Is a housing bubble on our horizon?
FRIDAY, NOVEMBER 13, 2009
The president and CEO of ING Direct Canada warns of a potential housing bubble as reported in Thursday's Toronto Star. Economic bubbles happen all the time – they're cycles that occur when a rapid expansion is followed by a contraction. When housing prices rise more rapidly than corresponding economic factors the bubble bursts. We might call that a market correction. It has all manner of dire consequences for those left holding homes worth less than they paid for them. Those homeowners might simply hang on until their home values rise again. But other factors work against them. The current market in Toronto is an example of a disaster waiting to happen, and this is what Peter Aceto of ING Direct is speaking about.
With a shortage of properties available in Toronto, buyers are driving prices up by bidding wars. It sounds great for the sellers. They're selling their properties for asking price plus a significant bonus. But does it make the house worth what the buyers are prepared to pay for it? Market value is defined as "willing, informed buyers and sellers acting rationally and prudently, given reasonable periods of time with no undue influences". Now I ask you, is it rational and prudent to pay $100,000 over the asking price of a house? If you have a comparable house on that street, you might answer yes.
As a realtor, I would have to ask why a buyer who is prepared to pay $600,000 for a house listed at $500,000 wasn't looking for $600,000 houses in the first place. Is it because they expected to over pay? Or did they find their dream house and are prepared to go to the wall to get it? I don't work in the Toronto market so I'm not going to speculate on what's going on there. But I am going to tell you that the other side of the bubble coin happens in every market and it affects every homebuying decision.
The key concept here is affordability. If you can afford it today, can you afford it tomorrow? What is actually happening across Canada is that Canadians are paying down their mortgages more slowly than ever before. That means we'll carry mortgage debt longer. And that's not so bad but what makes it worse is that in a disturbingly high number of cases, people are financing more than they can actually afford. And when push comes to shove, their properties flood the market and the bubble bursts.
As a realtor and a buyer's advocate, I want my clients to approach their homebuying adventure with joyous anticipation. And one way I can ensure that that happens is to help my clients keep their feet on the affordability ground and not get carried away by the big, shiny real estate bubble of broken dreams.