# Canadian Housing Market Collapse - Seeking Alpha Article



## Barwelle (Feb 23, 2011)

Read Part I and Part II.

There are some interesting facts and charts here on current Canadian debt vs US debt before their real estate crash, historical house prices, the exposure of Canadian banks to real estate loans (40%), and more.

Summary of the articles: We are now in a similar position that the US was in in 2006, and it's only a matter of time before we suffer a real estate correction.

Not that it's news that people are predicting a correction, but this article has some facts and figures to back it up. This article is also presented in a matter-of-fact way, as compared to Garth Turner, for anyone who reads him. (I find him to be a bit dramatic, and some of his ideas/facts seem to be anecdotal.)

Thoughts?


----------



## Jon_Snow (May 20, 2009)

I pretty much agree with all of it. I am a bit torn on the subject, as I own about 800k of real estate here on the BC coast (thankfully we bought in the late 90's before the big run up in prices, and everything is pretty much paid off). Our net worth would take a huge hit with a major real estate correction, it's true... But we would also love to say adios to condo living in Vancouver and buy a nice bungalow - which in the Vancouver burbs can easily cost 600k... If it were to fall into the 400's, we would likely jump on it..

So, yeah, I am torn on the subject... Either way it goes we can benefit - big time home equity or opportunity to "move up".


----------



## Barwelle (Feb 23, 2011)

You're in a fortunate position for sure. The ones who bought during this run-up would be the ones to suffer greatly should there be a massive correction... and you could do well for yourself, if you bought up a foreclosure or two after the crash. It is kind of messed up in Van though. What would all the HAMs do if things started sliding? Sell off, making things worse? Or hold on?

I'm unsure how things would go where I live. The facts have me expecting some kind of downturn in Canadian real estate as a whole... but Alberta has oil, and oil runs the world. There will be money to be made here for years to come.


----------



## sags (May 15, 2010)

I think Canadian home prices will decline at a faster pace than happened in the US, as many Canadians are aware of what happened there and will go into panic selling mode at a quicker pace.

The same demographics, upon which the OAS changes discussion is based, will also have an additional and significant impact on Canadian real estate prices, unlike in the US where demographics had no noticeable impact.

Statistics such as more retirees are carrying mortgages and debt into retirement, that 7 out of every 10 homeowners have no significant assets other than their homes, and there will be 9 million baby boomers looking for retirement income from the sale of their homes at a time when young people are not in a financial position to buy any home............should be of great concern.

The banks have shown their concern, as they publicly outline a future of flat or moderately increasing home prices on the one hand, while quietly dumping their mortgage portfolios onto the CMHC with the other.

I think........ now........would not be a wise time to indenture oneself to a large mortgage.

Those who planned to buy a home with a cash back mortgage or minimum down payment, would be well advised to continue renting and save a more significant contribution to the purchase.

The days of buying assets with someone else's money are coming to an abrupt end.

Credit tightened harshly in the US. At a time when home prices are low, mortgage interest is tax deductible, and the income to debt % is considerably less than it was, people can't buy a home because they can't secure a mortgage.

The banks are so busy, trying to maintain their capital reserves, while being forced to accept principal and interest writedowns for existing homeowners, they have no interest in issuing new debt.

People who live in areas where home values crashed, had their lines of credit arbitrarily rescinded by the banks, in an effort to avoid higher debt defaults.

We can see what falling home prices did to the US, not only financially when Trillions of dollars in asset wealth vanished, but also on the psyche of the country.

I am hoping for a slow and orderly descent in home prices, but fear it will not be so.


----------



## sags (May 15, 2010)

I read on Garth Turner's blog that the CREA is changing the way they report housing sales and prices.

Under the new system, the CREA will illuminate their view of trends in housing.

I think, reporting home prices dropping every month would not be good for their business.

But, it is their game.....and if they don't want to report actual sales prices, the length of time on the market, and other information...........I guess they don't have to.


