Just how vulnerable is Canadian real estate?
I’ve just read “Assessing Vulnerabilities in the Canadian Housing Market,” a five-page report written by CIBC economist Benjamin Tal and released on May 25. If you’re looking for some reassurances that the bottom isn’t about to fall out of the Canadian housing market, you may appreciate Tal’s assessment.
Mr. Tal clearly feels that Canadian housing is overvalued but he doesn’t think there is an unmanageable affordability problem in Canada.
First, Tal believes that “at least 1.5 million houses in Canada are overvalued” and his research indicates that prices on those properties are inflated by as much as 14%. Provincially, British Columbia is the worst with an over valuation of 20.7% and Alberta is the least inflated at 8.6%. Saskatchewan fits neatly between the two at 13.2%, just below the national average.
Tal goes on to say that the market is showing clear signs of cooling and that price growth has “rapidly decelerated” over the past few months. He goes on to suggest that absent a “trigger” to a violent correction, prices will not necessarily crash. According to Tal, rising rates will not be the trigger some believe it to be. He speculates that rates will climb slowly and that most Canadians will be able to manage the costs associated with those changes.
According to Tal and CIBC’s affordability index, which is based on actual transactions as opposed to “synthetic mortgage” assumptions, we can afford it. On average, Canadians are using just 15.6% of their income to make mortgage payments. “Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation” with just less than 12% of income being used on to service mortgage debt.
The report concludes by saying, “While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of 5%-10%) in the coming year or two. But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years—paving the way for a healthier housing market by mid decade.”
What do you think?
Read to full report here.
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Norm Fisher
Royal LePage Saskatoon Real Estate
61 comments so far. We'd love to hear your thoughts.
May 27th, 2010 at 10:59 AM
Norm, you are all over the housing economics stories! I know it must be a lot of work, but I think it’s a major advantage to clients who depend on their Realtor to be informed about the housing market.
Interesting report from the Canadian Real Estate Association today, arguing more or less what I’ve suspected recently; Canadian homes are overpriced compared to historical averages, but are not far from the historical price to income ratio, and barring an unforeseen disaster will not see a dramatic price drop:
http://www.crea.ca/public/news_stats/pdfs/housing_report_2010.pdf
I took a look through at the CIBC report, and it appears to me that they do not include home equity line of credit debt as “mortgage debt.” If true, the 12% (percentage of income going to mortgage for Saskatchewan residents) number might understate things a bit, since so many Saskatchewanians who owned their homes pre-boom have taken advantage of the equity through HELOCs. This doesn’t affect their mortgage loan balances per se, but definitely affects the amount of home-related debt people are carrying…
May 27th, 2010 at 11:40 AM
I don’t understand how CIBC’s numbers and RBC’s Affordability Index numbers can be so different. The CIBC report states:
“On average, Canadians are using just 15.6% of their income to make mortgage payments. “Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation” with just less than 12% of income being used on to service mortgage debt.”
While RBC states: (http://www.rbc.com/economics/market/pdf/house.pdf) a national average of 45% of income is being taken up by mortgage carrying costs. They also give the average for Saskatoon at what looks like an average of about 35% of income (based on a 25-year mortgage with 5% down on a 5-year fixed rate. I can’t find any information about how CIBC calculated their numbers.
Could you help me to understand this please?
May 27th, 2010 at 11:50 AM
“On average, Canadians are using just 15.6% of their income to make mortgage payments. “Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation” with just less than 12% of income being used on to service mortgage debt.”
That’s totally laughable…if you take the average cost of a house in Sask and then the average ‘income’ it’s not even close to those numbers….what was he smoking?!
May 27th, 2010 at 12:19 PM
“According to CIBC’s affordability index, which is based on actual transactions as opposed to “synthetic mortgage” assumptions.” we can afford it. On average, Canadians are using just 15.6% of their income to make mortgage payments.
RBC’s report addresses affordability from the perspective of “how affordable are Canadian homes to buy right now?”
Tal is addressing the question, “Can Canadians who have purchased houses afford to pay for them?”
Of the 53% of Canadian home owners who have a mortgage, the average mortgage amount is $170,000 and the payments consume 15.6% of their income.
May 27th, 2010 at 12:24 PM
Thanks a lot lawtalkingguy.
I have the “Don’t worry, be happy” CREA report in my briefcase but have only been able to read some of the press on it so far.
Not sure about the HELOC angle but you could well be right.
May 27th, 2010 at 12:27 PM
Jen and Jesse:
RBC is talking about affordability using the example of a person making a typical income buying a typical detached bungalow. That number is very useful, but it’s hypothetical.
CIBC looks at the actual data using actual mortgages held by all Canadians, which includes some people who just bought their homes (and whose index would be similar to RBC’s), but also people who’ve owned their homes for years and whose mortgage is only a fraction of the home’s worth. Remember there are also plenty of people out there who have no mortgages at all, as they’ve paid them off.
RBC’s number is very useful for figuring out how affordable homes are for first-time buyers, people are entering the market.
CIBC’s numbers tells us what percentage of Canadian’s income home costs actually eat up, which lets us know how vulnerable we are to an increase in interest rates. If we assumed that everyone in Canada who owns a home bought a month ago, interest rates would be a massive concern since a brand-new mortgage takes up such a large percentage of the typical person’s income. This number is much more useful for telling us how badly Canadian’s personal finances will be hurt by rate increases.
Bottom line: RBC’s number applies more directly to people entering the housing market. CIBC’s numbers speaks to the average situation of people who already own homes.
Hope this helps.
May 27th, 2010 at 12:30 PM
Glowing, rosy, nothing to worry about, clear sailing. Has to be the most optimistic housing report I’ve ever read. If there were more predictions like this one, I would really begin to worry.
May 27th, 2010 at 12:44 PM
You said it shorter and better than I did, Norm.
