A balanced view
Then there is the opinion that today's market is simply balanced, and therefore a healthy one. For Paul Gazzola, of Mortgage Architects in Mississauga, Ont., a bubble occurs when prices are inflated over and above what normal level statistics would dictate of supply and demand. Gazzola believes that the speculation of there being a bubble right now is indebted not only to pent-up demand and bubble-flavoured comments by political leaders and bank governors, but also to consumers investing in real estate in hopes of pushing the market to higher rates of return.
However, he said that affordability will thwart that effort. Because lenders and the Canada Mortgage and Housing Corporation have implemented measures since the economic downturn in regards to maximum loans to value rations and refinances, the real estate market will stay away from a potential bubble status. That is, as long as interest rates do not increase within the next year.
What to tell the consumer
Although Kinch does not foresee a bubble in the Canadian real estate market's future, he is wary there will be a small secondary recession.However, he finds it normal that there is a downturn in the winter months, so the consumer should not misinterpret it as anything more and overreact to regular market conditions.
"If I'm in my house and I'm making my mortgage payments and I can afford my mortgage payments, then the value of my house on a day-to-day basis is actually irrelevant," he said. "The value only comes into play the day that I go in to sell that house. Consumers should really focus on measuring peak to peak and not peak to trough."
For Kinch, lack of consumer confidence is the biggest threat to the housing industry. Not only should consumers change their attitudes, but according to Kinch, brokers should as well. He says that brokers shouldn't adjust to a market that does not experience double-digit growth in real estate prices. Instead, they should adjust to small ups and downs, and in the end, brokers and consumers should ask the consumer one question: What can you afford?
This question should be asked regardless of what happens to a house's value or interest rates.
Trafford offers that brokers and consumers in Ontario and B.C. should instead worry about how the harmonization sales tax (HST) will affect the market when it comes in effect July, 2010. He said that rather than focusing on talk of a bubble, brokers should remind clients that the impending HST and the potential for a rise in interest rates make now the best time to buy.
What history tells us
Trafford believes that for there to be a bubble, house prices must be artificially and substantially inflated by at least 50 per cent, which is based on his experience as a broker in 1990 when there was a definite bubble. He claims that optimism in the economy, low interest rates and the fear that interest rates will rapidly increase are encouraging people to buy houses more so than if these factors were not present.
Based on current market conditions, Trafford predicts there will be a bit of a slowdown in real estate next year. Not only will the refinance market slow down, but so will purchases because consumers will realize that the economy is not what they thought it was. Despite these conditions, Trafford believes that as long as interest rates stay low, consumers will continue, at some level, to buy homes. And while a slowdown in the market is one thing, Trafford says there is nothing scarier than an actual bubble.
"When houses double in 24 months, you know that that's not going to keep going and everything goes south. People lose homes, people stop buying and everything disappears," he said. "They can't refinance because they have no equity. A bubble is the worst scenario, especially when it bursts."
Gazzola even bought his first house in the aforementioned housing bubble of 1990, and as painful as the burst was to the value of his house, by 1997 the value was back in tact.
"People should keep in mind that this is part of everyday economics," he said. "It doesn't always go up. When you purchase, purchase for the purpose of your home as a shelter and good investment versus rent. If rent is cheaper for you, then you should stay in the rental market."
Gazzola encourages consumers with "tougher credit" to maximize on their interest rates and correct their credit before looking into purchasing a home.
On the other hand, he encourages consumers to truly understand what is affordable to them, especially since the current low interest rates are not likely to be available come renewal time, and stresses that brokers make their clients aware of such possibilities.
While there may not be a bubble now, with things like bidding wars becoming more common in large urban areas, a little caution never hurt anyone.
Perhaps Peter Aceto, chief executive of ING Direct Canada, explained it best to Bloomberg News when he said "When Canadians are waiving conditions and paying 10 per cent more than asking for a home, it does give you some pause."
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