Updated: January 2014
From the year 2000 onward, U.S. and Canadian real estate markets experienced an incredible boom in the construction of residential real estate.
However, most people seem to have forgotten – and more important, seem not to have learned their lesson – from the previous horrific real estate crash of the late 80s and early 90s, where due to oversupply, the market popped in both countries, sending real estate prices on a free fall of up to 50 percent of their previous values. Exceptionally hard hit were condos.
A Look at U.S. and Canadian Real Estate
By Dan S. Barnabic
In the aftermath of the crash, the market remained depressed almost for the whole decade of the 90s. However, thanks to exceptionally low interest rates that American and Canadian governments forcibly induced to revive their economies, the market eventually started showing signs of awakening. By the early part of 2000, fuelled by renewed consumer confidence, the price-deflated condo units and other forms of real estate started to regain their previously lost values.
Developers, ever so eager to cash in on new opportunities persuaded masses of ordinary tenants to become their own landlords. Small or no down payment schemes, coupled with strong sales pitches for anybody who was renting to buy a condo unit, sprung up to facilitate sales. Touted as being by far a more advantageous arrangement in comparison to renting, people that never before owned real estate, started to buy real estate, particularly condos, in droves.
In fact, the ease by which one could buy a condo, in numerous cases without even pre-qualifying for a mortgage, was due to the incredibly lax rules by financial institutions, all too eager to provide loans to any buyers in order to compete in the market place. Banks took advantage of a buying bonanza which seemed to have no end. As a result of rapidly escalating prices, just about everybody and his brother started speculating in condos, buying units and flipping them over for a quick profit.
The rampant and uncontrolled construction of condominium units had evaded government regulators. Eventually, so much real estate – especially condos – was built that ordinary buyers could not absorb them. Moreover, due to artificially inflated prices, they became way too expensive and unaffordable to ordinary folk.
Hence, another major real estate bubble burst in the U.S. by the end of 2006. It caused prices of real estate to plummet, causing some over-built cities to look like ghost towns with many empty, unsold condos.
Poor urban policies, coupled with the corporate greed of developers and financial institutions, have once again brought the real estate industry to a standstill.
This time around, however, the impact has been so severe it affected the whole U.S. economy. In fact, so much so, that large financial institutions buying and trading the mortgage backed securities, experienced catastrophic financial set-backs, requiring many of them to close their doors, and in many instances ask the government for incredibly large bail-outs, all at the expense of American taxpayers.
In fact, the crisis affecting the U.S. real estate market, which accounts for about one third of the economy, has brought the whole country to its very knees. During 2012/13 much was said and announced by the media, and government, that U.S. real estate is on the rebound. Again this renewed “confidence” in consumers getting back into price inflated real estate was induced by low interest rates and rampant speculation – the exact recipe that caused the 2006 crash!
Canadians have not yet experienced such a drastic downfall, but if one is to believe their Central Bank’s reports claiming that real estate prices are inflated by at least 10-15 percent, and the recent report by the Economist in early September 2013 ranking Canada as the most prone to experience a real estate crash, the logical conclusion is that the Canadian down-slide will occur soon.
Short of a miracle, the future upward sale cycles of real estate products can only be made possible by attracting more foreign buyers.
Some see the foreign buying of U.S. and Canadian residential properties as a salvation. However, others see the foreign buying as a very troubling, even scary, scenario for the future of U.S. and Canadian citizens.
For more on that topic, take a look at my next article: Troubling Thoughts on Foreign Buying of U.S. and Canadian Real Estate.
by Dan S. Barnabic