Housing market hot, but will it last?

[rage2021]

http://www.yourhome.ca/homes/realestate/article/721333--housing-market-hot-but-will-it-last

Discuss.

I'm going to be a first time home buyer in a couple years and I know I don't wanna overpay for some of these ridiculous asking prices. I'm hoping the market comes down.

[GonePostal]

In the GTA market things will definitely cool off. IMO things are not sustainable and will come back down to economic fundamentals.

You will probably see another run in the spring/summer due to the HST. So there might be a short window in the winter where there might be some deals.

[speedyforme]

I keep preparing myself for the crash as I bought a house last year.

[rage2021]

yea interest rates are going ot eventually go up..and when those people realize they cant pay them I think the market will start to adjust accordingly.

[ginko123]

yeah...no kidding lol....in my area...semis area being listed for $380K - $410K range near 9th line/ eglinton area of mississauga .....

I for one bought one almost 5 years ago and paid way less. But yeah a street or two down for me has detached 2500 sq ft houses being listed for 800K lol....


bubble will bust soon I think

[mecassa]

One current theory is that most baby boomers that will be retiring soon are house rich but cash poor and will need to sell their houses to fund their retirement. Some believe this will definitely pop the bubble.

I have a wait and see attitude.

[speedyforme]

yeah...no kidding lol....in my area...semis area being listed for $380K - $410K range near 9th line/ eglinton area of mississauga .....

I for one bought one almost 5 years ago and paid way less. But yeah a street or two down for me has detached 2500 sq ft houses being listed for 800K lol....


bubble will bust soon I think

I'm in that area too, it's crazy!

[audit13]

I believe that, when a correction happens, some house prices will drop more in some areas that others. Where I live, I haven't noticed an substantial price drops. In fact, prices seem to have stayed the same or gone up which is good for me.

[gman]

One current theory is that most baby boomers that will be retiring soon are house rich but cash poor and will need to sell their houses to fund their retirement. Some believe this will definitely pop the bubble.

I have a wait and see attitude.

Another theory is some baby boomers are actually cash rich and now have time to find new income after retirement from work. One type of income is rental income. I know a few people who are going to retire are preparing to jump for prime rental property when the market 'crashes'. By the way, baby boomers do not all retire in the same year. They are already buying and selling for a few years already.

[pitz]

What I'm seeing out there is that basically nothing is being done with CMHC mortgage insurance, or a downpayment at all. In other words, the entire market is being held together by a government subsidy program that cannot continue forever, as it will simply exhaust the ability of taxpayers to pay, or simply run out of buyers who are willing to buy into such a ponzi scheme.

I personally think we're on the precipice of a systemic meltdown of the housing industry in Canada, and this nonsense can't continue much longer. But then again, I would have never predicted this bubble would have inflated so much. All of the metrics on the Canadian market are far worse than even what existed in the USA before they had their crash.

[kahoots]

All of the metrics on the Canadian market are far worse than even what existed in the USA before they had their crash.

Which metrics are you referring too?


"Canada's housing market is certainly not stained by the sort of excesses that characterized the U.S. market before the crash. Subprime lending in Canada is estimated to represent less than 5 per cent of the market, compared with more than 20 per cent in the U.S. prior to the crisis."

http://www.theglobeandmail.com/globe-investor/easy-credit-soaring-prices-raise-new-housing-fears/article1346308/

Not educated enough to form a legitimate opinion but it seems obvious to many that we are in a bubble. But that doesn't mean it will just pop and come crashing down.

[pitz]

"Canada's housing market is certainly not stained by the sort of excesses that characterized the U.S. market before the crash. Subprime lending in Canada is estimated to represent less than 5 per cent of the market, compared with more than 20 per cent in the U.S. prior to the crisis."

http://www.theglobeandmail.com/globe-investor/easy-credit-soaring-prices-raise-new-housing-fears/article1346308/

Not educated enough to form a legitimate opinion but it seems obvious to many that we are in a bubble. But that doesn't mean it will just pop and come crashing down.

Well, a lot of people are in 'denial' over what 'subprime' really is in Canada.

5% down/35 year loans in Canada, CMHC-insured, would be considered 'subprime', if issued in the United States, and insured by insurance companies there (or structured as a 'subprime' loan per se, ie: an 80/20 piggyback loan, etc.).

Of course, the use of CMHC insurance seems to be burned into the psyche of most first-time home buyers in Canada; to wit: the 5/35 buyers in Canada would be insulted if you called their CMHC-insured loans 'subprime', but in reality, that's exactly what they are.

[VivienM]

Which metrics are you referring too?


"Canada's housing market is certainly not stained by the sort of excesses that characterized the U.S. market before the crash. Subprime lending in Canada is estimated to represent less than 5 per cent of the market, compared with more than 20 per cent in the U.S. prior to the crisis."

http://www.theglobeandmail.com/globe-investor/easy-credit-soaring-prices-raise-new-housing-fears/article1346308/

Not educated enough to form a legitimate opinion but it seems obvious to many that we are in a bubble. But that doesn't mean it will just pop and come crashing down.

The problem in the US wasn't subprime loans. Not DIRECTLY.

The problem in the U.S. was that CHEAP DEBT after 9/11 fuelled 10-12%/year increases in house prices.

That, in turn, creates speculation. If you can buy a house for $100K and sell it for a "sure" $110K next year, possibly tax free (is U.S. tax law like the Canadian?), and write off the mortgage interest (something you can't do in Canada), why not do it?

And then, since the prices are increasing, lenders stop thinking about default risk. After all, if somebody borrows $100K with no down payment, the value of that house rises to $110K by the time they default, then the bank.
THAT's where you got the subprime loans coming in.

And of course, the subprime loans get a whole new range of buyers and speculators into the market, fuelling the price increases for another round.

And, since the subprime loans were based on the lousiest fundamentals, they went belly up first. There are lots of underwater non-subprime mortgages out there, but hey, if the people can still make their payments... who cares that all their equity went poof?

In Canada, we may have fewer subprime loans, but we ALSO have the same underlying cause, namely that cheap debt is fuelling house speculation and increases in house prices.

Let me, finally, end this with a thought experiment. Let's pretend you have a simple loan. 5 year loan, $1200/month payment. You have two options:
a) Pay $62070 for the thing, and borrow at 6%, or
b) Pay $70201 for the same thing, and borrow at 1%.

Now, let's make these 25 year loans, again at fixed rates (impossible to get on a mortgage, but let's forget that for a second).
a) Pay $186248 for the thing, and borrow at 6%
b) Pay $318410 for the thing, and borrow at 1%

If you pick a), congratulations, you are a financially responsible.
If you pick b), you must be an auto industry MBA or a realtor.

If you tell me "but VivienM, you're such a tool, who cares, the payments are the same", then sorry, but you're an idiot. The real estate and banking industry will be happy to rip you off and keep you in debt forever, though. (And don't forget that in the real world, you can't lock in that 1% for 25 years like in my example)

What has happened in both the U.S. and Canada is a slightly fancier version of this.
People, for reasons that escape me, tend to adopt the same idiotic "but the payments are the same" reasoning instead of separating out amount borrowed and interest rates. (This is why 0% financing is used to sell cars instead of $5000 discounts and a market rate of interest. 0% financing is the same idea as option b) from above, and it's better for the lender/seller...)

Therefore, people who, when the interest rate was 6%, might only have been willing to pay $186248 for my hypothetical thing are apparently now prepared to pay up to $318410. (Remember, it's "1200/month of debt" in both cases) So up they bid the price, to the great benefit of sellers who get cold hard cash...

But the thing about this is, when the interest rates rise, the prices have to come back down. Let's say the interest rate on the $318410 goes up to 4%. Congratulations, it now costs $1680/month to buy that thing.

If (silly) people value it at $1200/month and are only willing to incur $1200/month worth of debt to buy it, then the price is going to fall way down...

[pitz]

Yup VivienM, even prime loans in the USA are now subject to crazy rates of default. Subprime, in either Canada or the USA is just the proverbial tip of the iceberg in terms of problems in the market.

Canadians also don't have the benefit of long-term fixed-rate financing -- so the *entire* market in Canada is essentially based on VRMs/ARMs. At least an American can lock in their mortgage rate for decades if they want (and they'd be wise to do so), which means they can logically pay a higher price for a home than a Canadian could because they never have to worry about interest rate risk.

Whereas, a Canadian has to worry extensively about interest rate risk. So, for the same level of risk, they can't pay as much.

IMHO, best-case scenario is that the stock market hyperinflates, housing remains flat, and salaries inflate strongly. Worst-case scenario is that the stock market stays relatively flat, salaries drop, and housing drops by half. I can't imagine there possibly being a happy ending for people who are buying today. Either they miss out on strong stock market gains, or they get raped on what they pay for their house relative to value a couple years from now.

[AllWheelDrift]

VivienM, you forgot all the people that got in late with "OMG, prices keep going up so I'll never be able to afford it unless I act now" and managed to get an "affordable" payment at a low rate by going to a 35 year ammortization. Things will end up badly in the overheated RE markets in Canada. Vancouver in particular is in for some serious pain, even though the house of cards has been holding up surprisingly well.

[G-Yo]

VivienM, you forgot all the people that got in late with "OMG, prices keep going up so I'll never be able to afford it unless I act now" and managed to get an "affordable" payment at a low rate by going to a 35 year ammortization. Things will end up badly in the overheated RE markets in Canada. Vancouver in particular is in for some serious pain, even though the house of cards has been holding up surprisingly well.

I wonder how long they can keep prime at 0.25 % ?

When will inflation take off ?

[tjthemanto]

http://www.yourhome.ca/homes/realestate/article/721333--housing-market-hot-but-will-it-last

Discuss.

I'm going to be a first time home buyer in a couple years and I know I don't wanna overpay for some of these ridiculous asking prices. I'm hoping the market comes down.

Yeah the prices will come down in a couple of years but the Mortgage rates will go up so essentially your monthly payments will remain pretty much the same.

Right now people are just getting sucked in by the low mortgage rates and are just seeing the monthly payments they will have to make . ..and they think they can afford the house . They might not be able to make their monthly payments when the rates go up considerably in the next few yrs.

Wait till the rates go up when their mortgages come up for renewal .

[tjthemanto]

The Canadian Real Estate Market crashed BIG TIME in the 1990's .

Maybe a similar crash might come soon . Usually history repeats itself every 20 years or so .

http://www.canadareic.com/content/view/285/1/

[brunes]

Well, a lot of people are in 'denial' over what 'subprime' really is in Canada.

5% down/35 year loans in Canada, CMHC-insured, would be considered 'subprime', if issued in the United States, and insured by insurance companies there (or structured as a 'subprime' loan per se, ie: an 80/20 piggyback loan, etc.).

Of course, the use of CMHC insurance seems to be burned into the psyche of most first-time home buyers in Canada; to wit: the 5/35 buyers in Canada would be insulted if you called their CMHC-insured loans 'subprime', but in reality, that's exactly what they are.

I don't see how you can compare a 5/35 Canadian mortgage to what was going on in the US, at all.

In the US you had things more like 50 year term mortgages, with the first 2 years being at a steep discount teaser interest rate and the mortgage being interest only. And then the mortgage was approved based solely on your ability to pay this crazy teaser rates.

This is totally different than a standard Canadian 5/35 mortgage -0 mainly because even if you are CMHC insured, the bank approval is base don your ability to make the TOTAL mortgage payment, not on this mystical reduced payment.

[chinamansteve]

I overheard my manager's friend at work talking about an imminent crash in housing prices. Apparently he works as an appraiser for some government agency forgot the name of it since my manager mentioned it to me briefly when I asked him. He also mentioned that housing prices won't crash steeply within a short period of time, but will drop gradualy over a couple years. Will have to see if this is true...


EDIT: Also, I have doubts housing prices could hold up much longer, as MANY of my mother's friends (in their 40s) have been cheering house prices to go up, and one time when I was speaking to them voicing my opinion on the housing market, all I got was "House prices will only go up! It's the best investment one can make!"

From hearing that from most of my mother's friends, it reinforced my doubts in someway.

[bigEfromGP]

VivienM, you forgot all the people that got in late with "OMG, prices keep going up so I'll never be able to afford it unless I act now" and managed to get an "affordable" payment at a low rate by going to a 35 year ammortization. Things will end up badly in the overheated RE markets in Canada. Vancouver in particular is in for some serious pain, even though the house of cards has been holding up surprisingly well.

My brother-in-law and I recently had a conversation about the RE market in Vancouver as he has just purchased a home there (older home in Whiterock for $625K). I asked him about concerns in regards to prices in Vancouver being very inflated, but he has spoke to several other Vancouverites and the concensus there is that Vancouver, TO, New York are all global cities and are not affected by the market like other cities because of the influx of foreign investors coming in to the cities. He also said that, in Vancouver particular, there is a lot of wealthy asians that move here, and although we think $600K for a 800 sq ft apartment is ridiculous, compared to where some of these wealthy immigrants are coming from, it is much more economical.

[pitz]

I don't see how you can compare a 5/35 Canadian mortgage to what was going on in the US, at all.


Well, the only circumstance that really differs in Canada is of structure and form. Not of pith and substance. We have CMHC insurance in Canada, whereas, in the USA, they had 80/20 structures, and private mortgage insurers.


In the US you had things more like 50 year term mortgages, with the first 2 years being at a steep discount teaser interest rate and the mortgage being interest only. And then the mortgage was approved based solely on your ability to pay this crazy teaser rates.


Same in Canada with the CMHC loans; they're approving people with the current low fixed rate, which resets typically in 5 years to a much higher rate. Whereas, in the USA, the loans were still written for 30 years typically.


This is totally different than a standard Canadian 5/35 mortgage -0 mainly because even if you are CMHC insured, the bank approval is base don your ability to make the TOTAL mortgage payment, not on this mystical reduced payment.

Based on artificially low interest rates, ie: the 2.25% Prime loans that we see going out today. The only major things that are missing from the Canadian market is the concept of the pay option ARM, *and* the 125% financing schemes that were available.

[EugW]

5%/35-year is worrisome, but it certainly isn't sub-prime.

[pitz]

Yeah the prices will come down in a couple of years but the Mortgage rates will go up so essentially your monthly payments will remain pretty much the same.


If there's a surplus of houses in the market, then mortgage rates can rise faster than the monthly payments for a given house. In other words, prices drop faster than what is implied strictly by interest rates.

This is what is happening in the United States.

A house is nothing other than a manufactured good, kinda like a Beanie-Baby. Beanie Babies, when they were in style, in the late 1990s, easily fetched $25-$30 a piece, with some high-end models fetching more than $50.

Now that manufacturing has caught up with the demand in the market, you can buy the same items for $5-$10. No different than housing essentially.

Everyone cheers on low-prices at Wal-Mart, but they want their houses, which essentially are manufactured consumer goods themselves, to go up in price.

This dichotomy is completely unsustainable. Because of advances in technology and the productivity of large-scale construction, houses should be far cheaper today, than they were, for instance, a decade ago.

All of the inputs to building a house have dropped like a rock over the past few years. Labour is the only thing that is somewhat expensive these days, but with gazillions of people on EI now, eventually those people will be looking for jobs, and will drive down construction costs.

Wait till the rates go up when their mortgages come up for renewal .

Yup. Either the economy continues to go into the toilet, or we come out of this with higher interest rates because businesses are optimistic about the future, and are looking to borrow for the next wave of economic growth, to fund new machinery and capital investment.

[kahoots]

The Canadian Real Estate Market crashed BIG TIME in the 1990's .

Maybe a similar crash might come soon . Usually history repeats itself every 20 years or so .

http://www.canadareic.com/content/view/285/1/


Saying history usually repeats itself hold zero weight IMO. Also saying the prices WILL (ie for sure ) drop is also just pure speculation. I'm not saying they wont ...but they could also keep growing steadily , they could flatten a bit and then grow slow , basically anything can happen. I really haven't heard any better advice than- if you do buy now be prudent , check what the principle will be in 5 years and make sure you can afford a rate of 7% even 8%. Too many doomsayers just say it will for sure tank when really we cannot know. There are too many factors.

My gut feeling is that the market will flatten , the rates will go to about 5.5-6 fixed 5y MAX in 5 years. Keep in mind that the 10 year rate today is 5.4. I don't think there will be too many people who will say in 10 years..wow I'm glad I locked in in 2009 at 5.4 cause I saved a boatload of cash. I think if 10 year 'lockers' save any money it wont be that much ..historically they should lose , and its usually not even that close.

I've recently bought a house in Toronto with 5% down and it does makes me nervous but I'm a risk adverse worry wart. I have a 25 year amortization and I will be able to afford the payments of at least 6% and keep the same amortization period. If rates shoot up to 7-8 % then I will have to extend the amortization. That's the risk I'm willing to take.

I bought my first house in 2005 in downtown Toronto as an income property and it was 520K. (currently appraised at 620k) I though I grossly overpaid but since the rent numbers worked with a locked in 10 year rate (5.19 at the time) it was a solid investment. Today I feel that it will be the single best investment I will make in my life. FYI I'm still keeping the orig house which is why my down payment for my recently purchased family home is so low.

[EugW]

A house is nothing other than a manufactured good, kinda like a Beanie-Baby. Beanie Babies, when they were in style, in the late 1990s, easily fetched $25-$30 a piece, with some high-end models fetching more than $50.

Now that manufacturing has caught up with the demand in the market, you can buy the same items for $5-$10. No different than housing essentially.

Everyone cheers on low-prices at Wal-Mart, but they want their houses, which essentially are manufactured consumer goods themselves, to go up in price.
That's an absurd comparison. I guess you've never heard of the concept of a teardown home, purchased for the value of the land.

There's no question that land value can decrease significantly, but land ain't a doll fad. People don't buy dolls to live in either. Or at least I hope not. ;)

[pitz]

5%/35-year is worrisome, but it certainly isn't sub-prime.

Ummm, that is the definition of 'sub-prime'.

Prime = 20% down, 25-year amortization
Sub-Prime = everything worse than that.

That's an absurd comparison. I guess you've never heard of the concept of a teardown home, purchased for the value of the land.


I've heard of the concept. It only works in an extremely limited number of circumstances. And there's nothing intrinsically different about a house, compared to any other manufactured good. Heck, they even build houses in factories these days, and the parts are just shipped to the job site for final assembly.


There's no question that land value can decrease significantly, but land ain't a doll fad. People don't buy dolls to live in either. Or at least I hope not.

Trends in land come and go. If there's a trend towards condo living, then land values should go down as the land requirements for condo developments are somewhat less than required for single family houses. Kind of like, if they invented a 100mpg car -- the cost of gas would go down sharply as the amount of petrol needed would diminish greatly.

[EugW]

5%/35-year is worrisome, but it certainly isn't sub-prime.
Ummm, that is the definition of 'sub-prime'.

Prime = 20% down, 25-year amortization
Sub-Prime = everything worse than that.
Ummm... No it isn't.

If you truly believe this incorrect definition, basically that negates any argument you've ever made about real estate here, cuz that's not what "sub-prime" means.

[albatman]

Ummm... No it isn't.

If you truly believe this incorrect definition, basically that negates any argument you've ever made about real estate here, cuz that's not what "sub-prime" means.

With all due respect, I thought this has been obvious for a while.

[pitz]

Ummm... No it isn't.


So what do you disagree with? The definition of "Prime", or the definition of "sub" ("sub" being Latin for 'lesser than'). Subprime means any loan that is less than Prime.


If you truly believe this incorrect definition, basically that negates any argument you've ever made about real estate here, cuz that's not what "sub-prime" means.

There's nothing 'incorrect' about the definition. And there is no 'negation' of any argument I've made in the past. All CMHC-insured loans are, by definition, sub-prime. Nobody would spend the 3-4% on CMHC insurance if they didn't have to.

Maybe taking out subprime loans, ie: using CMHC insurance, is socially acceptable in Canada, but that doesn't change the basic fundamentals of the loans, nor the fact that they're primarily issued to financially irresponsible speculators who have an inadequate ability to save for a downpayment, on a house they cannot possibly afford.

[pitz]

BTW, awesome forum where this stuff is discussed heavily:

http://www.realestatetalks.com/viewforum.php?f=8

Just found it today. It has its shares of bulls and bears.

[EugW]

There's nothing 'incorrect' about the definition. And there is no 'negation' of any argument I've made in the past. All CMHC-insured loans are, by definition, sub-prime. Nobody would spend the 3-4% on CMHC insurance if they didn't have to.

Maybe taking out subprime loans, ie: using CMHC insurance, is socially acceptable in Canada, but that doesn't change the basic fundamentals of the loans, nor the fact that they're primarily issued to financially irresponsible speculators who have an inadequate ability to save for a downpayment, on a house they cannot possibly afford.
Quoted for posterity. High ratio and/or insured ≠ sub-prime.

[pitz]

Quoted for posterity. High ratio and/or insured ≠ sub-prime.

Whatever. I think anyone who can read understands that any loan that needs those enhancements or embellishments, is a loan that is lesser than Prime quality, and hence, can be considered 'subprime'.

Just because its not polite to call the people who take out CMHC-insured loans irresponsible welfare trash in Canada, doesn't excuse the loans from the reality of being of poor quality.

Justify and rationalize CMHC subprime loans not being 'subprime' in Canada all you want -- that's just like a beer addict switching to wine coolers, and then claiming he's no longer addicted to alcohol!

[Nyte]

And you guys can argue the definition of subprime all you want, but in the end, the loan is not going to change whether you suddenly consider subprime or not. Why not focus on the possible problems (or lack of if you're bullish) instead?

[EugW]

And you guys can argue the definition of subprime all you want, but in the end, the loan is not going to change whether you suddenly consider subprime or not. Why not focus on the possible problems (or lack of if you're bullish) instead?
The point is that while there are issues with high-ratio mortgages, it is misrepresentation of the facts to suddenly label all high-ratio mortages as sub-prime, because that's not the definition of sub-prime.

He may wish it to be, and in fact, there is some merit in trying to further reign-in high-ratio mortgages, but arbitrarily calling them sub-prime when the word has a very different meaning is just tantamount to trying confuse people to further an argument.

What he conveniently forgets to mention is the vast majority of high-ratio mortgages are with people with good credit. This is in stark contrast to sub-prime, which is with people with not very good credit. That's obviously a pretty fundamental difference.

I just hope that some others here haven't been confused by his blatant misrepresentation of the term.


Justify and rationalize CMHC subprime loans not being 'subprime' in Canada all you want -- that's just like a beer addict switching to wine coolers, and then claiming he's no longer addicted to alcohol!
Worst comparison ever... which somehow doesn't seem unexpected.

[pitz]

He may wish it to be, and in fact, there is some merit in trying to further reign-in high-ratio mortgages, but arbitrarily calling them sub-prime when the word has a very different meaning is just tantamount to trying confuse people to further an argument.


Well this argument came up in response to the claim that the Canadian market did not have many 'subprime' borrowers compared to the USA, and that the situation in Canada is fundamentally different than in the USA. It is not, except that the goverment explicitly takes on mortgage risk in Canada through the CMHC, while in the USA, subprime mortgages were underwritten through the private sector (later heavily bailed out).

This has stopped a full-out crash from occurring, but in doing so, IMHO, has just set up Canadian real estate for an even deeper crash because artificially high prices stimulate additional oversupply.


What he conveniently forgets to mention is the vast majority of high-ratio mortgages are with people with good credit.


So? It really doesn't matter how good peoples' credit is, if the credit is against assets that are so heavily overvalued. The examples in Canada are perhaps not as extreme as in the USA (ie: no $500k loans to strawberry pickers!), but the sheer size of the subprime market in Canada, by far, makes up for a lot of that. I read a stat the other day that stated that over 80% of new Canadian mortgage originations are subprime loans. Even the USA, in the 2005 heyday, didn't reach those sorts of numbers.


This is in stark contrast to sub-prime, which is with people with not very good credit. That's obviously a pretty fundamental difference.


Sub-prime refers to the overall loan, and not necessarily the creditworthiness of the person behind it. An loan that is minimally collateralized is also subprime. I would suggest that you're just psychologically hung up on not wanting to call hard-working young people 'subprime' because they don't have downpayments. But in the bigger picture, they're buying houses they can't afford, with money that is only being extended to them at very high interest rates.

When you compute how much CMHC insurance costs, given a flat housing market, and typical repayment terms, most of the time, the effective interest rate is north of 10%. Prime borrowers don't pay interest rates that high.


I just hope that some others here haven't been confused by his blatant misrepresentation of the term.


I hope people aren't being confused by your misrepresentation of the term 'subprime', which means exactly that.


Worst comparison ever... which somehow doesn't seem unexpected.

Worst attempt at an insult towards me ever... lol.

[pitz]

And you guys can argue the definition of subprime all you want, but in the end, the loan is not going to change whether you suddenly consider subprime or not. Why not focus on the possible problems (or lack of if you're bullish) instead?

Okay. Bank Stocks versus Owning Real Estate (and borrowing from a bank):

Bank Stocks:

Bankers want more profits = can raise interest rates. Borrowers have no choice but to pay (meanwhile, the price of their houses go down...but the bankers don't care, since the loans are CMHC-insured!).

Banker wants to own your house = can raise interest rates to the moon, and suck away all of your equity. CMHC will even make the banks whole if they do this, for the full amount of the nominal value of the mortgage.

Home Owner (with mortgage):

Dependant on bank to continue 'renting' money for cheap. The minute this 'cheap' money dissappears, they're hit with the double whammy of higher interest expense + lower house values. Bye-bye any appreciation, and serious losses for most buyers in the past 5-10 years.

