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Canadian house price affordability measures are still misleading

MARCH 07, 2012

RBC has released their latest housing affordability report.  It shows an improvement in affordability, which was quickly trumpeted by media outlets without a fleeting though of perhaps checking the methodology of the index to make sure it made sense.  That's obviously way too much to ask of the media in Canada.  Here are some gems:

Home ownership becoming more affordable-  The Globe and Mail

Housing reports point to improving affordability- CTV

Home ownership becoming more affordable despite rising debt- Toronto Star

 

Issues with RBC's affordability measure:

I've previously discussed in detail why I'd be very careful pinning beliefs of a stable market to a metric like this.  In that post I outlined 7 reasons why the metric is flawed.  I've also previously discussed why I have a huge issue with the assertion that since affordability has remained relatively stable according to these metrics, it means we have nothing to be concerned about.  I think that's ridiculous.  I won't rehash them here except to point out the major issue which is that the index assumes a stable 25% down payment over time.  If people were putting 25% down 30 years ago and if people were putting 25% down today, yes their principal and interest costs would represent a comparable percentage of pre-tax income.

The problem, of course, is that the average down payment has shrunk over time, a fact discussed in the Summer 2011 Bank of Canada Review:

"Allen (2010–11) shows that from 1999 to 2004 most households with insured mortgages borrowed up to, or near, the maximum LTV ratio available at the time they purchased a home."

And since down payment requirements and savings rates have fallen over time, you can be sure that a stable down payment assumption is absurd. 

Compounding the issue is the fact that since the 80s (incidently during the same time frame that RBC measures), interest rates have fallen fairly steadily.  All things being equal, affordability should be well below historic norms.  That they are at "normal" levels with interest rates sitting st rock bottom, in and of itself, should be enough to concern us.

 

The bottom line is not that the metric is useless, rather that like other measures of house price sustainability, this one has flaws.  Decide for yourself if house prices in an area are sustainable at current levels by looking at a range of metrics, including price/income ratios, price/rent ratios, and price/GDP, supply/demand dynamics, demographics, etc  (all of which can be found for different areas of Canada on this site by looking through the Primer articles). Hanging a bullish argument on an affordability metric alone would be foolish.

 

Bank of Canada affordability index:

I was asked to comment on this chart from the latest Bank of Canada review:

Once again we see that affordability trend is favorable and is actually well below its long-term trend.  Unlike the RBC metric, this one actually assumes a stable 5% down payment.  Yet the results don't pass the "common sense" test, so I did some digging.

Here's the methodology from the Bank of Canada website:

In order to better capture the value of both new and existing homes, (the house price portion of the index) is an equally weighted average of the Royal LePage Resale Housing Price (RLPHP) and the New Housing Price Index (NHPI)

So the change in house prices used in this index is weighted so that 50% of the change is derived from change of resale house prices through CREA (which is what Royal Lepage reports) and 50% is derived from the change in the New House Price Index (NHPI).  I have a MUCH bigger problem with this methodology than I do with RBC's methodology.  Here's why.

 

1)  NHPI is quality-adjusted

As I have discussed previously, the NHPI is adjusted for changes in the quality of new homes.  What this means is that changes in quality of the new homes in a year (or even just the size of the homes) are adjusted to create a constant comparison over time.  Put simply, and as an extreme example, should all new homes built next year be twice as large and all contain the most modern amenities, despite the fact that the dollar cost of these homes would be much higher than in previous years, the NHPI would adjust for the changes in the size and amenities of these homes to show a much smaller gain in price (if any gain at all).  In other words, in the mind of the statisticians who create the index, yes, they paid more for the homes, but it was better quality than  homes built in the past, so the rise in price is not true inflation but represents an improvement in the quality of the homes, and therefore this should be accounted for.

I'm not debating the validity of the index as a component of the CPI; I understand the need to create a pure price change absent of changes in quality for measures of inflation, but to use this measure in an affordability index is, in my mind, a MASSIVE mistake.  Put simply, the buyers of these huge luxury homes in the previous example have still paid much more in nominal dollars to buy these homes and it seems wrong not to account for that in a measure that purports to track average affordability of homes over time.

 

2)  NHPI vs real-world measures of house price gains

To dig in a little deeper, below is a comparison of the growth in the NHPI vs the growth in the average resale house price in Canada (CREA) and the growth in the Teranet house price index, which also measures the growth in house prices but uses a paired-sale methodology.  You'll note that the NHPI has significantly under-performed the other measures.  This is largely because of the quality adjustments mentioned above:

I'll leave it to my readers to decide if it makes sense that the price of new homes built in Canada has significantly under performed the gains in the resale market.  If not, how much faith should you put in an affordability measure that weights the increase in house prices 50% to this index?

