Housing Bubble II: The Quest To Build Enough Homes Where People Actually Need Them

[lio45]

Originally Posted by P'tit Renard

Including taking out a HELOC to pay the downpayment of a new investment property. Leverage on leverage piles on.

I did that several times. The interest rates on HELOCs are low enough that I’m maximizing every HELOC I have (a grand total of three; I barely have any leverage nowadays). I agree with Warren, it’s a smart use of credit — rates are close to the best available (second only to residential mortgages).

[lio45]

Originally Posted by Innsertnamehere

Nite is right. It's well documented.

Wages are not outpacing the cost of housing however, especially in high cost markets. Which is where the pain is felt.

Wage increases are also uneven - some people get 15% wage hikes while others get 0%.

In a thread about housing, the correct statement about wages is that relative Canadian wages are going down. (As you yourself admit.)

(In a thread about Teslas, I’ll be the first one to agree that relative wages are going up.)

[MonkeyRonin]

Originally Posted by Nite

Wage growth in Canada very strong and is well beyond inflation.

Yet even with strong income growth, housing costs continue to eat up a ever-larger share of the median household's income:



Hence, fewer people can afford homes at the prices that they're being listed for.

[Changing City]

Originally Posted by MonkeyRonin

Yet even with strong income growth, housing costs continue to eat up a ever-larger share of the median household's income:

Hence, fewer people can afford homes at the prices that they're being listed for.

As the RBC report says that the graphic comes from, that's not because prices are going up in the past two years. The composite home price has fallen, but interest rates have risen consistently until today from 2.7% in March 2022 to 7.2% on May 1 this year. It's the interest rate (or more accurately, the mortgage rates) that has made home ownership more expensive, not price change. RBC correctly predicted today's rate cut. "We see the growing likelihood of rate cuts starting mid-year as a turning point for housing affordability in Canada. We expect lower borrowing costs will restore some of the massive losses during the pandemic. Any improvement over the coming year, though, is poised to be modest and leave budget-constrained buyers wanting."

And the current mortgage rates aren't particularly high, in a historic context.

[theman23]

Originally Posted by Changing City

As the RBC report says that the graphic comes from, that's not because prices are going up in the past two years. The composite home price has fallen, but interest rates have risen consistently until today from 2.7% in March 2022 to 7.2% on May 1 this year. It's the interest rate (or more accurately, the mortgage rates) that has made home ownership more expensive, not price change. RBC correctly predicted today's rate cut. "We see the growing likelihood of rate cuts starting mid-year as a turning point for housing affordability in Canada. We expect lower borrowing costs will restore some of the massive losses during the pandemic. Any improvement over the coming year, though, is poised to be modest and leave budget-constrained buyers wanting."

And the current mortgage rates aren't particularly high, in a historic context.

Affordability being at an all time low despite mortgage rates not being particularly high in a historic context would point to interest rates not being the sole cause of the affordability crisis.

[P'tit Renard]

Originally Posted by lio45

I did that several times. The interest rates on HELOCs are low enough that I’m maximizing every HELOC I have (a grand total of three; I barely have any leverage nowadays). I agree with Warren, it’s a smart use of credit — rates are close to the best available (second only to residential mortgages).

Agreed from an individual's standpoint that it's a smart use of existing credit, especially for a savvy RE investor.

From the systemic banking risk standpoint, it's downright disturbing that the government does not actively tighten regulations to rein in this leverage multiplier instrument, especially for the Trudeau Liberals who seem gung-ho on regulating everything else to death. Canadians can brag all they want about having a sound banking system, but the existence of these leverage multipliers, egged on and implicitly encouraged by the government means the soundness of our banking system is really just a facade.

[Changing City]

Originally Posted by theman23

Affordability being at an all time low despite mortgage rates not being particularly high in a historic context would point to interest rates not being the sole cause of the affordability crisis.

You know the recent history. Prices were ratcheted up to an extraordinary extent by buyers being offered low interest rates. There were warnings that rates could (and probably would) go back up, but Fear Of Missing Out led to bidding wars, unsustainable rising prices, and buyers paying more than they could afford if rates rose significantly.

The rates had been lower than historic norms since the 2015 oil price drop, but covid threw a wrench into the economic engine and the response was the lowest interest rates on record.

Then the Bank went into reverse and started hiking rates in "one of the fastest monetary policy tightening cycles in its history amid warning signs of a potential recession."

Other factors play a lesser role in affordability, but interest rates are the main explanation for why homes are less affordable despite prices not climbing in the recent past.

