CANADA HOUSING MARKET BOOM AND BUST?
2020-09-25
House
sales and prices have been surged in Canada including Toronto area around 18%
prices increased in July or August 2020 alone.
They
have been speculated that "supply and demand" was the main driving force.
This is sustainable according to realtors.
Let's
see a $400K house with 10% ($40K) down payment and mortgage rate of 1.64%
(5-year fixed) would force you to pay $348/week or $1508/month. In Greater Area
of Toronto, a small house is typically sold for more than $750K or close to
$800K, i.e. double mortgage payment $696/week or $3016/month. By the way you
should also check property tax and home insurance. There are many free mortgage
calculators available in Internet.
The
above mortgage showed that family net income (after taxes deduction) of a home
buyer must be above $5000/month or more than $85K annual salaries (before taxes
deduction or gross income). This is not affordable for people without a
university degree. These families have $2K left monthly for food, essential
stuff, or other loans such as car loans or credit cards.
Why
did house sale surge like this? Low interest rate or mortgage rate for new home
buyers? I doubt this. If home buyers were able to buy a house, they would
before mortgage rate dropped by 1%-1.5%. What do you save with 1.5% drop? 0.015
* $720K = $10,800 for the first year. Is this a good cushion for you if house
price dropped 10% or more (easily) as in USA or Australia during real estate
market correction? [Ex: $800K house listed as or sold at $720K before
commission during 10% correction - your $80K down payment evaporated. Would you
feel depressed by paying mortgage higher than its market price?]
*
You should do the math for "saving $10,800 in the first year, but pay 18%
more in house prices" would be the best choice or not?
The
main house buyers should be money investors. With the interest rate between 0%
- 0.25%, they are not interested to hold cash or bonds. The equity or stock
market is very pricey currently, i.e. too expensive as related to its earnings.
The stock market is likely to be corrected downward or in bear market as many
investors predicted.
Money
investors have jumped into housing markets and believed that they have a hard
asset, i.e. a house to back up their investment.
When
those investors left because there was a better option such as stock market at
bottom or bond rate raised, the housing market will be corrected.
CERB
was extended until October 3, 2020. Did anyone with CERB payment buy a house?
What will happen when CERB ended? But they haven't found a job?
I
think, realtors are experts in convincing people to jump into housing markets
at all cost.
https://www.cbc.ca/news/business/crea-house-price-1.5724433
--------
Further notes to make information above clearer to some readers -------
Back
the years to years before 2008-2009, house buyers in USA believed that house
prices would go up forever. They were only afforded to pay mortgage interests,
and hope making money as house prices increased. House prices were corrected
more than 30% during 2008-2009 have left many home owners in USA paying
mortgages higher than market price of their own house.
Many
house owners declared bankruptcy or gave away their houses to protect their
credit scores.
-----------------
I
don't follow Australia's real estate market, but Australia governments
announced that if housing market dropped more than 50%, they would step in.
This meant the market was corrected more than 30% or 40%?
In
USA (2008), some market saw more than 30% drop.
-----------------
Many
Canadians have friends or relatives in USA. How about asking them if house
prices have been recovered to its peak (probably 2007 price) or not?
If
not yet, home owners have been paying mortgage higher than market value for 13
years. Are they depressed?
If
yes, how many years have they waited for this happened? This would help to
estimate waiting years for Canadian home owners paying for under water house
price. By the way, US people are wealthier than Canadians, i.e. they are more
likely to buy a house to push its price up faster.
-----------------
Common
questions for home owners purchased a house before real estate market
collapsed, i.e. underwater house price:
[Assuming
you recently purchased a $800K house, and market just corrected 10% down]
-
Why did you buy a house while many analysts have warned bubble in housing
market?
-
$80K of saving in years had been evaporated. Will the house price slide down
further or not?
-
What if the prices slide down to 30% correction as in USA? This means $240K
would be erased?
-
When will the house price recover to what you had paid? How many years would
you wait?
