Real Estate

Vancouver housing bubble?

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Agreed... though if we focus on the Vancouver market, the affordability stats are dramatically different, which is partly why some people in this thread are much more doom-and-gloom on the west coast than looking at the national averages which only speak for certain markets in the country.

In Averageville, AverageProvince it may take a doubling of interest rates to drive people out of their houses, but the worry is that in the Greater Vancouver area a minor increase could lead to some serious consequences.
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Vitalogy80 wrote:
Jun 17th, 2013 4:04 pm
But it's completely different market right now (and in the past 5 or 10 years) then when my parents had a mortgage for example. Yes, housing has increased faster than wages, but that's primarily because interest rates have dropped.
Sure, and we know that interest rates are cyclical. And Canadians typically today are only locking in the interest rate applicable to 1/4 to 1/8th of their loan amortization.
With a 3% interest rate, you're looking at monthly mortgage payments of just over $1400 on a 25 year amortization. That is easily affordiable for a family making average salaries in Canada.
For the relatively short term. Again, going back to my comments about abnormalities, these things are cyclical, and we're clearly at what would appear to be an extremity of the cycle in terms of interest rates and price to income ratios.

The same logic, of low interest rates, should also inflate other asset classes such as stocks, right? How come we have the stock market trading at 12X earnings while housing trades at 35X? There's obviously some cyclical phenomena at work here.

So what's going to cause affordability to drop? A dramatic increase in unemployment, where all signs point to a decrease or a dramatic rise in interest rates.
Well, deflating incomes for starters, especially in the RE sector. And higher interest rate spreads, as investors rotate away from housing as an asset class. After that, it becomes self-reinforcing; lower prices lead to less activity/employment, even higher spreads, etc., which further reinforce lower prices.

Much like we've seen the opposite happen over much of the past decade, in a sort of feedback loop; high prices have allowed seniors to sell their houses for top dollar, put the money into GICs, which the banks lend out to young people to buy houses, creating more employment, etc., etc.
I don't think anyone expects dramatic interest rates increases, especially when deflation seems to be the talk right now.
I do, against specific types of collateral that go into over-supply. The withdrawal of the CMHC from subprime mortgage guarantees means that the new buyers, if they have credit available at all, will have pay much more for it (ie: rates that most of us would typically associate with subprime, rather than the subsidized rates the CMHC makes possible).
It's 5 years old now, and I still don't see a catalyst for a 50% in the housing market. It has to be one of those 2 things, a doubling (or more) of the 5 year rate or a dramatic increase in the unemployment rate (15% or higher). Which of these are the RE Bears projecting will happen??
I see it even more today than I saw a number of years ago due to the higher ratio of Canadians that already own, the terrible skewing of the economy towards the RE sector instead of diversification, extreme weakness in other sectors, and the CMHC limit having been hit.
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cegli214 wrote:
Jun 17th, 2013 5:16 pm
That's assuming that the market has absolutely no speculation in it. If that were true, then prices would have never gotten as high as they currently are. Right now if I kept renting the house I have, as opposed to buying it with a 25yr mortgage at a 3% rate, I would come out with far more equity by renting. This assumes 0% appreciation over 25 years. No drop, no gains. This would be a person's financial assessment if there was absolutely no speculation.
Why would speculation influence affordability? Speculators themselves are not going to cause the market to crash as long as housing remains in the affordable range.

Even though this is the Vancouver thread, I'm not meaning general Canadian Housing, not Vancouver specific. The average Canadian House as mentioned in my last post was around $375,000. I'd be surprised if you could rent out an average house for less than $1400/month...of course if you're paying $1400 for rent vs $1400 for mortgage, you're at least paying off some principal with the mortgage and gaining some value. Of course this doesn't include other housing expenses like insurance, taxes and upkeep.

