Fried Canadian Bacon?

[PP67]

There seems to be more than a few Canadians on this site so when I read Mish yesterday, his comments on Canadian real estate brought back some very poignant memories...

I grew up (if you can call it that) in Orange County, CA, the epicenter of the subprime disaster... I saw first hand the madness that went for real estate...

Unless this Vancouver home has a great ocenaview (and it doesn't), I am afraid Canada may be in for some "Maple Madness" in the near future...

Of course, this time it maybe different...



2119 East 3rd Ave, Vancouver
MLS® Number V934050
Listing Price: $899,500
Description: "This 1 ? story home has been extensively renovated over the last few years. The spacious kitchen has birch cabinets and Soapstone counters and opens to a 20x12' deck. On this level are 2 B/Rs and a modern 4pce bath. Upstairs has an office/den area, a 4pce bath and a big master B/R with a W/I closet and 12x8 view deck. The bsmt has a 1 B/R suite rented at $960 P.M. and the attached garage has been converted to a workshop with French doors opening to the fenced garden, with B/I bench, a patio and a kid's sandbox. "
2119 East 3rd Ave, Vancouver
MLS® Number V934050
Listing Price: $899,500
Description: "This 1 ? story home has been extensively renovated over the last few years. The spacious kitchen has birch cabinets and Soapstone counters and opens to a 20x12' deck. On this level are 2 B/Rs and a modern 4pce bath. Upstairs has an office/den area, a 4pce bath and a big master B/R with a W/I closet and 12x8 view deck. The bsmt has a 1 B/R suite rented at $960 P.M. and the attached garage has been converted to a workshop with French doors opening to the fenced garden, with B/I bench, a patio and a kid's sandbox. "

[Gosso]

MMmmmmm...back-bacon...Bob and Doug McKenzie tell you how to cook back-bacon (two minutes).

Okay, so the Canadian Housing Bubble. This has mainly been stimulated by the 1% interest rate set by the Bank of Canada to help keep our currency from appreciating.  The banks have been very relaxed in their lending standards and encourage people to take large loans because interest rates are SO LOW.  We are following the exact same play-book as the US, but for some reason we fail to see the obvious conclusion to this.  I think the delusion comes from the confidence that was gained by how well our banks handled 2008 -- this led people to the conclusion that the Canadian Banks can do no wrong, and that we somehow have the perfect system that will never stumble.  We shall see.

Vancouver is by far the worst.  Apparently it is very easy for the rich from China to purchase real-estate in Vancouver, and use these properties as investments in the 'safe' Canadian economy.  They also see it as a way out of China if the people ever revolt.

The rest of Canada is not as bad, but IMO is still in bubble territory.  As a renter I'm hoping this collapse gets under-way soon rather than later, but I have been saying this for a while...maybe it is different this time 

[Storm]

I've been having informal conversations with my friends from Canada for the last few years about this.  They seem overconfident that Canada couldn't possibly have a housing bubble like the US, because it is all government controlled and the government wouldn't let that happen... LOL...

The only thing that matters is price to rent ratio.  Rent represents the actual value of a property because it reflects what people are actually able to pay based on their income.  If prices are not in line with rents, housing is overvalued, period.  Look out below.

[Gosso]

I've been having informal conversations with my friends from Canada for the last few years about this.  They seem overconfident that Canada couldn't possibly have a housing bubble like the US, because it is all government controlled and the government wouldn't let that happen... LOL...

In general Canadians are much more accepting and trusting of the government.  IMO the reason for this is because our news media is boring and therefore do not create the "celebrity" image around our politicians.  We still have scandals and the politicians do dumb things, but emotions don't run as high and this allows for more of a discussion rather than a shouting match.

Here's a great tweet from the lovely and hilarious Kelly Oxford that summed it up well:

Canadians watch US politics like Americans watch Jersey Shore.

Here's another funny tweet from her:

When I heard Snooki was pregnant I automatically did the math to see if her due date was 12/21/12.

[Storm]

When I heard Snooki was pregnant I automatically did the math to see if her due date was 12/21/12.

[Gosso]

When I heard Snooki was pregnant I automatically did the math to see if her due date was 12/21/12.

LOL!!

