saskatoonhousingbubble

Dean Baker: The Reemergence of Housing Bubbles

2013-06-18T09:09:00.000-06:00

From Project Syndicate by Dean Baker. He was one of the first ones to warn about a US housing bubble way back in 2001, as house prices were straying away from their long term fundamentals. He has warned about house prices in Canada being overvalued over the last few years.

Since the economic collapse of 2008 there has been considerable effort devoted to redrawing regulatory rules to protect the financial system from future instability. The extent to which the new regulations implemented to date enhance stability is debatable, but if the purpose was to prevent asset bubbles of the sort that gave us the current downturn, arguably they have already failed.

There is a fundamental issue here that is not sufficiently appreciated. While the public’s attention was focused on the financial crises that brought most major banks to the edge of insolvency, and pushed quite a few over, the primary reason for the prolonged stagnation of the last five years was the deflation of housing bubbles in much of the world.

The case for this is clearest in the United States. The housing bubble was driving the economy in the years leading up to the collapse. The unprecedented run-up in house prices led to a record pace of construction in the years 2002-2006, even as the demographics would have predicted a slowing. When the bubble burst, construction not only fell back to normal levels, it dropped considerably below as a result of the enormous overbuilding during the bubble years. This led to a loss in demand in residential construction of more than 4 percentage points of GDP, or $640 billion in annual demand in the current economy.

The bubble also led to an extraordinary consumption boom, due to wealth effect from $8 trillion in bubble generated housing equity. The saving rate fell to nearly zero in the years 2004-2007. When the bubble burst and this equity vanished, the U.S. economy lost close to $400 billion in consumption demand, 2.5 percent of GDP in today’s economy.

This is the story of the downturn in the United States; there is no magic potion that will replace this lost demand, especially when the Fed is constrained by the zero bound. It is difficult to see how anything would be very different today if there had been no financial crisis. For all the talk of troubled banks, few small businesses cite lack of credit as major problem. Furthermore, credit is available at record low cost to larger firms, who clearly do not see many investment opportunities.

If the proximate cause of the economy’s troubles are burst asset bubbles, and not over-leveraged financial institutions, then it would make sense to focus more of our attention on the former than the latter. Unfortunately, the picture here is not very encouraging.

The bubble in the United States has deflated with house prices now more or less in line with their trend levels. However this is not the case everywhere. In several countries house prices have at best partially deflated from bubble peaks.

This is most clearly the case in Canada and Australia where inflation-adjusted prices are at or above their pre-crisis levels. The story is not much different in the United Kingdom. Prices are down by 25 percent from their bubble peak, but still more than twice their mid-1990s level. Homeowners in France might also have some grounds for concern given that prices there also are at pre-bubble peaks and close to double the mid-1990s levels.

Of course a run-up in prices doesn’t necessarily mean a bubble; it could reflect an increased demand for housing relative to other items. This doesn’t seem to fit with the fact that all of these countries have seen a sharp rise in the sale price to rent ratio over the last two decades. In this respect it is also worth noting that median house prices in all of these countries are now 50-100 percent higher than in the United States. Given their lower per capita incomes, this would imply a willingness to spend a much larger share of income on housing than in the United States.

Some analysts argue that current house prices are justified by the extraordinary low interest rates of recent years. In this view, if the implicit rental value of owning a home is viewed as comparable to interest on a bond, then we would expect a strong inverse relationship between house prices and interest rates.

There are two points to be made on this argument. First, we have not generally seen this pattern in the past. House prices have not been hugely responsive to interest rates in most countries over the last four decades. This means that if house prices will now fluctuate like bond prices in response to interest rates, it marks a change in the behavior of this market.

The other more important point is that if house prices now fluctuate like bond prices, then this view also implies that house prices will tumble if interest rates return to more normal levels as the economy recovers. If we think of house prices moving like long-term bonds then a doubling of interest rates will cause house prices to fall by roughly 50 percent. This view implies the same sort of future plunge in house prices as the bubble story, albeit for a different reason.

This sort of plunge in house prices would be no big deal if homeowners thought of their houses like bonds, with the corresponding response to fluctuations in interest rates. However, this is probably not the case. For example, if overnight rates go from near zero to 2.2 percent in three years, and 10-year Treasury rates rise from a recent low of 1.6 percent to 4.5 percent, as projected by the Congressional Budget Office in the United States, then will people in Canada, the U.K., and Australia expect their house prices to fall by 50 percent?

Assuming that most homeowners do not anticipate this sort of plunge in prices, and have not hedged themselves against this possibility, we may be in for another round of very bad news if interest rates ever return to more normal levels. It is remarkable that the latest run-up in house prices has received so little attention from people in policy positions. There may be an enormous price to pay for the continued lack of attention to housing bubbles.

Paul Krugman looks at the Canadian Housing Market

2013-06-16T08:29:00.000-06:00

From the New York Times

I’m in Toronto, where I just received an honorary degree from the University of Toronto; and my thoughts have naturally turned, as they don’t do often enough, to matters Canadian. For it seems to me that Canada offers a useful test case for theories about what lies behind the Great Recession and the Not-So-Great Recovery.

In its early stages, the slump was widely seen as essentially a banking crisis. This view in turn led some people — unfortunately, I believe, including some senior people in the Obama administration — to believe that the economy would bounce back quickly once banking was stabilized. In fact, however, banking was stabilized pretty quickly, and most measures of financial disruption look like this:

That is, a period of severe disruption in 2008-9, but a return to relatively normal conditions thereafter. Yet the economy remained depressed. As a result, many economists — myself included — turned to a view that stressed nonbanking issues, especially the broader effects of the collapsed housing and the overhang of private debt.

Enter Canada. Famously, Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis. And for a while Canadian housing prices lagged those south of the border. Since then, however:

The EconomistReal house prices, 1975:1 = 100.

And Canadian household debt has kept rising even as the US level has declined:

Bank of Canada

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

I’m not exactly making a prediction here; but I guess I believe in the debt overhang story enough to be worried, and Canada is certainly an important test case.

Could MOOC's be the saviour to the education bubble? An awesome infographic from online college courses

2013-06-12T11:47:00.000-06:00

I have published a few posts about the education bubble on how post secondary students are drowning in debt like never before.

The Education bubble, how will it impact the Canadian Housing Bubble?

In 1980, a full year of arts and science cost $655.00

In 1990, a full year of arts and science cost $1344.00

In 2010, a full year of arts and science cost $4900.00

That is an increase of almost 650%. To put that into perspective, housing, since 1980 has increased by 350%, while inflation has increased just over 150%.

And

Student Loans Are Bankrupting A Generation

So is there anything being done to help future students?

From online college courses

Academia is buzzing about MOOCs. What sounds like genteel name-calling is actually a powerful new medium with potential to transform the education system. Indeed, MOOCs and mooks are simply unfortunate homophones but the former is certainly ruffling feathers because their aim is to make higher education more affordable (free, in fact). These Massive Open Online Courses picked up speed and weight like a freight train, with more than five million learners in locations spanning the whole globe. Academic heavyweights like Harvard, Stanford and MIT back the courses, giving the world of online learning a much-needed boost of credibility.

In fact, two main players in online platforms, Coursera and Udacity, were founded by Stanford professors. As tuition rates continue to skyrocket, outpacing inflation like a Greyhound racing a Chihuahua, professors have banded together in hopes of making a world where anyone can access the elusive realm of an Ivy League education. The hurdles remain: Passing rates hover in the single-digits and completing a course has yet to be recognized for college credit. However, the appeal of MOOCs for both professors and students is so powerful it just might change higher education for good.

Click here for the website online college courses.

Can A Housing Bubble Occur With Tight Mortgage Rules?

2013-06-10T21:19:00.001-06:00

People often talk about how "prudent Canadian banks are" and how "conservative Canadian consumers are" in that we won't or can't have a housing bubble. While many people say that because we don't have the same kind of subprime lending as the US had, Canada can't have a housing bubble.

But if any have read my post on mortgage rules over the years you will find that the mid 80's were a time of the toughest mortgage rules that we have had since the late 60's.

The minimum down payment required was 10% from 1983 to 1992. The gross debt service ratio was at 32%. A house price ceiling on insured mortgages was set in 1983 which varied from region to region.

But with those tight rules, a housing bubble still occurred in the GTA.

