Is a Canadian first time home buyer’s strike in the works?

RBC releases first time home buyer survey

As Australia wrestles with a housing bubble that dwarfs our own, home buyers in Australia have wisely clued in to the dangers of buying at such inflated prices and have been busy organizing a formal buyer strike campaign.  It now appears that first time buyers here in Canada may be adopting a similar, albeit less organized approach.

The 18th annual home ownership study conducted by RBC has revealed some interesting factoids:

“Over half of young Canadians (55 per cent) believe that it makes sense to delay a home purchase until next year, 10 points higher than the national average, and almost half (46 per cent) of younger homeowners admit that their mortgage is using up too much of their income.”

The RBC report doesn’t adequately explain what they mean by ‘too much of their income’.  Does that mean they have to sacrifice going on an annual cruise?  Does it mean they are finding saving for retirement difficult?  I’d be curious to know how they worded this question.

Regardless, these are not an insignificant findings.  The data continues to suggest that a significant portion of house price appreciation over the past decade has been due to the loosening of CMHC mortgage standards.  To reuse an example I showed in an earlier post, consider that up until just over a decade ago, a $20,000 down payment would get you an $80,000 mortgage, meaning you could buy a house priced at $100,000.  The loosening of mortgage standards down to the current 5% minimum (a misnomer given that banks offer up to 7% cash back mortgages meaning you can technically buy with nothing down) has had a huge effect on opening the credit spigots.

Today that same $20,000 would secure a mortgage worth $380,000.  Not hard to see how this has had an effect on house prices as credit growth has blasted higher, pulling house prices with it.  Note that mortgage credit growth (the red line) went parabolic in the early 2000s.

The major impact of these loosened mortgage lending requirements has been to allow more people into the housing market who would otherwise have to wait until they had saved up an adequate down payment (….I know…..the injustice!).

As a result, we see that mortgage loan approvals and spiked around the same time while the home ownership rate rose significantly.

This entire process was aided by a general downward trend in fixed and variable interest rates, particularly since the turn of the century:

Finally, housing starts have outpaced household formation for the better part of a decade, with household formation running at approximately 175K and housing starts running well over 200K.

This excess inventory has been absorbed primarily because of the expansion in ownership rates, itself owing to loosening mortgage standards and falling interest rates.  We’ll explore just what effect this building boom has had on GDP and employment in a later post, but for now, recognize that a significant chunk of economic and job growth has been reliant on this arguably artificial boom in housing demand.

And this brings us back to the original point of this post.  First time buyers, the driver of our housing boom, are getting nervous.  They recognize that the era ahead of us is fundamentally different from the past decade.  Rather than falling interest rates, we will see rising ones.  Rather than loosening credit conditions, it seems that the government is determined to rein them in.  It seems a given that demand is set to fall, and I believe it will fall hard.  What remains to be see is how supply will respond.  Certainly home builders have pared back their activity and a lack of resale inventory has kept MLS listings at well below average for most of the past 8 months…..but will it continue?

This is indeed the million dollar question.  The attitudes of the young ‘uns and the overall inventory levels are barometers worth watching.

Cheers,

Ben

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37 Responses to Is a Canadian first time home buyer’s strike in the works?

  1. Mike says:

    In the beginning of the article, you speculate that first time Canadian buyers are waiting to enter the housing market for the same reason as Australians: the danger of buying at inflated prices. The RBC report doesn’t support this claim. On the contrary it suggests they’re waiting because they want to do some research first (lets hope this involves visiting your blog), and to save up a sufficient down payment.

    • jesse says:

      “The RBC report doesn’t support this claim”

      To be fair, without seeing the actual report, the RBC report is SPECULATING on the reasons why 55% of potential young home buyers are waiting. The press release does not provide any data supporting their assertions. We are left with inference. I find the press release disingenuous when its own “housing affordability” survey shows many Canadian markets are at the top end of affordability. Is it so hard for RBC to link the two reports and suppose that, maybe, their OWN SURVEY provides tangible and measurable evidence as to why homeowners might be waiting, instead of spouting off some untraceable behavioural economic platitudes?

