Callaghan O’Connor Realtor, Discusses The State of The Canadian Housing Market
The Canadian housing market may be in trouble. House prices have increased 375% nationwide and are still going up faster than any other country in the world. There are a couple of reasons for this- primarily that Canadians have had a 200% increase in disposable income while house prices have risen 400%. Mortgages are usually found at 1.5% or lower rates, so when rates go up from 1.5 to 3.5%, monthly payments increase by 30%.
This may not seem like much, but Callaghan O’Connor, Realtor from Victoria, BC, believes that it’s quite significant when you consider how long it takes to pay off your mortgage (25 years on average)! This may be an extreme situation, but many factors can affect your ability to buy a home. Historically low-interest rates increased savings, and an equity boom has caused skyrocketing housing prices, causing a perfect storm for would-be home buyers.
Low-Interest Rates
The Canadian economy is in a boom, and that means home prices are on the rise. Low-interest rates mean people can afford more expensive homes than they could before. The Bank of Canada has been keeping them low to stimulate spending and investment throughout the country — and it’s working!
The problem with low-interest rates is that they make houses artificially cheap compared to what they would be if we had high-interest rates like in the 1980s or 1990s. Callaghan O’Connor Realtor causes two problems: first, there aren’t enough houses for everyone who wants one; second, fewer families rent because it’s cheaper to buy, which causes landlords to raise the rent.
Callaghan O’Connor feels that this leads to a causal loop between supply and demand. Rents go up, which means that more people want to buy rather than rent. However, once the number of houses available reaches a low level, prices for buying go up exponentially because of reduced supply and increased demand. That makes housing less affordable for just about everybody-except those lucky enough to own their homes already.
The Pandemic
The pandemic has had many far-reaching effects that have not been fully understood. One of these factors was an increased level of savings among Canadians. With all the restrictions on travel and outside entertainment, consumers spent less than they would have.
Callaghan O’Connor Realtor feels that this led to many Canadians eliminating a huge chunk of their household debts. The elimination of debt led to many Canadian’s credit scores increasing, which made more and more Canadians able to get mortgages, combined with ultra-low interest rates, making houses an attractive target for spending that money.
Callaghan O’Connor believes that when the housing market nearly shut down early in the pandemic, it created a pressure cooker of unrealized demand that was finally allowed to vent last year. Buys outnumbered sellers in most of Canada, and sellers seeing the demand increased their prices. This became a cycle because once the sellers got an increased price for their homes, they had to buy another home, which was inflated because of housing price trends.
The Equity Boom
Private investors have noticed the big increases in Canadian housing prices and have responded about how you think they would. Equity firms have been snapping up investments properties, with some experts estimating that private investment firms own nearly 25% of single-family homes in the Toronto area.
Callaghan O’Connor Realtor believes that easy access to credit and low mortgage rates have led to many investment firms buying a fixer-upper strictly for “flipping” the home for a profit. Often, these firms come in and make minimal upgrades to the home to maximize profits on the sale.
With increased demand already driving housing prices up, these flippers influence other sellers to increase their prices, resulting in lower-income, more affordable areas becoming much more expensive to live in.
Another potential danger of an increased flipping industry, Callaghan O’Connor believes, are instances of fraud. In the past, when housing prices have soared this much, some investors have bought a home and resold it almost immediately with the help of a fraudulent appraisal that sets the price deceivingly high.
Then whoever they sold the house to ends up with a much larger mortgage than the house is worth.
The Risk Bubble?
High levels of investment and speculation can lead to a market bubble, which becomes more likely as buyers have access to cheap loans. Callaghan O’Connor believes that easy credit incentivizes this type of behavior but also leads down a dangerous path. As you’ve probably seen in the media lately, HELOCs are reaching all-time highs in Canada, with one in three Canadians owning a HELOC.
While one might consider this to be “good” because it allows you to invest in your home and make improvements, the danger is that many people are taking out large loans for little money down at super low rates without understanding the terms of their loan.
Many economists have said that most of the Canadian Housing market is overvalued and in a risk bubble. A risk bubble occurs when people do not accurately perceive the nature of an asset’s value and invest in it based on wishful thinking rather than objective analysis.
Final Thoughts
The Canadian Housing Market has been booming in the past year, with many people benefiting from cheap loans and high housing prices. However, this may lead to a risk bubble which will be caused by increased flipping and speculation. With so much of our economy relying on sales for home-building companies and developers, we can’t afford for an overvalued market to burst. Investors must educate themselves about how they invest their money wisely before it’s too late!
