2020-09-25
House sales and prices have been surged in Canada including
Toronto area around 18% prices increased in July or August 2020 alone.
They have been speculated that "supply and demand" was
the main driving force. This is sustainable according to realtors.
Let's see a $400K house with 10% ($40K) down payment and mortgage
rate of 1.64% (5-year fixed) would force you to pay $348/week or $1508/month.
In Greater Area of Toronto, a small house is typically sold for more than $750K
or close to $800K, i.e. double mortgage payment $696/week or $3016/month. By
the way you should also check property tax and home insurance. There are many
free mortgage calculators available in Internet.
The above mortgage showed that family net income (after taxes
deduction) of a home buyer must be above $5000/month or more than $85K annual
salaries (before taxes deduction or gross income). This is not affordable for
people without a university degree. These families have $2K left monthly for
food, essential stuff, or other loans such as car loans or credit cards.
Why did house sale surge like this? Low interest rate or mortgage
rate for new home buyers? I doubt this. If home buyers were able to buy a
house, they would before mortgage rate dropped by 1%-1.5%. What do you save
with 1.5% drop? 0.015 * $720K = $10,800 for the first year. Is this a good
cushion for you if house price dropped 10% or more (easily) as in USA or
Australia during real estate market correction? [Ex: $800K house listed as or
sold at $720K before commission during 10% correction - your $80K down payment
evaporated. Would you feel depressed by paying mortgage higher than its market
price?]
* You should do the math for "saving $10,800 in the first
year, but pay 18% more in house prices" would be the best choice or not?
The main house buyers should be money investors. With the interest
rate between 0% - 0.25%, they are not interested to hold cash or bonds. The
equity or stock market is very pricey currently, i.e. too expensive as related
to its earnings. The stock market is likely to be corrected downward or in bear
market as many investors predicted.
Money investors have jumped into housing markets and believed that
they have a hard asset, i.e. a house to back up their investment.
When those investors left because there was a better option such
as stock market at bottom or bond rate raised, the housing market will be
corrected.
CERB was extended until October 3, 2020. Did anyone with CERB
payment buy a house? What will happen when CERB ended? But they haven't found a
job?
I think, realtors are experts in convincing people to jump into
housing markets at all cost.
https://www.cbc.ca/news/business/crea-house-price-1.5724433
-------- Further notes to make information above clearer to some
readers -------
Back the years to years before 2008-2009, house buyers in USA
believed that house prices would go up forever. They were only afforded to pay
mortgage interests, and hope making money as house prices increased. House
prices were corrected more than 30% during 2008-2009 have left many home owners
in USA paying mortgages higher than market price of their own house.
Many house owners declared bankruptcy or gave away their houses to
protect their credit scores.
-----------------
I don't follow Australia's real estate market, but Australia
governments announced that if housing market dropped more than 50%, they would
step in. This meant the market was corrected more than 30% or 40%?
In USA (2008), some market saw more than 30% drop.
-----------------
Many Canadians have friends or relatives in USA. How about asking
them if house prices have been recovered to its peak (probably 2007 price) or
not?
If not yet, home owners have been paying mortgage higher than
market value for 13 years. Are they depressed?
If yes, how many years have they waited for this happened? This
would help to estimate waiting years for Canadian home owners paying for under
water house price. By the way, US people are wealthier than Canadians, i.e.
they are more likely to buy a house to push its price up faster.
-----------------
Common questions for home owners purchased a house before real
estate market collapsed, i.e. underwater house price:
[Assuming you recently purchased a $800K house, and market just
corrected 10% down]
- Why did you buy a house while many analysts have warned bubble
in housing market?
- $80K of saving in years had been evaporated. Will the house
price slide down further or not?
- What if the prices slide down to 30% correction as in USA? This
means $240K would be erased?
- When will the house price recover to what you had paid? How many
years would you wait?
- Should you sell your house now or hold on waiting for a recovery?
Those were common questions that you will ask yourself every day
without an answer, if housing market corrected. Is this depressing?
