Two Experienced Guys Talk Canadian RE – “How many people who own their home could afford to buy it if interest rates were at normal levels?.. We all know what happens when you’ve got more sellers than buyers.”

“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.,, 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.
– vreaa

13 responses to “Two Experienced Guys Talk Canadian RE – “How many people who own their home could afford to buy it if interest rates were at normal levels?.. We all know what happens when you’ve got more sellers than buyers.”

  1. When this all plays out I think we’ll have a new catch phrase known as “the bitter home owner”.

  2. Ralph Cramdown

    Mostly I agree wholeheartedly, especially about the difference between a US mortgage locked in for 15 or 30 years (with a borrower’s option to refinance) versus Canada’s typical 5 year fixed at 3% or 10 years at 4%, a difference that isn’t stressed enough when comparing our markets.

    Re. “I’m not sure that retirees need to worry […] unless their plan is to sell their house in three or four years, make huge profits[…]” It’s a bit of a red herring, assuming that they’ve been holding for decades and not dipping into the equity. But it applies equally if they’ve been withdrawing and spending the equity, or if they’ve only bought recently. If they’ve been using the house as a store of value, and it does that poorly, many of them will be hooped.

  3. Low rates can continue for some time but ultimately while yields may not go up any time soon, there is some question as to where real rates will head. I heard a few good US economists opine that if one has a mortgage, now isn’t such a horrible time to refinance.

  4. I think it’s refreshing to hear voices other than Garth Turner and Ben Rabidoux start drawing the same conclusions in public that the professional bears have. They are an important part of the reality-infusion that has to start happening in order to get a correction underway.

    • There have been other voices, but because they have not been called upon to opine over real estate on a regular basis they have remained obscure.

      There was a great article in either CBC/FP/G&M from a finance guy writing about house prices. It captured most of what vreaa et alia have been writing about for a while now, alas I doubt most remember it. Such is the way with great insight and foresight, until we go looking for it in hindsight.

    • Here’s Stephen Gordon on housing prices last year:

      Not that I can hope to go toe-to-toe with a guy featured on Invisible Hand, but his DCF analysis looks a bit cursory.

    • (from the What Bubble? sidebar):

      Addendum: ‘Those Who Get It’

      Here’s David Rosenberg, 17 May 2010: “No Housing Bubble, Eh? (Okay — we’ll call it something else: a giant sud). Home prices have surged to record levels relative to incomes or rents so call it whatever you like.”

      And this list of ‘Those Who Get It’ quotes care of Ben Rabidoux at financialinsights 30 Jan 2011:

      Dean Baker- “It looks me like you have some real problems…Canada could see house prices collapse by 25 to 30 per cent if interest rates rise by about two percentage points”

      Robert Shiller- “The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary”

      Paul Krugman- “Canada cannot be complacent in the face of disturbingly bleak global conditions, because Canadians spend too much relative to their household incomes and the country’s housing bubble has yet to burst.”

      David Rosenberg- “…Housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15 per cent to 35 per cent overvalued isn’t a bubble, then it’s the next closest thing. We are talking about two to three standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So, if it walks like a duck …”

      Mike Shedlock- “A Canadian housing crash is a given. The only thing that remains to be seen is how deep the crash is.”

      Don Coxe- “Canada continues to experience a real estate bubble”

      Stephen Jarislowsky- “In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels…I think things are going to get a hell of a lot worse….I hope I’m wrong but I think Canada is on the edge of a lot of trouble.”

  5. So our government, out of sheer ignorance of true economics, can make mortgage interest deductible in Canada and help recent buyers with bailout money so they don’t lose their house. Thus keeping this bubble intact and passing the burden of the mistakes people made, in buying something they clearly could not afford, onto the tax payer. This would mean budget cuts in many other areas and the raising of income taxes, both corporate and personal. If the government intervenes in this way, all it does is shift the problem elsewhere. But all governments, all over the world, are this short sighted.

  6. The boomers will take this market right down because they have more flexibility in their prices. This will destroy recent buyers as they can’t compete in the declining market. The word is out, everyone knows prices are falling.

    • >The word is out, everyone knows prices are falling.

      But it’s different here in Vancouver. We’re better than the rest of Canada. Best Place on Earth!

  7. Any relaxing of capital restriction in significant countries that buy our commodities will help speed along the demise of Canada’s housing mania. We have high housing costs in Canada because the commodities we are selling are too expensive and countries buying have capital controls that inhibit money to be invested internally. Hong Kong is crazy expensive because of capital controls on the Chinese Mainland. Our foreign minister Baird is totally freaking out at countries through the UN because of how nuts it is to live in Canada now. Our problems are not as internal as many (including me) would think. I’ve adjusted my thinking lately to put greater weight on the role of capital, and it sure ain’t for the landlord to decide.

    • This is why most countries try to control or regulate hot money flows.

      • International money flow strategies are mapped by people unaccountable to the voter. Strategic and tactical finance, like in war, are part and parcel of secretive organizations playbook as they conduct global Demographic transition. Canada is basically raped by high prices, as dollar infusion conflagarates through the system, especially high oil prices. HIgh real estate prices are symptomatic.. and temporary… as the dam is eventually burst. Canada, as a lead developed country rich in natural resources is sacrificed at the alter of capitalism, as capitalism is rammed through our nation first, then through the great bulge of developing economies that still hold to Capital restrictions. We’re at an inflection point in this process. Peak boomers, usually 5 years high or low of age 50, are the passive financial goons set up to do the worst of the bubble, and we performed admirably. Everyone in this group, take a bow.

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