“I’m not sure that retirees need to worry about housing prices unless their plan is to sell their house in three or four years, make huge profits, and use that to support themselves in retirement. The concern, I think is more for people starting out, who borrow as much as they can, buy a house, within their memory all they remember is housing prices going up, and housing being a great investment, and so they reach…
If you look at the situation in Canada now, in some of the big cities, housing is very expensive, compared to the US and most other places, our borrowing costs are very low, which means the prices are in part held up by peoples ability to borrow large amounts at low rates.
But Canadian borrowers are not like American borrowers, American borrowers can lock in the rate for 30 years, Canadians can’t. The American borrowers are getting a tax deduction, Canadians can’t. Here we have a much less hospitable borrowing environment that will turn very hostile if interest rates turn up. I’m not predicting that it will happen, but, if it does, it’s very hard for me to see how people are going to afford the payments.” …
“I remember Toronto, in the 1990′s, and I use that as a sanity check. [House prices came off by 25%; it was "bubble like".] You need to ask yourself the following question: How many people who own their home could afford to buy it if interest rates were at normal levels? Like, how many people are living in a house that they absolutely couldn’t afford to buy if interest rates were normal. I fear that in some of the larger Canadian cities almost nobody could afford to buy their house if they were entering the market with normal interest rates. That’s not a good situation to be in because it means that if interest rates do rise to normal levels, and people do try to sell their houses, there aren’t going to be that many buyers. We all know what happens when you’ve got more sellers than buyers.”
- Malcolm Hamilton, Mercer Human Resource Consulting Ltd., clientinsights.ca, 27 Sep 2012
‘Word’ (as folks younger than these guys would say).
Interesting for the characterization of our borrowing environment as “less hospitable” than that in the US, which contrasts with the widespread view that somehow our borrowing situation is more resilient.
Also spot on regarding retirees, buyers that “reach”, and people being unable to afford the houses they live in.
By the way, as we have repeatedly asserted, interest rate rises are not necessary for the Vancouver bubble to burst, but rate rises would certainly speed it along if they occurred.