Category Archives: Household Debt
Jamie Sturgeon – Global News
First-time buyers are screwed. Many young families who’ve bit the bullet on over-sized mortgages are dangerously vulnerable in the event of a downturn, while the whole creaking apparatus of Canada’s gilded housing market could be overpriced by nearly a third. At least that’s what the Bank of Canada now says.
Comment: No, the BoC said that last year, almost 4 months ago now. And they only said that home prices might be over valued. They never said buyers were screwed or any of that.
Boomers, meanwhile, counting on their suburban bungalows to double as gold mines that will shower them with cash in retirement maybe want to sell before the house of cards collapses.
Comment: That can’t be true, as they are not selling. They see no rush to cash out. No one thinks real estate is a house of cards. And no one thinks anything is going to collapse. Where are you getting this from?
That’s become the well-established — and rightfully alarming – narrative painted by Canada’s housing market bears, who’ve been saying for the last few years, as prices have raced higher, that a crash looms.
Comment: What is alarming? Who is alarmed? Okay, maybe Calgary, but that is. The bears have been calling for a crash for 12 years now. Some called for condos to die out in 2003. Garth Turner spent most of the first decade of the 2000s telling everyone that buying real estate was foolish and that a collapse was imminent (even as he bought and sold houses for profit, betting his own money that prices would continue to rise). Now we have Capital Economics and that guy from out west. Capital first predicted Toronto real estate prices would fall by 25% – just under 4 years ago now. Prices have risen some 30% since then. Now we have the guy, he wrote a book, I never bothered trying to remember his name, he predicts Toronto prices will fall 50% by this fall. Uh huh. So they have all been wrong for over a decade now, but we are supposed to listen to them? Why would we listen to people who are eternally wrong?
On the other side of the fence though are experts who say the market is fine, supported by demographic fundamentals, low interest rates (that are drifting lower), and stable employment levels churning out enough income to keep mortgage payments current.
Comment: But it is. Those are actual data. Us optimists are realists, using actual information and reality to judge what is happening. And you know what? We have been right for a long time now.
“Despite calls for a significant decline in Canadian housing activity, the overall market continues to show remarkable resilience,” economists at TD Bank, for example, said on Feb. 12. “Conditions are expected to remain stable over the next few years.”
Comment: And TD was chief naysayer of the big banks, so if they have come around, then I think we finally have consensus. But for a few outlying weirdos.
Canadian home prices appreciated a “sturdy” 7% nationally last year, TD said, or roughly double the pace of income growth. Gains were even higher in Vancouver, Toronto and Calgary.
Comment: Yet monthly payments are less today than they were 30-35 years ago.
“These increases portray a picture of housing tranquility,” commentary from noted housing pessimists at Capital Economics said the same day. But, “some regions are likely at the beginning of what could prove to be significant market corrections.”
Comment: Well duh. Oil took a nose dive, so it doesn’t take a genius to figure out that Alberta is going to have a tough time of it.
Time will inevitably tell whose version of reality holds, but as the multi-billion-dollar real estate industry gears up for another spring selling season, there are numerous warning signs that both buyers and sellers should pay close attention to.
Comment: Warning signs? Not in Toronto…
Calgary – and Alberta as a whole — appears poised to be one such market entering correction. But even now, if you’ve been in the market for awhile, you’ve made a big return.
Last month, the House Price Index (HPI) benchmark price for a residential property in Canada’s energy capital reached $454,200. That’s a jump of 109% compared to February 2005, when $215,400 got you a mid-market single family home. Meanwhile, home prices in Vancouver and Toronto — the country’s two most expensive markets — have bloated 68% and 71% over that time, respectively, to $641,600 and $522,200 (benchmark price, across all housing types).
Comment: “Bloated”? Is this reporting or opinion?
Incomes haven’t come close to keeping pace. And filling the void has been an ocean of low-interest debt.
Comment: But the real measure is monthly income vs. monthly housing costs. It is the same today – or lower – than it was 30-35 years ago (in inflation adjusted dollars).
Household debt has grown 80% since 2005, to $1.8 trillion, most of it — $1.2 trillion — in mortgage loans. The surge in leverage has pushed the indebtedness of the Canadian public to record highs in the process. While the yawning gulf between home values and incomes has now left a sizable chunk of would-be home buyers with too little saved for a down payment, or at least second thoughts about putting their chips down.
