Heavy days ahead

Stocks tumble on a barrage of bad news.

No longer seller’s market, says bank. Duh.

One day last week I did a radio show with two perky hosts in Vancouver on the topic of real estate. Once we went off air, one of them told me about the woman who cuts his hair – a middle-income, working stiff who, with her similarly-employed boyfriend, lusts after a home.

So, they went to the bank and got pre-approved for a mortgage, but with one major condition. The banker warned them they wouldn’t be able to borrow more than $900,000. But for that, they can buy an average-priced bungalow in Van.

So, this post is for all the hairdressers out there in the Lower Mainland. It’s for the young couples in the Xburbs around Toronto and Calgary (that’s where GenXers go to buy McMansions). It’s for the people with 40-year mortgages financing places in which they have no equity. It’s for those who think there’s actually a reason to shell out more in bank payments, taxes and condo fees than in rent for exactly the same residence. It’s for the Boomers who have trophy houses and no actual money. It’s for those still impressed with granite countertops. It’s for those who haven’t heard the news.

The economy grows ever weaker. Oil at $130 and gas at $1.40 will have a serious effect on everything over the coming months. The new cost of energy saps cash flow and consumer confidence. It is a death knell to the sale of suburban houses on distant crescents and cul-de-sacs. It is killing off export, tourist, automotive and manufacturing jobs.

At the same time, the world’s greatest consumer economy, and our biggest partner, is on the skids. Consumer confidence plunged last month as costs surged, employment fell and real estate collapsed. Home prices have declined for 16 months in a row, and are now 15% below levels of a year ago – and that’s a national average. Properties in some cities have given up a third, or 40%, of their worth since last summer. This has been utterly devastating to the middle class, which is the engine of economic growth.

Consumption is now contracting at the withering rate of 3% a year, despite $100 billion in government cash rebate cheques which have been flowing out of Washington. When that money runs out, economists may be running for cover. Americans have not had this bleak a view of the future since such surveys began almost a half century ago.

In Canada, the real estate bedrock is also cracking. Over 67,000 families listed their homes for sale last month, a 7% increase, despite a massive 17% decline in real estate sales nation-wide. More listings, fewer sales. This means the next big news you hear – three or four months from now – will be US-style price reductions. In some cities, some suburbs, it is already happening. The energy and jobs crisis is just serving to accelerate the process.

In this context, here are some thoughts:

  • If prices do fall, even a modest 10%, then recent buyers could find their mortgages exceed the value of their homes. This will be especially true of those who purchased with little or nothing down.
  • People with homes to sell, especially retirees who need to cash out, should expect the process to take months, perhaps a year or more. The days of multiple offers and quick sales in all but the most demand neighbourhoods, are over.
  • If listing, be realistic. The worst thing possible right now is to misprice the home, ask too much, then have it languish on the market forcing multiple price reductions. In that scenario, you will probably sell for less than market value.
  • If you are a first-time buyer, steer clear of zero-down real estate. Despite what the condo salesguy or the builder says, this is akin to buying stocks on 100% margin. You are going to lose.
  • Also eschew those 40-year mortgages. They reduce monthly payments a bit, and let you leverage up more debt and buy more house for the same income. But they magnify total repayable debt and add almost nothing each month to your equity.
  • Don’t listen to Phil Soper or Gregory Klump or any other of those so-called real estate media experts. While nice guys, they and the bank economists all are in the business of talking up the market and encouraging people to buy, whatever the conditions. Trust me, this is selling time, not buying time.
  • Debt kills. Especially when asset values are falling, the economy is losing altitude, jobs are hard to find and willing buyers even scarcer. Never before have Canadians had so much mortgage or household debt, and less in savings. More than 80% of all our net worth is in real estate which – in a word – is scary.
  • Therefore, if you have a mortgage, work at making it smaller. Prepayments and VRMs help, but weekly-pay mortgages are the best tool in the shed for shortening the amortization and lopping off interest.
  • If you decide to sell, be aggressive. This will mean lowballing the price to gain a quick sale before things get really messy. It’ll mean being willing to take back a mortgage for a year or two. It means painting the house and making it impeccable, along with staging it, working with an experienced agent, using MLS, setting up a sales web site for your property and, above all, not trying to sell it yourself.
  • And if you are a flipper who bought five units in a condo building scheduled to be completed in 2010, God rest your soul.


#1 Andrew on 06.26.08 at 12:27 am

Thanks for the advice Garth. I have been toying with the idea of buying a house recently instead of renting. But now I am going to rent for awhile and wait a few more months until I see where the market is heading. I am definitely going to avoid the 0 down mortgages and work toward getting a big down payment when I do buy. Thanks, Andrew

#2 michael-you lose on 06.26.08 at 1:15 am

Garth, you are my hero.

#3 Mike.slob on 06.26.08 at 1:17 am

My Real Estate prediction for June 2008:
Sales volume in GTA will be down between
14% and 17%.

My Real Estate prediction for July 2008:
Sales volume in GTA will be down between
17% and 22% but prices still up…..

#4 peng on 06.26.08 at 1:24 am


#5 $fromaSia on 06.26.08 at 1:25 am

Flippers are specuvestors, most working stiffs think that if theres going to be a bust it will happen after Vancouvers 2010.

