The housing market has experienced historical growth in appreciation in recent years, having many people ask, “will the housing market crash?”. The concern stems from the fact that the current levels of appreciation cannot be sustained for too much longer. For example, a home worth $600,000 would be worth about a $1,000,000 in just 3 years. If we continue to follow the trajectory of appreciation, that would mean that same home would be worth about $2,000,000 just 4 years later. Clearly, the question “will the housing market crash” is one that is worth asking as home prices are beginning to get out of hand.
There are two ways to approach the question:
- Will the housing market crash organically?
- Will the housing market crash through intervention?
In other words, will the housing market crash naturally or will it be caused by outside influence as a pre-emptive measure to protect the market?
Although anything is possible, we do not believe that there will be a “abrupt crash”, where the market prices of homes steeply decline. Having said that, we do believe that the market will level off or slightly decline and resume to stay flat for a few years to follow. However, if the government intervenes, then it is possible that the affects of that intervention may create a more influential decline in home prices as seen is western Canada. Either way, we do not believe there will be a “crash” that creates a decline in home prices of 25% or more.
To better understand why the market cannot sustain this rate of growth, we must look at the environment in which this is happening. Low interest rates have increased the purchasing power of home buyers and have allowed home prices to increase and sell at higher asking prices. However, the income of borrowers has not increased as aggressively year over year and in fact, sometimes not at all. So, what will eventually happen is that when interest rates hike, the purchasing power of potential borrowers will decline. This means that no matter what an existing homeowner wants to sell their property for, they will have a more difficult time finding someone who can buy the property for the asking price. This is mainly due to the fact that the purchaser will find it more difficult to get approved for the size of the mortgage needed to complete the transaction. If the seller cannot find someone who can complete the purchase, then they will be forced to lower their asking price. When this happens across the real estate market, it will essentially “cool off” the prices to a level that is sustainable.
The influences of the marketplace are very complex and there is no way to predict the actual outcome. So, will the housing market crash? We maintain that a crash is less likely than a “level off” scenario but in both cases, appreciation will probably see a reality check!