But if you're expecting a 50% crash, then you're payments for a 25 year mortgage will drop by half as well, so the average Canadian house would cost only $700/month on a 25 year mortgage.
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Scott M. wrote:
Jun 17th, 2013 5:20 pm
Agreed... though if we focus on the Vancouver market, the affordability stats are dramatically different, which is partly why some people in this thread are much more doom-and-gloom on the west coast than looking at the national averages which only speak for certain markets in the country.

In Averageville, AverageProvince it may take a doubling of interest rates to drive people out of their houses, but the worry is that in the Greater Vancouver area a minor increase could lead to some serious consequences.
Nah, "Averageville, AverageProvince" is in trouble as well. The major cities, being the 'senior markets', have a naturally higher justifiable P/E multiple due to things such as land constraints, desirability, etc. And it doesn't take much of a combination of rising interest rates (as applicable to housing loans), and declining incomes (particularly amongst the cohort that is the most highly leveraged) to really knock things down.
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Vitalogy80 wrote:
Jun 17th, 2013 5:32 pm
Why would speculation influence affordability? Speculators themselves are not going to cause the market to crash as long as housing remains in the affordable range.

Even though this is the Vancouver thread, I'm not meaning general Canadian Housing, not Vancouver specific. The average Canadian House as mentioned in my last post was around $375,000. I'd be surprised if you could rent out an average house for less than $1400/month...of course if you're paying $1400 for rent vs $1400 for mortgage, you're at least paying off some principal with the mortgage and gaining some value. Of course this doesn't include other housing expenses like insurance, taxes and upkeep.

But if you're expecting a 50% crash, then you're payments for a 25 year mortgage will drop by half as well, so the average Canadian house would cost only $700/month on a 25 year mortgage.
With my specific post, I was running the numbers for where I currently live (an expensive part of Vancouver). The same numbers apply to almost all of greater Vancouver. I'm sure there are plenty of places in Canada where it is still cheaper to buy than rent looking at it over a 25 year period.
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Vitalogy80 wrote:
Jun 17th, 2013 5:32 pm
Why would speculation influence affordability? Speculators themselves are not going to cause the market to crash as long as housing remains in the affordable range.
Affordability isn't the issue, so much as the amount of supply available to the incremental new buyer. Speculation has obviously facilitated the formation of a significant amount of new supply. There are very few new incremental buyers. This sort of environment can collapse/crash very easily, even in the absence of big changes to employment or interest rates.
Even though this is the Vancouver thread, I'm not meaning general Canadian Housing, not Vancouver specific. The average Canadian House as mentioned in my last post was around $375,000. I'd be surprised if you could rent out an average house for less than $1400/month...of course if you're paying $1400 for rent vs $1400 for mortgage, you're at least paying off some principal with the mortgage and gaining some value.
Not really; the rent includes all long-term maintenance, while any equity you're actually paying into a mortgage is basically being destroyed through depreciation. Nevermind the opportunity cost of the downpayment, and the cost of interest rate risk.
But if you're expecting a 50% crash, then you're payments for a 25 year mortgage will drop by half as well, so the average Canadian house would cost only $700/month on a 25 year mortgage.
I suspect the carrying cost won't be substantially different after a crash, only that, people will have a combination of less income and an increased interest rate on account of a greater perception of risk in the asset class.

Of course, if you're stuck paying an old loan, with the 'new' interest rate and a reduced income, this could be very painful.

Basically what it amounts to, IMHO, is that more $$$ is going to be transferred from borrowers to the banks. The bank will be building equity. Not you. After all, the opposite has occurred over the past decade; the bank's money has been devalued while home borrowers have been showered with large amounts of unearned equity (ie: equity that occurred due to appreciation, not due to equity being paid in).
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cegli214 wrote:
Jun 17th, 2013 5:37 pm
With my specific post, I was running the numbers for where I currently live (an expensive part of Vancouver). The same numbers apply to almost all of greater Vancouver. I'm sure there are plenty of places in Canada where it is still cheaper to buy than rent looking at it over a 25 year period.
Even using long-term average interest rates? I'm sure there's a few such places, but they're few and far between, with pretty obvious states of economic depression. Okay for a retiree perhaps, but if you need to work to pay a mortgage....
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Mark77 wrote:
Jun 17th, 2013 5:28 pm
Sure, and we know that interest rates are cyclical. And Canadians typically today are only locking in the interest rate applicable to 1/4 to 1/8th of their loan amortization.



