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Baby, we got a bubble!?

But there is little likelihood of a surge of foreclosures or a collapse of house prices in Canada, according to the C.D. Howe report entitled "Not Here? Housing Market Policy and the Risk of a Housing Bust."

That's because of the country's tighter mortgage requirements — which include a minimum down payment of five per cent, as opposed to zero down at some U.S. banks, as well as regulations against risky lending, and a much smaller high-risk subprime mortgage market, the C.D Howe report says.

"The small number of high-risk loans underwritten suggests that the modest decline in Canadian house prices predicted for 2011 is very unlikely to trigger a U.S.-style surge in foreclosures," Jim MacGee, an economics professor at the University of Western Ontario, wrote in the C.D Howe report.

U.S. home prices fell about 30 per cent between 2006 and 2009, while Canadian prices fell only about nine per cent before a rapid bounce back last year.

But the CCPA report is not as confident about Canada's ability to avoid a sharp correction in home prices and says the steep rise in house prices in so many Canadian cities is an "accident waiting to happen."

Home prices now sit at 4.7 to 11.3 times Canadians' annual income — much higher than historical comfort levels of between three and four times income.

It would take only a one to 1.25 per cent mortgage rate increase by Canada's big banks to cause a housing crash similar to the one the U.S. is grappling with, says David Macdonald, author of the report.

However, many economists at the big banks have concluded that Canada's once overheating housing market, which began to cool in the second quarter of the year, has stopped just shy of a bubble.

© The Canadian Press, 2010



Read more: http://www.cbc.ca/consumer/story/2010/08/31/con-housing-bubble.html#ixzz0yDYj9xdJ
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simuls said:
Here's the article (but from the Star):

Housing prices due to fall, says think-tank

August 31, 2010
Tony Wong
Business Reporter

Canada’s major metropolitan housing markets are looking awfully bubbly and are due to burst, says a report released Tuesday.

Macdonald said a full-blown crash can still be avoided if mortgage rates do not ratchet up quickly and if government puts more stringent requirements on lending.

The report says the last bubbles were triggered by interest rates moving up by just one per cent above the two-year rolling average. “It doesn’t take much for consumers to take pause, Between 1980 to 2000, the historical price range for housing stood at between $50,000 and $80,000 in inflation-adjusted 1980 dollars. But within a brief five-year period from 2001 to 2006, major housing markets shot to well above that $80,000 average, according to the report. “The comfort level isn’t there as affordability erodes,” said Macdonald.

Toronto economist Will Dunning says that the market cycle is in a cyclical downturn – not a bubble. “It is quite possible that the next phase of the cycle will be a partial reversal of the price gains of maybe 5 to 10 per cent, but this is not a post bubble collapse,” says Dunning. “It is the operation of a functioning market in which the vast majority of buyers are making decisions based on their real needs, not the mindset normally associated with bubbles.”

Despite their differences, all analysts seem to agree that prices could fall.
 Macdonald gives three scenarios in which prices might drop. The first is similar to what happened in Vancouver in 1994, a market correction through price deflation. In that scenario, Toronto prices would decline by 9 per cent from an average of $420,000 to $382,000. In the second scenario, the bubble would burst more slowly, similar to the 1989 Toronto bubble. In that case, prices would decline by 21 per cent from $420,000 to $330,000 over a five-year period. In the worst scenario, a bubble would form similar to the United States and prices would fall rapidly. In that case Toronto prices would drop 20 per cent over three years to $335,000. The price drop would be slightly less than in scenario two, but happen more rapidly. “Bringing house prices down just enough to moderate expectations but not so much as to cause a panic is a delicate balance,” says the report.“Government policy makers, the Bank of Canada, as well as rate setters at the big banks need to work together to steer the Canadian market to a soft landing. The alternative is not acceptable.”
------------------

I think it is of note that unlike the real estate association which is still calling for "price escalations in keeping with inflation", here all are talking about declines. The only issue in dispute is: how much and how fast.

What is truly frightening is the 1% change in mortgage rates and the possible effect it can have. I have read elsewhere that this results in about 15% increase in payments which is huge and I believe the population does not understand this well.

