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The Toronto Real Estate Market
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CBC News - Money - Should Canada fear housing bubble trouble?
February 10, 2010
Should Canada fear housing bubble trouble?
By CBC News
Most analysts don't see a housing bubble in Canada ? at least not yet. But many say the situation bears close watching.
These days, it doesn't take much to steer conversation toward the current state of the Canadian housing market. To put it mildly, it's been on fire.
The most recent MLS data show that the average resale home in Canada sold for $337,410 in December ? up 19 per cent from a year earlier. Sales were up a stunning 72 per cent.
Bidding wars are in full swing in Toronto and Vancouver, with anecdotal reports of some properties drawing 20 offers or more.
Economists agree that double-digit increases in housing prices in the absence of significant income gains are unsustainable in the long run. Housing would just become too unaffordable.
They also agree the current environment of record low mortgage rates is driving the current buying frenzy. A closed variable-rate mortgage goes for just 2.25 per cent at the major banks ? even less from some smaller lenders ? and a five-year fixed mortgage can be had for less than four per cent.
Canadian debt: By the numbers Household debt-to-income ratio (Q2/09): 142% Total residential mortgage debt (11/09): $956 billion Total household credit (as of Nov. 2009): $1.4 trillion Percentage of mortgages in arrears (11/09): 0.44% Sources: Bank of Canada, Canadian Bankers Assn. So the question then becomes how hard the landing will be once mortgage rates begin to rise. And everyone agrees they will rise. The only point of contention is when and how fast.
You only have to look at the recent collapse south of the border to see just how brutal a housing bubble burst can be. A huge wave of U.S. foreclosures played a key role in the global financial meltdown and the average American home price plunged by a third from 2007 to 2009 (Canadian prices fell only nine per cent from peak to trough and have since rebounded).
Could the same thing happen here?
In Canada, many economists, mortgage professionals, housing industry watchers and central bank advisers have been busy wading into the debate over whether we are about to echo the American collapse in prices.
Here's a sampling of some recent research, observations and predictions. Hyperlinks are included for those who want to read further:
The Bank of Canada:
"Generally, when there is a rapid rise in asset prices, including house prices, one should always ask whether they have increased too far, too fast.
"In the Bank of Canada's view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors ? notably the historically low borrowing costs, as well as pent-up and pulled-forward demand ? which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm."
? From Canada's Housing Sector in Recession and Recovery: Beyond Bricks and Mortar [http://www.bankofcanada.ca/en/speeches/2010/sp110110.html], a speech delivered Jan. 11, 2010, to the Edmonton CFA Society by David Wolf, adviser on behalf of Timothy Lane, deputy governor of the Bank of Canada.
Canadian Association of Accredited Mortgage Professionals:
"The bottom line from the simulations [see assumptions below] is that even though mortgage payments will probably rise for most borrowers, the increases in incomes (even with the cautious assumption that incomes will increase by 2.5 per cent per year) will more than offset the increased mortgage payments."
? From Revisiting the Canadian Mortgage Market [http://www.caamp.org/meloncms/media/caamp winter report black_2.pdf], a January 2010 report by Will Dunning, chief economist, CAAMP.
Notes for above quote: CAAMP ran a simulation of rising interest rates using its own mortgage database. It assumed rates would rise to 5.25 per cent for both fixed rate and variable rate mortgages. For mortgages with current rates above that, the rates were assumed to be unchanged in the future. The CAAMP study assumed that for variable mortgages, the 5.25 per cent interest rate would take effect in two years; for fixed-rate mortgages, the 5.25 per cent rate would be deemed to take effect at the scheduled end of the mortgage's term.
Canadian Real Estate Association:
"CREA's latest statistics [http://www.crea.ca/public/news_stats/statistics.htm] will no doubt spark further bubble talk amongst the usual suspects. Cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.
"The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons. By the second half of 2010, price gains are likely to shrink significantly, since a year will have elapsed since the decline and rebound. Further expected increases in supply will also take some steam out of the market."
? Comments from CREA chief economist Gregory Klump, quoted in a CREA news release [http://creastats.crea.ca/natl], Jan. 15, 2010.