What will Ottawa do Garth? Open the imigration flood gates to find Greater Fools?

#6 $fromaSia on 06.26.08 at 1:25 am

The Government needs to find a way to enforce taxing un declared rental income then this market and values will surely be cut in half. Call it the great equalizer!

#7 Another Albertan on 06.26.08 at 2:03 am

I have a colleague here in Calgary that had the first “sale” of their house fall through due to a failed inspection report. It turned out the inspector was wrong, but the buyer still bolted. The second “sale” of the same house appeared to be signed, sealed and delivered to a new buyer. The house was priced pragmatically and moved off the market reasonably quickly. Now with the possession date nearing, the buyers have elected to back out of the sale.

Before people start going off about how that is a breach of contract and such, please note when this story ultimately ends, there will almost certainly be fair compensation to the sellers. In the interim, it creates a nightmare scenario – a new mortgage on a new home, the existing mortgage on the house in limbo, additional legal fees, stress and uncertainty.

It should be re-iterated that transactions without conditions occurring in a friction-free, cheap money environment are all but over.

#8 Walker on 06.26.08 at 3:14 am

Financial leverage uses debt instruments so that the anticipated level return on the company’s equity would increase.

#9 ARiccio on 06.26.08 at 10:21 am

Garth, I do enjoy your blog and have been pretty much preaching the same stuff here in Calgary for a few years now. Speculators, flippers and mortgage fraudsters played a huge role in the market out here. Now that they are leaving the market, honest people are feeling the pain. Whether you weather the storm or not will depend on how much you benefit from the oil patch.

Consumption is contracting and in my view that’s the only way we’re going to solve a myriad of problems from the environment, to the price of oil and houses, to the debt crisis.

#10 rocker guy on 06.26.08 at 10:57 am

Garth: great piece. Here in Vancouver the crash has been long awaited. This will be the best possible thing for young families looking to own their own home, who will – perhaps not for another two years, of course – finally be able to secure a home at a reasonable discount to rent.

#11 Peter on 06.26.08 at 11:27 am

With 5 years CLOSED mortgage rate heading UP, i wonder when these people who are already in a mortgage with 5 Years Variable at a LOW BALL Rate can survive if they need to switch to a CLOSED rate to lock in…Price difference would be much more than these people can afford…Example would be 5 yrs variable = 4.00% –>5 yrs closed 5.65 % or higher (lets say 6.25 %)….imagine a $ 400K home or someone recall a 900K home with someone doing 40 years and 0 %, 5% or 10% down…I smell something bad into it….

#12 Al on 06.26.08 at 12:44 pm

Walker, snake oil salesman.

#13 Future Expatriate on 06.26.08 at 12:56 pm

Now there’s an idea, $fromaSia… instant citizenship to anyone that will buy a house for cash, with absolute residency requirements (i.e., you have to live in the house you buy or lose citizenship, with unannounced monthly drop-by checks for compliance.) With McCain in the White House (count on it) and more war, we could get some takers to bail us out. A bit.

INFINITELY better idea than the one they had down South in the US, giving no-down no-credit check no-job check no-immigration check adjustable-rate-loans to illegal aliens.

That’s why half of Las Vegas and almost all of Stockton CA are foreclosed and vacant.

#14 Rob M on 06.26.08 at 1:18 pm

AA: thanks for that anecdote and good point about efficacy of ANY contracted transaction in a down ward market– not mentioned so far on the boards here as far as I know.

Seller beware as well.

#15 vancouverite on 06.26.08 at 1:43 pm

Right on. Welcome to la-la land where hairdressers are looking to buy million dollar houses.

The only odd thing about your story is that the hairdresser didn’t already own several ‘investment’ condos nearing completion that she was trying to sell on craigslist.

BC overall gets around 3000 net new migrants a year (thanks Langley Financial Planning) and there are nearly 30,000 condos under construction in the Greater Vancouver area alone. As you say, God help you if you are a condo investor. And as condos go, so go the trade-up SFH buyers.

#16 itbeme on 06.26.08 at 1:45 pm

Is that figure of $900k plausible? I would of guessed you would need to quote 40 year terms, a 125-175K/yr household income or have one huge down payment.

(I was just playing with some of those affordability calculators from TD/RBC and it took large income, long term, low expenses to get $900k)

What am I missing, do hairdressers actually pull in 60k or 70k+/yr?

#17 nonplused on 06.26.08 at 2:01 pm

I just got a conditional offer on my house in Calgary (approval of financing and a house inspection, and the financing is a reasonable amount). I don’t really want to buy right now but it’s about location (I am too far from where I need to be). So you can still sell houses if you need to. To sell, your house needs to be 1. in decent shape, well maintained, necessary renos done. People aren’t bidding if they have to redo the bathroom anymore.
2. priced lower than the other comparable properties in the area.
3. negotiatable. the buyer’s are not expecting to pay list anymore.

I didn’t get a great price, but it was still above the city’s appraised value, representing in theory an increase over last year. However, it was no 30% increase and probably represents a decrease from the highs at the end of last year.

