Canada's 'housing bubble' deemed close to bursting

[someone123]

Originally Posted by caltrane74

That's pretty good, considering the banks might give you half of that on a mil. - (And the stock market will give you -50%, if you're lucky)

Except you've also got property taxes, maintenance, and whatever services you've agreed to cover for your tenants (which I hope is nothing at those rents).

[caltrane74]

I think rent on a million dollar home/condo would be at least $2000 per month. Not $1200.

In Toronto even half a million dollar condos rent for $2500 dollars a month.

[LFRENCH]

yeah but in this case we(parents) paid around $70K cash for it in 1980's and it has since hit nearly $1.2 million. I'm not retarded by freeweed's description I swear

I only rent it so I can use it during the summer as this was taken about 15 minutes ago by me:
[IMG]
174901_10150266944260938_515730937_8276885_4831484_o by LFRENCH87, on Flickr[/IMG]

[LFRENCH]

Originally Posted by someone123

Except you've also got property taxes, maintenance, and whatever services you've agreed to cover for your tenants (which I hope is nothing at those rents).

in this particular case tenants pay for long distance phone and heating costs only, everything else comes included in price.

[240glt]

^ recreational property is a different beast alltogether... especially lakefront. We could get $200/day for our family cottage in the Chilcotin, but not $6k a month. Plus most people want to rent it in July & August, and that's when we're usually using it. Rec property is also a lot more recession and bubble proof, especially lakefront.


^ you think your prents got a deal.... how about $500 for 500 feet of Lakeshore with water rights 45 minutes from Edmonton in 1960.. my partners' folks made out like bandits on that one, as it's now worth about a cool $1.5 mil.

My little piece of paradise in the West Kootenays that I bought back in 2004 for practically nothing is still worth practically nothing as it is a long ways up a f/s road that requires a vehicle with good clearance and sometimes 4x4 to get to, and it has no services at all except for a year round creek for water and potentially hydro. I wouldn't give it up for anything though.... when the apocalypse comes I'll be laughing

[LFRENCH]

Originally Posted by 240glt

^ recreational property is a different beast alltogether... especially lakefront. We could get $200/day for our family cottage in the Chilcotin, but not $6k a month. Plus most people want to rent it in July & August, and that's when we're usually using it. Rec property is also a lot more recession and bubble proof, especially lakefront.


^ you think your prents got a deal.... how about $500 for 500 feet of Lakeshore with water rights 45 minutes from Edmonton in 1960.. my partners' folks made out like bandits on that one, as it's now worth about a cool $1.5 mil.

My little piece of paradise in the West Kootenays that I bought back in 2004 for practically nothing is still worth practically nothing as it is a long ways up a f/s road that requires a vehicle with good clearance and sometimes 4x4 to get to, and it has no services at all except for a year round creek for water and potentially hydro. I wouldn't give it up for anything though.... when the apocalypse comes I'll be laughing

haha yeah that is less than 30 minutes from Victoria, as a matter of fact its about 5 minutes from one of the richest roads in BC. Useable oceanfront is very expensive as ocean front is often non swim-able in Canada as you can imagine My grandparents were the ones that got a real deal they bought two pieces of property at $50 each. lots here are now a million per parcel.

[whatnext]

Recent issue of Macleans had an interesting article on Canada's bubble. Some of the parallels to the US market circa 2005 are scary.

Time to Panic About the Housing Market

[freeweed]

Originally Posted by whatnext

Recent issue of Macleans had an interesting article on Canada's bubble. Some of the parallels to the US market circa 2005 are scary.

Time to Panic About the Housing Market

And the differences are much larger, and important in understanding what caused the housing collapse in the US. Things that happened down there that do not exist in Canada:

• Predatory lending practices
• 40-45-50+ year mortgages
• 0% down-payments
• Interest-only mortgages
• Never checking if people can actually pay their mortgage payments
• Lenders not financially linked to homeowners, encouraging the above
• Banks going insolvent when as few as 1% of their clients go into foreclosure
• Insolvent banks spreading the lack of credit to each other, thereby guaranteeing more homeowners would go into foreclosure the instant anything averse happened to them

Etc, etc, etc.