David Rosenberg, chief strategist at Gluskin Sheff:
"In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some charts showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15 per cent to 35 per cent overvalued isn't a bubble, then it's the next closest thing. We are talking about two to three standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So, if it walks like a duck ?"
? From Gluskin Sheff [http://https://ems.gluskinsheff.net/index.ncl.html] chief strategist David Rosenberg, in a note to clients, Dec. 10, 2009.
Scotia Capital Economics
"We expect housing demand will remain strong through the key spring sales season as buyers attempt to pre-empt the inevitable rise in interest rates, and improving labour markets bolster confidence. Reduced affordability ? through a combination of higher home prices and borrowing costs ? will eventually cool demand, though probably not until much later in 2010."
? By Adrienne Warren, Scotia Capital economist, in Global Real Estate Trends [http://www.scotiacapital.com/english/bns_econ/retrends.pdf], published Jan. 11, 2010
RBC Economics:
"One of the challenges of the housing market's resurgence amid still-poor labour market conditions is that mortgage obligations are becoming more difficult to meet for a growing number of Canadian households. The Canadian Bankers Association reports a rising proportion of mortgages in arrears. This is especially the case in Alberta where the earlier housing boom has saddled many households with hefty mortgages that are now harder to service in the face of surging unemployment in the province. Mortgages in arrears are likely to continue climbing across Canada until the economic recovery is well established and net job creation is sustained next year."
? From RBC Economics quarterly Housing Trends and Affordability [http://www.rbc.com/economics/market/pdf/house.pdf] report, November 2009
TD Economics:
"From their trough [in 2007], the most sustainable path for Canadian home prices would have been a gradual and modest uptrend aligned with nominal income growth. But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12 per cent at the national level. Unfortunately, sheer momentum suggests that this overvaluation is likely to increase over the course of the next few quarters, peaking at 13 to15 per cent in [the first half of 2010]."
? From TD Economics' December 2009 Resale Housing Outlook [http://www.td.com/economics/special/pg1209_resale.pdf].
Financial author Garth Turner
"I'd be surprised if there isn't a housing rush, led by cashless, hormonal, frantic, pre-approved newbies, desperate to beat the HST and the fabled rate hikes of autumn. Fanning the flames will be every local real estate board, gorged as they are on the MLS fees which have gushed in (let's save this for another post).
"Once again, the actions of the herd ? driving a market to orgiastic crescendos of desire ? will be the truest barometer of what comes next. People so desperate to get in that price hardly matters. Bre-X. Nortel. Bullion. Pet.com. It doesn't take a genius to know what comes next."
? Posted by Garth Turner in his blog, The Greater Fool [http://www.greaterfool.ca/2010/02/08/feral], Feb. 5, 2010.
February 10, 2010
Should Canada fear housing bubble trouble?
By CBC News
Most analysts don't see a housing bubble in Canada ? at least not yet. But many say the situation bears close watching.
These days, it doesn't take much to steer conversation toward the current state of the Canadian housing market. To put it mildly, it's been on fire.
The most recent MLS data show that the average resale home in Canada sold for $337,410 in December ? up 19 per cent from a year earlier. Sales were up a stunning 72 per cent.
Bidding wars are in full swing in Toronto and Vancouver, with anecdotal reports of some properties drawing 20 offers or more.
Economists agree that double-digit increases in housing prices in the absence of significant income gains are unsustainable in the long run. Housing would just become too unaffordable.
They also agree the current environment of record low mortgage rates is driving the current buying frenzy. A closed variable-rate mortgage goes for just 2.25 per cent at the major banks ? even less from some smaller lenders ? and a five-year fixed mortgage can be had for less than four per cent.
Canadian debt: By the numbers Household debt-to-income ratio (Q2/09): 142% Total residential mortgage debt (11/09): $956 billion Total household credit (as of Nov. 2009): $1.4 trillion Percentage of mortgages in arrears (11/09): 0.44% Sources: Bank of Canada, Canadian Bankers Assn. So the question then becomes how hard the landing will be once mortgage rates begin to rise. And everyone agrees they will rise. The only point of contention is when and how fast.