The 0/40 is supporting this market, and it isn’t going away any time soon as the banksters all know that would be the end of real estate as we know it. But unfortunately they seem to be running out of people to sign up so sales are off. Look for CMHC to use your tax dollars to offer an “insured” 10% cash back 50 year amortization starting soon. All they have to do to create a supply of greater fools is to loan them more money. The fools don’t care if they can’t pay it back. Most of them have nothing to loose in bankruptcy anyway.

But even with a “10% cash back 50 year” mortgage, it’s clear the top is in at least in inflation adjusted terms for a long time to come. But the way I look at it, I may have sold for less than my house was worth 6 months ago, but it’s still 2.5 times what I paid for it 7 years ago! It’s crazy!

Now, to rent or to buy?

#18 Andrewgarth on 06.26.08 at 3:38 pm

Garth and with oil prices forcast to rise per Rubin from CIBC … This will have a profund effect on housing. as well homes to go from 2 to three cars to 1.. will there be a mass exudos out of the subburbs back to the city or will the pain be felt all over as i suspect local transit will also increase prices as well to conpensate


$7-a-gallon gas, 10-million fewer cars: Rubin

Globe and Mail Update

June 26, 2008 at 1:47 PM EDT

A new forecast calls for gasoline prices to hit $7 (U.S.) a gallon in the next two years and oil to soar to $200 a barrel by 2010.

The report by CIBC World Markets also predicts there will be 10 million fewer cars on the road in the United States by 2012.

“Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history,” Jeffrey Rubin, the lead author, wrote in Thursday’s report.

Economist Benjamin Tal, who co-authored the report with Mr. Rubin, said Canadians can expect to pay about $1.85 to $2.00 per litre of gas at the pumps by 2010.

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Mr. Tal also expects the numbers of Canadian vehicles on the road to drop by 700,000 by 2012 – much less than the 10 million predicted in the U.S.

“We don’t have the same story in the sense that most low income Canadians have better access to public transportation,” he said, referring to the report’s U.S. calculations that estimates that about half the cars coming off the road will be from Americans who make less than $25,000.

In Canada, the decrease will be mainly come from middle-class families that own two or three cars, Mr. Tal said.

By 2012, the report predicts, the average miles driven in the United States will decrease by 15 per cent, and sports utility vehicles, which accounted for almost 60 per cent of U.S. market share in 2006, will drop to less than half that level. Overall vehicle sales will drop from 14 million to 11 million by 2012 – the lowest level since the early 1980s.

“While some of the current weakness in vehicle sales can be attributed to the economic slowdown, we estimate that highest gasoline prices have had almost twice the effect,” Mr. Rubin and Mr. Tal wrote.

Basic laws of supply and demand are “no longer operative” in the crude oil market, the report says, compelling CIBC economists to raise their target for West Texas Intermediate by $20 a barrel, to $150 next year, and by $50 a barrel by 2010, for $200.

“Higher oil prices spell stagflation for the U.S. economy next year, and we have marked down our GDP growth to barely over 1 per cent for 2009,” Mr. Rubin wrote.

The report also predicts that by late next year, gasoline sales in the United States, growing at a rate five times that of the rest of retail sales, will overtake grocery store spending as the largest item in households’ non-vehicle retail spending.

All of this means a “quantum” shift in driving habits, the report says. Americans will drive less in smaller vehicles, perhaps mimicking countries in Europe where fewer people drive their cars to work than in the United States.

(In the United Kingdom, the report says, 60 per cent of people use cars to get to work compared to the more than 90 per cent of Americans.)

“Of course the flip side to this equation is public transit,” wrote Mr. Rubin and Mr. Tal. American “obsession with the car is mirrored in its avoidance of public transit.

“When it comes to taking the train, bus or subway, the U.S. ranks the lowest among OECD countries, just as it ranks the highest among the same group when it comes to the use of the car,” the economists wrote.

Earlier Thursday, Organization of Petroleum Exporting Countries president Chakib Khelil said in an interview that crude could rise as high as $170 a barrel this summer.

“I forecast prices probably between $150-170 during this summer. That will perhaps ease towards the end of the year,” he told France 24 television, according to a text of the interview released by the station.

The comments came as crude prices neared $135 per barrel, after rising about 40 per cent this year.

Mr. Khelil said he doubted prices would climb as high as $200.

“I think that the devaluation of the dollar against the euro, if everything goes as I think it will, will be of the order of perhaps 1-2 per cent and this will probably generate an $8 rise in the price of oil,” he said.

Mr. Khelil said it had been clearly established that speculation was affecting markets.

“It’s not a question, but a certainty. The problem is the extent of that speculation on the market,” he said, adding that the effect of the subprime crisis in the United States had affected oil markets.

#19 Cam on 06.26.08 at 4:29 pm

Hair Dresser? $900,000? You don’t say. So much for conservative lending practices. When gas hits $2 a liter, they decide to have children or one of them is laid off due to recession etc. I wonder how they’ll keep up on their payments. How much motivation would they have to continue paying if the price corrected ~10% to 800,000?

Don’t know if you caught the TD analyst on BNN today, but he said, “Calgary, Edmonton to drop 8-10% from 2007… the boom is over”.

