I’m inclined to say that it’s too little, too late, but I don’t want to sound like a bitter bear.  But I will say that, once you’ve opened the floodgates with 5% down/35-year amortizations (and kept them open for so long), it’s very hard to go back.

The housing market was probably going to correct itself anyway; these rule changes will dampen the market for sure, but it’ll be interesting to see how much of an immediate impact they have. The rule changes are set to take effect on April 19th.

See also: more details from the CBC

Globe and Mail: Banks urge Ottawa to tighten mortgage rules

Wall Street Journal: Housing Rebound in Canada Spurs Talk of a New Bubble

Globe and Mail: Ottawa says housing bubble not a concern; no plan to tighten mortgage rules

Globe and Mail: Competition Bureau seeks to smash ‘anti-competitive’ CREA rules on MLS

There is a racial divide in America; just look at what a big deal it was for a black man to be elected president in the first place. At least Chris Matthews doesn’t have his head in the sand about it. Inadvertently or not, he revealed what was going on in his mind, and possibly in the minds of other Americans of his generation, and it was a positive shift in thinking. Let’s not chastise him for it.

Now we need to do the same for Bruce Benham, COO of Re/Max.  Google his name and you won’t find much; but I think he needs to be made infamous for emphatically denying the existence of a bubble at the market’s very peak. So what I propose is this: if you have a website or a blog, make a link with the words “Bruce Benham” that points to the following url:

http://www.realestatevancouver2010.com/market.html#bubblemyth

… and let’s get this onto the first page of Google results whenever someone searches his name.

I have a pretty good idea of what was going through their minds: “If I don’t get in the market now while rates are low, I’ll never get in!” I completely understand because I have those fears myself; what if interest rates go up, and prices don’t come down further? What if the Realtors® are right, and I’m priced out of the market forever??

From a completely rational point of view, though, that likely won’t happen. If rates go up, affordability erodes, meaning consumers can’t buy as much as they used to, which will drive prices down. Most of us as homebuyers (and first-time buyers in particular) already have to leverage ourselves to the hilt if we want to buy a $400,000 property (and if you’re single or your family lives on one income, you’re already priced out). Affordability has already reached its breaking point.

These historically low interest rates that we’re currently seeing is keeping the housing bubble inflated for just a little bit longer — and luring in more first-time buyers in the process. With interest rates having nowhere to go but up, however, I am doubtful that it will end well for my friends. Best case scenario, we will be the generation that spends our entire lives paying off half a million in mortgage debt; worst case scenario, my friends will end up underwater on their mortgages, and won’t be able to afford to keep their homes when they have to renew their fixed rate mortgages 5 years from now at double the interest rate. As I mentioned in my last post, it’s better to borrow $450,000 @ 7% interest rate, as opposed to $600,000 @ today’s 4% interest rates, even though the monthly payments are exactly the same — because you know interest rates have nowhere to go but up from 4%. Better to wait until prices are low and pay a higher rate, than be stuck with a huge mortgage over 25-35 years of fluctuating rates.

Even if I am completely wrong about this and prices don’t fall, but fixed rates creep back up to 6%, I’m not too worried — there are always variable rate mortgages.  As the prime rate goes higher, we should start seeing larger prime-minus rates again. Back in 2005 when prime was 4.25%, I was offered a prime-0.8% mortgage, for a rate of 3.45%. That’s comparable to any 5-year fixed rate that I can get today. (And had I taken that prime-0.8% rate back then, I’d be paying 1.45% on my mortgage right now! Sometimes I wonder if I shouldn’t have just jumped into the condo market back in 2005 instead of sitting on the sidelines Edit: I’ve since found out that the condo I almost purchased in 2005 required remediation.  I probably dodged a bullet on that one.)

A low interest rate environment makes it a dangerous time to buy

A lot of people I talk to seem to have trouble understanding that this low interest rate environment actually makes for a terrible time to buy.  Everyone knows that these low interest rates won’t last forever — but the prevailing sentiment is to lock in before rates go up, which on the surface seems to make sense.  But what these people don’t realize is that, when rates go up, the cost of housing must come down, since we must maintain the same level of affordability.  (I firmly believe that we’ve reached the limits of affordability…. If you still think prices are going up in the near future, because of immigration or higher wages or whatever, I’m all ears, but please back up your assertions with some hard data.)

In other words, if buyers are already stretched to the limit to buy a $600,000 bungalow at today’s historically low interest rates, no one is going to have the means to buy that bungalow for $600,000 when rates go up.  The price of the home has to come down.

Now, would you rather buy a house today for $450,000 at a 7% mortgage rate (pretend for a second that mortgage rates are at 7% today)… or would you rather buy that same house for $600,000 at 4%?  If you picked the former, you win the prize.  It’s much better to owe less at a higher rate; that rate actually has a chance to come down.  On the other hand, if you pay $600,000 today at 4% interest, it’s absolutely certain that rates have nowhere to go but up, so your monthly payments are guaranteed to increase in the future.  25 years is a long time to pay off a loan, and I can guarantee that you won’t be paying a mere 4% on your loan 10, 15, or 20 years from now.

“Even if you lock in a five-year mortgage rate, you have to realize that five years from now, they will be significantly higher….” – CIBC economist Benjamin Tal

Canada’s 5-year terms are effectively teaser rates

25-35 years is a long time to pay off a loan. So why is a 5-year amortization the norm in Canada?  In the U.S., it’s common to lock in to a rate for 30 years, which provides peace of mind — you’ll know what your monthly payments are for the entire term of your loan.

In Canada, the staple mortgage product is the 5-year fixed rate.  And after 5 years, you can be sure that your rate will be significantly higher.  In effect, it’s not much different than an ARM or a teaser rate that got so many Americans in trouble during the U.S. housing collapse.