The only parallel that exists is that housing prices are up, and interest rates are low. However, the US market completely imploded with no real change in interest rates, which is the doom-and-gloom predicted in this article. In short, there really isn't any parallel, certainly not a very scary one. It's more of a co-incidence than anything. We don't have subprimes, we don't have CDOs, we don't have CDSs. At least nowhere near the extent the US financial industry was allowed to get into.

A housing bubble bursting is certainly possible in Toronto and Vancouver, but the rest of the country really isn't seeing it. House prices in every other major city are well in line with incomes and most people can easily afford a hike in interest rates. And at any rate, a collapse in those 2 cities would have little to nothing to do with what happened in the US in 2008. Until I hear of someone earning $30,000 a year pumping gas qualifying for a mortgage on a $500,000 house, I'm not exactly going to panic.

[whatnext]

And, assuming you read the article, there are many parallels:

...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...

[kwoldtimer]

Don't know if we're in bubble territory or not, but I do find the aggressive promotion of home equity lines of credit by the banks to be troubling, and a recipe for trouble for many people at some point.

[freeweed]

Originally Posted by kwoldtimer

Don't know if we're in bubble territory or not, but I do find the aggressive promotion of home equity lines of credit by the banks to be troubling, and a recipe for trouble for many people at some point.

Absolutely. But HELOCs were not the cause of the bubble in the US, and not the cause of its bursting. The other thing that is not covered in this article is exactly WHO is using these - a lot of HELOCs are being taken out by retired homeowners in Canada who've long since paid off their mortgage and have plenty of equity in their house. The absolute dollar amount stated is completely meaningless - what matters is who and how much compared to overall equity.

There's a reason Ottawa stepped in and put some regulations in place on these things. And yup, some people are gonna lose their homes over this. But that has nothing to do with a bubble bursting, and certainly nothing to do with the US bubble - because theirs wasn't caused by it. The only parallel present in this article is "house prices have gone up and I think they'll go down". Yeah... that statement applies to literally every housing market in history. Not exactly a brilliant deduction there.

[someone123]

Originally Posted by freeweed

Absolutely. But HELOCs were not the cause of the bubble in the US, and not the cause of its bursting. The other thing that is not covered in this article is exactly WHO is using these - a lot of HELOCs are being taken out by retired homeowners in Canada who've long since paid off their mortgage and have plenty of equity in their house.

My evidence is only anecdotal, but one problem I've seen lately is a big gap between the fortunes of younger people and those in the baby boomer generation. Previous generations lived very frugally and tended to leave money for their kids, but now with the lines of credit and so forth there probably won't be as much passed down. Meanwhile, the value of housing owned mostly by older people is going up while wages are either flat or falling in real terms. The educational requirements for few jobs are going up and the cost of education is rising too.

I know a lot of people who don't seem like they're ever going to hit the level of financial success of their parents. Their jobs are approximately equivalent but their income in real terms is lower, particularly for lower middle class jobs and many of them have student debt. Those who decided to buy "starter" homes for $350,000 in far-flung suburban Vancouver are stretched to the max. Maybe things will even out a bit in the coming years when lots of baby boomers try do downsize and find that it's not actually possible to sell off 40% of inner-city Toronto for $1M per house or whatever it is.

When it comes to labour I think things could very easily go downhill fast though. Lots of older people have good union jobs paying $90,000 a year or more that required perhaps an undergrad, if that. In even more extreme cases there are older people working in some grocery chains or as bus drivers who make $50,000 per year or more. I don't think those jobs will be handed down to younger people. They'll be gone and there won't be jobs to replace them because there is no economic purpose for them. Meanwhile, there are a lot of entitlements for old people and if they're not re-evaluated (like OAS) we will have a perverse system where the poor $30k/year kids are being overtaxed to support subsidies for older people on fat pensions.

[freeweed]

What you say is going to be especially true in years to come, but for the next decade or two I see something different than your first paragraph - an unprecedented generational wealth transfer.

When you say that previous generations were "frugal" and "left money to their kids", in my experience this has been in the low-mid tens of thousands of dollars, at best. My parents' generation sure as shit didn't get much from their folks, and they will likely leave me with their house and a few thousand in the bank, if I'm lucky. Now that we're seeing the first of the Boomers retire and start their estate planning, it looks like we're going to regularly see 6 figure inheritances. And in many cases in the middle class, 7 figure once you add in the house value to the excess pension/annuity/RRSP/bank account. Hell, Boomers already are helping their kids out in a way that was simply never possible in the past. Now that we're seeing the first of the boomers retire and start their estate planning, it's astounding how much residual value will be left when most of them die.