Comment: Probably because prices are rising, so mortgages are rising. And there are more homeowners today, ownership rates are rising. You do not specify the increase in mortgage debt, so it is hard to evaluate that paragraph properly. And the “yawning gulf” between incomes and home prices can’t be that big a deal – sales are setting records, ownership rates are rising, prices keep going up. If it were that big a problem, we would see the opposite.
“That’s the big quandary. On one hand, mortgage rates will never be lower, on the other hand the price of your average house is so many multiples above average incomes, it’s just so prohibitive for a buyer getting into the market,” said John Andrew, a professor at Queen’s University and expert on housing. “But we were saying the same thing three years ago.”
Comment: Right. So your “expert” opinion was wrong. And again, if it was that prohibitive, then we would not see sales so high, would we?
Andrew has started warning his business graduates to carefully weigh the decision to take the plunge – even in markets so far unaffected by falling oil prices, like Toronto, as well as on relatively cheaper housing like condos.
“Let a landlord take the risk,” Andrew said. “I don’t particularly like the condo market in downtown Toronto right now. Personally, that’s a risk level I wouldn’t be comfortable with. And I would probably say that for Vancouver.”
Comment: So your students who rent instead of buying, how are you going to explain to them the money they lost when 5 years from now condo prices are up 15-20% and they have zero equity? Their down payments will have grown. If mortgage rates also rise, they might be priced out of even small condos. Don’t give bad advice that could hurt them financially.
GTA versus Chicago
To get a sense of how expensive Canadian homes have gotten, prospective home buyers could take a visit to Georgetown, Ont., a community of 40,000 that sits on the outer boundary of the Greater Toronto Area. The commute to Toronto is long, but even here, homes don’t come cheap.
“Ultimately, like anywhere, it’s location, location, location,” local Re/Max agent Darren Morris said.
Morris’ team successfully sold this month a two-story home on Princess Anne Drive, a well-designed 3,000 square-foot brick house with four bedrooms and three bathrooms; the idyllic home for the idyllic average Canadian family.
The price: $660,000. Based on a five-year mortgage with a fixed interest rate of 3.09%, the cost would be a few bucks shy of $600. Each week.
Comment: Except that mortgage rates are more like 2.79% right now. And your math is WAY off. Even using the correct mortgage rate and a down payment of 10% (and applicable CMHC fees), the mortgage would be around $650/week or $2,813.40 a month. That is not a crazy amount… A couple making $120,000 between them would qualify for that.
“In comparison to prices in Mississauga, Toronto or Etobicoke, we’re still pretty affordable,” Morris said.
Contrast that listing with properties situated about an hour outside of a comparable North American centre — say, Chicago. Experts suggest (which online listings back up) that a young family could reasonably expect to find a comparable home to the one Morris sold for about half the cost.
Comment: And you could go to NYC or California and find prices double what we have in the GTA. Go an hour north of New Orleans and you can probably get a house for $10,000 – so what?
And Chicago, which went through a price correction in 2008, isn’t the only major American centre where home prices are meaningfully lower than what buyers are confronting near Toronto.
Comment: The entire US went through a “correction” in 2008. Their economy tanked and their housing market crashed due to a very well-documented and criminal mortgage investment scam.
“This is even the case in New York, outside of Manhattan,” said Diana Petramala, a housing economist at TD Bank. “If you compare the suburbs around Toronto, they’re far more expensive than suburbs that surround other major urban areas. It’s much more difficult to find affordable properties here.”
Comment: That is total horse pucky! Williamsburg has a median sale price $708,000 USD. Downtown Brooklyn is $741,208 UD. Bed-Stuy is in the high $600s. It costs a median $800k to live near the horribly polluted Gowanus Canal. Queens ranges from $450k or so up to over $900k. Way over in Flushing Bay, with a view of LaGuardia Airport, that will set you back a median $515,000 USD. Even Hoboken NJ is in the $400-600k range. Sure, I can pick and choose some crappy neighbourhoods that are about the same distance from Manhattan as Georgetown is from downtown Toronto, and I can find average prices in the $240-250,000 USD range. But I can also show you townhouses at Finch & Albion or Jane & Finch for under $100,000. Just proves we can root through the data to find different numbers. But my point is that the vast majority of housing outside NYC is still very expensive.
