CN Tower
Banned
Fixed that for you James.
Seriously, show me the moron buying a unit at The Brat for $825 per square foot when units in the Shangri La are trading below $800.
Merry Christmas everybody!
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Fixed that for you James.
Seriously, show me the moron buying a unit at The Brat for $825 per square foot when units in the Shangri La are trading below $800.
Merry Christmas everybody!
KA1
Senior Member
$ 765 psf to be exact -- a few days ago.
Best wishes for the New Year to all. Happy investing
KA1
Senior Member
Riverdale Rink Rat
Senior Member
http://www.theglobeandmail.com/repo...-housing-affordability-crisis/article6755859/
This has been a very good series of articles. I wish, though, in this one, one of the commentators would have flat out said "don't buy a house right now."
This has been a very good series of articles. I wish, though, in this one, one of the commentators would have flat out said "don't buy a house right now."
James
Senior Member
I agree, these last few articles on G&M have actually been quite objective in nature and have been fairly well presented. I bolded a few tidbits here and there:
Ottawa's $800-billion housing problem
Tara Perkins and Grant Robertson
Home prices have doubled over the last decade, propelled by low rates and easy mortgage terms. But as the U.S. experience proved, soaring property values can come with an ugly downside. The Globe and Mail examines the foundation of Canada's historic real estate boom in a series.
The governor of the Bank of Canada was getting angry.
It was a sweltering afternoon in July, 2006, and David Dodge was meeting with executives at Canada Mortgage and Housing Corp. in Ottawa, in search of the answer to a pressing question: Why were they lowering their standards in such a reckless fashion?
As Canada’s largest mortgage insurer, federally-run CMHC is a gatekeeper to the housing market, influencing who gets to buy a home and who doesn’t. For decades it has sought to make it easier for people to enter the housing market, but it has also enforced some strict rules, requiring home buyers to make minimum down payments and pay off their mortgages in 25 years.
Now CMHC was abandoning its old ways. It was starting to allow more exotic kinds of mortgages, similar to what lenders were offering in the United States – 35-year loans, and loans on which the buyers had to pay only the interest at first, giving them low monthly payments at first but saddling them with more debt down the road.
To Mr. Dodge, these were irresponsible moves that would encourage some people to borrow too much or jump into the market before they were ready, creating new risks for the economy. “This is a mistake,†he told CMHC brass bluntly.
Lower mortgage standards were going to cause already-frothy house prices to inflate even more – an “excessive exuberance,†the governor called it – as buyers rushed in, borrowing greater amounts of money and purchasing bigger homes than they could otherwise afford.
“This is absolutely not the appropriate thing to do,†a frustrated Mr. Dodge told the meeting.
CMHC president Karen Kinsley defended the changes, arguing that the mortgage insurer wasn’t getting lax, and that borrowers would be as closely scrutinized as ever. But she had other concerns. For months, competitive pressure had been mounting on the Crown corporation to bring in more business.
Created in 1946 to help returning Second World War veterans find homes, CMHC had morphed over the years into a multibillion-dollar goliath that fuels bank lending and housing demand by insuring riskier mortgages, especially those in which the buyer has only a small down payment. Without that insurance, many more people would be shut out of the real estate market, unable to get a mortgage from a chartered bank.
It has also been a lucrative venture for the government. But that business was now being eroded as a result of the arrival of aggressive U.S. insurers into Canada.
The American companies were willing to do things CMHC had never done. Some were even backing “zero-down†mortgages in which the buyer borrowed every dollar needed to pay for the home.
It was a race to the bottom, and CMHC was playing along. “We didn’t lead it … As we lost market share, we would follow what the American companies were doing,†said former CMHC chairman Dino Chiesa. With money available and the economy booming, home buyers streamed into the market and prices soared.
Mr. Dodge’s warnings didn’t cause CMHC to change course. But later, convulsions in the U.S. economy would. The bursting of the American property bubble showed that a rapid rise in home prices and household debt, built on a foundation of low interest rates and easy mortgages, could be a toxic combination. When the boom ended, it left a legacy of failed banks, foreclosed homes, recession and government debt.
It is a path that Canada is trying to avoid after a period in which home prices have risen much faster than incomes – faster than any other decade since the 1950s. To afford those houses and condos, Canadians now hold nearly $1.2-trillion of mortgage debt, nearly three times what they had in 2000. Households have almost $1.65 in debt for every $1 in after-tax income, the highest since Statistics Canada began keeping the data in 1990.
