[daveto]

Hard to believe but true, most Canadians have substantial equity in their homes, while they have been taking advantage of low rates, our balances are low (thus payments low). In addition, when people are selling their homes, because of this equity, most are not putting 5% down as a mortgage. They are putting gigantic downpayments.

Brian, thank you for your post. What is your source for the amount of equity and the amounts of downpayments? I ask because every source I have seen has indicated the opposite - specifically the % of equity is decreasing and mortgage balances nationwide are increasing at double digit rates.

 

[safeashouses]

Nice blog Brian. I look forward to reading and responding,

I've also read that people fear there is speculation in the market and that real estate should not be traded like stocks. Well, because of technology, it is. Back in the day, you had to call up a stock broker to buy and sell, much like a real estate agent. Today you can do it with a click of a button. What this has caused stocks to become more liquid as more people can trade faster...this is the natural progression of the real estate market.

Trust me friend, there's nothing more ILLIQUID than real estate. While there may have been some efficiencies in the flow of info (ie mls and sales data on the web) the transactional process is still long and arduous.

I'd love to hear (and critique) your 15% return claims. It's tough out there my friend. I am in the business myself and understand that in order to achieve those kinds of returns you need to assume a fair degree of risk. I would love to see what kind of deals you are targeting.

 

[BrianPersaud]

Nice blog Brian. I look forward to reading and responding,



Trust me friend, there's nothing more ILLIQUID than real estate. While there may have been some efficiencies in the flow of info (ie mls and sales data on the web) the transactional process is still long and arduous.

I'd love to hear (and critique) your 15% return claims. It's tough out there my friend. I am in the business myself and understand that in order to achieve those kinds of returns you need to assume a fair degree of risk. I would love to see what kind of deals you are targeting.

You're right, it can never be a simple trading of paper. However, in Toronto we have shown ourselves to be a fairly efficient market. Things priced right sells quickly.

In addition, people may be put off because they hear properties going $100,000 over list...this looks crazy on paper, but real estate agents purposely put properties significantly under list to get a bidding war.

as for critique, I do what everyone else does to make money in real estate. Tried tested and true formulas.

Quick example of 15% return that anyone can do. 20% down with a 25 mortgage roughly pays down 12.5% after 5 years regardless of rate. Combine with a marginal appreciation 2.1% per year..voila 15%...do the math yourself.

I'd advise people put the odds in their favour by buying significantly under market value or with cashflow or with an upside potential.

This business is simple, but not easy.

 

[BrianPersaud]

Brian, thank you for your post. What is your source for the amount of equity and the amounts of downpayments? I ask because every source I have seen has indicated the opposite - specifically the % of equity is decreasing and mortgage balances nationwide are increasing at double digit rates.

I've been trying to find the article I read, it was from a bankers association or a mortgage broker assoication. I'll keep you posted

 

[BrianPersaud]

Brian, thank you for your post. What is your source for the amount of equity and the amounts of downpayments? I ask because every source I have seen has indicated the opposite - specifically the % of equity is decreasing and mortgage balances nationwide are increasing at double digit rates.

Here is the study:
http://www.caamp.org/meloncms/media/Survey1.pdf

significant statistics:

- Roughly 9.1 million homes are owned in Canada. The estimated value of these homes is $2.67 trillion and the total outstanding mortgage principal on these homes is estimated at $739 billion. This means that Canadian homeowners have about $1.93 trillion in home equity, which amounts to 72.3 per cent of the total value of their homes.

- Home equity positions in the Canadian market are about 67 per cent greater than in the United States. The US Federal Reserve reports that of the more than 75 million American home owners, the average equity holding is 43 per cent which is in contrast to Canada’s average of 72 per cent equity in their homes.

- Roughly 9.1 million homes are owned in Canada. The estimated value of these homes is $2.67 trillion and the total outstanding mortgage principal on these homes is estimated at $739 billion. This means that Canadian homeowners have about $1.93 trillion in home equity, which amounts to 72.3 per cent of the total value of their homes.

-Of all Canadian mortgage holders, 68 per cent have fixed rate mortgages, 28 per cent have variable and only five per cent hold combination mortgages. Fixed rate mortgages are most common among those aged 18-34 years (71 per cent), while Canadians aged 55 years or older are most likely to secure adjustable rates (35 per cent).

