Why a real estate bubble is unlikely in Canada
As global housing markets coughed and sputtered in 2011, Canada's barrelled ahead, even turning a few nervous heads along the way.
In fact, recently the Economist branded Canada one of the nine countries where “home prices are overvalued by about 25 per cent or more,” and among the four where prices are in line with those in the United States "at the peak of its bubble."
Is there really a cause for alarm? Are we doomed to ride this white-knuckled rollercoaster in 2012? Probably not, according to Benjamin Tal, deputy chief economist of CIBC.
"The housing market of tomorrow will not be as exciting as the housing market of yesterday,” he said in an interview.
While the current real estate market is overshooting, with home prices far higher than than they should be, we shouldn't expect a crash either, he explains. As long as interest rates remain relatively low and subprime mortgages kept at bay, the most likely scenario is that the market will plateau.
“Prices are already softening, housing starts aren’t in the sky, MLS [multiple listing service] activity is starting to soften, so it suggests the market is already starting to level off, and that’s what we need,” he said.
How will a more relaxed real estate market affect new homebuyers, investors and renovators in 2012? Here are Mr. Tal's predictions:
1. First-time home buyers
- Affordability and interest rates will be the major concerns in 2012. Prices will continue to be expensive, especially in urban centres like Vancouver and Toronto, since interest rates are likely to remain low for the time being.
- But rates won't stay low forever, which is why you should estimate mortgage payments based on interest rates that are 2 or 3 percentage points higher than current interesst rates, and if you cannot afford that, get a smaller mortgage and buy a less expensive house.
- Expect an end to bidding wars, or at least a temporary ceasefire. New home buyers will have the luxury of time in terms of looking at properties without being rushed into decisions. That’s the positive. The negative is that prices continue to be drastically higher than they were five or 10 years ago.
2. Investors and flippers
- If you’re in it to flip it – meaning you buy a home hoping the price will rise by just doing minimal changes – those days are over.
- In some pockets of the country, you may even see prices go down.
- The cost of renovations will not increase significantly so long as interest rates remain at their current level, so it’s a good idea to take advantage of this time to finance these projects.
- For those looking to take on a second mortgage, remember to make sure you’re equipped to finance them if interest rates creep up.
- Variable-rate mortgages are still a good option for those who are able to withstand fluctuations in the market and "ride the ups and downs without getting a stomach ache."