The Catalyst & Noose

Forget about price-to-rent or income ratios, historical averages, inflation rates, or trying to tie housing prices to other fundamental measures.

No, the catalyst for depressed housing prices will be the same as what started and exacerbated the boom in the first place: access to credit and the accompanying mortgage rules.

It’s no coincidence sales and prices surged in tandem when amortizations were extended 15 years. A report by the City of Calgary stated that:

Our analysis of CMHC rule changes on Calgary prices indicates that for every year that insured mortgage terms were extended beyond 25 years Calgary house prices rose by between $6,000 and $10,000. Between 40% and 70% of residential price changes in Calgary between 2004 and 2009 can be attributed to CMHC amortization rule changes.

In addition, even more buyers who previously wouldn’t have qualified were afforded the opportunity of homeownership because of the implementation of 0% down.

Incomes weren’t remotely close to matching the increases seen in housing prices. “Housing prices have risen 89 per cent since 2002 — vastly outpacing family income gains,” said Sal Guatieri, a senior economist at BMO Capital Markets. (April 2010)

(click to enlarge)

Fueling the housing boom further were the low interest rates as the Bank of Canada tried to keep inflation within their target zone.

“There is no doubt that record-low mortgage rates have juiced Canada’s housing market,” says Sal Guatieri.

(click to enlarge)

Mark Carney’s repeated calls for prudence have gone unheeded as Canadians kept piling up more debt. Many have treated their credit limits as a challenge, a goal to reach and max out.

Now after Canadian home prices and debt levels have already reached historical highs, it seems that a push to close the barn door is underway.

Last spring mortgage rules were tightened and almost instantly sales plummeted nationwide. Whether this was cause and effect or just pulled forward demand that had dried up is debatable. What is more cut and dried is what a further clamping down would mean to prices.

There is real speculation that the maximum length of amortizations for a mortgage will be lowered again, down to 30 years from 35. Also in consideration is a controversial proposal to increase the minimum downpayment required to buy a home from 5% to a higher figure. Now, some are saying rules are being discussed that would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage, up from its current 50%.

If you don’t think these changes will have a wide, far-reaching impact on the real estate industry in Canada, all one has to do is see the reaction from some in the industry:

Brad Lamb, a real estate broker and developer, says: “All it is a knee jerk reaction by idiot bankers pressuring idiot politicians.”

CREA released a “call to action” last week to more than 100,000 members urging them to write their Member of Parliament (MP) to explain the negative impact additional mortgage financing rule changes would have on home buyers, home owners and the economy.

CREA stated that “these changes would create affordability problems, especially for first-time buyers…further tightening of mortgage rules would have other far reaching consequences for the economy. It risks causing a home price correction, a drop in the net worth of Canadian households, lowered economic growth and reduced tax revenues.

First-time buyers are lifeblood of the real estate industry.  Without them, everything will grind to halt.   This is why its disingenuous to speak of someone being “priced-out forever.”     The moment a large portion of would-be first time buyers are “priced-out”, the market has overreached and is due for a correction.  What has prevented this from happening was the access to credit and low interest rates.

If you’re trying to time the market, it all hinges on how Mr. Carney & Mr. Flaherty plan to act (or not act) in the upcoming year.

32 responses to “The Catalyst & Noose

  1. brilliant article. the problem in the short term, regardless of what these 2 buffoons do is that demand has been pushed forward. There are no buyers period at this point. how that plays out on prices is anyones guess. Without more sellers you wouldnt see things crash. I think best case, prices sit here for a while, maybe a long while. If rules tighten up, it could be an ugly next couple years.

  2. Thank You ! Finally someone has spoken the ugly truth. Since interest rate won’t rise fast enough for a crash to occur, its going to be a slow melt for 3 more years back to 2005 prices.

  3. Great post. I would argue that no changes to CMHC rules are necessary for the correction to continue. Access to credit will make it much more pronounced. The sooner housing becomes affordable and bad debt is purged from the system (and folks pay down debt levels), the sooner we will see real economic growth.

    Low housing cost = good!

  4. Fantastic post Mike! Maybe it’s time for you to repost the graph you created that depicts the correlation between increasing house prices and loose lending standards during our “boom” years. You could also post the same graph backwards to demonstrate what could very well happen if the lending is tightened back up. Ok that’s probably a bit extreme 🙂 Keep up the great work.

  5. Two thumbs up. Far be it from me to espouse a nanny state, but for my part, they could ban all mortgages and credit cards. Unfettered credit access only drives up prices of everything for the 2% of us who try to live within our means and don’t drink straight from the punchbowl.

