On average across Canada, real estate prices rose by 19.3% over the past year, exceeding the economic growth indicators of the Canadian economy.
How much can we trust the opinion of the mentioned experts and the voice of the people in the form of those who believe that prices are currently at their peak and will only decline from here? Honestly, I am not inclined to take them seriously, as I still do not see real reasons for prices to even stop rising.
The confusion of the experts is understandable – they draw conclusions based on the concepts they are used to operating with and do not take realities into account well. I see the situation as follows: if something is happening, especially contrary to classic predictions, then there must be some forces that were not accounted for. And all that is required is to find these forces and make a forecast of how they will manifest themselves in the future.
Such forces, before the start of a full recovery of the Canadian economy and the rise in commodity and energy prices, were the movement of finances from the unprofitable sphere of stock and financial operations from risky foreign markets to the safe haven of the Canadian real estate market. An additional factor was inflation expectations. So, the experts giving negative forecasts seem to ignore all this.
When it comes to people who are not experts, their reaction is mostly based on personal feelings like, "I cannot afford to buy such expensive housing, so who can? And if I cannot, then prices are clearly inflated and at their peak." In principle, that logic is ironclad, if not for one small nuance – there are more than enough people in Toronto who can afford to buy real estate even at much higher prices. And around the world, those looking for a use for their money are countless.
Nevertheless, the situation with rising real estate prices across Canada personally worries me, as it washes away a large layer of local buyers from the market. But to stabilize prices and stop growth, a change in the economic situation in Canada or initiatives at the federal government level are required. And if the economy largely lives on its own and is still showing steady growth, fueling the rise in real estate prices, then the government can take measures. And these measures are already being taken.
In particular, in the coming months, the Bank of Canada is expected to raise its key interest rates. Canada's leading banks have already raised rates and plan to raise them further. So work is being done in this direction. Mortgage lending rules have also been tightened. If until now it was possible to get a mortgage with an amortization period of up to 40 years and a down payment of up to 5% of the purchase price, these figures have now been changed to 30 years and 10%, respectively. At the same time, Finance Minister Mr. Flaherty emphasized that there are no signs of a bubble inflating in the real estate market, and these measures are being taken purely as a preventive measure – to protect the market in the future from defaults on issued loans.
In fact, work is clearly underway to cool the market – there is no other explanation. The same can explain the thoughts of the experts mentioned above about a bubble in the real estate market – psychological manipulation is being conducted, the purpose of which is to redirect funds from the real estate market to the securities sector (which is generally correct, as it will further stimulate the economy).
But, to sum up, we can say that overall there are no signs of a bubble inflating yet. More precisely, there is a danger of such a bubble inflating in the western provinces of Canada (British Columbia, Alberta, and Saskatchewan) and in the Atlantic province of Newfoundland and Labrador. However, when it comes to the province of Ontario and especially the Greater Toronto Area, then, in my opinion, there is simply no cause for concern.
It is worth noting that the current situation is very reminiscent of the one before the crisis, when commodity and energy prices were steadily rising, pumping the Canadian economy, especially the budgets of the western provinces (where the main oil reserves are concentrated), with petrodollars, and prices for everything, including real estate, were skyrocketing. Now, it seems to me, the situation is very similar. Therefore, as long as demand, and with it oil prices, do not fall, the rise in real estate prices is unlikely to stop. That is, the only reason why real estate prices in these provinces could drop would be a second wave of the crisis. If, of course, it happens, and if it leads to a fall in oil and commodity prices.
How realistic is this scenario? In principle, it is quite realistic, just as it is realistic that real estate prices in the western provinces could drop again. However, the probability of this, in my opinion, is not very high.
As for the province of Ontario and the Greater Toronto Area, even in the event of a second wave of the crisis and a sharp drop in energy and commodity prices, a decline in real estate prices is unlikely (at least by analogy with what happened in the fall of 2008). At most, they might stop rising. If the second coming of the crisis does not happen, and the U.S. economy finally begins to strengthen (and things are heading that way), then prices will continue to rise, despite the measures being taken by the Canadian government to curb their growth.
Why do I think so? The fact is that the rise in real estate prices in the Greater Toronto Area, while high, is by no means frantic. If you compare the growth rates with the level of inflation for sensitive groups of goods, the rise in real estate prices no longer seems so high. As I wrote earlier, the main reason for the rise in real estate prices has been inflation expectations (which are consistently becoming reality) and the desire to preserve free funds from depreciation.
Read also material on the topic: HIGH COST AS A MARKET INDICATOR
Elena RYABININA.
«Russian Toronto»