 

[BrianPersaud]

Here is the study:
http://www.caamp.org/meloncms/media/Survey1.pdf

significant statistics:

- Roughly 9.1 million homes are owned in Canada.

There is twice this number of homes in foreclosure in the US!!!

 

[cdr108]

Here is the study:
http://www.caamp.org/meloncms/media/Survey1.pdf

significant statistics:

- Roughly 9.1 million homes are owned in Canada. The estimated value of these homes is $2.67 trillion and the total outstanding mortgage principal on these homes is estimated at $739 billion. This means that Canadian homeowners have about $1.93 trillion in home equity, which amounts to 72.3 per cent of the total value of their homes.

- Home equity positions in the Canadian market are about 67 per cent greater than in the United States. The US Federal Reserve reports that of the more than 75 million American home owners, the average equity holding is 43 per cent which is in contrast to Canada’s average of 72 per cent equity in their homes.

- Roughly 9.1 million homes are owned in Canada. The estimated value of these homes is $2.67 trillion and the total outstanding mortgage principal on these homes is estimated at $739 billion. This means that Canadian homeowners have about $1.93 trillion in home equity, which amounts to 72.3 per cent of the total value of their homes.

-Of all Canadian mortgage holders, 68 per cent have fixed rate mortgages, 28 per cent have variable and only five per cent hold combination mortgages. Fixed rate mortgages are most common among those aged 18-34 years (71 per cent), while Canadians aged 55 years or older are most likely to secure adjustable rates (35 per cent).

i'm sorry but you're sounding more like a RE shill than being objective and looking at all the angles/issues.

yes, Canada does not have US style non-recourse mortgages. Canada also doesn't have 25, 30, 35 year fixed rate mortgages. Ours typical one comes for re-financing every 5 years subject to changes in rates (which can only go up from here). Part of the problem with US mortgages had to do with ARMs that reset at higher rates ... that will be the same scenario here.

The statement you pulled is misleading as it includes all homes owned, including those WITHOUT mortgages.

From the same survey:

For home owners with mortgages, the average amount of outstanding principal is about $138,000. For those home owners with mortgages, the owners’ estimates of the current values of their homes average about $283,000. Therefore, home owners with mortgages have an average of $145,000 in equity, and their home equity equates to about 51.3% of the homes’ values. There are about 5.35 million Canadian home owners with mortgages.
(* and that's based on the current value of their home ... if the value goes down so does the equity, though the mortgage debt remains.)

For home owners without mortgages, the average home value is about $309,000. There are about 3.75 million Canadian home owners without mortgages.

Among Canadian home owners who have mortgages on their homes, ... 2% of them have negative equity and only 8% have equity positions of less than 10%. A further 16% have equity positions in the range from 10% to 24.9%. About three-quarters (74%) have 25% or more equity.

new mortgages (mortgages that are still in their original term and have not yet been renewed) that were taken out in the past two years.
Among these new mortgages, almost one-half (46%) had amortization periods exceeding 25 years. For those mortgages initiated during the period from six months to two years ago, about 30% had 40 year amortization periods. However, during the past six months, the federal government has eliminated its mortgage insurance guarantees
for amortization periods of more than 35 years. Therefore, for mortgages initiated during the past six months the share that have 40 year amortization has fallen sharply, to less than 10%. Correspondingly, shares have increased for amortization periods of more than 25 years up to 35 years. (30 years - 16%, 35 years - 22%, 40 years - 8%).

Equity Take-out
The survey data indicates that 15% of mortgage holders took out equity from their homes or increased the amount of the mortgage principal within the past twelve months. This is a reduction from the 22% rate found in the fall of 2008. However, the average amount of equity take-out increased, to an $42,500, versus $41,000 last fall. Detailed data collected in the Spring 2009 survey indicates that consumers were just as likely to take-out equity in the past six months as they were in the prior six months (at about
7.5% in each of the periods). The data also suggests that the average amount of equity take-out was higher in the most recent period (at $44,500) than in the prior six months ($40,500).

