Are Real Estate Prices Heading Up or Down?

Canadian real estate prices are headed up… no wait, they’re headed down… no that’s not right, they’re headed up! (or are they?)

I always get a chuckle out of reading news articles that attempt to forecast where real estate prices are headed.

Can you guess which one of the following headlines is correct?

  • Home prices expected to keep rising next year – going up
  • CREA boosts annual resale housing forecast – going up
  • Housing prices to drop 25% over next few years – going down
  • Residential values expected to climb next year going up
  • This year’s housing sales to be flatstaying the same
  • Canadian house price collapse forecast – going way down

 

100% Certain, 87% Of The Time

In my opinion, no one can predict with 100% certainty where real estate prices (or any prices for that matter) will go in the future (and yes, that includes me!).  If someone could do that, they would be filthy rich, as they could time the market exactly, buying at the bottom and selling at the top (assuming everything else goes well that is).

Even the educated ‘experts’ can’t get it right… and they are always offering conflicting predictions.  Unfortunately it seems that there are simply too many variables to predict anything 100% of the time.  Even the Canadian Real Estate Association (CREA) and Royal Bank of Canada (who publishes real estate reports) may at times ‘revise’ their numbers multiple times a year.

Despite that fact that no one can predict with certainty where markets will go, there are a couple of indicators that will give strong clues as to which way prices are likely (but not guaranteed) to be headed.

  • Interest Rates – This is one of my favourite things to watch because it can hint at future bargains on the horizon.  In the short-term, interest rate increases will affect new buyers, slowing down sales somewhat because less people can afford to buy. In the long-term, as mortgages come up for renewal, it will affect existing property owners, as they are forced to renew at higher interest rates. Cash flow will decrease and some will not be able to afford to hold on to their properties. As more and more people are forced to sell their property, prices will drop and bargains will appear.
  • Housing Affordability – How far can you push people to pay for real estate?  Just asking people living in Vancouver. According to RBC Housing Affordability measures, recently it took 68.8% of median pre-tax income to pay household costs for a detached bungalow.

    What does that mean?  Line up everybody’s income in order from least to most, and the person in the middle will pay 68.8% of their income for mortgage payments, taxes and utilities on an average priced bungalow.  This is a great indicator to show how affordable real estate is in major city centres, but unfortunately it’s not available for all cities and it doesn’t necessarily predict when a drop in prices is due (as can be seen with high rates in markets such as Vancouver and Toronto).  This indicator is useful as an overall ‘rough guide’.

 

Can You Trust Statistics?

Another problem to overcome when trying to figure out price direction is the way statistics are reported by CREA, RBC and other institutions. Here are a couple of examples…

Example #1

Many experts quote average home prices increasing as a way to show a hot real estate market.  However, an ‘average’ is a statistical calculation that includes the most expensive and the least expensive properties.  If enough of the most expensive properties increase drastically in price, it can increase the average price, even though an ‘average’ property hasn’t moved in price at all (or the one you happen to own).

Example #2

Another example is the median pre-tax income used by RBC to calculate housing affordability.  The person with a median income has an equal number of people earning more than them, and an equal number earning less.  But does that mean they represent a typical Vancouver family?  Not at all.  That person could be earning more or less than most people in the area, but even if they did represent a typical family, it might not represent the market where your property is located.

The thing to keep in mind with statistics is that they should be used as broad indicators of what has happened in the past, and give clues as to what might happen in the future.  You should always confirm statistics such as interest rates and housing affordability with other indicators and, more importantly, you should confirm with exactly what is going on in the particular market you are investing in.  That’s because…

 

Real Estate Is A Local Investment

Real estate is an investment that can vary dramatically across the country, and even within the same city.  One area of the country can be experiencing a boom, while another is experiencing a bust. The same applies the provincial level, regional level, city level, and even within neighourhoods.  It truly is a ‘local’ investment, with each property having its own unique characteristics that affect its overall price.

