Tag Archives: upward spiral
Housing credit squeeze likely to keep bubble at bay
By David Olive – Toronto Star
Finance Minister Jim Flaherty has headed off any last chance of a housing bubble developing in Canada.
Comment: No one but The Star thought there was any chance of a bubble anyway. You just threw the words around because it made for good press. All of the data supports the exact opposite. Look at the numbers from 1988–1991 versus 1996–2010 and notice that they are not at all alike. People – do not believe the hype, check the data for yourself and come to your own conclusions!
Not that there was much likelihood of a bubble forming, despite the astonishing recovery in Canadian house prices in recent months, fuelled by pent-up demand and record-low interest rates. The fears on that score are overblown. So are those of a crash in prices when the non-existent bubble implodes.
Here’s why the Canadian housing market is heading into a period of stability:
Ottawa has just signalled it will slam the brakes on the real estate market if it shows signs of spinning out of control.
Mortgage-tightening rules Flaherty unveiled Tuesday are gentle and highly targeted. They’re aimed at discouraging Canadians from using their homes as ATM machines. And to make life difficult for speculators who buy six-packs of condo units in the hope of flipping them for a quick buck.
That activity drives up housing values across the board, fostering the illusion of a sustainable rise in demand and prices that, in fact, is built on sand. These were culprits in the record run-up in U.S. housing values in the previous decade that ended with an epic collapse, as U.S. house prices abruptly plunged between 40% and 70% from their 2007 peak.
If Flaherty’s new measures don’t ease house-price inflation, he’ll reach deeper into his toolbox for a mallet, and now every player in the market knows it. Flaherty said Canadians can withdraw only 90% of the value of their homes when refinancing, down slightly from the current 95%. In the next round of disciplining the market, if required, Ottawa can drop that amount to 85% or still lower.
Ottawa will now require a 20% down payment on government-insured mortgages for what it describes as “speculative” investment properties.
Real estate agents, mortgage brokers and even some economists feared Ottawa might apply that 20% requirement on all housing purchases. That could dampen not only real estate values, but also the wider economic recovery.
But Ottawa has bared its teeth: If the upward spiral in prices continues, Flaherty might broaden the application of the higher down payment requirement to, say, principal residences.
The Canada Mortgage and Housing Corp., the principal insurer of Canadian home mortgages, already has tightened its rules on approving insurance on mortgages that show the slightest potential for default. And it has eliminated non-down-payment mortgages.
One of the classic characteristics of a bubble is that in the midst of one, no one thinks it’s a bubble. If they did, they’d quickly clear their winnings off the table. That fears of an emerging Canadian housing bubble have preoccupied economists, lenders, policymakers and buyers since last fall is a sure indication that the market is not caught up in an irrational buying frenzy.
There has been little speculative activity in the housing market. This dangerous phenomenon shows up in volume as much as prices, as the number of transactions soars with the rampant buying of non-owner-occupied homes. Yet in this market, as prices have risen strongly, volume has been close to flat.
The housing market is about to endure two cold showers. The Harmonized Sales Tax (HST) will kick in July 1 in Ontario and B.C., two of the biggest and most buoyant markets. And the Bank of Canada’s low-low interest rates – the main cause of today’s robust prices – are expected to rise this year.
The fundamentals of our economy don’t support another leap in prices.
No question, the Canadian housing market has recovered with startling speed and strength. From the trough a year ago last month, average Canadian home prices have soared 23%, in the teeth of a global recession with no equal in modern times. The average Toronto house price has jumped 19% in the past year, to $409,058 last month.
But Canadian personal income slipped 1% in 2009, and total employment was down 1.4% from 2008. And in a report Tuesday, the Ottawa-based Vanier Institute of the Family warned that Canadian household debt reached a record average of $96,000 last year. The incidence of late mortgage payments soared 50% in 2009, and credit-card holders at least three months behind in their payments was up 40%.
Under those circumstances, deferred gratification will trump irrational exuberance in most dinner-table discussions of family finances.
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What the world needs now is a little perspective
Daniel Muzyka and Lawrence Weiss – Globe and Mail
On the roof,
it’s peaceful as can be
And there the world below
can’t bother me
– from Up on the Roof
We need to listen to this sage advice from Carole King and Gerry Goffin: It is time to gain some altitude and perspective.
Watching the past few months unfold in the financial economy, then the real economy, and now in the press, you would think that everything that is happening is unprecedented. It is not.
For starters, economic cycles have had some pretty nasty twists and turns over the past century. It is just that our money managers and brokers – who are generally in their 30s and have only seen the market for the past decade – just don’t have it in their collective memory. The relative lack of massive swings over the past few years has led us into a comfortable lull, with a false belief that “risk” only has upside.
