Record Low Interest Rates

Record low interest rates for mortgages are keeping Toronto's real estate market at record highs. Torontonians are buying houses for incredible prices (often in bidding wars) despite the fact that we still have a pandemic going on.

Honestly I wonder if we had a war - possibly even a major war - if we might still be seeing this trend so long as the interest rates are super low and people feel safer in "a new house in the suburbs".

Meanwhile the CERB, CESB and various other measures like a moratorium on evictions have kept the Canadian economy alive, but in the next few months CERB and CESB are being phased out and evictions will resume. Those measures kept the Canadian economy going and Canadians spending money.

It could be that we shall see the true effects on the economy during the next 9 months if we see more companies declaring bankruptcy. There has already been dozens of large scale bankruptcies during the past 5 months of the pandemic, effecting tens of thousands of employees.

Similarly low oil prices means that various parts of Canada have shut down oil production, and yet gasoline prices remain high - proof that gas companies are continuing to unfairly gouge Canadians.

Thus I cannot help but feel that even though Canadian home buyers are benefiting currently from record low interest rates that we are standing on a precipice of what could be the biggest recession or depression in decades. I don't think the current situation is sustainable. Housing prices will have to crash eventually when a recession finally hits, and hits hard.

Canada managed to avoid the housing bubble bursting in 2008. Instead prices have continued to balloon, largely due to low interest rates.

But even record low interest rates must have a limit for how much they can stave off a recession or depression.

Is Household Debt the real estate market's Achilles Heel?

I have just returned from the studios in the CBC building in downtown Toronto where I was on CBC Radio discussing "My Quest for a Condo" and also Toronto's real estate bubble.

During the interview I asserted that household debt is the largest factor in Toronto's (and Canada's) real estate market.

So am I right? Is Household Debt the real estate market's Achilles Heel?

Yes, but its not the only factor.

The problem with having a radio interview is you can really only provide snippets of conversation within your allotted 6 minutes. There are many factors that go into the hows and whys the Toronto real estate market is going to have a US-style collapse within the next 3 years.

Exactly when I cannot predict, but I can pretty much guarantee it is going to happen when you consider ALL the factors.

#1. 60% of recent buys in Toronto's new condo market are from investors looking to flip the property for a profit. (Source: real estate research firm Urbanation) When Toronto's real estate market hits a serious bump they will sell the properties in a panic.

#2. Interest rates in Canada are currently super low, but if they go up too quickly it will hurt home and condo sales. If they don't go up or barely go up it will encourage an expansion of the current bubble by making credit too easily available.

#3. Foreign investors are taking advantage of Canada's banking and mortgage system wherein the banks put up the cash, the government takes the financial responsibility via the CMHC (Canada's version of Fannie Mae and Freddie Mac) as mortgage insurer and the foreign investors can cut and run if anything goes wrong. Real estate speculators are like sheep. They flee any market they can't make a profit in.

#4. Household debt in Canada is at an all time high. $1.61 TRILLION Canadian dollars.

#5. In 2012 banks started to refuse to give many Canadians more credit because they've recognized the threat of household debt (and financial losses from future bankruptcies). Too many bankruptcies will hurt bank profits so instead they're cutting back on credit availability.

#6. Less credit in Canada's current economic climate means a lowered consumer confidence level. People go out and spend less, tighten their belts and lack of spending = downward spiral into recession.

#7. Rising cost of living in Canada. Prices of food, gasoline and basic goods are all going up (partially due to high oil prices). Since food, gasoline and toilet paper are considered necessities it cuts into the household budget for other things (such as saving up for a house or condo).

#8. Toronto developers are currently building almost 3 times as many skyscrapers as New York City is currently building. Its a lot of skyscrapers. History has shown that developers start building skyscrapers en masse right before a major financial meltdown because land becomes too expensive but credit is too easily available so the only solution is to build vertically.

#9. Many investors rent out their condos and wait for a good time to sell. The rent income pays for the mortgage and its low risk. However if condo prices stagnate or prices drop it becomes high risk and they will be looking to sell in a hurry to prevent taking losses.

I could go on and on, but essentially the economy and housing market is a proverbial House of Cards and household debt/credit is the linchpin which holds it all together.

All it will take is a nudge to cause the collapse.