High prices stimulate more supply. So rents go down. So landlords will be hit with a triple whammy of higher financing costs, declining rents, and declining equity/valuation.

Home owners with debt won't be able to invest into the stock market to take advantage of growing bank profits, because they'll be fighting for their lives trying to keep their homes. Therefore, stock owners will be able to pick up stock for cheap, and enjoy future high returns associated with economic growth.

Home Owners = a bunch of loosers who pigged out on debt to buy depreciating consumable goods.

Suppliers to the housing industry = big winners, who made fortunes selling and financing the 'stuff' that is used to build houses.

Also, businesses will see the benefits of drastically lower rents in their operations. They're already seeing this hugely in Calgary now, which is coming at the expense of landlords there.

[VivienM]

Ummm, that is the definition of 'sub-prime'.

Prime = 20% down, 25-year amortization
Sub-Prime = everything worse than that.


Then you're not using the same language as everybody else.

High-ratio = <20% down
Subprime = lower-than-X credit score, higher-than-Y TDSR.

You may be of the view that anything high-ratio is sub-prime. That's your personal view; while we do agree on a lot of this stuff, I continue to stick to my view that there is nothing wrong with a high-ratio mortgage on a reasonable (mortgage amt ~3X annual income), long-term-viable (i.e. if you're a young couple hoping to have 3 kids, not a 1 bedroom condo) property.

And FWIW, I find it somewhat offensive that if I was to buy a modest house next year with a credit score in the upper 700s, a mortgage amount ~3X annual income, and a 5-10% down payment, you'd find me subprime.

If that's subprime, what do you call a 5-7X annual income, 5% down payment that is really 0% through some sketchy cashback scheme mortgage to somebody with a 580 credit score? Sub-sub-sub-sub-sub-sub-subprime?

[Nyte]

What he conveniently forgets to mention is the vast majority of high-ratio mortgages are with people with good credit. This is in stark contrast to sub-prime, which is with people with not very good credit. That's obviously a pretty fundamental difference.


It doesn't matter if the person has good or bad credit. Good credit just means the person has a history of making their payments. This will only stay true if they can afford to make their payments. What pitz is saying (at least as I'm understanding it) is that a lot of these people bought based on how much of a monthly payment they could afford. So when the interest rates go up, they may not be able to afford it anymore, regardless of whether the loan was prime or subprime.

Let's get over this idea of prime vs subprime and get back to the main issue.

[VivienM]

So? It really doesn't matter how good peoples' credit is, if the credit is against assets that are so heavily overvalued. The examples in Canada are perhaps not as extreme as in the USA (ie: no $500k loans to strawberry pickers!), but the sheer size of the subprime market in Canada, by far, makes up for a lot of that. I read a stat the other day that stated that over 80% of new Canadian mortgage originations are subprime loans. Even the USA, in the 2005 heyday, didn't reach those sorts of numbers.

The USA 2005 numbers probably used OUR definition of subprime, not yours. :)

As for "it doesn't matter how good people's credit is", that's BS. Let's say a couple with two stable jobs buys a $300K house. They can comfortably make the payments. Payments go up 30% when interest rates go up in 5 years. House value plummets to $230K. They still have their jobs.

What are they going to do? File for bankruptcy? Sell the house and 'crystallize' their $70K paper loss (and have to borrow $$$ on an unsecured loan)? Or dutifully make their payments while kicking themselves for having fallen into the real estate industry's sales pitch?

I'm going to put it to you, sir, that most such people would keep making their payments. Yes, the collateral may be crap, but if the borrower is paying back the money, who cares?

See, what makes a REAL subprime loan is that its default risk is high. High default risk + crap collateral = recipe for trouble. High default risk + collateral that "will always go up in price" = why the Americans went crazy giving mortgages to people with no income.

Hell, by your logic, isn't every new car loan subprime? The collateral, by definition, drops 30% in value 10 minutes after the loan paperwork is signed.

[VivienM]

It doesn't matter if the person has good or bad credit. Good credit just means the person has a history of making their payments. This will only stay true if they can afford to make their payments. What pitz is saying (at least as I'm understanding it) is that a lot of these people bought based on how much of a monthly payment they could afford. So when the interest rates go up, they may not be able to afford it anymore, regardless of whether the loan was prime or subprime.

But the flip side of this is: people don't have a 780 credit score if they have a history of being foolish with credit.

If they're NOT fools, then they may be wise enough to get an AFFORDABLE property right now, so that if their payments go up 30-40%, they can still afford the property.

Don't forget that utilization ratio is a key component of credit scores. Low utilization ratio = somebody with enough self-control to have a $15K credit limit on a credit card, yet pays the card off in full every month.

[GonePostal]

Okay. Bank Stocks versus Owning Real Estate (and borrowing from a bank):

Bank Stocks:

Bankers want more profits = can raise interest rates. Borrowers have no choice but to pay (meanwhile, the price of their houses go down...but the bankers don't care, since the loans are CMHC-insured!).

Banker wants to own your house = can raise interest rates to the moon, and suck away all of your equity. CMHC will even make the banks whole if they do this, for the full amount of the nominal value of the mortgage.

Home Owner (with mortgage):

Dependant on bank to continue 'renting' money for cheap. The minute this 'cheap' money dissappears, they're hit with the double whammy of higher interest expense + lower house values. Bye-bye any appreciation, and serious losses for most buyers in the past 5-10 years.

High prices stimulate more supply. So rents go down. So landlords will be hit with a triple whammy of higher financing costs, declining rents, and declining equity/valuation.

Home owners with debt won't be able to invest into the stock market to take advantage of growing bank profits, because they'll be fighting for their lives trying to keep their homes. Therefore, stock owners will be able to pick up stock for cheap, and enjoy future high returns associated with economic growth.

Home Owners = a bunch of loosers who pigged out on debt to buy depreciating consumable goods.

Suppliers to the housing industry = big winners, who made fortunes selling and financing the 'stuff' that is used to build houses.

Also, businesses will see the benefits of drastically lower rents in their operations. They're already seeing this hugely in Calgary now, which is coming at the expense of landlords there.
Reading Pitz's posts are comical. It's useless arguing with him. He makes his own rules and definitions and expects everyone to play along. Just like how he "defines" sub-prime. What he's qualifying is more risk of a mortgage and telling everyone else that they are defining sub-prime wrong.

This CMHC is mostly based on opinion and not fact. Just like his stance on NHA's MBS program. Just based on "the states had x so since we have something looks like x then we are doomed to the same fate". It's an over simplification like most of what he says.

Just because there are high ratio borrowers that put down less then "20%" doesn't mean they are high risk. There are many categories of borrowers that would not be high risk at all. Investors that have a large net worth but want to increase their ROI via CMHC. Professional couples with a high income (picture 2 lawyers or 2 doctors) that don't have a high net worth but have a high income and statistically speaking will not default on their loans. There are a million other reasons why CMHC iff (if and only if) high risk borrowers.

Technically could the banks increase interest rates to 10000000%? Yes because the bank rate is set by the banks and not tied directly to the BoC lending rate. Practically could they do this? No way. The Canadian banking industry is one of the most regulated (and well managed by the way) in the world. There is a reason why there are the "big 5" and not thousands of banks like in the states. The government would never stand for it and take steps to prevent that.

Second statistically speaking foreclosures and/or bankruptcies of homeowners in Canada happen in the first 2 years of owning. This held true even in the 1980's when interest rates sky rocketed. So the whole boogey man of "in 5 years interest rates will rise" is not as dire as exaggerated.

NHA's MBS program is not bad policy just because it has the phrase "mortgage back securities". MBS's have been existence for a LONG time and even the NHA's MBS program. The problem in the states wasn't that they were selling MBS's but rather they were selling MBS's that no one knew what was in them. So risk could not be accurately attributed to the contents. They were sold, repackaged and sold again. NHA's MBS program doesn't have that problem. I asked the person who did this year's risk assessment on one of the major 5 banks NHA's MBS holdings, how hard is it to assess the risk on these products? He said they are extremely simple and transparent. So risk can be attributed very easily. He also said the program is sound and not the "secret sub-prime" bomb some make it out to be. Just because it says MBS doesn't mean it's bad.

I could go on and on and on. But in the end it's not really worth it. You can't debate someone who makes up their own definitions and passes opinion off as fact.

[VivienM]

Second statistically speaking foreclosures and/or bankruptcies of homeowners in Canada happen in the first 2 years of owning. This held true even in the 1980's when interest rates sky rocketed. So the whole boogey man of "in 5 years interest rates will rise" is not as dire as exaggerated.

But in the 1980s, mortgages were on much smaller amounts, had higher down payments, etc. And most importantly, I'm sure there was far less speculation going on.

And people probably didn't have the cavalier attitude towards debt that people have now. It starts with student debt. I don't think ENCOURAGING 18 year olds to borrow huge sums is sound public policy. Yet the recent approach has been "hike tuition fees, cut taxpayer funding, and let them borrow". So here you have schools and the government telling 'kids' to borrow tens of thousand of dollars.

Next, you have the problem that life goes on. Few people are willing to hunker down in their parents' basement for a couple of years to pay off their student debt ASAP. So that debt just sits there, shrinking very gradually.

Next, add the fact that people don't realize how risky real estate is. They're excessively comfortable with debt, they "don't want to throw their money down the toilet on rent" anymore, condos are the new status symbol (what happened to sports cars? grrr), and 'everybody' sold their condo for 25% more than what they paid for it when they got married and needed a bigger place. So, they buy a condo... and add a whole bunch more debt to the pile...

Honestly, I think cheap debt destroyed our social fabric. When debt was more expensive, people borrowed more rarely, they PAID IT OFF EARLY (and saved a bundle by doing it, unlike in today's 2.25% world), and they saw value in staying out of debt. That ethic is gone.

[AllWheelDrift]

My brother-in-law and I recently had a conversation about the RE market in Vancouver as he has just purchased a home there (older home in Whiterock for $625K). I asked him about concerns in regards to prices in Vancouver being very inflated, but he has spoke to several other Vancouverites and the concensus there is that Vancouver, TO, New York are all global cities and are not affected by the market like other cities because of the influx of foreign investors coming in to the cities. He also said that, in Vancouver particular, there is a lot of wealthy asians that move here, and although we think $600K for a 800 sq ft apartment is ridiculous, compared to where some of these wealthy immigrants are coming from, it is much more economical.
Sure, it's easy to claim why things are different, but the concensus between most of the Vancouverites that I've talked to is that the market is not at all sustainable. It seems to me that the vast majority of Vancouver home owners wouldn't be able to afford their homes at their current prices, and given that affordability is poor at the low end of the market, what exactly will continue to support the prices? Things like drugs and foreigners will have a limited impact unless they are the norm, not the exception, plus if I was a rich foreigner or drug dealer I'd want a high end property, not a basic home that's worth around 1M just because it's in the city of Vancouver. I don't see how the market can ever reach an equilibrium at a point where the average person is priced out so unless all the normal people leave and only weathly immigrants (and drug dealers) remain their influence must be limited. If Tom, Dick, and Harry, can't afford homes they'll be forced to rent, and if rents aren't affordable, then they'll be forced to leave. If rents are affordable, the landlords aren't getting enough return relative to the value of their (unaffordable) property.

Higher interest rates will have a catastrophic effect on affordability at the entry level and also on those that overextended themselves with low downpayments and 35 year terms at low interst rates. Those two groups will easily be enough to cause prices to plummet across the entire Vancouver market. "This time it's different" or "The rules don't apply here anymore" are much more likely to indicate a bubble than a fundamental shift, the problem is people don't seem to realize this until after the fact. Fundamentals don't usually change, instead they are temporarily ignored by irrational exuberance.

BTW, I've been looking at houses in White Rock and put in a lowball offer last weekend on an older home with an asking price of $$619k, naturally it was rejected, but really we're just feeling out the market. We already own a home and looking to move up, so lower prices would be a benefit but not a huge one, which is why if the right deal comes along, we will move sooner rather than later.

Like I said, the real problem is the first time buyers which really support the entire market by allowing existing owners to move up, though the steep prices make moving quite expensive for existing owners as well. Someone with a 600k property can't easily step up to a 1M property, and a 1M property isn't even high-end in Vancouver.

Of course only time will tell what actually happens but my magic 8 ball says "outlook not so good"

[SLee]

He also said that, in Vancouver particular, there is a lot of wealthy asians that move here, and although we think $600K for a 800 sq ft apartment is ridiculous, compared to where some of these wealthy immigrants are coming from, it is much more economical.
Just wait till these "wealthy asians" see how much they can get for $600K in places like Las Vegas, Phoenix or Miami.

Thoug seriously, the wealthy foreigner effect hasn't seem to have saved any bubble market in the USA, I don't see why they will change for Canada.

[pitz]

Hell, by your logic, isn't every new car loan subprime? The collateral, by definition, drops 30% in value 10 minutes after the loan paperwork is signed.

Absolutely. Which is why auto loans are always for high rates, not prime rates. We've had this discussion before; there is no such thing as 0% financing in the auto industry. More typically, its 8-10% financing, against an artificially jacked principal amount.

I think the mistake that's perhaps being made is that you're using 'subprime' as a proper noun, to describe a certain type of loan product, while I'm using 'subprime' as an adjective, to describe a class of loans that have credit quality worse than prime. The end result is the same; a group of borrowers that has a high probability of default.

And if you think that new Vancouver borrowers who are $350-$400k underwater, aren't going to walk away (ie: return to Asia perhaps), despite the recourse nature of mortgages, well, IMHO, you've been enjoying some of that famous BC cash crop :).

[pitz]

Just because there are high ratio borrowers that put down less then "20%" doesn't mean they are high risk. There are many categories of borrowers that would not be high risk at all. Investors that have a large net worth but want to increase their ROI via CMHC.


Exxagerated. The only 'investors' who are going through CMHC are the wannabees who do not have high net worth, and are seriously undercapitalized. This is the same crowd that was out there buying Nortel stock, on 30% margin, at the height of the tech stock bubble.


Professional couples with a high income (picture 2 lawyers or 2 doctors) that don't have a high net worth but have a high income and statistically speaking will not default on their loans. There are a million other reasons why CMHC iff (if and only if) high risk borrowers.


This crowd is the intended (and perhaps appropriate) users of CMHC insurance. The numbers of these professionals do not increase significantly year over year, yet CMHC insurance outstanding has skyrocketed. Are Canada's bubble cities suddenly home to gazillions more doctors, lawyers, and rich engineers? Of course not.


Technically could the banks increase interest rates to 10000000%? Yes because the bank rate is set by the banks and not tied directly to the BoC lending rate. Practically could they do this? No way.


The US credit card industry is doing it right now. Esp. Citigroup, which is raising rates on even its most creditworthy customers' cards from <10%, to 30% in many instances. Why? Because they want the balances paid off, and to be out of the business. Once the downturn really starts get rolling in Canada, look for similar behaviour from the banks here.


The Canadian banking industry is one of the most regulated (and well managed by the way) in the world. There is a reason why there are the "big 5" and not thousands of banks like in the states. The government would never stand for it and take steps to prevent that.


I disagree; the government would not, and practically, cannot force a bank to lend on terms and conditions it does not agree with. We don't live in communism, and there will be no government men marching into banks forcing bankers to give people cheap loans. 10,000% is hyperbole, but even 10% would easily extract all of the equity borrowers have stolen from banks and lenders over the years, back into the hands of the banks and lenders who rightfully own it.


Second statistically speaking foreclosures and/or bankruptcies of homeowners in Canada happen in the first 2 years of owning. This held true even in the 1980's when interest rates sky rocketed. So the whole boogey man of "in 5 years interest rates will rise" is not as dire as exaggerated.


If we want to start talking about the statistical angle, how many sigmas from the mean has the annual appreciation been in the past decade across Canada? 5? 6? Juxtaposing normalacy, onto what essentially has been a past decade of extreme abnormality, is just silly.

NHA's MBS program doesn't have that problem. I asked the person who did this year's risk assessment on one of the major 5 banks NHA's MBS holdings, how hard is it to assess the risk on these products? He said they are extremely simple and transparent. So risk can be attributed very easily. He also said the program is sound and not the "secret sub-prime" bomb some make it out to be. Just because it says MBS doesn't mean it's bad.


Even Fannie Mae MBS don't have a market in the USA anymore, and none of those have sub-prime loans in them (Fannie Mae only dealt with conforming (ie: <$417k loans, >20% downpayment, etc.). The securitization process in Canada, yes, as you point out, is stronger and more stable. And bond holders in Canada will not suffer losses because of the NHA guarantee (hopefully preventing a run on them). That just means that the Canadian banking system won't be hit as hard when the downturn in these assets finally arrives.


I could go on and on and on. But in the end it's not really worth it. You can't debate someone who makes up their own definitions and passes opinion off as fact.

I have not made up any definition whatsoever, but I see a few people in this thread who seem to have an aversion to the term 'subprime' being used, even though, it is quite a correct term to use.

[pitz]

It doesn't matter if the person has good or bad credit. Good credit just means the person has a history of making their payments. This will only stay true if they can afford to make their payments. What pitz is saying (at least as I'm understanding it) is that a lot of these people bought based on how much of a monthly payment they could afford. So when the interest rates go up, they may not be able to afford it anymore, regardless of whether the loan was prime or subprime.

Let's get over this idea of prime vs subprime and get back to the main issue.

Yeah exactly; not only are credit scores easy to manipulate and are virtually meaningless -- but mathematically, you stress a person enough, and of course they won't be meeting their payments.

A lot of income, as well, is highly correlated to the continued performance of the real estate market. A doctor who gets paid by the government might not have any problem meeting the payment burden in a downturn, and would be a good risk for a CMHC-insured loan. Whereas, a construction worker, or someone involved in finance or real estate, would be a horrible credit risk. The CMHC underwriting process does not take this discrepancy into account.

[VivienM]

Absolutely. Which is why auto loans are always for high rates, not prime rates. We've had this discussion before; there is no such thing as 0% financing in the auto industry. More typically, its 8-10% financing, against an artificially jacked principal amount.

Of course, it's difficult to figure out what the market interest rate is. I guess it'd be instructive to see what a bank would charge on a new car loan (does anybody still borrow from banks to finance new cars?)...

I think the mistake that's perhaps being made is that you're using 'subprime' as a proper noun, to describe a certain type of loan product, while I'm using 'subprime' as an adjective, to describe a class of loans that have credit quality worse than prime. The end result is the same; a group of borrowers that has a high probability of default.

If subprime means "less than prime", then the question is, what is prime? :)

I admit, for example, that I am not convinced about the link between down payments and probability of default. Higher down payments lower the risk to the bank/mortgage insurer, sure. But default?

Take a silly example. Two people.
a) A borrows $300K. Puts down $75K. Buys a property worth $375K. This is a 'prime' loan by your definition.
b) B borrows $300K. Puts down $15.6K. Buys a property worth $315.6K. This is a subprime loan by your definition.
Assume A and B have the same income and job stability and other expenses.
Why is B more likely to default?!

As far as I can tell, the only difference is that if house prices fall, and both default and file for bankruptcy, the bank/CMHC is out a lot more money on B's loan.

And if you think that new Vancouver borrowers who are $350-$400k underwater, aren't going to walk away (ie: return to Asia perhaps), despite the recourse nature of mortgages, well, IMHO, you've been enjoying some of that famous BC cash crop :).

No, I've just been living in Ontario. :)

[pitz]

Take a silly example. Two people.
a) A borrows $300K. Puts down $75K. Buys a property worth $375K. This is a 'prime' loan by your definition.
b) B borrows $300K. Puts down $15.6K. Buys a property worth $315.6K. This is a subprime loan by your definition.
Assume A and B have the same income and job stability and other expenses.
Why is B more likely to default?!


B is more likely to default because he has less 'skin in the game'. Whereas A is less likely to default because he put up $75k of his own money.

Also, B technically doesn't have any equity after transactional costs, whereas A has an equity cushion of $50-$60k, give or take, so a default costs him enormous money.

Not a sillly example, BTW.


As far as I can tell, the only difference is that if house prices fall, and both default and file for bankruptcy, the bank/CMHC is out a lot more money on B's loan.


Exactly. Except A has a much greater equity cushion upon which to fall back on. Whereas the loan referenced in B is underwater the moment its written.

If subprime means "less than prime", then the question is, what is prime?

Good question; a good starting point is that Prime is what is allowed to be taken onto a bank's balance sheet without being insured. Although that brings up the question of whether bank regulation in Canada is prudent or not. I think we'll look back, 10-20 years from now, and realize that lowering the downpayment requirement from 25% to 20% was a monumental mistake, and the opposite should have occurred, downpayments should have been raised from 25% to 30% instead.

[VivienM]

Exactly. Except A has a much greater equity cushion upon which to fall back on. Whereas the loan referenced in B is underwater the moment its written.

How does the equity cushion help A? It helps the bank and CMHC (by not having to carry his mortgage on their books), but A?

Good question; a good starting point is that Prime is what is allowed to be taken onto a bank's balance sheet without being insured. Although that brings up the question of whether bank regulation in Canada is prudent or not. I think we'll look back, 10-20 years from now, and realize that lowering the downpayment requirement from 25% to 20% was a monumental mistake, and the opposite should have occurred, downpayments should have been raised from 25% to 30% instead.

The problem is that policymakers put the cart before the horse. They see house prices rising, so what do they do? They make it EASIER to borrow with lower/similar payments. Look at how we had 40 year amortizations for a short while. They seem to fail to realize that those measures, instead of making it easier for people to afford houses, simply lead buyers to take on more debt and lead to a windfall for sellers.

Hell, 13 years ago, it was 25% down for no-insurance, 10% down for normal CMHC, and 5% down for first-time home owners. Now it's 5% down for Tom, Dick and Harry Speculator... and they can do funky cashback schemes to go below that.

The problem now is - how do you get a soft landing? Way way way too many people were tricked by the real estate industry into buying silly overpriced properties on giant mortgages, and they'll scream bloody murder if they end up losing huge money they didn't even have...

[pitz]

The problem now is - how do you get a soft landing?


The best hope, IMHO, for a soft landing, is a skyrocketing in natural resource prices. There's lots of people (ie: me) who would be glad to pay current prices, if the TSX went up into the 30-40k range (where it should be, given the historical relationship between it and house prices).

Its a fairly unusual situation for the net yield on housing to be less than that of the stock market in a significant fashion. If the TSX earns 1000 a year, at an index level of 11,000, that's 9%. Housing is currently yielding roughly 3.5%. If the stock market went up enough such that it only yielded 3.5%, and housing was at 3.5%, then I'd gladly exchange some of my TSX investment, for some housing.


Way way way too many people were tricked by the real estate industry into buying silly overpriced properties on giant mortgages, and they'll scream bloody murder if they end up losing huge money they didn't even have...

Yeah. People think that they can borrow and 'make equity', equity being, something they can spend. But they forget where this equity comes from. Right now, its coming from banks and lenders, who are inducing homeowners with the opiate of cheap credit, to get them hooked. But like any good crack dealer, once they're completely and utterly hooked, the cost of the supply will increase.

[skyline518]

wonderful thread and discussion. While I am browsing RFD to try and forget about cramming the coming FRM exam, After reading some key risk terms such as prob. of default, collateral quality, and etc.. I realized that risk management will haunt me for life even outside of work..... :(

[GonePostal]

Exxagerated. The only 'investors' who are going through CMHC are the wannabees who do not have high net worth, and are seriously undercapitalized. This is the same crowd that was out there buying Nortel stock, on 30% margin, at the height of the tech stock bubble.

Wrong again. Some of the most wealthy people I know are utilizing CMHC. This was especially true 6-12 months ago when getting a mortgage on a multi-family property was almost impossible. CMHC was one of the only lenders playing ball.
Again I _KNOW_ of investors utilizing CMHC not because they have to but because it increases ROI. They have a high net worth but because the numbers are better they go CMHC.

Another example of passing off opinion as fact. I am not saying every investor that uses CMHC is like this. But your assertion that the _ONLY_ investors that use CMHC are speculators and idiots.


This crowd is the intended (and perhaps appropriate) users of CMHC insurance. The numbers of these professionals do not increase significantly year over year, yet CMHC insurance outstanding has skyrocketed. Are Canada's bubble cities suddenly home to gazillions more doctors, lawyers, and rich engineers? Of course not.

The expansion of the dollar figure of CMHC mortgages is another question all together. You asserted several times that CMHC mortgages are subprime and should be equated to the subprime mortgages south of the boarder. This demonstrates a large portion of CMHC users are not equivalent to the ninja loans south of the border.

Also if you have noticed the market activity is been driving mostly buy new buyers. New buyers are more likely to use CMHC, so that would account for some of the increase in lending from the CMHC.


The US credit card industry is doing it right now. Esp. Citigroup, which is raising rates on even its most creditworthy customers' cards from <10%, to 30% in many instances. Why? Because they want the balances paid off, and to be out of the business. Once the downturn really starts get rolling in Canada, look for similar behaviour from the banks here.

USA != Canada. Their financial industry is not regulated (for all intents and purposes). We are far more regulated then south of the border. Again believe what you want but this not fact.


I disagree; the government would not, and practically, cannot force a bank to lend on terms and conditions it does not agree with. We don't live in communism, and there will be no government men marching into banks forcing bankers to give people cheap loans. 10,000% is hyperbole, but even 10% would easily extract all of the equity borrowers have stolen from banks and lenders over the years, back into the hands of the banks and lenders who rightfully own it.

The government can't tell banks what to do. But they can definitely influence their decisions. It's been demonstrated time after time.

