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Canada will avoid U.S.-style real estate bubble, bank says

Prices will decline, but not precipitously

Canadian Press

The news out of Canada’s real estate market isn’t good, but the country will avoid a U.S.-style real estate meltdown, CIBC said Tuesday.

Comment: What news is bad? Sales are up 2.5% in September over August, nationally. And prices are up 1% year-over-year. How is that bad news? Toronto prices are up 6% annually, though sales are down 10%. But sales volume is tied directly to the new mortgage rules and nothing else.

Economist Benjamin Tal said in a report that even recently released data about high levels of Canadian consumer debt aren’t proof that there will be a sudden, big drop in home prices.

Comment: No, because these are the same consumer debt levels we have been talking about for a year now. Why would they cause a problem suddenly tomorrow?

“To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market,” he wrote.

Comment: Maybe nationally, but not here in Toronto. And heck, even a 0.6% drop annually counts as prices falling… but it really does not mean a lot in the big picture. Will we see a 10% drop, 20% or even 25%? No. Simple as that. No.

Tal noted that Canada’s debt-to-income ratio has just broken the U.S. record set in 2006, but said other countries have had even higher levels without a crash.

Comment: Only after the measurement was changed so that the number jumped 5%. Let’s make sure to put everything in perspective. That and our income is different than theirs, in that our health care is already paid for when we get our after-tax paycheque – they have to pay for theirs. This makes their income lower, in comparison. And our debt is different, it is of higher quality than theirs. It is not a simple apples to apples comparison. Never mind our housing asset values being higher and so on…

Statistics Canada, in revising how it estimates household credit market debt, earlier this month reported record household debt of 163% of disposable income in the second quarter.

Comment: And it used to be 158%. Changing the rules made us break the US record, not an actual change in data.

However, Tal said the U.S. market bubble saw U.S. homeowners with little or no equity value in their homes making them vulnerable when prices fell.

Comment: We have double or triple the equity in our properties, a major difference. And they had an actual bubble. Prices were rising as much as 25% per year at the peak of it. Mortgage fraud jumped over 1,400% in the early 2000s. There are so many differences, I just don’t have the time or space to outline them all.

As well, many buyers in the U.S. benefited from low introductory teaser rates on their mortgages only to be caught short when rates increased and they were faced with increased monthly payments.

“The introduction of the teaser rate, a low introductory rate for a period of two or three years that would adjust upward at the end of the initial period, worked to effectively neutralize U.S. monetary policy,” Tal wrote.

“The practical implication of that was that when the teaser period expired, millions of Americans felt the full impact of two years’ worth of monetary tightening virtually overnight.”

Comment: Their “variable rate” mortgages started at 1% for the first 12 months and then shot up to 12% or something ridiculous. Their mortgage payments doubled or tripled. It was all a ploy by the banks to sucker people into mortgages they could not afford. Either they paid the extortionate rates, or they defaulted and the bank got the property. And this was after they got the mortgage without having to prove income or anything… Work part-time at Walmart? Sure, here’s a mortgage for $600,000! How anyone thought they could afford the teaser rate mortgage payment of $1,800, never mind the $6,000 payment it shot up to after the initial loan period. And thus up to 30% of homeowners defaulted on their mortgages. You can see it all so easily in hindsight.

Home sales in Canada have been falling amid uncertainty about the economy and Ottawa’s tightened mortgage lending rules.

Comment: Not uncertainty, it is just harder for some to get a mortgage now. And monthly payments are higher. Nothing uncertain about that!

According to the Canadian Real Estate Association, September home sales fell 15.1% from a year ago, while the national average price was up 1.1% to $355,777 in September from a year earlier.

The association said excluding Vancouver, the country’s most expensive market, the average price was up 3.4% from a year ago.

Tal said home prices in large cities like Vancouver and Toronto are overshooting their fundamentals and will likely slip as sales fall.

Comment: What are these “fundamentals” that we are overshooting?

“But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned,” he wrote.

“Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself.”

Comment: Amen. The only trigger for housing problems is people believing all the hype. All of the data is available, I do not work with numbers that you cannot see. Do your own math, come to your own conclusions.

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Contact the Jeffrey Team for more information – 416-388-1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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David Rosenberg’s 5 reasons Canada’s household debt panic is overblown

November 1, 2012 Household Debt, Miscellaneous

Pamela Heaven – Financial Post

There’s a lot of horror stories circulating lately around the latest data showing that Canadian household debt to income ratio has hit 165% – not just a record high, but also beating the bubble peaks in the United States.

Gluskin Sheff chief economist David Rosenberg, however, has taken a closer look at the figures. Here’s his five reasons why the panic may be a bit overblown.

1) Canadian debt/income ratio isn’t as bad as it looks. Because Canadians pay for their health care through their taxes, their disposable income is distorted relative to the U.S. In terms of personal income, the ratio is actually closer to 118%, rather the scary 165%.

2) Canadian household debt relative to assets (19%) and net worth (24%) is below prior peaks of 20% and 25%, respectively. Rosenberg estimates Canada would need to see a 20% drop in the housing market to get net worth/income ratio down to the U.S. level.

3) Canadians have more equity in their homes – 69% of the value compared with 43% in the U.S. “This equity gap is a prime reason why Canadian household net worth/income ratio (at over 500%) is some 35 percentage points above U.S. levels,” Rosenberg writes.

