A housing bubble is always a threat in the housing industry and the pandemic made it so much worse. Before it was a far-fetched threat whereas now, it’s reality. The housing bubble continues to grow which makes it hard for both sides of the equation – buyers and sellers.

Here’s what you should know.

What is a Housing Bubble?

A housing bubble occurs when the demand increases beyond the supply available. This is how it works for just about any product. When more people want a product than there are products available, the prices naturally increase.

When people see the price increases, more people want to jump in on the real estate investment path which increases the demand even further. This is when a housing bubble starts. You have more people trying to get a mortgage or line of credit which then stresses out the mortgage companies, while home values aren’t matching the home prices, making it hard to approve anyone for a loan.

Why Does it Happen?

The increase in demand is just the start of the housing bubble. It can happen because of lower interest rates or other economic reasons, such as occurred during the pandemic.

Once the path starts, it’s hard to stop. People continually put more money into real estate because they see prices increasing so they think the industry is booming. This drives prices up even further, which is what begins causing the problem.

Too many people ‘bet’ on the real estate market. They think they are onto something good when what they don’t realize is that it causes many problems down the road and could result in a loss rather than the gain they were banking on.

How Does it Affect Canadians?

If housing prices get too high, it does a couple of things.

First, it excludes many Canadians from the ability to buy a house. When prices get out of control, they are priced out, not to mention that the home values often aren’t as high as the market pushes the prices so many people can’t get financing.

Without a valid appraised value, buyers can’t secure a house. The only way to buy a house that’s worth less than what the appraiser says is to make up the difference in cash, which isn’t something most buyers can do.

Not to mention, the higher home prices mean a much higher mortgage. This excludes many Canadians from qualifying for a mortgage. Without income increasing at the same rates as housing prices, most people won’t be able to afford to buy a house today.

Plus, if you don’t have perfect qualifying factors, you won’t get lower interest rates, which means you’ll pay more for your loan making it even harder to afford. This can lead to financial problems, including needing a consumer proposal or filing for bankruptcy just to be able to afford your mortgage.

What if the Housing Industry Crashes?

What goes up must come down, right? 

This is especially true for the housing industry. Housing prices can’t increase forever. When they reach the point of being overvalued, it leaves many homeowners upside down on their loans. It happens in every industry because prices can be inflated forever.

When you’re upside down, you owe more than the home is worth. If you were to sell the home, you wouldn’t have enough money to pay off the mortgage. This leaves you in a difficult spot – stuck in your house and you can’t refinance it either.

This can cause a recession as more people can’t afford their mortgage or if they pour all their money into their mortgage, they can’t afford other things.

What Can You Do?

During a housing bubble, there are certain precautions you can take to avoid getting in over your head and not being able to afford your mortgage.

For starters, don’t get caught up in the hype. If you hear values are increasing like crazy around you, that doesn’t mean it’s a good investment. Usually, when real estate prices increase that fast, they come down even faster, just not right away.

If you invest in real estate during the bubble, it’s best if it’s for the long-term. In other words, it’s best if you invest and stay there for a long time. This gives you time to wait out the housing crash because it will happen, but eventually, values will increase again. Just look at what happened in the U.S. after the housing crisis of 2008. It took a while, but values are finally back to where they used to be before the crisis.

It’s also important not to take on a mortgage or line of credit you can’t afford. Even if values are high and you can get approved, don’t take on more than your budget can handle. Remember, a mortgage is long-term debt. You will be in it for a long time and if you can’t pay for it, you could lose your house.

The key is to stick to a mortgage that’s a comfortable percentage of your income and to invest in a  house that has the potential to continue increasing in value because it’s not so tapped out in value due to the housing bubble.

Final Thoughts

If you’ve gotten yourself in over your head and don’t know what to do, contact the debt experts at EmpireOne Credit.

We help people like you all of the time figure out their finances and how to keep their heads above water. Even if you were able to get lower interest rates on your mortgage, but still found that you just can’t afford all your finances, we can help you with a debt reduction plan to help restructure your finances and help you save your home.

Contact us today to see how we can help.