-----------------
This web site should give you an idea the maximum house price that
a Canadian family could stretch their budgets before getting exhausted:
Google for "average family income in Ontario" from
statistics by government of Canada. Realtors may create one for their clients.
When house buyers exhausted or waited, housing market would be
corrected.
2016 data for Toronto:
- Average household income before taxes: $109,480
- Median household income before taxes: $78,378
- Average household income after taxes: $87,993
- Median household income after taxes: $68,627
What should be the average salary increases annually when your
annual salary above $50K? 2% - 5% a year? Do your math to estimate 2020
figures.
-----------------
Assuming the median income earner in 2016 got 5% annual salary
increase every year to $83,416/year in 2020. What would be the maximum mortgage
that they could afford based on https://www.cibc.com/en/personal-banking/mortgages/calculators/affordability-calculator.html
-
Annual income $83,416
-
8.69% down payment $60,000
-
Mortgage rate 2.14% on 5-year fixed.
-
Amortization period of 25 years
-
Mortgage principal would be $630,122 +
mortgage default insurance $25,205 à Total
mortgage amount $655,327
It means that this family would only be able to purchase a house
listed at $655,327 + $60,000 = $715,327. The additional expenses would be land
transfer tax, lawyer fees, etc. This web site stated that your maximum purchase
would be $690,122.
Will this family step in when the house price corrected from above
$800K to $690,122? This family would ask themselves the same questions as home
owners with their houses under water.
It should be noted that the above example was the best scenario,
i.e. maximum 5% annual salary increase for 5 years in a row and this family was
waiting to purchase a house. If the increase was lower than 5% or this family
has owned a house, you should expect people waiting for an entry at lower price
than $690,122.
* I got mixed up with net
income and gross income in the example above while entered in the mortgage
calculator. Perhaps I'll try again later. You could try your own numbers.
* I think, they listed median
gross income for 2019 in this post
https://dailyhive.com/toronto/average-years-toronto-home-zoocasa-report. $78,373 is median household income
before taxes in Greater Toronto Area.
* FYI: Most of Canadians like to travel during their vacations;
therefore you should wipe out $5K - $10K from their annual family net income in
your calculation.
- Annual family net income: annual salaries after taxes deduction
(lương g/đ sau khi đóng thuế)
- Annual family gross income: annual income before taxes deduction
(lương g/đ trước khi đóng thuế)
* In the
current pandemic climate, Ontario is facing a possible shut down again, i.e.
increasing jobs loss. Why could housing market go up 18%? Who are the buyers?
-----------------
2020-10-01
For people living in smaller cities, you should be aware of domino
effect occurred by housing correction in a large city such as Toronto, i.e. if
downward correction happened in GTA, other housing market in Ontario would
follow.
For Peterborough city of Ontario, you could take a look at this
web page http://areascore.ca/area/Peterborough_ON/income_median-income-statistics.
Statistic Dollar
Amount
Median personal income $29,146.10
Median employment income $45,272.40
Median family income $69,352.00
Median household total income $55,708.40
Median after-tax household income $49,723.50
The median family income was $69,352 before pandemic occurred.
Using this median gross income for the above affordability calculator, you
should get the following data
-
Annual gross income $69,352
-
5.45% down payment $30,000
-
Mortgage rate 2.14% on 5-year fixed.
-
Amortization period of 25 years
-
Mortgage principal would be $520,000+
mortgage default insurance $20,800 à Total
mortgage amount $540,800.
It means that this family would only be able to purchase a house
listed at $540,800 + $30,000 = $570,800. The additional expenses would be land
transfer tax, lawyer fees, etc. This web site stated that your maximum purchase
would be $550,000.
There are some important information about this city, which you
should know
-
Most of residents are pensioners, which mean
their average family income was
“The federal
OAS pension and GIS payments plus have an annual private income of up to $1,992
if you are a single senior or up to $3,984 if you are a senior couple.”
