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Is The Housing Market Going to Crash Like It Did 2008-2011?

Blog by Amanda Blake | October 23rd, 2015

I’m certainly not an economist but my half optimistic, half realist self would like to believe that what is happening with housing sales right now and for the next few years will not be a repeat of 2008 to 2011. These were the years when we saw buyers disappear and prices hit a decade low. Of course without my crystal ball working properly I can’t be certain but here is my logic.

We all know real estate prices are cyclical and sales data suggests the average real estate pricing cycle is 7 years. Prices rise for 3 or 4 years and then they decline for 3 or 4 years. So it makes sense that prices have started their downward turn here in 2015. We were on an up cycle when I started in real estate in 2006 through to 2007 right to the first two quarters of 2008 and then the drop continued to 2011 until we started back on the up cycle in 2012. The difference between 2008 to 2011’s housing cycle compared to 2015 is that in 2008, the global economy was crashing. In 2015, the drop in oil prices has had a huge impact to Alberta but only a ripple effect globally so the vast difference with the strength of the global economy suggests that we should not see a repeat of 2008 to 2011.

The other difference is that the terms for financing a home over the last 4 years (2011 to 2015) were much different than what we had in 2006-2008. In the last 4 years, our Canadian government eliminated zero down insured mortgages and 40 year amortizations. Currently 25 years is the longest one can amortize an insured mortgage. Investors were able to purchase rental property with just 10% down and that is now 20%. Lenders have also been more cautious on debt loads of applicants and the type of earnings that they use to qualify someone for financing on a purchase. So the overall strength of a purchasers financing in the last five years is better than what we had in the later part of 2006, 2007 and the first half of 2008.

Buyers purchasing habits for housing are also different now than they were in 2006 to 2008 because many people were “stung”. Buyers were paying outrages prices for properties because everyone wanted to get in on the action, only to discover that in just a year or two, the prices would start to decline. In 2012 to 2014 as prices went up, buyers were smarter. In the data I have analyzed over 2012 to 2015, there have been less anomalies with sale prices. In 2006 to 2008, the anomalies with some of the sales prices were unexplainable. I wrote an article back in 2011 to talk about recession proofing your purchase (which you can find on our website at: http://limegreenrealty.ca/blog/32-blog/147-is-it-possible-to-recession-proof-your-purchase). This article discussed a heritage home and the price variance from its purchase data to its sale date of almost $200,000. When prices did start to rise again in 2012, buyers were more cautious with the offers they were making. In fact, in 2014 when prices hit their peak, many home prices were still not back to the sale prices we had at the peak in 2008.

Overall, home owners who have purchased in the last five years are much less fragile then they were in 2008-2011 when the housing market crashed. Buyers in 2006 to 2008 were buying at peak price points, they were purchasing with zero down and 40 year mortgages with lending requirements for type of earnings or length of employment that were not as cautious as they are now. They just didn’t have the footings into their mortgage to help support them through the down cycle.

And lastly, the inventory levels are not the same in 2015 as they were in 2008. In 2008 the inventory was at an all-time high with Red Deer having over 850 active and conditional listings (single family, half duplex, townhouse & condo’s) compared to 2015 where inventory levels have not reached 600 active and conditional listings. The influx of inventory in 2008 was due to everyone wanting to sell because their housing price had doubled in 2006 to 2007. The buyers were declining at a quicker rate than the inventory so we were left with a huge supply and a small demand. 2010 experienced a repeat of this supply demand issue. Although the inventory was lower, the demand was even lower than 2008 and 2009 which trickled to prices in 2011 when they hit an all-time low.

I think there were a lot of lessons learned from the craziness of 2006 to 2008, one of them was that buyers needed to be cautious in future years which they were in 2009 to 2014. This helps to keep stability in our housing market as prices are now on a downward cycle and this is why I believe we won’t experience the same lows as we did back in 2008 to 2011.