[ILuvTO]

Which Canadian property markets are most at risk?

http://www.theglobeandmail.com/glob...erty-markets-are-most-at-risk/article2427557/

The oft-repeated axiom in real estate is “location, location, location.” Even housing “bears” recognize that there is no such thing as a Canadian real estate market. Granted there are macro factors that affect all regions equally, most notably the cost and availability of credit, but regional markets vary widely in terms of their fundamentals and, by extension, their vulnerability to a price correction.

The two markets that currently concern me the most are Vancouver and the Toronto condo market. Here’s why:

Vancouver
Vancouver concerns me primarily because of the incredible disconnect that currently exists between resale prices and fundamentals such as rents, incomes, and inflation-adjusted house prices. The charts on this front are quite telling:

As I noted last week, when rents increase much slower than resale prices, it can be a symptom of abundant and cheap credit driving prices to irrational levels. As an aside, the fact that rents in Vancouver have lagged prices argues very strongly against this market being driven by population density and a lack of available land, as we so often hear. If this was the primary driver of this market, we would expect that increased demand for dwellings would apply to both houses and rental stock. This has simply not been the case.

The latest data suggests that the resale market in Vancouver may be running out of steam. Active listings are near all-time highs for this month, sales are at decade lows, and prices are now falling on a year-over-year basis:

The bottom line is that there is no other city in Canada where the fundamentals are this ugly. The risk of significant price declines in this market is enormous.

Toronto:
The Toronto condo market concerns me for a very different reason. While prices have also outpaced fundamentals, most notably rents, what concerns me most is the potential inventory in the pipeline at a time when existing inventory is quite high.

Condo starts in Toronto have been very high over the past few years. In this chart, condos are represented by the “multiples” category. There are currently 53,000 residential dwelling units under construction in Toronto, an estimated 48,000 of them are condos. Condo research firm Urbanation recently noted that there were 15,554 unsold Toronto condo units at the end of March, an increase of 27 per cent annually. They further estimated that if current trends persist, that number could approach the all-time high later this year.

With this much inventory in the pipelines, strong demand for new units is essential to absorb this inventory without adversely affecting prices. However, the majority of new condo units are currently being purchased by investors and not end users. This is quite concerning considering that most new condo units in the GTA do not generate enough rents to cover ownership costs for investors, meaning they are cash-flow negative.

What this implies is that many investors are banking on continued strong appreciation in these units to make any money. This raises two enormous questions:

1) If the price of Toronto condos stagnates, will these same investors still line up to purchase new units? If not, how will all that unsold inventory affect the supply/demand balance?

2) How will current investors react if their expected capital gains begin to vanish and condo prices languish or even fall and remain suppressed? Will they continue to hold their cash-sucking “investment” or will they sell out, adding more inventory onto a weakening market?

On this front, the latest resale data should concern us. The headline 10 per cent increase in Toronto house prices is being largely driven by the detached segment while condos are beginning to lose steam and have largely moved sideways over the past year:

The bottom line is that no one reasonably expects the potential fallout of a housing correction to be felt equally across Canada. Some areas are far more at risk than others. The message for new buyers contemplating jumping into home ownership in these riskiest markets should be clear: Tread lightly!

 

[ILuvTO]

Buying a home with just 5% down? Make sure you love it

http://www.theglobeandmail.com/glob...-5-down-make-sure-you-love-it/article2425135/

There are thousands of 20- and 30-somethings out there who are tired of renting. They’re itching to buy a house but they have one big problem: they don’t have enough of a down payment.

Undeterred, some may fish a few toonies from between the couch cushions and scrape together the 5 per cent minimum down payment required by law.

Many of these folks will then lock in a bargain-basement 10-year mortgage at 3.89 per cent, find a hip property for about $300,000 and move in. For these new happy home owners, life couldn’t be better.

But what if, seemingly overnight, the unexpected happened and home prices dove 15 per cent?

The mortgage balance of these young buyers would suddenly be more than their house is worth. If forced to sell now, they wouldn’t be able to break their mortgage unless they made up this shortfall from their own pocket.

Their only choice is to ride out the real estate cycle - and hope it’s not a long ride.

If the above scenario sounds like a long shot, think again. Home prices are a two-way street. We’ve almost forgotten what selloffs look like but, believe you me, they happen.

When prices finish dropping, they sometimes rebound - or they can stay flat…for years.

