OVER THE PAST YEAR, as Canadians have rushed to take advantage of record-low mortgage rates,1 home sales across the country have surged. We asked Diana Petramala, a real estate economist, to weigh in on what this means for the future of buying and selling.
Historically, housing bubbles, when property prices far surpass actual property values, have eventually burst. There’s been debate over whether Canada is currently on this trajectory. Is it?
I identify a housing bubble by double-digit annual home-price growth for five years followed by a sustained decline for a much longer period. Right now, we’ve seen this level of national growth for only about a year, so there is still room for prices to run up.
How it turns out is going to depend on policy. There have been calls for higher interest rates to cool the market, but I believe that would lead to a crash. When rates increase, those who bought expensive houses and have to renew their mortgages may not be able to afford them and end up selling, likely for much less than they paid. This could put more households in a financially vulnerable situation.
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