#20 SMWhite on 06.26.08 at 4:58 pm

#15, thanks for the post, one question I have is how can Benjiman Tal one minute be talking about how great and fluffy the RE market(as he’s been a major RE pumper) and state there are no problems, keep buying, then the next he’s agreeing with his counterpart JR on $2.00 a liter oil?



I guess Greespan is right, economists are only right 50% of the time, especially if you play both sides…

BTW, the DOW has officially wiped out all gains from 2006 till now and the TSX is heading back to below 14K.

Smells like 1980, again…



DOW is currently priced at 12 – 13 ounces / DOW (11.5K) with gold @ $920.

I can see the DOW hitting 10K but find it hard that the ratio will go below 5? Even if it does that means gold will double…

Batten down the hatches!

#21 70s guy on 06.26.08 at 5:22 pm

I wouldn’t wait to too long to buy your house. Many people on this site salivate at the idea the Canadian housing market is collapsing and deals abound. Ain’t going to happen in downtown Toronto. 15% price drop in the choice neighborhoods, tops. I listed my house in Trinity-Bellwoods and can’t get my price. I’m not dropping. Why would I. The house is paid off, it’s a great neighborhood + rental income. I’ll wait 10 years if I have to.

The real doomsday scenario unfolding is world inflation. Were all screwed and the Feds are in denial. Wait for next year and double-digit inflation. The USA will begin raising interest rates after the Presidential election and we’ll follow. In a few years, your 15% (even 20%) savings in lower prices will be eaten up by colossal interest rates. Remember the 70s. Interest rates are now at the lowest they will ever be for the next decade.
House prices don’t have to fall to loose value in a stagflationary environment.

#22 GTA on 06.26.08 at 5:32 pm

Why would there be a “mass exodus out of the suburbs back to the city”? Last time I checked the city of Toronto is doing its best to scare businesses away with their taxes and unfriendly policies. Unless you work in the financial sector (which will be contracting in the coming years) you are better off living in the suburbs like Mississauga, Markham and Vaughan where REAL jobs still exist.

#23 Mike on 06.26.08 at 6:31 pm

Dear 70s guy….you should keep your home if it is paid off and generating positive income…. However you should not predict the future or home prices going higher and higher. All markets have a cycle and the key to any commodity…which a house is… comes down to how affordable the product is for the end purchaser. If no one can afford or there is a slump in economy or even just slight unemployment or just a feeling of uneasiness people will stay away in droves. It has happened before.. The agents will tell you that a house is only worth what someone is willing to pay. If you are in no hurry or are willing to try out the market .,…go for it . BUT if you advise people to not expect a huge correction or maybe even the prices to go back up after a modest slowdown then there are plenty of people who will disagree with you with lots more ammo then just your opinion or mine. Keep it and rent if you are into that sort of thing … eventually you may get your price…..maybe..

#24 Mike on 06.26.08 at 6:47 pm

Garth indicated in his list “IF HOME PRICES DECLINE”
Does this indicate a softening of opinion … seeing as he clearly seems to feel in his book that price will indeed drop across the board. I am reading too much into this??

Yes. — Garth

#25 David on 06.26.08 at 7:27 pm

Stories like this make my hair stand on end, so to speak. When any market becomes that distorted people might as well begin preparation for the ensuing housing apocalypse. The wealth destruction factor from inflation, higher interest rates and a non existent supply of greater fools during the next mother of all recessions, will all take an enormous toll on middle class wealth in Canada.
Hairdressers purchasing dingy bungalows for $900K is absurd in the extreme. Everything is wrong with this picture. If the rules of forest apply to housing, the weakest will eaten first when the correction starts in earnest. It seriously looks like the final death spasms of the Canadian middle class are upon us when home ownership at any price comes with complete disregard for the risks and responsibilities of home ownership and pricing becomes so financially distorted.
Anyone stupid enough to believe that people from China and India will keep the bubble magic alive in Canada needs to have his head checked. Families taking home after tax earnings of $75K spending nearly a cool million on some aging property do not need a mortgage, they need serious financial counseling which is considerably less expensive.

#26 lgre on 06.26.08 at 7:41 pm

70s guy – if you are predicting colossal rate increase then you casn expect colossal house price reduction, thats how it works, nobody is going to pay high prices and high rates (maybe a few). I would rather have high rates and low house prices because I can thrown an extra $30k into my mortgage besides my regular payment so that would benefit me perfectly.

#27 3rdman on 06.26.08 at 7:54 pm

Seen it all before – it’s 1973 fear mongering all over again. Have we run outa oil yet?

#28 50s Guy on 06.26.08 at 9:45 pm

As someone stated earlier, you can renegotiate a loan, but never the purchase price. Better to have high rates and low prices than the other way around.

Property may slowly gain value because of population increase and inflation, but houses don’t because they deteriorate and get obsolete over time. The tiny junk made now will deteriorate even quicker regardless of granite countertops, and no one will touch it at anything over a few grand because the layouts are so bad.

Post-WWII ‘starter’ houses that you can still see in some small towns at least had substantial yards. There isn’t even that, with the new junk anymore.

