Real Estate Boom in Vancouver
real estate boom
The real estate boom is over. You may or may not like that news, but it is now official.
I am calling the eight-year-long housing lovefest, finito. Done like dinner. Toast. Does that mean housing prices are going to start spiralling lower, with a rerun of the equity-busting days of the early 1990s? Should families who have concentrated most of their wealth in their homes be panicking?
Hardly. I see no storm clouds on the horizon. But neither do I see the weather conditions that would allow prices to keep on rising. And there is one overwhelming piece of news that, more than anything else, should tell everyone that real estate is an overvalued commodity ripe for correction.
My friend Peter Vukanovich, who came to visit me in my riding office, pulled the trigger. His company, Genworth Financial, has now become the first mortgage insurer to cover 35-year home loans. That goes one better than CHMC, which three weeks ago said it would insure 30-year-long mortgages. And the country's best-known mortgage guru, whom I spent time with as well last week in the boardroom of a Toronto law firm, told me in hushed tones he is preparing for the advent of the 50-year mortgage.
What does this mean? And what's the big difference from today's normal 25-year mortgage amortization?
Simply, it is this: Mortgages have always been very large debts for people to pay, and in order to make them more affordable, the payments have been spread over a long period of time - usually 25 years. The effect of this is that monthly payments are brought down, but the amount you end up paying back rises. At today's interest rates, with a 25-year am, you actually pay the lender about twice what you borrowed - almost $580,000 in payments on a $300,000 mortgage.
So, when the payment period (that's the amortization part - based on the French verb 'to kill') is extended, then the same formula kicks in, namely, lower monthly payments and a greater amount actually repaid. In the case of that $300,000 mortgage and a 35-year amortization, monthly payments fall from $2,000 a month to about $1,700, but the amount you dish over rises by $135,000, to a substantial $712,000.
So, why does this show the real estate market has peaked and is about to hit the down escalator? Simply because this is the third major indicator that housing prices have passed the ability of the average family to afford them. And anytime that transpires, the writing is on the garage wall.
First we have had the unprecedented use of the 5 per cent downpayment program. Genworth's Vukanovich told me in our meeting about the tens of billions in mortgages his company has just insured for buyers in that program - in fact, this is where almost all of the mortgage growth is.
Not good. Buyers putting up 5 per cent of the price of a home and mortgaging 95 per cent are doing the same things as stock market junkies snapping up securities on margin. The only way they make money is if the asset rises in value, and quickly. So far the 5 per cent-down crowd have done very well, since their extreme leveraging has paid off in a rising market. But if housing prices move in the opposite direction, their tiny little bit of equity can evaporate in a week or two, leaving them with nothing but a sea of debt. Oh yeah, and a home they "own."
The second indication this is a market living on somebody else's oxygen was the announcement some months ago that several of the banks would lend money to people who don't have any - hence, the zero-down mortgage.
Borrowers with good strong employment earnings, but no savings, suddenly qualified to buy houses they could not afford. Need I say more? But, actually, there is more - because boutique lenders will now give you enough money for 100 per cent of the purchase prices, plus more cash for the closing costs and a new plasma TV.
So, here we have the third indicator - amortizations which have gone from 25 years to 30, then to 35 years and quite possibly now to 50. This is irrefutable proof that houses at these levels are unaffordable if you play by the rules that have influenced real estate supply and demand for the last three generations. And layer on top of that the effect of five recent mortgage rate increases, with the prospect of a couple more to come, and you can see what's going down.
Over the last year, Vancouver house prices rose 26 per cent. In Calgary, 24 per cent. In Toronto, just six per cent. I would argue that the inevitable correction in real estate prices has already started in the GTA and will soon be spreading west. In mid-town Toronto right now, you have to spend $1.3 million to buy an 80-year-old brick house on a street full of the same houses, on a 30-foot-wide lot with no garage. And this is not an area of wealthy millionaire families, but rather working couples with public school-age kids. They may live in million-dollar homes, but they quite often also have million-dollar mortgages.
The only way they'll make money on those houses is if they find somebody to pay even more. And behind that indebted buyer will be a generous lender. And behind that lender, a creative insurer. And you don't want to know what's behind him.