Canada's 'housing bubble' deemed close to bursting

[kwoldtimer]

Originally Posted by Coldrsx

1% isn't the end of the world, but it certainly is being purported as such today on the morning news.

I didn't see anything about end of the world in the G&M or CBC reports.

That said, I'm glad I'm not carrying a mortgage or any other debt.

[WhipperSnapper]

Edmonton isn't really recognized by the majority. It's probably best that way otherwise a dramatic influx of a competitive workforce also needing shelter will quickly reverse low cost housing and high wages. It's also hard to make a drastic move when your treading water.

It's ingrained in the children of immigrants that their parents moved from one country to another. They also likely have fewer roots where they currently live. The current policies prioritizes immigrants and children of immigrants. The risk of moving to a new place is therefore lessened by all the support available.

[Truenorth00]

Originally Posted by Coldrsx

1% isn't the end of the world, but it certainly is being purported as such today on the morning news.

It is if you're a speculator who was investing in real estate using your HELOC. Especially since you have no idea what is coming in September.

Also, the stress test is now 6%. Look at the prices in your area. I'm going to bet not a lot of people will qualify at that rate.

I'm glad to see that the BoC finally moved. I hope to see an equally aggressive move in September.

[casper]

Originally Posted by Truenorth00

It is if you're a speculator who was investing in real estate using your HELOC. Especially since you have no what is coming in September.

I'm glad to see that the BoC finally moved.

I am ok with the BoC moving, however I would have preferred gradual steps. They should have started earlier with smaller steps. This extreme moves are the result of being far to reactive.

[Coldrsx]

Originally Posted by kwoldtimer

I didn't see anything about end of the world in the G&M or CBC reports.

That said, I'm glad I'm not carrying a mortgage or any other debt.

CBC's tone certainly was.

[Truenorth00]

Originally Posted by casper

I am ok with the BoC moving, however I would have preferred gradual steps. They should have started earlier with smaller steps. This extreme moves are the result of being far to reactive.

You cannot curb this kind of inflation with small steps.

Go back to first principles. What is inflation? It's too much money chasing too few goods. How do you reduce inflation? You either increase the supply of goods or reduce the supply of money? Central Banks can't increase the supply of goods. So they will do the latter. And the best way to do that is to increase interest rates so that all the borrowers see payments go up, taking money out of the economy.

The speed of it is highly relevant. Go slow and you start getting a wage spiral. If they weren't hawkish today, this time next year a lot of people will be asking for 10% raises. They will accept a recession to avoid that income.

[swimmer_spe]

Originally Posted by thebasketballgeek

Right but when did it become the standard for homeowners to completely skip the starter home phase of their life? Why do you need 3-4 bedrooms instantly when kids can share a bedroom for the first 12 or so years of their life? The only reason that one would ever need so much space for their first house is if they live in a multi-generational household like most South Asians. In fact the pooling of money and support system of multi-generational households should start getting promoted in Canada instead of our typical western bias of “individuality” but that’s a whole other can of worms.

When the popular homes to build have been larger for the last few decades, what do you expect? I want a car that has no power windows, manual transmission, no ac, and no keyless entry.... They don't exist. Same with houses.For the last few decades, 3 bedroom homes are the standard size.

Originally Posted by thebasketballgeek

There are cities that already exist that have public transit and much lower costs of construction outside of the big 3. Unfortunately, the surrounding communities of Toronto and Vancouver have virtually 0 areas that truly have a lower cost of construction. When house prices in goddamn Barrie are more then double the price of houses in places like Calgary and Winnipeg the outer communities of our large cities just haven’t shown any initiative to cool their housing markets. Which is why suburbs like Brampton are about to get a rude awakening.

We also have to consider that despite all the economic benefits of making a move, it’s just that people aren’t willing to move to the prairies where housing is actually affordable for a plethora of reasons. If people want affordable housing just move to Edmonton lol. But of course it’s never that simple because it requires risk and most people simply don’t have a high enough risk tolerance to make certain steps in order to improve their quality of life. There even was a NY Times article that explained why children of immigrants climb up the economic ladder simply because they are more willing to take risk of moving to places to better their financial security.

https://www.nytimes.com/interactive/2022/07/11/opinion/immigrants-success-america.html

I am not talking suburbs. I am talking about farther places that could be better. Using Toronto as an example, I am talking of cities like Windsor, Sarnia, Sudbury, North Bay, and then basically anything between Ottawa/Montreal and Toronto. Build better publci transport out to there and watch them grow.Even out to Saguenay would be viable. For Vancouver, Out to Kelowna and Kamloops should be good transit. It isn't and people who want to be car free cannot.