-
Should you sell your house now or hold on waiting for a recovery?
Those
were common questions that you will ask yourself every day without an answer,
if housing market corrected. Is this depressing?
-----------------
This
web site should give you an idea the maximum house price that a Canadian family
could stretch their budgets before getting exhausted:
Google
for "average family income in Ontario" from statistics by government
of Canada. Realtors may create one for their clients.
When
house buyers exhausted or waited, housing market would be corrected.
2016
data for Toronto:
-
Average household income before taxes: $109,480
-
Median household income before taxes: $78,378
-
Average household income after taxes: $87,993
-
Median household income after taxes: $68,627
What
should be the average salary increases annually when your annual salary above
$50K? 2% - 5% a year? Do your math to estimate 2020 figures.
-----------------
Assuming
the median income earner in 2016 got 5% annual salary increase every year to
$83,416/year in 2020. What would be the maximum mortgage that they could afford
based on https://www.cibc.com/en/personal-banking/mortgages/calculators/affordability-calculator.html
-
Annual income $83,416
-
8.69% down payment $60,000
-
Mortgage rate 2.14% on 5-year fixed.
-
Amortization period of 25 years
-
Mortgage principal would be $630,122 + mortgage default insurance
$25,205 à Total
mortgage amount $655,327
It
means that this family would only be able to purchase a house listed at
$655,327 + $60,000 = $715,327. The additional expenses would be land transfer
tax, lawyer fees, etc. This web site stated that your maximum purchase would be
$690,122.
Will
this family step in when the house price corrected from above $800K to $690,122?
This family would ask themselves the same questions as home owners with their
houses under water.
It
should be noted that the above example was the best scenario, i.e. maximum 5%
annual salary increase for 5 years in a row and this family was waiting to
purchase a house. If the increase was lower than 5% or this family has owned a
house, you should expect people waiting for an entry at lower price than
$690,122.
*
I got mixed up with net income and gross
income in the example above while entered in the mortgage calculator.
Perhaps I'll try again later. You could try your own numbers.
*
I think, they listed median gross income for
2019 in this post
https://dailyhive.com/toronto/average-years-toronto-home-zoocasa-report. $78,373 is median household income
before taxes in Greater Toronto Area.
*
FYI: Most of Canadians like to travel during their vacations; therefore you
should wipe out $5K - $10K from their annual family net income in your
calculation.
-
Annual family net income: annual salaries after taxes deduction (lương g/đ sau
khi đóng thuế)
-
Annual family gross income: annual income before taxes deduction (lương g/đ trước
khi đóng thuế)
* In the current pandemic
climate, Ontario is facing a possible shut down again, i.e. increasing jobs
loss. Why could housing market go up 18%? Who are the buyers?
-----------------
2020-10-01
For
people living in smaller cities, you should be aware of domino effect occurred
by housing correction in a large city such as Toronto, i.e. if downward
correction happened in GTA, other housing market in Ontario would follow.
For
Peterborough city of Ontario, you could take a look at this web page http://areascore.ca/area/Peterborough_ON/income_median-income-statistics.
Statistic Dollar
Amount
Median
personal income $29,146.10
Median
employment income $45,272.40
Median
family income $69,352.00
Median
household total income $55,708.40
Median
after-tax household income $49,723.50
The
median family income was $69,352 before pandemic occurred. Using this median gross
income for the above affordability calculator, you should get the following
data
-
Annual gross income $69,352
-
5.45% down payment $30,000
-
Mortgage rate 2.14% on 5-year fixed.
-
Amortization period of 25 years
-
Mortgage principal would be $520,000+ mortgage default insurance
$20,800 à Total
mortgage amount $540,800.
It
means that this family would only be able to purchase a house listed at $540,800
+ $30,000 = $570,800. The additional expenses would be land transfer tax,
lawyer fees, etc. This web site stated that your maximum purchase would be $550,000.
