Nobel laureate economist warns Canada at risk of housing bubble shocker

[nik-]

Originally Posted by polak

I don't know, my theory might be ridiculously off target but in an economy like Alberta's, wouldn't a real estate bubble burst only effect those that are using additional properties as investments? Since our economy is mostly reliant on external or recession proof demand (Oil, Agriculture, Low Cost-Big Box Retail hubs...etc) I can't imagine housing prices dropping and people losing money on investment properties would ravage our economy and lead to rampant unemployment i.e. the US crisis?

Those people who only have one, primary residence, should be okay outside of the fact that they may be over extended due to Canadian HELOC love, but if their jobs stay intact, they should still be able to make their payments and what not...?

I pulled all of this out of my a** as I was typing this so feel free to rip me a new one...

The economy as a whole is based in large part on housing. It happened here last time and we took a dip, why would it be different if it happened again.

[Brannigans Law]

Right now I'm looking at going into a mortgage at 2.89 % for 5 years for my house. I have until November to decide on that rate or go with a higher rate for 10 years. I don't think I will be moving out of this house for the duration of a either a 5 or 10 year mortgage, and the fact that rates are so low right now makes a 10 year lock in look attractive. The thing is that even if rates shoot up tomorrow to 5%, I still have my 2.89 until November of 2018. This is all really a huge gamble, how the hell can I guess what interest rates will do in all that time?

I have a feeling I'll be jostling with this decision until the very last second.

[GGG]

Originally Posted by nik-

The economy as a whole is based in large part on housing. It happened here last time and we took a dip, why would it be different if it happened again.

The 2007 reccession in Canada was to a large degree caused by banks not having money to lend and fund projects. A lack of available capital prevented major projects from going ahead. So while it was tied to housing I would argue it was the banking issues that were the problem.

Looking at the chart above our affordability is the same as in 1985. So was 1985 right before the late 80's housing crash or in the middle of the early 80's boom?

[Street Pharmacist]

Originally Posted by Brannigans Law

Right now I'm looking at going into a mortgage at 2.89 % for 5 years for my house. I have until November to decide on that rate or go with a higher rate for 10 years. I don't think I will be moving out of this house for the duration of a either a 5 or 10 year mortgage, and the fact that rates are so low right now makes a 10 year lock in look attractive. The thing is that even if rates shoot up tomorrow to 5%, I still have my 2.89 until November of 2018. This is all really a huge gamble, how the hell can I guess what interest rates will do in all that time?

I have a feeling I'll be jostling with this decision until the very last second.

The gain from the rates lowering won't hold a candle to the savings if the rates go up.

[blankall]

Originally Posted by Brannigans Law

Right now I'm looking at going into a mortgage at 2.89 % for 5 years for my house. I have until November to decide on that rate or go with a higher rate for 10 years. I don't think I will be moving out of this house for the duration of a either a 5 or 10 year mortgage, and the fact that rates are so low right now makes a 10 year lock in look attractive. The thing is that even if rates shoot up tomorrow to 5%, I still have my 2.89 until November of 2018. This is all really a huge gamble, how the hell can I guess what interest rates will do in all that time?

I have a feeling I'll be jostling with this decision until the very last second.

Theoretically anyways, people with a lot more knowledge on the subject than anyone here are responsible for setting the rates. They should have set them so that the decision is a coin toss for the average person.

What is the 10 year rate they are offering? Also, rates are highly negotiable. You should always negotiate down a few tenths of a point.

[Brannigans Law]

Originally Posted by blankall

Theoretically anyways, people with a lot more knowledge on the subject than anyone here are responsible for setting the rates. They should have set them so that the decision is a coin toss for the average person.

What is the 10 year rate they are offering? Also, rates are highly negotiable. You should always negotiate down a few tenths of a point.

2.89 over 5 years vs 3.67 over 10 years fixed

[GP_Matt]

Originally Posted by Street Pharmacist

The gain from the rates lowering won't hold a candle to the savings if the rates go up.

I always thought there was a pretty stiff penalty for a 10 year rate freeze so the punishment could be severe even if rates gradually go up.
Historically, a variable rate mortgage is more often than not the cheaper option. This may well be one of those times when it is not the cheaper option but one never knows.

I renewed my mortgages on two properties 2.5 years ago when the best variable rate I could get was 2.3% while 5 year fixed were sitting around 3%.
The prevailing thought was that rates were going to go up eventually similar to today but I chose variable anyway. My thought was that if the rates go up gradually 6 times over the course of my mortgage I would come out slightly ahead. Any more than that and I would behind and any less I would be ahead. 2.5 years later they haven't gone up at all so my new breakeven point is if the rates go up 150 points today and stay stable for the rest of the term. I can still lose, but it will take a much bigger climb in rates over the next year or two for that to happen. A 300 point bump in the last year would be close.

The same logic applies to a 10 year mortgage. You should play with the numbers a ton before you decide. Look at how much extra you will pay in the first 5 years to save on a potential hit in the next 5 years.

Something else to look at is to apply the higher 10 year payment amount to a 5 year rate. The additional money that you knock off of your mortgage might more than compensate for any risk of future rate hikes.

[Vulcan]

Originally Posted by GGG

The 2007 reccession in Canada was to a large degree caused by banks not having money to lend and fund projects. A lack of available capital prevented major projects from going ahead. So while it was tied to housing I would argue it was the banking issues that were the problem.