So we have to ask how, with the tightest mortgage rules over the last 50 years, did a housing bubble form in Toronto in the late 80's? It wasn't lax lending, it wasn't low interest rates. What was it? It was the perception of real estate. People saw real estate as a speculative investment. Real estate became a commodity, not a place to live in. This same ideology has taken form throughout most of Canada in the last half decade.

You don't need lax lending (it does help) to form a housing bubble. You don't need cheap credit (it also helps) either. You just need people to believe that real estate is the greatest thing since sliced bread. Just google "bidding wars" and enter whatever city in Canada and you will see a pile of links from the last half decade.

By the way, the average house price in Toronto, went from $273,698 in 1989 but by 1996, it was $198,150. That is a drop of $75,548.

Canada’s big-city mayors want action on affordable housing crisis ( a problem they helped to create)

2013-06-05T07:09:00.001-06:00

From News 1130

VANCOUVER – The mayors of Canada’s largest cities say there is a growing housing crisis across the country, with many people unable to buy homes because of record-high household debt, new economic realities and changing demographics.

The Big City Mayors’ Caucus met Thursday in Vancouver, ahead of the annual meeting of the Federation of Canadian Municipalities, emerging with an invitation for their provincial and federal counterparts to meet and address the problem.

“Housing affordability is putting home ownership outside of the reach of many Canadians, and we need to think hard about what that means in terms of what policies can we do to support housing affordability, how can we stimulate new rental housing, as well a what we do about existing social housing,” said Calgary Mayor Naheed Nenshi.

“We need to start working with the federal government and our provincial governments on a national view of housing.”

The average price of a new home more than doubled from 2001 to 2010, the mayors pointed out.

Just 10 per cent of new residential construction in the past 15 years has been dedicated rental housing, yet 32 per cent of Canadians live in rental units, according to the federation.

Read this rest here

Some of these guys have no clue. Many of their own policies have contributed to the housing affordability problem. For example, a walkout lot in the first phase of Willowgrove was selling for just over $80,000, but just 8 years later and about 5 km down the road, that same kind of lot is now selling for over $200,000. Cities have added loads of different levies on city lots and cranked up the price because land sales are a cash cow for cities. And as long as credit is easy to get and the majority of people see real estate as an investment, one outcome of this, is of course, an affordability problem.

Canada is Number 2 in Household Debt to Income in the World

2013-06-04T07:15:00.001-06:00

From the Economist

Looks like nobody will touch the Netherlands. Amazing!!

Average Canadian House Prices and Average Weekly Wage Growth From 1956 to 2012

2013-06-03T20:10:00.004-06:00

Too busy to make much of a post so here is a graph to chew on

A great article from the Calgary Herald about "affordable housing ownership""

2013-05-28T19:43:00.001-06:00

From a couple of days ago " Good intentions for housing are not good enough"

Before the meltdown in the American housing market in 2007, a decline from which that country has not yet recovered, a major contribution to the initial over-valuation of homes was how people who could not afford a home were anyway teased into the housing market.

The entry of low-income Americans into their own homes was greased by temporary, low teaser rates from banks and other financial institutions. Their entry was also facilitated by lax lending standards and by the bundling up of many such risky loans then sold off to unsuspecting buyers unaware of how poor the credit risk was in purchased mortgages.

However, once the price of American housing hit a peak and then reversed, it became clear that many low-income homeowners should never have been given a mortgage in the first place. That is when the financial meltdown began, and along with it, a sharp plunge in home values.

That history lesson should be recalled by those in Calgary who think it is a good idea to try to get everyone into the housing market, even when they would normally be ineligible for a mortgage.

Last week, Mayor Naheed Nenshi handed the keys to another young Calgarian who obtained her new abode, not through the traditional process of saving up enough for a down payment and then qualifying for a loan, but courtesy of Attainable Homes. That city-owned entity allows renters to become homebuyers if they can come up with a $2,000 down payment, providing they qualify for a mortgage and earn less than $80,000 per year and have less than $100,000 in assets.

While the city appears to be engaged in a prudent course of action, especially as the prospective owners must qualify for a mortgage, that ostensible requirement is illusory in the Attainable Homes process. In normal circumstances, qualifying for a mortgage includes demonstrating that one has saved five per cent of the purchase price.

The bigger picture in all this is how governments are often the authors of a "housing crisis" because of their own policies. The City of Calgary, along with other cities across Canada, often restricts the amount of land available for development, an action that constrains supply and sends home prices higher. The most obvious example of this is in Fort McMurray, where, in this case, the slowness of the provincial government to approve more land for housing has meant the concentrated demand for housing in that small city has led to the well-known housing shortage that has sent prices to Vancouver levels.

Read the rest here

I have harped about this many times, glad I'm not the only one.

The failure of the Assisted Home Ownership Plan 1973

2013-05-23T21:14:00.001-06:00

The early 70's was a time of high inflation and house prices rose like crazy. With house prices outpacing incomes, there was an "affordability" problem.

So of course, the government took it upon themselves to "help" the market.

1970- Innovative Low Cost Housing Plan- Federal plan aimed at low income housing
($200 million). Funded nearly 10,000 low income ownership units.
1970- Lenders were allowed to make high-ratio conventional loans providing they were insured by a private or public mortgage insurance provider.
1971- Assisted Home Ownership Program- $100 million program provided loans at below the CMHC direct lending rate. Borrowers taking advantage of this program also could chose longer amortizations.
1971- Amendment to the Income Tax Act that excluded principal residences from capital gains tax.
1972- Gross Debt Service Ratio increased to 30 percent from 27 percent. Also, before 1972, only half of spouses income used for GDS ratio. Now all income used.
1973- Assisted Home Ownership Program ( AHOP) 5 per cent down, 35 year amortizations, lower interest rates for first time buyers. 8 percent interest rates, compared to 11 percent for conventional loans. By the mid 80's, 11% of these loans defaulted.

More on the Assisted Home Ownership Program.

From John Miron, House, Home, and Community: Progress in Housing Canadians, 1945 -1986

AHOP was a brave and and pathbreaking departure; it married large initial monthly subsidies to a mortgage design that differed radically from the standard, and it made new home ownership accessible to more families. Under AHOP, initial monthly payments on a new dwelling unit were cut by the use of a mortgage payment design under which payments gradually increased over time. Underlying this design were the assumptions that the rate of inflation would not fall, that the inflation premium on interest rates would not change upon rollover, that incomes would rise with inflation ( hence, the payment-to-income ratio under AHOP would remain affordable), and that house prices would rise ( hence home owner's equity would not fall)

These assumptions were not realized. This bad luck with imperfect design resulted in more defaults than had been foreseen. Of the 161,000 units funded by assisted home ownership programs over the period 1970-8, some 18,000 had defaulted by 1985, an 11% rate.

What most people do not realize is that in 1983 the minimum down payment increased from 5% to 10% in response to the unprecedented volume of claims on CMHC's Mortgage Insurance Fund. Very high interest rates and the AHOP program were factors in the large volume of defaults at this time.

While no one can properly predict the future, we have ample evidence in the past that assisting people into home ownership that had trouble getting into home ownership by themselves, has not always worked as planned.

While there is not a national assisted home ownership plan, almost every city in Canada with a population over 30,000 has partnered with CMHC to "help" people into home ownership. In Saskatchewan we even have Moose Jaw with an affordability problem. And of course in Saskatoon we have the Mortgage Flexibility Support Program
The people using this program are people who are of lower income and first off the chopping block if the labor market turns sour. The more people that are "helped" into home ownership, the more that the housing market becomes vulnerable.

So are we repeating the same mistakes as before?

The housing crisis in Regina (The real problem nobody wants to talk about)

2013-05-20T06:56:00.001-06:00

On May 15th and 16th Regina hosted a housing summit to discuss the problem of affordable housing and the possible steps to address this problem.

From the cbc

Fougere is hosting a housing summit and, on Monday, he took part in a ground-breaking ceremony that highlighted one element of the housing needs in his city.

A project in Regina's core neighbourhood, set for completion in December, will see eight bachelor-style apartment units built. The apartments are meant to provide housing for young people who can't find anywhere else to stay....

Calvin White, who was working on the project Monday, said that rental rate is important considering what he has experienced in Regina.

"Outrageous," White said about some of the rents he has seen. "There are some places [at] 18-hundred bucks, for rent. I don't how people can afford that. $450 here. That's pretty affordable."

First, some background on why Regina has this affordability problem.

