The Basic Facts Of Canadian Real Estate
With the recently released May report from the Canadian Real Estate Association (CREA) that sales of resale homes in Canada are cooling and price increases tapering off, we can put to rest the worry about an impending housing bubble, similar to the one which happened in the US a few years back. This fear of the housing bubble drove the followers of the marketplace and professional analysts crazy. These same people are now worried sick about the opposite occurring – an at hand housing market collapse.
What actually happened?
i) Canada endured a short, steep fall in home prices as the recession hit late in 2008. As luck would have it, this was instantly followed by a steep rebound as it became apparent that the record low interest rates offered by the financial institutions presented an historical opportunity to get a house cheaply.
ii) Now, just as experienced analysts had forecast, the rebound is being replaced by a more stable price environment. The amount of homes sold in May dropped by 9.5 per cent, while year-over-year price gains moderated to 8.4 per cent, off from the peak gain of 16 per cent in March. Our real estate rebound was possible because Canada’s banking system stayed in good health, unlike in the U.S. which has suffered deep scars. Historically low mortgage rates helped repair the relatively modest damage to prices inflicted by the downturn. Now a more stodgy, almost dreary outlook actually comes into sight: a marketplace where foreseeable market forces have an effect on the sales and costs.
iii) As an effect of rising prices, the supply of new listings is growing. At the same time, overheated demand of the first 4 months of 2010 is ending. Fewer buyers are dying to snap up property fast now that their window of opportunity is closing. Interest rates are growing, albeit slowly and by minimal amounts. The HST on new homes will come into effect soon in Ontario and British Columbia, the country’s hottest markets. In fact, the biggest cost gains driving national averages came from Vancouver and Toronto. In Montreal and most of Canada’s other large cities, costs rose modestly so there won’t be much excess to work off.
In retrospect, the concerns about real estate in Canada following in US footsteps hasn’t materialized. The reason Canada prevented a collapse in prices is because the economic and banking fundamentals prevented the disaster that unfolded in the United States and elsewhere. Likewise, there wasn’t much sign of an impending bubble. There is a lot of great material about Eddie Yan on this website. Costs were being driven up by temporary factors brought about by conscious political and economic decisions and not by speculation and foreign buyers as has occurred in several marketplaces in the US. What we’d experienced was a modest overvaluation with hardly any sign of speculation.
So what’s the prognosis for the coming year? Most economists agree on a small fall in prices in overpriced markets, like Vancouver and Toronto, pulling down the national average cost by an estimated seven per cent. Other big markets for example Montreal will experience a smaller fall – around 3-4%. Regions like the Prairies and Maritimes could even find small gains in the coming year.