Canada Housing bubble in the Wall Street Journal.

I think Domus was the first to point out this article in the Wall Street Journal – it looks like the Canadian Housing Bubble is getting some attention in the US media.

But some economists who are concerned point out that home prices are rising far faster than other measures of economic health. The 2009 price increase of more than 20% came as personal income in Canada fell nearly 1% and total employment was 1.4% lower than the year earlier. In a December report, the Bank of Canada warned that household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.

Another possible danger: Because Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see increases soon. Toronto-Dominion Bank forecasts suggest that the rate to which many Canadian mortgages are pegged, the prime rate, could nearly double by the end of 2011. The Bank of Canada warned in its December report that if interest rates increase as expected, by mid-2012 about 9% of Canadian households could have so much debt that they’d be “financially vulnerable.”

“This is exactly what happened in the U.S., when affordability had moved way out of whack with prices,” says David Rosenberg, an economist who witnessed America’s housing bubble at Merrill Lynch in New York, and now sees similar trends up north from his post at Toronto-based wealth-management firm Gluskin Sheff.

Reading the article it quickly becomes apparent that Canada = Toronto (with a dash of Red Deer).  So we finally get some mainstream media coverage and there isn’t a single mention of the Vancouver market in there.  What are we, chopped liver?

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chico
Member
chico
6 years 2 months ago

The even better article is the G&M article concerning the Competition Bureau's decision to attack the MLS monopoly.

This poor industry: Attacked by foreign journalists and bloggers and now domestic bankers and bureaucrats. Pile on the HST, no more "the Olympics are coming" and buyers of the future used up months ago. Ouch!

Starving Artist
Guest
Starving Artist
6 years 2 months ago
It's going to be interesting to see what happens when completions catch up to the starts line – that's a lot of construction jobs that aren't likely to come back any time soon. http://housing-analysis.blogspot.com/2010/02/cons… Although I'm not sure how that jives with this: VANCOUVER, BRITISH COLUMBIA–(Marketwire – Feb. 8, 2010) – According to Canada Mortgage and Housing Corporation (CMHC), 917 new housing units broke ground in the Vancouver Census Metropolitan Area (CMA) in January, 50 per cent higher than the same month a year ago. I'd be inclined to believe the former, but that's just my bias showing. The construction… Read more »
patriotz
Member
6 years 2 months ago
http://www.theglobeandmail.com/report-on-business… Bubbles remain hard to define, difficult to measure and, like recessions, can only be accurately assessed after they have burst. Economists have wrestled with bubbles for generations, but have yet to devise an adequate scientific means of analyzing them, comparing them or providing us with an early warning system that would safeguard from their worst effects. With respect to RE bubbles, that is complete nonsense. Because the earnings of RE (rental value) and ability to pay (wages) are so predictable, it's very easy to see from price/rent and price/income whether price is out of line with earnings. These numbers… Read more »
Boombust
Guest
Boombust
6 years 2 months ago

TOTALLY off topic…but I almost gagged when Michael J Fox'x name came up as a possible person to light the Olympic torch.

WTF? What has he ever done for this country? He's not even Canadian anymore.

As far as Tsur Somerville, he reminds me a lot of Michael Levy.

Sticks up his finger to see which way the wind blows.

Me? I salute them both with the middle one.

ta da
Guest
ta da
6 years 2 months ago

Good thing those rich foreigners don't read the Globe and Mail's ROB.

Boombust
Guest
Boombust
6 years 2 months ago

Really though, all the recent MSM attention to our market…

I feel like a Noxema Girl. I knew I was beautiful all along.

Purp
Guest
Purp
6 years 2 months ago
@Patriotz "…it’s very easy to see from price/rent and price/income whether price is out of line with earnings…" — Doesn't it really come down to a monthly payment? In that sense price/rent should be a good indicator since rent can't mortgaged it represents what the market is willing to bear for housing. But I don't really get the price/income ratio, since this ratio is closely correlated with interest rates and amortization lengths. When rates were 10%+, the ratio sat at 3-4. It has been trending upwards for the past 25 years as rates have been decreasing, for much longer than… Read more »
patriotz
Member
6 years 2 months ago

@Purp:

You seem to be assuming that today's low interest rates are permanent. What I am saying is that if price/income and price/rent deviate significantly from their sustainable values seen during times of moderate interest rates (the 50's for example), they have to come back down. Because interest rates will inevitably return to normal as well.

rp
Member
rp
6 years 2 months ago

"What are we, chopped liver?" – a lost cause.

