“I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”

housing-obrienxxrb1
Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low.

“In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.
The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.
“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,” Ms. O’Brien said. “We probably would have waited.”
The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,” said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,” argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.”


“What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.”


- above two anecdotes excerpted from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

Examples of two couples who bought houses, but shouldn’t have; and who, under normal circumstances (and, ironically, at lower prices), wouldn’t have.
- vreaa

26 responses to ““I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”

  1. pricedoutfornow

    This market has nowhere to go but down. Now that prices aren’t skyrocketing upwards, there will be fewer of these young buyers who feel pressured to “buy now or be priced out forever!” Also, with the shorter amortization period, those payments which may have been affordable under the 40 or 35 year amortization, now look too too high in relation to renting. And there are few media stories about prices going up, so there goes the speculators who would have bought in hopes of making a quick flip. There is no reason for the market to recover in the spring, and I do think we’ll be seeing a substantial decrease in prices in 2013. I know several people in their 20s and 30s who are going to be stuck in a place they thought they would be able to move up from in a few short years, with the help of equity and rising prices. Now, they will be faced with (and some already are) a property that has decreased in value now they owe the bank more than what the property is worth.

  2. pricedoutfornow

    And yet…the government has a vested interest in keeping housing prices high (due to CMHC liabilities)-but they are caught between a rock and a hard place-Canadians have way too much debt, yet if people stop buying houses and prices fall, the taxpayer will be on the hook for a huge amount. I’m not sure how they can really prevent prices from falling though, since they’ve already cut the amortization period, got rid of zero downpayments etc etc. Interest rates can’t go any lower. How can they stop this train wreck? Some suggest the government may have some further tricks up their sleeve, but I personally doubt it. The market will fall, regardless of what they government does (unless they do something incredibly drastic we don’t expect). I hope not though, this market needs a serious correction, for the sake of the future economy of Canada.

    • UBCghettodweller

      Anyone care to speculate what these other tricks might be other than changing the amortization period (again)?

    • The government can always push more air into the housing balloon, e.g. with grants, rebates, financing, or insurance. The problem is that the economy adapts. Subsidies produce growth that is not self-sustaining so at some point it has to stop. The question is where does it stop, because a lot of us thought it would stop in 2008, with house prices at historic extremes. We have gone way beyond that now, and the economy has adapted to become entirely dependent on housing activity.

      Almost every point of GDP growth since the recession can be traced to housing or home equity withdrawal. We have a false economy built on inflated house prices and rapidly growing household debt. Of course it could continue to get worse – look at China for example.

      Whatever the outcome, Canada’s economic performance depends on fair market prices. Housing is the largest investment and expense of the middle class, and government policy has severely damaged the economic prospects of an entire generation.

  3. The governments in the USA, Ireland, Spain, the UK, etc all had a vested interest in keeping the housing bubble going, yet they all failed. So why is it going to be different here? By dropping interest rates to the lowest level in history, allowing banks to survive by allowing outright lying about asset values, and in many jurisdictions becoming the only lender they really tried (something like 90% of new lending in the US are government backed), and a temporary floor appears to have been found in some areas, but I believe that is only a stopgap measure.

  4. The Globe saved some zinger articles for the Xmas break.

  5. While reading the anecdotes above, a mental red light started flashing upon seeing the word ‘boyfriend’. I didn’t even have to click on the link to the original article to see that my concern was legitimate. Ms. Egerton and her boyfriend did, indeed, split up. Unless you’ve made some legal commitment to each other, buying a house with your boyfriend (or girlfriend) is not a good idea.

    This anecdote makes me think of the famous desert scene in Casino where Joe Pesci lays into Robert DeNiro. I can see somebody having a similar conversation with Ms. Egerton, forcefully informing her of all of the reasons that buying under those conditions was financial suicide. In the middle of the diatribe, I can just hear the words, to paraphrase Pesci (at the 1:42 mark of the added video clip): “…and what the f$&% are you doin’ buyin’ a condo with your boyfriend, anyhow?!?”