A friend recently noted that a client of his was outraged that his investment had declined in value. The client argued that the high-risk instrument he bought had a “guaranteed track record” of high returns. Hmmm.
Second, greed, “self-dealing” and frauds have been with us for time immemorial. Have we learned nothing from the tulip bulb mania (1637), Charles Ponzi (1920), Tino’s salad oil scandal (1963), Equity Funding Corp. (1973), the Hunt Brothers and Silver Thursday (1980), Enron and WorldCom (2001) … to name just a few of the most spectacular ones? (And as 2008 winds down there is the alleged fraud committed by Wall Street’s Bernard Madoff through a Ponzi scheme.)
During good times, people get greedy and stop doing proper due diligence. When markets turn down, we panic, thinking all the self-dealing will bring on an economic Armageddon. It won’t. The ebbing economic tide is likely to expose more of the rocks that have always been there as well as those that were tossed in during the bubble. We must modify Gordon Gekko’s comment: Greed may be good, but only with some common sense and care.
Third, the economic woes of some industries, such as the North American auto industry, are neither new nor fully caused by the economic conditions today. The industry has been having difficulties since the 1970s when the consumer markets told them they were building the wrong automobiles and foreign competition started to take considerable share.
Fourth, our world of instant communication permits media not only to report information, but to focus on a continuing series of negative reports. Reading some of the reports about value destruction in real estate might make you forget that most of the “value” now lost was only created in the past five years, during a bubble. Balance and perspective is important.
All of this leads up to the point that it is time to start thinking positively. We need to get back on an upward spiral.
The world has problems, the economy will have some twists and turns, but we have made some significant progress. Unemployment may reach 8 per cent, but realize that 92 per cent are employed. Yes, some industries will get hit, but the resources unleashed will make new opportunities and renewal possible. Our lives are better than those of our parents in so many ways. We have the capacity to feed much of the world and the power to conquer diseases that made our ancestors live much shorter lives just 50 years ago.
Whatever you do, don’t simply cut off spending. Reacting to trends and issues is important, but try to keep balance in your actions. Cancelling projects may make sense, but put them in perspective. Stretching them out, modifying them or pushing forward with the realization that new capacity will likely come when the markets turn up is often better for you and the economy.
In the end, we wish you peace, health and prosperity during this holiday season. Enjoy your family and friends and count all of the good things you have. And please, take heed of Carole King’s lyrics and get “up on the roof.” We can become part of the problem or part of the solution. We prefer the latter.
Daniel F. Muzyka is dean of the Sauder School of Business at the University of British Columbia, where he is RBC Financial Group professor of entrepreneurship. Lawrence A. Weiss is a visiting professor at McDonough School of Business at Georgetown University.
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Contact the Jeffrey Team for more information – 416-388-1960
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Sometimes, you have to leap before you look
The condo market forces buyers to make quick decisions, often on dwellings they have never seen
By Derek Raymaker – The Globe and Mail
Buying your first home is stressful enough, what with finding the perfect place to match your budget, lining up financing and inspections, and untangling the many tentacles of a household move.
But first-time condo buyers in Canada’s surging urban cores face another level of anxiety — the prospect of making a quarter-million-dollar purchase based on architects’ plans and the possibility that their new condo might not be ready when the developer says it will.
Nevertheless, condo ownership is by far the most affordable purchase option for first-time buyers who want to live near the centre of the action in Toronto, Vancouver, Calgary and many other booming cities. Even developers of traditional suburban tract housing are shifting to downtown high-density projects, noting the many customers drawn to them: young singles and couples taking advantage of historically low interest rates, recent immigrants, and retirees downsizing from detached houses.
While the prices of new condos are climbing across Canada, they’re still far more affordable than resale detached homes in most cities. But the upward spiral is forcing many new-condo buyers to make quick decisions to save themselves tens of thousands of dollars down the road.
Claire Munroe and her boyfriend, Josh Alter, both 26, are renters in the trendy Vancouver neighbourhood of Kitsilano, which is chock-a-block with organic health-food stores, yoga studios and casual bistros.
The couple wanted to remain in “Kits,” as it is commonly known, but that would have meant a $400,000 or $500,000 purchase for a very basic condo.
“Josh said, ‘For the amount of money that I have, I’m not going to get anything of quality [in Kitsilano],’ ” recalls Ms. Munroe, a consultant at National Public Relations. “He started looking as far east as Burnaby, but I really wanted to stay close to the city. We compromised on the Main Street area.”