Originally Posted by thebasketballgeek

Really interesting article, but the first thing that jumps out is that the areas with the lowest child poverty rates also have the smallest household sizes. Canada has roughly an average household size and as a result with our unaffordable housing has an above average child poverty rate of OECD countries. This seems to be another argument confirming that supply is still the problem as mentioned in the video and by myself and other posters numerous times on this forum.

I am not going to say it is not unaffordable. Right now, it is. The reality is, for low income workers, until a living wage is introduced thing will only get worse for them.

Originally Posted by thebasketballgeek

And I want a 2,500 sf single-detached home in the inner city on a main arterial that has a walk score > 90, protected bike lanes, and rapid transit while at the same time having no traffic. However, we can’t conform to the unrealistic expectations of Canadian families. If these selfish homeowners want a bunch of useless space than we have to make sure their whole lifestyle isn’t subsidized like it currently is today.

What do you mean by subsidized?

Originally Posted by thebasketballgeek

Yes I despise hyperbole as well but the video creator explicitly stated a minute into the video that the title was purely click bait to generate views because it’s YouTube after all. The problem of housing affordability can be fixed, it’s just that there isn’t much political will to take the appropriate steps to curb housing prices. Interest rate hikes are actually a good start, but the root cause of this issue will always be lack of supply relative to increased demand.

You and I agree on 2 things...
1) we hate hyperbole.
2) there isn't much political will to change things.

Originally Posted by Truenorth00

You cannot curb this kind of inflation with small steps.

Go back to first principles. What is inflation? It's too much money chasing too few goods. How do you reduce inflation? You either increase the supply of goods or reduce the supply of money? Central Banks can't increase the supply of goods. So they will do the latter. And the best way to do that is to increase interest rates so that all the borrowers see payments go up, taking money out of the economy.

The speed of it is highly relevant. Go slow and you start getting a wage spiral. If they weren't hawkish today, this time next year a lot of people will be asking for 10% raises. They will accept a recession to avoid that income.

Which is why I think that the Bank of Canada is doing the right thing.

[hipster duck]

Originally Posted by Truenorth00

• Video Link

This was one of the better videos on the problem I've seen. Thanks for sharing.

My only critique is that I wish he would have delved into the demand side of the issue more. Beyond super low interest rates, there are other reasons why Canadian investors have poured their money into real estate instead of into other vehicles. Some of it is not easily addressed through policy, like the fact that the TSX has not performed well compared to other foreign indices, but some are.

For example, real estate is quite tax-sheltered. There's the fact that you don't pay capital gains on the sale of your primary residence, but there's also the fact that Canadian property taxes are absurdly low, and there's an inverse correlation between average property tax rates (mill rate vs. expected selling price) and housing prices. Where do municipalities make up the shortfall they could net from raising residential property tax rates? By taxing businesses more (one more reason not to invest in starting a new business), and by raising development charges (one more reason not to build more supply).

Then the issues around capital controls and Canada as a place to launder money, but those are harder to find reliable statistics and do rigorous analysis around.

[WarrenC12]

Originally Posted by Coldrsx

1% isn't the end of the world, but it certainly is being purported as such today on the morning news.

No, but this stuff always lags. We haven't seen the full impact of the last rate hike. They did this after seeing US inflation numbers hit new highs (9.1%). We shall see what Canadian CPI is next week.

Everybody is getting coal for Christmas, I can tell you that.

[JHikka]

Originally Posted by WarrenC12

No, but this stuff always lags. We haven't seen the full impact of the last rate hike. They did this after seeing US inflation numbers hit new highs (9.1%). We shall see what Canadian CPI is next week.

Everybody is getting coal for Christmas, I can tell you that.

The BoC is still expecting GDP growth even with rate hike:


Via Trevor Tombe:
"It would be incorrect to conclude that these rate increases will necessarily cause a recession. It is definitely false to conclude that the BoC's objective is to cause one to lower inflation. They expect positive gdp growth this year, next year, and the year after."
https://twitter.com/trevortombe/status/1547242673085435904

[Truenorth00]

Average non-mortgage debt load in Canada is over $20k. In the span of six months, interest payments for these will have gone up 40-50% with more in the Fall. The average new mortgage is over $400k. The combined average debt load is about $73k. So with just this increase alone, the average person is going to see over $730 increase in interest for the year. Given the debt structure and retail rates, it's likely to be closer to $900. $75/mo is like suddenly adding an extra full service cellphone bill. 1% is a big deal. And that doesn't include past rate hikes this year, or what is coming in September.

[WarrenC12]

Originally Posted by JHikka

The BoC is still expecting GDP growth even with rate hike:

Yeah but they continue to drop their forecasts every time. A recession in inevitable at this point.

