Are Canadians rubes?
When it comes to figuring out what to spend our money on, apparently. Let’s do a little comparison with our American neighbours – you know, those subprimates we’re always dissing as being trailer park while we’re so smart.
US family income, on average, is $67,348. Canadian family income (in US dollars) is $68,305. Almost a dead heat there.
Household debt as a percentage of disposable income is 132% in America and 145% here. Whoops, we lose that one, but not by much. We’re all spending beyond our means.
Retirement savings in the US, as measured by the average 401k plan, is $62,900. In Canada, the average RRSP balance seems to be about $64,000, or $60,800 in US dollars – about the same.
Mortgage rates are, hmmm, similar. In the States a short-term home loan is 3.7%, while here is it 2.65%. But the Americans have the edge in being able to lock in a 30-year mortgage at 5.14%, while we have to renew at market rates every 5 or 7 years.
But what’s a very similar comparison breaks down entirely when it gets to real estate. The average US resale home costs $178,000. In Canada, the national average right now is $337,410, or in US dollars $300,294.
So, a house to the south costs 2.64 times income, and here it is 4.4 times income – which is damn close to twice the price. Not only that, but Americans are able to write off 100% of the interest on their mortgages from taxable income, as well as property taxes. They also enjoy the same capital gains-free status on their homes in essence as we do. The federal government will give new homebuyers $8,000, free, and move-up buyers can get $5,000 as a gift. Oh yeah, then they can sign up for a mortgage rate which will not change for three decades.
And still, with all those incentives – free money, interest-deductibility, rate stability – house prices in that country of 304 million are exactly half what they are here, in a land with one-tenth the people and more land mass. Makes ya wonder, doesn’t it?
I thought of that when I opened my email and found a note from a couple in a city I’d just visited: “We have sold our condo here in Kelowna, and are looking for a house and we are open to moving out of this city, but are not too crazy about living in snow country, we are looking for some insight into what and where is the best place to invest in real estate. We are 71 and 66 years old, so don’t want to move to an area that is really isolated. We have a RRIF as well as our government pensions, but wish to protect what we have and spend it wisely.”
Of course in Kelowna, like in Oakville or Sherwood Park or Delta or Red Deer, it’s hard to find a decent SFH for less than $450,000 – which is a third higher than the national average. So why would a couple of seniors (who would never qualify for a mortgage) be considering slamming a big chunk of their retirement cash into a piece of real estate? Are they nuts?
In a word, yes, of course they are. Buying a home with irreplaceable retirement savings when you are 70 or so, at the top of the real estate cycle, is madness. It constitutes real and immediate risk, while it augments daily living costs. It’s also exemplifies one reason there’s such a premium to reside in Canada: We live in a puddle. A vacuum of information. A regional backwater of a country where so many people lay down their savings, unquestioningly.
Real estate costs what it costs because of supply and demand. When demand rises, so do prices. There is every reason to believe Canadian house values are wildly inflated, and by almost any measure. Our market was beginning a worthy correction in late 2008 – sales and prices started to collapse as it became apparent to people houses had passed the ability of average families to afford them.
This correction was halted in its tracks by the actions of the Bank of Canada, acting in concert with the federal government. By dropping the central bank rate to just 0.25%, for the first time in history, the feds engineered emergency mortgages in the 2-3% range, while Ottawa offered insurance for anyone leveraging 95% of a house purchase.
The result was predictable – an explosion in demand. As a result, the average house price in Canada rose last year by 19%, or twenty times the rate of inflation and average wage gains.
This will not last. It cannot last.
Real estate at these levels is enveloping the Canadian middle class in debt. As interest rates begin their inexorable rise in a few months, all of this debt will eventually become far more costly, more difficult to pay and a greater burden on family incomes, which are unlikely to keep pace. It’s almost as if the federal government, desperate to create inflation by any means possible, staving off deflation and political disaster, engineered a real estate bubble.
Could it and the Bank of Canada have known what 2% mortgages would do?
Could they have surmised the creation of a housing mania?
Did they care the impact would be unaffordable shelter for most families? Ballooning household debt levels? Luring young buyers without savings into a financing trap? Convincing 70-somethings real estate is now riskless?
There’s no reason a home in Canada should cost almost twice what it does to the south, in equal neithbourhoods, in a similar society, among families making the same money and with comparable budgets.
How long this can endure is now the question.
143 comments ↓
Hey, Garth, this is the best post comparing the housing market in Canada and the US. I totally agree with you! It’ll be interesting to see what happens this year.
71 and 66? Sell the condo, pocket the few hundred grand and rent a nice place close to all of the necessities of senior life and have enough dough in the bank from the sold condo to be able to afford rent for the rest of your lives. And you’ll never have to touch your other savings… or worry about what to do when your new home is worth half what you bought it for.
This is my first time writing. I just wanted to thank you for your blog and your insight.
My wife and I have been renting since we got married 7 year ago. About 3 years ago we came close to buying a condo but decided to wait till we were on more secure footing as we still had some debts to finish off. It took a year to finish that off, once done we looked at the same condos. In that space of one year, the prices had risen about 20%. As I write this, that same condo we could have bought, is 45% higher then when we first saw it. Way beyond our price range. Naturally, their condo fees and taxes have gone much higher as well. I’m not sure what to think. I’m now starting to regret my cautious nature. The thing is, I cannot afford to buy in Toronto anymore – nor any of its suburbs. I have an above average income, no debts, and a good credit rating. I can get a mortgage anytime I want. But I know I cannot afford it in the long term. So now I save for a downpayment and hope that one day, the government can help me out by popping this insane bubble they allowed. I’m not sure I understand how people can afford to live in this city anymore. Anyway, it’s good to hear from everyone out there… and thanks again Garth.
Wow – who knew people would move *out* of condos and *into* single-family homes after retiring! I guess it really is different in B.C.
I’d like to highlight the post #123 from DrC on yesterday’s “Weird” entry…
http://www.dailytelegraph.com.au/news/sunday-telegraph/tighter-credit-rules-to-halve-home-loans/story-e6frewt0-1225822838856
Australia, with probably the biggest real estate bubble of them all (and one of the only places besides Canada that RE hasn’t crashed yet), now has a major lender that increased its own lending standards to require a minimum of 13% down — up from 0% just over a year ago.
I guess that Australia doesn’t have a CMHC-equivalent backing all of these mortgages? (or else why would a bank suddenly start caring about risk?)
Cool Dynamic Charts: BOC Prime Business and Average Residential Mortgage Lending 5 Year Rate History
http://canadabubble.com/charts/bank-of-canada-interest-rate-history.html
Get active, get involved. It is time we stood up to protest against this elitist event which has largely benefited real estate developers at the expense of average working class people
http://no2010.com/
Wrong blog, dude. — Garth
Garth, it might be just a false start, but looks like we are finally in the big “C” wave of correction. Off we go, poehali. Another reason is this: in my previous post I mentioned three families that had bought houses in mid-late 2009. The trend was obvious: less income – more mortgage. Now I’ve heard that family number four, with annual income of just about 35K gross, are looking for the house and (who’d believe that just a couple of years ago) got approved for the mortgage of 250K! That’s your omen.
I’ve been arguing that Blarney and Flatulence knew they were creating a housing bubble and doing so intentionally for some time. That’s how they staved off a financial crisis in Canada.
Oh sure, a bunch of people on the margin are going to loose everything they have in bankruptcy court at some point, but they didn’t have much to begin with. Small price to pay to not “go Iceland”, in their minds.
The hope is to process the bankruptcies in better times, when the banks can afford the write-offs.
For most people all that changes is your city appraisal, wildly up for a few years, and then wildly down for a few, but finishing about where it started adjusting for inflation.
Canadian and American culture are similar, but not quite the same.
We have democratic socialism. (A socialist tyranny, lead by the majority of voters).
They have fascist socialism. (A socialist tyranny lead by the merger of government with corporate interests and financing.) No, it’s not Nazi fascism, not even close. But if you look up the definition of fascism, it is a political system merging government and corporate interests. People associate fascism with Nazi Germany, and one can understand why, but Germany was but one example of the application of the term.
The wiki for fascism doesn’t even mention Germany:
http://en.wiktionary.org/wiki/fascism
Let’s break the definition down:
A political regime, having totalitarian aspirations,
[is there anything they do not attempt to regulate?]
ideologically based on centralized government,
[the US Federal government increasingly dictates to the states policy by means of conditional funding]
government control of business,
[GM, Chrysler, the banks, Fannie, Freddie. FHA, AIG, FDIC closing all the little banks and auctioning them off, plus all the regulation. And don’t forget the defense industry.]
repression of criticism or opposition,
[Try and find an article in the MSM or on CNN about the insolvency of California, yet Greece, with an economy 1/5 the size and impact, is all over the papers]
a leader cult
[Obamamania]
and exalting the state and/or religion above individual rights.
[Homeland Security Act, warrantless wiretapping, Gitmo, Tazering everyone and their dog who gets close to a police officer, etc.]
Our government’s reckless policies may have staved off deflation in the short term, but it has set us up for an even bigger fall in the long term. My generation (early 30′s) is locked in to massive debt for 30+ years. As interest rates rise and they have more kids their disposable income will plummet. The younger generation (early 20′s) faces uneven employment prospects. No boom on the horizon. Money can’t get any cheaper. The baby boomers are delaying retirement and many of them are stuck.