For this reason, I recommend investors use statistics as an overall guide, but then focus on:

  • Becoming familiar with whatever market you are in (or want to invest in)
  • Learning that market inside and out (go to open houses, talk to realtors and city planners)
  • Finding deals in that area (get a great realtor on your team, call private sellers, analyze the deal with conservative numbers)

While it can be a good idea at times to go outside of where you live to invest (e.g. if you live in Vancouver), don’t get caught up with chasing the latest hot area to invest in, just because a new forecast comes out from CREA or RBC.

In the long run, much of the profits from real estate come from your tenants paying off your property for you, and from slow market appreciation and inflation increasing its value over time.

What do you think?  Where will real estate prices head in this year and beyond?
How do you decide where to invest?

Follow Me

Paul Blacquiere

Founder and Editor at Spirepoint Wealth
Paul is an entrepreneur, investor, speaker, educator and publisher. He is founder and editor at Spirepoint Wealth, a financial education company dedicated to helping people improve their finances, create more cash flow and build long-term wealth.
Follow Me

Latest posts by Paul Blacquiere (see all)

  • g. brown says:

    I think you will soon find out that RE is a global investment, and it is in for a long rough ride downhill. Anyone who thinks their ;’local’ area will be special is in for a negative surprise.
    I invested heavily in RE in mid 80’s but the 30 years of tailwinds due to falling interest rates is on its way out. Headwinds of rising rates will not be comforting to RE investors. My advice to anyone at this point in time is to sit back and wait a year or 2 and your down payments will go a lot further….
    It doesn’t really matter what the ‘forecasts’ say, …lets just check back in a year or two. Take care…

    • Paul Blacquiere says:

      Consider this…

      If an investor owns a property that is fully paid off, interest rates have no direct affect on that investor, as long as they don’t plan to sell and the rental market stays strong. In fact, if rates increase, many home owners will not be able to afford rising mortgage costs and will be forced back to renting, which will strengthen the rental market.

      If an investor owns a property that is highly leveraged (e.g. 10% equity), they will be directly affected by interest rate hikes when their mortgage comes up for renewal (or immediately if they are on a variable rate).

      So the amount of leverage used affects carrying costs for a property, and the less leverage that is used, the better off investors will be in rising markets.

      Now this doesn’t say anything about dropping real estate values. But look at it this way…

      If you owned a property and its value dropped by 50%, but you had good tenants in it who were paying the bills and providing you cash flow… if you didn’t plan to sell anytime soon, would it matter?

      Yes, it would impact your net worth statement, but that is just a guess based on ‘market values’ anyways. In my opinion, as long as you can afford to hold on to the property, and that property is generating a good cash flow for you, temporary price changes don’t matter.

      If you’re trying to time the market, buying and selling, or you are forced to sell right when prices drop, that’s when the trouble happens.

      As for real estate being local, I stand by my statement. Even in the US, which is going through one of the worst real estate markets in history, not ALL markets are down. Some are worse than others (e.g. Phoenix, Florida were hit hardest because they had some of the biggest run ups in prices before the crash)…

      • g. brown says:

        I agree with you that there is a ‘local’ aspect to RE. That will always be true. But, there are many global implications with RE, credit, interest rates that exist today that did not exist to the same extent 10 years ago.
        I also agree that if one can ‘hold on’ for many years time, inflation and nice tenants will make it a profitable move.
        My issue is that many newby RE investors love to put as little down as possible because they have their eyes focused on all the future profits. Leverage is a 2 sided sword.
        I have seen many new investors leverage themselves up and then in a downturn they get wiped out, permanently.

        You had mentioned,
        ” If you owned a property and its value dropped by 50%, but you had good tenants in it who were paying the bills and providing you cash flow… if you didn’t plan to sell anytime soon, would it matter?

        Yes, it would impact your net worth statement, but that is just a guess based on ‘market values’ anyways. In my opinion, as long as you can afford to hold on to the property, and that property is generating a good cash flow for you, temporary price changes don’t matter.”