-Ben

 

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Ben Rabidoux
By Ben Rabidoux

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85 Comments

  • Greg said:
    • 2 years, 1 month

    Just read the 500 comments on G&M's post—that will explain any confusion.

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  • landlord said:
    • 2 years, 1 month

    Ben, you still don't understand the debt/income ratio don't mean anything until you adjust for rates, I have been telling you this for over 2 years when I told you to go long the cad housing market

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  • Zerodown said:
    • 2 years, 1 month

    Landlord: Vancouver housing is overvalued by a factor of three (or needs to drop 66%). The first 33% drop can be explained by rates going back to something reasonable. Might never happen, fine, but remember government rates don't have to do it, personal mortgage rates have to. Maybe creditors will one day charge more spread absent CMHC madness. The second 33% drop will be from buyers re-evaluating the premium they wish to pay over a discounted cash flow of rents even using today's near-zero real rate as the discount rate. This is the mania component.

    Other cities might not be as bad, but, as you suggest, these are the two big ways that the prices are wrong. One can run the numbers to determine the degree. Both will eventually revert.

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  • landlord said:
    • 2 years, 1 month

    66%, what planet are you on?

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  • Zerodown said:
    • 2 years, 1 month

    ow.ly/i/sGwF Another illustration of weird NHPI prices

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  • Market Player said:
    • 2 years, 1 month

    I heard again that gov. is going to shorten the amortization period. It seems the drum roll is getting louder by the day. If it is true, it is simply wrongheaded in many ways.

    Don’t they know condo sales in TO have already slowed. We still have 200 to go.

    Look. It is one thing for the average joes to debate about it, but it is a totally different matter for the gov. to intervene the market.

    We do not know if housing in TO is really a bubble. Bubble can only be known in hindsight. Ask Greenspan or Bernake for that matter. They did not see the bubble forming in the US housing. So if Allen, Ben could not foresee the US housing bubble, you think Garth, Ben (throw in Greg here) can ascertain the Canadian housing is a bubble? (Giggle here. Sorry.)

    Anyway, everything serves a purpose. Because of the Hi Tech bubble, many information highway infrastructures got built, i.e., long distance fibre cable. In Toronto, many ill-informed people think the condo boom is bubble. I beg to differ. In the last two decades, did you see any rental apartments have been built? If we do not have the flippers (sorry, investors) funding this boom, where are people going to live? (Go condos go!)

    Finally, so what if a bubble burst. It is not the first and will not be the last. Look down south. Their bubble burst. Big deal!

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  • Tony Snell said:
    • 2 years, 1 month

    Market Player, you are sweet, but do need to spend some time on the therapist's couch if you are suggesting that the government would be intervening by lowering lowering amortization to 25 years. They have been pumping money into housing for years through monetary policies that have artificially inflated housing prices to monstrous proportions, bordering on house driven superinflation. Our government is in it up to their eyeballs and now they are trying to feed the monster to keep it happy. If you were a "market player" like you say, you would be asking the government to let the market sort this one out - not the hands of little gods like Jim Julius Flahertus and Marcus Aurelius Carnibus.

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  • reasonfirst said:
    • 2 years, 1 month

    Go easy on him - Market player has a condition where his mind goes numb when he hears "CMHC"

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  • Leo S said:
    • 2 years, 1 month

    If the government is so intent on feeding the monster, please explain why they've tightened mortgage requirements so many times already. (40-35 years, 35-30 years, stricter qualification rules, stricter suite income rules, 20% down for investors, etc).

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  • Leo S said:
    • 2 years, 1 month

    Thanks Ben. I was wondering about that affordability measure. Like you said, it just didn't pass the common sense test. Thanks for explaining why. Using a quality adjusted measure for affordability is ridiculous.

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  • Appraiser said:
    • 2 years, 1 month

    Speaking of affordability; it looks like debt service just got another helping hand.

    http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages...

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  • landlord said:
    • 2 years, 1 month

    Grey Market has been 2.75% for the last 3 weeks. 10y 3.55%

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  • Greg said:
    • 2 years, 1 month

    That's great news and I can't wait for 1.99%, then .99% and then 0%!

    For those with an ounce of financial sense left who can parse bullshit offerings from a bank's insolvency; a reminder what I stated in the last post i) banks can ONLY profit from lowering rates ii) banks require 'deposits' in order to make loans. This is nothing more then another prowling hyena in search of whatever meat is left on the bone. Many have no clue what kind of competitive sociopaths are running these banks. These are immoral people filled with exceeding amounts of greed, that would even sell their mothers or eat flesh for money. Dick Fold CEO of Lehman http://tinyurl.com/6pel6ax

    Want investment advice? First educate yourself with how the banking system works at the highest level. Watch the video from beginning to end to understand how your wealth is commingled in a circus-casino ring that is mathematically proven to fail. http://tinyurl.com/7swexdk

    All you have left is common-sense and instinct. Use it wisely.