Also, the major discrepancy in numbers reinforces one of the main financial advantages of purchasing a home: Your mortgage payment goes down (or stays the same), while inflation takes your income up over time.
Let’s say I never get a “raise” in my life, I only get cost-of-living increases each year. My purchasing power never changes. But over twenty years, my income still rises due to inflation- I don’t want to do the math, but let’s say my income goes from 40,000 a year in 2010 to 60,000 a year in 2030, based purely on inflation.
My mortgage doesn’t move with inflation. If my payment was $1000/mo in 2010, it’s probably about $1000/mo in 2030. Without getting a single raise, my mortgage has gone from 30% of my income in 2010, to 20% of my income in 2030.
So CIBC’s data include all the Canadians who have benefited from this principle, as well as those who have paid down their mortgages ahead of schedule or who have benefited from significant appreciation.
RBC’s data speak only to Canadians who unfortunately are facing higher-than normal (but not grossly so) costs of buying a first home, compared to their incomes.
May 27th, 2010 at 12:55 PM
Rick: Which report are your referring to, and what part of the analysis are you critiquing?
Both reports are pretty explicit that the housing market is going to “slow down”, they just point to various factors explaining that there’s no real factual basis to expect a crash.
CREA’s report says:
“CREA and other organizations are forecasting that national sales activity will decline in 2011, and the national average price will sag marginally”
So the national advocacy group for real estate agents is openly predicting that sales will decrease and prices will go down in the short term. How is that “the most optimistic housing report you’ve ever heard”?
May 27th, 2010 at 12:56 PM
“You said it shorter and better than I did, Norm.”
I was just admiring your eloquence. You would make a fine IRL “Law Talking Guy.”
May 27th, 2010 at 12:59 PM
Both reports are pretty explicit that the housing market is going to “slow down”
I believe Tal even suggests that he’s open to the possibility of a 10-15% price correction.
May 27th, 2010 at 1:02 PM
“Canadians are using just 15.6% of their income to make mortgage payments. Manitoba and Saskatchewan ….with just less than 12% of income being used on to service mortgage debt.
Is $1000 a typical monthly payment? Then is, 1000/0.12 = 8333, a typical house hold income in Saskatchewan?
“Note, however, that as opposed to the situation in the US and to a common misconception, the share of this vulnerable group in total mortgage holders in
Canada is on the decline—currently accounting for just over 13% of all mortgages in Canada. ”
I wonder what was the ratio in the States when they had the crisis.
There are about 85,000 households in Saskatoon and the home ownership is about 60%. Let’s say here as well the percentage of homes with a mortgage is about 53% and 13% of these households are “spending close to 60% of their gross income on housing related cost, which is based on today’s ultra low interest rate.
85,000 x 60% x 53% x 13 % =3513.
Can anyone imagine 3000 houses for sale in Saskatoon? Today, active listings are just around 1500 and back in 2006 there were only about 700. This market is so small that it is sensitive to any small change in demand and supply. It’s true that there’re more people coming here these year, but there’re also many more people just buying and selling that make the market so hot.
I’d say 13% is a fairly scary number. But by the way, what exactly does “the bottom is about to fall out of the Canadian housing market” describe? Price falls 50%?
May 27th, 2010 at 1:10 PM
Thanks for the explanation, gentlemen- I see better how the perspectives differ now, and trying to compare them directly wasn’t appropriate.
I still think it’s quite concerning that average “new” homeowners seem to be devoting approximately 3 times their gross income to service their mortgage commitments than the average “current” homeowner. I feel that they’re underestimating how people who bought throughout the 2007-current period will deal under rising carrying-cost stress, such as in a rising interest rate environment. The market will not react happily if new buyers are too maxed out to continue to absorb supply. Be that as it may, I don’t think a “bottom falling out”/US-style scenario is likely either. It is a shame so many young people are under so much more financial strain than their more mature counterparts. Something’s gotta give.
lawatalkingguy,
I appreciate your explanation of the inflationary advantages of owning a home:
“My mortgage doesn’t move with inflation. If my payment was $1000/mo in 2010, it’s probably about $1000/mo in 2030.”
if your payment was at a historically low 3-point-something percent in 2010, do you really think it’s going to be the same when interest rates revert to their historical means when you go to refinance every 5 years thereafter? What if prices do fall 10% below what people paid with their 35-40-year mortgages in five years, when they’re paid off just 5-7% on the principal? How does paying 3 times the cost of the home over 35-40 years make inflationary sense?
Looking forward to your eloquence!
May 27th, 2010 at 1:19 PM
“Tal is addressing the question, “Can Canadians who have purchased houses afford to pay for them?”
Of the 53% of Canadian home owners who have a mortgage, the average mortgage amount is $170,000 and the payments consume 15.6% of their income.”
True and I understand that…but that’s kinda like math for fun. I mean I could use the same to calculate how many people spend on the cars they already own. If i buy a lexus suv for 65k that just means that the people that can afford to buy lexus suv’s if they are only spending 5% of thier income ON them that they wont’ fail…um of course they won’t…but if it ate up a bigger chunk they probably wouldn’t have bought one to begin with…
I suppose I was looking at this report and likening it to affordability which isn’t right eihter. If you can afford it you can afford it. Simple.
May 27th, 2010 at 1:20 PM
Hi Jen,
I believe that advantage only takes place in a normal market. With all those “if’s”, you can probably tell yourself that “at least I enjoyed owning my own house 2 or 3 years, though at the cost of xx,xxxx dollars.” or “This is life. Some make money, some lose. “
May 27th, 2010 at 1:24 PM
Sorry, I mean “2 or 3 years more”.
May 27th, 2010 at 1:50 PM
lawtalkingguy said:“My mortgage doesn’t move with inflation. If my payment was $1000/mo in 2010, it’s probably about $1000/mo in 2030.”
