There has been a great deal of talk in the mainstream media recently surrounding the possibility that Canada is in a housing bubble. First, what is a housing bubble? According to Answers.com, a housing bubble is "a run-up in prices fuelled by demand, speculation, and a belief that recent history is an infallible forecast of the future." It begins with an increase in demand when properties for sale are in short supply. At this point, speculators enter the market hoping to make a quick profit and this drives demand higher. When demand inevitably declines and supply increases, prices drop sharply and the bubble bursts. A recent, obvious example of a housing bubble is the current situation in the United States of America.
So is Canada in a housing bubble? A recent article in the Globe and Mail would suggest it is. David Rosenberg is Chief Strategist for Gluskin, Scheff & Associates Inc. He has looked at Canadian home prices in relation to personal incomes and residential rents and feels that prices are 15-35% too high based on these fundamentals. Adjusted for inflation, he says Canadian home prices are on a par with 1989.
As I've stressed in the past, housing is local. So what about Kitchener-Waterloo? First, a bit of history. In the late 1980's, prices in K-W rose dramatically and speculators, including Realtors, were everywhere. Prices would rise by the week and the prevailing wisdom was it was nearly impossible to lose money in real estate. In 1990, we entered a recession. The supply of homes for sale increased rapidly and prices corrected as interest rates rose by approximately 2.5% in a 6 month period. The speculators suffered losses and, in many cases, it took a painful 10 years for prices to recover. Fast forward to 2010. The "can't lose on real estate" attitude is back in vogue. The supply of homes for sale is low and the demand is high. The only thing that appears to be missing is widespread speculation. In short, there are danger signs locally but I would lean toward the low end of Mr Rosenberg's opinion for our area.
Going forward, keep an eye on the number of homes for sale. Higher interest rates are a virtual certainty this year and the only issue is timing. This will affect affordability and soften demand. It appears as though the Bank of Canada will have to wait for U.S. interest rates to rise before initiating an increase to prevent the Canadian dollar from appreciating above par with the U.S. dollar. Watch for the Canada Mortgage and Housing Corporation to increase their downpayment requirements and/or shorten the maximum allowable amortization to dampen demand.
As always, for sound advice about your housing needs, feel free to call or email 519-505-4488 Jeff.Gingerich@Century21.ca
Century 21 Home Realty Inc. Brokerage