Time to panic about the housing market

Why is everyone ignoring this unfolding disaster?

You’re about to get burned

Photo Illustration by CJ Burton

Back in the heady days of 2005, America looked like an awfully nice place to buy a house. Home prices were marching ever upwards. Home ownership was at record levels. Mortgage rates were at historic lows. Unemployment was falling while the economy was growing at a healthy clip.

Home sales had started showing their first signs of slowing that year, but that didn’t sway the National Association of Realtors from its persistently sunny view of the country’s housing market. “We’re confident that housing is landing softly,” David Lereah, the association’s chief economist, wrote in a November 2005 report just before house prices started a descent that would eventually wipe out nearly $30 trillion in global wealth.

Looking back, the signs of a country burying its head in the sand about a housing bubble seem obvious: the well-told tales of tricky teaser rates, of mortgage fraud and of gigantic home loans handed out to buyers with no income or assets. Household finances were even sketchier. In 2005, the average American owed $1.30 in debt for every dollar of income. Home equity was eroding as Americans pulled more than $900 billion out of their homes to buy cars, granite countertops and put their kids through college.

Then in 2008, the housewarming party was over as the country’s major banks teetered on the brink of collapse and took the economy with them.

Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the world’s new beacon for financial stewardship. It’s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.

But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt. “One of the really terrible narratives we’ve allowed to develop in the minds of Canadians is that somehow we are better than the U.S. and so that means we have nothing to be concerned about,” says Ben Rabidoux, who runs The Economic Analyst website and parlayed his obsession with watching the housing market into a job with a Wall Street firm that advises institutional investors on how not to get caught up in the Canadian miracle/disaster.

What Rabidoux and others have seen is just how much Canada’s economy has come to rely on the country’s housing boom—and how much consumers have been digging themselves into debt just to keep it going.

Since 2008, Canada’s ratio of debt to after-tax income has exploded. By the third quarter of 2011, Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.

“Everybody points out the differences in the U.S., about financial regulations and subprime mortgages,” said David Madani, a former Bank of Canada analyst now with Capital Economics. “But to me this is all a borderline attempt to misdirect the whole debate because we’re engaging in that type of discussion and only that discussion. It ignores the big elephants in the room.”

The elephants Madani sees include a sharp run-up in house prices compared to income: the average Canadian home now costs five times the average income, well above the multiple of three that is considered affordable. There’s also a sharp rise in home ownership rates, which at about 68 per cent of Canadians mirrors closely the 69 per cent at the top of the U.S. bubble. Madani also points to continued overbuilding and Canada’s still healthy construction industry. New building permits reached $6.8 billion in December, a 4.5-year high.

The biggest elephant of all is how much the boom has been fuelled by cheap and abundant credit thanks to a low interest rate policy pursued by the Bank of Canada, along with government-insured mortgages. “All the warning signs are there,” Madani says. “We just have to connect the dots.”

There is evidence the tide may already be turning in Canada’s housing market. The Canadian Real Estate Association reported home sales had fallen 4.5 per cent in January compared to December, the steepest decline since July 2010. Prices still rose, but by just two per cent, the slowest in the past year. Kelowna, B.C., a popular spot for retirees and vacation homes, reported a tenfold increase in foreclosures compared to three years ago. The hard landing might already be upon us.

In some major housing markets like Toronto, the signs of a bubble are as glaring as ever. Driven by a glut of condos that has made single-family homes a rarity, house prices have soared to nearly $500,000 on average. Even more proof that the city’s homebuyers have lost their heads: in January a west Toronto renovator’s dream went for $200,000 over asking price.

Nicole Austin, 31, and her boyfriend, Jim Varlas, know the mania all too well. The couple decided to sell their downtown Toronto condos and buy a house in Markham, a suburb north of the city. They moved in with Varlas’s parents and started shopping around for a house with a budget of $400,000. “Either the homes in our price range were really outdated and hadn’t been touched since the 1970s, or they would need to be renovated,” Austin says. They upped their budget to $500,000 and bid on three homes. They lost all three in bidding wars that pushed prices up as high as $575,000. “In some cases we knew what the house was worth and there was a certain point where we’d just walk away because it was getting ridiculous,” Austin says.

Earlier this month, the couple settled on a new build, paying “in the mid-to-high 500s.” But Austin says taking on a larger mortgage than expected was a fair tradeoff for finding a house in their chosen city. The couple say they expect prices to crash, but that doesn’t matter much since they plan to be in their home for at least 10 years.

With an average price topping $348,000 in January, Canadian homes are now worth a total of $3 trillion, nearly twice the country’s GDP. Home prices have doubled since 2002 and risen 13 per cent since the global recession hit in 2008.

When home prices rise, so does consumer confidence. Canadians, believing that their bricks and mortar are a gold mine, have become ever more willing to open their wallets. In less than 10 years, consumer spending has gone from 58 per cent of Canada’s GDP to 65 per cent.

The housing boom has helped prop up Canada’s construction industry, which now represents 7.4 per cent of the labour force, higher than it was in the U.S. at the height of its boom. Add in other housing-related industries, such as real estate agents, mortgage brokers and insurance companies, and the sector represents a staggering 27 per cent of the Canadian workforce. In the U.S., those same numbers peaked at 23.5 per cent. “We are far more dependent directly and indirectly on this current housing boom than they were in the U.S.,” says Rabidoux. “How in the world are you going to orchestrate a soft landing?”

More worrisome is where consumers have been getting their spending money. As wages stagnate and credit card use levels off, Canadian consumers have increasingly turned to their homes as a source of cash. As of last year, Canadians had pulled roughly $220 billion from their houses in revolving home equity lines of credit, a per capita amount three times larger than the U.S. at its peak.

Home equity lines of credit, known in the industry as HELOCs, have increased 170 per cent in the past decade, twice as fast as new mortgages. The federal government recognized just how risky HELOCs had become last April, when it announced it would no longer allow the Canada Mortgage and Housing Corporation to insure them.

Such home equity withdrawals were a large factor in fuelling the economic recovery. In 2007, Rabidoux says, home equity withdrawals in B.C. alone reached 4.5 per cent of the province’s GDP. “This is the real story of the Canadian economic miracle,” he says. “There’s nothing else that did such a fine job of pulling the country out of a recession than inviting people to take three per cent worth of GDP out of their homes.”

Of course, so long as home prices keep rising as fast as they have—averaging five per cent a quarter through 2011—the risk of all this debt seems minimal. It’s when the prices start to slide, as they have recently, that household debt becomes a problem.

Madani thinks the Canadian housing market has already hit a wall. “Overconfidence is what’s driving the market. It’s been fuelled by cheap credit. That just can’t keep going on forever,” he says. “I think it’s going to end badly.”

It’s hard to blame consumers for taking on huge mortgages when banks are offering five-year rates as low as 2.99 per cent. “Low interest rates are like a drug,” says TD Economics chief economist Craig Alexander. “The low interest rates are encouraging people to buy houses and take on debt. When they’re unhooked from that drug, they’re going to have to be unhooked very gradually because going cold turkey is going to hurt them.”

Banks themselves can only be blamed so much for offering consumers mortgages for next to nothing. The Bank of Canada has held its key interest rate at one per cent since September 2010, and most economists expect the bank to keep it there until well into next year.

It’s a dangerous game. Low interest rates might sound great for anyone looking to take out a loan, but they can have a perverse effect on an economy when they stay low for years.