  2. Ahsan Zaman says:

    Yes maybe it is a buyer’s strike. But isnt the more interesting question why is there a sellers strike? (I am talking Toronto here although it may be the same across the country).

  3. Sams Mango says:

    The last couple of points are trying to same thing in many ways, that housing is stretched. WE GET IT BEN. Great work, graphs, comments and discussions. But all of us now have to monetize our time and look at the following

    Why would this market break?
    What signs are solid indicators that something will happen soon?
    What are best weapons to trade profit from your views?

    The same stuff being recycled is tell me that actionable stuff is not in anyone vocab, but the same ol, the market is over priced, blah, blah.

    Your example “To reuse an example I showed in an earlier post, consider that up until just over a decade ago, a $20,000 down payment would get you an $80,000 mortgage, meaning you could buy a house priced at $100,000. The loosening of mortgage standards down to the current 5% minimum (a misnomer given that banks offer up to 7% cash back mortgages meaning you can technically buy with nothing down) has had a huge effect on opening the credit spigots.

    Today that same $20,000 would secure a mortgage worth $380,000. ”

    You have to focus on INTEREST RATES, rather then the turns of leverage. What did 1000$ a month get you then and what does it get you know and hold leverage constant or use a matrix – 5%, 10%, 15, 20, 25% DOWN vs rates at 1,2,3,4,5,6= in that matrix, you can see where we are now and go back historically and map it. The duration or sensitivity to rates is very very powerful, especially because you are not ready to accept to modern finance times of high leverage, low rates (i.e, you want large down payments) why are people not concerned with low payments for TV’s, Car’s etc and other great features of modern finance.

    Let’s move forward from the same old graphs and focus on making money then watching the same re-runs.

    • LS says:

      >>Why would this market break?

      Consumer sentiment.

      >>What signs are solid indicators that something will happen soon?

      This very post talks about some of those indicators

      >>What are best weapons to trade profit from your views?

      Sell, rent.

    • A. H. says:

      Because the average teevee does not cost $360K.

  4. “Why would this market break”

    Sentiment for one….hence this post.

    “same old graphs…”

    5 of these 7 graphs are originals made by me within the past couple weeks. 2 of them have never been posted before. ‘Same old graphs’ is a bit of a stretch.

    You know how to monetize this market…..start by selling your cash flow negative rentals. Step 1!

    For most people it’s not that easy. I posted on this some time ago…
    https://financialinsights.wordpress.com/2011/03/09/should-everyone-rent-when-does-it-make-sense-to-buy-a-closer-look-at-the-pricerent-ratio/

    Also check out my 3 part series on building an investment portfolio…
    https://financialinsights.wordpress.com/2010/12/31/building-a-winning-investment-portfolio-part-3/

  5. paradox says:

    looking at the charts , especially the one with BoC interest rates and RE prices, it seems that interest rates need to go up for RE prices to come down. This is the only thing that matters. All rest is noise.
    Given how unwilling central banks are to raise rates and even if they did it will take a very long time before their 0.25% increases start biting I would say that the crash is certainly not for tomorrow. I see an environment of low interest rates for the near future (next 5 years) so better have a plan B if you want to buy a house. Eventually I see wages catching up with inflation while RE prices stagnate at those levels. The crash we talked so much about was arrested in 2008 . There is no second crash coming in the horizon. Low interest rates are here to stay.

    • Liam from Calgary says:

      paradox, I agree with your analysis and to answer Ben’s question:
      Is a Canadian first time home buyer’s strike in the works?
      NO !!!

      • Liam, your unsubstantiated ‘rebuttals’ are always welcome, but perhaps I could burden you with a request that you expand on your position beyond simple conjecture. It makes for a more meaningful discussion and it helps you not to discredit yourself.

    • @ Paradox

      I’d once again suggest that you examine the most significant real estate busts and look for the relationship between house prices and interest rates. Have a look at Japan in the 80s-90s, the US since 2007, the UK right now as some potential starting points of reference. The bottom line is that significant housing corrections occur simultaneously with low interest rates for precisely the reason that demand for debt is virtually non-existant. Is this our future? I don’t have that crystal ball, but the notion that interest rates must rise in order to initiate a correction is fundamentally false.

