Canada's 'housing bubble' deemed close to bursting

[yyzer]

from the original article...

a major independent research firm warns. “Housing valuations have lost all touch with fundamentals and household debt is at a record high,”

As usual, the so-called 'experts' have confused cause and effect.....the high prices are not the cause of the bull market in real estate, they are the effect...

The causes of this market, which began around 1996, are threefold imo...

1.) low interest rates
2.) decent economy
3.) continued immigration into Canada

Unless one or more of these change, the market will continue...1.) I don't think Canada wants to raise interest rates in any meaningful way, it would boost the Canadian dollar even further, and would kill the manufacturing sector....2.) the economy seems to be improving - everywhere I look there are 'help wanted' and 'now hiring' signs.....3.) immigration continues unabated, with no policy change seen on the horizon....

my 2 cents

[miketoronto]

I hope it crashes, as prices have gone out of step with family income.
There is no way a middle class person in Toronto and area can afford a house right now. There just is not enough rich people to support the prices as they stand.
Something has to happen. So a crash would be great for regular Canadian's who don't make a million a year.

An example are houses near me. Which not long ago were going for about $150,000 to $200,000. Now you can't touch them for less than $600,000 and many approach $1 million. It just crazy.

[someone123]

Originally Posted by yyzer

1.) I don't think Canada wants to raise interest rates in any meaningful way, it would boost the Canadian dollar even further, and would kill the manufacturing sector....

I don't think Canada wants to either, but what happens when the US start raising its rates?

Many people are in unaffordable 30 year adjustable-rate mortgages. Even a relatively minor increase in rates over the long term means paying out way more money to the bank. It also makes it more difficult for new buyers, which means less demand for houses and lower values. In the US this left a lot of people with mortgages much larger than their property.

[aastra]

...I think Vancouver should consider itself lucky if prices only drop 35%.

Methinks a lot of people in Vancouver would consider themselves lucky if they were able to buy a $400K condo for $260K or less.

[Doug]

Originally Posted by someone123

I don't think Canada wants to either, but what happens when the US start raising its rates?

Many people are in unaffordable 30 year adjustable-rate mortgages. Even a relatively minor increase in rates over the long term means paying out way more money to the bank. It also makes it more difficult for new buyers, which means less demand for houses and lower values. In the US this left a lot of people with mortgages much larger than their property.

The US Federal Reserve does not want to raise either. Unfortunately, bond markets think otherwise.

[Doug]

It is more than obvious that the Vancouver market is in mega-bubble territory. A $1M Vancouver house/condo would need to be capable of generating $4,200 - $5,000 per month in rent to justify the price at current interested rates. Even a 1% rise in rates would increase that amount to $5,000 - $5,800.

[someone123]

Originally Posted by Doug

The US Federal Reserve does not want to raise either. Unfortunately, bond markets think otherwise.

Yep. It seems safe to assume that the US is simply going to have to pay more to borrow money in the future, whether they want to or not.

Another issue I could see in Vancouver is a collapse of the Chinese real estate market, though I am not really sure where wealthy Asian buyers get their money from. I also don't know which percentage are from mainland China vs. Hong Kong or Taiwan or what those other markets are all like.

[yaletown_fella]

Income tax rates for mainland China are higher than what I would have thought. They're actually about as high as Canada's. I guess they're keeping their savings offshore in HSBC?

[telyou]

Originally Posted by SpongeG

my friends visited a friend of theirs in montreal last summer - she rents in downtown montreal, a two bedroom apartment for $800 a month - they were both in shock cause it was so central and cheap

Holy shit, either the owner is clueless or doesn't care. I'm renting my unit for 1100$ and it's a 1 bedroom near the bay.

"Nothing is built here on spec, everything is presold before excavation even begins"

As opposed to every other city in the world?

This talk about supply & demand regarding Vancouver. Do Vancouverites understand where that demand is coming from and has been over the past decade?

[giallo]

^Of course they do. Every other article in the real-estate section of the Vancouver Sun or Province newspapers are about foreign (see Chinese) buyers.

[freeweed]

Originally Posted by Doug

It is more than obvious that the Vancouver market is in mega-bubble territory. A $1M Vancouver house/condo would need to be capable of generating $4,200 - $5,000 per month in rent to justify the price at current interested rates. Even a 1% rise in rates would increase that amount to $5,000 - $5,800.

Yeah... while definitively forecasting anything is a fool's game - the folks here who think Vancouver's market is untouchable are fairly deluded. We've already seen this game in Vancouver in the 80s. Prices crashed, and crashed HARD - for the exact same reasons they'll crash today.

