At nearly every turn over the past few years we’ve heard that Canadian home prices were about to fall off a cliff. The big crash hasn’t happened – yet – but it’s entirely correct to say it still might. It’s also equally fair to say it might well not, however. You see, that’s not how markets work. We should remember that differences of opinion about the future is one of the reasons why sellers are always present to accommodate buyers looking to purchase something they’re choosing to unload at that time.
Such is the nature of real estate just like any other market, and the only difference that gives it the magnitude it has being the fact that these purchases and sales are made for ever-increasing and already staggering prices in many parts of the country. Here at Real Estate Leads, our online real estate lead generation system is an excellent way for realtors to start prospecting for clients more effectively and get in on slices of what is clearly a very valuable pie!
But enough about that for now. Leading economists and industry experts agree that the housing market crash if very far from a lone gone conclusion. Decisions on where the market will go next depend on a great many factors, but here’s 7 of them that allude to at least the possibility that things may not ‘crash’ much, if at all.
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Interest rates
We’ve heard time and time again that the biggest threat cited for home prices is how much we pay for the money we borrow. A two percent increase from 8 to 10 percent wouldn’t be regarded too forebodingly in years previous. In the current market, however, a sudden rise in interest rates – even by 2 to 3 points – would effectively double the cost of interest payments, and essentially pop the bubble of what has been the Bank of Canada’s artificially low rates.
It is expected that interest rates will be left unchanged, but rising rates will gradually make mortgages more expensive. This is a negative of course, but it will serve to take heat out of the market, and a path that’s more moderate would allow the housing market to have a chance to adjust.
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Inflation
However, if the big banks decide that they need to dispel a sudden burst of inflation, that could mean that rates might rise suddenly. So far, though, inflation has been quite tame. Houses became more affordable for 1st time in over 2 years, and while that’s a plus there’s a catch. Inflation has always risen and fell in a long cycle and we don’t have anything tipping us off to where the cycle is heading next.
While inflation could lead to higher rates, some homeowners may see Canadian property as a long-term inflation hedge.
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Pent-Up Demand
It’s a fact that in many parts of Canada – and not just the GTA and GVA – housing demand remains strong following years of price rises and bidding wars. Government policy, including the well-documented new mortgage stress test regulations, may now be manifesting itself as a pent-up demand for housing. Large numbers of new immigrants definitely push this along, and the trend will serve to support prices if incomes begin to catch up.
Even if market conditions were to begin changing, it may mean that would-be house buyers that have been schooled in a market of ever-rising prices will now take time to adjust to this new reality, and that will in turn soften the landing for everyone thinking similarly.
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Rate of construction
Home building in Canada’s hottest markets is steaming ahead full bore. Recently the Canada Mortgage and Housing Corp. revealed that housing starts slowed in March, but the important bigger-picture point to understand here is that the ability of construction companies to keep pace with demand could affect the value of existing homes. Any trend toward overbuilding could result in a fall in prices. Oppositely, if builders overreact to their falling-prices fears and produce too few, those prices could rise by quite a bit.
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Investment properties
There’s no debating the fact that owning a condo in Vancouver or Toronto over the last decade has been a lucrative investment, and true even if you’ve never seen the need to rent it to pay the mortgage (assuming of course you have / needed one.)
Many condos in particular are owned by investors who have been taking advantage of double-digit speculative gains, but that Golden Goose may nearly be dead. The returns aren’t there like they used to be, and many people may decide to invest their money elsewhere. This would accelerate a housing market downturn.
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Economic health
Prospective home buyers may be less inclined to stretch themselves if they think the economy is looking less than promising. The consensus seems to be that a pattern where short-term interest rates exceed long-term rates may be signalling our moving into a recession.
A moderate slowdown here could reduce the impact of inflation, and with it a need to raise interest rates. However, strong economic growth creates jobs and puts money in Canadians pockets, making them more qualified home buyers in many instances.
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Local differences
Interest rates will have an effect on everyone, but whether the price of your house will rise or fall will also depend on where it is, and / or where you’re hoping to move to. Housing prices are regional, and homes in areas that are in demand as a result of a strong economy or proximity to services are more likely to hold their value.
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