You only have to look at the recent collapse south of the border to see just how brutal a housing bubble burst can be. A huge wave of U.S. foreclosures played a key role in the global financial meltdown and the average American home price plunged by a third from 2007 to 2009 (Canadian prices fell only nine per cent from peak to trough and have since rebounded).
Could the same thing happen here?
In Canada, many economists, mortgage professionals, housing industry watchers and central bank advisers have been busy wading into the debate over whether we are about to echo the American collapse in prices.
Here's a sampling of some recent research, observations and predictions. Hyperlinks are included for those who want to read further:
The Bank of Canada:
"Generally, when there is a rapid rise in asset prices, including house prices, one should always ask whether they have increased too far, too fast.
"In the Bank of Canada's view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors ? notably the historically low borrowing costs, as well as pent-up and pulled-forward demand ? which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm."
? From Canada's Housing Sector in Recession and Recovery: Beyond Bricks and Mortar [http://www.bankofcanada.ca/en/speeches/2010/sp110110.html], a speech delivered Jan. 11, 2010, to the Edmonton CFA Society by David Wolf, adviser on behalf of Timothy Lane, deputy governor of the Bank of Canada.
Canadian Association of Accredited Mortgage Professionals:
"The bottom line from the simulations [see assumptions below] is that even though mortgage payments will probably rise for most borrowers, the increases in incomes (even with the cautious assumption that incomes will increase by 2.5 per cent per year) will more than offset the increased mortgage payments."
? From Revisiting the Canadian Mortgage Market [http://www.caamp.org/meloncms/media/caamp winter report black_2.pdf], a January 2010 report by Will Dunning, chief economist, CAAMP.
Notes for above quote: CAAMP ran a simulation of rising interest rates using its own mortgage database. It assumed rates would rise to 5.25 per cent for both fixed rate and variable rate mortgages. For mortgages with current rates above that, the rates were assumed to be unchanged in the future. The CAAMP study assumed that for variable mortgages, the 5.25 per cent interest rate would take effect in two years; for fixed-rate mortgages, the 5.25 per cent rate would be deemed to take effect at the scheduled end of the mortgage's term.
Canadian Real Estate Association:
"CREA's latest statistics [http://www.crea.ca/public/news_stats/statistics.htm] will no doubt spark further bubble talk amongst the usual suspects. Cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.
"The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons. By the second half of 2010, price gains are likely to shrink significantly, since a year will have elapsed since the decline and rebound. Further expected increases in supply will also take some steam out of the market."
? Comments from CREA chief economist Gregory Klump, quoted in a CREA news release [http://creastats.crea.ca/natl], Jan. 15, 2010.
David Rosenberg, chief strategist at Gluskin Sheff:
"In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some charts showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15 per cent to 35 per cent overvalued isn't a bubble, then it's the next closest thing. We are talking about two to three standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So, if it walks like a duck ?"
? From Gluskin Sheff [http://https://ems.gluskinsheff.net/index.ncl.html] chief strategist David Rosenberg, in a note to clients, Dec. 10, 2009.
Scotia Capital Economics
"We expect housing demand will remain strong through the key spring sales season as buyers attempt to pre-empt the inevitable rise in interest rates, and improving labour markets bolster confidence. Reduced affordability ? through a combination of higher home prices and borrowing costs ? will eventually cool demand, though probably not until much later in 2010."
? By Adrienne Warren, Scotia Capital economist, in Global Real Estate Trends [http://www.scotiacapital.com/english/bns_econ/retrends.pdf], published Jan. 11, 2010
RBC Economics:
"One of the challenges of the housing market's resurgence amid still-poor labour market conditions is that mortgage obligations are becoming more difficult to meet for a growing number of Canadian households. The Canadian Bankers Association reports a rising proportion of mortgages in arrears. This is especially the case in Alberta where the earlier housing boom has saddled many households with hefty mortgages that are now harder to service in the face of surging unemployment in the province. Mortgages in arrears are likely to continue climbing across Canada until the economic recovery is well established and net job creation is sustained next year."