And here is the nudge that will do it:

Toronto currently has 148 high-rises and skyscrapers being built including 105 new condo buildings (and more scheduled for 2013 - 2015). Right now we are building 27,504 (a 14% increase), but there isn't the demand for it. When that extra 27,504 condos hits the market during the next 3 years it will cause condo prices to drop dramatically... which combined with household debt and people reneging on mortgages (or banks refusing to give them refinancing) will push a market correction.

So yes, household debt is the Achilles heel... but its too much condo supply during the next 3 years that is the ticking time bomb waiting to go off.

Who is to blame for Canada's housing bubble?

Its so easy to point fingers.

Banks. The government. Local politicians / mayors. The real estate industry. The housing industry. Greedy sellers.

Canada’s housing market has been relatively stable for over a decade, with the notable exception of Toronto and Vancouver which are the country’s hottest real estate markets. As Canada’s largest city Torono's home prices have risen 10.5% over the past year alone. The condo industry in Toronto is so hot that there is now three times as many cranes dotting Toronto’s skyline as there are in New York City.

Many real estate analysts are becoming increasingly worried that Toronto, Vancouver and Calgary are in an American-style housing bubble which could lead to an implosion of prices and a recession.

The analysts are not alone. Bank of Canada Governor Mark Carney is sounding the alarm over the growing level of household debt, while maintaining the overnight lending interest rate at a near-record low level of 1%. Mark Carney's hands are a bit tied in this matter. He can't raise interest rates without risking being the needle which bursts the bubble.

What is bizarre is the economy in Toronto and Vancouver are both stagnant and yet the prices are rising unusually fast. In contrast cities like Edmonton and Saskatoon where the economy is booming but home prices are stable.

Some people argue that the Canada Mortgage and Housing Corporation’s (CMHC) policies are to blame because they encourage overseas investment in Canadian real estate. They claim that investors from overseas have corrupted the system and is creating an artificial and potentially dangerous real estate bubble that will ultimately lead to a recession in Canada.

There is of course a quick and easy solution to this. Ban overseas investors from buying homes and condos in Canada.

The CMHC controls the majority of Canada's mortgage insurance and securitization markets and guarantees all (100%) of the principle balances and interest rates on insured residential mortgages.

The problem is that the Bank of Canada has such low interest rates that in combination foreign investment and low interest rates in causing the bubble to grow at an exponential rate. Investors are particularly attracted to Toronto and Vancouver's markets because of the recent history of rising housing prices.

Another problem is Canada's artificially low interest rates have been kept low for since 2008.

The longer interest rates remain low and investors keep flooding the real estate bubble the worst it will be when the bubble bursts and a market correction takes place.

Trying to prevent a correction however might make foreign investors skittish and cause them to withdraw from the Canadian real estate market in a hurry. Thus a preventive measure could even kickstart the market correction.

Foreign investors are not wholly responsible for creating Canada's housing bubble. Investors are sheep. They go where they see a financial opportunity with little risk.

Foreign investment is normally a good thing. It creates jobs and adds to the local economy. More condos and homes being built means more money for developers and construction works. More rental properties become available. The problem however is that investors have a tendency to flood markets. The home prices and rental prices go up, people get into household debts they cannot afford due to outrageous mortgages... and when the fit hits the shan everyone with a mortgage loses their shirts.

While its true that in Canada we crave foreign investment, that is only true so long as the investors stay the course and don't all back out at the same time. We need to avoid an artificially inflated housing market that will bring the whole economy crumbling down when the bubble bursts (see the USA, circa 2007-09).

So who does the bulk of the blame lay with then? The answer is the blame can be placed squarely on government policy.

By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans whether you are a foreigner or a Canadian. A foreigner with a good credit rating can invest in Canadian real estate, borrow money from the Canadian government to invest in our own housing market... and if anything goes wrong they're not Canadian and don't have to face any financial responsibility here. If everything goes smoothly for the duration they eventually withdraw their money (with a decent profit) and put it to use elsewhere.

Having such weak policies and lending standards is Canada's Achilles heel.

A report from the Reason Foundation in the USA found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Governments simply cannot price risk accurately while banks and private lenders have every incentive to price risk appropriately because its their money on the line. If the government loses money its the taxpayer that ends up with burdened and governments are far too willing to take unnecessary risks when there is no incentive to insure success.

