The Housing Bubble

The Comox Valley Local News reports from Canada. “Vancouver Island Regional Assessor, Bill MacGougan, encourages property owners to open their assessments and take a close look: ‘Property owners, they’re always interested in how the value of their biggest asset is holding up and from that perspective it’s a property owner’s market. I’m not commenting on the market going forward, but in terms of people receiving their assessments they can be assured that their asset hasn’t lost value.’”

The Vancouver Sun. “For the first time in many years, a significant number of homeowners in some areas of B.C. will see a drop in their property assessments, B.C. Assessment said. The most significant decreases will be seen in Whistler, Pemberton, on the Sunshine Coast and Bowen Island, said Jason Grant, B.C. Assessment Authority assessor for the Vancouver Sea to Sky region.”

“‘In stark contrast to last year, where (more than) 25-per-cent increases weren’t unusual, most residential homeowners (in Vancouver Sea to Sky) will open their assessment this year and say, ‘I’m within about five per cent off of where I was last year,’ said Grant McDonald, deputy assessor for B.C. Assessment’s Vancouver Sea to Sky region. ‘Looking at the city of Vancouver, if you drew a graph for a 10-year period from 2002 to 2012, it pretty much is a very steep curve in terms of value increases, with a blip in 2008 when values appeared to be falling a bit. Now it has sort of flattened off; the market is taking a bit of a breather.’”

From Saanich News. “B.C. Assessment’s area assessor for Greater Victoria Reuben Danakody stresses to homeowners that their assessment is not based on the current market, but on numbers from July 2012. ‘The market has softened since July,’ he said.”

The Province. “Pat Kelly, president of Whistler Real Estate, said vacation properties are still feeling the effects of a massive real estate downturn which began in the U.S. four years ago. ‘A year or so ago there was some [additional] consolidation of the market in Whistler,’ Kelly said. ‘Credit isn’t quite as available as it used to be. People are more conservation spending the extra $100,000,’ he said.”

The Times Colonist. “According to Sooke-based real estate agent Tim Ayres of Royal LePage Coast Capital, the drop in Sooke’s assessment average is no surprise given sales have dropped from 402 unit sales in 2009 to 261 in 2012. Ayres also noted the assessment is bringing some reality to the Sooke market after years of inflated prices. ‘Properties have tended to stay on the market longer and with less demand. Sellers have had to accept less than they’d hoped for in many cases,’ Ayres said.”

“Victoria Real Estate Board president Shelley Mann said similar drops in the average assessment — decreases of 6.69 per cent in Highlands and 6.36 per cent in Langford — is also all about correction after years of inflated pricing. ‘They were priced too aggressively for what they were and now the market has caught up to them and they had to come down in both assessments and market value,’ she said.”

The Globe & Mail. “Since 2000, the price of houses across Canada has risen 127 per cent; nearly 50 per cent since 2006. It’s no surprise that housing is expensive, but there’s no relief in sight. If anything, housing is likely to become even less affordable later this decade as interest rates return to more normal levels – unless there is a precipitous decline in real estate prices.”

“In the Vancouver market, houses are far less affordable now than they were even during those earlier interest-rate spikes, the Royal Bank’s figures show. The current ownership cost of an average two-storey house eats up close to 80 per cent of average household income. Elsewhere in the country, the average is closer to 50 per cent.”

“A health-care worker in southwestern Ontario who didn’t want his name used, said mortgage and child support payments make up roughly half of his take-home income, and that leaves very little for long-term investments such as RESP plans for his kids’ education, or retirement savings. ‘Any forward planning is really limited,’ he said. ‘When you are living this way it feels precarious, and that is with a great mortgage rate.’”

“The big worry, he said, is what will happen if rates rise and his payments increase significantly. That could require a drastic lifestyle change such as renting out his basement or selling the house and renting. ‘That weighs heavily on me,’ he said.”

“It was a sweltering afternoon in July, 2006, and David Dodge was meeting with executives at Canada Mortgage and Housing Corp. in Ottawa, in search of the answer to a pressing question: Why were they lowering their standards in such a reckless fashion? As Canada’s largest mortgage insurer, federally-run CMHC is a gatekeeper to the housing market, influencing who gets to buy a home and who doesn’t. For decades it has sought to make it easier for people to enter the housing market, but it has also enforced some strict rules, requiring home buyers to make minimum down payments and pay off their mortgages in 25 years.”

“Now CMHC was abandoning its old ways. Business was now being eroded as a result of the arrival of aggressive U.S. insurers into Canada. The American companies were willing to do things CMHC had never done. Some were even backing ‘zero-down’ mortgages in which the buyer borrowed every dollar needed to pay for the home. It was a race to the bottom, and CMHC was playing along.”

“‘We didn’t lead it … As we lost market share, we would follow what the American companies were doing,’ said former CMHC chairman Dino Chiesa. With money available and the economy booming, home buyers streamed into the market and prices soared.”

“One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length. The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.”

“‘We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,’ Ms. O’Brien said. ‘We probably would have waited.’”

“Home buyers have responded to low rates and easy mortgage rules ‘by bidding up the price of houses,’ said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.”

“‘You can never really provide cheap housing,’ argues Moin Yahya, associate professor of law at the University of Alberta. ‘All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.’”

“But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ashleigh Egerton and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.”

“‘Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,’ Ms. Egerton says. ‘I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.’”