News   Dec 01, 2023
 5     0 
News   Dec 01, 2023
 105     0 
News   Nov 30, 2023
 1.4K     0 

Baby, we got a bubble!?

http://www.mortgagebrokernews.ca/ne...omist-tells-brokers-at-caamp-conference/75719


While “the next few quarters are safe†from Bank of Canada rate hikes, Tal said Canadian consumers are “exhausted†due, in part, to a 146% debt-to-income ratio, and as a result, it won’t take many rate hikes in future to slow the economy. Tal also indicated a housing crash wasn’t in the cards. For that to happen you need two things, higher interest rates and poor quality mortgages, both of which are absent in Canada. “The trend of the vulnerable sector is declining as a share of the mortgage market,†he said.
However, Tal said that if rates rise, mortgage defaults will actually drop. He explained that is because rising rates imply rising employment, which influences defaults more than anything.

1 - A housing crash is always in the cards. Anywhere.

2 - LOL? The majority of mortgages today are 35 year VRM's with 7% down. LOL?

3 - ROFL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Ok, now they're lying through their teeth. That's just pure desperation. Everyday they try harder and harder to deny that there is a bubble...
 
Rolling on the Floor, or right out fucking loud, :)

That's a good one. Keep in mind this is the same Benjmain Tal that has been saying over and over that prices will drop, now he's saying a crash isn't in the cards.
 
Rolling on the Floor, or right out fucking loud, :)

That's a good one. Keep in mind this is the same Benjmain Tal that has been saying over and over that prices will drop, now he's saying a crash isn't in the cards.

I don't know that that is inconsistent. It is one thing to say that prices will drop. It is another to say a crash is not in the cards. You are right of course in your previous post stating a "crash is always in the cards".

But it does not necessarily follow that that is the most likely conclusion, even though you have clearly expressed you believe it to be. I believe that is what Benjamin Tal is getting at.

For all of our sakes, I hope it is a gradual readjustment and not a crash, since the hardship caused to all the population, even those non home owners, will be severe since as confidence would be eroded, people would not spend thereby hurting the overall economy. And with a crash, as with most pendulum swings, it will swing too far in the opposite direction even hurting those who were responsible with what they did. Witness all those Americans who had 50% equity in areas where they bought years ago and their equity is virtually wiped out. They were not the Ninja/ARM/SUB prime people yet they got caught in the overswing of the pendulum.
I don't wish ill on anyone and hence I hope Benjamin Tal turns out to be correct on at least this poit that a full outright crash, while in the cards as you point out, is unlikely.
 
interested, did you not see my points earlier when I replied to Brian? Do you dispute any of those?

Well, those were all present in Ireland, USA, Spain, UK, Japan, etc-- oh one more thing, the "It's different here, if there is a correction it won't be that bad, there can never be a crash here!" mentality-- and look what happened. You don't think that a 30% correction (ie a 300k house goes back down to 200k) isn't in the cards when that 300k house cost 125k 7 years ago (in inflation adjusted dollars, at that). A 40% haircut is impossible when a house that's shot up 150% would still represent a 50% increase from baseline levels, despite salaries not having increased and so forth? IMO Some areas may crash a lot harder, especially when nobody buys, and desperate sellers are being forced to sell by their banks or bank-owned foreclosures.

What goes up, must come down. I know, it sucks. A lot of people who bought a place and worked hard to pay off their mortgage had their equity wiped out overnight and can't even sell their house if they wanted to because they'd be competing with foreclosures selling for 10 cents on the dollar.

So my advice, do as my Uncle recently did last year, and sell ASAP and rent until the crash is over. He sold his Brampton "mansion" for a $550k, and took his $$ and is renting now with his wife and two kids. He's doing great. Great timing too, because apparently Brampton is crashing REALLY hard already-- rumours are sales are down at least 70% and there's a lot of desperate people selling now (Brampton RE board hasn't published stats since August, lol... no data for Sept, Oct or Nov... Whoops!). http://www.bramptonandarearealestate.com/2010_Residential.html

Also I checked Kijiji and those formerly $400k townhouses are going for 300k now.. that looks like a 25% reduction already in Brampton in what, 3 months?
 
paperchopper, if you're wrong, what will you do? It has to be something pretty crazy. Put some dignity on this.
 
