Housing Crash Coming 🇨🇦
Table of Contents :
Introduction.
Affordability.
Who's Investing?
Historic Problem.
Surging Immigration.
Priced Out.
My Perspective.
Disclaimer.
Do you know Canadian housing market is hiding a shocking truth?
Imagine a fair housing market, where deep-pocketed investors can’t price out first time home buyers, which is not the case anymore
Introduction
Politicians often suggest, immigration reforms and building more housing alone can solve Canadian housing crisis.
The fact remains, people view houses now as major financial investments.
Nothing wrong in it, but too much concentration of one asset class is not a prudent financial decision.
The current Canadian system encourages profit making from real estate, rather than ensuring affordable housing for everyone.
I know we live in a capitalistic society, where profit making is not bad.
But using dubious means just to qualify for a house mortgage, while pricing out first time home buyers, should be checked immediately.
Affordability
Housing affordability seems like a supply problem, so build more houses.
According to Bank of Canada, investors account for 30% of home buying in 2023, up from 22% in 2022.
On the other hand, share of first time homebuyers dropped from 48% to 43%, clearly showing that they have lost market share to real estate investors.
I believe, this is not a good trend for a healthy real estate market in any economy.
The fact remains, during a housing boom such investors create bidding wars to buy properties, thus driving up prices for actual home users people who are end users.
Who's Investing?
During pandemic, ultra low interest rates helped create a housing gold rush, as getting mortgage became easy.
Often foreign buyers and house flippers were blamed for speculating buying.
But recent regulations put in place, have curtailed such practice in most cases.
Presale buying with an intent to flip for a profit has picked pace too, which has distorted that market as well.
At the end, people now buying are, who want to downsize or upsize while retaining their old homes, and using their home equity to buy a second property.
All this results in lower supply and higher cost for first-time buyers.
Historic Problem
People buy house for many reasons, safe place to live, a sense of achievement, building home equity, an investment which you can pass on to your kids, or even for retirement nest egg.
As it goes up in value, homeowner’s equity also goes up, who can eventually make more profit when they sell.
Govt benefits from this appreciation which can be in the form of increased property taxes, or property transfer tax and capital gains when they sell.
Historically, housing sector has been a major contributor to Canadian GDP, which recently has gone out of proportion, relative to other G7 countries.
Surging Immigration
Over 2.5 million non-permanent residents have entered Canada in the last couple of years, which is too many too soon.
From a demand and supply perspective, rent as well as house prices are bound to go up, thus making them un-affordable.
Surely, there are other factors like high interest costs, delay in construction because of overregulation, etc. are reasons behind strain in housing market.
Inviting too many too soon without planning for their housing needs, was a disaster waiting to happen.
I believe, keeping sustainable level of immigration which we have done successfully in the past, could have avoided Canadian housing crisis.
Priced Out
Many Canadians think, un-affordability also means, inability to own a house with backyard in your favourite area.
I believe, renting for time being could be a valid option for people who cannot afford to buy right now.
Even though, Government is putting more resources to increase availability of rental spaces, but surely that will take time.
Till that time housing supply will be tight, putting upward pressure on pricing.
That is why youngsters think, that they will never be able to enjoy homeownership, because they don't have both, down payment and patient to accumulate it by sacrificing other things in life.
My Perspective
Bank of Canada warned, elevated household debt alongside over dependence of housing as investments, is not good sign for economy when interest rates remain elevated.
Financially squeezed as inflation is high, and job market remain weak, which puts enormous financial pressure on households.
Home prices in Canada has gone up too much too soon, where it has reached almost a bubble territory, and completely misaligned with real incomes.
I believe, a huge price correction is overdue and absolutely necessary, so that we have a healthy Canadian housing market in the long term.
Consequently, it's fair to say our housing market is a disaster waiting to happen.
Disclaimer :
As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.