In March, 2006, the couple made a deposit on a 675-square-foot, one-bedroom-plus-den condo in The Sophia, a new high-rise on Main Street and East 11th Avenue, which until recently was considered a less-desirable part of town. The price was $336,000, a bargain for a condo in central Vancouver.
The condo boom in the area, which is close to the SkyTrain mass transit system, will change the face of Main Street, the unofficial boundary between central and outlying Vancouver. Whether the area will ever acquire the cachet of Kits remains to be seen. “I don’t know if we would even want that,” Ms. Munroe adds.
Their new condo was supposed to be ready last month, but the developer, the Eden Group of Companies, has delayed occupancy until November.
Ms. Munroe thinks even that is optimistic, and predicts she’ll finally move in some time in early 2008. But she is not feeling any buyers’ remorse or frustration about the wait. “If we continued to wait [to purchase], it would have been that much more difficult to get into the market,” she says. “If you find something good, you really have to jump on it.”
Mitchell Purdy is a first-time buyer in Vancouver on the outside of the market looking in. The 24-year-old technology recruiter for TEKsystems figures he has looked at more than 70 condos since last September but still hasn’t nailed down a purchase.
He has made two offers on condos in the past six weeks, both of which came up short compared with competing offers, including one that was $20,000 above the list price. “If I can spend anything less than $420,000, I’ll be a happy man,” Mr. Purdy says ruefully.
Mr. Purdy also rents in Kitsilano, and is having a hard time finding something outside the area. “I’m looking at condos almost every weekend, and I’ve seen so many that it’s a very easy decision for me to make because I know exactly what I want,” he says. “The problem is that a lot of other people have, too.”
Mr. Purdy is looking for a two-bedroom condo expressly for the purpose of getting a roommate to help him pay what will no doubt be a hefty mortgage for someone in his mid-20s. Luckily, he has secured financial help from his father to put down 25 per cent of the purchase price, thus avoiding the need for mortgage insurance.
Ms. Munroe and Mr. Alter also say they would have a tough time making the purchase without help from their parents, who are ponying up funds to reduce the pain of the mortgage. One of the good things about the construction delay of their condo, in fact, is that it has allowed them more time to save for the down payment.
When buyers sign an agreement to purchase a new condo, they make a deposit that is held in trust against the purchase price. When construction is finished to the point where the unit is safe for occupancy, the condo is registered with the provincial land registry. After this, the deal can be closed; the buyer must deliver to the developer (or seller) the down payment, the balance of the purchase price in the form of a mortgage, and other closing costs, before moving in.
In Toronto, condo construction has been in such a prolonged boom that there isn’t the same supply crunch as in Vancouver. Thus, prices are more affordable, relatively speaking, and first-time condo buyers don’t feel the need to jump into the market quickly for fear prices will rise at a rapid pace.
The pressure in Toronto, in fact, is on the developers. Unless they are able to self-finance construction without backing from bankers, they must sell at least half the units in their projects before a finance syndicate will approve construction costs and shovels hit the ground.
In this type of real estate market, consumers often see new developments promoting incentives such as free parking spots, appliances or upgraded finishes as well as reduced maintenance fees to secure a deal.
Torontonian Lorna Johnson bought her first condo in early 2004 and moved in last July when it was completed. Her 1,118-square-foot loft in the five-storey Broadview Lofts at Broadview and Eastern avenues cost $250,000, but she added $38,000 worth of upgrades including a parking spot and balcony.
Ms. Johnson, a 43-year-old account director at an advertising firm, had been living in an east-end house with her teenage daughter but found that it was just too much for a single mother to take care of.
“The house had a lot of outside maintenance and my knees couldn’t handle going down to the basement to do laundry,” she says.
The biggest challenge for her in buying her new loft was making the purchase off blueprints, rather than seeing the completed unit.
“The challenge was not knowing what you’ll be getting,” Ms. Johnson says. “Trying to decide what to buy without knowing what it was going to look like was new to me.”
Condo costs
Handing over the deposit on your new condo is just the first of a long list of cash outlays, many of which may be unfamiliar to first-time buyers.
Development charges: Most municipalities levy a charge on developers for service upgrades, such as sewer and water connections. For a high-density project that needs to service 100 residents on a site that used to service only 20, these costs can be considerable — up to $5,000 a unit, says Toronto lawyer Sandy McIntyre.
Equipment leasing: Builders can lease everything from water heaters to elevators, and pass on the costs to buyers.
Land transfer tax: In Ontario, this is a provincial levy calculated on the size of the property at the time ownership changes hands. The land transfer tax applies to all home purchases, whether new or resale, house or condo.
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Contact the Jeffrey Team for more information
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