Another point to show how absurd your statement is. Raising interest rates to a level where borrowers can't afford would be good for no one. The banks wouldn't recoup "the equity that have been stolen from the banks". The massive foreclosures would just drive asset prices down and make homes unsaleable just like they you see in places like Las Vegas, Phoenix, and Miami.

Decisions don't happen in a vaccum.


If we want to start talking about the statistical angle, how many sigmas from the mean has the annual appreciation been in the past decade across Canada? 5? 6? Juxtaposing normalacy, onto what essentially has been a past decade of extreme abnormality, is just silly.


That really doesn't matter, don't change the focal point.
The data doesn't just span the last decade or the last 3. It dates back 50-60's so we have had many recessions since then with all kinds of economic environments. And it shows that a direct indicator for bankruptcy and foreclosure is not interest rates. It is equity in their property.


Even Fannie Mae MBS don't have a market in the USA anymore, and none of those have sub-prime loans in them (Fannie Mae only dealt with conforming (ie: <$417k loans, >20% downpayment, etc.). The securitization process in Canada, yes, as you point out, is stronger and more stable. And bond holders in Canada will not suffer losses because of the NHA guarantee (hopefully preventing a run on them). That just means that the Canadian banking system won't be hit as hard when the downturn in these assets finally arrives.

The bond holders are not secured against risk. CMHC only backs the mortgage to the lender. If the underlying assets dry up bond holders are not insured.
I'm just pointing out that your previous assertions in other threads that the NHA MBS program is some boogey man is not that. It's actually pretty predictable and transparent. There is nothing to be scared of.


I have not made up any definition whatsoever, but I see a few people in this thread who seem to have an aversion to the term 'subprime' being used, even though, it is quite a correct term to use.
It is not the correct term to be used. Because CMHC loans are not sub prime. I know a few people in the finance industry that deal with risk assessment and they all say that they wouldn't use the term sub-prime to describe CMHC mortgages.

[onlineharvest]

Wrong again. Some of the most wealthy people I know are utilizing CMHC. This was especially true 6-12 months ago when getting a mortgage on a multi-family property was almost impossible. CMHC was one of the only lenders playing ball.
Again I _KNOW_ of investors utilizing CMHC not because they have to but because it increases ROI. They have a high net worth but because the numbers are better they go CMHC.

Do you happen to know the % of people who use CMHC because they have to (not enough funds to cover 20%) and those who choose not to?

[p51dray]

The expansion of the dollar figure of CMHC mortgages is another question all together. You asserted several times that CMHC mortgages are subprime and should be equated to the subprime mortgages south of the boarder. This demonstrates a large portion of CMHC users are not equivalent to the ninja loans south of the border.

...

It is not the correct term to be used. Because CMHC loans are not sub prime. I know a few people in the finance industry that deal with risk assessment and they all say that they wouldn't use the term sub-prime to describe CMHC mortgages.


Are you at least willing to concede that borrowers who needs CMHC insurance have a higher probability of default?


Also if you have noticed the market activity is been driving mostly buy new buyers. New buyers are more likely to use CMHC, so that would account for some of the increase in lending from the CMHC.


Exactly; this is not a good thing.


USA != Canada. Their financial industry is not regulated (for all intents and purposes). We are far more regulated then south of the border. Again believe what you want but this not fact.


This is simply not true and it is Jim Flaherty's propaganda; anyone who have worked with regulators from both side of the border would know this. US financial regulations are MUCH more stringent and by-the-book while OSFI's are a lot more principles based (allows for interpretation). The Canadian system places a lot of blind trust on the banks to do the right thing and to minimize risks. IMHO it's more of a cultural issue. There tends to be much more greed south of the border and their regulators tries to curb it with lots of black and white rules, forcing US bankers to come up with creative things like CDS to increase ROI. The huge amount of opinions (50+ states) and lobbyists makes new regulations slow and difficult to implement so the problem blows up, leaving taxpayers to pick up the mess. Again, IMHO, I think the same recklessness is happening in Canada. You see the fundamental problem is the same: you can only push so much future consumptions to the present. The more you push the more risky it is and eventually it will tip.


The government can't tell banks what to do. But they can definitely influence their decisions. It's been demonstrated time after time.


Haha right. It works the other way around too. Don't like the current seg fund capital requirements? Head over to OSFI and demand them to change it--and they did.


Another point to show how absurd your statement is. Raising interest rates to a level where borrowers can't afford would be good for no one. The banks wouldn't recoup "the equity that have been stolen from the banks". The massive foreclosures would just drive asset prices down and make homes unsaleable just like they you see in places like Las Vegas, Phoenix, and Miami.

Decisions don't happen in a vaccum.


It's about equilibrium. Who is to say that the banks would have recouped more by holding their rates steady while the deck of card falls?


That really doesn't matter, don't change the focal point.
The data doesn't just span the last decade or the last 3. It dates back 50-60's so we have had many recessions since then with all kinds of economic environments. And it shows that a direct indicator for bankruptcy and foreclosure is not interest rates. It is equity in their property.


This is the "this time it is different" argument. You might be right and no one can tell what the future will be like, but at least the historical numbers are on our side.


The bond holders are not secured against risk. CMHC only backs the mortgage to the lender. If the underlying assets dry up bond holders are not insured.
I'm just pointing out that your previous assertions in other threads that the NHA MBS program is some boogey man is not that. It's actually pretty predictable and transparent. There is nothing to be scared of.


Uh you do know that CMHC guarantees to the investor payment of principal and interest of all NHA MBS's (source (http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/mobase_001.cfm))? So TD writes a CMHC backed mortgage. CMHC packages a whole bunch of this stuff into a MBS. Royal buys the the MBS. Win-win for them and the only person at risk is the taxpayer! Hooray, lend away!

[ferkel]

The Canadian Real Estate Market crashed BIG TIME in the 1990's .

Maybe a similar crash might come soon . Usually history repeats itself every 20 years or so .

http://www.canadareic.com/content/view/285/1/

Shhhhh!!! everyone here thinks it won't happen again :cheesygri

[skyline518]

I dont know why it is so important for some to define the meaning or application of the term subprime.
If there are only two types of borrowers, ones capable or willing to put down 20% vs otherwise. Which group would be more "prime" or less risky from a lender's perspective?
Why would CMHC be required if there are not perceived riskier?

The way I see it, its all about protecting the lenders' interests and preventing the domino effect in the event that the bubble bust and the collateral values decreased dramatically. But then, how much potential loss could CMHC absorb is another story.

[laptop-tech]

Yawn....

The bubble is about to burst since I was born. Yet, I only see prices going up, over the long run.

There was a guy on another forum (cant remember but I think it was buildinghomes) saying that houses would drop 50%-60%... since the beginning of the financial crisis last year he was posting this every day. There are people that truly believe this stuff.

Im not a realtor, but no matter what anyone says and has said in the past 8 years, I only see prices increasing. Yes I understand we CANNOT sustain that forever, but predictions that house prices will drop 50% are just jokes.

5 years ago I bought a townhome, and sold 1 year later for 40% more. Using the extra 40%, I bought another town which I just sold 3 months ago for a profit of 30% based on purchase price. Now I bought a bigger house (currently being built) and yet there was a waiting list to get houses in that development... $500k houses.

A few weeks ago there was a new release of townhomes in Oakville and my wife could not believe the cars lined up along Dundas St, waiting for the sales centre to open. Other Sundial sales centre in Burlington was so busy they did not even answer the phone.. I dropped by and it looked like boxing day at Futureshop, with lines inside with people holding their deposit cheques, waiting for their turn to buy a house.

Recession? Where???


yeah...no kidding lol....in my area...semis area being listed for $380K - $410K range near 9th line/ eglinton area of mississauga .....

I for one bought one almost 5 years ago and paid way less. But yeah a street or two down for me has detached 2500 sq ft houses being listed for 800K lol....
bubble will bust soon I think

My house on Stardust (first street north of Eglinton) was sold 3 months ago. It was a townhome, 1600 sq ft.... $360k. Bidding war on the last day.

[Germack]

5 years ago I bought a townhome, and sold 1 year later for 40% more. Using the extra 40%, I bought another town which I just sold 3 months ago for a profit of 30% based on purchase price. Now I bought a bigger house (currently being built) and yet there was a waiting list to get houses in that development... $500k houses..

Did you just make these number up? I smell a lot of BS

[pitz]

I dont know why it is so important for some to define the meaning or application of the term subprime.


Because certain posters want to claim that Canada does not have a significant proportion of subprime loans compared to the United States, and hence, has a structurally more stable real estate market. My argument is simply that, if you conform the US definition of 'subprime' with the Canadian market, there is very little difference in the types of loans being issued, and that, the environment here is just as bad, if not worse.


If there are only two types of borrowers, ones capable or willing to put down 20% vs otherwise. Which group would be more "prime" or less risky from a lender's perspective?


The 20% downpayment crowd, although once a borrower buys CMHC insurance, their loan is less risky than the one with the 20% downpayment, from the point of view of a private (non-CMHC) banker, and hence, should attract the lowest interest rate possible.


Why would CMHC be required if there are not perceived riskier?


Exactly!


The way I see it, its all about protecting the lenders' interests and preventing the domino effect in the event that the bubble bust and the collateral values decreased dramatically. But then, how much potential loss could CMHC absorb is another story.

Theoretically, unlimited. Although, there is a risk of a systemic meltdown in the Canadian economy if this gets too out of hand, since the government would need to borrow massive amounts of cash to make good on the insurance claims, at a time when the (primarily real estate-driven) economy is going down the tubes, leading to higher interest rates, leading to a continued meltdown in real estate.

Banks, meanwhile, will be paid out at 100 cents on the dollar, so they'll have cash available (from the defaulted mortgages) which they can invest in higher-yielding debt.

I believe that banks may actually actively encourage CMHC-insured mortgaged people to default, because at least, the bank gets paid immediately, and can re-deploy the cash proceeds towards something else at much higher interest rates.

[pitz]

Did you just make these number up? I smell a lot of BS

Even if he did...lots of people did very well flipping tech stock shares too. But they all went to zero except for a few high-end names (which still haven't fully recovered a decade later!).

Housing won't go to zero, but it will return to a level that reflects its earning potential, and more importantly, the ability of appropriately capitalized people to afford it.

[laptop-tech]

Did you just make these number up? I smell a lot of BS

Bought the first town for $192K (Canyon Oak model - Mattamy Homes - Upper Glen Abbey West - Oakville) and sold it for $269K. Used the money to buy another town for $280K (1640 model - RegalCrest homes - Erin Mills - Mississauga) and just sold it for $360K.

Send me $10.00 through Paypal and I will provide you the MLS numbers and addresses.

[VivienM]

Yawn....

The bubble is about to burst since I was born. Yet, I only see prices going up, over the long run.

There was a guy on another forum (cant remember but I think it was buildinghomes) saying that houses would drop 50%-60%... since the beginning of the financial crisis last year he was posting this every day. There are people that truly believe this stuff.

Im not a realtor, but no matter what anyone says and has said in the past 8 years, I only see prices increasing. Yes I understand we CANNOT sustain that forever, but predictions that house prices will drop 50% are just jokes.


See, you seem to be ignoring the role of interest rates and cheap debt in this.

The ONLY reason the Canadian real estate market went nuts this year instead of crashing is that cheap debt + short-sighted idiots + BS from the real estate industry and the media about it being a great time to buy fuelled another round of insanity.

Unless Mr. Carney and friends keep interest rates low forever, the rates will rise, and that'll cool off any price appreciation. In the long term, housing can't cost more than what reasonable buyers can afford!

Of course, if you're a seller, you don't care. You get cold hard cash, and some poor sucker gets a GIANT mortgage... and yet another poor sucker (me) gets a sucky interest rate on his savings because Mr. Carney and friends are having me subsidize the value of YOUR real estate.

[pitz]

See, you seem to be ignoring the role of interest rates and cheap debt in this.


Yeah no kidding. Let's take a typical Calgary house, $500k (only worth $200k). If the bank writes a $200k loan against it, they only get to collect, at best, maybe $200k of interest over its lifetime.

If the bank can inflate the price of that house to $500k, then they get to collect at least $500k in interest against it.

When prices crash down to $200k again -- the $500k of debt remains, and the bank basically gets to help itself to all of the 'equity' that people 'think' that they've 'created' in their houses, simply by living in them ('equity' that's been stolen from the banks and savers).

Pretty nifty game, eh? The major problem is that it is going to absolutely decimate baby boomers (who, demographically, aren't entitled to be wealthy anyways) who will not be able to go to their bosses and demand a raise to make up for all the debt they're in. Yet this same demographic actually has some equity, so just declaring bankruptcy isn't an option either.




The ONLY reason the Canadian real estate market went nuts this year instead of crashing is that cheap debt + short-sighted idiots + BS from the real estate industry and the media about it being a great time to buy fuelled another round of insanity.


Yup, and 20-something and 30-something-year-olds who are trying to follow in their older relatives' footsteps. And 'specuvestors'. I mean, re-inforce a pattern strongly enough into the minds of people, and they'll eventually take it as gospel. Like the H1N1 hysteria! People are fundamentally sheep, and can't think for themselves. Throw in delusions of riches, and you got yourself a real toxic combination. Average Toronto homeowner has made more $$$ per year, after-tax, after-expenses, on real estate in the past few years, than they made at working at a real job. Since houses don't actually produce anything (other than shelter), that's just ludicrous.

[laptop-tech]

See, you seem to be ignoring the role of interest rates and cheap debt in this.

The ONLY reason the Canadian real estate market went nuts this year instead of crashing is that cheap debt + short-sighted idiots + BS from the real estate industry and the media about it being a great time to buy fuelled another round of insanity.

Unless Mr. Carney and friends keep interest rates low forever, the rates will rise, and that'll cool off any price appreciation. In the long term, housing can't cost more than what reasonable buyers can afford!

Of course, if you're a seller, you don't care. You get cold hard cash, and some poor sucker gets a GIANT mortgage... and yet another poor sucker (me) gets a sucky interest rate on his savings because Mr. Carney and friends are having me subsidize the value of YOUR real estate.

I never said the market makes sense. I said that I keep hearing the market will crash in XX months since I was born, yet prices keep going up. Period. How long it will last? NO ONE knows.

But one thing is for sure: My ignorance made me NOT fear buying a property (or two or three) despite the fear mongering, and I made more money than I would otherwise, should I stay quite waiting for the market to crash. My bank account does not lie to me.

I laugh really hard when I visit a variety of forums and hear some "experts" predict the market will crash next month, so some folks keep waiting for the "buyer's market" to open up for them.

[GonePostal]

Are you at least willing to concede that borrowers who needs CMHC insurance have a higher probability of default?

Yes I can definitely agree to that. As an aggregate whole CMHC insured mortgages are more likely to default due to borrowers having less equity in the deal. If home prices move down it is much easier for them to be upside down on their mortgage. And having negative equity in your home is a much better indicator of likely hood of foreclosure/bankruptcy.



Exactly; this is not a good thing.


Not a particularly bad thing either.


This is simply not true and it is Jim Flaherty's propaganda; anyone who have worked with regulators from both side of the border would know this. US financial regulations are MUCH more stringent and by-the-book while OSFI's are a lot more principles based (allows for interpretation). The Canadian system places a lot of blind trust on the banks to do the right thing and to minimize risks. IMHO it's more of a cultural issue. There tends to be much more greed south of the border and their regulators tries to curb it with lots of black and white rules, forcing US bankers to come up with creative things like CDS to increase ROI. The huge amount of opinions (50+ states) and lobbyists makes new regulations slow and difficult to implement so the problem blows up, leaving taxpayers to pick up the mess. Again, IMHO, I think the same recklessness is happening in Canada. You see the fundamental problem is the same: you can only push so much future consumptions to the present. The more you push the more risky it is and eventually it will tip.

It's not propaganda. There is a billion reasons why we are not the same.
Just one case in point is Basel/Basel II compliance.

Just some food for thought:
http://www.financialpost.com/story.html?id=2083313

"The main reason banks Canadian banks didn't get tangled up in the subprime mess is because of a tougher regulatory environment and a more cautious business culture. Some analysts say banks here also enjoy a protected, less competitive environment that leaves them less inclined to take risks."

Haha right. It works the other way around too. Don't like the current seg fund capital requirements? Head over to OSFI and demand them to change it--and they did.



It's about equilibrium. Who is to say that the banks would have recouped more by holding their rates steady while the deck of card falls?

Because it was demonstrated in the states that large devaluations of home prices and massive foreclosures are bad for banks. Raising interest levels to unsustainable levels to "reign in" their debt is counter-productive.


This is the "this time it is different" argument. You might be right and no one can tell what the future will be like, but at least the historical numbers are on our side.


I'm actually saying the exact opposite. I'm not saying this time is different. I am saying that statistics show that borrowers are most likely to default in the first 2 years of a mortgage by a LARGE margin. So the argument that in 5 years people who bought now are going to go into foreclosure because interest rates will be much higher then today, can not be stated as fact. Higher interest rates don't have a direct relationship to foreclosures. While the amount of equity someone has in their home does.



Uh you do know that CMHC guarantees to the investor payment of principal and interest of all NHA MBS's (source (http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/mobase_001.cfm))? So TD writes a CMHC backed mortgage. CMHC packages a whole bunch of this stuff into a MBS. Royal buys the the MBS. Win-win for them and the only person at risk is the taxpayer! Hooray, lend away!
I was inaccurate in my wording. The principle is secured via the insurance that is purchased. Your rate of return isn't since the distributions are in form of principle and interest.

[pitz]

I never said the market makes sense. I said that I keep hearing the market will crash in XX months since I was born, yet prices keep going up. Period. How long it will last? NO ONE knows.


Exactly, thats the 'problem'. An entire generation has been conditioned to only expect higher prices in housing. Nobody my age (late 20s, early 30s) has ever seen prices fall.

I laugh really hard when I visit a variety of forums and hear some "experts" predict the market will crash next month, so some folks keep waiting for the "buyer's market" to open up for them.

Sooner or later, they'll be right. The utmost in denial, is a sign of the top of a manic phase.

[pitz]

I was inaccurate in my wording. The principle is secured via the insurance that is purchased. Your rate of return isn't since the distributions are in form of principle and interest.

Okay. So let's say that I buy a NHA MBS. Its filled with CMHC-insured mortgages, and 50% of them go to h*ll, because of higher interest rates.

Do the MBS suddenly start paying me out a lot more cash immediately, because the CMHC insurance kicks-in and pays the defaulted mortgages?

AFAIK, the answer is "yes".

So essentially, let's say interest rates go up to 10%, and my $1000 worth of guaranteed MBS (heh, I'm a poor banker), bought at a quoted rate of 5%, experiences 100% default. I open the mail, and in the mail is a cheque for $1000, right? (plus accrued interest)

I then lend out the $1000 I receive @ 10%, and I'm making 10%. I didn't suffer *any* interest rate risk on the security, because it was forced into default.

This is a circumstance where the bank actually would *want* borrowers to default. Because if they default, the bank gets to collect on the guarantee, and seek out high-yielding investments. Whereas, if they don't default, the bank is 'stuck' only collecting 5% interest for the remainder of the term of the mortgage.

[Vasyl]

I have not reached this level of sophistication, but I find amazing that two professional working people as my wife and I could not buy anything semi-decent in Richmond Hill for 500K. I am wondering who could afford to buy the houses on the market currently. However, I think, this situation could not go forever. I am waiting for the market to cool down or I will rent forever. Sad, but true.

[laptop-tech]

I have not reached this level of sophistication, but I find amazing that two professional working people as my wife and I could not buy anything semi-decent in Richmond Hill for 500K. I am wondering who could afford to buy the houses on the market currently. However, I think, this situation could not go forever. I am waiting for the market to cool down or I will rent forever. Sad, but true.

It does not have to be "sad, but true". Anyone looking to buy a property to flip in a short time is indeed at a great risk and must understand that.

You are willing to rent "forever", while you wait for the market to come down. In the meantime it may keep going up (yes - I said that) or not... If you buy that $500K property and the market crashes in 1 year, lets be very pessimistic and assume it might drop in value so bad that you cant get $300k for it. That would be a terrible moment to sell it, HOWEVER if you keep living on it and paying your overpriced mortgage, chances are that 5-10 years later the property will have regained its value. Even when the RE market crashed bad in the 80's, eventually property values went UP again many years later, so those who waited patiently were awarded with cash.
But if you keep waiting for the big market crash next month, it might take a big portion of your income in rent, which you will NEVER recover, no matter what direction the RE market moves. If you buy the overpriced property now and DONT need to sell it anytime soon, you WILL eventually build equity, whether it takes 6 months or 15 years.

The point in my posts is not to try and convince people to blindly buy whatever they see in front of them, in a silly belief that prices will keep going up straight, forever. What Im trying to do is explain that if you understand the fluctuations in the market and can afford to weather them out, you will eventually make money. This is how it has been for the past 500 years.

Im aware that my new house might be overpriced, but I still believe that it will go up in value another 20% within the first year (yes - I said that). If the market finally crashes next summer and my house is suddenly worth $200K less, I'll just keep living there and will patiently wait for the recovery.

JMHO.

[Buggy166]

renting as you forget also brings a huge amount of beneifts to counter the deficits vs owning.

- move any time anywhere when you feel like it with no issues or having to sell anything

- new job? move across the street...2 years later...again...etc
- dont have to pay hydro/water/etc included in rent
- rent is still lower than any sort of martgage vailable for any sort of housing..rent is say $1000 all included for a 1 bedroom...assuming mortgage was all included 1 grand...add condo maintenance fees $350, add hydro and water bills...$1500 ez...and the $500 just to be "owner". Also add property tax.
- and thats another thing..no tax on rent
- you can rent or not rent as many parking spots as you'd like...personal choice. you cant say to a condo owner "i want this but no parking"...not gonna happen unless you get lucky.
- you can stop paying rent if you so wish and move back in with your faimly for a short term while (assuming you're still a youngin)...if you default on your mortgage you quickly come to the realization you were actually renting a very expensive place instead of owning one all of those years


buying a place can be great, but so is renting, especially at the start when one doesnt know where he might end up working,living and so forth. (with no family,kids,etc to tie them down)

in short i dont forsee a crash but current prices dont make sense. its like adding 2+2 and getting a 5.

[Impossibles]

Pitz, don't you get tired of beating this drum? You bring up the same points over and over and over in every thread that comes up on the topic.

We get it, you hate CHMC.

[Vasyl]

Pitz, don't you get tired of beating this drum? You bring up the same points over and over and over in every thread that comes up on the topic.

We get it, you hate CHMC.

I hate them too. To pay for the insurance product which is not of any benefit for the insured, it defies all logic. I am not looking for any quick flip. Moreover, I do not even treat my future house as an investment; I am talking about a quality of life. My only concern is whether I can afford this house now (I can afford a 800K house only if I stop paying all my bills) and will be able to afford after 5 years when the interest rate goes up. I would rather pay a lower principle with higher interest rates than pay a bigger principle with lower interest rate.

[kashirin]

It does not have to be "sad, but true". Anyone looking to buy a property to flip in a short time is indeed at a great risk and must understand that.

You are willing to rent "forever", while you wait for the market to come down. In the meantime it may keep going up (yes - I said that) or not... If you buy that $500K property and the market crashes in 1 year, lets be very pessimistic and assume it might drop in value so bad that you cant get $300k for it. That would be a terrible moment to sell it, HOWEVER if you keep living on it and paying your overpriced mortgage, chances are that 5-10 years later the property will have regained its value. Even when the RE market crashed bad in the 80's, eventually property values went UP again many years later, so those who waited patiently were awarded with cash.
But if you keep waiting for the big market crash next month, it might take a big portion of your income in rent, which you will NEVER recover, no matter what direction the RE market moves. If you buy the overpriced property now and DONT need to sell it anytime soon, you WILL eventually build equity, whether it takes 6 months or 15 years.

The point in my posts is not to try and convince people to blindly buy whatever they see in front of them, in a silly belief that prices will keep going up straight, forever. What Im trying to do is explain that if you understand the fluctuations in the market and can afford to weather them out, you will eventually make money. This is how it has been for the past 500 years.

Im aware that my new house might be overpriced, but I still believe that it will go up in value another 20% within the first year (yes - I said that). If the market finally crashes next summer and my house is suddenly worth $200K less, I'll just keep living there and will patiently wait for the recovery.

JMHO.

what you say is interesting but not true
Let's see what happened in Japan. Their housing prices has never recovered and now 2-3 times below in nominal terms than in 1990

and this is despite their zero rates. Of course, as a buyer you can't be pessimistic so you think your house will appreciate 20 % but have a dream of 100% appreciation every year or better every month

But your 20% appreciation expectation is just another sign of the last stages of the huge bubble. I don't see how it can continue for more than 6 months

but even if it continues 2 or 3 years - I say anything might happen but chances are that even if you get your 20% you won't lock your profit as your greed will ask for more

and then bubble will just pop

[coghlan]

The point in my posts is not to try and convince people to blindly buy whatever they see in front of them, in a silly belief that prices will keep going up straight, forever. What Im trying to do is explain that if you understand the fluctuations in the market and can afford to weather them out, you will eventually make money. This is how it has been for the past 500 years.
JMHO.
Well, in the US, the lid really came off housing prices around 2001. See http://en.wikipedia.org/wiki/File:Case-shiller-index-values.jpg

They don't always go up and no one has a 500 year investment horizon.

I think it's a good idea to:

Remember Buffet's 1st rule of investing: never lose money
Try to forecast the real estate climate for where they live
Keep in mind that interest rates have been dropping for 27 years, and are due to turn around


You're probably going to do okay if you buy in an area that people will want to live in for the predictable future. I have a friend in San Diego who tells me there are just as many BMWs and Mercedes around as ever, plus people still buy theirs kids a new car on their 16th birthday. Not surprisingly, house prices have held up in San Diego. The same is not true everywhere in the US.

