Garth Turner - Real Estate in Canada

[Guest 50centdollars]

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

 

What are the chances a recession comes in the next decade? I think the odds are higher than rates rising.

[petec]

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

 

What are the chances a recession comes in the next decade? I think the odds are higher than rates rising.

 

+1

[KCLarkin]

It won't be rates that pricks this bubble. A simple recession will do it. Canadians have way too much debt and can't afford their homes a zero rates.

 

There is absolutely no evidence to backup any of your assumptions.

[frommi]

It won't be rates that pricks this bubble. A simple recession will do it. Canadians have way too much debt and can't afford their homes a zero rates.

 

There is absolutely no evidence to backup any of your assumptions.

 

When i recall it correctly than the real estate bubbles in Netherlands and Spain popped because of a recession, not because of rising interest rates. I can imagine that under rising interest rates inflation is rising, so house prices/wages possibly rise too.

[Guest 50centdollars]

http://www.bnn.ca/News/2015/2/12/Genworth-warns-of-rising-losses-on-mortgages-from-oil-sensitive-Alberta.aspx

[wisdom]

I look at real life examples for what can happen - in Europe, US and Japan - housing prices in several countries are lower even though interest rates today are much lower than at the peak of the housing cycle.

 

To me this is enough evidence to show that prices can be lower as interest rates drop if debt levels are too high.

 

Human behaviour in the market breaks all the rules taught in economics - lower interest rates do not lead to higher asset prices in these instances.

[wisdom]

This is why I believe 50cent$s maybe be right.

[Liberty]

Housing is a very emotional purchase. When you buy stocks or bonds, you calculate your returns and (hopefully) are somewhat rational about it.

 

Most houses aren't bought like that. People usually live in them, so there's no rent income, and they tend to be bought because "it's what you do when you reach a certain stage in your life", because "everybody I know is doing it", and because of social pressure from your mother in law or whatever.

 

That's why I think what matters most is sentiment, and who knows what can make it turn, but I know that confidence is built over time, but lack of confidence can be very very sudden. Looking at interest rates is looking at it more rationally than most people look at it; in fact, many people now buy houses like they buy cars (stupidly), just by looking at the monthly payment rather than at the actual price + interests.

[LongHaul]

Has there been any incredibly dumb lending in Canada like the US had with subprime, etc?  If so who has been the most aggressive?

[KCLarkin]

When i recall it correctly than the real estate bubbles in Netherlands and Spain popped because of a recession, not because of rising interest rates. I can imagine that under rising interest rates inflation is rising, so house prices/wages possibly rise too.

 

Before the housing crashes in Netherlands, Spain, US, Japan interest rates were rising.

 

Also, did the housing market crash because of the recession? Or was the recession caused by the housing crash?

[wisdom]

Higher interest rates lead to a slower economy which inturn leads to job losses. This leads to housing bubbles being pricked.

 

How does it matter what the reason for high paying jobs being lost is?

 

If the commodity crash casuses widespread job losses in an economy that is dependent on that sector - the end result should be the same.

[wisdom]

If regulated FIs could lend with 0% down and looked at financing based on stated income or equity based lending.

 

I wonder what the unregulated sector would have had to do to stay in business. They had to go further out on the curve to stay in business.

 

It is very easy to beat the system here and enough individuals have been doing it as they see this as a guaranteed route to riches - why because apparently everyone wants to live in Canada so foriegners will keep paying higher prices.

[frommi]

 

Before the housing crashes in Netherlands, Spain, US, Japan interest rates were rising.

 

Also, did the housing market crash because of the recession? Or was the recession caused by the housing crash?

 

Thanks, good questions! Looks like i have to read more.

[KCLarkin]

When did rates rise before the US crash?

 

http://b-i.forbesimg.com/jessecolombo/files/2014/01/united-states-interest-rate.png

[cwericb]

It is exactly two years since this thread started and back then ago the consensus was that Canada was in a housing bubble about to pop. Yet not only has there been no pop, but prices have continued to rise.