And in the process, the federal government has been taking on bigger risks as well. The federal government now backstops some $800-billion in mortgages, mostly through CMHC, the equivalent of almost half of Canada’s annual economic output.
Those are the reasons that Finance Minister Jim Flaherty has been trying to halt the rise in debt and engineer a soft landing in the real estate market. A crash in home prices wouldn’t just cause untold financial pain for Canadian homeowners – it has the potential to expose the federal government to huge liabilities for their mortgages.
How we got to this place is not merely the story of a historic boom in real estate. It’s also the story of an institution that has grown into something it was never intended to be.
The evolution of CMHC
CMHC was an idea of the postwar government of Mackenzie King, who saw a need for federal intervention to find a place to live for tens of thousands of soldiers who were coming home. It also built some of the first social-housing projects in Canada.
At the time, home ownership was out of reach for many Canadians, even those in the burgeoning middle class. Lenders usually required a down payment of about 50 per cent, and the mortgage business was not very competitive, dominated by a small number of trust companies and insurers.
In the mid-1950s, Ottawa moved to change that, opening the doors to banks to grant mortgages and asking CMHC to begin offering mortgage insurance. The insurance kicks in if the homeowner fails to make payments on the loan, compensating the lender for any losses.
The creation of a federal guarantee knocked down one of the major barriers to entry in the housing market. Now it was possible to buy a home with a down payment of just 10 per cent; lenders would advance the money, knowing they were protected by Ottawa from bad borrowers and falling property markets. Home ownership rates went up; by the early 1970s, about six in 10 Canadians lived in a house they owned.
Still, the system had its limits. One was on length: CMHC would only guarantee mortgages of 25 years or less, to encourage people to pay off their homes in a reasonable time.
The length of a mortgage has a major impact on its cost to the borrower. Consider two homeowners taking out an identical $400,000 mortgage, at 4 per cent interest, making monthly payments.
The first pays off the loan in 25 years, shelling out $231,000 in interest over that time. The other takes 30 years, in order to enjoy lower payments along the way. But that extra five years adds more than $53,000 to his interest bill.
Mortgage insurance is also expensive, and in the past, most home buyers tried hard to scrape together the minimum down payment needed to avoid it. (Since 2007, that minimum has been 20 per cent of the purchase price; before that, it was 25 per cent.) In 1992, just one in five mortgages was insured.
CMHC quietly served this slice of the home-buying public and was largely ignored by its political masters. Canadians are reliable when it comes to repaying their mortgages, so insurance claims were minimal, and the company made money for the government.
Meanwhile, after an early-1990s correction in some regions, Canadian home prices began a long upward march. By the middle of the past decade, the country was in the middle of a virtuous circle. Higher home prices made a lot of consumers feel wealthier, fuelling consumer confidence, which in turn pushed up house prices even more. In 2006, the average price of a home in Canada had surpassed $250,000.
But prices were just about to really take off.
In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.
The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.
“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,†Ms. O’Brien said. “We probably would have waited.â€
The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,†said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,†argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.â€
How much did the mortgage rule changes contribute to the steep rise in home prices? That’s not clear. Low rates and rising incomes have been significant factors, as has a perception that real estate is a more stable place to invest than, say, the stock market.
What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,†Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.â€
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.
The market starts to unravel
As CMHC was making it easier than ever to get a mortgage in Canada, it was also profiting from the boom. Its profits soared, rising from $376-million in 2000 to $1.03-billion in 2006.
Its balance sheet swelled. In 1996, CMHC was the insurer on $131-billion worth of mortgages; a decade later, it had more than doubled, to $291-billion. (It has since almost doubled again, to $576-billion by the end of September.)
By 2006, the year Stephen Harper’s Conservatives took office, Department of Finance officials started to think about how to take some of that risk off the government’s books. They mooted the idea of privatization. CMHC was a large, healthy corporation, already competing with private sector rivals. It looked strong enough to go out on its own.
A source close to the CMHC told The Globe and Mail that the discussions were serious. Had the global economy stayed robust, it’s likely the Tories would have proceeded with selling the business.
That, of course, is not what happened.
By the summer of 2007, two things had become obvious. First, the U.S. real estate market was in trouble, with serious implications for its economy; second, problems in “subprime†mortgages – those given to riskier borrowers – were beginning to choke the credit markets.
Within a year, Fannie Mae and Freddie Mac – two U.S. financial institutions whose mandate, like CMHC’s, is to promote home ownership by greasing the wheels of the home lending market – were nearing collapse and Washington started planning their nationalization.
