Warning: Is Ontario Experiencing a Housing Bubble?

by Jay Calafiore

Since the collapse of the U.S. housing market a few years ago, the concern of a “Housing Bubble” here has regularly made front-page news.

Let’s start by keeping in mind that for most homeowners their home is to be enjoyed and lived in for years to come, and is not merely a source of income by speculating that housing values will appreciate in the short term.

If we examine the 1989 bubble, there are clear indicators that speculators relied on short-term gains as a primary income source, which resulted in artificial and unsustainable rising home values. More recently, the U.S. collapse was primarily a result of very aggressive and irresponsible mortgage lending policies that allowed practically anyone to own a home.

In today’s Ontario real estate market, the environment is different; wages are increasing, immigration is up, speculators are few, employment is rebounding, and lending regulations are strict.

I believe we all can agree that home prices cannot appreciate at the rate they have over recent years, but these five factors alone should result in a more balanced real estate market and will keep a housing bubble from happening.

The moderate growth we will likely experience in the GTA will be grounded by some sound economic fundamentals… so far so good. To learn more about the current economic conditions, an excellent resource is the CMHC website where an army of Government economists diligently update Canadian housing trends.

And what if we did see a 20-30% drop in home values? That would ensure low interest rates for a long time and I know all borrowers would love that! If you plan on moving you could buy more house for your family and with greater appreciating potential in the future.

There is no real concern if you are selling and buying in the same market unless you are a short-term speculator… otherwise, a drop in home prices is often the best opportunity to make your move!

Fixed mortgage rates have been dropping in recent weeks (3.69%) which will also help sustain a healthy fall real estate market. Variable rate mortgages (2.05%) still work out mathematically better even if rates gradually rise over the next 5 years. Finally, the mortgage lending regulations in Canada do not allow lenders to approve mortgages on the current low rates.

The household income must support a mortgage as if the interest rate was approximately 6% creating a payment shock buffer should rates rise significantly in the future. It is clear that in Canada our regulators will continue to be far more prudent than our neighbours to the south and therefore I see no “Housing Bubble” on the horizon.

I would be glad to connect you, or anyone you know, with the most current mortgage conditions so that everyone can make more informed decisions.

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The Canadian Housing Bubble Fact Sheet « Caution: Economics Students at Work
June 1, 2012 at 5:40 pm

{ 7 comments… read them below or add one }

1 Douglas Beaudoin January 25, 2013 at 4:21 pm

It’s always hard to predict these kinds of things. As they say though: ‘What goes up must come down.’

2 Jay Calafiore January 25, 2013 at 5:07 pm

Very True Douglas. We will just have to wait and see :)

3 Hasham Khan February 18, 2013 at 1:59 pm

I was trying to join your email list but it is not active now.



4 Jay Calafiore February 19, 2013 at 4:48 pm

Thanks for the post Hasham. Try entering your email again because I just confirmed that it works.

5 Paul Cascagnette April 21, 2013 at 12:40 am

Always nice to see some actual mortgage education for Ontario residents Jay. I seen that CMHC forecasts a slight decline in house purchases over the next couple of years. But still averaging 175,000 to 200,000 transactions annually.

6 J. Jayman May 23, 2013 at 2:45 pm

There needs to be some analysis to figure out where the retirees are going. They have the disposable income to keep Ontario afloat, right? While there is migration, much of it will concentrate in the GTA for various reasons: work, family, community, etc. So perhaps it is also necessary to analyze Ontario in spatial terms. For example, Hamilton has bucked the trend, starting from a low and being influenced by the GTA, while Brockville, seems unaffected. Ottawa has been steadily rising despite government cutbacks… These are merely observations, not analysis, so it would be useful to have some differentiation in markets in Ontario itself.

7 Frank October 22, 2013 at 8:04 pm

Wages are not pacing inflation; immigration is not increasing; employment is not decreasing and if RE loses 20-30% it will increase even more. I really don’t think the economic fundamentals are sound at any level. A large portion of our GDP is based on real estate, massive influx of retirees, record dept. I really don’t see a light at the end of the RE tunnel.

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