Look for the return of the three generation household. It’s the solution to everyones’ problems. The grandparents get retirement covered and they get to see their grandchildren. The middle aged get cheap babysitting while both spouses work to pay off insane debts. The 20-somethings get cheaper rent and living expenses while they struggle with their careers.
Here’s an interesting take on Canada’s predicament from across the Pacific Pond…
http://news.xinhuanet.com/english/2009-12/28/content_12717797.htm
Oh man, I just finished watching that about a minute before I came here. Was still laughing. Of course were diffrent in BC…….. http://www.youtube.com/watch?v=5zey8567bcg
Garth!
In the good ole US of A, if it’s such a good deal to own real estate. Why all the foreclosures? I’ll tell you why, and I stand to be corrected. It’s cause 40% of the foreclosures are for medical reasons. When their medical insurance runs out than they resort to cashing in their 401′s than it’s money from family, friends or wherever. Lastly the house is sold to pay the med bills. When the assets are gone than the state picks up the tab.The baby boomer’s in the US are shaking in their booties and rightly so. They will have no more company subsidized insurance just when the body is starting to fall apart.
There’s also the high unemployment which is driving house foreclosures, but by far it’s the medical bills.
There’s a saying in US that you can only afford to get sick if your rich. We have a lot to be thankful for.
Consider the price of homes in North America in 2000 just as everyone got turned off equities and ran to the save haven of real estate.
$120K median home price in USA, 2000
$160K median home price in Canada, 2000
Canadian dollar was at $.65 USD in 2000 so it would have cost a Canadian almost $180K to buy that house in America. Or the inverse is it would have cost an American about $105K for a median priced Canadian home in 2000.
But what’s a very similar comparison breaks down entirely when it gets to real estate. The average US resale home costs $178,000. In Canada, the national average right now is $337,410, or in US dollars $300,294.
I think you can expect some rise in the value of the Canadian home in compared to USA because of the success of Canada’s finances over the decade, however, double is a little excessive considering the similarities in income and savings.
Just so nobody has a shit fit, I realize Garth used average prices versus myself using median prices but it should help state the obvious point.
Another great post Garth.
- Off Topic –
I’m on page 165 of “The Money Road”, nice juicy section full of goodies.
Just want to thank you for an awesome book and sharing your great wisdom/ knowledge.
Cheers
Mike
Fast forward 3-6 months, “Garth, our house has just been listed as we are concerned about the decline forming in RE right now and we are boomers with little retirement savings!”
Fast forward 6-12 months, “Garth, the VAN house we purchased in Nov 2009 for $900K in a bidding war is worrying us. We only have 5% equity in the home and a VRM. Homes now have asks below $800K, one sold recently for $749K. How long with the decline last and what will bank do if we want to lock into a 5 year fixed?”
Fast forward 12-18 months, “Garth, my TO property that we bought in February 2009 on the dip of around 10% at the time for $700K seems only to be worth$550K, we put down 10% originally and took out a LOC to finance some remodelling for about half the downpayment. Our renewel will be in 2014 and we have two good jobs but worried the house value will continue to decline and interest rates have doubled since we locked in! What are our choices?
Garth, as today with all the ridiculous questions you receive, the future holds a whole lot more of them!
I mean without putting out an I TOLD YOU SO type book next, what could the book do to assist people post bubble who are WAY UNDER WATER?
is madness. It constitutes real and immediate risk
nothing more need be said
@ #3
The Australian government has its own Fannie Mae:
http://www.aofm.gov.au/content/notices/25_2009.asp
Also:
A government guarantee provided to the banks following the global financial crisis last year allows banks to access AAA credit ratings, extending their reach into the market.
Australia’s big banks have together this year raised A$115 billion ($104.1 billion) of bonds using the guarantee, according to Deutsche Bank, and owe A$634 billion to foreign lenders.
Using Canadian averages Real Estate Prices skews the reality for many home owners who are not feeling the wealth affect . When Van and T.O. are removed from the averages there is not much of a bubble. For example in Barrie Ontario prices in 2009 are 1% up over 2008 with volume of sales for both well below 2007 sales results. No doubt this is similar in many communities across Canada. I don’t argue there is not a problem, However depending on where you live will dictate how you are affected. It would be more accurate to report by region instead of averages as most home owners need encouragement instead of the daily dose of fear they get here on a daily bases. It would be easy to show that contrary to the Canadian average prices most home owners values have not changed much in the past 24 months. The market in larger centres may see an adjustment but not to the extent predicted here. Everyone else will experience a stalled market as a result of drop off in speculation. How else do you explain a simultaneous fall in sales volume and inventory volume in many Cities and Towns across Canada.
It`s sinking in.
When housing prices start to correct this fall there will be a lot of uh ohs, and oh craps to be heard – even for folks with mortgage renewals 2 – 3 years in the future.
They will be scared and start to spend less. Less consumer spending, less hiring, maybe some layoffs. This will further negatively affect housing demand.
This could be ugly.
Garth — a quick question for you straight from page 145 of “Money Road” (I’m about 200 pages into it since Friday):
Even before noticing your note on a Bear Bond Fund, I was researching a few of them (such as HTD in Canada, and TBT in the US).
Any comments on the risk of these, given that there still could be another rush into long bonds as Government stimulus wears off and the economy sputters?
Also, Americans pay less tax than we do. I believe our tax of 50% kicks in at $80,000 and in the US it was something like $300,000. These figures may be very out-of-date. Does anyone know?
Also if you are self-employed in the U.S. I wonder what health care premiums are compared to our health care premiums (dental, drugs etc. etc).
Anyone?
I have been following this blog for the past 3 months and this post is an excellent comparison between the U.S. and Canada.
Just moved back to Toronto in the past month after having lived in Raleigh, NC for past 11 years and I cannot, for the life of me, believe what is happening here in Real Estate. I think that most people believe that if RE was going to plummet that it should have happened by now, so it probably never will.
I had dinner this past weekend with friends and was explaining a lot of what was in this post to them. They actually had no idea how similar the two countries were in terms of RE. One friend made a point of mentioning that she was now going keep an eye on what was happening.
I experienced the RE crisis first-hand in the U.S. and cannot see the Canadian experience ending well. It defies all common sense.
Please define ‘disposable income’. Is this income after taxes? Or after mortgage payments, rent etc.
Also please define ‘household debt’. Does this include mortgages or just consumer debt and credit cards?
Thanks,
Harold
why is real estate higher priced in canada than in america ?
because of the greed of the canadian real estate industry and the picture they paint of real estate as the non-stop ever rising investment.
lets not forget about our government and our banks as well; if they had given a damn about any of us, they would not have led the 0-40 and 5-35′ers down the inevitable path of being mortgage slaves.
Garth
Okay, keep the tie, it makes you look “professional”, apparently
Myself, I would not buy ANYTHING from either a “suit”, or anyone with one of those fancy double-barrel surnames. e.g. Peter Rhodes-Houghton {barfing into Walmart plastiq bag}
Apologies to anyone here with a double-barrel surname, unless of course you did it to yourself!
Regards
Munch
Garth sed–
“It’s almost as if the federal government, desperate to create inflation by any means possible, staving off deflation and political disaster, engineered a real estate bubble.”
********************************************
Yeah–i would “almost” give them credit for doing so–but–
This was Carney’s plan–
The twins– PM& FM wouldn’t know how to engineer a bubble on their own–
They don’t even know what a bubble is–
US housing prices have been on the decline since 07–
This is why they are priced so much less–
This is where we’ll go as well–
The market–sez so–
Carney–Harper and Fahlerity are delusional to think they can keep this thing floating–
Let the market work–
It’s a very efficient at real price discovery–
It’s never wrong–
http://4.bp.blogspot.com/_pMscxxELHEg/Swvyh1DDjzI/AAAAAAAAG3c/elL6wi5VwpI/s1600/CSSeptCities.jpg
“. . . if the federal government, desperate to create inflation by any means possible, staving off deflation and political disaster, engineered a real estate bubble. This will not last. It cannot last. How long this can endure is now the question.”
If this cannot last (and it won’t), then why were all these prime examples of stupidity, done at the highest level, put into action in the first place?
A poster mentioned in a prior column that Carney is a GS man, plain and simple and whatever GS wants or says, the whipping boys are there to handle the flak.
The cycle is happening and changing quicker than expected.
——
#2 Lance on 01.24.10 at 10:28 pm — Bang on. The older one is and the less ‘stuff’ owned, the better off one is. No property taxes, exterior maintenance, etc.
——
Black holes are like being in a vacuum cleaner. Once in, there is no way out.
34 sec. clip of a brand-new credit card (none of the others work anymore), known as MasterLard.
The Miniature Earth, with 50 women and 50 men. Following are figures as to who gets what. Remember, we are not the elite. A few mins. long.
The first sentence of this won’t be great reading for US banks. This may have something to do with it.
The reason why analog TV is being switched to digital.” It sure wasn’t done to improve TV reception, because over-the-air TV sucks since the changeover.” (wrh.com).
For those who believe the world will end in 2012, think again.
IFSA I just saw an ad on t.v. for rbc the premise is two bucks a day .. to get 50k if you work the numbers out with out interest (and we all know banksters don’t pay interest) is 730 per year x 68.49315 years to end up with 50k so you can ride away on your harley . RBC must know we are all retarded . I’ve seen the ad before but didn’t think about it as I don’t pay close attention to the ads . But what a bullcrap ad . Do they not know that we can add . I’m so disgusted with banks and the people that work in them that I want to puke when I see one . Hanging is too good for them.
