Slaying the Phantom of a Bubble Burst in the Canadian Real Estate Market

If we are going to believe what some groups are saying, the recent developments in major real estate markets should be a cause for concern for those who have major stakes in the industry. According to them, Canada is precariously moving closer to a possible bubble burst with the consistent decline in average selling prices of home units in major real estate markets.

A recent market report is looking at the prevailing conditions in real estate markets in Toronto, Montreal, Ottawa, Edmonton, Calgary and Vancouver. Industry analysts are worried that the overheated conditions in these markets will reach its tipping point and can lead to a major debacle once these markets make the corrections.

However, other observers disagree with this position.

The report has cited that six major real estate markets in Canada are experiencing housing bubble, which is a first in the last 3 decades. This observation is anchored on the prevailing average selling price which is above $300,000. This price level is way above the prevailing price norms under a stable market condition which is in the range of $150,000 to $200,000.

On the other hand, certain sectors are taking what they refer to as a more realistic stance with regard to the state of major markets in Canada. It is important for us to note that while average prices of homes have moved upwards, disposable income of consumers for the same period has not been able to catch up with the upward adjustments home prices.

The norm in the last 20 years is defined by an average home price that is about 3 to 4 times the yearly provincial median income. At present, the range has risen to nearly 5 to over 11 times the annual household income. This major disparity partly explains why a significant number of consumers have increasing levels of debt.

What worries most analysts are the homeowners who have gotten their mortgages at lower interest rates. These are the consumers that have the highest debt-to-asset ratios. This is the reason why Canada is at the top of the list of countries with high debt-to-income ratio. Homebuyers tend to be overstretched and may reach breaking point if they end up with high debt as a result of a more liberalized mortgage offers.

While progressive sectors tend to take on the alarmist role, other analysts and industry experts are not inclined to press the panic button. The resiliency of the labor sector and the absence of speculative pricing in major markets are strong indicators that a bubble burst is a remote possibility. Experts stress that there are no solid proofs that bubble exists in real estate markets in Canada.

In fact, the worst that we can expect are corrections in these major markets in the next few months. This anticipated correction is not a dramatic market event and can be attributed to the normal peaks and dips in these markets. These analysts and observers believe that such corrections or adjustments do not come about under the regime of a juiced-up market. Major markets in Canada are moving towards stable territory and are far from going bust. Bubble burst and collapse in major markets are remote and prices will continue to pick up, albeit at a slower pace.

The average sales prices of home units across all segments will ultimately attain their real market levels as we are not seeing an overvaluation of housing units that is driven by conditions associated with real estate bubble. Amid a strong mortgage financing regime and resilient labor market, market conditions are generally stable in major markets in the short and medium terms.