Real estate overheating : increase in housing starts in 2021
Are you interested in real estate property in Quebec or the rest of Canada? It could be a very good investment. You just have to be aware of certain realities, including the Canadian real estate climate, which is showing clear signs of overheating. The year 2020 is considered off the charts and a record holder for real estate sales by the Canada Mortgage and Housing Corporation (CMHC).
Indeed, this year has been the scene of an explosive price surge in this market. Many organizations have their eyes riveted on this sector with enormous potential, and in particular on new real estate. You want to know more? Here is an update on the construction of new housing.
Why is there such a real estate bubble in Canada?
In the second quarter of 2020, CMHC reports that the price of housing experienced an average increase of 11.8% over the previous year. While this considerable increase may well be the cause of the current pace of housing starts, two other reasons have a significant impact on this situation. These two statistical data for 2020 should provide more information.
Rising income and savings
According to Statistics Canada, Canadian households had 10.8% higher earnings in the second quarter of 2020. It also appears that over the same period, their expenses fell by 13.7%. The result speaks for itself: Households had a savings rate that rose from 7.6% to 23.2% in the three-month period.
Record low interest rate
For its part, the key rate set by the Bank of Canada fell from 1.75% to 0.25% from the first to the second quarter of 2020. This is an all-time low. And that’s not all: variable mortgage rates also fell during those few months. Clearly, these rate changes are an incentive for households that do not have unpaid bills to purchase real estate.
Result: Dramatic increase in demand in a market where supply is not sufficient to maintain a balance. This significant price increase was inevitable.
A drop in expectations for new homes: very strong demand for single-family homes
While supply has never been lower in over 16 years, every household wants to get their fair share of the pie. You get it, the demand is growing for single-family homes. As a result, purchase prices are bordering on the unbelievable due to the multiple offers and outbidding that has become the prerogative of sellers. The price of materials such as wood increased sharply in 2020 and early 2021. It is encouraging, then, that the price of wood decreased considerably in early summer 2021; the price of lumber fell 60% on the Chicago Stock Exchange in eight weeks. Real estate activity, however, is not affected by this situation.
One thing is certain, the COVID pandemic has had a lot to do with it. In fact, a belief that single-family real estate was going to rise in value emerged at the start of the pandemic. It’s safe to say that it has actually fueled the rise in the value of real estate. The Professional Association of Real Estate Brokers of Québec notes that many households have been scrambling to buy a home, often at the expense of a heavy debt load. In this race to buy, which is beneficial only to sellers, buyers have paid a hefty price.
Faced with this situation, the government is determined to do something; but pending a favorable outcome, perhaps it is time to explore another avenue.
Condos more accessible than ever: low demand
To be a successful investor, it is important to develop the ability to find great opportunities where others see dead ends. Currently, downtown Montreal condos are among the last choices for places to settle down. But might this not be a great real estate opportunity? There is indeed a variety of condos for sale in Ville-Marie that offer you an incredible lifestyle and that represent a superb long-term investment.
Admittedly, the district doesn’t exactly dazzle with charm or its attractions. Montreal may not really be the perfect place to raise a family or an enticing setting for a dream vacation, but it won’t always be that way. The opening of restaurants, concert halls and even museums is inevitable and habits will certainly change very quickly.
Condos are the only type of real estate where housing prices haven't been skyrocketing for months. As a result, it’s still possible to find a first-rate property in that sector at a good price.
What are the forecasts for the rest of the year?
One wonders if the situation will maintain this momentum and for how long. The fear is that if market values continue this upward trend, there will come a point when the market hits a wall. It’s a fact that households have limited purchasing power and are already having trouble buying a property. They would therefore be better off to take on a construction project. Nonetheless, factors such as the price of materials, interest rates and the demand in this market could influence this forecast.