        Many times it does matter. Why?
        Maybe one has trouble keeping tenants and have vacancy expenses for longer than you thought possible. Maybe you have to drop your rent. Maybe you become cash flow negative and it starts dipping into your personal cash? Maybe you start wondering why you keep subsidizing rent on an underwater property. What are you options upon renewal? Heaven forbid that rates have risen as well?
        Again, I have seen many new investors, mainly in downturns, who can not monetarily or emotionally continue on with a ‘loosing’ venture and sell, or are forced by the bank to sell, at a loss.

        I guess my bottom line is that if one were to buy RE in early to mid 80s, or even early 90’s, prices were low, and interest rates were on our side for decades.
        It is a different point in a macro credit cycle at present.

        My advice to any RE investor today , especially a new one is to hold off for a year or 2. My belief is that the USA is going to have a ‘double dip’ recession which will translate into a global recession similar to what we saw in 2009. Recessions are never favorable to RE prices and this case may in fact be worse because government and central bank options are more limited since they have pretty much used up all their bullets ‘fighting’ the last recession.

        FYI, I am not a perma-bear. I was very bearish in 08 when everyone was talking up the ‘goldilocks’ economy. I was bullish in March 09 into 2010, but I have become very bearish currently.

        Regardless of whether one thinks my economic calls are crazy or not…
        I guess the question I would ask a new investor (or even if you are buying your first home to live in) is if they think RE prices will take off in the next year? If not, they there is little harm in waiting. When one is starting out it is an awful feeling to see ones down payment vaporize, even if only on paper. If the USA does double dip, and your wait, you will be able to buy much more house, or even more investment properties.

        Recessions,especially after massive credit booms are particularly painful.
        In Japan, at the peak of their credit bubble, 1989, no one thought that the future held anything but blue skies. RE then fell for 16 years straight with prices down 60% where they basically sit today, 20 years later. I am not saying that will happen here. I point it out only to indicate the RE can go through long tough macro cycles, especially after credit booms end, which is what we have in NA at present. The interesting thing about Japan to me is that we often here that, “land, well they are not making anymore of it”, so it must be a good idea to buy RE. In Japan, a small island, with 120 million people and much of the country mountainous, one would think there is a scarcity of land? However, that scarcity meant little on the backside of the credit boom.

        Anyway, good luck investors and if you can sit on your hands for a while you don’t have much to loose by being patient and seeing what transpires over the next year or so….maybe I’m right, maybe not, or maybe I’m somewhere in the middle….good luck…

        • Moe Muise says:

          I agree that knowledge of economic fundamentals is essential. But more important than the oscillations of the global economy is the reaction of local economies to global trends. There can be big differences in real estate markets between cities, even cities that are relatively close to each other

          Look at trends in RE between Ottawa and Toronto, for example. In Ottawa, recessions can actually be seen as a GOOD thing, because during times of recession the federal government tends to take a Keynesian approach, spending more to stimulate the economy. What does that mean? Employment in Ottawa increases, and more money in general is sloshing around the city.

        • Paul Blacquiere says:

          @g.brown – I agree that leverage can be dangerous, especially to new investors with little financial education. It’s too easy to put a small down payment (yes, if the government changes the rules) and then when times get tough, those investors are wiped out. I saw it happen to a couple I know in southern Ontario who acquired 50+ properties and just recently had to declare bankruptcy, owing creditors millions of dollars because they kept borrowing unsecured funds to float their real estate.

          If you could find excellent tenants for all your properties and keep them happy for the long term, paying rents that cover costs plus a little extra, then you should be fine even when prices drop. However, tenants rarely stay forever, and tenant turnover can bring unforeseen expenses (refreshing the apartment, advertising) and reduced income (average rents can change). That’s why it’s especially important for investors to learn financial management skills (managing cash flow, expenses, etc.), but also marketing and customer service skills (to attract and keep great tenants).

