[downtowner1]

I have been lurking on this thread for months now, and thought I would jump in as a typical condo buyer (aka not all that knowledgeable but trying to learn). I know someone up thread was interested in what the general population are thinking.

I bought my condo just over 4 years ago, right around the time of crazy multi offers before the land transfer tax kicked in and right before the world economic meltdown. I bought an older condo, one plus den that needed updating, right in the St. Lawrence market area, and set about investing in a new kitchen and some other renovations. This is the first property I had ever bought and I did it as a late 20 something singleton. I didn't really do that much research into the economics of it before I took the plunge, as my parents and other friends all said buying is best, of course!

After a few years of nice low monthly payments (thanks variable rate mortgage, 40 year amortization and low maintenance fees!), about a year ago I started actually educating myself on the housing market and fundamentals. And I'm scared of what I see. I have read threads like this, sites like the Greater Fool and it all makes sense to me that the current condo/ housing market is unsustainable.

I look around at my friends, single and coupled up, and we have all somewhat struggled to stretch our dollars based on when we all bought places 4 to 6 years ago as young downtown professionals. We bought when a one bed in a good location was 250 to 300, and now those same places are 340 and up. How can the people "behind" us afford our units once interest rates go up (which they surely will)? I don't think they can, and those higher rates plus the huge supply of condos coming will surely cool the market off (or send it into a major downward spiral).

So now I'm wondering what to do about my place. I still love the space and location, but the view is about to be obscured by up to 2 new projects assuming they go ahead (60 Colborne and the 93 King building application that went in). And I'm scared of what is to come in the market generally. I don't see myself as a long-term condo dweller, ultimately I would like to live in a house, and I'm nervous that a market fall will coincide right with when I will be ready to make the move which will likely be within the next 3 to 4 years.

My options are sell and rent at what also seems to be obscene rates of about 1600 pm for an equivalent space to mine in my area, more than my total costs have been to own my place over the last few years, or stay put and risk the money I have in principal if the market does go south as well as put up with two constructions projects right across the road from me. There's no way I would sell and buy anything right now, as then I would be in an even worse position if the market does sink, plus I can't afford a house in what to me is a decent location.

I have talked to many of my friends about the property market (all young 30 somethings like me) and while most of them feel the market is a little overheated, I don't think any of them really have any concerns about a US style meltdown. They definitely all still have the "property always goes up in value" mentality, likely because that is what has always happened while we have actually been paying attention. I'm the only one who is truly concerned about what is to come.

I feel I have just rambled, but thought I would share the views of someone who is aware of the rumblings of a bubble but still not sure what to do. I'm sure there are others out there like me, but I do also think a lot of people still have little to no awareness of the bubble talk and still think it's different here.

 

[cdr108]

^ ^ ^

welcome downtowner1, and thanks for sharing your experience.
it's always good to hear what the 'person on the street' thinks.

it sounds like you've educated yourself, which is more than i can say from the majority of the population, on what is ultimately the largest purchase in one's life.

you mentioned that you bought 4 years ago, variable rate mortgage, 40 year amortization and low maintenance fees.
how has that changed/will change in your situation?
will you be coming up for renewal next year and still be eligible for the longer amortization (ie. 35 years remaining) or be forced to 30-year amortization or lower?
are you considering changing over to fixed rate mortgage?

you also indicated that you (and your friends) are struggling ... how stretched are you?
can you afford an increase in couple hundred basis points ... each 1.00% rise = ~10% higher mortgage payment, if all things remaining the same.
slightly off topic but quite relevant, do you have at least 3 months of funds (ideally 6 months) for expenses should something happen like unemployment, etc?

if your total carrying costs to own is less than renting (recalculate at the higher renewal rate and term), then it's probably best to stay put, but you may possibly lose any capital appreciation.

it's the transaction costs to buy/sell R/E that makes it difficult along with timing the market.

it's mostly those coming 'behind' you that will be facing a tougher burden.

 

[interested]

I would echo some of cdr's thoughts.

Welcome downtowner1.

Unless you are very tight and cannot afford a 2 or 3% increase in mortgages (incidentally that will increase your montly payments by 14 to 16% I believe for every 1% rise in interest rate, I would not do anything. The house you wish to buy will also presumably come down somewhat though I personally believe condos represent a larger risk than Single Family Houses or even Townhouses.

However, as you point out, you have to live somewhere. I suspect you are not spending more than the $1600 to run your place. You will incur transaction costs to buy and sell again. So, since you like where you live, and assuming you can carry it, I would not sell with the idea that in 3-5 years after renting you buy.

This is great if you can time the market. You can see a lot of us on this forum have waited a long time for the correction and have been proven wrong (though what should have happened did in late 2008 and early 2009...just the government intervention, the dropping of interest rates, and lots of quantitative easing (lots of money floating around) made it cheap and prevented the correction which must occur.

However, over 3 years, the 10% transaction costs (realty fees, Land Transfer taxes, legals, moving costs etc.) will offset a great amount of the gain.

Also, what if we are wrong and there is not a 35% correction but only a 10% or 15% one?