Low interest rates had as much to do with the U.S. housing bubble as subprime mortgages, even working to make such lending more popular, says Stanford University economist John Taylor. He argues there never would have been a housing boom or a bust at all if the U.S. Federal Reserve and its chairman, Alan Greenspan, hadn’t slashed interest rates in the wake of the 2000 dot-com bust and then held them low until 2005. Not only did low rates encourage Americans to take on larger mortgages, but they pushed banks to make more aggressive loans in search of profits and increased demand for higher-yielding—and therefore riskier—debt.

Given what happened in the U.S., many question why the Bank of Canada is sticking to the same strategy. The bank is well aware that its monetary policy has encouraged Canadians to pile on the debt. Governor Mark Carney has taken to sounding the alarm bells about household finances every chance he gets, telling the CBC in December, “The greatest risk to the domestic economy is household debt.”

The warnings have, predictably, fallen on deaf ears. Who, after all, can resist the lure of free money? The damage was done in 2009, when the Bank of Canada slashed interest rates to 0.25 per cent in April and promised to keep them there until the second quarter of 2010 on the condition that inflation didn’t spiral out of control. Inflation spent much of 2011 at three per cent, above the bank’s target rate of two per cent.

“You could argue that the Bank of Canada, by keeping interest rates so low for a long time, violated to a certain degree its mandate in terms of price stability,” says Thorsten Koeppl, the Queen’s University economist who spent much of 2011 advocating for higher interest rates to curb inflation.

So if Carney is partly to blame for inflating the bubble, could he have done anything differently? Most economists say Carney’s hands have been somewhat tied by the U.S. Federal Reserve, which is expected to keep its interest rate at near zero until 2014. Raising Canada’s rates too high by comparison would inflate the loonie, punishing exports and manufacturing.

But at some point the risks of a housing bubble begin to eclipse those of harming the export economy, and some economists have started calling on Carney to stop just scolding profligate consumers and start setting interest rates based not just on inflation, but on the stability of the financial system, including rising levels of household debt.

“I don’t know how effective his talks will be if we see lower and lower and lower rates,” Koeppl says. “The stakes are much higher, the imbalances are larger, the risks are larger and the moral suasion works less and less. The issue really here is when do we go back to a normal monetary policy regime?”

Getting back to normal interest rates of three to four per cent becomes increasingly difficult the longer rates stay low. Carney may be caught between trying to boost employment by getting business to spend their unused capital and trying to stop consumers from digging themselves into a hole. But he may also have backed himself into a corner if inflation or unemployment rises unexpectedly.

“One of the problems with getting out at the extremes of things like debt and financial crises is that all of your policy options get harder and harder and harder and you can’t fix one problem without another major side effect. And we’re in side effect city,” says University of Manitoba finance professor John McCallum.

TD’s Alexander believes an interest rate hike of two percentage points would push 10 per cent of Canadians into danger territory where they would be spending upwards of 40 per cent of their income on debt payments. “The economy is very sensitive to shocks,” he says. “Every quarter-point increase in the interest rate could have a far greater impact on the economy than a quarter-point increase could have had 10 years ago.”

Mortgage rates are especially vulnerable. Shorter-term variable rates, which are linked to the Bank of Canada’s overnight rate, have become increasingly popular, now making up about 40 per cent of the market. Nearly half a million homeowners swapped their fixed-rate mortgage for variable rates last year. “If you’ve got a very big variable rate mortgage and those rates moved up two to three per cent, I think a lot of families are right at the line in terms of spending and suddenly they’re looking at a very big jump,” McCallum says.

Where analysts say there is more room to move is in Canada’s housing policy, including reining in the growth of mortgages insured by the CMHC. This month, the government-backed insurance corporation warned that it was close to maxing out its $600-billion budget for insurance, driven in large part by banks insuring portfolios of low-risk mortgages, which are repackaged as bonds and sold to investors, primarily in the U.S.

Since they were first introduced in Canada in 2007, such investments, known as covered bonds, have grown from a $2-billion industry to $50 billion, with much of the growth coming in just the last year. The rise in mortgage bonds has also worked to drive mortgage rates down by freeing up banks’ money to make more loans.

The Conservative government has taken some steps to tighten mortgage rules, including lowering amortization periods to 30 years from 40, and raising the minimum down payment for CMHC insurance to five per cent from nothing. CMHC says it will limit the amount of portfolio insurance it offers to banks.

Rabidoux thinks the CMHC should reinstate a cap on the price of mortgages it will insure. Until 2003, the corporation would only insure mortgages up to $300,000 in markets like Vancouver and Toronto. After a decade of relatively flat growth, house prices rose steadily once the CMHC removed the cap. “The point of the CMHC is not really to get people into their dream house off the backs of taxpayers,” says Rabidoux.

But the debate has already morphed into one over whether the Canadian government should be in the mortgage insurance business at all, or whether the CHMC is the product of a bygone era when working stiffs had little opportunity to buy their first home without a huge down payment.

“It may be those times are past and we need to take another look at the whole of housing policy,” says economist David Laidler, a professor emeritus at the University of Western Ontario. “It’s something you need to think about as a major policy issue on the same level of health care.”

Of course, it may be too late for such a discussion. As the U.S. showed in 2005, no matter how loud the alarm bells and how long they’ve been ringing, a housing crash always comes as a surprise to the people paying the mortgage.

Or as John McCallum puts it: “The thing with household debt is it’s not a problem until it’s a problem. But when it becomes a problem, it’s usually a really big problem.”




Browse

Time to panic about the housing market

  1.  Two points to make:

     1. Carney has more than just interest rate at his disposal. He has – on paper – much more leverage through CMHC which is a government entity, unlike in US.

     2. Carney could always opt for FX market intervention, Swiss-style

     3. Europe has higher interest rate than we do

     My take is that, on one hand, Carney is trying to kick the can down the road so that Harper gets better economic performance than he deserves, and, on the other hand, if this thing goes, there maybe a one-two-three punch from FX/unemployment/defaults of otherwise healthy households, and we may end up being more like early 90es with a long and slogging recovery than like US in 2007-2011.

    • 1. Carney doesn’t command the government and its policy through CMHC, though I’m sure he has regular discussions with the government about it.

      2. In theory the Bank of Canada could print money to buy USD to suppress the exchange rate, but then you lose control of inflation. The Bank would have to abandon its inflation mandate to engage in FX market operations. Maybe it will do so to take the edge off in the face of a spike in the CAD:USD rate. Long term this can’t save us: see China.

      3. Not sure how that helps us.

      I give Carney a lot of credit; I don’t think he is taking political considerations into account when deciding on Bank policy.

      •  2. We already lost control of inflation. It is already higher than the rates.

         We essentially need to jack up the rates and print dollars to keep FX in check.

        • The Bank of Canada doesn’t directly control interest rates. They buy and sell bonds, which impacts the money supply, and the rates at which banks lend. So they can’t expand the money supply AND jack up the rates simultaneously. Anyway, what do you think would happen to inflation if they printed money?

          • It hardly matters.  With Canada’s wide-open fractional reserve banking system (where there is no reserves, and only a fraction of the money held by the banks), every loan is one made in a computer, and this is the largest source of currency “inflation”.

            Of course, people tend to use the word “inflation” as it sounds positive, but what it actually means in real life is that the currency is being deliberately DEVALUED.

            Take a ’67 Camaro.  You could buy one brand new off the lot for about $3,600.00 45 years ago.  Today, to pick up a brand new Camaro off the lot will cost you $55,000.