If the latter happens and you’ve saddled yourself with a big fat mortgage, you could wind up a prisoner in the home you used to love, a home which is now too far from your new job, too small for your growing family or too expensive with your spouse out of work.

This is the very real risk facing people who leap into a red-hot housing market with a dream, a 5 per cent down payment and very little savings.

While not a prediction, a 15 per cent-plus correction in markets like Toronto and Vancouver is a definite possibility. And that means fringe buyers who put down the minimum - and stretch their amortization to the maximum - are taking a Vegas-style gamble.

This hypothetical chart below shows what might happen if you bought a $300,000 house with 5 per cent down and a 30-year amortization. (The average purchase price for a first-time buyer is about $295,000, according to national figures from mortgage insurer Genworth Financial Canada.)

This chart assumes a 15 per cent drop in home value over three years and flat prices for another six or more years. (It also assumes you make no mortgage prepayments, pay a 2.95 per cent default insurance premium - as required by law, and incur roughly 6.5 per cent in liquidation costs, which include realtor fees, legal fees and disbursements, mortgage discharge fees and penalties, repairs and staging, etc.)

In this hypothetical scenario, if you wanted to sell your house after five years you’d owe at least $16,500 more on your mortgage than you could get from the sale.

So here’s the simple point: If you have to stretch yourself financially to buy a new home, you’re probably not ready to trade in your landlord for a lender.

If you do press forward with just 5 per cent down, be prepared to stay in your home a while - potentially a long while.

Here’s what some people with experience say about 5 per cent down mortgages:

• “5 per cent-down mortgages are geared to someone that’s more than a few years into their career, with path for advancement and income increases; someone who has a savings plan; and someone who’s demonstrated that they’re handling credit responsibility and are well below normal debt ratio limits. If a borrower’s house was worth less than their mortgage debt, things like job loss, pay cuts and overspending would only exacerbate the risks and further limit their options.†— Mortgage specialist Marc Ffrench, Royal Bank of Canada

• “The clients putting five per cent down on a $600,000 house with a high debt ratio are the ones you especially worry about. These are properties where you need two parties with six-figure incomes.†— Mortgage planner Geoff Willis, Dominion Lending Centres Origin

• “A five per cent mortgage really isn’t suited to a lot of people. If you absolutely have to put down 5 per cent, aim to make additional payments every year to amortize the mortgage faster.†— Financial adviser Adrian Mastracci, KCM Wealth Management

• “You should also have some kind of emergency fund - at least three months of living expenses. Put it at an institution that has not lent you any money because they can sometimes use money in savings to offset (delinquent debts).†— Mr. Mastracci

And by all means, if you can’t make a healthy down payment, be sure you’re financially stable and love your house. There’s a chance you could be in it a lot longer than you think.

 

[James]

I would actually like to know how many buyers are actually putting 5% down. The inherent risks of a 5% down payment are huge. Much of the volatility and risks we talk and read about are tied to these extremely high loan-to-value ratios. I would be all for instilling higher minimum down payments, like in the realm of 25% or higher. Yes I said it, 25%. Demand will decrease but along with that will be lower asking prices. Demand for the rental market will also increase but there is enough supply to satisfy that market. Minimum 25% down payment...and I'm sticking with it.

 

[cdr108]

I would actually like to know how many buyers are actually putting 5% down. The inherent risks of a 5% down payment are huge. Much of the volatility and risks we talk and read about are tied to these extremely high loan-to-value ratios. I would be all for instilling higher minimum down payments, like in the realm of 25% or higher. Yes I said it, 25%. Demand will decrease but along with that will be lower asking prices. Demand for the rental market will also increase but there is enough supply to satisfy that market. Minimum 25% down payment...and I'm sticking with it.

it should have always been that way - 25% , and then CMHC could be disolved.
the lenders would act more prudently since they wouldn't be able to securitize the loans off to others if they assumed the risks.
accordingly, without the looser credit standards and free money, prices would drop.

 

[CN Tower]

it should have always been that way - 25% , and then CMHC could be disolved.
the lenders would act more prudently since they wouldn't be able to securitize the loans off to others if they assumed the risks.
accordingly, without the looser credit standards and free money, prices would drop.

Good for some (sideline buyer)
Bad for most (homeowners and real estate industry)
CMHC/Canadian taxpayer......?

If the Canadian market adjusts down and CMHC takes any big losses I'm sure we'll see tougher CMHD rules. As it stands FlaHerty says he won't raise the CMHC insured limit so mortgage insurance is sure to become much harder to come by soon.

