Is the Real Estate Market Going to Crash?
When COVID-related shutdowns began in March, real estate brokers and clients scrambled to respond to the shift. Record-low interest rates caused lenders to halt new underwriting, and homeowners debated whether or not to put their houses on the market. However, those first days of uncertainty ushered in a period of growth in Canadian real estate, which currently accounts for a record-setting 9% of the country’s overall economic output.[1]
You may be wondering whether the good times can continue to roll on. If you’re a homeowner, should you take advantage of this opportunity? If you’re a buyer, should you jump in and risk paying too much? Below we answer some of your most pressing questions.
Why are home prices rising during an economic downturn?
At the beginning of the pandemic, fears of an economic recession were top of mind for homeowners all across the country. Overall, credit product origination declined across a variety of sectors, including car loans and credit cards, and government forbearance programs were put into place to cushion the blow of anticipated economic hardships.
However, strong demand —coupled with ultra-low inventory and interest rates—caused real estate prices to continue to rise. The national average resale price soared 17% during 2020, and mortgage originations showed year-over-year growth of almost 30% on the strength of renewals and refinancing in response to record-low interest rates.[1,2]
Are we facing a real estate bubble?
A real estate bubble can occur when there is a rapid and unjustified increase in housing prices, often triggered by speculation from investors. Because the bubble is (in a sense) filled with “hot air,” it pops—and a swift drop in value occurs. By contrast, the current rise in home prices is based on the predictable results of historically low-interest rates and widespread low inventory.
The Bank of Canada projects continuing low-interest rates until sometime in 2023, aiding in economic recovery and increasing affordability.[3] This helps offset the effects of high home costs even in markets where real estate might otherwise be considered overpriced. Continuing low inventory should gradually ease as an aggressive vaccination rollout and continuing buyer demand drive more homeowners to move forward with long-delayed sales plans and as new home construction ramps up to meet demand.[4]
Aren’t some markets and sectors looking particularly weak?
One of the hardest-hit sectors of residential real estate has been the rental market, which experienced a mass exodus of young professionals and families who fled to the larger square footage and wide-open spaces of suburban and rural markets. Interestingly, landlords have not responded to these vacancies with lower rental rates, which suggests that most property owners expect demand to return to normal quite quickly as the vaccine rollout begins to take effect.[5]
Some analysts predict a decline in the Canadian housing market due to the impending end of government emergency measures and lender deferrals. However, others point to the increased demand for homes in smaller markets and lower-density areas outside of the country’s urban centres as an optimistic indicator, allowing these distant suburban and rural enclaves to benefit from increases in home values and an influx of new investment.[6]
What’s next for the Canadian real estate market?
Projections vary widely, with some economists predicting a market correction and others predicting continuing strong growth. Low inventory and lack of affordability appear to be the negative factors applying downward pressures on the market, while pent-up demand and a return to normal employment and income levels, along with anticipated higher-than-average growth in the economy, point to ongoing good news in the sector.[7]
STILL HAVE QUESTIONS? WE HAVE ANSWERS
While economic indicators and trends are national, real estate is local. We’re here to answer your questions and help you understand what’s happening in your neighbourhood. Reach out to learn how these larger movements affect our local market and your home’s value.
Sources:
1. Huffington Post -
https://www.huffingtonpost.ca/entry/house-prices-canada-bmo_ca_600c7a98c5b6d64153ac675b
2. Global Newswire -
3. Bank of Canada -
https://www.bankofcanada.ca/2021/01/fad-press-release-2021-01-20/
4. Bank of Canada Monetary Policy Report -
https://www.bankofcanada.ca/wp-content/uploads/2021/01/mpr-2021-01-20.pdf
5. CTV News -
6. Huffington Post -
https://www.huffingtonpost.ca/entry/housing-forecast-canada-2021_ca_5fec942cc5b64e4421082979
7. Canadian Mortgage Trends -