Apartments converted into condos

From the cbc "Condo conversions popping up all over Regina, Saskatoon ( 2008)

The wave of condominium conversions that has recently rolled over Saskatoon appears to be continuing in Regina.

What is interesting is that from 1997 to 2007, while population increased by about 3,000, Regina had a net loss of 500 apartment units due to condo conversions. From 2007 to 2012 population increased by 23,500. But from 2007 to 2012 this is how many apartments were built.

2007	58
2008	141
2009	256
2010	253
2011	355
2012	727

For a total of 1790 units. But in my estimation, with that type of population growth, Regina should have built somewhere near 3100 apartment units. Anyone surprised this is the outcome?

Now Regina has had in place since 1994, some rules regarding condo conversions. One is that the vacancy rate cannot be under 3% in order for a condo conversion to go ahead. If it is under 3%, the approval process gets tougher, but condos can still be converted.

So in a quick nutshell, too many condo conversions and not enough apartment units being built for population growth over the last decade.

2nd reason why there is a housing affordability problem

Chart is pretty well self explanatory. Rent growth is from apartment units such as boardwalk and do not take into account private rents. Some estimations put private rent growth somewhere in the range of 70% to 100%. Compare that with weekly wage growth of 30% and you are gonna have problems.

The reason for this type of growth is that since 2006, there has been a change in how people view real estate in Regina. They now see real estate as an investment first, and then a place to live in second. People have used extremely low interest rates and easy lending to build up house prices. Oh, by the way, did you know that mortgage credit grew 11% in Saskatchewan during 2012 while labor income growth was about half that? You do now. This part of the equation won't change anytime soon it seems.

My thoughts
This is a complex situation and there is no easy fix. When one looks at mortgage financing, provincial and municipal governments have no power to control these, as mortgage rules and interest rates are set at the national level. With this easy access to credit, ( forget those who think mortgage rules are tight, here is some history for them, best compilation on the web) home sales are in a way subsidized by credit as most fundamentals are showing warning signs of some overvaluation in Regina. Because of this there is also a significant better rate of return for companies to build houses, condos and townhouses for sale compared to apartment units as home sales are financed through credit and rents are financed through wages.

A few ways they could try and fix this:

Restrict condo conversions.

About 30% of all future housing starts need to be rental units. The city could make it mandatory for big developers to build 3 rental units for every 7 residential units.

Incentives for these developers would need to be put into place so that these developers can get a decent rate of return and so that rental rates are affordable for renters

In the early 70's there was an affordable housing problem throughout Canada and there was no shortage of federal intervention such as:
1974- Multiple Unit Residential Program (MURB) a tax provision to shelter private investor income for rental units.
1975- Assisted Rental Program. Provided a monthly grant to private landlords to help address rental shortages. Later versions in 1976 and 1978 included interest free loans to bridge the gap between market rents and economic rents.
1981- Canada Rental Supply Program- Federal program aimed to stimulate rental construction in the private sector. Interest free loans for 15 years, up to a max of $7500 per constructed unit.

But after the housing bust of the early 80's these programs eventually ceased to exist.

Even with all these suggestions, this housing affordability problem won't be fixed. Why? Because the real problem is that most people do not want to recognize or do not understand the true root of the housing crisis. The real problem is that throughout history when there is an affordability problem for housing, then there is more than likely a housing bubble to some degree. Nobody is talking about that. As long as real estate is viewed as an investment first and a place to live in second, and credit growth continues to outpace income growth by a significant margin, there will be an affordability problem.

My question is, how was the housing affordability problem in the 70's fixed? Hint, it was not because of any programs that were implemented.

The Economist: Canada's Housing Market...A large bubble now looks set to burst

2013-05-17T19:57:00.001-06:00

The Economist chimes in about global house prices here

Housing markets are notoriously prone to boom and bust. To judge whether prices are at sustainable levels we use two yardsticks. One is the ratio of prices to disposable income per person, a measure of affordability. The other is the price-to-rent ratio, which is analogous to the price-to-earnings ratio used for equities, with rents going to landlords (or saved by homeowners) equivalent to corporate profits. If these gauges are higher than their historical averages, property is overvalued; if they are lower, it is undervalued.

On this basis Canada’s market is especially vulnerable. A large bubble now looks set to burst. Home sales in March were 15% down on a year earlier. Buyers are in short supply. A recent poll showed that only 15% of Canadians are likely to buy a home in the next two years, down from 27% last year—the steepest decline in the 20-year history of the survey. After a big boom, the housing bust will be a wrenching affair.

By contrast, the recovery in the United States, where house prices are up by 9.3%, is based on solid foundations. Previous falls in prices have made homes cheap by historical standards. The recovery

Awesome infograph from Quickenloans

2013-05-15T13:10:00.000-06:00

A great infograph from quickenloans.com. Just a heads up, Phoenix sq footage is wrong. I have yet to hear back from quickenloans but my guess is that the number should $153 not $1534.

Does Your Home Size Measure Up?

An infographic from the team at Quicken Loans.

Pacific Partners Real Estate Chartbook Update

2013-05-14T10:41:00.000-06:00

Pacific Partners is out with their updated real estate chartbook. Always good info from them.

On many levels an economic mean-reversion is taking place as a decade long bull-market in Canadian real estate has now stalled, coinciding with other faltering drivers of the Canadian economy. Meanwhile, the US housing market has surged 8% higher in the last year and cities such as Phoenix Arizona have risen over 25%. This recovery has emerged after a six-year US real estate drudging that has left in its wake systemically high US unemployment and a global economic dependence on central bank-sponsored stimulus.

Unlike with the US, Canadian markets are undergoing a period of price weakness; home prices in major markets of Toronto, Montreal, Vancouver, and Calgary are all lower from their all-time highs as the chart below illustrates. Notably, Canada’s three largest cities, Vancouver, Toronto, and Montreal are only into the first year of a potential lengthy period of price weakness.

However, even these early signs of weakness are significant because they are being accompanied by a systemic "drying up" of home sales volume. In some markets the volume drought has been large in magnitude. Vancouver in particular experienced April 2013 sales which were the lowest April sales since 2001, or 20.9% below the ten-year April average (Vancouver Sun). This reduction in sales volume is not just in Vancouver. The Canadian Real Estate Association (CREA) reported 90 percent of the local markets that it monitors posting year-over-year March sales declines (BNN). Why is the volume of home sales important? Sales volume contraction is often a precursor to price declines within any asset class, and particularly so in housing. We examined this fact in our previous chartbook publication by examining US housing sales volume changes leading up to the US housing crash (Chartbook Dec 2012).

Check out the rest of their report here. Loads of charts.

A smart investor would not buy a duplex

2013-05-08T06:59:00.002-06:00

I was emailed about whether or not buying a duplux is a good thing right now. If the numbers work, it can make sense, but for this individual it didn't. You will see why down below. And Friday's Star Phoenix has 2 quotes I would like to share.

From the Star Phoenix

more than 2,400 apartments were converted into condos in a 10year period, most between 2006-08. At the height of the conversion boom multi-family apartment buildings were trading at a record-breaking average of $101,555 per unit and at rates of return as low as three per cent.

Wow!, 3 per cent and after taxes that is less than inflation. Why would anybody in the right mind buy these units as an investment?

Before we get to that, how do we calculate rate of return?
Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.

Gross Operating Income – Expenses = Net Operating Income (NOI)
Net Operating Income/Purchase Price = Cap rate

Income is easy to figure out, what about expenses? Mortgage payment, insurance, property taxes, utilities, (most tenants pay utilities) maintenance, property management and vacancy allowance are all included in expenses. Very few investors use the last 3 in their calculations for expenses, but I would stress they NEED to, if they want to be a successful property investor.

The property I was asked about is a 70's duplex which is listed for close to $500,000. It needs some work but is rented out for $3000 per month. Assuming a $100,000 down payment at a 3% mortgage rate over 25 years.
Monthly expenses for this property look like this.
Mortgage payment = $1900
Insurance = $150
Property taxes = $375
Maintenance (8% of gross revenue) = $240
Property Management (10%) = $360
Vacancy (5%) = $180

Monthly income is $3000 while monthly expenses are $3205. This is a negative cap rate with 20% down payment along with emergency low interest rates. So why would a person buy a duplex or any unit that has negative cash flow? For the same reasons people bought properties in the Star Phoenix article I linked to.

