Canadian Housing Market | Mortgage Credit | Irina Marshall

Canadian Housing Bubble to Burst? Quell Your Fears Here.

When it comes to the Canadian housing market, you’ve likely heard the sensationalized phenomenon of the housing bubble that is about to burst at any moment.

The conditions to this prophetic, real estate apocalypse began just prior to the 2008 global financial crisis: there was a strong economy, low interest rates, and more lenient lending principles which ushered in an upswing in the appreciation value of homes. Luckily, government interventions have become stricter – removing those who cannot afford to be in the market through placing borrowing limits and lowering the maximum amortization to 25 years. These regulatory cooling attempts also prevented prices from getting out of control, and were a valuable lesson to learn and implement from the U.S.’s own housing bubble burst.

Indications of a housing bubble rely on the ratio of housing prices to apartment rents, and the ratio of incomes to housing prices. According to these ratios at first glance it would appear that the residential housing market is in trouble. This however, does not take into account low mortgage rates.

Housing Forecast? Not as gloomy after all.

Housing Forecast? Not so gloomy after all.

Overall, it is mortgage costs, and not just house prices that are the principle, determining factor for potential homebuyers, says Robin Wiebe of the Globe and Mail. Comparing monthly mortgage payments to incomes and rents makes more sense than comparing these solely to house prices. Within this context, it is easier to conceptualize the affordability of homes in terms of monthly payments.

As the mortgage rates gradually increase, this will bring about a slowing in housing starts and cool off the housing market, according to the Conference Board of Canada with their new publication, Housing Briefing: Bubble Fears Overblown. This is a far cry from the catastrophic meltdown that was previously predicted, but a reassuring one nonetheless.

In the shadow of the U.S. housing bubble boom and bust, The Conference Board of Canada quells fears by asserting that any market downturn that could occur, would not be further amplified by a surge of ‘“distressed” home sales’, (as was witnessed in the United States) because there are a low percentage of mortgages currently in arrears.

Along these same lines, Michael Babad calms us by going even further – explaining exactly what it would entail for a housing market crash:

1) Interest rates would have to spike sharply.
“With real growth of about 2% and a relatively subdued inflation forecast, we see no reason for interest rates to substantially rise in 2014”, quotes The Globe and Mail of Ed Devlin.
2) Unemployment rates would have to dramatically increase.
The current unemployment rate is currently hovering at 7% and expected to stay there. It would have to rise to 8-10% to fuel a disorderly housing correction.
3) Mortgage credit would have to lose backing.
The Canadian banking system continues to provide sound mortgage credit which is able to keep the housing market afloat.

Now that you can rest assured the housing market is stable, take part in it, and I can help you find the lowest mortgage rates.