The risks of easy money were now clear, and Mr. Flaherty was forced to respond. In July, 2008, he announced that government-backed mortgage insurance would no longer be eligible on 40-year mortgages. The new maximum was 35, and a down payment of at least 5 per cent would be required. The rules were scheduled to kick in Oct. 15.
By the time that date arrived, though, bad mortgage debt had tipped the world into a full-blown financial crisis; a global recession soon followed. Oil prices plunged, Canada’s manufacturing sector seized up, and companies began laying off thousands of workers.
Ottawa had a few levers to try to cushion the drop. The real estate market was one of them. Mr. Flaherty and his mandarins realized that CMHC could play a useful role. By using its balance sheet, it could ensure that banks had the money so they would keep lending during the crisis.
So in early October – the week before his new mortgage rules took effect – Mr. Flaherty placed a call to a high-ranking CMHC official to deliver a command. The Crown corporation would need to start buying tens of billions of dollars in mortgages from Canada’s banks, giving those banks cash to make new loans.
Under those orders, CMHC bought $69-billion worth of mortgages. It was a strategic move by the government: The banks continued to lend, Canadians continued to borrow, and after a short downturn, housing prices began to snap back in early 2009, helping to lead the country out of recession.
Fears of a housing bubble
Ottawa’s plan worked – too well. By early 2010, home prices were rising so quickly that a number of bank CEOs had become concerned.
Mr. Flaherty asked officials in the Finance Department to get him more information on real estate speculation, according to 773 pages of government documents that were released to The Globe and Mail on Dec. 24, nearly seven months after they were requested under the Access to Information Act.
The minister’s officials responded with a memo marked ``Secret`` on Feb 5, 2010, which included a section on mortgage insurance products.
Most of the memo has been redacted, and it is unclear what influence the memo had on Mr. Flaherty’s next move. On Feb. 16, he announced new restrictions on CMHC insurance covering investment properties. He also cut the amount of equity that people were allowed to take out of their homes when refinancing.
The moves were made so quickly that Finance had yet to work out the details. In fact, the documents show that 10 days after Mr. Flaherty`s announcement, he received another memo that was labelled “secret†about how the changes would be implemented. “We plan to define an owner-occupied property as one where the borrower, or an immediate family member, occupies the premise,†it said.
Yet questions about the housing market persisted. In April, 2010, Mr. Flaherty’s department sent him an analysis of household debt, which noted that some analysts were raising concerns about a potential bubble.
“While the broad conclusion of this presentation is that there is no clear evidence that a housing bubble exists this is not to suggest that a housing bubble could not develop overtime [sic] in Canada,†the internal memo said.
The economic risks associated with a bubble were significant, the memo said. “A house is most likely to be the single most important asset that Canadian consumers own. Housing is also the largest asset class in the economy. Changes in home prices, therefore, affect directly the wealth position of consumers and impact their spending patterns.â€
The mortgage insurance ‘sandbox’
Mr. Flaherty’s swipe at CMHC did little to dampen enthusiasm for real estate. Vancouver`s runaway housing market, which saw prices rise by 19 per cent in the year leading up to April, 2010, was poised for further increases and had economists worrying that the situation was out of control.
By December of that year, Finance Department policy makers were plotting further changes to the mortgage insurance “sandbox,†as they now called it, according to internal documents obtained by The Globe. They wrote a memo seeking a decision from Mr. Flaherty on possible new rules, under the subject line ``Sandbox Options: Housing Finance Changes.â€
The next moves came in January, 2011. Thirty-five year mortgages like Sarah O’Brien’s were banned from the sandbox. The government further reduced the amount of equity that could be taken out, and said it would no longer guarantee insurance on home equity lines of credit.
In normal times, those steps might have been enough to cool the market. But as Europe tumbled into a severe economic and political crisis in 2010 and 2011 and the global economic recovery got weaker, interest rates stayed low, making mortgages cheap.
Canada`s banks added to that problem by getting caught up in a mortgage price war. Even so, Mr. Flaherty took no action.
Then, this past June, he and central bank governor Mark Carney flew off to G20 meetings in Los Cabos, Mexico.
By that point, Mr. Flaherty had already been contemplating yet another tightening of mortgage rules for at least a month, according to the documents obtained by The Globe. The Mexico summit reinforced one crucial point for the two men: The euro zone disaster will take years to repair. That meant central bankers like Mr. Carney would be unable to raise interest rates for fear of discouraging business activity.
But those same historically low rates were stoking the housing market. So Mr. Flaherty and Mr. Carney plotted one more move on mortgage insurance, a topic they stewed over on the six-hour flight home from Mexico.