Garth you should fire a warning shot across the bow of the banks . They need it bad.
It’s interesting to hear the general public has accepted to pay double the price of a house, when we compare the prices 5 years ago, here in Calgary. It’s totally nuts! Totally insane! Who has that kind of money? My salary has not doubled during this time.
It’s also interesting that they LOVE the fact that they had 40 years, and now 35 years, to pay off a house, instead of the 25 years! Missing the point that that means we pay more on interest and allowed the prices to sky-rocket!
Interesting to hear them say, “You’ll miss the boat” right before the amortization years shortened. Now, they are saying, “You’ll miss the boat” right before the interest rates rise.
Oh, brother. People are so gullible and so brainwashed.
And now, the papers are full of “No housing bubble yet” articles since December. A sign that they are still in denial.
It doesn’t take a genius to see we need a huge correction! The prices have spiked up so high in such short time, it is beyond anything we’ve seen in Calgary.
All this during a recession! This does not make sense at all! People have gone nuts in this country!
How long can it endure? What is the upper limit?
Why doesn’t the govt take some of its Crown land and throw up tons of new houses as a stimulus plan? They would create a bunch of jobs, create affordable housing and the extra supply would make resale prices come down. At least this way, when people want to know what we got with the huge deficit, they would have something to point at. Heck, if they only marketed these houses to the boneheads who bid over asking and jump into bidding wars, they might even be able to make some money on them and reduce the deficit.
could it be that all the mortgages assess at today’s prices are on the banks balance sheets ? keeping home prices high makes the banks appear more profitable.
Definition of retired, Doing what you want when you want. I sold out of Kelowna in late 07 and moved to Ontario. Sold our house for $750,000, bought one for $160,000. Also bought several rental properties. I only need to make 1/3 of what I used to. We never looked back. I am retired, and I’m only 40 years old. The bubble worked great for me
It’s also exemplifies one reason there’s such a premium to reside in Canada: We live in a puddle. A vacuum of information.
You hit the nail on the head. I’m continually amazed by the lack of data and analysis on the Canadian markets that aren’t released by highly biased sources. We really are kept in the dark and fed lots of ****.
It’s out of our hands now. If this is the start of the next leg down in the USA and China pops we’re along for the ride. Our bit players are out of their league.
During a trip over to Halifax yesterday I noticed something I have not seem in years, One Month’s Free rent on a upscale unit across from the Halifax Commons. Of course there must be more around town if they had to do it. Sign of times who knows? but I do not Real Estate is not great spring will tell of course and only those who have been waiting will know if these are homes that were taken off the market late last fall. The do that ya know. Good luck with our senior friends, I would think rental is better option for a host of reasons we Seniors just to not care to talk about. Advice is cheap but making a move now when you have options is far better than when forced to.
If the situation hasn’t somewhat improved (i.e., LOWER house prices and HIGHER interest rates) by the time we’re ready to buy (with 100% cash) in about a year and a half, I will be RENTING.
I’m TIRED of competing with rich uncles with buckets of free money…
The real state of the economy can only be seen from a global perspective(USA).
http://theautomaticearth.blogspot.com/
2010 will be a most memorable year for many.
Garth – One thing you didn’t mention but we all know is true: Americans can buy a lot more for their $ than we do, for that 67K they make you’d need at least 80K in Canada to buy the same stuff.
Makes that difference in house price even more scary.
This country is going nuts over real estate. There are examples everywhere, here’s one: In my area they are building large senior residences for a fast aging population where through ads they encourage seniors to buy expensive condos with the money they got selling their houses. The argument being as usual that owning is better than renting, the value will appreciate, etc… I mean can you think of a worse financial move than paying cash for an asset at the top of a market cycle and whose price has been driven up by a mountain of debt?
#27 – I have seen those ads too. I got out the spreadsheet and did some math with interest rates. Mine are assuming better than GIC rates. I think the ad goes to show you that you need to save more than $2 / day
5% = 30 years
6% = 27 years
7% = 25 years
8% = 24 years
9% = 22 years
I see the “Rich Dad Poor Dad” tour is coming to Toronto area in early February. Although the author isn’t coming, his marketing people will come and tell me how to make a nice living off of real estate investments.
Hello Garth.
If real estate prices are based on supply and demand then the solutions to the problem are obvious.
1. Cut off demand by stopping immigration and refugees. Open the door to emigration.
2. Radically slash all government spending and subsidies.
3. Ban combining incomes for buying real estate.
4. Increase the minimum down payment to 25% and a fixed rate of interest for 25 years with no renewals every 5 years.
5. Ban foreign ownership of Canadian real estate.
If all that doesn’t work then ban mortgages and ban realtors . Property sells for a 100% unborrowed cash down payment.
If all that doesn’t bring Canadians to their senses then we need a 100,000 years of ice age to wipe the slate clean.
Steven
AUDIT THE C.H.M.C
Great post Garth! I couldn’t agree with you more…
Here is an article in today’s Globe and Mail concerning the housing bubble that offloading bank mortgages to the CHMC has created.
Link:
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/vox/bankers-get-the-bonus-and-government-takes-the-risk/article1442688/
- Bankers get the bonus, and government takes the risk -
Canada Housing Trust is financed by the issuance of bonds (which are sold by, among others, Canadian banks in return for a nice fee). And it is an insatiable beast. It has no trouble raising money because the government guarantees the return and that return is higher than comparable Canadian bonds.
It’s a no-brainer for banks that want to originate (i.e. sell) mortgages but not keep them on the balance sheet. To return to our example bank above, over the past three years it has done a brisk business in real-estate lending: Its “managed” mortgage portfolio has grown 15 per cent. But on an increasing number of these loans, the bank is merely the collection agent, having unloaded many of those mortgages to another party and the risk to the government. The amount of mortgages the bank has kept has dropped by 6 per cent.
Of course, banks earn fees for servicing the mortgages they sell, collecting the money and remitting it to the ultimate owners. At the current pace, CMHC’s in-force guarantees and insurance will get to a trillion in fairly short order. This is a boon for banks and their shareholders.
And as the government becomes more and more active in the mortgage market, you have to wonder whether it’s contributing to a housing bubble. Even some bank economists warn of over-inflated prices. That’s what easy money does. Real-estate prices have held up well thanks to government intervention, which I guarantee was in part prompted by the advice of banks.
I also guarantee that if housing prices tumble and defaults rise, taxpayers will suffer, but those bonuses won’t be paid back.
#30 West Coast,
How long will it endure? No one knows. However it cannot be years because other economic factors will take over and begin the lowering process.
I think the most important point Garth makes is the impact of the government intervention in 2008. Left to market forces prices would have continued to go down in 2008. How far down we will never know – 1%? 5%? 20%. We just don’t know.
However we should reasonably be able to surmise that “all other things being equal” the artificial gains of the past 2 years will eventually be erased when market conditions eventually return to the sector. That should mean at drop on a National level of at least 10% and as much as 30% in the heated areas such as Vancouver, Calgary and Toronto. Remember, this is just the correction necessary to bring is back to the true market values. For example, if interest rates went to a traditional number in the 6-8% range this would cause an immediate correction of at least 10% – and probably more.
The more difficult calculation takes place when you try and factor in other factors – both for and against a continued rise in prices. On the positive side, you have continued immigration and migration to many of the key urban centres which will stimulate positive demand.
On the negative side, you have an erosian of affordability that is immediately caused by the current economic slump which is turning out to be much worse than a garden variety recessions, rising costs for energy and other staple goods, flat wages and eventually rising interest rates. Furthermore the long term demographics suggest the baby boomers retirement will mean and increase of supply as they sell off and an overall slowing down of the economy as they move out of being productive and add more costs to the medicare system.
Simply put, it is hard to see how prices can remain at current levels for long. Furthermore when they fall it may take many years for them to return to the high whenever that is between last December and the beginning of the fall.
Hmmm…. 71 and 66. No snow country, no isolation, retired…. Let me think…. What about Homestead, Florida? 40min south of downtown Miami, 10km from the ocean. Nice gated community. 1420sq feet, 3 bedroom, 2 washroom, garage. For $57,000. Sounds ridiculous? Yes it does! Vice president of local Home Owners Association said I overpaid big time, in summer he paid only $37,000….
I believe that one of the fundamental differences between RE Bears and Bulls relates to their view on the current economic state. Most Bulls I know believe that the recession is over the economy is “gradually returing to normal”. Most Bears believe somewhere between “it is much worse than the mainstream media reports” and “it will take years to fully recover” to “it will get worse before it gets better.”
Here is a Bear like analysis:
http://www.ezega.com/News/NewsDetails.aspx?Page=heads&NewsID=1983&source=patrick.net
As a 25 year old with a finance major trying to invest my savings wisely, I don’t think any “asset” is fairly valued right now. From equities to RE, all prices have been inflated thanks to cheap borrowing and a false sense of stability from the media and our government.
As much as I want to have my own home, I think renting will be the way to go for the next 2-4 years. RE in Canada has no where to go but down.
Why the us markets are rallying
http://watch.bnn.ca/trading-day/january-2010/trading-day-january-8-2010#clip253604
#34 People the world over are morons because they take what their leaders say at face value. If one takes the cynical (and realistic view imho) objective and truly studies the situation from a both global and local perspective then I would have to say that Garth’s views are relatively mild.