Jen said: “if your payment was at a historically low 3-point-something percent in 2010, do you really think it’s going to be the same when interest rates revert to their historical means when you go to refinance every 5 years thereafter?”
You’re 100% correct to point out that mortgage rates (and therefore payments) will go up for a whole wack of people who bought in the last couple years of historically-low rates. But as both of the reports point out, the affected group is not as big as we might think (CREA suggests that many mortgages in the next little while will be renewing at cheaper interest rates compared to what they are currently paying).
Using myself as en example, I bought a little less than three years ago, and have been paying 5.79% fixed. Even though I bought fairly recently, I’m not paying a rock-bottom rate by any means.
The takeaway message of the CIBC report is that as a group, Canadian homeowners have better equity and mortgage payment/income ratios than many had believed (I was surprised, for one). The majority of Canadians will be alright, but there will be significant pain for those who bought beyond their means during the recent low-interest period. The data show that this group isn’t as large as we might have feared, though.
“What if prices do fall 10% below what people paid with their 35-40-year mortgages in five years, when they’re paid off just 5-7% on the principal?”
A lot of people would be disappointed and financially stressed, but being very slightly underwater wouldn’t be a disaster- it’s very unlikely that we would start seeing U.S. style “jingle mail” with people breaking their mortgage contracts.
“How does paying 3 times the cost of the home over 35-40 years make inflationary sense?”
Two things:
a) The CIBC study shows that people do not necessarily take the full mortgage amortization period to pay off their loans; advanced payments will greatly reduce the “3 times”.
b) your home will be worth more by the time you’ve actually paid that amount that sounds so scary
(I’m not a math guy, so the numbers here aren’t going to be perfect; it’s the principle I’m goign for)
We have to remember to compare apples to apples. If I were to take the full 40-year term of mortgage to pay off our house, it would cost me $588,000 for the $225,000 mortgage loan I took out in 2007. $588,000 sounds like a ton of money, but in wouldn’t be in 2047. The scariness of thinking about the total cost of a mortgage loan is largely due to comparing the total amount of money paid to your current home value, as opposed to the home value as it will be when you have actually paid all that money.
Even further,I (like many Canadians, according to the CIBC data) will pay nowhere close to three time my loan amount. In three years, my fiancee and I have paid off 13,000 of the original balance. by doing so we’ve chopped off over a hundred months of interest payments that we would have faced based on the 40-year amortization. We’ve done this on one income, and will soon add a second. If we do nothing more than keep up the pace we set with one income after we’ve added a second (higher) income, we’ll pay off our “40-year mortgage” in another ten years or so.
So while people often talk about how you’ll pay three times the purchase price in interest by the end of the loan, but
a) you’ll have a much more valuable home than you started out with, based purely on inflation; and
b) there’s no earthly reason why you have to actually pay all those dollars. People can and do pay their mortgages off far sooner than their amortization period would dictate.
“It is a shame so many young people are under so much more financial strain than their more mature counterparts.”
Only compared to the financial situation our more mature counterparts are in now, though. We think of the last few years as a complete anomaly in terms of affordability, but the parents of my generation earned their current situation by toughing it out through 20%-ish interest rates to buy their first homes.
If our more mature counterparts are in more comfortable situations now, it’s largely because they’ve earned it. I think some people (not saying you in particular) have taken to thinking that home ownership is an absolute right for any young person making a decent income. I think talking to our grandparents about what sacrifices used to be required for home ownership would sober us up a bit. How often do people save up over many years for down payments anymore?
May 27th, 2010 at 1:56 PM
“How often do people save up over many years for down payments anymore?”
Great point! I would also like to see in those calculations if they got ‘assisted’ along too. It makes a monstrous difference at least from people I’ve known.
May 27th, 2010 at 2:27 PM
I assume the numbers are gross income, and not net?
All I’ve been seeing is the people that need homes to be sold to make more money-banks, mortgage brokers etc. have had such an optimistic view on the market, that there’s not a bubble in places and that everything’s great. I’m not sure I quite believe it. The news that there’s a record number of bankruptcies at a time of low interest rates doesn’t bode well. Just because people aren’t paying much for their mortgage doesn’t mean they don’t have a ton of other debt ready to hurt them.
May 27th, 2010 at 2:32 PM
Thanks for the thorough reply, lawtalkingguy. Not only are you eloquent, you’re also obviously a very efficient typist.
I hope you are right with all the inflation-adjusted mortgage vs. income calculations. I do know that house prices cannot increase more than incomes in the long run. Is our current economic environment inflationary? Wage cuts and job losses in the US and Eurozone might tell us otherwise. I hope you are right that the number of people that might be financially stressed by what may be comming economically may be lower than we fear- I’m just afraid it may not take that many people buyign maximum house at rock-bottom rates to destabilize things. I’m sure you and your fiancee will have no problem paying off your mortgage early, having stable, well-paying careers and all- I’m afraid that of the majority of people taking out these types of loans won’t.
Nevertheless, thank you for taking the time to respond.
May 27th, 2010 at 2:58 PM
Mike S:
The CIBC report divides by gross income, yes. I suspect the idea is that net income varies way too much to be a consistent measure.
“All I’ve been seeing is the people that need homes to be sold to make more money-banks, mortgage brokers etc. have had such an optimistic view on the market, that there’s not a bubble in places and that everything’s great”
While your intuition makes sense (Warren Buffet wrote the other day that you should never ask your barber whether you need a haircut), I think you’re mischaracterizing the positions of the banks and CREA. Both reports say that homes are currently over-priced and should be expected to drop. I interpret that as recognizing a “bubble”, in the sense of homes currently being over-priced compared to fundamentals.
If saying that prices are going to fall isn’t enough, what is? They clearly lay out their reasons, based on history and economic fundamentals, that things aren’t going to completely collapse. What about their analysis do you not find convincing?
