The Housing Bubble

A report from North Shore News in Canada. “For anyone hoping a quick home sale on the North Shore will still result in lottery windfall, the real estate market has news – the party’s over, at least for now. Two years ago, gold rush fever gripped the real estate market, particularly at the high end in North and West Vancouver. Today, the market can best be described as becalmed, with potential buyers and sellers warily waiting each other out. When potential buyers view a detached home on the North Shore these days, instead of asking ‘How soon are you taking offers?’ or ‘How much over the asking price will I have to offer?,’ the questions are more likely to be ‘How long have you been on the market?’ or ‘When was your last price reduction?’ or ‘What is your assessed value?’ said Brent Eilers of Remax Masters Realty, a Realtor who’s been in business on the North Shore for 35 years.”

“‘That’s a dramatic difference,’ he said. ‘When the market was booming in 2016, everything was selling.’ In West Vancouver, sales of detached homes are down 63 per cent compared to historical norms and down 82 per cent since the fever pitch of 2016, he said.”

“According to the real estate board statistics, the price of a ‘benchmark’ West Vancouver home was $2.9 million in the first quarter of this year, compared to $3.1 million during the same time last year. Homes are also staying on the market for longer before selling and are having to reduce prices, he added. ‘The top end has fallen off the turnip truck.’”

From the Vancouver Sun. “Despite a feeling of ever rising price gains, there are signs that some buyers are reaching ‘a cause for pause when looking at some of the prices,’ especially at the top end of the market, says Michael Ferreira of Vancouver-based Urban Analytics, which provides data about new condos for developers, planners and bankers. According to independent March figures produced by SnapStats Publishing Company, the average condo price in West Vancouver dropped 33 per cent in the past two months from $1.492 million to $938,000. ”

“It’s a sign that while clamouring will continue and prices will keep rising for buyers of condos in the $700,000 to $800,000 range and lower, more established, savvy buyers could be starting to step back. ‘The average prices of condos in downtown Vancouver dropped from $950,000 to $840,000 in the last two months because of the change in high end condo prices,’ says Ian Watt of Sotheby’s International Realty.”

From CBC News. “Nearly half of all new condos sales that were finalized last year in the Greater Toronto Area were for rental purposes, but income from them could be falling short of ownership costs, according to a new study by CIBC. Rental investors accounted for 48 per cent of new condo closings in 2017— with the majority of them buying the property through a mortgage at 77 per cent, according to the CIBC Capital Markets and Urbanation report.”

“But more than 44 per cent of mortgage holders were cash flow negative — meaning the owners were spending more to maintain the condos every month than they were getting in rental income. The ‘changing economics’ of holding condos as an investment, while supply in the market increases within the next three years could pose a challenge to investors, said CIBC economist Benjamin Tal. ‘We estimate that for new units in development that were pre-sold over the past year and are tentatively scheduled for completion in 2021, in order for carrying costs to be covered with a 20 per cent down payment, rent would need to rise by 17 per cent over the next four years if there was no change in mortgage rates,’ he said in the report.”

“If interest rates did rise by one percentage point, rents would need to increase by an average of about seven per cent a year, he added.”

From the Financial Post. “Nearly half of all investors who bought condominiums completed in the Toronto area last year aren’t making enough rent to cover their holding costs, despite chalking up exceptional gains on the value of their properties, a new study finds. No less than 44 per cent of investors who took possession of new units in 2017 were in negative cash flow. Though 45 per cent of those investors were short by less than $500 per month, another 20 per cent were short between $500 and $1,000 per month. And 34.5 per cent were in the hole for more than $1,000 per month.”

“Roughly 60,000 new units are currently under construction in the GTA and 20,000 new units are expected to be completed annually between now and 2021. ‘We know now that many of them are in negative cash flow, but they also made very nice money on their investment,’ said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. ‘The question is will they begin to sell?’”

