A House in Canada Now Costs Almost 2X A House in the US

[KCLarkin]

2 hours ago, ValueArb said:

 

How much does a 10% increase in wages help when mortgage rates just doubled?

A lot? If rates double from 2.5% to 5%, how much does your mortgage payment increase? 30%?

 

If you have a 5 year fixed and your wages increase 5% per year, you would be paying less as a percentage of income at renewal. Even though rates doubled.

 

[alpha]

 

I don't think you can compare the 2 markets without factoring in a bunch of issues like: immigration rates, vacancy rates, building codes, property taxes, landlord/tenant laws, financial regulation/ money laundering laws, environmental laws, government lending programs, etc... pretty much all of these factors favor higher housing prices in Canada. I can't comment whether the valuation should be 2 times higher but currently there is definitely a supply/demand imbalance for housing in Canada.

[bizaro86]

4 hours ago, alpha said:

 

I don't think you can compare the 2 markets without factoring in a bunch of issues like: immigration rates, vacancy rates, building codes, property taxes, landlord/tenant laws, financial regulation/ money laundering laws, environmental laws, government lending programs, etc... pretty much all of these factors favor higher housing prices in Canada. I can't comment whether the valuation should be 2 times higher but currently there is definitely a supply/demand imbalance for housing in Canada.

 

I would have bought more Canadian real estate than I currently own if US style 30 year mortgages were possible.

[ValueArb]

9 hours ago, KCLarkin said:

A lot? If rates double from 2.5% to 5%, how much does your mortgage payment increase? 30%?

 

If you have a 5 year fixed and your wages increase 5% per year, you would be paying less as a percentage of income at renewal. Even though rates doubled.

 

 

If rates double from 2.5% to 5%, the cost of the mortgage doubles. Because the cost is the interest paid. Your payment might not double because your principle payment doesn't increase, but that's just forced savings.

 

A 30 year $240K loan at 2.5% has a $948 payment, $500 in interest. At 5% it's a $1,288 payment, $1,000 a month in interest. Not only does the higher loan cost nearly 40% a month more, but you are building equity far slower.

 

And if you have a 5 year fixed, good luck on getting a rate anything like you got in the last 3 years when you refi.

[Gregmal]

58 minutes ago, ValueArb said:

 

If rates double from 2.5% to 5%, the cost of the mortgage doubles. Because the cost is the interest paid. Your payment might not double because your principle payment doesn't increase, but that's just forced savings.

 

A 30 year $240K loan at 2.5% has a $948 payment, $500 in interest. At 5% it's a $1,288 payment, $1,000 a month in interest. Not only does the higher loan cost nearly 40% a month more, but you are building equity far slower.

 

And if you have a 5 year fixed, good luck on getting a rate anything like you got in the last 3 years when you refi.

Yea but this is why this spreadsheet shit with real estate gets annoying. Because it lacks context. Why did rates go from 2.5 to 5? Cuz your home value went up 30%. 

[Peregrine]

22 hours ago, alpha said:

 

I don't think you can compare the 2 markets without factoring in a bunch of issues like: immigration rates, vacancy rates, building codes, property taxes, landlord/tenant laws, financial regulation/ money laundering laws, environmental laws, government lending programs, etc... pretty much all of these factors favor higher housing prices in Canada. I can't comment whether the valuation should be 2 times higher but currently there is definitely a supply/demand imbalance for housing in Canada.

 

Yeah. I'm not sure there's as much meaning in this as there is in "US healthcare is 2x as a % of GDP as Canadian healthcare". 

[ValueArb]

21 hours ago, Gregmal said:

Yea but this is why this spreadsheet shit with real estate gets annoying. Because it lacks context. Why did rates go from 2.5 to 5? Cuz your home value went up 30%. 

 

I think my home value went up 30% because rates went from 5% to 2.5%. I doubt home prices will continue to rise if mortgage rates keep increasing.

[Gregmal]

17 minutes ago, ValueArb said:

 

I think my home value went up 30% because rates went from 5% to 2.5%. I doubt home prices will continue to rise if mortgage rates keep increasing.

So multiple years later you can’t afford the same rate the mortgage was when you purchased? 

[SharperDingaan]

11 hours ago, Gregmal said:

So multiple years later you can’t afford the same rate the mortgage was when you purchased? 

 

Buyers stretched to buy the bigger house they could now afford; when rates went from 5% to 2.5%. The interest cost remained the same, 'cause the mortgage was now bigger. Why the bigger house? 'cause all else equal, a 20% net gain on a 700K asset, is bigger than a 20% net gain on a 500K asset - see how smart we are!

 

Thing is, buyers did not recognize that over the holding period,  life stage was ALSO changing.

5 years in, and 1-2 kids later, it is not just sell the house and buy someplace else anymore. It's now sell and buy in the same neighborhood, and if all the houses cost about the same ... there is no monetary transactional gain to apply against the mortgage. There is just a bigger mortgage, at higher rates, and everyone using the foodbank to augment the Kraft dinner 4 nights/week. 

