The housing market is not a bubble despite the predictions made just a decade ago. According to a report released last year, the housing industry enjoyed its best year in decades, with the largest annual gains in home prices and rental rates, historically low foreclosure rates, and the highest number of home sales in the past 15 years. So why is this market still healthy? Let’s examine these factors in more detail.
Immigration to Canada
The numbers are impressive: in 2018, the federal government admitted nearly 270,000 new permanent residents and almost double that number of temporary residents. The Liberals’ pledge to bring that number up to over 420,000 in 2020 will add a new city every year in the provinces of Alberta and Halifax. Newcomers will primarily gravitate to the biggest cities, driving up housing prices in the most expensive areas.
The Canadian housing market has been pushed by immigration, which is a primary reason for its high price tag. As a result of the recent global financial crisis, the Canadian government has increased immigration numbers to its largest cities, including Toronto, Vancouver, and Montreal. But despite the recent rise in housing prices, the Canadian government has made its immigration targets attainable for people who want to buy homes and invest in the economy of Canada.
The recent rise in home prices is not related to immigration. Canada’s immigration policies attract newcomers with money and expertise. As a result, new immigrants will buy real estate and contribute to the local economy. While housing prices in some countries are inflated and fall with a weakening economy, those in Canada aren’t experiencing the same fate. The government’s plans to cool the housing market are not in place yet and will take time to implement. However, they may strengthen the demand for housing. And the need for skilled workers and construction are two reasons why immigration is continuing.
Moderating housing demand
The housing market has been characterized by increasing home prices, but that doesn’t necessarily indicate that we’re in a bubble. Professors Robert J. Shiller and Anne K. Thompson of the Massachusetts Institute of Technology argue that home prices are not driven by expectations of large price increases over the next decade. As a result, many experts don’t think the current market is experiencing a bubble.
The rise in housing costs is often caused by several factors, including widespread speculation, low inventory, and low-interest rates. When these three factors combine, it causes an extreme rise in the price of homes. Ultimately, this affects the economy and local businesses. In other words, there are a lot more reasons why today’s market isn’t a bubble than there were ten years ago.
First, consumer house-buying power is near record highs. According to the First American data, median existing-home prices have increased by more than half in the last decade. As a result, consumer house-buying power has doubled since 2006, while nominal median household income has increased by more than 40%. With the economy slowly recovering, the housing market is returning to its normal dynamics. Although buyers may be concerned about shifting conditions, this does not signal a bubble.
Rapidly rising mortgage rates
In recent years, the housing market has become remarkably similar to the one from the mid-2000s. There are some notable differences, however. While the housing market in the mid-2000s was a bubble, it is not a bubble today. Several factors contribute to the difference, including the rapid rise in mortgage rates and the decline in home prices.
The impact of rising mortgage rates on the housing market is fairly immediate. However, home sales volume generally declines after a rate hike. As a result, home sales volume generally increases during the first six months of an increase in rates, but then declines during the following twelve months. While this may seem like a warning sign, the rapid rise in mortgage rates has the opposite effect. It’s hard to tell whether the housing market is overheated or not.
The current housing market is a healthy one for most people. Several reasons are responsible for the booming real estate market. Millennial homeownership is at an all-time high, and a large percentage of households have enough equity to afford a mortgage. Rising mortgage rates, on the other hand, could cause more demand and squeeze the housing supply. However, rising mortgage rates could further tighten the market and increase affordability gaps.