? From RBC Economics quarterly Housing Trends and Affordability [http://www.rbc.com/economics/market/pdf/house.pdf] report, November 2009
TD Economics:
"From their trough [in 2007], the most sustainable path for Canadian home prices would have been a gradual and modest uptrend aligned with nominal income growth. But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12 per cent at the national level. Unfortunately, sheer momentum suggests that this overvaluation is likely to increase over the course of the next few quarters, peaking at 13 to15 per cent in [the first half of 2010]."
? From TD Economics' December 2009 Resale Housing Outlook [http://www.td.com/economics/special/pg1209_resale.pdf].
Financial author Garth Turner
"I'd be surprised if there isn't a housing rush, led by cashless, hormonal, frantic, pre-approved newbies, desperate to beat the HST and the fabled rate hikes of autumn. Fanning the flames will be every local real estate board, gorged as they are on the MLS fees which have gushed in (let's save this for another post).
"Once again, the actions of the herd ? driving a market to orgiastic crescendos of desire ? will be the truest barometer of what comes next. People so desperate to get in that price hardly matters. Bre-X. Nortel. Bullion. Pet.com. It doesn't take a genius to know what comes next."
? Posted by Garth Turner in his blog, The Greater Fool [http://www.greaterfool.ca/2010/02/08/feral], Feb. 5, 2010.
Sorry I had to go before I could write more.
Doubtful. The US had a far different policy with rate resets. From my limited understanding, there were many more "teaser" options there than there are here. Example: someone got 107% of the value of their home at a retarded rate, such as 1% or so, and then 3 years later the "rate reset" kicked in at 7%. That is a huge economic shock, coupled with prices having gone down.
That same person wouldn't have qualified here for 107% of the home's value, based on a stated income deal (i.e. self-employed). So - although it could happen here, it shouldn't.
What I don't get is this. The banks themselves are like crack addicts. They are more than willing to lend money out right now, but, want the help of the Government not to lend it out? I don't understand why they themselves can't apply tighter policy- but leave it up the the BoC to tell them to do so?
"oh we can't help ourselves lending money... please help us STOP"
Doubtful. The US had a far different policy with rate resets. From my limited understanding, there were many more "teaser" options there than there are here. Example: someone got 107% of the value of their home at a retarded rate, such as 1% or so, and then 3 years later the "rate reset" kicked in at 7%. That is a huge economic shock, coupled with prices having gone down.
That same person wouldn't have qualified here for 107% of the home's value, based on a stated income deal (i.e. self-employed). So - although it could happen here, it shouldn't.
What I don't get is this. The banks themselves are like crack addicts. They are more than willing to lend money out right now, but, want the help of the Government not to lend it out? I don't understand why they themselves can't apply tighter policy- but leave it up the the BoC to tell them to do so?
"oh we can't help ourselves lending money... please help us STOP"
The "rate reset" could very well happen here, people are taking variables at 2% and fixes at 4% now but in 5 years now, they could potentially run into more historical rates such as 6-8%.. its not quite a crazy shock, but if incomes remain flat as they have in the past decade and more people are taking on enormous debt loads.. there will may be a shock indeed
Yes but they qualify here at 4.65%, at least on our end we do. Therefore if the rate jumps from 2% to 4.75% (since prime moves in .25s), they'll know what they will be paying. Not if, but when mind you.
I hope rates go up, but hope they don't remove the 5% downpayment rule. That would suck BALLS.
I hope rates go up, but hope they don't remove the 5% downpayment rule. That would suck BALLS.
Sure they can apply tighter policies amongst themselves however that doesn't stop people from obtaining mortgages with less restrictive policies from alternative lenders. That in turn will cause them to loose business.
Bernnie Federko
TRIBE Member
The other thing is the Federal Gov't has forewarned all the major lenders that they're going to wind down their involvement in mortgage buying (aka the Mortgage Purchase Program; MPP).
The Canadian Press: New mortgage rules introduced to lessen mortgage crunch risks: sources say
Mortgage Rules are changing, although not as drastically as the banks' hoped for: 5% and 35-yr mortgages are available, who knows for how long.
Mortgage Rules are changing, although not as drastically as the banks' hoped for: 5% and 35-yr mortgages are available, who knows for how long.
Bernnie Federko
TRIBE Member
That's a start. The component relating to investment properties now requiring a 20% down payment is good to see.
