January 11, 2010 / 8:30 PM / 11 years ago

UPDATE 2-Bank of Canada says sees no housing bubble yet

* BoC says premature to talk of housing bubble

* hot market likely the result of temporary factors

* rate hikes not the right tool to cool market

* (Adds quotes, background)

By Jeffrey Jones

EDMONTON, Alberta, Jan 11 (Reuters) - The Bank of Canada does not see a housing bubble forming in Canada and clearly stated on Monday that it would not take any action to cool housing prices as the economy pulls out of recession.

David Wolf, adviser to Bank of Canada Governor Mark Carney, said housing prices, which have risen to near the record levels of 2008, appear to be in line with supply and demand fundamentals.

He said it would be a bad idea to hike interest rates earlier than planned just to target housing prices, as some have suggested.

“If the bank were to raise interest rates to cool the housing market now — when inflation is expected to remain below target for the next year and a half — we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession,” Wolf said in a speech.

Wolf was standing in for Deputy Governor Timothy Lane, who canceled his appearance at the last minute due to a private matter.

He spoke after a report showed Canadian housing starts rose 5.9 percent in December, their third consecutive monthly gain, beating forecasts and signaling the housing sector continues to lead the country’s economic recovery. [ID:nN11152762]

Record low interest rates have helped fuel the housing boom, prompting some analysts to fret about a possible bubble that could eventually lead to a collapse.

“In the Bank of Canada’s view, it is premature to talk about a bubble in Canadian housing markets,” Wolf said.

“A significant part of the surge in housing sector activity is associated with temporary factors ... which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm.”

The bank has promised to keep rates unchanged at least until this June unless it starts to become worried inflation falling astray of its 2 percent target in the medium term.

Its next interest rate decision is Jan. 19.

Instead of rates, the right tools for cooling the housing markets are in the realm of financial supervision and regulation, he said, such as ensuring banks lend only to credit-worthy home buyers.

“These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions,” he said.

The bank highlighted those risks in a report in December, when it warned that rising household debt poses a risk to the economy, although it said the risk was low.

For now, Wolf said the revival in the housing market was an intended result of monetary stimulus and that housing would continue “to work as an important engine pulling the Canadian economy out of recession.”

Scotia Capital economists Derek Holt and Karen Cordes said the central bank’s comments show it sees the current strength in housing as unsustainable, but expects a soft landing.

“Our view remains that Canadian housing is richly valued, and that in the near term the market will inflate further ...,” they wrote in a note to clients, adding that 2011 poses significant downside risks to Canadian house prices as rates rise and supply increases.

On the state of Canada’s economic recovery, Wolf said the strong Canadian dollar and weak U.S. recovery are dragging down growth and making the recovery more gradual than after past recessions.

Wolf, a former chief economist in Canada for Banc of America Securities-Merrill Lynch, was appointed as adviser at the central bank in April 2009.

When he was still in the private sector, in September 2008, Wolf had warned that the Canadian housing market was headed for a U.S.-style meltdown due to household finances that were in worse shape than in the United States or United Kingdom.

At that time he said his bank feared “it may simply be a matter of time” before home prices start plunging. (Reporting by Jeff Jones, writing by Louise Egan; editing by Peter Galloway)

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