May 27th, 2010 at 3:15 PM
These figures really are not surprising to me at all. While it’s easy to focus on the fact that house prices are so high right now, the vast majority of the homes purchased in Saskatoon were not originally purchased in the last 6 or 7 years.
Consider that 7 years ago you could buy a brand new 1200 sq ft bungalow in Arbor Creek for $155k. Anybody who bought a house in Saskatoon back then is not carrying a huge mortgage debt load even if they buy a house today because of the equity they magically inherited in their previous house during the market boom.
So really it’s only the first time home buyers in the last 3 or 4 years that are going to be carrying a higher than average mortgage/gross income debt load, and there aren’t enough of them to bring the average debt load up significantly across the province.
May 27th, 2010 at 3:16 PM
“I hope you are right with all the inflation-adjusted mortgage vs. income calculations.”
I don’t know if I’d go so far as to call them “calculations”
They’re just back-of-the-napkin type numbers, but I think they illustrate the point.
“I do know that house prices cannot increase more than incomes in the long run. Is our current economic environment inflationary? Wage cuts and job losses in the US and Eurozone might tell us otherwise.”
I’m very, very far from an expert, but moderate inflation has been “normal” for a long, long time. There have been examples of deflation (Japan) in the recent past, but everything I know says that’s extraordinarily unlikely here. The U.S., for example, looks to be headed for some serious inflation.
“I hope you are right that the number of people that might be financially stressed by what may be coming economically may be lower than we fear- I’m just afraid it may not take that many people buyign maximum house at rock-bottom rates to destabilize things. I’m sure you and your fiancee will have no problem paying off your mortgage early, having stable, well-paying careers and all- I’m afraid that of the majority of people taking out these types of loans won’t.”
People who bought unwisely will suffer, and there’s always the potential for people who bought responsibly to get caught in the wash. Buying a home is a risk, no doubt, and as a society we should be trying to make sure people know the risks and have some leeway to handle them. The fundamental problem in the States (or at least one of them) was the recent idea that everyone can and should buy a home, and it should be as big and gaudy as possible.
“Nevertheless, thank you for taking the time to respond.”
Thanks, and you too. It’s nice to see that the back-and-forth between “Bears” and “Bulls” that used to dominate the comments here seems to have gone away. Norm has created a very rare opportunity to discuss these issues which are, after all, very important to so many people in this province. It’s nice to that opportunity being taken advantage of with rational discussion.
May 27th, 2010 at 3:23 PM
Trigger for a crash?
How bout record debt for canadians?
Close to record high house prices
All time low interest rates make monthly payments ” moderately unaffordable”.
When normal rates come back monthly payments will be worse.
Sales are slowing while listings are creeping up to all time highs. Why if this market is balanced
Price to income and price to earnings are historically out of whack.
How many rentals are out there that can be bought and by using normal rates would the property actually make money
No more home reno or energy benefits from the government.
I guess I could go on.
Now for the bulls….
May 27th, 2010 at 3:26 PM
lawtalkingguy “People who bought unwisely will suffer”
Agreed, but i would tweak it to people who spent unwisely will suffer. People who bought their home wisely, but then borrowed all the home equity they could will also hurt just as badly as anybody who over extended themselves with the original home purchase. That fancy new Beamer or Malibu in the driveway is basically another mortgage on your house as far as the bank is concerned (assuming you bought it with a HELOC of course).
May 27th, 2010 at 3:38 PM
“Both reports say that homes are currently over-priced and should be expected to drop.”
Klump: “History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again,” he said.
I don’t see where he says that prices will drop??
May 27th, 2010 at 3:54 PM
Chris,
Good points on HELOC’s. I have to say though that I would have expected the number of home owners who had cashed out some equity to be higher. I recall in 2008 that the lenders seemed to be doing more re-fi deals than new purchases. This report comes as a pleasant surprise to me.
Mike,
I haven’t read the CREA report yet but their most recent forecast suggested that the average price in Canada would be higher at the end of 2010 than it was at the beginning. They proposed a 1.5% decline in 2011.
http://creanews.ca/2010/02/08/resale-housing-forecast-extended-to-2011/
May 27th, 2010 at 4:05 PM
Mike S:
On page five, he writes:
“CREA and other organizations are forecasting that national sales activity will decline in 2011, and the national average price will sag marginally”
What they’re saying is that there will be a “correction”, just not a “significant” one. They difference between real prices (adjusted for inflation) and nominal prices (the straight-up dollar amount) is relevant again here.
What they are acknowledging is that Canadian homes ARE over-priced right now, according to long-established fundamentals (income, primarily)
There are two ways that this imbalance can correct itself: Prices can fall immediately to “proper” levels, or prices can stay where they are while inflation eats away at the real value of that price.
If I but I house today for $300,000, and five years from now it’s worth exactly $300,000, i might think I’ve broken even. But assuming inflation (which as I said above, should be a safe assumption), my house is actually less valuable then it was when I bought it. (since a dollar doesn’t buy as much as it did five years before)
So say i buy that house for $300,000 tomorrow, and according to fundamentals it’s only “worth” $270,000
the market can correct in two ways:
a) the next month, the house’s market value drops to $270,000 scaring the bejeezus out of as a new owner, or
b) My home value doesn’t change at all for several years, while price and wage inflation go up. After five years might still be worth $300,000, but I’ve actually absorbed the market correction, just in a slower and less painful way.
The CREA reports review the history of home over- and under- pricing, and concludes that this is within the normal range of past examples which have corrected without a massive “bust”.
So, if you believe CREA and the banks (as far as their predictions overlap), we will see slow or no nominal price increases in the next little while, which means that REAL prices (described above) have actually fallen.
A vocal minority has suggested that Canada will experience not just real prices falling, but massive drops in nominal prices (two years ago people on this board were predicting home prices would be cut in half by 2010).
These reports say that will not happen unless a completely unforeseen shock to the economy occurs (not just a normal, cyclical change in oil prices or interest rates, for example)
Could they be wrong? Sure they could, but it’s one thing to say that you think they’re wrong, and other to say why you think they’re wrong.