 

[marsh]

A sign of things to come for Toronto? I also noticed flipping through the May Condo Life Magazine alot of developments advertising deals - like free maintenace for a year or free upgrades. Also noticed a couple offering lower down payments of 5% or 10%, I always thought new developments required 20 to 25% down payment .

Vancouver’s real estate swoon deepens
PAUL WALDIE AND TAVIA GRANT
From Wednesday's Globe and Mail
Published Tuesday, May. 15, 2012 9:17AM EDT
Last updated Wednesday, May. 16, 2012 7:08AM EDT


Mayur Arora is seeing something few would have expected in Vancouver’s real estate market – people walking away from deposits on houses, convinced prices will fall further.
“It happened twice in the last month. One [deposit] was $75,000 and one was a $20,000 deposit, the guys just walked away from it,” said Mr. Arora, who runs Oneflatfee.ca in Surrey, B.C. “They are going to wait it out. So they lost $75,000 and $20,000, but if the market comes down $150,000 on a $1.5-million house, that’s not uncommon.”
Vancouver’s once-overheated housing market has cooled sharply, with the average price falling nearly 10 per cent in April from a year ago to $735,315, according to figures released Tuesday by the Canadian Real Estate Association. That was the largest drop since the recession and it marked the fourth decline in the past five months.
In a market once famous for being overheated, Mr. Arora said he hasn’t seen a bidding war in months. “It’s totally a buyers’ market. Buyers are determining the price,” he said. “And sellers are surprisingly accepting it. They are taking it.”
One reason for the decline is fewer buyers from Asia, something that had been driving parts of the Vancouver market in recent years, according to agents. “The number of buyers from China is definitely down this year,” said Andrew Hasman, a real estate agent who specializes in high-end homes. “We’re seeing far fewer buyers from that part of the world and that’s the reason our sales are down.”
Mr. Hasman said money flowing out of China has slowed considerably and Canadian banks have also tightened their mortgage lending rules, especially on larger loans commonly associated with high-priced real estate. Jean Zhang, who works for Sutton Group in Vancouver, agreed and said she is also seeing fewer immigrant buyers.
Over all, home sales increased slightly last month across Canada and the average price jumped 0.9 per cent on a year-over-year basis to $375,810, according to CREA figures. Prices were up in 80 per cent of all local markets. Toronto remained one of the hottest markets, with sales up 2.5 per cent and the average price climbing 8.4 per cent to $517,556 from a year ago.
“While growth in Canadian housing activity has lost some steam over the last year, the level of Canadian home prices and sales remain high,” said Diana Petramala, an economist at Toronto-Dominion Bank. She added that low interest rates continue to push demand and estimated that Canadian housing is 10 to 15 per cent overvalued, particularly in Toronto and Vancouver.
While Toronto has garnered much attention for its price appreciation and flurry of activity, it's not the only real estate market that's bustling.
In Regina, year-to-date prices are 9.4 per cent higher than the same period a year ago. Sales and average prices set a record last month, driven by strong population growth, including migration, and the lowest jobless rate in the country. The average home price in Regina is now $312,873, according to CREA.
“The picture that emerges from the April existing homes statistics continue to support our view that housing market activity – at least on the resales side – is on a path of moderation over all in Canada but that regional divergences remain,” said Robert Hogue, a senior economist at Royal Bank of Canada.
Not everyone is convinced there’s a housing bubble. Economic fundamentals are driving activity and prices, and many markets are still undersupplied, said Peter Norman, chief economist at Altus Group.
He points to an improving labour market, low interest rates, population growth and pent-up demand from the recession as driving activity. “I wouldn't say it's out of control but it certainly indicates strengthening demand in a relatively supply-constrained market,” he said.
Even in Toronto, where talk of a bubble is most concentrated, rising prices simply reflect population growth of about 100,000 people a year in a city where “severe land constraints” are limiting the ability to build single homes, he said.

 

[interested]

Marsh, I read this this morning.

What caught my eye was "walking away from deposits".

This brings up exactly what I wondered about....if Canadians walk, that is not the end of the story. The developer/vendor will have to mitigate his losses and act reasonably. That means trying to sell again and any difference between actual price received and the initial price that the purchaser walked away from can be sought from the original purchaser.

Now if the purchaser is in China or elsewhere abroad, good luck chasing him but if you are a Canadian resident, expect a lawsuit if you do this.