If we were to try to prevent an American-style housing bubble bursting we should not have the Canadian government guaranteeing mortgages. Let the banking industry put the money up themselves and take on the risk.

After all why should taxpayers be asked to take on the risks of bankers and foreign investors? If people want to invest in Canada, fine, but they should do so without using government money as collateral.

The USA is already starting down that path. People looking to get a home purchase loan are now looking at companies which guarantee their own mortgages. ie. Mortgage Solutions of Colorado and similar companies are reducing (or removing entirely) their dependence on government guarantees.

Part of it may be because companies have realized that the American government isn't going to guarantee mortgages willy-nilly any more. Another part of it is Americans have become much more scared of mortgage contracts signed during a bubble and they think it is less risky to deal with a company which has its own money and isn't borrowing against itself to prop up its business.

Sadly I don't think Canada will learn from the USA's mistakes. We are just going to repeat the problem.

Housing correction coming says CIBC

CANADA - The Canadian housing market is due for a crash (ahem, a correction), but there are those who say it will likely be a slow decline instead of a sharp drop, according to the Canadian Imperial Bank of Commerce.

“While house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual,” says Benjamin Tal, deputy chief economist at CIBC. Tal believes the market will not crash abruptly because the two key triggers for a major drop are absent from the market.

“A significant and quick increase in interest rates and a high-risk mortgage market that is sensitive to changes in economic factors are not in play in Canada,” says Tal.

(But is that the only things that can spur a real estate market crash?)

The CIBC report joins a chorus of other analysts forecasting a correction in the overheated Canadian real estate market.

Capital Economics says housing in Canada could be overpriced by 25%. With the average price of a Canadian home now at $346,950, home buyers who wait until after the drop could save $86,000.

Many analysts think that a crash is an unlikely worst-case scenario. However even if home prices dipped by 10%, that would amount to $34,000 in savings when buying a home.

Or house prices might simply stagnate for several years, says Tal.

“The likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation,” Tal said. “Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction.”

Affordability has become a major issue for home buyers as average prices have risen every year for more than a decade to what is now ridiculous levels in cities like Vancouver or Toronto [where I live].

To me if the housing market falls, fast or slow, it doesn't matter to me, it increases my chances of being able to buy a place someday.

Canadian top banker warns condo bubble will burst

CANADA - Its not very often that a top banker says the sky is falling, so when the Bank of Canada Governor Mark Carney starts warning of a housing price bubble, particularly in big city condo markets, that is a signal that many Canadians should be worried about buying a condo in the near future... or else you might get burned on the price.

Once interest rates rise to normal levels (right now they're in recession/recovery mode) the higher interest rates could (and probably should) cause the condo bubble to burst. This will be good news if you want to buy a condo after the bubble bursts. Bad news if you're trying to sell and don't want it to burst right away.

In a speech in Vancouver, Mark Carney said the overheated housing market is in danger of taking of “expectations” overtaking the normal workings of supply and demand.

He says “the classic market emotions of greed and fear—greed among speculators and investors and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Mark Carney suggested that an expected cooling off of the economy may take some steam out of real estate, and that heavily indebted Canadian households are at risk of suffering financially when interest rates rise above today’s unusually low levels due to the recession. Thus when the economy recovers some people may end up losing their shirts when condo prices collapse.

Mark Carney notes that Canadians are now as deeply in debt (relative to their income) as consumers in the United States and Britain, which both suffered a financial meltdown in 2008 and 2009. Canada has yet to get hit by its share of the housing market meltdown, something which hasn't happened in Canada since the 1980s.

“The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years,” says Carney.

Mark Carney believes it was appropriate for the central bank to keep its influential overnight interest rate at historically low levels since early 2009 to spur business activity and speed economic recovery. But low interest rates “even if appropriate. . . .create their own risks.”

Canada “should not be lulled into a false sense of security by current low rates,” says Carney, who also says that Canadian “households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”

The Bank of Canada governor has been warning for two years that many overexposed households will face a rude awakening when interest rates go up. In the latest decision on May 31, the bank maintained the rate at 1%.

See Also
Canadian debts piling up
Young Canadians racking up debt faster

Toronto Market Sluggish

CANADA - A friend of mine is trying to sell his condo near the CBC building in downtown Toronto. Its a hot desirable location, close to the downtown financial sector. Sadly he is not alone, a lot of people are trying to sell their condos downtown and there is not a lot of buyers this Spring.