    • The Preacher says:

      Bond market moves mortgage rates and the yields are rising fast. BoC has tiny leverage over the housing market. Wanting something to be true is not the same as something being true, mate.

  6. John in Ottawa says:

    What the RBC survey does not say is that there has been a change in sentiment. They do not say that the result from this survey is different from last year’s survey. I had precisely the same complaint after I bought my first house in 1975. I forgot to factor in the purchase of a lawn mower and gardening tools, etc.

    I always like to see if I can find a reason to be concerned with the information presented here. I would like to go back to an analysis of your first graph and compare it with Slide 25 of Steve Keen’s power point presentation.

    You have used an inflation adjusted data set (which I’m having trouble reconciling with your fifth chart of nominal house prices) and Steve has used nominal prices, but given the magnitude of the relative changes, I don’t think that matters for this discussion.

    In looking at Steve’s Australian data, his data set starts in 1976, five years earlier than your 1981. I tried, in a comment yesterday, to adjust for the five years when I said that prices had gone up 10 times and debt 25 times since 1981. Note that in making the adjustment, I allowed for prices to double in just five years in Australia (a faster pace than the US bubble).

    Still, leaving the adjustment aside, Steve Keen makes the argument that house prices and debts are getting stressed now that debt has increased 55 times and house prices have increased 15 times since 1976. Australian house prices have doubled once every 9 years for 35 years! Canadian prices have only doubled once every 15 years for 30 years (nominal prices).

    Using your data in the first chart of this post, you show debt increasing 4 times since 1980 compared with 55 times since 1976 in Australia (I still think my 25 times since 1980 is accurate enough for comparison purposes).

    4 times versus 25 times or 55 times. Maybe if our Canadian data set went back another five years we could get Canadian debt up to 6 times versus 55 times. Regardless, the difference approximates an order of magnitude!

    So, this is my point. If Australia could withstand such massive increases in house prices and debt compared to Canada, and only with such massive increases over a prolonged period is the alarm starting to go off in Australia, aren’t we being a bit premature with sounding the alarm here? If you were to overlay your chart with Keen’s, and map the scale, we are back in 1995 Australia.

    Let me summarize a few points I’ve been making over the past couple of months.

    1) The Bank of Canada says US and UK consumer balance sheets are only now as strong, after three years of deleveraging, as Canadian balance sheets (Gluskin got it wrong).

    2) The entire US financial system committed mass suicide with its fraudulent casino driven TBTF arrogance and created a financial crisis that continues to this day and will continue for the foreseeable future.

    3) Canadian banks were isolated from the US and European casino operation due to differences in regulation. The CIA World Factbook introduces the Canadian economy in part with the following:

    Buffeted by the global economic crisis, the economy dropped into a sharp recession in the final months of 2008, and Ottawa posted its first fiscal deficit in 2009 after 12 years of surplus. Canada’s major banks, however, emerged from the financial crisis of 2008-09 among the strongest in the world, owing to the financial sector’s tradition of conservative lending practices and strong capitalization.

    Any attempt to compare Canada’s lending practices with US lending practices just demonstrates a lack of understanding of US lending practices. Co-opting US vocabulary is insufficient to make a case.

    4) The scale and timing of Canada’s “bubble” is dwarfed by both the US and Australia. US house prices doubled in six years (CS). Australian house prices have been doubling every 9 years for 35 years (Keen). Canada’s house prices have only doubled once in 11 years (TeraNet) and twice in 30 years.

    5) The international bond and FX markets think Canada has a strong economy and that Canada is a great place to invest. In the past ten years the Canadian dollar has strengthened against the US dollar from 62 cents to $1.04, a 67% increase. For foreign investors, that’s a 6.7% annual return before any return on the Canadian investment itself.

    Personally, I can’t think of a country with better economic prospects than Canada. The OECD expects Canada to have the best growth in the OECD this year. This doesn’t mean there aren’t any current economic issues that affect our lives. Is anybody concerned with $113/barrel oil? Could the C$ go to $1.20, even $1.50 and what would that mean for Canadians? What it means for real estate in Toronto and Vancouver should be obvious.