The survey asked borrowers how much their current monthly mortgage payment would have to increase before they would not be able to make their mortgage payments. The responses indicated that most borrowers have capacity to absorb payment increases. For example, just 3% indicated that they could not afford an increase of up to $50 and a further 5% could not afford an increase of $50 to $100. However, 8% of the mortgage borrowers indicated that affording their current payment is already an issue or concern for them. In total, about 15% of mortgage borrowers have relatively high sensitivity current payment levels or little room to afford payment increases in future.

 

[BrianPersaud]

i'm sorry but you're sounding more like a RE shill than being objective and looking at all the angles/issues.

yes, Canada does not have US style non-recourse mortgages. Canada also doesn't have 25, 30, 35 year fixed rate mortgages. Ours typical one comes for re-financing every 5 years subject to changes in rates (which can only go up from here). Part of the problem with US mortgages had to do with ARMs that reset at higher rates ... that will be the same scenario here.

The statement you pulled is misleading as it includes all homes owned, including those WITHOUT mortgages.

From the same survey:

For home owners with mortgages, the average amount of outstanding principal is about $138,000. For those home owners with mortgages, the owners’ estimates of the current values of their homes average about $283,000. Therefore, home owners with mortgages have an average of $145,000 in equity, and their home equity equates to about 51.3% of the homes’ values. There are about 5.35 million Canadian home owners with mortgages.
(* and that's based on the current value of their home ... if the value goes down so does the equity, though the mortgage debt remains.)

For home owners without mortgages, the average home value is about $309,000. There are about 3.75 million Canadian home owners without mortgages.

Among Canadian home owners who have mortgages on their homes, ... 2% of them have negative equity and only 8% have equity positions of less than 10%. A further 16% have equity positions in the range from 10% to 24.9%. About three-quarters (74%) have 25% or more equity.

new mortgages (mortgages that are still in their original term and have not yet been renewed) that were taken out in the past two years.
Among these new mortgages, almost one-half (46%) had amortization periods exceeding 25 years. For those mortgages initiated during the period from six months to two years ago, about 30% had 40 year amortization periods. However, during the past six months, the federal government has eliminated its mortgage insurance guarantees
for amortization periods of more than 35 years. Therefore, for mortgages initiated during the past six months the share that have 40 year amortization has fallen sharply, to less than 10%. Correspondingly, shares have increased for amortization periods of more than 25 years up to 35 years. (30 years - 16%, 35 years - 22%, 40 years - 8%).

Equity Take-out
The survey data indicates that 15% of mortgage holders took out equity from their homes or increased the amount of the mortgage principal within the past twelve months. This is a reduction from the 22% rate found in the fall of 2008. However, the average amount of equity take-out increased, to an $42,500, versus $41,000 last fall. Detailed data collected in the Spring 2009 survey indicates that consumers were just as likely to take-out equity in the past six months as they were in the prior six months (at about
7.5% in each of the periods). The data also suggests that the average amount of equity take-out was higher in the most recent period (at $44,500) than in the prior six months ($40,500).

The survey asked borrowers how much their current monthly mortgage payment would have to increase before they would not be able to make their mortgage payments. The responses indicated that most borrowers have capacity to absorb payment increases. For example, just 3% indicated that they could not afford an increase of up to $50 and a further 5% could not afford an increase of $50 to $100. However, 8% of the mortgage borrowers indicated that affording their current payment is already an issue or concern for them. In total, about 15% of mortgage borrowers have relatively high sensitivity current payment levels or little room to afford payment increases in future.

Shill? I thought I was fair in dispelling certain conjecture with unbiased research. All the sources I cite don't care if you buy real estate, it's all 3rd party.

Taking a look behind the curtain of hysteria we see:
- 42% of Canadians have no mortgages
- of the remaining that do have mortgages they average over 50% equity
- 75% of Canadians have 25% or more equity

Do you realize how large this number is? that means Canada must see a US collapse double what happened in the US before our equity positions are wiped out...and no way is are banking system that over leveraged.

The equity Canadians have is huge! Compare it Internationally. read the IMF (see here
Canada's real estate appreciation lagged International the statistically proven indicators for growth.

35 Amortizations don't automatically mean our market is in a bubble. You have to take a holistic approach of looking at incomes, net job creation, infrastructure spending, political climate, affordability, transportation improvements etc etc to determine where the market is heading...and then you have to study further what that particular housing type is going to do in that particular neighborhoods...because no buys Canadian real estate, or Toronto real estate...they buy specific properties in specific neighborhoods in specific towns.