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  • Appraiser said:
    • 2 years, 1 month

    Canadian new home prices up for tenth consecutive month.

    http://www.bnn.ca/News/2012/3/8/Canada-new-home-prices-edge-up-in-Januar...

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  • Greg said:
    • 2 years, 1 month

    Buy a Nice House, Forget About Retiring: http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carri...

    "Did your real estate agent or bank not tell you that? Of course not. All they worry about is whether you’re making enough money to carry your debts. The question of whether there’s enough money left over to save for retirement is of zero interest to them. "

    Sounds just like you App. Too bad everyone is slowly putting two and two together.

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  • Appraiser said:
    • 2 years, 1 month
    Reply
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  • reasonfirst said:
    • 2 years, 1 month

    as a bear I like more supply

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  • Greg said:
    • 2 years, 1 month

    Down -5% for Ontario and -3% for BC y/y. http://i41.tinypic.com/34yeon6.png

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  • landlord said:
    • 2 years, 1 month

    Ben, share the "low hanging fruit"?

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  • Olga said:
    • 2 years, 1 month

    Two comments:
    1. Ben, I actually disagree with your statement in your article above that
    "If people were putting 25% down 30 years ago and if people were putting 25% down today, yes their principal and interest costs would represent a comparable percentage of pre-tax income."
    If people were putting 25% now and then they would be left with the same 75% to pay out in principal and interest costs in their mortgage payments. But if their pre-tax income has only grown by 100% when the cost of their RE purchase has grown by 300%, their mortgage loan has to take more % of their pretax income. Run a simple test case to see it - despite the % being the same, the base variables do not change in the same proportion and when the speed of growth of the RE cost outpaces the speed of growth of the income, the proportion does not stay the same (eroding affordability).
    2. If they use the adjusted Resale Housing Price (RLPHP) and the New Housing Price Indexes, do they also use the income adjusted by the inflation rate?

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  • Greg said:
    • 2 years, 1 month

    Olga I believe this chart may explain Ben's point regarding savings compared to earlier times. http://i42.tinypic.com/n4utfk.png

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  • Olga said:
    • 2 years, 1 month

    I do not see how my post can be read as asking about the savings rate...?

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  • Greg said:
    • 2 years, 1 month

    Canada's Job Market Struggles For Growth http://tinyurl.com/7e5zfad

    "The country’s jobless rate fell two notches to 7.4 per cent in February, but that was due to fewer people seeking work rather than any pickup in the labour market, Statistics Canada said Friday. "

    On a y/y basis we're starting to see some major losses in key sectors: (In thousands) Self-employed -18.2k, Manufacturing -41.1k, Trade -34.1k, Finance, insurance, real estate and leasing -13.2k, Public administration -12.2k. http://www.statcan.gc.ca/daily-quotidien/120309/t120309a2-eng.htm

    As for Toronto, higher employment meeting population growth is looking bleak. StatsCan Employment Rate % http://i40.tinypic.com/10dxxso.png

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  • landlord said:
    • 2 years, 1 month

    Greg, people have stopped looking for work or have left jobs due the large amounts of money made on homes. Everyone is getting rich, so why work? Let the next guy overpay me by 700k, I can rent and live debt free and pick up a little place in Florida for 50k. My folks and other old people who are waiting to die are doing the same trade...it's that simple.

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  • chris said:
    • 2 years, 1 month

    Sounds sustainable long term. Are you even listening to what you're saying?

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  • landlord said:
    • 2 years, 1 month

    inter-generational transfer, happens all the time. You must have missed out and been renting.

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  • Mel said:
    • 2 years, 1 month

    Folks
    Before coming to this country I used to think my old place was very bad and most of the folks were corrupt, now in Canada I realize that at least I could find ethics, morals, honesty somewhere at my old place where as over here this whole system is standing on lies and every body belong to some kind of cartel here, all these cartels are headed by Govt. ...... unbelieveable. Govt has given full permission to all these folks to cheat common/middle class man. I can only say something which is unsustainable will not sustain, but I am afraid common/middle class will be wiped out. BoC and Fin. Minister are playing with the lives and retirement of these folks and it seems to me that 96% of the people will die poor. Houses will have no values in future because everybody will have one but will not have food or clothes. Unfortunately our tolerance level is so high that those 1% keep on coming with these injustices pretty frequently and we just mold ourselves to the new norms and start accepting them as routines.
    We need somebody who is knowledgeable and can transfer his knowledge to all these stupid folks out there whose goal for the life is homw ownership, I really respect your gesture and the service you are doing for all these fools, may be one day they will learn

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  • Greg said:
    • 2 years, 1 month

    This is what happens when someone presses the condo panic button.

    http://i42.tinypic.com/14tvwqv.png

    TREB MAP http://www.torontorealestateboard.com/buying/district_map/index.htm

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  • Olga said:
    • 2 years, 1 month

    This is what happening in Vancouver - yesterday's data:

    New Listings - 223
    Back On Market Listings - 1
    Price Changes - 71
    Sold Listings - 68

    *Attached & Detached - Date: 2012/03/09 Time: 20:06 Pacific YatterMatters.com: Courtesy REBGV.