...
MOAR: Rules tightened for home buyers - thestar.com
...
MOAR: Rules tightened for home buyers - thestar.com
Bernnie Federko
TRIBE Member
as an investment property, or your primary residence
ndrwrld
TRIBE Member
primary...probably near Hamilton.
with a separate basement apartment that we can maybe rent out, or just have for when friends stay over.
ndrwrld
TRIBE Member
some really decent houses for that price.
we're looking for around $180k.
Last edited:
Summary -
1- buyers must meet standards for 5 year fixed, even if they take variable
2- max 90% when "refinancing" homes (instead of 95%)
3- 20% down payment for CMHC insurance on investment property, non-owner occupied
Honestly, these to me aren't much of a change when it comes down to trying to "cool" the market. No change to amort periods or minimums on owner occupieds.
1- buyers must meet standards for 5 year fixed, even if they take variable
2- max 90% when "refinancing" homes (instead of 95%)
3- 20% down payment for CMHC insurance on investment property, non-owner occupied
Honestly, these to me aren't much of a change when it comes down to trying to "cool" the market. No change to amort periods or minimums on owner occupieds.
to the above: yes.
the condo market should cool off a little bit with the 20% rule. I've had many people buy a condo with 10% downpayment, people fully qualified, for a rental. Now with 20% as the minimum, it may make a small difference in the number of units sold, therefore prices could potentially cool off.
the refinance rule is good in case we do see a correction. It will still mean people's heads are above water if refinancing. Won't let people go balls out on refis.
The 1st rule is also soemthign that should be in place universally. Some lenders qualify at 3 year floor, others at 3 year posted. Both rule 1 and 2 are led by banks as the banks don't want to have mortgages on properties worth less than the amounts owing, and want to make sure that people taking variable mortgages can afford them when prime is double what it is today.
the condo market should cool off a little bit with the 20% rule. I've had many people buy a condo with 10% downpayment, people fully qualified, for a rental. Now with 20% as the minimum, it may make a small difference in the number of units sold, therefore prices could potentially cool off.
the refinance rule is good in case we do see a correction. It will still mean people's heads are above water if refinancing. Won't let people go balls out on refis.
The 1st rule is also soemthign that should be in place universally. Some lenders qualify at 3 year floor, others at 3 year posted. Both rule 1 and 2 are led by banks as the banks don't want to have mortgages on properties worth less than the amounts owing, and want to make sure that people taking variable mortgages can afford them when prime is double what it is today.
in December I met an agent just for the hell of it (at my house). she then said to list at a certain price, it will go into offers, and sell for a certain price. we both thought the same price(s).
yesterday she met the neighbour, same exact house. told him the same thing but raised it by a hundred K.
wtf is going on?
if he sells for that I am outta here so fast, take the cash, pocket it, and relax w/o a mortgage for a while and rent something.
it's really stupid/crazy still.
yesterday she met the neighbour, same exact house. told him the same thing but raised it by a hundred K.
wtf is going on?
if he sells for that I am outta here so fast, take the cash, pocket it, and relax w/o a mortgage for a while and rent something.
it's really stupid/crazy still.
Totally agree, our place has gone up considerably and yet they just started construction, ie only a hole in the ground, crazy silly.
I'm going through the same debate since last summer and houses as recent this weke are selling in days, some aren't even making it to MLS before they sell. BUT every time we talk about it we realize we could never get what we have now in the GTA. but on the flipside we'd easily pocket close to 150k, not bad for a 5 year investment.
Jake I was thinking about selling and renting for 5 years, then I could qualify again as a first time homebuyer.
Bass-Invader
TRIBE Member
I'm mulling over whether I should sell now (but i'd need to give notice to my tenants) or wait until Nov 1st when their lease ends...
Bass-Invader
TRIBE Member
60 days notice to break a lease for the purposes of disposing of the property. They are on month-to-month anyways so it wouldn't be an issue either way, however they have expressed that they would like to finish in November and I'd prefer not to put them in an awkward situation. However if it costs me 5 figures to be considerate I'm not so sure I can afford to wait.
janiecakes
TRIBE Member
are they in ontario BI?