# What do you think of this article?



## KaeJS (Sep 28, 2010)

http://www.theglobeandmail.com/repo...-housing-correction-in-canada/article1979229/

It seems a bit aggressive and biased. I agree housing prices are a bit high, but to no extent do I see a huge correction that will affect the canadian economy.

I feel that the housing market flatlining is more probable than a steep decline.


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## Four Pillars (Apr 5, 2009)

It's just speculation (which doesn't mean he's wrong).

The only argument he gives is the ratio of house prices to income which is higher than the historical average. 

Well guess what - interest rates are lower than the historical average, which means that the average income can borrow more money, which leads to higher house prices.

If I may extend his argument - if interest rates go up enough, then house prices will go down. 

That's my prediction.


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## marina628 (Dec 14, 2010)

I believe external factors are also affecting our housing prices .My friend is from Pakistan and came here about 17 years ago with $300,000 cash.
She has a Brother in Holland who is a multi millionaire and has bought a couple properties for cash.Her sister lives in London England with pockets of cash and considering doing the same.

I know many people who look down on immigrants and consider them lower than us but the fact is their extended family customs have made their household incomes much higher than our average 1-2 income households.Supply and demand will always have a factor in the housing Market and I REALLY think an argument can be made that both sides are correct.
Housing is getting our of reach by many Canadian families but there are investors from outside our country coming in and buying every day.
I grew up in small town Newfoundland from 'around the bay' .There are more people coming in buying from Switzerland ,Norway and UK than retired Newfoundlanders moving back home.My sister paid $10,000 for a 8 year old bungalow in 1986 because there was no jobs and the people moved away.A home of same size as hers sold for $90,000 3 years ago then the people invested $200,000 renovating it .They are from Norway and keep talking about what a deal they got.
Look around Atlantic Canada and you will find many Europeans investing there.They look at our house prices in Toronto ,Vancouver etc and say holy crap these are cheap I will take two !
I went to London in January 2010 and went to my friends 'flat' ,we put our luggage in the space in hallway and the place was full.She paid about $700,000 CAD for 2 bedroom 1 bath with kitchen/livingroom /dining being about total 140 sq ft.The bedrooms had double beds and there was about two ft of space between bed and wall.My husband reached out in middle of night and open the door without taking off his cpac mask or sitting up,I am dead serious.


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## olivaw (Nov 21, 2010)

I don't know if the author's prediction is right or wrong but the most compelling argument in the article is given in the quote below. Historical figures may be a good indicator that we are in a potential bubble. 


> Home prices are simply way out of line, especially when viewed in relation to household income. The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5. It is difficult to see how income growth in the future can bring this ratio close to the historical average within any reasonable period – so it follows that house prices will have to decline.


What will happen if baby boomers all try to sell our high priced homes at the same time?


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## KaeJS (Sep 28, 2010)

olivaw said:


> What will happen if baby boomers all try to sell our high priced homes at the same time?


Then first time home buyers like me will get good deals


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## andrewf (Mar 1, 2010)

I will admit, watch-outs for me are whenever people start using words like 'soft-landing'. That's usually an attempt to manage panic. Once you get into that soft-landing phase, people frequently panic and dump their positions. I'm not sure how much distressed selling there will be as it seems most Canadians have quite a bit of equity in their homes. What seems likely is that servicing debt loads will eat up large portions of income as rates rise and people may need to downsize to repay their debts, or have a hard time moving up the ladder. This subdued demand might cause a correction, too.

I'm building up a downpayment and I'll keep it in a diversified portfolio for the next two years. I'll see what things look like then. Prices seem pretty out to lunch to me in my area. It's pretty pathetic what 3.5x my income buys me around here, and in the meantime, renting is way cheaper than owning. The risk/reward isn't there right now.


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## sags (May 15, 2010)

Rising inflation.........and all that entails, is going to be a big problem for the many home owners who have over leveraged themselves. Little by little, a few dollars more for daycare. A few dollars more for taxes. A few dollars more for food. A few more dollars for gas....and pretty soon there aren't enough dollars to pay everything.

Many have already reached that state, as the credit agencies noted recently. People are borrowing from Peter (credit lines) to pay Paul (credit cards). Eventually they re-mortgage and the cycle continues.

When home prices started to fall in the US, the banks responded by cutting back credit lines and credit card balances. As people made a payment, their limits came down in tandem. That created a big problem for people who were caught with high debt loads and had counted on remortgaging to get them out of debt. They suddenly had to pay the mortgage and the debt.

When the market turns downward, buyers simply stop buying, because they figure there is a better deal coming in a few more months. 

Nobody is going to buy a home, if they think it is going down in value.

We will see, but I think a big correction is coming.


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## hypo (Aug 11, 2010)

> It's just speculation (which doesn't mean he's wrong).
> 
> The only argument he gives is the ratio of house prices to income which is higher than the historical average.


