Ads Google

The danger of mistaking a correction for a crash

by Corben Grant on 24 May 2022

In the last couple of months, we have seemingly started to come down from the peak of our recent housing rally, at least in southern Ontario. Now, as we enter a new period, many investors are reevaluating the current conditions with some even asking the question: Are we finally seeing the housing market crash? The reality is, however, that our current market conditions are far from what constitutes a “crash”. Rather, what we are now experiencing is merely a correction, which is its own distinct phenomenon.

How can we tell it’s only a correction and what do investors need to know when navigating these changing times?

To answer that question, we spoke with Christelle Mwamba, a mortgage agent with The Mortgage Scout out of Toronto. According to Mwamba, it’s crucial that investors understand the difference between a crash and a market correction so they can properly respond to a changing market.

According to Mwamba, right now “we are seeing a market correction as there are fewer transactions in real estate sales and volumes in the housing market.” Citing a recent report from Sagen, Mwamba points to a 27% drop in sales from February to March, an 11% year-over-year drop in new listings and a 6% lower inventory level than last year, all of which point to a slowing and cooling market. She further points to a prediction from Oxford Economics, calling for a 24% price correction in Canadian housing by 2024.

“A lot of the values that we have been seeing appreciate year-over-year are a by-product of the fundamental low supply in the market that just can’t fulfill the demand for housing,” said Mwamba. “It was also fuelled by a low rate environment which was a by-product of the pandemic. People were buying because it was cheap to borrow. That artificially drove up the values of real estate. However, as we see the overnight rate going up, bond yields increasing, and the cost of borrowing going up, these changes are having an impact on the true cost of funds and forcing stress test figures higher as well. That means low purchasing power for the consumer, lower capacity, and higher cost. All of these factors result in limiting those speculative buyers who only bought because money was cheap. That will have a softening effect on the market, but not a crash.”

It should also be noted that market corrections, as well as market crashes, have been observed many times throughout history. For those looking for a hint to where things may head now, it is worth looking at where we have gone in the past. Mwamba draws comparisons to the housing crash of the early 90s, noting that conditions now are quite different. Not only that, but the government has learned from the past, instating financial policies to help prevent a repeat of past events.

“The difference between what is happening now in the housing market today versus in the 90s is supply,” she explained. “In the 1990s the problems were that banks didn’t have control over developers which resulted in overdevelopment of some subdivisions. The government didn’t control how much was being built and that drove values lower because they had excess supply. That, paired with higher mortgage rates, resulted in the market crashing and a lot of people losing money. Having said that, now the Canadian government has learned a lot of lessons from historical market trends. Fundamentally, the Canadian government and Canadian economic infrastructure are very structured and backed up with strong policies. There are a lot tighter controls in the development of real estate, making sure that builders have sold enough inventory to proceed with their projects. There are a lot more checks and balances in place as financial institutions are financing these projects.”

Overall, Mwamba stresses that a market crash and correction are two very different things. While one is a significant loss in values due to “a fundamental failure in governance policy and systems,” the other is merely a response to artificially inflated prices. In some sense, a correction can be a good thing in the long run as it brings the market back to a more balanced and sustainable state.

“Investors need to understand that you are not going to lose your investment, but you may see a loss in value which is what we are seeing today. It is important to understand the difference because an investor may park their intention completely to the sideline thinking there is a crash coming and that there is going to be a great buyout opportunity. But, the fundamental measures of government policies are very sound. Chances are, those great buyout opportunities will be difficult to time.”

“I think buyers first and foremost need to get past the headlines,” Mwamba continues. “Don’t just read the headline and think that you are informed. Not everything that is being published is factual and a lot of people have formulated opinions based on social media. Being informed is very important as an investor and sometimes people have to put their current situation into a historical context.”

Understanding that we are experiencing a correction is one thing, but many people may still be wondering exactly how they should move forward given that fact. Though it does not mean that real estate has gone bust, a correction may still necessitate some changes to your investment strategy. Mwamba offers advice on how best to operate as a buyer, owner, or seller during a market downturn.

“As a buyer, if you know a market correction is coming, the key is to be patient and buy when the market is correcting and transact when you believe you are getting a good value for your dollar. If you are not sure how to determine whether something is of true value, this is where it has never been more important to make sure you have the right qualified real estate agent on your side. For owners, you have to think about what exactly your intentions are. Look at your current and future needs and access to capital to try to figure out what you need to do. If, as an owner, there is no reason for you to sell, then just stay put and ride out the fluctuation. If you are looking for an opportunity to capitalize on a correcting market, I would refinance and secure a line of credit to create some solvency and wait for the correction to start to transact.”

“As a seller, if there is no subsequent purchase then you need to cash out when the value is high which means you are selling today,” Mwamba continues. “Now, if as a seller, there is a subsequent buy, you can actually mitigate any value losses because that loss in value can also result in a similar drop in value where you are purchasing. If you don’t time it right, it is not a big deal because though your value went down, what you are buying in value went down too.”

Overall, the message is that a correction is a temporary period in the market and the smart investor can make the most of such a situation, even to their own benefit. For those looking to find their way through changing times, Mwamba stresses the importance of consulting the right advice.

“It has never been more important to have a financial professional like a mortgage broker or agent like myself in your corner who can explain your mortgage options and the driving factors behind the rates. In times of uncertainty is where advice and professionalism matter the most.”



Post a Comment



Most Trending News

Why new housing development is exploding in Calgary
News

The Canada Mortgage and Housing Corporation's biannual Housing Supply Report highlighted Calgary as the Canadian city with the highest percentage growth of housing starts in 2021.

Read More
Ending exclusionary zoning would boost the housing supply
News

Roughly 70 per cent of Toronto is zoned for detached houses only, which restricts the number of units that can be built.

Read More
Bank of Canada raises interest rate to 1.5%, and what it means for your mortgage
News

This week, the Bank of Canada announced an increase to their policy interest rate of 50 basis points, amounting to a total of 1.50%. That means interest rates are now six times higher than they were at the start of the year.

Read More