          Another thing to consider is that I don’t recommend investors buy properties at market value, if possible. If you can buy at a discount, you have already locked in a ‘buffer’ to help offset any potential price fluctuations in the future. Also, if you are forced to sell for some reason, having some equity (over and above your down payment) may allow you to break even or even make a small profit.

          Contrast that with the typical investor who thinks real estate is a good investment, so they liquidate their stock portfolio and pour it all into the first deal they see that ‘looks nice’ (e.g. is already renovated, with a marked up price). They have little to no training in real estate investing, yet they somehow think they will make a fortune. Funny how it never seems to work out that way…

          • G. Brown says:

            well, those are excellent comments for a newby or anyone who gets caught up in taking too much leverage.
            There is a saying out there that some of the ‘guru’s’ use.
            “Don’t wait to buy real estate. Buy real estate and wait”
            While in general I agree with that statement in the sense that one does need to ‘take action’, quit procrastinating or they will never get around to investing.
            It is also a relatively true statement during ‘normal’ economic scenarios. However, I don’t think we have anything close to ‘normal’ currently and I think the Federal Reserve in the usa has grossly distorted global economic and credit markets along with commodity markets to such a point that sustainability of the current ‘normal’ is facing greatly elevated risks. I can’t (due to time) and won’t write the long book on it and bore your readers to death, but suffice it to say I stick with my view that, especially newby’s and those looking to expand their leverage, sit on their hands for a year or so, or as long as they can stand, and just see how this global economic situation plays out. In my view there is little risk of the RE market ‘taking off’ within a year, but there is there is a very unusually high level of global economic risk that could translate into better RE buying opportunities. Take care….

          • Paul Blacquiere says:

            I just got an email from a gentleman who was asking for contacts in the US to buy real estate, and I thought I would share my answer with everyone…

            “Personally I think the US economy is still heading down, so if you plan to buy properties there, I recommend you flip or assign them for cash, or buy a retirement home and don’t worry if the price goes down further.”

            Hope this helps out anyone considering investing down south.

            Paul

  • Moe Muise says:

    I think you said it all here, Paul:

    “In the long run, much of the profits from real estate come from your tenants paying off your property for you, and from slow market appreciation and inflation increasing its value over time.”

    From what I’ve seen, the biggest disappoints come when new RE investors expect to be able to “flip” a property in a short period of time. My wife and I own two duplexes in Ottawa (plus our home), and we went into these investments expecting to hold onto them indefinitely.

    Re. G. Brown’s points, it sounds like he’s had some terrible tenants…

    • g brown says:

      actually I’ve had mostly wonderful tenants.
      I’m not bitter on RE as it allowed me to ‘retire’ at an early age. I was not a flipper but a long term holder.
      I still love RE as an investment. I just truly believe I will love it even more in a year or two when my down payments will likely go much further.
      I study the macro economic picture closely and have done so for over 25 years with pretty good success. I see more risk currently than any time I have observed. I have friends becoming ‘investors’ today some of them leveraging up, and I seriously worry for anyone doing that during the current economic background. Most of them can assess a property but have no idea what is happening in the economy. History shows its a bad idea to buy just before a recession.
      Recession? What recession? No one anticipates a recession? The economy is strong I keep hearing? Unfortunately I have a nasty knack of seeing them coming and I see a double dip usa recession coming within a year….anyhoo, time will tell….

    • Paul Blacquiere says:

      @Moe – I think those flipping TV shows contribute to the myth that making a fortune flipping properties is easy money. Every time I’ve seen one of those shows, I just shake my head because I know they are conveniently omitting a ton of costs. “Ummm… what about labour costs?” I usually say (some shows get their friends and family or the show staff to do the work — that alone accounts for 50-70% of most renovation costs!). And the list goes on and on.