----------



## Homerhomer (Oct 18, 2010)

Perhaps there will be a collapse, softening of the prices or it will keep going up still for a while, actually all that will happen it's just a matter of time and in what order.

The rates will have a major impact on it, we all have been saying that the rates should go up for couple of years now and it hasn't happened, and it won't happen for another two years at least, after that it's anybody's guess, money printing should produce rampant inflation, if that will be the case the housing will collapse if the rates will be in the 8% or higher range, if the rates go up by 2% and stay at low levels for an extended period of time, which is also possible (aka Japan), the RE market may hold up pretty well, especially with influx of immigration as it has been reported in the last few days.

We actually already had a crash in some markets, Windsor and surrounding area had a collapse just as bad as US, yet for some reasons most markets had litterally blip on the screen in 09, and have been on fire ever since.
On the same token number of US regions didn't suffer as bad, and are right now doing quite well (NY, Texas and few others), not all states are as bad as Arizona or Florida.

There are also significant differences between US and Canada:

1) Mortgages here are more regulated and despite everything they are still a bit harder to get than it was in US before the crash.
2) In Canada you can't just walk away from the house if it's underwater, you have to declare bankruptcy, in states you keep all your assets and can walk away from your home when you feel like it.
3) We have way more exports per capita than US, lot's of money coming our way, and will continue to do so for as long as emerging markets are growing.

I don't see a crash happening here until the rates shoot up higher.


----------



## RoR (Jan 18, 2012)

I agree with Homer's 1-2-3. I don't see any crash coming like happened in the US for those reasons. 

I CAN see a small problem arising, as mentioned earlier, when all the baby boomers try and sell their houses to move into retirement homes. But I don't think it will be any big crisis.


----------



## marina628 (Dec 14, 2010)

I think reality will hit when mortgages are up to 6% down the road and the homes that will fall or be harder to sell will be the ones the young people are paying $500,000+ for now.Condo fees will go through the roof on these 500 sq ft closets they are passing off as homes in the big city.
As most of you know we are Real estate investors and even with our net worth behind us we are working on paying off all our properties in 5-9 years.We are fortunate to have large disposable income left from our pay each month so we pay about $6000 a month over our require mortgages.My worst case is I have to sell off one $250,000 house to pay off the mortgages in 5 years if interest rates go up.I have nieces with $550,000 mortgages that earn pretax $80,000 as a couple and these are the people who will be in trouble 5-10 years from now.


----------



## Homerhomer (Oct 18, 2010)

marina628 said:


> .I have nieces with $550,000 mortgages that earn pretax $80,000 as a couple and these are the people who will be in trouble 5-10 years from now.




That's just crazy.

I make more than that and the max I would even consider for a mortgage would be $350K, and even that is a strech.

It's hard to believe they got a mortgage, however I spoke to one broker once who said I could get a mortgage in the 700-800K range, I thought he was smoking something but apperently not.


----------



## canadianbanks (Jun 5, 2009)

I think that we are in a huge bubble, but the timing of the burst isn’t clear yet. I mean with the rates staying where they are, there’s nothing much forcing homeowners and speculators to sell. I think the condos in Toronto will be the first casualty of the crash at any rate.


----------



## marina628 (Dec 14, 2010)

They had no Debt and 5% down , when they got the house she went and bought a new car with a 5 year loan @ 0% .She is a school teacher and 28 years old.


----------



## andrewf (Mar 1, 2010)

Apparently a decent number of states had recourse loans, and the recourse loans did not prevent house prices from falling. Florida and Nevada are both recourse states, and they both saw epic house price corrections and defaults. You see less strategic defaults, perhaps, but if people can't generate the cash flow to make mortgage payments (or worse--a lump sum at renewal if your house is underwater), they don't have much choice but to default.

