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Baby, we got a bubble!?

I find this an interesting comment. I say this as developers and real estate representatives rely on the sale to investors to get the buildings going. It is often easier to sell to an investor since the investor usually knows what he/she wants and presumably divorces emotions more than a buyer who may tend to be alot for finicky since it is a place they will live in. More work I would think for the agent selling the property.

Big difference between the investor at the beginning of the line who has purchased 1 or more units in most of your buildings; and an investor that is late to the show with this as their first major investment.

The second type, casual investor, is far more likely to dump and run if things get hairy.
 
I think that we should thank investors who are buying to hold product in the medium to long term, as opposed to those who flip for profit early in the cycle. These investors are adding to the long outdated rental stock in our city.
 
I think that we should thank investors who are buying to hold product in the medium to long term, as opposed to those who flip for profit early in the cycle. These investors are adding to the long outdated rental stock in our city.

agree. In the mid to longer term this keeps rents down and ultimately will slow/reverse the price growth as the excess product will shift the balance of power to the renters/buyers. Prices therefore should be expected at least to slow if not reverse course in the next year or two as this product comes on line and expenses increase. That said, the present frenzy of bidding wars and inflated prices ultimately hurts alot of buyers who buy "too high" and ultimately "investors" whose investment decreases in value as well as other owners as since they make money "on paper" as it increases, the moment they sell the next property they buy is at an inflated price as well. The concern is those financially weak "late in and/or speculators" who buy solely for price appreciation with no intention or ability to stay in the game(as landlords) for the mid term without high rents to justify the costs which are presently quite high if not overinflated as they may be forced to potentially sell at distressed prices creating a non orderly/rapid deflation of the bubble(if there is a bubble).
 
Yeah, I read that this morning, too. To my surprise, the language Flaherty is using suggests possibly a more somewhat aggressive approach than my suggestion of 10% down or a 30-year amortization period. Flaherty is hinting at both:

Flaherty says the new measures would target consumers “who are taking on obligations that they will not be able to handle in the future when the interest rates do rise.”

He says the likely measures the government will take is to increase the size of the down payment from 5 per cent “to a higher figure” and to reduce the amortization period “from a maximum of 35 years to something less.”
 
I could use a history lesson...

How long have 30 and 35 year amortizations been in place?

How long have minimum downpayments been at 5%?

If perhaps at one time amortizations were no longer than 25 years and downpayments were higher then perhaps during that period in time fundamentals were in place and that's where we should return to.
 
40 year amortizations were only available for about a year and a half or something, and ended in late 2008.

5% down has been around for a very long time.
 
I could use a history lesson...

How long have 30 and 35 year amortizations been in place?

How long have minimum downpayments been at 5%?

If perhaps at one time amortizations were no longer than 25 years and downpayments were higher then perhaps during that period in time fundamentals were in place and that's where we should return to.


google is your friend :D


CMHC announced in February 2006 a 4-month pilot project to extend the maximum amortization period from 25 to 30 years; then in June 2006 further extended the period up to 35 years.

http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2006/2006-06-28-1400.cfm


In 1999, the National Housing Act and the Canada Mortgage and Housing Corporation Act were modified, allowing for the introduction of a 5% down payment - a change launched as a five-year pilot in 1990, extended and finalized in 1999.

http://www.cmhc-schl.gc.ca/en/corp/about/hi/index.cfm
 
If the government does address both issues it will definitely create a big "popping" sound in Toronto's condo market. Say goodbye to $600+/ft for non luxury properties in the core.
 
google is your friend :D


CMHC announced in February 2006 a 4-month pilot project to extend the maximum amortization period from 25 to 30 years; then in June 2006 further extended the period up to 35 years.

http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2006/2006-06-28-1400.cfm


In 1999, the National Housing Act and the Canada Mortgage and Housing Corporation Act were modified, allowing for the introduction of a 5% down payment - a change launched as a five-year pilot in 1990, extended and finalized in 1999.

http://www.cmhc-schl.gc.ca/en/corp/about/hi/index.cfm

Thanks cdr. It's interesting to look at that timing. No doubt, the CMHC was influenced by the rising popularity of riskier mortgage practices in the States. Thankfully they didn't go nearly as wide open as they did down south. Hopefully they tighten it up even more - although I have to say that out of the two possibilities for controlling the housing market, I think reducing the maximum amortization rate would have the best effect on keeping people within their limits. Obviously having a sizeable down payment is ideal, but if people have 5% down at a reasonable amortization rate, it would likely eliminate most of the risk.

