# Wow, it took them long enough to see the obvious...



## Just a Guy (Mar 27, 2012)

https://www.cmhc-schl.gc.ca/en/corp/nero/jufa/jufa_036.cfm

The link goes to cmhc's latest "stress test". Amount the various scenarios, they discovered "a sudden rise in interest rates would cause a 30% drop in Canadian home prices".

I, personally, think they are being rather conservative in this estimate since my calculations lead me to believe about a 40-45% correction based on historical prices which I've pointed out many times before on here...

Of course, they don't explain what a sudden rise in interest rate means to them, which could explain the discrepancy.


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## lonewolf :) (Sep 13, 2016)

Higher Interest rates do not always lead to lower home prices. When the baby boomers pushed interest rates higher by their demand for IOUs to buy homes money was being used to put into homes which help push the home prices up.

This time around I do not see the demographics supporting a demand to buy homes on mass so a rise in interest rates would most likely lead to lower home prices along with the fact baby boomers will start selling homes to move to apartments & nursing homes.


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## new dog (Jun 21, 2016)

I think the figure sounds about right considering the tweaks that have been put in place for people to qualify. Of course if rates rise enough then who knows how far prices could drop.


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## Rusty O'Toole (Feb 1, 2012)

I think this is exaggerated. The market might go flat or slightly down, like 5% or 10% at the most. You only get a big correction if the market is way overbought at the end of a boom of 5 years or more and we haven't had that. 

Of course I am not talking about Vancouver or Toronto, I am talking about the 99% of the country that does not have insane prices right now.


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## Just a Guy (Mar 27, 2012)

I don't know, just put an offer for $70k on a place that sold for over 200k a few years back...it's not the first one I bought like that either.


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## mordko (Jan 23, 2016)

Just a Guy said:


> I don't know, just put an offer for $70k on a place that sold for over 200k a few years back...it's not the first one I bought like that either.


Very much depends where this is. The question is whether Toronto/Vancouver are going to tumble. Hasn't happened yet. If it does, the economy is in trouble.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> https://www.cmhc-schl.gc.ca/en/corp/nero/jufa/jufa_036.cfm
> 
> The link goes to cmhc's latest "stress test". Amount the various scenarios, they discovered "a sudden rise in interest rates would cause a 30% drop in Canadian home prices".
> 
> ...


Yes, What is a "sudden rise"? and how does one raise rates in a way that isn't "sudden"? this seems to be more scare stories to sell papers. The Trump scare story is over, so now they have to rotate into some other scary paper selling theme. But my complacency doesn't mean that I think real estate won't top out and suffer a bit, but I'm thinking that a 40% drop is a bit extreme.


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## Just a Guy (Mar 27, 2012)

Average house price in Canada is $482k according to the crea website. 

Median total family income for Canadians in 2014 was $79k according stats Canada. It seems to have gone up by about 2k for the prior 3 years, so let's say $83k for 2016. 

Old rule of affordable housing was 2.5x income. This means the average house price should be $207,500 which is 57% lower than the average house price. 

If we stretch the number to 3x income, or 249k, the average price should be 249k which is 39% lower. 

Low interest makes money more affordable, you can manage the payments for more money...unfortunately the interest rates aren't fixed for the life of the loan. What you can afford today, you may not be able to afford tomorrow. If rates increase just .5% each year (nothing right?) take a look at what happens toy your mortgage payments in 5 years when the interest rate is a tiny 2.5% higher than it is today and you need to renew.

Now, you can sell right? Hold on, your peers are all in the same boat, they can't afford to pay any more than you can. So demand for your house goes down...along with the price. It's what happens when bubbles burst, it's a correction.

The same thing happened in the states in 2007, but for a different reason. They borrowed on a balloon mortgage. Instead of paying 3% average interest, they had a product where you paid no interest in the first half of the mortgage, but double interest in the second half. Of course, you renegotiated your mortgage before the interest rate kicked in and you could keep pretending you could afford your home. Unfortunately, when he music stopped, the banks stopped renegotiating, people were hit with huge, unaffordable increases in their monthly payments, and were forced to sell...only to find no buyers. Prices tumbled upwards of...40% or more. 

Yeah, yeah, this time will be different though...that's what everyone thinks in a bubble. Keep denying it can happen...worked well for Hillary.

In my experience math doesn't lie, unlike opinions and feelings.


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## Spudd (Oct 11, 2011)

Pluto said:


> this seems to be more scare stories to sell papers. The Trump scare story is over, so now they have to rotate into some other scary paper selling theme.


This was put out by CMHC, not by a paper. CMHC doesn't care about selling papers.


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## the_apprentice (Jan 31, 2013)

Just a Guy said:


> I don't know, just put an offer for $70k on a place that sold for over 200k a few years back...it's not the first one I bought like that either.


Can't doubt your knowledge or success, however most would agree that $70k for a property isn't realistic for us. I have a hard time finding deals in that price range in other cities/countries. If I were to find a home in the price range, I doubt I (or anyone I know) would consider moving there at this point in our lives. If I were in your position, I would definitely keep adding at those prices though.

As for the stress test, it is interesting to see these numbers. While my outlook remains positive, I am not looking to add to my real estate holdings. It will be interesting to continue watching how unemployment rates, interest rates, oil prices, etc. affect real estate prices. These 20% increases have to come to an end at some point.


