Average house prices across Canada have continued to rise since 2002, with brief exceptions for the credit crisis of 2008 and attempts by the Bank of Canada to cool the market in 2017. That's when the mortgage stress test was first implemented to limit buying power and delay the ability of some home buyers to enter the market. In both 2008 and 2017, the dip in housing prices was relatively small, and overall, prices did not return to market "normal" before beginning to rise again. This has prompted housing market experts to call rising prices a housing bubble, while other reports may call it a real-estate boom. Let's take a closer look at the difference and discuss why you should care.
Definition of a Boom
Even before the pandemic, people had begun leaving expensive cities like Toronto for smaller cities like Hamilton and Niagara Falls. Here, the housing prices were lower, and buyers could get more for their money than they could in the city. This influx of buyers has caused a housing boom in smaller communities - a situation in which the housing prices rise and are expected to stay that way for the foreseeable future.
Do We Like a Boom?
If you live in one of these areas, the housing boom is good, making real estate a high-performing investment. Generally speaking, a boom is considered to be a positive sign because the gains are expected to remain, buyers can count on their home purchase continuing to increase in value, making taking on a mortgage less of a risk.
Now About Bubbles
While booms were happening in smaller communities across the country, home prices in larger cities continued to rise. We heard stories of bidding wars and homes selling for hundreds of thousands of dollars over asking. That kind of meteoric rise is generally not sustainable. Economists call it an "exuberant market." Several consecutive quarters of exuberance adds up to a housing bubble. Canada has one of the longest-running housing bubbles in the world, with 26 quarters of rising prices, second only to Germany with 27 quarters.
Bubbles Can Be Problematic
The problem is that bubbles are not permanent. Markets experiencing a bubble ultimately correct themselves to the market fundamentals, and prices drop back to a more sustainable level. If you bought a home at the beginning of the bubble, you are probably satisfied with the increase in your home's value. If you bought more recently, your home's value might still have increased; however, there is a greater risk that your investment may eventually drop in value when the bubble bursts. If the correction is substantial enough, there's the possibility that your mortgage amount exceeds the new value of your home—a situation no one wants to be in.
Longer running bubbles tend to create a more significant issue for homeowners because as time goes on, the gap between current prices and fundamental prices widens. Canada's housing bubble will eventually burst, and some people will feel the pain, but it's not all bad news.
The Impact of Booms and Bubbles
The timing of the correction isn't easy to predict. Though a recent report from CMHC says the risk for a correction in the near future is high. Homebuyers can use this information to make informed decisions about the timing of home sales and purchases. For existing homeowners looking to exit the market, selling while demand and prices are still high may be a good idea. For others considering a move, sticking with your existing home a little longer is a good way to protect against the risk of overpaying for a new home, only to see the value drop.
In the communities experiencing a more permanent boom, homeowners can breathe a little easier that their prices may be cushioned as the bubble bursts. However, staying put is still an excellent way to maximize the return on your real estate investment.
Working with a mortgage broker can take the legwork and the guesswork out of mortgage applications and renewals. Dave DeStefano represents the Mortgage Group in Niagara Falls and can help you find the best mortgage rates and terms to meet your financial goals. As a mortgage expert, Dave is committed to giving sound advice and making the sometimes complicated process of managing a mortgage easier.
Sources
https://betterdwelling.com/canadas-real-estate-bubble-is-the-second-longest-in-the-world-us-federal-reserve/#_
https://financialpost.com/real-estate/housing-market-risk-jumps-to-high-in-canada-government-rating
https://www.theglobeandmail.com/real-estate/article-big-real-estate-boom-hits-canadas-small-cities-and-big-towns/