The Housing Bubble

A report from Bloomberg on Canada. “The only thing that might be colder than Toronto in January is the city’s housing market. While the bleak mid-winter is never the best time to sell a home in Canada, a string of open houses in the country’s largest city were chillingly empty on a recent Saturday afternoon. Tougher mortgage rules went into effect on Jan. 1 just as higher interest rates began to bite, and the market’s on edge, waiting to see if a downturn that began last year will accelerate under the added pressure. Double-digit price growth was volatile and dangerous, said Simeon Papailias, co-founder of the Real Estate Center, real-estate management company. The new stress test will help make sure “that we don’t have unqualified people creating bidding wars,” he said. ‘Sellers are looking for the money they were getting in May, and that’s not a reality, it’s not going to happen,’ said Papailias.”

From Better Dwelling. “Canadian real estate prices were the fastest rising in the world, just a few months ago. Now we’re claiming the opposite title, as the market explores where prices should be. Newly released Federal Reserve Bank of Dallas numbers, show a decline in home prices for the third quarter of 2017. This is the first time in over five years, that Canadian real estate prices have declined for a quarter.”

“Canadian real estate prices dropped the most since the early 1990s, according to the the Dallas Fed. Real home prices, a.k.a. home prices adjusted for inflation, fell 3.82% in the third quarter of 2017. The single quarter decline is the first decline since 2012, and the largest since the first quarter of 1991. This is the largest single quarter decline in the world according to the Dallas Fed’s global index.”

From the Saskatoon Star Phoenix. “The head of the association representing Saskatoon’s real estate agents says while the city’s real estate market is correcting itself, he expects buyer’s market conditions to persist for at least a year, and perhaps as long as 18 months. A buyer’s market exists when a city’s housing supply outstrips demand, leaving potential buyers spoiled for choice while sellers are forced to slash prices or remove their homes from the market altogether. Saskatoon Region Association of Realtors (SRAR) chief executive Jason Yochim said while any ‘appropriately-priced’ home will sell, falling prices suggest the city’s residential real estate market is returning to balanced conditions.”

“Yochim, however, was quick to point out that declining prices — which may yet be influenced by stricter mortgage rules that came into effect at the beginning of 2018 — should not be cause for alarm. ‘Because the decline in prices and activity has been so slow, it wouldn’t appear to me to be a bubble. A bubble would be a more drastic short-term drop similar to what Calgary experienced a couple of years ago.’”

From CBC News. “Prospective home sellers in Saskatoon may be doing the city a favour by lowering their asking prices. While it may be a buyer’s market, this may actually not be the best time to buy a home, according to Josh Buchanan, a Saskatoon real estate analyst. ‘Buying now means you are buying an asset with a depreciating market value, which means it’s not a good time to buy, especially for those people who aren’t certain that they’ll be staying put long-term,’ Buchanan said, adding increasing interest rates and changing government regulations negatively impact the market.”

“Tuesday’s report showed evidence that overbuilding remains high, with numerous new condos and townhouses sitting on the market unsold following their completion. Buchanan said developers were slow to respond to overbuilding in the market and new construction continued, despite demand being satisfied. ‘The quickest and easiest way to sell off this excess supply is just to cut prices significantly to attract more buyers, just like we would see in any other type of market. Unfortunately, sellers are not eager to cut prices, which is preventing the excess supply from being sold off and the market from returning to balance,’ he said.”

From CTV News. “Some foreign investors, particularly those from China, are taking advantage of Canadian loopholes to become ghost immigrants, according to David Lesperance, a tax and immigration consultant with Lesperance & Associates. Lesperance cites one recent judge’s decision from a lawsuit in which the judge said Chinese millionaire Guoqing Fu bought multiple multi-million-dollar homes in Canada while claiming just $97 in worldwide income on his taxes.”

“‘That was really pushing the edge,’ Lesperance told CTV’s Your Morning on Monday. He says the situation would have gone unnoticed if Fu’s family and his partners, the Xia family, had not turned on each other and exposed their activities in court.”