[pitz]

You're probably going to do okay if you buy in an area that people will want to live in for the predictable future.


But that characteristic is already priced into those areas.


I have a friend in San Diego who tells me there are just as many BMWs and Mercedes around as ever, plus people still buy theirs kids a new car on their 16th birthday. Not surprisingly, house prices have held up in San Diego. The same is not true everywhere in the US.

People who cashed out their 'home equity' in the past few years and bought Mercedes and BMW-brand vehicles -- what exactly do you expect them to do? Sell their vehicles at huge losses, and buy Chevys to replace them? Of course not. The question is, can they afford the next car?

And as for buying 16-year-olds a new car on their 16th birthday -- in any city, there are wealthier areas of town, where people do that. Your friend must live in one of those.

[VivienM]

I never said the market makes sense. I said that I keep hearing the market will crash in XX months since I was born, yet prices keep going up. Period. How long it will last? NO ONE knows.

But one thing is for sure: My ignorance made me NOT fear buying a property (or two or three) despite the fear mongering, and I made more money than I would otherwise, should I stay quite waiting for the market to crash. My bank account does not lie to me.

When I was in high school well over a decade ago, I had this teacher. He had this friend who made a killing in Bre-X shares. So, since his Bre-X shares had done so well, this dude mortgaged his house and bought more. Certainly all old dinosaurs like me and pitz know how this story ends.

A few years later, everybody was swooning about high tech companies, dotcoms, and how much money they made on Nortel, and how much MORE money they'd have made on Nortel if they had gotten in earlier. I think we all know how that story ends as well.

Bottom line, as every securities industry disclaimer will say: past performance is not a guarantee of future returns. In fact, I'd go even further and say: the more something has gone UP in the past, the more likely it is to go DOWN in the future.

The mere fact that the Bank of Canada threw more cheap debt at the housing market fire (which, like fires typically do, reacted in the predictable fashion) doesn't mean that that rule doesn't hold true.

[VivienM]

Yup, and 20-something and 30-something-year-olds who are trying to follow in their older relatives' footsteps.

I don't think it's just that.

It's worse than that.

I think that condos have basically turned into the next 'status symbol' among young professionals.

In the old days, the stereotype was of some single young professional dude getting a fancy flashy car in hope that for whatever reason, the car would attract women...
That doesn't seem to happen anymore (which is no doubt why German automakers like, say, Audi are making their entry-level models more targetted towards older buyers). Now, the 'expected' 'attractive' thing is for said young professional dude to own his condo... and quite possibly have no car. Hey, not only is the guy not blowing his money on a stupid depreciating hunk of metal that destroys the environment, but he's BUILDING EQUITY! How hot is that?!? Surely a man who is BUILDING EQUITY at 27 knows how to provide for a family!

I'm going to put it to all of you real estate lovers that a 4 year lease on a BMW was a far, far, far less RISKY thing than a 35 year amortization, 5% down (possibly borrowed off a student LOC, either directly or indirectly) mortgage on a generic 1 bedroom condo.
Yes, there's a lot more potential for gain on the real estate deal (no one ever MADE money leasing BMWs), but you could easily lose way more than the $30K or so cost of your BMW lease (not to mention that you did get transportation out of that $30K).

[hagbard]

OP, the answer to your question is NO. Though its pretty amazing its holding on as long as it is (must be driving Garth Turner crazy).

[EugW]

renting as you forget also brings a huge amount of beneifts to counter the deficits vs owning.

- move any time anywhere when you feel like it with no issues or having to sell anything

- new job? move across the street...2 years later...again...etc
- dont have to pay hydro/water/etc included in rent
- rent is still lower than any sort of martgage vailable for any sort of housing..rent is say $1000 all included for a 1 bedroom...assuming mortgage was all included 1 grand...add condo maintenance fees $350, add hydro and water bills...$1500 ez...and the $500 just to be "owner". Also add property tax.
- and thats another thing..no tax on rent
- you can rent or not rent as many parking spots as you'd like...personal choice. you cant say to a condo owner "i want this but no parking"...not gonna happen unless you get lucky.
- you can stop paying rent if you so wish and move back in with your faimly for a short term while (assuming you're still a youngin)...if you default on your mortgage you quickly come to the realization you were actually renting a very expensive place instead of owning one all of those years


buying a place can be great, but so is renting, especially at the start when one doesnt know where he might end up working,living and so forth. (with no family,kids,etc to tie them down)

in short i dont forsee a crash but current prices dont make sense. its like adding 2+2 and getting a 5.
Renting has a LOT of advantages. That's obvious, but nonetheless, some hate renting, myself included. ie. Owning has tons of advantages too... which is why lots of people buy.

People don't buy homes because don't understand they can rent. It's because they want to own a home.


Yes, there's a lot more potential for gain on the real estate deal (no one ever MADE money leasing BMWs), but you could easily lose way more than the $30K or so cost of your BMW lease (not to mention that you did get transportation out of that $30K).
First of all, that's a car comparison, and everyone knows that internet auto analogies always suck. Anyways, you're talking absolute dollar value. How about percentage?

I would hazard to guess your initial investment for 10 BMWs ($45000 each) would be worth a lot less in 5 years as compared to a $450000 house. ;)

[VivienM]

First of all, that's a car comparison, and everyone knows that internet auto analogies always suck. Anyways, you're talking absolute dollar value. How about percentage?

I would hazard to guess your initial investment for 10 BMWs ($45000 each) would be worth a lot less in 5 years as compared to a $450000 house. ;)

Percentage? When you do something stupid, you don't lose a percentage, you lose cold hard cash! With zeros at the end of the amount! Lots and lots of zeros.

What I'm saying is this:
a) old 'values'. Lease BMW for 4 years. Total cost about $30K. Assume you would have gotten a cheaper car that would have cost $10K over those 4 years otherwise. Total cost: $20K. Opportunity for gain, zero. Opportunity for further loss, zero.

b) new 'values'. Buy highly leveraged $300K condo with 5% fake down payment [1]. Roll in taxes, CMHC and whatever into your mortgage amount, so assume you're borrowing about $300K at the end of the day.
Now, assume that the market drops 10%. Sell condo because your now-wife-who-was-so-impressed-with-your-equity-building-really-really-wants-a-bigger-house-now for $270K, minus 5% realtor commission ($13.5K) and other stuff. Now, you've lost $45K!, not counting your 'fake' down payment, so that's really $60K.
(Obviously, I've made a few more assumptions in this example, but hey)

That's with a 10% drop. Welcome to the world of leveraged real estate investing. :)

Compare:
a) Old values. Guy gets fancy car. Rents. Attracts girl. Marries girl. Buys house in suburbs where he and wife stay for 25 years.
b) New values. Guy buys condo. Attracts girl. Marries girl. Sells condo for either a huge profit or huge loss, then buys some other place where he and wife stay for a couple of years, hoping to sell that for a further profit.
While b) has worked wonders in the past, the day of reckoning will come eventually. Tell me, when did we all become real estate speculators???

[1] I'm sorry, but if you owe $60K in student debt, and instead of paying back $15K of that debt, you throw that $15K as a mortgage down payment, that's not a real down payment.

[EugW]

^^^ Heh. I thought you might have a long post justifying your previous post. However, you're missing option three. If you're one that truly thinks the market is going to drop, but you still want to consider getting a home later, the smart thing to do might be neither a nor b. Just buy a sensible inexpensive car, and put the rest of the money in a TFSA or RRSP or even just in the bank.

Contrary to popular belief, a lot of people actually do this.

[AllWheelDrift]

^^^ Heh. I thought you might have a long post justifying your previous post. However, you're missing option three. If you're one that truly thinks the market is going to drop, but you still want to consider getting a home later, the smart thing to do might be neither a nor b. Just buy a sensible inexpensive car, and put the rest of the money in a TFSA or RRSP or even just in the bank.

Contrary to popular belief, a lot of people actually do this.
a) and b) were the old and new ways of impressing women, not suggestions of what to do. Renting while driving a sensible, inexpensive car hasn't historically been a good way to get laid. Then again, you may be able to lie about owning a place you actually rent.

[VivienM]

a) and b) were the old and new ways of impressing women, not suggestions of what to do. Renting while driving a sensible, inexpensive car hasn't historically been a good way to get laid. Then again, you may be able to lie about owning a place you actually rent.

...and while that may great if you just want to get laid, I suspect if things get more serious, she'll catch on to your lying...

[AllWheelDrift]

...and while that may great if you just want to get laid, I suspect if things get more serious, she'll catch on to your lying...
At that point you just need to convince her it's better to be lying about owning than to have negative equity. :lol:

But really, do you really want to get serious with someone that is dating you because of your condo? With the right person it's not about impressing them with stuff you own.

[Vasyl]

a) and b) were the old and new ways of impressing women, not suggestions of what to do. Renting while driving a sensible, inexpensive car hasn't historically been a good way to get laid. Then again, you may be able to lie about owning a place you actually rent.

Very surprising twist in the real estate discussions.:cheesygri

[Buggy166]

to chime in on the A and B options...i think it also depends where you are in your life. by those 2 descriptions we're talking guys in their mid to late 20's...possibly early 30's.

then there's another thing..do you have stabale income (eg 60k a year every year with very little to no possible way to get fired) or do you have contract work that can spike both up and down (50k , then 46, then 87, etc) and also breaks in between.

another thing is wether its worth settling. stable job? if you're happy..its a good option...but depends on what you consider good prices.

unstable job...maybe you'll work in london in 6 months for x amount of months/years and come back or go to tokyo after...why would you bother buying real estate at inflated prices? automatically no.

Also to consider is the car option...do you need it or want it...and whats more important to you...buying and settling down in a condo/house or having a nice entry level lux car you can pay off in 2-3 years max while keeping yourself open for work no matter where it may be.

option C as stated, and perhaps the smartest (but not necessary the most satisfactory depending on a personal lifestyle) is buy a cheap but not necessarily rust bucket car if you NEED it and pocket your cash for future savings/investments.

as for attracting women with a,b or c...a level headed person i would expect to consider your situation from YOUR point of view:

1. buy house, no car or ****** car, "safe" job
2. rent, nice car, jobs all over the place or same place but not entirely stable although it could provice income more spikes since contracts usually pay more due to lack of security and benefits
3. rent, okay car, saving for the future (family or house or whatever), potentiall stable income or even non stable.

my guessing is most posters here are more interested in impressing themselves through smart moves more than any chicks in general with stupid financial decisions.

in the end it comes down to an individual's priorities both now and in the future.

[speedyforme]

^ I chose #1 - 93 Corolla that runs well and the outer body is still good. :cheesygri

[EugW]

a) and b) were the old and new ways of impressing women, not suggestions of what to do. Renting while driving a sensible, inexpensive car hasn't historically been a good way to get laid. Then again, you may be able to lie about owning a place you actually rent.
Wining and dining someone is a heluvalot cheaper than an expensive car or a high cost mortgage.

:)

P.S. Ironically, back in the day, I found these three things tended to get a lot more attention than I might have guessed:

1) My white G3 iBook. I used to get lots of random women out of the blue asking about the thing. I know it was the iBook and not my rugged good looks because as soon as I sold it a few months later and got the PowerBook Titanium (a much, much higher priced laptop I might add), all those random women disappeared. :( I guess the ladies liked the cute white laptop, which was different from all the grey/black monstrosities that were common in the day.

2) My fugly Prius. I bought a 2001 white (a colour I don't like in a car) Prius (a car that has been called ugly and un-peppy by many a car reviewer), and suddenly a whole bunch of people wanted to go for a ride in my car. I even had random women on the highway point to the car and give me the thumbs up. I wanted the Prius, but only got the white because it was a cheaper floor model. Either way I was shocked at how much of a girl magnet the thing was back then.

3) My motorcycle. I bought an el cheapo 20 year old motorcycle, and suddenly women wanted to go for a ride with me. The thing was an underpowered POS which I bought just to learn on, but nonetheless it was quite popular with the ladies. This was true regardless of education. Even the very well-educated and very well-to-do (but young) friends wanted to go for a ride on it. My older co-workers didn't care for it though.

Ironically, my friends with the BMWs got way less attention. ;) My acquaintance with the $6-digit Acura NSX got some attention from that, but unfortunately, it was typically from those who wanted free bar drinks and $200 dinners. :P Wining and dining someone AND getting a high-priced car is expensive.

[VivienM]

my guessing is most posters here are more interested in impressing themselves through smart moves more than any chicks in general with stupid financial decisions.

Most posters here, sure. Most people out in the real world who are driving up the price of real estate, I'm not so sure. :)

[EugW]

Most posters here, sure. Most people out in the real world who are driving up the price of real estate, I'm not so sure. :)
In all seriousness, I don't think I know of a single person that has ever said to me they bought a condo to impress the opposite sex.

I do know many people that say living in mom's basement isn't conducive to finding a hot date, but that's different.

Moving out of mom's basement doesn't necessarily mean buying a house or condo. People buy houses and condos because they want to own houses or condos, and not rent.

[VivienM]

In all seriousness, I don't think I know of a single person that has ever said to me they bought a condo to impress the opposite sex.

Not directly, but I do think that there is something irrational about condo ownership that is somewhat connected to that... There's just something inherently respectable, it seems, about condo ownership. And the more people own condos, the weirder/poorer/etc those who don't look. Until the crash, of course, but Mr. Carney keeps delaying it.

On the other hand, the 'young guy buying/leasing fancy car to impress the opposite sex' trend of past decades seems to be mostly gone. I do not entirely understand why, except that it seems to have been replaced by real estate investing... (hence the somewhat logical conclusion: if young guys used to get fancy cars to impress the opposite sex, but now spend their money on condos instead, it must be that the opposite sex is more impressed by a condo than a fancy car.)

[muchacho_007]

Birds do that. The male shows the female bird (chicks in the human population) how good his nest is.

[EugW]

OTOH...

FWIW, I had a friend who had a nice condo and a Porsche. He ran into some trouble... and sold the condo. :lol:

[VivienM]

OTOH...

FWIW, I had a friend who had a nice condo and a Porsche. He ran into some trouble... and sold the condo. :lol:

That makes sense! Condo probably went up in value, while the loan/lease on the Porsche was upside down...

[Buggy166]

That makes sense! Condo probably went up in value, while the loan/lease on the Porsche was upside down...


would've done the same.

also i think people who DO spend $50000+ on a car and are not necessarily rich (have salaries in the 50 to 60k range) appreciate the car a lot more and becomes part of their personality, thus having more attachment.

[max88]

On the other hand, the 'young guy buying/leasing fancy car to impress the opposite sex' trend of past decades seems to be mostly gone. I do not entirely understand why, except that it seems to have been replaced by real estate investing... (hence the somewhat logical conclusion: if young guys used to get fancy cars to impress the opposite sex, but now spend their money on condos instead, it must be that the opposite sex is more impressed by a condo than a fancy car.)

A fancy car used to be required to impress and to get out and seek. Now in the Internet age one can seek far without leaving home. Savings of not having a fancy car is now put into improving the nest to impress and to enjoy.

[out of topic] The lower significance of a fancy car may have something to do with auto industry's down trend.

[BananaHunter]

A fancy car used to be required to impress and to get out and seek. Now in the Internet age one can seek far without leaving home. Savings of not having a fancy car is now put into improving the nest to impress and to enjoy.

[out of topic] The lower significance of a fancy car may have something to do with auto industry's down trend.

Man what are you talking about? Internet dating does not work well for men. Meeting people of the opposite sex is godawful over the internet. Men have to deal with fake profiles and trying to attract women who are bombarded with interest. For every female/fake profile there are 50 males/crazies/psychos/perverts. Women have to fear for their safety. In real life, you can seek someone "on par". On the internet, even the fugliest girls can get something decent. You better speak 10 languages, play several instruments, have a 6-pack, look like Tom Cruise, and have lots of money if you want to meet a women that's considered "average" in real life.

On topic...I don't think people are stupid enough to buy a house without some expectation of the interest rate going back up. I wouldn't worry about the market failing just because people can't afford their mortgage payments.

Statistically, Toronto's real estate prices are NOT considered ridiculous when you compare to cities like Hong Kong and New York. When prices are high, it just means there will be more renters and less landlords. More renters make it more attractive for the rich to own properties as income property.

People need a place to live. Prices will go up if housing supply does not meet demand. The fact that lots of people are buying now pushes prices up. But that does not necessarily mean we're merely shifting future sales to the present. People move around, immigrants arrive. Once a house is bought, it will continue to be transferred to one owner to another through resale. Owners are very reluctant to sell their property at a loss. This is actually one of the most basic principal behind why housing prices rarely goes down.

There are zillions of reasons and even when if this thread reaches 100 pages, we probably won't hit all the reasons. When I look at all the factors I'm aware of, I think the housing market is hot now. It'll stay hot for a while. It'll get cooler but it won't crash in the foreseeable future.

[HolyPotato]

I don't think people are stupid enough to buy a house without some expectation of the interest rate going back up.

You have more faith in humanity than I do! :evil:



People need a place to live. Prices will go up if housing supply does not meet demand.

But the need for a place to live can be met by either a rental or an owned place. Why is it that only the owned property has skyrocketed in value?

I hypothesize that it is a combination of:
- cheap money/low interest rates
- relaxing of downpayment requirements
- owning (esp at a young age) became fashionable
- underwear gnomes

I believe the consensus is that the cheap money will not last. Whether it's a sharp spike in mid-2010 or some other scenario, rates have nowhere to go but up.

The negligible down payment (thanks to CMHC) has inflated housing prices by making it easier for anyone to get one -- that effect will probably be somewhat permanent (unless downpayment requirements are raised again). Since it was a discrete event just a few years ago, it also very suddenly increased the pool of buyers. Combined with the fashionability of owning younger, you suddenly had those in their late 20s/early 30s with 10-20% downpayments saved up competing against kids looking to "own their uni res" with nothing down. The system was suddenly flooded with first-time buyers, leading to bidding wars and other silliness. That component of the phenomenon will probably go away as the pent-up demand is used up, and I would expect upward pressure on housing prices to go away.

Likewise the underwear gnome effect of step 1. buy condo, step 2. ???, step 3. profit!! will go away. People got swept along by the rising market, thought they were genius flippers when they made money for no work, and became speculators, picking up multiple units (preconstruction, or a second house to "renovate" and flip). Once the market stops going up, if there is any significant percentage of underwear gnome flippers out there, that will spur the market lower. Especially when combined with higher rates, because many of them paid so much that they can't make money as landlords with rates even moderately higher than today's. It will all depend on how many speculators there are vs. people who actually live in their units.

[pitz]

The negligible down payment (thanks to CMHC) has inflated housing prices by making it easier for anyone to get one -- that effect will probably be somewhat permanent (unless downpayment requirements are raised again). Since it was a discrete event just a few years ago, it also very suddenly increased the pool of buyers. Combined with the fashionability of owning younger, you suddenly had those in their late 20s/early 30s with 10-20% downpayments saved up competing against kids looking to "own their uni res" with nothing down. The system was suddenly flooded with first-time buyers, leading to bidding wars and other silliness. That component of the phenomenon will probably go away as the pent-up demand is used up, and I would expect upward pressure on housing prices to go away.


Yup. And what do those kids who blew their brains out buying condos in college do, when they graduate and can't find jobs? They move back in their their families. Supply comes onto the market. What drove prices higher in the short term, will ultimately drive prices lower in the long term.




Once the market stops going up, if there is any significant percentage of underwear gnome flippers out there, that will spur the market lower. Especially when combined with higher rates, because many of them paid so much that they can't make money as landlords with rates even moderately higher than today's. It will all depend on how many speculators there are vs. people who actually live in their units.

With the heavy Asian populations in Vancouver/Toronto, one possible hypothesis for the bubbles in those cities is that borrowing to buy real estate is viewed as a one-way bet. If one owns a condo in Vancouver, and its price drops by half -- the owner just has to hop a plane to Beijing or Hong Kong, and there are no consequences for the debt whatsoever (and chances are, they'll be going to a more vibrant economy overseas anyways).

Whereas, your typical European-Canadian doesn't have that option. Fleeing to Britain, Germany, or Ukraine, isn't exactly very feasible for most.

[max88]

Man what are you talking about? Internet dating does not work well for men. Meeting people of the opposite sex is godawful over the internet. Men have to deal with fake profiles and trying to attract women who are bombarded with interest. For every female/fake profile there are 50 males/crazies/psychos/perverts. Women have to fear for their safety. In real life, you can seek someone "on par". On the internet, even the fugliest girls can get something decent. You better speak 10 languages, play several instruments, have a 6-pack, look like Tom Cruise, and have lots of money if you want to meet a women that's considered "average" in real life.

On topic...I don't think people are stupid enough to buy a house without some expectation of the interest rate going back up. I wouldn't worry about the market failing just because people can't afford their mortgage payments.


Not trying to debate the effectiveness of Internet dating. Just looking at some human interactions or economic activities that have been virtualized to some extent.

Before proliferation of the net, pretty much all economic activities are done outside of ones residence. Now, one can even "work" from home. The reduced dependence on physical transportation, in theory, results in collectively lower cost and higher efficiency. The surplus, if any, has to go somewhere, and most likely subsidizes housing that appears to be more significant, pushing housing price higher.

We can agree that housing price cannot go up at this rate forever. I just don't know when it's going to stall or drop. If I knew it, I would not have come to RFD!

[SLee]

You're probably going to do okay if you buy in an area that people will want to live in for the predictable future. I have a friend in San Diego who tells me there are just as many BMWs and Mercedes around as ever, plus people still buy theirs kids a new car on their 16th birthday. Not surprisingly, house prices have held up in San Diego. The same is not true everywhere in the US.
Even San Diego has suffered:

http://piggington.com/

The Case-Shiller index shows a 40% decline overall from peak.

[napoleon1769]

Wow good thread. I've always bought my houses outright without the need of a mortgage. Are you saying that if you have a 5% down/35yr mortgage, the rate is not going to be locked in for 35 years and this is why there are going to be foreclosures when the interest rates rise?

Is there a book I can read about and learn this stuff? I'm so outdated.

[pitz]

Wow good thread. I've always bought my houses outright without the need of a mortgage. Are you saying that if you have a 5% down/35yr mortgage, the rate is not going to be locked in for 35 years and this is why there are going to be foreclosures when the interest rates rise?


Even if rates don't rise, foreclosures will, as the actual economy, heavily reliant on the finance and real estate industries, slows down, leaving people unemployed.

Policy makers can, and perhaps will, keep interest rates low indefinitely, but they can't stave off foreclosures or falling prices. Just look at the United States, for instance.



Is there a book I can read about and learn this stuff? I'm so outdated.

There's no one single, definitive book about the real estate bubble that I'm aware of. There's lots of 'bearish' books on the economy (and lots of bullish ones, ie: Dow 36,000) though, and websites.

[VivienM]

Are you saying that if you have a 5% down/35yr mortgage, the rate is not going to be locked in for 35 years and this is why there are going to be foreclosures when the interest rates rise?


Most Canadian fixed-rate mortgages are for a five year term.

In other words, after five years, you sit down with your banker, and renew for the next 5 years. If the interest rate at that point is much higher, whoooooops. Hope you have some surplus cash in your budget.

If you don't, like all the idiots borrowing 6-7X annual income, then... your payments will go beyond what you can afford to pay back. At that point, it's only a matter of time until you go bankrupt, the bank sells the property (for way less than you owe for obvious reasons), and CMHC (i.e. Joe Taxpayer) pays them the difference.

This is the key difference (from the borrower perspective) between, say, paying a jacked up price for a car with 0% financing and paying a jacked up price for a house with a 2.25% variable or 4.25% fixed mortgage.
With the car, you've locked in your rate for the 6 years, so you're only screwed if you need to sell/tradein early (0% car loans on giant amounts, for reasons I've outlined a hundred times on this forum, are a disaster if you have to pay them off early).
With the house, even if you stay in it, there's this giant risk in 5 years. If interest rates are 4% higher, say, then
a) your property value will probably have plummeted 30% (by itself, not a problem unless you want to sell)
b) you still owe the jacked up amount, but now at a much higher interest, so you'll be paying WAY more than expected over the next 30 years

[coleworld]

Okay, so when do we start the 5 year clock....

Once rates start to go up?

[pitz]

Okay, so when do we start the 5 year clock....

Once rates start to go up?

Mortgages are constantly maturing and coming up for refinancing, so the 'clock' starts immediately, if you believe the theory that interest rate changes will nuke the Canadian market.

I personally believe more in a demand exhaustion theory. Basically everyone who wants to own a house, and is in the position to devote monthly cashflow towards ownership, already does. In fact, people own far more housing than they really need (like most of my single girlfriends who own large condos or single fam detached's, and basically, live alone in them).

[pitz]

a) your property value will probably have plummeted 30% (by itself, not a problem unless you want to sell)


Ummm VivienM, what kind of banker would want to issue a loan renewal against collateral that is only worth 70% of the loan's face value?

Especially when they can say, "no", and be compensated by the government for the full face value of the loan?

Only way that loan is getting issued is if the borrower performs lewd and indecent acts on the banker, or the bankers' appraiser.

[VivienM]

Ummm VivienM, what kind of banker would want to issue a loan renewal against collateral that is only worth 70% of the loan's face value?

One that's under intense political pressure? The politicians won't stand for bankers refusing to renew giant mortages.

Why not renew the loan, keep getting paid interest for as long as the borrower somehow stays afloat, and then at once the borrower sinks, collect from the government quietly?

