Canada's 'housing bubble' deemed close to bursting

[whatnext]

Originally Posted by d_jeffrey

Another reason to never get married...

Or at least to marry a realtor!

[whatnext]

Another canary in the housing bubble coal mine:

More than one-third of the money raised from investors to provide syndicated mortgage loans for Fortress Real Developments Inc.’s building projects was paid out as cash commissions to salespeople and as consulting fees to Fortress, new court documents say.

The court filings show Ontario’s financial regulator, the Financial Services Commission of Ontario (FSCO), has significant concerns about lending practices at Fortress’s affiliated mortgage brokerage company, Building & Development Mortgages Canada Inc. (BDMC). The company has raised more than $700-million from 11,000 investors since 2013, primarily to finance Fortress’s real estate development projects...

https://www.theglobeandmail.com/business...gage-loans-went-to-pay-commissions-fees/

[sunsetmountainland]

Too early to look for positives from government policies: experts

Muir noted the low rate of foreign ownership in Vancouver means any sales by foreign owners would have little impact on supply.

“Foreign buyers in Metro Vancouver last year were 3.6% of homebuyers, so how is a change in that number going to impact the market at all?”

Muir added that any impact would be tough to verify.

He feels the real drivers of the market continue to be ignored.

Supply is especially needed, both in terms of listings and new construction. Resale listings are at historic lows, meaning prices have continued to increase this year despite hopes for greater affordability.

Moreover, new supply contributes to economic activity whereas demand curbs don’t.

“The cure for a lack of supply in the housing market is typically more supply,” he said. “Severely cutting demand has a negative impact on the economy, whereas increasing supply has a very positive impact on the economy and jobs.”

https://biv.com/article/2018/04/too-early-look-positives-government-real-estate-policies-experts

[whatnext]

Originally Posted by sunsetmountainland

Too early to look for positives from government policies: experts

https://biv.com/article/2018/04/too-early-look-positives-government-real-estate-policies-experts

LOL, unbiased opinions from Cameron Muir, Chief Economist of the BC Real Estate Association, though we all know why you would like his splutterings.

[sunsetmountainland]

Originally Posted by whatnext

LOL, unbiased opinions from Cameron Muir, Chief Economist of the BC Real Estate Association, though we all know why you would like his splutterings.

Thank you for your reply. Please feel free to prove Cameron Muir, as well as his
numbers or information wrong. I understand you are not the chief economist of the BC real estate association. So if you have something you can supply that would make me understand your unbiased opinions, I am all ears!

[Xelebes]

Originally Posted by sunsetmountainland

Thank you for your reply. Please feel free to prove Cameron Muir, as well as his
numbers or information wrong. I understand you are not the chief economist of the BC real estate association. So if you have something you can supply that would make me understand your unbiased opinions, I am all ears!

Why? Have you not been following the discussion? Why does whatnext have to refute a propaganda piece that is counter to the narrative that is gaining international traction. Why are you demanding someone to refute a man with cotton in his ears? The man doesn't back up his claims, just says it is so.

[sunsetmountainland]

Originally Posted by Xelebes

Why? Have you not been following the discussion? Why does whatnext have to refute a propaganda piece that is counter to the narrative that is gaining international traction. Why are you demanding someone to refute a man with cotton in his ears? The man doesn't back up his claims, just says it is so.

Good point! You stated a propaganda piece that is counter to the narrative? What is this propaganda piece? Is it this?

Muir noted the low rate of foreign ownership in Vancouver means any sales by foreign owners would have little impact on supply.

“Foreign buyers in Metro Vancouver last year were 3.6% of homebuyers, so how is a change in that number going to impact the market at all?”

I asked whatnext a question. So I will now ask you this same question!

Please feel free to prove Cameron Muir, as well as his
numbers or information wrong. I understand you are not the chief economist of the BC real estate association. So if you have something you can supply that would make me understand your unbiased opinions, I am all ears!

[MolsonExport]

How about them ports?