May 27th, 2010 at 4:10 PM
Chris:
“Agreed, but i would tweak it to people who spent unwisely will suffer. People who bought their home wisely, but then borrowed all the home equity they could will also hurt just as badly as anybody who over extended themselves with the original home purchase. That fancy new Beamer or Malibu in the driveway is basically another mortgage on your house as far as the bank is concerned (assuming you bought it with a HELOC of course).”
No doubt. I think that there may be a significant amount of “hidden debt” in Saskatchewan because it’s in HELOCs rather than more easily tracked mortgage loans. Anecdotally, it seemed like a couple of years ago everyone who owned before the boom was buying a new truck or boat, or renovating their kitchen and bathroom, and presumably tapping into their newfound equity to do it. This is definitely something to keep an eye on.
May 27th, 2010 at 4:14 PM
lawtalkingguy,
Yes, people who bought and/or spent unwisely may suffer as a consequence of some less-than-stellar decisions, but we’ve also seen they are capable of dragging the prudent and their wisely-bought properties down with them on occasion.
“Norm has created a very rare opportunity to discuss these issues which are, after all, very important to so many people in this province. It’s nice to that opportunity being taken advantage of with rational discussion.”
Hear, hear! I’m grateful for the opportunity to dicscuss these issues too, and occasionally have my ruffled feathers somewhat soothed.
May 27th, 2010 at 4:25 PM
“Could they be wrong? Sure they could, but it’s one thing to say that you think they’re wrong, and other to say why you think they’re wrong.”
I never said that I thought they’re wrong. I pointed out that Klump said afterwards that prices will stabilize, he didn’t mention a correction. I don’t see stabilizing as the same as prices dropping, inflation or not. If they stabilize, people won’t go underwater the same way as if prices drop, or drop then stabilize.
I think that there will be a correction, especially in the larger centers where prices are quite out of hand. But I don’t take these “reports” too seriously, when one institution says prices will increase, and a week later another says there will be a correction.
May 27th, 2010 at 9:32 PM
So, a CIBC report states we are 13.2% overvalued in Saskatchewan yet the SP reports last week that prices are set to increase 7% over the next 12 months in Saskatoon. If the average annual inflation amount is 2% then I guess we are 5% undervalued here in Saskatoon.
Geez, is CIBC trying to justify their reserve and possibly advertise to lend more money – or is The SP reporting based on where their advertising dollars are coming from. Pretty sad nowadays when one has to sift through all the bologna that gets put out there and nobody has to take any accountability for reports that thousands read. Bear or Bull, there is a report out there that will support your view.
May 27th, 2010 at 9:52 PM
Here is the math I come up with. On a 240k mortgage regardless of what current or future interest rates are going to be. Monthly mortgage payments between $1,800.00 and $2,400.00 taxes $225.00 utilities $250.00 insurance $40.00 maintenance, repairs, upgrades, reno’s, appliance replacement $400.00/average. The total monthly house servicing cost is $2,715.00 to $3,315.00 Can the average homeowner/s in Saskatoon afford this? CIBC says yes they can.
May 27th, 2010 at 10:06 PM
“RBC’s report addresses affordability from the perspective of “how affordable are Canadian homes to buy right now?”
Tal is addressing the question, “Can Canadians who have purchased houses afford to pay for them?””
Sorry to bring this up again, but my mind has been slowly chewing it over…
In terms of addressing where the market is going – isn’t affordability *right now* the more pertinent question? Isn’t that the major pocket of vulnerability, as Mr. Tal would say? I mean, current homeowners don’t keep the current market going, first-time buyers do.
May 27th, 2010 at 10:37 PM
Brian,
This isn’t science. Can’t reasonable people have a different view on something like this without being corrupt?
Rick,
Did you read the report? He didn’t say that $240,000 mortgages are affordable. He surmised that those who already have mortgages which are at $170,000 on average can afford to continue paying them.
Jen,
How is “affordability” is so narrowly defined that it can only mean what RBC means when they say it. I don’t understand why everyone is so hung up on the word.
I agree that “affordability” as you and I typically understand it is a key component in how the market will fair, but it’s one of many factors at play. My read on this report? Tal is saying, “The Canadian market is not as vulnerable as the US market because people here can afford to pay these mortgages. If that’s true, and I’m not completely convinced based on what I’m hearing about consumer debt, then it reduces concern of mass foreclosures and “strategic defaults” from the equation. Those things have made a bad situation far worse in the US.
May 27th, 2010 at 11:00 PM
Lawtalkingguy said-
These reports say that will not happen unless a completely unforeseen shock to the economy occurs (not just a normal, cyclical change in oil prices or interest rates, for example)
Could they be wrong? Sure they could, but it’s one thing to say that you think they’re wrong, and other to say why you think they’re wrong.
A completely unforseen shock to the economy occurs???? You mean like the one that happened less than 24 months ago that all the economists from the banks and the Gov’ts couldn’t predict???
If I’ve learned anything in the last 2 years it’s that economists have their heads buried so far up their nether-regions that they have no idea what is going on let alone predict what will happen in the next year or two. Same goes for bank reports. They have nothing to lose by giving out out insane mortgages as they are essentially risk free thanks to our friends at CMHC…which we as taxpayers will be on the hook for if…wait, when a chunk of the mortgages go sideways.
Banks love HELOC’s. Take a banker out for a beer and when finally loosens his tie, he/she will tell you that they NEVER lose on a HELOC. It will be interesting to see how those who bought real estate in Arizona a year ago with home equity, will make out as they are already upside down approx.10% in what they paid not to mention all indicators that further decreases lie ahead.
I finally convinced my employer to let me move back to Saskatchewan from Alberta. I chose to rent because I firmly believe that there will be a correction in real estate starting this fall.