#29 $fromaSia on 06.26.08 at 10:41 pm

Ya 50’s guy now you have 1200 SQft for the land lord upstairs and a 2 bedrm suite down one side of the basement and a 1 bedrm suite on the other side of the basement rented out. No yard Reg. Garage. and on a 33 ft lot in YVR theres parking fights with people slashing other peoples tires because of the high density housing!!!

Farse, Vancouver other High Density Housing… The house with 2 or 3 suites and not enough parking!!!!!

#30 patriotz on 06.27.08 at 12:22 am

Remember, if you buy at a high price and low rates, in 5 years or less your mortgage will renew at the current rate. The idea that you should buy now because rates are going up is absolutely absurd – the reverse is true, you should wait for rates to go up and prices to go down. Because a high purchase price is forever, but low rates are not.

The Government needs to find a way to enforce taxing un declared rental income

Simple – institute a renter’s tax credit which requires the tenant to declare name of landlord and amount paid on their tax return. Turns every tenant into an informer. Could be instituted at the federal or provincial level.

#31 70s guy on 06.27.08 at 12:46 am

Igre: You would think escalating interest rates would suggest a drastic (more then 15-20%) price drop, but my argument is, in established neighborhoods like Trinity-Bellwoods, and others, where a majority of the home owners have their mortgages paid off or close to it, most people are not in a panic need to sell situation. I read in this blog, 40% of Canadians have their mortgages paid off. Yes, first time buyers who put very little down are going to get whacked by the high rates. Many may loose their houses, but not on the same scale as in the US. Sideways was the term used to explain the new Toronto market and I agree. Most people will hunker down and try to keep their properties, even the first time – no money down owners will do everything they can not to sell. They see their houses as life investments and their love in with 40-year mortgages tells me their prepared to pass on their debt to their kids. In Japan the last housing crisis resulted in 60-year mortgages. Go figure.

#32 Peter on 06.27.08 at 3:21 am

People will NEVER NEVER learn a lesson until something nasty HITS the fan…and oops…one day you and your wife woke up, turn on the TV, seeing people walk out of their nice little 600K condo or 900K 50 years old bungalow or 750K downtown townhouse which is close to a ghetto…my house price drop like hmmm…10 % ….11 %…and counting…and i can tell you 80% or 90% of the people will say “Hmmm…my hubby or my wifey, we are a LONG TERM investor, I buy my home to hold like Mr.Buffett…Maybe 10, 15 years later, I can see my home is a DOUBLE or TRIPLE!!!” but…some 10 minutes drive from your same area, you can buy a NEWLY home or condo or townhouse for 30 % or 40% of your current home’s price…and you begin to feel PISSED….and BANG Your Head and say…”See, I or We should buy it later and listens to Garth so we dont have to have NEGATIVE equity onto our homes and I dont need a 40 years mortgage or 50 years mortgage to pay down my home…”…(I expect this will be a popular script for your wifey or hubby in 2009!!!)

#33 Peter on 06.27.08 at 3:25 am

Lastly, you walk into a Bank, deposit your hard earned money and your teller will say “Dear Mr and/or Ms..so and so…, we have some nice GIC promotion for 6 or 7 or 8 % interest rate if you LOCK in for 5 years..how does it sounds ?” you think…hmmm…WOW..thats a HECK of interest !!! Let’s Do it !!! and on the other side of this, BNN is ON and your favorite green, red, blue or navy blue bank is on the news, having LOADS of bad debt write off, Blews up the ROOF…? Now what do you say ?….

#34 Mike on 06.27.08 at 8:00 am

IGRE is 100% correct. The lure of “low” interest rates makes people go crazy. It is far better to have a low principal than so called low interest rates. Besides the low interest rate issues are what caused the sub prime mortgage problem.. people got lured into low teaser rates but HUGE principal amounts …. once the rates changes they got squeezed. Keep in mind the compound effect of interest rates. You borrow 300K but end up , even with low interest rates, paying back 600k. If you borrowed 15% less than that say 240K
then you end up paying out 480K in the long run…
So IGRE is totally on the money… better to pay less and higher interest…than the reverse.

#35 lgre on 06.27.08 at 9:31 am

70s guy you are in a different boat, if your suggestion is correct on paid off mortgages that still leaves 60% left, I would be happy with a 10% correction across the board. I have a friend who bought a house with his fiancé and sister and have a mortgage of $1800 per month with a high rate and 40 years, the sister wants out, who’s going to pay? He barely makes more then that monthly with 2 kids.

As someone mentioned about quality of houses being built poorly they are correct, I just sold a new house in Milton, built by an award winning builder, they should of just used cardboard instead of drywall, I would of never of known the difference. The workmanship was ok but the quality of product used is the poorest they can find, and that goes for all builders. In Milton where the houses are being pushed up by this builder, everyone is buying the new houses but the resale is on the decline, house prices being lowered up to 3 times before they are sold. So Ontario is starting to feel it. Even hot places like Milton, Ont.