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  • landlord said:
    • 2 years, 1 month

    I dont think it's a panic Greg, it flippers who are now listing flats coming on-line, you will see many of those pops in the next few years. The amazing story this week was someone from China overpaid in Toronto by 500,000$ in a bidding war. The Chinese are just getting started. I can't wait to sell into this, going to be patient for the door knock.

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  • Greg said:
    • 2 years, 1 month

    Yes it was an amazing story, but what the media didn't publish is that fact that sales in Willowdale (C7) were down by 12.5% y/y, or on a two y/y basis, down by 31.25%. Stick to fundamentals, not headlines.

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  • Appraiser said:
    • 2 years, 1 month

    Thus far, I have seen no metrics other than the affordability indexes that are getting the real estate market right.

    Price to income ratio - useless. Price to rent ratio - useless. Home ownership rate - useless. All of the prededing metrics predicted a crash long ago and were dead wrong. Ipso facto, they are useless.

    "Use the one best tool", Anton Chigurh (played by Javier Bardem - "No Country For Old Men" )

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  • Greg said:
    • 2 years, 1 month

    I agree, all useless. However there is one index that is seen by millions of Canadians everyday that alters there affordability and spending pattern on a grand scale. http://i42.tinypic.com/9gxyfp.jpg

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  • landlord said:
    • 2 years, 1 month

    Homes don't suck Petrol, 5-10$ is not going to have any impact on housing.

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  • Petr said:
    • 2 years, 1 month

    "Price to income ratio - useless. Price to rent ratio - useless. Home ownership rate - useless. All of the prededing metrics predicted a crash long ago and were dead wrong. Ipso facto, they are useless."

    App/landlord/Sams -whatever you call yourself nowadays - As for your fundamental arguments... read this paper from the BOC - bankofcanada.ca/wp-content/uploads/2012/02/wp2012-03.pdf
    "House prices are volatile, with movements that are much larger than the movements in fundamentals such as income, rents, and interest rates. House prices are predictable. House prices exhibit short to medium run deviations from fundamentals but DO EXHIBIT A REVERSION TO FUNDAMENTALS."

    Let me also quote some earlier work from Ben - "Fortunes were lost then and for the same reason that the U.S. housing bubble several years ago almost brought the world economy to its knees -- too many buyers chasing a dream built on little more than faith in rising prices, leverage and greed. Canada, of course, did not escape the collapse and the country has gone deeply into deficit -- money that we will all have to pay back. "

    Total Residential Debt in Canada - http://i39.tinypic.com/2e3rfgx.jpg
    Housing related jobs lost - http://www.theeconomicanalyst.com/sites/default/files/u3/resi_investment...

    In a lagging economy, at a time when we are bombarded with messages of austerity, reminded over and over that the average Canadian carries too much debt and that we must start to live within our means, the fact we’re being told expensive real estate is affordable, thanks to low interest rates, is a recipe for disaster.

    Time to get out when you still can, App. Or is that why you're here? Afraid?

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  • landlord said:
    • 2 years, 1 month

    App is right about the metrics and it's something the Ben has never understood and why he missed the great money making trade in Canada over three years he has been running this blog. Watching debt levels without then adjusting for interest rates which he was told countless times.

    Petr, I can pay 35% more today then the peak of 2006/2007 and still have a lower monthly payment. That is something Ben has never understood and many people on this blog who with called for a crash years back. Read that again, 5yr is now 2.80 in the grey market. I am paying a lower payment then someone who bought a house in 2007! Thats all that matters.

    Until you understand that, you will never understand when and how to do the math and what appears to people to many is infact then a rate adjustment.

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  • Greg said:
    • 2 years, 1 month

    Then show us your calculations instead of running your senseless mouth off.

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  • Ben Rabidoux said:
    • 2 years, 1 month

    "over three years he has been running this blog"

    Nice try. This blog is 16 months old. But yes, housing is much stronger than I would have predicted.

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  • landlord said:
    • 2 years, 1 month

    So whats the "low hanging fruit" you are pitching?

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  • Ralph Cramdown said:
    • 2 years, 1 month

    I can pay 35% more today then the peak of 2006/2007 and still have a lower monthly payment.

