Baby, we got a bubble!?

[Kenny]

This is not suprising. Wages are higher in Toronto than Vancouver and so rents are relatively higher here. To purchase is more in Vancouver but it is 11x average wage vs. 7x or so in Toronto. Rents are lower there than in TO.

However, rents have not been rising as others are pointing out very much here either.

I would also argue that there's probably an increase in the proportion of luxury rental properties in Toronto (citation needed). Renting one of those fancy new condos downtown is a lot more expensive than renting an apartment. With worsening traffic problems, more people are deciding to live nearer to work, creating a bump in demand for floor to ceiling windows and granite counter tops, because if you're givin' up living in the 'burbs, you may as well do it in style.

 

[KA1]

There was an interesting debate this Monday on The Agenda on TVO ...

The Case Against Home Ownership
http://www.tvo.org/cfmx/tvoorg/theagenda/
(See show for Monday July 11)

I just got off watching this TVO program. My observations are as follows:

-owning a house is not for everybody
-more and more seniors are selling their houses -- mainly in suburbs-- and moving into condos in the inner cities
-more and more individuals -- of all ages -- are tired of long commutes between work and residence and are moving into dense inner cities where they can walk to various amenties
-various figures have been quoted about the % of renters versus home owners in various countries

My conclusions are as follows:

-since more and more individuals are/want to move to inner cities, prices in the inner cities will rise faster than those in the suburbans
- if you can afford a hefty downpayment, not 5/10/20% but close to 40/50%, then buy an investment property -- mainly in the inner cities or downtown/coredowntown for rental purposes. With close to 40/50% downpayment, rent should cover balance of the mortgage payments and carrying charges. Rental segment of the market is going to increase.

And if there is any bubble burst, it will affect only those who bought property with the bare minimum downpayment.

I fully expect 'bears' to pounce upon my post

 

[Kenny]

I
- if you can afford a hefty downpayment, not 5/10/20% but close to 40/50%, then buy an investment property -- mainly in the inner cities or downtown/coredowntown for rental purposes.

Not sure why you would put such a large downpayment. Interest rates are low enough that you could easily make more in stocks/bonds/etc. If rates do rise, you can always pay down your principle later. If the bubble bursts, you'll be glad you diversified your assets.

 

[cdr108]

today, uncle bennie has stated that the US central bank is examining several untested means to stimulate growth if conditions deteriorate.

i guess our R/E bubble will continue for awhile longer.

http://www.marketwatch.com/story/fed-weighing-further-easing-bernanke-says-2011-07-13

Fed weighing further easing, Bernanke says
Calls study ‘prudent planning’


....

Three approaches

Bernanke discussed three approaches to further easing in his prepared remarks.

One option, Bernanke said, would be for the Fed to provide more “explicit guidance†to the pledge that rates will stay low for “an extended period.â€

Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to “increase the average maturity of our holdings.â€

Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, “thereby putting downward pressure on short-term rates more generally.â€

“Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs,†Bernanke said.

Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.

The broad consensus of Fed watchers has been for the Fed to hold rates steady until the middle of next year and then begin to exit from its ultra-low policy. Only a few economists had predicted an easing. But that was before the June unemployment report, which showed the labor market was just about dead in the water.

 

[klb86]

Housing prices to drop over next two years: TD

OTTAWA — Canada’s housing market is set to undergo a “modest” correction, with resale activity poised to drop 15.2% and average prices likely to fall 10.2% over the next two calendar years, according to a report released by TD Economics Wednesday.


“A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first-time home buyers are expected to be the chief culprits behind the slowdown,” said the report, prepared by deputy chief economist Derek Burleton and economist Sonya Gulati.


But the national numbers will hide considerable regional differences, they added.


Vancouver, which they describe as “the poster child for those individuals worried about a real estate bubble here in Canada,” is destined for a thumping 25.4% peak-to-trough decline in sales activity and a 14.8% drop in prices.


Toronto will also be among the hardest hit. Burleton and Gulati expect a gradual correction in sales on the order of 25% over the next seven to eight quarters and a price decline of 11.7%, “as the number of first-time home buyers and investors settle back down to more normal levels.”


Prospects are “considerably better” for housing markets in Calgary, Edmonton and Regina, the report said, although it cautioned that means price and sales activity declines will merely be less pronounced.


