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  1. #1
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    Default The Elusive Canadian Housing Bubble

    I thought the Canadian crowd might like this ...


    by Alexandre Pestov - Schulich School of Business

    (P.S. - Uploading the PDF kept failing - so you'll have to use the link)

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    Default Re: The Elusive Canadian Housing Bubble

    'tis INSANE what I've been seeing.

    I'm having the same "conversation" with Torontonians that I had on DC housing bubble blog & SD housing bubble blog ca. summer 2006.

    " There will never be a Canadian housing bubble. "
    " ... somewhere to sleep ... and have sex ..."

    Point out that only 2 countries have "survived", Oz & the GWN and people seem to go deaf & not want to hear how we might have survived.

    Condo maintenance fees are running higher than my current rent(!!!)[0], and the property tax will be around 30% of the maintenance fees)

    [0] granted that in the vernacular my "apartment" is a ****hole, but still ...

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by Spartacus View Post
    'tis INSANE what I've been seeing.

    I'm having the same "conversation" with Torontonians that I had on DC housing bubble blog & SD housing bubble blog ca. summer 2006.

    " There will never be a Canadian housing bubble. "
    " ... somewhere to sleep ... and have sex ..."

    Point out that only 2 countries have "survived", Oz & the GWN and people seem to go deaf & not want to hear how we might have survived.

    Condo maintenance fees are running higher than my current rent(!!!)[0], and the property tax will be around 30% of the maintenance fees)

    [0] granted that in the vernacular my "apartment" is a ****hole, but still ...
    Insane is a good description.

    Oldest son of a long time and close friend of mine just bought his first home a couple of months ago. He and a buddy of his decided that it was "cheaper" to pay the mortgage on a house than the rent on their separate apartments.

    They have a variable rate mortgage at a current interest rate that is less than 3%. His parents live in a upscale, but older neighbourhood. The house their son bought is in the same district, but on top of the hill overlooking them, about 20 years newer, and twice the size.

    When I saw the pictures of the "new" house I pointed out to his father that when we were at the same stage of life as his son, house prices to income levels were much more reasonable than they are now, and yet although we both were earning professional incomes we couldn't afford such a house. The difference? Interest rates on the debt. Back then they were double digits.

    Our bankers and politicians are wrecking the country...

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by GRG55 View Post
    The difference? Interest rates on the debt. Back then they were double digits.

    Our bankers and politicians are wrecking the country...


    question, why weren't interest rates lowered back then? wouldn't it be good to have low rates?

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by touchring View Post
    question, why weren't interest rates lowered back then? wouldn't it be good to have low rates?
    Because this was the 1980s and Central Bankers, led by the Volcker Fed, were frightened of inflation. Now they are frightened of deflation...

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by GRG55 View Post
    Insane is a good description.

    Oldest son of a long time and close friend of mine just bought his first home a couple of months ago. He and a buddy of his decided that it was "cheaper" to pay the mortgage on a house than the rent on their separate apartments.

    They have a variable rate mortgage at a current interest rate that is less than 3%. His parents live in a upscale, but older neighbourhood. The house their son bought is in the same district, but on top of the hill overlooking them, about 20 years newer, and twice the size.

    When I saw the pictures of the "new" house I pointed out to his father that when we were at the same stage of life as his son, house prices to income levels were much more reasonable than they are now, and yet although we both were earning professional incomes we couldn't afford such a house. The difference? Interest rates on the debt. Back then they were double digits.

    Our bankers and politicians are wrecking the country...
    If he were to get 30 year fixed mortgage, what would the rate be?

    It is called "mort-gage" for a reason.

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by Polish_Silver View Post
    If he were to get 30 year fixed mortgage, what would the rate be?

    It is called "mort-gage" for a reason.
    There are no 30 year fixed mortgages in Canada.

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by GRG55 View Post
    There are no 30 year fixed mortgages in Canada.
    You mean all the rates are adjustable? I'd be really scared to get one of those!

    How are the rates determined? And is there a limit?

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by Polish_Silver View Post
    You mean all the rates are adjustable? I'd be really scared to get one of those!