#36 Geoff on 06.27.08 at 9:38 am

@ Peter above – I think you make some good points but “but…some 10 minutes drive from your same area, you can buy a NEWLY home or condo or townhouse for 30 % or 40% of your current home’s price” – there’s no land around my house that currently isn’t occupied by business, roads, parks or (mostly) other people’s houses. Downtown and mid-town TO are not the suburbs with vast tracts of land left undeveloped. The Canadian real estate market is made up of lots of small markets, so I find it interesting that people refer to “the Canadian market” as a whole but I see your point. Also (and please correct me if I’m wrong) I think in the US you CAN literally mail the keys back to the bank, but in Canada the banks will come after you for the $, not the house. So Canadians I think will have more motivation not to walk away than our US friends.

#37 David on 06.27.08 at 9:39 am

My wife and I spend ($1,300)14% of our gross combined salary on renting a condo valued @ 280K(value when we started renting it), if we were to buy a similar condo and put 80K down, we would be spending 24%($2,400) of our gross.

I dont even have to talk about the implications of yanking 80K out of savings to sink into a property.

Since we moved in to this place 10 months ago, the value of these condos went from 280K+(sold at) to 260K(asking) and going lower by the week, but no one is buying these units now. They are being listed and stay on the market for months, and then get pulled when someone list one at a lower price.

We bank the difference($1,100) in addtion to other “normal” savings and RRSPs, I am waiting for the market to bottom out

It did once in my lifetime already and it will happen again. Last time it bottomed out I bought a bungalow @ 180k(97), the people I bought it from paid 305K(88) I sold it for 250K(2002), last yr(07) the asking price for similar those bungalows was 290K.

Go Figure. This is not RE spin, it is hard numbers.

#38 Cam on 06.27.08 at 10:49 am

Why is it so hard to believe that people will walk away from their houses? If interest rates increase and/or prices decrease, people will owe more money than their homes are worth and may no longer be able to afford their payments. People who purchased on a 40 yr are probably already strapped by their payments or they would have chosen a shorter ammortization. In the mean time the cost of living is rising dramatically.

People declare bankruptcy on their credit cards and those debt loads will look like small potatoes compared to a house in Vancouver. Someone had posted an article recently that stated Canadian household debt will surpass 1 trillion dollars by 2010, that does not include the national debt. No wonder we’re reluctant to raise rates in an inflationary environment… start buying your hedges now (just watch as the precious metals catch up to oil).

#39 mortgage guy on 06.27.08 at 11:38 am

It absolutely amazes my how naive the average consumer is when it comes the home ownership. It is the brainwashing from the media that makes everyone believe homeownership is an entitlement and that they deserve to have the 2 story home with a 2 car garage, 2 new leased vehicles and the golden retriever with a pedigree waiting for them at the end of the driveway. A far cry from our parents “Leave it to Beaver” days.

Now match this sense of entitlement with the greed of the Banks and Mortgage Insurance companies approving mortgages with very little qualifying criteria and we have a very clear picture as to why property values over the last 5 years increased the way they did.

One is asking how hairdressers can qualify for a $900,000 house with little or no downpayment???? Simple, the hairdressers falls into the category of being self employed. If they have good credit and proof of being self employed for at least 2 years, they can now make up their income and qualify for 95% financing on practically any mortgage amount at a fully discounted mortgage rate. The consumer sees this as credit freedom, no longer do they have to sheepishly walk into the bank with their last 3 years tax returns in hand, and be told by the junior lender, you don’t qualify for a mortgage because you are self employed … A breath of fresh air. They are finally being treated as an equal… Or are they ???

When Genworth first released the Alt A program which is how many of these self employed people are being qualified for these monster mortgages, there was what I like to call a morality clause. It stated that the new mortgage payment they are applying for could not be greater then 25% of their previous housing expense, (mortgage payment or rent payment). This was to stop people from placing too much strain on the actual affordability of their next home. Only a 25% increase, many applicants were still being declined because maybe their current home is free and clear or they could have been a new professional (Doctor or lawyer) who is still living at home rent free. They were NOT being approved due to this morality check…. The Banks and the Mortgage Insurers wanted these high caliber client’s mortgages. So they removed the 25% increase clause and replaced if with a very ambiguous term. They will allow the consumer to state their income, but the amount of the income must be in line with the job they performing.

Now those new Doctors and the client’s whose house is currently free and clear will qualify for the stated income program, now the good clients will get approved. Yes they do, but it also just opened up the flood gates for all the other clients to be granted credit.

It is now the responsibility of the Bank to say, yes it is possible for a hairdresser to make $100,000 each year, for the next 40 years which maybe the amount necessary to qualify for that new $900,000 mortgage. The consumer thinks all is fine because the bank said they are approved….. and at such a great rate.

But lets look at what is going to happen to that hairdresser, who has never in her life made more than $30,000. Her new mortgage payment is $3755 which is 1.5 X greater then her actual income. Maybe she has access to $20,000 to $30,000 in credit cards. So she quickly starts to supplement her income with credit, and guess what she makes all of her mortgage payments. She thinks she is affording her home. When the value of her home keeps increasing by 10 -20% each year then she can consolidate the credit card balances by increasing the mortgage.

This is how many consumers believed they were living within their means. And as long as they could “Purge” the credit card balances every couple of years, everything was great. On top of all that, the value of their homes kept increasing, so they believed they were making money. Owning a home was looking like the greatest investment of all; some even went out and bought more then one. Now they can get that cottage they always wanted or start building a rental portfolio.

