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

[crs223]

1 hour ago, no_free_lunch said:

I don't know what will happen with housing. Hopefully prices can pull back 20-30% so we don't crush the new generation.

 

I said something similar last week to my brother-in-law: "prices will have to come down... cannot be that the new generation is plainly unable to buy a home"

 

He basically said: "new generation doesn't do any actual work... why should they be able to buy actual assets".

 

Similar to a soviet/communist phrase "we pretend to work... and they pretend to pay us".

[patience_and_focus]

Every old generation thinks that the new one is a slacker. It ain't so, (a) they are just different from the preceding generation (b) Preceding generation was slacking in their own way. 

 

https://en.wikipedia.org/wiki/Generation_X

"Generation X (or Gen X for short) is the demographic cohort following the baby boomers and preceding the millennials. .......As adolescents and young adults in the 1980s and 1990s, Xers were dubbed the "MTV Generation" (a reference to the music video channel), sometimes being characterized as slackers, cynical, and disaffected. "

[Peregrine]

It may surprise you, but:

 

Average mortgage balance in the US: $US 230k

Average mortgage balance in Canada: $CAD 200k

 

Canadians are just sitting on a lot more equity in their homes.

[Spekulatius]

12 hours ago, Peregrine said:

It may surprise you, but:

 

Average mortgage balance in the US: $US 230k

Average mortgage balance in Canada: $CAD 200k

 

Canadians are just sitting on a lot more equity in their homes.

So, that means the average homeowner will be fine. The average homeowner in the US was fine too in 2009. The problem is what is the mortgage for those homeowners in Canada that bought in the last 5 years and can they pay their mortgage if it resets to current interest rates or let's say 6% or 7%.

[Xerxes]

5 minutes ago, Spekulatius said:

So, that means the average homeowner will be fine. The average homeowner in the US was fine too in 2009. The problem is what is the mortgage for those homeowners in Canada that bought in the last 5 years and can they pay their mortgage if it resets to current interest rates or let's say 6% or 7%.

 

that is where crypto comes in ... lol

[Spekulatius]

1 minute ago, Xerxes said:

 

that is where crypto comes in ... lol

Yep. Crypto is supposed to be strong when central banks tighten and interest rates shoot up - save heaven and all...

[Peregrine]

35 minutes ago, Spekulatius said:

So, that means the average homeowner will be fine. The average homeowner in the US was fine too in 2009. The problem is what is the mortgage for those homeowners in Canada that bought in the last 5 years and can they pay their mortgage if it resets to current interest rates or let's say 6% or 7%.

 

Average homeowner in the US was not fine in 2009. Poor underwriting started off as pretty marginal and very quickly became table stakes. Even conforming mortgages at F&F became awful. Mass foreclosures ensued because so many borrowers didn't even put on a down-payment, resulting in a glut of homes that suppressed home prices and killed home building for more than a decade.

 

Mortgage underwriting has only gotten more stringent in Canada. Borrowers need to qualify at a 2% higher rate than the contracted rate so some level of rate sensitivity is already baked in. But agreed that first-time homebuyers are most at risk.

Edited May 3, 2022 by Peregrine

[Spekulatius]

20 minutes ago, Peregrine said:

 

Average homeowner in the US was not fine in 2009. Poor underwriting started off as pretty marginal and very quickly became table stakes. Even conforming mortgages at F&F became awful. Mass foreclosures ensued because so many borrowers didn't even put on a down-payment, resulting in a glut of homes that suppressed home prices and killed home building for more than a decade.

 

Mortgage underwriting has only gotten more stringent in Canada. Borrowers need to qualify at a 2% higher rate than the contracted rate so some level of rate sensitivity is already baked in. But agreed that first-time homebuyers are most at risk.

There were ~2.8M foreclosures in 2009 and there are 120M households in the US. The average homeowner did just fine during the GFC.  What percentage of homeowners did default during the GFC from 2008-2010? Maybe 6%? The average is almost always fine, it's those on the margins that are the problem.

 

[Gregmal]

2 minutes ago, Spekulatius said:

There were ~2.8M foreclosures in 2009 and there are 120M households in the US. The average homeowner did just fine during the GFC.  What percentage of homeowners did default during the GFC from 2008-2010? Maybe 6%? The average is almost always fine, it's those on the margins that are the problem.

 

There is a difference between stretching, and not being able to afford. People who had no business getting loans got approved for houses they had no business being in, at the max that could be justified using an ARM with a teaser rate. Totally different than anything we had or likely will ever see again in the housing market. Too many people are still scarred by the GFC to have anything resembling a repeat occur for a long time. 

[Peregrine]

4 minutes ago, Spekulatius said:

There were ~2.8M foreclosures in 2009 and there are 120M households in the US. The average homeowner did just fine during the GFC.  What percentage of homeowners did default during the GFC from 2008-2010? Maybe 6%? The average is almost always fine, it's those on the margins that are the problem.