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## lonewolf :) (Sep 13, 2016)

Just a Guy said:


> Average house price in Canada is $482k according to the crea website.
> 
> Median total family income for Canadians in 2014 was $79k according stats Canada. It seems to have gone up by about 2k for the prior 3 years, so let's say $83k for 2016.
> 
> ...


 Repelling Glass-Steagall by the Clintons did not help either. Banks (Clinton foundation donors) were able to bundle up loans & sell them. A lot of the bundled up loans were bogus. When the banks are able to bundle up loans then sell the bundled up loan, there is no incentive to make sure the borrower can pay back the loan. When the bank has money in the game the loans are more likely to get paid


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Average house price in Canada is $482k according to the crea website.
> 
> Median total family income for Canadians in 2014 was $79k according stats Canada. It seems to have gone up by about 2k for the prior 3 years, so let's say $83k for 2016.
> 
> ...


math operates within a set of assumptions. if the assumptions are inaccurate, the math draws wrong conclusions. 
These days affordability is measured in monthly payment amounts relative to income, not the price of the house. So obviously when rates go up, the house price comes down to compensate. 
A correction of around 25% at some point is more likely compared to 40 -50%. I'm having a difficult time envisioning rate increases sufficient to require a 40% decline in housing. The desire for home ownership is very strong, and people are willing to live a frugal lifestyle just to own.


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## Pluto (Sep 12, 2013)

Spudd said:


> This was put out by CMHC, not by a paper. CMHC doesn't care about selling papers.


yes, it was put out by CMHC, but the papers picked up on it. 
It also wasn't a forecast, it was examining various what if scenarios.


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## tavogl (Oct 1, 2014)

By mid 2017 I should have saved enough for a downpayment for my first home here in Canada (Vancouver), I am hoping prices come down quite a bit by then, but I wonder, if interest rates go up and home prices go down... I don't think there's going to be a big difference in what we're paying for the homes, kinda scary. I am trying to convince my wife to move to Halifax, great job opportunities, higher salary (for our professions) and real estate is very affordable compared to Vancouver, this city is INSANE.


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## Just a Guy (Mar 27, 2012)

For those of you having a hard time envisioning a correction, remember that the historical mean for a mortgage rate is 8%. Calculate your mortgage payment around that rate and see how affordable homes are.


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## the_apprentice (Jan 31, 2013)

With a mortgage rate of 8%, I will agree that most will not be able to pay down their debt as monthly payments will double. I wonder if we will ever see those rates again and if so, when will we see 8% rates?

While browsing MLS, Annual Sales for Single-Family Dwellings has only decreased 6 times since 1980. During the down years (1990-1996), there was a price reduction of nearly 30%. I like those odds.


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## Pluto (Sep 12, 2013)

^^
When I consider what it would take to get rates to 8% it is difficult to envision that happening in the next 10-20 years. (However, I did convert my crystal ball to solar power, so it is not as reliable anymore.) Its going to take some serious inflation to prompt rates to 8% anytime soon. I'm guessing that the upper range for prime rate will be around 5+/- a bit. Prime rate was near 5% through the 30's, 40's 50's up to the mid 60's. I don't see a reason why that can't happen again going forward from here.


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## Just a Guy (Mar 27, 2012)

Now check historically what happened to interest rates since the 1980's...

I'll give you a hint, the went from upwards of 21% down, fairly steadily, to under 3%. With the current overnight rate being at .5%, there certainly isn't much room for it to go down any further. The government has been wanting to raise rates for the last several years, but probably realizes what will happen if they do. Their "solution" is to tighten lending requirements and make it harder to borrow these cheap funds, then they hope they can raise the rates with less consequences.

Only problem is, most people who are already in debt can barely afford their payments, real income rates and buying power is dropping, and most of them can't afford even a small increase in rates. 

Let's hope someone in government doesn't decide to just bite the bullet and rip the bandaid off, get the pain over all at once as it were and blow up the system by just forcing up interest rates all at once. It would be devastating, but governments have done things like this in the past. Low interest rates bring many problems of its own, they may decide that those drawbacks outweigh the collapse of the real estate market, afterall the states recovered from 2007 despite he millions of casualties...

Truth be told, I can't see any way to raise interest rates slowly enough to solve the problem...they could use hyperinflation to get us out of the mess, but that has its own problems. Looks to me like the government will continue to try to mitigate the damages with restrictions, then decide to start raising the rates...it won't hurt many people for years either if you're locked in, or even floating as you'll probably lock in seeing that rates are rising and that'll be he general bank advice...

People won't understand the implications of what's happening until rental time comes and their payment make the sudden jump (most people don't understand how a mortgage works, they think the payments will basically remain the same forever). Of course, this will be 4-5 years after the process has begun, and will be the problem for the next elected government...

Then the public will scream bloody murder, and blame the "greedy financial system", and demand that the government do something. Maybe then the government will reintroduce the longer amortizations to "lower" the payments, allowing people to refinance...of course they will never pay off their property, but most won't realize it. 