Indeed stagnation seems to be the trend nationwide.

According to March price data from the Canadian Real Estate Association the average urban prices are up 4.3%, if you ignore the jet-propelled Vancouver market (up 13.4% and already way ahead the rest of the Canadian market).

In contrast Toronto is up 4.9% and Montreal is up 4.6% compared to last year. The problem however is that while prices soar, the rate of sales slow and cool down dramatically.

Douglas Porter, deputy chief economist at BMO Capital Markets, says that the housing market will continue to slow sales in 2011. While personal incomes may be up 5% compared to last year, household debts are also skyrocketing in Canada which means most people cannot afford to buy a new home.

Some analysts think that home price increases will slow further to a snail's pace or even stop entirely by late this year.

According to BMO Capital Markets the ratio of prices to incomes is about 14% higher than its long-run average, and therefore is "moderately overvalued." (Before the bubble burst in the USA in 2005 the ratio was 26%, or "highly overvalued".)

Even moderate overvaluation hurts home sales and market sustainable.

If interest rates go up it will hurt the market even more.

CIBC World Market and Royal Bank economist Robert Hogue also think the housing market will stall this year. Bad news for people wanting to buy or sell.

Here is a thought... if you are trying to sell a home or condo, maybe you should actually do the unthinkable...

LOWER YOUR PRICE!!!

In a February report on affordability across Canada, Royal Bank economists found a typical two-storey home in Vancouver cost $780,700, double the Canadian average. Such a home would have cost $342,600 in Montreal or $570,100 in Toronto.

In February Toronto did have one good news on the topic of sales... Condo sales in February hit an all-time high, shattering the previous record by a margin of 26% and sold 2,202 new condos. It was also the first time February condo sales beat the 2,000 mark.

When the housing market is too expensive there is often a jump in condo sales because they are more affordable. Sadly this only seems to have effected new condos. The Building Industry and Land Development Association says the number of condos sold, saw a 36% increase from last year.

The previous record was set back in 2002, long before the infamous housing bust of 2008.

Canadian housing overpriced says OECD

According to the Organization for Economic Co-operation and Development (OECD) Canadian housing looks “overpriced” and they believe the Canadian government should take measures to deliberately slow the mortgage market. The Paris based think tank monitors the economics of 33 wealthy member nations, including Canada.

“Canadian house prices, or at least some regional or local housing markets, notably those of Toronto and Vancouver may still reflect excess demand conditions,” says the OECD's annual review of the Canadian economy. “Housing looks overpriced on the basis of both price-to-rent and price-to-income measures.”

The average Canadian in 2010 makes LESS than what they made in 2007 and our disposable income is dwindling. Meanwhile household debt in Canada has skyrocketed 250% from 1989 levels to $42,000 in debt (from $16,800 in 1989). Simultaneously housing prices in Canada have continued to soar, so that the average price of a home in Canada is now approx. $330,000, but the average Canadian only makes $38,000 / year.

Affordable homes, according to economists should be in the range of 3 to 5 times the cost of annual income, after taxes. In Canada its 9 times that of income which means Canadian homes are overpriced.

According to the OECD the cost of Canadian homes is now 35% higher than long term averages.

The OECD also predicts about 7.5% of Canadians are so in debt they could find themselves financially vulnerable by 2012 if interest rates rise while borrowing stays at the current pace. “High household indebtedness also implies a growing vulnerability to any future adverse shocks,” says the OECD. “Household credit growth needs to slow down.”

The Canadian government currently provides financial guarantees for default insurance on risky mortgages, but this is basically just endorsing/ensuring risky mortgages instead of trying to slow them down. The OECD has noticed this.

“Rules to qualify for government backed insurance have been tightened, but more measures should be taken if needed to cool down the market.”

The OECD report suggests the government should require larger down payments on all federally insured mortgages. They also suggest the government force banks to disclose how “sensitive” their mortgage revenues are to rate hikes so that homebuyers aren't getting caught in the middle later on.

“Lending standards and the framework for mortgage insurance are the right tools to contain this cycle,” says the OECD.

The OECD notes that subprime mortgages make up 5% of mortgages in Canada. In 2007 before the recession hit the % of subprime mortgages in the USA was 33%.

