Two days ago on December 10th, the Bank of Canada stated that the housing market is overvalued by 10% to 30%. Many Canadians are wondering if a "housing crash", the burst of a "housing bubble" or if what most refer to as "correction in pricing" is going to take place. What the media have not reported accurately are the steps that must take place in order for the speculated "crisis" to begin.
The media tend to report mostly on negative news, and in this case have prematurely overestimated the results of a said 10% to %30 over-evaluation of our housing prices. When focusing on downtown Toronto real estate prices, yes they are over valued slightly. But at 1% vacancy and over 100,000 new residence each year in Toronto, the supply of homes cannot keep up with the demand.
The Governor of the Bank of Canada Stephen Poloz said that they are not expecting a housing crisis wherein there is a likelihood of a sharp drop in property prices, dropping them to a very low price. He said that there would be a problem if there was a spike in unemployment or interest rates, which would make mortgage payments unaffordable for some, but he isn’t expecting that scenario either.
It is natural for the public to speculate and be cautious considering the housing crash fallout we have recently experienced, but Poloz stated that he often stresses the negatives more than the positives to keep the public aware of potential hazards, no matter if they are minuscule, or perhaps even imminent risks. Poloz also said “We don’t think we suddenly became over-valued in a bubbly-type way. We don’t think of this as a bubble in any way.”
The Downtown Toronto real estate market is in high demand and so are the communities surrounding the city. The Governor of the Bank of Canada made it clear that we shouldn't be worried unless there is a rapid rise in unemployment, and a quick rise in interest rates - making it difficult for families to pay for their mortgages, Stephen Poloz isn't expecting either of those.
Mr. Poloz stated the need for expansion and innovation in Canada with bond financing; securitization to create new high-quality, low-risk products; peer-to-peer lending; and public-private partnerships.
For 2015 so far, the Bank of Canada is keeping the interest rate at one percent as inflation rises, as there are signs of "broadening" economic recovery. House hold debt should be more of a concern to Canadian households, as should the economic effects that low oil prices will have on the Canadian government. Also of concern is how the government will recoup those losses. Equifax debt report says Canadians now owe $1.5 trillion outside mortgages, and food prices have been estimated to rise faster than inflation next year. A huge positive for Canadian households is the growing American economy as Canada's gross domestic product rose to a 2.8% rate in the third quarter - which was unexpected, and had mostly to do with improved exports and expanded household spending. This is a major positive for Canada's $1.5 trillion consumer debt.
The Central bank said: "Stronger exports are beginning to be reflected in increased business investment and employment." Hopefully this means that the increased business investment and employment is leading to a balanced and self sustaining growth as the Central bank has suggested.
With a strong economy, increase in employment and a steady interest rate, the housing market seams to be right on track for a year of growth in 2015. The bank of Canada probably won't raise the interest rate until the Federal reserve raises theirs, which has been rumored to take place some time in 2015. This will mark the first change in the interest rate since 2010, and is a great sign of growth - as an increasing interest rate is a positive sign of a growing GDP. Speculation of a housing crash is just that - speculation. All the facts point to a high probability of sustainable growth in the housing market, which is all the more reason to invest in Ontario real estate. My next blog post will explore the fastest growing real estate market in Ontario and the future it sports for developers, industry and commuters.