I'll buy a $600k 350 sq ft condo.

PS X2 Inflation = Money Supply x Money Velocity, interest rates are raised to decrease inflation because people pay down debt and spend less when interest rates are higher. Increased inflation results in higher interest rates, I think you have it the other way around...


Also, bubbles pop once there are no greater fools to keep the scam going, much like a Ponzi scheme. A ponzi scheme is all bread and butter until people go ughm no I don't want to invest with you, then the feds come knocking. Just like with housing bubbles, everything is smooooooooth flying until the speculator realizes that the jig is up and nobody will buy it at a higher price than he will (not that they don't want to, they CAN'T, because they can't get more debt).
 
PS Canada's housing market did crash back in '08 -- 17% I believe in a few short months, that's pretty huge. It looked like the behemoth had been slayed and was finally going to Correct, with a capital C.

Then Flaherty and Co introduced 0/40's and Carney slashed prime to 0.25%. Then "magically" RE rebounded 21%.

Yeah, this one is going to be quite the ugly crash. I'm worried about the economy too, IMO, Canada will be the next Ireland, and we won't have a horde of countries ready to lend us $$, just the IMF (scary!). People will be broke, the economy will go into a recession overnight (literally) if panic selling sets in. Nobody will spend any $$, especially people who have mortgages. Construction and housing, which accounts for 20% of our economy, will come to a screeching halt too.

The Bond vigilantes will absolutely slaughter Canada once they realize the Federal Government of Canada is on the hook 100% for any mortgage losses via the CMHC. !!!

People do realize that if there is any housing crash, everyone is going to pay, right? Because the CMHC virtually insures every mortgage in the country. The CMHC has $9.1B in assets, and over $900B in liabilities. Any loss must be paid for the tax payer. If Canadian banks write off $100B in loss (just 300k $300K mortgages) and the CMHC has to pick up the tab, then the feds will have to borrow another $100B from the market to make up this deficit, already running at what $55B? Canada's interest payments would instantly double overnight from $33B a year to at least $60B, and our deficit would be $200B+ a year... ughm we'd be the next Ireland/Greece.
 
Last edited:
This is fascinating. Are you saying the builder is doing due diligence? Way to go. At least his project if it proceeds will likely not go under like Trump Hollywood Florida just did recently (being repossessed by lenders).

No Realtors: Is that acknowledging that realtors are a "problem".

They don't want speculators. Good for them not wanting the speculators because it means it protects the other would be owners from an immediate downturn at least to a degree.

One more fact: 45% in 3 months save the past insanity of sellouts in a weekend or a month of 75% of a project was never the norm until the development industry figured out how to prelaunch through multiple phases and then sell huge chuncks with VIP sales making realtors wealthy for simply having access to deliver their potential clients/investors. However, if what Bisha is doing becomes common play, then eliminating speculation/middleman markups to realtors who are buying to flip to their clients means prices should slow down quite a bit and in fact perhaps even drop by 3-5% that is being kicked back to the realtors.

That said, why only realtors however. I guess it is because the builders have figured that many realtors cannot close or are a risk as they likely purchase for their clients in many developments. Is that the rationale?

It's the lenders driving things, and now lenders are doing google searches to see if buyers are heavy hitting realtors that don't intend on closing.

The comparison to the states is valid...but if you look Toronto developers have very a different sandbox to play in than the US...banks won't lend construction financing unless builder pre-sells up to 80% of their revenues to qualified buyers, US could lend with as much as 20%. The idea is that developers make more money selling when people can walk into units (essentially building on spec). When buyers went away, builders were force to foreclose.

If builders were driving things you would see 100 storey towers vs two 50 storey towers....very hard to get construction financing for one project like that.
 
interested, did you not see my points earlier when I replied to Brian? Do you dispute any of those?

Well, those were all present in Ireland, USA, Spain, UK, Japan, etc-- oh one more thing, the "It's different here, if there is a correction it won't be that bad, there can never be a crash here!" mentality-- and look what happened. You don't think that a 30% correction (ie a 300k house goes back down to 200k) isn't in the cards when that 300k house cost 125k 7 years ago (in inflation adjusted dollars, at that). A 40% haircut is impossible when a house that's shot up 150% would still represent a 50% increase from baseline levels, despite salaries not having increased and so forth? IMO Some areas may crash a lot harder, especially when nobody buys, and desperate sellers are being forced to sell by their banks or bank-owned foreclosures.