    How are the rates determined? And is there a limit?
    The mortgage market varies from "variable rate" mortgages, which adjust each month based on Canadian bank prime rate, to fixed interest for anywhere from 6 months to 5 years. There are some exceptions, but this is the core of the market. If rates are high and declining then shorter terms and variable rate are more popular, if rates might be headed higher then more people prefer to lock in for 5 year terms. At the end of the term the entire mortgage comes due and a new mortgage has to be taken out. If one stays with the same bank its usually just a paperwork formality. If you change lenders then a new appraisal and so forth has to be done on the property and it gets more expensive.

    In really severe property price collapses, such as the one that Alberta experienced in the early 1980s, lenders can simply stop writing mortgages and they won't renew your expiring mortgage. That just added to the collapse of the housing market back then, with houses selling well below lot service and construction costs at the bottom...much like Phoenix and parts of inland California and Florida not that long ago.

    Mortgage rates tend to track the Canadian bank prime rate, government bond rates and GIC deposit rates for the applicable term, with the usual healthy mark-up for the banks to make their executive and Board bonus money.

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    Default Re: The Elusive Canadian Housing Bubble

    Quote Originally Posted by GRG55 View Post
    Insane is a good description.

    Oldest son of a long time and close friend of mine just bought his first home a couple of months ago. He and a buddy of his decided that it was "cheaper" to pay the mortgage on a house than the rent on their separate apartments.

    They have a variable rate mortgage at a current interest rate that is less than 3%. His parents live in a upscale, but older neighbourhood. The house their son bought is in the same district, but on top of the hill overlooking them, about 20 years newer, and twice the size.

    When I saw the pictures of the "new" house I pointed out to his father that when we were at the same stage of life as his son, house prices to income levels were much more reasonable than they are now, and yet although we both were earning professional incomes we couldn't afford such a house. The difference? Interest rates on the debt. Back then they were double digits.

    Our bankers and politicians are wrecking the country...

    Humpty Dumpty? Or horses and barn doors?


    Canada tightens mortgage rules to help cool blistering Toronto, Vancouver housing markets

    December 11, 2015 4:58 PM ET

    OTTAWA — The new Liberal government on Friday confirmed it is tightening lending rules for residential mortgages, setting a minimum down payment of 10 per cent on the portion of home prices over $500,000.

    Finance Minister Bill Morneau said homes purchased below the new price ceiling will remain at five per cent...

    ...“We believe that by increasing the down payment . . . we will create a better buffer for people and make people more secure, and have the entire market be more stable,” Morneau told reporters in Ottawa.

    The federal minister acknowledged the new measure will affect fewer than 10,000 home purchasers, or one per cent of the total market...




    New mortgage rules to hit Calgary hard, economist says


    Dec 11 12:36 PM ET

    A change in the minimum down payment rules will only affect about 3.9 per cent of new mortgages across the country but one of the cities most impacted can least afford a change in regulations.

    CIBC deputy chief economist Benjamin Tal said the motivation behind the new policy, which will increase the minimum down payment from five per cent to 10 per cent for the portion of a property more than $500,000, is clearly to slow down the the Vancouver and Toronto markets.


    “Those markets also happen to be the most expensive ones,” said the economist. “The Ministry of Finance is touching the untouchable (when it comes to down payments).”


    But in the stagnating Calgary market, where November sales were 20 per cent below the 10-year average for the month, the impact could be devastating, said the economist. “Note, the the largest impact, close to 10 per cent, will be on Calgary due to its relatively large share of high-ratio mortgages — not exactly a city that needs additional cooling.”



    Last edited by GRG55; 12-13-15 at 11:21 AM.

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    Default author's 1st language may not be english, and

    he's doing some really (I'm guessing for most North Americans) non-standard things here

    Until I realized what he was doing here I thought his hypothetical 10% rise was 10% to 11%.

    he calls interest rates going from 4% to 14% is a "10% rise", instead of calling this case the more usual "a 10 point increase", or some such.

    this really clashes on page 5:
    "10 percent rise in interest rates from 4 to 14 percent on a mortgage amortized over 25 years will send a $2,500 monthly payment to a stratospheric $5,701 or 128% increase"

    And there is the probable idiom he doesn't explain on p21
    "the shock waves rippled through the fabric of the global financial world at speed and intensity of those triggered by the Tsar Bomb. "


    "Tsar bomb" ? No explanation to non Russians?

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    Default Re: author's 1st language may not be english, and


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    Default Re: The Elusive Canadian Housing Bubble

    And this just in from Edward Jones via The Globe and Mail ...