 

Not all 120 mm households in the US are homeowners. And a very small percentage of homeowners are actually looking to sell in any given year. There were >4 million foreclosures from 2007-2011. It absolutely flooded the housing market (in some areas more than others) with supply that no one wanted and had a huge effect on housing wealth for years that was felt by pretty much everyone. Even prosperous areas like San Francisco saw prices down 25% from peak to trough in pretty short order.

 

Canada's housing problem is not an excess of supply but a dearth of it.

[Spekulatius]

1 minute ago, Gregmal said:

There is a difference between stretching, and not being able to afford. People who had no business getting loans got approved for houses they had no business being in, at the max that could be justified using an ARM with a teaser rate. Totally different than anything we had or likely will ever see again in the housing market. Too many people are still scarred by the GFC to have anything resembling a repeat occur for a long time. 

 

As for the GFC, my comparison is just alluding to the fact that the average homeowner during the GFC didn't really have a problem with their mortgage.

 

Canada situation is different than the US during the GFC, but that does not mean that homeowners buying now in Canada are not stretched. Its the reset in interest rates that could become a problem in addition to the high prices. I would love to see an analysis that states how homeowners that bought the last few years in Canada will do if their mortgage payment doubles, which is possible if he trend in interest rates persists.

[Peregrine]

16 minutes ago, Spekulatius said:

 

As for the GFC, my comparison is just alluding to the fact that the average homeowner during the GFC didn't really have a problem with their mortgage.

 

Canada situation is different than the US during the GFC, but that does not mean that homeowners buying now in Canada are not stretched. Its the reset in interest rates that could become a problem in addition to the high prices. I would love to see an analysis that states how homeowners that bought the last few years in Canada will do if their mortgage payment doubles, which is possible if he trend in interest rates persists.

 

If you're saying that most mortgagors didn't default in the GFC then you're correct. Of course, if over 50% of mortgagors default, the world would be over. Non-performing rates on US mortgages peaked at 10% and that was enough to bring about the worst recession since the Great Depression. Same metric in Canada never peaked above 0.7% or something.

[Viking]

15 hours ago, Peregrine said:

It may surprise you, but:

 

Average mortgage balance in the US: $US 230k

Average mortgage balance in Canada: $CAD 200k

 

Canadians are just sitting on a lot more equity in their homes.

We really do not have very good information in Canada on what is really going on with housing. I think it is pretty clear that lots of first time buyers are getting the down payment from parents/family members. Where are these people getting the $ from? Perhaps a home equity line of credit? Is this kind of borrowing increasing? How do rising interest rates affect those borrowers? Would this debt show up in mortgage numbers?
 

MOST IMPORTANTLY, with mortgage rates spiking, will parents be as willing to pull $100,000 or $200,000 out of their HELOC today to help their kid out? Will the big banks start to crack down on this type of borrowing (get a little more stringent)? My guess is the first time home buyer is the key to any housing market… when this group pulls back then it will significantly impact the rest of the housing food chain.
 

As we get the April housing data for Canada it is becoming clear that:

1.) Feb was peak pricing

2.) prices were lower in March (@4% from Feb)

3.) prices were lower again in April (@8% from Feb)

4.) housing inventory is starting to grow (still historically low)

5.) affordability is still at historic lows (given spike in interest/mortgage rates)

 

Bottom line, looks like rising borrowing costs are having the desired impact of slowing the housing market in Canada: rising inventory and declining prices - from Feb peak. Not a panic. But the speed of the turn is surprising given housing trends usually move, and change, at a very slow speed. 

[Spekulatius]

On thing I am sure about - if you want to understand if a housing market is "healthy" forget days on market, price trends or what the realtors say.  Just look at affordability - period.

 

 

These charts are interesting from Yardeni, but they apply to the US, not Canada:

https://www.yardeni.com/pub/houseafford.pdf

 

 

Canada looks quite terrible:

https://thoughtleadership.rbc.com/housing-affordability-spiraling-to-worrisome-levels/?_ga=2.263179724.1526013155.1651603474-524993783.1651603474

 

It's all driven by interest rates at his point.

 

Edited May 3, 2022 by Spekulatius

[SharperDingaan]

A lot of the buying has been boomer investment in 2nd property purchases.

Boomers using the equity runup on their existing house, to fund the DP on the 2nd property via a Heloc. The 2nd property pledged as collateral against a mortgage for the (cost - DP) difference, and rented out to cover the monthly operating cost. Accumulated negative carry financed against the heloc, and repaid from future expected capital gain, Highly speculative to many, but actually quite smart.

 

The second property is often the smaller retirement condo the boomer expects to downsize into; a new build bought cheap off plan, taking time to construct and be finished as requested, and upon completion - available whenever mom/dad choose to move in. Until then - rental income covering most of the cash cost, net investment carry costs generating tax refunds, and asset/liability inflation covering erosion of purchasing power. Not a guaranteed solution, but a very good one.

 

In the interim, the property is often simply rented to the kids. They need a reasonable place to live, and mom/dad need a reliable tenant. Sure rising interest rates hurt, but they don't cause widespread selling.

