Inflation...The Next Pandemic
You don’t have to be a rocket scientist to notice that prices for real estate are going up, and it's not just because of the cost of lumber has gone up, every material used in the construction process have doubled in price, others have quadrupled and those higher costs are being passed on to the consumer.
Inflation is at its fastest pace in a decade. Statistics Canada says the average cost of many products is up almost 3.5% compared to a year ago when the world was locked down.
Some of the price increases could just be temporary but it also might get worse before it gets better. When everyone is out of lockdown and ready to spend, demand for products will likely be intense driving prices yet even higher. As a result, markets are getting concerned about whether this could be more permanent than we know at the moment and that's an open question we can't yet answer.
So what does this mean for the future prices of homes? The Bank of Canada Governor had this warning for Canadians today saying that Canadians need to be prudent in taking on new debt.
In Canada the average price of a home is up 31% from last year and that is the biggest annual gain on record.
How much of that is a sustained burst of growth? Well, we're already seeing things start to calm down in terms of sales volumes and prices so yes it's unusual to see such a big gain but these are incredibly unusual times.
There's also still a very large proportion of investors buying up real estate, currently over 20% of homes are being bought by investors. The challenge with a high proportion of homes being bought by investors is that this also yet again elevates home prices. Investors usually will pay a lot more than home owners and if we do see a downturn in the future investors are also the first to pull out of the market.
So with all this being said, it’s really nothing new. We’ve been talking about a bubble in the Toronto real estate market for the entirety of our adult life and with low interest rates the simple fact is people can now borrow more for a longer time frame. The majority of buyers out there will tell you they have heard the warnings before and yet it's never happened so why should I worry now. Don’t forget, when Covid hit, all the experts said that real estate prices were going to tank and the prices went up over 30%.
The key warning here is really for people borrowing more than four and a half times their household income combined with people who are making very small down payments on homes.The difference here is that along with home prices going up so to is the price of everything else, so you need to understand that in the calculations of what you can afford.
This is why there may still be future changes to the mortgage stress tests to effectively try to reduce the amount of debt people can take on but it still appears very unlikely that the actual prices of homes stop increasing, especially taking into account the more prominent inflation factors we are definitely going to experience over the next year or so.
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