Almost All Buyers Are Very Leveraged – “41% have less than 10% down-payment, a further 21% less than 20% DP. Only 39% put down more than 20%.”

“According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.
For those purchasing from 2010 through spring 2012:
41% had less than a 10% down-payment
21% had a 10-19.99% down-payment
Only 39% put down 20% or more.
(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add to 100% due to rounding.)”

– jesse (‘YVR Housing Analyst’) at VREAA 8 Oct 2012 10:55am, quoting from a Canadian Mortgage Trends article on the recent CAAMP released figures.

Headlined for the chronological record.
The vast majority of buyers are very leveraged to RE prices.
The Vancouver subgroup is likely worse, given our price levels.
This flies in the face of those who claim that Vancouver is supported by vast numbers of cash buyers.
And, as we all know, if an owner has less than 20% equity in a house, they lose it all when prices drop 20%.
– vreaa

29 responses to “Almost All Buyers Are Very Leveraged – “41% have less than 10% down-payment, a further 21% less than 20% DP. Only 39% put down more than 20%.”

  1. Hard to tell how statistically valid this survey is, but is interesting nonetheless. I might opine the sudden release of the data by Mr. Dunning is designed as a means to convince policy makers of the housing market’s reliance on FTBs and high ratio insured mortgages. Wouldn’t it be funny if that ended up furthering the resolve of regulators that the whole sorted and unproductive scheme needs to be quenched sooner rather than later? Hhhhhaaaaaaaaaaaaaah.

  2. DOES it include cash buyers? Given the source, it may very well not.

    • I’d suspect that even if true, that would represent such a tiny minority of all buyers that it would make next to no difference to the results.

  3. I already called out McLister on this one and he didn’t post my follow-up response to his last reply. He stated first-time buyers are higher in ‘secondary markets’, as opposed to major centers. By secondary market he’s implying urban and rural areas; so I responded reminding him that rural properties are the highest risk to CMHC’s portfolio, as stated on record by CMHC’s CEO Karen Kinsley. He didn’t post it.

    This survey looks completely fudged.

  4. “The vast majority of buyers are very leveraged to RE prices.”

    Is 61% a “vast majority”? Or are you counting the nearly 40% that have >20% down as “very leveraged” as well?

    “And, as we all know, if an owner has less than 20% equity in a house, they lose it all when prices drop 20%”

    They only lose it if they sell and lock in the loss.

    • Okay, so they don’t lose the money, per se, but they lose flexibility to move by not accepting the monetary loss. The only way they will make up the monetary loss is by mitigating it over a long period of time, or holding until the top of the next bubble, whichever comes first.

    • nuxfan -> Yes, I’d say anyone with anything less than 50% equity in their home is very leveraged. The housing market drops 20% and you lose 40% of your equity. Nobody would dream of playing with leverage like this other asset classes, yet here we have the whole population happily leveraging away.

      And regarding “They only lose it if they sell and lock in the loss.”… Sure, they can wait 20 years and break even again (in the case of the 1980 peak, 26 years).

    • opportunity costs … you won or lost when you bought, sell to close is just when you choose to recognize it

  5. “According to CMHC’s home purchase report, the average market share for first-time buyers during 2010-12 is 35%; CAAMP’s survey is weighted 56% of first-time buyers, which suggests the results were skewed to a self-serving opinion”.

  6. I always thought Will Dunning wrote well reasoned, balanced and intelligent stuff, so I was a bit disappointed when he became a CAAMP follower, as it were. Without doubting that he knows on which side his bread is buttered, I think and hope that his stats are better than the typical ‘economists’ so prevalent in the industry.

  7. Speaking of financial cleavage leverage… A few hours ago and a mere TimeZone or two away from the RainForest… A cheeky photojournalist caught the IMF’s Christine Lagarde in a rare display of SangFroid…

    [NoteToEd: Nem’sCaption: “Inordinately pleased that, for once, she wouldn’t have to put up with the indeliby smug PBOC delegation, Mdme. Lagarde indulged the [latest] Japanese Finance Minister with a coqquetish demonstation of the WetTshirtContest technique she had deployed to such good effect during her studies at the Holton-Arms School for girls in Bethesda, Maryland.]

  8. Even if this survery has “cooked books” it is still interesting in that after a 10% correction (already @ 10-15% in many places) a discount at the time of sale of between 4-5% which is the norm as reported by RE boards as the sale price below the MLS price, and then 5-7% RE fees, etc, as well as legal costs, it seems that 60% of the homebuyers since 2010 are already underwater before you take into account mortgage prepayment penalties, if any.

  9. I find it shocking that so few people have a >20% down payment, given how many second-time-buyers out there should be equity-rich from holding their first purchase during the rising boom.

