What is a housing bubble? You’ve undoubtedly heard the term, but what does it actually mean, and is Canada experiencing one? Whether you already own a home, are considering buying one soon, or are waiting for the right time to sell, you want answers to this vital question.

Let’s explore what a housing bubble is, what causes it, and how it may impact you.

What is a Housing Bubble?

A housing bubble happens when the price of homes rises quickly, at an unsustainable rate. Typically, a price-growth rate in the high single digits is considered healthy and sustainable. Under healthy conditions, homeowners continue to earn equity over time, sellers can make a profit on resale, and buyers can still afford to get into the market. Economic factors such as an employment boom and favourable interest rates usually explain this price growth.

On the other hand, a housing bubble can result from non-organic growth. For example, if speculators were flooding the market, buying homes to take advantage of rapid price growth, to sell in the near term for a hefty profit. This massive influx of listings, coupled with stagnating demand, causes prices to plummet and results in a “housing market crash.” A housing market crash is temporary, prices eventually return to normal levels when demand rises again and home-buying activity resumes.

What Happens When a Housing Bubble Bursts?

During a housing bubble, homes become overvalued. When the bubble bursts, prices fall. Homeowners without the intention of selling are unlikely to feel the direct impacts of the bursting bubble. However, these market conditions often indirectly impact other aspects of the economy, so to call homeowners who aren’t selling “free and clear” would be misleading. The ripple effects of a bursting housing bubble would likely touch most of us in one way or another.

Homebuyers who purchased a home during a housing bubble likely paid considerably more than it was worth. Properties bought by end-users as a residence, with no intention of being sold in the short-term, will eventually rebound closer to “normal” values and, at some point, return to positive growth.

A housing bubble poses the most significant risk to home sellers. Those who purchased in the bubble but now find themselves forced to sell their home will come up short on resale. They bought the house at a price exceeding what they could recoup, putting them in the red with no assets to show.

For example, someone purchased at peak market prices, but due to circumstances such as a job loss or the inability to carry the costs for any reason, now has no choice but to sell in a down market. The seller still owes their mortgage lender money on a home they no longer own.

Are We in a Housing Bubble?

The Canadian housing market reached record-high selling prices throughout the COVID-19 pandemic. After coming to a grinding halt in mid-March of 2020, a spike in demand for homes met by a supply shortage created that environment of price growth.

Speculators tend to wait out hot markets, buying when prices are down and selling when they’re up again. The short-term investment opportunities they generally look for are hard to find under hot market conditions, where bully offers and bidding wars are commonplace, and demand continues to outpace supply. These factors are generally inhospitable to speculators and investors.

Now, with rising interest prices and an increase in supply, there are signs that the market may settle into more typical patterns, not the records we saw throughout the first two years of the pandemic. However, for a housing bubble to burst, there needs to be a steep incline in inventory and new listings and a decline in demand – neither of which is likely to happen any time soon.

Housing Crash 2022? It’s Highly Unlikely.

The Canadian housing market is still feeling the impacts of pent-up demand from 2017 when the government introduced the foreign buyer tax and the mortgage stress test to cool the overheating market. These policies prompted many homebuyers to move to the sidelines, opting to wait and save, with plans to re-engage in the housing market in a few years.

Now fast-forward a few years to 2020. COVID-19 had a similar impact on the market, whereby many homebuyers delayed their purchase plans due to pandemic-related uncertainties. That pre-existing pent-up demand for homes continued to swell. With Canadians subject to stay-at-home orders with nowhere to go and spend their hard-earned money, they collectively saved historically high sums, which were injected into the housing market once consumer confidence returned. The spending came in the form of record-high home sales and renovations to existing dwellings for those unwilling to face the competitive resale market conditions.

Though inventory is not at record lows, it is still in short supply. With monthly sales starting to decline, experts are predicting that we will return to a more balanced market in the coming months, with more normal levels of sales activity and a flattening out of prices.

Given all this, it’s doubtful that we’ll experience the influx of real estate listings needed for a housing market crash – and if we did see those listings suddenly come on stream, there should be plenty of buyers to absorb them.

Homebuyers and Sellers, Do Your Due Diligence

Challenging market conditions and a still-present global pandemic have added some personal risks for homebuyers and sellers. It’s important to remember that requirements vary dramatically across Canada between provinces, cities, and even from one neighbourhood to the next. Now more than ever, it’s essential to work with a trusted, experienced professional Realtor who can guide you through the buying and selling process.

Still Have Questions?

That’s okay, you’re not alone. RE/MAX Canada hit the streets in a new video series, to find out just how much (or how little) the average person knows about Canadian real estate, and to offer some answers in the process.

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Knowledge is power. Connect with a RE/MAX agent for answers to all your real estate questions.