The Housing Bubble

News 1130 reports from Canada. “No one is talking about a market crash anymore as concerns swing back to unaffordability for much of the Lower Mainland. Comparing major cities across the country, the latest RBC Housing Trends and Affordability Report finds it now takes more than 84.2 per cent of pre-tax household income to service the cost of owning a bungalow in Vancouver, a jump of 2.0 percentage points from the previous quarter of this year. Toronto is a distant second at 55.6 per cent. Montreal is third at just 38.3 per cent. RBC Economics calls affordability in Vancouver ‘uncomfortably strained.’”

From Global News. “Vancouver-based website Pricey Pads found a 76-year-old home in Point Grey on 1.197 acres, listed for $22.8 million. The home does have a fantastic view, but it’s not waterfront. However, the home is currently boarded-up and the value is primarily in the land. The creator of Pricey Pads, Mitchell Owsanski, wanted to see how many authentic chateâus in France you could buy for the same price as the Point Grey home. The answer? Nine.”

“Owsanski says many of the chateaus are on large plots of land. ‘They are in the countryside but regardless, some of them are on 400 acres,’ he said.”

“It would cost $22,606,270 to buy all nine French chateâus, $193,730 less than the single Vancouver tear down — enough savings to pay for hundreds of flights between Vancouver and Paris. The Point Grey property is also still on the market.”

The Financial Post. “At the age of 38, Lisa, as we’ll call her, finds herself in the vise of wage compression and rising living costs. Her salary has declined in the last year and mortgage payments, fees and taxes for her downtown Vancouver condo now cost her $2,149 a month, which works out to more than half of her $3,758 monthly take home income.”

“‘Buying my condo was a big risk,’ Lisa explains. ‘I want to work toward paying it off. Is it possible for me to retire at 65 or maybe a little later after I have paid off the condo?’”

“Family Finance asked Graeme Egan, a financial planner and portfolio manager with KCM Wealth Management Inc. in Vancouver, to work with Lisa. He sees the condo, which has an estimated market value of $335,000, as a foot in the door of the Vancouver housing market. Lisa could sell the condo, pay off her loans, and walk away. She would be free to rent equivalent space and save perhaps $500 a month. She would be mobile, could easily take jobs in other cities and would be free of debt. However, she would have given up a good asset in valuable real estate.”

“Frugalness has given Lisa an opportunity to have what will be an unencumbered asset, her condo, after it is paid off by age 49 or 50. If the condo, with a present market price of $335,000, appreciates at just 2% a year over inflation, it will have a theoretical market price of $595,000 in 2013 dollars at her age 67. Every year she pays down the mortgage, her equity will grow.”

The Globe & Mail. “There are signs that rents in Toronto’s condo market are on the verge of decreasing, at a time when new landlords are already dealing with low returns, a report by Veritas Investment Research analyst Ohad Lederer says. This comes at a time when someone buying a condo in Toronto as an investment stands a one-in-two chance of enduring negative cash flows each month of more than $200, according to the report. Shaun Hildebrand, senior VP at condo research firm Urbanation, expects upwards of 20,000 new condo units to come on stream annually over the next three years.”

“The report illustrates the potential implications of these factors in one worrisome chain of events: ‘In one possible scenario, the Toronto rental market may no longer absorb supply as it comes on-stream, resulting in lower rents and increasing cash outflows for landlords, who then decide to sell, at first in a trickle and then in a thunderous herd. In this scenario, condo prices could drop dramatically, given relatively small unit sizes that do not attract a wide segment of potential buyers and the already weak underlying fundamentals.’”

“Toronto condo developer Barry Fenton, CEO of Lanterra Developments, says the industry remains confident in the condo rental market. For one thing, he noted that he and many other developers are now offering investors rental guarantees when they buy units in buildings that haven’t been built. At the Britt condos, Lanterra sold 100 units to investors with a guarantee that they’d obtain more than $3 per square foot in rent for two years, or Lanterra will pay it, Fenton said. ‘We’re not here to lose money,’ he said.”

“Construction now represents 7.1 per cent of Canadian economic output, a sharp increase from the 5.2 per cent in 2000, Fitch Ratings said in a report to be released Tuesday. The high level of employment and individual wealth tied to housing means that a ‘housing downturn could have serious consequences for the overall economy,’ the ratings agency said.”

“Separately, the country’s mortgage brokers are warning that the market is on the verge of a drop in housing starts. ‘If what’s happening in Toronto is at all representative of the rest of the country, there is a big correction coming in construction starting about now and proceeding through the coming year,’ said Will Dunning, chief economist of the Canadian Association of Accredited Mortgage Professionals. ‘If we see a reduction of 30- or 40- or 50,000 housing starts, we’re talking close to 100,000 jobs directly being impacted, and then ancillary jobs as well.’”

“Fitch noted that ‘across the country, but particularly in Vancouver and Toronto, high, or even record numbers of units, are currently under construction’ and said that construction activity is often a response to higher real estate prices than to a population boom.”

From Reuters. “Housing markets are booming again in parts of the U.S. and Britain and they haven’t stopped doing so in Canada for the better part of a generation. What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.”

“Scanning through the results of the latest Reuters surveys of property market analysts and economists would leave any reader with a memory stretching back before 2008 with a sense of déjà vu. After all, interest rates are even lower, stock markets are soaring to record highs, and a rapid expansion in household debt in all three countries is driving the property market higher, leading what one economist in Britain, lamenting poor trade performance, has called the ‘estate agent-led’ recovery.”

“Asked if prime London property is an example of an asset price bubble, Stephen Lewis of Monument Securities says: ‘A ‘bubble’ would imply that prices might fall suddenly and steeply, but there seem to be enough international cash purchasers to prevent that happening.’”

“Despite the fact that it has had no correction even while the U.S. market has fallen by more than a third and started to recover, the Canadian market is taking off again. And analysts do not sound worried. Property analyst Will Dunning says: ‘The government continues to mis-characterize the housing market as overheated, when it is barely in balance. If you look at the price indexes… they’re all showing price increases somewhere in the range of 3 percent. A 3 percent price increase is pretty moderate. It’s reasonable. There have been a few places in the country that have been hot lately, particularly Toronto and Vancouver. I think that’s a very short-term response to interest rate changes.’”

“Even those who think there could be a correction cling to wild beliefs, not expressed very clearly, of why this time it would be different. Dana Peterson at Citi says: ‘Prices and activity could fall dramatically, but it would not be a U.S.-style, global credit market event since much of the impact could be absorbed by domestic factors.’”