For the relatively short term. Again, going back to my comments about abnormalities, these things are cyclical, and we're clearly at what would appear to be an extremity of the cycle in terms of interest rates and price to income ratios.
You've been singing the same song about increasing rates specifically for mortgages for years but we're basically 0.2% from all time lows. When exactly is this going to turn around and what will be the catalyst for it? We could be at the beginning of a Japanese style "lost decade" of a deflationary/low inflation environment. Their interest rates have been sub 2% for 20 years. Without the threat of inflation, why will interest rates increase?
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Mark77 wrote:
Jun 17th, 2013 5:42 pm
Affordability isn't the issue, so much as the amount of supply available to the incremental new buyer. Speculation has obviously facilitated the formation of a significant amount of new supply. There are very few new incremental buyers. This sort of environment can collapse/crash very easily, even in the absence of big changes to employment or interest rates.
OK, please show me one 50% crash that has happened ever without a significant increase in interest rates or unemployment.
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Vitalogy80 wrote:
Jun 17th, 2013 6:09 pm
You've been singing the same song about increasing rates specifically for mortgages for years but we're basically 0.2% from all time lows. When exactly is this going to turn around and what will be the catalyst for it? We could be at the beginning of a Japanese style "lost decade" of a deflationary/low inflation environment. Their interest rates have been sub 2% for 20 years. Without the threat of inflation, why will interest rates increase?
I told you what the catalyst would be -- collateral simply going into over-supply and lenders developing a revulsion against lending even more against the specific asset class. After all, its in nobody's interests, especially not the lenders, to be lending to build empty houses.

If you look at the mortgage stats for Canada, basically non-CMHC-insured mortgage debt hasn't grown since 2008/2009.

Now that the CMHC limit has been hit, where will the growth in debt, to sustain prices and to finance the new collateral (ie: new builds) come from?

Simple answer is that it won't. Thus, existing credit will be rationed. Higher spreads are how the market 'rations' the credit. Even in the absence of policy rate changes or significant moves in rates as applicable to 'risk-free' bonds at given terms on the yield curve.
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Mark77 wrote:
Jun 17th, 2013 6:36 pm
I told you what the catalyst would be -- collateral simply going into over-supply and lenders developing a revulsion against lending even more against the specific asset class. After all, its in nobody's interests, especially not the lenders, to be lending to build empty houses.

If you look at the mortgage stats for Canada, basically non-CMHC-insured mortgage debt hasn't grown since 2008/2009.

Now that the CMHC limit has been hit, where will the growth in debt, to sustain prices and to finance the new collateral (ie: new builds) come from?

Simple answer is that it won't. Thus, existing credit will be rationed. Higher spreads are how the market 'rations' the credit. Even in the absence of policy rate changes or significant moves in rates as applicable to 'risk-free' bonds at given terms on the yield curve.
So just so I understand, you're saying new supply needs to be added to sustain the marketplace?? That sounds really confusing to me...you're basically saying if CMHC stops insuring new mortgages, then houses will stop being built, which will decrease supply and prices will go down? I'm not an economics major, but when supply goes down or stays the same, usually prices don't go down with it unless demand changes. Demand won't change unless affordibility changes.

Also, did you find any examples of previous crashes without large interest rate increases or unemployment increases?

Also, house prices nationally in May were up almost 4% from May a year earlier.

“Prices remain stable, perhaps maddeningly so for the legions of bubble mongers,” said Douglas Porter, chief economist at BMO Capital Markets.