With this scenario, the housing market may not correct so dramatically, since no one can afford to sell being underwater if they tried. Houses will basically become worthless though with no equity and no market, it just won't be public since no one tries to buy (since they can't afford to) or sell (since they can't afford to realize the loss). Banks will basically become the largest landlords in Canada where homeowners pay rent to them, maintain their own property, and never build any real equity for 20 years...


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## Just a Guy (Mar 27, 2012)

Pluto said:


> ^^
> When I consider what it would take to get rates to 8% it is difficult to envision that happening in the next 10-20 years. (However, I did convert my crystal ball to solar power, so it is not as reliable anymore.) Its going to take some serious inflation to prompt rates to 8% anytime soon. I'm guessing that the upper range for prime rate will be around 5+/- a bit. Prime rate was near 5% through the 30's, 40's 50's up to the mid 60's. I don't see a reason why that can't happen again going forward from here.


Prime rate right now is .5%, so you can "easily" see an increase of 4.5% (remember mortgage rates increase more than the prime usually). Look what that does to a mortgage payment. It's devastating, especially with a 400k, average mortgage.


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## peterk (May 16, 2010)

tavogl said:


> By mid 2017 I should have saved enough for a downpayment for my first home here in Canada (Vancouver), I am hoping prices come down quite a bit by then...


...Said ever young professional in the last 10 years who did the responsible thing of "saving 20% for a down payment", and got burned badly. i.e. most of my friends.

Those who scraped together a 5% down payment, borrowed from 5 different relatives, with a 5x mortgage, 5 seconds out of high school seem to have done alrite. Don't ask them what a TFSA or RRSP is though...


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## Rusty O'Toole (Feb 1, 2012)

tavogl said:


> By mid 2017 I should have saved enough for a downpayment for my first home here in Canada (Vancouver), I am hoping prices come down quite a bit by then, but I wonder, if interest rates go up and home prices go down... I don't think there's going to be a big difference in what we're paying for the homes, kinda scary. I am trying to convince my wife to move to Halifax, great job opportunities, higher salary (for our professions) and real estate is very affordable compared to Vancouver, this city is INSANE.


I hear RE in Van has dropped a lot since they passed a new law taxing foreign speculators. Now I hear there is another law coming, a $10,000 a year tax on leaving a house empty with a $10,000 a day fine for lying about it.

This should bring down house prices rapidly and put a lot more houses on the market, both as rentals and for sale.

You might also consider a 'rent to own' or 'lease with an option to buy' deal. This would allow you to rent a house and buy it at a fixed price in 2017. If prices drop below your strike price you can renegotiate or move out, you do not have to get stuck for a high price but you get to lock in a low price.


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## new dog (Jun 21, 2016)

Rusty the best part of the rent to own deal is you will find out if you want to live in the area you are renting in.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Prime rate right now is .5%, so you can "easily" see an increase of 4.5% (remember mortgage rates increase more than the prime usually). Look what that does to a mortgage payment. It's devastating, especially with a 400k, average mortgage.


I think prime rate is 2.7


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## cashinstinct (Apr 4, 2009)

Not too bad, at 8% my mortgage payment would be $446,41 weekly instead of $299,34 (estimated renewal at 2.14%)


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## lonewolf :) (Sep 13, 2016)

Rusty O'Toole said:


> I hear RE in Van has dropped a lot since they passed a new law taxing foreign speculators. Now I hear there is another law coming, a $10,000 a year tax on leaving a house empty with a $10,000 a day fine for lying about it.
> 
> This should bring down house prices rapidly and put a lot more houses on the market, both as rentals and for sale.
> 
> You might also consider a 'rent to own' or 'lease with an option to buy' deal. This would allow you to rent a house and buy it at a fixed price in 2017. If prices drop below your strike price you can renegotiate or move out, you do not have to get stuck for a high price but you get to lock in a low price.


 India started the trend with luxury tax of taxing that which does not produce income. 

The R 500 & R 1000 notes India devalued in the war on cash. To stop under ground economy from not paying taxes.


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## mark0f0 (Oct 1, 2016)

Even if interest rates go nowhere, the declines can't be stopped at this point. Supply is overwhelming demand. The past 3 years of stagnation is turning to significant price falls across Canada, including GTA/GVR.


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## mordko (Jan 23, 2016)

^ again, this the exact opposite of what has been going on in GTA and GVR. Prices have skyrocketed. You can have your own opinions about predictions for the future, but can't make up you own facts about what happened in the past.


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## mordko (Jan 23, 2016)

Just a Guy said:


> Prime rate right now is .5%, so you can "easily" see an increase of 4.5% (remember mortgage rates increase more than the prime usually). Look what that does to a mortgage payment. It's devastating, especially with a 400k, average mortgage.


That's not Prime. It's bank of Canada target for key interest rate (overnight).


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## Just a Guy (Mar 27, 2012)

Some people confuse the two terms, I wasn't sure which you meant...even still, 1.5% will have a significant impact on a mortgage payment. Plus, that's only the next 5 years, most mortgages are amortized for 20-25 years...what will happen at the the 10 year renewal? The 15 year renewal? Will mortgage rates stay stagnant for that long?

