Have you ever woke up after a night of drinking, and only had a vague recollection of what happened? Then your responsible friend sets off a chain of text messages, trying to figure out where you went wrong? Well that’s what the Canadian real estate industry just did, and man-o-man did people screw up. The Canada Mortgage and Housing Corporation (CMHC), the Crown corporation in charge of mortgage liquidity, conducted a massive survey of recent buyers in Toronto, Vancouver, and Montreal. After getting drunk on exuberance, buyers indulged in a little too much borrowing, blaming everything from land scarcity to foreign buyers for the street fights bidding wars they entered.
About The Survey
The CMHC designed a massive survey to try and figure out where buyer exuberance started. Buyers in Toronto and Vancouver saw a quick rise in home prices, and adopted “excessive” expectations of price growth. To determine where the disconnect between fundamentals and price growth started, they took a novel approach – they asked the buyers. 30,000 recent buyers were sent surveys, asking questions ranging from what their budgets were, to why they didn’t stick to their budget.
The majority of price movements were driven by exuberance in Toronto and Vancouver. Yes, fundamentals played a part – but a small part. Instead, the survey focuses on finding out which data points buyers felt drove their FOMO. The fear of being “locked out” is always a powerful motivator, which tends to amplify the read on fundamentals.
Now, issues like foreign buyers are important, and need to be tracked and dealt with. However, no one forced anyone to buy in the small window of exuberance. The homeowner life didn’t choose these buyers, buyers chose the homeowner life. Despite what you may have heard, not all renters are poor and struggling to eat. Actually, a surprising number of bank executives are now renters, but I digress. Let’s find out what these people were thinking.
55% of Toronto and Vancouver Real Estate Buyers Entered A Bidding War
First up, the CMHC found that buyers use “rule of thumb mechanisms” to determine home prices. “It’s a hot market,” “I can’t miss out,” and “it’s really tight right now” are phrases analysts cited as examples of this mechanism. According to the CMHC, these were “phrases pushing homebuyers to overvalue an investment.” FOMO helps to build an overreaction to data, which resulted in a lack of self-control. The best example of this is a buyer’s willingness to engage in a bidding war.
The majority of buyers entered a bidding war in Toronto and Vancouver. 55% of survey respondents in both cities said they entered a bidding war to buy their current home. To contrast, just 17% of Montreal’s buyers experienced a bidding war.
The Discipline Was Not Strong With These Ones
Buyers that accelerated their buy, tended to break their budget according to the CMHC. Vancouver saw 47.91% of buyers pay more than they had planned. Toronto saw similar levels, with 47.79% of buyers paying more than budgeted. To contrast, Montreal only saw 23.67% of buyers pay more than they budgeted.
FOMO was the primary driver of breaching, with most of these homeowners buying sooner or later than expected. CMHC analysts believe that those that bought sooner likely lacked market information, pushing budgets higher. Those that bought later couldn’t find what they wanted in their budget, driving them to an upward budget revision.
Canadian Real Estate Buyer Budgets
CMHC survey of recent buyer budgets, and whether they stuck to them.
Source: CMHC. Better Dwelling.
The Foreign Buyers Made Me Do It
If Canadian real estate markets had a phrase of the year, “foreign buyer” would have been it in 2017. In Vancouver, 67.8% of buyers said foreign buyers had “a lot of influence” on home prices. Toronto was a little further behind, but not much at 47.88%. To contrast, 42.31% of Montreal buyers felt foreign buyers had a strong influence. Foreign buying is actually a part of the development strategy in cities like Vancouver, but they always tend to show up in droves when local credit expands – just like in the late 1980s. Funny how that works.
Perceived Impact of Foreign Buyers on Prices
CMHC survey responses from recent buyers, on the perceived impact of foreign buyers on real estate prices.
Source: CMHC. Better Dwelling.
Who Needs A Job When You’ve Got Credit?
Employment growth is normally an important fundamental factor, but buyers didn’t agree. In Vancouver, only 17.03% of buyers felt it had a lot of influence. Toronto buyers felt it was a little more important, with 26.24% of people thinking it had a lot of influence. To contrast, 35.05% of Montreal buyers felt it had a lot of influence on home prices. The bulk of respondents in all cities felt it had some influence on prices.
Perceived Impact of Employment Growth on Prices
CMHC survey responses from recent buyers, on the perceived impact of employment growth on real estate prices.
Source: CMHC. Better Dwelling.
There’s Too Many People!
None of these locations are growing like they used to, but population growth was still a perceived factor. Toronto had 54.56% of respondents claim population growth had a lot of influence on prices. Vancouver came in just under that, with 51.39% of buyers feeling the same way. Montreal only had 38.94% of buyers that felt population growth had a lot of influence on prices. For context, Montreal has the fastest growing population of the three regions.
