Something You Should Know Before Purchasing A Condo
How the real estate market continues to flourish despite a weak economy – and what it means for you!
The Canadian economy is struggling through a recession and our dollar continues to slide – yet the housing market is hotter than ever. How can this be?
It actually makes sense when you consider the factors at play. First, let’s look at the overall economic situation. Much of Canada’s wealth is derived from the sale of natural resources (oil, coal, precious metals, etc.) But commodity prices are down worldwide and China – an international powerhouse that drives much of the demand for these commodities – is struggling. These two factors spell tough times ahead for the Canadian economy.
In times of recession, the Bank of Canada will often lower interest rates in an effort to improve consumer confidence and stimulate the economy. On July 15, 2015 they did just that, reducing the overnight target rate to 0.5%. Canadian banks soon followed suit, and it is now more affordable than ever to borrow money in Canada. This has fuelled the real estate market, and created enormous upward pressure on housing prices.
What does this mean for the construction industry?
The construction industry is directly affected by the real estate market – a strong dema real estate study by Build Force Canada (sanctioned by the Government of Canada), found that housing starts and household formation – key drivers of the real estate market – are projected to rise steadily from 2014 to 2024, which puts the construction industry in a very good position for years to come.
Is this a Bubble?
The notion that low interest rates are causing the Canadian housing market to overheat is shared by the Bank of Canada and the International Monetary
Fund. The extent of the bubble, however, is hotly debated.
Large household debt is a relatively new economic phenomenon, which makes its long-term effects difficult to predict. And the debt alone is not evidence of an upcoming crash. Ultimately, the existence – and magnitude – of a real estate bubble depends on the extent to which elevated home prices are due to factors such as population growth and housing starts versus the current interest rate environment.
What does this mean for me?
The Canadian housing market is the strongest it has ever been, and there is plenty of opportunity for shorter term equity appreciation in the current environment. That said, the likelihood of depressed interest rates in the foreseeable future does not necessarily insulate the housing market from a meaningful and potentially painful correction.
As such, highly leveraged speculators and developers should proceed with extreme caution, in the event that an upcoming correction is more of a crash than a “soft-landing”.