That the USA is heading down, is a no brainer in my estimation…..hyperinflation nation poster child……and China…China is a basket case……you will see massive civil unrest in china very shortly (or not; as the media will be clamped down on hard to prevent reporting).
The Baltic dry index would have been down to near zero (tongue in cheek a little) if it were not for Chinas purchases of iron ore last year. Well the demand for steel worldwide is set to take a plunge as the credit markets reseizure with the realization that nobodies debt is getting repaid anytime soon.
For little ole “pie in the sky” Canadians…as our housing market catches up with reality mid to late next year…..and we suddenly realize that our vaunted export economy is in fact nonexistent and the illusion of real estate is shown for what it is we start entering the abyss of stage 2 civilization collapse (commercial meltdown) as the Americans enter stage 3 (political collapse)….we will have the dubious distinction to being one of the few nations to escape stage one (financial failure) but only because we are so linked economically to the americans that we were subsidized in our fairytale economy by their demonic one.
None the less, we will enter the abyss that the world is well into now, without fail.
For those who say “the world is not ending” I say…very true, the planet is still here and will be for essentially forever as much as that matters….but for humans and in particular, human civilization….the jig is now up….
Peaking (and now declining) oil supplies has ensured that our “world” (as defined by standard of living, outlook/expectation of life and livelihood/lifespan etc) is OVER now. Only those that have the courage to really look into the looking glass will have a chance (not a gaurantee….that is thinking from the past) of success.
We are entering a world that could only be analogous to perhaps the Regions of western europe just after the fall of roman rule……we are entering the dark ages of modern times. As the political system of the USA and other western nations begins to come apart at the seams under the effects of currency devaluations and subsequent social breakdown we in Canada will bear witness and ultimately experience something that is unprecedented in the modern western world.
Stage 4 societal collapse (rule of law and order finished). This is a stage that Both Argentina and Russia as well as Weimar Germany largely escaped because there was still a greater economic sphere around them to help correct the situation over time.
That is now evaporating as the oil subsidy was worldwide and is over.
Collapse is now inevitable as we are a highly complex and physically leveraged society, living on the last cheaply available rays of fossil sunlight. That legacy has been squandered by the post WWII generation and now the economic/ecological piper will be paid.
Stability in these situations is only achieved by a collapse to a much simpler society whose demands are much less energetically expensive……..thus the dark ages cometh.
Hows that for a spiel first thing in the am…..I need coffee
#33 Steve
Where do you buy a house for $160K? In Ontario in 2007?Close to GTA?
On the US vs. Canada debate, another aspect that is missing: size of the middle class.
It has been well-documented that US wealth is skewed at both ends of the spectrum: far more uber-rich, and far more in the lower class.
So, one of the reasons that RE is higher: there are more middle-class people (i.e. more families that earn close to the average income) in Canada… so, you’ve got more people that actually qualify to buy homes.
That being said: just because we have more people with incomes that qualify for home ownership, that doesn’t change the other stats such as down payment % (LTV ratios), and price-to-income ratios.
ruraldude,
You are paying for your health services with higher taxes my friend. In US if you buy decent helath insurance it will probably cost you less then the excess of taxes you are paying here.
Do you know how many ontarians don’t have familty doctor?
Do you know my friend how many times I have been to US to see a specialist (yes paying for that in addition to the taxes I am paying in Canada) as of the waiting times in Canada?
Do you know how many of my friends became doctors in US as they could not start here (no hospital will accept them after their graduation)?
Enough with this socialism and mafia, i am sick of it.
For those Calgarians on here, i think a drive up stoney trail nw sums it all up for RE in this city. Wide open road, fields as far as the eye can see and oh yeah domino stacked houses with 1m between them and no trees to the left and right all starting from 320K.
My wife and I have always been interested in moving to the US. We’re both educated professionals in Canada. What’s held us back is all the red-tape in order to get a green card to live and work in the US, without the hassles of renewing a temporary visa.
Nicer and cleaner climates, better salaries, less taxes, better school systems, tax-deductible mortgage, cheaper vehicles, nicer homes for 1/2 the price in Canada, better and cheaper flight connections, cheaper utilities (phone, internet, DishNet).
We are willing to pay medical premiums. The US health care system is not that bad, as long as you have insurance. I had read somewhere that health care costs average of $5,500/yr/Canadian.
If a day came where it was easy to become a US citizen, we would leave.
Yes, I can tell you why the prices (all of them) are way higher here than south….
It is because the Canadians don’t do many things with their money/credit/debt. The life here is very “slow”; people don’t fully enjoy the life. All is saved for the retirement. “….today I have to work a lot, 25 hours a day. Some day, when I am 85 (???) years old I will enjoy the retirement…”
That day, Canadians don’t realize, there will not be good health to dance, to party, to do many thing that makes what is called “quality of life”
“Brainwash” is something so powerful, that many don’t fully understand.
You have extensively spoken of BoC and Government of Canada come up with emergency interest rates and other measures that kept this bubble still going on.This Im sure will still go on for another summer.
Could you, in one of your future comments post something what they could (BoC and GoC) do in July 2010 to keep this bubble going on.
Im sure as politicians they could do a lot of things to avoid the hangover of this bacchanalian high of cheap credit and unrealistic high real estate prices.
Denial..denial..and denial.
Calgary average price this month is around 431,000 compare last month 451,000. Unit sales around 550-600 compare 799 last month..
Let see what CREB would say about this….denial again.
Here is a really dark one on the economic future. Whether you buy into all the arguments and the extremities it is hard to argue with the fact that that the fundamentals are pretty bad in the U.S. economy and it will take a long time to recover. It is arguable that Canada is in a better postion (see #11) but we still cannot be immune from the impact this recession will have on our largest trading partner.
Coming soon to an economy near you.
http://theeconomiccollapseblog.com/archives/economic-black-hole-20-reasons-why-the-u-s-economy-is-dying-and-is-simply-not-going-to-recover?source=patrick.net
To answer Garth’s first question… are Canadians rubes?
Answer… well mostly yes!!! We have a ton of debt…little savings…live hand to mouth.. and Canada has this false sense of security that we do trade with the biggest nation on earth.. So we go one leisurely as if there is no tomorrow just today… sadly there is some truth to enjoying now but everything in moderation people….
Will T.O. house prices tank by 20%… so far I am not seeing that but it is entirely possible../.. alot can happen between now and then… alot worse stuff I am afraid… most people over 40 are not optimistic and most people under 40 are mega optimistic….
reality is that with the Can dollar so high our export and manufacturing are getting gutted and that may never come back.. How much service can we have in one country… Oh sure there’s oil/gas/resources but with a limited supply of people who can afford it. So pack up your old gold and send it by mail it to those hucksters on tv and get your 10 cents on the dollar.
Something has just got to give…
Unrelated topic…. what ever happened to Garth’s POS that he gutted and rebuilt??
Our one bedroom condo in Rio de Janeiro is worth 1/5 the cost of the Canadian national average. We are 4 blocks from the beach in Copacabana……it is +35 (or more) this time of year……and when we are there on holidays it costs us $1,000 USD per month for the two os us to live. As I look outside my window here in Calgary at the falling snow and -15 degrees I wonder who in their right mind would pay our cost of living, our RE prices, and,for the life of me, why ?
Tick, tock, tick, tock……..
#47…..good post BTW.
When we ask the listing agent if we can come back in the morning with our agent for another tour and to potentially put in an offer, he looks at us with amusement. “Sure. But the house will probably already be sold. Why isn’t your agent with you? Your agent should be with you.” The open house is a feeding frenzy. You can hardly navigate the rooms. A weird tension is in the air, people shooting covert glances at one another, as if to say: “Get out. This is my house.” We’re quickly getting the picture. ‘http://vreaa.wordpress.com/2010/01/21/the-froogle-scott-chronicles-mortgaging-our-souls-in-paradise-part-1-greed-and-luc
Prices appear to have lost more ground in the U.S. in December. The headline reads, “Housing Prices take largest drop in 40 years.” Remember, this is after the bubble burst in the U.S. in 2008. One interesting thing is that it appears the home owner tax credit has pretty much done all it can do on the stimulus side. This is pretty consistent with what is happening in Canada with the 5/35 mortgages combined with the low interest rates. Affordability is maxed out.
http://www.huffingtonpost.com/2010/01/25/december-home-sales-take-_n_435368.html
Bloomberg Business News, radio just now: “Vancouver is now the world’s most un-affordable city, Toronto 2nd!”
Did I just hear that right? LOL.
OK Vancouver bubble-pumpers, your challenge for today is to spin that factoid into being good news for Vancouver real estate prices. If you can. He he he.
Same challenge to Toronto bubble-heads! Do you really think the state of the local economy (hint – it sucks bad) supports present real estate values, or the ridiculous over-heated market?
Hint: bidding wars are not a sign of long-term market health, more like a reliable sign of a blow-off top, right before the collapse comes.
More like The Grim Reaper is coming for your real estate ‘value’.
Governments may choose to inflate the money supply and the debt along with it, rather than raise taxes, so as to not threaten their re-election.
I don’t get it. Low rates are bad for homebuyers? Puh-leeze.
We bought a house in May 2008. Variable rate, 40 year amm, 20% down.
