Baby, we got a bubble!?

[Eug]

What are the averages for interest rates anyway?

I think in the last 15 years, excluding the last 2 years, it's more like 6-7% average for a 5-year fixed. It's higher if you include the 80s, when interest rates were in the mid-teens. However, those are just ballpark numbers. I don't know exactly.

I'd been thinking we could realistically see the 5-year fixed in the 6-7% range in 2015, but I'd be surprised if it's hugely higher than 7%, unless the economy really takes off.

 

[interested]

I would agree with you Eug.

In 1981, interest rates were 20% We had stagflation. Real estate was flat or down from the late 70's.
In 1987, interest rates peaked at about 13%
In the early 1990's 7% was enough to squash the economic recovery.
In the 2000's, they were even less to their present exceeding low rates.

I believe that governments will not allow (if at all possible ) interest rates in the 13 or 20% range again. They will act before and the economy seems to have been choked off at lower at lower points on the interest rate scale. So I don't think your 6% or 7% is off because I would expect the economy to weaken again if we see those rates. By the same token, current rates are simply not sustainable either and at some point, the bond market will demand more interest and hence mortgages will rise back to more historical levels.

1 additional point. We are essentially as low as we can be with interest rates now (at 50 year lows) so the only direction is up. People must remember and realize that the 30 year bull market for bonds in which bond prices rose as interest rates were dropping is now over, unless interest rates stay where they are. We better hope that is not the case because it would indicate that the bond market has lost confidence in a recovery. Not a good thing for the economy as a whole, let alone real estate prices which would have no reason to increase because if the economy is bad, why bid up the price of assets?

 

[lafard]

Interest rates are a gigantic question mark.

A very large proportion of the recent economic "rebound" was driven by money spun off the real estate bounceback. If it recorrects, either intrinsically due to stricter rules or higher rates, or for extrinsic factors (ie, cyclical variations, people just "debted out") then that money driving the recovery will disappear, which will cause a second dip and necessitate dropping rates again.

I'm still a real estate bear, but the Feds are as aware as we are that if it does go down, we're going back into recession no ifs, ands, or buts. That's why they keep warning over debt. That's one reason why there's sabre-rattling over a federal election even though the polling numbers are not great for Harper; if there is a double dip his current term will end before the secondary recession ends and he doesn't want to face the electorate in such a situation. Even if it's a minority mandate, he will get the election out of the way while times are still relatively good.

I think rates will stay low for a while. They can't jack it up because it'll collapse housing and the larger economy. You can sort of see that they're kind of between a rock and a hard place now.

 

[interested]

Rates will have to go up somewhat. That is clear.
However Lafard, as you point out, it will be limited by the state of the economy.

The next step at the first sign of recovery will be to start to deleverage all the world quantitative easing.

This is not going to be easy for the US, Britain or Europe to do.

China added alot to its economy and now has 5% inflation. India 8%. Brazil I believe is also quite high.

So those Bric countries that are growing are going to have to reign in their economies somewhat before inflation overheats totally.

The trouble is the Western Industrialized countries are relying on the emerging markets to bring them out of recession.

So if these countries slow down, this does not bode will for the Western Industrialized countries. That said, I don't see how one can be bullish about real estate right now. It is frankly only being supported by ultra low interest rates.

I come back to my point previously made. If the economy does really well, interest rates go up and put a lid on real estate appreciation and possibly cause it to stall or alternatively drop. If the economy does poorly, no reason for real estate to appreciate.
So, we need a Cinderella story as far as I can see. Slow steady recovery with confidence of the bond market to raise prices slightly, consumers to recover, BRIC countries to bring their economies under control without rampant inflation, and job creation all the while removing all the Qantitative Easing that has been put in.

I am sorry, I am not a pessimist but I also don't see the World through Rose coloured glasses. The likelihood of a Cinderella story I would rate at less than 25%, and the chance that something goes wrong, that governments don't get it right, or there is another shock awaiting, or that we just flounder along at 75%.

So, I still don't believe we will see a crash but I do believe we will see an adjusment down, though not necessarily 25% (but within the realm of possible) but more likely 10-15% drop back to 2008 levels. Just my best guess and it is just that, a guess.

 

[Eug]

So, I still don't believe we will see a crash but I do believe we will see an adjusment down, though not necessarily 25% (but within the realm of possible) but more likely 10-15% drop back to 2008 levels.

At the low point of 2008, Teranet`s house price index was 111.67 (Dec. 2008). In Oct. 2010 it was 124.85. That`s a 10.6% drop.

Yeah, I could see that happening.

 

[Bloor West Villager]

The rumours are true - some new changes are coming:

Government to introduce new mortgage rules

CTV.ca News Staff

Updated: Sun. Jan. 16 2011 9:56 PM ET

Finance Minister Jim Flaherty is expected to introduce new regulations on Monday designed to reduce Canadians' skyrocketing household debt levels.

Flaherty will announce the new measures at a news conference scheduled for 8 a.m., before North American markets open.

CTV News has learned that Flaherty will unveil three new rules:

Mortgage amortization periods will be reduced to 30 years from 35 years.
The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from the current 90 per cent.
The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.
According to a government official, the rules are aimed "at encouraging responsible lending and borrowing and encouraging people to increase their home equity."

