Canada's 'housing bubble' deemed close to bursting

[casper]

Originally Posted by WarrenC12

Hasn't it already stopped? The outlying suburbs from Vancouver area already showing the biggest real estate declines.

Very small towns and rural areas might be a little different.

The spike should have been expected. Hopefully it levels out to a modest growth rate that the community can absorb.

Some places may have also overshot but adding a new housing above the rate it can be absorbed going forward.

It is a positive overall.

[swimmer_spe]

Originally Posted by WarrenC12

Hasn't it already stopped? The outlying suburbs from Vancouver area already showing the biggest real estate declines.

Very small towns and rural areas might be a little different.

That is what I was talking about. It is like a mass exodus from the areas even around the cities.

[yaletown_fella]

Originally Posted by casper

I am not saying give low interest loans to individuals or businesses.

I am taking about given low interest loans to not-for-profits who mission is to build affordable housing. In BC the more common model was for the province or city to own the building and contract the not-for-profit to operate it. I am saying is let the not-for-profit own the building.

Co-ops (which are different than the non-profits) but produce similar results were population in the 1970-90s. Then government stopped funding new co-ops. They are now getting back into it.

There is a report out today about Broadway in Vancouver. The city is rezoning that corridor. The previous draft zoning was recently updated to remove 5 floors from the cap and increase the minimum frontage for a development application. The industry ran the numbers and one company is now saying the business case for rentals do not work under the new proposed zoning. So the city should be the 5 floors back in and remove the minimum frontage clause.

I see what you mean now, I misunderstood the post. For a while I've felt co-op housing is sorely lacking, as it's a reasonably affordable , except unlike city run public housing, it's usually well maintained with a pride of ownership.

It's a refreshing change from the means-test trap public housing and overpriced 'luxury' blockbuster condo developments that have become a dime a dozen.

Even if I won lotto 649, I still find most large scale 'luxury' condo towers like One Bloor East are unappealing investments compared to smaller scale boutique loft projects from a couple decades ago, like Candy Factory Lofts.

[MolsonExport]

Typical mortgage payment could be 30% higher in 5 years, Bank of Canada warns

Much of those inflated house prices have been built on a foundation of debt. Almost one in five Canadian households are now considered "highly indebted," which means their debt to income ratio is 350 per cent or more, the bank says.

Prior to the pandemic, only one in every six were that much in debt. Barely 20 years ago, in 1999, only one out of every 14 households had that much debt.

"Those numbers mean that each rate hike will inflict more pain on the economy than it would have in the past," said Desjardins economist Royce Mendes.

The bank makes the assumption that in 2025 and 2026, variable rate loans will cost 4.4 per cent in five years, while fixed rate loans will be slightly higher at 4.5 per cent.

Both scenarios are roughly two percentage points higher than what's available on the market today.

[someone123]

I live in a housing complex with a variety of different unit types and it's pretty interesting. We have a lot of higher end cars here (Tesla etc.), particularly parked by the townhouses and some in the condo parking. And then there are some condo units that are lived in but look really barren and we've had problems with tenants smoking pot 24/7 and letting garbage pile up and attracting vermin. Apparently we've gone up to around 50% rental here.

The sales prices are up in the $600,000-700,000+ range depending on the unit while townhouses are in the $1M+ range.

I doubt that the numbers would work out to buy a condo right now and rent it out (they probably never did unless you expected capital gains, probably those sweet sweet 0% taxed ones you get when you have your mail sent to your tenants), and it would be even more of a stretch if interest rates went up a little more.

[WarrenC12]

Originally Posted by someone123

I doubt that the numbers would work out to buy a condo right now and rent it out (they probably never did unless you expected the price to rise), and it would be even more of a stretch if interest rates went up a little more.

It hasn't made much sense for a long time in Metro Vancouver. Maybe 20 years.