"Investors were not buying these apartments for the income they were generating annually, but on the prospect of converting these rentals into condominiums and selling them per unit for a substantial bump in price," said McClocklin. "We are now beginning to replenish the rental units we lost and I suspect that this is just the beginning of the new wave of apartment construction."

To get a healthy cap rate of return of lets say 5% or 6%, rents would need to be raised substantially, but rents are sky high as it is right now, how much more can renters be squeezed. If anything expenses have more room to grow than rents as interest rates are at all time lows. If they were to increase, this investor would be in trouble. So why would anybody buy this duplex? The only reason is in hopes of capital appreciation, just like the units in the Star Phoenix article. Smart investors wouldn't touch this one as they do not like throwing money in the toilet.

Winnipeg part 3, housing bubble or what?

2013-05-03T07:16:00.001-06:00

Here is part 3 of the Winnipeg housing series.

First, I want to start off with population and employment growth, as they have been lackluster at best over the decade and a half.

Population Change

Or better yet, how does Winnipeg compare to others?

In the last 15 years, Winnipeg has averaged 0.8% population growth per year. Compare that with Saskatoon at 1.35%, Canada at 1.03% and Calgary at 2.81%.

Employment, Wage, House Price and Population Growth

Population and employment growth since 1998 are lukewarm at best. And if we look at when house price growth started it's double digit march in 2003, employment growth was almost 0% and population growth was .04%. In 2005 we see that employment growth was negative but house prices still marched at over 12% growth! The housing boom was not result of an employment or population boom at all in the last decade. There are only 2 years where the average weekly wage is above 4%. Other than that, the average weekly wage per year is less than 3%.

Labor Market

Winnipeg is like most other major centers in that real estate related industries are the major job growth engine of local economies over the last half decade. And this does not take into the account the spinoffs such as retail sales where people borrow against their homes to fund their lifestyles.

Building Permit Values

Other than the last couple of years, the significant majority of the construction boom has been in residential construction.

So was Winnipeg undervalued and is it now just properly priced?

I have turned over many rocks. Inflation, wages, rents, population, employment et al do not explain why house prices have tripled in just over a decade. But when backed into a corner, there is always an excuse, so many people will use the quote "our house prices were undervalued" to justify skyrocketing house prices. I have a bit of a problem with that. Why? What were house prices undervalued to? Incomes? Rents? Who has said that house prices were undervalued? The Real Estate Association? Banks? People whose livelihood depends on credit accumulation and housing? How many other countries ( dozens) had those professions saying the same thing before their housing bubbles popped? Conflict of interest with those industries maybe? Is there now an affordability problem for many renters and young home buyers now that house prices are not undervalued? Were home builders losing money on homes they were building before prices skyrocketed?

So why did house prices skyrocket? Simple. More and more people started to see homes as an investment first, ( for some, speculative) and a place to live in, second. House prices skyrocketed because people saw homes as the new best investment. This is a common theme found around the world at various time periods over the last decade. As I have said before, by looking at the numbers, Winnipeg is a classic example on how human emotion can drive up an asset price because all the fundamentals do not explain why house prices have tripled in just over a decade. Nothing, other than the increase in debt like I showed in the first post can explain the run up in house prices.

Instead of saying house prices were undervalued, maybe the banks and the real estate association should say that future buyers had more capacity to take on more debt. Think that will happen?

So housing bubble or what?

Winnipeg is ringing some alarm bells, Demographia says that housing in Winnipeg is "moderately unaffordable". Apartment rents have not increased at anywhere near what house prices have increased. Most of the price to income and price to rent ratios show that Winnipeg house prices are most likely in the overvalued category. While all time low emergency interest rates do help monthly affordability, and probably keep Winnipeg from entering the big bubble category, basing the strength of house prices and the housing market on these low interest rates is questionable at best.

The Winnipeg Housing Market Part 2

2013-04-30T14:18:00.000-06:00

OK, it has been a bit longer than I wanted but here is part 2 on Winnipeg.

Here we go.

House Price To Income Ratio

No surprise here. This is a common theme around the country as house prices have significantly outpaced family incomes in most cities over the last decade. Winnipeg is not different.

Medium house price to medium household income

Demographia publishes a household affordability survey study each year of 325 markets around the world. This is what demographia has to say on affordability ratios:

Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been from 2.0 to 3.0 times median household incomes (historical data has not been identified for Hong Kong), with 3.0 being the outer bound of affordability.

Since 2008, Winnipeg has entered the "moderately unaffordable" category.

Rents, Wages and House Prices

In a normal housing market, house prices, wages and rents will most likely move in tandem. Why is that? From The Great Housing Bubble: Why Did House Prices Fall? by Lawrence Roberts.

"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."

Here is average house price, rent and wage growth from 1992

In a normal housing market, the same pressures that push up housing prices, should also push up rents at about the same pace. But this has clearly not happened in Winnipeg. Rents have clearly lagged house prices. Why? Rents are paid by wages, while house prices are financed by credit. And unless you are living under a rock, credit growth has been substantial in this country over the last decade. And like the first post shows, Manitoba ( Winnipeg) is not different in regards to credit growth.

Now I should caution that the rents in the above graphs are from 2 bedroom apartments like Boardwalk and do not capture the increases that would be found from "investors" buying homes and renting them out. Because the vacancy rate has been low, these "investors" have fluked out on charging enough to cover the cost of the mortgage and then some. Rents in these homes are not a reflection of wages by renters but by monthly housing costs by "mortgage investors."

Many people throughout the country have bought investment properties on the hopes of capital appreciation and not on positive monthly cash flow. I'm sure the same has happened in Winnipeg. If the vacancy rate increases, I would expect rents to come down and some of these "mortgage investors" could possibly find themselves underwater. They could also find themselves underwater if interest rates were to increase ( I don't think so anytime soon, though).

House Price To Rent Ratio

What does this ratio mean?

From Investopedia

The price-to-rent ratio provides a comparison between owning and renting properties in certain cities. The ratio uses the average list price with average yearly rent on two-bedroom apartments, condos and townhomes that are listed on www.trulia.com, a real estate search website. The price-to-rent ratio is calculated by dividing the average list price by the average yearly rent price, as follows: Price-to-rent ratio = Average list price / (Average Rent * 12)
Trulia establishes thresholds for the ratios as follows:

Price-to-rent ratio of 1 to 15 = much better to buy than rent

Price-to-rent ratio of 16 to 20 = typically better the rent than buy

Price-to-rent ratio of 21 or more = much better to rent than buy

The price to rent ratio does have some limitations, such as changing interest rates and the quality of rental housing compared to owner occupied housing, but the fact that the gap between rents and house prices has continually increased every year in the last decade is definitely ringing alarm bells.

Affordability

While there are quite a few limitations on RBC's affordability study, it's the best monthly indicator on the market and it does go back to 1986. A couple of interesting tidbits on this graphic is that the elevation in monthly affordability in the late 80's was due to the increase in interest rates. House prices really did not move much from the late 80's until about 2002. Even though incomes have increased and interest rates have hit rock bottom levels, affordability has worsened. Winnipeg is one of just a handful ( Vancouver, Montreal) where affordability is worse now than in 2008. Was Winnipeg just late for the party?

In Part 3, I will take a look at the labor market, real estate related employment compared to all other employment, the construction boom, population growth, housing sales and that undervalued thingy.

The explosion of land prices in Saskatoon

2013-04-29T09:32:00.000-06:00

From the Star Phoenix " There's more to new neighbourhoods than houses"

An entry-level 55-foot lot in 2002 in Saskatoon was still available at a cost of $35,000, while that same lot now is not a standard lot and likely would cost anywhere from $150,000 to $250,000. A 30-foot entry-level lot in Saskatoon today will cost $105,000. Restrictive land supply and urban containment policies along with this escalation of land development levies by municipal governments continues to threaten the prosperity of communities in Saskatchewan.

I would love to see what has been added in terms to levies to new lands costs and how those costs have inflated since 2002. Increasing the cost for an entry level lot by 328% to 471% while the average income has increased by around 50% in the same time period is going to put pressure on housing affordability. All I can say is "wow!"

Winnipeg graph teaser for part 2

2013-04-26T20:51:00.002-06:00

Part 2 of Winnipeg's post is going to be bigger than I anticipated. While many analysts look at Toronto or Vancouver in regards to housing overvaultion, I think Winnipeg should not be overlooked. Not because I think Winnipeg has a huge housing bubble, I don't think that is the case. But by looking at the numbers, Winnipeg is a classic example on how human emotion can drive up an asset price because the fundamentals such as inflation, wages, population, or employment growth do not explain why house prices have tripled in just over a decade.

