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“Households with elevated levels of debt are more vulnerable to increases in interest rates”, the Canada Mortgage and Housing Corporation redundantly observes in its latest bulletin and warns that “with interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets.”

Naturally, this increased debt payment burden usually come at the cost of reduced consumption, decreased savings or opting to make lower repayments on principal amounts. Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges.

And, as the CMHC ominously warns, if an increasing number of borrowers begin to default on their loans, financial institutions may decrease lending activities in response.

These negative effects could then impact other areas of the economy. Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output, higher unemployment, and last longer compared to countries with lower debt levels.

Here are some of the latest troubling observations on Canadian household debt levels from the CMHC:

Household debt to disposable income near record levels

The debt-to-income (DTI) ratio is a measure of the relative vulnerability of indebted households. While households may be able to service their debt during periods of low interest rates, some may face challenges when rates rise. Highly indebted households have usually few debt consolidation options to respond to increasing debt service costs.

Total household debt relative to disposable income has been trending higher as indebtedness has been rising faster than incomes, with mortgage debt being a major contributor, counting for two-thirds of all outstanding household debt in Canada. While the increasing trend in the Canadian DTI ratio has now paused, it remains near a record high, hovering around 170% in Canada and varies significantly among Canada’s metropolitan areas (see chart 1).

…click on the above link to read the rest of the article…

CMHC Finds Irrational Exuberance in Vancouver & Toronto

July 31, 2018

CMHC Finds Irrational Exuberance in Vancouver & Toronto

There is much to learn from financial mania’s. In particular, the role of human behaviour responsible for inflating asset prices to previously unimaginable heights. Economist Robert Schiller has done some excellent work on this topic in his book Irrational Exuberance.

In essence, Schiller highlights a few key themes. Mainly that real estate booms seem just as mysterious and hard to understand as the stock market booms when they happen, there are always popular explanations for them- explanations that are not necessarily correct, but people love a good story. Meanwhile, higher prices tend to drive a positive feedback loop where initial price increases lead to more price increases as the effects of the initial price increases feedback into yet higher prices through increased investor demand. This second round of price increases feeds back again into a third and then a fourth round, and so on.

A recent publication from CMHC highlights strong human behaviour dynamics have been playing out in the Vancouver & Toronto Real Estate markets. After surveying 30,000 recent homebuyers, CMHC found evidence of euphoric and perhaps irrational behaviour.

For instance, respondents were asked about whether how much they paid was aligned with their plan budget. Respondents were also asked about a series of choices regarding location, size and timing of purchase. Choices all potential homebuyers must consider before buying a home in both Vancouver and Toronto, 48% of homebuyers respectively spent more than they budgeted.

CMHC believes home buyers may have experienced a fear of missing out, citing that homebuyers measure the value of a home through rule of thumb mechanisms like, “it’s a hot market, I can’t miss out, it’s really tight right now-will have to revise our budget if we want to get in” all of which are phrases pushing homebuyers to overvalue an investment.

…click on the above link to read the rest of the article…

CMHC: 55% Of Toronto And Vancouver Real Estate Buyers Were In A Bidding War

June 28, 2018

CMHC: 55% Of Toronto And Vancouver Real Estate Buyers Were In A Bidding War

Have you ever woke up after a night of drinking, and only had a vague recollection of what happened? Then your responsible friend sets off a chain of text messages, trying to figure out where you went wrong? Well that’s what the Canadian real estate industry just did, and man-o-man did people screw up. The Canada Mortgage and Housing Corporation (CMHC), the Crown corporation in charge of mortgage liquidity, conducted a massive survey of recent buyers in Toronto, Vancouver, and Montreal. After getting drunk on exuberance, buyers indulged in a little too much borrowing, blaming everything from land scarcity to foreign buyers for the ~~street fights~~ bidding wars they entered.

About The Survey

The CMHC designed a massive survey to try and figure out where buyer exuberance started. Buyers in Toronto and Vancouver saw a quick rise in home prices, and adopted “excessive” expectations of price growth. To determine where the disconnect between fundamentals and price growth started, they took a novel approach – they asked the buyers. 30,000 recent buyers were sent surveys, asking questions ranging from what their budgets were, to why they didn’t stick to their budget.

