What is a housing bubble? You’ve probably heard the term, but what exactly does it mean, and is Canada currently experiencing one? If you already own a house, are thinking of buying one soon, or are waiting for the right time to sell, we’ll explain what a housing bubble is, what triggers it, and how it can affect you.
What is a housing bubble?
When the price of a home increases at an unsustainable pace, it is called a housing bubble. A price-growth rate in the high single digits is usually considered stable and sustainable. Homeowners continue to build equity over time, sellers can make a profit on resales, and buyers can still afford to enter the market in good times. Economic factors such as a labour shortage and low-interest rates are typically to blame for this form of price rise.
Non-organic development, on the other hand, can result in a housing bubble. For example, if speculators flooded the market, buying up homes to take advantage of rapid price increases and then selling for a large profit in the near future. Speculators list their assets for sale when values are thought to have reached a peak. Prices plunge as a result of the huge influx of listings combined with stagnant demand, resulting in a “housing market collapse.”
When demand increases and home-buying activity returns, a housing bubble is a transient occurrence, and prices gradually return to normal levels.
When a Housing Bubble Bursts, What Happens Next?
Homes become overvalued during a housing bubble. Prices plummet when a bubble explodes. Homeowners who do not want to sell are unlikely to be affected directly by the bursting bubble. However, since market conditions often have an indirect effect on other facets of the economy, it would be deceptive to refer to homeowners who aren’t selling as “free and simple.” The repercussions of a housing bubble collapse will almost certainly affect all of us in some way.
Homebuyers who bought a home during a housing boom most likely paid much more than the home is worth. End-user properties purchased as a home and not intended to be sold in the near future would gradually revert to “normal” values and, at some stage, return to positive development.
The greatest danger to home buyers is a property bubble. Many who bought during the bubble and now have to sell will have a hard time reselling their homes. They purchased the house for more than they would recoup, leaving them in debt with little to show for it.
For example, someone who bought at peak market rates but now has no choice but to sell in a down market due to circumstances such as job loss or inability to cover costs for whatever reason. On a house they no longer own, the seller also owes money to their mortgage lender.
Are We in the midst of a Housing Bubble?
After grinding to a halt in mid-March, the Canadian housing market took a shocking upward turn during the COVID-19 pandemic. The slowdown was brief, and for the rest of 2020, there was a surge in demand for housing, which was met by a shortage of supply. There seems to be no end in sight as 2021 approaches.
Contrary to certain media reports, a number of factors suggest that we are not witnessing a bubble triggered by market speculators.
Speculators are not a factor in the Canadian real estate market right now, according to a recent online survey of RE/MAX brokers and agents in Western Canada, Ontario, and Atlantic Canada. In reality, more than 96 percent of RE/MAX brokers and agents agreed with this result, confirming that end-users make up the majority of homebuyers. Speculators are more likely to wait out hot markets, purchasing when prices are low and selling when prices are high. Under current market conditions, the short-term investment opportunities they’re looking for are difficult to come by. Bully offers and bidding wars are popular, and with the release of the monthly housing market data, demand continues to outpace supply. Speculators and investors are typically hostile to these causes.
A steep increase in inventory and new listings, as well as a decrease in demand, are needed for a housing bubble to burst – none of which is likely to happen anytime soon.
Is 2021 the Year of the Housing Crash? It’s Extremely Unlikely.
The effects of pent-up demand from 2017, when the government implemented the foreign buyer tax and the mortgage stress test to cool the overheating market, are still being felt in the Canadian housing market. Many homebuyers have been pushed to the sidelines as a result of these measures, preferring to wait and save with the intention of returning to the market in a few years.
Let’s fast forward a few years to the year 2020. COVID-19 had a similar effect on the market, causing many homebuyers to postpone their purchases due to pandemic-related concerns. The previously unmet demand for housing continued to grow. With nowhere to go to spend their hard-earned money due to stay-at-home orders, Canadians collectively saved historically large amounts, which were pumped back into the housing market until consumer interest returned. The money was spent on record-high home purchases and, for those who didn’t want to deal with the tough resale market, upgrades to existing homes. In reality, Canadian real estate was predicted to be the economy’s driving force in 2020.
The housing market is also under pressure due to savings, low-interest rates, and a lack of inventory.
Consider the housing needs of the 1.2 million people who are projected to immigrate to Canada between 2021 and 2023, according to the government’s Immigration Levels Plan for 2021-2023.
Given all of this, it’s highly doubtful that we’ll see the sudden flood of real estate listings that a housing market collapse will need – and even if we did, there should be plenty of buyers to absorb them.
Do Your Due Diligence, Buyers and Sellers
Homebuyers and sellers are taking on more personal risk as a result of difficult market conditions and an ongoing global pandemic. It’s important to note that conditions vary greatly across Canada, with significant differences between provinces, towns, and even neighbourhoods. Working with a trusted, experienced licenced Realtor who can direct you through the buying and selling process is more vital than ever.
If you have any questions about the current market in the Dufferin County area, contact us at 519.219.SOLD or visit www.kissrealty.ca