Canadians are a cautious people, so it isn't surprising that after resale homes posted an astonishing rebound of more than 60 per cent since January, leading the country's economic recovery, some analysts started looking for a dark cloud – or more specifically, a bubble.

Extremely low interest rates and improving consumer confidence have pushed Canadian sales and house prices higher in 2009 than anyone thought possible. The Canadian Real Estate Association recently revised its forecast upwards, and now predicts sales will hit 460,200 – about the same level as in 2004 but not quite as high as the record years of 2005 to 2007. Canada Mortgage and Housing Corp. CMHC) predicts that average house prices will rise by four per cent for single detached homes and two per cent for condo apartments by the end of this year.

In the fall of 2008, concerns about the economy caused a sharp drop in all real estate activity. While sales and prices have come back strongly, the number of listings on the market has not rebounded. In Toronto, there were 46 per cent fewer listings on the market in October 2009 than at this time last year. The shortage of listings is pushing prices up and producing multiple offers in many neighbourhoods.

Most analysts believe the pace of sales and price increases that we've seen during the last six months is not sustainable, and that the market will begin to stabilize in 2010. But is a full-fledged housing crash on the horizon?

Michael Gregory, senior economist with BMO Capital Markets, says no. "It's not a bubble when a record sales rebound follows a massive sales collapse, owing to the vagaries of pent-up demand," he says. "It's not a bubble when prices accelerate because growing demand is butting up against shrinking supply. It's not a bubble simply because relative prices are at record highs. Furthermore, given that mortgage credit growth is moderating, and new home and land prices remain subdued, the evidence on the ground argues against a housing bubble," he says.

So if a first-time buyer decides that now is the time to jump into the market and buys the best house he can afford at the current low rates, is he going to be in trouble when it's time to renew his mortgage and rates may have gone up? He may, if he stretches himself too thin.

But a new report by the Canadian Association of Accredited Mortgage Professionals (CAAMP) says most mortgage holders in Canada are in good financial shape.

The report says Canadian homeowners have about $1.98 trillion in home equity, or about 74 per cent of the total value of their homes.

"Among Canadian homeowners who have mortgages on their homes, most have considerable amounts of equity," says the report. It says more than 80 per cent of mortgage holders have 20 per cent or more equity. Another 11 per cent have 10 to 19 per cent equity in their homes, and only nine per cent have less than 10 per cent equity.

"The estimate that one per cent of Canadian mortgage holders have negative equity shouldn't be seen as a precise estimate, but rather as an indication that there are few Canadians in this situation (there may be 50,000 to 100,000)," says the report, which was written by economist Will Dunning. "While this is an uncomfortable situation for those involved, it is not a widespread issue."

The report says for those who financed or renewed a mortgage during the last 12 months, the average mortgage rate is 4.42 per cent. Assuming that rates remain at current levels and borrowers make the same choices for type and term of mortgages, the report says at next renewals, 69 per cent of borrowers will see a reduction in their mortgage rates. Twenty-eight per cent would see increases and two per cent would have no change.

"It is quite possible that interest rates will increase during the coming two years and that future renewals will be rates higher than at present. However, this analysis indicates that most mortgage borrowers will be very able to cope with any changes in interest rates that occur at their next renewal."

CMHC is forecasting that mortgage rates will remain stable for the remainder of this year, and then gradually increase in 2010 to a range of 3.50 to 4.25 per cent for a one-year posted rate, and 4.50 to six per cent for five-year posted mortgage rates.

Bob Dugan, CMHC's chief economist, says the current rate of mortgage arrears in Canada stands at 0.42 per cent. "I think this rate will stabilize and then in 2010, move lower," he said at a recent conference in Toronto. "In previous downturns there were rising mortgage rates and increased payment burdens (for homeowners). But today it's quite the opposite – the Bank of Canada is cutting rates."

One number in the CAAMP report that has garnered some attention is in the increase in long-amortization mortgages. "A small (but growing) minority of mortgage consumers (18 per cent) have amortization periods of more than 25 years – in the year earlier survey the share was lower at 16 per cent and two years ago it was nine per cent."

To ensure that new homeowners are not in over their heads in a few years if rates are up at renewal time, they should build some leeway into their mortgage. By not borrowing to their limit, they can absorb future increases, and in the meantime they can use any extra funds to make lump sum payments or increase regular payments, thus lowering the principal on the mortgage.

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