  6. Happy New Year everyone !!! Mike I love those pictures in your top banner.

    “The sooner housing becomes affordable and bad debt is purged from the system (and folks pay down debt levels), the sooner we will see real economic growth.”

    ALE, in Calgary there are SFH available anywhere from $200k to $10mil. Which one is not affordable?

    Bad debt is debt that can’t be paid back and is being purged out of the system all the time (thus the bankruptcies/foreclosures) even during boom times.

    What is real economic growth? The mid decade boom in Calgary clearly showed the %0 absolute unemployment is %3, which means no matter how good the pay, how easy to find a job, there will always be a minimum %3 of people who don’t want to work or are not capable to get or keep a job due to some impairments of some sort. Right now we stand at %6, or %3 in real terms, how bad is that really? Do you need %0 unemployment to see “real economic growth”?

  7. Very informative post. I don’t see any problems with decreasing amortizations and having stricter mortgage requirements. 1st time home buyers are buying houses that they can’t afford. Sure we’ll see a price correction, but it’ll be inline with historical realestate growth.

  8. CanuckDownUnder

    Great post Mike!

    I see that the CREB has yet another new President. It seems like there’s a new one every year, is that because they think the BS is more believable when it comes from a different talking head each time? To be fair this guy doesn’t sound too optimistic…

    Mike Fotiou says: There is a new CREB President elected every year.

  9. Well it looks like a correction is underway , it seems the slowdown will continue here all year . Prices have to come down as it is a reflection of the economy, however I think at most we will see about a 20% decline over the next 2 years . I know a few people that just recently got laid off , and my buds working in the field have said its steady no hiring but no layoffs either. As for my gal and I we just can’t afford to buy but sure wish we can in a few years.

    Good post as always Mike, bad news that the government is sounding like they are going to tighten up the rules more . Without easy rules I know we won’t be buying as prices are out of are range on our combined income around 75,000 food on the table is more important .

  10. So that means the proposed change from 35 to 30 year amortizations would have a $30,000-50,000 decrease in current house prices. Interesting…

  11. All of this is completely insane. Absolutely ALL of the “demand” for housing in the last few years has been credted by credit expansion. Easy credit, combined with “payment” buyers, low interest rates, lax CMHC reg’s, lax lending standards, etc etc etc have caused false demand. Demand where everyone all of a sudden thought they were a real estate expert, even realtors think the same way. Just because one is a mechanic, or took a weekend mechanics course, does notmake one an expert.
    Summary: easy credit, low interest rates, stupid people = disaster!!

    I give you credit Mike, at least you are honest about what is going on and what is about to happen.

  12. I agree with the others that this is a great post! Hopefully, the dynamic duo will have the ‘nads to tighten the rules back to a safer level.

    Quick questions: What were the CMHC rules prior to the 2006 changes? I gather the maximum amortization was 25 years, but what was the minimum down payment? Also, did CMHC fees also go up in 2006 to compensate for the additional risk of longer amortizations and lower down payments?

  13. Excellent post.
    I beleive Govt should tighten the mortgage rules ASAP to bring the house prices under control.

    I will be a happy person the day, govt passes this rule.

  14. A lot of backslapping here – it’s worth looking at the income part of this equation. If people in Calgary are making 89 % more than 2002 and prices are also up 89%, why is that due to credit expansion? I honestly don’t know what incomes were in 2002 but they have gone up about 5% per year for nine years AFAIK. We are far ahead of any other Canadian city in average annual incomes.

    Perhaps if you could include a graph of incomes to go along with this data it would shed some light?

    Restricting credit to new homebuyers is a good idea though. I wonder if a lot of the renters realize that while it will reduce prices, it will make mortgages harder to come by. This is really only good news for those renting and sitting on a lot of cash.

    Credit availability has been tightened a couple of times AFAIK in the last couple of years (long amortizations, and then credit score rules). Each time it did not effect house prices much. In fact I think when they cancelled the very long amortizations, prices went up a few months later.

    “Low housing cost = GOOD” – Tell that to the Americans and Irish.

  15. Pingback: : Politics and house prices

  16. CanuckDownUnder

    Thanks Mike, any chance we’ll see you run in 2012?

    CoffeeTims, here’s the income part of the equation you want:

  17. CanuckDownUnder,
    Thanks for the link to the income and housing price charts……..enough said!

  18. CanuckDownUnder:

    Those graphs are just flat wrong. It’s so obvious I decided to spend about one minute of googling to get the following:

    Calgary Median income 2000 45852.
    Calgary Median income 2008 91000 (100% increase, not 30%)

    Average house prices did not shoot up between 2008 and 2009. Check data on this site for that. Your source is obviously making stuff up there.

