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Doom and Gloom and Bursting Housing Bubbles Again?


Blog by Claire LeLacheur | September 1st, 2010


I have reposted an article written and published in this morning's Vancouver Sun by Chris McInnes. He does very well as the harbinger of possible doom, and the ultra George Bush like fear impression. My guess is that too many Vancouver Buyers won't even make it to the end of the article, which in my opinion is the best paragraph, and the most realistic thing I have read since 2008 about the current state of the Vancouver real estate market. 

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 Vancouver certainly raises the anxiety level for people who are now on the brink of buying their first home. It may even persuade some people that housing is now too risky an investment for the money they have been saving up for a down payment.

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 U.S. market and ours and found that there is little chance of us falling into the kind of dark hole that has crushed the dream of so many homeowners south of the border. But no one can rule out a correction in prices here, even though most real estate analysts aren’t predicting any major decline. We’ve had them in the past, when prices have gone flat or fallen year over year. And the prospect of a 20-per-cent fall in the value of a $500,000 condo or a $1 million house, no matter how unlikely, could easily be enough to scare off first-time buyers.

But making a purchasing decision based solely on what you fear will happen to the short-term value of real estate in Vancouver might be a mistake. It would overlook the fact that what most people pay for when they buy a property is not the property itself but the money they borrow to complete the purchase. That means what you should be looking at is not just the risk to the value of your prospective home, which, if history is any guide, may go down in the short term but will gain value over time. You should also be looking at what happens to your cost of borrowing if you put off your purchase over fears of a short-term decline in prices.

 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.