My thoughts exactly, its just his opinion. There are a couple of differences between us and the Americans too. One is that our banking sector is much more regulated, so if a housing collapse is coming, it should not produce a liquidity crisis nearly as bad, because there will be less leverage at work.

Personally I'd just wait things out for 5 years, re-evaluate then. Let the "crash" happen and then buy. If there wasn't a big drop, small price to pay for covering your basis.


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## andrewf (Mar 1, 2010)

He did offer some evidence. There are a number of indicators than suggest the house market is substantially less affordable than the long run average. Maybe that state of affairs can persist forever (ie, this time is different). I think it's likelier that we'll see mean reversion. The market can stay irrational for a long time, so maybe the correction is ten years away, but there seems a higher than usual probability of a correction.


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## Four Pillars (Apr 5, 2009)

andrewf said:


> He did offer some evidence. There are a number of indicators than suggest the house market is substantially less affordable than the long run average. Maybe that state of affairs can persist forever (ie, this time is different). I think it's likelier that we'll see mean reversion. The market can stay irrational for a long time, so maybe the correction is ten years away, but there seems a higher than usual probability of a correction.


Andrew, I agree with you about reverting to the mean. It is quite logical to think that housing will correct itself in some form, for that to happen.

His evidence may support the idea of a correction, but what it doesn't support is a severe correction, which is what the article (or the title at least) suggests. That's the part where he is guessing (IMO).

A fast, severe correction could happen of course, but it could also be a mild correction which lasts for a long time. It could even take the form of flat real estate values for the next 50 years.


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## Square Root (Jan 30, 2010)

There is a pretty credible article in todays G&M predicting a decline in Canadian residential house prices. The guy is probably right to some degree. 
It reminds me of a discussion I had in Miami in early 2006. I was looking at real estate listings in the window of a real estate brokerage in South Beach, when a broker came out. He asked me if there was anything I was interested in. I responded no as I thought the prices were too high and headed for a fall. He laughed and said " no way, prices for desirable real estate won't go down" I was certainly right on that one! I would think we are probably going to see a decline here but who knows? Most people who are heavily invested in real estate convince themselves the market will not decline. There are many reasons one can use to support this view but in the end real estate markets can be volatile and unpredictable. Best result would be a stable market.


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## LondonHomes (Dec 29, 2010)

Home prices have risen because of interest rates being so low.

20 years ago a mortgage payment of $1000 meant you where paying $100 in principle & $900 in interest so you could only afford a $100,000 home.

Today with interest rates so low that same $1000 payment means you can afford a $200,000 home. $400 in principle & $600 in interst.

Same house, Same monthly payment you just owe more to the bank at the start of the mortgage, but after 25 years and the mortgage is paid out their should be no difference.

EXCEPT IF INTEREST RATES CHANGE.

When interest rates fell people who owned property made a big win fall. Which means that there currently is a big risk for people buying homes because if interest rates start to increase significantly they may not be able to pay the new mortgage rate.

(All figures are made up for example purposes only)


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## Square Root (Jan 30, 2010)

Agree with you Londonhomes. This is what happened in 1987. Rates went up and I was stuck with 3 houses for a while. Let's hope rates only go up gradually.


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## marina628 (Dec 14, 2010)

Banks approve the variable rate folks on the posted fixed 5 year term so logically if rates went up they can still afford it.There is a 2.5%-3% spread between variable rates and posted 5 year rates.My mortgage deal we close April 29 had to be qualified on 5.19% which was the non discounted 5 year rate.


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## andrewf (Mar 1, 2010)

Well, if he's suggesting RE will decline by 36% (from 5.5x incomes to 3.5x incomes), I suppose that's a pretty severe decline. I could see a 20% correction happening. Vancouver's market is just crazy, and I wouldn't be surprised to see a decrease in excess of 40%.


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## GoldStone (Mar 6, 2011)

Four Pillars said:


> The only argument he gives is the ratio of house prices to income...


Not true. He looked at 4 different metrics.

1. house prices to income



> The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5.


2. number of households behind their mortgage payments



> About 17,400 households are behind in their mortgage payments, representing an increase of nearly 50 per cent since the start of the last recession.


3. house prices to rents



> Average house prices have doubled in the last 10 years, while rents have risen by only about 30 per cent. The ratio of house prices to rent is now higher in Canada than in any other developed country.


4. housing as a percentage of GDP



> Residential housing investment as a percentage of GDP was 6.48 per cent in 2009, down slightly from 6.76 per cent in 2008, after peaking at 7.13 per cent in 2007. The previous peaks were at 7.26 per cent in 1976 and 7.18 per cent in 1989 – and we know what happened to the housing market in Canada in the early 1980s and early 1990s. After residential housing investment as a percentage of GDP peaked in the previous two cycles, the housing market crashed within a few years.


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## Four Pillars (Apr 5, 2009)

GoldStone said:


> Not true. He looked at 4 different metrics.
> 
> 1. house prices to income
> 
> ...