As such when home prices in Canada drop or collapse, it should be in the range of 15 to 18% instead of the 45% range it was in the USA. The drop was the biggest in large cities like L.A., Miami and New York. Canada should expect the largest drops in Vancouver, Toronto and Montreal.

Furthermore the big drops were usually in the suburbs or parts of the cities which were more financially woeful. Housing prices stay relatively stable in older / more wealthy communities.

Bank of Canada raises rates again

The Bank of Canada has raised interest rates again, the third time in 2010, up another 25 basis points from 0.75% and bringing the total to 1%.

People with variable mortgage rates or lines of credit will notice the effect immediately...

However the good news is that banks are becoming more competitive with their mortgage rates... the slumping Canadian real estate market is dragging its knuckles and looking like its going to get punched out for the count... and as a result the Canadian banks are becoming super competitive about trying to get your mortgage.

However I am worried the Bank of Canada increase of mortgage rates will just scare homebuyers even more, worsening the bursting real estate bubble that has started.

When you consider that Canada might fall into a double dip recession the Bank of Canada seems to be playing it fast and loose... and taking far too many risks in their efforts to curb spending and household debt.

Leaside, a dream neighbourhood in Toronto

The Bank of Canada has raised interest rates again, making it more difficult for people to get a mortgage at an affordable rate. The key overnight lending rate has been raised from 0.5% to 0.75%.

With that in mind it makes sense to me that people might want to consider buying a house in a region of Toronto which is often overlooked.

Leaside is a small but quiet neighbourhood right in the middle of Toronto. Most of the homes in Leaside are traditional detached two-storey designs dating from the 1930s and 1940s, all-brick constructed, with distinctive intermixing of cut stone around entryways and front bay windows. Homes in Leaside often have exterior details such as leaded glass windows, arched / peaked entrances and broad wooden door casings. Its a level of artistry that hasn't been seen in decades and for someone like myself who enjoys older architecture, a pleasure. Inside you will typically see traditional wooden mouldings, baseboards, and floors... the type of things you'd see when visiting your grandparents.

Or in my case, my parents' farm... or the 1920s apartment building I currently live in.

I look at the architecture of some of the homes in Leaside and I just drool. They're "perfect", almost idealized, like a Carl Schaefer painting.

Not all the homes in Leaside are what I'd call affordable. Some of the really nice homes are $900,000 or more. Depending on where you look however there are more economical alternatives. South Leaside has a variety of semis and bungalows with price ranges hovering around $500,000.

The reason for this is because Leaside is a good place for anyone in the upper middle-class wage bracket. So that means people like myself probably couldn't afford to live there... but I can still dream right?

Sure, its not the multi-million dollar homes of Rosedale... and its not one of the soon-to-be-a-slum condos by the waterfront either. Its just a nice quiet neighbourhood with the following perks:

#1. Conveniently close to both Yonge Street and the Don Valley Parkway. Commute time to downtown is 15-30 minutes.

#2. Cycling distance from downtown. In fact there's plenty of bicycle lanes and trails in the surrounding region. (As a bicycle mechanic, I appreciate these things.)

#3. Abundant local parkland. Serena Gundy Park, David A. Balfour Park, Moore Park Ravine, Flemingdon Park, Sunnybrook Park, Blythwood Ravine, Sherwood Park.

#4. Lots of local schools for children and teens. Maurice Cody School, Blythwood School, Bessborough Drive School, Rolph Road School, Leaside High School, Northern Secondary School, Marshall McLuhan Secondary, North Toronto CI, Don Mills CI.

#5. Oh and its only a short bicycle ride to the Ontario Science Centre, a huge chunk of parkland, fishing in the Don River and the archery range just south of the OSC (as someone who enjoys the sport of archery I can appreciate that).

The area is named after the Lea family from Lancashire, England who arrived in Canada in 1819. John and Mary Lea later built the first brick house in York township in 1829. In 1841 their son William later bought additional land and built an octagonal home which he dubbed "Leaside". The house is no longer there, but its location was where the Leaside Memorial Gardens is now.

I did manage to find a painting of the octagonal home however, shown here.

A lot has changed since Leaside was once prime farmland. Now there's three subway stations nearby, Eglinton, Davisville and Bayview, a plethora of restaurants, boutiques and a combination of small "family businesses" and larger retail stores.

