Is There a “Housing Bubble” in Canada?

Matt Chan • Jul 05, 2016

Since at least 2008, there have been repeated bursts of commentary that there is a housing bubble in Canada. Those comments have generally assumed that rapid growth in house prices (or a rising ratio of house prices versus incomes or of house prices versus rents) is sufficient evidence of a bubble. To the contrary, these supposedly strong indicators are not definitive proof. They may actually represent healthy outcomes within existing conditions.

Proof of a bubble requires two findings:

There are expectations of price growth that are self-fulfilling – that the expectations of growth lead to increased (and excessive) activity in the market, which drives the price growth
Prices diverge significantly from what should be expected based on economic fundamentals

On the first condition, the author’s statistical research into Canadian housing markets suggests that growth of house prices has very little influence on market activity and, therefore, there is no evidence of a “speculative mindset”. There is evidence of a moderate effect in British Columbia, but even in BC the effect is nowhere near as strong as occurred in the US during its bubble period.

On the second condition, the critical economic fundamental is that very low interest rates have created “affordability space” in which house prices could rise. The amounts of actual increase in local markets have varied, depending on local conditions. The key finding here is that, in the 11 major market areas that are included in the Teranet/National Bank House Price Index, none have fully consumed the affordability space that has resulted from low interest rates. As such, we can conclude that the rapid rises of housing prices are consistent with economic fundamentals.

Another way to interpret the data (which is hopefully clearly evident in the charts shown in this section) is that housing affordability is currently very favourable almost everywhere in Canada. This is resulting in strong housing activity and supporting the broader economy. This support is increasingly valuable, given that investment in energy projects is no longer a driver of growth.

This report concludes that housing bubbles do not exist in Canada.

These findings explain why the countless predictions of doom have not been proven correct. That said, the economic fundamentals can change. In particular, a non-trivial and sustained rise in mortgage interest rates (or a sharp economic downturn) could put current prices offside and lead to price reductions.

There is risk in the policy arena. Changes in mortgage lender or insurer policies that reduce access to mortgages would result in a significant change in fundamental conditions, leading to an unnecessary drop in housing demand and housing prices, causing consequent economic damage.

Assessment of risks in the housing and mortgage markets should give considerable attention to the outlooks for interest rates and the employment situation. Someone who holds strong expectations about adverse changes for the fundamentals could see very substantial risks. On the other hand, someone who does not expect adverse changes for the fundamentals should see limited risks in the housing and mortgage markets.

This article was taken from the report Looking for balance in the Canadian Housing and Mortgage Markets published by Mortgage Professionals Canada in June of 2016, written by Chief economist Will Dunning.

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Using your RRSP for a Home Purchase

By Matthew Chan • 15 May, 2024

Did you know there’s a program that allows you to use your RRSP to help come up with your downpayment to buy a home? It’s called the Home Buyer’s Plan (or HBP for short), and it’s made possible by the government of Canada. While the program is pretty straightforward, there are a few things you need to know. Your first home (with some exceptions) To qualify, you need to be buying your first home. However, when you look into the fine print, you find that technically, you must not have owned a home in the last four years or have lived in a house that your spouse owned in the previous four years. Another exception is for those with a disability or those helping someone with a disability. In this case, you can withdraw from an RRSP for a home purchase at any time. You have to pay back the RRSP You have 15 years to pay back the RRSP, and you start the second year after the withdrawal. While you won’t pay any tax on this particular withdrawal, it does come with some conditions. You’ll have to pay back the total amount you withdrew over 15 years. The CRA will send you an HBP Statement of Account every year to advise how much you owe the RRSP that year. Your repayments will not count as contributions as you’ve already received the tax break from those funds. Access to funds The funds you withdraw from the RRSP must have been there for at least 90 days. You can still technically withdraw the money from your RRSP and use it for your down-payment, but it won’t be tax-deductible and won’t be part of the HBP. You can access up to $35,000 individually or $70,00 per couple through the HBP. Please connect anytime if you’d like to know more about the HBP and how it could work for you as you plan your downpayment. It would be a pleasure to work with you.