There
are some important information about this city, which you should know
-
Most of residents are pensioners, which mean their average family
income was
“The federal OAS pension and
GIS payments plus have an annual private income of up to $1,992 if you are a
single senior or up to $3,984 if you are a senior couple.” They have gross
income less than $4000/month or $48,000/year for a couple. If a pensioner
passed away, a single pensioner couldn’t afford to pay property taxes,
maintenance fees, home insurance, and mortgage for a house.
-
This city is the land of farmers, but they have owned farms and
houses.
-
House prices in Peterborough have been doubled since 2015. Why?
Many new residents sold their houses in Toronto and purchased one here to net
profits. What is their main concern? It would take them more than 1h30min car
ride (each way) to work in GTA, because there are not many jobs in this city.
-
Good small houses in this city have popped up above $450K. Do you
think that Peterborough residents could afford a $450K house?
-
High income earners of Peterborough had owned a house. Many of
pensioners have sold their houses to relocate to more relaxing cities as
Peterborough’s daily expense is getting expensive.
In
addition to domino effect, when GTA’s housing market corrected to affordable
levels, many GTA’s workers would sell their properties in Peterborough and
moved back to GTA to save commuting time and gasoline cost. However, GTA
workers must wait for external buyers, e.g. GTA residents, to buy their
properties as Peterborough residents either owned a house already or couldn't
afford one.
Related good articles:
-
Employment reached 94.1% of its February level and the unemployment
rate fell 0.4 percentage points to 10.7%. Sep 4, 2020
-
Mortgage deferrals will soon end for many Canadians. Then what?
https://globalnews.ca/news/7286008/coronavirus-mortgage-deferrals-end-canada/
-
Swiss bank UBS says Toronto has 3rd biggest housing bubble in the
world
https://www.cbc.ca/news/business/ubs-toronto-housing-bubble-1.5746432
-
These homes are still worth less than they were in 2007 in USA
https://www.marketwatch.com/story/these-homes-are-still-worth-less-than-they-were-in-2007-2017-09-21
-
CERB is ending, here is what to know about your benefits
https://www.ctvnews.ca/politics/cerb-is-ending-here-is-what-to-know-about-your-benefits-1.5121648
-
Toronto home prices not expected to bounce back till 2022
If
you’re unsure about the housing market, you should wait for the mortgage
deferral AND emergency benefits from government ended. The housing correction
could cost you hundred thousands of Canadian dollars, so it's up to you to play
games.
If
housing market collapsed, you have the name of organization and their staff to
go after, e.g. RE/MAX and those hosts advertised Toronto properties on the show
Hot Property of CP24. https://torontostoreys.com/canada-housing-market-remax-cmhc
For
people living outsides of Canada, the following web site is very popular in
searching and viewing a property. Just filling in the city, where you're
interested in finding a house for its asking price: https://www.realtor.ca
Usually
the mortgage rate goes in opposite direction with house prices. Let’s say the
current mortgage rate is up 2% - 3%, the house prices drop 10% - 20%, and you
should be saving money or losing money on mortgage payment or principal
mortgage? This scenario is good for both home buyers and bankers. You could use
a mortgage calculator to estimate mortgage payment and principal mortgage for
changes in mortgage rates and house prices.
-----------------
2020-10-03
The
majority of house prices listed in Toronto are way above my estimate around
$1,000,000 - $5,000,000. The estimate for median income earners could afford a
mortgage of approximately $690,000. Those median earners represent large potential
house buyers in the Greater Toronto Area.
The
question should be “should you jump in to purchase a house, if corrected 10% -
20% down?”
Assuming
houses were corrected -20%, which would make lots of buyers see as good deals.
The main issue was if you bought a house in between $800,000 - $4,000,000, you
would have to pay mortgage. If you could not afford mortgage payment for any
reasons, you would list your property in the market AND hope the potential
buyers at $690,000 to buy your house?
