The Elusive Canadian Housing Bubble

[jarrettvaughan]

The following is a link and abstract of a paper written about the potential of a housing bubble in Canada. Please read and comment.



The cause of the housing bubble associated with the sharp run-up and the subsequent drop in home prices in the US over the period of 1999-2008 has been the focus of significant research attention. Despite numerous similarities, the Canadian housing market escapes the same level of interest, mostly due to the seemingly stable housing prices.
This paper explores the subject of a possible housing bubble in Canada. It examines a diverse array of factors that may have contributed to the rise in house prices in Canada. The paper evaluates each factor individually and determines the health of the Canadian housing market using common valuation techniques.
Results suggest that economic fundamentals in Canada provide little explanation for the Canadian house price dynamics. Market fundamentals have become insignificant in affecting house prices, and the price-momentum conditions characteristic of a bubble now exist. The extreme decoupling of the market prices from the underlying fundamentals suggests an upcoming correction in housing prices in Canada.

http://www.zerohedge.com/sites/default/fil...sing-Bubble.pdf

 

[luckyluciano]

I`ve been selling RE since 1985. We are definitely in a bubble. The main reason we averted some sort of correction like the US and the rest of the world is the loosening of credit by way of the introduction of the 35 and 40 year ammortizations. At first banks were almost embarrassed to recommend them. Now my brokers tell me 90% of the buyers are using the 35 year amm. It has the same effect as lowering rates significantly while keeping the borrower in debt to the Banks for most of their lives. This and this alone is the only reason our real estate snowball is still rolling. Once Canadians have filled their bellies with as much debt as they can swallow, this bubble will deflate or burst as well. This event may be accelerated with the increase in rates which will send our dollar soaring to new heights and destroying our manufacturing sector. This debt bubble is Canada wide and varies from city to city upon competition and average income levels for the respective town or city.

 

[housingrental]

I think the big question is will rates rise significantly soon?
If so, this might happen.
If not, and you can get a mortgage 5 years from now a percent higher, it is hard to see how this can play out.
Would you agree?

QUOTE (luckyluciano @ Mar 22 2010, 07:47 AM) I`ve been selling RE since 1985. We are definitely in a bubble. The main reason we averted some sort of correction like the US and the rest of the world is the loosening of credit by way of the introduction of the 35 and 40 year ammortizations. At first banks were almost embarrassed to recommend them. Now my brokers tell me 90% of the buyers are using the 35 year amm. It has the same effect as lowering rates significantly while keeping the borrower in debt to the Banks for most of their lives. This and this alone is the only reason our real estate snowball is still rolling. Once Canadians have filled their bellies with as much debt as they can swallow, this bubble will deflate or burst as well. This event may be accelerated with the increase in rates which will send our dollar soaring to new heights and destroying our manufacturing sector. This debt bubble is Canada wide and varies from city to city upon competition and average income levels for the respective town or city.

 

[luckyluciano]

Yes, I totally agree. I don`t see how rates can rise by any significant amount givin the high debt levels most Canadians are in plus the soaring loonie. But if history is any indicator, the average 10 year rate for the BOC is over 5% which is quite reasonable and based on this the 5 year fixed could easily end up above that.
QUOTE (housingrental @ Mar 22 2010, 12:57 PM) I think the big question is will rates rise significantly soon? If so, this might happen. If not, and you can get a mortgage 5 years from now a percent higher, it is hard to see how this can play out. Would you agree?

 

[housingrental]

Thanks Lucky

I`m not sure I`m following your perspective though

How do you see a collapse coming if you expect financing costs to move up only slightly over the next few years?

Wouldn`t this call for a somewhat stagnant market - ie prices in 2015 being similar +/- to current levels? ie as incomes (or noi for multi-family) rise offsetting increased financing costs



QUOTE (luckyluciano @ Mar 22 2010, 04:14 PM) Yes, I totally agree. I don`t see how rates can rise by any significant amount givin the high debt levels most Canadians are in plus the soaring loonie. But if history is any indicator, the average 10 year rate for the BOC is over 5% which is quite reasonable and based on this the 5 year fixed could easily end up above that.

 

[Demerara]

I am surprised there are not very many comments about this. I didn`t read the entire paper in detail but scanned through it and there are many interesting points made. There are convincing enough arguments made to say we are in a bubble.

I think the overvaluation in many cities probably can continue for some time but you would think there has to be some give at some point. I am not sure if slowly rising interest rates will have that dramatic of an effect. However, I could see a sharp rise causing a small group some pain.

I have always been surprised by the skewed affordability index but one thing the writer does not discuss is the equity many buyers have when moving to another property so the affordability issue is potentially diminished since the actual mortgage for a high priced property will be offset from the previous property equity down.

While investor properties were not specifically discussed, I think a lot of investors could get caught out when their low rate variables move up to a level that will no longer "cash flow", and I use the term loosely because I know some investors consider cash flow as anything above their LOC interest carrying costs which many have pointed out is foolhardy.

I think a lot of people have made decent money since 2000 (and earlier) and feel real estate has been kind to them and have been maybe a bit complacent about risks. If we have a serious crisis like the US and prices drop significantly I would not be surprised to see a lot of investors get beaten up badly. I am curious to see if many on this board feel there is a significant risk.

 

[wgraham]

QUOTE (Demerara @ Mar 25 2010, 08:44 AM) I am surprised there are not very many comments about this.