The majority of price movements were driven by exuberance in Toronto and Vancouver. Yes, fundamentals played a part – but a small part. Instead, the survey focuses on finding out which data points buyers felt drove their FOMO. The fear of being “locked out” is always a powerful motivator, which tends to amplify the read on fundamentals.

Now, issues like foreign buyers are important, and need to be tracked and dealt with. However, no one forced anyone to buy in the small window of exuberance. The homeowner life didn’t choose these buyers, buyers chose the homeowner life.

…click on the above link to read the rest of the article…

House flipping tax could curb speculative foreign money, CIBC says

May 14, 2016

House flipping tax could curb speculative foreign money, CIBC says

Tax on home flippers may be helpful, but most foreign investors are likely legitimate, Benjamin Tal says

Canada lacks concrete data on the level of foreign investment in the country's housing market, experts say.

Canada lacks concrete data on the level of foreign investment in the country’s housing market, experts say. (Daniel Acker/Bloomberg)

In a report Friday, Tal delved into a topic that is currently a major focus of policymakers: the impact of foreign investment on Canadian home prices.

There is a perception in some quarters that a major cause of high house prices in Canadian cities such as Toronto and Vancouver is foreign investors. Specifically, it has been alleged that foreign money is flooding into real estate in those two places, and pushing prices out of reach for those who actually live there.

Unfortunately, hard data on foreign money is hard to come by, as Canada does not yet reliably track such information — although recent steps from B.C. to track residency info of buyers is a step in that direction.

Canada’s national housing agency, the CMHC, says it is trying to collect more information on the topic, and Statistics Canada was earmarked half a million dollars in the recent federal budget to beef up its data collection on the housing market.

In the report, Tal draws a distinct line between foreign money where the buyer has an actual foothold in Canada, and speculative investments where the buyer has no incentive other than a financial interest.

The first is the more common type of foreign investment, Tal said after speaking with a group of real estate brokers who deal exclusively with foreign buyers. And moreover — it’s nothing to worry about.

…click on the above link to read the rest of the article…

CMHC says many major housing markets showing signs of overvaluation

April 27, 2016

CMHC says many major housing markets showing signs of overvaluation

Nine of the 15 largest Canadian housing markets are showing some signs of overvaluation, the CMHC said.

The Canada Mortgage and Housing Corporation said in its quarterly Housing Market Assessment Wednesday that a majority of Canada’s large housing markets are showing either “moderate” or “strong” evidence of being overvalued.

The housing agency looks at housing markets to gauge their health based on four factors:

overheating — when demand is significantly and persistently outpacing supply
overvalued — when prices are higher than they should be based on economic fundamentals
accelerating — when house prices are increasing faster than household costs of living are
overbuilding — when supply of new homes significantly outpaces demand.

The agency rates each market on a colour coded scale where green means there is little evidence of that factor, yellow means there is moderate evidence of it and red means there is strong evidence of it.

Read the CMHC’s report here

On the overvaluation front, the CMHC says there is moderate or strong evidence of that happening in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Hamilton, Toronto, Montreal and Quebec City.

Four of those cities — Toronto, Quebec City, Vancouver and Saskatoon — now show “strong” signs of overvaluation.

The first two were singled out in the agency’s last report on housing in January. But the latter two were only recently given their red warning on overvaluation.

In Vancouver’s case, the housing agency said “Single-detached home prices are now observed to be at levels higher than those consistent with financial, economic and demographic fundamentals.”

…click on the above link to read the rest of the article…

Jingle mail rears its ugly head in Alberta again

February 8, 2016

Jingle mail rears its ugly head in Alberta again

Federal government worried about Albertans making strategic defaults on their mortgages

This tiny hamlet south of Calgary has 27 homes for sale for more than $1 million.