Here is a teaser post. I have made about 10 graphs with some commentary with more to come. Some time next week I hope. But until then...

Population and employment growth since 1998 are lukewarm at best. And if we look at when house price growth started it's double digit march in 2003, employment growth was almost 0% and population growth was .04%. In 2005 we see that employment growth was negative but house prices still marched at over 12% growth! The housing boom was not result of an employment or population boom at all in the last decade. There are only 2 years where the average weekly wage is above 4% and that of course coincides with the housing boom. Other than that, the average weekly wage per year is less than 3%.

Who gets hurt by high house prices? Repost

2013-04-25T10:14:00.000-06:00

I'm very busy this and next week so here is a repost from way back, but it pertains to today more than ever.

A great little article from across the pond, it has a similar theme to Canadian housing.

"But high house have all kinds of insidious, damaging effects. As a result not even the baby boomers can really be said to have benefited. They may have lost out less than other groups, but ultimately everybody loses from high house prices."

1) The young suffer

Firstly, and most obviously, young people can’t buy a house and settle down. As a result, young working couples are delaying having children, and end up having less children than they say they would like to.

Any wonder why there is a day care problem in Saskatoon where there are some waiting lists over a year long for good daycares. Most young families need both parents in the work force just to make ends meet. While there is the perception that young families "need" to have everything, the fact that housing takes up a considerable amount of income can not be ignored.

2) Working home owners suffer

People who do manage to buy a house can then end up spending a fortune servicing their mortgage. At present things don’t seem to be so bad, because of unprecedentedly low interest rates. But as interest rates rise, those who stretched themselves to buy in the boom years may really start to suffer.

3) Older home owners suffer

Not even the baby boomers really gain. By late 2009 a staggering 80% of first time buyers under 30 needed help from their parents. Those with housing wealth are pestered to be the “bank of mum and dad”, feeling pressured to help out – or even guilty if they can’t help their kids get on the housing ladder.In many cases parents end up with their grown up kids living with them, when they would much rather they moved out. So many young people now live at home it even has a modern acronym to describe it as a lifestyle trend – “KIPPERS” – “Kids In Parents Pockets Eroding Retirement Savings”. More scientifically, the ONS noted that the proportion of young people under 30 with a mortgage fell sharply from 43% in 1997 to 29% in 2009%. The boomers lose out in other ways too, because of the wider effects on our society.

4) Social mobility suffers

If being able to buy a house depends on having well off parents, then wealth or poverty will increasingly flow down families, reducing social mobility. The rich stay rich, and the poor stay poor, which is not very attractive.

5) Society suffers

As Alex Morton pointed out in a brilliant paper two weeks ago, expensive housing pushes people into social housing, and our social housing system then pushes people into dependency, because of the perverse incentives it creates. (The more needy you become, the higher up the queue you jump.) Even controlling for every other possible factor, people in social housing are 20% less likely to be in work than equivalent people who are not in social housing. While Britain as a whole is isn’t a “broken society”, on some of our big housing estates society definitely is broken, breeding crime and other problems that affect us all.

In Saskatoon, whether you call it lax lending or subprime lending, there are programs to encourage people to get into the housing market who have no business getting into the market. There are probably hundreds of these across the country. Percentage wise, Canada has now put more people into homeownership than the Americans did at their peak. ( 71%-69%) A society with too high of a home ownership rate built on a foundation of debt is detrimental to economies in the long run.

6) Taxpayers suffer – in all kinds of ways

Last but not least, we all suffer as taxpayers. The Government spends £20 billion a year on housing benefit, £15 billion in building, maintaining and subsidising social tenants’ rents, and at least £7 billion in welfare payments, due to higher unemployment rates among social tenants. These costs have shot up in line with rising housing costs.The number one reason housing costs have risen is the constriction of supply. Our tight planning laws have made it difficult to build new houses – even though polls show people all over the country think we need more.What is the government going to do about it? We need more housing. Ministers are beavering away on ways to reform the system. But so far they have been shy about setting out their ultimate goals, and we don’t know how radical they are going to be.They should shout it from the rooftops: high housing costs have hurt us all, and it’s time to put a stop to them.

In Saskatoon, condo conversions, subsidizing builders and buyers, restrictions on who builds homes, and the cranking up of lot prices are just a few of the blunders that will bite back in the near future.
Who gets hurt by high house prices?
In the end, everybody loses, except the banks because that is where the misallocation of capital goes to. If prices stayed even with inflation or wages, then there would be more money left over that is put into the local economy.

How bout Winnipeg? Housing Bubble or What?

2013-04-19T07:11:00.000-06:00

I have done other housing bubble pieces on Calgary and Vancouver. What about Winnipeg?

The reason house prices in Winnipeg more than doubled in 10 years is simple. They were undervalued and needed to catch up. Right? Well, more on this later.

Winnipeg is amongst the leaders of house price growth since 2000. Sadly, income growth compared to house price growth, is pathetic. House prices have increased 4 times faster than incomes since 2000.

But who needs income growth to increase house prices when mortgage rules were conviently loosened when house prices in Winnipeg were launched. For the most comprehensive list on the net for down payment, GDS ratios, amortizations and loads of various programs, read this post. Below is just since 2000.

2001 – Genworth (GE Capital) mortgage insurance was expanded to cover equity take out refinancing. CMHC also introduced a new refinance product that was "designed to allow homeowners to optimize the use of home equity
2001 – CIBC offers below-prime mortgages.
2002- Genworth (GE Capital) expanded its insurance to cover applicants with good credit ratings, but who cannot provide traditional income verification by introducing Alt-A BFS (business-for-self) loans.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003– CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
2003-2004- CMHC introduces new products including Rental Refinance, Homeownership On-Reserve and Secured Line of Credit. Genworth (GE Capital) follows by introducing Home Equity Line of Credit Mortgage Insurance. In addition, Genworth (GE Capital) mortgage insurance was expanded to cover cash-back loans.
2004 Genworth (GE Capital) and CMHC expanded their insurance coverage to secondary homes and GECMIC expanded its coverage to vacation properties. CMHC also introduced the Mortgage Loan Insurance for Energy-Efficient Homes and for Self-Employed borrowers
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth announces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
2007- ecoENERGY Retrofit Program offered Canadians up to $5,000 to make their homes more energy efficient. Ended in 2012.
April 2007 -Minimum down payment required to avoid the CMHC fees changes from 25% to 20%.
2007- Some lenders scrap GDS ratio altogether, bumping their acceptable TDS ratios up to 44%. On an exception basis, borrowers are sometimes approved with TDS ratios of 46% or more.
Oct 2008 – CMHC: 5% down, 35 yr amortizations.
2008- CMHC applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) No GDS requirements for low risk borrowers, TDS at set 45%
2009- Home Renovation Tax Credit Program- Applied to eligible expenditures of more than $1,000, but not more than $10,000, resulting in a maximum credit of $1,350.
2009- The maximum amount that can be withdrawn as part of the HBP increased to $25,000
April 2010- Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. Investors need 20% down.
March 2011- CMHC only allows 30 yr amortizations. Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.
July 2012 - CMHC only allows 25 yr amortizations, insured mortgages limited to $1 million. Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. New caps on GDS (39%) and TDS (44%) Riskier borrowers (35% GDS and 42% for credit scores below 680 stays the same)

Below we can see how CMHC has played their part.

Now, I'm not pinning it all on mortgage rules, because the loosening of mortgage rules was just one factor. But we can see how people in Manitoba have embraced debt. Yeah, no worries Manitoba, the banks love you too.

Sometime next week, I will do part 2. I will look at some house price to income and rent ratios, and some economic indicators. Oh yeah, I will also talk about that "undervalued" thingy.

As Housing Sales Cool, Some Are Saying Recent Mortgage Rules Are Unjust; They Are Wrong

2013-04-17T07:19:00.001-06:00

From the Globe and Mail Smaller cities share pain from new mortgage rules

Mr. Porter points to the sales decline in Winnipeg as particularly noteworthy. “Among the major cities, it’s got basically the lowest prices in the country,” he said. “I think by most metrics you wouldn’t consider Winnipeg to be overvalued.”

Winnipeg realtor Cliff King, at Re/Max Executives Realty, said sales in the city are spotty now. “Markets are so different and I think that was totally uncalled for,” he said of the mortgage insurance rule changes. “It definitely had a huge impact and they should have had a program that was customized to parts of Canada that required it.”