According
to research in one of the articles above
·
“As of the
end of June, some 760,000 Canadians, or about 16 per cent of mortgage holders,
have taken advantage of mortgage deferral options rolled out by banks since the
middle of March.”
·
“The research, which dates
back to June, finds that one in five households has enough financial buffers
only make just two months of mortgage payments and about one-third can make up
to four months of payments. In other words, without a regular income, many
homeowners wouldn’t last long.”
20%
- 30% of 760,000 house owners would be able to float their mortgage payment
between 2 months – 4 months, i.e. 152,000 survived 2 months AND 228,000
survived 4 months with mortgage payment, if they could not find a job. By the
way, they must be able to afford “an increase in mortgage payment as mortgage
interests accumulated during deferral periods”.
You
should check with banks to see the end date of mortgage deferral period, which
is different for each lender.
For
new Canada emergency benefits replacing CERB “Canadians will be able to apply for the three new benefits through the
CRA for one year up until Sept. 25, 2021.” If house owners were unable to
find a job before September 25, 2021 and mortgage deferral period ended, they
would sell their houses as quickly as possible. Otherwise lenders would seize
their houses and sell “as is.”
If
you purchased a house between $1,000,000 and $5,000,000 with 10% down payment, 2.14%
interest rate and 25 years of amortization, your monthly mortgage payment would
be between $3,872 and $6,454. For 4 month cash buffer, you must have in your
saving account an amount between $15,488 and $25,816. You are very rich. [For
sellers, the mortgage rate has just come down recently; therefore your rate may
be higher, i.e. higher cash buffer while waiting your house is sold.]
-----------------
2020-10-04
How
to check the annual interest rates received by money investors by holding cash?
Usually we should check the interest rates set by central banks such as Bank of
Canada (BoC), US Federal Reserves (US Fed), European Central Bank (ECB), Bank
of England (BoE), etc. You could google those key words.
What
is the Bank of Canada interest rate?
“Bank of
Canada maintains commitment to current level of policy rate, continues program
of quantitative easing. The Bank of Canada today maintained its target for the
overnight rate at the effective lower bound of ¼ percent. The Bank Rate is
correspondingly ½ percent and the deposit rate is ¼ percent.”
What
is the US Fed interest rate 2020?
“In
September 2020, the US Federal Reserve maintained its target for the federal
funds rate at a range of 0% to 0.25%.”
What
is ECB interest rate?
“Against
this backdrop, the ECB decided Thursday to keep its interest rates and
coronavirus-stimulus program unchanged. The interest rate on the ECB's main
refinancing operations, marginal lending facility and deposit facility remain
at 0.00%, 0.25% and -0.50%, respectively. Sep 10, 2020”
What
is Bank of England or UK interest rate?
“How do
interest rates work? The Bank of England sets the bank rate (or 'base rate')
for the UK. The current rate is 0.1%.”
Bonds
offered by companies are higher risks, because a corporate could declare
bankruptcy. Therefore company’s bond rates are higher than a government bond
rate. Let’s see Canada bonds and US bonds by google those key words, e.g.
Canada bond yields.
What
is the Canada bond rate?
“The Canada
10Y Government Bond has a 0.567% yield. Normal Convexity in Long-Term vs
Short-Term Maturities. Central Bank Rate is 0.25% (last modification in March
2020). The Canada credit rating is AAA, according to Standard & Poor's
agency.”
What
is U.S. Treasury Yields?
Maturity Last Yield Previous Yield
3 Month 0.08% 0.08%
5 Year 0.29% 0.27%
10 Year 0.70% 0.68%
30 Year 1.48% 1.45%
What
are UK government bond yields?
“The United
Kingdom 10Y Government Bond has a 0.252% yield. Yield Curve is flat in
Long-Term vs Short-Term Maturities. Central Bank Rate is 0.10% (last
modification in March 2020). The United Kingdom credit rating is AA, according
to Standard & Poor's agency.”
What
are European government bond yields?
