What happens when the real estate bubble bursts?

In the span of a few days this week and last, several big-bank CEOs and chief economists let loose a flurry of warnings about surging home prices in Vancouver and Toronto, where it now costs an average of $1.5 million and $1.3 million

Source: Malean’s (click here)

“Bubble!”  I have been hearing this word since I got into real estate back in 2007.  News outlets have been saying for years now that the Canadian housing market has been overheated and destined to follow the same fate as the U.S. Each and every year, however, it continues to tick along.

Predicting the real estate market is like trying to predict the stock market- it is next to impossible to do with some many variables in play.  Nonetheless, we can interpret it through sales data, historical numbers and trends, but just like every mutual fund clearly identifies – past performance is not always an indicator of future success.

Source: Canadian Real Estate Association
Source: Canadian Real Estate Association

I do tend to agree with the author of the article- The Vancouver and Toronto real estate markets are overheated and have been for some time now.  The problem is that media and news outlets take this information and apply it to the real estate industry as a whole, with headlines like “Canadian Real Estate Market facing a bubble.” While Vancouver and Toronto are major Canadian cities, they are not the only place that real estate is sold in the country.

Real estate is inherently local and you cannot take stats and information from one area and apply it to another.  The article mentions 37 & 15% increases in these cities, which is just not sustainable.  Here in the KW region, we have seen a much more modest 3-5% year over year appreciation, depending on the neighbourhood and type of property, according to the Kitchener-Waterloo Association of Realtors. This is much more in line with Canadian real estate historic averages of 1.3-4%, according to the Canadian Real Estate Association. Although, K/W has had a record breaking year this year, with homes selling year-to-date for 11.4% more than last year (this is an average of the increase for all housing types – detached, condo, etc).

So will K/W suffer the inevitable bursting bubble facing that of Vancouver and Toronto?  It is difficult to predict but I am not naïve enough to think that if these two major cities suffer a downturn, it won’t impact us in the K/W region.  Buyers will inevitably be weary and cautious pulling back from the market for the short term.

Luckily for us, though, Waterloo region has some great fundamentals going for it that will help us weather the storm much better in my opinion than other areas.  We have a number of key economic indicators for overall growth that are working in our favour.

  • Population growth- the region enjoys steady growth of 1.58%, on average over a 15 year period.
  • Job Growth- unemployment rates have been decreasing over the past few years, in large part due to finance, technology, food service, and public administration, according to the K/W Chamber of Commerce.
  • Diversification- as stated above, we are not a 1-industry town. We have many finance and insurance companies, tech, manufacturing, an ever-evolving food scene, not to mention 2 great universities and a major and growing college.
  • Transportation- a key driver in the growth of any city is access to transportation.  Our local government has been forward thinking enough to build a transit system that will service our city for decades to come in the LRT.

Also as discussed above, growth in our region has been much more sustainable than that of Toronto and Vancouver. Therefore, one can predict a much shorter free fall to reach a stable market.

Predicting when or what the trigger will be to induce this change is difficult, but I would err on the side of caution when purchasing in these too major cities unless you have a long time horizon.

If, or perhaps when it happens- I believe we will see a small blip here in Waterloo region but as buyers wade cautiously back into the market, you will see a strong and steady real estate market locally in the years to come.

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