Wednesday, February 3, 2010

Canadian Moral Superiority - Prudent Homebuyers

As Canadians, we pride ourselves on not being American, at least when it suits stoking our Canadian egos (hey you don't really want to get into a pissing contest with the sole superpower unless you're going to define the rules right?).

Case in point: the perceived "stability" of the Canadian housing market. We're lead to believe by Stephen Harper, Jim Flaherty, Mark Carney, and the mainstream media in general, that the reason we haven't had a US-style housing price collapse is because we have a combination of prudent, less risky banks, and responsible borrowers.

I'd challenge that on both points.

First off, let's start with borrowers. The average Canadian house price is 337,410 CAD. The median Canadian household income before taxes is 70,800 CAD. This leaves us with the average home to gross household income ratio of 4.77. Canadian housing prices are at record levels, seeing an unprecedented 19% increase YOY in 2009, despite the fact we just escaped the largest post-war recession to date.

At the peak of the US housing bubble, median US household income was 50,000 USD, with the peak housing price being 230,200 USD. This would put the ratio at the peak of the US housing bubble at 4.60. And yes, we're still inflating our bubble, US prices have collapsed significantly, bringing affordability back into many markets in the US. Meanwhile, the Canadian market continues to ramp to infinity thanks to cheap mortgage rates, panicked buyers that actually are buying into the "buy now or buy never" mentality that's pushed by the real-estate industry, and lazy media publications that print everything that's spoon-fed to them by the CREA (or the NAR in the US).

The rule of thumb (in the US) is that a house should cost no more than 3x household income. Keep in mind, this is the rule in a country that pays generally less in taxes, can deduct the cost of their mortgage interest from income taxes, and where consumers have the option to lock into a 30 yr fixed rate mortage, whereas Canadian consumers typically lock in for 5 year terms, and then face the risk of rising rates at renewal time. In general, the cost of carrying a mortgage in Canada should be higher than that of the US (and hence, it would be prudent to borrow less).

The scary part is, the prospect of higher interest rates, and the soon to be introduced HST on housing (coming in July), is actually motivating buyers to rush out and buy before these 2 events happen! Seriously, if you buy the day before the HST hits, and then try to sell the day after, do you really think that you can sell for the same price you paid, and just assume the buyer will pony up the extra 13% in taxes...or does the seller eat the difference?

As far as rates go, I swear it might be easier to explain the theory of relativity to some buyers than try explain the inverse relationship between mortgage rates and home prices.

Are Canadian homebuyers smarter than Americans?

If some dipshit jumps off a cliff and breaks his leg when he doesn't realize the water is only 6 inches deep, you laugh and say, "Holy shit dude! You OK?", you take him to the hospital, laugh about his stupidity and shitty luck and get the poor fucker fixed up.

If some other idiot that saw what just transpired does the EXACT SAME thing less than 5 minutes later...isn't your reaction more likely to be "Holy shit! What the hell is wrong with you?", and you leave the idiot screaming in agony just to teach the stupid ass a lesson.

That's us...idiot number 2.


  1. That's the problem. Idiot number 2 doesn't realize they are an idiot and won't believe you if you explain it to them. They will tell you till they are blue in the face why the water is actually deeper than 6 inches and clearly you must have measured wrong because our lovely government which coddles and protects us with a gazillion rules and regulations SURELY wouldn't let us jump if it wasn't safe to do so... or would they?

  2. I get the whole "Not enjoying being told you're wrong" thing...I just get a little shocked at how much you can get attacked for "being a pessimist", I don't put that much stock in "hope" when it comes to my financial future...ignorance is bliss.

  3. Jeremy,

    I grew up in London Ont and moved to Chicago in 95 and have been here since. I recently sold my house to the local landfill on a buy back guarantee (long story - see ) I now rent a 4000sf house on an acre with well /septic for 2200 per month. Talk about a monkey off my back. In general people have no sense of what is going on here. Most people think their housing values will come back in a couple of years and are sitting tight. While others are remodeling in anticipation of a sales boom in 1-2 years. I know cause my co is booming doing all the remodeling (modest bathroom and kitchen remodels)/ The 500k+ home will suffer the most. they can't give the sh*& away

  4. It's gonna get worse before it gets better.

    Gotham, WI


    "January unemployment rate drops to 9.7 percent"

    Want to see a perfect example of “Headline Spin”

    Doesn’t that headline imply that things are good? Most people stop reading after the headlines anyways right?

