The idea of a real estate bubble is not new. In recent years, the most well-known example is the 2007-08 housing market crash that happened in the U.S. It all started with a real estate bubble in the mid-2000s which contributed to the great recession.
What is a real estate bubble?
Also referred to as a housing bubble, a real estate bubble refers to a period of years or months characterized by low supply, high demand and inflated home prices. Such bubbles are caused by a wide range of factors including low interest rates, easy access to credit, rising economic prosperity, lack of financial literacy and wider mortgage product offerings. In the past, housing bubbles have popped due to a rise in interest rates, a downturn in the economy or reduced demand.
Is the Canadian housing market a bubble?
All indications show that the current Canadian housing market could be considered a bubble. According to the Canadian Real Estate Association (CREA), the national average home price reached a record high of $816,720 in February 2022. This was a 20.6% increase from $677,435 last year. To put this into global perspective, consider when converted to U.S. dollars, this price is 50% higher in comparison to the median US home price.
Just like the US in the 2000s, the homebuying frenzy in Canada was triggered by low mortgage rates in 2020. To offer support to the economy during the COVID 19 pandemic, the Bank of Canada cut down its interest rate to a record low of 0.25%. Since homes were made more attainable, investors and buyers flooded the market. By the end of 2021, records from the Canadian Real Estate Association reveal that there were only 86,000 homes left for sale countrywide. The high demand combined with the limited supply resulted in the record high prices in early 2022.
To cool off the hot real estate market, the Canadian government has taken measures to deal with the speculation and demand. Prime Minister Justin Trudeau announced that foreign investors will be banned from purchasing homes in Canada for two years. The government also enacted higher taxes for individuals that sell their properties within one year. To address the shortfall in housing supply, the Canadian government plans to increase the pace of home construction in the next decade.
Buying a home in a potential real estate bubble can be very risky. Knowing whether the housing bubble is expected to pop is also dependent on many factors, such as exact location. The experts at Regalway Homes can help you make wise investment decisions. Set up a free consultation with one of our investment coaches today.