 

I am not saying that there are no serious concerns nor am I suggesting that there may not be a pricing correction in the Canadian housing market. However, the Canadian market is not quite the same as in the U.S. and many other countries. A lot of people here have a reasonable amount of equity in their homes above their mortgages and many mortgages are insured by the Canadian Government (CMHC). In the past we have seen CMHC step in to help stabilize prices during a correction and when prices dropped in the past they rebounded fairly promptly.

 

Remember the law of supply and demand.  At one time we used to have nuclear families where 2, 3 generations would live in the same house. Now it seems everyone has their own house or condo.

 

In general our population is well educated and many singles live in their own homes and condos. Today’s high divorce rates means you now need two houses where previously only one was needed. Immigration also drives our housing industry.

 

Here is something else that seems to be overlooked. Our houses are more expensive to build and probably last longer because of that. They have to meet high snow load criteria, withstand high winds and very cold temperatures. That means a high quality level and makes them more expensive to build. Materials are also expensive because they must travel greater distances to and service smaller markets in many cases. Our houses must be very well insulated, require much more expensive heating systems, and because our houses are built tight we often require air exchange systems to keep the air fresh and humidity levels in check.

 

So perhaps our housing is expensive, but there may be more value in them as well.

 

Just my opinions.

 

[wisdom]

Is it that much different from the US - our demographics or the cost to build.

[wisdom]

The oil crash is a possible catalyst and things tend to stay irrational longer than one can imagine - even though it sounds like a cop out - it is true.

[wisdom]

Another number to check out - if this has been true for a while - better quality builds - why has an average house in the US been more expensive until 2008.

 

Or did these codes come into effect after 2008.

[Liberty]

It is exactly two years since this thread started and back then ago the consensus was that Canada was in a housing bubble about to pop. Yet not only has there been no pop, but prices have continued to rise.

 

I'm sure people were saying that in 1998 and 1999 too. The market can stay irrational a very long time.

 

I've always said that I have no idea about the timing of any correction or crash, just that pricing doesn't make sense, and what can't go on forever will stop at some point. In the meantime, I'm renting.

 

All the excuses I hear about Canada being different ring hollow to me. Vancouver is not Paris or New York, Canada isn't 2x more desirable to live in than the US, our economy isn't booming, land is not scarce, our debts are incredibly high (people take out their equity through HELOCs) and now that almost everybody owns, who will the marginal buyer be, esp as boomers retire and downsize (few other investments than their homes, right?), etc. CMHC isn't some magical institution that can snap its fingers and make everything right.

[KCLarkin]

All the excuses I hear about Canada being different ring hollow to me. Vancouver is not Paris or New York, Canada isn't 2x more desirable to live in than the US, our economy isn't booming, land is not scarce, our debts are incredibly high.

 

I don't know what stats you are using but remember that averages are misleading. Average U.S. housing prices might appear cheaper but most of the cheap cities are not desirable. Anyone want to move from Toronto to Detroit, Buffalo, or Cleveland? The really desirable cities (San Francisco, LA, San Diego, NY, Miami) are expensive even after the housing meltdown.

 

The other factor that people are ignoring is land use policies. Land is scarce in Vancouver and Toronto. In 2005, the Ontario government introduced the Places to Grow Act designed to promote intensification. This has limited the supply of single family homes (and resulted in a condo boom).

 

Housing prices are certainly elevated but when you can control for supply constraints and interest rates, I don't know that we can be certain there is a bubble. We will only know in retrospect.

[wisdom]

Don't NY or San Francisco have land restrictions? If yes, why is that any different in Canada - why does it result in higher prices in Canada. NY median houses are cheaper than Toronto. Does that imply Toronto is more desirable and people will leave NY to move to Toronto.

 

Does Canada have less desirable cities (as a %age) or is it just Toronto and Vancouver that everyone lives in? Would someone move from Windsor/Winnipeg to Miami. Not sure how that makes any difference to affordibility, highest ever debt levels, highest ever homeownership.