    No, wait, nevermind– with FTBs accounting for 56% of this survey’s responses, that sort of a ratio is to be expected. FTBs shouldn’t make up 56% of the market…

    How much do you want to bet that Vancouver’s down payment ratios are substantially worse than the national average? (especially for FTBs)

    • The unknown figure in CMHC and CAAMP’s surveys is the cash source. The issue is, many developers have been selling new units (pre-cons) on deposit structures (a loan) to finance a down payment on a mortgage (another loan). Not hard to see where leverage is and why there is already 2-3 years priced into current average prices.

    • With weak sales in Vancouver, would we expect move-up to decrease and the market to become more dependent on FTBs?

  10. Negative equity is a real problem even if home-owners don’t have to sell (and thereby lock in their losses). The psychological effect of negative equity on consumer spending can be huge — it’s the leverage-induced reverse of the RE “wealth effect”. When people open their mortgage statement and see they owe $350k on a house that’s maybe worth $320, it doesn’t make them want to go out and spend more money.

    • I would not underestimate the damaging effect of the negative equity as well, it is also going to be a real problem when the home-owners have to refinance, in a few years from now. By then the property assessed values will reflect the lower sell prices and banks are going to be well aware of it – I suspect that it is going to affect the rates people with almost none or even negative equity get for their next mortgage term – as you know the eligibility is now going to be reevaluated every time they refinance. Will they be suddenly required to pay an CMHC insurance premium?

      • For buyers who already have CMHC insurance, mortgage renewals will be seamless, as the insurance is in force for the duration of their amortization. They might have trouble transferring their mortgage to another bank, though; if I was a bank manager, I’d take the opportunity to dig into the buyer’s pocket for a higher interest rate on renewal (if their property had dropped significantly in value), because their mortgage is more complicated to transfer to another institution.

        For buyers without CMHC insurance, it’s not clear to me what the banks are required to do at mortgage renewal– if the buyer’s got negative equity, the bank (assuming it’s a federally-chartered bank) probably *can’t* legally renew the mtg. They may require that the buyer either put up cash to bring the property to >5% equity (so that the buyer can qualify & pay for CMHC insurance), or put up cash to bring it to >20%.

        Of course, for a *refinance* (not a renewal), where the amortization changes (eg, you bought a 25 yr mtg, now it’s been 5 years, and you want to renew it for 25 years again, to reduce monthly payments), or you take cash out, any prior CMHC insurance coverage is lost. Of course, if you’re in negative equity, you’re not taking cash out, but if rates rise, I can easily imagine people extending their amortization to minimize the monthly payments…

      • “For buyers without CMHC insurance, it’s not clear to me what the banks are required to do at mortgage renewal”

        Here’s one recent situation: Link

        “Has the rules for mortgage renewals change recently, where the 25 year amortization is the only option? I just did one with Scotia, and the term has to be 25 years. Previously, it was 40 years for me. I thought the amortization would be grandfathered, or stay the same.”

      • M-, mark-to-myth appraisals were in operation in the US, ultimately when it comes to negative equity the loan is like a landmine — does no harm unless you tread on it — so why not keep payments up as long as possible instead of calling it on renewal. Also short sales and other REOs as you likely know became magnitudes more prevalent after prices started falling.

        Canada’s situation is slightly different as the vast majority of mortgage holders will need to renew within five years, so the wave of impaired equity qualifications could hit like a ton of bricks compared to the US experience. Not that I know any better but it would be something I would stress test if I were suitably interested.

      • So true. I know folks that upon renewing their mortgage had to pony up $20K to go toward their negative equity. Others (including myself), sold assets after the Calgary RE crash as layoffs spread through the energy industry and rentals (my own) became vacant overnight all at the same time. Thankfully, with zero debt I was able to wait it out. Someone else I know, had to wait two years to find a good tenant for their fully-owned rental SFH. Another risk-loving friend of mine was carrying so much mortgage debt on his 9 rental properties, that it was his bank that bent over backwards to make sure he could stay solvent. He (the bank actually) was saved by the collapse in mortgage rates and the re-inflation of the bubble here. Amazingly, it’s now cheaper to buy than rent as vacancies have plummeted and rents have rocketed up. My buddy is back to being super (paper) rich again. I guess he called it right as he’s hitting the sell button hard this time around.

  11. I guess statistical shenanigans can cut both ways (I’m talking to you REBGV). Having said that, FTBs are disproportionately important to the health of a RE market. If they disappear, or can’t move up because of negative equity, then the whole market grinds to a halt.

    Or maybe the market will be saved by yellow helicopters full of HAM sprinkling millions around like confetti.

  12. Lovin the einstein photoshoppage …is that a vreaa orig ?

  13. The neighbour put her house up for sale when her husband died, she couldn’t stand being there alone.
    Borrows from her line of credit and buys an apartment.
    The house has sat for months, crickets, and she is freaking out, she is now trying to sell the apartment because her overhead is through the roof.
    It’s these sort of s****y situations that are going to force the housing prices down, selling out of need not choice.

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