domus
Guest
domus
6 years 2 months ago

More bubble talk on the G&M this morning:

http://www.theglobeandmail.com/report-on-business

I am hearing echos of 2008.

anonymousAA
Guest
anonymousAA
6 years 2 months ago
Nice press from the US. If Americans are finally taking notice of Canada, there MUST be a problem. It's tax time, and as an accountant I see a lot of financial information. I really don't like what I'm seeing. Excuse me, but people who earn $40k per year really shouldn't have $700k in debt (and that's just the mortgages!) And it's not just one or two clients, it's quite a few. They've taken out these mortgages to buy principal residences, and then added a couple of rental properties for good measure. Ever get that sick, worried feeling in your stomach?… Read more »
shannon
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shannon
6 years 2 months ago

bubble verbatim article from globe and mail

http://www.theglobeandmail.com/report-on-business

Purp
Guest
Purp
6 years 2 months ago

@Patriotz — I guess the question is what is 'normal' for rates? No doubt that rates have nowhere to go but up, but is it realistic that 5 year mortgages will go back to 10%+ anytime soon?

Not much of a name...
Member
Not much of a name...
6 years 2 months ago

@Purp:

It doesn't matter if rates don't go as high as 10%. When you have rates that are in the range of 2-4%, going up to, let's say 6%, will hurt many many people.

If people are stretching in terms of affordability now, every incremental rate increase will only be that much more painful.

Purp
Guest
Purp
6 years 2 months ago
@NMOFAN — Agreed, higher rates in any form will cause hurt. My point is only that if we are using a price/income ratio of 3-4 as 'normal', then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years. I just don't see that happening anytime soon (if it did it would absolutely bring the world economy to it's knees). In the medium term, I wonder if we will return to something in between, say 6-8% and 30 year ams. This will correspond to a different price/income ratio, say around 7-8. People… Read more »
Eyes of the World
Guest
Eyes of the World
6 years 2 months ago
Hahaha..I love checking in here and seeing the same old "arguments" being rehashed over and over and over again… Vancouver is the best place on earth and the Olympics will show that to the world. People will walk around, notice the beauty and buy here. Most people are room temperature, and there are a lot of them with tons of money. A lot of them are coming to the games (who else can afford them?). Not all of them are rational investors, as the supposed bubble has shown. If you think that many of them wont buy here because of… Read more »
Drachen
Member
6 years 2 months ago

@Starving Artist:

Regarding the sharp uptick in housing starts in January it may just be the unseasonably warm weather we've been having this year. Often housing starts follow weather patterns rather than 'calendar' seasons.

No Longer Looking
Member
No Longer Looking
6 years 2 months ago

Vancouver is Interzone. Exterminate all rational thought.

Aleks
Guest
Aleks
6 years 2 months ago
@Purp: @NMOFAN — Agreed, higher rates in any form will cause hurt. My point is only that if we are using a price/income ratio of 3-4 as ‘normal’, then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years. I just don’t see that happening anytime soon Interest rates doubling from 3.5% to 7% would have exactly the same effect on people's ability to pay as when they went from 5% to 10% or 9% to 18%. Plus, a lot of people are so maxed out that even just a 1%… Read more »
patriotz
Member
6 years 2 months ago

@Purp:

My point is only that if we are using a price/income ratio of 3-4 as ‘normal’, then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years.

What do you mean "we", white man? I explicitly gave the 1950's as a time of stable house prices and interest rates. What do you think the rates were then?

BTW longer amortizations cannot result in lower prices long run, because they borrow demand from the future with interest. They also greatly increase the risk from rising interest rates.

patriotz
Member
6 years 2 months ago

@patriotz:

Excuse me, "longer amortizations cannot result in higher prices long run".

logic
Guest
logic
6 years 2 months ago

16: "Not everyone is a rational investor like all the bear renters here."

———————————

In Soviet Russia, Investment Rationalizes You!

(coming soon to an Olympic town near you)

Drachen
Member
6 years 2 months ago

@Eyes of the World:

"Not everyone is a rational investor like all the bear renters here.."

Well that's what we've been saying for the past five years!

A bubble market cannot develop if everyone behaves in a rational manner. But it cannot be sustained indefinitely either so it will crash. The only pertinent question is when.

Your own argument promotes the bubble hypothesis you know?

