What’s a Real Estate Bubble?
A housing bubble or property bubble or residential market’s real estate bubble is a kind of financial bubble that happens occasionally in local as well as global real estate markets, following a boom in the property. A property boom is a quick increase in the market price of real estate property such as housing until they achieve unsustainable levels and then decrease in a bubble.
Ontario’s real estate market’s condition is in a bubble right now and it’s on the verge of reaching its maximum circumference. You will find most of the housing mortgaged higher than the actual price, i.e. their market price and the selling price is way up than the actual value of the property. All thanks to the international buyers who laundered money here in Canada. Also, to the local investors who pay extra cash under the table via their undocumented money to again sell the property at higher prices.
We suggested a solution to this in our earlier post. We recommended that a rule must be implemented that after buying the house, the buyer cannot sell the house for a year. This rule will keep the local investors at bay.
Let’s rewind the clock back to 1980 and see if we can get a solution to Ontario’s current situation. The stats will take you with a surprise.
Over the period of 1980 to 2010, 156 times the five-year residential mortgage rate increased over the prior month, and 97 times house prices increased two months later. That means that 62% of the time, increasing mortgage rates corresponded with higher pricing. If we look at the cases, the month-over-month rate increases were greater than 5% (this happened in only 22 of the 365 months observed). Surprisingly, in 13 of those 22 months, there was still an increase in average house prices two months hence. So, even in cases where rates rose dramatically, the odds were still better than 50% that they coincided with rising house prices.
You can read the complete study by David Larock
Imagine a scenario where you have to pay a 5% interest over a house sold for $500,000 and 2.25% interest for the same house prices at $800,000?
The lower interest rate in the second option would entice you, but the second option as per BARRY KAINTH is not good for the future housing market as the mortgage is over a principal amount in a bubble. Remember, the reason of Ontario’s bad real estate market condition is Market Price and Selling price being hugely greater than the actual price of the property and the second option (where you see a lower interest rate) is promoting the same style of market, that’s why it’s not healthy for Ontario’s real estate market.