When you're exposed to real estate, it's not good enough to only look 5 years down the road, real estate is a long term investment. Even in a regular economy, when you factor in interest rates, legal fees, realtor commissions, etc. It takes about 7 years of capital appreciation just to break even on reselling a house. If you throw in renovations and bank fees for breaking a mortgageit could be even longer...

Most people, when buying, don't think about where things are going to be in the next quarter century...heck, most people think the world stays the same...it doesn't. 

Look at how successful the average person is at predicting the stock market, which has a very short term horizon in comparison. Most people are caught by surprise at its unpredictability, yet in real estate everyone all feel like experts. I bet most people don't study real estate and what effects the market any more than they do the stock market. It's a buy and pray mentality, but they all "know" that they are fine...

Of course, you can never tell people that a bubble is happening...breX, nortel, Enron, worldcom, internet stocks, etc. People bought all the way down despite proof that the companies were frauds...the experts were wrong. Heck, I'm not even mentioning the fools who drove up the prices based on market performance, not actual information about the company.

However, in the end, it's your money. I'm buying and probably face more exposure than 99% of the population. Of course the price I pay usually factors in a correction of at least 40% so I'm not as exposed as 99% of the population...I must be the fool here.


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## Pluto (Sep 12, 2013)

^
You are not the fool, you are just too extreme in what you think is probable. A 40 - 50 % decline in residential real estate across Canada is not probable. 
Even when mortgage rates were 7 - 8 % in the late 60's, real estate in general kept going up until the early 1980's. Of course RE corrects during economic downturns, but it recovers.


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## Just a Guy (Mar 27, 2012)

What were the real estate prices relative to income in the 60's and 70's? What proof or evidence do you have, other than your opinion, that the correction won't happen? 

I've provided numbers, based on history, to support my arguement, but everyone else seems to just say "it won't happen". Just like they said in 1999 before the internet bubble burst. "They don't need earnings, this is the new economy" was the general arguement to those who pointed out the numbers didn't make any sense.

Enron used a similar arguement, which believers eagerly chanted, whenever the numbers guys said something was wrong.

The problem with real estate isn't the interest rates, it's that the interest rates allowed people to over pay for the property. Money became cheap, so people could afford to overpay. Had the ratio of income to value remained the same, there wouldn't be a problem with the price of houses, we could afford to have higher rates, but that's not what happened.


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## ian (Jun 18, 2016)

We bought our first house in Vancouver in the early 80's. Lots to choose from because so many had been foreclosed. Interest rates zoomed up to 21 and we on their way down just as quickly.

We made an $85K offer for a home that was listed at $139K, then 129K, then 119K. I suspect that higher interest rates will have a larger impact on those who want to sell and move up.


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## Just a Guy (Mar 27, 2012)

Those in cash, or with their propeties paid off, or at least with high equity, won't be impacted as much as those buying at the peak. In fact, they could be in a great position to buy in after the crash. Of course, even if you bought high and are now paid off you'll lose when the prices correct, but you won't lose your house.

Many people think their houses are good investments, but few actually calculate he ROI based on the real numbers (which include the legal fees, the realtor fees, the interest paid, the upgrade costs, etc.). They tend to just say I bought at $X and sold at $Y so I made a profit...the real numbers don't work that way unfortunately, but people are happy with their delusions.


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## mordko (Jan 23, 2016)

It's all about supply and demand. Neither one of these factors by itself is enough to determine which way the prices are going to go. Nobody can predict a 50% fall or a 10% increase in prices; it all depends on a whole a lot of future events, which impact supply and demand in each particular location. 

Having said this, prices are clearly above long-term trends, which is why I wouldn't expect long-term returns to be all that great going forward.

If people calculated their ROI/CAGR on real estate in GTA/horseshoe or Vancouver for the last 10-15 years, they would find that it beat TSX. At least that's what I found. The reason is supply bottleneck combined with strong jobs market and population growing plus foreign investment/hence demand. Again, I don't expect this trend to continue.


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## Just a Guy (Mar 27, 2012)

True, while no one can predict the future, one can look at the numbers and say what is likely to happen...CMHC did this exact thing and saw a 30% correction if there were a sudden increase (though they never disclose what that means). I too, ran the numbers and found that a large correction is looming. When an event occurred in the United States in 2007 it triggered a correction of over 30%, but interest rates remained low so the prices rebounded (only those more qualified to buy bid up the bargains). 

Short term, Vancouver is experiencing a big correction, until some clever lawyers figure out how to get around the latest regulations. I say short term, because the underlying problem, cheap money, hasn't changed. People don't think about the long term consequences, they just think if I can afford it today, I'll be fine tomorrow...didn't work so well in Calgary over the past two years once the oil patch shut down and the money stopped flowing...

Oh, and as for the ROI on Vancouver housing, first off that's not the norm and second, if you sold how much would it cost to buy something new, or even just live there?

There was a guy I know who bought a house before the boom, he paid 100k, and lived there about 10 years, just as the boom was starting. He sold for $130k and upgraded to $175k house as the boom began. About 10 years later, he sold his house for $400k but, ironically, his old house sold for just under $350k around the same time. The next house he bought was $500k and the trend continues...

Oh, on his first house he built a fence, renovated the inside and spent quite a bit...second house was other renovations as well. Cost of borrowing went down however, but the rule of 72 said he was close to, if not more than paying double for his houses in interest accumulation...


