Comment by refurb | Hacker News Reader

Comment by refurb | Hacker News Reader

I'm keeping an eye on Canada. They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021, despite no 30-year fixed mortgages (most float or are fixed for 5-years at most). During Covid prices were up 20-30% over those two years. Absolute insanity.

The bank of Canada has increased interest rates from 0.25% during Covid to 4.25% with the latest increase this week. The economy isn't really slowing much, so a few more increases are likely next year. Plus Canada needs to keep up with the US interest rate or else their currency will depreciate which is great for exports, but crappy for imports (and thus inflation).

Cracks are starting to show. In Toronto the outlying suburbs are down 20-35% in just the last 8 months (which bring them down to pre-Covid or slightly below). A ton of people took variable rate mortgages during Covid (30% last year) so each interest rate increase is increasing their monthly payments. It's not unusual to hear people say their $2000 mortgage is now $3800/month. All while home prices are dropping.

It's going to be really interesting. I'm guessing a 2008 like correction (without the financial institution crisis like the US). Some areas will likely see 40%+ down from peak which will likely bring prices back to the early 2010's.

Another problem is that most mortgages in Canada are recourse (except Alberta). So if you can't make payments, sell, and your proceeds don't cover the remaining mortgage, well the bank is coming after your other assets for the difference.

Quite the situation.

> They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021

The general cost of housing is pretty bad in the US and it seems to be even worse in Canada.

Beyond the risk of bankruptcy and underwater mortgages, I wonder how much longer its politically palatable to have housing this unaffordable - especially in Canada where it seems worse.

I wonder what (if anything) the government will (be forced to) do to address this. Its often discussed how a generation of people (millennial) were basically all renters. Meanwhile, a lot of boomers seem to depend on the value of their house to aid them through retirement. Unless society finds a way to embrace renters as the new "American dream" (or Canadian, or whatever), it seems like there will be a major problem that will one day emerge.

It's cycle. It always has been. Look at homeownership rates for both countries. When housing becomes a bubble, home ownership rates jump. When it crashed, they drop and then the cycle repeats.

We're had a couple decades of continuously lower and lower interest rates, so the continuously higher and high home prices shouldn't be a surprise.

Housing prices will drop, houses will become more affordable, then we'll do another bubble. This is already the second one in my lifetime.

> It's cycle. It always has been.

No, it hasn't always been; you're conflating historically consistent and reasonable cycles with the speculative manias that have occurred over the past two decades. Make no mistake: we are not in a normal cycle.

Prior to these bubbles, the next closest historical US analog over a century would have been the rebuilding that occurred after WWII, when home prices reverted back to inflation-adjusted fair value after the housing market was completely hammered by the onset of the Great Depression---a time when ballon payment mortgages were the norm, and a crisis that gave rise to the financial innovation of fixed-rate mortgages as the de facto US standard circa 1930s. This spike in home prices was largely attributable to a bona fide housing shortage (think Baby Boomers)...yet no speculative mania and no bubble arose over those decades.

To get a sense for just how ridiculous today's real estate market has become, you need to consider the situation in real (inflation-adjusted) terms[1]. No amount of contrived marketing can quantitatively justify today's egregious bubble home prices, whether it's relative to building costs (!!), population growth, or decreasing interest rates as shown in the graph, or relative to other meaningful metrics that aren't shown like increasing real disposable income or tax-advantaged benefits of the asset class.

For reference, Robert Shiller covers this topic well in his book Irrational Exuberance[2].

On a similar note to your parent post, the UK is looking quite dire as well. Interest rates aren't as high (yet), and although both countries have a strong bias towards adjustable-rate mortgages, I suspect the key difference is in the demographic of bag holders: for the UK, I'm specifically looking at fixed-income pensioners. When the first wave of adjustments kick in next year, it's going to break a lot of people with little to no financial alternative.

[1] http://www.econ.yale.edu/~shiller/data/ShillerHPI.jpg

[2] https://www.amazon.com/dp/0691173125/

No, it hasn't always been; you're conflating historically consistent and reasonable cycles with the speculative manias that have occurred over the past two decades. Make no mistake: we are not in a normal cycle.

What's a "normal" cycle? Cycles all differ. Some are extreme like in 2008 and others are much more muted.

But regardless, housing cycles have always happened. Even Shiller admits this.

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