[theman23]

Disagree. If low interest rates led to sky high prices, but high interest rates didn’t drop prices and just led to bigger payments then interest rates are clearly not the only factor driving affordability.

[Changing City]

Originally Posted by theman23

Disagree. If low interest rates led to sky high prices, but high interest rates didn’t drop prices and just led to bigger payments then interest rates are clearly not the only factor driving affordability.

It's often stated that prices go up easily, but are sticky coming down. If rates held at the same as last month, more and more buyers who are refinancing would be unable to make payments at higher rates and would have to sell, at a loss, and prices would presumably fall. What we're seeing now is that there are more and more would be sellers, but fewer buyers, so prices are either stable or falling slightly. Given time, and no rate cut, prices should come down more. But we've had a rate cut, and owners who can't really afford the homes they bought will be hoping for further cuts. Many will do whatever they can to hang onto their homes.

If we had 30 year mortgages, as the US does, it would take some of the volatility out of the market, but with regular refinancing, fixed and variable rates and mortgages offered for different terms, the Canadian market is much more unstable.

And I haven't suggested it's the only factor - it's the main factor.

[whatnext]

Originally Posted by Changing City

It's often stated that prices go up easily, but are sticky coming down. If rates held at the same as last month, more and more buyers who are refinancing would be unable to make payments at higher rates and would have to sell, at a loss, and prices would presumably fall. What we're seeing now is that there are more and more would be sellers, but fewer buyers, so prices are either stable or falling slightly. Given time, and no rate cut, prices should come down more. But we've had a rate cut, and owners who can't really afford the homes they bought will be hoping for further cuts. Many will do whatever they can to hang onto their homes.

If we had 30 year mortgages, as the US does, it would take some of the volatility out of the market, but with regular refinancing, fixed and variable rates and mortgages offered for different terms, the Canadian market is much more unstable.

And I haven't suggested it's the only factor - it's the main factor.

Then why doesn't gov't legislate that banks must offer 30 year mortgages? Surely it can't be that they're slaves to Canada's banking oligopoly?

[lio45]

theman23 is correct: in a balanced market, the prices that people will bid for housing are going to be stable over time (adjusted for factors like inflation), therefore as interest rates vary, real estate prices will vary the opposite way, so that the monthly amount that people have to shell out for housing (the real indicator of demand vs supply) stays the same.

In an unbalanced market, the prices that people will pay for housing will either increase or decrease over time, depending on whether it's demand or supply that's oversized.

If interest rates were the main factor, real estate prices would've fallen a lot more: they'd have fallen to the point where people's housing costs are staying close to the same as before (the "demand is stable compared to supply" scenario: people are willing to pay the same as before for housing, but not more).

But what we're observing instead is that people are devoting more and more $$$ to keeping a roof over their head in Canada, which is extremely logical and expected by any reasonable observer, because demand is crazy high (we import a ton of FNSs per month) while supply is limited (for many reasons already listed here plenty of times). As a result of this continuous (and ever-worsening) supply/demand imbalance, the amount of $$$ that people have to bid in order to not be homeless gets higher and higher, regardless of the mix of interest rates and nominal real estate prices.

I witnessed the "interest rates are the main factor by far" phenomenon myself in 2008: interest rates fell sharply, real estate prices immediately doubled (or maybe even more than that) as a result, while rents and landlords' monthly mortgage payments stayed the same (as demand for housing was stable, the only parameter that changed was interest rates). It was great for anyone who had happened to buy a portfolio at the much smaller prices of 2005-2007 (like me), yet it was also perfectly okay for anyone who was starting at the new post-GFC ultralow interest rates, as the cashflow for new acquisitions at the new prices was the same as before. (The only risk, of course, with acquisitions at that new double price was if rates were to go back to where they were pre-GFC, but then many people figured that wasn't going to happen anytime soon.)

[Nite]

Originally Posted by theman23

Disagree. If low interest rates led to sky high prices, but high interest rates didn’t drop prices and just led to bigger payments then interest rates are clearly not the only factor driving affordability.

Average home prices in Canada are down 15% from the peak when interest rates started to rise.

[whatnext]

Originally Posted by Nite

Average home prices in Canada are down 15% from the peak when interest rates started to rise.

And wage increases are Hyooge in Canada!

[Nite]

Originally Posted by whatnext

And wage increases are Hyooge in Canada!