I believe that #1 scenario is already happening. Possibly #2. I don't believe we will see the US style crash but then in the US everyone was in denial over it even as it continued to occur over the next 3 years. It takes along time before capitulation sets in if we are going to go down that route. However, whatever the scenario, not increasing prices will be the result.

Of course we are mostly converted to this view on this forum at present with a few exceptions. I hope the "exceptions" turn out to be right, though I don't expect it. Or at least that they are not too wrong, i.e. that we don't get a scenario # 3.

I think if we get a soft landing it will be "inspite of government intervention or planning" since if we recall Mr. Flaherty approved the 40 year no money mortgage only to reverse himself within a year after the US experience. It was the luck that we were 2 years behind the US and remain there that is saving us at least up to now.
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interested said:
What is truly frightening is the 1% change in mortgage rates and the possible effect it can have. I have read elsewhere that this results in about 15% increase in payments which is huge and I believe the population does not understand this well.
... I think if we get a soft landing it will be "inspite of government intervention or planning" since if we recall Mr. Flaherty approved the 40 year no money mortgage only to reverse himself within a year after the US experience. It was the luck that we were 2 years behind the US and remain there that is saving us at least up to now.
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from post 1198:
one thing i think many don't take into consideration is the financing cost/or their ability to finance in 5 years when the mortgage is renewed.

for every $100,000 mortgage @ 4.59% 5-yr term/25-yr amortization = $558/m
http://www.mackenziefinancial.com/ca...nscheduler.jsp

after the first 5 year term, the O/S balance would be $87,927.
if interest rates rise, as many believe, by just 200 bps (ie. 2.0%);
then $87,927 mortgage @ 6.59% 5-yr term/20-yr amortization = $656/m ...
http://www.mackenziefinancial.com/ca...nscheduler.jsp


even though the principal decreased by ~$12K (ie. 12%), the mortgage payment increased by 17.5% from a minor 2.0% rate rise ... imagine if it was something more dramatic!

high prices are resulting in the largest mortgage debt in history.
if the percentage of income going towards mortgage payments weren't so high, i wouldn't be concerned.
but as it stands i don't think many can withstand to pay ~20% more ...
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i also did a quick calculation based on the 1.0% (100bp) rate change from 4.59 to 5.59:
then $87,927 mortgage upon renewal @ 5.59% 5-yr term/20-yr amortization = $606/m ... that's a 8.6% increase in mortgage payment.

however, the above values will be different depending on the interest rate.
if one went from 3.59 to 4.59:

for every $100,000 mortgage @ 3.59% 5-yr term/25-yr amortization = $504/m
http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp

after the first 5 year term, the O/S balance would be $86,442.
if interest rates rise by 100 bps (ie. 1.0%) then $86,442 mortgage @ 4.59% 5-yr term/20-yr amortization = $549/m ... that's a 8.9% increase !
http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp
 
We will wait for condo George to come back to the town next week and give us his spiritually uplifting sermon.
 
cdr108 said:
from post 1198:


i also did a quick calculation based on the 1.0% (100bp) rate change from 4.59 to 5.59:
then $87,927 mortgage upon renewal @ 5.59% 5-yr term/20-yr amortization = $606/m ... that's a 8.6% increase in mortgage payment.

however, the above values will be different depending on the interest rate.
if one went from 3.59 to 4.59:

for every $100,000 mortgage @ 3.59% 5-yr term/25-yr amortization = $504/m
http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp

after the first 5 year term, the O/S balance would be $86,442.
if interest rates rise by 100 bps (ie. 1.0%) then $86,442 mortgage @ 4.59% 5-yr term/20-yr amortization = $549/m ... that's a 8.9% increase !
http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp
Click to expand...

Than you cdr for this. Even if it is just an 8.6% increase, that is still huge and that is just 1% increase. I don't know alot of people who have room to expand a significant part of their budget by 8.6%. A very useful post.
 
Couple decide to buy house.

Couple read Star article (based on a report, not on irrefutable facts)

Couple decide to not buy house, and wait for prices to drop.


How do you "analysts" feel about this scenario?
 
Roy G Biv said:
Couple decide to buy house.

Couple read Star article (based on a report, not on irrefutable facts)

Couple decide to not buy house, and wait for prices to drop.


How do you "analysts" feel about this scenario?
Click to expand...

