Predictions of a Housing Bubble Bursting

We may or may not be in a bubble.

Every year, there is an article or news report about the housing bubble in Toronto and surrounding area. Every year, some bank or economist predicts the bubble will burst setting prices to more "normal" levels. I'm sure the banks and economists are smart. It's just I've been hearing the same tune for the last few years now.

So why is it that everyone is expecting the bubble to burst? Seems everyone is expecting the overnight lending rate to increase sometime in 2015. Currently, the rate is sitting at 1% and has been at that level since September 2010. The same thing happened when Wifey and I purchased our house in 2012. Everyone was expecting the "bubble" to burst sometime in 2013. If we waited another year for that to happen, we'd still be waiting and we would have needed a bigger down payment as house prices have since increased.

Additionally, there were many reports of an impending interest rate hike from the Bank of Canada.

Why exactly would a rate increase mean lower housing prices?

Seems the answer to this lies in the fact that a higher interest rate would mean people wouldn't be able to borrow as much to pay for a home.

Of course, that didn't stop people from borrowing money when the Government required people to save a 10% down payment instead of 5%... or the times they shortened the maximum amortization period (which increases the monthly mortgage payment) from 40 years to 35 years... and then to 30 years... and finally settling on 25 years. Instead of going down, prices continued to climb steadily.

If you've been waiting since 2010 for a drop in housing prices before taking the plunge into home ownership, I'm sorry. Even when the Bank of Canada increases the overnight lending rate, it still is not a guarantee that housing prices will go down.

In times like these, I find it's best to reframe the question.

Instead of 'Would you wait a year to buy a $400,000 home in hopes the price will drop to $380,000?', ask yourself 'Would you sell your home for $400,000 in hopes that you can buy it back next year for $380,000?'.

Well... would you?

I wouldn't. That's why wifey and I own a house for less than what it costs for a townhouse in our area*.



*Currently, townhouses in our area are starting from the mid-500s. We bought our house for (much) less in 2012.