      @g.brown – Can’t we rely on the media to inform us when we’re in a recession? 😉

      I agree the US is still in for some big trouble. I’ve seen information that seems to indicate the employment and inflation numbers are nowhere as good as the government is reporting (apparently they changed the ‘formula’ they use to calculate them). This seems confirmed with friends and family who say the economy is still very bad and as my cousin put it ‘the media is on crack’. Couple that with adjustable rate mortgages (ARMs) starting to come due this year (could be bigger than the sub-prime fiasco) and it’s a recipe for disaster…

      • G. Brown says:

        fwiw, I agree with your comments, especially about the crack media. If I have learned one thing over the years, it is that the media is consistently misleading. Typically always bullish, and when they finally turn universally bearish, it is usually a good time to do some buying….I think its time for some elevated patience. If the usa is in for some hard times there will, as usual, be some follow through to Canada. take care.

  • Fiona Styles-Tripp says:

    Investing in real estate has its risks just like any other investment. I am sure we all know people who have had lousy tenants, a lemon rental property or those who have lost their shirts. Here in Alberta in the ’80’s when the economy crashed, my husband had friends that were heavily invested in rental properties and they lost everything. Why? They were over leveraged and the economy tanked which caused the renters to leave Alberta in droves and head to the Eastern provinces where the economy was better. So, if you are highly leveraged, you are certainly putting more stress on yourself and leaving yourself vulnerable to changes such as increased interest rates, lower economic times with possible higher vacancy rates.

    I agree with you Paul in that I buy rentals with the idea of holding them long term and letting the tenants pay off the mortgage. Now I need to think about bringing in investors so that I don’t over-leverage myself!!

    (that’s my 2 cents worth)

    Fiona

    • Paul Blacquiere says:

      Leverage is like a gun… it can be used for both good purposes and bad. Too many people hear about low or nothing down real estate and think it can be applied anywhere, but that’s just not the case.

      High yields can give a good indication if a highly leveraged deal is possible and even recommended. If the yields are good enough, and you can buy at a discount, a highly leveraged deal may be possible, but most new investors don’t know how to look for those sorts of deals.

      I guess the bottom line is… if you’re going to use high leverage, you better have deep pockets (or investors with deep pockets) ‘just in case’.

  • Barb says:

    This is a difficult question because the market is really volatile. There is so much consumer debt, that it makes it difficult for those who are in debt to do anything. I, personally, don’t want to work with renters.
    Our land prices (new area) are being sold, if they are being sold at all, for $20,000 less than the property assessment value … I believe realtors are listing houses at prices they want so that the market will not go down in value, and almost everything is slow or frozen …
    I have a property that I was going to sell, but am wondering if it is better to hold onto it, although we can’t really make payments right now … know anyone who would want to invest in BC?

    • Paul Blacquiere says:

      Hi Barb,

      Sounds like you’re in a tough market, but there are always ways to make your property stand out from the rest. I could write a book just on this alone, but basically you need to make your property stand out from the rest, and look at what your target market buyers are looking for and cater to them.

      For example, if your neighbourhood is attracting mainly young, first-time home buyers, consider including 1 year of free internet access, plug a flat screen TV. That would only cost you about $1500 or less, yet it could help you sell the property fast.

      Also, I recommend you have your property professionally staged (whether it’s vacant or not). For a few hundred dollars, you can have your property look like a model home, which will give you an edge over nearby properties.

      Lastly, make sure the first impression of your home is a good one. The front door and associated hardware (doorknob, mailbox, etc.) should be high quality. Change all old light fixtures in the house, and if your light switches and plugs look old, change them too. Seems like small things, but they make a big difference.

      Anyways, I hope this helps. Good luck

      Paul

      • Barb says:

        Hi Paul: These are great suggestions! However, this is only raw land, and I wanted to set it up for a business, but you would have to get a building up first. Too hard to hold onto.

        I’m open to more suggestions… haven’t put it on the market yet.

        • Paul Blacquiere says:

          Then you’ve got more of a challenge on your hands 🙂

          Do you have neighbouring farmers who might be interested in renting it? My uncle has done that for years — let’s them rent it out as farmland.

