Does Canada have a mortgage crisis or not?

[msj]

It's a misnomer to call what's happening here a "mortgage crisis". We have a wealth crisis, i.e. we're not generating enough real wealth as a general rule across Canada.

This is a good point - if real incomes were increasing (rather than being essentially flat for the past couple of decades) then one would expect house prices to rise accordingly.

Yet, incomes have been stagnant while house prices have gone up.

The reason they have gone up is because people are willing to take on more debt which is why Canadians are so indebted now than they have been in the past.

IOW - Canadians have replaced the lack of rising incomes with debt and seem oblivious to just how bad this shift in thinking really is over the long run.

The problem with housing is a function of our rising cost of living. The cost is rising because we've shifted too far toward a service-based economy, and away from production where real wealth is generated.

House prices have increased much faster than incomes and the general rate of inflation for years.

The logical thing to do would be rent since rents have been flat or declined in real terms (per the link provided by Dre previously).

Yet people continue to borrow more money to "own" a home based on premises like "real estate is a sound investment" and "real estate only goes up" and "they are not making any more land" among other bad cliches.

Once again, people choosing to borrow money to make up for the gap between what they are really making versus the lifestyle they think they should be having, despite not being able to support that lifestyle with anything other than more debt (first a mortgage, then a secured line of credit, then an unsecured line of credit, then credit card debt, then ?).

The problem with mortgages, and housing is just one aspect of a larger systemic problem. And anyone who thinks housing or any other sector of our economy is sustainable is going to be steam-rolled by history.

Agreed.

Housing has become a much larger share of our economy in the past 10 years. When it slows down (new home construction, renovations etc) then it will have repercussions that could spiral downward much like the US.

No, I do not think Canada will end up as badly as the US.

However, Canada is not nearly as safe and secure as so many people think.

A shock like higher interest rates or higher unemployment would expose our systems flaws for all to see.

We should be trying to prevent and reduce such shocks to our system/economy.

Instead we have people who willfully choose to blind themselves to the reality that our banks have been recklessly lending money for years because the government has let them. People have been recklessly borrowing this money because they don't understand that not everyone should own a house, a bimmer, and a dog.

Some day this is going to end, and it won't be pretty.

I hope that we get lucky and it's a soft landing but the longer this nonsense goes on then the more likely it's going to end hard.

[greyman]

msj,

Good post.

[dre]

I think the real danger here is that the bubble WONT fully deflate. High housing costs hurt Canadians in general, and make our industries less competitive.

Id like to see housing prices return to mid nineties levels, even if it meant a mild recession. Problem is... that would completely wipe me out. The vast majority of my net worth is in realestate equity on my houses.

The BOC should start raising rates, and bleed some of that fake paper value out of the market, and encourage Canadians to start rebuilding their savings. They know they will need to do that at some point, but they are afraid to do it now because it would probably cause a mild recession... maybe worse. So they are flooding the markets with cheap easy credit in an attempt to keep the bubble inflated. I just renegotiated my mortgage down to 1.9%... Thats how desperate they are to keep people borrowing and spending.

[greyman]

I think the real danger here is that the bubble WONT fully deflate. High housing costs hurt Canadians in general, and make our industries less competitive.

Id like to see housing prices return to mid nineties levels, even if it meant a mild recession. Problem is... that would completely wipe me out. The vast majority of my net worth is in realestate equity on my houses.

The BOC should start raising rates, and bleed some of that fake paper value out of the market, and encourage Canadians to start rebuilding their savings. They know they will need to do that at some point, but they are afraid to do it now because it would probably cause a mild recession... maybe worse. So they are flooding the markets with cheap easy credit in an attempt to keep the bubble inflated. I just renegotiated my mortgage down to 1.9%... Thats how desperate they are to keep people borrowing and spending.

dre,

I feel for you, it is tough in today's climate.

I completely agree, interest rates must rise, sharply.

We're due for a correction, and it's going to hurt more because it's going to blindside many Canadians. All because it's not politically expedient to level with the public and tell them that the credit party is over, and then act accordingly.

Savings are the way out of this mess, and it is not easy to put money away in the current environment.

[dre]

dre,

I feel for you, it is tough in today's climate.

I completely agree, interest rates must rise, sharply.

We're due for a correction, and it's going to hurt more because it's going to blindside many Canadians. All because it's not politically expedient to level with the public and tell them that the credit party is over, and then act accordingly.

Savings are the way out of this mess, and it is not easy to put money away in the current environment.

Yeah its really a head-on collision between long term interests and short term interests.

No sitting government wants to preside over a recession, so they ease. They dump credit into the economy and open the discount window. The problem is all this cheap easy credit creates the NEXT asset bubble, and the business cycle gets more violent each time, and more and more economic growth and depletion of real resources is required each year to keep the house of cards standing.

It makes really good sense if youre a sitting government in the middle of a four year term. A recession will get you turfed out of office. But it doesnt make very good sense at all in terms of building a strong and sustainable national economy.

