Understanding Canada's Real Estate Bubble and the Effect of COVID19

What is a Real Estate Bubble?

A real estate bubble is created when housing prices increase steadily because of demand, speculation and a high rate of spending. Like an actual bubble, the market is bound to pop as it continues to get bigger and the spending and prices become unsustainable. This results in a sharp drop in prices.

When this happens, many people lose large sums of money and properties, while others are able to purchase homes at previously unimaginably low prices. While housing bubbles are temporary events, they can last for years before bursting. Most people are probably familiar with the housing bubble that burst and created the 2008 Financial Crisis.

Banks were giving loans at such a high interest rates and people were borrowing money they couldn’t possibly pay back to purchase larger homes or multiple homes, resulting in a crash where many people lost their homes and had to declare bankruptcy. The price of homes

There are a number of factors that are expected to affect the Canadian housing market in the wake of the global pandemic, but the most basic is income. Unemployment levels are at an all- time high, and even if this is temporary, losing several months of income is a big deal when 53% of Canadians live paycheck to paycheck.

Even those individuals who are more stable and have savings accounts will likely have to dip into their savings, meaning they have less money to put on down payment when purchasing a home in the next few years. This will all affect the amount of money available on the market and will force sellers to lower their asking prices to move property.

COVID's effect on Canada's Real Estate Market

With the current world pandemic still in full swing and unemployment rates continuing to rise across Canada, many people are asking: will COVID-19 burst Canada’s real estate bubble? Open houses are currently not possible, and people wishing to see homes have to ask a realtor to unlock the property and then leave.

They are then able to let themselves in and see the space, and then leave and call the real estate agent. The realtor then returns and wipes down the surfaces and doorknobs in the house and locks up. This is obviously a much more complicated process and makes it impossible for people to see homes while people are still living in them. Because of this, buyers are reluctant to go see homes at the moment, resulting in a dip in sales during the last half of March and April.

RE/MAX said on April 7 that Canada’s housing markets have been largely unaffected by the Coronavirus pandemic so far.

Despite the stock market crashing to its lowest levels in recent history, the Canadian housing market so far seems unaffected. This isn’t necessarily a realistic picture yet though as the effects take time to show up in real estate.

The Royal Bank of Canada (RBC) released a statement around the same time that said they expect to see home resales decrease by 30% following the pandemic to a 20-year low. While many large homes sold early in March as people were taking their money out of the stock market and reinvesting, sales have already cooled and are down 37% in April compared to April of last year.

Many people who had initiated the buying process before the pandemic has had to back out after losing their jobs or facing other financial hardships.

Home deals typically take 48 days to close, and while contracts can usually be pursued legally if people back out, the pandemic potentially changes the binding nature of contracts and lawyers are less likely to prosecute hundreds of people who have lost their jobs and their savings.

More people are already backing out of home purchases now, and this is expected to increase in the upcoming months.

Is the Real Estate Market going to Crash?

Experts predict these trends could turn around as soon as next year as lower interest rates and a bounce back in employment rates and immigration will help boost real estate sales once more. So the answer to is the real estate market in Canada going to crash is a little more complicated than yes or no.

While the market is almost guaranteed to take a dip in the coming months, it is still unclear if the decrease will be lastin or more temporary.

While experts disagree on whether the market will crash significantly or not, the effects of the pandemic won’t be evident for several months. For now, keep an eye on the trends and sale prices of homes in your area and across the country and seek financial advice from a trusted institution before making a purchase or sale.