If You’re Looking to Sell Your Property, Start Here

By Matthew Chan • 08 May, 2024

If you’ve been thinking about selling your existing property, for whatever reason, it would be in your best interest to connect with an independent mortgage professional before calling your real estate agent or listing it yourself. And while talking with your mortgage professional might not sound like the most logical place to start, here are a few scenarios that explain why it makes the most sense. If you’re buying a new property If you’re selling your property, chances are, you’ll have to move somewhere! So, if you plan on buying a new property using the equity from the sale of your existing property, chances are you’ll need a new mortgage. Don’t assume that just because you’ve secured mortgage financing before, that you’ll qualify again. Mortgage rules are constantly changing; make sure you have a pre-approval in place before you list your property. Also, by connecting with a mortgage professional first, you can look into your existing mortgage terms. You might be able to port your mortgage instead of getting a new one, which could save you some money. If you’re not buying a new property Even if you aren’t buying a new property and want to sell your existing property, it’s still a good idea to connect with a mortgage professional first, as we can look at the cost of breaking your mortgage together. Unless you have an open mortgage, or a line of credit, there will be a penalty to break your mortgage. The goal is to work on a plan to minimize your penalty. Because of how mortgage penalties work, sometimes it’s just a matter of waiting a few months to save thousands. You'll never know unless you take a look at the details. Marital breakdown The simple truth is that marriages break down. When that happens, often, people want closure, and unfortunately, they make decisions without really thinking them through or seeing the full picture. So, instead of simply selling the family home because that feels like the only option, please know that special programs exist that allow one party to buy out the former spouse. The key here is to have a legal separation agreement is in place. If you’d like to discuss the sale of your property and your plans for the future, connect anytime. It would be a pleasure to work with you!

Locking in a Variable Rate Mortgage

By Matthew Chan • 01 May, 2024

If you have a variable rate mortgage and recent economic news has you thinking about locking into a fixed rate, here’s what you can expect will happen. You can expect to pay a higher interest rate over the remainder of your term, while you could end up paying a significantly higher mortgage penalty should you need to break your mortgage before the end of your term. Now, each lender has a slightly different way that they handle the process of switching from a variable rate to a fixed rate. Still, it’s safe to say that regardless of which lender you’re with, you’ll end up paying more money in interest and potentially way more money down the line in mortgage penalties should you have to break your mortgage. Interest rates on fixed rate mortgages Fixed rate mortgages come with a higher interest rate than variable rate mortgages. If you’re a variable rate mortgage holder, this is one of the reasons you went variable in the first place; to secure the lower rate. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain.” And while it’s true that because the variable rate is tied to prime, it can increase (or decrease) within your term, there are controls in place to ensure that rates don’t take a roller coaster ride. The Bank of Canada has eight prescheduled rate announcements per year, where they rarely move more than 0.25% per announcement, making it impossible for your variable rate to double overnight. Penalties on fixed rate mortgages Each lender has a different way of calculating the cost to break a mortgage. However, generally speaking, breaking a variable rate mortgage will cost roughly three months of interest or approximately 0.5% of the total mortgage balance. While breaking a fixed rate mortgage could cost upwards of 4% of the total mortgage balance should you need to break it early and you’re required to pay an interest rate differential penalty. For example, on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more depending on the lender and how they calculate their interest rate differential penalty. The flexibility of a variable rate mortgage vs the cost of breaking a fixed rate mortgage is likely another reason you went with a variable rate in the first place. Breaking your mortgage contract Did you know that almost 60% of Canadians will break their current mortgage at an average of 38 months? And while you might have the best intention of staying with your existing mortgage for the remainder of your term, sometimes life happens, you need to make a change. Here’s is a list of potential reasons you might need to break your mortgage before the end of the term. Certainly worth reviewing before committing to a fixed rate mortgage. Sale of your property because of a job relocation. Purchase of a new home. Access equity from your home. Refinance your home to pay off consumer debt. Refinance your home to fund a new business. Because you got married, you combine assets and want to live together in a new property. Because you got divorced, you need to split up your assets and access the equity in your property Because you or someone close to you got sick Because you lost your job or because you got a new one You want to remove someone from the title. You want to pay off your mortgage before the maturity date. Essentially, locking your variable rate mortgage into a fixed rate is choosing to voluntarily pay more interest to the lender while giving up some of the flexibility should you need to break your mortgage. If you’d like to discuss this in greater detail, please connect anytime. It would be a pleasure to walk you through all your mortgage options and provide you with professional mortgage advice.