            When you look at the advances made in materials technology, manufacturing technologies, composite material substitutions and related technologies, factory floor productivity enhancements, and dozens of other methods of reducing costs over the last 45 years, you have to wonder why all of these COST REDUCING MEASURES have still resulted in the price of the same car shooting upwards fifteen times, in spite of all of those advancements.

            The only answer is that the value of the dollar has decreased.

            It’s going to get a whole lot worse in Canada before it gets any better, and Emperor Harperius will be the last person to do anything positive to save the economy, or the country, as he is all about political rhetoric, and nothing about reality.

  2. “Here in Canada, we patted our backs for not falling into the same trap”

    You mean, other than the $75 Billion in mortgages bought back from the banks and placed on the taxpayers line of credit over at CMHC to help our banks “maintain competitiveness” and prevent them being “put at risk by global events”, right?

    • There was no net new risk. Those mortgages were already insured.

      • Actually you’re incorrect that there has been no increased risk.  In order to keep the system afloat, Flaherty et al. increased the coverage by the CMHC so that banks wouldn’t clam up their lending.  I emailed my objection to us making ourselves even more vulnerable should the worst happen, and some 8-10 months later received a form letter from Flaherty (or his office) essentially saying it’s OK because they eventually clawed back the expanded coverage requirements.  They didn’t reduce the risk, they just stopped increasing it.  They took a gamble, and were lucky things didn’t collapse then.  
        (I usually believe in sourcing statements like these, but I’m going to cop-out as tired.  I believe you should be able to find info fairly easily about them increasing CMHC coverage in the wake of the 2008 collapse fairly easily using Google.  If you try, and can’t, challenge me and maybe I’ll remember to check back here and be guilted into doing to work another day.  Until then I understand if you take this with a grain of salt, but I am certain the information is out there.)

      • Uh, that’s massively ignorant. Taking those mortgages off the banks’ books allowed them to write $75 billion MORE mortgages that are now insured by the Canadian government.

      •  Ah, so it’s all about risk. The fact that the banks received a 75 billion dollar subsidy is of no consequence. I guess if the government bought 75 billion of merchandise from major retailers (in order for the retailers to refresh their stock and offer new products), you wouldn’t bat an eyelash. Healthy industries do NOT require massive subsidies.

  3. My take on this is, why would the population behave any differently than our governments???  Aren’t we just following the examples set by our leaders??? spend, spend, spend!!!!

  4. remember 2% inflation equals 25% price appreciation in 12.434 yrs
    Average Cdn prices ‘coloured’ by heavy weightings for Toronto and Vancouver.
    Vancouver is immigration mecca (homes bought w cash – no pymnts)
    Toronto Condos ARE overbought … but it doesn’t show because the 2012 price paid in presales doesn’t get recorded in “official reports” til the completion some 2-5yrs hence.

    The real “problem” Carney faces w interest rates is on Gov’t Budgets … if he raises rates 2% he break every provincial and the ConFederal budget to pieces! no tax increase is going to cover that ….. and spending cuts? … bon chance … labour give-backs? … wowie-zowie watch the fireworks!

    • “homes bought w cash – no pymnts”

      Yeah right….  the data does not support the existence of these cash buyers.  Leverage is rising just as fast as prices.  Cash buyers, in any significant numbers, would imply a de-leveraging.

    • Check your math. 1.02^12.434=1.279 not 1.25

      • splitting hairs.  the point is the same.  25% 27.9% same result

  5. This article is important, and I hope it gets wide distribution.

    There is an obvious connection between relaxing the rules for CMHC insurance and the bubble. Is it outrageous to suggest the rules were relaxed specifically to increase prices and help the RE industry?

    • Given that the CMHC is run by industry insiders (check their laughably poorly qualified board of directors), I’d say you are bang on the money.

      • Theres a reason for a ‘laughably poorly qualified board of directors’ its called control.

  6. Now that MacLeans and other mainstream media have finally picked up on this I guess that only leaves Global to get it to the non readers…Wonder if Flaherty has seen this.  1/4 point would do a hell of a lot more good than all the gentle warnings by Carney and Flaherty.

    • actually any rate increase would cause ‘panic buying” – in fear of greater rate hikes ahead.

      • Eventually you run out of panic buyers. 

  7. According
    to many published reports, about 42% of Canadians have a grade four or five
    reading skills. Most of us spend an average of four hours of TV, and do not
    read beyond the headlines. In short, we are not properly informed and trust our
    government. Unfortunately, our governments are high jacked by the Corporations,
    and have very little interest in governing. After all when they leave office,
    they may need a job at Bay Street.

    (Sorry
    about my English language skills. I was not born in Canada and still learng)

    Regards,

    • That’s assuming they bother to read at all. 

      In fairness, I find reading various media to be little better than reading tea leaves nowadays. 

    •  You’re learning quite well — you write more coherently than many native English speakers!

  8. “The couple say they expect prices to crash, but that doesn’t matter
    much since they plan to be in their home for at least 10 years.”

    In other words, we’ll just let the banks and the developers and the contractors name their prices for as long as they can get away with it.  The reason housing prices keep going up is because people are too stupid to realize the concept of supply and demand.  The upper limit of the mortgage approved by one’s bank is now the only limit on the price.  Value for the dollar is completely ignored.

    • I found that sentiment astounding (or is it ‘confounding’?) as well. Seriously? You don’t care if you purchase an asset at $550,000 and it crashes? 

      Clearly they’re just mindlessly parroting what their mortgage specialist, realtor or overly indebted friends have told them. (probably all three)

      • Agreed. And what makes that couple think that if the market crashes, their home will regain all the value it lost over the course of 10 years? Ask the Japanese. In real terms, house prices are still less there than they were before their crash almost 25 years ago!

      • Yep. They have to be two of the biggest idiots in Canada, if they in fact are real. They think the market will crash, but they won’t rent for a year or two in order to take advantage of lower prices. Duh. Buy high and hold is not a good investment strategy.

        • But its not buy high and hold, look at the NPV when you add inputs of at least 12k per year you would pay renting. Loosing 5% on your home doesn’t look bad when you save 120k over 10 years and spend only half that on reno/upkeep, tops.

      • Actually I can see where they are coming from: they need a home, hence wanting to buy one now rather wait until later when prices drop; and, the reason they don’t care if the value of the house would crash later on is because they aren’t thinking about it as an investment, but, as a home first and foremost.
        Yeah maybe a bit shortsighted (i.e. in 10 years if they want to move somewhere else, but the house is worth less than they bought it for, that’s not a good situation), but, again: they want a home now – not an “investment property,” but a home.

    • I agree that that is a stupid approach to take.

    • It’s probably fine – they really want a home now to live in, and are betting it doesn’t crash tomorrow. They may regret it, depending on how much and when.

      • I have friends who I’ve tried to talk out of buying right
        now who’ve said pretty much this to me. Some people just don’t understand math,
        economics or the time value of money.

    • Definitely the most disturbing sentence in the entire article.

  9. Not time to panic, just time to sell.

  10. BOC would be insane to hike interest rates. It would send the economy into a tailspin. No, the best way of cooling off a housing market it is by reducing amortization periods and by mandating higher down payments. Take Germany, for example. Unlike the rest of Europe, Germany did not experience a housing boom for two very good reasons. Substantial down payments are required and amortization periods are short.