“The judge’s ruling from the case indicates Fu ‘had a large and successful business in China,’ yet he only claimed ‘a miniscule worldwide income of $97.11′ on his Canadian income tax return, despite spending millions on three different homes. ‘This was an incredible assertion given the fact he owns one of the top 10 textile manufacturing and distribution companies, based in one of the biggest textile manufacturing centres of China,’ the judge’s decision said.”

“Lesperance suggests foreign buyers are pulling off these schemes in Toronto, Vancouver and Montreal, where their homes are sitting empty despite high demand for housing in the area. ‘While they are getting the benefits of Canadian permanent residence and citizenship, they are, like this gentleman, not contributing to the tax base,’ Lesperance said. ‘They’re driving up house prices, they are denuding neighbourhoods of vibrancy and customers for local restaurants and businesses, and they’re not contributing to the tax base.’”

“Lesperance says the tactic is not isolated to one particular group. ‘It’s not endemic to one particular group of immigrants,’ Lesperance said. ‘It’s just endemic to immigrants who look at the situation and say, ‘It’s easy to cheat, I get all the benefits, the costs are low and they’re not chasing me.’ And at the end of the day, you get citizenship.’”

From the CBC News. “If all goes well, the arc of early adulthood is supposed to go: graduate, get a job, buy a house. We’re told this is the formula for success. With each milestone you reach, friends and family pat you on the back. And by the time you reach the final step, you know you’ve really made it. You’re a homeowner now. Congratulations. Welcome to the club.”

“But wait. Some smart young people in Calgary with more than enough money to buy are opting to rent. Yep. Rent. Or, as your uncle might say, ‘paying someone else’s mortgage.’ Are they crazy? Or do they know something the rest of us don’t?”

“Taking out a mortgage might make your mom happy, but a lot of things will have to go right for you to make a fraction of what she made on her first home. And if just one or two go wrong, you might find yourself trapped. Past returns are no guarantee of future returns. A cold, hard look at the numbers reveals how the scales of risk and reward can tilt in a different direction. It may run counter to conventional wisdom — the orthodoxy of ownership promulgated by governments, banks and realtors. It may prompt disapproving sighs from family members. It may even bring Tinder dates to an abrupt end.”

“It all comes down to math. Prices for a typical, detached house in our city have hovered around the $510,000 mark for the past few years, says the Calgary Real Estate Board. To buy that house today would likely cost you about $3,000 per month. That would cover the mortgage, property taxes, insurance and maintenance costs. If you wanted to rent a similar home, meanwhile, you can likely find something for $1,700 a month in the current market, which has seen vacancy rates increase fourfold during the downturn.”

“Right there, that’s $1,300 you’d save by renting — each and every month. Add that to the tens of thousands of dollars that you don’t have tied up in a down payment, and now you have some serious capital to feed into in any number of other investments.”

“Home ownership rates have been on the decline for the past decade among people under the age of 35. In the 2016 census, it was down to just 50.6 per cent. Among the baby boomer and older generations, by contrast, the rate has increased slightly to 83.1 per cent. Clearly, there’s little debate in that crowd about the wisdom of home ownership. And understandably so. ‘They kind of have a backwards-looking perspective on it,’ said Max Fawcett, a former Calgary resident who has written extensively on what he’s described as the religion of real estate.”

“The problem, he says, is prospective buyers are presented with an ‘imbalance’ of information. It comes from realtors and bankers with an incentive to sell homes. It comes from well-meaning parents who want their kids to benefit from the same returns they’ve enjoyed. It comes from governments who entice first-time buyers with the ability to borrow down payments from their RRSPs and claim tax credits for home renovations. ‘It makes it difficult for people to accurately assess the information that’s in front of them,’ Fawcett said.”

“‘I do think smart young people value keeping their options open,’ said Fawcett. ‘They know that they can buy whenever they want. That’s the great thing about being a renter … you can buy next week if the numbers change and the math starts to work in your favour or your life situation changes.’”

“In the meantime, they’re resisting the pressure to purchase. They’re more than happy to put away the money they save by renting, while enjoying the freedom and flexibility that brings. Some day, they may choose to buy a home. But for now, they won’t be swayed by their folks, their first dates or the fear of missing out.”