The surprise announcement came the morning of June 21. The government cut the maximum length of an insured mortgage back to 25 years, effectively ending much of the experimentation of the past six years. CMHC would only back mortgages on homes bought for less than $1-million, and refinancing rules were changed for a third time.
Only a few years earlier, in the depths of the crisis, government policy encouraged consumers to borrow. Now the message has changed. First-time buyers are particularly affected by the new regime. People such as Ms. O’Brien and Ms. Egerton, who benefited from the easing of government policies before, would no longer be able to buy homes on those same terms today.
CMHC’s future role
Six months after Mr. Flaherty’s latest crackdown, the “excessive exuberance†that once defined Canada’s housing market has disappeared.
Home prices have not fallen much, but sales activity has, particularly in Greater Vancouver. Some who earn their living in the real estate business now blame the government for overcompensating in response to the heated housing market, and that Ottawa should not have meddled a fourth time in CMHC’s rules.
But it will take much longer to answer the really big questions. Has the government managed to engineer a healthy correction in home prices – or something much worse? If prices do fall sharply, what will that mean for CMHC and its competitors, who now backstop nearly three out of four mortgages?
CMHC, which dominates the market by a wide margin, had about $286-billion of insurance outstanding, as of the end of 2011, on mortgages where the homeowner had a down payment of less than 20 per cent. It has a large cushion to absorb potential losses, but how steep would those losses be if the property market were to suffer a hard landing? “What’s immediately at risk in the event of a significant downturn is the capital of CMHC, which is about $12-billion, so once they blow through that, then they start turning to the public purse,†says Finn Poschmann, vice-president of research at the C.D. Howe Institute.
“To blow through that, you need unemployment that stays high for a little while and a significant increase in the number of mortgage defaults. That’s not farfetched – it has happened before. We like to think that it won’t happen, and that we’re better at managing those risks, but good things happen and bad things happen and they’re very difficult to predict.â€
Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.
Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,†he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,†Mr. Dodge said.
Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,†including “an honest evaluation of CMHC’s relationship with our major financial institutions.†Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.
Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a rece interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.
But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,†he says.
“And when something is too big to fail, the government will come in.â€
~~~
James
Senior Member
Frozen out: Behind Canada's housing 'affordability crisis'
Richard Blackwell
Home prices have doubled over the last decade, propelled by low rates and easy mortgage terms. But as the U.S. experience proved, soaring property values can come with an ugly downside. The Globe and Mail examines the foundation of Canada's historic real estate boom in a series.
Canadian homes have rarely been as expensive as they are now.
For just the second time in the past century, the country’s housing market is pushing the limits of affordability, according to key statistical measures, shutting many potential buyers out of the market, and making it harder for those who have already taken the plunge to pay off their mortgages.
In the past decade-and-a-half, house prices have accelerated at a rate that has outpaced increases in disposable income – though interest rates at historically low levels and a greater comfort level with debt helped mask the risks. Even the recent cooling in the housing market has so far been marked by a drop in the number of sales, with little downward movement in prices.
“There is no question that in Canada, we are in a real affordability crisis right now,†said John Andrew, a professor in Queen’s University’s school of urban and regional planning.
Since 2000, the price of houses across Canada has risen 127 per cent; nearly 50 per cent since 2006.
It’s no surprise that housing is expensive, but there’s no relief in sight. If anything, housing is likely to become even less affordable later this decade as interest rates return to more normal levels – unless there is a precipitous decline in real estate prices.
A sharp spike in rates – like those seen in 1981 and 1990 – is unlikely. But even a small increase in rates will cause major pain for current homeowners saddled with record mortgage debt, larding on hundreds of dollars to monthly payments.
“There is going to be a very rude shock to the system once mortgage rates move up,†said Prof. Andrew. “Rates have been low for enough years that people have forgotten how unaffordable houses really are.â€
A perfect storm
The current run-up in house prices began in about 1997 and has continued almost unabated despite very small gains in income over the same period. Only once before in the last 100 years has there been a similar long-term shift, and that was back during the postwar years as returning veterans and a widespread housing shortage pushed prices up sharply in the late 1940s and early 1950s.
Before that, prices had been very stable in the 1920s and 1930s. And from the 1950s to the late 1990s there was another long period of relative stability, punctuated only by a couple of brief mini-booms in the 1970s and 1980s that were followed by quick pull-backs in prices.