[pitz]

One that's under intense political pressure? The politicians won't stand for bankers refusing to renew giant mortages.


But what about the other borrowers of the bank who get deprived of limited funding because of this?

If $500k houses collapse to $250k (as I believe they will), and if they write loans, as you suggest, at the urging of politicians -- that's $250k that doesn't get lent out to businesses.

Will politicians choose homeowners over businesses that create jobs?

(so far, the answer is "yes", because if politicians gave a damn about jobs, they would have shut down CMHC a long time ago, and forced the banks to lend to the productive economy).



Why not renew the loan, keep getting paid interest for as long as the borrower somehow stays afloat, and then at once the borrower sinks, collect from the government quietly?

I think the bankers will be out in full force trying to push the underwater borrowers into default, maybe even slipping a few thousand $$$ to them in, for instance, gift cards or other non-cash, cash-equivilants, to walk away.

[Chyron]

Wow. Excellent thread.

I'm in the position where I want to buy a house, but prices are just too high for what you're getting. I thought there was somethin wrong with me because I couldn't afford a place, yet everyone and their brother is buying. Yet after reading this discussion, and the articles posted, I'm realizing the optics of the market don't reflect reality at all.

I thought you had to have the ~20-25% downpayment for CMHC otherwise you got "penalized", but people are essentially trying to put as little down as possible; something that utterly surprises me. I also thought it was your goal to pay as much off the principle as possible, hence bigger downpayments and hopefully lump-sum payments throughout the mortgage term.

It never occurred to me that people are paying these over-inflated prices for houses that are way beyond their means. I also never thought the majority of people would actually risk the doubling, if not tripling, of monthly payments when their rates are re-negotiated.

I always thought the goal of a mortgage was to help you afford the house now, and your goal was to pay off that mortgage and own that house as fast as possible. But VivienM's discussion about "why" people buy condos vs cars, only reinforces the notion that houses (and condos) have become like stocks; people aren't buying shelter, or a palce to raise their family, but rather something they can hold on to for 5 years then make some money on.

I guess in the end, people are living wayy to far outside their means and somepoint soon things are going to even themselves out.

[laptop-tech]

...If $500k houses collapse to $250k (as I believe they will)...

Your posts are surely entertaining.

[Buggy166]

Statistically, Toronto's real estate prices are NOT considered ridiculous when you compare to cities like Hong Kong and New York.

There lies the problem. toronto is not even comparably close to those on any sort of terms whatsoever.

[Buggy166]

Your posts are surely entertaining.


isnt that what they said before the U?S bubble burst? lol.

i just heard of people from family friends that have started getting bad news. bought a house with a 5% downpayment on a 300k place, started paying, 1 yr in the guy lost his job and their income is 30 grand...with a baby kid just born.

another guy lost his 6 figure bank job and cant get anything even remotely close for the past 6 months. They wont lose the house but not doing great by any means.

bankruptcies increased by almost 50% from last year in september.

yet housing prices are increasing and doing "great"...this is so funny its stupid. it actually makes more sense to buy a 50k car and rent than to own a place to live in financially.

This should be a fun watch. thankfully i just go where work takes me so owning anything past a car is irrelevant due to jumping cities, countries or continents, but the hosuing market is gonna be up for an ugly re-adjustment eventually.

[EP32k2]

There lies the problem. toronto is not even comparably close to those on any sort of terms whatsoever.

+1

Population density = demand

Simple economics right durrrrrrrrrrrr


Even if the interest rates go up, it doesn't neccesarily mean that mortagage payments will go up, unless it's a major jump. If we are talking 100bsp, monthly payments will remain the same, however the more of the monthly payments made would be towards interest instead of the principle.

Lets see what the new year brings us when the stimulus packages run out...

[AllWheelDrift]

Your posts are surely entertaining.
In Vancouver, that would only be unwinding about 6 years of gains, which is what the stock market did when it crashed.

If I look at the percentile my wife and I are in in terms of income vs what percentile of housing we could afford (even given the crazy loans we could get approved for) the numbers just don't add up. It's pretty clear to me that most of the current home owners in Vancouver do not have salaries which would support mortgages with an 80% LTV (using current values) on their homes. They also never would have been able to save up to make a larger than 20% downpayment. Instead their "wealth" is purely property appreciation that isn't backed by any real creation of value. The continued appreciation can be explained by the fact that these spectacular gains have encouraged people to place large bets (sponsored by the government via NHA and CMHC) that homes will continue to appreciate even though the fundamentals (rents and salaries) clearly show even current valuations can only be explained by irrational exuberance.

This has happend quite frequently in history. Just a few examples are tulip bulbs, to rail roads stocks, and of course more recently, internet stocks.

Of course the alternative is that things continue the way they have and in another 6 years from now, young couples will spend all their money on lottery tickets in the hopes that they'll be able to win $1 million to pay for a 2 bedroom condo in Vancouver.

[pitz]

Your posts are surely entertaining.

Why? Think I'm being too conservative?

[DearSummer]

Why? Think I'm being too conservative?

Your prediction was extremely vague. You need to be more specific.

[pitz]

Your prediction was extremely vague. You need to be more specific.

Do I look like a fortune teller? At 7X earnings right now, and with the long-term mean house price at 3X earnings, and with mean reversion, I'd look for the trend to bottom out at 1.5X - 2X earnings.

Usually highly overleveraged markets eventually become all-cash markets, for particular asset classes.

For instance, in the 90s, it was easy to borrow on margin for tech stocks, and it was easy for good tech companies to leverage up their balance sheets.

After the tech stock bubble collapsed, margin became almost completely unavailable on tech stocks, and only the most cash-rich firms survived. Indebted tech firms, with almost no exceptions, all failed or were acquired (although AMD still is hanging on, although barely....).

How much 'cash' do people have on-hand to buy houses these days? I suspect, practically none. Therefore, prices revert to something resembling nothing.

[Neil]

Summarizing some points that have been made (and ignored) time and again:

- low low interest rates have artificially boosted the price of homes

- there's way too much hubris in the majority of Canadians who think we are smarter/better than the 'dumb Americans' and therefore immune from house price correction

- population/demographics can have a big role in what's going to happen

My own theory is that over the long term the average family income has to be able to afford the average family home. When that ratio is out of whack (as it currently is) then things will eventually have to swing back.

A good rule of thumb is that your home/mortgage amount probably shouldn't be exceeding 3x your income unless there is some other factor to make up the difference.

[DearSummer]

A good rule of thumb is that your home/mortgage amount probably shouldn't be exceeding 3x your income unless there is some other factor to make up the difference.

What makes this a good rule of thumb?

[DearSummer]

Do I look like a fortune teller? At 7X earnings right now, and with the long-term mean house price at 3X earnings, and with mean reversion, I'd look for the trend to bottom out at 1.5X - 2X earnings.

Usually highly overleveraged markets eventually become all-cash markets, for particular asset classes.

For instance, in the 90s, it was easy to borrow on margin for tech stocks, and it was easy for good tech companies to leverage up their balance sheets.

After the tech stock bubble collapsed, margin became almost completely unavailable on tech stocks, and only the most cash-rich firms survived. Indebted tech firms, with almost no exceptions, all failed or were acquired (although AMD still is hanging on, although barely....).

How much 'cash' do people have on-hand to buy houses these days? I suspect, practically none. Therefore, prices revert to something resembling nothing.

Let's assume an average income of $45,000. You are predicting that house prices will drop to between $67,500 and $90,000 before leveling out around $135,000?

The national average in Oct-09 was $341,079. In Oct-08, $282,583.

From current levels, you're predicting at least a 74% drop in price but maybe I'm miscalculating something or making an assumption that you're not. Let me know.

[pitz]

Let's assume an average income of $45,000. You are predicting that house prices will drop to between $67,500 and $90,000 before leveling out around $135,000?


Sure, that's what I said, if you want to attach numbers to it (think your estimate of average income in Canada is slightly on the low side though..).

Print this message out, paste it to yer wall somewhere, and we can talk in a few years :).

[DearSummer]

Sure, that's what I said, if you want to attach numbers to it (think your estimate of average income in Canada is slightly on the low side though..).

Print this message out, paste it to yer wall somewhere, and we can talk in a few years :).

The average income I saw was around $40,000 actually but I decided to be conservative.

So what time frame are you looking at for this drop? Also, if you are a home owner you are surely already in the process of selling your home, right?

[rage2021]

FIght Fight Fight

[AllWheelDrift]

What makes this a good rule of thumb?
The fact that it's a reasonable amount to pay off in your lifetime? If you lived like a pauper and have decent salary growth, you might be able to pay off 7x your salary in 10-15 years, though most likely it would take a lot longer and heaven forbid you run into tough times.

In fact, I suspect at 3x income, it would probably take most people around 10-15 years to pay off their mortgage. At 7x, they'll be lucky to have repaid it by the time they retire.

For example, I bought a condo at 3.6x my salary with 10% down a little over 6 years ago (I didn't know better.) Thanks to the fact that my income grew substantially (purchase price was 3x my current salary, though the current "value" would be 5x my current salary or 6x my orignial salary) and I also now have a wife earning nearly as much as I do, plus generous wedding gifts and the fact that I got a large severance package last year, we've managed to repay the mortgage in just over 6 years. We've done so by living very frugally (though not sacrificing retirement savings) by most people standards, certainly frugally relative to our income. If I'd remained single, it probably would have taken me at least 15 years to repay what was originally 3.6x my salary. I also don't expect the same level of salary growth going forward.

[pitz]

The average income I saw was around $40,000 actually but I decided to be conservative.


Yeah two schools of thought on this; either you examine the income of everyone, or you examine the income of the people who are actually in a position to buy, which is usually the 25-35 age group. The 25-35 age group has largely been frozen out of the job market in the past decade because of the ongoing recession in manufacturing, technology, etc.


So what time frame are you looking at for this drop?

It'll start as soon as the CMHC runs into major losses and blows through its capital, I suspect.

[Nyte]

The average income I saw was around $40,000 actually but I decided to be conservative.

So what time frame are you looking at for this drop? Also, if you are a home owner you are surely already in the process of selling your home, right?
You might want to consider the average household income. 40K is probably about right for the average individual income.

[AllWheelDrift]

You might want to consider the average household income. 40K is probably about right for the average individual income.
Yeah, last time I checked, the median household income was around $55k. Still, as pitz points out, most potential buyers are probably on the younger end and thus with lower income.

[pitz]

Yeah, last time I checked, the median household income was around $55k. Still, as pitz points out, most potential buyers are probably on the younger end and thus with lower income.

Yeah, it would seem that the income disparity is much larger between young and old, than it was in the past. And the indebtness of the young is higher as well, in relative terms, than its ever been.

So 3X 'average' income might even be too aggressive nowadays. Especially with the almost complete abolition of pension plans in private sector workplaces.

[DearSummer]

Especially with the almost complete abolition of pension plans in private sector workplaces.

Where are you getting this information?

In total, about 5.9 million Canadian workers are members of employer pension plans.
http://www.statcan.gc.ca/daily-quotidien/090608/dq090608c-eng.htm
http://www.statcan.gc.ca/daily-quotidien/090915/dq090915c-eng.htm

[Little Tim]

Your posts are surely entertaining.

Nobody can make me laugh as much as pitz. 'Housing is like tech stocks and hard drives!' LMBOOOO!!! :lol:

Still not to say that there are people that currently are taking on more debt than is reasonable and that more effort should be made by people in general to pay off their debt faster. However, the screamers coming from pitz once in a while makes it impossible to take anything else he says seriously.

[someguy91]

Where are you getting this information?


http://www.statcan.gc.ca/daily-quotidien/090608/dq090608c-eng.htm
http://www.statcan.gc.ca/daily-quotidien/090915/dq090915c-eng.htm

he's talking about the proposed pension reforms which has the government taking over responsibilities of pensions because apparently private entities are incapable of doing it themselves.

Stop letting him trollbait you guys.

[pitz]

Nobody can make me laugh as much as pitz. 'Housing is like tech stocks and hard drives!' LMBOOOO!!! :lol:


What's your point? I used that as an example of progress, and productivity. The housing industry has become more productive in manufacturing a consumer good, to wit: housing. The computer industry has become more productive in manufacturing storage products. Housing is priced at levels that are reminiscent of tech stocks; completely out of whack with earnings.

[pitz]

he's talking about the proposed pension reforms which has the government taking over responsibilities of pensions because apparently private entities are incapable of doing it themselves.


Not even that. Just an absolute decline in the number of private sector employees that are covered by pension plans, and hence, are really being compensated much higher than just their paycheques would indicate.

Good point about the solvency thing; the way things are set up, older members of the workforce will get their pensions paid out, in preference to the younger members. So essentially, even if the younger members are having pension contributions made, on their behalf -- those contributions do not necessarily increase the actual income or net worth of the beneficiary over their lifetime.

But if we want to discuss this further, let's start another thread.

[someguy91]

What's your point? I used that as an example of progress, and productivity. The housing industry has become more productive in manufacturing a consumer good, to wit: housing. The computer industry has become more productive in manufacturing storage products. Housing is priced at levels that are reminiscent of tech stocks; completely out of whack with earnings.

Try thinking for a moment before moving those faglips of yours, please.

wow.

[pitz]

wow.

Wow what? One of my first summer jobs, when I just got out of high school, was building truss components for houses in a factory. We had a brand new computer program where you entered in the loads on those trusses, and some other information, and it spat out an optimal design which used, in many cases, only 2/3rds of the wood and labour that the previous designs used.

That's a very simple example of how houses have become less materials and labour intensive to construct.

Another example is bathroom taps. I replaced a set in a house recently for a friend. The old ones were made in the USA, and used copper fittings that had to be bent, by hand, to a specific angle, and had lots of parts and were complicated. The new ones I picked up had flexible rubber/polyurethane fittings, were made in China, and was very simple. At least half an hour of labour saved, and lower materials cost.

The only reason why housing has gone up, and not down in price, over the past decade, is that there's been a paradigm shift away from buying it based on its intrinsic worth, and towards "what people can borrow". Its no coincidence that the 7X multiplier for house prices to income is also what banks like "ING Direct" will qualify people for on mortgages.

Just like those tech stocks. All leverage, no substance.

[Deal4US]

25 years ago my parent bought a detached home in St.clair and Caledonia approx $250K.
10 Years ago I bought my detached home by King side road and younge in richmond hill for around $270K

So in order for me to buy a house around 200K-300K i have to wait until Toronto House Price drop back to 1984 level and Richmond Hill house price at 1999 level? Im no realestate expert but i think highly unlike i will see that kind of price in my lifetime again.

[muchacho_007]

The only reason why housing has gone up, and not down in price, over the past decade, is that there's been a paradigm shift away from buying it based on its intrinsic worth, and towards "what people can borrow".

When we started looking to buy rental properties, this is the first thing we noticed.

I felt something wrong with it, something that didn't make sense and it made me look at numbers over and over, think of projections and took a lot of work to try to make sense of it.

A good question to ask is: If this is the new way to look at home prices, is it going to go away?

I'm not interested in bubbles and such, just the idea that this is the way of looking at housing prices.

Is intrinsic worth gone? Developers want to make money, land owners need their cut, then there is the bank, lawyer, RE agent all these people do not want to go back to intrinsic worth.

I think that even if the housing market undergoes a correction, pricing houses based on "what people can borrow" is here to stay.

[angelo]

Wow what? One of my first summer jobs, when I just got out of high school, was building truss components for houses in a factory. We had a brand new computer program where you entered in the loads on those trusses, and some other information, and it spat out an optimal design which used, in many cases, only 2/3rds of the wood and labour that the previous designs used.

That's a very simple example of how houses have become less materials and labour intensive to construct.

Another example is bathroom taps. I replaced a set in a house recently for a friend. The old ones were made in the USA, and used copper fittings that had to be bent, by hand, to a specific angle, and had lots of parts and were complicated. The new ones I picked up had flexible rubber/polyurethane fittings, were made in China, and was very simple. At least half an hour of labour saved, and lower materials cost.



Of course technology and productivity improvements have reduced the cost of building a house. However you need to build a house on a piece of land and that is where the vast majority of the appreciation is happening. The physical structure actually depreciates while land historically appreciates (perhaps at an unrealistic rate in recent years).

Due to this factor, your hard-drive to real estate comparison is seriously flawed.

[DearSummer]

Not even that. Just an absolute decline in the number of private sector employees that are covered by pension plans, and hence, are really being compensated much higher than just their paycheques would indicate.

The number isn't declining. Look at the links I posted.

[laptop-tech]

25 years ago my parent bought a detached home in St.clair and Caledonia approx $250K.
10 Years ago I bought my detached home by King side road and younge in richmond hill for around $270K

So in order for me to buy a house around 200K-300K i have to wait until Toronto House Price drop back to 1984 level and Richmond Hill house price at 1999 level? Im no realestate expert but i think highly unlike i will see that kind of price in my lifetime again.

According to Pitz, very soon you will be able to get better than 1984 prices, as he predicts 50% price drops (and hinted he might be conservative). The house you want to buy now for $600K will be $300K or less.

Im saving as much as I can, because I cant wait for the day I will be able to buy small condos in downtown Toronto for $75k a pop.

That is, of course, if the world does not end in 2012.

[Neil]

The fact that it's a reasonable amount to pay off in your lifetime? If you lived like a pauper and have decent salary growth, you might be able to pay off 7x your salary in 10-15 years, though most likely it would take a lot longer and heaven forbid you run into tough times.

In fact, I suspect at 3x income, it would probably take most people around 10-15 years to pay off their mortgage. At 7x, they'll be lucky to have repaid it by the time they retire.

For example, I bought a condo at 3.6x my salary with 10% down a little over 6 years ago (I didn't know better.) Thanks to the fact that my income grew substantially (purchase price was 3x my current salary, though the current "value" would be 5x my current salary or 6x my orignial salary) and I also now have a wife earning nearly as much as I do, plus generous wedding gifts and the fact that I got a large severance package last year, we've managed to repay the mortgage in just over 6 years. We've done so by living very frugally (though not sacrificing retirement savings) by most people standards, certainly frugally relative to our income. If I'd remained single, it probably would have taken me at least 15 years to repay what was originally 3.6x my salary. I also don't expect the same level of salary growth going forward.

It does work out remarkably well when you consider historical borrowing rates, inflation, debt ratios, life spans, and the time scale during which people's incomes rise and then fall, and when their need for credit rises and then falls.

[pitz]

Of course technology and productivity improvements have reduced the cost of building a house. However you need to build a house on a piece of land and that is where the vast majority of the appreciation is happening. The physical structure actually depreciates while land historically appreciates (perhaps at an unrealistic rate in recent years).

Due to this factor, your hard-drive to real estate comparison is seriously flawed.

There's no shortage of 'land' anywhere in Canada (land may actually be a liability, because if you have a lot of it -- that means you're likely to be far away from anything useful). But there is an abundance of apologists for the RE industry that keep claiming, "land is valuable", or "they're not making any more land".

So no serious flaws :) Its all subject to the same influences as structures, up and down, with advances in technology or productivity.

[DearSummer]

There's no shortage of 'land' anywhere in Canada (land may actually be a liability, because if you have a lot of it -- that means you're likely to be far away from anything useful). But there is an abundance of apologists for the RE industry that keep claiming, "land is valuable", or "they're not making any more land".

So no serious flaws :)

There's no shortage of land in downtown Toronto? That's news to me. I wonder why they're building huge skyscrapers there?

[laptop-tech]

There's no shortage of 'land' anywhere in Canada (land may actually be a liability, because if you have a lot of it -- that means you're likely to be far away from anything useful). But there is an abundance of apologists for the RE industry that keep claiming, "land is valuable", or "they're not making any more land".

So no serious flaws :)

Out of all absurd things you have said so far, this one stands out. Seriously.

[Neil]

Well consider that if for some reason borrowing rates go up 2-3 percent and incomes stay on the normal inflationary keel, that totally lowers what most people can afford.

A lot of the recent bubble has been driven by situations where a person who 5 years ago could be approved for $250,000 but is now approved for $400,000 given the 2-2.5% interest rates.

Places that might otherwise have sold around $250,000-300,000 were thus pushed up to $400,000 simply because buyers were approved to spend these imaginary sums based on qualifying for short-term payments, people who didn't want to miss out on their chance to buy.

But a 60% spike in debt over 5 years is not matched by growth in their earnings.

It's been pointed out, but what happens when their $375,000 mortgage comes for renewal and buyers are only being approved for a max of $300,000 or $325,000 at the new rates? For sellers, it's a scramble of price reductions.

But even if they aren't selling, what happens when the lender gets a new appraisal for $320,000 and isn't keen to lend $375,000 against that.

[Neil]

It does work out remarkably well when you consider historical borrowing rates, inflation, debt ratios, life spans, and the time scale during which people's incomes rise and then fall, and when their need for credit rises and then falls.

It also fits well when you invert what a lot of lender debt ratio thresholds are.

[brunes]

Wow what? One of my first summer jobs, when I just got out of high school, was building truss components for houses in a factory. We had a brand new computer program where you entered in the loads on those trusses, and some other information, and it spat out an optimal design which used, in many cases, only 2/3rds of the wood and labour that the previous designs used.

That's a very simple example of how houses have become less materials and labour intensive to construct.

Another example is bathroom taps. I replaced a set in a house recently for a friend. The old ones were made in the USA, and used copper fittings that had to be bent, by hand, to a specific angle, and had lots of parts and were complicated. The new ones I picked up had flexible rubber/polyurethane fittings, were made in China, and was very simple. At least half an hour of labour saved, and lower materials cost.

..

Just like those tech stocks. All leverage, no substance.

You're comparing apples and oranges here. Near 50% of the cost of building a house is labour cost, a cost that can't be engineered away (atleast not until we have robots building assembly-line houses). Ask anyone who has built a house or done a major renovation.

You could use technology to cut materials cost by 25% (an ENORMOUS MARGIN), and you would still only be cutting a max of 12.5% off of the total cost of construction. This doesn't compare to the computer or technology industry, *at all*. The nominal cost of labour to manufacture something like a flash drive or computer, is near zero. Nearly all cost is split between R&D and materials.

Its pretty much as polar opposite an industry type as you can get.

[pitz]

But even if they aren't selling, what happens when the lender gets a new appraisal for $320,000 and isn't keen to lend $375,000 against that.

1) If the borrower has a decent income and has cash or other assets available to make a higher payment, they write the loan, but its at a much higher rate of interest, to keep the loan out of default.

2) If the borrower doesn't have a decent income and is stretched to the limit, then they simply call up the CMHC, and dump the loan off onto them, collecting the full value.

1) is the scenario I personally fear the most, because 1) applies heavily to professionals (ie: doctors, lawyers, engineers, etc.) who really should be allowed to accumulate savings, so they can invest those savings into growing the economy.

The people in 2) previously would have been renters and would not have been investors, and after they lose their houses, they will continue on as renters.

Near 50% of the cost of building a house is labour cost, a cost that can't be engineered away (atleast not until we have robots building assembly-line houses).

I just gave you an example of how the cost of installing bathroom taps was 'engineered' down to less than it used to be. And the trusses required less materials and hence, less labour to build them.

You could use technology to cut materials cost by 25% (an ENORMOUS MARGIN), and you would still only be cutting a max of 12.5% off of the total cost of construction.

Its not just technology, its also, having sub-assemblies manufactured overseas in lower cost labour areas.

[opendoor]

You're comparing apples and oranges here. Near 50% of the cost of building a house is labour cost, a cost that can't be engineered away (atleast not until we have robots building assembly-line houses). Ask anyone who has built a house or done a major renovation.

You could use technology to cut materials cost by 25% (an ENORMOUS MARGIN), and you would still only be cutting a max of 12.5% off of the total cost of construction. This doesn't compare to the computer or technology industry, *at all*. The nominal cost of labour to manufacture something like a flash drive or computer, is near zero. Nearly all cost is split between R&D and materials.

Its pretty much as polar opposite an industry type as you can get.

There have been massive amounts of efficiency brought into home construction which has greatly reduced labor costs. Decades ago guys were cutting studs with handsaws and using hammers to drive nails. Now they use power and pneumatic tools. Complicated roofs used to be site built over a period of days or weeks, now they're put up in a day using engineered trusses that were also built in a day. The introduction of CNC technology has changed the cabinet industry and made it more efficient. A kitchen that may have taken a week to build in a cabinet shop can be made in a day or two. Many plumbing lines are done using flexible supply lines and press together fittings rather than copper with soldered joints, which saves time for plumbers.

You're either kidding yourself or you don't know much about the construction industry if you don't think that home construction is much, much more efficient than in decades past. Not only that, there's room for even more efficiency as prefab components are used more and more. Obviously there will still always be a lot of labor involved in building a house, but that can and has been greatly reduced through technological innovation.

[pitz]

You're either kidding yourself or you don't know much about the construction industry if you don't think that home construction is much, much more efficient than in decades past. Not only that, there's room for even more efficiency as prefab components are used more and more. Obviously there will still always be a lot of labor involved in building a house, but that can and has been greatly reduced through technological innovation.

Not only that, but the supply chains themselves are more efficient. Individual "mom and pop" hardware stores and lumber yards, have been highly replaced by large-scale integrated warehouses, which use computers and minimal amounts of labour to procure and replenish supplies.

Because prices have been so high (relative to costs), developments have been done on much larger scales than in the past, which cuts down on labour costs, design costs, etc.

Chimneys are obsolete. Modern furnaces and water heating equipment only requires PVC pipe to the outside world.

