Housing bubble headlines have once again become prevalent in the media, as home prices continue to climb in Canada and new reports weigh in with alarming findings. In some cases, experts predict home prices could fall as far as 50 per cent when said bubble pops. And, while Canada’s own Finance Minister Joe Oliver refuses to buy into bubble claims, even bigger authorities such as the International Monetary Fund have fueled fears stating our housing market is overheated by 10 per cent. This is frightening news for homeowners who have been sitting comfortably on their real estate investments, assuming their value will continue to rise. If you own real estate or are in the market to buy a home, there a few specifics to be aware of. However, I disagree that we are facing housing bubble – here’s why.
The Millennial Effect
Much of the bubble’s spotlight has been overwhelmingly focused on the condo market, particularly in the bigger cities like Toronto, Calgary and Vancouver where there has been a large influx of condominium towers built in the last decade. Demand for these condo units is currently being fueled by millennials, those born from 1980 to 2000.
For example, in Toronto condo sales jumped by 20 per cent in September compared to the same time last year. This increase is attributed to young people taking advantage of lower rates. Millennials are also finding condos are the cheapest avenue to get into real estate. Take for instance in Calgary, where the average price for a condo was $330,200 in September 2014, but the average sale price for a single home was $512,300 during the same month. Regardless of the number of towers being built, the demand from young people is real, especially as they are priced out of the detached home market.
A Bad Rap for Big Cities
Most reports point to Canada’s big three urban centres, which are excessively pushing the average sale price of homes in Canada. This was reiterated by Oliver at conference in Toronto last week. “There are three urban centres, Calgary, Toronto and Vancouver, where the prices continue to go up and there are affordability issues,” he stated adding, “I don’t see a housing bubble, neither does the governor of the Bank of Canada or the CMHC or the OECD.”
As well, reports should take into account the overall financial inflation associated with being a big city dweller. Canada’s largest cities offer some of the best job opportunities and greatest pay in the country. The average Canadian salary is $928 a week – higher home prices are not always reflective of higher salaries. But the argument that home prices are too high in big cities is irrelevant. It’s because many areas with cheaper homes have less job opportunities and would make that purchase impossible without a good weekly wage. Once you get into real estate, the big cities have a greater chance of their values holding and continuing to rise.
Are More Mortgage Rules On the Way?
Under Canada’s current mortgage regulations, anyone putting down less than 20 per cent to buy a home requires mortgage insurance though the Canada Housing and Mortgage Corporation, which is backed by Canadian tax payers – if a homeowner defaults on their mortgage, government funds are used to pay back the lender. Oliver has talked about gradually reducing taxpayer exposure to this debt and forcing banks to assume more liability – but he rejects any claim that this is a short-term development.
As he stated at the G20 Summit in Australia last month, “we do not have in mind any major moves in this regard (to the CMHC)… Any revamp under consideration would be more modest in nature.” In the last five years Canada has moved to tighten mortgage rules. Amortization has been reduced, minimum down payment amounts have increased and the HELOC ratios have also been tightened. A housing bubble would be more likely if these steps had not already been taken. If Oliver were to take a further step to reduce taxpayer’s exposure to mortgage insurance banks could make it even harder to get a mortgage or secured line of credit.
The Global Outlook
In its latest World Economic Outlook, the IMF says Canada’s record household debt levels are cause for concern, in addition to our housing market being overvalued. In its report, it states these factors “call for continued vigilance and may require additional macro-prudential measures.” Low interest rates are the culprit; it’s cheap to borrow so Canadians continue to buy more, and in bigger amounts. When rates rise there will be some pressure on home prices, but there will also be more opportunities for Canadians to get a better fixed rate of return on their money, encouraging people to save more.
Perhaps Canada’s housing market has some overvaluation – but in my opinion, calling it a bubble is alarmist and irresponsible. New homeowners should feel encouraged to buy a home at these low rates, but pay their mortgage as if the rate was two percentage point higher. Then you will really be taking full advantage of the incredible lending situation we are in right now and avoid getting caught up in a housing bubble burst.