 

Buyers either divorce, give up the neighborhood, or moms/dads help cover the mortgage payments while the kids are young and there is only one income. Divorce high on the list, as it ends the fighting, forces a location/status change, and releases the equity built up on the bigger house. Money to start again with ....

 

Not a hard problem to resolve, but the divorce stats would suggest a great many are unable to.

Obviously, not the way to go.

 

SD

Edited May 6, 2022 by SharperDingaan

[Peregrine]

Some more interesting data:

 

Canada prime rate:

1972: 6%

1981: 21%

 

Canada housing prices indexed to 2010 at 100:

1972: 39

1981: 52

 

So during the time frame when the prime rate more than tripled, housing prices went up 33%.

 

The real downturn was from 1989 to 1996 when prices fell 20%. And this was during a period when prime rates fell from 12% to 5%. Seems like housing prices are more correlated with unemployment than anything else.

[Gregmal]

14 hours ago, Peregrine said:

Seems like housing prices are more correlated with unemployment than anything else.

This is a great point and certainly something worth investigating. The whole rate argument for housing often falls short of any contextual exploration and relies too much on basic first level spread sheet inputs.

[valueinvestor]

@Peregrine

 

You brought up a good point, I always thought it was inflation as from 1990 to 1998, where we had a decline of 37% but we've also experienced a correlation in unemployment.

 

[Spekulatius]

On 5/7/2022 at 9:53 PM, Peregrine said:

Some more interesting data:

 

Canada prime rate:

1972: 6%

1981: 21%

 

Canada housing prices indexed to 2010 at 100:

1972: 39

1981: 52

 

So during the time frame when the prime rate more than tripled, housing prices went up 33%.

 

The real downturn was from 1989 to 1996 when prices fell 20%. And this was during a period when prime rates fell from 12% to 5%. Seems like housing prices are more correlated with unemployment than anything else.

Yes, housing prices tend to be strong when employment is robust. On the other hand, rising unemployment causes distress in the housing market. This has almost always been true.

There is a bit of reflexivity here because strong housing itself caused employment to rise.

 

In any case, I think it is likely that a weakening labor market goes hand in hand with  a weaker housing market.

Edited May 9, 2022 by Spekulatius

[Peregrine]

One more thing that deserves mention:

 

The speed of the housing decline. The 20% decline from peak to trough in Canada in 90s took place over the course of 7 years. In the US GFC, a 20% housing price decline from the peak took barely 2 years. I think this clearly was the effect of a huge amount of foreclosures or homes from distressed sellers that flooded the market with housing supply. And why were there so many foreclosures? It came from insanely lax mortgage rules that fueled a massive homebuilding boom that took the US a decade to recover from.

 

As mentioned before, Canada's big housing problem is a lack of supply. I doubt that a huge number of homes suddenly come on market even if arrears rates kick up substantially.

Edited May 9, 2022 by Peregrine

[Gregmal]

The GFC in regards to US housing was basically a once in a lifetime event. Which is why it’s laughable when I see people dramatically declaring “recession”, pausing to wait for gasps, and then baselining models off of “this is what happened in 2008”. Folks would be better off completely throwing 2008 type stuff out the window. Using it and letting it influence future investment decisions likely has, and only will continue to be, to your own detriment. 
 

It is soo hard to default on a mortgage, let alone have so many of them come at the same time it effects the macro. Give it up folks.

[maplevalue]

Blackstone targets Canadian real estate, opens office in Toronto

Blackstone Inc.  is ramping up its Canadian real estate business and opening an office in Toronto as it expands from significant investments in warehouses into new sectors such as commercial and residential properties.

 

https://www.theglobeandmail.com/business/article-blackstone-targets-canadian-real-estate-opens-office-in-toronto/

[Gregmal]

Genuine question Ive kicked around, the answers to the housing shortage(crisis some call it, but to me its awesome) was to build. Except now you see homebuilders getting scared off, reducing their enthusiasm for building. Folks with existing 30 year mortgage arent selling...so what exactly solves the issue? Are all investors gonna puke their properties? Housing supply is still nowhere near sufficient, even after solid increases its like half of where we were pre covid. Even if we get back to precovid, in other words current homes listed doubles, the problems that were supposed to get solved, dont get solved. 

[LC]

They're building. Developers out here were way over budget due to material costs over the past few months, but now those material costs are coming back down.

 

Either that or you see a re-migration. Buying land out here pretty much requires a blood oath to sacrifice your first born and half your liver. The same thing I can get back in upstate ny or new england for 25% of the price. 

 

My old man is looking to finally settle down in upstate NY, CT, MA area and the stuff he can buy for 5-800k is glorious compares to the stuff surrounding the popular western cities.