Have you ever wondered why the prices of homes increase every year, even if there are no new or improved features? One important factor to consider is inflation.
Inflation is generally defined as a sustained upward movement in the general price level of goods and services in an economy over a period of time. There are generally two types of inflation: cost-push and demand-pull.
Cost-push inflation occurs when the prices of goods themselves rise, but it can also be caused by other factors such as an increase in production costs. Demand-pull on the other hand occurs when demand outpaces supply.
How Inflation Relates to Real Estate
Inflation is a measure of how much the price of goods and services rises over time. Inflation affects everything from food to transportation, but it can also have an impact on real estate prices.
In Canada, housing costs have been steadily increasing for more than 20 years. The Canadian Real Estate Association notes that in 2000, the average home sold for $160,000 while in 2010, the average home sold for about $370,000 – a difference of more than 100%. Just over another decade later, we are once again seeing a significant increase with the average cost of a Canadian home falling around $770,000.
While some factors such as changes in municipal taxes or interest rates may cause fluctuations in real estate prices from year to year, inflation is also a factor with implications both large and small.
What Does Inflation Mean for Buyers?
Buying a home is an exciting experience, but one that is also fraught with worry. A big concern for many people when they are buying their first house or upgrading to a bigger property is the cost of living. It can be difficult to predict how much your mortgage will increase in the future, and what impact this may have on your ability to afford your monthly payments. The last thing you want after spending so much money on a property is to see it lose value because of inflation!
For those trying to enter the real estate market, especially first-time homebuyers, this time can be challenging. Along with a stark increase in housing prices, the shortage of supply on the market is increasing the competition.
Buyers are dealing with things many have not had to deal with in recent years such as blind purchases, bidding wars, and bully offers.
What Does Inflation Mean for Sellers?
Inflation can mean a lot of things depending on your perspective as a seller. While rising prices mean higher profits, the rising cost of living will affect your financial situation.
However, inflation is also beneficial to sellers in the form of increased equity. As inflation drives up prices, the value of your home increases as well. This means that you can sell your home for more money than you paid for it, resulting in higher equity.
While it may seem very enticing to sell while prices are high, this also means if you don’t have somewhere to move to, you will also have to buy high. For many people who are able to transfer substantial amounts of equity, this can equal out, for some this does mean significantly increasing the more.
Potential Issues
Housing bubbles are dangerous for all involved. If you’re in the market to sell your home, there’s always a risk that it will depreciate in value after you’ve sold it. But what if the housing bubble bursts?
What is a housing bubble?
A housing bubble is a temporary period that is characterized as having low supply, high demand, and inflated prices.
The risk associated with buying while in a housing bubble is the potential of it bursting. In terms of real estate, this means that housing prices have hit unsustainable prices or other factors that force them to burst. These factors include an economic downturn or a rise in interest rates.
What happens when a housing bubble bursts?
Many people think of a housing bubble as something that can’t happen to them, but history has shown it is not always easy to predict when the market will go south.
In September 2008, for example, US home prices had been steadily rising for three years and there was no sign of slowing down. That all changed with the collapse of Lehman Brothers in late September 2008 and the subsequent global financial crisis. The Dow Jones Industrial Average fell by an astonishing 500 points following Lehman’s bankruptcy filing. The cost of credit jumped up immediately thereafter and didn’t stabilize until mid-2009 which caused significant turmoil in Canada as well as countries such as Greece and Iceland which were heavily indebted at the time.
Since housing is closely tied to the economy, other economic factors such as unemployment rates and interest rates tend to rise after an economic downturn which causes home equity levels to drop. This can make it difficult for homeowners to obtain mortgages for future purchases or refinancing costs after selling their homes at a reduced rate.
What Does 2022 Look Like For Canadian Homeowners
According to many real estate reports, Canada’s housing market is anticipated to slowly continue to climb over 2022, however not at the same rate as the past couple of years. With housing now making up nearly 10% of Canada’s GDP, many financial institutes are noting a record high level of debt. Combined with the threat of potential mortgage rate increases, there are also new stress tests which are requiring buyers to be able to afford rate hikes which are just a few of the contributing factors in calming the market down.
“While it’s difficult to predict what will happen in the future, it seems that the Canadian real estate market is slowly starting to level off, though it will remain relatively strong in 2022,” says Richard Fung of Forever Homes based out of London, ON.
This may be good news for buyers who are worried about being able to afford a home in the future, but it could also mean that sellers may not see as high of a return on their investment if they choose to sell in the next few years. Whatever your position in the market, it’s important to stay up-to-date on current trends and make decisions based on reliable information.
