What Is A Housing Bubble and How Could It Affect You?
posted in Mortgage News
While Canada might not be experiencing a housing bubble, the global pandemic has brought about conditions that have tipped the housing market on its head, and it pays to be mindful of such changes and how they could affect you, as a homebuyer. With that in mind, let’s look in a little more detail at housing bubbles:
What is a housing bubble?
When house prices go up due to an increase in demand instead of the economy, and the sudden increase can’t be attributed to typical, logical reasons, such as demography, interest rates or fluctuations in the job market, then a housing bubble occurs.
With previous housing bubbles, the market boomed, that much is sure, but not for the right reasons, and as result of previous experiences, the rules for Canadian homebuyers have been made a lot more stringent. Now, to be able to purchase a home in Canada, a buyer’s financial situation must be sound, and financial institutions must check that mortgages are able to be repaid, even if interest rates went up, by performing what is known as a ‘stress test’.
What causes a housing bubble?
Let’s say that if people bought shares in a company with the hope of selling them on for more, and some people bought them from them for more than what they had paid, but the shares aren’t actually worth the money; then the share price would go down – right down. Overvalued shares can cause a bubble, so it’s important to remember that there must be a reason for every price.
What can happen during or after a housing bubble?
The most dangerous time financially, is in the aftermath of a bubble; when it has burst. When this happens, the prices of property could crash, and borrowers could be left with loans that are far greater than their property’s market value. Debt, bankruptcy, reduced access to housing and a downturn in economic activity are all possible negative consequences of a burst bubble, but the truth is, that the consequences of a bubble bursting are not easy to predict, and oftentimes, the bubble isn’t recognizable until it bursts.
As a buyer or a seller, what should you do?
It’s important to ask yourself whether buying or selling at this particular moment in time is the right decision, and you should take the time to carefully assess the pros and cons.
Remember, also, that Canada has more than one real estate market, and that prices and situations can vary significantly depending upon where you are and what type of property you’re buying.
Above all, remember that the real estate market is a many faceted thing, and that one of the best ways to understand it - irrespective of whether there’s a suspected housing bubble - is by consulting with those who know it the best. Experts involved in both real estate and the mortgage industry are best placed to give you all the latest homebuying and selling advice, and if in doubt, consult with them at the earliest.