Perceived Impact of Population Growth on Prices
CMHC survey responses from recent buyers, on the perceived impact of population growth on real estate prices.
Source: CMHC. Better Dwelling.
We’re Running Out of Land!
My favorite narrative, we’re running out of land – a.k.a. land scarcity. Vancouver had the most buyers that felt land scarcity had a lot of influence, with 52.94% of buyers agreeing. In Toronto that dropped to 44.22% of buyers. Montreal was just under that, with 43.06% of buyers agreeing it had a lot of influence.
Perceived Impact of Land Scarcity on Prices
CMHC survey responses from recent buyers, on the perceived impact of land scarcity on real estate prices.
Source: CMHC. Better Dwelling.
Those Darn Rich Locals!
Locals seem to underestimate the impact of domestic investors in all three regions. Toronto had the highest ratio of people that felt they had a strong influence, at 48.11% of buyers. In Vancouver, that number dropped to 46.33% of people feeling they had a lot of influence. Montreal only had 25.9% of buyers that felt domestic investors were a contributor to prices. I’m guessing not a lot of people in Toronto know the city’s domestic investor numbers, or that agents in Vancouver are sometimes paid with condos. Ah well, another article for another day.
Perceived Impact of Domestic Investors on Prices
CMHC survey responses from recent buyers, on the perceived impact of domestic investors on real estate prices.
Source: CMHC. Better Dwelling.
These factors did contribute to higher prices, but buyers added emotional premiums. During the peak of a real estate cycle, buyers will always become exuberant as prices accelerate. Speculators, both international and domestic, can usually smell the blood and begin circling. Did people line up, and are foreign buyers accumulating massive portfolios of homes? Or were people paid to stand in line for condo assignments, with employees posing as Mainland Chinese buyers? Probably a little of both. However, it often doesn’t matter if the narrative is true or not, it just matters if you’re willing to max out your credit. As my favorite real estate agent once posted on her Instagram, “anything is possible if you belief [sic] it is.”
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Tsk tsk tsk…”In Vancouver, 67.8% of buyers said foreign buyers had “a lot of influence” on home prices. Toronto was a little further behind, but not much at 47.88%.” …Don’t call BS on BD that often (gotta take it with a grain of salt) but to suggest 20pt delta is ‘a little further behind’ is a false. That is a significant difference.
Munch…munch..munch..INB4 LL, lol…gots me some pops! Time to watch the train wreck. BD4L.
In fact Vancouver is the only outlier in this category. Montreal is similar to Toronto (unless the article has a typo).
I’ll call out BD here too.
“Respondents were given two weeks to access the questionnaire via a secured website provided in the mail out invitation. A follow up phone call was scheduled for those who failed to respond within a two week period. The response rate was strongest in Montréal with 998 surveys completed, followed by Vancouver with 664 and Toronto with 497. The survey is statistically representative of homebuyers in each CMA in 2017. In a nutshell, this means the responses collected reflect the population as a whole. Thus, the results presented below on homebuyers can be generalized to the population of Vancouver, Toronto, and Montréal.”
Stephen, usually your on the ball but this is a pretty big omission. 2159 (7.19%) respondents.
The base size for each market is statistically representational (I believe the minimum is 486) and overall 2000+ is more than enough for statistically significant conclusions. I worked in research, for some reason Quebecers love to take surveys. If this was properly weighted then I don’t see the issue but I’m surprised they CHMC didn’t push to get more ON buyers but I guess they got what they got. The response rate is quite good for a Gen-pop study with no compensation, actually very good. Buuutt…call them out, BD needs to be held to account if there is a concern with the data! BD4L.
Those sample sizes are not huge, but are pretty reasonable for a survey of this nature. (Big election polls often have between 1000 and 2000 respondents.) The possible biases inherent in a voluntary response survey are a bigger issue, but there’s no getting around that for this sort of thing.
Former stats major, now pollster chiming in.
Not sure what you’re “calling out.” That sample size in relation to the number of sales is actually much higher than any political polls that get used. Technically speaking, if adjusted properly (which I’m assuming the CMHC does), that would likely be more accurate than any of the other data points Canadians are comfortable with.
StatsCan job numbers are a similar example, they attempt to survey 50,000 people, but never tell you how many responded. They then use this to project UNEMPLOYMENT RATES FOR THE WHOLE COUNTRY. No one’s ever thought about how fucked up that distribution is, because they like that it agrees with what they want to hear. Wait until a recession hits, and everyone starts tearing those numbers apart looking for sunshine and rainbows.
