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Canadian Housing Market Seems Poised to Avoid Both Boom and Bust

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Canadian Housing Market Seems Poised to Avoid Both Boom and Bust
3 min. read

Canada’s hot real estate market over the past eight years could have positioned itself to follow the trend of real estate booms seen in the United States, U.K., and other markets. Instead, it appears that steps taken to prevent a collapse may be working.

Solutions to Cool Down the Market without Making It Collapse

Home values in parts of Canada have doubled since 2009, and while an adjustment in price was needed, concern was raised that too significant an adjustment could leave homeowners with a lot of debt on their hands and not much to show for it.

However, rule changes and increasing interest rates appear to have done exactly what economists were hoping for—put the brakes on the market without stopping it altogether.

Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management in Toronto, stated in an interview for the Financial Post:

“It’s a pretty good spot to be in, avoiding boom but avoiding bust as well. The rule changes that have been made have been effective in cooling these markets down.”

Interest Rate Increases Appear to Have Been Successful

Though the increase in interest rates may have a more negative impact on other aspects of the economy, the latest real estate data shows that a healthy slowdown is underway in markets like Toronto and Vancouver, which saw median real estate values more than double in just eight years.

Just a few years ago, investors across Canada were experiencing a lack of confidence due to growing debt and housing worries. Now that it appears a boom and bust may have both been avoided, economists believe that the rule changes were effective.

Home sales fell for the second month in a row in October but remain close to their ten-year average. Benchmark prices are up 2.3% compared to last year, and the gains in traditionally soaring areas like Toronto and Vancouver were closer to the national average. If Canada manages to get out of its housing boom without a crash, that would mean the “medicine is working,” as Benjamin Tal, deputy chief economist at the Canadian Imperial Bank of Commerce, put it.

The Boom May Have Ended in the Middle of Last Year

Though the reality and seriousness of boom and bust cycles can only be truly understood in hindsight, all data points to the housing boom having come to an end in the middle of 2017. This was after eight years of constant growth that resulted in national median home prices going up by almost 80%. Since then, prices have remained relatively constant while transactions have declined.

Cooling Real Estate Markets Are Still in Question

Of course, none of this means that Canada is in the clear. Today’s young homeowners and buyers have only seen historically low mortgage rates. As refinancing becomes necessary over the next few years, there is still concern about borrowers with extremely high rates of debt.

Tal notes that while it seems clear that the real estate market is reaching “some sort of landing,” there is still a question about just how soft that landing will be. For many in Canada, it’s enough to know that it appears the free-fall has been avoided.

That said, even when all the latest figures point to stability, it could be years until the imbalances are straightened out. Lascelles describes the housing market as “off the boil” but notes that “there is no pre-ordained conclusion here,” and much remains to be seen.

A Tricky Time for Interest Rate Hikes and New Interventions

As the housing market appears to be more sustainable, the Bank of Canada has indicated that they intend to continue to move forward with modest interest rate increases. Government officials are being careful to avoid new or additional interventions that may scare households and change the housing market for the worse.

The Senior Economist at Bank of Montreal, Robert Kavcic, notes that the future of Canadian real estate is likely to see flat price growth, at least in the short term—a situation the country hasn’t been in since the 1990s.

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