    Now, as McMahon points out the government has already being doing that. What she does not mention is that the main reason the cost of housing gone through the roof since 2006 is the Conservative government decided pour fuel on an already red hot real estate market. The Conservatives extended the mortgage amortization period from 25 years to 30 years in February 2006, extended it to 35 years in July of 2006 and extended it yet again to 40 years in November 2006. During this period they also reduced the needed down payment on second properties from 20% to 5% and allowed for 0 down on one’s primary residence. Ever since the down turn, Jim Flaherty has been scrabbling to undo the damage his past actions have done. Flaherty first reduced amortization period from 40 years to 35 and again mandated a 20% down payment on secondary properties and 5% on primary properties in October 2008 and on March 18th 2011 he reduced the maximum amortization period to 30 years. Never once acknowledging that it was he who raised the amortization period to begin with, Jim Flaherty has repeatedly said that reducing the amortization and increasing the minimum down payment was the right thing to do. “In 2008 and again in 2010, our government acted to protect and strengthen the Canadian housing market,”. It too bad for all of us that Flaherty is guilty of more than chutzpah.

    •  well said!

    • Insane, perhaps, but also very necessary. Cheap credit will destroy the economy just as thoroughly as higher rates will. 

      • The European debt crisis was started when the ECB raised rates from 1% to 1.25% back in April. For Canada to follow suit would be pure folly. A rate rise is also blunt instrument. It would hit everyone. If Flaherty and company want to cool the housing market, they should specifically target housing. Dropping the amortization period back down to 25 years and or increasing the needed down payment would do just that. 

        • ” The European debt crisis was started when the ECB raised rates from 1% to 1.25% back in April.”        ROTFLMAO

          “The levered assets of the banks in many Euro-sovereign
          nations easily outstrip those nations’ GDP’s. So when the nations’ banks get
          in trouble from bad banking practices (and a very large swath have), the nations
          themselves not only are helpless in attempting to truly save the banks (and
          instead only institute a bait and switch wherein private default risk/insolvency
          potential is swapped for public manifestations of the same), but are put at
          risk themselves for the bank is actually more of a sovereign entity than the
          sovereign is – at least from an economic footprint perspective. This is what
          happened in Iceland. If one were to take an empirical look at other nations
          in Europe, Iceland and Greece are merely the tip of the iceberg. I have warned
          about this over a year ago regarding Spain and the Spanish banks (see The
          Spanish Inquisition is About to Begin…), and now the chickens are coming
          home to roost.”  Reggie Middleton FEB 2010,
          http://boombustblog.com/

        • I aggree completly, targeted action is the only good approach, so as to not derail our other economic sectors

    • BoC doesn’t need to hike interest rates; the banks will do it themselves as they shift credit preferences to other areas of the economy that are more investment-worthy.  Especially with the CMHC debt limit reached.

      • I would be shocked if the CMHC did not ask for the debt limit to be rised.  That is what they have done before, the last time being in 2008.  It would be dangerous for government to say no.  It is one thing to let air out of a bubble.   It is quite another to pop one. 

    • Does it really
      matter?

       

      What’s driving this
      market is the affluence of new buyers, without them it tanks in a hurry. (At
      this point with such prices, even with no changes it’s hard to keep
      up…)

       

      Now weither you stop
      buyers with interest rates or with CMHC conditions the results are the same: not
      enough buyer to feed the beast. At that point the downward vicious circle
      begins… (and rates will go up anyways because less investors will be willing
      to lend to a tanking market…)

       

      This is bad, real
      bad!

    • Good idea but I feel it would be better to raise the down payment requirement after a crash happens. If people were suddenly forced to pay 20% down, first time home buyers would almost be non-existent in every major market.

    • Do a bit of both – to curb housing bubble and credit bubble.

    • While you make interesting points, I disagree with your conclusions.
      The two changes to the amortization length (40-30) and minimum down payment required didn’t in fact have an impact on housing prices. They continued to increase, and are still increasing.
      Housing has 2 advantages in Canada: first, land is limited so housing is a real finite commodity. Second, there is no sub-prime market like in the US.
      Most homeowners have upwards of 5-10 years of built-in equity in their houses. Markets like Toronto and Vancouver are hothothot and are popular, therefore there is a huge demand for properties.
      I’m 30 and I’ve NEVER seen housing prices decline in any substantial way. My parents are close to 70 and have NEVER seen the value of their houses go down.
      I think this is Chicken Little syndrome. Housing is not in a bubble, nor will it ‘collapse’ like it did stateside. It’s unfortunate that housing is so expensive, but those are the prices the market is reflecting. Thus, the ‘fair’ market price.

  11. I absolutely agree that there is a bubble.  

    BUT, one factor that the journalist neglects to address is the effect of rich Chinese investors on the market.  It is my understanding that most of the US housing boom was attributed to the working class borrowing money on a house that they could not afford.  As such, when the prices tanked (and mortgages came up for renewal at higher interest rates), these people couldn’t afford their mortgage.  Yet, I have a feeling that the Chinese investor can afford the house that they purchased.  Secondly, who is not to say that the Chinese investor won’t keep investing (even if it is 5 times beyond the average salary of a Canadian)? There are ghost cities in China where more people own condos than they do live in them.

    I’m not arguing that having an overwhelming number of Chinese investors to inflate our housing prices is good.  I think it’s bad.  

    BUT I do wonder how this affects the housing bubble.  Will this delay the bubble?  Or can it sustain the bubble until the US finally increases its interest rate (therefore releasing Mark Carney from the fear of harming the exports and allowing him to increase the interest rate)?

    • The “Chinese” investors don’t exist in any numbers significant enough to actually make a difference.  If they were a force in the market, then outstanding mortgage debt would not be growing at pretty much the same rate as house prices.

      But “Chinese” sure makes for a good story.

      • In the area where I live, it is in fact the Chinese investor that has inflated the prices to above $1 million for a shack.  I’m pretty sure I’m not wrong seeing as I walked through the high school one day (for a vote) and looked at the pictures of the kids.  My real estate agent (who herself is chinese) mentioned this as well.

        Oh, and before you get all up and offended so easily with your little ‘quotations’ everywhere, I am Chinese.  I’m not being racist, derogatory or trying to lay blame.  I was simply stating the facts about what is happening in my area.

    • Chinese investors in Vancouver often buy the most expensive properties, but they are missing this fall and spring (China’s RE is correcting). Their conspicuous absence may be the tipping point for this city.

    • Like subprime borrowers, the process of getting capital to sustain a housing bubble from rich Chinese investors is not sustainable, at least in Ontario. Those investors are getting rich, for the most part, due to China’s success in manufacturing, which in turn, places downward pressure on Southern Ontario’s bread and butter industries (now if the Chinese were buying in resource-rich northern Ontario, that’d be a different kettle of fish).

  12. This article is all about predictions.. no difference than economist, fortune tellers, mayans

    The fact is that Toronto and Vancouver are the most attractive cities in the world and foreigners are trying to bust down barriers to enter these two cities to lay their roots.  Here’s why the RE boom will continue:

    - Lots of immigration coming in; esp professionals and high net worth families
    - Best banking system and excellent government policies in place
    - Very competitive in the resources/oil/financial sectors
    - Consistently ranked by all financial publications as the best cities to live in the world
    - Best educational system in the world
    - Diverse, multi-cultural, polite population that are always welcome to foreigners
    - Interest rates will stay low for a very long time (think Japan)
    - The Conservatives show us that time and time again that they are pro-RE and will not let prices fall at all

    Here are the prices for Toronto and Vancouver in 2030:
    Toronto -> http://i39.tinypic.com/fvgzfp.jpg
    Vancouver -> http://i39.tinypic.com/kb6iwo.jpg

    Stop throwing rent down the rent and filling your landlords shorts with money bags, stop dumping money into risky and volatile stocks or savings account yield negative interest rates..

