GIPHY

 

"Ten years ago, The Economist magazine concluded Canadian real estate was grossly overvalued. Nine years ago, Merrill Lynch declared Canadian housing was afflicted by “overvaluation, speculation and oversupply.”

 

Seven years ago, the Organization for Economic Co-operation and Development and the International Monetary Fund began sounding sirens about the dysfunctional state of Canadian housing. And a year ago, the Canada Mortgage and Housing Corp. warned home prices could fall 18 per cent as a result of the COVID-19 pandemic.

 

What did this multi-year outburst of public shaming accomplish? Absolutely nothing. Canadian home prices marched relentlessly higher." Excerpt from "The trouble with ‘bubble’: Why Canada’s red-hot housing market is defying the burst" published in The Globe and Mail April 30, 2021 Click to see Full Article

 

The market is absolutely crazy right now, and I hear so many people talking about the coming crash. Are you waiting until after the crash to purchase a home? Let's consider the crash from a few different angles.

 

What economic driver would make a housing crash happen? A pandemic possibly? Nope – just went through that. A Tsunami – that didn’t work either. A Global Financial Crisis – temporarily slowed the market. Some people feel that prices "have to" drop. What would cause this is to happen? Loss of employment by millions of people – that didn’t do it. Government initiatives for affordable housing? Not that either. The one thing that could make housing prices fall would be a huge drop in construction costs and building fees by local governments. I don't see construction costs falling anytime soon, in fact, they are skyrocketing. 

 

There is a saying about when the best time to buy is, “Five years ago and if not five years ago, then today.” The fact is that even if prices fall, it will be temporary. In the long run you will be ahead if you buy, even in a crazy market like this one.

 

Let’s suppose for example that a house sold at $400,000 last December and is now worth $468,400 as prices have risen 17.1% in the first four months of 2021 (May 2021 Economic Housing Forecast BCREA Click to read the Full Report). There is an expected increase of another 5.4% for the remainder of the year which would put the house at $490,000 after just one year. If there were a 10% "crash" in housing prices over the next year the house would be worth $421,560. You are still ahead. 

 

Think interest rates are going to go up? In my opinion, it is unlikely that a rise in interest rates will have much of an effect on slowing the market, the cost to the consumer just isn't high enough. For every 1% increase in interest rates, your monthly mortgage payment will go up by about $50 per $100,000. So on a $500,000 mortgage, your payment will increase by $250 per month. The federal government has developed measures to protect Canadians from rising interest rates. When qualifying for a mortgage, you actually have to qualify at an inflated rate, generally 2.5% higher than the actual interest rate you will be paying. Mortgage finance regulations have built-in this buffer so that if interest rates increase you should still be able to afford the payments on your home.

 

Some people believe that once everyone who deferred their mortgage has to start paying again, there will be a lot of foreclosures and forced sales which will cause the market to drop. With the top ten banks reporting their mortgage arrears to the Canadian Bankers Association, in BC at the end of February 2021 only 0.16% were over 90 days late in their payment (Canadian Bankers Association Arrears Statistics Click to See the Stats). With an active seller's market, if someone is getting into hot water with their lender, they are going to sell their home before the bank forecloses. 

 

If you are waiting for the crash you could be waiting a long time. What if you bought into the market today and then waited? I can assure you that you will be ahead ten years from now and thanking me for giving you a kick in the ass.