When to buy or sell? Is Now a Good Time, or Not?

All over the United States, realtors and home owners are looking at the recovery of the Canadian real estate market and are wondering how we did it.  Some areas in the US are still experiencing the bust that the market became since 2007.  Canada’s housing market has recovered with such rabid fervor, it has left many of us scratching our heads.

With seasonally adjusted monthly sales hitting an all-time record and prices five percent higher than the peak in 2007, homeowners selling now are flush with Christmas cash.Buzz Lightyear

“Extrapolating this trend echoes Buzz Lightyear’s mantra, ‘to infinity and beyond!’  Back here on earth, however, this latest housing cycle raises a number of concerns,” says Pascal Gauthier, an economist at TD Bank Financial Group.

The challenge with the run in a market like this is that homes become over-valued and increase faster than personal income.  That pushes affordability beyond many consumers.

“In all likelihood, as affordability declines in response to higher prices and rates, demand will soften and price increases will moderate,”  says Sal Guatieri, senior economist for BMO Capital Markets. “However, if prices continue to leap-frog incomes in coming years, the odds of a market correction will escalate, especially if interest rates exceed neutral levels.”

Mr Gauthier responds saying that the danger isn’t that the real estate market will coast more than expected in the near future, but “the risk is rather that the market remains as hot as it currently is for too long, eventually running head-on into monetary policy tightening (and longer term bond yields rising).  There is more than adequate time for the housing market to cool before then, but history suggests that if it fails to do so, the ensuing adjustment would be a rude awakening.”

The real estate market could slow for a number of reasons:  pent-up demand from the earlier stall is erased; an increase in the supply of listings will help to moderate prices; and buyers waiting for the flurry to die down or trying to cash in while interest rates are still low.

Both economists are concerned about rising household debt in Canada (it was in the paper again today).  Guatieri has watched household credit grow twice as fast as personal income since 2002.  Gauthier warns that the cost of debt will be rising during the next few years, and “while most households can handle this rebalancing act, those already overstretched or getting into homeownership on th margins of affordability would do well to plan ahead by building up equity and saving through other means.”

Nothing is certain.  And the crystal ball is cloudy.  Deciding to buy or sell a home is a personal decision. Whatever the market is doing, educate yourself and make the best decision for you.