    Be an OWNER and not a renter and GET RICH

    • … and in 2100 prices will be a kajillion dollars!!! We’ll all be rich and driving ferarris!!! Yaayyy!!!

    • My god… You are so right!!!  It only makes sense that a person making $50,000 a year should have a house worth 1 million dollars in 2024!

      • California and Florida had high levels of immigration and large numbers of foreign buyers during the bubble years. Yet both were particularly hard hit.

        As to the impact of Chinese buyers, it is had to hard to say just how big an impact they are having. Solid numbers are lacking.

    •  Are those charts you made up yourself?

    • That isn’t even a worthy attempt at trolling. No sentient being would belief the load of baloney you just posted. 

      The Conservatives show us that time and time again that they are pro-RE and will not let prices fall at all 

      And that pretty much gives it away. If you’re dumb enough to believe any government can possibly keep RE prices going up forever, well…. nobody’s that dumb. Therefore, I call BS on your entire post. Either you’re just trying to get a reaction, or you’re sitting on some RE that you’re trying to sell and you’re getting desperate. 

      •  Yep… This BobJJJones fool gives some really stupid reasons as to why he believes RE will stay high. If he is telling the truth and all his worth is tied up in RE as he implies, I actually feel sorry for the poor guy.

    • “Be home owner and not a renter and get RICH” – This could only be coming from somewhere who doesn’t understand how economics play huge factors in housing cycles. Could you be a mortgage broker perhaps?.

      The article could have tackled much bigger influences of why were facing housing bubbles, BUT there isn’t anything mystical or deeply intuitional about it. Facts are facts, house prices vs house hold incomes are within deep disproportions, residential investments are now at previous bubble highs. 

      Even home owners who have made there profits, are renting as result to not wanting to put any money into real estate as an investment. The only people who are buying are buying because they have either sold their vacation homes in Tofino and are looking to stay in Vancouver for quite some time, knowing full well they are paying more than full price and are not expecting much returns. Then there are other people are house horny, and feel that they too must be a proud owner because renting is throwing your money away, even if they refuse to see that real estate at this point, is not an investment anymore due to unsteady economic times.

      You can’t base your opinions on theories on predictions either, suggesting that a Re-Boom could result because of high income immigrators coming to Canada to snag up our overly appraised real estate just to fit in, would be great but evidence has pointed otherwise. While we look like we are competitive because of our natural resources like our Tar sands industry, most historians and experts would suggest were peaking and need to find other new-able resources to be considered deep competitors globally. Our Financial sectors are no where near competitive as result to being so closely tide with US economics and downfalls of Euro, have you seen our TSX?.

      Though, we could be considered one of the most desirable cities to live in, there’s nothing desirable about Canadians having these low of interest rates, while our Government promotes us to spend, borrow, and leverage, even though when interest rates are this low debt should be tackled, spending should decrease, but I suppose that would not work well for Apple or Best buy’s earnings. 

      Lastly, if interests rates stay low then, yes think Japan also think Liquidity Trap. Think low in terms of economic growths, when low interest rates fail to stimulate, consumer spending and monetary policy becomes ineffective. Think more deflation, periods of gloomy economics consumers save and spending decreases, which lead to more credit crunches, unwillingness to hold bonds if interest rates are zero, investors will expect interest rates to rise, if interest rates rise the price of bonds fail which means investors would rather hold cash than hold bonds. And then after we can think our lucky stars for Conservative economic policies 

    • Please tell us the name of your Real Estate brokerage.

    • Bobby – you are the spokesperson for greed and ignorance regarding Canadian RE. I’ve commented on your ridiculous charts on more than one occasion, and their high-school level foolishness.

      Keep up the good work!! I’m sure you make the other RE bulls proud.

  13. I just sold one of my semi-detached houses in a northern suburb of Toronto that I purchased last year for $450,000 and recently sold it for $550,000… that’s $100,000 PROFIT in 11 months.. how easy is that?

    I still have plenty of homes within the Toronto and Vancouver area that I will hold to make me rich.. but for the time being, I am going to Hong Kong because Canadian winter is too cold

    • You’re an idiot

      • I agree

      • Where’s the phuckeeng DISLIKE button !

    • 100k profit? tax man be coming for you!

    • Oops – hit liked by accident.

      Bobby – you always mention HK. How’s prices there? How’s prices in Beijing? Tell us all you know about your native cities.

    • Wow you had no closing costs?  No legal fees?  No maintenance cost in those 11 months?  No property taxes?  Anyone dumb enough to think that Sales price – Purchase price = profit should be charged an additional dummy tax.

    • If you bought graphite mining stocks last year, you’d be up 200+%. It is easy to point out the potential for short term gains. The point of the article is that the trend is not sustainable in the long term.

  14. I wish I didn’t have to sell my property I preferred being an owner.

    But unfortunately I don’t believe Asian investors will save us. Weather its Stocks or Real estate people always sell when prices start dropping.

    And I don’t think we have the best banks in the world as many of them offer “Cash Back” mortgages. Virtually the same thing as no money down. There are also many mortgage brokers that offer no money down mortgages. “not a penny down mortgage”. google it.

    Also we had government back 40 year Zero down mortgage just 3.5 years ago. anyone who bought a place with one of those has only been paying interest and hasn’t put a dent in their actual loan, especially if they’ve taken out an HELOC against the rise in the value of their home.

    •  true words joey jo jo….i sold

    • i sold – not easy to do, but i’ve made enough

  15. If wages hadn’t stagnated for years maybe people could keep up with mortages. However people must realize the free coffee and doughnuts and a big smile doesn’t make the bank your friend. They want to make a buck and you want the same buck so take their advice and do the opposite. They’ll say borrow, never been cheaper. Do with what you got and stash the cash. Like that dude who’s wondering what he’s gonna do next year when he retires at 42.

  16. Peter Schiff, Ron Paul, Marc Faber. Anyone of those men could’ve written this article. At what point do we acknowledge central banks artificially keeping rates too low for too long is the root cause of our booms and busts?

    • Given that the central banks are very influential in the economics profession, and many banks are entwined with media firms, I’d say you aren’t going to see that in the media, ever.

  17. The only people hurt by a properly valued dollar are stock market gambler’s. These foreign investor’s are the bread and butter of the single minded thinking conservative government. The manufactures and their employee’s benefit from a low dollar. This is the sector of society that Torie’s (starting with mulroney) have been try to wipe out for year’s. They have almost accomplished this and we are going to pay a heavy price that I’m sure Canadian’s feel already.

  18. This is a fantastic article, I hope it will be widely read and distributed.

    However I think the conclusion is right: whatever the governement does it’s too late to avoid a painful correction.

    I also think the article should have insistes a little more on CMHC’s (hence government)  responsibility in creating this terrible mess.

  19. I can only say that at 52 I am glad that I own my home!  My concern is for my kids!  They are going to have to work very hard and be very disciplined in order to own their own home one day.