 

SD

Edited May 4, 2022 by SharperDingaan

[Peregrine]

1 hour ago, Viking said:

We really do not have very good information in Canada on what is really going on with housing. I think it is pretty clear that lots of first time buyers are getting the down payment from parents/family members. Where are these people getting the $ from? Perhaps a home equity line of credit? Is this kind of borrowing increasing? How do rising interest rates affect those borrowers? Would this debt show up in mortgage numbers?

 

There's $200 bn in HELOCs in Canada, compared to $1.6 trillion in mortgages outstanding. I think that average balance might include HELOCs, though I'm not sure.

[Viking]

Nice overview of the economic linkages of housing to the rest of the economy. I found interesting his explanation of why treasury yields might actually fall as the Fed gets further along the tightening cycle (he called it second order effects).

 

It is super interesting how divergent the forecasts are today of many smart commentators… likely means volatility will stay high, until a more consensus view emerges.

 

 

Edited May 3, 2022 by Viking

[ValueArb]

On 4/28/2022 at 1:32 PM, Gregmal said:

Duh LOL. Tilson is establishment Wall Street. A clown who was given everything, took his fees, sold his "wisdom", and now parades around like he's hot shit because he has money. 

 

When I first started to believe value investing could work I encountered Whitney for the first time. After reading his crap I began to wonder if I was wrong.

[KCLarkin]

 

On 5/3/2022 at 10:44 AM, Spekulatius said:

So, that means the average homeowner will be fine. The average homeowner in the US was fine too in 2009. The problem is what is the mortgage for those homeowners in Canada that bought in the last 5 years and can they pay their mortgage if it resets to current interest rates or let's say 6% or 7%.

 

Won't wage inflation offset the impact of higher rates?

[Gregmal]

16 minutes ago, KCLarkin said:

 

 

Won't wage inflation offset the impact of higher rates?

People completely miss factoring in wage inflation when doing their thing with the whole rates rising doomsday thesis 

[ValueArb]

51 minutes ago, KCLarkin said:

 

 

Won't wage inflation offset the impact of higher rates?

 

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

[Gregmal]

4 minutes ago, ValueArb said:

 

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

Do the math on a couple who gets a 10% bump on wages, and decides to move from NY to FL. Even if you used dislocated theoretical figures like only a 10% pay increase, but mortgages doubling, it’s still favorable. However right now, lots of folks are getting 10-20% raises(if they want them) mortgages are 5.5% up from 3.5%, and reducing annual property taxes and income tax is just another big lever. 

[ValueArb]

4 minutes ago, Gregmal said:

Do the math on a couple who gets a 10% bump on wages, and decides to move from NY to FL. Even if you used dislocated theoretical figures like only a 10% pay increase, but mortgages doubling, it’s still favorable. However right now, lots of folks are getting 10-20% raises(if they want them) mortgages are 5.5% up from 3.5%, and reducing annual property taxes and income tax is just another big lever. 

 

I can't move until my kids go to college (and then I'll be likely forced to downsize). So my Apples to Apples comparison is that the house I sold is going to cost me over $52,000 a year in interest + taxes now instead of the $35,000 it would have cost when I sold it end of 2020. Assuming I could buy it back for same price. 6 months ago I got a new job at my highest cash comp ever, and a couple weeks ago they increased it 15% due to "market adjustments".  I'm an outlier making 25% more in 2 years yet still not close to the 50% cost increase my old house would be at its sale price. And assuming that it would even sell for that (I often wonder if I missed out on another 10-20% in appreciation selling in December 2020 instead of waiting 6 months, would have made divorce even more tolarable).

 

A couple that decides to move from NY to FL is also a year late because the cost would have been far lower last year. Moving from expensive to cheap and downsizing your home will always make sense. The problem is the 95% of the buyers just trying to buy a house where they live today now can afford a whole lot less.

[Gregmal]

Thing is if you own a house you don’t need to buy and take out another mortgage. If you are looking to move, you can move to places that are better and cheaper. If you don’t own anything you’re kinda fucked. 
 

A $700k home in NY with a 500k mortgage also carries probably $15-20k in property taxes, maybe more, Another $10k state taxes at least. My place in Florida Keys is ~$800k and taxes are $4k annually. 
 

Even if you don’t own, the benefits and work from home tailwind make a difference. That’s why it’s dumb to fight a secular trend. 

[Gregmal]

28 minutes ago, ValueArb said:

A couple that decides to move from NY to FL is also a year late because the cost would have been far lower last year.

Thats also not really how it works. You could have bought AAPL 5 years ago cheaper than today too. Things grow in value. Homes have lots of "things" that are appealing to people working in their favor. Get a big event like covid and that forces people to make decisions. First your parents move. Then some friends. Then you look at the numbers? Speeds things up. Just cuz stuff goes up doesnt mean its less attractive. The only answer is a) build more if you can to bring price down, or b) beg the Fed or politicians to destroy stuff so you wealthier brethren can take it cheaper. Thats all that really happened in the aftermath of GFC. Wealthy folks got amazing deals on desirable real estate. Maybe vacation homes too.