You could say it’s a Toronto thing. But it’s not.
Pricey real estate relative to incomes has become endemic across the country. The old rule of thumb when taking out a home loan was that it shouldn’t exceed three times the amount of your annual household income. Anything above that level, you risk losing your shirt if you’re hit with a financial shock, such as a job loss.
Comment: Regardless of how much your mortgage is, you cannot make the payments if you don’t have a job. It doesn’t matter if it is $300,000 or $600,000, does it? And don’t forget, Canada is a good place. Our economy is good, our banks are solid, lots of people move here every year. People want to be here. So they come and buy or rent homes. With a net influx every year, we need to add new housing for the new people. Thus we are constantly making more housing. The more we make, the less land there is to put it on. Thus the remaining land gets more expensive. And the remaining land tends to be outside the city centres, making the downtown cores more valuable, as the supply is constrained. With low borrowing costs, it is easy for people to buy. And for those who cannot afford to buy, there a lot of people renting out the properties they own. But in both rental and sales camps, there is barely enough to satisfy demand, keeping constant pressure on prices.
But in Canada, no one’s contained themselves to within that threshold in years. The average “multiple” of home price-versus-average household income has hit 5.6 times, according to TD Bank. In British Columbia and the GTA, multiples are dizzying, fueled in part by wealthy foreign investment.
Comment: But that simply does not matter. The CMHC, banks, many others – they all discounted the income-price ratio as being meaningless. And it is. What matters is monthly income to monthly housing costs. And that is obviously in line, as banks would not lend to those if it wasn’t. And people would not be making their payments if it they couldn’t afford it. Default rates haven’t changed since WWII. So, opinions aside, obviously everything is fine.
“Canadian housing prices are almost double U.S. housing prices,” said Hilliard MacBeth, a portfolio manager from Richardson GMP in Edmonton. “What makes us think we can afford double?”
Comment: What makes you think we can’t? And why are we comparing our housing market to the US? It is SO different as to be moot. Why not compare to Tibet or South Africa? They have as much in common.
MacBeth, another notable Canadian housing market bear, suggests the multiples Canadian homebuyers are paying on bloated home loans are well in excess of any housing bubble in Canada before now. He said that during previous housing busts in the late 1970s and late ’80s, borrowers hit “the old peak” of about 3.5 times incomes.
Comment: There was no housing bubble or bust in th 1970s. There was a bubble beginning in the late 1980s, but the bust was in the 1990s. And the price-to-income ratio had NOTHING whatsoever to do with the bubble of the 80s and 90s. It was speculation, which we all know. People paid more and more, hoping to flip and make money. Then it all fell apart. But incomes had nothing to do with it.
“This is a much, much bigger bubble,” said MacBeth, who believes home values could crater by 50%.
Comment: Nope, ain’t a bubble. Prices have risen an average of 5.7% annually since 1996… certainly not anyone’s definition of a rapid increase. And it hasn’t dropped, there has been no “pop”. Thus we are missing both main components in the definition of a bubble. So, no bubble. And this guy thinks Toronto prices are going to drop 50% by fall 2015. Right.
But TD’s Petramala said this time is different. “What’s important here is that interest rates have come down, so historical comparisons might not hold in this environment because rates are so low. And we don’t expect them to return to historical levels in the near future.”
Comment: Exactly! And with mortgage rates ranging from 5% in 1951 to 21.46% 1981 to 2.79% today there is no real way to compare different time periods. Recessions in the early 1980s and early 1990s also skew the data… as well as the almost-recession we had in 2008-2009. Inflation rates have jumped around from -17.8% to 21.6% as well, making it hard to compare money values from different time periods. How do we compare the housing market of the early 1980s – with a recession, mortgage rates over 20% and inflation in the 13% range – to today? There was more land available then, fewer cars, different jobs… It was simply a different time, it was a generation ago. Heck, how do we compare the $5,000 my grandparents paid for their house in 1956? You simply can’t.