  20. There was a time in the ’80′s when interest rates were around 20% for 5 years mortgage, when the downpayment had to be at least 25% of the property value, in those years affordability meant to spend between 50% and 60% of your household income.  What do we want now? . . . when most of people is able to afford a property with about 35% of their gross income, when there is much more disposable income to be used in “comsumption” of other goods and 13% taxes being paid directly in almost everything; besides who determines what is the real rate of interest to be charged in mortgages? isn’t it the open market? or is it that somebody decides to raise or to lower the rates just because. . . I think that property prices nowadays seem to be high, but at least they are more affordable than the ones during those years   

    • Maybe affordability is the same now as in the 80′s, but there’s no where to go but down from here. With interest rates at the bottom, it will only become LESS affordable. Imagine that?

  21. Leaving all policies aside, financial and otherwise.
    From the point of view of someone who works in the home construction industry, I can add the following to the conversation.

    Let’s assume someone buys an older home in some neighbourhood.  They then decide to renovate and/or add an addition.  After hiring an architect and subsequently a contractor and putting budgets together, it is common to find that after all is said and done, including possible budget overages, that the total overall cost is higher than the highest comparable sale(market gauge) in the area.

    In Toronto, many instances can be seen where a dated home sells for 850k(1500 sqr.ft, or less). 
    In the same area a new home sold for approximately 1.3million(sqr. footage between 2000 & 3000). Now, consider the fact that a budget of $200-$250/sqrft(Mid range finishes) is required from planning to completion and so, should that person choose to update the home(size and finishes), they will be moving in to there “new” home, in a lot of cases with “negative equity”.

    Sure, a lot of people say “It’s an investment and I plan to live in there for a long time”.  My question is would you intentionally by an investment that if you had to sell in the short term would only return you 90 percent of your money(Best case scenario, I think).

    *The assumptions made above are:
    -Closing costs, Land transfer taxes included.
    -Proper permits and inspections.
    -Hiring of professional project managers and contractors.
    -All work done above board and taxes paid.
    -High quality trades and materials used.
    -Property not resold for quick profit, where extra costs and Tarion would apply.(making the issue worse)

  22. This is the best article on the inherent dangers in Canadian RE. Congrats Macleans – your writer deserves praise for doing actual Journalism.

  23. Bubble shmubble (at least not until we enforce border controls). It’s about capital migration from Asia to Canada.

    The baby boomers have sold our country out.

    Get ready for a country you won’t recognize because the only way out is to accelerate immigration.

    • I think that was part of the plan. There are forces at work that want to turn Canada into a third world country. A mass of third world immigrants who have no knowledge of what is was like here 50 years ago, and who will be able to compete with their relatives back home in the marketplace.

      Wages will equilibrate, and domestic Canadians will be upset. The solution? Replace them with third worlders.

      There are also individuals and organizations who want to wipe out the First Nations and European population. Mass immigration is their way to make those groups statistically irrelevant.

    • The 600,000 immigrants and temporary workers that hit the
      streets of Canada every year need a place to live and a job.  It is unfortunate that it at the cost of
      Canadians quality of life.   Immigration
      has kept wages historically low and is driving real-estate prices high.  Over 80% of the housing market in Vancouver
      is driven by mainland Chinese home buyers. 
      With over 20 million investor immigrants and their families from China
      wanting to move to Canada our real-estate market may keep rising, Canadians
      will unfortunately need to find somewhere else to live to accommodate them.

  24. Interesting comments with a huge contrarian component but a very thin macro overview and an abundance of comparisons that are only comparisons with very little analysis given the enormous differences in the Canadian and American monetary, tax and fiscal processes..

  25. interesting timing that McLean’s quotes David Lereah

  26. Instead of raising interest rates, which can’t be done because of the inflationary impact of the dollar, I have a simple remedy for “the worry”…

    Raise the CHMC insurance rates.

    This drives behaviour from buyers to have more equity in their home, reducing the likelihood of default.

    And, of course, it provides more dollars for those defaults that do occur.

    It has a negative impact on buyers with low equity, which is somewhat similar to the raise in interest rates that so many say is actually necessary.

    So, aside from potentially slowing purchase activity (which is apparently on the decline anyway), I’m not sure I see much downside.

  27. In my neighbour in Calgary, house prices are down over 20% from there highs of 3 years ago.

  28. Why is it so hard to believe that supply and demand forces are responsible for increased housing prices? Supply of land has not increased by 1 square foot while over 200,000 people are either born or move into the GTA every year.
    Is it so foolish to speculate on real estate in an area where this trend has absolutely no sign of stopping for the next 10, 20, 30 years and beyond?

    • There is no denying that there is a finite supply of land on which to build, but this isn’t what’s at issue in this case. The demand side is the issue, not supply.

      When house prices go up significantly (for any reason) past a specific point, generally accepted as a certain multiple above household income, houses become unaffordable for the majority of people. At that point, people should either rent or move somewhere more affordable, but what is actually happening (due in large part to low interest rates and easily obtained HELOCs) is they are choosing to live beyond their means, in hopes that house prices will continue to rise to cover their costs should they default.

      However, easy and cheap credit can only go so far. An overpriced market eventually becomes illiquid as fewer people can afford to enter it and some wait for prices to drop. As a result, when interest rates increase (driving affordability down), homeowners are stuck with mortgages they can’t afford (due to higher monthly payments) and houses they can’t sell, resulting in defaults.

    • Yes, apparently san francisco, miami and boston have an inexhaustible supply of land, which is why their prices crashed. Canada is land poor, so pries will never crash here.

      Duh.

  29. the article fails to hit on a majoir point.  mortgages were handed out like free candy.  there were no incentives to avoid high risk loans.  it’s not like this here in Canada….  is it???

  30. the danger isnt cheap interest rates its raising them.

  31. Don’t forget Canada is an immigrant country, its economy is strongly supported by the countries like China and India. Due to the extremely high demand and low interest, and strong economy in India and China. I hardly see the housing price is going to drop in any near future.

    However, we should really pay more attentions to the development in India and China, if their real estate market crash, then Canada will follow.

  32. YTD sales volumes are half, that’s 50%, of where they were last year. Year over year price corrections are pervasive. It is far more difficult to get funded this year compared to one year ago. The market is actually highly price sensitive. Overprice and you get ignored. Immigration Canada reveals that they have virtually stopped accepting applications citing a 5 year wait to unclog the system. Richmond BC listings are over 2200 detached vs 800 one year ago. Transactions are happening but if you are in the business you are acutely aware of a rolling correction initiated by the minister of Finance. His press releases are targeted and policy has had an effect. Beyond the hysteria and emboldened anonimous chatter there is a boring reality being played out. It is not as exciting as what happened in the US but it is upon us.    

  33. It’s all driven by greed.  Control the greed.  But not from this government, that’s for sure.

  34. Gee, just what all the hard – working Canadians want to hear, especially like me, who is in the
    process of selling my house ! Hopefully with any luck Tamsin some jerk like you will tell a story
    that keeps you up all night worrying about an already difficult situation…not that you probably
    own a house , but gee what a great cover story…how many extra magazines did you sell….so
    pathetic !!!!!

    • Hey, if housing is such a great industry and buying real estate is such a good idea, what do you have to worry about?

    • Yah, because the world revolves around you, and your ability to get the best possible price for your house. I’m sure they’d have held off a few months had they known of your personal situation. 

  35. Yes. What the heck? We can’t sell in Calgary because we bought in 2007 and now house prices SUCK. If you want cheap housing come to Calgary. Buyers’ delight!  And psst…winters are getting warmer…..!