          • Barb says:

            Thanks for the comments!
            This is rural residential with only a driveway and flat lot for the house in the mountains. If it were land in the valley, you could rent it out for people who would want an orchard or winery.

          • Paul Blacquiere says:

            Then you’ll have to sell the ‘picture’ of what it could be. Perhaps get an artist’s rendition of a potential home (or maybe team up with a builder with one of their stock floor plans), and focus on all the benefits of the lot – e.g. any views, nearby water, proximity to any nearby stores, etc. Sell the sizzle! (even if the sizzle is a small one 🙂

            Good luck!

  • Dan W says:

    Hi Paul

    I am a real estate investor in Barrie. I believe we will be in for a correction within 3-5 yrs. Hopefully not as bad as it was in the ’90s. What is your take on this? I am looking at paring down my holdings by 50% within three yrs for fear of a great equity loss. I am in my mid 50’s. I would like to do more real estate investments but don’t want to loss what I have gained. Comments pls? Thanks

    Dan

    • Paul Blacquiere says:

      I personally believe it is only a matter of time until interest rates rise, and when they do, alot of people who are just ‘squeezing by’ with their mortgage payments (which are at all time lows), will be forced to sell when their mortgages come up for renewal.

      That will definitely have an effect on price, but it won’t be the same effect in all markets. For example, Ottawa has proven fairly resilient over the years, but places like Edmonton, Calgary, and Vancouver have been much more volatile.

      It will be a great time to get deals, and many people who were previously home owners will need a place to rent. This is a good thing for landlords overall.

      As for your existing portfolio, if you are looking to invest the equity elsewhere, that might be a prudent idea. However, if your properties are carrying themselves with positive cash flow, and your tenants are paying them off, why not keep them?

      As they are paid off, the cashflow from them will generate a nice retirement income for you.

      Hope this helps

      Paul

  • dana says:

    Hi
    I am just reliying as to what I think of the prices in my area, this is east york , toronto. I have been trying to buy a house here and over the past 2 years I have noticed a huge price hike! And by this I mean the price were at 350-380 K for 3 br attached , these have shot up by at least more than 100-150k… So I am stuck with no house as yet even though I have the deposits e.t.c.. and with a great credit score…affordability is a huge issue…max morgage I was comfortable with 16-17 hundres per month and have had a 20% downpayement with my seeking range for 2 years..still no hope…I will stick to my own rental if need be…prices have to drop…

    • Paul Blacquiere says:

      Wow, that’s quite the increase! I’m sure it has something to do with natural supply and demand, but more importantly, with ultra low interest rates. With low financing costs, people can afford to bid more for homes.

      I agree prices are in for a correction, especially in hot markets like Toronto and Vancouver…

  • Siraj says:

    Hi,
    “Statistically speaking” The vacancy rate is a good indication between “want” and “need”

    • Paul Blacquiere says:

      Thanks Siraj. However, one problem I can see with vacancy rate is that there is a limit to the downside — it only goes to 0%. That could indicate a lack of supply of rental units, but it doesn’t indicate whether demand for those rentals is increasing or staying the same.

      Also, vacancy rates are typically determined using very informal methods — telephone surveys with landlords. At least that’s how it’s done in Ottawa — I know because I’ve received many of those calls over the years.

  • Gil Hewer says:

    Dear Mr. Blacquire,
    I have been in the real estate industry, in one section or another, for the past 37 years. I have seen all sorts of predictions. Once in a while some the predictors get it right but most are off the mark since, as you said, in your piece there are so many vairiables. But then few of us remember the predictions or who made them, and so the gueswork continues. Your piece “Are RE prices heading up or down?” is one of the most sensible articles I have ever read on the subject.

    What I am going to do is concentrate on the fundamentals of real estate such as location, cash-low, interest rates, employment stability and trends, and forget about which direction prices may be headed, since as you said, no one really knows.