    Report warns of housing bubble threat
    ‘The increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified’

    Steve Ladurantaye
    Globe and Mail Update Published on Tuesday, Apr. 27, 2010 9:36AM EDT Last updated on Tuesday, Apr. 27, 2010 10:37AM EDT


    Canada's housing market is looking increasingly like a bubble in the making, Edward Jones said today in a report.

    “Canada’s housing market escaped the recent severe downturns in the U.S. and other countries. However, today’s conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments,” wrote analysts Kate Warne and Craig Fehr, adding that Canadians should prepare for “the possible impact” of a housing downturn.

    An asset bubble forms when cheap money causes speculators to flood into a market, driving prices higher despite weak underlying fundamentals. With unemployment high and the economic recovery on shaky ground, the rapid recovery of Canada's real estate market has many economists concerned that prices could head lower. Prices have gained almost 20 per cent in the last year, as a lack of inventory and easy access to cheap money has propelled Canadians toward home ownership.

    The analysts said three factors must be in place for a bubble to form – prices that are too high compared to historical averages, easy credit, and lax government policy that allow people to get in over their heads. Last month the federal government made it more difficult to obtain a mortgage, requiring all borrowers to qualify at the five-year rate when applying for credit rather than the variable rate, which can be much lower.

    “We think the first two conditions characterize the current Canadian housing market,” the report states. “To avoid the third condition, the government is taking steps to tighten mortgage availability, and regulation remains relatively tight. While we believe any housing downturn in Canada won’t be as severe as the recent U.S. experience, the increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified.”

    While the economy has shown signs of strength, the analysts suggest the pace of recovery in the housing market has been too high to be sustainable.

    “Housing prices have outpaced the overall economy, including unemployment trends and gross domestic product (GDP) growth,” they state. “As a result, our stance on Canadian housing market risk is becoming increasingly cautious.”

    Tighter lending standards, rising interest rates and mortgage costs, an increase in new supply and consumer deleveraging could all conspire to take the market lower, they said. Any slowdown has implications for the broader economy, they said, particularly when it comes to consumer spending.

    About 30 per cent of all mortgages taken out between 2007 to 2009 have terms of less than three years, they said, which means they will likely be renewed at higher rates.

    The extra costs could keep people from spending on other items -a 3 per cent increase in mortgage rates would mean an extra $444 a month for a mortgage of $254,514, they said. That would shift $1.82-billion of Canadians' $911.5-billion in annual discretionary spending toward mortgage costs.

    “In addition, Canadian consumer debt has risen steadily for several years, reaching new highs as measured by debt as a percentage of disposable income,” they said. “Thus, consumers don’t appear to have the flexibility they might have had in the past.”

    Last week, Gluskin + Sheff economist David Rosenberg suggested Canada's housing market was in for a 20 per cent price correction. He said government intervention and easy money has helped the market get ahead of itself.

    “The question is not whether home prices slide especially in bubbly Toronto and Vancouver, but just how much froth is there to come out,” he said. As rates begin to rise and more supply comes on the market, he said the market will be under a lot of pressure to keep advancing.

    “The housing market in Canada, the goose that laid the golden egg for the broader economy, is now going to be operating without the crutch of massive government support. It will be fascinating to see how this all plays out.”

  14. #14

    Default Re: The Elusive Canadian Housing Bubble

    Hi itulipers, this is my first post on the board but I've been reading for a year or so now. I noticed today that the Canadian banks lowered fixed mortgage rates by 10-15 basis points, citing the Greek (EU) crisis and subsuquent market pullback and flight to Canadian bonds as the primary reason for doing this.

    http://www.theglobeandmail.com/repor...rticle1564570/

    In my view, this will effectlively prolong and enhance Canada's real estate bubble. The B of C has hinted at rate increases for the end of June but in the event of a further market pullback, will these increases be put on hold? Given that ongoing market pullbacks are highly likely on and off for the next several years, can we legitmately expect rates to rise in rapid and linear fashion, as has been speculated widely by many individuals? Also, I'm interested in hearing peoples interpretation of how the deflation of the Canadian real estate bubble might occur. Obviously the key indicators suggest that we are very frothy in some parts of Canada and I expect a sizeable correction but I'm starting to think that the bubble popping may be further off than I thought (I was thinking it would start this summer and fall), especially if market turmoil in the EU has the effect on mortgage rates that it did today. Thoughts?