I won`t speak for everyone but I for one am tired of the doom and gloom talk and for this reason alone I am not surprised that a paper passionately written by an MBA student isn`t getting more traction on this forum.

Here is a link to the writers linkedin profile Outside of the posted credentials I don`t know that this student has the history or backing to truly talk about what is going on in the real estate market and especially the trenches where it really matters.

I can tell you that my cash flows are better than ever with my variable rate mortgages even with slightly lower rents. Yes rates will rise as the economy gets going but my rents will also rise! My values are on the rise. Lending is getting easier again. vacancy rates are dropping. people are getting jobs and pay increases again! and most importantly Investors are stepping back into the market!!!!

A good friend of mine and junior REIN member pointed this post out to me and asked if I had read it. NO was the answer at the time and truthfully I can`t be bothered to read a 60 page report (please give me a 5 point summery) But I asked him what he thought of it. His answer..... scary. So I asked him what he was going to do about it.....no answer.

You can read this stuff all day long. Believe what you want to......but here is the big difference between rookies and veterans......veterans will make a plan based on their market beliefs and capitalize from it. They are not fixed on past beliefs and make changes as the market changes. Rookies will just be parallelized in fear from not knowing what to believe and not knowing what to do about it.

Happy investing,
Wade

 

[housingrental]

I couldn`t have written my thoughts better than you have

QUOTE (Demerara @ Mar 25 2010, 09:44 AM)
While investor properties were not specifically discussed, I think a lot of investors could get caught out when their low rate variables move up to a level that will no longer "cash flow", and I use the term loosely because I know some investors consider cash flow as anything above their LOC interest carrying costs which many have pointed out is foolhardy.

and have been maybe a bit complacent about risks.

 

[BrianPersaud]

QUOTE (housingrental @ Mar 25 2010, 01:51 PM) I couldn`t have written my thoughts better than you have


Right now sellers are cocky, this reminds me of Edmonton in `06. If this continues past fall...sound the alarm.

 

[Smitty]

Wgraham:
Well said, especially the part about your belief system. Reminds me exactly of Van K Tharp, a psychologist that specializes in stock market traders. You are always investing/trading based on your beliefs.

Veterans/masters of trading, real estate, whatever vehicle you choose know this principle inside and out, create a plan, and act accordingly. Housing bubble or not, its irrelevant to seasoned investors because they are using a system to help them ride out inevitable price and market corrections.

Smitty
QUOTE (wgraham @ Mar 25 2010, 10:11 AM) I won`t speak for everyone but I for one am tired of the doom and gloom talk and for this reason alone I am not surprised that a paper passionately written by an MBA student isn`t getting more traction on this forum.

Here is a link to the writers linkedin profile Outside of the posted credentials I don`t know that this student has the history or backing to truly talk about what is going on in the real estate market and especially the trenches where it really matters.

I can tell you that my cash flows are better than ever with my variable rate mortgages even with slightly lower rents. Yes rates will rise as the economy gets going but my rents will also rise! My values are on the rise. Lending is getting easier again. vacancy rates are dropping. people are getting jobs and pay increases again! and most importantly Investors are stepping back into the market!!!!

A good friend of mine and junior REIN member pointed this post out to me and asked if I had read it. NO was the answer at the time and truthfully I can`t be bothered to read a 60 page report (please give me a 5 point summery) But I asked him what he thought of it. His answer..... scary. So I asked him what he was going to do about it.....no answer.

You can read this stuff all day long. Believe what you want to......but here is the big difference between rookies and veterans......veterans will make a plan based on their market beliefs and capitalize from it. They are not fixed on past beliefs and make changes as the market changes. Rookies will just be parallelized in fear from not knowing what to believe and not knowing what to do about it.

Happy investing,
Wade

 

[DaveRhydderch]

I agree with the sentiments here. I invest in RE and have a long term plan. I do assess the market as a whole, but I can`t worry about everyones opinion out there.

 

[JoeRagona]

This is exactly right Wade, Dave...

I don`t really consider myself a veteren investor, but I sure am not a rookie anymore. Two years ago this sort of thread would have freaked me out and have me second guessing.

It`s why I slowly fly under the radar and stick my plan - adjusting as I go along. I think my JV partners appreciate the calmness I portray when these types of `reports` are released

 

[YehoramShenhar]

Here is another view from a speaker with more credentials. Dannielle Park is experienced money manager that, notably had her clients in cash since 2007 before the bear started. She has been warning for a while of financial trends that points to a housing bubble - http://www.howestreet.com/goldradio/index....ediaplayer/1594.
I appreciate the comments of the veterans above. Also, I know that the above clip talks about the Canadian market as a whole.

I guess the original point in this thread was how to react when multiple economic signs, as well as some experts start to point at problems on the horizon.

 

[EdRenkema]

Read page 7 in March issue of WBC - Ontario members.
The doom and gloom has been predicted over and over throughout time, each recession was the worst ever and was going to be the next `Depression`.
Meanwhile those who had a system-even in the Great Depression stuck to it and became very wealthy.

 

[DaveRhydderch]

QUOTE (YehoramShenhar @ Mar 26 2010, 09:01 PM) I guess the original point in this thread was how to react when multiple economic signs, as well as some experts start to point at problems on the horizon.

The problem is this is always the case. There`s always "economic signs" and experts that point to problems in the horizon. Simply put though, so long as the population is growing and people are working, house prices will go up. This is esp. true in Canada with our conservative practices. And no other investment can offer the returns that real estate can.

Follow the system and the money will take care of itself.