What’s a Real Estate Bubble?
A financial bubble that happens in the global as well as local real estate market after a big boom in the property sector is termed as a housing bubble or residential market’s real estate bubble. The big boom in property is a quick increase in the selling price or market price of the housing until they reach an unsustainable height and then bursts out.
Similar is the situation faced by Ontario’s real estate market and it is on the edge or bursting.
– Most of the houses are priced above the than their actual value.
– International Buyers are hopping in and giving money more than the actual price to get the deal.
– Local investors are doing the same. They are using their laundered money to pay out some extra cash under the table for the property.
– The property buyers buy the property not for residing there but for re-selling it, thus raising the property prices again.
Galaxy Gate (GG), suggested a way out of this. If the buyers are subjected to live in the property and not able to sell it for a year, then the investors or re-sellers would keep themselves away from such deals as for a year they won’t be able to sell it. Such a rule would control the price rise and situation will become normal soon.
A study was conducted by David Larock that suggests how things changed since 1980 to 2010.
During 1980 to 2010, there are about 156 times the 5-year residential mortgage price raised over the prior month, and 97 times house rates raised two months later. Clearly, the times increased mortgage rates that lead to higher house prices are more. The month-over-month increased prices were more than 5%. Read more about David Larock’s study.
Take instance of these two scenarios
(a) 5% interest rate over a house sold for $500,000
(b) 2.25% interest rate for the same house sold for $800,000
The lower interest rate in (b) entices more buyers, but Barry Kainth believes option (b) is the reason current reason for the today’s price rise in Ontario and it is dangerous for Ontario’s real estate future. You see the principal amount is higher in option (b) changing the whole dynamics of Ontario’s Real Estate Market. This can be brought to control if the interest rates put higher and principal amount lower to the actual value of the property.