10-Year
Government Bond Yields
Country
Yield 1 Month
France -0.26% -9
Italy 0.78% -23
Spain 0.22% -13
Netherlands -0.43% -7
Those
treasury yields and government bond yields are currently very low; therefore
money investors are not interested in holding cash or purchased government
bonds. They must invest in higher risk security such as stocks or corporate
bonds. However stocks prices are very high as compared to earnings, e.g. stock Price/Earning
(P/E) is over the roof. Many companies are struggled because of COVID-19, thus
corporate bonds are very risky.
When
a corporate declared bankruptcy, usually bond holders are the first line of
investors to get left over asset of that corporate, and then stockholders. A
house is a hard asset, which could be rented out to cover some loss if downward
corrected. Probably money investors have poured money in real estate markets
around the world, and speculated “low
mortgage rates” to home buyers to trigger buying interest or to push house
prices upward.
Some
big and stable private banks (e.g. Bank of Montreal, RBC, TD, or Scotia Bank) offer
low 5-year bond to their investors, e.g. 0.75% 5-year fixed rate, with 0.5%
higher than government bonds. Many investors would purchase private bank bonds.
Big banks would use this amount of money to offer 2.14% mortgage rates to home
buyers, i.e. banks are making 2.14% - 0.75% = 1.39% for 5 years with free money
in this example.
If
your down payment for a house is less than 20%, you must pay around 2% default
insurance to Canada Mortgage and Housing Corporation (CMHC):
How does
CMHC mortgage insurance work?
“Mortgage
default insurance, which is commonly referred to as CMHC insurance, is
mandatory in Canada for down payments between 5% (the minimum in Canada) and
19.99%. Mortgage default insurance protects lenders, in the event a borrower
ever stopped making payments and defaulted on their mortgage loan. Jun 5, 2020”
How is CMHC
calculated?
“The CMHC
Mortgage Loan Insurance premium is calculated as a percentage of the loan and
is based on the size of your down payment. The higher the percentage of the
total house price/value that you borrow, the higher percentage you will pay in
insurance premiums. Mar 31, 2018”
If
a house buyer made a down payment less than 20%, and housing market was
corrected to force home buyer default a mortgage, banks were secured by CMHC
insurance, i.e. not impacted their investment.
If
a house buyer made a 20% down payment, and default a mortgage because its
prices dropped more than 20%, e.g. -30% corrected. Bank’s investment in this
house would be impacted around -10% of original purchase piece. Bankers should
only be worry with house buyers, who made 20% down payment.
-----------------
Based
on historical data, many home owners have been winners or savers by selecting
variable mortgage rates. Recently I asked a mortgage broker about mortgage
rates for a possible house purchase, and he offered 1.64% on 5-year fixed rate
OR 1.60% 5-year variable rate (prime rate
minus 0.85%)
5-year
fixed rate means that your mortgage payment doesn’t change for 5 years. 5-year
variable rate (prime rate minus some
percentages) means that your mortgage payment could be increased or decreased (varied)
slowly based on the prime rate.
“The prime
rate in Canada is currently 2.45%. The prime rate, also known as the prime
lending rate, is the annual interest rate Canada's major banks and financial institutions
use to set interest rates for variable loans and lines of credit, including
variable-rate mortgages. Jun 23, 2020”
You
should pay attention to news posted by central banks around the world
especially US Fed and BoC to see the direction of prime rate, which should be
up or down based on the interest rates set by central banks. Usually the prime rate equals the central bank
rate plus some points.
Recently
US Fed announced that they didn’t see any possible increase of interest rate
until 2022 or 2023, i.e. 2 to 3 years from now. After that we could see an
increase rate by 0.25% per quarter or per year depending on the performance of
their economy OR may be flat. The odd of decreasing rate set by central banks
is very low as US Fed and BoC are not interested in negative rates. Only ECB
started negative rates forcing other European banks entering negative rates,
which have fueled their real estate markets in bubble territories and trouble for
fixed income investment industry.
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