The history of the area includes:

The Leaside Junction Station, one of the busiest train stations and train yards in Toronto from 1894 to 1969.

The Leaside Viaduct, a bridge built in 1927 across the Don Valley.

Residential construction in Leaside didn't begin until the 1930s. In 1967 Leaside became part of East York and eventualled was amalgamated with Toronto in 1997. The area is popular with families, since it has such quiet streets, very little crime and a large number of schools / parkland. Many parents consider it to be one of the ideal locations in Toronto to raise kids.

In the 1990s a number of "exclusive" condos and townhouses were built in the region, attracting more families to the area. Many of Leaside's local shops are geared towards children and mothers, although the area also boasts antique shops, specialty stores and pubs. There's also libraries, community centres, indoor ice arena and an indoor swimming pool, curling rink and an auditorium. The local Sunnybrook Park even has horseback riding stables.

Seriously, freaking horse stables! Who wouldn't want to live in Leaside???

Well, maybe if you were allergic to horses or you have Hippophobia (the fear of horses)... but otherwise, com'on! Leaside is like a dream neighbourhood most people can only fantasize about living in. Of course, if you have a good job and can afford to live there that is another matter entirely.

Learn more about Leaside here:
Leaside : Prime Toronto Neighbourhoods
Search Leaside Homes
A Brief History of Leaside

Which Toronto neighbourhood is the best?

When it comes to buying a home the question of which neighbourhood is the best (or at least the best for you) is a question that is bound to come up.

For example, I happen to like the quaintness of Tiny Town (Craven Road, near Gerrard and Coxwell). There's also Marlborough Place Avenue, a thin street between Avenue Road and Yonge Street, just north-west of Rosedale Subway Station. So despite the small size of the homes in Tiny Town or on Marlborough, these little houses are arguably pretty good if you want to find a house on a budget and you're not fussy about lots of space.

If you live way out in the middle of nowhere (ie. Mississauga's Lorne Park) you might think being surrounded by lots of trees (and the occassional vacant lot) is a good thing. Lorne Park is like the new Oakville... really far away from downtown Toronto, but the houses and land there is cheaper... just so far as you don't mind commuting.

And frankly there's nothing I find MORE BORING than sitting in traffic for 2 hours per day, because that is what you get when you live in Oakville, Richmond Hill, Vaughan, Markham, Purpleville or even those crazy people who commute all the way from Aurora, Newmarket, Pickering, Barrie or Hamilton. Its not even NEAR Toronto any more when you live way out there. Its just insane people who are too cheap to buy a house which is closer to downtown Toronto...

Or worse, they're so obsessed with having a backyard and a front yard that they completely ignore the condo option. Don't even get me started on the anti-condo movement... (Although I will note that overseas in Asia, condos are considered to be better than a house. The anti-condo sentiments in North America are outdated and unrealistic.)

Anywho... my point is that there is still plenty of unused land close to downtown where people can buy a house (or even build a new one). People can get "more bang for their buck" simply by shopping around more and exploring different options... ie. Midtown, uptown, Little Italy, Cabbagetown, Lawrence Park, Leaside, Summerhill... you know... the sleepy neighbourhoods where the prices aren't sky high, and are still pretty reasonable when you consider their location.

Price appreciation in the suburbs and satellite cities of the GTA have been going up so fast that a house in Richmond Hill is now comparable to the price of a house in Leaside. The houses in Richmond Hill may be bigger, have extra rooms you will never use (seriously, I swear the people designing these houses are building extra living rooms in them just so they can jack up the price more)... and frankly who needs all the extra space?

As a devoted cyclist I like being able to cycle around downtown on a moment's notice. Driving for an hour to get something annoys the hell out of me. I want to be close to the things I want. I am willing to pay extra for the convenience... and when you consider that the prices of homes in these suburban boonies are going up quickly it makes you realize that its probably unsustainable.

Lets take Lorne Park for example (its an upscale neighbourhood near the beach in Mississauga), where the average price has gone up 30.2% in the first half of 2010 compared to 2009 prices (figures from ReMax). The average home there is now $880,373 compared to $676,289 in 2009.

So you're not saving any money by living in such an upscale suburban neighbourhood. All you're doing is giving yourself extra headaches from traveling farther, making your gasoline budget sky rocket and destroying any convenience you could have had by living in a neighbourhood closer to the downtown core.

