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No Real Estate Ragnarok this year! – Lachman Balani

Posted in Business, Featured

Published on May 23, 2017 with No Comments

Daily there are reports in the media that Canada’s housing boom is about to go bust. The reasons are many including high property prices, high debt to income ratios (at 167% currently), high proportion of real estate contribution to total GDP and more. The exorbitant rise of up to 30+ % of prices over last year in the Greater Toronto Area (GTA) is in my opinion much too high and should be cooled down. The recent 16 point plan of the Ontario government to cool prices in the Golden Horseshoe Area hopefully will do its job and reign in the home prices.

But will it spell doom for the GTA real estate market and thereby lead to a rippling effect that will hurt the economy as a whole?

Not in my opinion. There are several reasons but let me highlight a few here just for brevity, but they are enough to drive home my point.

  1. The main reasons oddly enough are the very tightening of rules that the government has undertaken in the last several years. In general, from a 40 year amortization period the government took it down to 35 years and then down to 30 years and finally down to 25 years where it currently stands (with greater amounts of down payment one can still qualify for a 30 -35 year amortization).
  2. Also refinancing was taken down from a high to only 80% of the home value.
  3. Then a home worth more than $500,000 had higher down payment rules.
  4. Furthermore there were several increases in the Canada Mortgage Housing Corporation (CMHC) mortgage default insurance rates for those having less than 20 % down payment (extended to all companies that provide this insurance).
  5. Following that came the rule that buyers instead of qualifying at the fixed 5 year rate that is in the 2% range, all those with less than 20% down payment, had to qualify at a higher rate of 4.64%, commonly referred to as the stress test.
  6. Recently in April, 2017 an extra 15% tax was levied on all foreign buyers plus a host of covenants were put into place for a ceiling on rental price increases, on speculators and several more restrictions were announced for real estate in the Golden Horseshoe region in Ontario. These last measures seem to have had a slight effect on dulling the property market in the GTA, but will the phenomenon last?

Let us just say for argument’s sake that the slowing down takes hold but only slightly leading to a cooling of prices from their current levels but still representing an increase over last year. That would be welcome.

If it takes hold more strongly and leads to a flattening of prices for a while that is also fine.

However if all the above measures combined lead to a drastic lowering of prices into negative territory and construction in the housing market is lowered so much so that it adversely affects the economy as a whole, well just as the accordion has been tightened, the government can back-pedal on all the steps taken and loosen the accordion until enough relief is seen in the economy; and they have plenty to scale back on which should be more than enough to straighten things out.

Despite many reports including those from overseas saying the property bubble is about to burst and there will be doom and gloom as prices plummet and people won’t be able to keep up with their home payments, all I can say is that the only Ragnarok upcoming this year is Marvel’s mega movie “Thor:Ragnarok!”

 

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