Ok, so I lied. 

Seriously - the 50% increase in late mortgage payments number? Does that mean anything at all? It's a 50% increase of a very small number. Sounds good, but I don't think it's significant.

As I already stated - yes, these metrics are enough to convince me that a correction will happen, but none of his arguments support his assertion that the correction will be severe - that's just his guess.

I'm not saying I don't think there will be a severe correction (I have no idea), I'm just saying the author is full of sh*t.


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## Square Root (Jan 30, 2010)

I don't think he is full of sh*t. Also the catalyst for a decline could be a fairly small increase in rates. It's not necessarily that people can't afford their mortgages but rather a spark that sends everyone to the exit at once.


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## LondonHomes (Dec 29, 2010)

Square Root said:


> I don't think he is full of sh*t. Also the catalyst for a decline could be a fairly small increase in rates. It's not necessarily that people can't afford their mortgages but rather a spark that sends everyone to the exit at once.


But not everybody is going to head for the exits all at once. If you have owned your house for a period of time you should have enough equity to be able to withstand a housing market correct.

The only people that would be a risk in Canada would be those that have just purchased a home and purchased it at the top of their ability to pay. 

In the US the problem was their ability to deduct mortgage interest from their taxes so even retired people had a mortgage on their house. Thus making a lot more American's vulnerable to interest rate changes and in a situation where they could be forced to sell.


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## Sampson (Apr 3, 2009)

andrewf said:


> Vancouver's market is just crazy, and I wouldn't be surprised to see a decrease in excess of 40%.


Then everyone would buy a house!

If Vancouverites are willing to fork over 70% of their income to housing, imagine what would happen if they only had to pay 30-50%. It would be like a mad sale.

Heck, I would move to Vancouver.  At least I'd get to watch some playoff hockey.


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## kcowan (Jul 1, 2010)

Just like it is taking a long time for the bubble to burst, it will take a long time for the next growth phase in prices to start. Once prices start to decline, sales dry up. Everyone sits on the sidelines waiting because the cost of waiting becomes very low.


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## v_tofu (Apr 16, 2009)

As a homeowner, I see it as just that.. owning a home. 

Wife has lived in an apartment all her life, so getting out of a building whether it be a condo or apartment was a must 

However, its scary to see people buy a house that they cannot afford. I guess I'm lucky to live in the praries where a 1300 sq foot home cost me about 250,000. and I thought that was way over priced!

If interest rates do go up, then we just have to tightn the belt. no cable, slower internet speed etc. I'm glad we followed the less than 3x income rule


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## Square Root (Jan 30, 2010)

kcowan said:


> Just like it is taking a long time for the bubble to burst, it will take a long time for the next growth phase in prices to start. Once prices start to decline, sales dry up. Everyone sits on the sidelines waiting because the cost of waiting becomes very low.


Agree. It has happened before and it will happen again. May not happen immediately but pretty likely to happen nevertheless. I hope it isn't too disruptive.


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## Bupp (Nov 13, 2009)

Posted this in the other thread on this topic, but thought I'd repeat it here since this thread has been more active:

The author is the chair of ben graham value investing at university of western ontario.

He is well published with research on canadian equity markets showing how low p/e ratios and low p/b ratios lead to outperformance in the long run.

While the same concept can be applied to housing with regards to price to rent ratios as is applied to evaluating equities, the author is smart enough to know not to give a time horizon to his prediction.

I give a lot more weight to this author's view on canadian housing than someone say like Garth Turner.

*We've already seen these types of articles presented before. What is different about this article is that it is written by a respected academic who has a background in value investing. More importantly, given that interest rates are now starting to increase, alongside the tightening of cmhc lending rules, there is a catalyst in place that did not exist earlier. Overpricing + catalyst = market downturn.*


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## heffer (Feb 21, 2010)

*Why is the government not raising rates?*

I think the housing prices will continue to go up this year, and then drop by 5% in 2012, and then flat line for a couple of years. I don't think we'll see a big drop in prices because 

1) The higher house prices climb, the more dangerous it is to raise mortgage rates. And since the bank of Canada doesn't want to raise interest rates now, it means they think there is still room for higher prices 

and 2) some of the investors who say they won't buy real estate now because prices are too expensive and will drop by 10% or more in the future, are the same people who say they will wait until prices are cheaper before they get into the market. If there are that many people waiting for prices to drop then prices will never drop that low.


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## andrewf (Mar 1, 2010)

Remember that the BoC is not primarily concerned with the housing market--their mandate is to meet an inflation target. A secondary concern is to keep Canada's economy stable. Avoiding a housing boom and bust helps the Bank attain its primary goal, but by no means are they targeting house prices.


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## kcowan (Jul 1, 2010)

heffer said:


> ... If there are that many people waiting for prices to drop then prices will never drop that low.


You also have to check trading volumes and compare them to regular times. If the volumes are substantially lower, then the prices may not be representative of the true market. This applies to RE sales too.


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