Purp
Guest
Purp
6 years 2 months ago
@Patriotz : I don't know what the rates were in the '50s, I wasn't alive yet, maybe you can tell me? 🙂 Look, the point is, a given 'affordable' price/income ratio is only relevant in a static lending environment (ie rates that are steady). If someone says a 4x ratio represents a normal market, they are also implying that 5-year interest rates are in the 10-12% range. If the rates change, then the price/income also changes, which means it's not a particularly useful metric. I think price/rent is a much better metric because it directly ties the price to a… Read more »
Purp
Guest
Purp
6 years 2 months ago

@Aleks — you kind of made my point. Wishing for a 4x price/income ratio is like either wishing for unicorns or economic scorched earth. One isn't going to happen and you don't want the other one to happen.

patriotz
Member
6 years 2 months ago

@Purp:

If someone says a 4x ratio represents a normal market, they are also implying that 5-year interest rates are in the 10-12% range.

I already corrected you once, I'll correct you again. I was talking about the interest rate level we had in the 1950's. Straw man much?

And what was that? Right around 6%. How much of a shock would that give to recent homedebtors?

http://www.bankofcanada.ca/pdf/annual_page57_page

patriotz
Member
6 years 2 months ago

@Purp:

Wishing for a 4x price/income ratio is like either wishing for unicorns or economic scorched earth. One isn’t going to happen and you don’t want the other one to happen.

They didn't want it to happen in the US, Ireland, Spain, etc, either.

So why did it?

logic
Guest
logic
6 years 2 months ago

"I think price/rent is a much better metric because it directly ties the price to a monthly payment."

-0——————

And by this measure too we are in a massive bubble.

logic
Guest
logic
6 years 2 months ago

"you don’t want the other one to happen"

————–

Err, I do. Don't assume we are all in your pseudo-altruistic camp. I want exactly what is best for me and my financial health, and that scenario would be.

Purp
Guest
Purp
6 years 2 months ago

@Patriotz 27 : Read my quoted statement again and see if you can't find the answer. Hint, it's not unicorns.

@Logic : Agreed.

Purp
Guest
Purp
6 years 2 months ago

@Patriotz 26 : Thanks for the link, interesting stuff. But I'm not sure why you are disregarding the past 30 years of data, instead basing affordability on what the price/income ratio was in the 1950s. I would put that in the unicorn camp.

taylor192
Member
6 years 2 months ago
LOL @ Purp and patriotz arguing silly semantics Who cares if its 3x or 4x, right now Vancouver is 9x and that's silly by any standard. Purp, you're technically correct. Rates have been dropping since the 80s, higher TDS/GDS and longer amortizations seem here to stay. Thus the magical price/income ratio of 3/1 has changed… or has it? patriotz makes a good point that other countries with bubbles that overshot the price/income ratio have seen a return to a 3/1 price/income ratio. Housing is ruled on emotion right now, not fundamentals. A collapse in housing may see a 3/1 price/income… Read more »
patriotz
Member
6 years 2 months ago
@Purp: Price/income was at the same level as the 1950's as recently as the mid-1980's. We have been in two bubbles, with a slight correction, since then. It's that simple. Do note that real prices were a lot higher in the 80's than in the 50's, because real household incomes were higher (higher real wages and many more two income families). But it was the same price/income. I am using the 1950's as an example for interest rates because I don't think rates are likely to go back to where they were in the 70's or 80's, because people are… Read more »
patriotz
Member
6 years 2 months ago

@taylor192:

A collapse in housing may see a 3/1 price/income ratio again – if a collapse occurs.

The historical price/income for Vancouver, like California, has been 4/1. People really have been willing to pay more to live here – but just 33% more, not over 100% more.

And the collapse is not a matter of "if" but "when" and "how fast".