We’ve been paying a fixed monthly payment set at 6.65%, but our VRM is Prime-0.6% (i.e., 1.65%). This means that Carney’s low rates have allowed us to pay negligible interest and pound the principle.
What, exactly, is wrong with this? Why is it always assumed that mortgage holders are idiots and that nobody is taking advantage of the low rates? Do you have any statistics demonstrating that current 30-40 year mortgage holders are actually over-leveraged instead of simply taking advantage of low rates to use the money elsewhere (investments with higher rates, pre-payments on mortgage, etc.)?
I’m, frankly, skeptical of all of the moaning about VRM, 40 year ams & low rates being bad things. The 40 year am allowed us to enter the market, and the VRM and low rates has allowed us to, essentially, turn that 40-year am into 20 (and dropping) within the first 2 years of payments (even assuming rates average ~5% for the rest of the mortgage).
Even if rates go up 500 basis points, our payments will not change, and in the meantime we are paying down principle faster.
Until I see some stats on how many 30-40 year ams actually take that long to pay off their mortgage, or default rates between 20, 30 & 40 year mortgages, I’m skeptical that they are all that different.
Vancouver is not the 4th least affordable city in the world. Fortunately it is different here.
http://www.financialpost.com/story.html?id=1226971
Knuclewalker…you are my favourite new poster.
I’ve been waiting for a return to normal since the high interest rates of the 80′s. Kind of like waiting for the Leafs to win another Cup.
What I’ve witnessed is an never ending spree of human creativity to avoid the truth. When the old rules don’t work any longer, presto chango, they’re gone.
As sentient beings, our biggest asset is our creativity, at the same time our biggest liability is our creativity. We don’t know when to stop creating stuff or drama.
Might I suggest a good vantage point above the high water mark to watch the party unfold, and to watch the dark side of creativity at work.
The entertainment is trying to predict what will be created next.
Garth!
In the good ole US of A, if it’s such a good deal to own real estate. Why all the foreclosures? I’ll tell you why, and I stand to be corrected. It’s cause 40% of the foreclosures are for medical reasons. When their medical insurance runs out than they resort to cashing in their 401’s than it’s money from family, friends or wherever. Lastly the house is sold to pay the med bills.
——————————————
is there some sort of massive outbreak in the U.S that has affected millions recently? What are you talking about and how could this dictate the housing market right now for them? 40% of the foreclosures because of medical reasons….wow
You clearly sound like someone who’s suffering some post-traumatic stress over medical expenses or experiences surrounding you.
Is the correlation between real estate and the stock market positive or negative? Thanks!
As a 25 year old with a finance major trying to invest my savings wisely, I don’t think any “asset” is fairly valued right now. From equities to RE, all prices have been inflated thanks to cheap borrowing and a false sense of stability from the media and our government.
As much as I want to have my own home, I think renting will be the way to go for the next 2-4 years. RE in Canada has no where to go but down.
——————————————
you’re right for the most part especially in regards to real estate and your time frame, although, gold stocks (not bullion) say hello when you say over valued
#27 deptfree
I assume the rbc commercial assumes at least a 5% rate of interest or roi compounded annually for 30 years. But like u said they don’t pay that kind of interest so it’s a bit pie in the sky.
I just about chocked watching HGTV and one of my favourite shows ‘Property Virgins’ this weekend. It’s about couples with little down payment who qualify for obscenely large mortgages and choose to bid for houses because they might be ‘priced out forever’. Normally, I don’t mind watching the carnage, but I actually had to change the channel when the hostess of the show told a couple who were wary of maxing out the mortgage available to them that ‘they were looking at the wrong number – it’s not the purchase price that matters, but the monthly payment’. Ugh, I don’t think I can watch the impending train wreck anymore…
The US hasn’t bought into the European model for structuring our cities. In Toronto, $500000 for a condo gets you a great view of the condo across the street. And hand in your car keys too. As an environmental criminal, you have no right to be driving when and where you choose. If someone truly wants to live like that, they can -in France! This is Canada, not France.
Suburbia rules in the US. Lots of new shopping, parks, restaurants, open areas and recreational facilities to support the family unit and you can enjoy it all because you are paying hundreds of dollars less each month to pay the mortgage. Kids actually have real backyards to play in with their playmates. Families get to bond with each other and those around them at backyard BBQ’s around the pool. As a Canadian, it all sounds so sinful and decadent and surely the government should pass a …….. (You know the rest of this story).
Cheaper housing means that Americans can work for lower wages than Canadians. Lots of US companies in Southern Ontario didn’t leave to go to India or China. They closed up shop and went back to the US or opened up new facilities there to keep competitive on the world stage. It costs less to operate there. Lots less. Helpful local and state governments too.
Our Politbureau media and government tell us that, as Canadians, we are some kind of superior race. Nothing wrong with feeling good about ourselves, but our standard of living continues to erode a little more each year. You can’t spread “feeling good” on a cracker. At the rate we are going, we can only expect to live as well as those in Mississippi or West Virginia.
Americans enjoy a roughly 15% greater standard of living than we do. Most Americans have health care and they don’t have to wait months to get it. Most Americans do not live in downtown Detroit or a crime infested shooting gallery in L.A.
High real estate prices hurt Canadians. Capital is being diverted away from consumption and, more importantly, new technologies to improve our competitive position in the new world economy. Our sense of well being brought on by recent RE gains is only an illusion as we will soon find out.
#62 Bob,
There is nothing inherently wrong with low mortgages. They are an important factor in affordability. The problem we are now facing is that the low interest rates also pushed up prices – which is understandable – if you can borrow more you can afford more. It is all relative.
The long term problem is that Canadian mortages are adjustable in 5 year increments. If the housing market drops or is flat between now and 2015 AND interest rates rise many people will have negative home equity. This is what happened in the U.S. where nearly 25% of homeowners are in negative equity.
The concern that many of us have it that these are goverment back loans which means if we default then the tax payer is on the hook for the debt. The CMHC is taken on a huge amount of risk over the past few years – particularly in the last six months. Many of believe that very few of the home-owners really understand the risks they face because of the culture of “forever real estate gains.”.
Our Senior couple with Money and no house and not liking snow should of course consider moving to the Southerm U.S.
Pick up a house on the cheap down there…
Since when is owning a home in Canada’s primo location a “Right”?
Currently, Canadians can purchase homes in windsor,,,where prices are as cheap as in the US.
…Does every person purchase a new car?…
Nostradamus jr.
#65 Dave
LOL
There was a massive outbreak, of stupidity and greed.
Thank jebus that we’re immune here in Canada from the two.
I am sickened by the state of affairs in this country. No one believes a correction is going to happen! I really hope it happens soon.
#64 well thank ya’ll…..sorry I have a hard time with the accent I picked up while working in the Florida panhandle.
I would basically be called a doomer by the mainstream….within the genre itself I am now in what is called the “fast crash camp”…that is the small group of thinkers worldwide (and yes there are some wingnuts) that believe that we are headed for the worst, worst of times and very quickly.
It is not complicated stuff, not at all.
The decisions that are made now, by people everywhere, will by and large, make their lives worse in the end. The paradigms of progress and “cyclical” economics are a siren song that will lead most into the abyss. Conventional thinking….that paper investments are an avenue of safety is a myth…..one that will get everyone under the age of 60 ….dead….yes I said dead…a lot earlier than they might otherwise have obtained.
It sounds so trite but it is not…Guns, Gold, Garden supplies….and people at your back……all the rest is going away.
RRSPs, stock options, GICs, ETFs, MFs …is all a farce if you are under 60.
Paper dollars and the faith in their worth are about to go away…..petrodollars and solar dollars are all that remains….and the petro ones will not be easy to come by.
We are about to discover writ large…that the world was not made us…….the dragons of energy collapse are crawling out onto the map of our oh so impressive civilization, and they have no respect for us.
62/Bob – It’s simple. You are the exception, not the rule. Most people can’t eyeball the tip on a restaurant bill, never mind try to juggle multi-hundred-thousand-dollar financing terms.
http://www.vancouversun.com/business/Vancouver+severely+unaffordable+study+shows/2482163/story.html
up to 60,000 alberta government jobs may go
http://albertabubbleblog.blogspot.com/2010/01/60000-alberta-jobs-may-go.html
500,000 Canadians to exhaust their E.I.
Oh boy..
#53 deepakrai – what may keep the bubble going are the chartered banks themselves. As my friendly mortgage lender replied when I posed the question as the what happens when the BOC increases the rates next summer. His reply was, we can simply go back to “prime minus”. It’s the same old story, when you have nothing to lose (CMHC insured), why not keep the bubble going. Same story with depositors. They don’t care what the banks do with the money they deposit, it’s insured. Take away the insurance and I guarantee things would change. The banks would want 25% down like they did in the past and then you would see housing prices come down so fast it would make your head spin. This is the whole problem, our government is causing the problem with their by being in the insurance business and all for political gain. They only see 4 years ahead at most. You can verify that Garth, right?
#70 RET
You get the BINGO ! for today.
“But according to a study released Monday, Canada’s 100 highest paid CEOs need not worry — they will have earned Canada’s average annual salary of $42,305 by just after lunch on Jan. 4.”
Canadian Centre for Policy Alternatives.
