The housing market: home sweet home or house of cards?
July 21, 2016
Is real estate a ticking time bomb? Is your house overvalued? The only people who are not afraid of the rapidly escalating house prices in Canada are those who own them and those who line up to pay record-breaking prices.
The Canadian dream of homeownership is alive and well. However, many organizations or government bodies that oversee the financial health of Canada view escalated house prices as a pending nightmare.
Early in July we heard another warning about the heated real estate market.
Caution on lending practices
The Office of the Superintendent of Financial Institutions (OSFI) sent an open letter to the mortgage industry cautioning firms to be careful about their lending practices.
OSFI recommended mortgage providers verify borrowers’ income levels. Plus it recommended more caution with borrowers who have low credit scores.
The federal regulator went on to say that lenders should consider if a mortgage holder can continue to make mortgage payments if interest rates rise.
And finally, suggested mortgage vendors be more careful on accepting appraisals supporting real estate value.
Two things are significant. Firstly, OSFI is encouraging lenders to do all the things that they should have been doing in the first place, and secondly, that OSFI would make this request so public.
The Bank of Canada and the Federal Finance Department have been cautioning the real estate housing sector for many years.
Recently the Bank of Canada warned that 15 per cent of borrowers had mortgages that were more than 4.5 times their income.
A ‘deep dive’ into housing market
The Federal Finance Department said they will do a “deep dive” into the housing market.
Home owners and prospective homeowners are oblivious to the ongoing warnings that have been issued since 2008, and have watched as house prices have continued to escalate.
A 20 percent increase
The Toronto Real Estate Board reported prices for detached and semi-detached houses increased 20 percent for the 12 months ending in June.
A single-family detached house in Vancouver now sells for just over $1.5 million.
Real estate has defied gravity and prices have continued to soar. If housing prices fall, many homeowners face a financial risk, especially those who have borrowed excessively.
My recommendation is to separate the reasons to own a house. Pride and comfort of home ownership is one thing and investing in real estate for profit is another.
The popular consensus about real estate is it is an excellent investment. It has been excellent during recent years, however over the longer term, real estate as an asset class has increased in value significantly less than owning stocks as an asset class.
Simply put, if your motivation is profit, the long-term evidence supporting stocks over real estate is compelling.
Benefits of reducing mortgage debt
If you do own real estate, consider the benefits of reducing mortgage debt. Canadian households are holding record debt levels and when interest rates eventually rise the financial stress will be suffocating.
There are benefits to owning a house and there are also risks. Consider both the upside and downside of homeownership.