mohican, what's really going on with this latest raise? Is it the closing of the residual risk spread after the effective promise of rate hikes last week, the banks seeing more risk of defaults/arrears, or is there something else going on?
The decline likely will not really start until several years down the road when fixed rate mortgages are now fixed at higher interest rates and those very weak hands that can't afford the higher monthly payments will eventually be forced to hit the bid. The rate of the decline will almost be completely based on where rates are in 2 years. If there are marginally higher than here then I doubt we see much of a decline, but a slight decline/moderation. If rates are significantly higher then a few years down the road we could see a fairly big hit but like I've said for almost a year now on this board I doubt a severe decline is coming this year.
The decline likely will not really start until several years down the road when fixed rate mortgages are now fixed at higher interest rates
Agreed it might take a few years to completely unravel but the fact is right now today there are way fewer people that will be able to buy at current prices(i.e. they just can't borrow as much money anymore). This is because 5 year interest rates have gone up a full percentage points and people that want to go variable have to qualify at the 5 year rate. Also there are people right now that have had their variable rate go up that are starting to feel the heat. Even if they're smart enough to lock in they are still going to be paying more. I don't think you have to wait until 3 and 5 year rates reset for there to be significant downward price pressure.
I used to think that increasing rates wouldnt hurt the market a huge amount because most people are fixed and therefor wont have to renew for a few years.
Then I realized that prices are set by buyers. (well set by sellers I suppose, but they need a buyer otherwise its just a number they hope to get)
Increasing mortgage rates should have an effect just a couple months after they jump (to weed out the pre approvals) because current buyers need a mortgage.
If rates rise dramatically it will severly impact house prices even if most owners can afford to renew at the current rates.
I haven't had time to look at the rate issue in depts so I'm not really sure why the banks are raising rates. It could be that the bond desks are pricing in a bit more of a premium on NHA backed bonds now than before based on perceived political risks associated with CMHC and the unique risks that come with the bond issues - repayment risks, compounding risks etc.
Generally the mortgage rates follow the Gov bonds pretty close but there could be a bit more of a spread developing between the plain vanilla govt bond and the NHA backed bonds than we've seen in the recent past.
I was also going to write what david wrote - now I don't have to.
The housing market does not need mass foreclosures / mortgage rate resets to decline dramatically, it just requires sales to drop and inventory to stay high. Clearly, foreclosures would and mortgage rate renewals would add distressed inventory, adding more downward pressure on prices.
I concur, if rates go up rapidly then the cheap monthly payments are no longer an incentive for buyers to step in, but even though rates have gone up quite quickly in the past month, we're still at ridiculously low levels. Sure prices will drop if rates go up dramatically and buyers are no longer anxious to pay a high price due to low rates but a decline based on that premise would be gradual and in my opinion quite shallow, possibly even a flat market 5-10 years down the road. I'm completely neutral on RE right now, I was quite bullish last summer, now, to be honest I'm somewhat confused as to what will happen next.
I just want to add one thing in terms of inventory. This evidence is 100% anecdotal but just giving real life examples. I personally know of 4 good friends/relatives that have their house or condo up for sale right now and have just put it on the market recently. Each person selling has the same reason, they feel with rates going up, olympics attracting people to the city and the HST that the market will decline in coming months so they'll try to sell and downsize if they can, but if they can't they have absolutely no problem staying where they are now. I wouldn't doubt that a lot of the inventory we see now is "fluff" and sellers just testing the market and we may see many listings cancelled instead of price reductions or below ask sales, most of these people are hoping for a bidding war.
david, that is the concept of "marginal pricing." Market price is set by what buyers are willing and able to pay, not by what sellers want, no matter how long they hold their collective breaths.
"to be honest I'm somewhat confused as to what will happen next."
I don't think you're alone. But, as long as you don't mind waiting an indeterminate amount of time, the journey is inconsequential to what those of us bearish on house prices believe to be a known destination.
I think all this talk about rates or HST or anything else causing the crash is off point. I think it is all about market mentality. We are already seeing a lot of bubble talk in the media. I mean, was there a definite catalyst in 2008? Just the expectation of a drop will be enough to actually cause it. After all the true cause of the crash will be the runup that preceded it.
Vibe, come on.... many of your posts are great but was there a catalyst in 2008? The economy was in recession, peoples equity portfolios were down in excess of 50%, international and Americans that owned homes here or were otherwise going to buy homes were obviously no where to be seen buying, only selling. I agree the HST is a silly reason for there to be a selloff, the only reason I mentioned it was because I know many people putting their houses on the market because they THINK it will effect the market and they don't NEED to sell or even really want to sell so I was illustrating how much of the inventory may be "fluff". JimTan, I hear ya, that's why I said I'm a little bit at a loss as to where RE goes over the next year or two, some factors say higher, some factors say lower, some say flat.. predictions are a difficult thing, perma bulls and perma bears sometimes make it seem like the future direction is very obvious, the direction of the market is difficult to predict, the timing is almost impossible.