  6. Hmmm…that didn’t work. What is the code to embed youtube videos within a comment? Thanks. Here’s the link to the Casino clip:

  7. Still waiting for that number vreaa.

    • For those who don’t recall the exchange, JTS is referring to this from a prior thread:

      vreaa: “…the vast majority will end up riding their paper profits all the way down again…”

      JTS: “That’s very interesting, vreaa. Before I get ahead of myself, your assertion requires that you know what price “the vast majority” bought at. Please, tell me what that number is and how you came to it.”

      Actually, no, you don’t need to know any ‘number’, you don’t have to know precisely when people bought, you just have to have a basic understanding of bubble dynamics. It’s like math, or gravity, or the tides.
      Whether people bought decades ago, or whether they bought any time between 2001-2010, they are sitting on paper profits that are imaginary until they cash out. When the spec mania implodes, these ‘profits’ will disappear.
      Sure, there will be a owners who bought their SFH for $4,500 in 1952, or for $18,000 in 1976, or for $350,000 in 1997, but – you know what? – they all believe that their home is now ‘worth’ $1.5M or $2.0M or $2.5M. A few may cash out, but the vast majority will ride the numbers back down to 2003, 2002, 2001 prices. Late buyers (2003-2011) will be devastated. Sure, earlier buyers will still be somewhat ahead (not all that impressive if you account for inflation), but you think that this will make the evaporation of that ‘wealth’ any less painful? No, it won’t. As ‘foremski’ pointed out on the prior thread, they “believe they have ‘earned’ the appreciation”.
      There is no other way this can resolve. They cannot all cash out. Even a relatively small number trying to do so at once (7%? 8%?) is enough to crash the market (spring 2013? 2014?). There is not another greater concentric circle of thousands of buyers with billions of borrowed dollars waiting ready to bail them out. In fact, those buyer ranks are currently very, very thin.
      Thus: “the vast majority will end up riding their paper profits all the way down again”. Just watch.
      If you have another scenario, please, share it.

      • You are being way too nice, vreaa. Everything that can be said about the bubble has been said many times already. J.T.S could easily find a plethora of resources that would explain everything… including real experiences from other bubbles.

      • Yeah, thanks for the guidance; you and jesse (YVRHousing) are correct, should simply let lie.
        It would be useful to have a series of stock discussions/educational material sidebared, and just refer these (tired, old) concerns to them by number. Like the old joke about the comedians’ convention, with guys summarizing old jokes by simply yelling out numbers…

      • “A few may cash out, but the vast majority will ride the numbers back down to 2003, 2002, 2001 prices.”

        When do you expect prices to reach the 2001 point? ( I’m assuming that’s 2001 + inflation ).

      • I don’t think anyone can predict the exact timing. Much like no one really knows if the US Housing Market has “bottomed” — I suspect that it won’t move in unison (like the bubble and early onset of the burst did).

        But, it would probably mirror it’s rise and at the very least you have the data in the US to look at — and even specific markets if you think they are more similar to Vancouver than other places.

        But as bubbly suggested, vreaa is being way nice.

      • 4SlicesofCheese

        Rule of thumb is however long prices started to detach from historic norms to the peak. That is how long it will take to bottom out. Just look at any graph with peaks, they are pretty symmetrical in shape.

    • Real Estate Tsunami

      JTS,
      simple math.
      An asset of $100,000 that has appreciated 100% will only need a depreciation of 50% to revert back to $100,000.
      Time frame is irrelevant, but holding, financing costs are.
      As are the costs of selling the asset, particularly for RE transactions.

  8. Flaherty’s going to get hammered for meddling with CMHC amortization requirements.

  9. Off topic but this comprehensive report is must read for everyone regarding TREB’s manipulation.

    Expert report by Gregory S. Vistnes, Ph.D. PDF Link

    This is why I’ve always warned about believing the boards’ statistics (no matter how honest they seem) and why the market is much worse then it appears.

  10. JTS: “That’s very interesting, vreaa. Before I get ahead of myself, your assertion requires that you know what price “the vast majority” bought at. Please, tell me what that number is and how you came to it.”

    is this just an easy one or a trick question? The vast majority bought at a price much less than current values. So the number is actually not a number, it’s a word, “lower”

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