[greyman]

Yeah its really a head-on collision between long term interests and short term interests.

No sitting government wants to preside over a recession, so they ease. They dump credit into the economy and open the discount window. The problem is all this cheap easy credit creates the NEXT asset bubble, and the business cycle gets more violent each time, and more and more economic growth and depletion of real resources is required each year to keep the house of cards standing.

It makes really good sense if youre a sitting government in the middle of a four year term. A recession will get you turfed out of office. But it doesnt make very good sense at all in terms of building a strong and sustainable national economy.

+1000

[fellowtraveller]

Yeah those are the same analysts that said the US realestate market was healthy.

This isnt just a few markets, to spot a realestate bubble you have to look at the difference in cost between renting, and owning, and you need to look at wages. And when you look at these indicators its clear that realestate is way over valued. AT LEAST 25%, probably more like 30%.

That doesnt mean that the outcome will be the same... youre right about that.

Your name is either Garth(The Man Who Is Always Wrong) or Chicken Little.

As I recall, you are also the guy whose opinions on renting being better than owning in large part because you have a sweetheart, cheapo deal on rent.

I own my house free and clear. if I choose to stay here, my overhead per month will be far less anybody renting. Better yet, I will not be vulbnerable to a landlord making decisions on whether I eat cat food or steak when I retire eventually.

[greyman]

Your name is either Garth(The Man Who Is Always Wrong) or Chicken Little.

As I recall, you are also the guy whose opinions on renting being better than owning in large part because you have a sweetheart, cheapo deal on rent.

I own my house free and clear. if I choose to stay here, my overhead per month will be far less anybody renting. Better yet, I will not be vulbnerable to a landlord making decisions on whether I eat cat food or steak when I retire eventually.

Who's on the hook when your foundation cracks?

Who's on the hook when your plumbing's backed up?

How much do you spend each year beautifying or keeping up your property?

The list could go on and on. Renting is cheaper in the long run. Outright ownership assumes all the risk, and bears all the cost. Just one of those problems I mentioned above could cost the same as your rent for an entire year.

[dre]

Your name is either Garth(The Man Who Is Always Wrong) or Chicken Little.

As I recall, you are also the guy whose opinions on renting being better than owning in large part because you have a sweetheart, cheapo deal on rent.

I own my house free and clear. if I choose to stay here, my overhead per month will be far less anybody renting. Better yet, I will not be vulbnerable to a landlord making decisions on whether I eat cat food or steak when I retire eventually.

No I dont think renting is better than owning, and the rest of your post is just garbled nonsense.

[fellowtraveller]

Who's on the hook when your foundation cracks?

Who's on the hook when your plumbing's backed up?

How much do you spend each year beautifying or keeping up your property?

The list could go on and on. Renting is cheaper in the long run. Outright ownership assumes all the risk, and bears all the cost. Just one of those problems I mentioned above could cost the same as your rent for an entire year.

Who do you think is on the hook when your rented apartment needs repair?

You are, of course.

Did you think that there was some sort of Repair Charity that intervenes? It ALL comes back onto your rent.

[Bonam]

Personally I'm really glad house prices have come down where I live. I just put in an offer on a 245k condo that was 450k a mere 5 years ago. Rentals of a comparable unit in the same area are almost 30% higher in terms of monthly payment compared to the monthly cost of the mortgage.

Vancouver needs a dose of the same medicine badly.

[msj]

Who do you think is on the hook when your rented apartment needs repair?

You are, of course.

Did you think that there was some sort of Repair Charity that intervenes? It ALL comes back onto your rent.

Uh, no it doesn't.

That person can pick up and move if various rent controls don't keep the price of rent down (or the market itself doesn't keep the price down).

If what you say is true than this nice graph showing real rents wouldn't be pointing the wrong way [i.e. as in generally negative since 1974].

One would expect with inflated house prices over the past 10 to 15 years that that chart would be going the other way.

[msj]

Personally I'm really glad house prices have come down where I live. I just put in an offer on a 245k condo that was 450k a mere 5 years ago. Rentals of a comparable unit in the same area are almost 30% higher in terms of monthly payment compared to the monthly cost of the mortgage.

Vancouver needs a dose of the same medicine badly.

What market are you in?

[dre]

Personally I'm really glad house prices have come down where I live. I just put in an offer on a 245k condo that was 450k a mere 5 years ago. Rentals of a comparable unit in the same area are almost 30% higher in terms of monthly payment compared to the monthly cost of the mortgage.

Hmmm thats definately unusual. It costs about 1200 per month to finance that 245k, another hundred or two per month in insurance, and another hundred or 2 per month in property taxes. So people in your area are paying nearly 2000 a month to rent a shitty ass condo?

I own a rental property that cost about 225, and Its hard to get 1300 per month even though my costs are about 1550 (provided no maintenance is required).

The reality is that if youre mortgaging close to the full purchase price, any rent you collect is NOT going to cover your monthly costs, and that gap between rent and cost is the highest its ever been Canada wide.