This time, a perfect storm of low interest rates, coupled with a relatively strong economy and Canadians’ ever-growing willingness to pile on debt, prompted a nearly unprecedented run-up in prices. High immigration numbers and limited land for expansion in the country’s largest cities have exacerbated the problem.
High-school math teacher Nadine K. Mohammed, 32, always thought she’d own a house by now. “I thought I’d go to university, get a really good job, save some money, and that would be the ticket to being able to afford a home. I was so excited,†she said.
Instead, the Toronto resident, who has been teaching for eight years, is renting the main floor of a bungalow in the west-end neighbourhood of Etobicoke with her husband. They save everything they can to put toward a down payment and hope to purchase a home in the next two to three years. “But if prices continue to go up, I don’t know if that’s going to happen,†Ms. Mohammed said. “It’s kind of a scary thought.â€
The couple also worries that when they’re ready to buy a home in the city, it will be “really tiny.â€
“As I’ve gotten older, I’ve realized I need to adjust my expectations and be more realistic,†Ms. Mohammed added.
While some of her friends managed to purchase their first homes when they were in their twenties, they were able to live rent-free with their parents to save money. “Then voila, they had down payments,†she said. “Once you have to pay rent, saving takes a lot longer.â€
Because she knows mortgage rates will likely be higher by the time she and her husband buy a home, Ms. Mohammed figures they will take longer to pay off their mortgage than their friends who already own homes.
‘House poor’
Right now, just getting into the housing market is a huge challenge for many Canadians.
The average home in Canada now costs about $350,000, roughly five times the average household income. In the mid-1970s, it was three times average income, says University of British Columbia professor Paul Kershaw, who crunched the numbers for a recent report on generational income gaps.
There are many ways to judge how affordable a house is, but on that most basic measure – how many years of earnings it takes to buy a typical home – houses in Canada are dramatically more expensive than they were four or five decades ago.
Building up enough cash for a down payment can be crippling for many people, Prof. Kershaw says.
“Take an average 25– to 34-year-old in 1976, working full-time and making the average wage. That person had to save for five years to build up a 20-per-cent down payment for an average home,†he said. “Today, take the same 25– to 34-year-old. Now, they have to save for 10 years. And in B.C., it is 15 years.â€
The underlying reason for this, Prof. Kershaw points out, is that housing prices have risen dramatically, while household incomes – adjusted for inflation – have barely moved at all since the mid-1970s.
In 2012, “home ownership is so much more challenging,†he said. “And in urban settings, the home you are purchasing, as a younger person, is far less likely to have a yard. And if it does have a yard, it is because you are tolerating a far longer commute.â€
There are huge social implications in this shift, Prof. Kershaw argues. Young people are becoming resentful of those already in the housing market, and are subject to significant financial stress. Buying a house is getting out of reach, he said, even though it is “a central part of the transition into adulthood.â€
Two decades ago, one in five Canadians bought homes with less than 25-per-cent down, the amount needed to avoid paying for mortgage insurance. Today, three-quarters of home buyers require insurance from Canada Mortgage and Housing Corp., though the government has lowered the threshold to 20 per cent.
Royal Bank of Canada’s respected Housing Affordability Measure underlines the impact of interest rates on housing costs. The index, which tracks the proportion of pre-tax household income required to pay principal and interest on a mortgage, along with property taxes and utilities, shows a huge spike in the early 1980s and again in the early 1990s, when interest rates jumped dramatically.
Significantly, however, the RBC chart also shows that ownership costs have tracked upward pretty much non-stop for the past decade, even as interest rates declined to the current rock-bottom levels.
In the Vancouver market, houses are far less affordable now than they were even during those earlier interest-rate spikes, the Royal Bank’s figures show. The current ownership cost of an average two-storey house eats up close to 80 per cent of average household income. Elsewhere in the country, the average is closer to 50 per cent.
A health care worker in southwestern Ontario who didn’t want his real name used, said mortgage and child support payments make up roughly half of his take-home income, and that leaves very little for long-term investments such as RESP plans for his kids’ education, or retirement savings. “Any forward planning is really limited,†he said. “When you are living this way it feels precarious, and that is with a great mortgage rate.â€
The big worry, he said, is what will happen if rates rise and his payments increase significantly. That could require a drastic lifestyle change such as renting out his basement or selling the house and renting. “That weighs heavily on me,†he said.