Roy, you are correct that the press may influence behaviour, but as others have posted previously: when everything was going up greater than inflation, no one was complaining about stories of people lining up for days, bidding wars and houses going for 20% over ask etc.

In this information age, the reality is it is here and one has to work within its confines. The fact that it is to a great extent overkill, and daily rehashing of the same info (as we do alot of on this forum) makes it appear that things are worse than they may be. However, one cannot wish this away.

What would you suggest. That the press just not report the news because it is less than favourable?
 
FYI.

My R/E agent has got an invitation for a 'special sale' event for DNA3 scheduled for September 15, 2010 -- $ 20,000 off for the 1st sale he makes.

Five condos is giving an un-advertised 'promotion' of 1 year's free condo fees.Things seem to be rough out there.

Individuals at AURA construction have told me that they have gone down as far as they had wanted to. Today ( Wednesday) a crane will be set up on the site. They are getting ready to start on footings. Another 2 cranes will be coming on the site in due course.
 
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daveto;
I would be suprised if this lawsuit went anywhere at all. That said, it demonstrates that if you are "bought" with trips etc., it becomes reasonably clear that you will be owing to your benefactor. I am not sure that this is terribly different than the newspaper management saying to the employee to write something "positive" about this condo because they just took out a full page ad.

That said, one hopes perhaps wishfully if unrealistically "that some journalistic integrity exists".

This is why both sides should be presented.

I note that there is a weekly column from the president I believe of BLD(the industry group) and his slant is routinely that things are in fact quite positive or at least not as negative as other commentaries.

Articles routinely quote the head of the real estate companies or developers who have an obvious self interest in promoting real estate who "spin" even negative data to neutral, and neutral data to positive to their cause which to any neutral observer is clearly a stretch.

That said, alot of journalists go for headlines which have little to do with the article content or in no way represent what is presented but are designed to catch the readers attention (journalism which incidently as a consumer I resent) but it must be effective because it happens repeatedly.
 
KA1 said:
FYI.

My R/E agent has got an invitation for a 'special sale' event for DNA3 scheduled for September 15, 2010 -- $ 20,000 off for the 1st sale he makes.

Five condos is giving an un-advertised 'promotion' of 1 year's free condo fees.Things seem to be rough out there.

.
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The condo I looked at in Oakville offered 10% off to previous buyers for 2 weeks since the project was cancelled about 2+ years after for whatever the developer's reasons where but I believe too slow sales. It was relauched in August this summer about 8 months later.

I was told by a realtor they were now offering to their VIP (read any realtor in Oakville) 10%; 5% discount to the buyers and 5% to the real estate agent. YES: 5% commission; Average price is close to $600/ sq. ft. and I believe the average units are around 1200 sq. ft. so $700,000 condo the buyer pays $660,000 and the real estate agent for bringing in a buyer gets a $35000 commission; (the full one side commission for selling normally about $1.2 million home at 6% commission, let alone a more expensive home at 5%).

Basically the realtor is being "bought" by the developer with a markedly inflated commission to get his client in and essentially pay too much in what can only be described as a kick back to the realtor. I find this offensive as a purchaser and I believe most of the public would be upset to know that for the realtor bringing you the "finder's fee" is inflated. I knew the realtor well but I am quite sure this is not being disclosed to their clients: that they are getting an oversized incentive to bring you in and cheer lead.

This serves the realtor well but inflates the price for the end consumer beyond reasonable and "your realtor representing you / his or her client" cannot be expected to be objective when he /she is being offered double or almost double their usual commission if you buy this project.

Ultimately long term this does not serve the realtors well because when the information finally comes out, it undermines all the honest hardworking real estate agents/ brokers who genuinely try to do what is best for their client. Whether they succumb or not to the incentive, the perception that they are being bought or at least attempting to be bought will ultimately become the reality perpective of the public, their ultimate clients.
 
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interested said:
daveto;
I would be suprised if this lawsuit went anywhere at all. That said, one hopes perhaps wishfully if unrealistically "that some journalistic integrity exists".
Click to expand...

Agree 100%. Which is why I ignore anything in the MSM about RE. Most of it is pro-RE, due to advertising revenue, and that which isn't is often simply quoting a published report (which I would prefer to read first hand)
 
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