Looking at the chart above our affordability is the same as in 1985. So was 1985 right before the late 80's housing crash or in the middle of the early 80's boom?

In Calgary the housing crash followed the recession and hit hard about 1984 and didn't recover until about 1990. I was paying about a 17.5% interest rate on my house which was probably about average. So while the affordability has stayed the same costs that were previously sucked up by inflation is now taken in profit by developers and home builders and the home buyer is still in the same boat.

[Brannigans Law]

If my mortgage interest rate ever climbed to 17.5% I'd have to burn down my house.

[nik-]

haha, at 17% my semi monthly payment would be $400 more than what I pay in two semi-monthly payments.

Burn it down indeed.

[albertGQ]

I would take the 5 year rate at 2.89 over the 10 year rate at 3.67 any day

[Table 5]

Originally Posted by mykalberta

Does anyone have any home prices for San Fancisco? I would compare Vancouver to SFO for the most part (sans the tech industry). I am wondering if SFO is experiencing the same East Asian price influence that YVR is?

It would seem similar to YVR for home pricing according to the below website

I think SF is a bad comparison to Vancouver because San Francisco actually has an economy, whereas Vancouver just lives in this bubble where nobody seems to really work, yet they all live in crazy expensive places.

The amount of action in SF right now is amazing. I can't tell you how many friends Ive had move from NYC to SF because of jobs. Even myself, Ive seen a noticeable shift in my clientele from east to west...and they aren't from LA, but SF. LA might get all the stars and attention, but SF is the economic hub of California. It's stupidly expensive, but you can kind of understand why.

[krazycanuck]

Vancouver is a scary proposition. I don't think it's an if but when that bubble bursts. Particularly with China's housing bubble about 5 years overdue from exploding. I imagine that will have some pretty big ripple effects on markets with big Chinese foreign ownership.

[Vulcan]

Originally Posted by nik-

haha, at 17% my semi monthly payment would be $400 more than what I pay in two semi-monthly payments.

Burn it down indeed.

Lots just walked away from their mortgages, but it wasn't because of the interest rates it was because they lost their jobs.

[Winsor_Pilates]

Originally Posted by krazycanuck

Vancouver is a scary proposition. I don't think it's an if but when that bubble bursts. Particularly with China's housing bubble about 5 years overdue from exploding. I imagine that will have some pretty big ripple effects on markets with big Chinese foreign ownership.

How much of Vancouver is owned by Chinese foreign ownership?

[krazycanuck]

Originally Posted by Winsor_Pilates

How much of Vancouver is owned by Chinese foreign ownership?

You're the Vancouver real estate guy...enlighten me. I'd peg it at anywhere from 2-7%.

[Vulcan]

Originally Posted by Winsor_Pilates

How much of Vancouver is owned by Chinese foreign ownership?

Unlike most countries, cities and jurisdictions around the world, neither Metro Vancouver, British Columbia nor Canadian government agencies keep public records on foreign ownership of real estate.




For some unstated reason, B.C. public officials are unwilling to learn from what has been done for decades in diverse political places – such as Florida, Switzerland, Austria, Prince Edward Island, Manitoba, Alberta, Denmark, Japan, Indonesia, Bali, Thailand, Australia, Turkey, Singapore and Beijing.

In addition, concern about foreign ownership clearly cuts across Metro’s ethnic spectrum. The Vancouver Foundation survey, for instance, found residents who speak Chinese in their homes, by a margin of almost three to one, also agree “there is too much foreign ownership of property here.”

So it's not a racist problem but a problem for all Vancouver residents. How the government, if not corrupt, ignores this problem is puzzling.

http://blogs.vancouversun.com/2013/0...ign-ownership/

[Winsor_Pilates]

Originally Posted by krazycanuck

You're the Vancouver real estate guy...enlighten me. I'd peg it at anywhere from 2-7%.

Well I didn't make the statement, so not my job to enlighten. That's why I was asking you.

Not trying to take shots at you personally, but that statement gets tossed around a lot by people who don't have any stats to back it up and often by people who don't even live in Vancouver, let alone deal with Vancouver real estate.
I'm just curious how it has become a "fact" that people keep quoting without actually any evidence, empirical or anecdotal.

As I see it, immigrant ownership and foreign ownership gets used interchangeably but are 2 very different things.

Vancouver has a lot of the former, but I don't think the percent is very high on the latter which is what always gets stated.
What people are really complaining about is that wealthy immigrants are coming here with sources of income beyond the local 9-5 jobs, and it's hard as hell for your average 9-5er to keep up.

Fair complaint and something I can certainly relate to myself, but that's not a "foreign ownership" problem.

[Red]

Originally Posted by albertGQ

I would take the 5 year rate at 2.89 over the 10 year rate at 3.67 any day

What is the second 5 year chunk is at 5% or even more? It's likely that we will see normal rates coming back soon. Mortgages will be going up again in a few days and the economy is in an upswing so BOC will probably reverse the emergency low rates. 5 - 6% may be a reality in the next 2-3 years.
Something to keep in mind.

[Brannigans Law]

http://www.thespec.com/news-story/38...s-on-the-rise/

Rates are going up north of 3%