  36. A couple of  issues that have been given little consideration:

    1) In the U.S., I believe you can lock your interest rate and payments in for 30 years which protects you from rising rates; In Canada, a large number of mortgages and almost all lines of credit are variable rate or locked in for 5 years or less. If rates start moving up an owner can only watch as their variable rates increase or lock in a longer term of several years at a much higher rate. Either way, the monthly payments increase dramatically to the point of being unaffordable for many.

    2) CMHC insurance protects the banks not the owner. Owners who can no longer afford their payments will find they owe all losses and costs to CMHC until the day they die even after losing their house. The CRA (Canada Revenue Agency) collects on behalf of CMHC through the tax system.

    The risks to owners with large mortgages in over-heated markets are therefore substantial.   

  37. Forget real estate. Buy gold.

  38.     Biggest problem right now is HELOC’s – people are using their houses as ATM’s and borrowing against them for expenses such as vacations and vehicles.  Basically, tapping the equity in their homes and then consuming it on expendable and/or depreciating items.  Going down this road too far is like quicksand – very difficult to recover without an increase of income and I doubt many who are using their houses as ATM’s like this are expecting significantly higher incomes.

  39. A similar story was posted two years ago by Macleans, titled The shocking truth about the value of your home By Duncan Hood – Monday, February 23, 2009 (subtitled:New evidence shows that Canadian prices could go down, and stay down, for a decade). Houses were stable the last two years and in some provinces houses increased in value. Funny how these stories are run just before the hottest real estate selling months (March, April). Coincidence? Hmmmm…

    • Sooner or later they’ll be right. That’s what we should all be concerned about. Or, you can keep your head in the sand. Canada is not immune to the corrections that have occurred in most other western countries, much as we’d like to believe otherwise. 

      •  Sooner or Later…that seems to be the big question. What I find most inaccurate is the TIMING of these forecast. If they are off by several years or the whole length of say a mortgage term which is typically 5 years, To be a professional economist and be off by two years and counting is unprofessional. People have made a killing in Toronto’s market in the last 2 years. In 2-3 years profit taking is absurd. So even if there is a correction, the net effect is probably still a positive gain for these people unless the market takes a huge dive of 30-40 % and I don’t see that happening.

        You see, I’m sure one of these years eventually the correction will come. It’s called the Law of Probability. Now will all the experts and so-called experts give us the year that it will happen? 2013? 2016? 2019? 2025? Soner or later..he says. I find that so typical of these forecast. And when it does come in 2015, they’ll say “see it was predicted this in 2009 that the RE market would burst…what a joke. If it does come in 2015, 6 years is just too for a lot of profit to be pulled out by investors.  For end users, by this time people would have paid off 10 years of mortgage at 3% (and we’re approach 5yrs already) which is almost half the life of the mortgage. Another 2 years from now the prime won’t change much (I say it will still stay under 4%)…and beyond that who really knows.

        I have bookmarked Maclean’s prediction and we will see who has the last laugh!!  Maclean is already off by 3yrs (and counting).

  40. I am not sure panic would be a proper word to say for Canada’s housing market.

    Don’t forget Canada is a immigrant country, its economy is strongly supported by countries like India and China. If you look at who actually bought most houses and condominiums in the past couple of years, you will be shocked. They are majority new immigrants from India and China. Many are buying with CASH. 

    There does seem a lot of issues, how come all of sudden there are so many rich people interested in  investing in Canadian real estate? Why they didn’t choose US, the house on average is a lot cheaper there. 

    Yes, we do need to be cautious, but not PANIC.

  41. Prices in smaller cities have decreased or flattened out since 2008.  Vancouver and Toronto are inflating the averages.

  42. Did anyone see a few weeks back the RBC and CIBC rehypothecate over a $120 billion backstopping the EU?

  43. As a Realtor of 22 years what I see on the home front are some of the same indications that were present in the 1990′s. before the housing crash. We have much less buyers, more bank repo’s creeping onto the market, new housing contractors offering incentives to realtors, realtors leaving the industry in droves, more listings on the market than in previous years, homes are on the market for longer periods, more difficult to sell the higher end homes, bank appraisals are stricter etc. Its a question of time however, it is business as usual and we learn to adjust.

  44. I’m dissapointed that your comparison of the Canadian situation with the US situation at the start of the housing correction and subsequent financial fiasco didn’t look for potential solutions. Instead you seem to have blamed retail borrowers for acting in economically rational ways: borrowing cheap to invest in assets appreciating at higher rates than the cost of borrowing. In my mind there is no problem in doing that. Banks seem to have no concern that their portfolios of loans are at risk of default as indicated in the interest rates they are willing to lend at. Perhaps the problem is in how the banks are operating, or assessing risk, not how the borrowers are behaving.

    When our Canadian chartered banks report profit growth at 5 to 8 times GDP growth a red flag is raised in my mind. Why are banks growing so vigourously when the rest of the economy is not? If bank profits are growing so fast, wnere is that growth coming from – at the expense of what other sectors – why? What are the policies affecting the banking and finance sectors that are so disproportionately in their favour? Is that policy in effect a tax on other sectors being collected by the chartered banking sector? … a transfer of wealth? … is that in the countries’ best interest? Should the Bank Act be revisited and revised to address the real source of the problem?

    Obviously the US has not found a solution to their problems except to tack the huge bailout bill onto the bills of future taxpaying generations. Perhaps those generations will find a way to pay, or deny or default on their obligation that is more effective than our own. … or maybe they’ll be even smarter!!

  45. I am really not sure if it is a main issue for American people. Estate is becoming heated?

  46. Unfortunately, as Canadians our home is no longer just a place to live, but its our whole life, our key investment, our raison d’être..

    The severity of the bubbling problem is not only that the middle class will eventually not be able to afford a 1 bedroom condo, but that having such a high percentage of your income going to your mortgage, takes away from the spending on other stuff. 

    This other stuff includes goods and services that stimulate the rest of the non housing economy.

  47. There is too many immigrants coming to Canada and making it unaffordable for Canadians to live. 

  48. “The Conservative government has taken some steps to tighten mortgage
    rules, including lowering amortization periods to 30 years from 40, and
    raising the minimum down payment for CMHC insurance to five per cent
    from nothing. CMHC says it will limit the amount of portfolio insurance
    it offers to banks.”

    That quote is very generous.  Mortgage lending standards remain lower today than they were in 2006 before the Tories were elected. 

  49. The real reason why housing prices are going up is because of foreign investment. Over 60% of sales are made up of foreigners(China, India) buying up properties. I don’t think pricing will collapse. The government will just open the boarders to allow more foreigner investors. Every year the population in China and India grows by 15 million people combined. Which is about half the Canadian population…they gotta live somewhere.

  50. Boy oh boy. I can just see the look on the faces of all the real estate hacks in the great state of california during the long long decline in the price of real estate in the golden state.. Contrary to popular belief that a large decline in the price of real estate is a bad thing. Those who profited most from the meteoric rise in the price of real estate in california over the last twenty years are now the ones suffering the most. First time buyers with good credit can now qualify for a thirty year mortgage at a interest rate of just four percent. Or think about this the young couple with fairly good credit but not quite perfect credit making a reasonable down payment of ten percent’ they have been waiting for the so called chance of a lifetime to appear and wanting to seize the opportunity to buy that dream house at a rock bottom price. Having picked out their dream house made the deposit. Than nervously waiting for two whole weeks to see if they qualify for their thirty year fixed rate mortgage at 3.99 percent. Than only to hear back from their banker. Im sorry but you just don’t qualify for the thirty year fixed rate mortgage.