    Hey, isn't that what the Greeks said after they joined the Euro?

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  • landlord said:
    • 2 years, 1 month

    The second thing you don't understand is the term margin call. Almost every single debt instrument has one except housing. In the US, the masters of modern finance took what was a non-margin product and turned it into a leveraged margin call product. That is why it collapsed.

    In Canada, no margin call. The government is the final person ready to pay. If you think you can win against a printing press, you are out of luck.

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  • Petr said:
    • 2 years, 1 month

    "Petr, I can pay 35% more today then the peak of 2006/2007 and still have a lower monthly payment. That is something Ben has never understood and many people on this blog who with called for a crash years back. Read that again, 5yr is now 2.80 in the grey market. I am paying a lower payment then someone who bought a house in 2007! Thats all that matters."

    landlord - The information I got out of this animated gif was more informative than what you just said - http://tinyurl.com/6659wnm

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  • Ralph Cramdown said:
    • 2 years, 1 month

    If your uninsured mortgage comes up for renewal and you've lost equity, there's a margin call. If your insured mortgage comes up for renewal and you've lost equity, there isn't a margin call because you've paid a fee for insurance against this eventuality -- but the insurance only allows you to keep mortgaging, it doesn't make up your losses. If you fail to make the monthly amortization payment three times, there's foreclosure, whereas stock margin loans are interest only. I believe the term used by real estate investors is "cash call" if the property needs repairs or there's a shortfall in income versus expenses. Real estate investors, big and small, go bust all the time. Some of the celebrated ones have gone bust spectacularly, or multiple times.

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  • landlord said:
    • 2 years, 1 month

    uninsured mortgage ??

    ever of CMHC?

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  • Canayjun said:
    • 2 years, 1 month

    If it's true 68% of Canadians already own their place, where exactly are we going to expand sales to get above 68% from? A certain proportion of Canadians are mentally ill, in assisted living, homeless, drug addicted, on social assistance, too young (18-20) or just simply don't want a house ever because they want to be mobile. Immigration isn't going to keep this party going, because those new immigrants buying a house/condo don't represent that big a proportion of home sales in Canada. Further, not all immigrants will choose to buy a home. AND...many immigrants are children of adult immigrants. So you can't say 100% of all immigrants to Canada are going to buy a house.

    So WHERE are the sales going to come from to bring this 68% figure up to 70+ percent? Are people going to own multiple properties? To sell to whom? To rent to whom? Surely, people should realize, IF we were to attain 100% home ownership in Canada, how exactly would sales continue to increase then? It seems to me 68% ownership in Canada is a ceiling.

    And surely people realize we have to be able to increase this number from 68% to somewhere in the 75% range for there to be a continuation of expansion of the housing market. DENIAL is the most violently voiced right before everything falls apart. It's the moment of peak fear.

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  • landlord said:
    • 2 years, 1 month

    The 68% number is not true. It is high because of the tax benefit. Most people I deal with will use every single family member to hide one true owner. The density is more around 55% in our estimates and the vacant rate is also much higher.

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  • reasonfirst said:
    • 2 years, 1 month

    Home ownership is based on statscan census data not some kind of CRA stats. The renter of these homes of your tax evading "people" won't answer the census that they own the home that they live in.

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  • Greg said:
    • 2 years, 1 month

    What estimates? who's we? and why is it that you always have something to say without providing any math or a source behind it? You sound like a degenerate landlord in panic mode whose investment is betting on an Asian invasion and a printing press.

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  • landlord said:
    • 2 years, 1 month

    Greg, are you making money with your data? No. Am I making money with mine. Yes. Enough said

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  • Greg said:
    • 2 years, 1 month

    Exactly what I stated. You're a degenerate brainless wannabe landlord that nobody on this blog takes seriously. Are you that illiterate that you have to lie about it?

    You don't own anything.

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  • landlord said:
    • 2 years, 1 month

    Easy Greg, don't get upset. For every foolish buyer, we must have a seller ;)

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  • Greg said:
    • 2 years, 1 month

    Desperate for workers, BC seeks immigration powers. http://www.theglobeandmail.com/news/politics/desperate-for-workers-west-...

    What Christy Clark really means is BC needs more immigrants to fill empty condos and streamline mortgages to. With nearly 250,000 temporary worker immigrants entering Canada per year, the claim of a shortage for skilled workers is an absolute joke.

    The government is losing control people.

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  • landlord said:
    • 2 years, 1 month

    Losing control? Greg, you are out of your mind if you think the government is in secret getting to post fake jobs to fill gaps in the condo rental market/resale market.

    Don't jump of a bridge if prices go higher. Maybe you should get on the streets with the Occupy Toronto folks and work your message from the ground. You are clearly not the 1%, but I suspect you might be on the lower end of the 99% and possible fearing a nuclear attack.

