Having a look at China
What I am finding the biggest unknow in predicting is policy and other countries.
Vancouver has this massive housing bubble that has sustained itself. I sold out of the market in 2008 and it has continued up about 10-15%.
We originally bought into the Vancouver market in 93, and that was the top of a bubble. In 2003 when we moved into the home we sold in 2008, we'd only made about 10% on our home and the cost of mortgage, taxes and strata fees had totally destroyed disposable income. We never replaced a vehicle in that time and had no car payments during that time. We also did not have children and we shared a single vehicle for 12 years. By all standards, we had what would be consider a healthy family income. We weren't quite house poor, but we would have been if had to replace a vehicle.
And today housing prices are somewhere between double and triple that 93 bubble that truly stole lifestyle and grossly compromised the ability to save for retirement.
So, how the heck are prices still going up?
One change in policy is a Canadian change around Canada Mortgage and Housing Corporation. I worked in banking from 79 to 84, which was through the period where mortgage rates went to over 20% at one point and I saw scores of people lose their home. It was also a period where CMHC put in measures to ensure people could actually afford the homes they were buying. One measure was 10% down before you could buy mortgage insurance, which was required if there was less then 25% down. Mortgages were limited to terms of 25 years.
Somewhere in this mess CMHC allowed as little as 3% down, but it has been increased back to 5%. The maximum amortization term had been 25 years, but 30 years is allowed now and insurance is required if less then 20% down, not 25%. So together these changes make it far easier to enter the housing market and make it easier for housing bubbles to form or sustain themselves. Also, interest rates were 9% when we first bought.
So, reductions in interest rates, downpayment required and increasing the mortgage term increase what you are allowed to borrow. Our maximum mortgage permitted when we bought was about $290k, and with today's lending standards with the same income and downpayment it would be about $580k, or double. The increased amortizaton period allows for borrowing an extra $65k and not requiring a minimum 10% down allows an extra $220k of borrowing. So, 10% down was the the strongest restriction for home buying with the declining interest rates.
So, locally, access to financing has eased.
But, what about China?
Vancouver is a major port, and international city in Canada. The airport has been expanded several times during my life because of the international flights from Asian cities. And Asian home buyers in Vancouver have remained a huge driving force for the Vancouver market.
One of the things I learned looking into this today is that wealthy immigrants to Canada had to put in a $400,000 deposit with the government which they were entitled to get back after 5 years. So, this would have been prior to the 2007 crash and a lot of that money has been going into housing as it has been released.
He points out that prior to December 2010, investor class immigrants were admitted to Canada provided they could show a net worth of at least $800,000 and deposit another $400,000 with the federal government, which they would get back (interest-free) after five years.
Many of those immigrants are now getting their deposits back, said Muir, adding that B.C. gets over half of all such immigrants to Canada.
"Half a billion dollars is coming back into the pockets of investors and anecdotally you're probably seeing that money being invested into real estate."
As more people get exposure to Canada as an offshoot of globalization, the overseas investor market will rise, Hlinka said. As an instructor at George Brown College in Toronto, he has seen an explosion in the number of foreign students.
“When their parents come to visit, they get an idea of what real estate costs here, and they can’t believe how cheap it is. They want to buy because they think it’s a bargain.”
In addition to China, investors pouring money into real estate are flocking to Canada from the Middle East, Korea, Russia, India and the Philippines as well, said Tony Ma, who owns HomeLife Landmark Realty in Markham.
Canada’s stable government and banking system and the relatively low prices draw investors, he said, pointing out that while condos in downtown Toronto can sell for $800 per square foot, in Beijing, the price is $2,000 per square foot and in Hong Kong it's double that.
Moreover, to control prices, the Chinese government allows each family there to bank finance only two properties — one to live in and one to invest in — and buyers must pay 100 per cent cash for anything above the two-property limit, Ma said.
So, even though Vancouver prices are highly bubbled and out of reach for many Canadians, they are cheap for people from places described as living in "Mother of all Bubbles."
I'd describe $4000/sq ft as the mother of all bubbles as well. I'm into my home in the low $60/sq ft range. I could trade my 3000 sq ft here in for 50 sq ft in Hong Kong... Ok, so home prices are really cheap where I live, but still...
Ok, so, it seems to me that the Vancouver market has had significant spill over from the Chinese housing bubble, which appears to be correcting.
Housing prices in China tripled from 2005 to 2009.
Something like this is truly amazing when you consider wages in China. In China, the masses can't afford these properties.
Here's a thought... I've always looked at this as having to correct at some point as homes aren't affordable any more. But it seems there are many places where homes haven't been attainable at all for generations. Maybe it is the anomaly is that there was a period that the masses could afford homes and we're trending to the norm where home ownership is unattainable for the masses.