On a related note, is CMHC very much like Freddie Mac is in the states? If defaults get way out of control like they did in the states, could it become insolvent?
 
I think there is some resilience left in the housing market. However, it seems more and more likely that a confluence of small events will put real stress on the market even if interest rates are raised in a tentative manner.

2010 will be an interesting year. History would tend to suggest we would have to wait until 2011 to experience the most trying year for real estate and development. I am still of the mind that the trough portion of this real estate cycle will be very long and drawn out, meaning it could be even later than that.
 
With this market being driven by first-time buyers according to all the experts, any change in amortization/dp would affect them the most. This could put serious strain on smaller 1b and 1b+den condos just when 1000's are coming available, although in the short term - while people are panicking, it will actually add to the current frenzy. If the gov't takes action within the next couple of months and institutes the changes effective immediately, it'll be a fast drop and we might not have to wait until later in 2010/early 2011 to see the effect. I can't see them waiting on the BoC to raise rates because long term mortgages aren't connected to them in any significant way and most of the new mortgages have been taken out on longer terms.
 
I think this could be a disaster if the government ends up doing this and enacting it at this time. Not because I don't think that it is a good idea, on the contrary I think it is but this is the wrong time to do it. Imagine what will happen to all of the people sitting on the fence that have let's say a 5-9% downpayment and are pondering getting into the real estate game. What's going to happen is a feeding frenzy, the likes we haven't seen before in the coming year. All those wanting to get in before the downpayment and amortization period regulation are going to "get in" before they are priced out of the market. This will in turn drive up prices even further, and perhaps prompt first time buyers (most vulnerable) to purchase at a higher price point when they otherwise wouldn't, and definitely affect them the most. For the seasoned investor this will not have a huge impact, but for the thousands and thousands of first time buyers....it definitely will. I say wait until the market cools and inventory goes up, basically a balance in the market place and then take the necessary steps for a long-term solution....not a short-term one with near sightedness that can inflate the so called "bubble" even further if there is one.
 
Currently, it is not. But by the end of 2010, it will certainly be way oversupplied. There have only been 3000 condo completions in the last 19 months in the Toronto Core, but over the next 17 months there will be 15 000! That is a 1000% increase....and it could get worse. If 30% of those condos are investor owned (a very conservative estimate) that's a lot of rental units, plus, many people moving into these condos are already renting condos - sometimes a couple - each renting a separate condo and then moving in together into another, thus opening up 2 condo's for the one built form.

Also, rents are currently 35% below where they should be to generate a decent (8%) return from an investment perspective. This leads me to believe that prices are overinflated.

I've put my money where my mouth is and sold my condo in May in order to lock in the equity. It's true that if I'd waited until now, I probably could have made another $10 000, but I was looking at a time horizon of needing the cash for another condo that will be completed by Nov 2010. At this point I expect there to be a correction in full swing. Especially amongst smaller units.

A couple other things to think about, and I apologize if anyone has read another post of mine that mentioned this. Until about 3 years ago, when you purchased a condo, you paid the market price for that unit as if you were buying it right then. You buy in August of 2006, you pay August 2006 market price - even if it won't be ready until 2011. You, not the builder, take the RE risk and hope that when it's finished you see an appreciation. The possibility for an upside is definitely there. Now, when you buy pre-construction, you are being asked to pay not what the unit is worth now, but a theoretical price that it will be worth when completed. The builders have removed any incentive for RE risk and taken all the presumptive appreciation for themselves. Costs for building are lower now than they were in 2006, but developers are charging 2x the price for the same stuff. New condo sales are still down 40% and while we hear of a recent surge, the fact is, very few properties have been launched over the past 12 months so the surge is happening in a much smaller market which might make it sound bigger.

I've totally flipped sides and while for the past 6 years I was big big big on condos and argued as much using the whole demographic change, the shift from actually wanting house to desiring a condo, immigation, etc. I think these new realities are not enough to counter the low interest rates/skyrocketing availability/high debt load problem, and we're in for a rude awakening that's going to start in about April.

Ben Myers from Urbanation was on the show earlier and he put a slide on showing there was always a premium paid on pre-construction condos since they tracked numbers.

I'll have CMHC on the show wednesday 8:30p (on RogesTV) to go over their recent rental market survey and analysis on where they think the market will go. It should be eye opening to all.
 

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