  51. I watched HGTV last week. There was a huge 4000 square feet, 2 storey, 4 bedrooms, double garage house for sale in a Houston suburb. Asking price: 219 000$. Than, I saw a little 900 square feet condo in the Plateau Mont-Royal in an average 8 plex build in the 90′s. Asking price: 515 000$ ….There is a problem…

    •  No kidding!

  52. You can say that immigration has caused higher prices, but the fact is that they will not sustain them.  The facts in the article include immigrants, which if so financially sound, would move many of these measures into a more comfortable territory.  Even with these “cash” buyers, Canadians on the average only own one-third of their house, and borrow more from their house than the the U.S.  Rising prices are encouraging prices to rise, and once it stops, it will come crashing down, and there is nothing that the government can do about it.  They have already allowed Canadians to leverage as much as possible and there is not room for leverage to soften any fall.

    I understand that the government cannot easily change rates, but they should have further decreased amortization periods and increased minimum down payments.  It’s getting to the point where people don’t even know what a house is worth, which is why everything is now based on carrying costs.  When I look at others I can only think ‘how do people afford this’, and this is the only way it makes sense.

  53. what are 5 key financial evidence of this article and what are 5 financial evidence that refutes his argument?

  54. i was ripped off from , they put my house into a Home equity line of credit to free up money to “save” (universal life insurance) they sold me UL insurance as an investment, no money for 10 yrs and we need to discuss this as well from these people who are in multi level marketing companies.
    They are licesed but dont understand what reprocussions are down the road for those families.

    • who is the company??

  55. That’s why I sold my Montreal property and moved to rural New Brunswick, where housing prices are immune from speculation. I bought a house for $10,000, spent $70,000 (cash) on it, and lived happily ever after on my OAS, with enough left over to spend a month in Europe every year.

  56. The article misses out on one important point for keeping the interest rates low, and that is the federal and provincial debt.

    Also, if the real estate show of the last years comes crumbling down it’ll impact about 30% of the national GDP, that’s how much large a segment looms in this measure. More worrying – unlike the USA, tent cities are impossible in Canada, it’s too cold in the Winter. But if the base rate continues to be kept at record low for the next three to four years more money is going to go overseas, as interest is below devaluation. Seems like the BoC is stuck between a rock and a hard place.

  57. My husband and I bought a 41″ detached house, about 2500 squared feet in January 2011 for $634,000.00 (GTA)  We thought this was crazy but after renting for 2 years and waiting for the crash to happen, we were kind of forced into it.  We bought detached thinking we will stay in it for the long run if need be and we had a verygenerous downpayment to put down at least (thanks to good incomes and YEARS of savings).  The same house (same model, same square footage, same lot) was just released by the builder again in April 2012 for a LIST price of $810,000.00 and it sold out in a day.

    Did incomes go up about $200,000 in a year? Did savings increase by that much in a year? I’m not seeing it in my industry nor among my friends or colleagues but maybe someone else out there knows where these increases in savings and income are coming from? Please let me know – I want in, thanks.

  58. To the author of the above article and the editors of MacLeans: This article is an insult to all Canadian homeowners, not to mention real estate agents and banks. Canada is in no way comparable to the United States when it comes to irresponsible lending and housing bubbles. The whole world’s economy came crashing down in September 2008 and houses in several Canadian markets (including Winnipeg) continued to appreciate at a moderate clip.
    I am glad we have freedom of speech in Canada and that the government cannot take legal action against the media for engaging in this sort of ludicrous fear-mongering. We have a free press and you should be able to print whatever nonsense you see fit without government interference. However, if I had more time and money on my hands, I would look to sue your magazine in a class action lawsuit with hundreds of other homeowners and real estate agents.
    Do you have any idea what kind of anxiety you create for honest, hard-working tax paying citizens who borrow responsibly and build equity in their property (like my wife and I) when you print a sensational headline like “You’re going to get burned” with a picture of a burning house? Do you realize that you could be driving thousands of Canadians to the point of suicide with this shameless fear-mongering? This issue’s cover made me sick to my stomach when I saw it in my dentist’s office 3 weeks ago, as did the article itself. Shame on you!

  59. In markets like Vancouver; you tend to pay twice as much for a mortgage as you would for rent on the same property. Prices have been speculated to the point where most people cannot afford to buy but the smalest, oldest units. This will no longer be sustainable because property prices have already outpaced incomes. Those who still buy, only do so thinking prices will rise as they did in the past, but they will not, unless the banks start issuing 50 year mortgages. I doubt that would happen because it would only worsen the household debt ratio.

  60. Hello:
    My brother just sent me this article…and 2 other ones…and i have realized they all forget to take into consideration ONE important factor when comparing what has happened in the States and here in Canada. We are comparing a country with 36 million people and still growing because of Immigration laws, to a country with around 270 Millions…
    How can they have the same realities when it comes down to household…or won’t new immigrants buy home too…i believe personnally that Canada is 15 years from reaching its peak.
    Cheers

  61. It’s really hard to take the situation in which America found itself and compare with anything that’s going on Canada. In truth, what happened to real estate in America had a lot to do with fraudulent (and scary) lender practices. They were telling people they could afford more house than they actually could, so when rates started rising (all at the same time), a massive amount of individuals began defaulting. There was a woman who made $36,000 who was approved for a $750,000 house…the lenders didn’t care about the people – just that they got paid in the process. This was a huge part of the RE downfall. The new mortgage rules in Canada are serving to assure this won’t happen here. It’s not foolproof, but there is reason to believe this market is still very safe for income property investments.

  62. How do I start a housing development fast before the crash so i can cash in along with all of these other wealthy developers? People: Stop buying $600thousand homes that should be only worth about half that! I have watched house prices in my area more than double in the last 5 years!

  63. Am I the only one here who is skeptical of the above? Pull up a chart of Canadian real estate prices since the 70s. Prices have NEVER gone down in a substantial way.
    Real estate is the ONLY investment that will go up. We’re in 30+ years of increasing prices. There’s no WAY that, magically, they will collapse in the next 2-5 years. Just won’t happen. The demand is too high. When the author described the house going for 200k above asking, that’s because it was in a desireable part of town and that’s what the market decided the price would be.
    This is basic supply and demand. Demand his hot, and supply is finite. Therefore prices rise. And they will continue to rise. Maybe not at the rate they have been, but we’ll never see a crash.
    Real estate is STILL the best investment you can make.

  64. This article is perfectly accurate. I’ve been saying for years this will end in bad way. The way I see it is we are too far gone now. No sense in worrying about it now. Unless of course you are buying. Just don’t. If you can’t survive a rate hike or a job loss, sell now and rent. You can get back in after the dust settles with a perfect credit rating. Also, what not talked about allot here is this. Ruin your credit when this unfolds, and you won’t get a cent when it all smooths out. Nobody will lend to you. My home has increased in value six hundred percent. Am I going to sell? Not a chance…I don’t view a house as an asset, just a place to live. Six hundred percent, in 8 years, that’s just wrong. Banks are just liars. So is the entire housing industry. Believe Carney. Heed his warnings. When the Finance Minister is sending out warnings, believe him. How often is it when a politician tells the truth…Even if they want to tell the truth their advisors prevent it. Now, nobody is silencing Jim. This is serious stuff.

  65. Actually. that 30 trillion wasn’t wiped out, it was transfered. No, where do you think that money ended up?

Sign in to comment.