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Real Estate Bubble – Are We Headed for a Housing Bubble?

With rock bottom interest rates and real estate sales on a sharp upswing, is it possible that Canada is in, or headed for, a real estate bubble?

That’s right, the dreaded B-word. You’ve probably heard the term before, but what does it really mean?

A housing bubble (also known as a real estate bubble) is an economic term for what happens when the cost of real estate rises faster than the rate of inflation or income levels. When the bubble bursts, housing prices plummet back to more realistic levels, leaving many home owners with negative equity, which means that they owe more on their mortgage than their property is worth.

While there is no doubt amongst economists that housing bubbles occur, it is difficult to predict and identify a bubble until after prices crash. At this point, many economists are in disagreement over whether or not we’re in a real estate bubble or boom.

Is Canada in a House Bubble?

According to a report by analysts at Scotia Capital, “Is Canada in a housing bubble? Probably, but low rates, mortgage innovation and a relative shortage of new supply are likely to keep it going for a while yet”.

Potential buyers are frustrated to show up to house viewings, pre-approved mortgages in hand, to find that they can’t compete with the pile of offers already on the table. It’s not uncommon for properties to sell for thousands of dollars more than the listing price.

How to Protect Yourself

While it’s difficult to take emotions out the home buying equation, the most important way to protect yourself during a real estate bubble is to buy a house you can afford. Don’t be enticed into buying a bigger or fancier house than you need. It helps to think of your home as a place to live and not as a short term investment. A good mortgage broker can help you navigate these precarious waters.

Here are some other tips to survive a housing bubble:

  • Leave the equity in your home where it is. Avoid using it pay for cars, dream vacations or to pay off debt.
  • Get rid of the variable rate mortgage. A traditional fixed rate mortgage where you pay principal and interest is the best bet. It’ll protect you from the inevitability of rising interest rates.
  • Limit your housing costs – property taxes, mortgage payments, insurance – to lower than 32% of your income.
  • Don’t make an assumption that your house will appreciate at the same rate as it has in past years.
  • Avoid terms of 30 years or more or mortgages that exceed the value of the property.

Most importantly: don’t panic. Only time will tell if we’re headed for another real estate bubble. In the meantime, exercise caution when buying real estate and be sensible about what you buy.

Comments(2)

  1. Berniebee says:

    Like the proverbial frog in boiling water, Canadians have adjusted to the ever-upward spiral in house prices with a shrug. Are we entering a bubble?
    I think that the more appropriate question today is “Are we exiting a bubble?”
    Take the city of Ottawa for example. On first glance, Ottawa’s $350,000 average house price pales with Toronto or Vancouver levels. There’s been no media reports of yellow helicopters filled with Asian buyers (Ala Vancouver) or bidding wars on condos. As a government town, Ottawa has stable employment and nice parks , but certainly there’s no excitement in the real estate market here, right?
    But check the numbers. Ottawa house prices have steadily appreciated faster than inflation for about a decade. Not by a lot , and not every year, of course. But prices have now left incomes in the dust.
    With only some minor tweaking of mortgage rules by the feds, suddenly Ottawa house sales have been squeezed to a trickle. In my observations (of an admittedly small neighbourhood), prices are being reduced on several houses, and they remain unsold after several months. Several have chosen to pull their house off the market.

    With banks offering huge mortgages to anyone with a pulse, and interest rates so low that paying off your mortgage or HELOC seems like a waste of money, it’s no wonder that the average Canadian is more indebted than the average American was at the height of their housing bubble.
    Approximtely 70% of Canadians now own homes, a higher percentage than the US before their crash.
    Canadian average house prices are now approximately double the American average.

    How to protect yourself:
    If you are considering entering the housing market, don’t. Wait at least a year, and then congratulate yourself on saving many thousands of dollars.
    And remember , real estate agents are in business to sell you a house, period. Their view of the market is perennially sunny, or they quit. Take the real estate board’s house sales and price “statistics” with a grain of salt. No one to my knowledge knows exactly how the boards generate their numbers.

  2. Berniebee says:

    Like the proverbial frog in boiling water, Canadians have adjusted to the ever-upward spiral in house prices with a shrug. Are we entering a bubble?
    I think that the more appropriate question today is \"Are we exiting a bubble?\"
    Take the city of Ottawa for example. On first glance, Ottawa\’s $350,000 average house price pales with Toronto or Vancouver levels. There\’s been no media reports of yellow helicopters filled with Asian buyers (Ala Vancouver) or bidding wars on condos. As a government town, Ottawa has stable employment and nice parks , but certainly there\’s no excitement in the real estate market here, right?
    But check the numbers. Ottawa house prices have steadily appreciated faster than inflation for about a decade. Not by a lot , and not every year, of course. But prices have now left incomes in the dust.
    With only some minor tweaking of mortgage rules by the feds, suddenly Ottawa house sales have been squeezed to a trickle. In my observations (of an admittedly small neighbourhood), prices are being reduced on several houses, and they remain unsold after several months. Several have chosen to pull their house off the market.

    With banks offering huge mortgages to anyone with a pulse, and interest rates so low that paying off your mortgage or HELOC seems like a waste of money, it’s no wonder that the average Canadian is more indebted than the average American was at the height of their housing bubble.
    Approximtely 70% of Canadians now own homes, a higher percentage than the US before their crash.
    Canadian average house prices are now approximately double the American average.

    How to protect yourself:
    If you are considering entering the housing market, don’t. Wait at least a year, and then congratulate yourself on saving many thousands of dollars.
    And remember , real estate agents are in business to sell you a house, period. Their view of the market is perennially sunny, or they quit. Take the real estate board\’s house sales and price “statistics” with a grain of salt. No one to my knowledge knows exactly how the boards generate their numbers.

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