[MolsonExport]

Some people are all ears. Others are not, but they have something important between these ears.

[1overcosc]

So I was with my family last weekend and we came to an interesting conclusion.

My sister and brother-in-law bought their first house a few months ago. They paid $385k for it.

We were talking about mortgage payments the other day and my mom and my sister compared their mortgage payments on their first homes. My sister paid $385k for her first house in 2017, my mom paid $120k for her first house in 1989. They both put in 10% down and borrowed the rest.

We pulled out the BoC inflation calculator and found that, when adjusted for inflation, even though the purchase price my sister paid for is 82% higher than the price my parents paid, my sister's mortgage payment is actually 15% lower, because of massively reduced interest rates.

So reduced interest rates since the late 1980s have allowed property value increases of 82% to be 15% cheaper for first time home buyers!

It made me realize just how dramatically lowered interest rates have allowed real estate prices to rise. Which very strongly suggests that the strong gains in real estate values of the past 20-30 years can't be realistically matched in the next 20-30. Interest rates can't go down further.

[MolsonExport]

great anecdote that supports a very coherent theory.

[someone123]

Other factors like the stress test requiring people to qualify at 2% higher rates will have an effect similar to rising interest rates. A smaller supply of credit, which means lower housing prices paid, which results in some combination of less fancy house construction or renos or simply lower prices for the same old places.

In a city like Vancouver where the supply is heavily limited when the supply of money goes up the price of houses shoots up in lock step. Existing land owners capture all of the increase and don't bother improving properties when they will get a huge windfall either way. In a city with a competitive real estate market people still tend to borrow more, often to the max allowed, but nicer properties are built and the average quality of housing goes up more. This second scenario is the fairer and more productive one.

Some other observations:
- The $120k -> $385k scenario is in a more affordable city. Metro Vancouver detached homes have gone from around $200k -> $1.6M over the same period (and were ultra volatile in the 70's and 80's, sometimes doubling or halving in market value in 1-2 years, something many people insist cannot happen today).
- The people who borrow at a lower interest rate will still have to renegotiate in the future, so they risk huge payments in the future.
- To say something about affordability we also need to know about incomes. Inflation and high interest rates alone are not the full story. If you are a young person who borrows at a high interest rate but your income rises even faster you are better off.
- In the high interest cheap house scenario you had the option to save up more to buy a house. In the expensive low interest scenario you pretty much have to borrow. The ability to save depends on typical investment returns which is another factor (i.e. you can't just say saving is hard when interest rates are high; it's the real rate of return that matters, and it wasn't necessarily lower back in the higher interest era).

(We have a similar credit bubble in post-secondary education. As governments have expanded student loan programs, the cost of education has risen.)

[MolsonExport]

as governments have expanded student loan programs, the cost of education has risen

From an insider's perpective, the funding received from government for undergraduate education, has, in Ontario, fallen below the 50% mark for the first time. Students are literally paying more than 50% of the cost of their education. Ontario charges the highest tuition fees in the country, and has the lowest per-student funding, out of all ten provinces (all provinces have at least 1 university).

government funding, in real terms, for undergraduate education is only a third of what it was in the 1970s. Young people are getting a raw deal compared to their parents (and grandparents) who were educated in the 1980s-90s (and 1960s-70s, respectively).

[osmo]

Originally Posted by whatnext

Another canary in the housing bubble coal mine:

More than one-third of the money raised from investors to provide syndicated mortgage loans for Fortress Real Developments Inc.’s building projects was paid out as cash commissions to salespeople and as consulting fees to Fortress, new court documents say.

The court filings show Ontario’s financial regulator, the Financial Services Commission of Ontario (FSCO), has significant concerns about lending practices at Fortress’s affiliated mortgage brokerage company, Building & Development Mortgages Canada Inc. (BDMC). The company has raised more than $700-million from 11,000 investors since 2013, primarily to finance Fortress’s real estate development projects...

https://www.theglobeandmail.com/business...gage-loans-went-to-pay-commissions-fees/

Can someone explain Fortress to me? It seems that for evrey 5 peices of gold they finance they churn our a lump a coal as well. I understand Sydicates are somewhat risker finance channels but many reputable develpers (Brad Lamb) use Fortress all the time.

