Many economists expect property prices to return to growth in 2024, as the macro environment recovers. If the property bubble pops, the exchange-traded fund could fall by double digits again.īut unlike technology or oil stocks, real estate is an asset whose value appreciates. A gradual decline shows profit taking by value investors. BMO Equal Weight REITs Index ETF fell 22% from its March 2022 high. The interest rate hike has reduced the fair market value of properties, pulling down prices of all real estate investment trusts (REITs) trading on the TSX. The thing with bubbles is you know you are in one but don’t know when it will pop. While you can’t time a bubble, you can prepare your portfolio for a bubble. Story continues How to prepare for a Canadian property bubble The current macro environment could pop the property bubble if things worsen. The house price has to drop another 20-25% to reach the affordability level. Inflation reduced the value of money, and high-interest rates reduced the money in the hands of consumers, slowing demand.Ĭanada’s housing prices dropped 15.8% year over year in February 2023, raising concerns that Canada’s real estate bubble could pop anytime. ![]() The financial environment reversed in 2022, as the central bank hiked interest rates from 0.25% in February 2022 to 4.5% in March 2023. House prices rose to a point where they became highly unaffordable, with the average home price at $713,500 in December 2021. The stimulus money and record-low interest rates inflated the bubble. Canada’s housing prices reached the euphoria stage in 2021, with the Canadian Real Estate Association (CREA) House Price Index rising at its fastest pace of 26.6% year over year in December 2021. ![]() There are five stages of a bubble: displacement, boom, euphoria, profit taking, and panic.Ĭanada’s property bubble started inflating, as the Bank of Canada maintained a low interest rate (0.25-1.75%) in the 2020 decade. But there comes a point when the price becomes unaffordable and comes crashing down. Canada’s property bubbleĪ bubble forms when an asset price inflates rapidly beyond its value. Let’s look at the Canadian real estate market and understand whether it is a viable investment option. Some industry experts say it has already popped some say it will pop soon. The popping of bubbles one after the other has raised concerns if Canada’s property bubble next. Rising interest rates reduced the value of bonds held by banks, causing a liquidity crunch when customer deposits surged. ![]() The rising interest rate caused the bubble to burst. The last 15 months saw several bubbles burst, starting with the tech bubble at the start of 2022, with the crypto bubble following suit. For example, the RBC report shows housing activity in Calgary has shown more resilience than in Toronto.Written by Puja Tayal at The Motley Fool Canada The sales activity during recessionary times can switch from larger, higher-quality homes to smaller, lower-quality homes hence, any change in average prices will not represent the change in the price of an average home.Īt the same time, some housing markets will experience a more significant decline in sales and prices than others. RBC expects interest rates to rise further and forecasts the “national benchmark price to drop 14 per cent from (quarterly) peak to trough.”Īgain, benchmark prices can differ from average prices, which do not account for the differences in housing quality and size over time. The reference points are not as material in comparing the decline in sales, which are considerably down year over year and from peak to trough.Ī recent report by RBC Economics concluded that the expected slowdown in housing sales and prices has been the result of soaring interest rates. The peak-to-trough comparisons suggest much higher price declines than what year-over-year comparisons reveal. A review of housing market indicators quickly reveals that any conclusions about the state of housing markets depend upon the benchmarks used to study them.
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