Back to the Canadian Housing Bubble.  Here is an article from Dr. Housing Bubble that paints a fairly depressing picture, here are a few graphs from that article:





The Canadian Housing market is beginning to look more like this:

[Storm]

Wow, that graph almost makes it look like, for the first time in recorded history, an asset bubble has been successfully reflated.  In truth, we will probably find out that this is not near the top of the bubble.  Most asset bubbles have a final blow off top that looks like exponential growth.

[Gosso]

Wow, that graph almost makes it look like, for the first time in recorded history, an asset bubble has been successfully reflated.  In truth, we will probably find out that this is not near the top of the bubble.  Most asset bubbles have a final blow off top that looks like exponential growth.

The dip in 2008 was due to the fear factor that the economy was going to completely collapse, but once things turned around in March 2009 and the Canadian Banks were still in good shape, then it was "game on" again.

It's possible we may see housing prices stagnate over the next decade or so, while inflation eats away at the value of the house.  Or we have a "soft landing" where prices just slowly decline.  But I have a hard time seeing how investing in a house will be a good investment at the moment in Canada.

Edit: spelling

[PP67]

Based on the Dr.HousingBubble link, the average Vancouver income for 2009 was $67,550 and now the average house is costing over $1,000,000!...  This is very reminiscient of The OC were back in 2007 the average income was $65,950 while the median house was selling for "only" $645,000.  As of 12/2011, the median house in The OC is around $408,000, a 37% drop!...  And it is only that high due to a totally propped up zombie market by the Fed/Fannie/Freddie and eventually (and more increasingly) you American taxpayers (Thank you very much!)...

[Gosso]

Here is a short two minute interview talking about how young Canadians (~30's old) are going deep into debt to buy these homes.  It's not as entertaining as Peter Schiff back in 2007, but it does sound eerily similar.

If I don't get into the market now, then I'll never be able to afford a house.

[MediumTex]

Here is a short two minute interview talking about how young Canadians (~30's old) are going deep into debt to buy these homes.  It's not as entertaining as Peter Schiff back in 2007, but it does sound eerily similar.

If I don't get into the market now, then I'll never be able to afford a house.

What does the rental market look like up there compared to the sale market?

Does it cost a fortune to rent as well?

Are there goofy home financing options in Canada?  Part of the problem with the U.S. housing bubble is that near the end all sorts of exotic mortgage products came into widespread use, including interest only loans, negative amortization loans, and of course the teaser rate where your ability to afford the payment was premised upon the teaser rate continuing for the whole 30 years of the mortgage.

[Alanw]

Here is a short two minute interview talking about how young Canadians (~30's old) are going deep into debt to buy these homes.  It's not as entertaining as Peter Schiff back in 2007, but it does sound eerily similar.

If I don't get into the market now, then I'll never be able to afford a house.

What does the rental market look like up there compared to the sale market?

Does it cost a fortune to rent as well?

Are there goofy home financing options in Canada?  Part of the problem with the U.S. housing bubble is that near the end all sorts of exotic mortgage products came into widespread use, including interest only loans, negative amortization loans, and of course the teaser rate where your ability to afford the payment was premised upon the teaser rate continuing for the whole 30 years of the mortgage.

Having been a mortgage lender for three decades, I'll give my take on the U.S. housing bubble.  I never really saw a problem with interest only loans or even negative amortized loans if fully understood and used properly.

I believe the real problem came about with low or no down payment loan products and limited credit checks.  I knew the end was near when wholesale lenders came by my office offering loan programs with no down payment, no income documentation and a credit score of only 620 needed to qualify (the EZ qualifier loan).  This allowed people to purchase homes valued at double or more of  what they  could afford.  Also, there were equity lines of credit of up to 125% of the homes value.

CNBC did an excellent special on the U.S. housing market called "House of Cards" back in 2009.  It explains how the mortgage products evolved, the government involvement and how the whole thing came crashing down.

As with most bubbles, the pendulem swings too far in either direction.

[Gosso]

What does the rental market look like up there compared to the sale market?

Does it cost a fortune to rent as well?