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## twa2w (Mar 5, 2016)

Ok so just what is a rapid interest rate for cmhc stress test purposes?

In the scenario of a jump in interest rates, CMHC said an increase of 2.4 percentage points over two years could lead to a 30 per cent drop in house prices and a peak unemployment rate of 11.3 per cent.

In the case of a severe and prolonged global depression, CMHC said its test suggested housing prices could drop by 25 per cent while unemployment could peak at 13.5 per cent. The agency could face an insurance loss of $3.1 billion.

In the event of that the price of oil falls to $20 US per barrel next year and remains between $20 and $30 US for another four year, CMHC said it could face an insurance loss of more than $3.5 billion, while house prices could slide by almost eight per cent. Unemployment could reach 8.8 per cent.


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## twa2w (Mar 5, 2016)

Fyi, this stress testing at CMHC is not new. Most, if not all, big corps do it every year, including CMHC, dept of finance and other gov departments etc. So do a lot of smaller corps and agencies.
They also assign probabilities to various levels of stress.


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## naysmitj (Sep 16, 2014)

Politicians won't voluntarily increase rates driving up unemployment, but their new focus on driving up the debt through massive deficit spending will force Canadian bond ratings lower driving up interest rates. 
It won't be sudden, but it will be irreversible.


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## marina628 (Dec 14, 2010)

Just a Guy said:


> I don't know, just put an offer for $70k on a place that sold for over 200k a few years back...it's not the first one I bought like that either.


What are you drinking ?If you paid $70,000 anywhere in GTA it was on Jane Street where you risk getting shot or watch drug deals all day long.If you do buy cheap it is condos and usually they are coming with high maintenance fees because they are old and need lots of investment.I recently looked outside of GTA ,London Ontario to be exact and even there they are around $125,000 for anything decent .


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## Just a Guy (Mar 27, 2012)

Never claimed it was in GTA. Canada is a lot bigger than the GTA. I buy the deals where I find them. A smaller place sold in the same complex for $130k this year. 

Sometimes people have to sell, I was in the right place at the right time with the money, so I got the deal.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> What were the real estate prices relative to income in the 60's and 70's? What proof or evidence do you have, other than your opinion, that the correction won't happen?
> 
> I've provided numbers, based on history, to support my arguement, but everyone else seems to just say "it won't happen". Just like they said in 1999 before the internet bubble burst. "They don't need earnings, this is the new economy" was the general arguement to those who pointed out the numbers didn't make any sense.


Based on history I'm not aware of any 40-50% drop in CDN RE. I'm not aware of anyone who claimed a correction won't happen. The odds are that any correction will be more modest than your doomsday scenario. 
It is true that rates have been very low and that has contributed to asset inflation. It is also true that in a higher rate environment asset values will correct. But I don't see rates high enough to precipitate a 50% decline.


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## Just a Guy (Mar 27, 2012)

When, exactly, did we last see interest rates at below 3% on a mortgage? I don't know anyone who ever saw that coming, nor expecteded it to ever happen...doesn't mean it didn't happen. I'll also point out, once again, that it's already happened in 2007/8 in the states. However the rates didn't rise, so it was just a land transfer from those who couldn't afford it to those who could at a discount.

Notice, I don't talk about "belief", "feelings", "wishes" or unicorns...

As I said in the past, I hope I'm wrong on this...just never seen any evidence to say the numbers I quote are wrong.


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## justanick (Oct 11, 2016)

Pluto said:


> Based on history I'm not aware of any 40-50% drop in CDN RE. I'm not aware of anyone who claimed a correction won't happen. The odds are that any correction will be more modest than your doomsday scenario.
> It is true that rates have been very low and that has contributed to asset inflation. It is also true that in a higher rate environment asset values will correct. But I don't see rates high enough to precipitate a 50% decline.


If there is a 40-50% correction, the RE market will just return to its price two or three years ago 
I have a friend in Calgary who just bought a house with the same price of 1996 and another under its price in 2007.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> When, exactly, did we last see interest rates at below 3% on a mortgage? I don't know anyone who ever saw that coming, nor expecteded it to ever happen...doesn't mean it didn't happen. I'll also point out, once again, that it's already happened in 2007/8 in the states. However the rates didn't rise, so it was just a land transfer from those who couldn't afford it to those who could at a discount.
> 
> Notice, I don't talk about "belief", "feelings", "wishes" or unicorns...
> 
> As I said in the past, I hope I'm wrong on this...just never seen any evidence to say the numbers I quote are wrong.


My concerns are you are not specific enough about your numbers. It isn't clear to me what you mean when you use the word "it". For example, you use the phrase "it's already happened in the US...." What is the "it's" that's happened? 

This article:
https://en.wikipedia.org/wiki/United_States_housing_bubble

gives the history of US median and average home prices. They both dropped about 23% during the time frame you speak of. But you are predicting a 40 - 50% drop for Canada and claiming that "it's" already happened in the US. 

Also, you are vague about how high rates would go to precipitate a 50% drop in home prices and vague about what factors would drive rates to that required level.


