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Old 02-10-2012, 04:03 PM
 
701 posts, read 897,828 times
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I would just point out, that before anyone tries to compare the Canada housing bubble to the US and draw conclusions from what happened in the US, realize that the US collapse is very much still underway. So "what happened" in the US is a long way from being over.

Interest rates have nowhere to go but up. Price/income ratios are obscene in many Canadian markets. Canadians are as badly indebted as Americans were at the peak. Barring a boom in the Canadian economy that brings average wages (and debt-service ability) up a lot, it's hard to see Canada home prices avoiding the same fate that awaits any asset that's run up beyond any reasonable fundamentals-based support.

And if you look south, you'll see that it could last a long, long, long time.
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Old 02-10-2012, 04:23 PM
 
Location: Hougary, Texberta
8,607 posts, read 11,109,331 times
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The biggest difference is that in Canada you are unable to get a mortgage for the entire 25-30 year ammortization. We generally buy in 3-7 year intervals with an ammortized payment over 25 years.

If people are underwater at renewal, they'll simply re-ammortize over the full 25 years instead of the reduced interval.

eg. 5 year mortgage ammortized over 25 years. After five years, most people would renew over 20, but instead you'd revert to a longer ammortization for the same balance, reducing your payments.

In the US with 30 year mortgages the checks and balances were fewer as the assumption was that housing prices will always go up, so we'll give you 110% of the value of the home.

You really cant compare the two, as the home finance systems are very different.
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Old 02-10-2012, 04:37 PM
 
Location: Fishers, IN
6,495 posts, read 10,816,945 times
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Quote:
Originally Posted by mikeyyc View Post
The biggest difference is that in Canada you are unable to get a mortgage for the entire 25-30 year ammortization. We generally buy in 3-7 year intervals with an ammortized payment over 25 years.

If people are underwater at renewal, they'll simply re-ammortize over the full 25 years instead of the reduced interval.

eg. 5 year mortgage ammortized over 25 years. After five years, most people would renew over 20, but instead you'd revert to a longer ammortization for the same balance, reducing your payments.

In the US with 30 year mortgages the checks and balances were fewer as the assumption was that housing prices will always go up, so we'll give you 110% of the value of the home.

You really cant compare the two, as the home finance systems are very different.
I know of no way you can get a conventional home mortgage loan in the U.S. at 110% loan-to-value. The GSEs and FHA simply will not allow that. VA loans can go to 102%.

That Canadian borrowers must assume interest-rate risk over a 30-year amortization would seem to present a huge risk to the Canadian market right now (assuming that homes are overpriced and Canadians are too indebted). At the same time, the shorter fixed-rate periods and lack of interest deductibility, as I understand it, also encourage quicker principal paydown.
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Old 02-11-2012, 10:33 AM
 
Location: 130 Miles E of Sacramento
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Just look what happened to America.
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Old 02-11-2012, 06:49 PM
 
Location: Vancouver
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If the bubble pops, then we just need to look down south to see what might/would happen.

Having said that, no one - citizens, investors, government officials - wants a hard landing. A hard landing will result in lots of people seeing the value of their homes suddenly drop resulting in a lot of angry citizens. The government will try to do as much as they can to prop up the system and prepare for a softer landing.
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Old 02-11-2012, 08:03 PM
 
Location: Back & Forth
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Assuming this does happen which is always possible, a couple of ways to prevent personal catastrophe is to:

1. Live within or under your means now
2. Have 6 months to 1 year of cash in a savings account to live off of in case you are unemployed
3. Don't purchase a house you can't afford
4. Your house is an investment, but its also a place to live. So don't panic if house prices come down.
5. Don't treat your house like a bank, don't borrow from the equity
6. Don't have credit card debt
7. Don't a have a line of credit
8. Save for something before you buy it (car, vacation….)
9. Save now.

