by Larry Weltman
I work as a representative at AccessEasyFunds, or AEF for short, which is a business that provides advances to Canadian real estate agents on the commissions they earn. I’ve been with the company since its inception and, as a result of my close working relationship with agents across Canada, I’ve had the good fortune over the years of being able to watch the trends that pass through the real estate market.
If you’ve been keeping up with real estate news recently, you may have noticed the growing chatter in many media channels about the Canadian real estate market and, specifically, about the rising real estate prices across the country. Perhaps adding fuel to the fire, the Canadian Real Estate Association announced another surging home sale month for October, up 8% from October 2012.
Indeed, with this rise in home sales and, more importantly, with the increase of real estate values now outstripping affordability for the average Canadian, many real estate analysts are predicting that the market is reaching a tipping point and that we’re, in effect, in the middle of watching a real estate bubble form.
The media repeats the doom and gloom predictions; and the Government has done its best to control surging real estate prices by implementing many new mortgage restrictions in the past two years. No one wants a big meltdown like we witnessed in the US and parts of Europe!
The murmurs of an impending real estate bubble in the media were indeed loud enough for the Governor of the Bank of Canada to try to assuage the increasingly anxious market by publicly stating on November 20th that, unless the global economy is hit by another financial meltdown similar to the one circa 2008, Canadians should neither be concerned about the possibility of a real estate bubble, nor should they be concerned about the likelihood of some sudden correction in real estate prices.
Of course, the hope is that the Governor is not only accurate in his positive assessment, but also that his attempt to appease nervous skeptics succeeds; after all, as we all know that, in many respects, economic bubbles tend to be self-fulfilling phenomena.
We after all witnessed increasing prices for almost more than a 10-year period; with one small dip in the fall of 2008 with the world market crashes. That dip seemed to only last about 6 months, with prices in sales surging again in the spring of 2009.
Personally, I’m also cautious about starting in on the drum beat of doom and gloom when it comes to the current real estate environment. Looking five, ten years out, I’m optimistically hopeful that, rather than the market blowing out in a quick devaluation, it will gradually level off and eventually reach a point of increasing affordability for middle class Canadians, as perhaps the economy starts to rebound and create more employment and better-paying jobs.
With that said, there is one trend in the current economic sector that is more than mildly dampening my cautious optimism, and that’s the trend of Canadians taking on an ever increasing amount of debt. As point of illustration, in an article dated November 13th of this year, The Globe and Mail cited that “… the average Canadian consumer’s total debt in the third quarter rose $225 to $27,355, or 0.83 per cent, from the previous quarter”.
The willingness of Canadians to assume a greater amount of personal debt is cause of alarm in and of itself. It’s also cause for concern when considering the future outlook of the real estate market. Simply put, if the current trend of increasing personal debt continues its upward momentum, Canadians on average will find it far more difficult to afford mortgages in the coming the years; especially if mortgage rates rise. So key to a price levelling off market without a crash, is that mortgage rates remain in the low.
Of course we must look at the affects of immigration and foreign investment in Canadian property. Canada remains very appealing from an immigration perspective, and many foreigners view Canada as stable and secure from a property investment perspective. So I feel this all bodes well.
I’d also like to point out that there could be some sort of coupling affect with the growing amount of student loan debt that our younger generation is taking on. As mentioned in a recent Financial Post article, across the board, Canadian tuition fees are increasing quicker than the rate of inflation. Furthermore, the same article mentions that “… 60% of undergraduate students go into the working world with an average debt of $27,000, and that is likely larger if private debt is included.”
Unlike our American neighbors, high student tuition, along with high student debt, is relatively new and unprecedented in this country. The question is – how will this effect the younger generation’s ability to afford homes that are increasing in value at an ever quicker pace? Although, once again, I don’t want to pound the drumbeat of doom and gloom, these two trends – higher home prices matched with higher consumer and student debt – are fundamentally opposed to each other and if the two continue in their same respective trajectories, it could lead to a far different Canadian real estate environment in the future.
This article strictly reflects my opinion, thoughts and perception of the real estate market. I strongly recommend that anyone consults with an experienced professional before making a decision to sell or buy a property, or to hold onto a property; and should not rely on this article. Moreover I assume no responsibility whatsoever for any decisions made by any reader of this article.