    Things to ponder:

    1) Western Canada is loaded with natural resources, which typically gives Canada a positive balance of trade
    2) Our own ugly debt problem has not been acknowledged but still exists although perhaps not to the extent to the US.
    3) Are our banks as healthy as reported? US banks looked healthy prior to a collapse in real estate as well.
    4) CHMC is still guaranteeing mortgages that banks probably wouldn't touch. I wonder what would cause that situation to end.

    Thinks in advance for any thoughts that you have.

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    Default Re: The Elusive Canadian Housing Bubble


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    Default Re: The Elusive Canadian Housing Bubble

    http://www.ft.com/intl/cms/s/0/59991...#axzz2qZJE2mAc

    January 16, 2014 6:07 pm
    Canada’s property boom

    By Camilla Hall


    Record house prices and low interest rates have fuelled fears of a bubble that has excited hedge funds


    Skyward limits: Toronto’s prices are up 37 per cent since 2008



    Ben Rabidoux was teaching at Georgian College, a small university an hour’s drive from Toronto, when he started writing a blog about the Canadian housing market. His job teaching economics and finance gave him access to reams of real estate data, which he used to back up his contrarian – and unpopular – case that Canada was in the midst of a housi

    The blog won a small but loyal following. In late 2011 Mr Rabidoux received a call from one fan, Mark Hanson, the analyst known for forecasting the US housing crisis. Soon, Mr Rabidoux realised many of his avid readers worked for hedge funds and were eager to bet against Canada’s housing market.

    -continued at link-

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    Default Re: The Elusive Canadian Housing Bubble

    Mish has cobbled together several recent Canadian RE articles. (he now blocks copy/paste - a stupid decision)

    http://globaleconomicanalysis.blogsp...-late-for.html

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    Default Re: The Elusive Canadian Housing Bubble

    Time to drop in on Garth Turner's blog...it's been a while:

    ...Susan lives in Calgary with her husband, and was shocked at a story he came home with last week. “One of the guys he works with is up to his eyeballs in debt. (He’s in his forties, married, with three kids). He and his wife make about $150,000 between the two of them,” she says.

    “So, my husband suggested he look at a consumer proposal as he was at the end of his rope. So the guy called, I believe Money Mentors, and they were so busy they couldn’t get him in for an INITIAL meeting until March 31. They told him they have NEVER been this busy and are pushing through an application every half hour, per agent. And that is just a Calgary office. What’s the rest of the country doing? Just thought you should know….possibly a sign of the overextended times?”

    The latest stats suggest about 20% of everybody will eventually go bankrupt, Sue. It’s a shocking number, but should surprise nobody. Debt is endemic, and doesn’t seem to scare people the way it used to. The debt-to-income level of about 165% is at a record (US personal debt is 136%, and falling), and mortgage indebtedness just went off the charts.

    And this is with 0.9% car loans and 3% mortgages. Just wait until inflationary pressures force rates to normalize.

    Calgary? Why shouldn’t things be worse in a city where house prices are ridiculous? A SFH in Cowtown now costs almost $480,000 and is 26% more expensive than five years ago. Someday more locals will understand this isn’t something worth growing chest hair over...



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    Default Re: The Elusive Canadian Housing Bubble

    Debt is endemic, and doesn’t seem to scare people the way it used to.
    Gee. I wonder why . . .

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    Default Re: The Elusive Canadian Housing Bubble

    did it pop?

    The Canadian economy is rolling over and their recent jobs situation is worse than the US (and it's always cold weather-y up there?!) but the last great pillar of the 'recovery' in Canada is perhaps about to get crushed. As the WSJ noted recently, Canada's housing market is the most expensive in the world (60% over-valued by historical standards) and one simple reason explains it - Canada has been very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market. Until now... As SCMP reports, Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986. Soft landing?

    Deutsche Banks's house-price-to-rent index says Canada has the most expensive housing market in the world - 60% over-valued...


    "Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. "
    As it's home price index hardly missed a beat while the US plunged... (different scales but point is to illustrate drastic difference when financial crisis started - and where the liquidity went...)



    Via The South China Morning Post,

    Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.


    The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.

    The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.

    The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires. Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.

    In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.

    For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.

    Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.

    A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.

    Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.

    All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

    The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.


    So the Canadian government is looking a liquidity gift-horse in the mouth and saying "no, thanks" - an impressive decision to take given the potential weakness in the real economy... we'll see how long it takes for the decision to be unwound, altered or canceled ...

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