[Bonam]

Hmmm thats definately unusual. It costs about 1200 per month to finance that 245k, another hundred or two per month in insurance, and another hundred or 2 per month in property taxes. So people in your area are paying nearly 2000 a month to rent a shitty ass condo?

I own a rental property that cost about 225, and Its hard to get 1300 per month even though my costs are about 1550 (provided no maintenance is required).

The reality is that if youre mortgaging close to the full purchase price, any rent you collect is NOT going to cover your monthly costs, and that gap between rent and cost is the highest its ever been Canada wide.

Yeah I'm in seattle, not canada. The cost to finance is 1150, 300 dues, 250 taxes, bit of insurance too (only about 30/mo cause rest is part of the dues). The cost to rent a comparable place is 1600 + usually about 150 for a parking spot (which for a condo is included). I didntinclude all the costs when I said the differential was ~30%, but evn adding them all in, renting ends up a bit more expensive or a wash.

And its not a "shitty ass" condo, its a beautiful 2001 20th floor waterfront

Rents in the area have risen rapidly while prices have been falling, creating this somewhat upside down situation. That's one of the reasons I chose to buy.

Edited February 7, 2012 by Bonam

[msj]

Oh, perhaps you didn't notice the title mentioning Canada?

Yeah, those numbers seem plausible enough.

I'd buy too under those circumstances.

Edited February 7, 2012 by msj

[dre]

Yeah I'm in seattle, not canada. The cost to finance is 1150, 300 dues, 250 taxes, bit of insurance too (only about 30/mo cause rest is part of the dues). The cost to rent a comparable place is 1600 + usually about 150 for a parking spot (which for a condo is included). I didntinclude all the costs when I said the differential was ~30%, but evn adding them all in, renting ends up a bit more expensive or a wash.

And its not a "shitty ass" condo, its a beautiful 2001 20th floor waterfront

Rents in the area have risen rapidly while prices have been falling, creating this somewhat upside down situation. That's one of the reasons I chose to buy.

Ok that makes sense. Im sure your condo is nice btw, I just meant that seemed like real high rent for a condo, not that theres anything wrong with yours.

It makes good sense that things would be different in some US areas where prices have come way down, and demand for rentals is high.

Congrats and enjoy your new digs! Lemme know when the house warming is

[Bonam]

Oh, perhaps you didn't notice the title mentioning Canada?

Yeah, those numbers seem plausible enough.

I'd buy too under those circumstances.

Yeah my tie in to Canada was that Vancouver could use this kind of "crisis" too. You know, the travesty of housing actually becoming affordable for real people that live in the city.

Edited February 7, 2012 by Bonam

[msj]

Yeah my tie in to Canada was that Vancouver could use this kind of "crisis" too. You know, the travesty of housing actually becoming affordable for real people that live in the city.

But, but, but, Vancouver is affordable, don't you know? We have really low interest rates and banks that will give people their down payment and 30 year amortizations and, and....

[dre]

But, but, but, Vancouver is affordable, don't you know? We have really low interest rates and banks that will give people their down payment and 30 year amortizations and, and....

I wonder what would happen to the market in Vancouver if interest rates hit 8% like they did in the early nineties?

Canadians are putting themselves in a dangerous position. We are leveraging more than ever before, at a time when rates are at historic lows. What happens when rates go up?

Edited February 7, 2012 by dre

[PIK]

CBC LOL

[Jerry J. Fortin]

I wonder what would happen to the market in Vancouver if interest rates hit 8% like they did in the early nineties?

Canadians are putting themselves in a dangerous position. We are leveraging more than ever before, at a time when rates are at historic lows. What happens when rates go up?

I think you make a very good point. Interest rates will go up at some point. These historic low costs of borrowing will catch a few folks I think.

[msj]

Well, according to Business Insider Canada has a bubble - 54% on average overvalued.

73% over valued when using rent-to-income as the ratio.

34% when using income.

I remember seeing obnoxious thresholds for the US market and thinking the day of reckoning was gonna hurt.

This is terrible and some heavily indebted idiots are going to get hurt.

[Smallc]

http://edmonton.ctv.ca/servlet/an/local/CTVNews/20120213/cmhc-canadian-housing-market-outlook-120213/20120213/?hub=EdmontonHome

[Michael Hardner]

http://www.theledger.com/article/20120213/NEWS/120219723

Toronto has more skyscrapers and high-rises under construction than any North American city -- almost three times as many as New York -- stoking debate on whether the condominium market in Canada’s largest city is headed for a U.S.-style correction as prices rise and household borrowing hits a record. Canadian lenders including Toronto-Dominion Bank last week raised mortgage rates to cool off the housing market.

“Condo construction has always been rather prone to boom and bust cycles, and this one seems particularly strong,” said Sheryl King, an economist with Bank of America Merrill Lynch in Toronto. “Builders seem to overestimate how much demand is going to be out there, and that’s when you tend to see some abrupt pull-back.”