The “near suburbs” have been driving up prices during the first six months of 2010 because buyers want homes within a half-hour drive of downtown. Except Lorne Park isn't even near the downtown... the commute time is still 40 to 50 minutes via the Gardiner Expressway.

But buyers in 2009 actually got a deal in 2009... because prices in Lorne Park dropped 18% in the wake of the financial crisis in the USA. Thus anyone who bought a home in Lorne Park managed to get it on sale and is probably now tempted to flip it for a good sale value.

According to ReMax 80% of GTA neighbourhoods had a decline in value in 2009. With the record low interest rates people actually looking to buy probably got a good deal.

But this year the prices are back up. The average sale price in June was up 8% compared to June 2009, but overall the number of sales of Toronto homes were down 23%... despite the fact that home listings is up 28%, suggesting the Toronto real estate market is becoming a bit flooded.

Usually when the market is flooded prices should come down, but this phenomenon is not limited to just Toronto. Canadian home sales across the country in June were down a seasonally adjusted 8.2% compared to May. The Canadian Real Estate Association reported 36,467 sales in June, down from 39,778 reported in May.

Actual (not seasonally adjusted) sales was also down by 19.7% in June compared with June 2010.

And yet despite the lower number of sales, the average price in Canada in June was $342,662, up 4.9% from June 2009.

Part of this is probably due to the rise in interest rates and Canada's shakey recovery from the American Recession. Job numbers in the service sectors are up, but manufacturing is still shedding jobs.

So which Toronto neighbourhood is best? I think it really depends on what you can afford, but vote is for any neighbourhood where you can walk to the movie theatre, the grocery store or go shopping... all within 20 minutes.

Because then its no longer the size of your house. The whole city is your oyster.

Housing prices dropping suddenly

Housing prices are starting to drop in Toronto... and this is both bad news for the short term and good news over the long term.

What it means is that Toronto's housing bubble is about to burst. Which will lead to a recession in the construction industry as the prices of homes collapse, which will have a ripple effect across the Canadian economy.

In the long run however the economy will recover and home prices should be roughly half of what they currently are (the same thing happened in the USA in 2007, resulting in the American Recession of 2007-2009).

Its about freaking time too. Toronto's real estate market has been in an unprecedented bull market for over a decade now, resulting in bidding wars on homes that have raised home prices to double what they're actually worth.

The sudden downturn in home sales is a sign that many Torontonians are fed up with high prices for homes and have decided to wait before buying a home. Sales dropped in May and again in June. The Toronto Real Estate Board reports 8,442 homes were sold in June, down 23% from June 2009.

If we see more decreases in July and August we will be looking at a collapse, one which ultimately hurt banks if people decide to default on their mortgages because the house isn't worth any more what it supposedly is worth on paper. If we see extreme drops in sales (like 30% or more) then the prices will start to drop significantly.

“In the old days the vendor called the shots. It was do you want the property or not? Because we have a lot of other people lined up for it,” says Ede, an Remax agent. “Now buyers are saying 'I’m going to think about it – and you better give me a good deal.'”

Right now average prices in Toronto are still high. In June 2010 they were $435,034, up 8% from June 2009. Real estimate economists however admit that was below double digit expectations.

Listings are up 28% too in June... homes are flooding the market and yet they're not selling.

Economists worry this may be signs that Toronto's real estate market bubble is about to burst. If that happens it will mean chaos for the industry and mortgage lenders. Analysts say if sales dip below 8,000 per month then it will start to make bankers very nervous.

Canada managed to avoid a bank bailout during the American Recession. But that doesn't mean the same problems can't happen here if the real estate market collapses... which at the same time will hurt the banking and mortgage deriviatives/equities industry.

If you have stocks or deriviatives in the mortgage industry now would be a very good time to sell, before those companies lose their shirts.

There's also more reasons why the market is likely to collapse soon. Toronto is currently experiencing a building renaissance in new homes and condos. Residential building permits were up 22% in April according to Statistics Canada. Most of them are condos, indicative that more Torontonians are opting for condo living instead of commuting from the suburbs.

Non residential building permits meanwhile were down 28%, suggesting industrial, commercial and institutions are cutting back. Canada wide both residential and non-residential sectors are down 10.8%.

