rofl?
Yes, no, you guys are right, prices will keep going up FOREVER! People are making $200K a year now on average and a $500K condo is chump change.
A bubble is a bubble is a bubble. The academic definition of a bubble is when the majority of the market participants are speculators-- ie all all of you "condo" investors who are negative gearing. Purchasing condos and flipping them, with the only reason being able to buy condos is due to rock bottom interest rates and lax lending standards on behalf of the banks.
Interested, I typed a long post but this freaking site times out after 5 minutes. Several points, 1, ARM's never reset from 2% to 20%, more like 2% to 5-6%, but people were maxed out to the hilt and as soon as they reset people couldn't afford them (cough cough Canada today). The highest interest rates I saw on Wall St were 9%, and those were Puerto Rican mortgages everyone was snapping up towards the end of '05. Second Miami went from $180K to 425K, about a 136% increase. Vancouver has gone from 325K for a detached house in '01 to 1M in '10, over a 200% increase. A 136% increase is about in line with Toronto/Montreal, hrmmm, similarities anyone?
Banks don't follow the qualifications for 5-6% when doing VRM's. They can add any hypothetical situation, ie a basement suite, your husband/wife taking a part time job, etc to make up the additional monthly payments that will be incurred as a result of the 2-3% extra interest rate, which is negligible.
The big one, which you are completely wrong on, is the interest rate argument and Toronto back in the day. The high interest rates SOFTENED the crash, not made it worse, because jacking interest rates from say 13% to 15% isn't going to raise your monthly payments by too much, perhaps by 5% a month if that. So the interest rates going up had nothing to do with it, it was just a bubble, and once people realize that it's a bubble, the bubble bursts and panic selling sets in. That's how they all burst. Anyways, carrying costs on $100k @ 4% are $500/month, boost that up to 7%, which is a very small increase in interest rates terms, and we're paying $700 a month per $100k, a 40% increase. Not so good.
Anyways, Brian, here are the reasons that have been repeated, oh I don't know, 50 trillion times as to why Canada has a housing bubble?
1. Historic, unprecedented low interest rates @ 2% that will not last (straight from the mouth of Marc Carney, BoC Governor)
2. Increased amortizations (35-40 years) and 0 or negative downpayments (BMO 2% cashback, TD 125% mortgage, etc)
3. Subprime (9% of Canadian mortgages are subprime, see Xceed Mortgage Corp)
4. Lax lending standards by the banks (every mortgage has a 'helper suite' to boost monthly income / borrowing amount)
5. CMHC insures virtually all mortgages, taking any risk off the banks (essentially risk-free money to them). CMHC has 9.1B in assets and over $900B in liabilities.
6. Average downpayment is approximately 7% in Canada-- indicating that nobody has any savings or can afford much.
7. Canada has a debt-to-income ratio higher than the USA did at the peak of their bubble, 147% vs 139%.
8. Over $1 trillion in mortgage debt - clearly pointing that the run up in prices is DEBT based, again, the classic signs of a bubble (cheap credit)
All of this has resulted in prices for single family homes going from $325K in Vancouver to 1000K in Vancouver, with similar increases elsewhere. The price of an average house in Canada is now $340K -- completely unaffordable by the average person without going into as much debt as possible.
Our per capita income purchasing power wise hasn't increased in over a decade. Canada hasn't become more productive. We're just taken on more and more and more debt on cheap credit, which is exactly what the:
1. Americans did (Pop!)
2. Irish did (Pop!)
3. Spanish did (Pop!)
4. British did (Pop!)
5. Japanese did (Pop!)
The 3 largest bubbles remain in China, Canada and Australia, coincidentally, the Chinese are driving Vancouver's RE market.
Canada has had many RE booms and busts, Vancouver has crashed 50% before, but this time it'll be far worse.