Are we in a housing bubble that’s about to burst?
Most real estate analysts don’t think so. But it’s still a pretty scary prospect for homeowners who owe what may be more than their house is worth if we have an American-style crash here. And the prospect of a 20- to 30-per-cent decline in the cost of housing in
On Monday, a report from the Canadian Centre for Policy Alternatives argued that prices have floated into the bubble zone. It warned the bubble could burst if we get too rapid a rise in interest rates from their current historic lows.
In one scenario, the report considered an American-style collapse in prices of 30 per cent in a single year. On Tuesday, the C.D. Howe Institute followed with an analysis that looked at the differences between the
But making a purchasing decision based solely on what you fear will happen to the short-term value of real estate in
With interest rates at historic lows, the cost of borrowing will almost certainly go up. For people who put off buying a home now because they fear real estate prices will fall, there is a good chance that the increase in borrowing costs will represent an even larger hit to their net worth by the time they finish paying off their mortgage. For example, for someone contemplating borrowing $400,000 with a rate of three per cent, the interest cost over 25 years with a 25-year amortization would be just under $170,000. If the rate increases to six per cent, the cost would be $373,000, an increase of more than $200,000.
Is a three-point increase in interest rates over the next few years more likely than a major price correction? I think so, but lacking a crystal ball, I still believe the best advice is to give up trying to time the ups and downs of the housing market. I think the best advice is to buy a home when you can afford it and you find one you like. After a few decades, you’ll still have a home, no matter what kind of investment it turns out to be.