[cmyden]

Good writeup by Kevin over at EHB about the bubble and how we got where we are...

http://edmontonhousingbust.blogspot.com/2009/11/whos-to-blame.html

[pitz]

Good writeup by Kevin over at EHB about the bubble and how we got where we are...

http://edmontonhousingbust.blogspot.com/2009/11/whos-to-blame.html

Excellent summary, he forgot one other factor though:

The Stock Market -- in the wake of the collapse of Canada's technology industry, and as a result, the valuation of the Canadian and worldwide stock markets, people felt more 'comfortable' with 'investing' in housing, versus investing in businesses. Capital stripping business models were allowed to rise in the Canadian market for far too long by the government, through their refusal to regulate income trusts at an early stage. People lost confidence in the ability of businesses to grow themselves, grow employment, and provide dividends.

This can be blamed on a Canadian government that has been severely anti-business, by expanding the size of the civil service dramatically, and dragging its feet on modernizing the Canadian regulatory and taxation structure.

[hagbard]

http://dynamic-evolution.com/ehb/091121-2.jpg

:cheesygri

[Jungle]

If I had a dollar for every time PITZ mentions the tech market and real estate crash on this forum, I could buy myself another expensive home in Toronto.

Actually I could buy lots of land in the city of Toronto, because apparently there's no shortage of it.

My land is in the sky right now.

[hagbard]

Its going to crash...just ask Garth Turner! Okay, don't, but its is going to crash and the longer it takes the more dramatic its all going to be.

[G-Yo]

Even the banks are comming around to the idea that this is a bubble. Who's next, Realtors ?

Scotiabank hints at a housing bubble; http://ca.news.finance.yahoo.com/s/24112009/3/finance-business-scotiabank-hints-housing-bubble.html

[AllWheelDrift]

Even the banks are comming around to the idea that this is a bubble. Who's next, Realtors ?

Scotiabank hints at a housing bubble; http://ca.news.finance.yahoo.com/s/24112009/3/finance-business-scotiabank-hints-housing-bubble.html
I had a better quote from ING somewhere, saying the market and mortgages are reminiscent of the USA and Europe just before the collapse. Oh, and I first saw Scotiabank suggesting there may be a bubble at least a week ago. I think it was around a month ago the BoC was trying to remind home buyers to be prudent in how much debt they take on because the low interest rates wouldn't last forever.

My realtor is starting to pester me to show me homes. It feels like she's getting a bit desperate. A home we put a lowball offer on at $580k several weeks ago when it was listed at $619k is now listed for $599k and has been through an open house at that price.

[muchacho_007]

According to this very good research by RBC (www.rbc.com/economics/market/pdf/house.pdf) - the housing market will remain hot for at least one year.

Another report (http://www.teamfisher.com/pdfreports/scotiabank112409.pdf)that analyzes weather we are in a housing bubble also concludes the same thing: the housing market will remain hot for the next year even though housing prices are too high.

It is a very good read.

[UrbanPoet]

If I had a dollar for every time PITZ mentions the tech market and real estate crash on this forum, I could buy myself another expensive home in Toronto.

Actually I could buy lots of land in the city of Toronto, because apparently there's no shortage of it.

My land is in the sky right now.

Oh.. That and 'engineers are the best! you need us!!!'

[DearSummer]

Sure, that's what I said, if you want to attach numbers to it (think your estimate of average income in Canada is slightly on the low side though..).

Print this message out, paste it to yer wall somewhere, and we can talk in a few years :).

I noticed you were making similar predictions back in 2006. How's that been working out for you?

[EugW]

My realtor is starting to pester me to show me homes. It feels like she's getting a bit desperate. A home we put a lowball offer on at $580k several weeks ago when it was listed at $619k is now listed for $599k and has been through an open house at that price.
That doesn't sound like a lowball offer.

Even if $619000 were a reasonable price (and it doesn't sound like it is), $580000 is only 6% below that.

A lot of people consider low ball offers something that is say 10% below fair market value. If $599000 is fair market value, then your $580000 offer is only 3% low, which can be considered a reasonable starting point for negotiations in such a deal.

[AllWheelDrift]

That doesn't sound like a lowball offer.

Even if $619000 were a reasonable price (and it doesn't sound like it is), $580000 is only 6% below that.

A lot of people consider low ball offers something that is say 10% below fair market value. If $599000 is fair market value, then your $580000 offer is only 3% low, which can be considered a reasonable starting point for negotiations in such a deal.
Well, we started below the $580k, which was the max we were willing to come up to. Their last counter was $609k, (presumably hoping we'd meet around the $590-600k range) then a week later they drop their asking price to $599k, which based on recent sales (previous month) of similar properties in area seems to be below current market value. I had expected the house would move with that price and the open house. Instead, it feels to me like the Vancouver market has been losing steam since late October and through November. My ancedotes are by no means scientific, but new listings also seem to have dropped in price even though the number of new listings has slowed as well.

And like I said, previously my realtor had backed off (because we said we weren't in a hurry and had decided to wait) but lately she's become agressive. At the very least, she seems to have more free time to call me. :lol:

[EugW]

Heh. I guess that rule turned out to be true in this case...

If you only get one offer, even if it seems a bit low sometimes it makes sense to take it.

There was a property that I looked at which I thought was priced high so I didn't even put in an offer. They got an offer earlier that was actually higher IIRC than it seemed most of us prospective buyers were willing to offer but they declined it, because it was the first week and a few % below their asking.

It then sat unsold and empty for a year even though they reduced the amount substantially.

[AllWheelDrift]

Heh. I guess that rule turned out to be true in this case...

If you only get one offer, even if it seems a bit low sometimes it makes sense to take it.

There was a property that I looked at which I thought was priced high so I didn't even put in an offer. They got an offer earlier that was actually higher IIRC than it seemed most of us prospective buyers were willing to offer but they declined it, because it was the first week and a few % below their asking.

It then sat unsold and empty for a year even though they reduced the amount substantially.
Actually, I also left out some important info. The current owners want a March/April closing date. Not only is that a very long closing date but it's after the Olympics and a lot of people seem uncertain about the effects the games will have on housing prices.

Thinking about it, it may be time to go back with a slightly higher offer but adding a "subject to sale" of our condo clause. (We were convinced that with the "subject to sale" clause we couldn't offer significantly below asking, but asking has dropped.) A 4-5 month call option at near the asking price would be worth tying up a deposit.

[hagbard]

Here's my completely original prediction. Market will start to level from now to January, then start heading down rapidly ending way below average prices of 2002, bottom at end of 2012 and start moving up slowly in 2013. IOW, the decline is going to be way more dramatic than the climb. Think hockey stick with the end broken off. Don't quote me on this if I'm wrong. :lol:

[kahoots]

According to this very good research by RBC (www.rbc.com/economics/market/pdf/house.pdf) - the housing market will remain hot for at least one year.

Another report (http://www.teamfisher.com/pdfreports/scotiabank112409.pdf)that analyzes weather we are in a housing bubble also concludes the same thing: the housing market will remain hot for the next year even though housing prices are too high.

It is a very good read.

Good read indeed! Thanks for posting.

A couple of points from the reports:
Fundamentals and affordability are in good shape but both should deteriorate as interest goes up in the next few years.

RE Toronto:
" In the third quarter, RBC’s
affordability measures for the Greater Toronto Area rose between 1.0 and 1.9
percentage points. Still, as affordability levels remain close to long-term averag-
es, these increases do not pose an immediate threat to the market’s rally, al-
though, if sustained, they might eventually take some of the steam out."

[AllWheelDrift]

According to this very good research by RBC (www.rbc.com/economics/market/pdf/house.pdf) - the housing market will remain hot for at least one year.
I love how most of the housing affordability graphs have a scale from 0-40% or 50%, while the one for Toronto goes to 80% (mostly because of the late 80s early 90s) and Vancovuer tops out at 90% (due to more recent activity).

The comments for BC and Vancouver have some gems:
This near-frenzied tone to the market is occurring despite still historically poor, and now deteriorating, levels of affordability. In the third quarter, RBC’s affordability measures for Vancouver worsened for the first time since early 2008, rising between 1.7 and 4.3 percentage points. These increases were, in fact, the biggest among major cities in Canada. Even though the affordability measures fell substantially during 2008 and early 2009, they remain well above long-term averages.
... it appears that the cost of homeownership will remain well above long-term averages in British Columbia. This might emerge as a risk factor going forward.
Also keep in mind the affordability index is based on the carrying costs, including mortgage payments, based on the current rates. In other words, the affordability index is so far above long term norms during a period where low interest rates should be helping affordability.

[fidelity_1]

I can't help but feel that continuous influx of foreign immigrants in this country will keep housing prices at high levels.

My parents recently tried to immigrate to U.S. and it's freaking impossible. Immigrating to Canada is extremely easy when you have a little bit of dough. Your investment is also guaranteed by the Canadian government.

However, in the case of U.S. you need at least U$1,000,000 and hire 10 full-time employees. You can also invest U$500,000 in designated regional centers, but this is much more risky (likened to "gambling $500,000 for a green card" by many immigration lawyers). Your investment in U.S. is also NOT guaranteed. This uncertainty is not something that typical upper-middle class foreigners are willing to tolerate.

This is only for investment visas. However, generally speaking, I think Canada is much more accommodating to immigrants so it's easier for foreigners to come here. My point is, there will be a strong inflow of foreign capital in the foreseeable future into areas like real estate as long as Canada keeps its gates open. Because of that, I doubt housing prices will come crashing down like it did in U.S. It may flatten or gradually decrease over the years though...

[AllWheelDrift]

I can't help but feel that continuous influx of foreign immigrants in this country will keep housing prices at high levels.

My parents recently tried to immigrate to U.S. and it's freaking impossible. Immigrating to Canada is extremely easy when you have a little bit of dough. Your investment is also guaranteed by the Canadian government.

However, in the case of U.S. you need at least U$1,000,000 and hire 10 full-time employees. You can also invest U$500,000 in designated regional centers, but this is much more risky (likened to "gambling $500,000 for a green card" by many immigration lawyers). Your investment in U.S. is also NOT guaranteed. This uncertainty is not something that typical upper-middle class foreigners are willing to tolerate.

This is only for investment visas. However, generally speaking, I think Canada is much more accommodating to immigrants so it's easier for foreigners to come here. My point is, there will be a strong inflow of foreign capital in the foreseeable future into areas like real estate as long as Canada keeps its gates open. Because of that, I doubt housing prices will come crashing down like it did in U.S. It may flatten or gradually decrease over the years though...
What about the fact that the the land mass of Canada is larger than the land mass of the US and as a result the population density in the US is almost 10x higher than that of Canada (and even that's nothing considering the population density in India is over 100x higher than that of Canada.) Sure, you could argue no-one wants to live much north of the US border, but Russia has a less hospitible climate and has a population density about 2.5x Canada and Finland and Sweden are about 5 and 7 times respecively. Heck, Iceland's population density is comparable to Canada.

Canada has lots of room for immigrants, maybe we just need to have them bring money to build some new cities. :lol:

[i6s1]

I can't help but feel that continuous influx of foreign immigrants in this country will keep housing prices at high levels.

My parents recently tried to immigrate to U.S. and it's freaking impossible. Immigrating to Canada is extremely easy when you have a little bit of dough. Your investment is also guaranteed by the Canadian government.

However, in the case of U.S. you need at least U$1,000,000 and hire 10 full-time employees. You can also invest U$500,000 in designated regional centers, but this is much more risky (likened to "gambling $500,000 for a green card" by many immigration lawyers). Your investment in U.S. is also NOT guaranteed. This uncertainty is not something that typical upper-middle class foreigners are willing to tolerate.

This is only for investment visas. However, generally speaking, I think Canada is much more accommodating to immigrants so it's easier for foreigners to come here. My point is, there will be a strong inflow of foreign capital in the foreseeable future into areas like real estate as long as Canada keeps its gates open. Because of that, I doubt housing prices will come crashing down like it did in U.S. It may flatten or gradually decrease over the years though...

Given the shrinkage of the natural population in most developed countries, and the growth of the middle class in China and India, I think we're going to see less immigration in the future. Why would an educated, upwardly mobile Indian want to come to Canada, to subsidize the retirement of an aging population?

And as far as real estate goes, why would an investor pay $700k for an average Vancouver house when he can pay under $300k for one in Miami? Faith in Canada's housing market is the only thing. Once price support starts to crack, it will rapidly crumble.

[sixsixii]

I think to some extent this is the current immigration policy in Canada. It's all good, and everyone is happy as long as there are high paying jobs in Canada. By the way, I don't know many upper middle class immigrant in my area. Prove me wrong though.


I can't help but feel that continuous influx of foreign immigrants in this country will keep housing prices at high levels.

My parents recently tried to immigrate to U.S. and it's freaking impossible. Immigrating to Canada is extremely easy when you have a little bit of dough. Your investment is also guaranteed by the Canadian government.

However, in the case of U.S. you need at least U$1,000,000 and hire 10 full-time employees. You can also invest U$500,000 in designated regional centers, but this is much more risky (likened to "gambling $500,000 for a green card" by many immigration lawyers). Your investment in U.S. is also NOT guaranteed. This uncertainty is not something that typical upper-middle class foreigners are willing to tolerate.

This is only for investment visas. However, generally speaking, I think Canada is much more accommodating to immigrants so it's easier for foreigners to come here. My point is, there will be a strong inflow of foreign capital in the foreseeable future into areas like real estate as long as Canada keeps its gates open. Because of that, I doubt housing prices will come crashing down like it did in U.S. It may flatten or gradually decrease over the years though...

[Impossibles]

Well, we started below the $580k, which was the max we were willing to come up to. Their last counter was $609k, (presumably hoping we'd meet around the $590-600k range) then a week later they drop their asking price to $599k, which based on recent sales (previous month) of similar properties in area seems to be below current market value. I had expected the house would move with that price and the open house. Instead, it feels to me like the Vancouver market has been losing steam since late October and through November. My ancedotes are by no means scientific, but new listings also seem to have dropped in price even though the number of new listings has slowed as well.

And like I said, previously my realtor had backed off (because we said we weren't in a hurry and had decided to wait) but lately she's become agressive. At the very least, she seems to have more free time to call me. :lol:

Its pretty typical for the real estate market to slow down in november/december, I wouldn't look into that too much.

[GemInite]

There was a unit in the Pantages condo listed in Toronto recently for $250K which when I saw right away I knew was to encourage a bidding war.

A week after the listing it was re-listed at $400K.

That to me says the seller had no intention of selling under $400K and the offers he/she received were too low.

It's one thing to put it under market value but at $150K what you want is pushing it.

[sixsixii]

There was a unit in the Pantages condo listed in Toronto recently for $250K which when I saw right away I knew was to encourage a bidding war.

A week after the listing it was re-listed at $400K.

That to me says the seller had no intention of selling under $400K and the offers he/she received were too low.

It's one thing to put it under market value but at $150K what you want is pushing it.

Stop posting, please. Nobody, really cares about your deals that got away, sorry to break it to you. Oh, yes, that $250K was to just a tease, total conspiracy! :twisted:

[GemInite]

Stop posting, please. Nobody, really cares about your deals that got away, sorry to break it to you. Oh, yes, that $250K was to just a tease, total conspiracy! :twisted:

I'm not looking for a deal, there are no deals in real estate. The point I was making that people are now setting attractive prices no where near what they are looking to get.

It's one thing to put a unit under market value, but to pretty much straight out lie to everyone is another story.

[Ceryx]

Real Estate, like any investment, took time to reflect its real value.

My friend bought a chain restaurant for 500k and a house for 400k in the end of 2008. The restaurant runs very well with a lot of customer for the first half of the 2009 but the business has dropped drastically due to the economy downfall. The headquarter even advise all chiains that they have to hang in there because they think this is going to last for awhile. They don't want to sell the restaurant now as they will be taking at least 15% of loss.

The house price took a correction in the early 2009 but now people are again crazy with the house. Housing price has risen up around 15% if you compared to beginning of the year. I would say the number in Januray is the real value of the house and it will be going back to that in 12 months.

We will find that out in couple of months. The bottom line is that I don't think the house price will go up while the business are doing bad.

[fidelity_1]

There’s lots of talk about a Canadian housing bubble. Resale prices have rocketed to levels above the atmosphere of incomes and rents. And, instead of dissuading demand, these high and rising prices seem to be stimulating sales—the kind of mania that causes would-be homebuyers to line up for days for new condo constructions and possibly assume too much risk out of fear that “if we don’t buy now, we’ll never be able to afford it”—all under the influence of once-in-a-lifetime lows in borrowing costs. These phenomena are definitely bubble markers, but they are, by themselves, not sufficient to verify the existence of a bubble. There are three other critical criteria. First, market turnover must be aided and abetted by credit growth—increased borrowing against inflated home values to buy even more homes or fund other types of spending. However, mortgage credit has been decelerating. In August (the latest data), it was 7.1% y/y, the slowest pace in more than seven years.

Second, froth in the existing home segment must spill over to new home and land prices. By September (also the latest data), new home prices rose sequentially for three months, but they are still down 2.1% from year-ago levels. Embedded land prices are down 1.9% y/y, matching their steepest slide in 18 years. Third, the recent surge in resale volumes and prices must not be explained by fundamental or technical factors. However, part of the record nine-month 74% surge in resale volumes since January is a response to the near-record four-month 29% dive during the global panic triggered by Lehman Brothers’ bankruptcy. And, part of the 20.7% y/y spike in the average existing home price reflects regional shifts in activity (about one-third of it) and the fact that the unleashing of the above-mentioned pent-up demand was not matched by supply. The post-Lehman record decline in new listings has not yet bounced back. When growing demand butts up against shrinking supply, higher prices are required to bring balance back to the market, particularly by attracting new sellers.

Even if the criteria for a Canadian housing bubble are not currently being met, there’s still the concern that new homebuyers could be assuming too much risk. Current extreme-low mortgage rates are destined to rise, and the resulting higher mortgage payments could prove too onerous for lifestyles or incomes. Some households may refuse to cut back on future discretionary outlays or save some of the future growth in their incomes to smooth the transition to higher payments but this is not likely the case for the majority. Current longer-amortized mortgages are inherently more risky because more things can go wrong over longer periods of time (such as losing your job or an income-damping disability), but there are many ways to significantly shorten effective amortization periods, such as by modestly bumping up payments over time (which many homeowners already do). Unfortunately, risk is a fact of life… equity investments can sometimes lose more than half their value (which we saw earlier this year) and even marriage has a near-40% failure rate. These risks don’t mean it’s imprudent to buy stocks or get married, as long as you take them into account (say, via diversification strategies for the former and communication strategies for the latter). New homeowners are taking risks, but I doubt the vast majority are doing so imprudently.


From MICHAEL GREGORY, Economic Research, BMO Capital Markets

Somewhat a neutral view, IMO...

[AllWheelDrift]

From MICHAEL GREGORY, Economic Research, BMO Capital Markets

Somewhat a neutral view, IMO...
Interesting. The "maybe we aren't" points seem to focus around comparing the current state of things to a year or so ago. I don't think pondering whether a bubble has formed in the past year is the real question. It's more of a question of whether a bubble has formed over the past 5 or so years. I suspect applying the criteria to that timeframe would more strongly suggest there is a bubble.

[justforboa]

Depends on the future.


Seriously, I can't believe these pointless threads contain more than 13 pages.

[Aggy]

My wife and I have been looking for a house for a year and a half now. We own a condo at Bayview/Sheppard, but need something bigger. We've been concentrating our search in the Warden/Sheppard/Huntingwood/Birchmount area in the west end of Scarborough.

We've been involved in 2 bidding wars on houses we loved and we've been blown out of the water each time!

First house listed at $469k and sold for $549k about 2 weeks ago. Second house we bid on last Wednesday listed at $497k and wenst for $660k! Our max price is only $550 and we're getting pretty pessimistic about getting a house in the Huntingwood area. We love the area as it's close the 401, mature neighbourhood and close to Sheppard.

I really hope the market cools down in that area because we don't want to be in a condo forever! :(

[EugW]

Given the shrinkage of the natural population in most developed countries, and the growth of the middle class in China and India, I think we're going to see less immigration in the future. Why would an educated, upwardly mobile Indian want to come to Canada, to subsidize the retirement of an aging population?
Probably for the same reason they're coming now. More stability, more personal and political freedoms, better safety, better health care, better less crowded housing, etc.

India is improving, but it's still a total mess. China is improving in terms of living standards, but the issues of corruption and personal safety are actually getting worse.

And as far as real estate goes, why would an investor pay $700k for an average Vancouver house when he can pay under $300k for one in Miami?
While I think prices are too high in Vancouver, I'd much rather live in Vancouver than Miami. And I'd rather live in Toronto than Vancouver.

It's moot though. In my field, new jobs are now pretty non-existent in Miami. The economy there has been decimated. Actually, a colleague has just moved from Miami to Toronto. While that person had a job in Miami, everyone is so short staffed and the morale amongst all the employees is so low, a lot of people are jumping ship and moving elsewhere, partially to pre-empt being laid off. My colleague joined the exodus, and moved to Canada, although most who move stay in the US obviously. Many of those vacated positions are being left unfilled on purpose to save money... which means those left over are even more overworked and frustrated.

Faith in Canada's housing market is the only thing. Once price support starts to crack, it will rapidly crumble.
Prices may decline significantly, but the question is when. It's risky entering now after all the prices increases, but then again people have been saying that since the early to mid 2000s. If you need a place to live and you plan on living there for an extended period, it can still make sense to take advantage of today's low interest rates, provided you don't go insane and way overpay in an emotional and foolish bidding war.

[AllWheelDrift]

Prices may decline significantly, but the question is when. It's risky entering now after all the prices increases, but then again people have been saying that since the early to mid 2000s. If you need a place to live and you plan on living there for an extended period, it can still make sense to take advantage of today's low interest rates, provided you don't go insane and way overpay in an emotional and foolish bidding war.
The problem is taking "advantage" of today's low interest rates actually has you overpaying and the low interest rates won't last the length of your mortgage. If this were the US where you can lock into a low rate for 30 years, then you actually could take "advantage" of low interest rates (though you still pay for it by overpaying for the house.)

Buying while rates are low in Canada you get the worst of both worlds, a price that has been inflated due to low rates, but a rate that will roughly be average over the length of your ammortization. Yes, you can find 10-15 year mortgages, but most people choose between 1-5 year fixed and 5 year variable so the vast majority of mortgages in Canada have a duration of 5 years or less, which is only 1/5-1/7th of the duration of their ammortization. If buyers were rational and well informed, low rates should cause less of a boom in Canada than the US, but I don't think this has been the case.

[EugW]

The problem is taking "advantage" of today's low interest rates actually has you overpaying and the low interest rates won't last the length of your mortgage. If this were the US where you can lock into a low rate for 30 years, then you actually could take "advantage" of low interest rates (though you still pay for it by overpaying for the house.)

Buying while rates are low in Canada you get the worst of both worlds, a price that has been inflated due to low rates, but a rate that will roughly be average over the length of your ammortization. Yes, you can find 10-15 year mortgages, but most people choose between 1-5 year fixed and 5 year variable so the vast majority of mortgages in Canada have a duration of 5 years or less, which is only 1/5-1/7th of the duration of their ammortization. If buyers were rational and well informed, low rates should cause less of a boom in Canada than the US, but I don't think this has been the case.
If you can afford a significant down payment and a shorter term like 10-20 years, then the risk is much less. If rates go up significantly, you can simply extend the amortization. Meanwhile you still have a place to live. This is esp. true for those who already own and want to upgrade. They may already have significant equity in their existing homes. Even if one cannot afford a 10-20 year amortization period, then 25 isn't that bad either. The riskier ones are those with 5% down and 35 year amortization periods.

BTW, over the long run, 5 year mortgage terms have been cheaper than 7-10 year mortgage terms. Maybe that won't be true for people starting today, but we don't know that.

[AllWheelDrift]

If you can afford a significantly down payment and a shorter term like 10-20 years, then the risk is much less. If rates go up significantly, you can simply extend the amortization. Meanwhile you still have a place to live. This is esp. true for those who already own and want to upgrade. They may already have significant equity in their existing homes. Even if one cannot afford a 10-20 year amortization period, then 25 isn't that bad either. The riskier ones are those with 5% down and 35 year amortization periods.
I wasn't talking about the risks, just simply sayiing that house prices are higher when rates are low, and rates probably won't stay low so chances are buying when rates are low you end up paying more. This is just as true if you have a larger downpayment and shorter ammortization and/or are moving up in the market. In those cases, the principle is a larger concern than interest rates, but higher prices = larger principle as well.
BTW, over the long run, 5 year mortgage terms have been cheaper than 7-10 year mortgage terms. Maybe that won't be true for people starting today, but we don't know that.
That's because you have to pay a large premium for mortgage terms longer than 5 years in Canada. Again, this isn't the case in the US.

[EugW]

Indeed, this is not the US, and I don't think we should get too hung up on the lack of 30 year mortgages (which are more expensive anyway).

[VivienM]

Indeed, this is not the US, and I don't think we should get too hung up on the lack of 30 year mortgages (which are more expensive anyway).

But what happens if you pay a jacked up amount for a house on the basis of a 4.5% 5 year mortgage, and when you renew in 5 years the rate is 7.5%?

You're basically screwed, whether you make your payments or not.

An American with a locked-in 30 year mortgage would only be screwed if they wanted to sell the property...

[chenwaa123]

But what happens if you pay a jacked up amount for a house on the basis of a 4.5% 5 year mortgage, and when you renew in 5 years the rate is 7.5%?

You're basically screwed, whether you make your payments or not.

An American with a locked-in 30 year mortgage would only be screwed if they wanted to sell the property...