Further there are developers offering 5% commissions to realtors. This in my view is nothing short of bribing the realtor to put people into their projects even if the realtor doesn't believe in the product. It the realtor was already pursuing his own interest with a 3% commission, what do you think he/she will do to get a 5% commission. I am not saying all realtors will do this but the design is clear. Come to my project for you the "agent's benefit". This has got to influence any agent who ultimately is conflicted looking at his own vs. his client's interests.

There is clearly more limited demand from China at least in Vancouver. Assume this is the case in Toronto as well for a moment and if this extends to other foreign buyers, the locals won't be bidding vastly up condos at least and probably SFH's.

The important point is that "people are walking away". The problem is "why buy today if you think it will be cheaper tomorrow. Everyone fence sits and it is a question of who blinks first. If the sellers, and with condo speculators I suspect it will be sellers as so much Precon is "investor/speculators", there is potentially a big drop until one reaches the floor.

The other issue is: stock market is falling, gold falling, C$ falling (maybe good for some foreign buyers but unless they are American the C$ is up against the Euro and I am not sure how it compares to Asian/Indian/Russian currencies) so people are getting poorer. On the other hand, one has difficulty to invest one's money and get a return so rent of +3% is better than a negative.

Interestingly in the Globe and Mail this morning there is an article about Norway and Sweden where they have had 120-140% price increases since 1996 with no correction. Debt to income ratios are a whopping 170% and 210%, worse than Canada's 153% and the 160% that existed when the US debacle occurred in 2006. The difference is that most of the debt in these 2 countries is owed by the wealthier with more secure jobs apparently vs. those who are younger and perhaps with less total assets. Anyhow, maybe they too will drop. There have been calls for a crash there too but as yet go unheaded.

 

[t2lieu]

Hey guys,

My first post i've been more of a voyeur than a player in these conversations. But just like to mention that if Greece leaves the EU it won't look pretty for investors and who knows what they'll decide to off load, or keep.

 

[ISYM]

The same thing happened in the GTA during the mini recession of ‘08/09 when buyers opted instead to walk away from their deposits rather than go through with a mortgage on a property that saw 10-20% of its purchase price shaved off by declining market values. Back then I could understand the reasoning – the economic fall out from the mortgage and loan mess in the U.S. The Canadian economy isn’t struggling to this extent today so I wonder if those walking away are foreign buyers suffering from the economic woes in their own countries.

As for the increased commissions and bonuses, developers would face a conundrum and backlash from the initial 90% of purchasers should they sell off the remaining 10% units at deeply discounted prices. They have to manage the perception of market value, the impact on the marketing of future projects and their reputations which would all be negatively impacted if instead of offering the 5% commission plus the Mercedes C250 and the 7% discount, Westbank Corp., were to lower the price by the 15% (as they state it amounts to) for the $2 million plus Shangri-La suites they need to sell.

It possibly amounts to a masking of market sentiment and momentum and directly relates to the question I posed a couple days ago to you.

Marsh, I read this this morning.

What caught my eye was "walking away from deposits".

This brings up exactly what I wondered about....if Canadians walk, that is not the end of the story. The developer/vendor will have to mitigate his losses and act reasonably. That means trying to sell again and any difference between actual price received and the initial price that the purchaser walked away from can be sought from the original purchaser...

Further there are developers offering 5% commissions to realtors. This in my view is nothing short of bribing the realtor to put people into their projects even if the realtor doesn't believe in the product. It the realtor was already pursuing his own interest with a 3% commission, what do you think he/she will do to get a 5% commission. I am not saying all realtors will do this but the design is clear. Come to my project for you the "agent's benefit". This has got to influence any agent who ultimately is conflicted looking at his own vs. his client's interests...

 

[macookie]

Hey guys,

My first post i've been more of a voyeur than a player in these conversations. But just like to mention that if Greece leaves the EU it won't look pretty for investors and who knows what they'll decide to off load, or keep.

Welcome to the future fire-sale discussion group.

Greece isn't leaving the EU... yet... but, I'd be more concerned about a Greece default and if the derivative desks at our Canadian banks... might perhaps have a future JP Morgan like $2 billion (bet) loss... they might have to ask our Government (via us taxpayers) to cover.

 

[interested]

The same thing happened in the GTA during the mini recession of ‘08/09 when buyers opted instead to walk away from their deposits rather than go through with a mortgage on a property that saw 10-20% of its purchase price shaved off by declining market values. Back then I could understand the reasoning – the economic fall out from the mortgage and loan mess in the U.S. The Canadian economy isn’t struggling to this extent today so I wonder if those walking away are foreign buyers suffering from the economic woes in their own countries.

