Exclusive: Analyst explains bold prediction

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“An increase of that amount in such a short time is very rare but when it has happened in other countries, it’s always been followed by a financial crisis, as the borrowing is used to buy illiquid assets such as real estate,” he said.

MacBeth believes three quarters of Canada’s $1.8 trillion in household debt is backed by government insurance which, he says, protects the lender only and not the taxpayer or the economy.

As for which areas are most at risk, MacBeth believes Calgary will be the first to correct, with Edmonton, Vancouver and Toronto also at risk.

“The surplus of condos in Toronto that is developing is dangerous too, as an oversupply of units could mean that condos -- which are difficult to sell except when brand new -- will be dumped on to the market by investors who have borrowed most of the money,” he said. “Or by lenders who have foreclosed on the properties.”
 

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  • James Robinson on 2015-03-20 11:47:28 AM

    The ratio between household income and monthly carrying cost of a home would seem to be far more relevant than income to house prices. People do not buy a house for $500k, they buy a house for $2500 a month. It would take a big increase in interest rates to cause carrying costs to rise dramatically and with government being both the biggest borrowers and in charge of setting interest rates, my money is on low rates for a lot longer than anyone thinks......just look south to the Fed decision this week.

  • MtgBrker on 2015-03-20 11:50:55 AM

    ^^ So hypothetically if the overnight rate drops to 0% in a 6 month timeframe and your payment is still $2500, you would be ok with paying $600k for that house?

  • James Robinson on 2015-03-20 11:58:02 AM

    That is certainly how the market behaves. I bought a house in 1990 for $340k and the mortgage payment was about $3300 monthly at 13.5%. Today, the exact same house would sell for $1mm and with 20% down the payment is almost the same.

  • John on 2015-03-20 12:03:49 PM

    I guess we all need raises

  • MtgBrker on 2015-03-20 12:04:01 PM

    So you would attest that the value in that home justifiably increased 20% simply due to a rate cute. I hope you don't give fleeting advice like that to clients of yours, as rates do have a tendency to fluctuate. I inform people that regardless of rate, they still actually have to pay back that money - something people seem to be forgetting. Also inflation adjusted wages have not increased materially since you bought a house in 1990 for $340k...

  • John on 2015-03-20 12:06:59 PM

    Record profits and no significant wage hike, maybe that's the real issue all over the world not just Canada. More for less.

  • Kevin R on 2015-03-20 12:16:36 PM

    Rates when 9/11 happened were 7.0%, since that day & what transpired shortly after, the world has not been the same. Economics changed world wide. Rates fluctuate but only to threshholds. If rates go too low, we get spending, cheap cost consumer debt at record levels. Rates climb up to slow economies but once it reaches a level, rates come back down as economies/defaults slow down too fast as this huge debt chokes the cash flows of people. But why would we expect people to suddenly eliminate all their debts when we have governments overspending so much they should be bankrupt. Hilliard is making a mistake using formulas that were applicable prior to 9/11. The only thing that will probably change the huge rut & teeter tatter effect of rates is when the Baby-Boomer generation dies & this huge amount of wealth is transferred to the next generation. Then the consumer debt will drop substantially & economics will be able to change. Right now, it's hard to imagine rates being much higher than what we have seen in the last 5-10 years.

  • Brian Lambert on 2015-03-20 12:19:49 PM

    If we look at the mechanics of home price increases for example (and there are many). I have a close relative that bought a home in 1984 for $144,000 today that home is valued at $300,000. It took 30 years to double in price. Now if you bought that home, say in 2000 for $150,000 it would be worth $300,000 today. The person who bought the home in 1984 had seen no growth for 16 years in value and would say that a home doubling in value over 30 years is normal. Are we playing catch up over the past 14 years since home prices were stagnant for the previous 16 years, or are we in bubble territory. It depends on many factors and how you analyze it?

  • Brian Lambert on 2015-03-20 12:20:05 PM

    If we look at the mechanics of home price increases for example (and there are many). I have a close relative that bought a home in 1984 for $144,000 today that home is valued at $300,000. It took 30 years to double in price. Now if you bought that home, say in 2000 for $150,000 it would be worth $300,000 today. The person who bought the home in 1984 had seen no growth for 16 years in value and would say that a home doubling in value over 30 years is normal. Are we playing catch up over the past 14 years since home prices were stagnant for the previous 16 years, or are we in bubble territory. It depends on many factors and how you analyze it?

  • Jay on 2015-03-20 12:36:37 PM

    This guy should stick to what he 'knows' best.

    Although the thought of people giving him money to invest makes me shake my head as much as these sensationalist articles.

  • Jerry Quigley on 2015-03-20 12:44:06 PM

    Some people on here seem to suggest that the Canadian government/BoC can set future interest rates. Were that the case, we might be fine. The world market dictates Canadian interest rates. We cannot leave our rates lower than everyone else or the purchasing value of our dollar deflates making all the food and consumer products that we must have to live cost more than the money we save by keeping our interest payments lower.
    I'm certainly not convinced that we will see a 40%+ correction, but perhaps 20% in GTA & Van, and 10 to 15% in some other areas.
    Low interest rates are making mortgage payments low and driving up the prices. Perhaps the next move for Ottawa is max 20 year amortizations in some hot spots, maybe 15 years.

  • Mortgage Guy Geoff on 2015-03-20 1:06:07 PM

    Another day, another prediction about the economy/house prices/interest rates. Ho hum.

    What I find most interesting (alarming?) is the recent trend amongst Financial Planners {I've heard about this through several clients now} to promote this noise about a bubble about to burst to convince people that buying a home now is a bad idea. Convenient eh? That client now has $1,000's in down payment money that is now free to be invested with that same Financial Planner.