[lio45]

Originally Posted by 1overcosc

It made me realize just how dramatically lowered interest rates have allowed real estate prices to rise.

Lol... you just realized that?? It always went without saying.

Ordinary residential real estate markets have always been driven by what people can afford in terms of monthly payment. ("Ordinary" keyword to exclude the rare cases where there's a infinite pool of Chinese billionaires who've taken a fancy to your market as an alternative to bitcoins.)

To me, it's akin to saying you "just realized" that when gas prices are skyhigh, people tend to drive less, and vice versa when gas prices go down to being particularly low.

[lio45]

Originally Posted by someone123

- The people who borrow at a lower interest rate will still have to renegotiate in the future, so they risk huge payments in the future.

We had all those discussions in here already, but yeah, that's the risk when buying at bottom low interest rates. The amount you pay and the amount you owe both get fixed..... so you'd better hope that rates will remain historically ultralow, given that your decision only makes financial sense as long as they stay there.

[someone123]

Originally Posted by lio45

We had all those discussions in here already, but yeah, that's the risk when buying at bottom low interest rates. The amount you pay and the amount you owe both get fixed..... so you'd better hope that rates will remain historically ultralow, given that your decision only makes financial sense as long as they stay there.

Apparently fixed rate mortgages are common in the US. People can take out 30 year mortgages there and know what the rate will be for the entire period.

The lenders have to price in their risk with these mortgages (effectively smooth out what they think interest rates will be over the period, plus add some profit) so I'd assume rates on their long fixed term mortgages are significantly higher, while we have the more "bubbly" version.

Non-recourse mortgages are more common in the US too. If you can't pay you give back the house but they can't sue you to make up the difference. This is another variation in rules across the border that makes Canadian lenders more likely to loan out more money but actually makes mortgages riskier for Canadians (who often don't understand what they're getting into!).

[wave46]

Originally Posted by 1overcosc

It made me realize just how dramatically lowered interest rates have allowed real estate prices to rise. Which very strongly suggests that the strong gains in real estate values of the past 20-30 years can't be realistically matched in the next 20-30. Interest rates can't go down further.

The main driver of house prices in the next 20-30 years will be population growth, since the 'boom' caused by low interest rates cannot be repeated. This will be mitigated by the baby boom generation exiting the housing market. Effectively, the housing boom's end result will be one of the largest inter-generational transfers of wealth in history.

I suspect the baby boomers will end the beneficiaries of this, while the younger generations will end up stuck with the bill (see: US government debt and Ontario government debt explosions).

Housing prices in Canada's largest cities will be more affected by international events than smaller cities. A Chinese recession will likely severely damage the high end housing markets in Toronto and Vancouver.

[rousseau]

Originally Posted by someone123

Apparently fixed rate mortgages are common in the US. People can take out 30 year mortgages there and know what the rate will be for the entire period.

I'd like to know what percentage of Americans have these fixed mortgages. I imagine it's really high, because I've always gotten blank looks from them any time I've ever happened to mention renewing my mortgage.

I distinctly recall one time when an American I was talking to couldn't grasp the concept. "You mean, you're getting a new mortgage? Or something?"

[lio45]

It's a good idea though, it greatly reduces "timing luck". If you overpay for your property, at least you'll be enjoying low interest rates. And vice versa.

Some people (such as, probably, recent buyers) will have the worst of both worlds. Others, such as myself (bought most of my buildings at ~8% interest rates without expecting them to change, with variable rate mortgages because I figured on average it was more advantageous, then real estate around here more than doubled in value as rates fell to ~2.5% not long after, while my monthly payments became substantially lower for the same incoming cash flow) had the opposite experience.

I wouldn't want to buy an overpriced property unless I knew for sure I can have great leverage AND 30 years of a low interest rate to make up for overpaying.