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## peterk (May 16, 2010)

justanick said:


> If there is a 40-50% correction, the RE market will just return to its price two or three years ago


All the more reason for a _huuge_ correction. The last 2 year's price spike will barely "count" in terms of fear sentiment, as only 20% of the last 10 years worth of home purchasers have purchased in the last 2 years. The market reaction will follow the sentiment of the 80% majority that bought for less, so perhaps a normal real estate bear market of 10-30% decline for that majority, while the people who bought just recently in the last 2 years will get absolutely creamed, but their numbers won't be significant enough to affect the market sentiment.


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## Pluto (Sep 12, 2013)

justanick said:


> If there is a 40-50% correction, the RE market will just return to its price two or three years ago
> I have a friend in Calgary who just bought a house with the same price of 1996 and another under its price in 2007.


According to figures given here: http://www.huffingtonpost.ca/ypnexthome/canadas-housing-performance_b_9266608.html

current CDN home average is: 442,264. A 50% decline takes it back to 2004 prices, that's 12 years ago, not two or three years ago. 

a drop in prices to 2 years ago is a 17% decline to 363,606.

There will be a correction, or lengthy flat consolidation, but very unlikely it will be a 40-50% decline.


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## Just a Guy (Mar 27, 2012)

Pluto, again what do you base your conclusion on? All you state is you don't think it will happen, without any basis.

My premise is built on he cost of housing vs. The average income when interest rates return towards the historical average. The math says people can't afford the prices at that point. No feelings involved. It's not tin hat time either. 

Now, granted, I'm not saying that interest rates are going to climb overnight, but even a relatively slow increase will hurt. I don't think interest rates can fall much lower, no bank is going to pay you to buy a house, so they have to either stay flat for a long time and not have people bid up prices anymore allowing inflation to correct the problem, or somthings going to break.

If interest rates rise very slowly, inflation can correct the problem over time and prices will remain flat. Unfortunately, I don't see that happening the way the economy gets manipulated.


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## janus10 (Nov 7, 2013)

Why would the BoC raise interest so quickly if they know it would lead to massive unemployment and a destruction of home value? I could see them raising the rate to combat inflation which, typically, would also include wage inflation.

The arguments proposed here seem to think that the interest rate could go up dramatically with severe consequences but disregard other variables or constraints that would tend to slow, stall or even reverse the plans to increase.

Without even raising interest rates, the government has started to come up with various initiatives to dampen the hyperinflated housing values. I think they can implement various mechanisms to mitigate against a hard landing, let alone a housing crash.


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## Just a Guy (Mar 27, 2012)

Well, one reason would be we don't live in isolation. The USA has already started to raise rates, and already born the burden of a correction. I haven't followed down there too closely to see how out of balance their mortgages are, but I know many people are very gunshy now after what happened.

So, if the USA increases rates, Canada would probably have to follow suit. Trump has suggested raising rates, but you never know what he'll actually do.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Pluto, again what do you base your conclusion on? All you state is you don't think it will happen, without any basis.
> 
> My premise is built on he cost of housing vs. The average income when interest rates return towards the historical average. The math says people can't afford the prices at that point. No feelings involved. It's not tin hat time either.
> 
> ...


You claim cmhc is too conservative and that your calculations indicate a a 40 - 50% decline vs their 30% in a what if sudden rise scenario. But you don't lay out your calculations, so I can't really comment on your calculations. 

There is no reason for the sudden rise to occur to an extent that there would be a 50% decline. A sudden 1/4 rise would most certainly not precipitate a 50% decline. So how high would it have to be? a sudden 6%, or 10% rise? What would make that happen? Nothing I can see.


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## Mortgage u/w (Feb 6, 2014)

Correct me if I'm wrong but no one has a 'crystal ball' in their possession that can predict the future. We can all sit around here and act all smart by throwing around a bunch of numbers (statistically proven or not) and come up with a conclusion, but NO ONE can predict the future. Yes, rates are low. Yes, higher rates can affect debt repayment. But the facts end there. That the market will plummet, that people will go bankrupt, that the sky is falling.....those are all speculations. 

The problem I have with people speculating is that it convinces others that those theories are correct. And people react with emotion so even if it ain't so, "it must be because I read it on the internet". 

How about we just wait and see? How about we don't panic just yet and let things pan out naturally?


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## Pluto (Sep 12, 2013)

^
I see your point. 
Besides the cmhc article pointed to several other factors not mentioned in this doomsday thread. 
1. Rents rising, rental yields remain healthy. 
2. Immigration the largest number since 1910 keeping demand for housing up. 
3. vacancy rates low. 

So the picture is mixed, and not a pure doomsday scenario.


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## Just a Guy (Mar 27, 2012)

My intention is not so much doom and gloom, more of a warning to people entering the market. I'm still an active buyer in this market, in fact I get my new one next month, however I waited for a property to sell at a substantially lower price than average.

How many people come on this board talking about the $300+k investment that makes them $1000/month thinking it'll make them rich? Or how about all those who brag about their net worth, when most of it is locked up in heir house. People tend to get complacent, think everything is always going to go well...I'm just trying to remind people that things can go wrong as well...maybe not to the extreme, but it is also possible.


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## Mortgage u/w (Feb 6, 2014)

I could appreciate we all wanting to warn people of the potential risks - but those risks are there even when the economy is at its peak. Every decade of the last century had some form of risk when talking about real estate. This time around is no different.


