Housing a 'balloon' not a bubble: economist

The state of Canada's housing market continues to take centre stage, with executives at a number of the leading banks expressing concern that record high prices may soften in the next few years. Sal Guatieri, Senior Economist at BMO Capital Markets, tells BNN that housing is not in a bubble, but rather a "balloon."

"In a balloon the air can seep out slowly, it doesn't necessarily need to burst unless something comes along to prick the balloon," he says. "That something could of course be a recession or a loss of incomes or job…or a big spike in interest rates that worsens affordability, but we don't see that happening."

"We don't see interest rates rising meaningfully perhaps until the back half of next year," he adds.

Guatieri says that while home valuations are "excessively high" in Vancouver and "somewhat high" in the Greater Toronto are, he doesn't expect a major implosion in home prices.

"We think Canada's housing market will fizzle out rather than flame out," he says. "It will indeed soften, there's no doubt it will because household debts are relatively high -- there's only so much more rapid mortgage growth that can be sustained in Canada's housing market and economy."

Guatieri remarks come after comments on Tuesday by three of the country's biggest banks that housing valuations may be stretched.

CIBC chief executive officer Gerry McCaughey told bankers at a gathering that the housing sector may have peaked and will begin to soften. RBC CEO Gordon Nixon and Bank of Montreal CEO Bill Downe also expressed concern about housing prices, saying the next few years could see a pullback.

Many economists say the condo market is particularly vulnerable if there is a pullback in home prices, but Bank of America Merrill Lynch Canada economist Sheryl King says predicting an isolated fall in home prices is risky.

“I don’t think that anybody would want to say with the lessons that we learned with the United States that you can isolate a particular sector or a particular part of the market and say everybody else is going to be protected,” she says.

“There’s a lot of exuberance in this market right now, there are increasing signs of speculation…this is a market that is red hot and you have to be a little cautious right now,” she adds.