Bubble, bubble, bubble. That’s all anyone’s talked about when it comes to Canada’s housing market over the past year or so. Prices keep going up, and many Canucks can’t help but see our future situation as being as bleak as it was in the States during the recession. And of course, no one’s more worried than those who just bought an overpriced home and are now looking at forecasts that say those values are going to drop over the next 12 months or so. It’s led to a lot of debate and speculation; but The Star’s David Olive has broken down the numbers to show us that things really aren’t that bleak after all. And when Olive compares our situation to that of the States’, it’s clear that it’s really not the same thing at all.
Canadians have been looking at the markets in cities like Vancouver, Calgary, and Toronto – markets in which housing prices are the highest. The worry is of course that when the prices drop, those Toronto mortgages will be much higher than they actually should be, compared to what will be the value of the home will be. On the surface, it might look like the same situation as the States, where millions of home were left underwater, burdened with first and second mortgages, and more debt than equity put into it. But Canadians shouldn’t panic, says Olive. When the markets in Florida, Arizona, and California bottomed out, the property values dropped by 70% – 90%, in just a matter of two years. Over the next year, our housing prices are still expected to drop, but only by about 10%, nowhere near what our neighbours south of the border experienced.
Along with the housing market comparisons, Olive also points to the differences in American and Canadian banking practices. Just prior to the housing crisis American banks were giving out mortgages to just about anyone that asked for one regardless of income, credit history, or how much down payment they had available. They were simply giving people mortgages that couldn’t afford them. Here in Canada however, the government has clamped down on lending rules and practices, first tightening HELOC and amortization rules and more recently, imposing legislation that makes it necessary for banks to be more clear about their mortgage prepayment penalties. All of this of course, while Bank of Canada Governor, Mark Carney, and Finance Minister, Jim Flaherty, continue to warn us about extremely high household debt levels, and that the historically low interest rates will not be around forever. It’s actually getting tougher to get a mortgage in Canada, not easier.
Once you break down the numbers and understand the differences, it is easy to see the merit in these arguments. Housing prices are going to fall, but we should relax. Because as David Olive puts it, “Our real estate prices are falling, not the sky.”
