Real Estate Prices going down? Where?

Factual Questions
101

It sounds like he’s describing an adjustable rate mortgage to me. The common terms in the US are 3/1, 5/1, and 7/1, which means 3,5,7 years of no adjustments, then an adjustment every 1 year thereafter. Maybe you can get a 3/3 or a 5/5 as well? Not sure. I imagine that if you wanted that, some bank would figure out how to sell it to you, but you’d likely pay some premium because it’s not “standard”.

In the US ARMs are a lot less common than they might otherwise be because 30 year mortgages are effectively subsidized by the federal government via Fannie Mae and Freddie Mac, which purchase a majority of conforming mortgages.

102

Weird, it never occurred to me there was no such thing down there…

Basically, most Canadian mortgages - you borrow the money with the understanding it comes due when the term is up - 6 months, a year, 2,3,4,5, etc. Fixed rate or variable tied to the prime rate. When the term is over, the principal is usually rolled over to a new term, at the prevailing rates. Since the interest rate is set for the term, longer terms tend to have higher rates. The amount of payment detemines the full life of the mortgage.

So you can have a mortgage that takes 25 years to pay off, but have to re-sign with the bank in say, 5 years. Often, too, various banks try to steal each other’s business since at the end of the term, you could shop for a better rate and move to a different institution.

Tricks like discounts on payments in the early years are also unheard of. Canada has CMHC, a crown corporation which insures mortgages for the bank (and the premium is added to the mortgage principal) so few places will lend if the buyer does not meet CMHC rules for minimum down payment, income criteria, etc. This made the Canadian housing market far more stable in 2008.

So raising interest rates will affect most homeowners here within a few years, as well as making home ownership more expensive for new buyers - thus lowering the price the average buyer can afford.

Because mortgage interest on a personal dwelling is not deductible, Canadians tend to pay off mortgages as fast as they can, don’t usually re-mortgage.

103

Thanks for clarifying. This is called a balloon mortgage, and, yeah, they exist, but they’re rarely used by individuals to buy homes to live in.

I think they were more common in the (fairly distant) past (I believe a lot of depression-era foreclosures were partially driven by being unable to come up with the balloon payment or find any bank willing to extend credit), but the US federal government has been subsidizing and consuming the primary mortgage market for a long time, and its favored instrument is the 30-year mortgage, so there are substantial financial incentives to get one.

104

I think the United States is an outlier in having fixed (really fixed) long term mortgages often with no prepayment penalty. A fixed percentage for 30 years isn’t available in South Africa for example, and I think when they say “fixed” they mean “fixed for 2, 3, 4 years etc. and then reversion to variable”. It sounds like Canada is similar? Or at least lets you transition to another negotiated fixed rate, but still with no guarantee you get the same rate for the full financing duration.

It is kind of nuts that that you can lock into a 2-3% APR for 30 years here. I don’t really understand the economics of it. On the surface it seems like a lousy bet for a bank to make. I’m curious to hear from our more economics minded posters regarding how this works.

105

It is a lousy bet for a bank to make, and they largely only do so because the Federal Government effectively buys up a majority of loans, assumes the credit risk, and packages them into securities with various risk levels.

The 30-year mortgage is dominant in the US because it is subsidized by the government. Basically everywhere else, variable rate and/or shorter term mortgages are dominant because those are the natural market equilibrium.

There is an argument that this subsidy is a pro-social policy because it lets homeowners have predictable housing costs, and also arguments that it’s a market distortion that leads to screwy real estate economics and the 2008 crash.

106

NY Property taxes are not a bargain plenty of snow, But NE South Carolina has Ocean,low prop Taxes & there seem to be work if your not retired…No snow either. Just my take

107

It is the same thing that’s been happening for many decades, but it’s none of things you mentioned. People are moving from all over the country to a few currently hot places. That drives up the demand and pricing in those places. There is very little corresponding shrinkage of prices in the places they left because only small numbers are leaving from each cool area. It’s always true that there are many more cool areas than hot areas.

The trend has been unidirectional since WWII, from the northeast to the South and West. The Rust Belt metro areas grew slowly while the South/West areas boomed. New York state had a greater population than California until 1970 and now it has half, even though New York City has stayed the same size.

Will that change now that housing prices in California are insane? People will seek out newer hot spots, like Boise, but those small cities cannot take in enough people to make a noticeable percentage difference nationwide, just like the number of Covid deaths opening homes is too small to be noticeable. Tens of millions of people have to relocate to move the needle. We haven’t seen anything like that yet.

One thing that is, relatively, new is the percentage of investors buying up homes. They are at 18% of home purchases and that’s a record. Pricing is always local and subject to any number of factors, but investors buying at over-median values did not figure into any of the older migrations. With demand remaining high in the hot areas, that’s not a trend likely to change much in the future.

As people have pointed out, the population always shifts to where the jobs are and away from where the jobs aren’t. Tell me where the jobs will be twenty years from now and I’ll make all the predictions you want.

108

Balloon mortgages were popular during the housing bubble, and IIRC they had low initial interest rates and then got the prenegotiated higher rate after the term of the low interest rate. This didn’t have anything much to do with the prevailing rate. The idea was that after the term was over you refinanced, thus never paying the higher rate. Which worked fine until you house was no longer worth enough to get a full mortgage on.
As I said I had adjustable rate mortgages, and I got a letter saying what my new interest rate was when it adjusted. It always went down, so I wasn’t too concerned. There was no new contract and no sense of rolling everything over.
md-2000, do you have to go through a whole new application process, or does rolling over with the same bank mostly automatic?