Additionally, I cannot believe the number of 20-somethings I know that have had their parents buy them cars. Houses. You name it. And I'm not talking doctors and lawyers and CEOs. I'm talking your average white collar office schlub Boomer. The "Freedom 55" crowd, if they end up working till 58 or 60 (or beyond) will have huge war chests built up, to the tune of hundreds of thousands of dollars of spare cash above and beyond their gold-plated DB pensions.

I definitely agree with your general sentiments though. The current retiring generation should have been forced to accept a higher retirement age a decade ago. Instead, it's my generation (X) that is likely going to have to pick up the tab for Boomer excess. They'll all comfortably live with unneeded OAS and CPP from an early age, combined with their DB pensions. I'll be lucky if I collect government retirement benefits before I'm 70 (and quite possibly 75 the way things may need to go), and I will never in my life ever get a pension that I have not created and invested in myself. This isn't sour grapes; I'm fine with my situation but the previous generation's excess was never sustainable and it's just reality that things will have to change, and radically.

I'm not entirely sure how this will hit the lower/lower-middle classes though. If the Boomers there are highly in debt, and cannot pass much (if anything) to their children - these kids are fucked. They will most definitely have to work harder than their parents. This could quite possibly put the stall on rising house prices that has been predicted for quite some time now.

[someone123]

I don't know how much will be passed down on average (I suspect that lenders will be able to swindle a LOT of money out of baby boomers before they pass it on to their kids), but as you say there will definitely be winners and losers. I know lots of 20-somethings who had their parents buy them a condo. The ones who don't have extra help are pretty much out of luck, at least in a market like Vancouver's. It seems like in some ways we are moving backward to the time when one's standard of living had more to do with who they were related to than what they accomplished on their own. That is a very unfair and inefficient way of doing things.

I think there are even more fundamental problems that will continue to get worse. Demand for human labour will fall, but we still have an economy and society based on the idea of people working to earn money to pay for basic necessities. To some degree we have gotten around this change by shuffling people off into service industries, but eventually people are relegated to work of lesser and lesser importance.

I think Canada needs to move toward a system where there is still an incentive to work and get a good education, but where nobody must work to have a good living standard. The corollary that will freak people out is that some people will get big government cheques for sitting around all day. I don't actually think that will be a problem when their consumer goods are all coming from factories full of robots.

This is not quite the situation today but it's coming very soon. In another 10-15 years we won't really need human drivers, for example. There will probably be lots of backlash and instead of embracing the new technology that could make everybody wealthier we will have a turf war between labour, which will be irrelevant, and companies that could potentially run off with the lion's share of social benefit from a new technology they did not create. I can imagine absurd compromises where we pay bus drivers to do pointless work because we just cannot break out of the employment model.

[freeweed]

Originally Posted by someone123

I don't know how much will be passed down on average (I suspect that lenders will be able to swindle a LOT of money out of baby boomers before they pass it on to their kids), but as you say there will definitely be winners and losers. I know lots of 20-somethings who had their parents buy them a condo. The ones who don't have extra help are pretty much out of luck, at least in a market like Vancouver's. It seems like in some ways we are moving backward to the time when one's standard of living had more to do with who they were related to than what they accomplished on their own. That is a very unfair and inefficient way of doing things.

Completely agreed. A return to an inherited aristocracy is one of my bigger fears with society's recent trends. It's also why I argue for an inheritance tax, but I get crucified because people think it's their god-given right to spoil their middle-aged children. It's also, incidentally, why housing prices keep rising out of proportion to incomes - when Mom and Dad cover off a large chunk of your downpayment, you can afford to spend much more for the same property.

I think there are even more fundamental problems that will continue to get worse. Demand for human labour will fall, but we still have an economy and society based on the idea of people working to earn money to pay for basic necessities. To some degree we have gotten around this change by shuffling people off into service industries, but eventually people are relegated to work of lesser and lesser importance.

I think Canada needs to move toward a system where there is still an incentive to work and get a good education, but where nobody must work to have a good living standard. The corollary that will freak people out is that some people will get big government cheques for sitting around all day. I don't actually think that will be a problem when their consumer goods are all coming from factories full of robots.

