Tuesday, November 06, 2007

Canada's Home Buyers Skating on Thin Ice


Canada's housing market may be peaking but that isn't stopping some first-timers from taking the plunge into the already overheated market.

A business story in today's Toronto Star tells of desperate buyers getting in way over their heads. One couple mentioned set a $450-thousand limit for themselves but, after losing six bidding wars, finally signed on to a $700-thousand purchase. How they intend to pay for it wasn't mentioned.

"According to Statistics Canada, Canadians owed $760 billion in total debt in 2005, three-quarters of which was in mortgages, up 43 per cent from 1999. Household debt has been increasing annually at 4.7 per cent for the past three decades, outpacing gains in disposable income."

Stats Can also reports that savings are pretty much a thing of the past. In 1982, personal savings ran at 20% of after tax income. Today that's down to a meagre 1.8%. With steadily increasing debt and constantly declining liquidity, young Canadians are becoming far more vulnerable to economic jolts such as interest rate increases or a downturn in real estate prices. This is a candle that's burning at both ends.

3 comments:

Anonymous said...

I've been berating my friends for a year and a half about this very issue. What happens in the U.S. will be mirrored in Canada, we are not immune..

Yes we have far less exotic loan devices (but some people have taken 100% mortgages via HSBC and a few others) but we do have average property values which are totally non sustainable. The percentage of takehome pay to cover housing is going up, savings are going down, personal credit card debt is also at record levels and a U.S. recession/depression will undboubtedly impact our export market and overall economic growth.

Had I more captial and less ulcers I could have made a killing in the last year. Shorting U.S. homebuilders, lenders and the U.S. dollar. I took the more conservative route and stocked up on the Anti Money, Gold and silver bullion and equites and have done resonably well.

The debt levels of Canadians is not sustainable. The BoC is stuck between a rock and a hard place- inflation fears vs a high value currency that will kill export jobs. Either solution will hurt Canadians, whether racing with the U.S. dollar towards zero value or losing jobs. Personaly I believe a strong currency approach is most fair to savers and the fiscally responsible, inflation favours the fool hardy and government.

Despite my arguemnts and examples seveal friends have taken $400,000 leaps of faith in the last year, I now keep my mouth shut since they won't want to be reminded "I told them so"when prices come crashing down in 2 years.

So far I've been correct and I still stand by my prediction of 1.10 dollar by year end and $950 gold.
Houses will roll back 25% in comming years and I will be there with my pile of shiny metal ready to buy a discount hobby farm.

It's going to get ugly!!!!

The Mound of Sound said...

I fear your predictions may be right, GAB. I practised bankruptcy law before retirement and I've seen this picture before. It's always the greedy or the frightened that get the worst of it. I have no sympathy for the greedy but immense pity for those so desperate to have a place to start a family that they panic and take the gamble.

Anonymous said...

investors looking for renters will also be a factor