Name me another time in your living memory where wage growth has been above 4% for so long as it currently is. So far it's over 24 months with it reaching 5.1% in the latest report.

here are how things look from the peak of house prices to now

Feb 2022
Average house Price: $836,000
Average hourly wage: 32.14/hr (66.8K a year if worked 40 hrs a week)
Average house price / yearly weage = 12.5

May 2024
Average house Price: $719,000
Average hourly wage: $36.01/hr (74.9K a year if worked 40 hrs a week)
Average house price / yearly weage = 9.6

https://tradingeconomics.com/canada/...e-house-prices
https://tradingeconomics.com/canada/...ourly-earnings

Average house prices were down 16.2% but relative to income, yes i know this omits interest rates, they are down 23.2% now than in Feb 2022

[theman23]

Why would you omit interest rates?

[lio45]

Originally Posted by theman23

Why would you omit interest rates?

Because he doesn’t want to admit the fact that Canadian wages have continued to go down relative to housing costs. It’s the only possible reason.

[Truenorth00]

Originally Posted by Nite

Name me another time in your living memory where wage growth has been above 4% for so long as it currently is. So far it's over 24 months with it reaching 5.1% in the latest report.

here are how things look from the peak of house prices to now

Feb 2022
Average house Price: $836,000
Average hourly wage: 32.14/hr (66.8K a year if worked 40 hrs a week)
Average house price / yearly weage = 12.5

May 2024
Average house Price: $719,000
Average hourly wage: $36.01/hr (74.9K a year if worked 40 hrs a week)
Average house price / yearly weage = 9.6

https://tradingeconomics.com/canada/...e-house-prices
https://tradingeconomics.com/canada/...ourly-earnings

Average house prices were down 16.2% but relative to income, yes i know this omits interest rates, they are down 23.2% now than in Feb 2022

BOC Target overnight rates:
Feb 2022: 0.25%
June 2024: 4.25%

https://www.bankofcanada.ca/rates/in..._button=Submit

The real metric is monthly mortgage payment/rent relative to monthly income and by that metric housing is not more affordable today. Mortgage and rent payments are higher. And that was indeed the goal of the BOC. That's how they take excess demand out of the economy.

[Nite]

Originally Posted by lio45

Because he doesn’t want to admit the fact that Canadian wages have continued to go down relative to housing costs. It’s the only possible reason.

Well no I was comparing the fall in house prices to the rise in wages in Canada.

It's funny now you want to talk about interest rates being a factor in Canadian house prices, when before it was all about immigrants are causing the problems
But it's nice to see that you have finally come around to see that interest rates play a much bigger role in demand and house prices than population growth which is insignificant in comparison.

[lio45]

Originally Posted by Nite

Well no I was comparing the fall in house prices to the rise in wages in Canada.

It's funny now you want to talk about interest rates being a factor in Canadian house prices, when before it was all about immigrants are causing the problems
But it's nice to see that you have finally come around to see that interest rates play a much bigger role in demand and house prices than population growth which is insignificant in comparison.

I will repeat for the 1000th time:

The supply and demand imbalance (a.k.a. immigrants) is what causes Canadian housing costs (i.e. what Canadians are forced to pay, if they want to avoid being homeless) to be higher than ever right now and still climbing;

For a given housing cost (which is fixed by demand), THEN interest rates and nominal real estate prices are directly (inversely) correlated, so that the metric “monthly mortgage cost that people will have to accept to pay to have a roof over their head” is directly correlated with the metric “excess demand vs lack of supply for Canadian housing”.

It’s weird, pretty much everyone else gets it, but with you, it’s like talking to a brick wall. I’m betting anything that you still wont get it, and that we’ll have this exact conversation again in the future.

[lio45]

Originally Posted by Truenorth00

BOC Target overnight rates:
Feb 2022: 0.25%
June 2024: 4.25%

https://www.bankofcanada.ca/rates/in..._button=Submit

The real metric is monthly mortgage payment/rent relative to monthly income and by that metric housing is not more affordable today. Mortgage and rent payments are higher. And that was indeed the goal of the BOC. That's how they take excess demand out of the economy.

Exactly.

I already had a real estate portfolio before the GFC, so I could see firsthand the (extremely predictable and extremely logical) result of a drastic variation in interest rates as the sole variable (i.e. while demand for housing didn’t change too much). What happened was that real estate prices moved like clockwork in the opposite direction so that the real metrics (monthly payments and rents) both stayed where they were.

By contrast, this time, we had a big variation in interest rates BUT also a big increase in demand at the same time, so the net result of both of these has been higher (and still increasing…) housing costs, because there are more people fighting for finite supply and most people prefer not becoming homeless.