This is not quite the situation today but it's coming very soon. In another 10-15 years we won't really need human drivers, for example. There will probably be lots of backlash and instead of embracing the new technology that could make everybody wealthier we will have a turf war between labour, which will be irrelevant, and companies that could potentially run off with the lion's share of social benefit from a new technology they did not create. I can imagine absurd compromises where we pay bus drivers to do pointless work because we just cannot break out of the employment model.

Yup, yup, yup, yup, yup. I work, rather proudly, in an industry dedicated to automation (IT). Which at its core is about putting people out of work. Robotics is just the physical/manufacturing side of what I do. Primarily, I put accountants and secretaries out of work. The problem is that a lot of people see this as a threat, because we still tie work with survival. I used to scoff at it, but I suspect in my lifetime we will see a guaranteed living wage for every person in Canada. And anything else, as you say, will be incentivized.

Honestly, right now there's a need for maybe 20% of what the average white-collar worker does. The rest of their "work" is spent in pointless meetings, filling out paperwork that goes nowhere, and other make-work projects designed to make us feel "important" and "useful". A company would make the same amount of profit if its employees did far less than they do today, but focussed on actual productive work. However this threatens too many people's ideals, so instead we invent things to do. We'll soon see another wave of this in manufacturing, and eventually society will have to realize that not everyone can work in the service industry. We will have to accept that our basic needs can be met with extremely little work by most people. And those that choose to work will do it out of choice, not to avoid starvation.

A utopian ideal, sure. But one that I see large glimpses of every day. I know extremely few white collar workers who are "productive" 40 hours a week. Of course, this is also why the "1%" will continue to accrue wealth, while the gap between the rest of us widens - there simply isn't the NEED for all of us to work like we used to, in order to live like we used to. What's happening more and more is that the excess wealth being generated by pointless work is being funneled to the 1%.

[flar]

Originally Posted by freeweed

What you say is going to be especially true in years to come, but for the next decade or two I see something different than your first paragraph - an unprecedented generational wealth transfer.

Only a few lucky people will get this. Boomers are going to live longer and use up more of their savings doing it. A lot of them probably don't have adequate savings to live the way they want anyways. If you look at debt levels, a lot of them probably won't have any wealth left to pass on. Young people will be left paying not only for their pensions, but for their gargantuan health care bills.

As it stands now, nobody's buying me cars or houses, and nobody paid for my education. I had to go into debt, just like pretty much everyone else I know. That's how our system works, and why the 1% keep getting richer. You go in debt, and spend the rest of your life trying to get out.

[leftimage]

The average middle class family today leaves money to their kids. This transfer is definitely substantial enough that forecasting it's effects is an important part of planning Canada's fiscal future.

The average middle-class family of yesterday simply never existed. There was no middle-class until the 50s and 60s. So I'd say it's a little premature, if not foolish, to conclude that the effects of "wealth-transfer" will be minor.

My parents decided that rather than leave us a larger will, they would leave us a smaller will but help my sister and I pay for school, buy our first condo, etc. As such, we've been able to make/save money as home-owners and earn more money as workers. Their generosity also saved us from having higher levels of debt - school debt, mortgage debt, etc - thus enabling us to use our money more productively. This is good for us, but for the general economy as well.

Being said, my parents have never been defined as "upper class", far from it. They are essentially a middle-class, average family. These types of opportunities didn't exist for the average family a few generations ago. That's definitely a huge factor.

[flar]

Originally Posted by leftimage

The average middle class family today leaves money to their kids. This transfer is definitely substantial enough that forecasting it's effects is an important part of planning Canada's fiscal future.

The average middle-class family of yesterday simply never existed. There was no middle-class until the 50s and 60s. So I'd say it's a little premature, if not foolish, to conclude that the effects of "wealth-transfer" will be minor.

My parents decided that rather than leave us a larger will, they would leave us a smaller will but help my sister and I pay for school, buy our first condo, etc. As such, we've been able to make/save money as home-owners and earn more money as workers. Their generosity also saved us from having higher levels of debt - school debt, mortgage debt, etc - thus enabling us to use our money more productively. This is good for us, but for the general economy as well.