Loan-to-income ratios are out of whack

At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income.  In Canada today, we are at 7.4 times the average income — almost 50% higher.

Debt-to-income ratios are out of whack, too

At the peak of the U.S. housing bubble, the debt-to-income ratio for the average American was 127%. Today, the debt-to-income ratio for the average Canadian is at an astounding 142%.

A housing boom in the midst of a recession

Few stop to think about the absurdity of a housing boom in the middle of a recession.  This has never been the case in recessions past.  For example, in 1989, the market collapsed 28% and didn’t bottom out for five years; it didn’t return to its 1989 peak values for another nine years.

Even bank economists think a bubble is forming

A roundup of bubble comments that the major banks have been making lately.  The prevailing sentiment is that a bubble is forming or has already formed, and come mid-2010 when the Bank of Canada raises rates, we might see the start of a shake-up in the real estate market. Bad news like this is rarely seen in the mainstream media, so when so many noted economists publicly voice this opinion, it’s a good idea to perk up and listen.

The US market went kaput a long time ago, so maybe we should start considering why the Canadian market hasn’t followed suit.

A correction is most likely coming, although I’m no longer so sure we’ll see it happen anytime soon, thanks to the flagging US economy, which effectively prevents Canadian policymakers from raising rates.  The Bank of Canada would love to raise interest rates, in part to stem the bubblicious housing market, but before that can happen, the U.S. has to do it first, lest the Canadian dollar soars even further.  In light of the weak U.S. dollar and strong loonie, it’s unlikely that BoC governor Mark Carney would make such a move.

Carney is navigating tricky waters right now.  The strong loonie has hurt Canadian exports, meaning hurt for our economy.  In response, Carney has been telling the world that rates won’t be raised anytime soon and has even managed to talk it down a few cents.  On the housing front, there are some who suspect that he’s possibly convinced mortgage lenders to raise fixed rates, hoping to put a stop to any burgeoning housing bubble.

In his best case scenario, as interest rates eventually go up, it will slow the market, but not cause it to crash; the economy will start moving again, and inflation will return to the target rate of 2% without much prodding of interest rates.  5% down/35-year amortization mortgages will be the new norm and housing will still be expensive, but a return to 6%-7% interest rates won’t cause a wave of mortgage defaults, take down the CMHC and the Canadian taxpayer, and precipitate a massive tumble in real estate values.

On the other hand, if you’re a doom-and-gloomer, hyperinflation will swamp us all. But this will mean that the BoC will be forced to raise rates to tame inflation… which might also mean that the eventual effects of inflation may simply keep the nominal housing dollar figures propped up (even though it would still cause a correction in real terms). In which case, now is as good a time as any to buy, because you’re going to have to pay $500,000 for a leaky SFH anyway (even if $500,000 isn’t worth as much then as it is now).

Mind you, I don’t think these best- or worst-case scenarios will unfold as cleanly as I’ve laid out. But maybe, just maybe we won’t see a nasty housing crash in Canada.  At any rate, if you’re like me and you’d like to wait until after the crash to buy, you may be waiting for a long time, especially if the economy takes much longer to recover and rates stay low for years to come.

Their realtor: “Um, I’m sorry, but there’s an accepted offer on that house already.”

Our realtor: “What?”

Their realtor: “My client wanted to keep prospective buyers going through the house, so I was instructed to keep the accepted offer a secret, in case it fell through.”

Our realtor: <Jaw drops to the floor>

—–

To the owners of 785 Viaduct Ave: thanks for getting our hopes up and for wasting our evening. You guys suck.

First, if you’re not familiar with bonds, check out this excellent explanation of what bonds are. For those of you too lazy to click on the link, basically bonds are like loans: when the Government of Canada “issues you a bond,” you’re loaning money to the government to finance their operations. In return, they agree to pay you interest on the loan you’ve given them.

Technically, a bond is considered a “debt security”, which simply means the government is indebted to you.

The government isn’t the only entity that can issue bonds; companies can do it, too, in order to raise money for whatever it is they need to do.

Mortgage lenders (banks as well as private lenders) work this way — they raise capital by selling bonds. They find investors who have piles of money, issue bonds to those investors, and pay those investors interest. Now the mortgage lender has an even bigger pile of money; they turn around and use it to offer loans to us poor homeowners. And that, in a nutshell, is why bond yields are closely linked to fixed mortgage rates.

As I write this, the GoC benchmark 5-year bond yield has shot up to 2.88 from 2.50-2.64 just last week, meaning private institutions were also forced to offer their investors that much more for their capital. (Government of Canada bonds are considered practically risk-free, since they’re backed by the government; bonds from private institutions are not risk-free, hence investors demand higher interest for lending them money.)

Mortgage lenders wasted no time in passing on that added cost to homeowners, raising their fixed rates. Currently, the Big 5 banks’ 5-year “special offer” rates are at 4.54% or above.

I’m now telling buyers to wait a couple months. We’re at the peak price for this year, there’s a very poor and limited selection, and there’s not much downside to waiting it out. Many buyers with pre-approvals have a guaranteed interest rate that will still be valid in August. Sure, there’s 3500 SFH listed for sale, but 90% of them are un-sellable at their present price. That’s why there’s such a panic when an attractive new listing shows up. A sales-to-new-listings ratio of 80% is the sign of an overheated market.

We’ll let things settle down for a while. History tells us the average and median prices will start to drop in July, and more listings will be available soon.

Read the post here: http://www.bobtruman.com/blogs/bob_truman/archive/2009/06/28/it-s-all-down-from-here.aspx