#63 junius on 01.25.10 at 12:23 pm Vancouver is not the 4th least affordable city in the world. Fortunately it is different here.
http://www.financialpost.com/story.html?id=1226971
=====================================
that link is a year old. here’s this year’s survey results:
http://www.demographia.com/dhi.pdf
With its median house price at 9.3 times the median household income, Vancouver takes home the crown and brings pride to all Canadians.
Darn, I can’t get over the political symbolism of that Monty Python picture –
It’s a smug PMSH embracing his adoring dumb-blonde electorate, with the Liberal Party serving as unengaged backdrop, in red to boot.
But seriously, Garth, Money Road arrived this morning. I am giving my daughter first crack at reading it because she has only started a business career, while I have my professional life and “investments” behind me. Much success to you too – well-deserved for your efforts for others.
I’m taking all my down payment money and betting it on Garth talking about the affordability index on the next post. Is there a leverage etf for that?
**”62/Bob – It’s simple. You are the exception, not the rule. Most people can’t eyeball the tip on a restaurant bill, never mind try to juggle multi-hundred-thousand-dollar financing terms.”**
But how do you know I am the exception? Again, I haven’t seen any solid statistics demonstrating this at all. I’m very willing to be convinced, but so far nothing has been offered to support the Doom & Gloom scenario.
In contrast:
It makes good sense to have higher GDS during periods of low interest rates — this isn’t necessarily a bad thing. Are there some over-leveraged people getting into the market? No doubt; but most media coverage implies (with no analysis whatsoever) that this is the norm. There is no evidence that it is the norm. In fact, the opposite seems to be true.
1) only 1/3 of mortgage activity is new mortgages — most are refinanced. This is good. It is people taking advantage of lower interest rates. And what are Canadians doing with that money?
2) 41% of refinance proceeds were used to pay down debt. 29% was used for home renovations. 15% was used for investing. This is good.
3) 40% of American home purchases were being made for investment purposes. In Canada: 5% This is good.
4)Canadian mortgage arrears are still just .40%. This is good.
Where is the data demonstrating that long mortgages and low rates are being used by fools with no money?
Great post Garth and when one considers how much cheaper the cost of living is in the US from groceries to most household needs etc,the comparisons are shocking.IMO corrections will be severe,long lasting and the destruction of many families. Hundreds of thousands of Canadians are suffering hardships right now but as individuals they are unnoticed unless they are members of a large group which is affected. I know several and i am sure most people do.
The Chinese Xinhua.net must be reading this blog – to whit:
Canada’s economic leaders are worried that low interest rates are luring consumers into amassing huge amounts of debt that they may not be able to pay back when interest rates rise from their historic low levels.
Canada’s central bank lending rate is 0.25 percent. Mortgage rates are about 4.5 percent, while five-year consumer loan rates for items such as automobiles are about 8 percent.
Recently, Canada’s Finance Minister Jim Flaherty and the governor of the country’s central bank, Mark Carney, have sent warning signals that the days of low-interest borrowing may soon end.
Their statements show that the Canadian government is afraid that Canadians will default on the loans that are used to buy homes. About 70 percent of Canadian families own their houses, and real estate makes up the bulk of the assets of typical Canadian families.
Besides, Canadians, especially those who have not saved for their retirement or do not have a workplace pension, see home ownership as a way of locking away money until their retirement, using the money from their house sales to top up their small government pensions.
Still, most Canadians must borrow the bulk of the money they use for home purchases. Most are content to assume this large debt if the cost of the monthly payments is comparable to rent charges, and if house prices continue to rise.
In the past decade, the government has allowed the term of mortgages to be extended from a maximum of 25 years to 35 years, and has permitted its home loan insurance agency, Canada Mortgage and Housing Corporation, to sell insurance on loans with a down payment of only a 5-percent.
The system has worked to stimulate house construction, but analysts worry that it has created a speculative bubble that may burst, allowing house prices to settle back to a level that will leave many families owing more than their homes are worth. If that happens, the national government, already running a massive annual deficit, would be stuck with the loans of Canadians who defaulted.
Last year, Canadian resale house prices rose by more than six times the rate of inflation. Interest rates have also been kept low to stimulate borrowing for capital investment.
However, the rates will probably have to rise if Canada’s national government, its provinces and cities hope to sell bonds in a market already flooded with U.S. government debt.
In an interview broadcast this week on the country’s largest private television network, Finance Minister Jim Flaherty warned Canadian families that the days of easy home ownership debt may becoming to an end.
Link: http://tinyurl.com/y9vkhp3
bob;
I would guess one statistic would be that Canadians are at a record debt level of around 145% of disposable income, the highest level ever recorded by Statistics Canada.
If house prices are climbing and sales are up, with the average Canadian carrying this kind of debt load, they are probably not putting 20% down on a $300k house.
Still, you’re right. There aren’t any #’s specifically on what you are asking for , but you have to read between the lines. If what I’m saying is true, then even guys such as yourself who are doing the right thing may be dragged down by the masses who think they are doing the right thing.
Taking advantage of low rates if you have the means is a smart thing, provided you didn’t overpay in an overheated market.
Why is the Swiss government through the courts blocking the required tax information? I thought the point of the G20 and the offshore tax havens etc were to share the information once requested.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a6cvtZ3o6Lco&pos=15
http://www.financialpost.com/news-sectors/story.html?id=2482163
Its now official Vancouver most unafordable…
http://www.financialpost.com/news-sectors/story.html?id=2482163
#29 Calgary Boy.
Saw your posting, aside from most of the boring comments on here, I had to reply.
You are correct in your assessment of disagreement for wages vs. housing costs in Calgary. Ive been here just 3 years and have thought it crazy the whole time. I moved here because there was no work on Vancouver Island in my field.
Ive learned ways to deal with the crazyness of Calgary regarding finances by disconnecting, I imagine similar to what people do mentally in Europe. Focus on other things, you cannot control finances other than your own personal choices. Here I am in Calgary making $100K a year and its increasing and Im struggling to amass a down payment on a house here cause my rent is expensive.
The really nasty things is that there are so many people who believe their houses are worth more and havent done any upgrade work. The only reason houses are worth more is because of easy lending practices, low interest and people moving here cause of jobs. None other. The houses here are actually less special than many other places.
Look at the drywall, the framing, the energy codes, the materials and you’ll see that while the housing looks good its certainly not priced appropriately. A good house in Calgary that is 1500 square feet should be $180K tops.
That isnt likely to happen, so focus on other things, otherwise you’ll just end up with high blood pressure.
#86 bob
“Where is the data demonstrating that long mortgages and low rates are being used by fools with no money?”
Bob, only one point to make – common sense; that is the only “data” you need to have.
If your common sense thinks that bucking long term historical trends is the way of the future, that home prices will go up forever, mortgage rates will never rise, salaries keeping pace with rising home prices, increasing gov’t deficits are good, unfunded pension plans will get corrected somehow, the economy keeps getting stronger, that if 3/35 is not so bad then 0/50 would be even better then I guess you would be your right.
#87.
Do you really think that all what is going on is to help you to pay less and make it easier for you to get out of debt?
BRIC is financing their way up. Like this: they “send” money to our gov to be lent to us, for us to buy the stuff made by them (when you buy a house you’ll fill it with chinese craps). They buy our bonds (send money to our gov)
Wait….. I see. I see you read newspapers and, top of that, you beleive them.
No wonder!
#51 Bill.
I am a dual citizen, born in the U.S. You are ignorant of the reality of living in the USA. Consider yourself lucky that the INS is a slow organization. I wouldnt even want to vacation there, its one giant paranoid police state. Im glad I married a Canadian. Best move I ever made.
You can go live in the USA, you are entitled to it and enjoy learning a whole new culture depending on which region you end up in. Its not nice there.
#80 – squidly77:
The coming wave of people whose EI is running out was pretty disturbing to me, too. There’s a similar wave in the US and more than half the states have completely run out of unemployment insurance funds.
The Canadian story mentioned that there weren’t any jobs waiting for those without funds, either.
(Off on a tangent, why did they change the name from UI to EI? Who needs insurance in case they might become employed?)
Was the real estate bubble engineered by the Harper government? Nothing would surprise me with these guys. Those “Canada’s Action Plan” ads are starting to get really stale, and they are no more true now than when they were first launched. They use the real estate numbers as a leading indicator of economic recovery and hope to get re-elected on them.
Definitely torch and pitchfork time for the government on semi-permanent vacation.
Dogs! This just in…Hot off the press!
House prices in U.S plunge for the month of December 17%! after $8000 tax credit is extended to April.
NO ONE is in any rush to enter the house market there, unless Government assistance is about to come to a end, ie, “TAX CREDIT”.
People in Canada are buying…only due to…yes, you guessed it “Goverment Assistance” without that little help, no one see’s value in paying hords of money for a house.
You know what? Americans are people with behavior exactly like Canadians except they are now behaving like we will AFTER being kicked in the ass!3
See link-
http://money.ca.msn.com/investing/news/business-news/article.aspx?cp-documentid=23324654
See link
The reason we don’t see this US vs Canada dichotomy is because of our Canadian style “chip on shoulder” chauvanism. We blame the Americans for a supposed moral failing (not repaying debt) for their low prices rather than investigate our rip off pricing in Canada. Not just housing but everything here seems 15-35% more expensive than it should be compared to our peers in the world.