"The economy was in recession, peoples equity portfolios were down in excess of 50%"
You have to do better than that. Equity portfolios started cliff diving in September, house prices in Vancouver started cliff diving in June. I guess if house prices start falling in the summer it's time to sell stocks! Every crash can point to a supposed catalyst but IMO it's academic.
It would be silly to argue that RE markets are not affected by the economy or equity markets, but you may want to brush up on the sequence of events in 2008 before reaching such a flawed conclusion.
I have no idea how many listings are serious or how many are only fooling, but I think we can all agree that the price drops of 2008 were preceded by a listings surge that started in the early spring, which was well before any recession warnings managed to penetrate the skin of the public. While we had a few stock market jitters in June, the real damage did not happen until Oct (after the demise of Lehman Bros late in Sept)
As for the current state of the economy and market direction, it would be just as silly to believe that the biggest financial upheaval can be fixed by merely cranking up the printing presses. It would be ludicrous to believe that we are immune to a US deficit that consumes 85% of their GDP, and to RE bubbles bursting around the globe, and entire countries drowning under sovereign debt.
I firmly believe that our mini-bust of 08 was justified by fundamentals like affordability and demographics, and while it may have been interrupted by record low mortgage rates, the bell has now rung for round 2.
What charts are you guys looking at? By mid 2008 the Vancouver real estate market was BARELY off highs and by mid 2008 and at that exact same time the s&p500 was down 20%!!! The US real estate market was absolutely falling off a cliff at that time as well. Clearly the decline was fear based and nothing more judging by the rapid rebound. Bears can claim all they want that low rates caused the rebound, they helped, A LOT, but rates are also low in the US and they haven't rebounded one bit. Bears (and bulls) make it seem like the future is so incredibly obvious, no offense bears but I've read what you all have said for years and years and you have all be incredibly wrong.
Rates were low in the UK and they saw measurable price increases despite being in even more trouble than Canada. The mortgage market in the US is a very different beast compared to the Canadian and UK markets.
For me, it doesn't make a big difference if the mortgage rate is going high in that we can still manage paying our Canadian mortgage investment (Calgary) company. Also, it is just a small sacrifice for me to successfully own a house.
22 comments:
It seems like only yesterday that the blog skeptics were claiming the Government would never allow such a thing.....
:-)
Doesn't Mark Carney have magical powers to control the bond market??? What gives....???
mohican, what's really going on with this latest raise? Is it the closing of the residual risk spread after the effective promise of rate hikes last week, the banks seeing more risk of defaults/arrears, or is there something else going on?
The decline likely will not really start until several years down the road when fixed rate mortgages are now fixed at higher interest rates and those very weak hands that can't afford the higher monthly payments will eventually be forced to hit the bid. The rate of the decline will almost be completely based on where rates are in 2 years. If there are marginally higher than here then I doubt we see much of a decline, but a slight decline/moderation. If rates are significantly higher then a few years down the road we could see a fairly big hit but like I've said for almost a year now on this board I doubt a severe decline is coming this year.
I tend to agree that a severe decline in 2010 is unlikely.
The decline likely will not really start until several years down the road when fixed rate mortgages are now fixed at higher interest rates
Agreed it might take a few years to completely unravel but the fact is right now today there are way fewer people that will be able to buy at current prices(i.e. they just can't borrow as much money anymore). This is because 5 year interest rates have gone up a full percentage points and people that want to go variable have to qualify at the 5 year rate. Also there are people right now that have had their variable rate go up that are starting to feel the heat. Even if they're smart enough to lock in they are still going to be paying more. I don't think you have to wait until 3 and 5 year rates reset for there to be significant downward price pressure.
I used to think that increasing rates wouldnt hurt the market a huge amount because most people are fixed and therefor wont have to renew for a few years.
Then I realized that prices are set by buyers. (well set by sellers I suppose, but they need a buyer otherwise its just a number they hope to get)
Increasing mortgage rates should have an effect just a couple months after they jump (to weed out the pre approvals) because current buyers need a mortgage.
If rates rise dramatically it will severly impact house prices even if most owners can afford to renew at the current rates.
Good point david.
I haven't had time to look at the rate issue in depts so I'm not really sure why the banks are raising rates. It could be that the bond desks are pricing in a bit more of a premium on NHA backed bonds now than before based on perceived political risks associated with CMHC and the unique risks that come with the bond issues - repayment risks, compounding risks etc.
Generally the mortgage rates follow the Gov bonds pretty close but there could be a bit more of a spread developing between the plain vanilla govt bond and the NHA backed bonds than we've seen in the recent past.
I was also going to write what david wrote - now I don't have to.
The housing market does not need mass foreclosures / mortgage rate resets to decline dramatically, it just requires sales to drop and inventory to stay high. Clearly, foreclosures would and mortgage rate renewals would add distressed inventory, adding more downward pressure on prices.
