It’s quite clear that the housing market has come back to life in the last few months. In December, most markets (notably except for in Alberta) saw record-breaking sales.
Image: Thetruthabout... / Flickr
This has naturally prompted concern that the market is becoming over-active, or bubbly. Scotia Capital recently published a report called “Is there a Canadian Housing Bubble?” The authors of the report, Karen Cordes and Derek Holt said, “with prices up 20 per cent over year-ago levels and at all-time highs by virtually every measure, this is becoming an over-valued asset class in our opinion.”
The Canadian Mortgage and Broker Professionals have waded into the debate. In an article called “Bubble. What Bubble?” they lay down their reasons for why they think it’s unwise to worry. And they have some good points:
- An asset bubble is due to buyers and sellers acting excitedly. These people do not tie their purchasing behaviour to rational fundamentals, but to the irrational expectation that prices will always go higher. So far, there does not seem to be any indication that this is what is happening in the market.
- Although the number of sales in December was record-breaking, it was not very far from historical norms. As well, some of the growth can simply be attributed to the fact that sales in early 2009 were very depressed from the norm, and that the growth we are experiencing is simply a reaction to that.
- The arrival of the HST in Ontario and B.C. (although there is a petition in B.C. to stop it) will hinder the housing markets in these provinces, reducing the chance of a bubble. As well, the coming higher interest rates will also help to deflate any bubbly qualities in the market.
And finally, all of the experts interviewed point out the same thing: a housing bubble only matters to individual buyers if they end up buying a house they cannot afford. If you buy a home with a somewhat overinflated value in a bubble, and the house’s value drops after the bubble bursts, in the long run it may not matter that much. Inflation will likely help you regain the home’s value after a few years. That is, if you don’t run into financial trouble in the meantime because you bought a house that was too expensive for you.
Paul Gazzola, of Mortgage Architects, knows what he’s talking about. In 1990, he bought a house in the housing bubble, but by 1997, it had regained its value.
He offers good advice: “When you purchase, purchase for the purpose of your home as a shelter and good investment versus rent. If rent is cheaper for you, then you should stay in the rental market.”
Nelson Goulart
Broker of Record with Signature Service GMAC Real Estate
www.ssgmac.ca
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