They have gross income less than $4000/month or $48,000/year for a couple. If a
pensioner passed away, a single pensioner couldn’t afford to pay property
taxes, maintenance fees, home insurance, and mortgage for a house.
-
This city is the land of farmers, but they
have owned farms and houses.
-
House prices in Peterborough have been
doubled since 2015. Why? Many new residents sold their houses in Toronto and
purchased one here to net profits. What is their main concern? It would take
them more than 1h30min car ride (each way) to work in GTA, because there are
not many jobs in this city.
-
Good small houses in this city have popped up
above $450K. Do you think that Peterborough residents could afford a $450K
house?
-
High income earners of Peterborough had owned
a house. Many of pensioners have sold their houses to relocate to more relaxing
cities as Peterborough’s daily expense is getting expensive.
In addition to domino effect, when GTA’s housing market corrected
to affordable levels, many GTA’s workers would sell their properties in
Peterborough and moved back to GTA to save commuting time and gasoline cost. However, GTA workers must wait for external buyers, e.g. GTA
residents, to buy their properties as Peterborough residents either owned a
house already or couldn't afford one.
Related good articles:
-
Employment reached 94.1% of its February
level and the unemployment rate fell 0.4 percentage points to 10.7%. Sep 4,
2020
-
Mortgage deferrals will soon end for many
Canadians. Then what?
https://globalnews.ca/news/7286008/coronavirus-mortgage-deferrals-end-canada/
-
Swiss bank UBS says Toronto has 3rd biggest
housing bubble in the world
https://www.cbc.ca/news/business/ubs-toronto-housing-bubble-1.5746432
-
These homes are still worth less than they
were in 2007 in USA
https://www.marketwatch.com/story/these-homes-are-still-worth-less-than-they-were-in-2007-2017-09-21
-
CERB is ending, here is what to know about
your benefits
https://www.ctvnews.ca/politics/cerb-is-ending-here-is-what-to-know-about-your-benefits-1.5121648
-
Toronto home prices not expected to bounce
back till 2022
If you’re unsure about the housing market, you should wait for the
mortgage deferral AND emergency benefits from government ended. The housing
correction could cost you hundred thousands of Canadian dollars, so it's up to
you to play games.
If housing market collapsed, you have the name of organization and
their staff to go after, e.g. RE/MAX and those hosts advertised Toronto
properties on the show Hot Property of CP24. https://torontostoreys.com/canada-housing-market-remax-cmhc
For people living outsides of Canada, the following web site is
very popular in searching and viewing a property. Just filling in the city,
where you're interested in finding a house for its asking price: https://www.realtor.ca
Usually the mortgage rate goes in opposite direction with house
prices. Let’s say the current mortgage rate is up 2% - 3%, the house prices
drop 10% - 20%, and you should be saving money or losing money on mortgage
payment or principal mortgage? This scenario is good for both home buyers and
bankers. You could use a mortgage calculator to estimate mortgage payment and
principal mortgage for changes in mortgage rates and house prices.
-----------------
2020-10-03
The majority of house prices listed in Toronto are way above my
estimate around $1,000,000 - $5,000,000. The estimate for median income earners
could afford a mortgage of approximately $690,000. Those median earners represent
large potential house buyers in the Greater Toronto Area.
The question should be “should you jump in to purchase a house, if
corrected 10% - 20% down?”
Assuming houses were corrected -20%, which would make lots of
buyers see as good deals. The main issue was if you bought a house in between
$800,000 - $4,000,000, you would have to pay mortgage. If you could not afford
mortgage payment for any reasons, you would list your property in the market
AND hope the potential buyers at $690,000 to buy your house?
According to research in one of the articles above
·
“As of the
end of June, some 760,000 Canadians, or about 16 per cent of mortgage holders,
have taken advantage of mortgage deferral options rolled out by banks since the
middle of March.”