My 74-year old father recently bought a new home near Kelowna. He still have a home in Prince Rupert he’s trying to sell, and another mobile home on a lot near Vernon (trying to sell that as well). And can’t forget the 35′ motorhome in the driveway, all for two individuals. Afraid to ask him what percentage this all is of his net worth…
#87 Bob,
Where do you get your statistics from may I ask?
#65 Dave: Garth!
In the good ole US of A, if it’s such a good deal to own real estate. Why all the foreclosures? I’ll tell you why, and I stand to be corrected. It’s cause 40% of the foreclosures are for medical reasons. When their medical insurance runs out than they resort to cashing in their 401’s than it’s money from family, friends or wherever. Lastly the house is sold to pay the med bills.
——————————————
is there some sort of massive outbreak in the U.S that has affected millions recently? What are you talking about and how could this dictate the housing market right now for them? 40% of the foreclosures because of medical reasons….wow
You clearly sound like someone who’s suffering some post-traumatic stress over medical expenses or experiences surrounding you.
***
It’s been well-documented that US health insurance companies have been increasingly denying claims to people who have been diligently paying their premiums for years and thought they would be covered if they became ill. No massive outbreak, just ordinary illnesses that people seem to get in the western world – cancer, heart disease, etc.
A serious illness can cost many tens or hundreds of thousands of dollars and more, depending on the treatment and how much hospitalization/drugs are required. When that claim gets rejected (often time it’s claimed it was a “pre-existing condition” or “experimental treatment” which is not covered), those people are on the hook to pay those costs to the hospital, doctors, etc. It has led to the bankruptcy of many Americans who played by the rules and thought they were covered.
Garth can you give me a rough idea of when the real estate market will come to it’s senses? My fiancee and I have been renting for almost 2 years now and the only thing we’ve seen are prices becoming increasingly out of reach for us.
Although I understand that mortgage rates are governed by bond rates, VRMs are still moving with what Carney does and everything points to Carney keeping rates low for at least another year!
Mortgage rates will be “low, well into the usually strong spring home-selling season”. – Sal Guatieri, BMO economist
“The BOC will lift its target lending rate 2% by 2011″ – Derek Holt, Scotia Capital economist
“On average, the first rate hike following a recession takes place one quarter before the output gap closes… If this strategy is replicated this time around…then the very earliest the bank will move is the second quarter of 2011.” – economist David Rosenberg
“If the bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.” – David Wolf, BOC advisor
- Forever renting
One thing you left out; it’s more fun to live in Canada
from yattermatters.com
What to Make of It
Understanding this change in all things Detached Kitsilano, might best be explained as night terrors. Taking many forms, one might be VISA® bills arriving with the totals for the holiday spending spree. That all expense paid trip to Hawaii has a different tone when it’s your expense – oh happy day! Then again, another could be that the market could be melting as fast as the Olympic snow on Cypress Mountain.
Either way, it’s too early to suggest that real estate market drama is unfolding in Kitsilano. Fortunately, we will soon have the games afoot to help us forget thoughts of such woes. Who knows – by the time the games end, it’s entirely possible that we’ll discover that B.C. really is supernatural and with any luck, boarding competitors will find gold amongst the rocks of Cypress Mountain and begin a land rush unseen before.
Dear Xurbia,
Where are thou my booketh?
the suspense is killing me. Siad they shipped. I’m frigin 2 hours away. I’ll go pick it up dam it.
lol
On the way. Take a cold shower. — Garth
#90 sean
High debt level:disposable income is not a strong data point in your favour. In a low interest environment, it makes sense to have a higher debt level than in a high interest environment. I see nothing inherently wrong with people taking on more debt in low interest contexts. Unless you make the *assumption* that they are irresponsible borrowers. And I have seen no data to support this assumption. Give borrowers and lenders some credit — it IS possible to be a responsible borrower in a low rate environment. In fact, one of Garth’s suggestions is to borrow money at a low rate and invest it elsewhere at a higher rate (Smith Maneuver, etc.) to make mortgages tax-deductible.
#95 Rory
It exactly your kind of “common-sense” arguments that are so weak. Either provide some data to support your argument or admit that they are not really based on anything at all. In addition to a weak “common-sense” argument, you also set up a bunch of straw-men arguments. Nowhere did I say any of the things you attribute to me (bucking long term trends, rising prices forever, etc.).
All I am saying is that if you are going to borrow money, it makes sense to do it in a low rate environment. Why are we all so quick to assume that today’s borrowers are not responsibly borrowing at a historically advantageous time? Where are the data to support this argument?
#80 squidly77 on 01.25.10 at 1:52 pm 500,000 Canadians to exhaust their E.I.
Oh boy..
Squidward! I think people ARE using their savings ON TOP of their EI benefits. Have you tried to live a normal life style on EI benefits.
Believe me .. you can’t! I’ve know folks who’ve done it twice now in the last 4 years. and they’re dipping into their savings, borrowing from family, under the table work, etc, etc.
If you can get $1,600 a month from EI… you’d be lucky. That hardly covers the rent.
I have a strong feeling the govt will do all it can to inflate their way out of this mess. And savers like me will end up being the greatest fools!
I can’t see how the Canadian house prices will balance with the ones from US, other than a market crash. The Canadian $ will be too strong for the next five years to hope that it will deflate.
#14 Onemorething – I mean without putting out an I TOLD YOU SO type book next, what could the book do to assist people post bubble who are WAY UNDER WATER?
The next book may very well be one of the two: Bankruptcy Road — How to declare bankruptcy in three easy steps and to hide the LCD TV from the trustee.
China Road — How to move to China in three months and learn Chinese in four.
Vancouver the most unaffordable house market in the WORLD
http://ca.news.yahoo.com/s/capress/100125/national/affordable_housing
#62 Bob,
I agree, we’re in the same boat – 20% down with 1.9% variable and a rental property with $1000/month income (which helps with the double up payments). We also bought in the city, we both ride our bicycles to work and only have one car (more disposable income for the double ups). But I suspect we are not the majority hitting our principal hard.
With inflation and peak oil, I think suburban properties will decrease further than inner city homes. Will our house decrease in value? Probably a bit, but we’re not flipping. We bought for location and for rental income – we walk to the grocery store. Also, as per #8′s comment, our duplex is good for the multi-generation plan as well (I would like cheap child care when the time comes).
Everyone mentions that low interest rates mean higher interest rates around the corner. But they should be saying, while interest rates are historically low, make those double up payments and lump sum payments while you still can – they will make a big difference.
bob
Why are we all so quick to assume that today’s borrowers are not responsibly borrowing at a historically advantageous time? Where are the data to support this argument?
buying a $450,000 calgary home with 5% down is not responsible at all.
#48 Cory Thunder Bay
103 don’t get me started
Elizabeth Warren has stated these facts and reported this in the commission findings along with all the other tricks and traps ,pay day loans, predatory lending …americans using credit cards to pay child support,tuition, health care etc.
#113 Bob,
I don’t that anyone is arguing against low interest loans. Many of are more concerned about teaser loans and their potential impact when they are varied a few years later when market conditions have changed.
The best indicator of the potential of this problem is the negative equity situation in the U.S. where as many as 25% of the population are in negative equity.
You are certainly correct in that a majority of the population was responsible or responsible enough to avoid negative equity and there were probably many that acted responsibly.
The problem that many of us see is the fact that these rates are also being insured by the tax payer AND being offered in an artificially created low interest environment. Furthermore I would argue that many of the people who are pursuing teaser mortgages are less sophisticated and less credit worthy and more likely to end up in negative equity. Certainly this was the U.S. experience.
There is nothing wrong with low interest rates. However when artificially created and tied to a ticking time bomb 5 years out they could be ruinous for many – including tax payers who are providing the guarantee.
High house price – low mortgage rate or low house price – high mortgage rate…. Who Cares? Take my advise because I don’t use it anyway….as long as you don’t financially over-extend yourself then go buy a house and make it your home. It’s a great feeling. You can’t put your life on hold thinking you or anyone else can out smart the markets. Life is just too short for this nonsense. Here’s another thought, since buying my house 30 years ago I have put 3 times what I paid back into it in renos and additions. Not a great investment but more of a forced savings. Still it’s the family home and not for sale at any price. O’h and my Dad said I was paying too much at the time and mortgage rates were 13%.
Garth, i just finished your book very informative i never realized when you look at a stock to look for the beta Value at 1.00 but if it’s under 1.00 i guess its better correct?
Shane
#48 Cory and # 115 Steve ……. You had better have either a ” fist full of dollars ” or a helluva good job in the government services, if you are to consider the move. Top 10 employers by numbers are ALL government funded salaries….. municipal, provincial and federal, and what does your crystal ball predict for government funding in the years ahead, given the huge deficits all are running. Oh ….BTW ….. the commute to the GTA is about 1400 kilometers and don’t forget to pack a parka, sorels and a damn good snow shovel.
#108 bob
If your going to shit on Rory for not providing links to data why don’t you practice what your preach and show your own homework for #87?
Yes it makes sense to borrow when money is cheap, provided your not buying an overpriced asset that has a high probability of dropping in value.
I’m just glad to hear that you’ve droped 20% down, one less pariah sucking on the teat of the Canadian tax payer …
carry trades based on interest rate differentials
What is the carry trade?
In the most common version of this strategy, an investor borrows a given amount in a low-interest-rate currency (the “funding” currency), converts the funds into a high-interest-rate currency (the “target” currency) and lends the resulting amount in the target currency at the higher interest rate….
investors in international financial markets do seem able to make profits through such strategies. In fact, market participants and commentators have often cited the carry trade as the source of several recent exchange rate swings.