  19. You have a great site Mike, please dont let the likes of coffeeTims bring it down.

    Mike Fotiou says: All viewpoints are welcomed, and respectful discussion is encouraged.

  20. Calgary Median Income
    1. Census families include couple families, with or without children, and lone-parent families.
    Source: Statistics Canada, CANSIM, table (for fee) 111-0009
    SFH Median and Income Comparison

  21. CanuckDownUnder

    The original graph I linked to used average hourly wages so to be fair it is a bit misleading. And they really could have provided a better source than simply “Statistics Canada.”

    Thanks for that great graph Mike. So 2002-2005 saw median SFH prices right in that much referenced 3-3.5X average income range followed by a complete breakdown of that benchmark as the lending standards were loosened.

  22. Canadian Mortgage Trends covered the topic of what 100% of condo fees for qualifications could mean.

    If that person made $60,000 a year, this rule change would slash the mortgage amount they’d qualify for by approximately $48,000 (13%!).
    (Assumes a qualified applicant with strong credit, a 35-year amortization, property taxes at 1%, a 44% total debt service ratio, and a 3.79% 5-year fixed rate.)

    You can see why policy makers have to tread carefully… in this example, just the inclusion of condo fees reduced the buying power of the purchaser by 13%. What if amortizations were decreased as well?

    Read the article here

  23. January Says: “ALE, in Calgary there are SFH available anywhere from $200k to $10mil. Which one is not affordable?”

    All of them. You’re confusing (likely intentionally) price and value.

    All the best to your clients.

  24. Mike, this blog should be required reading by all Realtors as part of their license. Not only the content which of course is excellent well thought out and of course well researched, which is a welcome out there. Best of all it is written by a licensed Realtor who is not afraid to tell the truth and report from Data.
    That takes guts. You inspire me to keep doi g the same on my blog in face of disdain from my customers in the Real Estate industry.
    Also to those commenting your contribution is much appreciated as well.

    Thanks to all

  25. Pingback: Tweets that mention The Catalyst & Noose | Calgary Real Estate Review --

  26. It doesn’t matter which figures you use – house prices increased at a substantially faster rate than incomes.
    Income vs Housing Prices

  27. Pingback: Greg Williamson – Blog » More Perspective on the Proposed Mortgage Rule Changes

  28. I’m actually surprised to see how quickly incomes have risen.

    I am skeptical of the chart at VREAA as it shows salary rising by just over 30% between 1996 and 2009. The StatsCan figures shows a 51% increase between 2000 and 2008, a much shorter time period. The point remains that if mortgage conditions and rates revert back to historical norms current incomes do not support these prices.

    2002 had a price income ratio of 2.75. Assuming from 2008 onwards had income increase at 2%/year then income would be ~97K in 2011. Prices would need to drop to ~267K to reach that same ratio now.

  29. Thanks Mike.
    My point was to show that based on CMHC criteria (and using their calculator with the values provided in my previous post), using today’s median income, MLS median price and mortgage interest for a 25year mortgage, median income CAN AFFORD MLS median price. Please correct me if I’m wrong.

    Mike Fotiou says: Qualification isn’t synonymous with affordability. As well, can you please briefly outline what exactly you entered into CMHC’s mortgage calculator, because using what you stated ($8k/month income, $15k down, 5.5% interest over 25 years) with absolutely no debt, heating costs, condo fees, or property tax, the max mortgage amount I get is $285k (or $300k total including downpayment) Something is wonky with that calculator… will try it again later.


    “Ottawa is clamping down on the mortgage market with a package of measures to deal with Canadians’ record levels of household debt.

    The Finance Department is expected to announce that Ottawa will stop backing mortgages with amortization periods longer than 30 years, cutting off support for the 35-year mortgage. In addition, the announcement by Finance Minister Jim Flaherty is also expected to reduce government backing for home equity lines of credit.”

  31. Mike, here are the numbers I’ve entered: 8k/month for income, 15k down, 200/month tax, 150/month heating, no debt, %5.5 interest over 25y.
    Maybe they’ve just changed the rules … lol.

  32. “January Day says:
    January 16, 2011 at 9:07 pm
    Mike, here are the numbers I’ve entered: 8k/month for income, 15k down, 200/month tax, 150/month heating, no debt, %5.5 interest over 25y.
    Maybe they’ve just changed the rules … lol.”
    They did just change the rules, but that is besides the point. The average house requires maximum leverage; leverage that is only available with the backing of our Government. By focusing on allowable leverage, boiled down to a monthly payment you are misleading (again I’d argue intentionally) your clients into thinking current prices are affordable.

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