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## Just a Guy (Mar 27, 2012)

True enough,

Here's an article about Fort McMurray that I'm sure no investor ever imagined...

http://www.cbc.ca/news/canada/edmon...ndlords-slash-rent-1.3869246?campaign_id=A100

However, those people buying at today's prices and ignoring the fact that they are extremely high while defending their decisions with "it always goes up" or "I don't think it will drop" are, in my opinion, fooling themselves.


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## kcowan (Jul 1, 2010)

Pluto said:


> Also, you are vague about how high rates would go to precipitate a 50% drop in home prices and vague about what factors would drive rates to that required level.


In the GTA, our house went from $1050000 to $535000 between 1990 and 1997. So it can happen and it did happen in the GTA. Since 1997, house prices have only gone up. That suggests that a correction is inevitable unless there has been a structural change in the market?


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## mordko (Jan 23, 2016)

kcowan said:


> In the GTA, our house went from $1050000 to $535000 between 1990 and 1997.


That is nothing short of stunning given what average house prices did over the same period (clue: they crashed): 

http://www.torontohomes-for-sale.com/4a_custpage_2578.html


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## Spudd (Oct 11, 2011)

mordko said:


> That is nothing short of stunning given what average house prices did over the same period (clue: they crashed):
> 
> http://www.torontohomes-for-sale.com/4a_custpage_2578.html


I think you mis-read his post, it went from 1.05mil to 535k.


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## mordko (Jan 23, 2016)

Oops  So did. Sorry.


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## Pluto (Sep 12, 2013)

kcowan said:


> In the GTA, our house went from $1050000 to $535000 between 1990 and 1997. So it can happen and it did happen in the GTA. Since 1997, house prices have only gone up. That suggests that a correction is inevitable unless there has been a structural change in the market?


yes, some individual properties did tank around 50%, but that is not representative of the average property. the ones I know of that fit the 50% decline were brand new houses that were over priced around 1990. New houses seem to have about a 25% premium on the price that vanishes very quickly upon one moving in. I don't know why people buy them since they could get a used well maintained place for less money.


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## mordko (Jan 23, 2016)

^ Canadians love new houses. It makes no sense. And the quality of construction (with some exceptions) is really poor, worse than ~50 or 30 years ago. Does not change a thing.


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## mordko (Jan 23, 2016)

Pluto said:


> yes, some individual properties did tank around 50%, but that is not representative of the average property.


The average drop was ~36%.


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## Mortgage u/w (Feb 6, 2014)

kcowan said:


> In the GTA, our house went from $1050000 to $535000 between 1990 and 1997. So it can happen and it did happen in the GTA. Since 1997, house prices have only gone up. That suggests that a correction is inevitable unless there has been a structural change in the market?


So what is that same house worth today?


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## sags (May 15, 2010)

I see increased mortgage amortizations as the "bail out" for home owners to save the banks, CMHC, and the construction and real estate industries.

There really is no other option unless they go negative interest rates, which is highly unlikely as bond lenders would rather exit the Canadian markets for more profitable areas.

The happy home owner who can't afford the payments on his 20 year mortgage will be offered to switch into a 50 year mortgage.


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## Just a Guy (Mar 27, 2012)

Mortgage u/w said:


> So what is that same house worth today?


Does it matter? The interest rates continued to decline from 1997 to today, people could afford to pay more for the house and bid up its "worth". As I recall, the interest rates were fairly steady between 1990 and 1997, but the economy went into a slump. Rates started to fall around the end of that time and haven't risen since.

The first arguement here was "it can't happen", which was proved false both by what happened in the USA in 2007 and the gta in 1997. The next arguement is it didn't stay low for long...however the original argument pointed out that the low interest rates enabled people to overpay for properties thus inflating their prices to unsustainable levels in a higher interest rate market.

The final arguement seems to be "it won't happen again" usually relies on people's hopes and dreams more so than anything else. Technically anyone can predict the future, your opinion is equally valid as mine, however being correct about the future is another thing...

If I'm driving down an unknown road where all the signs say "bridge out", I technically don't really know that the bridge is out or if the construction guys just didn't pick up their signs after they just finished. Heck, maybe it's just a prank. Should I floor the car and hope the signs are wrong, or proceed with caution in case they are right? After all, how often have you seen a bridge being out as opposed to one being just fine? The bridges you've crossed have always been fine...


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## marina628 (Dec 14, 2010)

In April 1992 my husband and i paid $160,000 for a semi detached that the couple paid $230,000 for the year before.They walked away from the house because they only had 5% down and figured it would take them years to recover from it.We sold same house in 2001 for $190,000 in Brampton so there was not much appreciation during that time.This house sold last year for $397,000 and from what I seen they didn't do anything to the home except a bit of painting.


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## marina628 (Dec 14, 2010)

Another fun fact in 1992 our mortgage interest was 8.75% and in 2001 our new mortgage on the house was 1.24% variable


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## sags (May 15, 2010)

I have thought rising prices and stagnant incomes was unsustainable for years, but the houses keep getting built and the driveways keep filling up with cars. I am thinking though....if this all comes crashing down it is going to make the US housing crash look like a picnic.

