Are we in the midst of a real estate bubble? And is it going to pop?
Those are the questions that I think a lot of people are asking right now. And it's a good question. It's something that I think about quite a bit in is what is happening to our real estate market, as we've seen prices inflate significantly, throughout 2020 but also in the first three months of 2021. In fact, we're here in the middle of March, and it's been basically a year since COVID started to shut things down. It’s also been about a year since the head at CMHC (the Canadian Mortgage Housing Corporation) came out and predicted that there would be a eight to 18% drop in housing values across Canada
The Experts were Wrong
In fact, the real estate market ran the complete opposite direction with even more severity than he predicted. So we've seen last year about an 18% increase in prices. And the first three months prices have continued to grow significantly throughout the London market. And honestly, all across Canada, housing values have been growing. And for the most part, every single real estate market across Canada is synchronized on that. While the percentages kind of vary a little bit, they are all growing. So is that a real estate bubble? Maybe. I mean, the experts tend to say it's not, but again I just referenced what expert predictions mean. They could be completely wrong.
Rising Values: The Perfect Storm
You have to look at a few fundamental factors. We have technically gone through a recession throughout 2020 and we're still in the midst of a recession. How do you have real estate values growing when you're in the midst of a recession? It should be the opposite.
Obviously there's been some interventions along the way. You've got historically low interest rates that are basically being encouraged by the government dropping their overnight rate. You have the government of Canada continuing to pump money into our economy, and the bank of Canada buying up all the debts that the government of Canada is taking on to fund all this money printing. You've got a government that has basically mandated banks to lend to a Canadians so that the Canadian economy will continue to move along.
The primary way that banks do that is by doling out mortgages. So, you know, you've got all of this stuff in place, and that is really really what has pushed real estate values.
On top of that, we throughout all of last year but particularly even the beginning of 2021, at least in the London area, we've basically had the lowest inventory on the market that we've ever seen really. We had about a half a months worth of inventory heading into January. The January real estate market just carried on basically the same, if not, with even more demand running into 2021 than we saw in most of 2020.
You've got this environment where you've got high demand, low inventory, low interest rates, banks that are willing to lend and they are just basically shoving mortgages out the door.
A Picture of The Future
Saying that we're in a real estate bubble is almost like an obvious statement. You almost have to say like, of course we are. There's lots of people that love to yell, “Hey we're in a real estate bubble!”, but they never stopped to actually think about why we're in that bubble.
I think it paints a bit of a picture of what we can expect in the future. We've seen so much intervention from the government that has created this, and on top of that, we have the bank of Canada that is almost denying the fact that the real estate market is a bubble or that it's even kind of frothy.
Really, the bank of Canada has no mandate to regulate or intervene in the real estate market in any way. It's not one of their concerns. Their concern is to try and get inflation to 2% per year measured on their basket of goods, of which real estate is not included. So when they look at our market, our economy they don't see an inflation, or they don't consider the inflation in the real estate market as something to be monitored or even considered really, which to me is crazy.
"Just wait until it pops!"
A lot of people like to scream “Well, just wait until the bubble pops!” or, “Wait until the bottom falls out!”. It's almost like people want it to happen, like ‘I told you so’.
People have been saying this for like forever, right? For 10 years, they've been saying that. The reality is that I think that the government isn't going to let it happen, because the government itself has taken on more debt and has encouraged Canadians to take on more debt. To do that, and then just leave Canadians high and dry and let interest rates spike?
At the end of the day, particularly in the real estate market, who is it that's going to begin to default on their loans? It's most of the higher leverage loans that are insured by the government. So the bank of Canada or CMHC and the bank are left holding the bag for all those folks that default. So there's a vested interest in making sure that does not happen. The bank of Canada has already come out and said that they're going to keep interest rates basically pinned to the floor for well into 2023.
You have to keep in mind that most of the folks getting mortgages right now are locking in that interest rate for five years. So it's not really a problem until five years down the road potentially.
Government intervention is inevitable
While this is a time that is completely unprecedented (and I do not have a crystal ball nor do I claim to!), I think that you have to keep in mind the ones that created this market are also going to be the ones that have to deal with it. And that is our federal government.
I just don't see them letting the economy actually run its course the way that it's supposed to. They didn't let it happen through the pandemic, and I don't think they're going to let it happen post-pandemic either. There is no way that any government, whether it's the Liberals or the Conservatives, are going to let Canadians suffer that way. Gone are the days where we take responsibility for the debt that we've accumulated ( this isn't post-World war II). That is not the case.
In fact, we'll just keep spending and spending and spending any time that we hit a recession. When you look at 2008/2009, the government is always there to soften the blow. The day of reckoning comes when the government can no longer do that. And that's a completely separate topic.
If you own Real Estate…
…the above is, in my opinion, some of what you should pay attention to as a Canadian citizen, as somebody that is looking to invest in real estate or owns real estate even if it's your own primary residence. I think you just need to look at that a bit more specifically versus just saying, hey, it's a bubble, and every bubble pops.
Again, I am not an expert. I'm just kind of observing things from where I sit as a Realtor that's out there every day, helping people navigate this.
I'm a real estate investor, I own multiple properties. I just closed on a property at the beginning of 2021. So I mean, I'm out there and it's not that I necessarily want it to go one way or the other. I just think as an investor, I have to be conscious of what is happening in the marketplace. I do think that real estate is a fairly safe bet for the next few years, at least. In that timeframe as an investor I'm putting a large percentage of capital into those properties as a down payment. So it would take a fairly significant correction in the market for somebody like myself to be upside down on a mortgage versus the first time home buyer who only puts 5% down, you know somebody in that position who potentially loses a job, or comes upon hard times those are the folks that may run into difficulties.
This is by no means an exhaustive conversation on it. I would love to hear your thoughts on where you think things are going or what am I missing.