    With the launch of the new site, I would like to see more broad economic analysis and far, far less focus on real estate. I suggest about 10% real estate may be the right proportion.

    • John

      More than any other reader, your insight and always-valid criticisms of my work have prompted me to dig deeper into the stats. I do thank you for that. But in this case, I fundamentally disagree with a number of the points you’ve raised.

      Australia’s debt/housing bubble absolutely dwarfs ours. Private credit as a percentage of GDP is roughly 150% in Australia versus 95% here. No comparison. Likewise house prices have increased much faster than our own. No comparison. Mortgage debt as a percentage of GDP is roughly 85% there versus 65% here. Certainly they have outpaced us in terms of any potential bubble, but the more pressing question is, does that mean we have nothing to be concerned about? Further to that point, I’d say it’s a huge stretch to suggest that their bubble is an order of magnitude larger than ours without first exploring the change in underlying fundamentals.

      I think one of the reasons why we tend to see things differently is that you tend to look at the absolute change in a particular metric (house prices, mortgage debt, etc), while I tend to look at the change in that metric relative to the fundamentals that arguably support it (incomes, GDP, etc.). There’s nothing inherently right or wrong about either approach, but it does explain why we often see things differently. This is a case in point.

      While comparisons with other countries are valid to a point, I am far more convinced by a more systematic comparison to our own historic measures of fundamental value. With regards to the Canadian experience, housing is inarguably richly priced. In fact, by many measures, it is at unprecedented levels. While an apples-to-oranges comparison with Australia suggests we could see house prices run significantly higher, an examination of the dislocation with our own historic measures of value strongly argue against that notion.

      With regards to the other points you’ve raised, allow me to address them one by one:

      1) “The Bank of Canada says US and UK consumer balance sheets are only now as strong, after three years of deleveraging, as Canadian balance sheets”

      That’s arguable. Differences in tax regimes make such comparisons tricky. Gluskin chose to examine debt relative to disposable income rather than debt to gross income. On that metric, things look decidedly different. I’m far from convinced that the Bank of Canada’s measure of debt is necessarily the best.
      In addition, if we are looking at US and UK debt consumer debt levels, why not look at them from the perspective of a metric that is not as ambiguous. Our total consumer debt levels relative to GDP are now at the exact peak the US experienced.

      2) “The entire US financial system committed mass suicide with its fraudulent casino driven TBTF arrogance and created a financial crisis that continues to this day and will continue for the foreseeable future.”

      No argument that there was a level of fraud involved. Here’s where I’ll turn the tables. When you raised concerns about using aggregate data while examining a potential Canadian housing bubble, I went to great lengths to create regional metrics. I’m now going to ask you to do the same. Can you quantify this? What percentage of consumer loan originations involved outright fraud (and this does not include the recent fraud scandal that involved the securitization of these loans after their origination)? What percentage were ‘subprime’? Can you define that term for us? I’m concerned that there’s a bit too much ‘shooting from the hip’ in this statement.

      3) “Any attempt to compare Canada’s lending practices with US lending practices just demonstrates a lack of understanding of US lending practices.”

      Again, the fundamental question is not whether or not our potential lending excesses have equalled those in the US. They haven’t! A much more pertinent question would be whether or not we have engaged in a credit excess that, while uniquely Canadian, is nonetheless problematic. Perhaps you’d like to explain how our prudent lending practices compared with the reckless habits in the US have resulted in an aggregate consumer debt level relative to GDP that is identical between the two nations.

      The concept of ‘prudent’ is indeed fluid. Have we been prudent relative to American banks? Certainly. Have we been prudent relative to our own historical standards? That’s a different story all together. What are the implications of each?

      4) “The scale and timing of Canada’s “bubble” is dwarfed by both the US and Australia.”