109

So what happened? Are you still planning to relocate?

110

AFAIK “renewing” your mortgage when the term is up is pretty much a formality. Of course, you’ve had up to several years of regular payments, so a credit history and more equity in the house. I have never heard of anyone getting a re-assessed creditworthiness during renewal, but don’t have a lot of personal experience, my current house is 80% paid off after 14 years and my previous house I paid off within 7 years. (I assume if you consistently miss payments, you may need to have a discussion with the bank…)

Generally, there is a simple assessment when you first buy a house - are you entitled to a mortgage or not? At the time, unless the down payment is more than 25% (I think?) you also buy CMHC (Canada Mortgage and Housing Corp. - government corporation) mortgage insurance, so the bank is guaranteed to recover any money they lose should they foreclose and the house does not sell for the principal owed. To qualify for the insurance, the CMHC requires a down payment of 5% (I think?) and discourages borrowing that down payment. So there is a shortage of high-risk, no-equity home buyers here. Similarly, the bank assumes no financial risk, just the hassle of dealing with any delinquent customer. If CMHC won’t give the buyer a mortgage, a bank would be stupid to assume that risk themselves - so they pretty much don’t.

you either qualify or you don’t, so with the insurance the bank does not have to charge different interest rates depending on credit scores. I think there’s a specific criteria in the contract, when your mortgage is considered sufficiently in arrears that the bank can foreclose under the terms of the CMHC insurance, and so collect if they can’t sell for a high enough price. Other than that - you simply renew for the published rate.

If you qualify, you get the published rate. Choose your term. When it’s time to renew, get the current published rate, choose your term - or find another bank who will be happy to take you. IIRC the CMHC insurance is for the life of the mortgage itself, not just the term. It is possible to negotiate and maybe shave a few fractions of a percent off the published rate, especially if you bring other business (like a big retirement savings) to the same bank.

Until the last few years, general thought was interest rates would be going up soon… So the variable rate was lower than the fixed rates, and interest rates are generally higher the longer the term. When I locked in with 5-year fixed in 2019, I got 2.74%, slightly better than the published rate; before that, variable had been consistently less. 10-year is rarely worth it unless you think interest rates will jump crazily in the next few years. (Canada’s prime rate is generally within a fraction of a percent of the USA rate.)

So like the USA, the banks assume less risk than the government does. Same thing only different. In general, the CMHC insurance premiums make the process self-financing unless there is a serious market downturn. their rules also AFAIK disallow mortgages where the principal is not being paid down.

111

Thanks for the information. In the US if you are behind in your payments the bank can start legal proceedings against you, which requires all kinds of documentation. One issue during the housing crisis was that the banks were so far behind that they didn’t furnish this documentation so the homeowners could keep from being evicted. In Canada, if you are behind when your term expires, can the bank just drop you without any legal action? Or are there protections?

112

I really don’t know. I presume what is grounds, what level of arrears, for example, for foreclosure is laid out in the mortgage. the bank doesn’t need to wait until renewal time to start foreclosure; and someone who can’t make their payments and is behind is unlikely to come in and sign up for more.

It used to be that you could “walk away” and turn the keys over to the bank, the insurance would take care of things, no more debt. But in the early 80’s with the interest rate jump and the recession, CMHC ended up owning so many houses rules were changed so the buyer was still on the hook for outstanding for any shortfall with the repossession sale if they lost the house. It would take bankruptcy to cancel the debt. (This made sure that people didn’t walk away just because their mortgage was underwater.) Plus, if you defaulted on a mortgage, CMHC would not allow you to insure another one for 5 years.

The bank would be foolish to start foreclosure without satisfying those criteria. A vengeful debtor could spend their last few days totally trashing the house. (This happened in Alberta especially when the oil business and housing market crashed in the early 1980s’ and people thought they were hurting their bank.) That would leave the bank holding a house not worth the outstanding balance; they’d want the mortgage insurance to be active to cover the difference.

The upshot, to get back to the OP topic s that Canada has a more stable housing market. People are given a mortgage only if they properly qualify. The banks have no incentive to offer to those who don’t qualify. Generally, the customer can opt for the level of interest stability they choose. They tend to pay off the house, less incentive to remortgage. (A remortgage requires re-insuring, which can be up to 4% of the house price. A second mortgage is not insured so tends to be much more limited in the amount of equity covered.)

But regardless, house prices in popular areas especially big cities, are high and climbing, despite claims that this or that economic issue will level prices off. There are assorted reasons - BC with it’s scenery and climate attracts a large number of retirees. Vancouver attracts investment from China and the area (for those who distrust the Chinese government and banks). Big cities attract a lot of immigrants and have the better jobs, and like most of modern civilization, there’s the trend to urbanization. Remote areas tend to have low or dropping prices, unless they are attractive as cottage country. However, cottages that are not primary residences are not CMHC-insurable and so the banks have stricter terms, higher rates, etc.

Also remember that materials and laour are more expensive in recent years. A common reminder to homeowners (as I’m sure is the case in the USA) is that it would cost more to rebuild the same home now, so be sure your house insurance is adjusted to reflect this.

https://www.cmhc-schl.gc.ca/en/professionals/industry-innovation-and-leadership/industry-expertise/resources-for-mortgage-professionals/mortgage-loan-insurance-and-premiums