One of the most frequently mentioned things that I hear from the general public is “I am not ready to buy or sell yet, I hear that the housing market bubble is going to burst”. When we get deeper into this topic and I ask about the basis of their statement and it is usually met with “My cousin Larry knows a guy who is friends with a financial guy” or “That’s the word on the street”.
The fact of the matter is when this topic gets brought up it is usually just regurgitated doom and gloom that doesn’t have much fact behind it.
WHAT IS A HOUSING BUBBLE?
A housing bubble is a run-up in housing prices fueled by demand, speculation and exuberance. … Speculators enter the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and the bubble bursts. These bubbles are caused by a variety of factors including economic prosperity, low interest rates, better mortgage product offerings, and easy to access credit. Forces that make a housing bubble pop include a downturn in the economy, a rise in interest rates, as well as a drop in demand. Since 2003, the Canadian Real Estate Market has seen an increase in home and property prices of up to 337% in some cities, leading to a large real estate bubble.
The average length of a growing economy is 38.7 months or 3.2 years. The average recession lasts for 17.5 months or 1.5 years. A full business cycle on average is 4.7 years. The longest contraction or recession of record in the United States was the Great Depression in 1929 that lasted 43 months or 3.6 years. Bubbles in housing markets are more critical than stock market bubbles. Historically, equity price busts occur on average every 13 years, last for 2.5 years, and result in about 4 percent loss in economic activity (Gross Domestic Product).
ARE WE FACING A BURST or A COOLING?
The results are in: we have a 50/50 chance of a bubble burst in the next 3-5 years. Economists and financial gurus alike are divided down the middle on their opinions and the media loves to sway your opinion and breathe fear into you. Hindsight is ALWAYS 20/20. Though it’s possible to study the market and identify factors that can lead to a market crash, it’s impossible to know for certain the exact moment in which it finally happens, regardless of what economists may tell you. The only way to know for sure when a market crash happens is after the fact. What sources you are willing to trust?
The federal and provincial governments have created market cooling regulations such as the mortgage stress test, the foreign investor taxes, and these have had some degree of success in causing prices to stabilize, prices still remain high. As a result, a large number of would-be home buyers are sitting on the sidelines, hoping that home prices to drop, with a few of them are even holding out hope for a housing bubble burst that would make home prices plummet.
SHOULD I BUY A HOME DURING A RECESSION?
A down market is a buyer’s market. Houses that hit the market during a recession might be from sellers who can no longer afford their mortgages or are in need of liquidity. … When supply exceeds demand, buyers can have an easier time negotiating and prices may level off or fall. When prices fall, the question is not really how low can they go? The question is how much real estate can you buy before prices go back up. If you are buying a home during a housing recession, getting a good price is just as important as being able to hold and ride out the housing recession. Not every home you spot for sale will be a good buy. Some might require extensive repairs or be located in the wrong neighborhood. The key to buying a home is and always will be location, location, location.
At the end of the day, it is nearly impossible to time the real estate bubble. Your cousin Larry’s friend who is buddies with a financial guy may have an interesting perspective but I would hang my hat on it. Be smart with your money, make sure you can afford your investments, make sure that they are sound choices and be choosy on what you take as gospel.
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