In Calgary, sales are expected to decline 8.8% from peak to trough over the two-year outlook and prices are expected to dip 6.4%.


In Edmonton, sales are expected to drop 9.5% from peak to bottom and prices to fall 6.6%.


In Regina, sales are forecast to edge down 3.8% and prices by 6.1%.


In the immediate future, TD expects demand to be supportive and that the brunt of the adjustment will take place in 2012 and 2013.


Over the forecast period, the report said the market will be constrained by national economic growth that is expected to slow from 2.8% in 2011 to 2.3% in 2012 and 1.9% in 2013.


As well, personal disposable income will remain subdued, while job creation is anticipated to slow from 1.7% in 2011 to 1.2% over 2012-13.


“With the forecast growth performances below historical trends, economic activity should not generate enough momentum to sustain above average price and sales gains,” Burleton and Gulati wrote.


One of the key reasons is rising interest rates. TD expects the Bank of Canada to resume tightening of credit conditions in January 2012 and lift its key lending rate to two per cent from the current one per cent in 2012. In 2013, rates are expected to rise another full percentage point.


As well, tighter mortgage rules will further exacerbate the erosion in home affordability caused by rising rates and chase many first-time buyers out of the market.


By 2013, the average resale home will be priced at $334,000, while sales activity will average 416,400 units.


Canada Mortgage and Housing Corporation said Tuesday that housing starts are also expected to slow in the months ahead, as new home construction moves back to align itself with demographics.

And a similar article from the globe and mail:

Vancouver, Toronto to feel brunt as home prices fall: TD

House prices to drop
Toronto-Dominion Bank economists expect existing home sales to sink 15.2 per cent, and average prices 10.2 per cent, over the next two years, in what they see as a "moderate correction" in Canada's real estate industry. Those projections compare to the first quarter of this year.

Vancouver and Toronto will see "a more significant cool down," though Calgary and Edmonton will outperform, Derek Burleton and Sonya Gulati said in a report today.

"A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first-time home buyers are expected to be the chief culprits behind the slowdown," they said.

"With most of these drivers expected to remain supportive to housing demand in the very near term, we anticipate that the brunt of this adjustment will take place in 2012 and into 2013."

But the national picture, they added, masks the regional differences in the 12 major centres they studied.

"Vancouver and Toronto look poised for larger-than-average declines over the next few years, reflecting in part their exposure to the condominium segment, which appears particularly ripe for a correction," the TD economists said.

"At the other end of the spectrum, prospects are considerably better for housing markets in Calgary, Edmonton and Regina. Still, no market is likely to experience a housing boom over the medium term."

 

[ducati0000]

Why would a bank continue to issue loans for property if they feel the loan is worth more than the property?..again its trying to slow down the pace of a stable real estate market and it not because people cant afford it or the property is overpriced,if it was overprice banks would want more downpayment.The banks already made it tough to borrow with %20 down and you must have a clean credit abstract,meaning stable job and good credit.The place I see a bubble is Vancouver where good jobs for regular workers are hard to find and the pay isnt that great,in Toronto the financial hub of Canada with the largest population a $350,000 condo is not unreachable for a person making $55000 a year.I predict a slow down on sellers if prices arent rising at good pace but lack of listings means those who are selling will probably get the price they are asking for.The market wont contract %20 it be a slower climb upwards until the US gets back on its feet.

 

[dlam]

To add to that, TD is currently giving mortgages with no checking if you put down 35%. I hear Scotiabank is doing that too soon.

Thoughts?

 

[Kenny]

Why would a bank continue to issue loans for property if they feel the loan is worth more than the property?

Why not? What do banks care what the property is worth if the client can pay the loan?

 

[Torontotony]

To add to that, TD is currently giving mortgages with no checking if you put down 35%. I hear Scotiabank is doing that too soon.

Thoughts?

Both TD and Scotia have had an equity lending policy in place for years. It's not, however, as cut and dry as suggested. There are minimum credit score requirements, and there is a reasonability test for declared income (ie. is it reasonable for a line cook to earn $100k/year?). The programs were mainly designed for individuals who have difficulty in proving their actual income, but have been selectively offered to the general masses (provided the borrower meets minimum lending criteria).

