The Economist magazine in 2005 described the rise in the US house prices since 2000 as the ‘biggest bubble in history’. Subsequently, since 2006 the U.S. housing prices declined 33percent.It resulted in an estimated $7 trillion loss of household wealth, and about 12 million U.S. homeowners are currently underwater on their mortgages.
A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states. Low-down-payment and subprime credit are some of the factors that inflated home prices first and then caused recession.
Reading all these, the natural question that comes to our mind is“what about Canada?”
We expect in 2012,
- Sales and prices to stabilize in Canada
- Interest rates also to remain low in Canada
A recent Statistics Canada data shows average household debt in Canada hit a new record high of almost 153 per cent to disposable income in the third quarter. It is a disturbing trend. Till now, housing market was not controlled by Jim Flaherty’s moves such as lowering the maximum amortization period and increasing the down payment.
It is interesting that Bank of Canada governor Mark Carney also repeatedly issued warnings to Canadians last year on piling personal debts. This mountain of debt may cause some housing-price correction. “Risk reversals, when they happen, can be fierce,” warned Carney.
It appears that low interest rates have kept buyers competing for homes and driving prices higher in 2011. A more balanced market is expected in 2012. It means that the market will not see bidding wars.
However, a recent report in The Economist suggests Canadian homes are 29 per cent overvalued.
Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. Better to focus on debt reduction first, before accumulating wealth through leveraged money.
Is the Canadian real estate market a bubble that is about to burst?
Right answer will be known in 2013.
No comments yet.