However there is on major problem with this equation, take away the annual increase in housing prices and you now will be faced with the reality that your “HOME EQUITY ATM” just ran out of funds. Now you are faced with the high mortgage payments, maxed out credit cards, and a real estate market that is showing significant signs of correcting. But now you can’t sell your house because with the high mortgage and the additional insurance premium to qualify for the stated income program, you actually owe more then your house is worth. This is where the good quality credit consumer is about to fall into the SUB PRIME mortgage market. How did this all happen? Who is at fault?

Who is the victim?

I am sure there will be enough blame to go around.

But I think it has to start with the consumer to figure out how to start budgeting again, figure out how much money they really make and commit to a mortgage payment they can actually afford.

I think the banks have to go back to the old style lending and actually qualify clients for mortgages again.

Lets go find our last 3 years tax returns and return to reality.!!!!

#40 kabloona on 06.27.08 at 12:05 pm

Check this out:


“Marketplace indicates the boom may be bust

Number and value of sales are down but industry says not to panic”

What else would they say…??? ;-)

#41 Ali on 06.27.08 at 12:16 pm

Hi David

thanks for sharing your comments, I would like to know at this stage do you buy a “revenue property” ? that you basically pay half of your mortageg from renting the basement suit ? and how close are we to the Calgary (or Canada) housing bottom price ?

#42 Michelle on 06.27.08 at 1:16 pm

I’m already noticing a few price decreases in Leslieville. One home valued at 399 previously is still on the market 30 days later and lowered to 389. Another one for 329 went down to 319 in about a week. They’re small decreases and one could argue that they were over valued to begin with but I’m noticing more for sale signs than sold signs. I think the correction is already creeping in but no one wants to talk about it and keep prices artificially high.

#43 SMWhite on 06.27.08 at 1:17 pm

Just to add to Igre and Mike’s comments:

$300K @ 5.5% = $845 month bi-weekly
$300K @ 6.5% = $925 month bi-weekly(+$160 month)
$300K @ 7.5% = $1010 month bi-weekly(+$170 month)
$300K @ 8.5% = $1100 month bi-weekly(+$180 month)

$77K interest paid for 5 years @ 5.5%
$267K principal left after 5 years @ 5.5%

After ten years 225K still owed
$270K @ 6.5% = $833 month bi-weekly
$270K @ 7.5% = $910 month bi-weekly(+$144 month)
$270K @ 8.5% = $990 month bi-weekly(+$160 month)

$82.5K $interest paid for 5 years @ 6.5%
$245K principal left after 5 years @ 6.5%

After ten years 209K still owed

A 10% drop makes a big difference on principal, I agree 100% that too many people focus on the rate instead of the most important number, the principal.

As fuel surges, it will put inflationary pressure on every service adding extra carrying costs to the household. When carrying costs including mortgage rates increase the price of a home has to decrease to offset affordability.

To the 70s guy, a 15% drop is huge, I used 10% just for ease of math, if you are now to put down 10% – 20% for your mortgage, your effectively playing Houdini and making your equity vanish!

You might say your not dropping your price and that’s your choice, you won’t sell, but the transferred, dead & divorced (and a new addition, the foreclosed) don’t have that option. These people HAVE TO SELL and will have to take less, effectively driving down the price of homes in their respective neighborhoods.

Part of housing “denial” is refusing to lower your price because of the false illusion that the home is worth what it hit at market top. Too many people doing this practice only adds to the inventory and eventually succumb to the mad rush out the door…

This inflationary period will send housing prices back to their national 30% affordability number very soon.

Peter Schiff, Dean Baker, Robert Shiller as well as our crazy canuck counter part G.Turner’s proficiency are coming to light…

#44 patriotz on 06.27.08 at 1:49 pm

my argument is, in established neighborhoods like Trinity-Bellwoods, and others, where a majority of the home owners have their mortgages paid off or close to it

This is the old “my neighbourhood is special” fallacy.

It doesn’t matter whether anyone in any given neighbourhood needs to sell. Neighbourhoods maintain price differentials based on amenities, i.e. hood X may traditionally be 20% more expensive than hood Y. But that means that if hood Y goes down, e.g. 20% for whatever reason, hood X will go down 20% too, because people aren’t going to suddenly pay 40% more to live in hood X.

The upscale hoods in Toronto got clobbered in the 90’s bust and they will be hit again in any future bust.

#45 70s guy on 06.27.08 at 1:56 pm

Igre & Cam:
Credit card bankruptcy is entirely different from household delinquency. People love their homes and will do everything to stay in them. My mother bought a Toronto house in 89 (at market peak) and after buying out a partner she is still saddled with a sizable mortgage (20 years latter!!) She’s 75, just got laid off from a Law firm, with no severance or pension. She has little savings. She doesn’t want to sell but brought up the idea. Her family (4 kids & an ex–husband) stepped up. I bought her a furnace last year; airfare for a well-deserved holiday was covered, and summer camp(s) for a grandkid she takes care of, was paid for. We want her to enjoy the last years of her life in her own house. When she passes, by then, hopefully more or all of the mortgage will be paid off (she does have renters) and we will inherit the house and abide by her wishes to provide cheap/or free accommodation to the grandkids. I have heard many stories of families and friends coming together to protect a house investment. In Canada we won’t have the massive walk-aways that happened down south. I know in Toronto there are less multiple house flippers then in the USA.