Mr. Porter noted the May data show “housing remains on track for a fabled soft landing … making a mockery of talk of an imminent collapse.”
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Vitalogy80 wrote:
Jun 17th, 2013 7:09 pm
So just so I understand, you're saying new supply needs to be added to sustain the marketplace??
Yes, to sustain the RE industry at 27% of GDP or so, the credit growth trajectory of the past few years (until recently) must be sustained.

Obviously when credit expansion slows down or stops, this is highly problematic to the housing market.

At first, the incomes of the people associated with that 27% of GDP deteriorate. Overtime is cut. Lawyers, Realtors, public servants, surveyors, appraisers, home inspectors, home stagers, cleaners, minor renovators, etc., see their billings slashed significantly. Realtors downgrade from leased Mercedes to leased Chevrolets. Etc.

Then its a downwards spiral from there. Many/most of those people won't necessarily report being 'unemployed', but that doesn't mean that they're not earning dramatically less than they did in the boom times.
That sounds really confusing to me...you're basically saying if CMHC stops insuring new mortgages, then houses will stop being built, which will decrease supply and prices will go down?
The role of CMHC is to suppress interest rates to subprime borrowers (ie: borrowers so poor in credit quality that they can't cough up a large enough downpayment that the bank feels comfortable lending to). Normally a subprime borrower (ie: what CMHC insures) would pay 8-10% as a high-risk borrower. The CMHC allows such a borrower to pay a rate closer to 4% instead.

Now, with the CMHC limit being hit, the only credit available for new, subprime buyers will be at those 8-10% rates.

Obviously it is dumb to buy a house at 8-10% rates when the cost of renting is so cheap in comparison. So they simply won't. Until the prices come down such that they become credit-worthy enough (ie: their 10% downpayment morphs into a 20% downpayment), or the numbers simply start to work out properly.
I'm not an economics major, but when supply goes down or stays the same, usually prices don't go down with it unless demand changes. Demand won't change unless affordibility changes.
I can appreciate that you're not an econ major, but there is the concept of price elasticity and demand elasticity. There is likely zero demand for Canadian housing, at current prices, with un-subsidized (ie: non-CMHC-insured) credit to new buyers. Therefore, prices have to adjust. Downwards until such demand exists.

Meanwhile, there is significant supply elasticity, which may actually increase with decreasing prices due to the sheer amount of leverage involved. Not to mention a panic mentality. Lower prices may actually bring more supply to market, as people race to lock in capital gains (or avoid negative equity), and developers race to monetize the billions of investment they have in the factories, materials, inventories, supply chains, etc., associated with the supply of housing, ahead of their competitors. After all, in the game of RE supply, the first entity that converts its assets to cash "wins" the game. The losers are those who hang on and go into bankruptcy.

Same on the loan side. The bank that liquidates its mortgage portfolio the most quickly and invests in other loans/asset classes, will have better performance than the bank that comes late to the party. After all, the late comers may have suffered a deterioration in their loan portfolios (due to the others withdrawing), and the new assets or loans they wish to purchase will be commensurately more expensive as late-comers.
Also, did you find any examples of previous crashes without large interest rate increases or unemployment increases?
The problem with answering your question is one of causality. Obviously a crash in house prices is going to cause unemployment, particularly in the RE supply sector. The question is, which came first, the deceleration of employment (which may not be actual unemployment, but simply, lower earnings of those in the RE sector), or the deceleration in housing. Not the easiest question to answer.
Also, house prices nationally in May were up almost 4% from May a year earlier.
Careful there, that's average selling price, not actual house prices. A statistical mirage since we know that volume has dropped off a cliff, with the low end taking the brunt of the fall.

Of course, with the high end of the market less affected, such will pull the numbers up. But it doesn't mean that your $500k Toronto house is worth $500k + 4%. It means that the $1M portion of the market has held steady, while activity in the lower end (ie: $500k in Toronto) has dropped out. The $1M houses may actually be down as well, but since they comprise a greater portion of the sales mix, the average rises.
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Just to clarify, "new supply of collateral" = more houses built. If that helps you understand what I was saying.