    • Paul Blacquiere says:

      Hi Gil, thanks for the positive feedback.

      I recommend investors focus on elements they can CONTROL. For example, down payment, mortgage interest rate and term, purchase price, tenant selection, property expenses, etc. Over time, their rental property will be paid off by the tenants, and inflation will more than likely increase the value of the property and the rents.

      All the other statistics and factors are nice to have, and MAY affect the value of your property or increase your odds of profiting, but there are no guarantees in life. Your market could be different and property values could go nowhere or even down. But if you focus on things you can control for your rental property, you’ll eventually have a free and clear property with a regular monthly income.

      Paul

  • wes coast says:

    From a macroeconomic view – prices will fall across the board with some markets (Vancouver) falling hard. Here is why:

    1) Consumer debt is loaded up at 165 percent of disposable income – and that’s at artificially low rates.

    2) Rates will go up – not by the willl of government. The desperate search for yield and security has created a bond bubble. When that bubble blows bond prices fall – rates go up. Mortgages are funded via the bond market. Rising rates will drown many who have loaded up on debt – see point number 1 above.

    3) The last 10 years of housing bubble has created a huge dependance on housing to create jobs. It has crowded out investment in industries that would have sustained themselves without being jacked up on loose credit standards / policies. A declining housing market will cause real damage to the real economy. Contractors, realtors, mortgage brokers, notaries, appraisers, stagers, advertisers, banks will all see a mass reducton in revenue – and that will reverbrate throught the economy. This will only force further reduction in housing demand as the unemployed don’t get approved for mortgages.

    4). The CMHC loophole is now (finally) closed. For the last decade banks have been passing off mortgage debt risk to the tax payer backed CMHC while siphoning off HUGE profits year over year. When a bank has no risk – it will sign up mortgages based on the most basic criteria. The banks – by insuring the mortgage via CMHC have their ass(ets) covered if you default – they get paid back from CMHC. While you are not in default they colllect a cushy 3 percent spread on massive mortgage principle amounts. The banks had incentive to sign as many mortgages as possible – and they did. They created this housing bubble and all you have to do is check out their profits in the last decade and their stock chart. You’ll see how sweet it is to make 3 percent on risk free mortgages. I had a personal experience where the banks wanted to charge my a full percentage more on a mortgage if put 25 percent down. They wanted CMHC involved and that meant I had to put less skin in the game. This is Canada’s subprime.

    5) Growth in housing was driven by credit expansion – its demise wll be from credit contraction. House prices vis a vis income and/or rent has decoupled from anything resembling healthy and prices will have to revert to their long run averages without a cushion of credit to prop it up.

    In summary, with rates having no where to go but up, CMHC (ie the tax payer) no longer taking on the banks risk, consumers all tapped out for credit, and housing prices being no where close to their valuations that are supported by fundamentals (income / rent) means only one thing: housing prices will be coming down – a lot.

    • Paul Blacquiere says:

      Hi Wes,

      Thanks for your detailed response — very informative!

      I agree housing prices will come down overall, however, there will always be local areas that buck the trend.

      Personally I think falling real estate prices will be a good thing, as cap rates have dropped so much it doesn’t often make sense to invest in rentals, unless you’re buying at a steep discount.

      Paul

  • E-Dot says:

    Going down. Canada like Australia rode the commodity boom fed by ‘the Fed’. Cheap money chases assets to find marginal return. This is why Canada was booming while the world went bust. As the USA recovers and rates rise, our poor decisions and bubble mentality will need to be reconciled. 2017 is my prediction.

  • Nill Dowman says:

    Well, based on the financial index, discussion, journals, news papers and markets, it is hard to predict; even if one does predict, may not be not correct. At the same time, when it happens, it happens with surprise like oil price. Before it actually happened, I did not find not a single financial forecast mentioning that oil price would go down in the early 2015.

