Industry experts and economic analysts alike predict that 2010 will still be dominated by relatively the same negative forces that dictated the overall tempo of the economy last year. Though leading indicators are showing early signs of recovery, 2010 may not bring about the positive change we have been praying for so long now. The appalling condition of 2009 bore the signs of serious financial woes that had hit major economies for the past couple of years – high unemployment rate, depressed stock markets, etc. While these are happening, real estate markets are on a roll with record number of property turnovers over a period of several months, record low house prices and heightened demand.
What are these events leading to? Here are 5 major events that need close monitoring as these might lead to something as serious as a crash in Canadian real estate markets.
1. Decline in demand across all segments
The reason why we are seeing frenzied action in real estate markets in Canada is primarily because they have been going through what most industry experts consider as a “mini bubble.” Demand is primarily being pushed upwards by the entry of deferred sales during the 2008 winter layoff and purchases that were defined by anticipated upward adjustment in rates by some buyers. A major part of these purchases were actually accelerated purchases which should only start coming in by the early or middle part of 2010. This can lead to weakened demand as the expected sales for the year has already been made last year.
2. Cost of home mortgage will rise
Bank of Canada has recently announced that rates will remain stable for the first half of 2010. This is an indication that interest will start rise after June of this year. If this event comes about in the second half of the year, it will result to increase in house prices. The average interest rate of mortgage loans for the last 20 years was about 8% and for the last 5 years, it was within the range of 4 to 6 percent. With the frenzied bidding that was resorted to by Canadian homebuyers during the past couple years coupled by 4% cost of mortgage loans that were obtained, we are seeing a gloomy prospect for homeowners if mortgage rates hit 7 to 8 percent during the second half of 2010.
3. No further safety nets for homeowners
When things got tough for homeowners in the past, the Canadian government adopted a more liberal control of mortgage offers in order to spur activities in the real estate markets. These has led to the adoption of pro-homeowner policies such as the extension of amortization, lower minimum initial payment, increase in the amount of RRSP for those who are buying their first home. This means that the government has already offered everything that they could possibly offer to protect the interest of homeowners. And a no down payment or a 40-year payment period is not something that we should expect to happen in the near future.
4. Increase in the rate of unemployment
Economists predict that unemployment will breach the 10% mark this year. The unemployment rate is currently running a high 8.6%. There are those who will be out of job but are able to leverage a credit line to sustain them until they land a new job. However, there are those who will not be fortunate enough and will be left with no other option but to dispose their homes. When things are bad in the job market, more and more people will have lesser capacity to buy. With lower consumption, businesses will have no choice but to scale down operations. This leads to further job cuts and unemployment rate will rise and ultimately leads us into a vicious spiral.
5. Home prices will decline
The collective impact of higher cost of mortgage loans, decreasing demand and increasing rate of unemployment shall be a decline in home prices. When this develops, then we really have to watch out and seriously consider both our short term and long term goals. This volatile and unpredictable situation can further worsen the economy. Consumers have the natural tendency to cut down on their consumption in anticipation of further drop in prices of commodities. This wait-and-see attitude shall be the proverbial straw that will break the economy.
No one can definitely say how things will play out this year. Although, experts are taking a guarded position due to these disturbing leading indicators, many are still hoping that things would be better this 2010. We are not discounting other possibilities. However, we have to consider multiple scenarios before we grab a $60,000 asking price, a low 5% down payment and a 35 year amortization of a 4% home mortgage.