Your only in trouble if you were strenching yourself at 4.5%. People who aren't taking advantage of pre paying before rates head higher only have themselves to blame

[dealhunt]

Your only in trouble if you were strenching yourself at 4.5%. People who aren't taking advantage of pre paying before rates head higher only have themselves to blame

Yes they have only themselves to blame (although many people influenced their bad decisions).

The big problem is that there are so many of these people carrying so much debt, that the market will become instable. A lot of people will be in for a lot of hurt, including every Canadian taxpayer when CMHC has to backstop all these loans.

[muchacho_007]

Unless we are destined to be humiliated - as a country. We have been the financial envy of the world but it looks like the current government has not learned anything from what happened in the south.

In the US. Fannie and Freddie had tacit government backing while CHMC is explicitly government backed. Maybe the tacit backing left the US government with a false sense of security that lead to inaction. Maybe having explicit government back will lead the current government to be more proactive with it's actions.

[EugW]

In the worst case scenario, what many people say could happen, could actually happen. However, what I don't understand is why so many seem to think the worst case scenario must happen. Personally I think it's less likely.

What I am still predicting is a market pullback (in real inflation-corrected dollars) in the coming years, but nowhere near what the sky-is-falling types might have us believe.

For this reason, while I will say that it might be very risky to be a real estate speculator in Canada right now, it can still make a lot of sense to buy for your own primary residence if you're not stretching yourself out to max.

[Buggy166]

In the worst case scenario, what many people say could happen, could actually happen. However, what I don't understand is why so many seem to think the worst case scenario must happen. Personally I think it's less likely.

What I am still predicting is a market pullback (in real inflation-corrected dollars) in the coming years, but nowhere near what the sky-is-falling types might have us believe.

For this reason, while I will say that it might be very risky to be a real estate speculator in Canada right now, it can still make a lot of sense to buy for your own primary residence if you're not stretching yourself out to max.

i still think a ratio of 7:1 of salary to housing is unsustainable and if it rises its even more than a clear indication about **** hitting the fan. i dont forsee people working overtime JUST to go home, sleep, and work overtime again the next day to maintain a house they dont live in bust just sleep in.

salaries arent going up, housing is. jobless rate is falling, house sales are climbing. dont need to be a scientist to figure something's gotta give.

sky wont fall but there'll be "adjustments"

[EugW]

Actually, the prices in the last while haven't gone up much as some might claim in many areas, if you exclude the fall 2008 blip. For example, prices for October 2009 in Toronto are only 7% more than they were in October 2007. That's all of 3.5% per year on average over the last two years (compared to the average of over 5% over the last 10 years).

Furthermore, if you use Teranet's numbers, average home prices at last measure are actually lower than they were at the peak of 2008. To put it another way, if you fit the prices to a curve, home prices to a certain extent have plateau'd of late.

So yeah, there might be some "adjustments', and I am predicting them as well, but nonetheless "adjustments" can occur while still being far better than worst case scenarios.

[AllWheelDrift]

Indeed, this is not the US, and I don't think we should get too hung up on the lack of 30 year mortgages (which are more expensive anyway).
In the US they aren't particularly expensive. The current average rate for a 30 year mortgage in the US is 4.78% which seems pretty cheap to me. Sure, a 15 year mortgage in the US is a bit cheaper at 4.29% but .49% doesn't seem like much to pay for an extra 15 years of security.

The lack of a long term mortgage at a low rate in Canada is something to be hung up on. In the US, terms shorter than the ammortization are called "balloon" mortgages and being forced to refinance them at higher rates as they matured was one of the major contributors to the meltdown. (Yes, there were even more exotic mortgages that also contributed.) In Canada, essentially all our mortgages are baloon mortgages.

At least in the US if you want to be responsible and lock in your rate for the duration of your ammortization you can and it doesn't cost you much.

[AllWheelDrift]

For this reason, while I will say that it might be very risky to be a real estate speculator in Canada right now, it can still make a lot of sense to buy for your own primary residence if you're not stretching yourself out to max.
Yes, but how could 7x your salary NOT be considered stretching yourself out to the max?

[ItzMe]

And as far as real estate goes, why would an investor pay $700k for an average Vancouver house when he can pay under $300k for one in Miami?

Just my opinions, but...

Housing is highly localized.

- Demand to live in Vancouver might be greater than demand to live in Miami (I have no idea what the net immigration numbers are to Miami ...)
- What neighborhood do I get for 300K? Is it a nicer area? Or does it back into a slum? I have no idea, but I know nicer area condos in foreclosures are above 200K, so I would estimate that for 300K, I could get a nicer house in just an average area, with likely lower incomes all around for residents...again never looked at Miami seriously though so I may be wrong.
- What supply restrictions are in place? How much available land can be developed around me?
- Perhaps the investor is local and prefers an investment that is local.
- Rents may be higher in the area of Vancouver that the investor is looking at, justifying the higher investment
- The investors confidence may be higher for Vancouver than it is for Florida
- The investor doesn't want the hassle of dealing with Florida real estate (higher property taxes for out of state owners, can't be on site to manage it, etc.)

Could be 1 or many of the above.

Finally, for a potential home buyer in Vancouver looking at a 700K property...

Just putting this out there as a point of interest based off some numbers that I've run - all is my opinion so make your own judgements and what not :)...Assuming:

- A purchase price of a home in Vancouver of 700,000$
- A married couple, each person earning 60,000$ per year in salary

This brings us 120,000$ per year in gross salary.

Tax payable (according to E&Y's tax calculator) is roughly 12K per person in BC (assuming singles - they don't offer a married calculator :)) - giving us 96K net per year (60K x 2 minus 12K x 2)

Assuming 20% down, (140K), it leaves a mortgage of 560K, with monthly payments of 3,256.99$ per month, assuming a 5% rate of interest (just over double the current prime lending rate), and a 25 year ammortization period.

This would mean that the mortgage would equal, roughly, 41% of the household net income. Add in property taxes, maintenance, etc. and it gets expensive based on net income, but definately not impossible for a reasonably frugal couple - the total could stay below 50% of net income, leaving 4K net per month for things like food, transportation, entertainment, and the like.

Personally I think 4K is plenty extra - knock off 1K of that for a moderate retirement savings fund every year, and I can see how a couple can comfortably live on 3K, with a decent car, moderate entertainment expenses, etc.

I suppose there's always the arguements of:

a. The downpayment is too high
or
b. The 4K of net income left is insufficient

I would argue:

a. Find better employment (whether through furthering education, taking up some part time work, or whatever else - increase your salary making more net income) - save more overall - whether that's for your downpayment, or just to increase the allocation to your retirement savings or w/e else...

b. Don't buy such an expensive home - either look at a condominium (a nice 2BR unit in the city, or even in a nice close burb like North Van can be had for under 500K for a higher floor in a nice, newer (< 10 years old) building with ammenities by way of example of a listing I saw a few weeks back), or, look for a home further away (Surrey, Langley, Coquitlam, etc. all come to mind as having properties less expensive than Vancouver, per square foot). This means a commute of course if you work in Vancouver however.

Anyway - just trying to say that, based on what I would consider to be a relatively reasonable, if not low, income for an educated couple, it's by no means impossible to live in Vancouver. Is it cheap? No. Are there deals to be had? Maybe...prices have rebounded sharply over the last few months, so personally I think most of the inventory is getting too expensive for my tastes again, but a few months back? Definately...developers were desperate then. Now, people are lining up again :)

Of course if too much of your net income goes up in smoke with a distinctive odour every month, all bets are off...it is Vancouver after all :P

[napoleon1769]

What? Toronto>Vancouver>Miami? I think it's the other way around.

[pitz]

The lack of a long term mortgage at a low rate in Canada is something to be hung up on. In the US, terms shorter than the ammortization are called "balloon" mortgages and being forced to refinance them at higher rates as they matured was one of the major contributors to the meltdown. (Yes, there were even more exotic mortgages that also contributed.) In Canada, essentially all our mortgages are baloon mortgages.


Yup. Balloon mortgages basically fell out of favour (or were banned, I'm not sure) after the Great Depression in the United States because so many people lost their houses with them because bankers demanded payment in full and would not refinance.

Most people in the Great Depression could still make their payments, but because the mortgages were 'balloon', and because bankers themselves were being put into liquidation -- the bankers foreclosed to meet their own obligations to their creditors/depositors.


At least in the US if you want to be responsible and lock in your rate for the duration of your ammortization you can and it doesn't cost you much.

Yeah and tax deductibility should push the prices up in the USA as well. When you look at the situation of Canada vs. US pricing logically, its fairly difficult to conclude that Canada deserves a higher housing price than the USA. If anything, a lower housing price would be more appropriate because of the smaller square footage, the higher risk-adjusted cost of financing, and tax deductibility of mortgage payments for people who do not fall under the AMT regime.

[pitz]

Explain this one (http://www.newgeography.com/content/001221-housing-bubbles-why-are-americans-ignoring-reality?ref=patrick.net), housing bulls:

Meanwhile, back in the normal market of Houston, they are merrily building starter homes of 235 square meters (2,529 square feet) for $140,000 on the fringes ($30,000 for the lot, $110,000 for actual house construction).

$140k for a house that would probably, if located in the GTA, Calgary, or Vancouver, fetch $500k. Hmmmm.

Let's see... Falling apart, terribly inadequate infrastructure and high taxes in Calgary/Toronto/Vancouver....or very modern infrastructure, high standard of living, better jobs, low taxes, etc., in Houston? Oh, and probably the cheapest pump petrol in the western world?

Hmmm.. Touch choice, lol.

[DearSummer]

Explain this one (http://www.newgeography.com/content/001221-housing-bubbles-why-are-americans-ignoring-reality?ref=patrick.net), housing bulls:



$140k for a house that would probably, if located in the GTA, Calgary, or Vancouver, fetch $500k. Hmmmm.

Let's see... Falling apart, terribly inadequate infrastructure and high taxes in Calgary/Toronto/Vancouver....or very modern infrastructure, high standard of living, better jobs, low taxes, etc., in Houston? Oh, and probably the cheapest pump petrol in the western world?

Hmmm.. Touch choice, lol.

You think people are going to move from the GTA/Calgary/Vancouver because of house prices? Ya, I'll just pickup from the country in which I'm a citizen, have a job, and all my friends and move to some foreign city a few hundred miles away. That's not how real estate works.

You've been talking about the market crashing since 2006 pitz. We're still waiting. You're still renting, right? :lol:

http://www.globalpropertyguide.com/assets/img/CO-CAP-F01.gif

Oh, and the mortgage market in Canada is doing great as well.

http://www.globalpropertyguide.com/assets/img/CO-CAP-F04.gif

Canada’s conservative lending practices, once considered a weakness, helped it avoid contagion from the US subprime crisis.

Some notable differences between the Canadian and US mortgage markets:


Loan prepayment is very expensive in Canada, whereas it is a free option in the US.
Securitization rates are lower in Canada.
In Canada, only about 30% of loans are initiated by brokers, as compared to around 70% in the US.
In Canada, the lender has recourse to the other assets of the borrower, if the loan goes to foreclosure. In the US, this alternative is either expensive or illegal, especially for owner-occupied dwellings.
Canadian lenders offer fewer loan options.
A typical mortgage loan in Canada is a five-year fixed-rate loan, amortized over 25 years; whereas in the US, most loans are for 30 years or more.

Up from 50% in 2007 to 54% of GDP, Canada’s domestic mortgage market grew surprisingly strongly in 2008, according to Statistics Canada. In 2008, total outstanding residential mortgages rose 11.8% from a year earlier, the highest rate of growth since 1990.

[ItzMe]

$140k for a house that would probably, if located in the GTA, Calgary, or Vancouver, fetch $500k. Hmmmm.

Let's see... Falling apart, terribly inadequate infrastructure and high taxes in Calgary/Toronto/Vancouver....or very modern infrastructure, high standard of living, better jobs, low taxes, etc., in Houston? Oh, and probably the cheapest pump petrol in the western world?

Hmmm.. Touch choice, lol.


Let me head to Houston for it's fantastic lifestyle. I hear I can windsurf on the ocean in the summer and snowboard on mountains that are host to the olympics in the winter, all just a short drive from where I live. Oh wait, that's Vancouver ... :)

Or, lets ditch Toronto and let me head to Houston and take a job in a major financial centre - lots of banks and insurance co's and the rest are headquartered there! (Well maybe some are ... I really don't know :D)

I'll give it the it's warmer than Calgary argument ... and they're both cities that have loads of big oil folks :)...but I don't invest in Calgary so ... w/e :)

As for better jobs, I have no idea...but I'd imagine it's highly career dependent - if I'm an investment banker, Toronto sounds pretty good to me. If I'm in tech or hospitality or growing green stuff (a seemingly popular career choice) Vancouver seems pretty nice. Sure if I'm an in demand engineer for oil co's, or have some critical skills for support staff etc. oil cities might do me well - but I wouldn't say that it caters to every single job category out there making it somehow "better jobs...".

Lower taxes are important but the higher ones up here also pay for some pretty important things like public health care (whether I like it or not is a different story but fact remains, it's there, and we pay for it :)).

Anyway, sarcasm asside...choosing a city to live in goes well beyond what the housing prices and the like are...it has so much to do with lifestyle, career and business opportunities, and the like - and in a city like Vancouver, supply & demand - there's loads of demand to live in certain areas of the city, and not a whole whack of land to build on here (unless you start heading out into the booneys an hour or more out of downtown :)). I don't know squat about Houston but I can make a general assumption that may not be the case there...

P.S
Not many houses in Vancouver for 500K that are relatively new (most would be considered heritage...and not a nice heritage IMO :D). Burbs, maybe...but not Vancouver :) Just a point of interest.

[ItzMe]

You've been talking about the market crashing since 2006 pitz. We're still waiting. You're still renting, right? :lol:



Just as an asside...

One could make the argument that the market did "crash", to a point, last year, in downtown Vancouver condos, by way of a simple example. Compared to 2006 presale prices, units completing in 08 were coming in at least 15% lower in price on the resale market, and the only buyers were really the vultures and lowballers.

Of course that reversed rather quickly and we're back to lineups like we saw last week at the Omni development in Yaletown, along with a resumption of the heyday pricing...but there was a nice period where there were good deals on both resale and new developments (Concorde pacific's "cosmo" development in downtown VAN comes to mind ... if they had waited 6 months, they'd have made alot more money :)).

I think there's just a contingent of folks who believe that the market is doomed to collapse and there's nothing anyone can say to convince them otherwise. But if they weren't around, I guess investors wouldn't have as big a tenant pool to pluck from, so maybe we all serve a purpose in the end :D

[pitz]

You think people are going to move from the GTA/Calgary/Vancouver because of house prices?


Absolutely. Employers do all the time. In the 90s, global engineering and O&G firms were hiring people in Calgary because the labour was cheaper there, as well as the cost of housing and everything else relative to the USA. Today the trend has reversed.


Ya, I'll just pickup from the country in which I'm a citizen, have a job, and all my friends and move to some foreign city a few hundred miles away. That's not how real estate works.


In a knowledge-based economy, the jobs ultimately move to where the lowest costs reside, and Canada's not competitive, not even by a long shot.

BTW, I posted the article not to elicit debate on the whole Canada vs. USA thing, but rather, to point out that houses do not cost crazy amounts to construct once you strip all the crazy profits of the developers and the speculation out of the equation.


You've been talking about the market crashing since 2006 pitz. We're still waiting. You're still renting, right? :lol:


I live in hotel rooms mainly, so yeah, you could say that I rent. Cheaper than owning, that's for sure, and I don't even have to make my bed :).


Oh, and the mortgage market in Canada is doing great as well.


US mortgage market performed just well until it went off a cliff too. Point??

(your other quote contained some mistruths too....but I'm sure if you look hard enough, you'll find some shady things in my article, so let's call it even for the evening and smoke a bowl, eh?)

[VivienM]

You've been talking about the market crashing since 2006 pitz. We're still waiting. You're still renting, right? :lol:

Your graphs are not showing, say, mortgage rates and amortizations.

Could pitz have predicted that, since 2006, CMHC and the BoC would adopt policies that would fuel house price increases?

Hell, in 2006, wasn't CMHC only insuring 25 year amortizations with 10% down or 5% down for first-time buyers?

When did CMHC start insuring 35 year, 5% for all?

[Motoss]

Your graphs are not showing, say, mortgage rates and amortizations.

Could pitz have predicted that, since 2006, CMHC and the BoC would adopt policies that would fuel house price increases?

Hell, in 2006, wasn't CMHC only insuring 25 year amortizations with 10% down or 5% down for first-time buyers?

When did CMHC start insuring 35 year, 5% for all?.

[NuclearBlast]

Hell, in 2006, wasn't CMHC only insuring 25 year amortizations with 10% down or 5% down for first-time buyers?

When did CMHC start insuring 35 year, 5% for all?

They started in 2006 :lol:

[GemInite]

did the insurance on 35 year mortgages on 5% really just start in 2006?

Wow I didn't realize it wasn't that long ago. Now I see why real estate was such a deal between 2002-2005.

I've mentioned this before but right now I feel like I'm competing against those people with a 35 year/5% as I've set a hard cap for myself despite the ridiculous amount he bank approved me for.

[yucksta]

Let me head to Houston for it's fantastic lifestyle. I hear I can windsurf on the ocean in the summer and snowboard on mountains that are host to the olympics in the winter, all just a short drive from where I live. Oh wait, that's Vancouver ... :)

Or, lets ditch Toronto and let me head to Houston and take a job in a major financial centre - lots of banks and insurance co's and the rest are headquartered there! (Well maybe some are ... I really don't know :D)

I'll give it the it's warmer than Calgary argument ... and they're both cities that have loads of big oil folks :)...but I don't invest in Calgary so ... w/e :)

As for better jobs, I have no idea...but I'd imagine it's highly career dependent - if I'm an investment banker, Toronto sounds pretty good to me. If I'm in tech or hospitality or growing green stuff (a seemingly popular career choice) Vancouver seems pretty nice. Sure if I'm an in demand engineer for oil co's, or have some critical skills for support staff etc. oil cities might do me well - but I wouldn't say that it caters to every single job category out there making it somehow "better jobs...".

Lower taxes are important but the higher ones up here also pay for some pretty important things like public health care (whether I like it or not is a different story but fact remains, it's there, and we pay for it :)).

Anyway, sarcasm asside...choosing a city to live in goes well beyond what the housing prices and the like are...it has so much to do with lifestyle, career and business opportunities, and the like - and in a city like Vancouver, supply & demand - there's loads of demand to live in certain areas of the city, and not a whole whack of land to build on here (unless you start heading out into the booneys an hour or more out of downtown :)). I don't know squat about Houston but I can make a general assumption that may not be the case there...

P.S
Not many houses in Vancouver for 500K that are relatively new (most would be considered heritage...and not a nice heritage IMO :D). Burbs, maybe...but not Vancouver :) Just a point of interest.

I think Pitz point is still valid. Toronto and Vancouver are becoming prohibitively more expensive and considering the makeup of these cities is largely immigrants, I see no reason why people will not start to leave for greener pastures, if indeed green pastures are out there.

I don't think that people are so tied to Toronto/Vancouver that they wouldn't leave if it becomes advantageous to leave that just like many of us or many of our parents or parents parents left wherever (probably a place where we had much stronger ties) to come here in the first place.

[Bamelin]

I think Pitz point is still valid. Toronto and Vancouver are becoming prohibitively more expensive and considering the makeup of these cities is largely immigrants, I see no reason why people will not start to leave for greener pastures, if indeed green pastures are out there.

I don't think that people are so tied to Toronto/Vancouver that they wouldn't leave if it becomes advantageous to leave that just like many of us or many of our parents or parents parents left wherever (probably a place where we had much stronger ties) to come here in the first place.

What is far more likely to happen (in my opinion) is that people will start flocking to the suburbs of these major cities again. A shoebox in downtown Vancouver/Toronto/etc or a decent house an hour out? Young professionals may still pay hundreds of thousands for their shoe boxes but most people starting or with families will simply continue to move out of the city to areas that are affordable.

[yucksta]

What is far more likely to happen (in my opinion) is that people will start flocking to the suburbs of these major cities again. A shoebox in downtown Vancouver/Toronto/etc or a decent house an hour out? Young professionals may still pay hundreds of thousands for their shoe boxes but most people starting or with families will simply continue to move out of the city to areas that are affordable.

Like they haven't already? The suburbs are expensive.

I still don't understand what what we will be producing or providing in Vancouver or Toronto of value that will sustain our lifestyles for years to come.

I think things will fall apart sooner than we think.

[AllWheelDrift]

What is far more likely to happen (in my opinion) is that people will start flocking to the suburbs of these major cities again. A shoebox in downtown Vancouver/Toronto/etc or a decent house an hour out? Young professionals may still pay hundreds of thousands for their shoe boxes but most people starting or with families will simply continue to move out of the city to areas that are affordable.
In Vancouver, $500k is already suburbs (or a condo). West of Main St. in Vancouver you can't get a house for under $1M. Ok, I lied, there's a couple pockets with some run down houses in bad areas for a total of a couple dozen for under $1M while there's close to 500 houses for sale total in the area.

[VivienM]

What is far more likely to happen (in my opinion) is that people will start flocking to the suburbs of these major cities again. A shoebox in downtown Vancouver/Toronto/etc or a decent house an hour out? Young professionals may still pay hundreds of thousands for their shoe boxes but most people starting or with families will simply continue to move out of the city to areas that are affordable.

In the case of Toronto, HOW can you move to the suburbs when transportation infrastructure has been starved for decades?

Well, okay, I mean if you work downtown. At $400/month for a parking spot and the Gardiner and Don Valley Parking Lots to deal with, that leaves socialist transportation as realistically the only way to commute, and good luck commuting to Oakville or Pickering or Newmarket by socialist means...

[VivienM]

did the insurance on 35 year mortgages on 5% really just start in 2006?

Wow I didn't realize it wasn't that long ago. Now I see why real estate was such a deal between 2002-2005.

I've mentioned this before but right now I feel like I'm competing against those people with a 35 year/5% as I've set a hard cap for myself despite the ridiculous amount he bank approved me for.

Yup. Your feeling is EXACTLY right. The market price is set by the highest bidder, and that's the 'speculator' (by which I mean a person who doesn't care about paying off the house) stretching him/herself with 35 year amortizations, 5% down, etc.

I really wonder how our policymakers could be this stupid. What made ANYBODY in their right state of mind think that making it easier to borrow bigger amounts was actually going to improve long-term housing affordability?!

Oh wait. It's probably the same people who cooked up student loans. Easy debt seems to be the magical solution to all of society's ills...

[fruganizer]

In the case of Toronto, HOW can you move to the suburbs when transportation infrastructure has been starved for decades?

Well, okay, I mean if you work downtown. At $400/month for a parking spot and the Gardiner and Don Valley Parking Lots to deal with, that leaves socialist transportation as realistically the only way to commute, and good luck commuting to Oakville or Pickering or Newmarket by socialist means...


There's a train that goes through Pickering every 1/2 hour. It's a very easy commute to downtown.

[VivienM]

There's a train that goes through Pickering every 1/2 hour. It's a very easy commute to downtown.

Easy, sure, but how long on that train to Union Station?

How long does it take you to get to that train station from your average house?

When does the last train run? Some GO routes seem to have service only until like, 6:30, which could be problematic for some people.

[GemInite]

In another forum the members have likened agent only pre-sales for condos to insider trading. Which it basically is if you think about.

Brokers and agents get a crack before anyone else does. If this was the business world you would be arrested and thrown in jail.

[pitz]

In another forum the members have likened agent only pre-sales for condos to insider trading. Which it basically is if you think about.


I'd liken it to brokers who are able to allocate shares of IPO's to preferred clients in preference to the market.

The main issue with the involvement of real estate brokers is that they tend to operate anti-competitively, and a conspiracy to restrain trade and fix prices. The government has no huge issues going after oil companies that fix prices, or engineering companies -- but they won't go after real estate agents who operate anti-competitively.

The other problem with RE brokers is that they aren't really professionals, and the amount of conflict of interest is unbelievable.


Brokers and agents get a crack before anyone else does. If this was the business world you would be arrested and thrown in jail.

Developers are the ones who are losing out if their agents could achieve a higher price for units in the marketplace selling through traditional means.

[fruganizer]

Easy, sure, but how long on that train to Union Station?

How long does it take you to get to that train station from your average house?

When does the last train run? Some GO routes seem to have service only until like, 6:30, which could be problematic for some people.

About 35 minutes to union
I don't know where the average house is in Pickering. It's ten minutes to the train from the average house in Oshawa
last train is at midnight

We used to live in Halifax and it takes approximately the same length of time to commute 5km to downtown Halifax as it takes to ride the train 50km to downtown Toronto.

[GemInite]

in regards to the go train there are way too many lines that only run in rush hour.

I live near Agincourt GO station but it only has 3-4 trains that run only in rush hour. As I work nights I don't even have the option to take it.

[Aggy]

Here we go again...house came on the market today for $480k. With the most recent houses in the Bridlewood area of Scarborough going for about $100k over asking we're probably going to get outbid again. I wish we bought 1.5 years ago where the same house would have easily have went for $450k :(

We're going to try to go in with a bully offer tomorrow since offers aren't accepted until Monday. I hate bidding wars!

[Bamelin]

In the case of Toronto, HOW can you move to the suburbs when transportation infrastructure has been starved for decades?

Well, okay, I mean if you work downtown. At $400/month for a parking spot and the Gardiner and Don Valley Parking Lots to deal with, that leaves socialist transportation as realistically the only way to commute, and good luck commuting to Oakville or Pickering or Newmarket by socialist means...

