A burst of Canadian real estate is on the horizon!

Sold above asking...

The Canadian real estate market is due for correction. Recent regulatory measures designed to stabilize or even cool the housing markets have been less than cosmetic. However, inflation and the upcoming increase in interest rates have already pushed mortgage payments up. Six months ago, the lowest 5 years fixed rate was around 1.6%. Today, the same mortgage is about 3%. This upward trend is likely to continue during this year and the next.

For many years, Canadian house prices were going one direction: up! There are reasons to believe that this time it will be different. So what will the shape of the correction be? The burst of the bubble or a deflation? If a deflation, how long it will continue? If a burst, how low prices will go?

The sharp drop seems more likely. The recent increase in real estate prices have been pushed mostly by investors (now owning an estimated 25%). The inflow of new immigrants has been a minor factor. At these price levels, not many of them can afford to buy a house. Stream of millionaires coming to Toronto and Vancouver is disappearing too. It is also hard to imagine an inflow of Hong Kong residents with Canadian passports that would stay in line to overpay for a Toronto house.

With mortgage rates going up and new government regulations coming into force, a huge part of investment demand will disappear soon. What is the point of investing in a house if the prices are not going up like crazy? Buying and selling these days is relatively quick and easy. If Canadian investors start running to the door all at the same time, prices are likely to drop fast. Nobody knows how low they will go, but the bear market is defined as more than a 20% decrease.

Here is some reading on this topic: Canadian Housing Market: Party's Over

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This blog does not provide investment advice. Please do your own research and talk to professionals before investing.

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