How likely is it that government initiatives and interest hikes will simply will ease prices back down to earth? Like this was planned all along? Sound management of the economy?The idea is that we want to slow down the bubble before it gets too big and pops.
That's what all those initiatives are about. Slowing down the market so it can be more balanced.
I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!With interest rates only going up...cmhc upping the minimum requirements for obtaining a mortgage...the addition of the hst....and the simple fact that real estate is too expensive right now. How is it that we are not in a bubble?
Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!
Some local markets will have to deflate, but won't pop!
Fundamentally we are in good shape.
Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.
I read the other day that the average Canadian has total debt to income levels of 143%, which is the highest in the world.
Later I read that according to Stats Can, consumer spending has not dipped but continues to grow month on month.
Are the two related? Would the cost of servicing this debt not push more people than normal to sell their house when rates go up? Increases in supply puts downward pressure on prices. Add that to what's been mentioned already by bh_23, does this not spell lower prices for housing?
Again, I just don't understand the fundamentals that everybody in the real estate game keep mentioning. I do know from reading the newspaper that in January 2009, a market correction of around 5% was expected for the year. Instead, a 20% increase occurred. Now, I'm to believe that regardless of reckless borrowing, interest rate increases, HST, etc, the Feds and their new mortgage regs coupled with the BoC have created a fluffy pillow that the market will comfortably land on. This Canadian management of economic policy is surely the envy of the world and I'm finding it difficult to comprehend.
Very well put! I've been presenting the same arguments for the last 2-3 years, but very few were willing to listen until recently. Now that a few of my friends have lost their high-paying jobs (they never thought this can happen, after all "it's different here" works until it doesn't), they have changed their tune very quickly. Now they are realizing that their huge mortgages are liability, which they might not be able to afford very soon.@NorthernAlex:
I have to disagree. I think there is a lot of compelling evidence that we are in a major bubble in Canada right now.
To start, Toronto, Montreal or Vancouver are not anything close to cities like New York, Paris, Tokyo, etc. If you think so, you are living in a dream world. Those cities not only have massive populations that Canadian cities do not, but are the financial hubs of the world.
To understand how we are overpriced, just look at two indicators: the rent price versus the buy price for the same home, and the average income versus the average home price.
In most major cities, the rent price to the buy price is way out of line, so much so that you'd be crazy to buy instead of rent (yet people keep buying). In Vancouver or Toronto, you can rent a two bedroom downtown condo for somewhere in the $2000-2400 range. Yet the same place will cost you 450,000 to 600,000 in each city respectively, plus monthly condo fees. The cost of carrying the mortgage far exceeds the rental price. That is about as good as it gets for indicating the prices are way out of line.
Not to be left out, the average household income in Canada is something like $70,000 and the average home price is $340,000. That's just unsustainable considering the numbers alone (never mind relatively to other countries).
Now also consider rising interest rates in the near future (just look to that mortgage study), increasing taxes to cover our deficit, as well as the large number of baby boomers with no savings except that which is tied up in their home.
Most people who believe otherwise are those who have some sort of vested interest in real estate staying expensive, such as real estate agents or mortgage brokers.
I would say 20%+ in major urban centers such as Toronto, Vancouver and Calgary. Some U.S. analysts have put Canadian real-estate overvalued on average as much as 27%.What is a major bubble for you? If the price drops 15%? 50%? 75%? Where? Canadawide or just in some local markets?
As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.No doubt, that the Vancouver/Toronto market is overheated- and we saw a small drop in YYZ within the last 18 months. But we also saw a rebound. This was a correction! Correction is good and the market needs it. But these doomsayer shouting about a BUBBLE are just wrong. The market will not tank Canadawide 50%.
Aren't you just proving my point that real-estate prices have been bid way beyond their true value?Whoever buys a 600,000$ condo in Toronto will definitely (hopefully?) make more than 70,000$/yr and hopefully has a good down payment. Who is forcing them to buy there? Common sense should say that it doesn't make sense to buy there if you didn't have a huge heritage. Again, lifestyle inflation. They need to ask themselfs: "Can I afford to pay the mortgage if I lose the job and need 6 months to get a new one?" Do they know that they maybe have to live there for some years until they break even again? Was this considered in the purchase process?
