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Buy, sell or stay? Making sense of Canada's confusing housing market

A “Sold over asking” sign is on display on a house for sale in Toronto’s housing market Oct. 21, 2016. (HuffPost CA)

It’s no secret that Canada’s housing market has been on a wild ride lately. With reports stating that in some of the country’s hottest markets, home prices are rising as sales are plummeting, some homebuyers and homeowners may be confused as to what it all means.

“Any time you have a supply constraint market where you can tell a compelling demand story, you get into a real confusion about how much these places are worth, especially when interest rates are low,” Tom Davidoff, an associate professor and director of the Centre of Urban Economics and Real Estate at the Sauder School of Business at The University of British Columbia, tells Yahoo Canada Finance.

“How much a three-bedroom or two-bedroom condo in a good location or okay location near Toronto or Vancouver is worth — that’s a very hard valuation to do. There’s a lot you have to know to be confident that you’ve got the right number.”

It may be a fact more Canadians will soon have to face as home sales are picking up even in cities like Ottawa and Montreal.

Concerns of a housing bubble

The state of the market has also sparked concerns about a possible housing bubble that could put Canada’s economy in a tailspin.

However Sal Guatieri, a senior economist and director of economic research at BMO Capital Markets, says he doesn’t think there’s concern for a housing bubble on a national level.

“When you move beyond Vancouver and Toronto, maybe a few other regions in British Columbia, Victoria, for example, valuations and affordability, are very healthy,” he says.

But Guatieri says last winter — late 2016, early 2017 — Toronto’s housing market was likely in a bubble, citing signs of speculation driving up home prices more than 30 per cent.

“We were seeing a lot of investment, not only foreign buyers, but domestic buyers, a lot of speculation, lending of properties, that was a clear sign, along with the acceleration in prices, of a bubble,” he adds. “That bubble has basically deflated now over the past year.”

Hilliard MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Bubble Crash, believes some turbulent times are ahead for Canada and that the market correction is hitting different regions at different times.

“Compared to 1998 or 1999, house prices have basically tripled everywhere, and the differences are that the correction that we’re now in started several years ago in Alberta,” he says. “It’s about a year old in Toronto. In single-family detached [homes] in Vancouver, it’s about two years old.”

Differing views on prices

Part of the reason MacBeth believes we’re seeing oddities in the market like few sales while prices are going up is because buyers and sellers have two different perspectives on what the price of a home should be.

“The sellers are kind of stuck [at] what I call the ‘anchor price.’ They’ve got a price in their mind that they just feel they deserve — basically the market owes me this price because a similar house sold two years ago at the peak for $4 million, and therefore I have to have $4 million,” he says. “The buyers are becoming aware that there’s a lot of inventory and prices are likely to drop more, so the buyers are just not willing to reach up to the seller’s price, so you get very few sales.”

For Toronto and Vancouver in particular, Guatieri says, sales drops are due to a drop in demand due to the tougher mortgage rules, which has left fewer Canadians able to qualify for a mortgage, but for condos, the situation is complex, particularly in Toronto and Vancouver.

“We’re also seeing very lean levels of condos available for sale, both in the resale market and the new condo market, and this will slowly be resolved because we are seeing a record number of condos under construction,” he says. “We could see condo prices, even if sales remain pretty soft, continue to rise for this year.”

Homebuyers take different strategies

With the market as wild as it is, Guatieri says that in some cases homebuyers are literally going the extra mile to make their home ownership dreams a reality.

“They’re buying basically the last affordable option, and that is condos or townhomes or else they are driving, commuting quite a distance and buying in the [suburbs] or far away from the core of the metropolitan region,” he says. “The second thing they’re doing, I believe, is they’re just waiting. They are seeing detached home prices softening.

“They’re probably just waiting it out to see when detached home prices stabilize and hit bottom before taking the plunge.”

MacBeth has also noticed the growing popularity of condos and says that some people are choosing to borrow from the bank of mom and dad to get in the housing market in part as a result of what he says is the irrational and unfounded beliefs that home prices will always go up and that Canada has a stable financial market that will weather out any financial storms.

It’s a poor choice, he says.

“All you get is an ownership in a building, you don’t get any land, and the value of the building actually declines over time,” he adds. “Condos are a terrible investment, absolutely, so if anybody is thinking of getting in the housing market, they should wait until they have a downpayment to buy an actual real place.”

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