I guess it is a question of which thought bothers you more. Losing 10% immediately which may or may not turn out to be correct.

Remember, you are not the typical investor, rather you are an end user. You are gaining non financial benefits of home ownership. It is yours, you do not have to answer to a landlord or move because the landlord wants to sell or move in. You like
where you live. So I would stay put provided you meet cdr's criteria...that you have some money for a rainy day and you can handle a 2-3% increase and have a stable job/income.

And if not, hopefully you have parents or family who will backstop you if they can if everything conspires against you.

Hope this advise helps.

 

[rbt]

I don't see myself as a long-term condo dweller, ultimately I would like to live in a house, and I'm nervous that a market fall will coincide right with when I will be ready to make the move which will likely be within the next 3 to 4 years.

This is a move up right? So you want a crash.

A 10% drop to your condo is a reduction of $30,000 in value. A 10% drop on the house might be a $50,000 reduction in value.

You've just saved $20,000.


Unless you believe your area will devalue far more than the upgrade (house) you plan on moving into, then keep it, put as much into savings as possible (for a downpayment), and hope for prices to drop.

 

[interested]

^^^
rbt: I am not sure this is correct. In the last year, it is my understanding that SFH are up about 10% whereas condos only 2%. Hence, in a downturn, it does not necessarily follow that he will get the savings you suggest.
This would be more accurate if talking about upgrading condos where I think your valuation would hold true.

 

[downtowner1]

Lots of food for thought here, thanks!

To answer a few questions:

- I can handle a shorter amortization period/ higher interest rate comfortably. I was perhaps being a little hyperbolic on the "struggling" thing to prove my idea that current prices aren't sustainable. I live a 20 minute walk to work, so have no transport costs and no car. My job is as secure as any in these tough times. It's a family business, I would only be unemployed if it went under.

- My concern is indeed that the condo market will decline more/ faster than the housing market. I would probably be less concerned if I was looking to stay in the condo market, although there is the construction factor (the sign went up about the 93 King development just recently).

- A 35% decline is terrifying and would wipe out all the money I put towards my place, plus I would be looking for money for closing! I guess I would be happy that I wasn't underwater, but yikes. My fear of a decline like that is I would feel "stuck" in my condo and like I had to stay here even after I was ready to live closer to the ground again. I have some RRSPs but the bulk of the money I have is tied up in my condo.

I should say I will be talking to my family's financial adviser before making any final decisions, but want to make sure I have done my due diligence on my own as well.

One question - when I look at spend on rent versus own, should I take my total monthly spend for owning (including what goes against principal) or should I consider the amount going against principal as being like a "saving"? Or is it only a saving once you have sold and up until then a cost?

Thanks so much for the input, and sorry to hijack part of the thread! I wish I could give more valuable input to this thread, but for now I'm more of a student than a teacher.

 

[interested]

^^^
these are very smart observations on your part. Just remember planners don't make money if you invest in condos, they make money if you put it in the market or buy mutual funds etc. Hopefully your family's advisor will be objective.

The principal repayment in my view is like a saving. Of course if the investment (the condo) drops in value, your savings will decline. However the same will happen to a stock, mutual fund or other investment if it declines.

The one thing you said is a 35% decline is terryfying. It would be. But I would bet that the stock market and other investments will be declining at the same time. So unless you are sitting on cash or gold which brings in nothing what do you do? If you are not going to sleep at night, then I would sell. If you on the other hand accept that you are happy where you are, I emphasize again I would not move now. Also, who says and I don't know your time frames but have you met the person you are going to marry and figured out you are going to a house in 3-5 years or is this just speculation at this time. I say this not to pry but to suggest that if you know that is the time frame, you are in a committed relation that you see leading to marriage in the near future (or living together) and having that family then maybe you do take your equity out today and sell. If on the other hand you are only thinking things will unfold this way and are not in the committed relation, your plans may change drastically going forward.

Not much help I know, just a way to consider the issue in my view.

I

 

[cdr108]

The one thing you said is a 35% decline is terryfying. It would be. But I would bet that the stock market and other investments will be declining at the same time. So unless you are sitting on cash or gold which brings in nothing what do you do?

preferred CDN bank shares that pay ~5% dividend.
declines and gains are limited but you'll sleep at night.

 

[interested]

^^^
good point.
But from the report you posted cdr: Canadian banks got $114B from governments during recession of 2008.

Fully 3 of the big 5 banks were under water. Surely if there is a 35 % decline in real estate, especially precipitously, even with a number of mortgages off the balance sheet at CMHC, I doubt the "dividend" would be there especially if the problem persisted. I would expect a cut of the common share dividend and probably the pref's. I agree this is unlikely but I am not sure from this article that one would be sleeping at night.

 

[cdr108]

^^^
good point.
But from the report you posted cdr: Canadian banks got $114B from governments during recession of 2008.

