There has been a lot of buzz recently about the Canadian housing market. Much of the recent financial news revolves around a possible housing bubble. The concerns have mostly had to do with dramatically rising housing prices in Vancouver and Toronto. According to The Huffington Post, although the population in Vancouver has dropped by 5% in recent years, the housing prices have almost doubled. These statistics make no sense if you’re looking at the market through the lens of supply and demand. So, what exactly is going on?
The Housing Bubble
Housing bubbles occur when a set of circumstances causes the market price of homes to become disproportionate to the rest of the local economy. Some areas are seeing housing prices in excess of 12 times the annual income of residents. In Toronto housing prices have increased by a jaw-dropping 33% in a single year. Charles Sousa, Ontario’s Finance Minister has been casting blame on foreign investors and property scalpers, in this instance primarily house flippers, with creating the inflated prices in Toronto.
Why It’s Happening
These entities have likely been attracted to the markets in Vancouver and Toronto because of the Canadian government’s choice to lower the interest rates in the wake of the 2007-08 economic crisis. Aside from making housing unaffordable for local residents, part of the problem with housing bubbles is that they eventually burst, leaving drastically reduced home values and higher interest rates for residents to deal with.
The Solution
The housing market is complex and there is no one thing that will magically fix the situation for struggling Canadians. However, the Canadian government plans to integrate various measures that may help stabilize the climate. Included are extra taxes for foreign buyers and house flippers. There are also some options to help people cope with the current situation. In particular, products such as reverse mortgages which allow equity release for the senior population.While it is hoped that the new measures will help local residents with housing costs and their ability to live a comfortable lifestyle, it is admitted that there is little hard data on how much foreign investors are actually impacting the market so it’s difficult to tell how effective the new taxes will be.
The Future….
….is sadly not now, but with any luck the government’s actions will help struggling Canadians sooner rather than later. In the meantime, perhaps the best advice is just to keep saving your pennies and wait out the storm; whether that be with your grown children, or mom’s basement.
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