Yes, I just posted twice in a row…what would be interesting is the dollars attached to this exuberance. I would guess that the buyers in Vancouver + Toronto, vs MTL and other parts of Canada, had massive budgets so 10%, 15%, 20% and even 40% over asking resulting in hundreds and hundreds, maybe even millions, in overvaluation. Someone in the Winni getting into a bidding war and paying 10% over asking on a $200K place is a drop in the bucket vs $1, $1.5, $2.0, $4.0+ values which we’ve seen. I definitely see how some people got very rich buying and selling during this time. Now the music has stopped…tick tock. BD4L.
Hey Blue,
Good little tidbit on alt lending for you
https://twitter.com/ExtraGuac4Me/status/1011708596701126657
Sweet lord Grizz, I thought things like this only happened in the wild West. This is gold. Many thanks. BD4L.
LOL yeah, crazy one.
Wonder if this borrowing was done to speculate on more properties or if this was just a straight rip and run. “Borrow” as much money as possible, then get that cash and yourself the hell out of Dodge. The latter at least implies some sort of intelligence.
Speaks volumes to the underwriting standards of today’s lenders in either case.
It seems outlandish to think someone got into that bind through naive, bad decisions. Thing is, if that is a ‘borrow’ and run — how do you run? Numbered company, live outside the country? Either way, examples like this are nuts, can’t imagine there won’t be some fallout.
That’s one of the best articles I’ve ever read in terms of analyzing buyers psychology! I can tell because as I keep researching I keep finding out that FOMO and psychology are playing a big role in artificially inflating prices and destroying affordability.
Who’s to blame? That would be a different topic!
The blame game is totally different, they’re still pointing fingers at different people in the US for the 2007 bubble.
The bottom line is these buyers paid a premium for the security of homeownership today. As the analysts pointed out, some buyers moved their purchase forward, some backwards. This squeezed two demographics into the existing cohort, forming a situation similar to a short squeeze.
Wow, that’s why this blog is so important because public opinion is way off on some points.
If we continue to build new properties at the household formation levels it absolutely doesn’t matter how population is growing because housing inventory growing as well.
There is no evidence that we are building too few properties in GTA therefore population growth factor is completely irrelevant.
Land scarcity is another one.
Toronto population density is 4,457 people per square kilometer.
Brooklyn – 14,541
London – 11,054
Paris – 21,067
” Canadian cities—including Toronto and Vancouver, which are experiencing an affordability crunch—can accommodate much more housing supply as they have much lower population densities than other major urban centers around the world”
https://globenewswire.com/news-release/2018/01/09/1285786/0/en/Fraser-Institute-News-Release-Canada-s-biggest-cities-much-less-dense-than-other-major-U-S-international-urban-centres.html
We will have same amount of land in 2100-2200 but we’ll have much larger population. The only solution is to increase density and we have ton of potential here compared to our peers.
It’s sad that those two RE myths are actually affecting regular homebuyer a lot and fuelling their FOMO.
FOMO is big, and bigger than agents. I’ve advised people not to go into a bidding war, but they really think they can “win it.” Anytime you start throwing money at a problem without a plan, consider it gone. It’s one part FOMO, one part addictive rush, two-parts fantasy.
I do not agree. Whatever the densities, apparently Toronto has overcrowded subways and the sixth worse traffic congestion in the world. There must be other factors at play that are not easy to change in order to increase density. I find Fraser is often myopic in that they do not look past their initial theory or ideological perspective on an issue.
Bitcoin followed the exact same pattern. And the hype in both real estate and crypto and equities is going to cause an economic depression in the next two years.
Banks and sub prime lenders helped fuel the greed and FOMO. RBC has $250B of mortgages. No doubt a large percen are bad mortgages that Canadians will walk away from.
Enjoy the collapse
Good News is a recession is 12-18 months away. It may have already started. It’ not a bad thing. Prices will flatten in most markets and drop in some for a period of 2-3 years. This is good news because to get the Economy going Central Banks (World Wide) will reduce interest rates. At the next Cycle Low Interest Rates in Canada will be NEGATIVE. You will be able to obtain Debt in the Mortgage Market at – 1.00%. Asset (Housing) Prices will double by 2025. Cheers.
I thought for a second you were serious … LOL.
Ya, I don’t think that house prices will double. Even with low rates, if we are in a recession demand will plummet since people will likely begin losing their jobs. Good luck butter cup.
I think that a biggest factor in stirring the pot was the real estate brokerages and agents..look at all those “coming soon” signs!
LL = Lonely Loser
Go away you sad schmuck! This site is reserved for the intelligent.
could you not
I was wondering what people pay in terms of % from their income for housing?
We make a little over 110K family income ( one small child ..will be in daycare for another 2 years …1,400month childcare expense)If we were to buy – what morgage amount would be acceptable so we are not underwater soon…Just wondering…
Gigi; Maybe LL can answer that one for you.
I’d be interested in the answer from an out-of-work Realtard.