David and Mohican,
I concur, if rates go up rapidly then the cheap monthly payments are no longer an incentive for buyers to step in, but even though rates have gone up quite quickly in the past month, we're still at ridiculously low levels. Sure prices will drop if rates go up dramatically and buyers are no longer anxious to pay a high price due to low rates but a decline based on that premise would be gradual and in my opinion quite shallow, possibly even a flat market 5-10 years down the road. I'm completely neutral on RE right now, I was quite bullish last summer, now, to be honest I'm somewhat confused as to what will happen next.
I just want to add one thing in terms of inventory. This evidence is 100% anecdotal but just giving real life examples. I personally know of 4 good friends/relatives that have their house or condo up for sale right now and have just put it on the market recently. Each person selling has the same reason, they feel with rates going up, olympics attracting people to the city and the HST that the market will decline in coming months so they'll try to sell and downsize if they can, but if they can't they have absolutely no problem staying where they are now. I wouldn't doubt that a lot of the inventory we see now is "fluff" and sellers just testing the market and we may see many listings cancelled instead of price reductions or below ask sales, most of these people are hoping for a bidding war.
http://www.schl.com/en/hoficlincl/mobase/mobase_006.cfm
This blog is like the executive class of discussion compared to the economy class of other places! I love the tone of discussion here.
Chad: fluff or not fluff, it is still inventory and affects how pliable sellers must be with their prices.
david, that is the concept of "marginal pricing." Market price is set by what buyers are willing and able to pay, not by what sellers want, no matter how long they hold their collective breaths.
"to be honest I'm somewhat confused as to what will happen next."
I don't think you're alone. But, as long as you don't mind waiting an indeterminate amount of time, the journey is inconsequential to what those of us bearish on house prices believe to be a known destination.
I think all this talk about rates or HST or anything else causing the crash is off point. I think it is all about market mentality. We are already seeing a lot of bubble talk in the media. I mean, was there a definite catalyst in 2008? Just the expectation of a drop will be enough to actually cause it. After all the true cause of the crash will be the runup that preceded it.
????
Do assets markets crash when economies enter the bull phase? Am I missing something here?
"I mean, was there a definite catalyst in 2008?"
Vibe, come on.... many of your posts are great but was there a catalyst in 2008? The economy was in recession, peoples equity portfolios were down in excess of 50%, international and Americans that owned homes here or were otherwise going to buy homes were obviously no where to be seen buying, only selling. I agree the HST is a silly reason for there to be a selloff, the only reason I mentioned it was because I know many people putting their houses on the market because they THINK it will effect the market and they don't NEED to sell or even really want to sell so I was illustrating how much of the inventory may be "fluff". JimTan, I hear ya, that's why I said I'm a little bit at a loss as to where RE goes over the next year or two, some factors say higher, some factors say lower, some say flat.. predictions are a difficult thing, perma bulls and perma bears sometimes make it seem like the future direction is very obvious, the direction of the market is difficult to predict, the timing is almost impossible.
"The economy was in recession, peoples equity portfolios were down in excess of 50%"
You have to do better than that. Equity portfolios started cliff diving in September, house prices in Vancouver started cliff diving in June. I guess if house prices start falling in the summer it's time to sell stocks! Every crash can point to a supposed catalyst but IMO it's academic.
Hi Chad,
It would be silly to argue that RE markets are not affected by the economy or equity markets, but you may want to brush up on the sequence of events in 2008 before reaching such a flawed conclusion.
I have no idea how many listings are serious or how many are only fooling, but I think we can all agree that the price drops of 2008 were preceded by a listings surge that started in the early spring, which was well before any recession warnings managed to penetrate the skin of the public. While we had a few stock market jitters in June, the real damage did not happen until Oct (after the demise of Lehman Bros late in Sept)
As for the current state of the economy and market direction, it would be just as silly to believe that the biggest financial upheaval can be fixed by merely cranking up the printing presses. It would be ludicrous to believe that we are immune to a US deficit that consumes 85% of their GDP, and to RE bubbles bursting around the globe, and entire countries drowning under sovereign debt.
I firmly believe that our mini-bust of 08 was justified by fundamentals like affordability and demographics, and while it may have been interrupted by record low mortgage rates, the bell has now rung for round 2.
What charts are you guys looking at? By mid 2008 the Vancouver real estate market was BARELY off highs and by mid 2008 and at that exact same time the s&p500 was down 20%!!! The US real estate market was absolutely falling off a cliff at that time as well. Clearly the decline was fear based and nothing more judging by the rapid rebound. Bears can claim all they want that low rates caused the rebound, they helped, A LOT, but rates are also low in the US and they haven't rebounded one bit. Bears (and bulls) make it seem like the future is so incredibly obvious, no offense bears but I've read what you all have said for years and years and you have all be incredibly wrong.
Rates were low in the UK and they saw measurable price increases despite being in even more trouble than Canada. The mortgage market in the US is a very different beast compared to the Canadian and UK markets.
For me, it doesn't make a big difference if the mortgage rate is going high in that we can still manage paying our Canadian mortgage investment (Calgary) company. Also, it is just a small sacrifice for me to successfully own a house.
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