[WarrenC12]

Originally Posted by Truenorth00

Average non-mortgage debt load in Canada is over $20k. In the span of six months, interest payments for these will have gone up 40-50% with more in the Fall. The average new mortgage is over $400k. The combined average debt load is about $73k. So with just this increase alone, the average person is going to see over $730 increase in interest for the year. Given the debt structure and retail rates, it's likely to be closer to $900. $75/mo is like suddenly adding an extra full service cellphone bill. 1% is a big deal. And that doesn't include past rate hikes this year, or what is coming in September.

HELOCs will get boned for sure. I don't know how many people out there have that kind of debt load, or what assets they can sell to help clear it. They are the most hooped.

For mortgages, most people are on fixed rates. Some people are on fixed payment variable rates, and some are on adjustable variable.

People on adjustable variable will see immediate bill increases, and will have to cut back other spending, or worse.

People on fixed payment variable will have a time bomb when renewal hits. People on fixed will also see a huge spike at renewal time.

We're only ~6 months into these interest rate increases. Mortgage contracts are usually 3-5 years long. We'll be in a snowball effect of increased pain for mortgage holders for years to come.

[someone123]

Originally Posted by WarrenC12

Yeah but they continue to drop their forecasts every time. A recession in inevitable at this point.

While economists in general have predicted 9 of the past 5 recessions, central banks have predicted approximately 0 of the interest hike driven recessions in modern history.

Given the poor management of the economy that has happened for so long I am not sure there is a painless way out. It is hard to deleverage and cope with changes to prices of major assets, and there are a lot of aspects of the economy will tend not to rebalance unless there is a recession and perception of a major downturn.

[someone123]

Originally Posted by hipster duck

Some of it is not easily addressed through policy, like the fact that the TSX has not performed well compared to other foreign indices, but some are.

Can't Canadians buy those foreign investments?

[WarrenC12]

Originally Posted by someone123

Given the poor management of the economy that has happened for so long I am not sure there is a painless way out. It is hard to deleverage and cope with changes to prices of major assets, and there are a lot of aspects of the economy will tend not to rebalance unless there is a recession and perception of a major downturn.

For sure, it will continue to get worse before it gets better.

[Truenorth00]

Originally Posted by WarrenC12

HELOCs will get boned for sure. I don't know how many people out there have that kind of debt load, or what assets they can sell to help clear it. They are the most hooped.

HELOCs aren't bad. Just depends how they are used. Peeing who used them to make downpayments on investment property? They might be screwed. Somebody who used it to invest in energy efficiency upgrades for their home? Not so much.

Originally Posted by WarrenC12

For mortgages, most people are on fixed rates. Some people are on fixed payment variable rates, and some are on adjustable variable.

Mostly true. However, in the last year or so, a lot of people started taking up variable mortgages. And these are also likely to be people with the largest balances.

A majority of Canadians buying a home or renewing a mortgage preferred the lower upfront cost of a variable rate rather than the peace of mind of a fixed loan in the second half of 2021, according to a new report released Wednesday.

The Canada Mortgage and Housing Corp. (CMHC) said in its bi-annual report on the country’s mortgage industry that 53 per cent of home buyers and loan renewers chose a variable rate mortgage over a fixed one in the final six months of last year. Just over a third (34 per cent) had opted for variable in the first half of 2021.

CMHC pointed to the wider spread between rates offered for fixed and variable mortgages in the latter half of the year as fuelling the shift in preferences.

https://globalnews.ca/news/8970237/canada-mortgages-variable-fixed-cmhc/

Originally Posted by WarrenC12

People on adjustable variable will see immediate bill increases, and will have to cut back other spending, or worse.

People on fixed payment variable will have a time bomb when renewal hits. People on fixed will also see a huge spike at renewal time.

We're only ~6 months into these interest rate increases. Mortgage contracts are usually 3-5 years long. We'll be in a snowball effect of increased pain for mortgage holders for years to come.

Absolutely. And while everybody focuses on the surge in post-Covid prices, I'm not sure a lot of pre-Covid buyers are all that secure either. Many of them have gotten used to their mortgage payment at current levels. Renewal will see payments jump to what they were stress tested for.

[thurmas]

Bank of Canada increased rates by 1 full percentage point today largest since 1998

[WarrenC12]

Originally Posted by Truenorth00

Mostly true. However, in the last year or so, a lot of people started taking up variable mortgages. And these are also likely to be people with the largest balances.

Those people are in trouble for sure, but they have renewal periods the furthest out. If I was ~3 years from renewal I actually wouldn't be too concerned yet.

The spread was because the bond market predicted this inflation and reaction. Smarter minds!

[travis3000]

Originally Posted by kwoldtimer

I didn't see anything about end of the world in the G&M or CBC reports.

That said, I'm glad I'm not carrying a mortgage or any other debt.

My car loan is locked in at 2.8% and my mortgage is locked in for another 4 years at 1.79%. So this doesn't affect me thankfully.

Regardless, it's still worrisome for others who have variable mortgages, line of credits, or looking to take on new debt in the next little while.