To Buy or Not to Buy?

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Money Bills by Will Keightley
Money Bills by Will Keightley

The resilience of the Canadian housing market is continually a great surprise. Real estate prices in the country follow the very opposite pattern as the rest of the world and continue to reach new records. Public opinion stays positive and surveys show that Canadians consider investment in real estate as beneficial. What makes the situation slightly dramatic are analysts who predict that the market is approaching a severe price correction. Therefore the question of whether it’s the right time for real estate investment is important to consider.

When Public Opinion Says to Buy

The 19th Annual RBC Homeownership Poll showed that an increasing majority of Canadians think it’s the time to make an investment in the housing market. 88 per cent of Canadians claim that housing is a good investment and over two thirds believe that the value of their home has increased in the past two years. According to research by RBC, the largest residential mortgage lender in Canada, a slightly higher number of Canadians say they’re unlikely to buy house in the next two years, even though overall confidence in home investment is clearly on the rise.

The head of RBC home equity financing, Marcia Moffat, explained that opinions and real activities on the housing market significantly differ in Canadian society, where people are still rather confident about real estate but “a little uncertain about where the market is heading and when it makes sense to buy.“ She too claims that high prices together with availability may be the reason why people are not as enthusiastic about eventual purchasing.

Is the Canadian Real-estate Market in a Bubble?

This sort of reluctance is supported by numerous indicators often used as evidence for a housing bubble already present in Canada. For example, average house prices have doubled in the previous ten years while only a 30 per cent rise in rent has occurred, which is the highest such ratio of all developed countries. There are other powerful indicators that point out to a bubble in Canada and a possible severe housing correction. Residential housing investment as a percentage of the GDP in recent years has reached peak levels, similar to other historical peaks from 1976 and 1989, when housing corrections struck the market, which crashed within a few years afterwards.

Smalley House by Bill Longstaff
Smalley House by Bill Longstaff

Many believe that Canada is running out of time. The real estate investment vs. GDP ratio similarly peaked also in the U.S. in the mid-2000s at the height of its housing bubble. A similar pattern occurred toward the end of the 1980s in Japan and announced the country nearing the end of its own property boom. Both countries experienced rapid declines in housing prices soon after the peak ratio occurred.

More strong evidence lies in the relation of Canada’s high house prices to income level, together with household debt levels without precedent and over-investment in residential construction. These indicators all point to home prices that are simply out of line. Without any income growth, it is reasonable to assume that house prices will have to decline.

From this point of view, Canada may be past the point of no return. What has possibly delayed the correction is the artificial demand from Asian investors, which eventually will dry up. The ratio of residential investment to GDP has proven to be a powerful leading indicator of housing corrections. That’s why it’s likely that a price level corrections will take place.

Prices May (not) be about to Fall

Many analysts have already predicted that house prices are about to fall. The most pessimistic opinions claim that we can expect decreases no lower than 25 per cent. On the other hand, some believe that prices could fall significantly only in the case of a major economic shake. The Canadian economy has gone through the recent crisis without any bank failures. It’s hard to say whether the country really prevented the possible negative impacts of its housing bubble or whether the day of reckoning has merely been put off.

On the other hand, some claim that low interest rates, solid banks, a growing economy, abundant natural resources, and a relatively conservative mortgage market will support Canadian housing prices. Talking about the U.S. housing bubble comparison, optimists emphasize the difference between Canadian home prices based on strong demand from homeowners as opposed to those of the U.S. fuelled by speculators.

One thing is evident: there’s a lot of information out there. Prudence, along with expert advice, can definitely help you to make a safe, informed decision.

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