I'm not sure you can draw such easily parallels between the US and Canada. Apparently the debt to disposable income statistics in Canada are different from the US, and not readily comparable. Nonetheless, I expect house price returns to be subdued as I do expect some mean reversion in house prices. I'm not convinced that it will happen via a sharp price correction. It could be a decade of slightly negative y/y price change and inflation. I'm sure that is what the BoC, Ministry of Finance want to see. I think people who are eagerly buying real estate expecting high future returns are nuts. Rents are very low right now relative to prices, and capital appreciation seems challenged by high debt loads, high home ownership rates and interest rates that can't go any lower.


----------



## andrewf (Mar 1, 2010)

canadianbanks said:


> I think that we are in a huge bubble, but the timing of the burst isn’t clear yet. I mean with the rates staying where they are, there’s nothing much forcing homeowners and speculators to sell. I think the condos in Toronto will be the first casualty of the crash at any rate.


Many condos in Toronto are cash flow negative even at current, very low interest rates. So while nothing forces a speculator to sell, soft price appreciation, and negative cash flow make holding onto a condo unappealing for a speculator.


----------



## sideways (Feb 20, 2012)

Really struggling with decision on what to do with our home. It's about two and a half years old in arguably the most desirable area in Barrie. Most reputable elementary school, all detached homes, no condos or town homes in our school catchment area, prices stagnated a bit in 2009, but have been rising steadily again since summer of 2010.

If Harry S. Dent is correct with this demographics-based prognostications, it would make sense to sell soon to maximize how much we can make from our home. But he recommended getting out back in 2009, and he blames the continuous bailout activity for delaying the inevitable crash to come. 

Hard to know what to do.


----------



## bigcake (Apr 3, 2009)

When house price starts falling, I mortgage rates will drop to 1~2% something. Saving rates will keep 0% for 100 years.


----------



## Barwelle (Feb 23, 2011)

Hmm... seems like there has been a lot of warnings about increasing debt lately. This from the same people who had a hand in encouraging taking on debt by providing 40-year mortgages and loose restrictions.

But... since they are warning of a "shock"... maybe that means we won't get one.


----------



## sags (May 15, 2010)

People justify HELOC spending as prudent because of lower interest rates, so they are "saving" money in their mind. This kind of thinking was reinforced by the lenders.

Consumers also view HELOCs, not as borrowing money or creating debt, but merely accessing some of their "equity" in their homes.

HELOCs may be the most dangerous part of a housing bubble.

When home prices fell in the US, the banks reduced HELOC credit limits in stride with the payments. This forced people to repay the debt without access to anymore borrowing.

It was "pay the piper" time.

Again, I heard today on BNN that a big "difference" in Canada is that mortgages and HELOCs are non recourse loans, while in the US consumers could just walk away.

Not true..............Some of the hardest hit States had recourse loans and people still walked away and declared bankruptcy.

The rest of the world has looked at Canadian housing prices and predicted a big crash.

Either they are all wrong...........or we are in for a hard time.


----------



## blin10 (Jun 27, 2011)

same story every year since 2005...


----------



## Barwelle (Feb 23, 2011)

Was there this much discussion/warning before the US collapse? I don't remember there being, but I wasn't paying as much attention back then either.


----------



## kcowan (Jul 1, 2010)

Seeking alpha is a bunch of guys like you and me expressing their opinions. Take them with a grain of salt. But you will get a bunch of great well-thought-out opinions, many in conflict with each other!


----------



## sags (May 15, 2010)

Barwelle said:


> Was there this much discussion/warning before the US collapse? I don't remember there being, but I wasn't paying as much attention back then either.


I remember, and there are still videos on Youtube, when business news stations like CNBC were openly mocking guys like Peter Schiff who was predicting the crash. I believe they gave him the nickname.......Dr. Doom.


----------



## Homerhomer (Oct 18, 2010)

sags said:


> I remember, and there are still videos on Youtube, when business news stations like CNBC were openly mocking guys like Peter Schiff who was predicting the crash. I believe they gave him the nickname.......Dr. Doom.


The more predictions one makes the better the chance of hitting it once eventually.

