Lots of RE news today in the Globe and Mail. Here’s a round-up:

Globe and Mail: Banks urge Ottawa to tighten mortgage rules

Wall Street Journal: Housing Rebound in Canada Spurs Talk of a New Bubble

Globe and Mail: Ottawa says housing bubble not a concern; no plan to tighten mortgage rules

Globe and Mail: Competition Bureau seeks to smash ‘anti-competitive’ CREA rules on MLS

I love it when noteworthy realtors who do nothing but pump the real estate market are held accountable for their quotes. Do a Google search for David Lereah and you’ll see what I mean. The former chief economist and senior VP of the National Association of Realtors has been thoroughly discredited for his constant cheerleading, even as the U.S. housing market imploded.

Now we need to do the same for Bruce Benham, COO of Re/Max.  Google his name and you won’t find much; but I think he needs to be made infamous for emphatically denying the existence of a bubble at the market’s very peak. So what I propose is this: if you have a website or a blog, make a link with the words “Bruce Benham” that points to the following url:

http://www.realestatevancouver2010.com/market.html#bubblemyth

… and let’s get this onto the first page of Google results whenever someone searches his name.

A lot of my friends are buying right now. I have two married friends who bought in 2008 at pretty much the peak of the cycle; another friend paid close to $425,000 (the maximum you can purchase as a first-time buyer if you want to take advantage of the Property Transfer Tax exemption) for a 4-bedroom bungalow in the Gorge area back in May.

I have a pretty good idea of what was going through their minds: “If I don’t get in the market now while rates are low, I’ll never get in!” I completely understand because I have those fears myself; what if interest rates go up, and prices don’t come down further? What if the Realtors® are right, and I’m priced out of the market forever??

From a completely rational point of view, though, that likely won’t happen. If rates go up, affordability erodes, meaning consumers can’t buy as much as they used to, which will drive prices down. Most of us as homebuyers (and first-time buyers in particular) already have to leverage ourselves to the hilt if we want to buy a $400,000 property (and if you’re single or your family lives on one income, you’re already priced out). Affordability has already reached its breaking point.

These historically low interest rates that we’re currently seeing is keeping the housing bubble inflated for just a little bit longer — and luring in more first-time buyers in the process. With interest rates having nowhere to go but up, however, I am doubtful that it will end well for my friends. Best case scenario, we will be the generation that spends our entire lives paying off half a million in mortgage debt; worst case scenario, my friends will end up underwater on their mortgages, and won’t be able to afford to keep their homes when they have to renew their fixed rate mortgages 5 years from now at double the interest rate. As I mentioned in my last post, it’s better to borrow $450,000 @ 7% interest rate, as opposed to $600,000 @ today’s 4% interest rates, even though the monthly payments are exactly the same — because you know interest rates have nowhere to go but up from 4%. Better to wait until prices are low and pay a higher rate, than be stuck with a huge mortgage over 25-35 years of fluctuating rates.

Even if I am completely wrong about this and prices don’t fall, but fixed rates creep back up to 6%, I’m not too worried — there are always variable rate mortgages.  As the prime rate goes higher, we should start seeing larger prime-minus rates again. Back in 2005 when prime was 4.25%, I was offered a prime-0.8% mortgage, for a rate of 3.45%. That’s comparable to any 5-year fixed rate that I can get today. (And had I taken that prime-0.8% rate back then, I’d be paying 1.45% on my mortgage right now! Sometimes I wonder if I shouldn’t have just jumped into the condo market back in 2005 instead of sitting on the sidelines Edit: I’ve since found out that the condo I almost purchased in 2005 required remediation.  I probably dodged a bullet on that one.)

Yesterday, I opined on how the Canadian housing market might actually make sense. Today, I’m going to talk a bit about why the market doesn’t make sense, and why I think it’s in for a serious correction.  There are a myriad arguments against buying real estate at the moment; here are just a few of them.

A low interest rate environment makes it a dangerous time to buy

A lot of people I talk to seem to have trouble understanding that this low interest rate environment actually makes for a terrible time to buy.  Everyone knows that these low interest rates won’t last forever — but the prevailing sentiment is to lock in before rates go up, which on the surface seems to make sense.  But what these people don’t realize is that, when rates go up, the cost of housing must come down, since we must maintain the same level of affordability.  (I firmly believe that we’ve reached the limits of affordability…. If you still think prices are going up in the near future, because of immigration or higher wages or whatever, I’m all ears, but please back up your assertions with some hard data.)

In other words, if buyers are already stretched to the limit to buy a $600,000 bungalow at today’s historically low interest rates, no one is going to have the means to buy that bungalow for $600,000 when rates go up.  The price of the home has to come down.

Now, would you rather buy a house today for $450,000 at a 7% mortgage rate (pretend for a second that mortgage rates are at 7% today)… or would you rather buy that same house for $600,000 at 4%?  If you picked the former, you win the prize.  It’s much better to owe less at a higher rate; that rate actually has a chance to come down.  On the other hand, if you pay $600,000 today at 4% interest, it’s absolutely certain that rates have nowhere to go but up, so your monthly payments are guaranteed to increase in the future.  25 years is a long time to pay off a loan, and I can guarantee that you won’t be paying a mere 4% on your loan 10, 15, or 20 years from now.

“Even if you lock in a five-year mortgage rate, you have to realize that five years from now, they will be significantly higher….” – CIBC economist Benjamin Tal

Canada’s 5-year terms are effectively teaser rates

25-35 years is a long time to pay off a loan. So why is a 5-year amortization the norm in Canada?  In the U.S., it’s common to lock in to a rate for 30 years, which provides peace of mind — you’ll know what your monthly payments are for the entire term of your loan.

In Canada, the staple mortgage product is the 5-year fixed rate.  And after 5 years, you can be sure that your rate will be significantly higher.  In effect, it’s not much different than an ARM or a teaser rate that got so many Americans in trouble during the U.S. housing collapse.

Loan-to-income ratios are out of whack

At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income.  In Canada today, we are at 7.4 times the average income — almost 50% higher.

Debt-to-income ratios are out of whack, too

At the peak of the U.S. housing bubble, the debt-to-income ratio for the average American was 127%. Today, the debt-to-income ratio for the average Canadian is at an astounding 142%.

A housing boom in the midst of a recession

Few stop to think about the absurdity of a housing boom in the middle of a recession.  This has never been the case in recessions past.  For example, in 1989, the market collapsed 28% and didn’t bottom out for five years; it didn’t return to its 1989 peak values for another nine years.

Even bank economists think a bubble is forming

A roundup of bubble comments that the major banks have been making lately.  The prevailing sentiment is that a bubble is forming or has already formed, and come mid-2010 when the Bank of Canada raises rates, we might see the start of a shake-up in the real estate market. Bad news like this is rarely seen in the mainstream media, so when so many noted economists publicly voice this opinion, it’s a good idea to perk up and listen.