#46 Mike on 06.27.08 at 3:28 pm

Unfortunately 70s guy…alot of people in the states used their house as an ATM…borrowed against the borrowed non asset with no equity. As I indicated in a previous post you should keep your house as it delivers pleasure and income. If not… try to keep it and hold till the market does come back. It is quite true that there are many many many people who bought in the late 80s and only after 20 years or so, some less admittedly, they got “their money out”. They obviously didn’t as they had to pay taxes, upkeep , roof , kitchen etc.. They actually lost money but if they were happy then so be it. The problem comes when you get the person chiming in to say it “IS A GREAT INVESTMENT’ Losing money is no great investment but sometimes if you love the house, love the person in the house then it is worth keeping for as long as you can. By the way, my mother is 87 and still in her own house with a caregiver so your mother should be around for along time to come for sure.
As for credit card debt. That is the next stage in the upcoming debacle. People in the US wanted stuff now. not later so they borrowed to fill up those houses and got new cards to pay off their other cards and so on ..
plus they are still using those cards to pay off their mortgages until they can no longer do so…
I suspect you are right that we won’t have the walk aways like the US but it will happen here in due course as the very young ones have been forced to overspend and will be swimming in debt for most of their adult lives. If we keep up with the 5% downs , I have even seen 0% down in the local paper, then you will definitely see the walk aways as they have nothing really invested in the property so essentially they loose nothing except maybe their credit score.

#47 poorguy on 06.27.08 at 6:07 pm

Here we Go!


#48 70s guy on 06.27.08 at 6:29 pm

“The upscale hoods in Toronto got clobbered in the 90’s bust..”

My mother’s house bought for 300K in 89 dropped 15% by 92-93 according to two separate realtors who wanted to list it. I bought a house in 93 that had dropped 17%. I can site examples of 5 other houses that dropped in that range. Clobbered?

What’s more interesting, my mother’s house took 10 years to make it back to 300K.

#49 smwhite on 06.27.08 at 8:12 pm

70s guy is right, it took about 10 – 12 year for most homes to return back to their late 80’s highs. This is going on the theory that housing gains 4% – 5% a year.

Here’s a great chart that proves that fact for the Ottawa market… I would say it would be a good base to use for what could happen to the AVERAGE house price in Canada.


#50 Tweed Curtain on 06.27.08 at 8:40 pm

‘kabloona’ – What’s printed in the T-C will surely be read with great attention, as the movement of the housing markets will impact the Victorians net worth far more than some other area in Canada that has an established productive industry (oil or manufacturing).

Apart from landing fees for the Vancouver-Victoria seaplane, and tourist dollars, and general societal maintenance like health clinics and Overwaitea, what else is there besides retirees’ [housing] nest eggs and their razor-thin investment returns (3% GICs)?

#51 patriotz on 06.28.08 at 2:22 am

My mother’s house bought for 300K in 89 dropped 15% by 92-93 according to two separate realtors who wanted to list it.

They would say that wouldn’t they? There’s only one way to find out what a house is really worth, and that’s by selling it.

The bottom of the market in Toronto was not reached until 1996 BTW.

#52 kabloona on 06.28.08 at 3:58 am

True, I think a slip in Victoria RE values will likely have more impact on net worth than, say, for someone in the GTA. The incomes in Victoria are lower and the real estate is quite a bit dearer than in Toronto.

Anectodally, I’m seeing a bunch of new “for sale” signs pop-up in the neighbourhood…the question is: are they trying to cash out now because they sense the market has peaked or are they just “testing the waters”…??? Personally, I would list in early Spring or late Summer/early Fall for the best price, so maybe these new listings are from people who sense this is their last best chance to lock-in those capital gains.

#53 kabloona on 06.28.08 at 9:23 pm

oops…meant to say “anecdotally”….lousy spelling strikes again. ;-)

#54 Closing date this week! on 07.01.08 at 12:29 am

I liked this post for the advice. I do think that in certain price ranges some buyers are/will be less affected. My partner and I bought our first house (detached North York with 2-car garage in walking distance to the subway) at the end of April, and we paid over asking, competing with four other offers. However, we are able to afford it, with a reasonable down payment and two higher-range stable incomes in the federal government and a large corporation. I think that as long as interest rates are low, and banks continue to allow people to borrow and overextend, that there will be competition, so the essential issue is in the balance of whether you can afford to compete, or whether you should keep waiting. How much is it worth it to wait for a ‘bargain’? You can try and time the market, or you can make a resonable calculated risk if you wish to be a homeowner, and buy quality in a good location. And, of course, it is always possible to buy less than the max of what you are eligible to borrow.

#55 Rob M on 07.02.08 at 12:20 pm

Closing Date — while all you say is true, it’s your situation and approach in a down market that keeps houses moving. At the same time, for every person/couple buying sensibly and within their means, there are a lot of others who’ve been buying on margin essentially with a view to an endless growth market.

#56 Wateredge on 07.08.08 at 6:20 pm

How long will it last? Will anybody can predict? Two years?