I would like to start this blog off by saying that the housing market, like any market can change rapidly and isn’t 100% predictable. It’s important to understand that this post isn’t meant to sway anyone’s opinion about the housing market; it’s simply to give readers a better idea of what’s going on. Everything you read below is from research and talking to people in the industry.
What is a housing bubble? A housing bubble is when the prices of homes increase at an unsustainable rate that forces homes to be overvalued and for individuals to become over-leveraged financially. This can cause a crash because eventually demand will decrease, normally at the same time supply is increasing and this will cause a drop in housing prices. In other words, “A crash is when the bubble pops”.
I hear people talking about it all of the time whether from clients, co-workers, friends or family. Everyone seems to have a strong opinion on if the housing bubble is going to burst or not.
I hear realtors say it won’t happen and articles online “guaranteeing” a collapse. I hear home owners enjoying the increase and buyers waiting until the market “crashes”.
Talk. Talk. Talk.
Hearing all this talk can get confusing and overwhelming so I’m going to focus on answering three main questions in this blog. Why is the market so crazy right now? What qualifies a crash? Are we in a bubble right now?
Why is the market so crazy right now? This can be answered in one word, demand!
Ah yes, all of this craziness is all because of a simple supply and demand curve.
To give a brief summary, the housing sales prices are increasing so fast because Canadians have more savings and less places to spend their savings (COVID). Canadians are opting to move out of cities and into surrounding areas that offer more living space (COVID); interest rates are at historic lows and Canada has a low housing inventory (supply). All of these factors contribute to why demand is so high.
What is being done to limit demand and return prices to a healthy appreciation? Well with COVID still an uncertainty, it’s hard to say what will happen with demand. Most Canadians will continue to save money and desire more square footage outside of cities. On top of that, interest rates will most likely stay low. The only real action that the government is taking is to increase the stress test.
Remember the stress test? I wrote about it in my last blog if you need a refresher!
The Canadian government is increasing the stress test on June 1st to make it harder for Canadians to get loans. Although this may sideline some homebuyers, it’s hard to say if it will actually decrease demand. “In this type of stress test it could create a larger gap between lower priced homes and higher end homes..which then puts even more demand on the average home people can afford which will then push the average priced home up even more (Huebl, 2021)” If Huebl is correct and the new stress test forces demand up then its hard to see how demand is going to decrease anytime soon.
What about supply? If part of the reason demand is so high is because supply is so low, then what is the government doing about that? After doing some research the answer seems to be… nothing! ” We’re not incentivizing home builders. We’re not constructing low-income or subsidized housing. (torontorealtyblog, 2021)”
With demand either staying the same or increasing and supply not increasing enough to settle demand, it forces Canadians to pay more for a property in order to win the offer. Individuals who are expecting the market to crash would say that these individuals are over-paying. Individuals who think the housing market will stay strong believe that Canadians are simply paying more. Paying more for housing is something Canadians have been doing year over year for decades, only seeing a few dips in housing prices in recent years like the 1987 stock market crash (not so recent) and the other being in 2017.
I know you’re probably thinking, “Silly Griffin forgot about the housing crash in 2008”. Well you would be mistaken as I’m writing this post about he Canadian housing market and not the American/global housing market. “The Great Recession of 2008-09, when the subprime mortgage crisis left a lasting impact on housing markets down south, Canadian housing markets somehow dodged the bullet, and have led those in the U.S. ever since. (Haider & Moranis, 2021)” Canada was the only G7 country where the government didn’t have to bail out the big banks with Canada avoiding a crash.
Talking about the housing crashes in the past brings me to answering the next question.
What Qualifies a crash? Well, this is self defined.
Is a housing crash a price decrease of 5%, 10% or is it 90%? Is it when interest rates increase while people are already financially over-leveraged forcing defaults on mortgages? Well, what is it? No honestly I’m asking. I hear so much talk about the housing market crashing without any definition of what they think a crash is. The same goes for people on the other side of the argument. What insinuates a bullish housing market? A specific increase that an individual deems healthy or just a general increase?
To me a housing crash equates to a crisis like we saw in 2008 where more than just housing prices fall and entire economic systems fall apart because of the housing market; however, your definition of a crash could be different. It could be any decrease to housing prices.
People have been talking about a housing crash forever! I know I’m relatively new to the industry but ask any realtor that’s been in the industry for more than 10 years. This is probably the question that they’re most asked, “Will the bubble pop”? If you predict the bubble to pop long enough, you will probably be right. However, what you have lost waiting for the housing market to decrease is years and years of increase. From 2000 to 2020 the Canadian housing market has increased by around 158%, including some small decreases in 2017 (around 4.5%) and some select markets in 2008 (DELMENDO, 2021). If you waited to get into the housing market until it “crashed in 2017” then you would have missed out on your property more than doubling.
This brings me to answering the last question. Are we in a bubble right now? Yes.
By a basic definition of what a housing bubble is, housing prices have been going up at a rapid pace and yes this type of increase is unsustainable. “Ontario is expected to post the biggest annual rise in house prices of a huge 16.3% during 2021, to an average of 823,656 (CA$) (DELMENDO, 2021)”. This statistic was posted at the beginning of 2021, now that we’re in May some markets in Canada are projected for more than a 16.3% increase by the end of the year. Regardless, a 16.3% or higher increase just isn’t sustainable year over year.
However, don’t cancel your home buying plans just yet. Even though this increase is unsustainable, it by no way suggests that the housing bubble will pop and the housing market will crash. Change your mindset from unsustainable increases = market crash to the following: unsustainable increases = several possibilities. No one is saying that the housing price increase is healthy but it’s very likely that the market changes to a healthy appreciation, flatlines or even decreases a little bit.
So yes, we’re in a bubble in the same way that the housing market has always been in a bubble. If the only way to get out of the bubble is for the bubble to pop than the Canadian housing market has been in a bubble for over 30 years.
Could it pop tomorrow? Maybe. Could it pop in 10 years? Maybe.
- Anything can happen and I encourage you to do your own research and make up your own opinion.
- Don’t let the fear of a housing bubble scare you as it doesn’t mean the market will crash.
- Remember that housing is a long term investment and worrying about the possibility of a short term loss could hurt you financially in the long run.
“A housing crash is a temporary event and prices eventually return to normal levels, when demand rises again and home-buying activity resumes. (McNutt, 2021)”.
Huebl, S. (2021, April 8). Https://www.canadianmortgagetrends.com/2021/04/homebuyers-to-face-more-stringent-mortgage-stress-test-after-june-1/. Retrieved May 12, 2021, from https://www.canadianmortgagetrends.com/2021/04/homebuyers-to-face-more-stringent-mortgage-stress-test-after-june-1/
(2021, March 29). Retrieved May 12, 2021, from https://torontorealtyblog.com/blog/the-market-crash-is-coming-right/
Haider, M., & Moranis, S. (2021, January 29). Looking for the reasons why Canada’s housing prices are rising faster than in the U.S. Retrieved May 12, 2021, from https://financialpost.com/real-estate/looking-for-the-reasons-why-canadas-housing-prices-are-rising-faster-than-in-the-u-s
DELMENDO, L. (2021, January 28). Canada’s red-hot housing market. Retrieved May 12, 2021, from https://www.globalpropertyguide.com/North-America/Canada/Price-History#:~:text=Ontario%20is%20expected%20to%20post,and%20New%20Brunswick%20(5.7%25).
McNutt, L. (2021, April 30). What is a housing bubble? And are we in one? Retrieved May 13, 2021, from https://blog.remax.ca/what-is-a-housing-bubble-and-how-will-it-impact-you/