Housing Bubble or Housing Correction?

Housing Bubble or Housing Correction?

The Covid-19 pandemic housing boom seems to be coming to a stop. Mortgage rates have almost doubled since the beginning of the year, pricing buyers out of the market. Not to mention prices that are just not attainable for most buyers.


With the word recession looming and more and more people talking about one, the economy would be smart to watch what happens to the real estate market. The Bank of Canada’s (BoC) campaign to curb inflation by raising interest rates is having an intended effect on cooling the once hot housing market.


With borrowing costs climbing, as well as stock market fluctuations, buyer confidence is waning. As Canadians adapt to the new norms of Covid-19, the mad dash to leave metropolitan cities to the suburbs (where prices were more affordable) is slowing.


Some are calling for the real estate bubble to burst. If that were to happen it could have a drastic effect on the economy. Moving companies to home appliances and furniture stores are all affected by the housing market.


Statistics Canada (Stat Can) data shows the gross domestic product (GDP) advanced in Q1 2022. Nearly half of the quarter’s growth was due to residential investment, or homebuilding.


(Chart below) The share of GDP from housing investment (residential investment).


The good news for buyers trying to navigate the least affordable housing market this country has seen is that they will have less competition as bidding wars subside. However, prices are sticky in most market places. Even with less sales, supply is still tight.


As long as you didn’t buy a house in Q1, homeowners are sitting on record equity. With decades of price-appreciation it’s unlikely buyers will see many “deals” or “fire-sales” in the marketplace.


The craziness in the market over the past two years was due to come to an end at some point. At one point, buyers were so worried about missing out that they waived their right to a financing and building inspection condition. And, of course, each bidding war meant the winning bid often had to stretch on the price, propelling the market upward.


Overheated markets are unsustainable, but with a housing shortage in this country, it’s anyone’s guess whether prices will go down compared to pre-pandemic prices. People are always moving for a variety of reasons such as divorce, growing families, financial reasons and the big one, immigration.


Stats Can reports Canada aims to welcome 431,645 new permanent residents in 2022, 447,055 in 2023 and 451,000 in 2024. With those numbers, Canadians will need to start building more housing quickly or get ready for a supply and demand war.


Canadian Real Estate Was Responsible For Nearly Half of GDP Growth Last Quarter