4) Canadians are better able to service their debts. Canadian wage growth at 4% a year is about double what it is in the U.S. – a rise that pretty much matches the average interest rate they are paying. Meanwhile, debt growth has slowed to its slowest in a decade – showing that balance sheets are improving “without the painful deleveraging that has occurred south of the border.”

“To be sure, if the Bank of Canada feels compelled to raise rates that would be a different matter, but that is a long way off,” he said.

5) The debt-servicing ratio in Canadian households is now just over 7% – a level it has only been below in the past 15% of the time. So even though Canadian interest rates are 75 basis points higher than in U.S, it is not hampering our ability to handle debt.

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Contact the Jeffrey Team for more information – 416−388−1960

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Higher than expected home prices renew concerns of Canadian bubble

June 4, 2012 General Real Estate, Mortgages and Financial Information, National Real Estate

Gordon Isfeld – Financial Post

As home prices continue their steady ascent, the volume of debate over the too-hot or just-about-right market is also getting turned up.

Politicians and monetary policy-makers are warning consumers to tackle their debt loads now, while many analysts argue that is already happening and house prices are still in a healthy range.

Comment: It is happening, there is proof. Canadians, as a whole, are taking on less debt and are paying down what they have. Couple that with rising incomes and our debt-to-income ratio is falling. Just what the finance minister ordered!

Few are suggesting a market crash is imminent, but this week’s spate of strong housing data has renewed concerns the market is dangerously close to overheating and heading for a bubble.

The latest salvo came Thursday, with Statistics Canada data showing new home prices climbing 0.3% in March — the 12th monthly increase in row — and just above forecasts. When compared to 12 months earlier, prices were up 2.6%.

Comment: Wow, that rate of increase is actually 0.65% less than the long-term inflation rate. And exactly the same as the current inflation rate. That means prices have actually not risen at all.

The biggest gains in March were in the Toronto and Oshawa region, where prices were up 0.6% in March — due to favourable market conditions and increased demand — and 6.2% higher on the year.

On Monday, StatsCan reported housing-permit values rose 4.7% in March, way above expectations, and following a 7.6% increase the previous month. But it was Tuesday’s closely monitored new home construction report that really got tongues wagging.

Canada Mortgage and Housing Corp. said housing starts jumped 14% in April from the month before to 244,900 units. Most of that activity was once again in the frenzied condo sector.

Comment: And the warmer than usual weather would not have anything to do with that, would it? Not that builders could get a head start and begin more projects sooner because the weather allowed them to. Naw, more likely just another sign of the real estate apocalypse.

That report “led to more than a few gasps and coffee stains upon release, highlighting just how high the heat has turned up in certain markets,” said BMO Capital Markets economist Alex Koustas.

“That being said, the new home price index has been relatively well-behaved, reflecting more balance on a national level.”

Comment: So really, if we don’t twist the numbers, things are overall just fine. Uh huh.

Yet, some market watchers believe home prices are overvalued by as much as 15%, while others see the gains as moderate.

Comment: No one has any basis for their “overvalued” numbers. Why 15%? Why not 22%? Or even 8.2% The market is what the market is – free and open. Prices are set by 100s of 1,000s of buyers and sellers and realtors every year. There were 456,749 sales across Canada in 2011. With one buyer and one seller, each with their own Realtor, there were 1,826,996 people involved in the national real estate market last year. Almost 2 million independent opinions on what properties are worth. Thus, house prices are exactly where they should be, at market value.

“The [market] is still healthy,” said Laura Parsons, mortgage specialist at Bank of Montreal.

“Vancouver’s market is so much different than most of other markets, and [in] Toronto … new housing prices are up substantially but it’s because of a lot on condo development — and affordable condos.”

Comment: What? New housing costs are not up. In fact, new condos fell by 1% per square foot in Q1.

As for household debt, Ms. Parsons said: “I’ve never seen so much discussion around trying to save on costs and paying more attention to their debt load.

Comment: And it is working. People are reducing their debt load. Good news, end of story.

“I think if we really had to cut back on our budget every month to afford a mortgage, I think there’s room there.”

The Bank of Canada, which has kept its trendsetting interest rate at a near-record low of 1% since September 2010, says household debt remains the biggest threat to the domestic economy.

Household debt-to-disposable income is running at about 152.9%.

Along with Finance Minister Jim Flaherty, central bank governor Mark Carney has urged consumers not to get in over their heads because rates will eventually start going up.

Last month, Mr. Carney told the House of Commons finance committee that the average home price in Canada is now about 4.75 times people’s income, while the historic average is around to 3.5 times income. He cautioned Canadians to use “prudence and caution” with their family budgets.

Comment: Yet again, that ratio is flawed. People buy a house based on the monthly cost, not the purchase price. Without getting into the details, the average house in 1982 at the current mortgage rate would have cost around $7,100 in today’s dollars. The same average house at today’s rates is around $2,800 a month. That is the ratio that matters.

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Contact the Jeffrey Team for more information – 416-388-1960

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Laurin and Natalie Jeffrey are Toronto real estate agents. We would be happy to help you find your new Toronto home — be it house or condo or loft. We would also be more than pleased to help you sell your current Toronto property.

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The vast majority of content on this blog is not written by Laurin or Natalie Jeffery. It is written by many different authors, for many different publications and websites.

We re-print these articles here as a collection of Toronto real estate news and information. We aim for this blog to be a one-stop shop for people looking for information on Toronto real estate.

We do not claim any of the information we did not write as our own. We do not work for any publication, nor any builder. We are Registered Real Estate Sales People working for Century 21 Regal Realty Inc. Brokerage.