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July 25, 2017

Canadian housing bubble?

by Bob Schwartz

Canadian housing bubble – a reflection of the Southern California housing market?

Could the fast home appreciation occurring in Canada be a mirror reflection of our own Southern California real estate market?

Canada is experiencing a huge real estate boom over the past two decades. When I say boom…I just mean the value of someone’s house goes up a lot. This is great for current homeowners, but this is terrible for new home-buyers who now have to take out a much larger mortgage to get their first house.

Why is this a problem? Why is it bad for someone’s house to appreciate rapidly in value for decades? This is bad because it eventually gets to a point where the price of a house is beyond any accurate or rational reflection of its actual worth. A house with a value of $1,000,000…may in reality only is worth a couple hundred thousand.

Canadian housing bubble

2017 San Diego real estate market forecast - Canadian housing bubble

How does this all come together? The extremely large mortgages people take out, although may seem safe, are at a large risk of interest rates going up. Think of interest rates as just the cost of borrowing a large sum of money from the bank to buy a house. Interest rates, or the cost of borrowing money, are at all-time lows in Canada. As LOW as it can be. They are so low, they can’t really get any lower. Because of these low-interest rates, it is VERY attractive to take out a mortgage to buy a house. The cost of borrowing money from the bank is low, and that’s seen as a good thing

The problem is that this is not sustainable. Eventually, interest rates will have to rise. Why? Since interest rates are at historical lows…there is going to be a HUGE demand to want to borrow money to buy a house. Like I said earlier…Low-interest rates are ATTRACTIVE! The problem is that demand will be so much higher than the supply of houses available…that an adjustment needs to take place. Something needs to lower the demand significantly, that way demand = supply. That something is a rapid increase in interest rates. This is because interest rates affect the consumer demand to take on debt. The higher the interest rate, the less attractive it is for someone to take out a mortgage. And once the rates spike, it’s game over for Canadians.

Remember…we talked about the affordability earlier of a house. Most Canadians are increasingly unable to afford the mortgage they are taking. Combine that with a huge demand for houses, a demand that Is way large then supply, that a correct must take place. A correction through the increase of interest rates. Once they spike rapidly by let’s say 20-30%, the people who took out a mortgage they can’t really afford, to begin with…will be screwed. Their monthly mortgage payment will increase by so much, they will have to leave the house and default (unable to pay) their mortgage.

Once this starts happening and people start vacating their homes cause they can’t afford it…the values of houses go down tremendously! And that my friends…is the nutshell of the Canadian housing bubble.

This is a problem because Canada is deeply reliant on the real estate market. It makes up about 12% of our GDP (gross domestic product). I didn’t quite touch point on a lot of other key details that I think you should know.

1. demand for houses isn’t solely high because of low-interest rates…its also because of our culture. Home ownership is s stepping stone to adulthood…and you didn’t “make it” unless you got your first house. Strange right…but people’s human emotions are a factor here. People are pressured to take on debt to “become a real adult with their first house”

2. It’s a bidding war out there. I said earlier in this video there is JUST NOT enough houses to meet the demand for everyone. A lot of houses are being sold hundreds of thousands over the asking price because multiple people are bidding furiously for the same home

3. It believed that foreign investors…people who don’t live in Canada, are affecting this as well. People are seeing Canada’s housing market BOOM…and for rich foreigners…it seems like a great investment. So now with people who already live in Canada competing and having a bidding war for houses…we now have foreign rich investors interested too. These are thousands of more people now entering the Canadian real estate market…who otherwise wouldn’t have even been here, to begin with. This adds, even more, bids on houses…and driving up prices even more.

Canadian housing bubble

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