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Canadian Real Estate

Will the Canadian Real Estate Housing Bubble Finally Burst? What Debtors Need to Know

In the midst of the pandemic, as people around the world suffer through economic distress, the Canadian real estate housing market continues to boom.

So much so, in fact, that this February 2021, the price of detached homes in Toronto saw a 23.1% increase compared to the prior year, before the pandemic even started.

And it’s not just big Canadian cities that are experiencing this soar.

Because of COVID, the outskirts are now seen as more desirable, raising the value of single-family homes in the suburbs and surrounding areas.

The average home price in Canada has risen by more than 30% during the pandemic.

But how is this possible amid the job losses and cutbacks, at a time when several industries have come to a crashing halt?

Well, there are a few reasons the real estate market continues to rise.

What factors are contributing to the housing bubble?

One contributor to inflation of the Canadian real estate market is the fact that interest rates are so low right now.

Though salaries have increased about 15% over the last 15 years, they certainly aren’t keeping up with the artificially inflated value of homes.

This means that hard-working Canadians need to pay hundreds of thousands of dollars more to buy the same house we would have bought 15 years ago.

And how are we able to do that?

It’s thanks to those low interest rates.

You see, the majority of us buy homes so that our families have a place to live. And we have come to expect that prices will only increase as time goes on.

Canadians take on more and more debt to buy homes because we fear the ever-rising prices of houses will lock us out as homeowners.

But there’s another piece to this.

It’s those buyers who purchase homes as assets or investment properties.

People earning higher incomes have suffered less in this pandemic because their type of work is more amenable to being done remotely. They’ve also saved more due to travel and shopping restrictions.

Add onto this the fact that interest rates are so low, and you get to the obvious conclusion that Canadian real estate is a great place to invest.

How does the Canadian Housing bubble affect me?

As property values of homes rise, the amount of debt we homeowners take on rises along with it.

The Bank of Canada Governor Tiff Macklem said it best:

“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

Toronto is not immune to a bubble burst just because of our high rate of immigration and ultra low interest rates.

And thanks to the pandemic, the bubble burst may happen sooner rather than later.

Because while many are hopeful that things will return to normal now that vaccines are here, it likely won’t be as quick a process to overcome as that.

Debtors will inevitably end up defaulting on their mortgages. And when they do, banks will tighten their lending rules, making it harder to get loans.

As a result, people won’t be able to borrow as much to buy houses, so home prices will drop.

A drop in housing prices – or an increase in interest rates – means trouble for those of us who have high personal debt.

So what is your best plan of action if you are having problems paying your bills?

I have plenty of equity in my home, but I’m having trouble paying my bills. Who should I talk to about my debts?

You might think to yourself that your best option is to borrow against your home equity.

In fact, many debtors who would have normally filed a Consumer Proposal or Bankruptcy in the past, now opt instead to borrow against their home at low interest rates.

A home equity line of credit (HELOC) is set at a maximum of 65% of the value of one’s home. With rising property values, the line of credit a person can get increases.

They then use this money to consolidate their debt, pay off high interest credit cards, or buy big ticket items.

It seems like an attractive option. You stay afloat without going insolvent.

But when that housing bubble bursts and those artificially inflated property values come down, you won’t be able to use your home equity line of credit to maintain the lifestyle you have become accustomed to. There won’t be any more new equity against which you can borrow.

So what’s the takeaway?

Avoid treating your home like it’s an ATM machine. Borrowing against the equity in your home may not be your best option to repay your debts. Contact a Licensed Insolvency Trustee (LIT) to find out all your options so that you can pick the best solution for you and your family.

I don’t have any equity in my home. Who should I talk to about my debts?

If you are having trouble meeting your bills, you’re not alone.

Many of us have no savings or home equity to draw upon, and we’re maxing out our high interest credit cards.

In these situations, all it takes to go from just barely making your bills each month to winding up in a financial catastrophe is one unexpected event. Think car repairs, funeral costs, or a sudden health issue.

What’s the takeaway?

If you have more debt than you can handle and no equity in your home, contact a Licensed Insolvency Trustee immediately. There is always a way out of debt.

Adamson & Associates Inc. Licensed Insolvency Trustee Can Help

Our professionals are seasoned experts in the full range of debt relief options available, from simple budgeting and debt consolidation all the way to Bankruptcy. After a comprehensive review of your financial situation, we can provide you with your options so that you can pick the best solution to repay the money you owe.

We can help you drastically reduce or eliminate your credit card debt so you can see your way clear to a better financial future. Call Adamson & Associates Inc. today at 519-310-JOHN (3546) for a free, no-obligation consultation.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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