      Once again we see that you are choosing to focus on absolute change in nominal prices. I’m not convinced that this tells the whole story. How does the change in house prices relative to incomes, rent, GDP, etc. compare? Perhaps more meaningfully, how does the current state of our housing market compare to our own historic experience. Unless we’re willing to embrace the “this time it’s different” mantra, by these more meaningful metrics, we’ve arguably got some problems!

      5) “The international bond and FX markets think Canada has a strong economy and that Canada is a great place to invest.”

      Canada is a great place to invest. We have resources that will remain in demand in the global economy. This argument does not logically indicate that we don’t simultaneously have problems with our housing market and consumer debt levels. In the context of this discussion, this may well be a slightly rose coloured herring…;)

      Finally, I make no apologies for having a heavy focus on debt levels and the housing market on this blog. I believe that this is a topic of extreme importance to understanding some potential risks to our economy. I would love to explore a more broad range of topics on my site. Unfortunately this terrible burden known as a career often gets in the way. Perhaps you’d like to volunteer some of your time to explore topics you deem important. I’d be happy to post them.

    • Sams Mango says:

      John on the hill, I have to agree – I have lived in many places, Canada has got it right in many ways. The house prices as you pointed out in long term have not grown as much as people think.

      • I really don’t think the rate of increase is the most important metric, though I disagree that it has been insignificant. If house prices rose a very modest 3% per annum but incomes, rents, GDP, inflation, etc only increased at 1%, given enough time you’d still be facing a significant overvaluation issue. You can’t look at nominal price increases within a vacuum. There’s much more to it than that.

      • Sams Mango says:

        I don’t agree, if housing has always had a spread to those factors, then you have to look at how that spread widens and contracts. Nothing says it has to be flat to GDP, inflation ,etc.

        Review NAV pricing vs stock market prices, you will always have a discount and premium to NAV, it’s important to understand that spread rather than focus on the absolute. You might buy an ETF at a discount, but you will also sell it at a discount.

    • jesse says:

      It’s a good point that it’s generally more difficult to find positive areas in an economy than it is negative areas. I wouldn’t want this blog to turn into a pointless permanent brick in the “wall of worry”.

      That said, residential investment and the high debt loads associated with it should be a large part of discussion because, historically, it has been relatively volatile and has been seen by policymakers as a method of transmitting stimulus to an economy. Residential investment historically leads economies out of recessions and it certainly did for the last one. But now, on a strict investment gauge, incomes from rented residential properties are weak and do not justify their valuations in the long run. I am concerned this over-investment in residential will become a net drain on economic growth going forward and I can’t think of another industry for which I can state that.

      I agree with Ben that looking at magnitudes misses the underlying weakness of housing as a utility. The luxury add-ons associated with owner-occupied stock, perhaps, should be considered as a separate asset class.

    • jesse says:

      So if Australia can withstand the price rises and ostensibly have a functioning economy, Canada should not be worried when UE drops to 5% and the overnight rate climbs to 5%, mirroring conditions like in Australia?

  7. jesse says:

    Look what Australia’s doing:
    http://www.aofm.gov.au/content/notices/02_2011.asp

    “On 5 April 2011 the Treasurer issued a Direction for the AOFM to invest up to an additional $4 billion in Australian RMBS, together with remaining capacity from the current program of about $3.5 billion. Investments will continue with the aims of supporting competition in residential mortgage lending and lending to small business.”

    That sounds familiar.

  8. John in Ottawa says:

    I am not disagreeing with Steve Keen. Australia is showing signs of stress.

    What I am saying is that Australia, which has an economy slightly smaller than Canada’s and is similar in many key ways, managed to withstand a bubble that has persisted for decades and has grown to an order of magnitude larger than ours.

    Magnitude and rates counts for something. We are about where Australia was in 1995. Should Australians have been counselled to get out of real estate in 1995? In 2000?

    Look at it this way. I used to own a Piper Arrow. In hundreds of ways that matter, it is just the same as a Boeing 747. It has wings, and flaps, and retractable under carriage, and it obeys the same laws of physics. It will kill you just as dead if it falls out of the sky. It’s cockpit has the same instruments that UPS has in their 747s. It has the same redundant electrical, avionic and fuel systems. It has an emergency locator transmitter in the tail. It has to be able to navigate safely in the complex air traffic control system. I could go on and on and on. They are even both called airplanes. Really, the only significant differences between a Piper and a 747 is the Piper can’t fly as fast, as high, as far, or carry as much cargo. Still, a Piper isn’t a Boeing and can’t carry out the same mission.