Last week, I compiled a very exhaustive list of mortgage rules over the years. To list them all, would too much, so let's just look at the main changes over the years.

Down payments
1960 to 1983, 5% is the minimum down payment needed
1983 to 1992, 10% is the minimum down payment needed
1992 to 1999, 5% is the minimum down payment for first time buyers, still 10% for repeat buyers
1999 to 2004, 5% is the minimum down payment for everybody
2004 to 2005, down payment can be borrowed, essentially 0 down but 95% insured.
2006 to 2008, 0% down payment is allowed
2008 to present day, 5% down is minimum down payment required.

Amortizations
1960 to 2005, 25 years is the maximum length for most loans, ( some programs allowed longer amortizations)
2006 to 2008, 40 years is the max
2009 to 2010, 35 years is the max
2011, 30 years is the max
2012 to present day, 25 years is the max

Gross Debt Service Ratios
1946 to 1956, GDS is set at 23% of income
1957 to 1971,GDS ratio is increased to 27%
1972to 1980, the GDS ratio is increased to 30%. Also, the GDS ratio started to use all of the spouses income. Before, 1972, half of spouses income was used.
1981to 2006, GDS ratio is increased to 32%
2007, some lenders scrap GDS ratio altogether, bumping their acceptable TDS ( Total Debt Service) ratios up to 44%
2008 to 2011, CMHC applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) No GDS requirements for low risk borrowers, TDS at set 45%
2012, new caps on GDS (39%) and TDS (44%) Riskier borrowers (35% GDS and 42% for credit scores below 680 stays the same)
Price Ceilings On Maximum Amount That Mortgages Will Be Insured By CMHC
1979 to 1982, price ceiling removed
1983 to 2003, price ceiling put back into place and dollar amounts varied according to regions. In the 90's, the price ceiling ranged from $150,000 to $250,000 depending on the area.
2003, the price ceiling was removed
2012, the price ceiling put back in place but was capped at $1 million.

Comparing mortgage rules of today to a decade ago and we see that amortizations, at 25 years are the same. Minimum down payment requirements, at 5% down, are the same. Gross Debt Service ( GDS) ratios have increased from 32% to 39%. And price ceilings have increased to $1 million.

How have amortizations changed monthly payments?
Here is a quick look at how amortizations have changed using a $300,000 mortgage at an interest rate of 3%.
25 years- $1419
30 years- $1261
35 years- $1151
40 years- $1074

So they are some people saying that $158 is keeping some prospective buyers out of the market? Yeesh.

How have GDS ratios changed monthly payments?
GDS ratios were at 32% in 2007, they now sit at 39%. They average household income in 2007 in Canada was near $70,000, so households could put about $1866 of their gross income towards housing. In 2013, the average household income is over $80,000 ( we will use $80,000) but with the increase in the GDS ratio, this household could put $2600 ( or about half of net income) towards housing.

I have to ask, if mortgage rules are too tight and are shutting too many prospective buyers out of the market, at a time when 5 year mortgage rates can be had under 3%, is it that the market has been too much based on debt and not income over the last decade?

The more I have been looking at mortgage rules over the years, down payments of 5% are acceptable. Even the increase in amortizations was OK. But where the government went wrong, was allowing the GDS ratio to expand. GDS ratios should have been crimped when amortizations were lengthened. Maybe from 32% to 30%. But GDS ratios expanded and what we have ( house prices) is a debt fueled bubble.

I still believe that mortgage rules are too loose yet. When a household can put about half of their net income ( GDS ratio of 39%) towards monthly housing costs, which by the way, does not include repair or maintenance costs, ( which can average $300 to $500 per month) that is not prudent or conservative. If there is any more mortgage rule tightening, the GDS ratio of 39% should be on the chopping block.

Saskatoon Kijiji Ad On The Rental Situation "RENT not R@PE"

2013-04-15T08:45:00.000-06:00

A reader sent this ad from Kijiji. Here is the link. May not work for long but I have the ad down below.

Title catches your attention? If you’re not one for opinions or offend easily by the truth, don’t waste your time reading or replying. I will only be forced to be rude to you and I tend to enjoy being a d!ck like that to those deserving.

It would seem as though the Saskatoon rental market is suffering from an identity crisis. It must have us confused with cities like Vancouver, Calgary, Ottawa or places with higher average household incomes? Who in the blue hell is paying 2 to 3 thousand dollars in rent per month? Or even $1200.00 to $2000.00 for shared living accommodations (suites, basements and main floors), per month? Maybe the better question is, if you can afford to rent at those prices, why not buy a house and rent it out at a reality based rental price and still have money left over to rent another home? Of course, it is not the renters fault. The real problem is those out there who know that many average everyday people are FORCED to rent at the prices they so unabashedly charge. I for one, DO NOT enjoy having to fork over 65-80% of a monthly income to simply have a roof over my head, never mind the extra for utilities, or in some cases, paying extra for a garage/storage already ON the premises. I’d have to work two full time jobs plus have a grow-op or meth lab, just to cover these types of living expenses/prices. Wait though, it gets worse… even if you have a fat wad of cash at your disposal for rent, you get limitations put on you as to what you can do in said premises and in some cases who can live under that roof i.e.; children. I don’t know about the rest of you would be renters, but if I’m paying these rental prices, I’m also doing whatever the hell I please in them(within responsible reason), with whoever the hell lives with me coming along for the ride. If I want the United Nations of children living with me, you better believe that if I’m paying over $1500.00 a month for a place to live, they, their cats and dogs, goldfish, parrots, ferrets or the termites from their old shanties, are ALL coming with me. *Pause, a few deep breaths*

Don’t get me wrong, I’m sure there are a few properties worth the asking price out there, new homes, extremely large homes etc. Maybe some of these rentals come with gold lined toilet paper and a Unicorn in the back yard too. Maybe in some instances, we are paying for the landlords’ exceptionally charming personality. But for the most part, this is a system no amount of credit checks, references or limitations will stop from failing. Unfortunately, the Office of the Rentalsman also favors the Landlord before the tenant in almost all circumstances too. It would appear the system is set up to be nothing more than a legal form of robbery. I also acknowledge the old homage that one bad apple spoils the whole dam bunch (and they would have gotten away with it too, if wasn’t for those meddling kids!), but it is unfair for everyone to pay the consequences. So called affordable housing, rental subsidy claims, welfare housing, all with lengthy wait lists long enough to circle the city 50 times and choke it. So, with our collective tenant backs against the wall, what do we do? And what would be the point of this negatively spewed propaganda ultimately be other than stating the obvious? Are we not bent over the proverbial barrel, with not so much as dinner and a movie first and not a whisper of hope? NEVER underestimate the power of the written or spoken word! I encourage and applaud any and all to take up even the smallest amount of revolt from within and flood these landlords’ inboxes, phone lines and property management offices with the facts given here and any of your own. Write your government, call in to radio talk shows and blow up social media, whatever it takes to have your voice heard. I wrote this and got you reading, pay it forward! I’m no leader, or the guy to stand up with a rallying cry for most things, I’m a realist, through and through and realistically speaking… This market, these landlords and this service of renting at these prices/problems is unrealistic. It befalls us, to either continue exposing our flanks, or stand up in some way or fashion, for however briefly, to let them know we are sick to death of it! 

We should not be surprised to see ads like this and I would expect to see more in the future. According to stats can, 50% of all renter households paid 30% or more of their income for shelter costs in 2005. With house prices and rents badly outpacing wages since that time, this stat would be worse in 2013.

A look at down payments, amortization rules, GDS ratios, loan and other home programs over the years.

2013-04-13T08:09:00.002-06:00

Here is a long list of down payment requirements, amortizations, GDS ratios, loan and other home programs over the years. It is not complete, but I will be adding to it. Grab a coffee, a beer, or both, cause there is loads of information.