If it gets bad, as I have said before....amortizations will probably be increased. Extend and pretend economics.


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## Mortgage u/w (Feb 6, 2014)

Just a Guy said:


> Does it matter?


Well it kind of does. 
The argument is that home prices are overpriced and will plummet; but historically, that argument has always been there. Speculators that 'invest' in properties will continue to have that argument till the end of time since profit and value are their primary concern. Homeowners should not be as concerned because they should be buying a place to live in for the long term. If the value goes up, all the better. If it goes down, well, the home is still serving its purpose. 

But if we follow the constant rise of inflation and cost of goods over time, the general tendency is that it rises. So that million dollar property that lost half its value in the 90's is definitely worth well over 1million today. If profit is of concern, then follow the economy like every other investor - buy low, sell high and cross your fingers. If not, you shouldn't be too concerned. Prices go up and down and we need to live with that idea. People will always need a place to live. That's why there will always be a value to a property. And it will fluctuate with supply and demand. I agree that interest rates have had a big impact and they will continue to do so. Which is why people need to be educated. Its easy to open up a newspaper and feel pressured to buy or sell a property based on the headlines. Its not as easy to understand the logistics behind the headline, though.


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## kcowan (Jul 1, 2010)

Mortgage u/w said:


> So what is that same house worth today?


39 Cachet Parkway Unionville ON


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## Just a Guy (Mar 27, 2012)

Mortgage u/w said:


> Well it kind of does.
> The argument is that home prices are overpriced and will plummet; but historically, that argument has always been there. Speculators that 'invest' in properties will continue to have that argument till the end of time since profit and value are their primary concern. Homeowners should not be as concerned because they should be buying a place to live in for the long term. If the value goes up, all the better. If it goes down, well, the home is still serving its purpose.


Actually, that's not quite true when it came to traditional rental properties like apartment blocks. These places tended not to rise in value a great deal but were bought mainly relying on their cash flow to set the sale price. That, of course, went out the window years ago when places started allowing them to be rezoned as "condos". Suddenly a $40k rental was worth $120k as a condo without any input by the "developer". Of course, many of these places had poor maintenance, no reserve funds, bugs and other issues which were simply ignored during the boom times...people made off like bandits. 



> But if we follow the constant rise of inflation and cost of goods over time, the general tendency is that it rises. So that million dollar property that lost half its value in the 90's is definitely worth well over 1million today. If profit is of concern, then follow the economy like every other investor - buy low, sell high and cross your fingers. If not, you shouldn't be too concerned. Prices go up and down and we need to live with that idea. People will always need a place to live. That's why there will always be a value to a property. And it will fluctuate with supply and demand. I agree that interest rates have had a big impact and they will continue to do so. Which is why people need to be educated. Its easy to open up a newspaper and feel pressured to buy or sell a property based on the headlines. Its not as easy to understand the logistics behind the headline, though.


While I agree prices generally go up, they tend to rise at a pretty even rate if you lay it out on a graph. Your assuming that the high price in the 90's was the proper point from which the price would grow. The truth is the base price was probably much lower, yet probably higher than the corrected low.

Personally, I like to try an buy at an over corrected price. It gives me a cushion in case the market, as a whole, corrects more than I expect, not to mention gives me a much lower price point than my "competition" to make cash flow.

The value of a property doesn't really matter to landlords, it should be all about the cash flow. Even if properties in general are worth more, once you sell at a higher price it's very difficult to find a cheaper replacement which would generate cash flow in a higher priced market.


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## sags (May 15, 2010)

One problem with long term planning regarding homes, a buy it and forget it thought process, is how society has become more unstable.

Thinking of the divorce rate and the numbers of jobs acquired in a lifetime and long term stability doesn't come immediately to mind.


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## Mortgage u/w (Feb 6, 2014)

kcowan said:


> 39 Cachet Parkway Unionville ON


Exactly.


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## kcowan (Jul 1, 2010)

Mortgage u/w said:


> Exactly.


Except that history will repeat and the recovery will be very long...it has to recover from 20 years of above inflation rates to return to the baseline.


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## Mortgage u/w (Feb 6, 2014)

kcowan said:


> Except that history will repeat and the recovery will be very long...it has to recover from 20 years of above inflation rates to return to the baseline.


I'm no economist but I've listened to enough of them to learn that our economy is currently in recovery mode and on the rise. You are isolating property values which is not the only determining factor. Although the consensus is that over-valuation is a problem today, I cannot see this as the single factor that will cause a housing "bubble crash". For that to happen, consumer spending has to go down, unemployment go up, and a shift in demographics has to happen ( immigration, old age, job displacement etc). So far, everything is either flat or on a rise. 

The 90's had a different picture so if history has to repeat itself, what are the odds that all those determining factors play out in the exact same manner? I can tell you that we are heading towards a much older population - lots of baby boomers retiring and life expectancy increasing. There will be a shift in housing demands. This alone can assure you that history will not repeat itself in the exact same manner. 

The government is hoping that the new mortgage measures will cool off some hot markets. If it works, then it could potentially solve the over-valuation issue and will result a stronger economy. If it doesn't, they better hope that consumer confidence doesn't go down. All this to say, if a correction in pricing occurs, it will not be major.


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