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.