Fully 3 of the big 5 banks were under water. Surely if there is a 35 % decline in real estate, especially precipitously, even with a number of mortgages off the balance sheet at CMHC, I doubt the "dividend" would be there especially if the problem persisted. I would expect a cut of the common share dividend and probably the pref's. I agree this is unlikely but I am not sure from this article that one would be sleeping at night.

i doubt the pref's would be touched, unless the banks completely collapsed.
the dividends for the common shares are another matter, and their share price would be cut

 

[interested]

On the National tonight they have their at issue panel discussing the housing situation. All the economists/reporters there are predicting the end is now here. Patti Croft is saying 10-15% cut but if a bubble could be 30-50%.

I think if enough of them talk about it on shows like this, it is inevitable. I am not saying they create the bubble but they may ensure a disorganized unwinding.

They talk about the condo market which many of us here have said is ridiculous and they point out when the investors stop, there will be a big question as to where the floor is. I said before and I say again, I think we will revisit 2008 prices in the condo market for sure. Not as sure about the SFH's.

 

[CN Tower]

On the National tonight they have their at issue panel discussing the housing situation. All the economists/reporters there are predicting the end is now here. Patti Croft is saying 10-15% cut but if a bubble could be 30-50%.

I think if enough of them talk about it on shows like this, it is inevitable. I am not saying they create the bubble but they may ensure a disorganized unwinding.

They talk about the condo market which many of us here have said is ridiculous and they point out when the investors stop, there will be a big question as to where the floor is. I said before and I say again, I think we will revisit 2008 prices in the condo market for sure. Not as sure about the SFH's.

I like Amanda. The others are useless fill ins. The CAW has an economist? Really? The other 2 had nothing interesting to note.

Sure watch Toronto slow from 28,000 units to 20,000 units sold in 2012. And watch new prices rise moderately. There has to be a limit to e number of spec units units along Richmond and Adelaide and in that busy King West corridor between University and Spadina.

But in the established areas things will continue to sell, briskly.

 

[Eug]

Just remember planners don't make money if you invest in condos, they make money if you put it in the market or buy mutual funds etc. Hopefully your family's advisor will be objective.

There are fee-for-service planners out there who bill hourly, not just with commissions from funds or insurance sales, etc. I haven't used one yet, but I'm beginning the process of looking.

I like to manage my own finances, but things are getting a little too complicated for me, both in terms of direction, and in terms of day-to-day mechanics. However, I think I were to get some advice, I think I can manage from then on. I'd need a couple of hours of an advisor's time to get me started though, with some periodic hourly fee-for-service tuneups.

 

[interested]

There are fee-for-service planners out there who bill hourly, not just with commissions from funds or insurance sales, etc. I haven't used one yet, but I'm beginning the process of looking.

I like to manage my own finances, but things are getting a little too complicated for me, both in terms of direction, and in terms of day-to-day mechanics. However, I think I were to get some advice, I think I can manage from then on. I'd need a couple of hours of an advisor's time to get me started though, with some periodic hourly fee-for-service tuneups.

Makes sense Eug...
I agree with your idea of paying a fee only advisor.

3 comments: 1) Even if you have an advisor, stay on top of your investments. There are constantly reports of malfeasance by advisors. You have to oversee and ensure the advisor knows you are on top of the situation.
2) forgive my cynicism. The fee only advisor model became popular with the crash of 2008. Why? Because people got scared, investments plummeted, people did not wish to pay trading fees and suddenly in a down market or flat market, it was tough to make money. So introduce flat fees (1-2%) and you the advisor make a fee on a percentage of the holding rather than trading away.
3) Planners supposedly do make more money for their clients than people without planners. Don't know who assembles that data (though I suspect it is the financial industry) but I think it would be fatally flawed anyhow since the people who use planners already likely 1) have more money than those who don't and 2) are more educated and concerned about their wealth and therefore more informed...in other words a skewed population group.

Please understand as well, professional money advisors beat the market less than 20% of the time. And 80% of your return is where you place the money.. the final 20% is the actual investments in general. By this I mean that if you decide to invest in the TSX for eg. most of the return you will get is from that decision. Now, you may get advise and hit it out of the park but the reality is with a diversified portfolio, the decision to buy an ETF of the whole market in the longer term will make up 80% of the return and the last 20% will vary. When you factor in fees in a low interest rate environment it is difficult when one adds the fees to beat the index and this has been happening a lot.
Just my 2 cents.

 

[brockm]

I like Amanda. The others are useless fill ins. The CAW has an economist? Really? The other 2 had nothing interesting to note.

I dislike Amanda Lang greatly. She's even worse than most of the CNBC hacks in that she is generally incapable of objective economic analysis. Her economic worldview is colored with an extremely political disposition. A decidedly social democratic one. Based on watching her blather for the last few years I can deduce that:

1. She supports nationalistic economic protectionism, with very little in the way of economic argument to back up her views other than romantic notions of Canadianism;
2. She views all of our economic problems today as largely the fault of supposed capitalism run amok due to a lack fo regulation;
3. She thinks highly or regulators and central bankers.

Essentially she's a statist, corporatist run-of-the-mill left-wing populist commentator who happens to report on business. Yay!

I don't know, but I'm guessing she thinks highly of Paul Krugman from the things she says. And I don't think highly of people who think highly of Paul Krugman.