    Ben pointed us to a graph of house prices and mortgage debt in Australia, and reproduced a very similar looking graph for Canada. Steve Keen did the math for us and said, “Look, mortgage debt has grown 55 times and house prices have grown 15 times!” Ben left us to the math for ourselves, but it works out to house prices have gone up only about 4.5 times in Canada in nominal terms in 30 years. Australia is the 747 and Canada is the Piper.

    It takes time for economies to adapt. House prices doubling in 11 years, when they were undervalued in the first place, is sufficient time. Judging by Australia, we can handle a lot more stress.

    I’ve never said that we wouldn’t experience a correction. They happen all the time. It may burn a few people who have no equity, but if they can continue to make their payments they can grow equity back. There is no such thing as timing the housing market. Houses are not investments. They are a place to live, period.

    What I’m saying is there is nothing in any of the data I have seen here in the past couple of months that leads me to believe there will be a disorderly housing crash, a made in Canada financial crisis, bank failures, a bond vigilante rebellion, or a tax payer bailout. This is all a tempest in a tea pot.

    • Declan says:

      The problem Australia has is that, unlike the United States or Canada, their housing supply is very unresponsive to housing prices. Whereas increases in Canadian prices led to a construction boom (nicely documented in the charts above, easily verified by simply looking around).

      This means that while prices have climbed, rents have also climbed a lot in Australia so they have a housing bubble on top of a housing shortage which makes for some pretty crazy stats.

      Although I disagree with its pumper tone and ‘no bubble’ conclusion this paper does a nice job showing the housing supply issue in Australia (interesting Australia and England use the same system for controlling housing starts, and both have seen the price-supply relationship break down over the past few decades, well documented for England here).

      Meanwhile, here in Canada, construction has boomed, rents have grown slowly, and our price/rent ratio (the most important metric in the housing market, IMO) is one of the highest in the world (higher than Australia’s in 2009, per the OECD (see chart 2).

    • If I understand correctly, your basic premise is that Canada has little to worry about because Australia has more to worry about. I’m not sure I entirely buy it.

      I am curious though. When you see charts showing house prices at unprecedented highs relative to incomes, rents, GDP per capita, etc how do you interpret those and how does that jive with the notion that house price increases have been modest? I would once again re-emphasize that it is not the absolute nominal change in house prices but house prices relative to measures of fundamental value that concern me most.

      Just for clarification….the bank failures, financial crisis, tax payer bailout (of what exactly?) was suggested by whom?

      I’m also wondering if you are going to expand on your comment that the US financial system collapsed primarily because of fraudulant lending as opposed to collapsing primarily because of perfectly legal lending that turned out to be excessive and anything but prudent.

    • ATP says:

      How about a made in China global economic slowdown?

  9. BC renter says:

    I don’t know if they’re “striking”, but I know of four couples who are leaving BC this summer. In each case the move comes down to the cost of housing. Home ownership has been successfully marketed as a prerequisite to retirement planning, if not a central part of the plan itself. Houses are sold as investments that happen to have four walls and a roof that you can live under. The four couples I know have no hope of purchasing a home in the town they grew up in. They were born too late to get the affordable prices and don’t have wealthy parents who can give them a $30K-$70k down payment, so that’s it. No house = no retirement = why do I live here?

    I’m in Victoria. The average cost of a house here went from $231K in 200o to $490K in 2006. Right now the average price is cruising well above $600K — and back in 200o it was considered expensive since you could live damn near anywhere else in the country for half that amount!

    So we’ve gone from a market where a young person could get a condo for maybe $100k and move up over the course of 5-10 years to a market where the condo now costs more than a house did less than 10 years ago. The wages are about the same, and everything has gone up in price but we’re supposed to pay double or triple the price for the same house.

