First National - Market Trends

First National - Market Trends

Is a housing bubble on the horizon in Canada?

With the U.S. housing crisis still fresh in homeowners’ memories and Canadian housing prices recently posting strong increases, you may be wondering if a housing bubble is forming here. You’ll be happy to hear that there are many positive signs for the housing market in Canada, and there is little evidence that a bubble is on the horizon.

What is a housing bubble?

A housing bubble occurs when a rapid increase in prices leads to houses being overvalued, followed by a sudden market downturn. In most cases, it’s driven by speculation — investors buying property to sell quickly afterward so they can capitalize on short-term increases in value.

Sooner or later, the housing market comes to realize that homes are selling for more than they’re really worth. At that point, the bubble bursts and prices decline. Homeowners may see the value of their home deteriorate. For anyone looking to sell, the bursting of the bubble means a lower sale price.

Contributing factors in Canada

Why have some analysts been warning that a bubble might be forming here? The main reason is the significant increase in average resale home prices through 2009 and into 2010. According to the Canada Mortgage and Housing Corporation (CMHC) in its Housing Market Outlook — Second Quarter 2010, residential resale prices rose from an average of $304,986 in 2008 to $341,893 in the first quarter of 2010, an increase of more than 12%.

However, this increase appears to have been driven by a combination of low prices and low rates. By the end of 2008, as the global recession took hold, Canadian home prices had dropped. Meanwhile, mortgage rates had reached record lows. As a result, homeownership suddenly became much more affordable, and more people entered the market. Increased demand drove home prices up.

At the same time, fewer new homes were being built. Housing starts went from 211,056 in 2008 to 149,081 in 2009, a decrease of more than 29%. With fewer new homes to choose from, potential buyers turned to resale homes, driving demand — and prices — up.

Benefiting from a balanced market

It’s important to keep the recent price increases in perspective. In most markets, prices have simply returned to their pre-recession levels and not posted new highs.

Going forward, CMHC’s outlook is for the Canadian housing market to continue to remain strong. CMHC forecasts moderate price increases ahead, with the average resale home price expected to rise by just 1% — to $345,500 — from the first quarter to the fourth quarter of 2010. Housing starts are expected to decline throughout 2010, which would also support demand for resale homes.

All of these indicators suggest that there doesn’t appear to be a housing bubble on the horizon. If you’re planning to sell your home and buy a new one in the near future, it’s likely that you’ll be able to get fair value for your existing home and buy a new home at an affordable price.