    Get a life.

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  • Greg said:
    • 2 years, 1 month

    That is precisely what I think and is exactly what's going on. Corporate interest is running the government. http://i39.tinypic.com/9jkwb4.jpg Like this new BC tax credit for first-time home buyers to bailout developers' new housing inventory: http://tinyurl.com/7uoxryp

    It's the same problem all over the world as governments are throwing taxpayers money to postpone the inevitable housing crash—when all it does it make it worse! http://tinyurl.com/7beflnn

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  • landlord said:
    • 2 years, 1 month

    wow, is that BC story for real?? What is the fine print?

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  • landlord said:
    • 2 years, 1 month

    Read the story, it will the help 5 white guys in line with all the Asians pick up the nanny flats. The credit is not even in the context of the market.

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  • 45north said:
    • 2 years, 1 month

    what if the Royal Bank, measured each customer to see his level of debt? Where does he live, what is the market value of his house, what's the mortgage, how much does he make, how much does his wife make. The bank could classify each customer as
    - tapped out
    - some discretionary income but not likely to make a big change
    - significant discretionary income

    the Bank could do this every night, over time the bank could compare the customers classification with what he really does. For example the customer was classified as having significant discretionary income and what do you know, six months later he applies for a LOC to do a reno. Over time, the Bank could improve its classification.

    What if the Bank, already has this data on the whole Canadian real estate market. At a minimum the data base would provide a highly detailed stress test at any level - Vancouver, lower mainland, City of Toronto, GTA. Why wouldn't the Bank have this data? Why wouldn't CMHC?

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  • landlord said:
    • 2 years, 1 month

    When people are paying bills on time, no one cares. It's when they stop, your questions come up. Stress testing the CMHC, etc doesn't matter. The impact on the economy from a large slowdown is what the clowns in Ottawa should be looking at. The fact the more people spend money on housing and less at local Cad Tire, Rona will show up in the GDP, no one seems to care about that, except Ben and a few others. The spotlight shouldn't be on the bidding wars, it should be on the HELOC which is being used to pay the mtg, credit cards, etc. Once the house ATM stops, the whole can spiral out of control quickly. But Canada is not near that point, nor will it get to that point. The government is going to force people with a wink wink to start to lock in 10y+ rates. Watch and see.

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  • Greg said:
    • 2 years, 1 month

    Now I know for sure why your arguments are baseless. You have absolutely no clue how the banking system works.

    When the banks' consumer spending algorithms start blinking red, indicating consumers are paying their mortgages with HELOCs, banks will quickly lower credit limits and increase interest to mitigate further risk. Banks require a certain amount of deposits to service covered bonds backed by HELOCs and mortgages. So when people pay a mortgage with their HELOC, that is $0 in actual deposits, forcing the bank to use its own reserves to service the bonds. That's why TD and some other banks recently jacked up rates—they almost had a heart attack when Christmas figures starting rolling in.

    http://i40.tinypic.com/dc3tpk.png

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  • Ben Rabidoux said:
    • 2 years, 1 month

    That surge in HELOCs isn't as dramatic as it appears. A large portion of that increase is due to IFRS accounting whihc forces off-balance sheet securitized assets to be accounted for on-balance sheet. Alot of the 'growth' towards the end of the year was simply due to this new accounting practice rather than new originations. Far more telling is the BoC consumer credit data which shows non-mortgage consumer credit decelerating to 3.1% y/y...the slowest pace of increase in 20 years, particularly once adjusted for inflation.

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  • GuyfromMtl said:
    • 2 years, 1 month

    ^^^^
    What do you mean? People are starting paying of their debt? Slow down in consumer consumption?

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  • landlord said:
    • 2 years, 1 month

    Exactly, the Canadian manufactured miracle is still going strong for now...A nation has gone from savings in a bank account to savings into box. That doesn't mean imply a nation of reckless spenders!

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  • Greg said:
    • 2 years, 1 month

    True. But it's on the banks balance sheet now and investors don't like it. If banks don't come up with positive Q1 earnings, we're going to see some deposits leaving our banking system, and that's when the problem really takes off. As you know Ben, with all these low rate offerings means lower NIMs for banks, meaning they will require more volume within a contracting credit environment to sustain profit. Not happening.

    It's going to get ugly soon...

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  • Dave said:
    • 2 years, 1 month

    Greg I do appreciate all the stats and graphs you put up, but we here in Alberta need more people. I know a lot of people working long hours because we can't find the people to do the work (Engineering in my case).