For the record, this program has been very successful not only for TDCT and Scotia, but also other lenders who have similar policies. Also, delinquencies on such loans are exceptionally low, (probably because the minimum credit requirements are more stringent).

 

[ducati0000]

Why not? What do banks care what the property is worth if the client can pay the loan?

because if the loan worth more than the property and if a correction is real they be holding a property value less than the loan.Banks dont lend money out unless they are promised a profit on a property if the borrower defaults.If a property is valued by the bank at $500,000 you think they would give you a loan at $500,000?...they will give you $450,000 loan and the rest as a safety net if the market corrects.

 

[Torontotony]

because if the loan worth more than the property and if a correction is real they be holding a property value less than the loan.Banks dont lend money out unless they are promised a profit on a property if the borrower defaults.If a property is valued by the bank at $500,000 you think they would give you a loan at $500,000?...they will give you $450,000 loan and the rest as a safety net if the market corrects.

Your point is somewhat correct, however lenders do not make a profit on property, they make it on loan interest and ancillary charges for other products and services. The 10% buffer you refer to is not a safety net for the lender, rather the insurer.

Lending on the premise that a market is going to correct or increase in value, does not make for good lending policy, so lenders don't do it. Rather, every loan/mortgage, whether it is written to purchase a condo or a mutual fund is based on the current borrower profile and the current value of the security offered (not the future value).

 

[cdr108]

Why would a bank continue to issue loans for property if they feel the loan is worth more than the property?..again its trying to slow down the pace of a stable real estate market and it not because people cant afford it or the property is overpriced,if it was overprice banks would want more downpayment.The banks already made it tough to borrow with %20 down and you must have a clean credit abstract,meaning stable job and good credit.The place I see a bubble is Vancouver where good jobs for regular workers are hard to find and the pay isnt that great,in Toronto the financial hub of Canada with the largest population a $350,000 condo is not unreachable for a person making $55000 a year.I predict a slow down on sellers if prices arent rising at good pace but lack of listings means those who are selling will probably get the price they are asking for.The market wont contract %20 it be a slower climb upwards until the US gets back on its feet.

$350,000 / $55000 = 6.36x income ... which probably gets one 550-600 sq ft condo and only 'affordable' based on monthly payments tied to historical low variable rate interest of 2.5 %.

6.36x income is 82% above historical norm of 3.5x income.

i hope you're not overly leveraged

because if the loan worth more than the property and if a correction is real they be holding a property value less than the loan.Banks dont lend money out unless they are promised a profit on a property if the borrower defaults.If a property is valued by the bank at $500,000 you think they would give you a loan at $500,000?...they will give you $450,000 loan and the rest as a safety net if the market corrects.

if the property is CMHC insured, the bank doesn't have any skin in the game.
any loss will be covered by CMHC, then CMHC will go after the borrower.

if the property has at least 25% dp and the borrower defaults, ideally the property be sold for at least the loan.
however, if there is a deficit, the bank will go after the borrower and legal costs.
unlike the US, most Canadian jurisdictions do not have non-recourse loans.

btw, the banks profit is based on the interest you pay throughout the amortization.
they LOVE people who take the longer term mortgages of 30-, 35-, + years and don't accelerate the payments.
one ends up paying 50% more interest just for the extra 10 years ... YAHOO ! $$$$$$

 

[wang888]

YOU HEARD HERE FIRST, real estate crash 2012 in toronto, APRIL 2012 is the date of a 25% crash

 

[EXgeMMy]

because if the loan worth more than the property and if a correction is real they be holding a property value less than the loan.Banks dont lend money out unless they are promised a profit on a property if the borrower defaults.If a property is valued by the bank at $500,000 you think they would give you a loan at $500,000?...they will give you $450,000 loan and the rest as a safety net if the market corrects.

I'm pretty sure banks don't care about a correction if the loans are insured by CMHC

 

[ducati0000]

CHMC is needed for less than %20 down...what about those who put more than %20...again experts were wrong about this year correction,they were wrong about 2009 correction.I not naive to think prices will continue to rise like they did the last three years but a major correction?.I bet it be a flatline price increase for 2012 but with less inventory on the market there be more buyers than sellers.GTA vacancy is %1.8 and falling,this is not a sign of being over built,its a sign that good rental properties are harder to find in the core of the city.