I realize I’ll be labeled a gloom and doomer but honestly, my income depends on a strong economy. I’d love to see that our economy is in recovery but because of either common sense or too many years spent in finance, I don’t see that happening right now.
May 28th, 2010 at 10:13 AM
I 100% agree with westcan. I too am moving from Alberta to Saskatoon and have decided to rent for the short term and wait and see what happens. I took a purely analytic approach and built a spreadsheet comparing renting to buying over a two and three year period. I compared buying a $400,000 home with $100,000 down (to avoid those darn CMHC fees) at 5.5% over 25 years with $3500 annual taxes and $850 annual HO insurance with renting a home for $2,200 monthly (that same cost as PITI) and investing that $100,000 down payment at 5.5% annually. I also assumed that housing pricing remained constant and that the home was sold at the end of the two and three year terms. The numbers told me that after 2 years I was almost $20,000 ahead as a renter and after three years I was almost $3,000 ahead as a buyer. This assumes housing prices are stagnant (which I think everyone agrees is not the case). I also considered the fact that if I postponed buying for a couple of years my $400,000 should buy me “more house“ should prices indeed fall. Keep in mind, this analysis was case specific to my situation and would not apply to everyone, however it took me out of the current market.
Just a quick thanks to Norm for his blog and insight, when we decide to jump in the market, you`ll be the man!
May 28th, 2010 at 11:46 AM
Jen said: “In terms of addressing where the market is going – isn’t affordability *right now* the more pertinent question? Isn’t that the major pocket of vulnerability, as Mr. Tal would say? I mean, current homeowners don’t keep the current market going, first-time buyers do.”
True, and this is why prices are very likely to drop in the short term. the question is what happens after that- CREA’s whole argument is basically we’re going to have a normal price drop fueled by exactly the affordability problem you’re describing. They predict, however, that the expected drop will be in line with previous “cyclical” drops rather than catastrophic, because they perceive the affordability ratio to be- while quite high- in line with previous history.
Bottom line: Affordability matters, and its effects will be felt one way or another.
Westcan – Yes, and I’d agree that “unforeseeable” events aren’t really that uncommon; but I’d point out that recent history shows us that even unforeseen economic clusterfudges may not be truly devastating to Canadian home prices, as long as we as a country are not reaching too far beyond our means.
It comes down to whether or not you believe these studies that basically say we’re nowhere near as stretched out as Americans were prior to the sub-prime crash. If that’s true, then even a major economic shock shouldn’t devastate the housing market. I’d point out that we just went through a pretty significant economic shock, and the housing market held up pretty well. I think it takes more than just overall economic distress to really hammer a housing market, it takes a country that has spent beyond its means AND gets hammered by economic turmoil.
The question is whether or not that describes Canada/Saskatchewan or not. CIBC and CREA don’t think it does; based on the information currently out there, I tend to agree with them. (And remember, I still think there will be short-term price drops and medium-term price stagnation)
Sheri- that’s an admirable approach to the house-buying decision, and there’s no question if I was only looking at being in one place for two or three years, I’d personally be looking at renting rather than buying.
Unless I’m mistaken, though, your “avoiding CMHC” number is a bit higher than necessary- I believe you “only” need 20% to avoid the fee, which would change your numbers a little bit.
May 28th, 2010 at 12:44 PM
Here’s a historical view of how the last bubble “popped” in Saskatchewan in the early 80′s.
In Regina in 1981, within less than a year, prices increased by 45%. Then from 1982 to 1992 prices slowly rose by a total of 8% (about 0.75% per year). This might not seem like a bubble bursting, since prices continued to rise afterwards, but when you considered how high inflation were during that decade, prices actually dropped by an inflation-adjusted 35% over that period, while rates increased to record levels. Inflation-adjust prices bottomed out in 91/92 and didn’t return to their inflation-adjusted highs until 2007 (26 years from the peak of the bubble).
I’m not saying this is a good model for the upcoming decade, but it’s a good example of how a bubble can pop without a US-style price crash, and how prices can stagnate for longer than most people expect.
The Regina housing price chart is here:
http://www.canadabubble.com/charts/695-canadian-housing-price-chart.html
May 28th, 2010 at 12:55 PM
Very interesting stuff. I’m trying to figure out how they calculate the “real” prices, but if income is properly figured into that calculation, then CREA’s claim that the recent price increases have been within historical ranges seems to be hurt by that chart.
May 28th, 2010 at 1:13 PM
lawtalkingguy,
You said that a big chunk of mortgage today is not a big deal 30 years later. I agree. But have you thought about how much that money would earn you in 30 yrs if you invest them instead of paying somebody else? Sure, if somebody can save $60,000 a year and feel comfortable losing it in case the price drops, he/she can enter the market any time. Paying off mortgage quickly or not doesn’t change the fact that he/she pays more by a significant amount of money even if at 0 interest. He/she can choose to hold on to the property, but others may choose to sell before their house value shrinks. Just like how the fear of buyers drives the market up, the fear of sellers may drive the market down.
I read somewhere the housing price-to-income ratio was 2.6 in 2006 here. Let’s say that was because the houses were undervalued. So a house of $200,000 in 2006 should have been $269,230 if the ratio were say 3.5. If the economy went well (which was not the case), 6% annual appreciation was possible, then in 2010 that house should worth $339,896. Currently they are around $400,000. A $60,000 (17.5%) correction seems to me a reasonable thing. I don’t see why a reasonable thing should hurt the economy in the end and why it can only happen when the economy stops recovering. A healthily growing economy should bring people higher income, not necessarily higher cost of living. I actually believe in the long run this type of correction will do good to the society as a whole.
However, anybody has any idea of the pace of new housing starts and the population increase recent years? Supply-demand relationship is the critical.
May 28th, 2010 at 1:55 PM
“You said that a big chunk of mortgage today is not a big deal 30 years later. I agree. But have you thought about how much that money would earn you in 30 yrs if you invest them instead of paying somebody else?”