Unless China continues to export millionaires. Which is entirely possible I suppose. Eventually these rental properties will all be sold though (who in their right mind would hold onto a property worth $1M+ that takes in only $1500/month??), and these $1100 apartments will suddenly cost 2-3-4x as much. Unless Vancouver has some seriously strict rent control laws in place.

[Richlord11]

Definitely agreed! According to Capital Economics, the Canadian Housing Bubble is now close to bursting as house prices have lost touch with fundamentals. They predict a 25 per cent decrease of house prices. Next market´s symptoms of a housing bubble are the rapid increase in construction and the very high level of construction employment.

[Waterlooson]

Originally Posted by freeweed

. We've already seen this game in Vancouver in the 80s. Prices crashed, and crashed HARD - for the exact same reasons they'll crash today.

Prices crashed in the early 1980s because mortgage rates went up to around 23%.... that isn't going to happen anytime soon.

[Waterlooson]

Originally Posted by Richlord11

Definitely agreed! According to Capital Economics, the Canadian Housing Bubble is now close to bursting as house prices have lost touch with fundamentals. They predict a 25 per cent decrease of house prices. Next market´s symptoms of a housing bubble are the rapid increase in construction and the very high level of construction employment.

Of coarse various "experts" have been forcasting that for nearly 10 years now... any commodity (including housing) can stay over valued for a very long time.... they will eventually correct, but when? .... after they have gone up another 50% first?

[ssiguy]

Real estate is a very localized affair.
Some markets in Canada are not over values at all like in Atlantic Canada, Quebec, and Ontario {except for the GTA}. SK is and prices will decline accordingly as will Alberta.
The GTA is probably 20% over valued but the real bloodshed will be in BC.
The whole province is completely overvalued. The real estate market in all of BC has no longer any correlation with the local economy.
BC's average earnings are 5% below the national average, it's population growth has plunged, it's economy is growing at a slower pace than the national average and yet house prices are more than twice the national average.
Also BCers are going broke....litterally. BC has had a negative savings rate every year this millenium and are the most indebted in both mortgages and general debt in the country.
Prices in Vancouver will probably plunge 40% and the rest of the province by 30%.
The real problem is that most BC ers who bought in the last 10 years did so with 40 year mortgages which is effectively renting and they are going to find themselves in the same situation as Arizona and Neveda.......they are going to be making payments on houses that are worth less than what they owe on them.
People may be prepared to swallow that if they have negative equity of $20-$40k but in Vancouver that can mean negative equity of quite literally 5 times that amount. That's when people will simply start walking away from their homes and mortgages en masse.

[jlousa]

Ahh another ssiguy post with made up numbers posted as facts.

most BC ers who bought in the last 10 years did so with 40 year mortgages

Would love to see you find a source for this one.

[Spoolmak]

Oh hey look it's ssiguy. Gather 'round folks.

[someone123]

Originally Posted by freeweed

Unless China continues to export millionaires. Which is entirely possible I suppose. Eventually these rental properties will all be sold though (who in their right mind would hold onto a property worth $1M+ that takes in only $1500/month??), and these $1100 apartments will suddenly cost 2-3-4x as much. Unless Vancouver has some seriously strict rent control laws in place.

These numbers are off. You don't find $1M units in Vancouver for $1500/month. And many of the $1100 apartments are in old rental type buildings. It's possible but I don't believe that rented condos are a huge percentage of overall rental stock. It's also fairly easy to build new apartment stock -- and wouldn't that would be extremely attractive long before even a doubling of rental rates?

I do believe that Vancouver real estate is "overvalued" in the sense that many people buy in thinking prices are always going to climb at 10% a year***, and weird things might happen when values stop rising and interest rates climb. I don't think it's ever going to be a cheap city though. It's just naturally a very desirable place, in the same way California is desirable in the US. Vancouver attracts people who are willing to pay more to have a certain lifestyle.

*** This is just based off of personal observations of people saying crazy things and believing that owning is always better. It would be interesting to see large polls to gauge attitudes. My guess is that those polls would be pretty frightening.

[LFRENCH]

Originally Posted by freeweed

Eventually these rental properties will all be sold though (who in their right mind would hold onto a property worth $1M+ that takes in only $1500/month??)

Funny enough, I do indirectly. I infact only charge $1200 a month for a $1.2 million dollar property.

[caltrane74]

Originally Posted by LFRENCH

Funny enough, I do indirectly. I infact only charge $1200 a month for a $1.2 million dollar property.

That's pretty good, considering the banks might give you half of that on a mil. - (And the stock market will give you -50%, if you're lucky)