From Our Windsor. “The Toronto housing bubble resembles a drug epidemic in that it’s dangerous, addictive and will destroy your health, bank account and family. The pills dangle before your eyes. Yes, you get a wonderful floating high when you score a big profit based on nothing but the passing of time and a well-timed flip. But sooner or later you’ll encounter a sudden drop in the market and it will do you in.”

“‘This impacts your health. Financially, it breaks families,’ one trapped homebuyer told the Toronto Star’s real estate reporter, Tess Kalinowski. He is in a pickle. He offers lessons for the fortunately not-yet-pickled. Kalinowski writes expertly on the consequences of an unreliably hot market. (There is no such thing as a reliable one. That’s the nature of the beast.) Kalinowski’s job is to take the long view. The buyers took the short one. Readers are aghast. No, we would never do that. But we might.”

“The sad thing is that the buyers had no pressing need to move in the first place. Their error was in seeing their homes not as nests but as units to gamble in the Toronto housing casino. Everyone has to live somewhere. They should have stayed put.”

The Hamilton Spectator. “Real estate sales in Hamilton-Burlington have plummeted for the third straight month — and this time prices took a sizeable tumble as well. The Realtors Association of Hamilton-Burlington says residential sales fell by 37. 8 per cent in March 2018 compared to a year ago. Sale prices fell by 13.8 per cent. That means the average sales price in Hamilton-Burlington was $530,843 last month compared to $615,776 in March last year.”

“The average sale price of freehold homes fell 15.5 per cent. The Hamilton-Burlington area was not alone is experiencing the declines in sales and prices. ‘Our area experienced similar cooling off as is being reported by other real estate markets in the Golden Horseshoe area,’ said RAHB CEO George O’Neill. O’Neill said ‘the price drop is catching up to the decline in sales … as people see the properties sitting longer. In order to sell them, the prices have to come down. That’s pure supply and demand economics.’”

From York Region. “The price of homes in York Region are inching up but remain significantly lower than last year, the figures show. Prices increased 4 per cent, from an average $898,888 in February to $939,659 in March. But that is down 20 per cent from the average of $1,182,406 in March 2018.”

“Meanwhile, house sales continue their upwards trend but also remain well off the pace of last year’s frantic pace. Sales were up 24 per cent, from 805 in February to 1,066 in March. But that is 44 per cent lower than the 2,402 homes sold in March 2017.”

From the Calgary Herald. “The average Alberta household would see debt-servicing costs shoot up by more than $1,200 a year — the highest jump in the country — if interest rates rise by one percentage point, according to a new report by RBC Economics. It could be worse. Such an increase would cost the Alberta treasury $226 million. We can quibble on who would feel more pain, but the simple fact is interest rates have been climbing in Canada since last summer.”

“‘On a household basis, it’s in Alberta where the debt load is the highest and the debt-service costs are highest,’ said RBC senior economist Robert Hogue. ‘It doesn’t mean Alberta households are on the edge of a precipice, because they do earn more still than Canadians in other regions of the country. But that being said, they will probably be more sensitive to interest-rate increases than in other parts of the country.’”

“Hogue also believes Albertans would feel the effect of higher rates sooner than other Canadians because more people in the province have shorter-term mortgages and will face an interest rate reset.”

From Chat News Today. “A shot in the arm could be on the way to the Medicine Hat housing market. The City’s Land and Business Support Department is looking at lowering prices on a number of subdivisions that have sat empty for a decade. A focus is being put on building townhomes and condos, with only around 30 units being sold in Medicine Hat last year.”

“The City is looking at major decreases in three neighbourhoods, slashing land prices of up to 40 percent in some cases. The largest proposed cuts would be in Ranchlands, with four properties being considered for price adjustments. Three of the four lots would see reductions above 37 percent, including a one-acre parcel currently listed at $768,000 potentially dropping to $462,000.”

“Garry Ruff with the Canadian Home Builders Association of Medicine Hat said it’s a great opportunity for developers. ‘There’s probably developers and builders out there that have looked at these properties,’ said Ruff. ‘Crunching the numbers, they felt it was a little too tight. But, this might give them the opportunity to move forward, purchase the properties, and build something for prospective buyers.’”