Yes, and I’ve seen some well-constructed arguments that- purely financially speaking- renting can be better than buying. But that relies on some pretty specific assumptions about future economic events, and about human behaviour.
(as always, all my numbers are completely made up in an attempt to illustrate the general point)
People suggest that, if you can buy a house for a total payment (PITI) of $2200/mo, you’re better off renting the same house for, say $1400/mo and investing the “extra” $800/mo. The argument is that investing gains will outstrip the equity gains you’re getting by paying down a mortgage.
I haven’t seen this argument effectively explain the following things, though:
1) After twenty-five years or so of paying down a mortgage, you have a free-and-clear asset and no more mortgage payment. The rent-and-invest-the-difference individual has to face continuously rising rent payment (based on inflation) for the rest of their life, whereas somewhere down the road the mortgage-loan-payer is going to be able to drop their loan payment completely. That $800 “savings” will likely be eroded until it actually costs more to rent then it does to service the PITI on the same house, at some unknown point.
Think of this for a second. Barring the collapse of Western society, the average monthly rent payment for a home in Saskatoon will probably hit, say, $4000 in my lifetime. Inflation is a bad mother.
2) Renting-and-investing relies on the renter having the discipline to invest every dollar of their “savings” vs. a mortgage each month, which is a tall order for even disciplined people. Check out our national RRSP contribution rate vs. contribution room numbers, for example. People don’t always make the “right” decision, and a model that presumes they will has issues.
3) For me personally (and this differs with everyone), it gives me a lot more enjoyment to own a home than it would to rent a comparable home. This is an intangible benefit, but it counts. My fiancee and I didn’t buy a home because we thought it was a no-brainer financial decision, we bought it because we have two beagles and they need a backyard to play in. I rented for a lot of years. I personally wouldn’t want to do it any longer than i had to.
4) The “renting and investing is financially better than buying a home” argument is chock-full of assumptions, just like any economic model. Assumptions about future rent-to-income ratios, future tax laws, future in-migration rates, rent vs. buy cost ratios, etc etc.
The biggest of these is the assumption about investing returns (which are, after all they very essence of the argument). And if recent years tell us anything, it’s that investment returns are far, FAR from being guaranteed. No one knows for sure that they can expect to get 10%, 7% or even 1% investing in the stock market over the next few decades.
Given all these assumptions and unknowns, I’m nowhere confident enough in the financial benefits of renting-and-investing to give up the well-being I get from owning a home. Everyone’s preferences and risk tolerance are different, so what isn’t the right choice for me may be the right choice for my neighbour.
May 28th, 2010 at 2:50 PM
Don’t get me wrong – I would much prefer owning right now than waiting; my situation allows me the flexibility of making that decision. Buying a home is a big deal and probably the most costly, both financially and emotionally. It’s this emotional side that leads to craziness. I believe that buying a home is hands down a sound financial decision in the long run for every reason that lawtalkingguy already illustrated. Not to mention the feeling you get from owning your own home. Canada is certainly not the US either, thanks to common sense lending regulations. US banks were writing 125% loans with 2 year teaser rates with no income verification – what did everyone down there think was going to happen? I in no way think that Saskatoon real estate is going to fall 50%, but a 10% drop in the short term is a whoot, whoot for me! $40,000 off a $400,000 house sounds pretty good to me from the buyers perspective.
May 28th, 2010 at 2:56 PM
lawtalkingguy,
Thanks again for your thoughtful responses. You state:
“CREA’s whole argument is basically we’re going to have a normal price drop fueled by exactly the affordability problem you’re describing. They predict, however, that the expected drop will be in line with previous “cyclical” drops rather than catastrophic, because they perceive the affordability ratio to be- while quite high- in line with previous history.”
I’m afraid I don’t buy Mr. Klump’s assertion the incomes will “catch up” to the cost of housing after a downturn anytime soon. According to Alexandre Pestov (http://scr.bi/c6VNNe), “Between 1996 and 2009, the average household income rose by 23 to 32 percent in the four largest Canadian cities. Over the same period, the average house prices in these cities increased between 100 and 200 percent. The gap between the income and house prices growths is the most prominent in Vancouver: from 1986 to 1991 house prices doubled, in 2002 they tripled and by 2008 they had increased more than 6 times.” Do a back-of –the-envelope calculation for yourself; how long would housing prices have to “reamin muted” for the price-to-income ratio to revert to the mean? Much longer than he is asserting, I’d guess.
“I’d point out that we just went through a pretty significant economic shock, and the housing market held up pretty well. I think it takes more than just overall economic distress to really hammer a housing market, it takes a country that has spent beyond its means AND gets hammered by economic turmoil.”
Again, I’d disagree on both counts. The current economic turmoil in the US was (arguably) caused by and unsustainable housing market. Nor do I think was sailed through the current economic situation: recall that in 2008 the housing correction that was in the works was averted due to lowering interest rates to almost nothing. Canadian housing saw a huge run-up in 2006 as lending standards were progressively reduced (extended amortizations, progressively lower down-payments), and In both cases of market intervention, “affordability” increased as the monthly cost of borrowing was reduced, but in neither case was the intervention sustainable. We’ll see what happens with the market in the absence of intervention soon enough, I suppose.
May 28th, 2010 at 3:30 PM
Interesting, yet another objective, third party assessment that Alberta is less over valued/more affordable than Saskatchewan. Apparently, higher average wages, lower taxes and more diversity are a good thing!
“Provincially, British Columbia is the worst with an over valuation of 20.7% and Alberta is the least inflated at 8.6%. Saskatchewan fits neatly between the two at 13.2%, just below the national average”
Would think Saskatchewan is hugely vulnerable, our ONE saving grace last year for a potash catastrophe, was a very strong year for farming AND uranium.
