CMHC Report Shows the Emotional Impact of the Housing Bubble

A couple sitting on the couch dreaming of homeownership.

A June 2019 Housing Market Insight report, from the Canada Mortgage and Housing Corporation (CMHC) has highlighted the impact of bidding wars on property prices over the past two years. The report demonstrates the emotional factors that drive Canadians to stretch their budget and engage in bidding wars, regardless of their self-identified appetite for risk.

The CMHC surveyed more than 65,000 households during the fall of 2018 in an effort to gauge the motivating factors for homebuyers in Vancouver, Montreal, and Toronto – Canada’s largest and most heated housing markets.

More than half the respondents believe foreign investors are helping drive up prices, particularly in Vancouver where 70 percent of people cite foreign investment as an issue. The CMHC report pointed out that in Toronto, homebuyers were aware of the impacts of macro-economic factors and believed those to be more substantial in the cost of housing than other factors.

“Respondents’ perceived traditional fundamental drivers, such as employment growth, interest rate changes and population growth, to be less influential than subjective ones linked to speculation, such as city attractiveness and the presence of foreign investors. The dominance of short-term factors was obvious in Vancouver, while respondents in Toronto perceived population growth to be influencing housing prices the most.

“Since increases in housing prices cannot be explained by economic fundamentals alone, subjective factors like city attractiveness and perceived price growth must play a role. This report, and the survey it is based on, helps us shed light on homebuyers’ perception of how subjective factors influence housing markets and will improve our understanding of housing markets in Canada.”

Vancouver saw price growth expectations drop to 1 percent last year from 10 percent in 2017. One reason for this decline might be uncertainties about the economy last year that weren’t apparent the previous year, and for a general flattening of the real estate market in that city.

Bidding Wars Boosted Spending by 24 Percent

Homeowners said that bidding wars caused them to spend an average 24 percent more for their homes than intended in 2018. The amount they spent was also higher than the median home price. The good news is that in Toronto at least, the incidence of bidding wars has reduced. In 2017 in Toronto, about 55 percent of homebuyers were involved in bidding wars but this decreased to 45 percent last year.

In Vancouver and Montreal, the percentage of sales that involved a bidding war stayed the same year over year, at 55 and 24 percent respectively.

Influencers that Contribute to Bidding Wars

Homebuyers are willing to pay more for a house they want in a bidding war, which is in line with the report. Subjective factors like neighbourhood attractiveness and where one wants to live may have an impact on home prices. Potential homebuyers might be more inclined to pay more for a home if it has factors they perceive as important.

Buyers Take More Risks On Investment Property

The CMHC hypothesized that how a homebuyer sees financial risk can influence how much they will spend on their homes and if they will stick to their budget or go over for the desired home. However, they found little variation between Canadians who identify as “willing to take financial risks” and those who spent more than initially intended.

A likely explanation is that most respondents don’t see real estate as a financial risk – even if they end up paying more than first planned. According to the survey, 88 percent of Canadians agree that real estate is a good long-term investment – more so than financial investment tools.

The report found that as homebuyers age, their appetite or desire to explore different types of financial risk decreases.

It is possible this might have to do with how millennials purchase real estate. They see the long-term benefits of investing in real estate and will put more towards a down payment. Millennials look for the potential in a home that might include renting it out and selling it or “flipping it” at a higher price. Other factors that can influence them include if the property has low maintenance costs and if it has access to nearby transit services.

The survey found that as income increased for respondents, they were willing to take more risks. For those not willing to take any type of financial risk, about 31 percent made less money, in this case, under $60,000.

Why Buyers Need to Get Pre-Approved and Pre-Qualified

In general, prospective homebuyers are encouraged to get pre-approved and pre-qualified for a mortgage. The advantages of pre-approval include:

  • Buyers can lock in their interest rate anywhere from 60 to 120 days or longer. This helps if there’s a subsequent rate increase.
  • They have the added security of knowing they’re already qualified for a mortgage loan.
  • It gives them leverage because sellers know a potential homebuyer is serious when they make an offer.
  • The amount a homebuyer qualifies for lets them know exactly what they can afford. And, they can determine if they want to shop in the same area or expand their search to get “more house” for their money. This also ensures they don’t become house rich and cash poor.

Advice for Homebuyers

Purchasing a home is a big investment. Hence, it’s advisable to research topics like how to buy a home and then research the area where you want to live.
Here are a few suggestions to help:

Use a mortgage payment calculator and a mortgage affordability calculator.

When you find a home you’re interested in, use a convenient online calculator.

These include:

Use an online mortgage interest rate comparison tool.

Finding a mortgage lender can be a time-consuming task – which is why it pays to shop around using the RateSupermarket.ca mortgage rate comparison tool. It’s convenient and fast and can help you in your search for the best mortgage interest rates. At RateSupermarket.ca you’ll be able to view rates from the leading mortgage lenders across Canada all in one place.

Related Topics

Buying A Home / Home Ownership

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