    I just don’t see how this can continue. I’ve seen all the charts and graphs, heard both sides of the debate and read all the press releases from the banks and realtors but the one thing that shapes my opinion more than anything is what I see and hear every day from my peers who are either swamped with mortgage debt or terrified of it and renting indefinitely. Maybe houses will never go down in price, in which case I’ll never buy one and neither will most people I know. We just can’t afford to borrow 1/2 to 3/4 of a million dollars for a very basic house and we can’t raise a family in a 600sqft 1bd, 1ba condo. So that’s it. We’re out. They can find a buyer somewhere else.

    The mentality here is that renters are fools who didn’t buy when they should have or they’re losers who don’t work hard enough to afford houses but the truth is we’re just like everyone else. We probably make the same as those people living in the $600-$700k houses, it’s just that we were born a little too late to get one for $230K. How are we supposed to carry an extra HALF MILLION DOLLARS in debt on the same income?

    • blammo says:

      Doesn’t it seem, in retrospect, that the anomaly might have been the overly cheap housing back in 2000 when most anyone could afford to buy a house right out of high school?

      Its certainly not the case in most of the developed world that one can buy a house in a major centre with a below average income. But that was the case in Victoria pre-2000. I know, I was there. I didn’t buy either but friends did, while I went to school and got ‘educated’. Who do you think is better off now?

      Did my friends know that Canadian RE was globally undervalued? I’m sure they didn’t, but they knew they could afford it and took advantage of the opportunity. They are more lucky than smart but that’s not the point.

      The point is, we aren’t going back there. Ben’s analysis is great, and I agree we are due for a correction of some sort. But I think he fails to acknowledge that the base point of Canadian RE (anytime before 2000) was a globally mis-priced asset that has since been rectified.

      • A. H. says:

        Riiiight. Anyone could afford a home… that’s why home ownership rates were much lower prior to 2000; and now that this ‘mis-priced’ asset has been rectified (i.e. become much more expensive), many more people own. It all makes perfect sense. Hey wait, maybe it has something to do with the massive increase in credit/debt and loosening of lending standards in the past decade, eh?

      • BC renter says:

        I lived here back then too and the job market was not that good for 18 year olds with no real job experience. I don’t know anyone who could buy a house out of high school. The jobs a high school-educated kid could get were basically minimum wage or maybe if your uncle was in a union he could hook you up. And I don’t know of any teenagers who were borrowing a quarter million dollars out of high school with their first real job.

        The population of BC was actually shrinking at one point because so many young people like myself packed up and headed east.

        I’ve wondered the same thing though, and if so I’ll never own. It’s just that simple. We make decent money now but not enough to buy property and retire on time the way we’d like. When I see my co-worker who is ten years older than me living in a house he bought for $240K I just can’t bring myself to pay $650k to live next door. I would feel like an idiot if I paid that much.

        I’m saving for retirement and no matter what happens with local real estate I’ll be ok and retire comfortably on my own terms. The only annoying thing is, like I mentioned before, there’s a stigma now if you rent. You’re seen as a lazy or stupid. It has become perfectly normal to pay $300,000 for a little condo out in Langford on Millstream and the highway when that same money would have bought a gorgeous house in Fairfield a few years back. People’s sense of money is distorted. It’s like money isn’t even real.

        I lived in the states during the bubble down there, and after watching a bubble inflate and burst in real time it has really made me aware of just how unpredictable things can be. A bubble can only exist if most of the participants are unaware of its existence. After all, if they knew they were overpaying for crap they never would have bought it in the first place. 70% of Americans were owners, and were deeply invested in the idea of an infinite housing boom. Most of the information in the media was coming from the commissioned realtors and lenders and their advice was always “Buy now!”. Renters who said “hey wait a minute, that’s a lot off money to pay” were ignored. After all, they were mere renters and were too stupid to understand the market. If they knew anything they would have already bought. That is basically the attitude I’m seeing here now.

        So I guess if prices never drop we’ll have a permanent underclass of renters and and a good chunk of owners who can pay the mortgage, but not much else. Maybe that’s how it will go. I’m not sure how people are going to raise families in these little micro-condos or qualify for loans on the houses. Wages have not gone up enough to pay these prices so I’d like to know where the money is supposed to come from.

