With the recently released May report from the Canadian Real Estate Association (CREA) that income of resale homes in Canada are cooling and price increases tapering off, we can put to rest the worry about an imminent housing bubble, like the one which occurred in the US a few years ago. This fear of the housing bubble drove the followers of the marketplace and professional analyzers mad. These same people are now worried sick concerning the opposite happening – an imminent housing market collapse.
What really occurred?
i) Canada suffered a short, steep drop in home prices as the recession hit late in 2008. As luck would have it, this was instantly followed by a steep rebound as it became apparent the record low interest rates offered by the financial institutions presented an historic opportunity to purchase a house cheaply.
ii) Now, just as experienced analysts had forecast, the rebound is being replaced by a more stable price environment. The amount of homes sold in May fell by 9.5 per cent, while year-over-year price gains moderated to 8.4 per cent, away from the peak increase of 16 per cent in March. Our real estate rebound was possible because Canada’s banking system stayed in good health, unlike in the U.S. which has suffered deep scars. Historically low mortgage rates helped repair the comparatively modest damage to prices inflicted by the downturn. Now a more stodgy, almost dull prognosis actually comes into sight: a market where predictable market forces have an effect on the sales and costs.
iii) As an effect of rising prices, the supply of new listings is growing. At exactly the same time, overheated demand of the first 4 months of 2010 is finishing. Fewer buyers are dying to snap up property quickly now that their window of opportunity is closing. Interest rates are increasing, albeit slowly and by minimal amounts. The HST on new homes will come into effect soon in Ontario and British Columbia, the nation’s hottest markets. Actually, the largest price gains driving national averages came from Vancouver and Toronto. In Montreal and many of Canada’s other big cities, prices rose modestly so there won’t be much surplus to work off.
In hindsight, the concerns about real estate in Canada following in US footsteps hasn’t materialized. The reason Canada averted a collapse in prices is because the economic and banking principles prevented the disaster that unfolded in the US and elsewhere. Similarly, there wasn’t much indication of an impending bubble. If you are looking for comprehensive information on Eddie Yan, check out this page. Prices were being driven up by temporary factors brought about by conscious political and economic choices and not by speculation and overseas buyers as has happened in several markets in the US. What we had experienced was a small overvaluation with very little sign of conjecture.
So what is the outlook for the coming year? Most economists agree on a small drop in prices in overpriced markets, like Vancouver and Toronto, pulling down the national average price by an estimated seven per cent. Other large markets like Montreal will experience a smaller drop – approximately 3-4%. Areas including the Prairies and Maritimes might even find modest gains in the coming year.