What’s the cause of the increase? We can chalk it up to two main factors: 1) economy, 2) consumer confidence.
The first has to do with current state of the economy, which in Canada, and particularly in Alberta, is recovering. Now the pace of this recovery is actually quite slow, is just looks torrid in comparison to the continued problems south of the border.
Overall the Canadian economy has come out of the economic slump and is starting to grow, particularly in the energy rich province of Alberta. Jobs are plentiful and salaries are increasing. The pace, again, is slower than the previous boom, but a turnaround is around the corner. The same cannot be said for America where layoffs continues and the housing market is still mired in a slump.
The second component is consumer confidence. People may not be earning anymore than they were before, but the low prices coupled with low interest rates that are soon to increase, the desire to purchase a home now rather than rent for the most part makes good financial sense. Preferences right now are ripe for new home ownership. (This doesn’t factor in the various arguments that in this economy it would be better to rent….)
The question is, whether the perception of an improved/stable economy benefits the housing market in a good way. Is it a good thing that people are buying houses even though it may be putting them and the economy at risk?
Technically yes, it implies the economy is recovering as consumers purchase the single largest asset in their lives–homes. However, it’s not a good thing because the economy is still fragile and the new homes are still rapidly increasing in price (an element of a housing bubble) yet wages haven’t caught up. That means increased debt loads.
The Bank of Canada and the Government have warned Canadians that they’re taking on too much debt, so much so nowadays the debt load is greater than personal debt loads in the USA–Canadians just aren’t saving.
…disposable income rose to 147.3 per cent in the first quarter, surpassing the revised 146.2 per cent mark in the fourth quarter of 2010. (Globe)
Just because a bank can lend you the money based on your current income doesn’t mean that you necessarily need to borrow the max they’ll give you. That only helps the bank.
A renewed sense of personal finances that includes living within your means and not beyond it is radically necessary in Canada or some bigger problems will emerge.
This post compiled with some data from Calgary real estate lawyer Taylor Conway.