Are we in a housing market bubble?

Are we in a housing market bubble? A simple google search of Canadian Real Estate will tell you that people are concerned about it. The price of a home in Grey Bruce Owen Sound has gone up 56.7% since last April, and 11.3% since January of 2021. One has to wonder, how long can this pace be sustained? It’s not just Grey Bruce that’s having this upward momentum, it’s the entire country. In the month of March, The price of a home in Canada was up 31.6% in one year according to CREA.

Why have prices gone up so much?

There has been a perfect storm of factors causing the surge in house prices; increased cost of building material and new construction, low interest rates, government grants, increased consumer savings, people moving out of the big cities and buying in smaller towns, and of course, the severe lack of supply. 

But is it all going to come crashing down? Probably not. Investors dictionary defines a housing bubble as: 

“..a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic indicators, followed by decreases that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Unlike a stock market crash following a bubble, a real-estate “crash” is a slow process, because sellers just decide not to sell.”

There is little doubt prices are inflated, should we be worried homeowners cannot afford their payments?

To get a mortgage in Canada you have to qualify based on Three things: 1) Down payment –  5% for purchases up to $500,000, 10% for purchases between $500-999,999 and 20% for purchases 1 million and over. 2) Debt service ratios – Lenders look at your monthly payments for your housing expenses, interest, car & loan payments and divide that by your annual income. That number needs equal less than 40% to get approved. 3) Stress Test – Borrowers taking a conventional mortgage must qualify based on the Bank of Canada Benchmark rate, which currently sits at 4.69%. You can still whatever the prime rate is, but you must qualify  based on making payments at 4.69%. It’s not easy to get a mortgage in Canada and to think that people all of a sudden won’t be able to afford their payments if prices go down is wrong. 

Will rising interest rates cause the market to crash?

What about all the talk of government intervention to cool the market? The BOC does not plan to raise the overnight rate until 2022 and any adjustments to bank interest rates should be small. Even the Federal Liberals’ Parliamentary Secretary for Housing Adam Vuaghan stated recently that Ottawa does not want to see recent gains in home prices decline. 

So will we see a market crash?

Unlikely; demand remains, and underwriting criteria to qualify for a mortgage in Canada is strong. Interest rate increases will cool the market but it will be gradual. It does not appear a crash is on the horizon, even CMHC is not predicting a crash, and they always do. However a gradual cool down of the market should not come as a surprise in the coming months. 

Tim Matthews is a Real Estate Agent serving Owen Sound and Grey County. Want to talk with Tim? Lets Connect

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