This tiny hamlet south of Calgary has 27 homes for sale for more than $1 million. (Colin Hall/CBC)

Jingle mail — the act of walking away from an underwater mortgage by mailing your keys back to the bank — is a peculiarity of the Alberta residential market and an act of desperation. However, a combination of high debt and lost jobs make it an option in a province going through a significant economic reckoning.

It’s enough of a concern that the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada’s banks.

‘People saying that we can’t make a go of it and mail the keys to the bank.’– Don Campbell, Real Estate Investment Network

“We’re slowly starting to see it in Grand Prairie and Fort Mac,” said Don Campbell, senior analyst with the Real Estate Investment Network.

“People saying that we can’t make a go of it and mail the keys to the bank. In the big cities, not so much because the average sale prices haven’t really dropped much, we haven’t seen the pain yet. But Calgary is getting pretty tight.”

Bruce Alger, an insolvency trustee at Grant Thornton in Calgary, said he is dealing with one such case and has heard of more.

“It’s when you see high-end home prices drop 20 per cent below the peak,” said Alger. “I think there are people considering walking away and I’ve talked to one or two myself.”

Why Alberta is different

Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).

…click on the above link to read the rest of the article…

Toronto’s Epic Condo Bubble Suddenly Turns into Condo Glut

June 12, 2015

Toronto’s Epic Condo Bubble Suddenly Turns into Condo Glut

The high-rise construction boom in Toronto has been evident for a while. It has been motivated by sky-high prices. In May, prices in Toronto rose another 5% from a year ago. For all types of homes, prices are now 42% higher than at the crazy peak of the prior bubble! And if people can’t afford to buy any longer, even with super-low interest rates, well, they can step down to a fancily equipped micro-condo, or more commonly called shoebox condo, where the dining table might fold into a bed.

But suddenly we get a nerve-wracking disturbance in this beautiful picture:

National Bank Financial said in a note to its clients that, based on data from Canada Mortgage and Housing Corp., the number of completed but unsold condos in Toronto spiked in May to 2,837, an all-time record high.

So the monthly data is choppy and may not be very reliable. It’s an estimate, and estimating new and unsold condos isn’t that easy. But the magnitude of this spike far exceeds the monthly ups and downs in recent years, and exceeds even those dizzying spikes in the late 1980s and early 1990s when the Toronto condo market went completely haywire.

But it wasn’t just one month. The count had edged up in April to hit 2,038 after having already spiked beautifully in March to the highest level since the early 1990s. This is what this phenomenon looks like:

The report blamed the absorption rate, a measure of condos that have been completed during the month and were either sold or rented. It plunged to 69.5%. But don’t worry. “It would be premature to think that the absorption rate will stay low, causing persisting accelerated increases in the number of vacant completed condos,” the note said to mollify client anxieties.

…click on the above link to read the rest of the article…

Canada housing agency sees moderation in housing starts in 2015

February 8, 2015

Canada housing agency sees moderation in housing starts in 2015

OTTAWA (Reuters) – Canada’s federal housing agency softened its forecast for housing starts in 2015, saying it expects the pace of new home construction to gradually moderate in the coming years.

Although the Canada Mortgage and Housing Corp said on Friday it expects employment and disposable income to continue to support the country’s robust housing market, it noted the downside risks have increased since its October forecast because of the decline in oil prices.

As such, the CMHC said it had widened its forecast ranges for starts, sales and average prices.

Housing starts are expected to range between 154,000 and 201,000 units this year, with a point forecast, or most likely outcome, of 187,400 units, the CMHC said.

That is slightly lower than the forecast it gave in October of a range of 172,800 to 204,000 units, with a point forecast of 189,500. Under its base case scenario, starts will decline by 1 percent compared to 2014, CMHC said.

“Lower oil prices will negatively affect oil-producing economies like Alberta, Saskatchewan, and Newfoundland and Labrador, which will only be partly offset by the positive effects of lower exchange rates and interest rates across all provinces,” said CMHC’s chief economist Bob Dugan.

For 2016, the CMHC expects a range of 148,000 units to 203,000 units, with a point forecast of 185,100.

…click on the above link to read the rest of the article…

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