Come mortgage renewal time, first-time buyers who have jumped into the market in recent years are hoping Petramala is right.
“I think their big risk isn’t so much a correction, because they’re already in the market. Their risk is a mortgage rate risk,” Queen’s professor Andrew said.
Comment: Exactly. Even though there is NO correction. And mortgage rates only affect those renewing or getting new mortgages. And right now, those renewing are getting lower rates than they had before. And in 5 years from now, they will have been paying their mortgages for 10 years. Five years ago the average Toronto property price was $400,000 or so and their rate was maybe 4.75%. With 10% down, they would have $325,000 left after 5 years. Renewing at 2.79% would see their monthly payment drop from $2,092 to $1,768 and after 5 more years they would only have $260,000 left on their mortgage. So even with a 35% drop in values, they would still be above water. And even if mortgage rates shot up to 8.5% (which they WON’T), they could push their amortization out from 15 years to 25 years and still have lower payments than when they first bought the property. There is VERY little risk in any of this.
“Let’s say they took out a mortgage two years ago. In three years, that mortgage is going to come up for renewal. What most people do is borrow as much as they can, buy as much home as they can possibly afford. And for most of us, income growth isn’t outstripping inflation, so three years from now, what if that mortgage rate isn’t 3% or 4%, but 5% or 6%?” he asked.
Comment: That is not true. Trust me, I do this for a living, people almost always spend less than the bank will give them. And if they would 2 years ago, the average price would have been around $500,000 and mortgage rates would have been in the 3% range, so their payments would be $2,178 with 10% down. If rates hit 6%, their payment would rise to $2,805 – an increas of $627 a month. If that is too high, they can always push their amortization up from 20 to 25 years and their payment falls to $2,519. I think it is safe to assume that most people can afford an extra $341 a month. And if they find a variable rate that is 1-2% lower, then their payments are almost the same as they were in the beginning. It sounds bad when you throw around various numbers, but when you sit down and do the math and explore the options, you see that it is not the end of the world the doomsayers want you to think it is.
Alberta is providing buyers and sellers in other markets a glimpse of how quickly conditions can sour as crashing oil prices send a deep chill through what has been Canada’s hottest housing market.
Comment: But that can’t happen here, so it doesn’t matter.
Sales in Calgary crumbled 34% last month, while average prices fell 4.3% compared to February a year ago. New listings have surged 107%, suggesting much more downward pressure on home values awaits as power shifts into the hands of increasingly nervous buyers.
Comment: And as oil price rise again, all of that will reverse.
Other markets where oil and energy prices that have drawn in workers and housing investment are now falling as well, such as Saskatchewan and Newfoundland.
Comment: Regina has been doing poorly for a while. And the Martimes have never done well, the economy has never been good from Quebec eastwards.
“Prices appear to be on track to fall by as much as 10% in Calgary, Edmonton and St. John’s over 2015 and 2016,” TD said this month.
Comment: So wait a second. Even with Calgary’s economy collapsing catastrophically, their home prices will only fall 10% over 2-1/2 years? And Mr. Macbeth thinks Toronto is going to fall 50% in the next 6 months? How is that even possible?
Hilliard has written about investment follies previously in his 1999 book Investment Traps and How to Avoid Them. In it, he lays out the case of what he calls the “buy-high trap” that seduced pensioners and others to buy into the dot-com stock market mania that eventually popped a couple years later.
Comment: And yet most of those stocks have come back to their old highs, or higher. Sure, the stupid sock puppet site is gone, but any money put into Apple or Google has seen its value rise by orders of magnitude. My father invested in a lot of tech stocks – and while he has had a rocky ride, he has ended up with a LOT of money.
“The funny thing about bubbles is that the timing is the unknown. In 1999, there were warnings several years before the dot-com bubble burst,” Hilliard said. “But while you were in the middle of it, it just kept going and going and going.”
Comment: Sort of. No one quite expected the rapid run up and then collapse. But everything was rapid, same with housing in the 1980s and 1990s, prices rose and fell quickly. It just isn’t the same today, it isn’t. Heck, even the tech bubble of 1999-2000 is 15-16 years ago now, that is a fairly long time.
Contact Laurin Jeffrey for more information – 416-388-1960
Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.