The Bank of Canada raised its benchmark lending rate by 25 basis points to 1% in mid-September. What does that mean to the average home owner in Canada?
Variable rate mortgages that are directly effected by bank rate changes are being chipped away by this steadily increasing interest rate environment. The Bank of Canada has increased it's lending rate three times over the past five months. Late in 2008 the mortgage fiasco in the USA dramatically effected our market in Canada, Alberta and Calgary bringing sales to a standstill. Sales in Calgary were the lowest we have seen in over a decade following the huge slide in the American housing market. It is important to note that the Canadian mortgage regulations are far different than our neighbours to the south, however, the perceived potential downfall in our market pulled many potential buyers from the market taking the "wait and see" approach. The Bank of Canada reacted quickly reducing its lending rate to a mere quarter percent. This emergency measure was brought in to increase affordability and - most specifically - to kibosh a potential disaster in our real estate sector. These measures contributed to the fact that values in our city and across the country stayed relatively constant after the US market plummeted in value at the end of 2008 and early 2009. It was only a matter of time before these emergency rates needed to be reevaluated and a more realistic lending rate be implemented.
Those of us that have opted to save interest charges by utilizing the variable rate mortgage or a Home Line of Credit (HELOC) are being effected most by these increases and are now paying more for making those choices. Interestingly enough, the current economic instability and unpredictable bond market have created a small window of opportunity to lock in historically low fixed rates.
The cost of borrowing certainly effects the real estate market and we have seen our market slow over the past few months. Many factors have contributed to this trend, including the higher cost of borrowing and more stringent lending guidelines. I am not sure this is necessarily a bad thing. At the peak of our dramatic climb from 2006 to mid 2007 we saw home prices double. Was that sustainable? Absolutely not, and many home buyers over-extended themselves out of necessity during this time. We are still seeing the effects of this climb and subsequent fall in home values. It is anybodies guess as to how long we will see this decline in value... we are in the midst of a "market adjustment" and have been for the past three years.
There are many opportunities in the market today. Interest rates are still at historical lows and inventory is quite high giving buyers a great opportunity to get into the market, to move up, or to downsize. Your home is you biggest financial asset and a real estate investment, regardless of the price category, is still a great long-term financial strategy.
Tuesday, September 28, 2010
Thursday, September 2, 2010
Canada's Housing Bubble - An Accident Waiting to Happen
The Canadian Centre for Policy Alternatives (CCPA) has just released its study "Canada's Housing Bubble: An Accident Waiting to Happen". This paper is certainly worth the read as it runs over a variety of potential scenarios we may be facing in the next few weeks, months and years.
My critisism of this study is the fact that the author is "predicting" one of these scenarios to happen in future. The over inflated prices HAVE happened in Calgary peaking in mid-2007. The question is - are we in the midst of one of these "bubbles" or about to enter one? Without a doubt, I believe we have been in this "correcting" mode for over three years. As that is the case, the next series of questions to address would pertain to understanding where we are within this price correction. Are we in the beginning, the middle or the end?
The Canadian housing market has shown remarkable resilience through the worldwide economic downturn and the recession of 2008, quickly regaining ground over the past year creating possible price bubbles in several Canadian hot zones, including Calgary. The study points out that the recent U.S. housing crash provides a stark example of what can go horribly wrong when housing prices are outside their historical norms. Although the Canadian and American banking and mortgage situations are very different, it is important to note what happened, and how it happened south of our border, "a similar crisis could potentially occur."
Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across its six largest residential real estate markets. The paper puts together a variety of price adjustment scenarios wondering the odds of the bubble bursting, flaming out fast or slow, versus a slow price moderation - or market correction. Regardless of the road we take, this study certainly leads to the conclusion that we WILL see adjustments, whether fast or moderate changes.
Whether the crash is orderly, protracted, or sudden, seniors and new home buyers will certainly feel the effect of the changes the most. Those who purchased homes through high-ratio mortgages while prices were at their highest will find that they owe more on their homes than the value the market permits. Seniors who will be counting on selling their homes to make their retirement plans viable and can't wait a decade or so for prices to recover will be the most effected.
While the outlook seems dim, it is pointed out that those who hold real estate through the entire boom and bust would still see their property appreciate significantly despite the declines in the final years of these various scenarios. Often the process is quite lengthy, requiring a decade or more from beginning to end. In all of the bubbles examined in the paper, the new average price after the bubble burst is always higher than the initial starting point.
My critisism of this study is the fact that the author is "predicting" one of these scenarios to happen in future. The over inflated prices HAVE happened in Calgary peaking in mid-2007. The question is - are we in the midst of one of these "bubbles" or about to enter one? Without a doubt, I believe we have been in this "correcting" mode for over three years. As that is the case, the next series of questions to address would pertain to understanding where we are within this price correction. Are we in the beginning, the middle or the end?
The Canadian housing market has shown remarkable resilience through the worldwide economic downturn and the recession of 2008, quickly regaining ground over the past year creating possible price bubbles in several Canadian hot zones, including Calgary. The study points out that the recent U.S. housing crash provides a stark example of what can go horribly wrong when housing prices are outside their historical norms. Although the Canadian and American banking and mortgage situations are very different, it is important to note what happened, and how it happened south of our border, "a similar crisis could potentially occur."
Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across its six largest residential real estate markets. The paper puts together a variety of price adjustment scenarios wondering the odds of the bubble bursting, flaming out fast or slow, versus a slow price moderation - or market correction. Regardless of the road we take, this study certainly leads to the conclusion that we WILL see adjustments, whether fast or moderate changes.
Whether the crash is orderly, protracted, or sudden, seniors and new home buyers will certainly feel the effect of the changes the most. Those who purchased homes through high-ratio mortgages while prices were at their highest will find that they owe more on their homes than the value the market permits. Seniors who will be counting on selling their homes to make their retirement plans viable and can't wait a decade or so for prices to recover will be the most effected.
While the outlook seems dim, it is pointed out that those who hold real estate through the entire boom and bust would still see their property appreciate significantly despite the declines in the final years of these various scenarios. Often the process is quite lengthy, requiring a decade or more from beginning to end. In all of the bubbles examined in the paper, the new average price after the bubble burst is always higher than the initial starting point.
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