What is the Canadian housing bubble and how will it effect you?

WHAT IS THE CANADA HOUSING BUBBLE AND HOW WILL IT EFFECT YOU?

The Canadian housing bubble is a very real factor effecting the Canadian Real estate market today. You may have heard of this term in your local paper or reading through real estate reports. Canada continues to experience a bubble in real estate value and this is making it more challenging for buyers to consider buying or selling homes in the future.

Housing bubbles explained

A housing bubble is related to the process of a home price rising quickly and at a rate that is unsustainable. When the growth rate on homes remains in the single digits this is often considered to be a sustainable rate. Under these conditions a homeowner can continue to earn equity on their home over time and they can make a profit on the resale, while still being able to afford a new home. Usually this occurs when interest rates are not at all time low rates. A housing bubble can occur as a result of a factor called non organic growth. This often occurs when the rate to borrow on mortgages is low and it is advantageous for speculators and investors to aggressively bid in the market. Buying up homes and taking advantage of rapid growth, with the plan to sell out before interest rates rise is what creates an inflation of the prices. When prices eventually hit a high point, speculators list their properties.

This leads to an influx of listings, a demand that stagnates due to the high pricing and eventually a crash in the value of homes. Housing bubbles are temporary events and when prices move back to normal, this is when the process can often start out again if it is advantageous for speculators.

What happens when the bubble bursts?

When a housing bubble bursts, the value of properties falls at a record rate. Homeowners that have no intention of selling are not likely to feel the impact of the bubble, but under these conditions there are ripple effects to people who entered the market during the inflated pricing or for those interested in selling.

For those that purchased a home for more than it is typically worth, they can be locked into a mortgage with an increasing interest rate that grows more difficult to afford. The normal value of the home will eventually rebound while the property owner continues to pay off a hyper inflated loan.

For home sellers that are interested in entering the market after the bubble, they may have to lose money on their home during the resale. Some homeowners may also be forced to sell due to increases in the interest rate making it difficult for them to keep up on mortgage payments.

Forecast for our current bubble

Many financial experts expected Canada’s real estate bubble to pop during the pandemic but the slow down was extremely short lived. A spike in buying behaviour started again in 2020 with a shortage of supply and the bubble continues to inflate into 2021.

The market shows no signs of slowing down either. Savings over the pandemic, low interest rates and a low inventory of listings put pressure on the market. 1.2 million people are expected to immigrate into Canada through 2023 and this places a whole new level of competition on the housing market too. No one currently has a crystal ball as to when the bubble will pop but at current rates, you need to have an experienced agent to get yourself into a home.