Narrow economy, less affordable than Alberta? Maybe I need to make the move from Regina west… like most of the smart/successful types from my high school class years ago…
May 28th, 2010 at 3:43 PM
lawtalkingguy,
You don’t seem to be working on Friday afternoon, neither do I,
.
You know, you are the type of people who can afford it and your personal situation and your view of the market made owning a house the No.1 priority in your life. (Did you buy it in 2007? It wasn’t the worst time, not too bad) And I agree with you about what you just said. However, I think you kind of misunderstood what I was trying to say.
I never think renting for 25 years is a better idea. What I’m trying to say is, I believe in 2-3 yrs the price would fall at least 20% ($80,000 off a now $400,000 house). Renting till then might be a wise thing to do. By then one can put down more money as well. That being said, I myself can not wait for that long due to my personal needs and the feeling that the market will probably not go down by 50% in 3 yrs.
If I do buy by the end of the year, I am prepared to suffer $50,000 loss. If the situation is bad enough, I may choose to sell after weighing the trouble of moving v.s. the amount of money loss. At that time, I’ll be one of the bear sellers who drive the market further down…
May 28th, 2010 at 9:31 PM
Excellent points, Jen.
I do think that the numbers will be different for “Canada’s four largest cities” than for Saskatchewan, as places Vancouver has shown that sometimes people will pay far, far more than fundamentals would dictate for highly desirable real estate that is in short supply. Income is a hugely important fundamental, but it’s still just an influence for the ultimate factor of “demand”, after all.
Klump seems to suggest that part of the reason income/home price ratios are getting skewed is that more people are buying homes with “wealth” as opposed to “income”. He specifically talks about recent immigrants in B.C., who may have brought significant cash, but may not make a strong income in their first years in the country. I have no idea how true that is.
But he also points to boomers and retirees, who may have very significant wealth built up but have comparatively low incomes. I’ve seen some of this in Saskatchewan; some of my friend’s parents have “retired” by selling their farms in recent years, often getting enough cash to buy a very nice home in the city. Their income is quite low, and yet they can easily afford $500,000 condos based on their assets. This is all anecdotal; Norm might be able to shed some light on whether or not more buyers are using “wealth”, rather than income, to afford housing prices.
May 28th, 2010 at 9:40 PM
Cindy, I think we’re on the same page. I personally think you’re making the 100% right choice, both because I’d prefer to rent if I didn’t know I’d be in the same place for a longer period of time, and because I too think prices will be lower in the short term.
“If I do buy by the end of the year, I am prepared to suffer $50,000 loss.”
I used to play poker for a living, and I’d determine if a particular poker game was too high-stakes for me by imagining how much I would lose if I had a truly horrific run of luck. If I could mentally handle that imaginary loss, I could play. If it made my tummy hurt, I’d find another game.
You’ve got your head on straight, that’s for sure- good luck with your eventual home purchase. Hopefully more of us have developed this realistic perspective about real estate after seeing what happened in the States.
May 28th, 2010 at 10:16 PM
lawtalkingguy,
“I used to play poker for a living”
Wow- I’d love to hear more about that some day! Although we may disagree on some points, I really do enjoy your posts.
Cindy,
I agree with lawtalkingguy; don’t bet more than you can afford to lose. You’ve put a lot of thought into your eventual purchase, and you sound like you will do very well with it when it happens. I did similar calculations when preparing to buy last year myself. I wish you the best of luck!
Norm,
Thank you SO MUCH for adding the spell-checker! You rock!
May 29th, 2010 at 2:24 PM
Thanks lawtalkingguy and Jen, I hope my final purchase will be close to what I want.
May 30th, 2010 at 3:37 PM
“Norm,
Thank you SO MUCH for adding the spell-checker! You rock!
”
Agreed. Any chance the ability to add italics/bold/underlining is next?
May 30th, 2010 at 6:36 PM
lawtalkingguy,
Are you guys playing games with me on the “spell-checker”? To the best of my knowledge we don’t have a spell checker. I sure as heck don’t see one.
I will speak to my latest web guy about offering some html tricks. There should be a simple plug-in that would allow for that.
I have a list of other projects that I can’t seem to get anyone to attack. Seriously, they charge $60 an hour, seem really excited when you hire them and then they disappear for weeks, and weeks.
May 30th, 2010 at 7:42 PM
No, definitely not playing games (!?!). It wasn’t working Friday during the day when I posted from work, and then later that evening (posting from home) suddenly it was.
May 30th, 2010 at 8:22 PM
Thanks Jen,
Are you talking about the red line that appears under misspelled words?
May 30th, 2010 at 9:15 PM
“Are you talking about the red line that appears under misspelled words?”
Uh-uh. I sense a misunderstanding here!
May 30th, 2010 at 9:27 PM
I’ll say. I just don’t see a spell check option on this here blog o’ mine. Are you able to take a screen shot of your monitor. If so, I’d appreciate it if you could email me an image of what you’re seeing. Too weird.
May 31st, 2010 at 11:03 AM
Jen,
Thanks for helping me get to the bottom of this. The spell check is a nice feature.
May 31st, 2010 at 12:41 PM
Norm,
Yes, yes it is.
May 31st, 2010 at 12:51 PM
I can’t tell if you guys already figured it out or not, but I’m pretty sure we’re talking about the automatic spell-checker that comes with some browsers (Firefox has it for sure) but not others. That would explain why it appeared on one of Jen’s computers but not the other. So it’s not actually the blog that was doing the spell checking.
May 31st, 2010 at 1:15 PM
Thanks lawtalkingguy,
I did eventually get on the same page as the rest of you, and yes, I understand that this is a browser function.
Thanks very much.
June 2nd, 2010 at 11:43 PM
Another spell check option would be for everyone to just use Mozilla web browser, is built in,
from my spelling, I am sur you can all tell I don’t practice what I preech. Butt work has it, and is handy. Free down load. Explorer replacement.