Do housing bubbles matter to the average consumer?

When you consider the definition of a housing bubble: “the run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse,” it might seem pretty clear cities like Toronto and Vancouver experienced a housing bubble in recent years. However, when prices become too high, and buyers stop buying, demand drops and so do the prices.

The Toronto market saw a drop in home prices as well as fewer bidding wars which have buyers wondering if they should be buying now. Adding to the confusion, Toronto was recently listed as the second most over-priced housing market in the world. In the world! That’s even compared to the explosive prices in Vancouver, which ranked sixth. If all this talk is making your head spin, read on to learn more about housing bubbles and how or even if they affect you.


Hilliard MacBeth told CTV he thinks buyers should continue to wait things out. As a portfolio manager at Richardson GMP in Edmonton and author of "When the Bubble Bursts: Surviving the Canadian Real Estate Crash," he knows bubbles.

At that time, the Canadian Real Estate Association had released a forecast in June projecting the national average housing price would drop to about $485,000 this year on the heels of a 4.1 percent drop back in 2018. However, everyone has to remember that housing prices dropped because more people were worried about the new mortgage stress test rules which came almost hand in hand with mortgage rate increases.


Today, factors such as strong economic fundamentals and declines in mortgage interest rates have CREA changing their tune a little. Combined with better than expected trends in B.C. and Ontario, they have revised their forecast for 2019 and into 2020, with an expected recovery from 2018’s five years low by 5 percent.

They still foresee levels for national sales activity this year and next to be below levels seen since before the stress test appeared.


According to the Bank of Canada, housing price corrections have occurred in Toronto and Vancouver. They have been in danger of major price corrections as far back as the 2008 financial crash when the housing bubble burst in the U.S.

"Given that scenario, it would be best to wait because the U.S. bubble when it crashed, it took four years to bottom, so one would expect that a larger bubble in Canada would probably take at least that long and probably a little bit longer," MacBeth told CTV.

In contrast, Canada's Business Development Bank isn’t anticipating a crash any time soon because of job growth and a strong economy. Nonetheless, according to MacBeth for homes to become affordable, there would have to be a decrease by 40 to 50 percent from the time prices peaked. That’s drastic.


When we look at Vancouver and Toronto, there have been price reductions, but in a town like Toronto, what would be considered affordability might never return. This is because the market is softer in Toronto.

Real estate experts view a softening market as an opportunity for buyers using historical trends as a reason home purchases are always a worthwhile investment. When prices cool, it means there is always a chance for profits because property values will appreciate. On average Canadian home prices tend to see increases by over five percent annually.


With this track record in mind, buyers should not expect there to be an ultimate bursting of the proverbial bubble. Slowdowns can happen, but how far prices will drop realistically is hard to predict. In fact, a true drop to affordability levels outlined by MacBeth is unrealistic.

Even in recessions, the housing market remains stable because things tend to even out.

While homes for sale drop, so do the number of buyers, keeping supply and demand on par. According to Craig Hennigar, director of market intelligence at Colliers International, a drop in housing prices usually doesn’t last longer than a year. "If you look back over the last 20 or 25 years there have been very few periods where we actually had a drop in prices for more than 12 months in most markets," he told CTV.


What buyers should look for are houses that have been on the market without offers. This indicates less competition and the opportunity for negotiation, according to Hennigar. Right now, an incentive is also lower mortgage rates, meaning buyers will see more of their money go to the principal more quickly.

He also points out that as long as buyers can afford their mortgage payments, how much they’ll sell their house for in the future becomes less important. “It's a great tax-free investment that really supports your ability to live your life, which is probably the more important question, but people do get hung up on pricing," he says.


Meanwhile, as mentioned, Toronto was listed as the world’s second most overvalued housing market, according to The Financial Post. UBS AG’s annual global real estate bubble index points out low rates and supply shortages are at fault.

Looking at Toronto’s housing prices, they actually tripled between 2000 and 2017. “A major price correction seems unlikely in the short term given improving mortgage conditions, a weakening Canadian dollar, and falling supply,” UBS told The Post.

With 2016 regulatory changes Vancouver prices depressed by 7 percent compared with a year ago. However, according to UBS, the market remains vulnerable due to “sky-high valuations and overstretched affordability.”


The good news is that the UBS report notes, “the housing frenzy seems to be over for now.” Although the housing bubble risks in Toronto and Vancouver still remain, a correction is expected not just in Canada but worldwide. And to be clear, a correction is not drastic and would indicate prices dropping by no more than 10 percent. They help resolve market demand. Market crashes are less common and indicate reductions over 10 percent from a 52-week price peak. This won’t be happening any time soon.

So, there you have it. Housing bubbles inflate prices and when the market can’t bear them any longer, the bubble bursts. For the average consumer, it’s all about the mortgage you can afford, avoiding paying a price that will affect appreciation and buying when the price is right for you.

At we have experience in navigating the challenges of a Toronto bidding war. We can assist in your home search and prepare you for tough negotiations to help you get the home of your dreams. Reach out to one of our agents today so we can help you find your home.


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