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  • Olga said:
    • 2 years, 1 month

    How about they simply pay more so people start to relocate when see the offers? As far as I remember the gap between the rich and poor is growing and I assume that lots of businesses make more money than before and are able to afford to pay more.
    On the other hand, this is the strange situation what the country get when the advantage in immigration was given to the people with the money not the skills to keep the housing market going up and up without addressing the fundamental needs - aging work force. These Chinese billionaires, their aging parents or spoiled kids are not going to work or pay taxes in Canada. Our government had no idea what to do with the looming recession and the only bright idea they figured out to sell the future.

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  • Greg said:
    • 2 years, 1 month

    @Dave

    I agree, except the powers to select skilled workers should be given to corporations, not the government. Politicians will always try to take advantage of any situation to kill more birds with one stone, in effect, the program ends up being inefficient by misallocating human resources.

    Look at the percent distribution of foreign workers http://i43.tinypic.com/2w4cz69.png Alberta's share has been declining since 2008 while other core provinces have gained. This is what happens when CIC tries to allocate human resources according to what they think is sufficient for each province. In the end, you get more traffic in metropolitan areas creating exceeding demand for limited supply, or in better terms, overcapitalized regions.

    Not to mention all the fraudulent marriage documents, university degrees and other documents submitted by immigrants just to enter the country. Our immigration system is a complete disaster.

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  • Olga said:
    • 2 years, 1 month

    Dave - I just realized that no person with the Engineering degree can seamlessly immigrate to work in Canada as they all have to be locally certified - it takes few years before you get the degree up to the level when you are able to comply with the local codes and rules, so the immigration is not going to provide any quick fix here.

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  • Rob said:
    • 2 years, 1 month

    Greg and anyone else,
    here is a good summary of the banking system also if you want to read it. wont take more then 5-10 minutes. let me know what you think.

    http://fofoa.blogspot.com/2009/11/money-talk-continued.html

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  • Greg said:
    • 2 years, 1 month

    Wanna take a swing at this one Ben? This is total volume in dollars divided by sales (Average Price). Hence July when TREB started their new report.

    http://i40.tinypic.com/2l2yhk.png

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  • landlord said:
    • 2 years, 1 month

    That is great chart trying to show the balance shifting this summer into larger sales on the margin sale. However, I would also graph the five year fixed rate posted -1.50 or the discount market along those bars, I am sure you will see a large dip right when those bars go up. I am not saying this graph is bad, but trying to make it stronger to show that rates are only driver in this market at the moment, if they go up, its game over or jobs. Job loss is much slower on the demand destruction side however, whereas rates will hit demand overnight.

    Many Canadian mortgage brokers are getting paid larger fee's to get clients to roll into 10y from 5yr. This is next behind the eyes of the public (Greg speak) that is going on now via BOC and financial institutions.

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  • Greg said:
    • 2 years, 1 month

    You would also graph the five year, but you're incapable, while the least you could do is measure the fixed rate yourself (only to find no correlation), but you're incapable of that too. What are you good for other then to fix the kitchen sink?

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  • Olga said:
    • 2 years, 1 month

    Ben - I think that you have to monitor the posts as it gets really nasty here at times - I do not think that you want to be associated with this type of arguments.

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  • landlord said:
    • 2 years, 1 month

    I agree Olga, Greg is crossing the line and needs to be booted out.

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  • backwardsevolution said:
    • 2 years, 1 month

    Olga - I don't think Ben has the time to monitor the site. He's working full-time now.

    As for Greg, I think he has shown enormous restraint. Obviously he's miles ahead of everyone else on this site (except Ben), but I would argue that he's more outspoken than Ben (calls a spade a spade), which is not at all bad. It's a good thing and brings a different perspective.

    I applaud Greg's tenacity. He actually shows charts and stats to back up what he's saying, unlike the mouthpiece.

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  • Olga said:
    • 2 years, 1 month

    @backwardsevolution - I did not mean Greg only...He kind of started that but it was landlord's response to Greg's post above - and it is now removed (I assume by Ben) - that was really rude and I even thought that in reality he might be an underage teen - who knows on the internet who is who.
    And regardless that Ben is working full time now and has no time to monitor this discussion - I do not think that it is in his own interests leave it unattended, the profanity and rudeness have to be removed at least once a day as his name is associated with this blog.

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  • Kellee said:
    • 2 years, 1 month

    I have no problems with Greg's comments whatsoever. He backs up his opinions with facts and research. Unlike some posters who do not seem to realize that anyone can have an opinion, but an informed opinion is the only one worth listening to. Landlord/appraiser/Bryan/whatever, is just a troll who makes rude comments just to get a rise. Stop giving him the attention he craves, and he will slink back from whence he came. Ben cannot be expected to patrol this bog, but we can do this ourselves by ignoring posts that are designed to inflame discussions and provide no useful informaion.