Prof. Andrew of Queen’s said that for many years the generally accepted idea was that housing costs should eat up about one-third of household income. The RBC figures show that the reality today is far different. A range of 40 to 45 per cent is likely a sustainable number over the longer term, Prof. Andrew said, although even at that level “it means that people are not going to have the disposable income to spend on other things, and that is not good for the economy. You want people to be able to spend on cars and trips and those kind of things, without necessarily borrowing against the value of their homes.â€
He also noted that people’s attitudes have shifted significantly, and Canadians are far more willing to accept the fact that they will be “house poor†over the long term. Indeed, that appears to have been the motivation for federal Finance Minister Jim Flaherty to tighten up mortgage lending rules this summer, to try to reduce levels of debt associated with home ownership.
The danger in debt
Canadians weren’t always so willing to pile on debt.
Brian and Dency Sharkey became homeowners when they were in their twenties in the mid-1960s, but they were very cautious in buying a house that from today’s perspective looks unbelievably affordable.
The couple paid $19,500 for their bungalow in the Ottawa suburb of Nepean, and their monthly mortgage payments amounted to $99. In fact, that was even less than the $115 they had been paying to rent a two-bedroom apartment.
Still, even with two teachers’ salaries adding up to about $6,000 a year, it was hard to meet the payments, Mr. Sharkey said. It was done through scrimping, not through further borrowing. “My wife keeps reminding me about drinking powdered milk and that kind of stuff,†he said.
Things are different in 2012, and with so many people willing to take on large mortgages and burdensome monthly payments, the big risk is a spike in mortgage rates, or even a moderate rise. A significant number of mortgage loan defaults among homeowners could have a devastating effect on the economy.
Essentially, low interest rates are magnifying the already considerable risks that first-time home-buyers are taking on when buying expensive properties, said Ben Rabidoux, an analyst with research firm M. Hanson Advisors.
“Having young Canadians jump into home ownership, with mortgages that are at income multiples we’ve never seen before, is exposing a broad section of the population to significant risk if we run into any sort of a recession or macro shock or interest-rate rise,†he said. “We are just staggeringly comfortable with debt here in Canada right now.â€
Exacerbating this issue, Mr. Rabidoux said, is that many young Canadians already have significant debts even before they take on a mortgage. They may owe money on credit cards, and many will still have student debts outstanding when they buy a house. “Twenty or 30 years ago that was not the case.â€
With house prices now softening slightly in some markets, it is possible affordability will improve over the next few months, Mr. Rabidoux said. That would be healthy in the long term, and may eventually bring in new buyers who have been priced out of the market. But in the short term, our economy is so tied to the housing boom, and the construction jobs it generates, tht a weakening housing market is “backing policy-makers into a corner,†he said. Politicians would like to see house prices decline to make them more affordable, yet they worry that any decline in home-building could dent an already weak economy.
With files from Claire Neary
~~~
Eug
Senior Member
Canadian Housing Observer, from CMHC, as reported by CanadianMortgageTrends.com:
CMHC says the ratio of mortgage principal and interest to disposable income was 34.3% at the beginning of 2012. That’s well below 2007 and 1990, but it’s also well above the 26.8% from one decade prior (in 2001).
CMHC says the ratio of mortgage principal and interest to disposable income was 34.3% at the beginning of 2012. That’s well below 2007 and 1990, but it’s also well above the 26.8% from one decade prior (in 2001).
daveto
Active Member
Canadian Housing Observer, from CMHC, as reported by CanadianMortgageTrends.com:
CMHC says the ratio of mortgage principal and interest to disposable income was 34.3% at the beginning of 2012. That’s well below 2007 and 1990, but it’s also well above the 26.8% from one decade prior (in 2001).
Some quick notes on that chart:
1. Assumes a consistent 25% downpayment over the years since 1991. As such, its not consistent with what has happened in the market where the average downpayment has decreased, and thus homeowners are paying more interest and have more principal to repay over that the term.
2. Doesn't reflect the higher property taxes and higher closing costs (ie as % of higher housing price). Nor does it reflect the various Land Transfer Taxes (not only new since 1991, but as % of higher price, and must be paid up front or amortized within mortgage)
3. Doesn't reflect the CMHC insurance fee (ie 2% of higher house costs). This amount would then typically be amortized within the mortgage.
4. Doesn't reflect the lost opportunity cost/lost investment income from the higher down-payment (ie 25% of a higher housing price)
Here is the full report. Quite comprehensive. I've not looked through it in detail yet.
http://www.cmhc-schl.gc.ca/odpub/pdf/67708.pdf?fr=1357150322828
daveto
Active Member
5. Because it is using post-tax income, it doesn't reflect that combined federal/provincial income tax rates for the average worker dropped about 20% from 1996-2006. Thus post-tax income since 1996 is approx 8% higher due to the tax cuts, which understates the visual appearance in the graph of the increase in the mortgage cost since 1996.
