There’s been a lot of talk lately about a real estate bubble in Canada. And after Jim Flaherty announced his changes to mortgages in Ottawa, many think it’s going to come crashing down around us. But, not every Canadian is in that bubble. So, who would be most likely to feel it if that bubble ever does burst?
Really, there’s only two groups of people that don’t need to worry about a bubble bursting. The first group are those people that aren’t in the market, and aren’t looking at entering the market anytime in the near term. The second group that won’t feel the hit are people that are already in their homes and are making mortgage and second mortgage payments that they can afford. These people won’t feel the bursting effect because they haven’t stretched themselves too thin. While these households may have still taken advantage of the low interest rate that’s been hanging around for nearly two years, they’ve still kept things at an affordable level on their personal balance sheets.
If those who are already in their home making payments, and will be able to afford to continue making payments, also plan on staying in their homes for a long time, these are the ones that are really laughing. Prices could drop and values could fall in the next few months to a year, and these homeowners won’t be affected at all – even if there mortgage did go underwater for a short time.
However, this is only a group of Canadians. There are still many that would be hurt by a bubble bursting.
Those are people who purchased too much home for themselves, and their mortgage payments are eating up more than 35 per cent of their household income. An interest rate increase (which many think would be the cause of the bursting,) would seriously hurt these homeowners and maybe even put mortgage payments well beyond their reach.
Another group that could potentially be hurt are real estate investors – but only a certain kind of investor. These are flippers who purchase property low, fix it up, and then sell it for a higher price. With no clear idea when interest rates could increase, depending on the timing, these investors could also be caught “holding the bag” as some say, when their property values fall before they’re sold.
And the last group that will be hurt by a bubble bursting? Those that rushed into the market to take advantage of low interest rates – but it will depend for many of these homeowners. Again, if they have only taken on payments that they can afford, a home they can afford, and don’t plan to sell for some time, they likely won’t feel too great an effect of the bubble.
Those that just wanted to get in and get out though, may find that they waited too long to do it.
