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Talking house: Where’s the real estate market headed?

There’s no shortage of opinions about what the real estate market will be doing next. We hear that it’s about to soar…or crash. We hear that prices are too high…or that demand is too low. And the word “bubble” gets tossed around a lot. But broad generalizations about a market that spans two oceans are about as helpful as generalizations about, say, men and women. You can gather all the statistics you want, but they only describe things in the broadest terms, leaving no room for details. The problem is, it’s precisely in the details that you find the truth.

So where is the Canadian real estate market headed? Here are some of the factors at play.

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The “Big E”

Most people implicitly understand that the economy affects the housing market. A strong economy tends to be one in which more people have good jobs and can save to buy homes. People follow money; if there’s prosperity in an area, that’s where people will move.

Take Saskatchewan as an example. Real estate prices shot up in the mid-2000s after years of relative stagnation. What happened wasn’t some kind of real estate miracle. In fact, prices increased based on a simple economic factor: demand. In the early part of the 2000s, Saskatchewan struck oil in what’s called the Bakken Formation. There was wealth, there were jobs and suddenly, there were a lot more people who wanted to live in Saskatchewan, which drove the cost of the homes available up. In general, as long as demand persists, that upward trend will continue until one of two things happens: more homes are built or the prices become too high for people to afford.

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Of course, employment isn’t the only factor that affects housing markets, although it’s certainly a major factor when it comes to specific markets. Broader economic factors such as fluctuations in the financial markets can also influence people’s overall wealth and their ability to buy. Housing markets can even be affected by how strong people perceive the economy to be. All of these factors combine to create the complicated soup that produces the real estate prices you see in a given market. The basics, however, are simple: When more people want to buy, prices go up, at least until more homes are built. If people start moving away from an area, prices go down.

The cost of borrowing

Whether people have the financial means to buy a home is one key part of the equation; the other is whether they can afford the loan to pay for it. That’s where interest rates come into the picture. When loans are cheap, people are more likely to borrow. When rates are high, buying a home becomes much less affordable, thus reducing the number of buyers in the market. In fact, it was ultra-low interest rates that helped drive the real estate market to unrealistic highs in the United States, resulting in the spectacular crash we saw in 2006 and 2007.

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But although Canada’s real estate market saw gains that were occasionally on par with the U.S., that doesn’t mean we’re emulating the same scenario. Canada’s housing market has benefited from low interest rates, which have been sitting at 1 percent for more than two years after hitting an all-time low in 2010. But low interest rates on their own aren’t the only factor that drives demand, partly because a market’s sensitivity to changes in interest rates isn’t always the same. Factors such as population growth, rapid economic expansion or government policies can mediate how these rates impact the market. Plus, some economists would argue that low interest helps support borrowing among businesses, thus helping to contribute to economic growth. This means that while interest rates are said to drive home-buying, they may also drive the economic expansion that makes it possible for people not just to mortgage homes, but to pay them off.

The rules of the game

Because the real estate market is an important factor in any economy, the government tries to keep it growing at a reasonable rate, without allowing it to get so hot that it burns itself out. As with all things in economics, however, achieving that delicate balance is easier said than done. In June, Canadian Finance Minister Jim Flaherty announced stricter lending rules that reduced the amount of equity borrowers could take out of their homes and dropped the amortization rate from 30 to 25 years for government insured mortgages. They were small changes, but they were designed to help reduce the chances of a real estate bubble by ensuring that increases in home prices had some fundamental legs beneath them. Indeed, economists believe that rules such as these help keep the real estate market under control – and on firm footing.

Will there be a bubble?

The big question people always ask about real estate is whether there will be a bubble. This is where things get really complicated, especially when Canada’s housing market is compared to that of the United States. To be fair, it’s an easy comparison to make; both countries have shown similar patterns in terms of increased housing prices. In the U.S., prices rose steadily from the 1970s onward, until about 2000, when they shot up by close to 100 percent over five years, and then crashed spectacularly in 2006. In Canada, the pattern has been similar, as evidenced by the Teranet-National Bank Composite House Price Index, which has more than doubled since 1999.

So, does that mean the Canadian market is setting itself up for a crash too?

Not necessarily. In any market, we often assume that what goes up must come down, but whether a crash occurs really depends on why the market soared in the first place. A report released by the Bank of Canada in 2012 found that much of the increase in the Canadian housing market could be explained by a rising population and higher incomes. Lower interest rates also played a lesser role.

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In the U.S., on the other hand, the market’s speedy ascent has largely been blamed on federal incentives for homebuyers, lax (and sometimes predatory) lending standards, and an unrealistic consumer expectation that home prices could only go up. This isn’t to say that Canada’s real estate market avoided all these pitfalls, but in most parts of Canada, housing prices grew because cities, populations and demand grew. That’s a lot different from a housing boom built around speculation and complicated mortgages that many borrowers could never realistically afford to repay.

The final piece of the puzzle

And now for the real estate wild card: local factors. While many real estate indexes and predictions are based on national figures, the reason they aren’t necessarily useful to homebuyers and sellers is that the various markets within Canada are so different. In Calgary, home prices have been climbing ever higher, propelled by a thriving provincial economy. Notoriously expensive Vancouver, on the other hand, has been seeing a slump. Rather than raking in oil money as in Calgary, some speculate that Vancouver’s real estate boom was driven by rich foreign investors. Other cities have their own set of forces at play. Trying to decide what’ll happen in one city based on what’s happening in another is like assuming that everyone in Canada is eating poutine. While we like to feel that Canada’s a small country, in reality it’s anything but, especially economically speaking.

So where is the Canadian real estate market headed in 2013? The answer is really quite simple: It depends on where you live. is a free personal finance and education site for women.

Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.

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