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Housing boom depends on timing
Boom and bust
Leverage makes real estate easy to profit from in a rising market. One homeowner bought in 2013 with 20% down, and the total payment including taxes and insurance is $1,800 a month. The exact same house now rents for $4,000, and its value has tripled.
Buyers near the 2021 peak are in a different place, looking at prices today that sit far below what they paid.
What drove prices
Several things drove the run. Interest rates kept falling to record lows, immigration ran high against a limited housing stock, and housing supply grew too slowly. Those forces sent prices up extremely fast, which is why they have come down in such an extreme way. Stock-like returns from real estate forever are not a reasonable expectation, even though they appeared for some years.
Why did falling interest rates push prices up?
Lower rates cut the monthly payment on a given mortgage, so buyers can borrow more for the same payment. The Bank of Canada cut its overnight rate to 0.25 percent in March 2020, its lowest level on record at the time. When many buyers can afford more at once and supply is limited, prices rise.
How does leverage amplify home price changes?
A buyer who puts 20 percent down controls the whole house, so a price rise of 10 percent adds up to a 50 percent gain on the down payment. The effect runs in reverse on the way down, where a similar fall can erase a large share of the buyer's stake. In the United States, the S&P CoreLogic Case-Shiller national index fell about 27 percent from its 2006 peak to its 2012 low.
Why does housing supply respond so slowly?
Building a multi-unit project involves land assembly, zoning approvals, permits, financing, and construction. From first plans to move-in day, that process often takes several years. Prices can therefore rise for a long stretch before new supply arrives.
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