Being said, my parents have never been defined as "upper class", far from it. They are essentially a middle-class, average family. These types of opportunities didn't exist for the average family a few generations ago. That's definitely a huge factor.

Everyone thinks they're middle class in North America. Sorry, but if your parents paid for you and your sister's educations and condos, you are not a typical family.

[freeweed]

Originally Posted by flar

Everyone thinks they're middle class in North America. Sorry, but if your parents paid for you and your sister's educations and condos, you are not a typical family.

Not necessarily. "Middle class" is defined by income, and it's quite possible for his/her parents to have had mid-ranged incomes, saved accordingly, and decided to spend money on their kids like this. Also, he said HELP, not entirely pay for it. Hell, I know a guy squarely in the middle class (probably earns $70,000 max) who took out a rather large HELOC just to pay for his daughter's $50,000 wedding. Stupid way to spend your money if you ask me, but it's surprisingly common amongst the middle class.

I'd love to see some income bracket stats to define exactly what IS "middle class" these days. I'd imagine $50,000-$90,000 family income in most Canadian cities? Maybe a bit higher? Calgary is so skewed that I'm not sure what's realistic anymore.

[osmo]

Originally Posted by freeweed

And the differences are much larger, and important in understanding what caused the housing collapse in the US. Things that happened down there that do not exist in Canada:

• Predatory lending practices
• 40-45-50+ year mortgages
• 0% down-payments
• Interest-only mortgages
• Never checking if people can actually pay their mortgage payments
• Lenders not financially linked to homeowners, encouraging the above
• Banks going insolvent when as few as 1% of their clients go into foreclosure
• Insolvent banks spreading the lack of credit to each other, thereby guaranteeing more homeowners would go into foreclosure the instant anything averse happened to them

Etc, etc, etc.

The only parallel that exists is that housing prices are up, and interest rates are low. However, the US market completely imploded with no real change in interest rates, which is the doom-and-gloom predicted in this article. In short, there really isn't any parallel, certainly not a very scary one. It's more of a co-incidence than anything. We don't have subprimes, we don't have CDOs, we don't have CDSs. At least nowhere near the extent the US financial industry was allowed to get into.

A housing bubble bursting is certainly possible in Toronto and Vancouver, but the rest of the country really isn't seeing it. House prices in every other major city are well in line with incomes and most people can easily afford a hike in interest rates. And at any rate, a collapse in those 2 cities would have little to nothing to do with what happened in the US in 2008. Until I hear of someone earning $30,000 a year pumping gas qualifying for a mortgage on a $500,000 house, I'm not exactly going to panic.

There was a study which linked that 20% of homeowners would be pinched hard if rates were to jump 2%. The fact of the matter is that collectively 74% of Canadians own real estate with totals of mortgages at around 600$ Billion Dollars (equal to a national debt).

Canada has/had the same dirty tricks the Americans had. Ours were just more subtle. Examples

Canada had Cash back mortgages ... essentially sub-prime in which people could borrow the 5%+ needed to put towards a down payment.

Its not hard to get a mortgage anybody with a pay cheque as a co-signer can get things through. The Banks know they will get their money via CMHC or by taking away your assets. This is unlike the states where people could get around getting the banks their cash.

The majority of mortgages token upon by Canadians were of the 0/40 - 5/35 variety. The largest increases in mortgages issued occurred when Harper let the taps run on easy credit.

Yes our banks did not need to swish money around amongst each other to shore each other up. why? Because all of out Mortgages are already backed by taxpayers. America had to bail out the mortgages after the fact are already backed up by CMHC whom holds 600 Billion worth of insurance to the banks.

Its a myth that Canada was any more "prudent" then the Americans. We only had 6 major players in the mortgage game versus in America you had a host of institution and private lenders. They ran there gambit with a touch of class because like I said they are guaranteed their money they did not have to sling mud like we saw in the states. The damage is the same if not more though. Are debt levels are greater to the America prior to the bust and now in a nation where 85% of Canadians live in Cities the majority of Cities have seen home prices rise to unafordable levels. Incomes are not rising, prices and inflation are kicking up each year at levels between 7-10%.

The myth is to think prices can rise at these rates without an equal dump. The majority of Canadian and especially boomers have the majority if not all of their worth in housing at a time its quite clear the market is a basketcase.