CN Tower
Banned
http://http://ksj.mit.edu/sites/default/files/images/tracker/2011/yawn2.jpg
Who cares! What's the latest on the market?
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KA1
Senior Member
daveto
Active Member
Ahem, would have been funnier if you had embedded the picture, instead of the link.
Dec TREB data is out.
Sales down 20%, average prices up 6.5%, Days on Market up from 32 to 36
YOY data consistent between condo/non-condo, CityTO/Non-CityTO
http://www.torontorealestateboard.com/market_news/market_watch/2012/mw1212.pdf
cdr108
Senior Member
Why housing prices aren't coming back
George Athanassakos
Special to The Globe and Mail
Published Thursday, Jan. 03 2013, 8:11 PM EST
Last updated Friday, Jan. 04 2013, 11:52 AM EST
Numbers don’t lie – especially about Canada’s overheated housing sector. Increases in home prices in recent years have not been matched by underlying increases in fundamentals. The market is due for a severe correction.
One particularly telling statistic is housing investment as a share of GDP. This ratio has steadily climbed toward a record high over the past two years. It is now more than 7 per cent of GDP versus a 50-year average of 5.8 per cent and previous peaks of about 7.26 per cent in the late 1970s and 7.18 per cent in the late 1980s. After residential housing investment as a percentage of GDP peaked in the previous two cycles, the housing market crashed within a few years.
But while cyclical ups and downs in the housing market are to be expected, my forecast is not simply for a cyclical downturn. Rather, I see a long-term fall in home prices that will not be reversed when the economy picks up.
The key factor is demographics. House buying tends to follow the life cycle. Individuals accumulate assets when they are young and sell them as they get older and approach retirement. A country with a large chunk of its population in its working years will experience higher demand for housing – and therefore higher house prices – than countries with particularly young or especially old populations.
The evidence suggests that an increase in the proportion of people in their prime working years, between 20 and 64, has a positive effect on housing and real estate returns. The opposite is the case when the share of population that is younger than 20 or older than 64 increases.
One way to put a number on the demographic effect is to calculate the portion of the population that is not in their working years (people younger than 20 or older than 64) and divide this by the share of the population in their working years (between 20 and 64). A decrease in this ratio suggests that more people, relatively speaking, are in their home-buying years. An increase indicates the opposite, namely, that a smaller portion of the population, relatively speaking, is in their home-buying years.
The accompanying chart plots this ratio against house prices in Canada and in Toronto. There is a perfectly negative relationship – as the ratio has fallen, home prices have shot up. That is just what you would expect.
The demographic effect makes itself felt beyond the housing market. Households treat real estate like a savings instrument, so changes in population patterns have a similar effect on the bond market as they do on housing.
If we plotted the population ratio against bond prices, we would see a similar pattern as plotting the population ratio against house prices. As the population ratio has decreased over the last 20 years (indicating a growing portion of the population in their prime asset-gathering years), bond prices have risen. Since bond prices and bond yields move in opposite directions, yields have plummeted as bond prices have shot up.
Those low yields are reflected in low interest rates. And as we all know, low interest rates have helped to drive the housing market in Canada.
How much could home prices fall over the next few years? Every region is different, but I have developed a model of condo prices, based on Toronto condo rents, which uses investment-grade bond yields as discount rates.
My model estimates the condo prices that are, in theory, implied by current rents. The underlying assumption is that people should want the same cash flow from an investment in a condo as they would derive from putting the identical amount of money into a bond portfolio.
Assuming the rental market is properly priced, I calculate that the price of condos in Toronto should be, on average, about $100,000 less than they are now. As a result, one can expect about a 25 per cent decline in condo prices over the next few years. In the long run, the decline could be even more significant.
Of course, different regions may have different results, but I believe a perfect storm is coming in the housing market. Canada will experience significant “secular,” or long-term, decline in house prices starting around 2015, when the population ratio is about to turn upward based on Statistics Canada projections.
The extent of this correction will surprise many people. Once the cyclical decline in housing is thought to be over and everyone prepares for an upturn in the housing market, the long-term impact of demographics will make itself felt and it will not be pretty.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, Western University.
sorry i wasn't able to include the graph. maybe someone else can do that . thx
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jremazki
New Member
Attachments
marsh
Active Member
MOre predecitions from todays Star:
Toronto housing prices to flatline in 2013: report
By Susan Pigg Business Reporter
Toronto house prices are expected to flatline rather than fall in 2013 — with gains averaging just one per cent — with the “cyclical correction” that has taken hold since spring likely to be more short-lived than severe, according to a new report from Royal LePage.