For ease of going through this post I have color coded a few things.
BLUE means changes in Gross Debt Service (GDS) ratios
PURPLE mentions down payment requirements
RED mentions amortizations

1918- The first modern day housing program was launched with a $25 million program aimed at returning soldiers from world war 1. The program offered low interest loans, small down payments and long amortizations.
Pre-1930's 5 year mortgages, 50% down payment was the norm for conventional mortgages. Interest payments due every 6 months or yearly.
The Dominion Housing Act 1935- The government provided 20% of the lending value and the private lenders provided between 50 and 60% (the maximum then permitted). Loan- to-value ratios, therefore, were in the range of 70 to 80%. As the interest rate on the mortgage was set at 5% and the rate on the government's share was to be 3 %, lenders received between 5.7 % (on loans at 80 % of value) and 5.8 % (at the 70% level) interest on their investment. Loans were to have a ten year term
The National Housing Act 1938-Loan-to-loan value ratios of 50% to 90% for new houses of $2,500 or less in lending value. The upper limit reduced the equity requirements; and the lower limit was to permit the owner's labor on the construction of such units to be included as equity. The 70-80% range was retained for new units costing more than $2,500, to ensure that lenders would not make only low ratio loans
1941- Rent controls are initiated throughout Canada by the Wartime Prices and Trade Board
1941 Wartime Housing Limited- was created to provide war workers rental housing in areas of housing shortages
1942 Veteran's Land Act- under a similar basis of the 1918 program which was directed at returning soldiers from war. Over 40,000 units were built under this program. 10% down payment, 3.5% interest rate over 25 years.
The National Housing Act 1944-The amount of loan to be given was again determined by a loan to-value formula - 95% on the first $2,000.00, 85% on the next $2,000.00 and 70% on the remaining portion of lending value with the government putting up 25 %. The term of the mortgage was set at 20 years.
1946- Gross Debt Service Ratio is set 23 percent
1946- Central Mortgage and Housing Corporation (CMHC) is established.
1950- Rent controls implemented in 1941 abolished, except Quebec.
1954: Introduction of Mortgage Loan Insurance- by the Canada Mortgage and Housing Corporation. Down payment of 25% or less needs mortgage insurance. With lenders protected from home buyer default, credit is made more available for home buyers. Affordability and accessibility for home ownership is increased. Conventional mortgages set at 25 years.
1957- Gross Debt Service Ratio increased to 27 percent
1960- Lenders had been required to obtain evidence that home owners and purchasers are providing from their own resources (either cash, labor or land) equity to the amount of 5% of the lending value for NHA loans.
1963- Private mortgage insurance began on an in-formal basis in 1963 by the Mortgage Insurance Company of Canada (MICC). The business strategy of MICC was to make mortgage loan insurance available to the segments of the market not being served by NHA insurance. ln addition, some lenders had preferred to obtain MlCC insurance because NHA insured loans were subject to an interest-rate ceiling until 1969.
1966- existing homes became eligible for insurance under the NHA
1967- The Bank Act was amended to remove the six percent interest rate ceiling on bank loans, including mortgage loans, to allow banks to make conventional mortgage loans
1969- Minimum mortgage terms are now 5 years. Before 1969, mortgage terms were set for 25 years.
1970- Innovative Low Cost Housing Plan- Federal plan aimed at low income housing ($200 million). Funded nearly 10,000 low income ownership units.
1970- Lenders were allowed to make high-ratio conventional loans providing they were insured by a private or public mortgage insurance provider.
1971- Assisted Home Ownership Program- $100 million program provided loans at below the CMHC direct lending rate. Borrowers taking advantage of this program also could chose longer amortizations.
1971- Amendment to the Income Tax Act that excluded principal residences from capital gains tax.
1972- Gross Debt Service Ratio increased to 30 percent. Before 1972, only half of spouses income used for GDS ratio. Now all income used.
1973- Assisted Home Ownership Program ( AHOP) 5 per cent down, 35 year amortizations, lower interest rates for first time buyers. 8 percent interest rates, compared to 11 percent for conventional loans. By the mid 80's, 11% of these loans defaulted.
1974- Registered Home Ownership Savings Plan (RHOSP) introduced. Annual tax deduction of $1,000. Lifetime of $10,000 plus what was earned. Double for partner. Withdrawal only once.
1974- Multiple Unit Residential Program (MURB) a tax provision to shelter private investor income for rental units.
1975- Assisted Rental Program. Provided a monthly grant to private landlords to help address rental shortages. Later versions in 1976 and 1978 included interest free loans to bridge the gap between market rents and economic rents.
1975- Canadian Home Insulation Program (CHIP) Financial incentives offered by the government to upgrade home insulation levels.
1978- Minimum term for NHA mortgages was reduced from 5 years to 3 years. Reduced to 1 year in 1980.
1979- Removal of loan limits made NHA-insured financing available to higher priced homes
1979- Name change for the Central Mortgage and Housing Corporation to Canada Mortgage and Housing Corporation.
1980- Canada Oil Substitution Plan- Federal program that provided grants to home owners who switched from fossil fuel heat to non-fossil fuel heat. Over 1 million households took part. Ended in 1985.
1981- Canada Rental Supply Program- Federal program aimed to stimulate rental construction in the private sector. Interest free loans for 15 years, up to a max of $7500 per constructed unit.
1981- Gross Debt Service Ratio increased to 32 percent
Early 1980's- Canadian Home Stimulation Program provided grants ( up to $3,000) to home buyers; the Canada Mortgage Renewal Plan (1981 to 1983) assisted those who were experiencing difficulty renewing their mortgages at higher interest rates; and the Graduated Payment Mortgage Plan helped homeowners offset the rising costs of home ownership by lowering initial monthly mortgage payments.
1982 Variable rate mortgages becoming eligible for NHA mortgage insurance
1982- Canada Home Renovation Plan -Federal plan to stimulate employment in the home building sector. Grants of up to 30% were provided to cover renovation costs. Up to a max of $3,000. Ended in 1983.
1983- Minimum down payment increases from 5% to 10 % in response to the unprecedented volume of claims on CMHC's Mortgage Insurance Fund. Very high interest rates and the AHOP program were factors in the large volume of defaults at this time.
1983 House price ceilings established by CMHC on the basis of regional market conditions.
1984- Mortgage Rate Protection Plan (MRPP) introduced.
1987- Introduction of Mortgage Backed Securities (MBS), which allowed pools of NHA-insured mortgages to be package. Made mortgages more attractive to a broader range of investors
1992: Two programs created by the federal government.
The first was the Home Buyers’ Plan (HPB) allowing buyers to withdraw up to $20,000, tax-free, from their Registered Retirement Savings Plan (RRSP) and use it as a down payment to buy or build a home.
The second, was a test program called the First Home Loan Insurance Program (FHLIP) which decreased the down payment needed to buy a first home from 10% to 5%. GDS ratio for buyers in the FHLIP was set at 35%, everyone else it was still set at 32%.
1994 The federal government announces the HPB as a permanent program.
1995 – GE Capital (later named Genworth in 2004)enters the Canadian mortgage insurance market
1998 The FHLIP was replaced by a permanent program. And instead of 10%, all buyers were now allowed a 5% downpayment.
2001 – Genworth (GE Capital) mortgage insurance was expanded to cover equity take out refinancing. CMHC also introduced a new refinance product that was "designed to allow homeowners to optimize the use of home equity
2001 – CIBC offers below-prime mortgages.
2002- Genworth (GE Capital) expanded its insurance to cover applicants with good credit ratings, but who cannot provide traditional income verification by introducing Alt-A BFS (business-for-self) loans.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
2003-2004- CMHC introduces new products including Rental Refinance, Homeownership On-Reserve and Secured Line of Credit. Genworth (GE Capital) follows by introducing Home Equity Line of Credit Mortgage Insurance. In addition, Genworth (GE Capital) mortgage insurance was expanded to cover cash-back loans.
2004 Genworth (GE Capital) and CMHC expanded their insurance coverage to secondary homes and GECMIC expanded its coverage to vacation properties. CMHC also introduced the Mortgage Loan Insurance for Energy-Efficient Homes and for Self-Employed borrowers
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth announces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
2007- ecoENERGY Retrofit Program offered Canadians up to $5,000 to make their homes more energy efficient. Ended in 2012.
April 2007 -Minimum down payment required to avoid the CMHC fees changes from 25% to 20%.
2007- Some lenders scrap GDS ratio altogether, bumping their acceptable TDS ratios up to 44%. On an exception basis, borrowers are sometimes approved with TDS ratios of 46% or more.
Oct 2008 – CMHC: 5% down, 35 yr amortizations.
2008- CMHC applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) No GDS requirements for low risk borrowers, TDS at set 45%
2009- Home Renovation Tax Credit Program- Applied to eligible expenditures of more than $1,000, but not more than $10,000, resulting in a maximum credit of $1,350.
2009- The maximum amount that can be withdrawn as part of the HBP increased to $25,000
April 2010- Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. Investors need 20% down.
March 2011- CMHC only allows 30 yr amortizations. Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.
July 2012 - CMHC only allows 25 yr amortizations, insured mortgages limited to $1 million. Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. New caps on GDS (39%) and TDS (44%) Riskier borrowers (35% GDS and 42% for credit scores below 680 stays the same)

Amortizations
There are some things that are muddy over the years like amortizations. I have read that lenders allowed certain borrowers 30 year amortizations in the 50's under various programs, as well, the AHOP allowed 35 year amortizations, but it seems like conventional mortgages were set at 15 years length in before 1944, increased to 20 years in 1944 and had increased to 25 years by 1954. They stayed that way until 2006 when they were increased to 40 years only to be changed back to 25 years in 2012. I will dig a little deeper on this aspect to clarify.