    And as we've seen for the last 50-60 years or so a year from now that house they wanted to buy is another 5% more expensive. Who really won in that equation?

    {Actually for fun I tell my clients to ask these so-called Planners if they've sold their house and will rent so they too can make a killing when the bubble bursts. Guess what the answer invariably is...}

  • Mark Olkowski on 2015-03-20 1:42:31 PM

    It is remarkable how people come up with a theory based upon misleading information.
    Here are facts:

    1. Banks NEVER used a factor of household income to determine mortgage affordability. No, it did not happen before, and it is not happening now.
    2. The statement that people are getting mortgages at 10 times their income is also false. You must understand that mortgage brokers are usually pretty good at math, and we will challenge you on misleading or false statements. (Stick with the 5x as that is a little more accurate).

    Banks DO NOT and have NEVER used factors of family income. They use affordability ratios and the ability to repay the loan based upon gross income. (look up GDSR and TDSR).
    Simply put, as interest rates go up, payments go up, and you cant afford as much property.
    My first mortgage in 1989 was at 12.75%, and my mortgage payments were obviously higher. I could not afford as much of a mortgage then as I can today (because interest rates were higher in 1989). At that time anecdotally the mortgage did work out to approximately 2X your income.
    (They still used GDS and TDS back in the "good old days").
    Now interest rates have dropped, so that with the SAME 1500/month repayment on in 1989 was for a $138k mortgage, the same 1500/month today gets you a $327k mortgage.
    Nothing to do with household income... it has to do with repayment of debt.

    Mr MacBeth, there are 5 parts to a financial equation. You are focusing in on only one of them. Please consider the other 4.

    Your theory for a 40-50% reduction in values is based upon an "household income factor" that I believe I have proven here is simply false.
    Therefore, I think you need to revisit your theory.

    Having said that, if you truly believe that interest rates will go back up to 12.75%, then your theory will be more accurate.

  • Mark Olkowski on 2015-03-20 1:42:55 PM

    It is remarkable how people come up with a theory based upon misleading information.
    Here are facts:

    1. Banks NEVER used a factor of household income to determine mortgage affordability. No, it did not happen before, and it is not happening now.
    2. The statement that people are getting mortgages at 10 times their income is also false. You must understand that mortgage brokers are usually pretty good at math, and we will challenge you on misleading or false statements. (Stick with the 5x as that is a little more accurate).

    Banks DO NOT and have NEVER used factors of family income. They use affordability ratios and the ability to repay the loan based upon gross income. (look up GDSR and TDSR).
    Simply put, as interest rates go up, payments go up, and you cant afford as much property.
    My first mortgage in 1989 was at 12.75%, and my mortgage payments were obviously higher. I could not afford as much of a mortgage then as I can today (because interest rates were higher in 1989). At that time anecdotally the mortgage did work out to approximately 2X your income.
    (They still used GDS and TDS back in the "good old days").
    Now interest rates have dropped, so that with the SAME 1500/month repayment on in 1989 was for a $138k mortgage, the same 1500/month today gets you a $327k mortgage.
    Nothing to do with household income... it has to do with repayment of debt.

    Mr MacBeth, there are 5 parts to a financial equation. You are focusing in on only one of them. Please consider the other 4.

    Your theory for a 40-50% reduction in values is based upon an "household income factor" that I believe I have proven here is simply false.
    Therefore, I think you need to revisit your theory.

    Having said that, if you truly believe that interest rates will go back up to 12.75%, then your theory will be more accurate.

  • Aaron Vaillancourt on 2015-03-20 3:32:43 PM

    H Macbeth is putting it all on the line for his book (and associated brand equity), as G Turner and others have done in the past. The price of making a disaster-call on any market is only one's own humility. Headlines need to hit a home-run; nuance does not sell copy.

    P-to-I is a perfectly horrible predictor of underlying strength in a market if you strip out interest rates (i.e., time value of money itself). As others have pointed out, carrying capacity is a much more important factor for affordability, since "payment" is the vehicle for how much a buyer "pays".

    Even more important than capacity is having a "job" itself. The unemployment rate (and associated labour force participation rate) are unquestionably the primary drivers of credit creation. It would be easy (and likely correct) to make a bear case for a (continuing) decline in the LFPR due to demographics in most communities in Canada. The national unemployment rate, improving for the last half-decade, will likely reverse course once the effect of 50 dollar oil is absorbed.

    How changes in interest rates and employment metrics will effect housing varies from one market to the next. A national "figure" for housing is probably worthless (unless you're in charge of crafting federal policy).

    And as far as analysts who break out Canada into a sum of its parts, there are much better and more sophisticated researchers out there (B Rabidoux would certainly fall in this category).

  • Neeraj on 2015-03-21 9:22:41 AM

    All the above arguments about calculations and ratios hold valid point.

    Another thing in GTA market ,there is high percentage of home owners lies in Business of Self category. Their declared income is much lower than they actually make.
    Immigration factor in GTA is huge as well. Any new immigrant does not come empty handed and according to study, Most of new immigrants buy fst home in fst three yr.

    There is big influx of foreign students in our Universities and colleges. All those students are going to settle down in next 2-5 years and would need housing.
    I believe as long as Canadian Economy does not start doing exceedingly well to force BoC to increase overnight interest rates over 10%. It seems difficult for so called bubble to burst. But looking in past and Canadian Manufacturing index and export, raising interest rates looks very distant dream.

    Till then enjoy the ride. Let's pay off our homes when rates are low and we wouldn't need to worry about it anymore.

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