A lot of people called wolf term, yet,wolf did not really appear. Wolf calling makes people feel numb about the real danger. But, this time, we all heard the growling of a ferocious beast.
By facing the reality, we are talking about the bubble of the housing. How big the bubble is, when the bubble will burst, and how serious the problem will be after the disaster, are unknown. We are hoping the least, but the pain will last. Let us check some causes to create this bubble.
First, reducing interest rate is obviously a No.1 promoter.
Economic crisis forces authorities to install dramatic measurement to prevent the possible recession. Monetary stimulation encourages the spending and investing.
However, when there are short of real demands, private companies are not willing to invest and government-owned organizations mostly deal with the low efficient projects, the extra funds flow into the bubbling housing market. Because of the historical low interest, buyers feel confident to pay off current mortgages. The monthly mortgage payment is low for the buyers just right now.
Second, the buy’s confidence in the housing market is high. The house prices seem always going up these ten years. People easily forgot the pain which was caused by the falling house prices ten years ago.
Third, inflation let people seek anti-inflation assets. Investing in the houses with the land look like a smart choice.
But, now, the housing feast comes to the end.
Let us check the historical interest rates.
The interest rates of Bank of Canada from 1935 to 2011 are as below: (Source: www.bcrealtor.com/d_bkcan.html)
Year’s interest rates (%) median rates (%)
1935-1945 1.50-2.50 2.00
1946-1955 1.50-2.00 1.75
1956-1965 2.00-4.00 3.00
1966-1975 4.00-9.25 6.60
1976-1985 7.00-22.00 14.50
1986-1995 4.50-22.00 13.25
1996-2005 2.50-8.00 5.25
2006-2008 2.50-4.50 3.50
2009-2011 0.50-4.25 2.38
--------------------------- (average rate) 5.80
From 1935 to 2011, average interest rate is around 6%.
But, 2011 interest rate is 1.25% now.
So, we have the reasons to expect another 5% increase in the interest rate within the foreseeable future.
Meanwhile, buyer’s confidence will be negatively influenced by the economic gloomy expectation. Canada’s unemployment rate is hovering around 7%.
We are not optimistically seeing any improvement in the short term. One of the warning signals is that the mortgage debt as a percentage of GDP is alarmingly high.
From 1980 to 2011, Canada mortgage debt as a percentage of GDP rose from 25% to 65%.
(Source: www.chpc.biz/images/Ho..._Debt.jpg)
Every reasonable person will ask whether this debt trend can be sustained.
Last straw of the house price bubble is the possible drastic currency depreciation which relatively decreases the buyer’s existing mortgage payment.
When inflation is so high, we hope that our income monetary amount increase can catch up the inflation rate. The historical inflation rates from 2002 to 2011 are between 0.08 %( October 2009) and 4.68 %( February 2003).
But, when economic crisis comes to a full swing, it is not realistic to expect the big increase in the income.
When we look at these big pictures, we can predict the high possibility of the ending of the housing price fever.
Now, the questions left to us are how deep the house price will fall, how we survive in this crisis.
My suggestion is that everyone does a pressure test.
Try this: if the interest increase at least 5% within 5 years, and you lose the job 2 years, can you still float above the water?
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