The term “real estate bubble” or “housing bubble” is often cited when house prices soar. A bubble can occur anywhere in the world, at any time, changing the face of the local market.
What are the causes, consequences and potential impacts of this phenomenon on the Québec market? We tell all!
What the Term Means
More specifically, a bubble comes about when real estate property prices increase rapidly and excessively without any seemingly logical reason. This quick rise in prices is usually fuelled by strong demand and intense speculation.
Problems typically arise when demand slows down or when other economic factors change, leading to a dramatic drop in prices. And so, the bubble bursts! As you’ve no doubt deduced, we experienced a real estate bubble here in Québec shortly following the pandemic. Since then, prices have decreased slightly without the bubble deflating.
The Possible Causes
There are many reasons why a housing bubble may form.
- A past period of low interest rates: From approximately 2010 to 2020, mortgage rates were historically low, prompting several buyers to purchase property, boosting demand as well as prices. Nevertheless, interest rates have risen sharply since then, which has cooled the market.
- Speculation: Investors buy real estate hoping that its value will continue to increase, sometimes artificially inflating demand, which in turn drives prices higher. But this kind of speculative behaviour is relatively rare in Québec.
- Greater access to credit: When credit is easily accessible, more people can borrow to buy more expensive homes.
- Demographic trends: A growing population, especially in major metropolitan areas like Montréal, leads to a heightened demand for housing resulting in rapid price increases.
The Current State of Québec’s Real Estate Market
The Québec real estate market has recently gone through a phase of overheating, but the Bank of Canada’s series of key interest rate hikes have slowed the rate of price growth. Despite this, house prices remain high in many regions, raising concerns among certain experts that the market was overvalued during the period of low interest rates.
What Happens When the Bubble Bursts
When a housing bubble pops, it can have serious consequences on homeowners and the economy.
- A sudden drop in prices: People who purchased real estate in the middle of a bubble may see its value decrease significantly, leaving them with a mortgage that surpasses their property’s value.
- Economic downturn: A sudden drop in prices can potentially destabilize the financial market, affecting consumer confidence and triggering an economic downturn.
- Household debt: Homeowners who have borrowed to the maximum of their capacity may be unable to repay their debts if the value of their property falls, leading to foreclosures and bankruptcies.
How to Avoid the Negative Effects of a Bubble
- Invest prudently: Absolutely do not give into the pressure of buying out of fear of missing an opportunity. Take all the time you need to carefully analyze the market before deciding.
- Avoid too much debt: Don’t take on more debt than you can afford to acquire a home. Maintaining some financial flexibility is crucial, especially in times of economic uncertainty.
- Follow market trends: Stay abreast of real estate market trends in Québec and the economic factors that can influence prices.
In any case, when you finally do decide to purchase real estate, your best bet is to rely on a broker’s guidance in navigating a fluctuating market.