Down Payments
In the late 50's and early 60's, CMHC was pressured to allow 0% down payments for low income households by various pro housing authorities ( in Ontario) but CMHC was not interested in helping low income housholds enter home ownership with no skin in the game. But CMHC was willing to help them with more affordable rental units. Of course, over time we do find that the CMHC does cave into the pro housing industries. From what I gather, the minimum of 5% down for conventional loans was accepted from 1960 to 1983. From 1983 to 1999, 10% was the minimum down payment, except first time buyers, it was 5% from 1992 onward. By the mid 2000's, 0% down payments were acceptable.

Price Ceilings
Price ceilings on the maximum amount that could be insured were removed in 1979. After the early 1980's housing bust, price ceilings were again implemented in 1983 and dollar amounts varied according to regions. Price ceilings on the maximum amount CMHC would insure in the 90's ranged from $150,000 to $250,000 depending on the area. In 2003, the price ceiling was removed. In 2012, the price ceiling put back in place but was capped at $1 million.

Gross Debt Service Ratios
In 1946, GDS is set at 23% of income. In 1957, the GDS ratio is increased to 27%. In 1972, the GDS ratio is increased to 30%. Also 1972, the GDS ratio started to use all of the spouses income. Before, 1972, half of spouses income was used. In 1981, GDS ratio is increased to 32%. In 1992, the FHLIP program allowed first time buyers to have a GDS ratio of 35%, everyone else it was still 35%. In 2007, some lenders scrap GDS ratio altogether, bumping their acceptable TDS ( Total Debt Service) ratios up to 44%. On an exception basis, borrowers are sometimes approved with TDS ratios of 46% or more. In 2008, CMHC applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) No GDS requirements for low risk borrowers, TDS at set 45%. In 2012, new caps on GDS (39%) and TDS (44%) Riskier borrowers (35% GDS and 42% for credit scores below 680 stays the same)

Another thing to note is the role that provincial and municipal governments have played in regards to the housing market is not mentioned in the above list. It would just be too much to go through each provincial and municipal government to see what kind of roles they have played in regards to housing throughout the years, but it has been very significant.

Now I will be the first to admit that this list is not complete, there is definitely more to add, but it is the most comprehensive list you will find on the net. When I get the chance, I will list the sources as well. If there are any mistakes let me know.

House Price and Wage Year Over Year Percentage Changes in Canada 1956 to 2012

2013-04-11T06:51:00.001-06:00

Ok, I love this average house price graph.

But how does the average weekly wage and average house price percentage change look like over the years?

The times when house prices increased faster than wages, 1957 to 59, 1966 to 69, 1972 to 75, 1986 to 1990, was corrected when house prices slowed and wages caught up in 1960 to 1964, 1970 to 1971, 1981 to 1983.

Over the last decade and half, house prices gained more than wages from 1999 to 2007 and 2009 to 2011 but wages have not caught up to house prices. Just looking at the above graph, are we gonna see house prices flatline for a decade while wages catch up, or will we will see house prices fall of a cliff?

A Look At Canadian House Prices And Expanding GDS Ratios 1956-2012

2013-04-08T14:18:00.001-06:00

For this post we will take a look at how the change in GDS ratios over the years have helped increase house prices.

We all have seen this graph.

But let's take a look at it with how GDS and TDS ratios have changed over the years. First, a primer on what GDS and TDS mean.

Gross Debt Service Ratio (GDS)- This is the percentage of the borrower's income that is needed to pay for monthly housing costs. Housing costs include a mortgage payment, property taxes, heat and 50% of condo fees.
Total Debt Service Ratio (TDS)- This is the percentage of the borrower's income that is needed to pay for all housing costs plus all other monthly loan obligations such as student loans, car loans, lines of credit, credit cards, etc.

Here are how the GDS and TDS ratios have changed over the years. I don't have the exact years of when GDS ratios changed in the 60's and 80's but those are the decades they did increase. And of course, there is a graph at the end.

1946- GDS ratio is 23 %

1957- GDS ratio increased to 27%

1972- all of spouses income can now be used in GDS ratio, before 1972, only half was used.

1972- GDS ratio increased to 30%

1981- GDS ratio increased to 32%

1980's ?, TDS ratio set at 40%

2007- Some lenders scrap GDS ratio altogether, bumping their acceptable TDS ratios up to 44%. On an exception basis, borrowers are sometimes approved with TDS ratios of 46% or more.

2008- CMHC applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) No GDS requirements for low risk borrowers, TDS at set 45%

2012- New caps on GDS (39%) and TDS (44%) Riskier borrowers (35% GDS and 42% for credit scores below 680 stays the same)

So how has the increase in GDS ratios over the years help inflate home values in this country?
For this exercise, let's suggest a family income of $90,000 and we will plug in GDS ratios over the years. Husband makes $60,000. Wife makes $30,000.

The 1946 GDS ratio was 23%, but only half of the spouses income is used. So the income used for the GDS ratio is $75,000. Gross monthly income is $6250 and the maximum amount this family can allocate towards monthly housing costs is $1437.

In the 1960's the ratio was changed to 27%, but still only half of the spouses income is used in the GDS ratio. So the income used for the GDS ratio is $75,000. Gross monthly income is $6250 and the maximum amount this family can allocate towards monthly housing costs is $1687.

Under pressure by many pro housing industries such as the Canadian Home Builders Association, all of the spouses income was used from 1972 and on. So the income used for the GDS ratio is $90,000.
Gross monthly income is $7500 and the maximum this family can allocate towards monthly housing costs is $2025.

In the early 80's the GDS ratio was increased to 32%. So the income used for the GDS ratio is $90,000. Gross monthly income is $7500 and the maximum this family can allocate towards monthly housing costs is $2400.

In 2007, some lenders scrapped the GDS ratio altogether and bumped up TDS ratios to 44%. So theoretically, if this family had no other debt, they could allocate $3300 towards their monthly housing costs.

In 2012, the GDS ratio is capped at 39% for people with good credit scores, So this family could now "only" allocate $2925 towards monthly housing costs.

So Canada allows up to 39% of ones gross income for monthly housing costs. This would be alright if only 39% of ones income goes toward housing but remember this is gross income. Who pays their monthly housing costs with net income? Maybe a Canadian Senator, but for the everyday working Joe, up to 53% of their net income can be allocated towards monthly housing cost.

So home buyers can allocate 39% of their GROSS income ( 53% of their NET income) towards housing, and we are to believe this is prudent? We are to believe this conservative? The proof is in the pudding. Retirement savings for young home buyers are pretty much non-existent. Day care waiting lists are over a year long in many parts of the country just due to the fact that most young families need both parents to work just to make ends meet. And this is at a time when a five year fixed rate mortgage can be had for under 3%.

We all know that wages have not done much to help launch home prices in this country. Especially in the last decade.

It has been mortgage debt.

Along with inflationary pressures, changes in interest rates and the loosening of mortgage rules ( I will be doing a post on mortgage rules dating back to the 30's), house prices have also been pushed up by the help of expanding debt service ratios. Few people really mention the role that debt service ratios have played in the increase of house prices in this country. We all know that down payment and amortization rules are now back to 2006 levels, but gross debt service ratios are 7 points higher than 2006 levels ( 39% now, 32% in 2006,) For anybody to say that mortgage lending rules are too tight and should be eased, especially at a time with below 3% interest rates, is either stupid or just plain dumb.

I don't know what is crazier, that there are people out there that say Canada's mortgage lending rules are prudent and conservative, or that there are people who actually believe that.