While there are some things about the 1980’s that we wish could last forever (big hair, disco, Bruce Springsteen) the frenzied real estate market (housing bubble) in Toronto and its subsequent crash isn’t something that anyone wants to re-live. Fortunately, there is no reason to believe that the infamous housing crash of the 80’s in Toronto is here already, is coming back, or is lying in wait for poor first time homebuyers.
It is highly likely that the year-over-year price increases that Toronto has experienced for the past several years will not continue. However, a market stabilization, or correction, is very different from a bursting bubble. Even if there is a housing bubble in the Toronto market, and even if it does burst, it does not mean that we will be flung back into the 1980’s. Here are two reasons why, even if the market corrects, we’re not in a 1980’s style situation:
- Interest rates are low. In the 1980’s interest rates were hitting 20% or higher. It’s no wonder that when the market corrected many people could no longer afford their monthly payments. It also stands to reason that with such a high interest rate, as soon as the market corrected most homeowners owed the bank more than their house was worth. While it is likely that interest rates will go up in the next little while it is highly unlikely that they will again go into double digits.
- People aren’t losing their jobs: The whole economy tanked in the 80’s so while house prices were declining homeowners were also losing their income.
With this said, if the market does start to correct, buyers who purchased a home that they could barely afford will be in trouble when interest rates start to rise. If you are a buyer in this market, the best practice is to put as much equity as you can into your home. Don’t over-extend your monthly payments so that if you have to start paying a little more you can do so comfortably. Ask your mortgage broker to qualify you at a higher interest rate just to see if you can handle the extra burden.
If you want to talk about this more, get in touch.