 

All I can say is all the power to individuals that think this is a good bet to make and a place to have their capital as I am not comfortable putting my hard earned capital  at risk when the odds aren't in my favour.

 

We should list - numbers/facts that are at historical highs in Canada - those are easier to layout rather than stories that can be used to rationalize what has happened.

 

If most of the numbers are against buying - then the odds are your capital is at risk. I do not expect everyone to agree as there is always some story that can be used to rationalize any decision.

 

Nor does it imply a crash is imminent. But, once the music stops watch out.

 

EDIT: That should read NY metro and GTA, not NY and Toronto.

[Liberty]

All the excuses I hear about Canada being different ring hollow to me. Vancouver is not Paris or New York, Canada isn't 2x more desirable to live in than the US, our economy isn't booming, land is not scarce, our debts are incredibly high.

 

I don't know what stats you are using but remember that averages are misleading. Average U.S. housing prices might appear cheaper but most of the cheap cities are not desirable. Anyone want to move from Toronto to Detroit, Buffalo, or Cleveland? The really desirable cities (San Francisco, LA, San Diego, NY, Miami) are expensive even after the housing meltdown.

 

The other factor that people are ignoring is land use policies. Land is scarce in Vancouver and Toronto. In 2005, the Ontario government introduced the Places to Grow Act designed to promote intensification. This has limited the supply of single family homes (and resulted in a condo boom).

 

Housing prices are certainly elevated but when you can control for supply constraints and interest rates, I don't know that we can be certain there is a bubble. We will only know in retrospect.

 

I know all this. Still doesn't make sense to see housing totally disconnect form wages and inflation for so long. Do we foresee people making 60k/year buying $3-4 million houses in 10 years? Where does this stop? Either wages go up a lot to catch up, or housing comes down a lot. Because in the meantime, the delta between wages/inflation and housing has been filled with debt, and there's a limit on that too.

[mcliu]

Would it be possible that people can just afford to pay more for a house?

 

This is just a back-of-the-envelope calculation:

 

Toronto Median Detached Home in 2005 was ~$350K. Avg. Mortgage Rate: 6%. Median Household Income ~$65K

Toronto Median Detached Home in 2014 was ~$600K. Avg. Mortgage Rate: 3%. Median Household Income ~$72K

 

If you assume a 70% LTV at those rates, interest expense in 2005 would be $15K and in 2014 would be $13K. Given that household income has risen while interest expense has declined..

 

http://creastats.crea.ca/treb/mls/mls05_median.htm

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil107a-eng.htm

[Liberty]

This tool is pretty neat (you can isolate countries in the list on the right, say, Canada and the US):

 

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

[wisdom]

That is true at this point in time. Is it different in US, Japan or Europe? Why are their houses cheaper?

 

I do not anticiapte everyone to have trouble with their mortgages. Just on the margins.

 

So what matters is the number of individuals who will have trouble servicing the debt during financial stress:

1) longterm home ownership rates in Canada are around 63%. Today around 70%. In the long run could it go back to 63% or is it different this time.

2) debt to disposable income was around .90 until the late 1990s. Now 163%. Is this a permanent state where we can carry 60% more debt over the long run.

3) Consumer debt per capita in early 2000s was around $19,000. Today $29,000. In British Columbia it is at $38,000.

4) total private debt is close to 100% of GDP at a historical high.

5) Can first time buyers afford to buy. Where is the future demand coming from?

6) A median house is 5.5x median income. In the US it is 2.5x. Are the rates not low there? Are their incomes that much lower?

 

This is the same point Liberty raised when he talked about - individuals are looking at the payments and not the total cost of owning. What is the difference between a $200,000 mortgage v $400,000 using the long term average 5 year mortgage rate in Canada - most mortgages in Canada are amortized over 30 to 40 years. What will the total cost over the 30 or 40 years be.