    Read further and what do we find… “annual revision to the estimates of total payrolls, which showed there were 930,000 fewer jobs last March than previously estimated” Hmm…. You fucked up your numbers and upon “revision” we see that you mis-counted by nearly 1 million jobs???? Let’s go a bit further… “also revised down its estimates for April through October of last year, adding another 433,000 job losses” Hmm…. another fuck up of nearly half a million jobs missed?? So… how accurate exactly are these monthly reports that seem to have so much weight with the markets and the economists??

    Also, of interest, how did the employment rate drop with such terrible actual numbers? “The rate dropped because a survey of households found the number of employed Americans rose by 541,000, the Labor Department said” I see… so you went door to door and asked what? 500 people if they had a job? Then you extrapolated those results to accurately surmise the health of an economy with 300 million people? Nice job! I’m sure that’s a super duper accurate number that surely won’t be re-adjusted 6 months from now!

    “All told, the Great Recession has eliminated 8.4 million jobs, the department said. That's the most of any recession since World War II as a proportion of total payrolls” Nice… worst recession since WWII. Funny how the average person thinks this is a GREAT time to go house shopping, buy some more furniture on a 120 month “no-interest, no payment” plan. This should be good. What a mess!

  6. Always sell high and buy low. Don't do that and your a "LOOOOOOOOSSSSSSEEEEERRRRR"
    Sold 198 properties at an average GROSS PROFIT OF 1167% WITH AVERAGE HOLD OF 23.65 MONTHS.
    That's 49.2% per month Average Gross Profit!

  7. Angry, the comment on the US statistical "revisions" is dead on. What's the point in reporting numbers where the revision is more significant than the actual number initially reported. The noise is louder than what they're actually saying. Utterly ridiculous.

  8. Hi Jeremy,

    I do not think you understand several fundamental differences between the Canadian and US residential real estate systems which led to the majority of the problems they now face.

    You stated, "We have a combination of prudent, less risky banks, and responsible borrowers." This is not by any means why the Canadian Real Estate market is less effected then the US.

    The main reasons why are as follows:

    1. The US provides heavy incentives to borrow money.

    2. The Canadian sub-prime market is about 5 to 6% of the total real estate market. In the states, that number is between 15-20%.

    3. Canada does not provide NINJA type loans. As #1 mentioned, there are a variety of incentives in the states to borrow money. Thus, more individuals who shouldn't buy homes are able to.

    4. More regulation in Canada - CMAC etc.

    The Canadian real estate market will never have the same issues that the US market had. Canadian real estate has increased in value substantially over the past 50 years and is one of the main reasons that many baby-boomers are able to retire. You think that this recession will have a significant impact on real estate value in 5 years? The fact is that it won't. We have gone through multiple recessions in the past 30 years. Not surprisingly real estate prices have continued to keep pace with the economic landscape that Canada operates in.

    Much of what you are stating in your article is not the reality of what is happening in the real estate market. Further you neglect to mention a variety of economic principals which dictate how the real estate industry operates.

    Example 1:

    "Canadian market continues to ramp to infinity thanks to cheap mortgage rates, panicked buyers that actually are buying into the "buy now or buy never" mentality that's pushed by the real-estate industry, and lazy media publications"

    The real estate market is cyclical. Whether you buy now and pay a lower interest rate or buy later at a lower price, the outcome is nearly a wash. You are right, the media is pushing the sale of real estate but is marketing a new function of a capitalist society?

  9. Lockshot,

    You seem to be under the impression that the problems of the US housing bubble collapse is confined to subprime. I'm not denying the US had a wider subprime problem, and many cases of outright fraudulent activity (ninja loans, liar loans). That being said I view subprime as merely the tip of the iceberg. The bulk of defaults currently occuring aren't due to subprime. The US is experiencing defaults due to option-ARMs, subprime, prime, and simply borrowers who can afford to pay but choose not to because they are now in a negative equity situation due to falling home prices.

    You argue that the US provides heavy incentive to borrow money, and I don't dispute that, but that would be a reason WHY American's should hold more mortgage debt per house...there are tax incentives to do so. Yet Canada is even more indebted in terms of house to median income ratio than the US was at the peak. This clearly indicates a bubble in the Canadian market.

    Of course housing is cyclical, and in terms of the current demographics (as you mentioned rich boomers cashing out for retirement), this is yet another reason (completely aside of the massive market correction due to the recession, and over indebted homeowners) why the bubble will correct.

    My point is that anyone foolish enough to have bought within the last 12 month is going to feel a massive amount of pain. Unlike some US homeowners, mortgages here are recourse. We can't walk away, if we make a commitment to buy a house, we're stuck with it until we can offload it to another buyer.

  10. I hope the Real Estate market does crash in Canada, and I think it will.
    Only then will I consider buying RE and may actually be able to afford it as well.
    Real Estate people lie to keep the ponzi game going, and the people who believe them are fools.