Further more,
From the Canadian bankers Association website it states in Ontario 0.43% of mortgages are in arrears. It's up 3000 from the peak of the market for the entire province (when 35 year mortgages didn't exist). Put that in perspective: There was 4000 new home sales for september 2009 in the Toronto area alone.

Regarding equity take outs. Money has never been this cheap ever...of course there are going to be a lot more equity takeouts. It's tax free money and people have lots of equity...of course their going to take advantage of it. They use it to give their kids downpayments for their homes, buy second properties, invest, pay off bad consumer debt, and improve their homes.

 

[Therion]

I thought Brian was quite reasonable with his postings. I mean, he's got statistics. How many of the other real estate agents come armed with those, other than the latest monthly sales numbers?

As to housing, I've been mostly in the Garth Turner "housing collapse is imminent" camp for a while (despite recently having bought a house and moved up the property ladder). What changed my mind short-term was the huge number of alt-a and option-ARM mortgages in the States that are about to reset. This will mean that the Fed can't raise interest rates for a while, or the number of foreclosures will skyrocket. No Fed raise = no BoC raise = housing in Canada will keep going up for a while.

That's my lay take on it...

 

[safeashouses]

Quick example of 15% return that anyone can do. 20% down with a 25 mortgage roughly pays down 12.5% after 5 years regardless of rate. Combine with a marginal appreciation 2.1% per year..voila 15%...do the math yourself.

Brian,

You're either uneducated in matters of basic finance or intentionally misleading your audience. I'll give you the benefit of the doubt and go with the latter.

What the above omits is a realistic cash flow statement demonstrating how the investment will perform over your expected 5 year holding period. If you buy a condo for $500 per square foot that rents out for $2 per square foot gross and yields under 3% net ($24 in gross rent, 60% operating profit so $14.4 per year net) then your 'investment' is probably not covering your cost of debt. You are very likely going to have to reach into your pocket to own this property for 5 years and then pray that it's worth more than you paid 5 years down the road when it's now 5 years old and you're competing with hundreds of newer projects being marketed to people with your 'can't lose' approach to condo investing. After all transaction costs I'd be shocked if you broke even.

You are better off speculating on the price of gold. At least there are plausible arguments by respected analysts why it's value will increase and you have instant liquidity.

Brian, listen up friend: real estate is a leverage game, there's no question. The trick or challenge is to leverage assets that can realistically generate a return that exceeds the cost of capital. New condos in Toronto fail to demonstrate that capability.

Thanks for allowing me this debate. I look forward to your response.

 

[BrianPersaud]

Brian,

You're either uneducated in matters of basic finance or intentionally misleading your audience. I'll give you the benefit of the doubt and go with the latter.

What the above omits is a realistic cash flow statement demonstrating how the investment will perform over your expected 5 year holding period. If you buy a condo for $500 per square foot that rents out for $2 per square foot gross and yields under 3% net ($24 in gross rent, 60% operating profit so $14.4 per year net) then your 'investment' is probably not covering your cost of debt. You are very likely going to have to reach into your pocket to own this property for 5 years and then pray that it's worth more than you paid 5 years down the road when it's now 5 years old and you're competing with hundreds of newer projects being marketed to people with your 'can't lose' approach to condo investing. After all transaction costs I'd be shocked if you broke even.

You are better off speculating on the price of gold. At least there are plausible arguments by respected analysts why it's value will increase and you have instant liquidity.

Brian, listen up friend: real estate is a leverage game, there's no question. The trick or challenge is to leverage assets that can realistically generate a return that exceeds the cost of capital. New condos in Toronto fail to demonstrate that capability.

Thanks for allowing me this debate. I look forward to your response.

By way of your passive agressive tone you seem a tad angry...anyways...your welcome into the debate.


1) So what you feel I said is that by buying a condo $500 psf and putting 20% down you will be carrying huge cashflow losses...when actually I said putting 20% down on a property with just mortgage paydown and about 2% appreciation you will yield 15%+.

Perhaps I should of qualified it by saying a break even property, which may be a condo, but not at $500psf. If you can't find a property that won't at least break @ 20% a 30min drive away from downtown you have to fire your realtor.