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  • backwardsevolution said:
    • 2 years, 1 month

    Olga - agreed. Thanks.

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  • Greg said:
    • 2 years, 1 month

    Everybody cool? Good.

    I've extracted some GTA sales data from Realty Sellers http://tosolds.ca/ I can't guarantee the accuracy of this data but I'm posting it anyway to compare it to TREB's coming mid-month sales report. If it turns out to be accurate or close enough, I'll be posting real-time GTA sales from hereon.

    Total GTA Homes & Condo Sales 2,632

    Homes Sold from March 1-14

    GTA Sales 1796
    Median $499,900
    Average $603,157

    416 Sales 548
    Median $599,000
    Average $775,264

    Condos Sold from March 1-14

    GTA 836
    Median $314,945
    Average $336,408

    416 Sales 515
    Median $333,000
    Average $356,623

    Details can be found here: https://docs.google.com/document/d/1o2oIbBn3KocxoMmLs6ajoVTMMzG9r1UNvM-8...

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  • Market Player said:
    • 2 years

    Oh, No! F is going to shorten the amortization period from 30 to 25 in the coming budget. That is the talk of town now.

    If that's so, I will really be pi**ed off!

    Look, folks. The condo sales in GTA have already slowed down. I’m already nostalgic for the days people lining up overnight for a pre-construction condo unit. We still have 200 more condos to be built in GTA in next two or three years. This ill-advised meddling of the market will put a damp to the GTA condo market. This is plain stupid!

    I don’t know who the hell he is listening to. Why does he not seek solace from the tried and true, blue blooded economists such as Sherry Copper, Doug Porter, and other real industry experts like RE/Max CEO? They have already guaranteed that we have no housing bubble or consumer debt problem! Period.

    Folks. We need the next 200 condos to be built in Toronto. Landlords are charging with outlandish rents, even with leaky roofs and flooded basements. Instead of fixing the kitchen sinks for their slum apartments, landlords are killing their abundant leisure time by feverishly posting on the blogs. That’s because they can get away with that. Renters have no choice. We absolutely need the next 200 condo buildings to come to the market to crush the rents!

    I will never vote for H again if the rumor comes into truth.

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  • reasonfirst said:
    • 2 years

    I love the way you refer to de-intervention as meddling. cracks me up.

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  • 45north said:
    • 2 years

    Bens last post just dropped out! I made a mistake and posted "the market will just Reply". That post has disappeared.

    Market Player: Oh, No! F is going to shorten the amortization period from 30 to 25 in the coming budget.

    about time!

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  • Greg said:
    • 2 years

    The consensus amongst banks and institutions is that Flaherty will terminate the use of collateral backed by CMHC into covered bonds. This will force banks to make better quality loans and tap into private insurers instead of being dependent and abusing CMHC's competitive rates.

    After analyzing some new data on covered bond issuance, I can see why Flaherty would choose this option after the banks just dumped all their soon to be toxic mortgages on taxpayers lap via CMHC. Some details http://i39.tinypic.com/142sqi8.png

    Flaherty will be in the hot seat soon. He knows he's due for a hard grilling.

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  • Greg said:
    • 2 years

    Charts of Interest: StatsCan National Balance Sheet Accounts

    Debt Indexed To Personal Disposable Income http://i41.tinypic.com/dz6npk.png

    Owner's Equity Indexed To Real Estate http://i39.tinypic.com/8widy9.png

    Financial Assets Indexed To Net Worth http://i43.tinypic.com/v62gqb.png

    Net Worth Indexed To Personal Disposable Income http://i43.tinypic.com/10755s6.png

    Consumer Credit & Mortgage Liabilities Indexed To Personal Disposable Income http://i39.tinypic.com/rkty1d.png

    Real Estate Indexed To Personal Disposable Income http://i41.tinypic.com/10oqkac.png

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  • Petr said:
    • 2 years

    The grizzly bear "Ben Rabidoux" will be on Globe and Mail tomorrow for a questions and answer period - http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages...

    I've seen these Q & A's before and found them useful. Prepare some tough questions for him or you may be the victim of a bear attack.

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  • Fabian Fraser said:
    • 6 months, 4 weeks

    I just pulled some very valuable information from
    michellefraser.com

    Seems pretty promising:

    "The sale of luxury homes is expected to gain momentum this 2013 fall. This increase may be fueled by the demand from international investors, according a new report from real estate sales and marketing company Sotheby’s International Realty Canada.
    The company said Tuesday that sales of high-end homes worth at least $1 million were up in major Canadian urban markets in the first half of the year compared with the second half of 2012.
    Sales were up 61% in Toronto possibly due to buyers from China, Russia, the Middle East, India and the U.S. who are expected to continue to fuel the demand for luxury homes this fall"

    Seeing this happen already!

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