·
“The
research, which dates back to June, finds that one in five households has
enough financial buffers only make just two months of mortgage payments and
about one-third can make up to four months of payments. In other words, without
a regular income, many homeowners wouldn’t last long.”
20% - 30% of 760,000 house owners would be able to float their
mortgage payment between 2 months – 4 months, i.e. 152,000 survived 2 months
AND 228,000 survived 4 months with mortgage payment, if they could not find a
job. By the way, they must be able to afford “an increase in mortgage payment as
mortgage interests accumulated during deferral periods”.
You should check with banks to see the end date of mortgage
deferral period, which is different for each lender.
For new Canada emergency benefits replacing CERB “Canadians will be able to apply for the
three new benefits through the CRA for one year up until Sept. 25, 2021.”
If house owners were unable to find a job before September 25, 2021 and
mortgage deferral period ended, they would sell their houses as quickly as
possible. Otherwise lenders would seize their houses and sell “as is.”
If you purchased a house between $1,000,000 and $5,000,000 with
10% down payment, 2.14% interest rate and 25 years of amortization, your
monthly mortgage payment would be between $3,872 and $6,454. For 4 month cash buffer,
you must have in your saving account an amount between $15,488 and $25,816. You
are very rich. [For sellers, the mortgage rate has just come down recently;
therefore your rate may be higher, i.e. higher cash buffer while waiting your
house is sold.]
-----------------
2020-10-04
How to check the annual interest rates received by money investors
by holding cash? Usually we should check the interest rates set by central
banks such as Bank of Canada (BoC), US Federal Reserves (US Fed), European Central
Bank (ECB), Bank of England (BoE), etc. You could google those key words.
What is the Bank of Canada interest rate?
“Bank
of Canada maintains commitment to current level of policy rate, continues
program of quantitative easing. The Bank of Canada today maintained its target
for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate
is correspondingly ½ percent and the deposit rate is ¼ percent.”
What is the US Fed interest rate 2020?
“In
September 2020, the US Federal Reserve maintained its target for the federal
funds rate at a range of 0% to 0.25%.”
What is ECB interest rate?
“Against
this backdrop, the ECB decided Thursday to keep its interest rates and
coronavirus-stimulus program unchanged. The interest rate on the ECB's main
refinancing operations, marginal lending facility and deposit facility remain
at 0.00%, 0.25% and -0.50%, respectively. Sep 10, 2020”
What is Bank of England or UK interest rate?
“How
do interest rates work? The Bank of England sets the bank rate (or 'base rate')
for the UK. The current rate is 0.1%.”
Bonds offered by companies are higher risks, because a corporate
could declare bankruptcy. Therefore company’s bond rates are higher than a government
bond rate. Let’s see Canada bonds and US bonds by google those key words, e.g.
Canada bond yields.
What is the Canada bond rate?
“The
Canada 10Y Government Bond has a 0.567% yield. Normal Convexity in Long-Term vs
Short-Term Maturities. Central Bank Rate is 0.25% (last modification in March
2020). The Canada credit rating is AAA, according to Standard & Poor's
agency.”
What is U.S. Treasury Yields?
Maturity Last Yield Previous Yield
3
Month 0.08% 0.08%
5
Year 0.29% 0.27%
10
Year 0.70% 0.68%
30
Year 1.48%
1.45%
What are UK government bond yields?
“The
United Kingdom 10Y Government Bond has a 0.252% yield. Yield Curve is flat in
Long-Term vs Short-Term Maturities. Central Bank Rate is 0.10% (last
modification in March 2020). The United Kingdom credit rating is AA, according
to Standard & Poor's agency.”
What are European government bond yields?
10-Year
Government Bond Yields
Country
Yield 1 Month
France -0.26% -9
Italy 0.78% -23
Spain 0.22% -13
Netherlands -0.43% -7
Those treasury yields and government bond yields are currently
very low; therefore money investors are not interested in holding cash or
purchased government bonds. They must invest in higher risk security such as
stocks or corporate bonds. However stocks prices are very high as compared to
earnings, e.g. stock Price/Earning (P/E) is over the roof. Many companies are
struggled because of COVID-19, thus corporate bonds are very risky.
