Bubble? The Next Step In The Canadian Real Estate Market

Housing Affordability Leaves Room for Improvement
In fact, a recent report by the Royal Bank of Canada believes that housing affordability, which had already begun to erode across most of Canada (Alberta being the notable exception) will continue to decline in the next 12-18 months.

However, RBC also believes that the “red-hot demand for housing is likely to cool during the second half of this year, as factors that fuelled it dissipate.” This in turn should reduce housing prices, and improve affordability in the long run.

Canadian Real Estate Attracts Overseas Buyers
The ‘fuelling factors’ were of course, low interest rates, paired with limited inventory and strong demand. It’s also worth noting here that the demand is not just from Canadians themselves; Canada’s much-touted stable financial sector and prudent fiscal policies (and a strong loonie) have made it desirable to international investors, too.

Vancouver real estate brokers, for example, are seeing increasing numbers of wealthy Chinese buyers looking to invest in Canadian real estate as a relatively safe place to house their money.

Prime Rate Climbs, Cools the Market
The Bank of Canada hiked the prime rate for the first time (and as the first of the G7 countries to do so in the wake of the financial crisis) last month, and there is every indication more hikes are in the works to keep inflation under control. Not only will this make mortgages less attractive to those on the margins of affordability, those who rushed into the market early to capitalize on those unprecedented low rates will have left a void, and the number of new homebuyers should now dip below average as a result.

The adoption of the Harmonized Sales Tax in Ontario and British Columbia on July 1st also created a small rush on new home purchases in the first half of the year. All in all, the second half of the year is not expected to keep pace – and this is a good thing.

If affordability is to be brought back into line, an essential factor in preventing the kinds of mortgage defaults that wiped out the US housing market, then the Canadian housing market must cool its heels in the coming months. A failure to do so could spell disaster, the dreaded bubble so long anticipated.

Tighter Mortgage Rules Mean Better Adaptability
Finally, recent changes to insured mortgage rules are designed to prevent home-buyers from taking on more than they can handle, making for tougher qualification rules and ensuring a built-in buffer zone should interest rates continue to rise.

Real Estate to Slow but not Spiral
In short: earlier, frenzied demand was circumstantial, and will not continue; reduced demand will likely lead to a price correction in the most over-inflated markets, but the existence of foreign investment will help to offset the worst of it; rising interest rates will further cool demand, but there is every indication that increases will be measured and modest as Canada’s economic outlook remains positive.

Best predictions, then, are that a slow down in the Canadian real estate market is due, is coming, and is healthy. Of course, external factors cannot be predicted, and Canadians are still in a precarious enough position that any dramatic changes to these interlocking factors may yet force a real estate crisis.