I have been saying for many years real estate is too expensive, bought a house 8 years ago for way too much, sold it this week for much more and way more I would ever pay for it (9 offers, no conditions on 40 year old house, 5% over asking and the asking IMO was pretty high already), and our R/E market is still much cheaper than many places around the globe.

Maybe it will crash, maybe it won't, I bet all of us (me including) thought the 2009 correction would be much more severe and long lasting, turns out for most major markets it was a bleep on the screen.


----------



## Barwelle (Feb 23, 2011)

So it sounds like the general thinking before the crash was that there wouldn't be one. But since we're being warned, and since we saw it in the US... I would think that if we do see a decline, we won't fall hard like they did. As long as interest rates aren't significantly higher once people have to renew their low-rate mortgages... and I doubt they would be, since the BOC knows it would be bad news bears if they were.

Homer, what's your plan now? Rent? Or do you have another house lined up?


----------



## Homerhomer (Oct 18, 2010)

Barwelle said:


> Homer, what's your plan now? Rent? Or do you have another house lined up?


We already bought another house, so yes, while we were able to sell our house for a good chunk, we also had to pay good money for the new one (at least this one was without bidding war, and since we had no buyer's agent I was able to get it below asking price).

I treat my house as a place to live first and foremost, I wouldn't dare to try to time it (have been wrong enough times with equities ;-), there is no way I would be putting my family through the stress and try to time R/E).


----------



## Eclectic12 (Oct 20, 2010)

sags said:


> [ ... ]
> 
> HELOCs may be the most dangerous part of a housing bubble.
> 
> ...


+1 on the way most use their HELOC.


Do you have any links for the outside of Canada sources that are predicting a Canadian crash? Most sources I can recall are Canadian.


I'm biased as a fair number of people I know were ready to snap-up the bargains in Ottawa as the high tech crashed and most complained they couldn't find anything close to what they expected would be available.


Cheers


----------



## Tom Dl (Feb 15, 2011)

We had a housing bubble in the 80s in Toronto. If you are in long term and not over leveraged it will seem like a blip. Gaming it can be profitable, but few people have the flexibility. I mean I could sell my house, buy a yacht, and sail around for a year or two, then come back and maybe snipe some good prices, but it probably isn't in the cards.


----------



## Jungle (Feb 17, 2010)

And trying to time the market could end up being a very bad idea.


----------



## sags (May 15, 2010)

The International Monetary Fund (annual housing report), Bloomberg, and Professor Robert Schiller (Schiller/Case housing index) are among those who have warned of a housing bubble.

The deviation of Canadian housing prices from historic anchors, aging demographics, consumer debt loads, and temporary availability of low cost borrowing, were all cited as reasons for concern.


----------



## Berubeland (Sep 6, 2009)

The reason you didn't hear much before the US collapse was because there were a number of factors that led to the drastic real estate downturn there. It was a bit of a black swan event certainly combined with the mortgage lending crisis and collapse of Freddie and Fannie. 

The thing about black swan events is that no one can really see them before they arrive. Once the "common knowledge" has been seen to be entirely false and the veil is lifted it becomes a complete simplicity to spot the same kind of circumstances forming again. For people in the US who were fed the same kind of drivel as Canadians and then saw the real estate market completely betray them it's easy to spot the same red flags. 

Canadians in general are in complete denial of the likelihood of a serious readjustment of the real estate market. That is virtually 100% it's just the when that remains to be seen. The impact on our economy will be devastating.


----------



## iherald (Apr 18, 2009)

*"You're About to Get Burned" - Macleans*

An interesting article (for what it's worth) about the real estate market in Canada

http://www2.macleans.ca/2012/02/28/youre-about-to-get-burned/


----------



## NotMe (Jan 10, 2011)

Agree that the likelihood of a correction is high.. but the timing is hard.

For example I predict right now that the Leafs will win a Stanley Cup.

but I'm not gonna say when, and you really need to have both the event and timing together to make a good prediction. Can't have one without the other.....


----------