Combine that with limited potential to increase rent due to provincial controls, and it's not a good idea. A 2nd home/condo might make sense if that's a place you want to retire in the future. Buying bank stocks and collecting dividends is a much better way of making "passive" income.

[travis3000]

I think its somewhat unrealistic to assume to have any idea where the rates will be in 2026, given that it's 4 years away. All we need is some recession or economic weakness and the rates will be on their way down.

My mortgage was locked in last year at 1.8%, expires in March 2026. To try and predict that far ahead...impossible. Could be higher than now, could be the same, could be lower.

[someone123]

Another anecdote I hear about are the condo tycoons who run to the bank to buy more condos to rent out whenever they can. I wonder how accurate or representative these stories are and how stretched these people are. But the fact that so many of the condos in my building are rentals is a piece of evidence that maybe it's not that rare. I think the most common scenario is that people move up and don't sell their old condo, or they cash out of an expensive property and buy a condo in case they want a place in the city. Due to the empty homes tax they rent these places out, at least on paper.

This whole discussion was somewhat warped in the past by the "foreign buyer" debate.

One unusual aspect of the Vancouver market for a long time was the disconnect between high rents and purchase prices. Vancouver had prices in the San Francisco ballpark while rents were maybe 1/3.

[WarrenC12]

Originally Posted by someone123

I think the most common scenario is that people move up and don't sell their old condo,

This is my scenario. On a cap rate basis, it's not a great investment. However I've owned it for a long time, and a sale would generated substantial capital gains taxes. My loose plan is to sell it in year 1 of retirement and take no other income to lessen the hit.

[svlt]

Originally Posted by travis3000

I think its somewhat unrealistic to assume to have any idea where the rates will be in 2026, given that it's 4 years away. All we need is some recession or economic weakness and the rates will be on their way down.

My mortgage was locked in last year at 1.8%, expires in March 2026. To try and predict that far ahead...impossible. Could be higher than now, could be the same, could be lower.

you just possibly won yourself some 50-100k over five years there depending on the size of mortgage and where you think rates are going so congratulations are in order!

[Innsertnamehere]

It's a mix of end buyers who rent out when they move, investors, etc.

My experience is that pre-construction is mostly investors buying the units then flipping them to end buyers upon project completion. Often they rent them for a few years after completion before flipping.

End buyers often end up buying from these people.

There is also a lot of people who own a handful of condos as investment vehicles for retirement. Even the average person who sets up a 500k retirement fund (equal to about 20k of retirement income, quite modest) can handle an investment rental condo in their portfoli0 - and returns once equity is accounted for can be extremely healthy, even if cash-flow is actually negative. There are TONS of people like this who own one or two condos as investment vehicles for retirement and for who their tenants rent pays the mortgage and lets them build equity.

[swimmer_spe]

Originally Posted by MolsonExport

Typical mortgage payment could be 30% higher in 5 years, Bank of Canada warns

I read that and thought.... We are all screwed, maybe. Unless you have bought a house and have been in it for over a decade, this will hit most Canadians. It will cause people to try to sell and offload an expensive house, but nothing cheap will be around. That will see many default on their mortgage. That will cause a recession, unless we are already in one. In that case, that will cause a depression. So, in short, we are screwed.

[Innsertnamehere]

Originally Posted by swimmer_spe

I read that and thought.... We are all screwed, maybe. Unless you have bought a house and have been in it for over a decade, this will hit most Canadians. It will cause people to try to sell and offload an expensive house, but nothing cheap will be around. That will see many default on their mortgage. That will cause a recession, unless we are already in one. In that case, that will cause a depression. So, in short, we are screwed.

if you've bought since 2017 you have been stress tested on your approval for up to 5% mortgage rates or higher. IIRC my 2.19% 5-year fixed which I signed in June 2020 was stress tested for approval at 5.15%. So theoretically I could afford up to that rate - and I can confirm that we could afford a 5.15% mortgage rate. It wouldn't be fun and would make us a lot tighter financially, but it would work without much problem, we would just have to put off some vacations planned and a renovation or two. We wouldn't be foreclosing or anything. And that's today, another 3 years from now our incomes will have increased more, particularly with inflation the way it is, and the mortgage will be a much smaller proportionate part of our income.