"The rules are designed to significantly reduce interest payments to help Canadians get rid of their mortgages before they retire," CTV's Ottawa Bureau Chief Robert Fife reported Sunday evening.

The new rules comes on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens had hit the highest levels on record. The bank said earlier this month that the ratio of household debt to disposable income has reached 147 per cent.

Canadian household debt is now at $1.4 trillion, while mortgage delay payments have increased by 50 per cent," Fife said.

"In fact, the International Monetary Fund says household debt is the number one risk to the Canadian economy."

http://www.ctv.ca/CTVNews/Canada/20110116/mortgage-rules-110116/

 

[Eug]

Mortgage amortization periods will be reduced to 30 years from 35 years.
The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from the current 90 per cent.
The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

No change in the condo fee calculation?
No increase in the minimum down payment?

If not, that's less of a change than even I was expecting.

 

[EXgeMMy]

they really should have increased the down payment to at least 7%. I would have liked to see condo fees go up to 100% for calculations also.

Didn't Flaherty learn from last time that these gentle changes don't really do anything.

 

[interested]

He did increase refinance changes to 85%.
I guess he accepted Eug that first time buyers can't muster more than the 5% changes.

Not increasing the condo fees, disappointing.

Remember, I am sure Flaherty was under tremendous pressure from a real estate and development industry with deep pockets. As well, I don't believe politically he could do more without risking fallout from people upset that they could not get in the market.

By doing small steps, he is continuing the slow message of watching out.

The thing to note is that they always say mortgage default in Canada is very low and this is very true but a 50% increase in mortgage delay of payments cannot be ignored. further add that to almost certain interest rate hikes and he has to do something.

I think you will see him progress in steps, small ones as we keep going. Remember, the devil is always in the details. This was a news headline. Let's wait and see if there may be more than what CTV learned last night. This may be the high lites only. If that is all they did, I agree with Eug that I am disappointed they did not do more because that would have been the responsible thing to do in my opinion.

 

[interested]

http://www.theglobeandmail.com/repo...ty-details-new-mortgage-rules/article1872599/

Further info regarding this. Does not appear to say anything more. Except that the mortgage industry did pursuade him not to increase the 5% down.

There is 60 days before this happens. I wonder if this will have the effect on entry level to get alot of people to rush in again and support the prices if not increase them over the next few months.

 

[interested]

http://www.theglobeandmail.com/glob.../new-mortgage-rules-will-bite/article1872711/

One more article. What is interesting is that 95% of first time buyers according to this mortgage broker are going for 35 year terms and 5% down.

I think this is exactly the home buyer I was referring to who concerned me. Young inexperienced and potentially saddling themselves with an albatross around their neck if there is any significant market correction for potentially decades to come. Remember in Canada, one cannot walk away from their non recourse mortgage as happened in the US but that also means that short of declaring bankrupsy, or getting creditors to agree to a restructuring, the house under water in Canada is a continuing burden. Those most at risk obviously will be those with the lowest down payment and the longest amortization, as they have the least flexibility to alter their mortgage to more favourable terms.

The fact that Flaherty moved before the budget shows how concerned he is. I think we will hear some minor noise but none of the opposition will say anything because I believe that most thinking rational people realize this is a sensible thing to do. We can argue whether it is enough but I don't think anyone will argue that something needs/needed to be done.

 

[Eug]

BTW it will be interesting to see what will happen with those buyers with marginal finances with 40 year amortizations from the mid 2000s. Their terms are ending now. They will only be able to renew with 30-year amortizations. A increase in the supply of condos in the next year or two, as these marginal owners sell?

P.S. I see around the net some complaining that the change from 90% to 85% for refis penalizes those with high credit card debt. Well, maybe, but if someone needs to refi to 90% just to cover credit card bills, then there's a much bigger problem there IMO.

 

[cdr108]

too little, too late IMO.

loosening the standards to 0% DP/40-year amortizations was a huge mistake,
and they already had the opportunity to bring it back in line to increase DP requirement to 10% minimum and shortening amortizations to 30 years,
yet they've caved in again to industry lobbying and political fear of not getting re-elected than doing the right thing.

refinancing limits decreased from 90% to 85% is still excessive .. it should be 75% maximum so CMHC doesn't have to provide insurance and banks take responsibility for their lending, and owners stop treating this speculative equity as an ATM similar to what occurred in the US.
who says we're different than US is delusional.

 

[interested]

My guess is it is political reality for the Harper Government. Try and get through to the next election and hope the whole thing does not implode until then.
I think they will continue similar smaller steps but likely not until next year.
I suspect that if they got refinancing limits to 80%, they would stop.
I think they need to raise the 5% downpayment. That worries me more than the refinancing issues though that needs to be reassessed.

In fairness, and I don't approve of using your house as an ATM, but it makes sense to increase your house mortgage if you eliminate credit card debt which is much more expensive. The problem is that people are doing both and extending themselves further.

 

[cdr108]

In fairness, and I don't approve of using your house as an ATM, but it makes sense to increase your house mortgage if you eliminate credit card debt which is much more expensive. The problem is that people are doing both and extending themselves further.

that would be the prudent move; however, as you've stated, once the CC debt is brought down, they continue with the spending spree.

these are habits people typically cannot/will not control by themselves unless forced to.

i don't believe we should live in a nanny state; however, if Canadians cannot learn from what has been happening around them world-wide for the past 4 years, then something must be done ASAP.