Pre-crisis déjà vu in burdened market – analyst

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The U.S. real estate sector is showing a troubling repeat of warning signs that have preceded the subprime crisis nearly a decade ago—a trend that can be observed in Canada’s markets, as well.
 
Writing for MarketWatch, columnist and industry observer Michael Brush said that the ongoing phenomenon of small homes selling for disproportionately inflated prices—such as a Brooklyn “tool shed” going for half a million dollars—is showing the housing market’s gradual march towards a no-return point of unsustainability.
 
Brush said that while the signs don’t indicate a point-by-point recurrence of the previous decade’s collapse, there’s little reason to be complacent.
 
“[Thankfully], at least a full-blown repeat of the 2008 financial crisis is unlikely. That’s because banks aren’t amplifying the problem via wholesale repackaging of home loans into risky investment instruments. At least not yet,” Brush wrote in his analysis.
 
“But that should be small comfort. Because housing-sector excesses are clearly developing, which would dramatically worsen a recession. This is bad news, given that growth for the first quarter growth came in at well under 1% — pretty close to recession,” he said.
 
The increased incidence of real estate speculation, the unchecked price growth in active markets, and the sudden popularity of “quick mortgages” all increase the likelihood of a meltdown that can bring housing investments crashing down, Brush warned.
 
Complicating the issue is the seemingly unstoppable demand despite relatively static income growth.
 
“Buyers are stretching their budgets to purchase homes,” Brush said. “A lot of people are taking out mortgages with dangerously high monthly payments relative to their incomes. And the problem is getting worse.”
 
“We’re just about back to the zero-percent down payment [regime],” he added, alluding to the current median down payment of 3.5 per cent for first-time buyers.

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