He did…Apparently I’m poor..LOL
Underwater is different than not being able to afford your home. Banks will not foreclose on you solely for being underwater. If your income can still maintain the payments, they would much rather have you keep paying than to lock in a lose for themselves.
For affordability, the rule of thumb is that its healthy if your payments only equal 30% of your monthly income. 40% is the max. With record low interest rates, this means that the total debt load you can service at any given income has increased (almost in proportion to housing prices…..go figure). Because rates have much more room to go up then down I would be wary of over buying today.
Your HH income, while above average, probably only would qualify you for a smaller unit today (at least in GTA or GVA) . Which just goes to show how unsustainable all of this is. If you could buy a home that could service your family for the next 15-20 years, you are confident in your job security, and the monthly payments could be handled even if they jumped 10%. Then you should be fine to weather a storm. The decision here is if the benefit of home security is greater than the negative side effects of taking a paper loss that could take years to recover.
That being said, it looks like all you could buy today would not support your family so I would suggest waiting it out. The safest bet for renting is to find something in a rental only building (won’t be kicked out so landlord can sell) or rent a property from a career landlord. Someone who has been doing this for 15 years +, has seen some ups and downs, and actually has a strategy to hold indefinitely.
Dear BD moderators,
As your blog becomes more successful, may I suggest instituting a comments policy? No racist remarks (to wit: yesterday’s comment about Somalis) or childish name calling (“dumb dog”) should be allowed. Adds nothing to the debate. We are all adults here (or most of us at least). Can’t we enjoy a civil discourse?
A loyal reader
I don’t think the comments are moderated, but they should ban the SINGLE person that said both of those things yesterday.
I completely agree.
What happened during the OREA/Ford Effect on Home Ownership/Realtors webcast this morning?
Thanks for the reminder Mark! There is nothing on OREA website, googled it and no one has written anything about it; no announcement no coverage not even a synopsis of his talking points. What I find interesting is that Ford’s twitter feed has NOTHING on it about the announcement either. If he actually had anything worth while to say I imagine they’d be trumpeting it there with headlines like “Ford helping families with affordable housing”…I imagine it was just a bunch of BS (he can’t do shit about housing) and more a favour to Hudak.
Money laundering report on B.C. casinos also came out today. Haven’t had time to crunch it yet but I’m sure there are some doozies in there
Yep, it’s pretty big. Another blow to Chinese dirty money in Vancouver and another message: “You are not welcome here anymore”
Good job Eby!
https://www.theglobeandmail.com/canada/british-columbia/article-bc-casinos-laundromats-for-proceeds-of-organized-crime-report/
I wonder how this report will affect local market physcology.
Interesting read here. It is not just millenials that have been priced out of housing, though I feel and hear they are the biggest and most important group effected. Long term renters of all ages are effected as landlords sell. Some people go through divorce and rent, and then they are priced out. Then they are forced from rental as it is sold and then end up paying twice the rent or have to move way out of the gta or live in substandard housing. If they can find substandard housing. Once you are priced out of the city it seems you are priced out. The whole thing seems to be disaster now. Except for those who can sell now or have an extra home or two to sell.
I would like to see 30 year mortgages like they have in the U.S. as it avoids some of the boom and bust in housing seen from the fluctuating interest rate cycle. Still it seems we have a housing shortage, supply and demand is also a major factor. Therefore, solutions are needed. As a realtor I see many people in their 70’s to 90’s living alone in large homes, and they do not see the need or advantage of downsizing. So the demographers or city planners were wrong on downsizing and much of the housing they thought we have is truly not available. There are many solutions but not likely any short term solutions to address the problem.
The quickest solution is to increase densities in many parts of the GTA.
At the same time create a new city with government putting in the infrastructure ( high speed train, sewers, highway ) and plan and create a European type new city with high density, with tons of surrounding shared green space, parks, shops. A walkable City that encourages social places and refutes individual automobile transit within the core.
A couple things…
The boomers are absolutely taking up a lot of the SFH inventory but they’re a big part of the population and what happens in the coming years when they all pass?
Regarding your GTA utopia – yes, of course. That would be ideal. The lack of infrastructure is the main reason we are not a “world class city”, at least not yet. But with wages so low relative to the cost of living here, who’s going to pay for that? Everyone is balking at rising property taxes and hoping Ford will cut the land transfer tax, and the province, like its people, is severely indebted. Toronto seems to barely be able to fix its pot holes! Ha! The point is, no one has any financial wiggle room. I feel like the city really f*cked up by not having a clear vision 40 years ago. And now here we are.
Two flaws with this survey based on what I read in the. BD article:
First, how is “recent buyer” defined? Pre or post stress test?
Second, an obvious question was omitted:
“What is your perception of the impact of historic low interest rates/easy credit on home prices?”