The Housing Boom May Be Here To Stay: What could it mean for you?

​The cost of real estate continues to rise at an unprecedented pace in Canada, making the housing industry fundamental to the economy. The explosion of buying activity and price increase may be why Canada's central bank is cautious about enforcing policies that will depress the market, bringing the frenzy to an end. 

During the pandemic, home prices have skyrocketed due to record-low interest rates, limited supply of property available, and lockdowns that cultivated a phenomenon known as 'pent up demand,' which means the period of little or decreased spending eventually led to a sudden surge in demand. 

Moving forward, the central bank could cool the market in the following ways:

1. Create policies that end frenzied buying, like mandating the termination of blind bidding or similar to the B.C. Government allow a more extended cooling-off period that permits buyers to walk away from an offer to purchase without legal consequences. 
2. Raise interest rates.
3. Tighten mortgage rules further as it has done with the "Mortgage Stress Test" and implement a new formula used to calculate the monthly payment of unsecured debt on mortgage applications. 
4. Impose taxation like capital gains on flips or the sale of primary residences. 

The Bank of Canada's overnight lending rate is currently 0.25 percent, and it has kept this rate low over the last two years, contributing to the explosion of real estate prices. The real estate market is worth 300 percent more than Canada's GDP, making some of its largest cities victims of housing bubbles. 

In reality, approximately 75 percent of Canadians hold most, if not all, of their wealth in real estate. According to a report by Stephen Punswasi, "Co-Founder and chief data nerd at Better Dwelling," $248 billion got invested in Canadian real estate in just the first three months of 2021. This figure represents a 42 percent increase compared to 2020. 

The significant issues with rapidly rising home prices include affordability, payment shock if interest rates rise, and risks of sharp corrections. When the cost of property becomes highly inflated, borrowers take on substantially larger mortgage debt, which places them in a situation where they could struggle with higher mortgage payments when rates rise. 

Poll after poll has shown that Canadians would enter turbulent financial waters if their mortgage payments unexpectedly rose by just $100.  Therefore, if suddenly, the housing industry plummeted into a recession, the consequences would be severe for homeowners, investors and Canadian homebuilders. 

Here is a list of what the government has tried to so far to cool the market but has been unsuccessful:

1. Foreign Buyers Tax.
2. Empty Homes Tax.
3. Speculation Tax.
4. Mortgage Stress Test.
5. Record New Home Completions.

Despite all of these measures, home prices in Canada's largest cities continue to rise at an unprecedented speed. A report by Teranet shows that 25 percent of property purchases in 2021 were done by investors, people who already owned their principal residence.  What is obvious is the increase in value allows existing homeowners to purchase a new property by tapping into equity, which leads to a cycle of price growth that continues to benefit investors. Unfortunately, the number of new purchasers (i.e. first-time homebuyers) getting into the market is declining. 

It seems the government will eventually have to act. We will stay tuned about what they will propose next and update you accordingly. 

Do you have mortgage questions? Please shoot me an email at sarah.colucci@mortgageedge.ca 

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