        So yeah, I’ll just wait it out I guess and keep on saving. If houses were always supposed to be so bloody expensive then I guess I never should have wanted one in the first place.

      • Sams Mango says:

        @ BC Renter – I would have loved to buy Apple stock 10 years ago also. Accept the current market price to get in, or rent. It’s simple, you should not feel shame.

      • jesse says:

        I agree with SM, just rent. Get a long-term lease if you’re worried about stability.

      • BC renter says:

        @Sams Mango: I guess that’s what it comes down to. My wife and I do not accept these prices and therefore will not purchase real estate when we can rent for far less money.

        At this point in our lives we would consider owning the home we live in to be an unnecessary luxury.

        If and when we purchase something it would have to be a multi-unit property or we wouldn’t be able to justify it, but we’ve always felt that way, even when homes cost a lot less than they do now.

        For us, retirement is the real end game here and being disciplined about saving is ultimately far more important than renter/owner status. Things may have turned out differently if I’d been born 10 years sooner, in which case the mortgage on a nice little house could be less than what we pay in rent, but it is what it is. We’re not on a level playing field any more and we can’t borrow and spend double or triple just to keep up with a previous generation.

  10. Pingback: VR View – Worthwhile Links (March 9 2011) » Valdao Reputo (VR)

  11. TS says:

    @BC renter
    When I see my co-worker who is ten years older than me living in a house he bought for $240K I just can’t bring myself to pay $650k to live next door. I would feel like an idiot if I paid that much.

    Bingo the people that create the pressure to buy are the ones that bought low. It is ponzi type thinking.

  12. pricedoutfornow says:

    BC Renter:

    I agree with everything you say. The people who are just slightly older than us, who bought houses in the early 2000s (I was just out of college, just had my first career job and didn’t have a dime to buy a house), feel like geniuses because they bought.
    I’m in Vancouver and I remember talking to people about housing prices in 2001. Everyone lamented the high cost of housing though, a house in the city of Vancouver was about $300k or less. Now, those same houses are $800k! but today nobody really talks about real estate being “expensive”-they are all too busy buying those $800k houses.

    I knew far more people who were renters back then, and it wasn’t so much of a stigma to rent. It was accepted because owning was pricey. This was mostly because you actually had to save some money for a downpayment, and interest rates were about 7% or so. Now, any fool can buy a house with zero down (unofficially, the banks call it cash back mortgages), and rates are rock-bottom.

    Strange how psychology has changed. $300k 10 years ago was “expensive”, yet $800k today is not! Shows was cheap credit can do. I think those who own $800k houses with huge mortgages may be in for a shock though, when rates go back to normal levels, 7 or 8%. Run the numbers and it’s absolutely shocking what the mortgage payment will be. Of course, these same people believe that interest rates will never go up…though weekly Flaherty warns us otherwise.

    • Sams Mango says:

      The price is cheaper today. 300@8% is 24k in interest a year. That can finance a million bucks now

      Homes are cheaper today adjusted. Not many people get it. They look at the price. Not the adjusted leverage cost

  13. mac says:

    Wow. John has come around.

    I wonder, John, if you looked solely at Vancouver prices and data sets if your conclusions would be the same? I think we’ve doubled in prices every 7 to 8 years.

    BC Renter: I think the stigma of renting, if you want to call it that, it’s really just nosy people wanting the “best for you based on what they believe, I think that stigma came with the run-up in housing prices. It’s a panic kinda thing.

  14. Ray says:

    A bit off topic but…

    Checkout the charts in the Statscan 2010 annual review.

    http://www.statcan.gc.ca/daily-quotidien/110407/dq110407b-eng.htm

    I found it very interesting about the 10-year trend of us slowly decoupling from the USA as our sole trading partner and that exports have instead tripled to China and the UK. Great news for Canada and somewhat relates to everyone’s observations above that comparisons to the USA might not be entirely useful as we slowly ween off having to have their fate.

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