February 8, 2010
The Canadian Real Estate Association (CREA) has projected that we will have record housing sales in 2010 which will ease in 2011. The Globe and Mail is warning that there is a housing bubble caused by low interest rates. The Bank of Canada has promised to keep low rates until the summer…so what does it all mean?!?
The real estate market in Canada has surged recently. There’s no denying that, but there may be some confusion as to why. Here’s the basic cause-and-effect chain:
Sluggish Economy (2008) –> Low interest rates (to bolster economy through cheaper lending) –> More people buy houses (because of cheaper borrowing) –> Housing boom (prices go up)
The Bank of Canada has only promised low rates until the summer, after which rates will increase. The increase in rates could, at best, decrease the overbearing demand in the Canadian housing market (leading to an easing of prices). At worst, it could leave some Canadians unable to pay debt already taken on (leading to more drastic price changes).
But the Chief Economist for CREA paints a rosier picture of Canada’s real estate market:
“A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. Although builders are understandably more upbeat than they were during the depth of the recession, speculative building will likely continue to be held in check. As a result, while the real estate market will become more balanced, Canada will continue to avoid the massive realignment in housing supply and demand experienced in the U.S.” Financial Post
So we’re all waiting to see if our neighbours budgeted for an increase in interest rates in the summer or not.