What goes up, must come down. I know, it sucks. A lot of people who bought a place and worked hard to pay off their mortgage had their equity wiped out overnight and can't even sell their house if they wanted to because they'd be competing with foreclosures selling for 10 cents on the dollar.

So my advice, do as my Uncle recently did last year, and sell ASAP and rent until the crash is over. He sold his Brampton "mansion" for a $550k, and took his $$ and is renting now with his wife and two kids. He's doing great. Great timing too, because apparently Brampton is crashing REALLY hard already-- rumours are sales are down at least 70% and there's a lot of desperate people selling now (Brampton RE board hasn't published stats since August, lol... no data for Sept, Oct or Nov... Whoops!). http://www.bramptonandarearealestate.com/2010_Residential.html

Also I checked Kijiji and those formerly $400k townhouses are going for 300k now.. that looks like a 25% reduction already in Brampton in what, 3 months?

I responded to the points you made to me. I felt it is up to Brian to answer first your points to him.

Of course a 40% haircut is possible. Even more is possible. The question we are addressing is what is probable. Clearly Paperchopper you feel it will be a crash the proportions of which will exceed the US national average of 30% down to date (which when the US resumes foreclosures may well go down another 10% which would mean about 33% from the top) or even 70% down as some of the hardest hit areas.

The point is again not that we disagree that there will be a correction. It is that there will be a reasonable retraction (15-20%), that we will revisit 2007 or 2008 (mini correction) levels possibly as I believe or will it crash totally like the hardest hit areas in a similar fashion.

Again with the greatest respect, I don't have a crystal ball but I am not so confident as to predict with certainty what will happen in the near term.

Unless you can account for every event in your prognistication, you are subject to error. I have been humbled in the past. Perhaps it is that I am older than you or maybe it is that I am not as smart. My point is, I know enough to know that I don't get it right all the time, not even close.

I remember when GM was the largest most successful company in the world in the 1970's and Roger Smith, the then Chairman and CEO of the company (a pretty smart guy) was asked "if he ever made a mistake?"

His response was first laughter and then: (and I paraphrase) "I consider it a good day when I make more than 51% correct decisions". I think you can see my point.

As Roy Biv said, maybe your Uncle is right and brilliant to have sold. Those buying today and in the last 2-3 years may well lose the paper equity. Will we go back to 2000 prices, I doubt it. And if we do, get ready for everything but cash and gold to go with it. It will mean that the petrocurrency/resource currency C$ will slide, implication is China and others no longer need resources: The US, our biggest market takes another hit like it did in 2008 and we have to believe the end of the financial world is upon us.

I believe with respect and I don't think this is the appropriate forum to continue this point that comparing us to Ireland or Spain is over the top and not valid, though some other countries you are correct may form some basis of comparison.

I agree with your statement that what goes up must come down and I have been a long preacher of the statement that frightens me most:
"It's different this time". However, not every excess price inflation need end in an absolute burst "pop" but may adjust over time especially given all the political meddling.


We both agree that things are overvalued but assets do not only have a 1 way "crash" scenario as the only result.

With respect to your uncle: Brampton is not necessarily the most desirable of suburbs, has had a huge housing boom, and is not limited like the core of the city. There is only 1 City of Toronto core for those who desire the City life. We can argue how limited the core of the city is but my point is there is lots of land in the suburbs and lots ofsuburbs: Mississauga, Oakville, Etobicoke, North York, Pickering, Ajax, Vaughn, Richmond Hill, Thornhill to name a few where you can buy/build a townhouse. I don't think this has any or little "international investor appeal" which is certainly a driving force presently. By the way, I view the international investor appeal as a significant risk to the Canadian market. That said, if I happen to wish the ammenities of the City, there are less possibilities.

I agree even more with you that a townhouse for $400K for a person with a young family is a crazy price in a suburb. Those suburbs (and the city fo TO for that matter has priced itself out of reasonable reach when looking at income ratios and house prices and rents) However, since locals can't buy anymore, there is no one left to buy those overpriced suburbs.