“Very modest home price appreciation will be the norm for the next two years,” the realty company says in a national housing market survey released Tuesday, noting that further declines in Vancouver house prices, and the softening in Toronto’s condo market in particular, will have a “significant dampening effect” on Canadian average house prices in 2013.
However, fears of a “sharp or drawn out collapse are unwarranted,” it notes, adding that prices have simply outpaced wages for the last three years “and the market requires time to adjust.”
“The silver lining in every real estate market correction is that there is a balance shift,” says Royal LePage president Phil Soper in a statement. “ ... Canadian home buyers will see momentum shift in their favour this spring.
“They should be met with more choice — and stable prices.”
First-time homebuyers, who realtors and housing experts feared have been virtually locked out of the market by tighter mortgage lending rules imposed by Ottawa, “are adjusting to the new requirements by opting for cheaper homes or saving longer,” says the survey.
While bidding wars and bully bids dominated the busy spring market in 2012, come summer realtors began to see “a disconnect” between buyers and sellers: Buyers have been holding off, anticipating a slump in prices, while sellers have dug in their heels, determined to wait and see if spring 2013 brings some heat back to the market.
The lack of enough houses for sale in Toronto last year to meet demand helped boost the price of a two-storey home by 6.2 per cent, to an average of $668,133 year-over-year by the fourth quarter of 2012. A detached bungalow climbed 4.9 per cent, to $558,345, during the same one-year period.
Toronto condos averaged year-over-year gains of 2.6 per cent, ending 2012 at an average $356,865.
“The pipeline of buyers in Toronto seeking single-family homes will remain strong throughout 2013,” according to Gino Romanese, a senior vice president with Royal LePage.
The condo sector is likely to soften further, with the exception of older, bigger condos in desirable Toronto neighbours that, says Romanese, “will likely outperform newer units that target investors and young professionals.”
The Royal LePage House Price Survey looks at seven types of housing in more than 250 Canadian neighbourhoods. Past and present studies can be found at www.royallepage.ca.
Toronto housing prices to flatline in 2013: report
By Susan Pigg Business Reporter
Toronto house prices are expected to flatline rather than fall in 2013 — with gains averaging just one per cent — with the “cyclical correction” that has taken hold since spring likely to be more short-lived than severe, according to a new report from Royal LePage.
“Very modest home price appreciation will be the norm for the next two years,” the realty company says in a national housing market survey released Tuesday, noting that further declines in Vancouver house prices, and the softening in Toronto’s condo market in particular, will have a “significant dampening effect” on Canadian average house prices in 2013.
However, fears of a “sharp or drawn out collapse are unwarranted,” it notes, adding that prices have simply outpaced wages for the last three years “and the market requires time to adjust.”
“The silver lining in every real estate market correction is that there is a balance shift,” says Royal LePage president Phil Soper in a statement. “ ... Canadian home buyers will see momentum shift in their favour this spring.
“They should be met with more choice — and stable prices.”
First-time homebuyers, who realtors and housing experts feared have been virtually locked out of the market by tighter mortgage lending rules imposed by Ottawa, “are adjusting to the new requirements by opting for cheaper homes or saving longer,” says the survey.
While bidding wars and bully bids dominated the busy spring market in 2012, come summer realtors began to see “a disconnect” between buyers and sellers: Buyers have been holding off, anticipating a slump in prices, while sellers have dug in their heels, determined to wait and see if spring 2013 brings some heat back to the market.
The lack of enough houses for sale in Toronto last year to meet demand helped boost the price of a two-storey home by 6.2 per cent, to an average of $668,133 year-over-year by the fourth quarter of 2012. A detached bungalow climbed 4.9 per cent, to $558,345, during the same one-year period.
Toronto condos averaged year-over-year gains of 2.6 per cent, ending 2012 at an average $356,865.
“The pipeline of buyers in Toronto seeking single-family homes will remain strong throughout 2013,” according to Gino Romanese, a senior vice president with Royal LePage.
The condo sector is likely to soften further, with the exception of older, bigger condos in desirable Toronto neighbours that, says Romanese, “will likely outperform newer units that target investors and young professionals.”
The Royal LePage House Price Survey looks at seven types of housing in more than 250 Canadian neighbourhoods. Past and present studies can be found at www.royallepage.ca.