Are there goofy home financing options in Canada?  Part of the problem with the U.S. housing bubble is that near the end all sorts of exotic mortgage products came into widespread use, including interest only loans, negative amortization loans, and of course the teaser rate where your ability to afford the payment was premised upon the teaser rate continuing for the whole 30 years of the mortgage.

The rental market is becoming more and more pricey.  The rent for a lower-end bachelors apartment is around ~$800 per month in a major Ontario city.  Rent for a modest home might be around $1500 per month.

I don't believe Canada has reduced lending standards to the level seen in the US during 2006-2007, but it appears we are getting closer as time goes by.  Here is an article from The Financial Post:

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk”? to financial institutions, according to the banking regulator.

Banks and other lenders are becoming “increasingly liberal”? with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,”? the documents show.

“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,”? said David Madani, an economist in Toronto with Capital Economics, which estimates that Canadian housing prices may fall 25% over the next few years. “The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market.”?

Canada’s housing market has surged since the 2009 recession as near-record low mortgage rates fueled prices and home purchases, unlike the U.S., where sales and values have fallen since 2007. Bank of Canada Governor Mark Carney has said record consumer debts are the greatest domestic threat to the country’s financial institutions, even as the central bank has held the benchmark rate at 1% since September 2010.

I have a feeling the housing market will continue upwards until something breaks:
- China's economy slows down
- a new stock market crisis
- rising interest rates / inflation

Or it could collapse under its own weight.  Frig I wish I had a crystal ball!

[Storm]

Here's a couple very easy ways to tell if houses are overpriced:

1.  What's the median house price compared to median income?  Historically, since the invention of modern currency, this has held at about 2.5 times a household's annual income.  So, if the median household in a town is pulling in $50,000 a year, the median house price should be around $125,000.  In parts of the US this got as high as 10-15 times annual income or more.  You had schoolteachers with a $40,000 a year income buying $800,000 condos on interest only, no downpayment loans.  Crazy.

Remember, incomes determine prices.  Nobody is willing to pay more than they can afford unless they aren't really paying.

2.  How much annual rent would the house bring in, if it were on the rental market?  3% or less of purchase price?  Forget about it.  6% or less?  Borderline.  9% or less, go ahead and buy, it's a decent price.  This means if you are buying a house for $100,000 and comparable houses rent for $750 a month, go for it.  If it only rents for $500 or less, think twice.

Rents reflect the true value of a property because they reflect what someone who works for their money has to pay.  Credit can hide all sorts of evils.  When people are paying with monopoly money, they don't really think twice about buying more than they can afford (we'll just make more money later).

[stone]

Storm, isn't the tricky thing though that the return on other investments also varies? So let's imagine you have £100k and rents are 3% on houses that cost £100k. Is it that much more sensible to rent and buy stocks or treasuries that pay no more than that in interest or dividends?

[Storm]

Storm, isn't the tricky thing though that the return on other investments also varies? So let's imagine you have £100k and rents are 3% on houses that cost £100k. Is it that much more sensible to rent and buy stocks or treasuries that pay no more than that in interest or dividends?

Why invest in a house that only pays 3%, before taxes, maintenance, and upkeep, when you can invest in the PP?

If people took emotion out of the house buying decision and looked at whether it made sense to rent or own, they might make a lot wiser decisions.

Back to Canada housing news:  http://business.financialpost.com/2012/ ... ng-agency/

[CA PP]

Good point about rent or buy.
This is a interesting calculator:
http://www.nytimes.com/interactive/busi ... lator.html

[moda0306]

I don't think any benefits of owning a house over 30 years is is nearly as much about the appreciation nearly as much as the reduction in your monthly/annual living costs.

For instance, the real estate market could be flat for the next decade and only go up 1% thereafter, but I'll have saved a ton in rent (adjusted for taxes and maintenance, of course (In MN we have abnormally low price-to-rent ratio for any region, much less for one with such a healthy economy).

Of course if that's NOT the case then you're losing out. 

[stone]

Maintenance costs for housing must vary massively depending on the construction. Our house is made from stone and has a slate roof and is a very basic simple shape (a bog standard terrace - no turrets and balconies etc). I don't think (fingers crossed) anything much needs replacing over really long time scales. I'd imagine that a wooden house might need lots of care and attention.