If ‘So-Called’ Bubble Builds, Bursts, Should We Be Surprised?
Here we are in the dawn of 2010, and many real estate markets appear to have bounced-back rather nicely. Glance at the latest national numbers, and at some of the major markets across Canada, and the numbers are far less bleak than we thought they would be back in, say, Nov ‘08 or Jan ‘09.
Then all of a sudden the rumor-mill begins to churn. The media-machine drums up the latest ‘what-if’ scenario, and starts making us fear anything seemingly too good to be true (which is ironic considering how often too good to be true is, in fact, actually just life being what it is).
And now, after threats of a pre-emptive strike by the feds, to kybosh any sort of building real estate bubble, now the talk seems to have shifted to government and financial officials thinking twice about cracking the whip, when it comes to imposing measures aimed at putting the squeeze on any further positive real estate gains.
A recent CBC News article hints the Bank of Canada (BOC) is now, quote, “backing away from recent warnings about a housing bubble in Canada.” And, in turn, that means that a knee-jerk by the central bank would be premature as it would quite likely mean muffling the momentum currently being experienced by the Canadian economy.
So the debate continues. There are still many who feel housing prices are still over-inflated and and they’re waiting for the other shoe to fall when it comes to the market. And there’s the other side of the equation which includes those whom are insistent that factors like pent-up demand, record-low mortgage rates, and a steadily declining inventory of homes to choose from (in most markets) are what is actually creating the sales activity and consumer spending (on real estate) that we’re currently experiencing.
Who’s right? Well, as usual, we won’t know until we get there. What’s more interesting to me is the idea that Canadians need to think about other factors which might affect them – in the not too distant future. For example, we will most certainly see a change in market conditions, sales activity, and prices if the feds decide to raise the downpayment requirement to something above the current 5% minimum, or if they decide to change the maximum amortization period to 25 years, down from the current 35 year maximum.
And as I mentioned in an earlier post, combine the two above proposed changes, with inflation and with predicted rise in interest rates in Q3 or Q4 of this year and suddenly the warning-bells for some Canadians should be going off regarding how much these measures could increase their already tight ability to service and qualify for their debt.
“The bank’s worry is that homeowners with large mortgages that are manageable now with interest rates at record lows won’t be able to afford their monthly payments once interest rates start rising, as is expected later this year.”
A legitimate concern but one that shouldn’t instill widespread panic, remembering that the fate of Canada’s recovery shouldn’t rely (and historically has never relied) on the housing market alone.
“On the economy as a whole … recovery is still dependent on government support and that growth driven by the private sector has yet to materialize.”
So we shouldn’t be surprised that the answer isn’t a simple one. And we also shouldn’t be surprised we can’t come up with the answer right away, today, this minute. Hindsight is 20-20, so hopefully we’ll know what to watch out for this time. But even still, a lot of other factors will have to play out, organically, before we’ll know for certain whether any sort of bubble builds or bursts.
Thoughts Bubbling? Bursting? Send me your comments.
