Is there a bubble in Canada’s real estate market? The boom or the bust?

24 Aug

In 2008, the housing crisis in the United States left many people in a state of panic. The housing market collapsed and prices dropped. It took 5 years for the market to recover (for example, a unit in Murano Grande was sold for only $1.85 million in 2012  whereas last year it was sold for $2.55 million, a 37% increase). Now, United States’ neighboring country might face the same situation.

According to The Federal Reserve Bank of Dallas, Canada’s real estate market price increased by 18% nationwide from the previous year. Meanwhile, sales have gone down to the lowest in five years. It’s alarming since the household debt to income remains at all-time high. Furthermore, the Federal Reserve has recently announced an increase of real interest rates of 0.25%. For example, this would mean that a homeowner is required to pay $83 more per month (or $996 per year) than he previously would for a $750,000 house mortgage.

Back in 2008, Canada was considered as a safe haven from the crisis. Canada’s real estate market dipped only 7% whereas it plunged 30% in the US and 60% in Spain’s Costa del Sol. Since then, the country’s prices have risen at a rapid rate, almost doubling up in the past decade. The housing bubble, however, does not go unnoticed, 67% of Canadians agree that there is a housing bubble but only 43% think that it will burst in the next 12 months.

High leverage on houses has contributed to this optimism. Indeed, homeowners are pleased with the increase of property value since they can get equity out of it. However, holding a higher leverage is also risky especially when losses could become greater. Once homeowners realize this, the bubble could burst. There will be a depreciation of price and the economy of the country will be heavily impacted. One could only hope that Canada is prepared for it.

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Posted by on August 24, 2017 in News


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