I also heard that Brampton was being spec'ed by people buying towns to flip and is overbuilt. So this will correct likely "in spite" of the overall picture.

One final point, eventually you will (and so will I) be correct that there will be some correction. Real estate is a cyclical asset. It became problematic when the world decided to buy and sell it like a commodity instead of shelter that it is. That said, I believe alot of people have said there will be a crash for 5 years now and we are still waiting. They are hoping that prices will 1/2 but even so, will they be better off than had they bought TO LIVE 5 years ago. Maybe but I suspect not. I agree again it should correct. But those who bought in 2005 aren't looking too bad now.


Let's hope that you are proven wrong because a correction like the US or the other countries means huge austerity, job loss, business collapses and alot of social unrest.

That said, would I be buying today as in 2011? NO. On that, we agree and I have been telling all who ask me that 2007-2008 was the last year/years in which one could barely justify investment real estate.
 
Last edited:
Some points to consider

1-Rising Interest rates are not required for prices to drop. Prices drop when supply exceeds demand. Higher interest rates would indeed decrease demand, but there are many other factors which would also do the same.

2-There is an illusion about debt in Canada. Typically, international comparisons focus on Federal debt, but most countries don't have provincial debts. Consider the US where the individual states are not able to run long term deficits. Similarly, Canada has a large number of crown corporations which have their own debt and liabilities (ontario hydro, CMHC, etc).

3- Finally, in different countries, debt is differently allocated between personal, corporate and government. Some countries have very relatively high government debt, but low corporate and personal debt. In Canada, we have relatively low government debt at the federal level, but very high personal and corporate debt.

***

With respect to housing prices, there are three affordability metrics which have stood the test of time.

1-Avg price to Avg Income ratio (usually 3.5 to 1)
2-Carrying costs to Income ratio (less than 30%)
3-Ownership costs to Rental costs ratio (should be similar)
(note that carrying costs are only a subset of ownership costs)

Any justification for housing prices in any market which cannot address these metrics should be taken with a grain of salt.
 
Some points to consider

1-Rising Interest rates are not required for prices to drop. Prices drop when supply exceeds demand. Higher interest rates would indeed decrease demand, but there are many other factors which would also do the same.

2-There is an illusion about debt in Canada. Typically, international comparisons focus on Federal debt, but most countries don't have provincial debts. Consider the US where the individual states are not able to run long term deficits. Similarly, Canada has a large number of crown corporations which have their own debt and liabilities (ontario hydro, CMHC, etc).

3- Finally, in different countries, debt is differently allocated between personal, corporate and government. Some countries have very relatively high government debt, but low corporate and personal debt. In Canada, we have relatively low government debt at the federal level, but very high personal and corporate debt.

***

With respect to housing prices, there are three affordability metrics which have stood the test of time.

1-Avg price to Avg Income ratio (usually 3.5 to 1)
2-Carrying costs to Income ratio (less than 30%)
3-Ownership costs to Rental costs ratio (should be similar)
(note that carrying costs are only a subset of ownership costs)

Any justification for housing prices in any market which cannot address these metrics should be taken with a grain of salt.

thanks Dave for pointing all this out once again. I agree fully with all your points.

Prices in TO should adjust downward. I believe but prices/rents are 5:1 in TO or so. Is that correct? If so, to return to historical metrics: correction would be 30% drop.
Don't know carrying costs to Income in TO but am guessing it is less than 40% . However assuming it is 40%, that would mean a 33% drop.
Ownership to rental costs: around 6% return is usually quoted. Today it is 3% at best. However, recall that the metrics at present at least are skewed by inordiantely low interest rates. When interest rates rise and presumably to approach historical norms it will be because of improvement in the economy rather than stagflation, incomes should also be rising so it would not be 50% overvalued but something less.

So all in all, I could see 30-35% correction which would equate to the correction in the US for most cities (excluding the severe crashes).

While I believe we will see 15-20% correction, more is definately possible by this logic. However, I am of the view and the hope that there will be a more gradual correction over years rather than a sudden pop and that incomes should rise, hopefully rents eventually rise at least with inflation, and that we do not have to descend as far as the 30-35% levels.
 

Top