With the recently released May report from the Canadian Real Estate Association (CREA) that sales 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 that happened in the US a couple of years back. This fear of the housing bubble drove the followers of the marketplace and professional analyzers insane. These same individuals are now worried sick about the opposite happening – an at hand housing market collapse.
What really occurred?
i) Canada endured a short, steep fall in home prices as the downturn hit late in 2008. As luck would have it, this was immediately followed by a steep rebound as it became apparent that the record low interest rates offered by the financial institutions presented an historical chance to get a house cheaply.
ii) Now, just as experienced analysts had forecast, the rebound is being replaced by a more stable price environment. The number 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 gain 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 endured heavy scars. Historically low mortgage rates helped fix the comparatively small damage to prices inflicted by the decline. Now a more stodgy, practically boring prognosis really comes into sight: a marketplace where foreseeable market forces affect the sales and costs.
iii) As an effect of rising prices, the supply of new listings is growing. At the same time, overheated demand of the first 4 months of 2010 is finishing. Fewer buyers are anxious to snap up property fast 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 most of Canada’s other large cities, costs rose modestly so there will not be much excess to work off.
In hindsight, the concerns about real estate in Canada following in US footsteps hasn’t materialized. The reason Canada avoided a collapse in prices is because the economic and banking principles prevented the disaster that unfolded in the US and elsewhere. Likewise, there was not much sign of an impending bubble. This page has a lot of information covering Eddie Yan. Prices were being driven up by temporary factors caused by conscious political and economical choices and not by conjecture and foreign buyers as has happened in several marketplaces in the US. What we’d experienced was a modest overvaluation with very little hint of conjecture.
So what’s the outlook for the coming year? Most economists agree on a modest fall in costs in overpriced markets, like Vancouver and Toronto, pulling down the national average cost by an estimated seven per cent. Other large markets like Montreal will experience a smaller drop – approximately 3-4%. Regions such as the Prairies and Maritimes might even find modest increases in the forthcoming year.