Now, of course, if there are more houses built than there are people wanting to buy and occupy them, that is a very serious problem as it means the value, the scarcity of houses will be somewhat less. Since houses are collateral for mortgage loans, the performance of the collateral is said to have decreased. Bankers typically charge considerably more to lend against collateral that performs poorly or is decreasing in price.

ie: car loans are typically far more expensive than housing loans, because lenders anticipate that cars will lose a good chunk of their price. In some cases, rendering the loan even partially unsecured (ie: negative equity).

In some environments, particularly those with high inflation, this could be reversed. I was watching a documentary about an airplane crash in Chicago in the 1970s of the Douglas DC-10 -- inflation was so severe that the airline actually earned a profit by having a 10-year-old airplane crash and collecting the insurance proceeds. In such an instance, the lending rate would be more favourable because the credit quality of the loan is anticipated to improve over time.
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Mark77 wrote:
Jun 17th, 2013 7:31 pm
Yes, to sustain the RE industry at 27% of GDP or so, the credit growth trajectory of the past few years (until recently) must be sustained.

Obviously when credit expansion slows down or stops, this is highly problematic to the housing market.

At first, the incomes of the people associated with that 27% of GDP deteriorate. Overtime is cut. Lawyers, Realtors, public servants, surveyors, appraisers, home inspectors, home stagers, cleaners, minor renovators, etc., see their billings slashed significantly. Realtors downgrade from leased Mercedes to leased Chevrolets. Etc.
Stats Canada has the GDP of the entire Financial Sector (or in their terms, Finance and Insurance, Real Estate and Leasing and Management of Companies and Enterprises) as under 25% of Canada's GDP. Now I can't pull Real Estate out of it, but since you're in love with Canadian Banks and have concluded that problems with the Real Estate sector won't hurt them, I can't see the Real Estate portion of this 25% taking even 20% of this 25%. Yes, there's Construction included as well which is around 7% of GDP, so let's say 25% of that is solely for the Real Estate industry. That's around 10% of the entire economy that's dependant on the Real Estate industry...which still seems way too high to me. Where are you getting these numbers of 27% from?
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Vitalogy80 wrote:
Jun 17th, 2013 8:56 pm
Stats Canada has the GDP of the entire Financial Sector (or in their terms, Finance and Insurance, Real Estate and Leasing and Management of Companies and Enterprises) as under 25% of Canada's GDP.
Yeah then you have to add the construction sector, and the sectors that supply it extensively. But the precise number doesn't matter -- I think we can agree that it is a substantial part of the Canadian economy.
Now I can't pull Real Estate out of it, but since you're in love with Canadian Banks and have concluded that problems with the Real Estate sector won't hurt them, I can't see the Real Estate portion of this 25% taking even 20% of this 25%. Yes, there's Construction included as well which is around 7% of GDP, so let's say 25% of that is solely for the Real Estate industry. That's around 10% of the entire economy that's dependant on the Real Estate industry...which still seems way too high to me. Where are you getting these numbers of 27% from?
A quick Google indicates that the source of the number was from the Conference Board:

http://murraydobbin.ca/2013/03/11/1209/
According to the Conference Board of Canada, the resource sector (energy, forestry, mining, agriculture) accounted for a mere 7% of GDP in 2012 while housing (finance, real estate, construction) accounted for 27%. If the housing market goes south, just what sector does Mr Carney think is going to replace it as a growth driver?
(and the question asked by the blogger is very pertinent as well -- just where will the demand come from when this sector falls apart? I agree with the premise of the question -- the BoC has a very serious problem on its hands and probably is in significant danger of finding itself behind the curve in terms of policy rate cuts and stimulus of the non-housing sector).

I know quoting a blog is just repeating hearsay, but certainly the 27% figure has appeared a number of times. In short, in much of Canada, housing is pretty big business.
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