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Housing Market Set to Cool

28 December 2011

Just a couple of days ago we talked about whether or not the mortgages of today would be underwater tomorrow; that is, if homeowners would find themselves in the position of having more home debt than home equity. In that post, we spoke about ways to try and save yourself from an underwater mortgage if you’re currently a home-buyer looking for a home. But today, we have even better news! The housing market is now set for a cooling period in 2012. Yes, prices are going down, and that’s the best way to protect yourself against an underwater mortgage.

The news comes from Scotiabank, and the report says that the housing market is going to cool and prices will come down, and as early as in the beginning half of next year. Right now, the report says that homes are overvalued by about 10% (which is why it’s no surprise that some homeowners and home-buyers are so concerned about going underwater.) But, there’s hope – they’re set to drop by as much as 5% in the first six months of 2012. So why the decrease, and are interest rates going to stay the same when the drop in prices comes?

The fact that houses are so high they really can’t go any higher is only one reason why prices are going to drop – and an excess of inventory is another. So why can’t they go any higher? Simply, because home-buyers can’t afford it and because many aren’t paying the high prices now, never mind if they go up again. But the huge amount of properties currently sitting empty might be an even bigger reason. Everyone saw as Vancouver built and built and built, only to be left with hundreds of properties sitting empty. That trend carried all the way across to Toronto, where condominium construction went crazy over the past year, only to face the same problem of having no homeowners to buy them.

So how much is a 5% drop in prices, anyway? Currently, the average price for a Canadian home is $360,396, and so 5% of that is $18,000. By those calculations, you can expect to see the average home price be around $342,000 – a very affordable number for many Canadians.

And what about interest rates? The Bank of Canada has said that they won’t raise them through the beginning of the year. How long that is, no one knows for sure. But it definitely means that those who currently own their home might want to lock into a home equity loan before they start to rise again.

By all measurements, it looks like 2012 is going to be a great year for both homeowners and home-buyers! ”

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