Canadian Housing Question

[Spartacus]

Re: Canadian Housing Question

No

Let me clarify -- A five year loan to me means that the loan has to be paid back in its entireity in 5 years.

bad assumption.

As far as I can tell, in Canada, balloon mortgages are much more common than in the US.

[blazespinnaker]

Re: Canadian Housing Question

Historically Canadian real estate, from urban housing to farmland, has always been cheap compared to most international locations. It only looks "expensive" now because the global bubble is gradually bursting as it works its way around the world...from California to the Costa del Sol, Dublin to Dubai, it's over baby. The only holdout is the Pacific Rim...Sydney, Shanghai and, of course, Vancouver.

I doubt Toronto is going to get hit too badly, simply because it's the FIRE capital of Canada...and as long as the government continues to support the bankers [and I see no end in sight to that], Toronto will be the last place in Canada to experience an outright collapse in real estate prices.

A reasonable analysis. Last I heard it was Montreal, Edmonton, and Vancouver that were going to be hit the hardest, in that order.

It's difficult to tell though, what's going to happen. If inflation starts ratcheting up, we may see some nominal stability in prices.

Certainly as interest rates have been moving down lately, we'll see some price support.

[LargoWinch]

Re: Canadian Housing Question

If inflation starts ratcheting up, we may see some nominal stability in prices.

Why? If inflation starts in earnest, CBs will be forced to raise rates (even though rates will remain negative in real terms).

The increased rates means that when the "mortgage rate reset" occurs (every year to 5 years), borrowers will be left in the dust.

There is no "inflating your mortgage debt away" in Canada: homeowners will be it with higher payments and lower/negative equity on their houses. As I said, a disaster insured by CMHC (in other words, the $CAD bonar).

[ThePythonicCow]

Re: Canadian Housing Question

Why? If inflation starts in earnest, CBs will be forced to raise rates (even though rates will remain negative in real terms).

Eh - why?

CBs might be thus furced in a healthy, honest and competitive market for debt paper.

But I don't that constraint applies to our current predicament.

[Adeptus]

Re: Canadian Housing Question

To add to Aerius's list of reasons why BC real estate is in the process of tanking...
1) July 1st, 2010 - BC province has introduced the "HST" (Harmonized Sales Tax), which increases the previous 5% (provincial) or 7% (federal) tax rate on most goods & services to a harmonized 12%. Courtesy in part of our lying Canadian Conservative government & the 2010 way-over-budget Vancouver Winter Olympics. 12% tax also is applicable against the largest family purchases like new houses (as well as all the real estate transaction fees) & new cars. How do you spell inflation? HST!
2) After the American RE meltdown, the Canadian government has jumped the fence and is no longer artificially subsidizing housing. Aside from HST in BC, they have also:
a) Feb 2010 - Ended the ~$1300 tax credit if you spent ~$10,000 on renovations
b) ~2009 - Ended the 0% down 40 year mortgage terms. Now it's (still cheap) 5% down, 35 years
c) CMHC insurance has increased (I'd have to go google for numbers)
d) April 19th, 2010 - In order to get a variable rate mortage you first need to qualify for 5 year fixed rates (in BC). This is huge, because it means people will have to qualify at much higher mortgage rates.
e) April 19th, 2010 - Mortgage refinancing requires you have 90% of equity in your home (down from 95%). This reduces slightly how much Canadians can use their houses as ATMs. At least 10% must remain as equity.
f) April 19th, 2010 - Minimum downpayment to purchase an investment property requires you to put down 20% (instead of 5%). All those 5plexes & beyond will see the number of buyers decrease dramatically, meaning prices will come down.
g) April 19th, 2010 - Qualification of mortgages for Rental income properties (i.e. 2 to 4 suites total in 1 house) has changed *dramatically!*. Video below explains details, but for example, sombody who could previously qualify for a $450,000 house with an extra suite if they had a $48K/Yr salary, now with the same house, same $48K income + same rental income, you can only qualify for a $250,000 mortgage! Can you say price collapse?!

VIDEO explaining d, e & f: http://www.youtube.com/watch?v=CMmKNyyQkuw
VIDEO explaining g: http://www.youtube.com/user/Notapenn...29/CxeeKLccrfY

Yep, "looks like top" to me.


313fyf5.jpg
What's missing from this chart & thread is the city of Victoria which trends roughly between Vancouver & Calgary in terms of irrational exhuberance in real estate valuations.

Adeptus

PS. ... and just wait until interest rates actually start going up for real. It'll be 1980's style Armageddon for Victoria & Vancouver.

[LargoWinch]

Re: Canadian Housing Question

Eh - why?

CBs might be thus furced in a healthy, honest and competitive market for debt paper.

But I don't that constraint applies to our current predicament.

What I am trying to convey here TPC, is that all the ZIRP and TARP will at some point lead to some serious inflation. Now given that, if the CBs do pursue the same policies as today, then their fiat will collapse - they are idiots but they are not that dumb. That is why, I believe they will raise rates to save the system, but the said rates will remain negative in real terms also to save the over-endebted system we are in. A careful balancing act if you will.

So, back to my point: the inevitable rate increases will cause havoc in the Canadian RE market since it has been financed with little money down and variable mortgage rates (a lot of them being 12 Months only). Households simply cannot withstand a 200bps increase on their mortgage loan, let alone 500bps or more.