I suspect increased interest rates will be a relatively short term thing anyway. They'll spike in the next year or two before they decline after they tame inflation.

[swimmer_spe]

Originally Posted by Innsertnamehere

if you've bought since 2017 you have been stress tested on your approval for up to 5% mortgage rates or higher. IIRC my 2.19% 5-year fixed which I signed in June 2020 was stress tested for approval at 5.15%. So theoretically I could afford up to that rate - and I can confirm that we could afford a 5.15% mortgage rate. It wouldn't be fun and would make us a lot tighter financially, but it would work without much problem, we would just have to put off some vacations planned and a renovation or two. We wouldn't be foreclosing or anything. And that's today, another 3 years from now our incomes will have increased more, particularly with inflation the way it is, and the mortgage will be a much smaller proportionate part of our income.

I suspect increased interest rates will be a relatively short term thing anyway. They'll spike in the next year or two before they decline after they tame inflation.

Could you afford your monthly payment to increase by 20% -30%? That is what they are saying will happen. I don't think anyone is stress tested for that kind of rise.

[ssiguy]

Originally Posted by travis3000

I think its somewhat unrealistic to assume to have any idea where the rates will be in 2026, given that it's 4 years away. All we need is some recession or economic weakness and the rates will be on their way down.

My mortgage was locked in last year at 1.8%, expires in March 2026. To try and predict that far ahead...impossible. Could be higher than now, could be the same, could be lower.

I agree, guessing interest rates 4 years from now is a crap-shoot especially in times like this of unprecedented economic uncertainty.

The issue with soaring mortgage rates is not just the higher payments but also plunging house prices. Canada, depending on the location, is in for at LEAST a 30% drop in prices. This means people will be paying much more money for a property that is worth a lot less than when they bought it.

For people in affordable markets it won't mean too much but for hyper-expensive ones, people could be out hundreds of thousands of dollars which is when they simply see their homes as nothing more than a financial noose around their necks and decide to just turn over the keys to the banks. Of course the banks, who have no skin in the game thanks to CMHC, quickly turn around and pass those keys to the taxpayers.

This is what happens when you offer people free money.........they tend to take it.

[SignalHillHiker]

I’m still alright with a 30% increase.

Currently I’ve a variable rate of 2.7% and my payment is $354 biweekly (plus another $67 for property taxes). I’m going to stay variable. The lowest locked-in rate I can get here is 4.5% for four years so meh. I’ll wait it out.

[WarrenC12]

I'm on ARM and my payment is already up about 12% on the recent rate hikes. Not as high as it was pre-COVID, but getting there.

[esquire]

Originally Posted by swimmer_spe

Could you afford your monthly payment to increase by 20% -30%? That is what they are saying will happen. I don't think anyone is stress tested for that kind of rise.

Even for those who can afford the increases, it's hard to imagine that it won't result in a significant hit to your disposable income. A lot of discretionary spending might be out the window in those cases.

[swimmer_spe]

Originally Posted by esquire

Even for those who can afford the increases, it's hard to imagine that it won't result in a significant hit to your disposable income. A lot of discretionary spending might be out the window in those cases.

That is my point. This is why we are in for a recession or depression.

[whatnext]

Originally Posted by swimmer_spe

I read that and thought.... We are all screwed, maybe. Unless you have bought a house and have been in it for over a decade, this will hit most Canadians. It will cause people to try to sell and offload an expensive house, but nothing cheap will be around. That will see many default on their mortgage. That will cause a recession, unless we are already in one. In that case, that will cause a depression. So, in short, we are screwed.

Sounds like a great buying opportunity!