Citizens’ of Vancouver awoke today to the realization that their most prized assets maybe reaching a tipping point and not one invoked by the drunken swaying of Canucks fans. Mark Carney, in a talk yesterday (June 16, 2011), gave some thinly veiled, ominous warnings to the Canadian home-buyer about the potential for the existence of a bubble in the Vancouver market. Although Mr. Carney avoided use of the dreaded b-word he suggested the Vancouver market has become increasingly similar to a “financial asset market” with favourable borrowing conditions lending themselves to a market fed by fear and greed. With recent reports suggesting the Vancouver market lies third behind only Hong Kong and Sydney on the hierarchy of over-inflated property values and the average home in Vancouver now priced at 11.5 times the average household income levels it is hardly surprising Carney opted to speak out.

However Carney stopped short of calling for an immediate end to the ultra-low rates which have characterized the surge. Rather, he warned that the favourable conditions would “eventually be withdrawn”. Carney’s reluctance to remove the stimulus is hardly surprising given that Canada’s growth for the second quarter is to fall short of the 2% predicted by the central bank in April of this year. The country continues to suffer under the weight of a strong Canadian dollar and a recovery of glacier-like speed. Such is the Catch-22 Canada now finds itself in, Carney is beginning to look more reminiscent of a character in a Joseph Heller novel rather than a member of Canada’s banking elite. Carney knows he has to raise rates to curb the housing boom but with The Fed now suggesting their rates will remain at an “exceptionally low level” for an “extended period” he is also aware he can’t risk breaking free from his American neighbours.

We at Morcan Direct have been advocates of the variable rate for quite some time and we see little reason to change our stance given recent changes. While some have pointed to the plummeting of fixed rates as a sign that the variable rate game is over we believe such calls are premature. The only thing consistent about experts’ predictions for rate increases in the propensity with which they change their opinions and one can hardly blame them in this weather. Many of the banks are now expecting September to be the date when the yearlong cease-fire on rate increases comes to a halt but the market has the rate increase priced in for as late as March 2012. Even when the increases do come however there is enough uncertainty in US and enough turmoil in the EU (with the Greeks smashing more than just plates) to ensure any rate increase should be conservative.

Should you have any questions about anything you have read here we ask you to contact us at 416-214-9000 and talk to one of Morcan Direct’s mortgage specialists for sound, unbiased mortgage advice.