Tons of people live an hour out of the core or more and commute in on the GO.

You can get a nice 1500 sq ft townhome on the fringes of the city for 200 - 250k. Contrast that to Toronto where 250 k will buy you a 500 sq ft shoebox.

Families just starting out will continue to move out of Toronto to the outer suburbs (when I say outer I mean waaay outer ... not Mississauga. I'm talking about places like Oshawa, Ajax, Whitby, Newmarket, Alliston Burlington and Milton)

[anom]

Tons of people live an hour out of the core or more and commute in on the GO.

You can get a nice 1500 sq ft townhome on the fringes of the city for 200 - 250k. Contrast that to Toronto where 250 k will buy you a 500 sq ft shoebox.

Families just starting out will continue to move out of Toronto to the outer suburbs (when I say outer I mean waaay outer ... not Mississauga. I'm talking about places like Oshawa, Ajax, Whitby, Newmarket, Alliston Burlington and Milton)

+1

or Richmond Hill, Markham, and yes, I know some people that have started out in Mississauga recently as well...

[thelefteyeguy]

lol...Gibson Square price list...

http://urbantoronto.ca/showthread.php?t=10698

what a joke.

30k for parking in north york...
819 sqft 427k+30K+0.5k per floor

HST...you're looking at $500k easily at closing...more if you want upgrades.
(EDIT...not sure if the builder included GST/HST in listed price)

when did north york become downtown?

[yucksta]

Tons of people live an hour out of the core or more and commute in on the GO.

You can get a nice 1500 sq ft townhome on the fringes of the city for 200 - 250k. Contrast that to Toronto where 250 k will buy you a 500 sq ft shoebox.

Families just starting out will continue to move out of Toronto to the outer suburbs (when I say outer I mean waaay outer ... not Mississauga. I'm talking about places like Oshawa, Ajax, Whitby, Newmarket, Alliston Burlington and Milton)

+1

or Richmond Hill, Markham, and yes, I know some people that have started out in Mississauga recently as well...

I still think prices are too high in these areas as well considering the increased transportation costs, and I still don't understand how this setup will continue to viable particularly when peak oil hits and our economy with a declining manufacturing, becomes a paper shuffling economy producing nothing of *real* value.

Commuting anywhere in the GTA is a pain unless you live AND work right next to a GO station. I live in Burlington and commute to Mississauga over the QEW/403 and it takes nearly 2 hours out of my day to get to and from work. And this is nothing compared to the amount of time others are wasting commuting from places like Hamilton to Markham to do work that typically doesn't even require you to be at a specific physical location. What an inefficient setup this is, how can we be such idiots?

[krazo]

lol...Gibson Square price list...

http://urbantoronto.ca/showthread.php?t=10698

what a joke.

30k for parking in north york...
819 sqft 427k+30K+0.5k per floor

HST...you're looking at $500k easily at closing...more if you want upgrades.
(EDIT...not sure if the builder included GST/HST in listed price)

when did north york become downtown?

These prices are outrageous.. not sure how they can be justified.. do buyers expect to make money on top of this when they sell in 3-5 years?

[anom]

I still think prices are too high in these areas as well considering the increased transportation costs, and I still don't understand how this setup will continue to viable particularly when peak oil hits and our economy with a declining manufacturing, becomes a paper shuffling economy producing nothing of *real* value.

Commuting anywhere in the GTA is a pain unless you live AND work right next to a GO station. I live in Burlington and commute to Mississauga over the QEW/403 and it takes nearly 2 hours out of my day to get to and from work. And this is nothing compared to the amount of time others are wasting commuting from places like Hamilton to Markham to do work that typically doesn't even require you to be at a specific physical location. What an inefficient setup this is, how can we be such idiots?

I agree that it's ridiculous, but people are doing it. Everywhere in the GTA seems "too high" right now...

While some people do work remotely, I'm wondering if this will ever become the norm considering the commute time/costs.

[pitz]

I still think prices are too high in these areas as well considering the increased transportation costs, and I still don't understand how this setup will continue to viable particularly when peak oil hits and our economy with a declining manufacturing, becomes a paper shuffling economy producing nothing of *real* value.


Yeah no kidding, a lot of these useless activities (ie: banking) will dissappear or be severely rationalized when peak oil and declining oil hits hard.

Maybe engineers involved in energy efficiency, in oil production or alternative energy might be able to do an hour-long commute every day (or commute by aircraft...like many bankers do) and not feel the pain. But everyone else, forget it.

[speedyforme]

I still think prices are too high in these areas as well considering the increased transportation costs, and I still don't understand how this setup will continue to viable particularly when peak oil hits and our economy with a declining manufacturing, becomes a paper shuffling economy producing nothing of *real* value.

Commuting anywhere in the GTA is a pain unless you live AND work right next to a GO station. I live in Burlington and commute to Mississauga over the QEW/403 and it takes nearly 2 hours out of my day to get to and from work. And this is nothing compared to the amount of time others are wasting commuting from places like Hamilton to Markham to do work that typically doesn't even require you to be at a specific physical location. What an inefficient setup this is, how can we be such idiots?

I won't comment on the driving commute but it seems like a lot of businesses are moving out of GTA due to costs so there might always be some sort of demandto live in the surrounding areas of GTA and out of the core due to the businesses moving. *shrugs*

[GemInite]

lol...Gibson Square price list...

http://urbantoronto.ca/showthread.php?t=10698

what a joke.

30k for parking in north york...
819 sqft 427k+30K+0.5k per floor

HST...you're looking at $500k easily at closing...more if you want upgrades.
(EDIT...not sure if the builder included GST/HST in listed price)

when did north york become downtown?

A few realtors I spoke with thought those prices were ridiculous.
I walked by the showroom and decided to pop in this past weekend. There was a lot of people traffic but I did not see anyone buying at all.

Everyone was doing the same math and were like wtf? That's crazy expensive

[EugW]

TREB update for November 2009 (http://torontorealestateboard.com/consumer_info/market_news/mw2009/pdf/mw0911.pdf)

Greater Toronto REALTORS® reported 7,446 sales in November – slightly more than double the November 2008 result when GTA home sales had dipped markedly due to the economic downturn.

Year-to-date sales were up 14 per cent compared to the first 11 months of 2008.

The average price for November transactions was up 14 per cent year-over-year to $418,460. The average price year-to-date was up four per cent to $394,464.

In November, the median price was $353,800, from the $312,250 recorded during November of 2008.

---

The average price was $393,757 (http://torontorealestateboard.com/consumer_info/market_news/news2007/nr120507.htm) in November 2007. Nov. 2009 represents an increase in price of 6.3% over Nov. 2007, or 3.1% per year averaged over two years.

[slavka012]

We bought a house in spring. Now I've checked new listings in the areas where we'd been looking. There were quite a few listings below 400K in the Concord, Maple, Woodbridge. Now there is none. That is just crazy!

[7jai]

Why?

- HST is coming in place (higher taxes coming our way)
- COLA is still the same (cost of living has not risen)
- Wages and salaries remain stagnant (economy is still in a downturn, businesses are still closing down, corporations are still in a hiring freeze - despite what the news says)

With just these 3 simple reasons (there are many more btw), you expect a potential buyer with this kind of criteria to buy a house that is overly inflated? Yeh ok, good luck trying to find someone who wants to buy it then.

If people have that much money to spend, I would say go do it. This way, I can buy your house for cheaper later on ;) ha ha

[EugW]

If people have that much money to spend, I would say go do it. This way, I can buy your house for cheaper later on ;) ha ha
The bizarre-logic post of the day.

Basically you're encouraging people to pump up prices, because you will be buying later.

[chinamansteve]

I am in the process of checking out house prices in my area as I will be looking to purchase one soon. I have no idea where house prices will head, there are a lot of bulls and bears in the real estate market. I personally think house prices may come back down when interest rates rise, but I am no expert. At the moment I am looking with the mindset to buy, but at the same time I am patient due to my speculation of a "housing bubble". I know what I want and what price I am willing to pay for it, so if I come across a house at my price range I will buy regardless of where future house prices are heading. At the moment, I am hedging my speculation on a housing bubble by buying REITs for my TFSA.

[EugW]

I am in the process of checking out house prices in my area as I will be looking to purchase one soon. I have no idea where house prices will head, there are a lot of bulls and bears in the real estate market. I personally think house prices may come back down when interest rates rise, but I am no expert. At the moment I am looking with the mindset to buy, but at the same time I am patient due to my speculation of a "housing bubble". I know what I want and what price I am willing to pay for it, so if I come across a house at my price range I will buy regardless of where future house prices are heading.
That seems like a level headed approach to the market. You may lose your chance on a lot of properties if there are bidding wars, but then again there's no sense in getting too emotionally attached to a house and overpaying in an unjustified bidding war.


At the moment, I am hedging my speculation on a housing bubble by buying REITs for my TFSA.
Personally, I just left cash in my TFSA for now. I use it as an emergency fund.

[squid]

Explain this one (http://www.newgeography.com/content/001221-housing-bubbles-why-are-americans-ignoring-reality?ref=patrick.net), housing bulls:



$140k for a house that would probably, if located in the GTA, Calgary, or Vancouver, fetch $500k. Hmmmm.

Let's see... Falling apart, terribly inadequate infrastructure and high taxes in Calgary/Toronto/Vancouver....or very modern infrastructure, high standard of living, better jobs, low taxes, etc., in Houston? Oh, and probably the cheapest pump petrol in the western world?

Hmmm.. Touch choice, lol.

Hey Pitz, it does make me wonder. I am trying to get some quotes for an upgrade and they are all in the 150,000 range just for an addition. I am choosing not to go ahead. So how do we get construction costs lowered here in Canada?

Also, I would love to move to lower cost, warmer climes, but that is impossible due to legal and tax issues, at least for me. Not to mention, my wife would take over a 50% hit on her salary if we went to US.

[pitz]

The bizarre-logic post of the day.

Basically you're encouraging people to pump up prices, because you will be buying later.

Its actually good logic, because the bigger the rise, the bigger the fall (because of oversupply).

It just takes time to play out, that's all. Houses are no different than any other sort of consumer good, whether it be a computer, a beenie-baby, or a can of shaving cream.

[EugW]

Its actually good logic, because the bigger the rise, the bigger the fall (because of oversupply).

It just takes time to play out, that's all. Houses are no different than any other sort of consumer good, whether it be a computer, a beenie-baby, or a can of shaving cream.

Kinda expected that from you. I guess one thing I can say that's positive is that you're consistent.

[pitz]

Hey Pitz, it does make me wonder. I am trying to get some quotes for an upgrade and they are all in the 150,000 range just for an addition. I am choosing not to go ahead. So how do we get construction costs lowered here in Canada?


Wait for the inevitable collapse, and just sell the house and buy something different that you want, then?




Also, I would love to move to lower cost, warmer climes, but that is impossible due to legal and tax issues, at least for me. Not to mention, my wife would take over a 50% hit on her salary if we went to US.

What sort of job pays that much less in the USA compared to Canada? Is it really a sustainable job in Canada? (or is it civil service, that will eventually face severe cutbacks and wage-realignment?)

[CSR]

Here we go again...house came on the market today for $480k. With the most recent houses in the Bridlewood area of Scarborough going for about $100k over asking we're probably going to get outbid again. I wish we bought 1.5 years ago where the same house would have easily have went for $450k :(

We're going to try to go in with a bully offer tomorrow since offers aren't accepted until Monday. I hate bidding wars!

Don't mean to rub it in, but we bought in pre-sale 2000-2001 iirc for mid to high $200k. By closing (early 2002), the value of our house was up $50k already. Glad we bought a smaller house in scarb. vs. a larger one in the boonies.

[EugW]

Don't mean to rub it in, but we bought in pre-sale 2000-2001 iirc for mid to high $200k. By closing (early 2002), the value of our house was up $50k already. Glad we bought a smaller house in scarb. vs. a larger one in the boonies.
I'm not sure that really counts though. Pre-sale is a very different kettle of fish from resale.

Some people might even go as far to say that a re-sale can be worth up to 15% more than a corresponding pre-sale, because of all the hassle and potential additional expenses involved with the pre-sale.

P.S. I am even assuming here that the GST was included in the pre-sale price, and wasn't on top of that.

[CSR]

I'm not sure that really counts though. Pre-sale is a very different kettle of fish from resale.

Some people might even go as far to say that a re-sale can be worth up to 15% more than a corresponding pre-sale, because of all the hassle and potential additional expenses involved with the pre-sale.

P.S. I am even assuming here that the GST was included in the pre-sale price, and wasn't on top of that.

I was just providing some historical context for the region. Our house is on the smaller side, single garage 16XX sq. feet.; tiny lot.

[i6s1]

Don't mean to rub it in, but we bought in pre-sale 2000-2001 iirc for mid to high $200k. By closing (early 2002), the value of our house was up $50k already. Glad we bought a smaller house in scarb. vs. a larger one in the boonies.

That's the way it used to be with pre-sales. They used to be available at a discount, based on the uncertain timetable, the project risk, and the fact that you couldn't inspect something that didn't exist.

Check out the Infinity towers in Surrey. Towers 2 and 3 stopped worth suddenly one day last October, when the builder's financing collapsed with the US credit market. Work hasn't started again yet. I feel sorry for the people who bought a presale there.

Nowadays, pre-sales aren't a priced at a worthwhile discount compared to similar existing housing. Existing houses should be worth significantly more then pre-sales, (15% sounds reasonable) but they aren't.

[7jai]

The bizarre-logic post of the day.

Basically you're encouraging people to pump up prices, because you will be buying later.

umm.. did I say something wrong? It's rather simple logic and economics in my opinion. I am encouraging people to spend freely and purchase overly-inflated homes. Reason? Because I want to be one of the many people who catch those whom will fall when they realize they can't sell their homes for the same values they purchased them b/c people aren't as "rich" as they think they are.

If you read my previous post again, people like us aren't getting any richer, and yet we are paying more taxes starting this upcoming year w/ HST. Housing prices are being over inflated, and the average worker isn't able to afford that housing at those prices (ON TOP of the HST taxes we will be paying for a home).

With the mentality of today's modern day consumer, people tend to keep wanting to move and relocate almost every 3-5 years (to something better, or bigger) rather than staying put - reason being b/c we have more freedom of choice and opportunity (as my parents, or your parents never did have since they were the ones struggling to allow us to have this type of opportunity to explore). With that said, there will be a big supply of houses coming out on the market in the next few years - but soon they will realize that their value went down dramatically because the demand for their houses + value isn't exactly what buyers can really afford. Value will drop, and that's when everyone should start reconsidering on buying again.

In any case, that's my 2 cents. My theory is rather skimpy since I don't have time to really debate that in depth - but I think you get the gidst of where i'm heading. Once again, i'm using very basic economics to forecast the future.

1) income = remains the same
2) taxes = higher
3) housing price = overly inflated
4) housing demand = low (due to lack of affordability) .... housing supply = high (due to consumers wanting to constantly change, and move on to better things. also due to dropping value, so trying to sell before it hits rock bottom)

[EugW]

A more logical wish for a buyer would be that the prices would begin to fall now, and continue to fall until s/he buys.

Cuz if they go up now, they may just never come back to attractive levels.

This is precisely what happened in 2004. A few people were saying prices might go up in the short term but they can just wait until they fall.

Well, they fell a bit in 2008, and then promptly went back up again in 2009. Furthermore, I suspect if they do fall, they may never fall back again to 2004 levels.

Be careful what you wish for.

[pitz]

A more logical wish for a buyer would be that the prices would begin to fall now, and continue to fall until s/he buys.


But where would the glut of unsold houses come from if prices didn't remain elevated above construction costs???




Cuz if they go up now, they may just never come back to attractive levels.


Computers. Beanie Babies. MP3 players. .... :)


This is precisely what happened in 2004. A few people were saying prices might go up in the short term but they can just wait until they fall.


Yet in the United States, they're back down to, in many places, 2000 prices, and still plenty of drop to go. Can Canada escape this?


Well, they fell a bit in 2008, and then promptly went back up again in 2009. Furthermore, I suspect if they do fall, they may never fall back again to 2004 levels.


Spoken like a true RE bull. I don't agree with your position, but I do admire that you stick to it :).

[GemInite]

in 2004 there was no 40yrs/0% or 35yrs/5% mortgages available.

I really wonder how sustainable current housing prices are.

There are a lot of factors driving people to rush out and buy now. e.g. low interest rates, hst incoming.

IMO back in 2004 when people were saying it was too expensive I actually thought it was still affordable.

I doubt there will be a collapse in Canadian real estate but I hope there will be a correction in the 20% range.

[EugW]

I had been predicting a 10-15% drop from 2007 levels. So I guess that would roughly make it around 13-18% from 2009 levels.

However, so far I've been proven wrong.

[leoben]

I had been predicting a 10-15% drop from 2007 levels. So I guess that would roughly make it around 13-18% from 2009 levels.

However, so far I've been proven wrong.

across canada? or certain regions? even if there were to be a correction, it would probably happen in certain metropolitan areas. for example, i don't really ever see the ottawa housing market collapsing.

[kashirin]

across canada? or certain regions? even if there were to be a correction, it would probably happen in certain metropolitan areas. for example, i don't really ever see the ottawa housing market collapsing.

are you a respectable analyst or what?
based on what you don't really see ottawa housing market collapse?
I bet the single reason you don't see ottawa housing market collapsing is because you recently bought

in my opinion ottawa RE will crash first

[simms]

This is a different root cause.. but here we have people already asking for a bailout...

‘Orphaned' homeowners face foreclosure (http://www.theglobeandmail.com/report-on-business/orphaned-homeowners-face-foreclosure/article1390721/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheGlobeAndMail-Business+%28The+Globe+and+Mail+-+Business+News%29&utm_content=Google+Feedfetcher) - Lenders ask federal government to back special billion-dollar fund

Most voted comment was: Rarely do I comment on an article however this one really makes my blood boil. Canadian taxpayers should not end up footing the bill for this.

What happened to common sense with these home purchasers when they were buying? Little if any down payment... traditional lenders not willing to lend... only option was to go with mortgage lending sharks. Anyone with common sense would have concluded they shouldn't be buying a house.

Providing a government bail out would be a slap in the face to every financially responsible Canadian saving to buy a home.

[leoben]

are you a respectable analyst or what?
based on what you don't really see ottawa housing market collapse?
I bet the single reason you don't see ottawa housing market collapsing is because you recently bought

in my opinion ottawa RE will crash first

er. chill out dude. i am only in my early 20s, i don't have a recently bought house in ottawa.

i just based it on employment trends in the city, and it was just a remark. you can predict whatever and however you want, i just threw that comment in there to emphasize that things will be different across different cities.

[kashirin]

er. chill out dude. i am only in my early 20s, i don't have a recently bought house in ottawa.

i just based it on employment trends in the city, and it was just a remark. you can predict whatever and however you want, i just threw that comment in there to emphasize that things will be different across different cities.

past performance doesn't guarantee future results

employment trends in ottawa are not sustainable as the government is already overstretched and sooner or later will be forced to cut spending which will result in mass lay offs in ottawa and housing market collapse which will be far greater than in other major cities

[EugW]

across canada? or certain regions? even if there were to be a correction, it would probably happen in certain metropolitan areas. for example, i don't really ever see the ottawa housing market collapsing.
Sorry, I specifically meant Toronto.

However, to be honest I think it's wishful thinking to think Ottawa is completely immune. It might be less severe than other sites, but if other cities drop, then so may Ottawa.

That said, so far even Toronto has been holding up better than I expected.

[Aggy]

So we placed an offer on a house tonight and we got it - no huge bidding war like the last one which went for $160k over asking. Tonight there were 3 bids and we got it for $30k over asking ($510k) in the Bridlewood area of Toronto. After 1.5 years of looking I can't believe we finally found something we like.

Now the cleaning begins as we have to put our condo on the market this week!

[leoben]

So we placed an offer on a house tonight and we got it - no huge bidding war like the last one which went for $160k over asking. Tonight there were 3 bids and we got it for $30k over asking ($510k) in the Bridlewood area of Toronto. After 1.5 years of looking I can't believe we finally found something we like.

Now the cleaning begins as we have to put our condo on the market this week!

160k over asking?? wow. is that normal in toronto these days? unless the seller intentionally priced it low in order to trigger a bidding war..

anyway, congratulations on finding a house you really like.

[VivienM]

Sorry, I specifically meant Toronto.

However, to be honest I think it's wishful thinking to think Ottawa is completely immune. It might be less severe than other sites, but if other cities drop, then so may Ottawa.

That said, so far even Toronto has been holding up better than I expected.

A lot of people in Ottawa think Ottawa real estate is safe - I think they're basing themselves on the idea that employment here is more stable.

Why, precisely, Ottawa would be immune to interest rate capitalization effects is something I haven't understood. But then again, a lot of people don't understand how low interest rates fuel real estate price increases...

[EugW]

So we placed an offer on a house tonight and we got it - no huge bidding war like the last one which went for $160k over asking. Tonight there were 3 bids and we got it for $30k over asking ($510k) in the Bridlewood area of Toronto. After 1.5 years of looking I can't believe we finally found something we like.

Now the cleaning begins as we have to put our condo on the market this week!
Congrats!

160k over asking?? wow. is that normal in toronto these days? unless the seller intentionally priced it low in order to trigger a bidding war..

anyway, congratulations on finding a house you really like.
In Toronto in a sellers' market with houses in affordable price ranges (ie. not high end), it's reasonable to underprice a home to generate interest. The real estate agents know what it's really worth, give or take.

However, I question the wisdom of severe underpricing. It's just irritating. :p

Also, there have been homes that have sold not only way over asking, but way over fair market value IMO. People get far too caught up in the process, and lose all rationality. For that price range, my gut feeling (knowing nothing about the deal) is that $160000 over asking is probably way too much.


A lot of people in Ottawa think Ottawa real estate is safe - I think they're basing themselves on the idea that employment here is more stable.

Why, precisely, Ottawa would be immune to interest rate capitalization effects is something I haven't understood. But then again, a lot of people don't understand how low interest rates fuel real estate price increases...
People think Ottawa would be a less severe drop, because the rise has been less marked. I think there's some truth to that. However, I still think it will likely drop somewhat if the rest of the country drops.

[cmyden]

Why, precisely, Ottawa would be immune to interest rate capitalization effects is something I haven't understood. But then again, a lot of people don't understand how low interest rates fuel real estate price increases...

Ottawa didn't bubble up to the degree that other Canadian cities did. If the U.S. situation is any guide, the cities that deviated the furthest from their long term fundamentals were the ones that suffered the most.

** most to least bubbleicious according to our version of the Case-Shiller **

http://www.housepriceindex.ca/Default.aspx

Calgary 170
Vancouver 150
Montreal 125
Halifax 122
Ottawa 120
Toronto 115

Edmonton isn't tracked, but would likely be right up there with Calgary if it were.


http://www.chpc.biz/Major_Cities_Chart.htm

[Douces]

A lot of people in Ottawa think Ottawa real estate is safe - I think they're basing themselves on the idea that employment here is more stable.

Why, precisely, Ottawa would be immune to interest rate capitalization effects is something I haven't understood. But then again, a lot of people don't understand how low interest rates fuel real estate price increases...

I wonder how government cuts would affect the real estate. They're going to have to cut some of those overpaid, useless employees eventually considering the deficit we're running.

[speedyforme]

Government employees are already feeling the pinch. No more Xmas parties this year, we have to pay out of our own pockets.

[EugW]

Government employees are already feeling the pinch. No more Xmas parties this year, we have to pay out of our own pockets.
It's interesting how different government funded organizations work.

My department is government funded, but isn't a direct government office per se. All of our employees are considered public employees and most are unionized. However, those of us who are quasi-management are paid differently, with a portion of our income coming from outside sources.

Our Xmas parties have NEVER been paid for by our usual government-provided main budget since I've worked here. It's always been paid for out of our own pockets. Specifically, it's been paid for by us quasi-management types with our outside income.

So, in a way, consider yourselves lucky to have your Xmas parties paid for by the usual budget in the past.

[speedyforme]

It's interesting how different government funded organizations work.

My department is government funded, but isn't a direct government office per se. All of our employees are considered public employees and most are unionized. However, those of us who are quasi-management are paid differently, with a portion of our income coming from outside sources.

Our Xmas parties have NEVER been paid for by our usual government-provided main budget since I've worked here. It's always been paid for out of our own pockets. Specifically, it's been paid for by us quasi-management types with our outside income.

So, in a way, consider yourselves lucky to have your Xmas parties paid for by the usual budget in the past.

We are a Crown Corp. Our old budget used to be $30 per person for lunch and $60 per person for dinner.

[new_vr]

Government employees are already feeling the pinch. No more Xmas parties this year, we have to pay out of our own pockets.
If that is the only pinch you are feeling, I wouldn't complain too loudly.

[pitz]

Calgary 170
Vancouver 150
Montreal 125
Halifax 122
Ottawa 120
Toronto 115


Humourous, but Vancouver barely more of a bubble than Montreal/Halifax? Toronto the least bubbly of them all?

Obviously you have to look at the methodology used, but something seems very wonky about those numbers.

We are a Crown Corp. Our old budget used to be $30 per person for lunch and $60 per person for dinner.

Lol, big deal. I'd rather see government agencies put on nice christmas parties to keep the few productive staff they have (and lay the rest off), than to keep a bunch of incompetent, lazy staff, and then to not treat them well.

[ferkel]

Government employees are already feeling the pinch. No more Xmas parties this year, we have to pay out of our own pockets.

welcome to 1995. you government employees sure got it good.