When a corporate declared bankruptcy, usually bond holders are the
first line of investors to get left over asset of that corporate, and then
stockholders. A house is a hard asset, which could be rented out to cover some
loss if downward corrected. Probably money investors have poured money in real
estate markets around the world, and speculated “low mortgage rates” to home buyers to trigger buying interest or to
push house prices upward.
Some big and stable private banks (e.g. Bank of Montreal, RBC, TD,
or Scotia Bank) offer low 5-year bond to their investors, e.g. 0.75% 5-year
fixed rate, with 0.5% higher than government bonds. Many investors would
purchase private bank bonds. Big banks would use this amount of money to offer
2.14% mortgage rates to home buyers, i.e. banks are making 2.14% - 0.75% =
1.39% for 5 years with free money in this example.
If your down payment for a house is less than 20%, you must pay around
2% default insurance to Canada Mortgage and Housing Corporation (CMHC):
How
does CMHC mortgage insurance work?
“Mortgage
default insurance, which is commonly referred to as CMHC insurance, is
mandatory in Canada for down payments between 5% (the minimum in Canada) and
19.99%. Mortgage default insurance protects lenders, in the event a borrower
ever stopped making payments and defaulted on their mortgage loan. Jun 5, 2020”
How
is CMHC calculated?
“The
CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan
and is based on the size of your down payment. The higher the percentage of the
total house price/value that you borrow, the higher percentage you will pay in
insurance premiums. Mar 31, 2018”
If a house buyer made a down payment less than 20%, and housing
market was corrected to force home buyer default a mortgage, banks were secured
by CMHC insurance, i.e. not impacted their investment.
If a house buyer made a 20% down payment, and default a mortgage
because its prices dropped more than 20%, e.g. -30% corrected. Bank’s
investment in this house would be impacted around -10% of original purchase
piece. Bankers should only be worry with house buyers, who made 20% down
payment.
-----------------
Based on historical data, many home owners have been winners or
savers by selecting variable mortgage rates. Recently I asked a mortgage broker
about mortgage rates for a possible house purchase, and he offered 1.64% on
5-year fixed rate OR 1.60% 5-year variable rate (prime rate minus 0.85%)
5-year fixed rate means that your mortgage payment doesn’t change
for 5 years. 5-year variable rate (prime
rate minus some percentages) means that your mortgage payment could be
increased or decreased (varied) slowly based on the prime rate.
“The
prime rate in Canada is currently 2.45%. The prime rate, also known as the
prime lending rate, is the annual interest rate Canada's major banks and
financial institutions use to set interest rates for variable loans and lines
of credit, including variable-rate mortgages. Jun 23, 2020”
You should pay attention to news posted by central banks around
the world especially US Fed and BoC to see the direction of prime rate, which
should be up or down based on the interest rates set by central banks. Usually the prime rate equals the central bank
rate plus some points.
Recently US Fed announced that they didn’t see any possible
increase of interest rate until 2022 or 2023, i.e. 2 to 3 years from now. After
that we could see an increase rate by 0.25% per quarter or per year depending
on the performance of their economy OR may be flat. The odd of decreasing rate
set by central banks is very low as US Fed and BoC are not interested in
negative rates. Only ECB started negative rates forcing other European banks
entering negative rates, which have fueled their real estate markets in bubble
territories and trouble for fixed income investment industry.
Based on the information above, you should select the 1.64% 5-year
fixed rate, because 0.04% is not a good saving, if central banks raised rate by
0.25% in 3 years. The prime rate could be increased/decreased at anytime, but
it will increase if central bank raised its rate. Do your math to figure out
concrete numbers. By the way you should have better sleeps if you knew how much
you are paying monthly or bi-weekly for a mortgage than a sudden increase of
mortgage payment.
Author: Vinh
Nguyen, B.Eng., LLQP
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