Jim
Guest
Jim
6 years 2 months ago
@Eyes of the World: Hahaha..I love checking in here and seeing the same old “arguments” being rehashed over and over and over again… Vancouver is the best place on earth and the Olympics will show that to the world. People will walk around, notice the beauty and buy here. Most people are room temperature, and there are a lot of them with tons of money. A lot of them are coming to the games (who else can afford them?). Not all of them are rational investors, as the supposed bubble has shown. If you think that many of them wont… Read more »
Drachen
Member
6 years 2 months ago
@taylor192: "Now who wants to get back to predicting whether a collapse will occur, and when?" Not whether, that is a given. As for when, as I said a few days ago we're peaking right now, within a couple of months things are going to start to slide and within six months there will be an undeniably downwards trend. A year from now specuvestors will be peeing in their pants. @Purp: Purp, I don't think it matters whether we want a crash to happen or not. It's going to happen so get yourself in the best position possible to see… Read more »
Purp
Guest
Purp
6 years 2 months ago
@ Patriotz 33 : "…I am using the 1950’s as an example for interest rates because I don’t think rates are likely to go back to where they were in the 70’s or 80’s, because people are so indebted now they wouldn’t be able to buy anything (i.e. it would result in general deflation)…." — Agreed, so if rates don't return to that level, then what will change to reign in the amount of cheap money sloshing around fueling the bubble? Are you anticipating that CMHC rules change and risk is offloaded back to the banks, who will likely tighten… Read more »
crabman
Member
6 years 2 months ago
@Purp: If someone says a 4x ratio represents a normal market, they are also implying that 5-year interest rates are in the 10-12% range. Actually (at least for a condo) you get a 4x ratio at 6.1% for people with car payments. With no other debt, you still hit the 4x limit at 8.9%. For example, an income of $100k buying a $400k condo with 10% down and $500/mo in taxes and condo fees: For a Debt Service ratio of 32%: Max monthly outlay = ($100k/12) * 0.32 = $2,666. After condo fees and taxes, there is $2,166 available for… Read more »
Not much of a name...
Member
Not much of a name...
6 years 2 months ago

@crabman:

That's also using an income of $100k per year. Scale that back to the median family income of about $65k a year and see what that yields…unaffordability.

Dave
Member
6 years 2 months ago

@crabman:

The 9.3 ratio is meaningless. The average person in the GVRD does not purchase a SFH in Vancouver. Vancouver homes are in the upper 90% percentile of real estate in the Lower Mainland and perhaps even 95th. If you want to read into these ratios, then you should also adjust the income for people who buy those homes. Of course when you do that, the ratios are nowhere near 9.

There are still plenty of affordable options in the Lower Mainland.

patriotzed
Guest
patriotzed
6 years 2 months ago

@Dave:

The 9.3 ratio is meaningless. The average person in the GVRD does not purchase a SFH in Vancouver.

Nor does the average person in the Bay Area buy a SFH in San Francisco.

As I recall price/income in the Bay Area peaked around 10:1 and has since declined to about 5.5:1, i.e. prices are down about 45%. And that bust is not over.

How come Dave?

White Payer
Guest
White Payer
6 years 2 months ago

@Dave:

Dave, dumps in Surrey are selling for over half a million. THERE ARE STILL PLENTY OF AFFORDABLE OPTIONS across Canada, just not the Lower Mainland.

Boombust
Guest
Boombust
6 years 2 months ago

Gag me. NOW I have heard the "The Terminater" himself is going to carrying the torch?

Can someone explain WHY?

I mean, c'mon! As if we'd be on California's radar screen if THEY were hosting the games. Not even close.

other ted
Guest
other ted
6 years 2 months ago

40. Dave if 9.3 ratio is meaningless. What is the ratio for condos only. And using your logic we should adjust down the income to show who is buying. But even if we don't what is the best case ratio for income/price. Something tells me its still not even close to 3.

Delusional
Guest
Delusional
6 years 2 months ago

Dave has no sales again today. The Demographia survey is for metropolitan areas, and “Median Multiple” (median house price divided by gross annual median household income).

patriotzed
Guest
patriotzed
6 years 2 months ago

@Boombust:

Can someone explain WHY?

Well either because The Terminator was a pioneer in the use of steroids or because his father belonged to the party that invented the Olympic Torch, I guess.

What better credentials could you ask for.

Not much of a name...
Member
Not much of a name...
6 years 2 months ago

Using the multiple of 9.3 even for condos is rather functional. I'm sure there are many FTB out there purchasing $375k condos with $40k a year salaries.

patriotzed
Guest
patriotzed
6 years 2 months ago

@logic:

Arnold is one of Gordo’s buddies. This is BC, land of nepotism, after all.

That's cronyism not nepotism, unless there are some family ties we don't know about.

🙂

logic
Guest
logic
6 years 2 months ago

true that. but nepotism and cronyism are cousins, so to speak 🙂

realpaul
Guest
realpaul
6 years 2 months ago
#10 Domus, one thing that struck me in The CREAäs response to Competition Inquiry oversight was the confrontational style of his answers, saying "we are negotiating a settlement" . Excuse me, a 'settlement'? If you are breaking the law you cease and desist, usually after being sanctioned for your criminal behaviour!! Second, I got the distinct impression that Ripplinger is saying that by collecting public information and withholding it from the public that the CREA has a right to call the collection of public statistics 'CREA property'? Excuse me? These peoples arrogance has gottten way out of control. You'd think… Read more »
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