In addition there are dozens of other strategies to make that 15% even if you are carrying negative cashflow (buy with capital gain built in, rezoning and flipping, doing a wrap, reno-flipping building an assembly etc etc)

2) If I was advising someone to buy a condo, and at $500 psf, I assuming you mean pre-construction because you can still find "new" resale for under $500psf, you're not carrying a mortgage...and with astute negotiation you can cut down occupancy costs, property taxes, closing costs, maintenance fees, assignability fees and price...ensuring that if you "speculate" you are protected as best as you can.

3) In addition, comparing pre-construction condos to gold is not entirely fair.

a) Pre-construction condos your deposit is insured by Tarion. Gold there is no insurance against the loss
b) Real Estate has out performed gold..while that may change in the future, I don't want to be reading the paper every day watching the huge fluctuations in gold we have seen over the past 3 years...i'll take my steady eddy 9% appreciation in real estate anyday. Real estate is a slow business.

4) I think i debunked the oversupply issue already. In the preceeding 4 years there was massive building of new homes (see my blog for the research). The reason why we have bidding wars is because the market is currently undersupplied.
5) As for a leverage game, that may be the right strategy for you. But there are dozens of empty condos in Montage at city place showing you otherwise. Isn't possible Joe professional, Jane Doctor, and Herbert Lawyer would buy a condo negative cashflow for the tax benefits? for them its the right strategy and prudent strategy because of the huge equity upside they have.


Man these forums are bit addicitive. I have lots of work to do, I apologize in advance if I dont respond promptly.

 

[simuls]

3) In addition, comparing pre-construction condos to gold is not entirely fair.

a) Pre-construction condos your deposit is insured by Tarion. Gold there is no insurance against the loss

You are only insured by Tarion up to $20 000, the rest is protected by a Trust set up according to the Condo Act of '98.

b) Real Estate has out performed gold..while that may change in the future, I don't want to be reading the paper every day watching the huge fluctuations in gold we have seen over the past 3 years...i'll take my steady eddy 9% appreciation in real estate anyday. Real estate is a slow business.

Your steady eddy 9% is an assumption. From 1992-2004, in Toronto, housing prices appreciated 0% above the rate of inflation.

4) I think i debunked the oversupply issue already. In the preceeding 4 years there was massive building of new homes (see my blog for the research). The reason why we have bidding wars is because the market is currently undersupplied.

While it is quite clear that at this very moment and probably for the next 6-10 months, there is an undersupply of condos in Toronto, that will drastically change over the course of the following 6 months with approximately 15 000 new condos being registered in the core alone. This will more than overcorrect to the side of oversupply, especially with rents being approximate 35% less than necessary to justify the investment side of a condo purchase. Not only that, but this current low interest rate environment has encouraged an entire generation of home buyers to enter the fray 2-5 years earlier than would've been expected, thus poaching future new home buyer sales and it is this segment that is almost entirely responsible for the current RE wave. So, there is a very strong possibility of not only oversupply, but under-demand, leading to a housing downturn in Toronto. Please keep in mind I speak only of the condo market. I do not see any of this happening in the freehold house market as Toronto's core is pretty much built out.

 

[zeeden]

While it is quite clear that at this very moment and probably for the next 6-10 months, there is an undersupply of condos in Toronto, that will drastically change over the course of the following 6 months with approximately 15 000 new condos being registered in the core alone.

Can you direct me to where you found this information? This would be helpful.

 

[urbandreamer]

^You could go up the CN tower and look out the windows. How many construction cranes do you see?

 

[taal]

I think this is a very valid point though, if you look at the nature of the sales over the last year or so the only driving factor has been low interest rates - prices barely dropped - they stopped increasing. The number of first time buyers is extremely high, ask any relestate agent and you'll get this impression right away.

I wouldn't ask anymore then that though - why? Biting off the hand that feeds you is never a good thing - that applies to investors as well if you catch my drift ...

Anyway, to sum it up - I think we'll looking at a very interesting spring / fall 2010 - Don't forget the impact of HST as well, particularly at the non-first time buyer end of the spectrum. So we have incentives in multiple markets for different reasons. The question is, after HST is applied and grumblings of rate increases begin, what happens? One can only wait and see ...