    For housing, most people are waiting if goes down specially in Toronto, Vancouver and Calgary so it feels like it is taking time and not happening. How you expect, in a developed country, have to have more than 100,000 annual income to buy an average house; isn’t frustrating?

    Based on all the current information, the housing price will go down surprisingly and rapidly like oil specially in three provinces, Vancouver, Toronto and Calgary starting mid 2015.

    • Paul Blacquiere says:

      Thanks for your feedback Nill. If your prediction is correctly, it will certainly be a good time for investors to find deals in those cities, as there will be many motivated sellers.

      I think the same thing will happen in many other markets when interest rates go up. It may not have an immediate effect on prices, but as soon as mortgage renewal comes up for many people, they will have to sell because they can’t afford the payments. More supply and less demand = lower prices.

  • Alan Taylor says:

    You sure can’t predict prices! But it seems to me if interest rates go up, prices will be driven down because the population has to be able to afford their monthly payments, or who will buy houses?
    Secondly, it’s got to be a good time to buy in the US when the economy is improving rapidly, whereas Canada is so iffy right now.

    • Paul Blacquiere says:

      I agree with you Alan. I think as interest rates go up, those people who stretched themselves to the limit on mortgage payments will be forced to sell, driving prices down. However, many Canadians are not stretched to the limit, and they’ll likely be okay, as long as they can wait out any down turn in the market to sell their home.

      And yes, the US is starting to come back and it’s certainly a good time to ride the appreciation wave! 🙂

      Paul

  • Mac says:

    I’m a new immigrant to Canada (Almost a year now) . I have good credit history and i have 5% down-payment for up-to 450000$. I have a permanent job and my annual income will be 72K. Is it a good idea to buy a house for me in Scarborough or east end like Ajax or Whitby now or Should i buy a condo now ?

    Should i wait for some more time to gain more savings and the prices to come down ? I have my wife, 2 babies and my mother living with me, Please help me !!

    • Paul Blacquiere says:

      Hi Mac,

      I recommend you talk with a mortgage broker (not your bank) who can help you determine exactly what you can afford. Keep in mind that condos have their own separate fees, so that will affect what you can afford. Plus you have to factor in any other debts you have, plus other costs.

      There are no guarantees prices will go up or come down. And while a 5% down payment is technically enough to buy property using CMHC mortgage insurance, it is not a very large down payment. As a result, you don’t have much room if the real estate market turns down temporarily and you need to sell during that time.

      Since it sounds like you are the only source of income for your family, that could be a risky position to be in if interest rates go up (chances are they will eventually) and your home is very highly leveraged (95% financing). You may no longer be able to afford it, and be forced to sell.

      If your wife and mother also provide income, that could reduce the risk. You could also consider saving more down payment, which would also reduce the risk, or finding a lower cost home.

      I hope this helps

      Paul Blacquiere

  • Chris says:

    Hi Paul,
    I’m considering investing in the Fraser Valley outside Vancouver. I’m looking for a place I can live in the basement and rent out. Do you think it’s best to continue saving and wait out the market? The area I’m looking in has slowed down but it doesn’t seem the price drop in similar areas (surrey) has reached this part (abbotsford) yet. Am I wise to continue saving and add to my down-payment? (I have ~15% on 500k)

    • Paul Blacquiere says:

      Hi Chris,

      I don’t know what the market is like in the Fraser Valley. However, keep in mind that if you can save more down payment money faster than the rate at which prices are going up, then wait, save more and your mortgage will be lower. Otherwise, you may want to consider buying now. Either way, I recommend talking to a realtor to get a better idea of what’s going on in that market.

      Another thing to consider is if you’re buying a multi-unit building, such as a duplex or triplex, you can not only rent out 1 or 2 of the units above you, but if you’re single, you could also rent out a room to help cover the mortgage. If each unit is 2 bedrooms, then you could get an extra $300-500/month for renting out an extra bedroom in your apartment. I did it for years before I got married and it really added a lot of extra cash flow.

      Hope this helps


  • >