That being said, I would also like to reiterate my now 18-month old prediction that the $CAD will never go above par vs. the USD for more that a few quarters. This is due to an upcoming housing correction in Canada, which has been financed by a pseudo-GSE: CMHC.

[LargoWinch]

Re: Canadian Housing Question

Here is another video, relating to my point regarding Quality of Construction i.e. when people wake and realize their house is falling apart, they maybe want to sell:

[leegs]

Re: Canadian Housing Question

No doubt the quality of the construction is probably not so good. However that video was about 98% bullshit. The creator of it demonstrated a serious ignorance of construction and the issues it pointed out are not indicative of poor quality IMO.

One exception - there are some concerns over the use of i-joists, related to their performance in a fire. Otherwise, they are no 'less strong' than conventional lumber.

[Spartacus]

Re: Canadian Housing Question

When I first saw the video I thought the same: those I-joists are engineered to take the load, and the're staggered closer than the old 2x8 or 2x10 used to be. It's a more efficient use of fewer resources to do the same job.

I did emotionally agree with the point - I've seen sheets of that type of chipboard material come apart very easily when wet.

An upper floor toilet leaks, floods the floor, the water leaks onto those glued sheets, they delaminate & the house will be history (or geography, as the case may be ...)

At least they didn't go for the obvious cheap shot of Chinese drywall ...

No doubt the quality of the construction is probably not so good. However that video was about 98% bullshit. The creator of it demonstrated a serious ignorance of construction and the issues it pointed out are not indicative of poor quality IMO.

One exception - there are some concerns over the use of i-joists, related to their performance in a fire. Otherwise, they are no 'less strong' than conventional lumber.

[GRG55]

Re: Canadian Housing Question

I respectfully disagree GRG55.

The only metric worth a damn in RE, is the median household income to median house price.

Historically, this has been hovering around 2X-3X.


Today in Toronto, median household income is around $66K, while median house price is currently $360K, up $100K since only 2004, for a household income to median house price ratio of 5.45X.

Thus, I believe the Toronto market to be overvalued by at least 33% to 55%, especially the condo market.

With the possible exception of Montreal, every urban housing market in Canada is "overvalued"...even Saskatoon and Regina fergawdsake.

However, being overvalued and being ripe for collapse are two quite different things. Below one simple chart that shows the distinction between Vancouver and Toronto. Hence my view that Toronto is unlikely to witness an outright collapse in property prices.

Toronto has a far higher proportion of head offices than Vancouver, and that is one reason salary levels are higher in Toronto than Vancouver. As I mentioned in the last post, Toronto is the banking [read: FIRE] capital of Canada with Calgary [with its capital intensive oil and gas businesses] ranking second ahead of Vancouver in terms of commercial banking activity - another important source of those high salary jobs. Vancouver is ripe for a collapse...Toronto will decline with the rest of the Canadian market, but no collapse.

[Chart from Brian Ripley's website]

[Rajiv]

Re: Canadian Housing Question

Where is the money coming in to inflate Vancouver RE? It is obviously not coming in from wage earners. The Calgary bubble is more understandable, because of the energy boom, and subsequent rise in wages.

[LargoWinch]

Re: Canadian Housing Question

With the possible exception of Montreal, every urban housing market in Canada is "overvalued"...even Saskatoon and Regina fergawdsake.

However, being overvalued and being ripe for collapse are two quite different things. Below one simple chart that shows the distinction between Vancouver and Toronto. Hence my view that Toronto is unlikely to witness an outright collapse in property prices.

[Chart from Brian Ripley's website]

GRG55, there is still a disconnect.

You see, I believe the median house price (mhp) to median household income (mhi) as virtually the only measure of RE bubbleness.


Even, if Montreal's median house price increase since 2003 (as per the attached graph in your post) went up "only" from $175K to about $260K (up about 50%), while at the same time Vancouver is up a gazillion percent; for me, it does not matter.

The key question I ask myself is: what is Montreal's median household income? The best answer I could find can be found here and dates from 2006: $50,100.

Thus, based on the information collected via google-fu the mhp/mhi ratio in Montreal is 5.2X ($260/$50.1).

Now, is it possible that the graph you added is somewhat misleading? (again since it does not account for the associated region's median household income). Well, lets see:

[LargoWinch]

Re: Canadian Housing Question

Where is the money coming in to inflate Vancouver RE? It is obviously not coming in from wage earners. The Calgary bubble is more understandable, because of the energy boom, and subsequent rise in wages.

Rajiv, the money is coming from these guys and especially these guys (Canada's own Freddie/Fannie wrapped into one big mess).

However, do not underestimate the power of the "5% cash back mortgage" [translation: you do not need a down payment to buy a house in Canada with this product]. Yes baby, lets party like its USA 2006!

[Rajiv]

Re: Canadian Housing Question

Rajiv, the money is coming from these guys and especially these guys (Canada's own Freddie/Fannie wrapped into one big mess).

However, do not underestimate the power of the "5% cash back mortgage" [translation: you do not need a down payment to buy a house in Canada with this product]. Yes baby, lets party like its USA 2006!

I understand that -- but why Vancouver, and not Montreal? It is not that there is a huge exodus of population from Montreal, Ottawa and Toronto to Vancouver.

[mooncliff]

Re: Canadian Housing Question

I saw a 6,000 sq ft house being constructed in California about 4 years ago using similar construction materials. All I could think was that I would rather have a 2,000 sq ft house made out of solid wood.