Why do people line up in Toronto to purchase a condo which is not build in the next 18 months and already pay 20% down? Why do they do that? Missing due diligence. Yes, they will lose money! But who said spending money smart is easy?
Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.Most people who believe otherwise are those who are filled with bitterness, because they did got burned or said that there was a bubble 8 years ago and didn't see a 50% drop!
A correction was there, indisputable! Toronto's prices dropped and sales dropped,too. But they also recovered. Maybe too fast, but different story.As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.
No, I am proving my point that we have individual local markets, which are overheated and which will correct them-self. I call a 20% drop a correction, not bubble. A bubble is a province/countrywide drop like seen in the US. Where all prices were hammered over these mentioned 20%. Where you see 50% or so. Technically spoken I would maybe that Windsor experienced a bubble, but actually not. It was a "sell off on bad news".Aren't you just proving my point that real-estate prices have been bid way beyond their true value?
Some claim that bubbles cannot occur because people act rationally on all available information. IMHO, the lay person is not rational, in fact, most don't have much common sense at all, they buy because rates are low and because of past performance of real-estate, caught up in bidding wars and influenced by the media, without any consideration to the actual worth of shelter.
I used the condo market as an example, because rentals are readily available, but the same hold true for the housing market.
Of course you can guess. I was replying to your "Most people who believe..", where I think that you maybe had some bad experience. Yes, I have a "substantial position in RE", because I believe in what I do and that I do it good. I write dozens of offers, get refused a dozen times. I was told once that it is only a good offer if you are a little bit embarrassed. All my deals in 2010 and 2009 were private. I even posted one of my deals back a few months.Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.
Well, here is again the "Lifestyle Inflation". If they can afford to buy and support a 700k home, than I would say "HOLD". Don't sell with a loss (except you can use the loss with previous gains). It will come back to the 700,000$ and even more, but it will take its time (if the area is not dying). I think that I could afford a $700k house, but I can't deduct the mortgage and can let the money work better for me elsewhere.What do you think is going to happen when prices depreciate even 10% on that new $700,000 mortgage? Do you think people will want to keep paying the interest on that mortgage when their house is now only worth $630,000? What about a 20% drop?
Thanks, I appreciate your response.Jav;
Like mentioned in one of the other posts here: We can't say in general that RE in Canada is too expensive. There are hot spots, which will heat up in cool down. Vancouver, Alberta aso. It is always a cycle. These cycles are needed to "flush" fresh money into the market and to get to the new high. Expenses are increasing, expenses are increasing, too.
Compare RE prices to other cities in the world. Toronto/Montreal/Ottawa prices to Paris, Tokyo, London, Moscow aso. These cities are still more expensive than our cities.
The general point I am saying is: RE in a healthy or upcoming area will ALWAYS increase in value. The only thing you need, maybe, is time if you bought too high. If someone buys a house with 5% down and wants to own a $600,000+ house, well, than his start was wrong from the beginning and will lead to a price correction due to the foreclosure of this person (economic Darwinism), but the market will absorb that very qiuckly.
I am not saying that there won't be a price CORRECTION. But only a correction. A correction means for me that a the whole RE market won't get hammered, but local market maybe (like Windsor because of the uncertainty what GM is going to do), but not the market in general.
In regards of the mentioned 143% income level: I don't know these numbers, but always refer to "lifestyle inflation", which is definitely a main reason for that. Adding now a low financial down payment won't help of course. As harsh as it sounds, but not everyone can afford a house.
I invest in multi res and other positive cash flowing properties and bought a lot (for my take) in the last 18 months. I will switch soon to my HOLD mode to consolidate and wait for the next opportunity. Even if the market correct itself- I don't care. As long as I can rent the places (which I can, due to the more difficult mortgage environment aka. more tenants), I am good, because I am in for long.
Berubeland mentioned it somewhere correctly: CMHC is taking the right steps to deflate the potential bubble.
My 2c for now. Have a great day.