Why can carry trades be profitable? If the exchange rate between the funding and the target currencies does not move, then the profit from the carry trade is proportional to both the interest rate differential and the forward premium between the two currencies. But, of course, exchange rates do move, and, therefore, a carry trade involves exchange rate risk, in particular, the possibility that the target currency will depreciate against the funding currency. In that case, the value of the amount initially borrowed in the funding currency will increase in terms of the target currency, effectively increasing the borrowing cost of the strategy. By the same token, the higher interest rate obtained by lending in the target currency will be worth less in terms of the funding currency, ultimately trimming its profitability.
http://www.frbsf.org/publications/economics/letter/2006/el2006-31.html
What do Tornadoes and Beauty Queens have in common?
Sooner or later they both end up in Trailer Parks
#118 Tom: Here’s another thought, since buying my house 30 years ago I have put 3 times what I paid back into it in renos and additions.
Tom! You’re a complete anomaly! VERY FEW! and I mean VERY FEW .. stay in a home like you for 30 years. Come on! Most folks move much more then that. and between commission fees, lawyer fees, etc.. and the market timing no one would be sitting on a gold mine like you are.
But good for you! Congrats!!
China appears to be the next to join the party. Bankers to the World – “I know, let’s through a bubble party and invite EVERYONE”.
http://www.cnbc.com/id/35056774
December was the worst month in 40 YEARS for US HOUSING!
http://thecomingdepression.blogspot.com/2010/01/housing-sales-in-december-largest-drop.html
#118 Tom from Lindsay
Please explain to me how I have put my “life” on hold by renting. Do you know my life?
Interesting comments. Anyone notice (or read) that China is recovering from its worst sea ice in 40 years? That’s CC — never makes it’s mind up!
Heads Up Canuckleheads (FF)! And who just happened to buy Kinder-Morgan? That’s right! GS! I understand that dubya (not sure) has links with The Carlyle Group.
Banks are beginning to fall like branches in a hurricane, and January still has a week to go! The second wave of foreclosures hasn’t begun yet, and commerciall RE has yet to wake up to being broke as well. Also here.
Two down, plenty to go. Good for them, and speaking of fakes . . . Vaccinations for profit?!
Layoff apocalypse. / New Outsourcing “When the rich wage war, it’s the poor who die.” — Jean-Paul Sartre (Of course, the rich wage war just for the fun of it.)
Pakistan and We are free to be economic slaves (sheeple).
#110 SaverBear
You get a BINGO! today too.
BOB
the problem may be that responsible borrowers are now competing in the same market as irresponsible borrowers, who borrows base on cash flow
and
borrowing in a lowest possible interest rate environment carries greater interest rate fluctuation risk
asset value also carries greater risks in terms of fluctuation/reduction in pool-of-potential-buyers
#108 Bob,
I think a lot of people miss the point Garth is making.
Here’s the thing that he’s been stressing lately: invest well, avoid heavy taxes, look towards retirement.
So the question for people is not whether they can afford real estate and pay down the principle quickly in this low-interest environment. It’s whether it’s the best thing to do with their money.
Chances are most mortgage carriers do not have a balanced portfolio. The home purchase was mostly emotional, akin to buying a car. (From what I’ve seen, people are not leveraging home equity loans for other forms of investment either. If they do use home equity loans for investing, typically it’s for MORE real estate. But that’s just what I’ve seen.)
Garth’s also been saying the old adage: buy low, sell high. Not buy high and hope. Run some calculations. I’ll bet with your 20% down and extra payments toward principle, you could have come out way ahead by investing that money into something else.
Problem is, as someone alluded to above, Canadians aren’t that proactive. Myself included. Real estate is the layman’s investment. No thought required.
SOLD
Finally sold my house since I was months away from going bankrupt. Many people who are selling need to sell before they go bust. My EI is weeks away from running out and my savings is down to almost nothing. Very happy to have found the greatest fool. If buyers were smart they would WAIT out the 80-90% of sellers who are close to going bust. An ex co-worker of mine is in the same boat but hasn’t found his greaterfool and his fears not finding one this spring when he thing the money will run out. We will see if buyers are smart enough to understand we are in an economic recession/depression. The media is all lies and for my sake was good in helping the young couple who most likely has no money and bought a financial prison and set me free.
Thank-you greaterfool from toronto
112 Fred/ 93 Peter/ 84 No 1/63 Junius/ 60 Watch
If we are referring to the yearly demographia housing
affordability study, it only covers anglophone countries.
Hideously expensive? Yes! Most unaffordable in the
WORLD? Havent seen that data.
Hey Bob,
Why would someone who’s in a position to hammer their principle sign up for 40 years? It doesn’t shake. You can capitalize on low rates at any amort. period, right? So why not sign up for a conventional period? I’m guessing it’s because they max out their affordabilty.
And care to provide sources for your definitive statements? No sources = bullshit.
Nost. Jr. – where did anyone say homeownership is a right?
Hey Grantmi, guess your right….we don’t have a dishwasher or flat screen either. We are looking to buy a second home in Barrie though and I can’t think of a better time or a better location in Ontario to invest in real estate.
Don’t wait to buy…Buy and wait!
to 124 grantmi
like tom– i also owned the same house for 32yrs (sold in 2009) many of my neighbours have been in the same house for 20 to 30 yrs and will probably stay in them for a long time yet— don’t know all their financial situations — it was a good neibourhood good people and a nice place to raise kids and over the years we never really worried what the RE market was doing
#133
Why sign up for a 40 year amm if I was going to go with a fixed rate VRM? Because at the time I signed up, the Lender (Big 5 bank) was simply registering **everyone** at a 40 year amm and then setting the payments at whatever the client wanted in order to simulate whatever actual amm they wanted. They did this in order to save time — if a client applied for a 20 year conventional amm and was rejected, they would just turn around and apply for a 30 or 35, for which they would qualify. This is one of the reasons I’m highly skeptical of the stats for long amms — I think they are artificial because lenders simply registered *everyone* at the high and set the payments accordingly. I know at least two other people who thought they were in 25 year mortgages (that’s what their payments are set at), but who actually are in 40 year amms. Not that they will take that long to pay them off.
In addition — I’ll ask you the flip question. If you can set your payments at any level with a 40 year amm, why *wouldn’t* you give yourself the added flexibility in case disaster strikes (lose a job for a year, wife goes on mat leave, etc.) to be able to lower payments — even if you never intended to. With a conventional mortgage you don’t have that flexibility.
I don’t see why you should assume people with 40 year amms plan to take 40 years to pay it off . . . There are no stats to back this view up.
Links for the stats above. You can complain if you like that some of them (not all) are produced by Mortgage Broker Association — but unless you can demonstrate exactly how and why their stats are flawed, it will simply be complaints with no basis:
http://www.imf.org/external/pubs/ft/wp/2009/wp09235.pdf
http://www.cba.ca/index.php?option=com_content&view=publication&id=69&Itemid=56&lang=en
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/10/mortgage-files-stats-from-caamps-annual-meeting.html
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/10/mortgage-files-stats-from-caamps-annual-meeting.html
bob;
I think you are missing what I am referring to when I quote that statistic.
That statistic does not count living costs, that is debt over and above the basic cost of living, ie: consumer debt.
With this number at 145% of disposable income, this means that people are borrowing from uncle Mastercard to pay aunt Visa while ho-ho-holding the payments on something else. This is the big Ponzi scheme. When this comes down it will drag others with it.
Even if you are doing the right thing, 20% down solid income etc, you are the minority. You alone will not hold up the value of property.
Bob, thanks for the reply.
Fair enough, flexibility is nice. Kudos to you and your disciplined approach.
However,
“the Lender (Big 5 bank) was simply registering **everyone** at a 40 year amm”
So, everyone was being given a 40 year mortgage – with the corresponding upper limit and low monthly payment. And you don’t think many people spent more than they responsibly should have, especially in a hot housing market with high prices?
I can see it now….
“Hey honey… look how much the bank will give us! Now we can get that “McMansion” and keep up with the Jones’ ”
I don’t have any numbers; but I’m not optimistic about human/consumer behaviour/impulses.
I can think of a factor you’ve missed; the canadians place a much higher price on gasoline. This makes longer commutes much more expensive in the US, and thus makes urban living more desirable. When everyone wants to live on the same patch of land, prices rise. I can’t speak for the rest of Canada, but I am familiar with Vancouver. It’s not hard to see that the land around this city is quite limited, being hemmed in by the mountains on one side and the water on the other. That also will pinch housing into a smaller area and increase prices.
It’s time to acknowledge the elephant in the room: mass immigration. Canada is taking in over 250,000 people anually, most of whom settle in major metro areas–Vancouver, Calgary, Toronto. As Bill C-428 and the corruption-ridden Immigrant Investor programme reveal, things like pension solvency and filling ‘jobs Canadians won’t do’ never was the point of mass immigration. The only reason for bringing in such staggering volumes of people is keeping the housing bubble inflated. Of course, urban sprawl, loss of farmland (less than 5% of Canada is arable), stress on already overtaxed freshwater supplies and gang-related crime are the results. If people want to ‘do something’ about housing costs, severely curtailing immigration is the only option.
Those are not ‘staggering’ numbers. You are wrong. — Garth