You don't have to be rich to put these rules into place. Then if you do lose everything in the future, at least you can have peace of mind that you did your best.
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Old 02-11-2012, 10:54 PM
 
Location: Hougary, Texberta
8,607 posts, read 11,109,331 times
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Quote:
Originally Posted by grmasterb View Post
I know of no way you can get a conventional home mortgage loan in the U.S. at 110% loan-to-value. The GSEs and FHA simply will not allow that. VA loans can go to 102%.
Not a chance now, but at the height of the bubble, it was common to take out loans for "improvements" and then buy new cars, electronics, etc.

Inflated appraisals helped people not be at 110% on paper, but the reality was the appraisal wasn't worth the paper it was printed on.
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Old 02-12-2012, 06:42 AM
 
Location: Fishers, IN
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Quote:
Originally Posted by mikeyyc View Post
Not a chance now, but at the height of the bubble, it was common to take out loans for "improvements" and then buy new cars, electronics, etc.

Inflated appraisals helped people not be at 110% on paper, but the reality was the appraisal wasn't worth the paper it was printed on.
But those were through portfolio home equity loans offered by banks. It had nothing to do with the traditional home mortgage market driven by the GSEs, FHA and VA.
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Old 02-12-2012, 10:36 AM
 
701 posts, read 897,828 times
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Quote:
Originally Posted by AskKent View Post

Having said that, no one - citizens, investors, government officials - wants a hard landing. A hard landing will result in lots of people seeing the value of their homes suddenly drop resulting in a lot of angry citizens. The government will try to do as much as they can to prop up the system and prepare for a softer landing.
This is very, very wrong. I desperately wish it weren't, but it is.

Sweeping the world is a huge wave of faith in the concept of "austerity" as the cure for what ails. It's based on the the simplistic notion that if excessive debt is a problem, forcing less debt - and as as fast as possible - must be the solution. It's an easy notion to believe in, because it makes intuitive sense: if there's too much debt, how can getting rid of it as quickly as possible be a bad thing? This is flawed reasoning, as to service/get rid of the debt, you need a healthy, growing economy. And the only way to GET to a growing economy may be to borrow more and invest, the same way that a person deep in debt's best option may be to borrow more to get a university education so as to be able to get a job that pays enough to service the debt, or RIM's best option may be to borrow to hire engineers to build a new product that makes them competitive again. So the level of debt per se isn't the issue, it's whether you're spending the proceeds in productive ways that counts.

This isn't a particularly difficult concept. All businesses trying to grow, all people trying to be better educated to improve their lot, face it every day.

However, at the government level, we seemed to have completely forgotten it in our "austerity" mania. The "who cares who suffers, just wipe out debt" thought process is very much the mode right now. We see it in Britain, in Europe and the US.

Indeed it's a - if not the - core conservative fiscal value, and conservatives are running the show in Britain, Europe, and driving the US into the abyss by forcing inaction. And you may have noticed, they also run Canada.

One can only pray that Harper conservatives are not as off-the-charts as insane as US conservatives. Nonetheless, don't be surprised if the Harper govt. does little or nothing to stop a deleveraging in Canada.

The reason is that conservative thought is simplistic thought: Less govt involvement = better, in all cases and in all places.

(Which is clearly nonsense, as there are some things gov'ts can do far more effectively than individuals, like forecast weather, defend the nation, etc. So the real thrust should be, "what is gov't better at and what is it worse at?")

But that's neither here nor there. The reality is that the people running the show believe less gov't action is always better, by definition, ideologically speaking.

So, logically, if Harper does what the aforementioned nations have done, expect in Canada to see the results the aforementioned nations are seeing: those results are not good. Not good at all.
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Old 02-12-2012, 11:31 AM
 
Location: US Empire, Pac NW
5,008 posts, read 10,809,162 times
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I think I agree with the Economist article. Canada has the beginnings of a bubble forming. They would do well to learn from America's mistake and contain it.

Easier said than done though. Commodity exports can likely soften a blow to the housing market, and maintaining a lending rate of ~3.5% would likely dampen demand in the real estate market. Passing foreign investment laws to limit the number of foreigners flush with cash and willing to speculate could also help, which would quiet "blind foreign" investment.
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