As for the increased commissions and bonuses, developers would face a conundrum and backlash from the initial 90% of purchasers should they sell off the remaining 10% units at deeply discounted prices. They have to manage the perception of market value, the impact on the marketing of future projects and their reputations which would all be negatively impacted if instead of offering the 5% commission plus the Mercedes C250 and the 7% discount, Westbank Corp., were to lower the price by the 15% (as they state it amounts to) for the $2 million plus Shangri-La suites they need to sell.

It possibly amounts to a masking of market sentiment and momentum and directly relates to the question I posed a couple days ago to you.

I would argue perhaps that Canadians are worse off. I don't know what the debt to income ratio was in 2008 but it was lower than the 150+% it is today. Canadians could not weather the storm presumably as well. Also, interest rates dropped further from 2008 to now. No where but for interest rates to go up, not down. So, not so sure about the bolded statement.

 

[interested]

Welcome to the future fire-sale discussion group.

Greece isn't leaving the EU... yet... but, I'd be more concerned about a Greece default and if the derivative desks at our Canadian banks... might perhaps have a future JP Morgan like $2 billion (bet) loss... they might have to ask our Government (via us taxpayers) to cover.

How about CMHC....single handedly much larger than any derivative risk I would say if there is a "future fire-sale".

 

[detroitbootybass]

51% of Canadian homeowners expect to carry a mortgage into their retirement years:

http://www.theglobeandmail.com/repo...-carry-mortgage-in-retirement/article2434462/

 

[cdr108]

51% of Canadian homeowners expect to carry a mortgage into their retirement years:

http://www.theglobeandmail.com/repo...-carry-mortgage-in-retirement/article2434462/

just as disturbing ...
if the mortgage is such as burden now with historical low rates, imagine when they go up a few 100 basis points back to the historical average.

Many see carrying mortgage

Ever wonder whether your retirement years will be mortgage-free?

Fifty-one per cent of Canadian homeowners believe they'll still be paying, according to a survey released today by Bank of Montreal.

Fifty-two per cent say their debt burden or mortgage is causing them trouble in saving for their retirement years, the survey by Leger Marketing showed.

On a regional basis, those feeling the heat most are in British Columbia, where 59 per cent think they'll still be paying, followed by 58 per cent in Quebec, 48 per cent in Manitoba and Saskatchewan, 47 per cent in Ontario, 46 per cent in Alberta, and 43 per cent in the eastern provinces.

 

[Southcore]

Hey guys I was away on vacation last few weeks, just catching up with what I've missed. So of course I start with reading Garth's blog, on May 3rd he wrote this:

Three sexy new developments went to market last week in downtown Toronto, the hottest condo market on the planet (just over 2,000 sales a month). All three rolled out at close to $700 per square foot, and all of them bombed. Says a veteran developer who secretly reads this pathetic blog: “It went badly. Investors don’t like the prices, and end users aren’t even looking!”

Any idea which one's he's referring to? I'm still jet lagged but off the top of my head is this 88 Scott, Eau Du Soleil and...? Then again I'm not sure if this is a case of Garth being Garth but I just wanted to know if anyone has any other insights.

Reason I ask as well is while I was gone my father in law is looking at a $700K unit at Eau. I told him before I left to tread very lightly but he's 'horny' as Garth would say. This would be an 'investment' (using quotes because as this thread has discussed to death is precon at >$650 PSF an investment?) for him. He wants me to go check things out this weekend, I'm trying to figure out how to break it to him that now isn't a good time for pre con (or maybe real estate in general). Problem is he's self-employed, little debt, lots of cash on hand looking to burn it (no pun intended?)

Anecdotely he also told me of one of his fellow self-employed friend who bought 3 larger units (I think all 2 beds, maybe even a 3 bed) at the Marilyn towers in Mississauga and collectively between the 3 units he's -800 a month negative cash flow. I told him this kind of is the writing on the wall, he didn't have a retort. Sometimes I wonder how these guys can be so successful in business yet can't figure out something as simple as calculating their bottom line. But then again that leads me to another issue right now: too many pre con vvvvip agents get in their ears and sell them the dream, especially in my ethnic community, some of these guys are some slick con men (no disrespect to the agents with integrity, out some of these guys are scum).

Anyway, back to the above, has anyone heard anything about the latest launches and how they've been moving?