According to a house price survey by Royal LePage we should expect to see house prices increase 7% by the end of 2010 compared to December 2009, as people try to take advantage of low interest rates and low taxes. But this is not a good sign... affordability is a big issue, so while prices may go up the number of actual sales is expected to go down as the market continues to become flooded.

The first 6 months of 2010 has already seen double digit increases in home prices, so 7% suggests that the next 6 months will see a dip in housing prices. Analysts admit that the flooding of the market means high prices is unsustainable.

They have to crash sometime.

Some economists believe Canada's housing market is overvalued by at least 30% in major cities. If the market collapses it will actually dip BELOW the real value, especially if people lose their shirts and have to sell their homes when they can no longer make payments.

And there's actually a lot of Canadians that are hovering near financial collapse. According to the bank loan managers a lot of Canadians have been refinancing their mortgages and using their home equity like an ATM so they can buy a new car, a speed boat, a cottage, etc. Or they're making their mortgage payments using their credit card, maxing their credit card out to $60,000 or more.

These financially inept people are so plentiful that one in four Canadians would be unable to deal with an unexpected expense of $5000... even if allowed to use their credit cards. They have almost no money in their bank accounts and they have already maxed out their credit cards... or worse, their credit rating is so bad they would be refused credit.

Meanwhile the CMHC has increased the number of mortgages which are "insured" by the Canadian government to $600 billion... so if the mortgage industry in Canada collapses it won't be the banks on the hook... it will be the Canadian government and Canadian taxpayers who will be paying for it.

Remember how Stephen Harper is against the bank tax? Well, if the mortgage industry collapses and nearly takes Canadian banks with it you can pretty much guarantee he will be flip-flopping on that issue pretty quickly.

Although frankly I can't see Stephen Harper's minority government sticking around very long if the Canadian economy goes into a local recession. Canada was barely affected by the American Recession... we were shielded from the worst of it. But a made-in-Canada recession is a different matter. It will be deeper and hurt a lot more Canadians, especially in major cities.

G20 lack of results good for homebuyers

34 political leaders (including 20 leaders from the biggest economies in the world) converged in Toronto this past weekend. The economy was the main point of discussion, but there was a lack of consensus on what to do about it.

United States President Barack Obama wants to do more stimulus spending until America's economy is fully recovered, worried about a "double dip" if they don't finish the job properly. He is however in favour of a bank tax, so banks can repay the public for trillions of dollars in bank bailouts (and to punish bankers for using a lot of that bailout money to buy themselves yachts and new cars).

In Canada Stephen Harper favours no bank tax and wants to maintain Canada's status quo. (We didn't have a bank bailout, so a tax seems unnecessary for Canadians.)

The various countries agreed to disagree and the G20 meeting was basically a flop. The individual countries couldn't agree to any targets, deadlines or anything for financial recovery but instead will go on doing what they usually do. The G20 leaders failed to accomplish anything.

This is good news for homebuyers. In the USA it means the mortgage and housing industry will continue to get back on its feet, planting itself more firmly. Housing prices should stabilize and rebound slowly enough that people buying a home in the USA will get some nice deals. (I've seen the prices south of the border and they're so cheap its ridiculous!)

In Canada housing prices won't be moving much. The CIBC and TD Bank have postulated prices might dip 10% in the next year or two, but the good news is that the Bank of Canada will be keeping interest rates pretty stable for the next while which means people looking to buy a house in Canada will be able to lock in some super low interest rates for their mortgages.

What is upsetting however is that our idiotic government spent $1.1 billion on G20 security and all that happened was a few smashed windows and a couple police cars burnt because apparently Toronto police are too incompetent to guard their parked cars.

For $1.1 billion Toronto could have built 11,000 small houses or condos (at $100,000 each) and solved Toronto's homeless problem permanently. Then the activists (who are mostly upset about poverty in Canada) would have very little to complain about. Plus that $1.1 billion would have boosted the local economy immensely by creating construction jobs, reducing unemployment in the GTA instead of hurting it by shutting down the city's downtown core for a week.

You catch more flies with honey than vinegar.

Interest Rates going up

If I am going to buy a house or condo on a mortgage I'd better do it soon. The Bank of Canada raised interest rates by 0.25% recently and will probably raise it again before the end of 2010.