[paperchopper]

You guys know nothing about RE investing. RE is always a sound investment, when you can purchase a property and rent it out, and generate equity. Over the long term, you build equity. As the bank realizes you know what the hell you're doing and that you're a good steward of their capital, they will bestow more upon you, making both you and them very rich in the long term as you leverage their capital to build equity for yourself while earning ridiculous amounts of interest for them.

You cannot do this when the own-rent ratio is too high, as it is now, above 2:1. So the only point to buying today is to either a, live somewhere (but you can rent cheaper, so why buy?), or to, you got it, speculate.

As soon as the majority of market participants are speculators, then that is the very academic definition of a bubble.

 

[interested]

rofl?

Yes, no, you guys are right, prices will keep going up FOREVER! People are making $200K a year now on average and a $500K condo is chump change.

A bubble is a bubble is a bubble. The academic definition of a bubble is when the majority of the market participants are speculators-- ie all all of you "condo" investors who are negative gearing. Purchasing condos and flipping them, with the only reason being able to buy condos is due to rock bottom interest rates and lax lending standards on behalf of the banks.

Interested, I typed a long post but this freaking site times out after 5 minutes. Several points, 1, ARM's never reset from 2% to 20%, more like 2% to 5-6%, but people were maxed out to the hilt and as soon as they reset people couldn't afford them (cough cough Canada today). The highest interest rates I saw on Wall St were 9%, and those were Puerto Rican mortgages everyone was snapping up towards the end of '05. Second Miami went from $180K to 425K, about a 136% increase. Vancouver has gone from 325K for a detached house in '01 to 1M in '10, over a 200% increase. A 136% increase is about in line with Toronto/Montreal, hrmmm, similarities anyone?

Banks don't follow the qualifications for 5-6% when doing VRM's. They can add any hypothetical situation, ie a basement suite, your husband/wife taking a part time job, etc to make up the additional monthly payments that will be incurred as a result of the 2-3% extra interest rate, which is negligible.

The big one, which you are completely wrong on, is the interest rate argument and Toronto back in the day. The high interest rates SOFTENED the crash, not made it worse, because jacking interest rates from say 13% to 15% isn't going to raise your monthly payments by too much, perhaps by 5% a month if that. So the interest rates going up had nothing to do with it, it was just a bubble, and once people realize that it's a bubble, the bubble bursts and panic selling sets in. That's how they all burst. Anyways, carrying costs on $100k @ 4% are $500/month, boost that up to 7%, which is a very small increase in interest rates terms, and we're paying $700 a month per $100k, a 40% increase. Not so good.

Anyways, Brian, here are the reasons that have been repeated, oh I don't know, 50 trillion times as to why Canada has a housing bubble?

1. Historic, unprecedented low interest rates @ 2% that will not last (straight from the mouth of Marc Carney, BoC Governor)
2. Increased amortizations (35-40 years) and 0 or negative downpayments (BMO 2% cashback, TD 125% mortgage, etc)
3. Subprime (9% of Canadian mortgages are subprime, see Xceed Mortgage Corp)
4. Lax lending standards by the banks (every mortgage has a 'helper suite' to boost monthly income / borrowing amount)
5. CMHC insures virtually all mortgages, taking any risk off the banks (essentially risk-free money to them). CMHC has 9.1B in assets and over $900B in liabilities.
6. Average downpayment is approximately 7% in Canada-- indicating that nobody has any savings or can afford much.
7. Canada has a debt-to-income ratio higher than the USA did at the peak of their bubble, 147% vs 139%.
8. Over $1 trillion in mortgage debt - clearly pointing that the run up in prices is DEBT based, again, the classic signs of a bubble (cheap credit)

All of this has resulted in prices for single family homes going from $325K in Vancouver to 1000K in Vancouver, with similar increases elsewhere. The price of an average house in Canada is now $340K -- completely unaffordable by the average person without going into as much debt as possible.

Our per capita income purchasing power wise hasn't increased in over a decade. Canada hasn't become more productive. We're just taken on more and more and more debt on cheap credit, which is exactly what the:

1. Americans did (Pop!)
2. Irish did (Pop!)
3. Spanish did (Pop!)
4. British did (Pop!)
5. Japanese did (Pop!)

The 3 largest bubbles remain in China, Canada and Australia, coincidentally, the Chinese are driving Vancouver's RE market.

Canada has had many RE booms and busts, Vancouver has crashed 50% before, but this time it'll be far worse.

I would like to address the points I have bolded.

Again let me state that I too believe that prices will go down, however, I am not convinced they will pop despite your certainty of this fact.

On the ARM's, I did say that they went from 1% to 6% I believe. My point was that proportionately 3.5% today would be close to 20%. I was not saying it would go there and that is the reason I suggested 7%.

I do appreciate you are correct in stating that 13% going to 15% is not as big an issue as 1% increasing to say 3% or whatever. My point was that at 13%, and similar rents to today, rents could not justify the carrying costs. It meant that people yelled uncle after the first year or 2 of losses. The actual bottoming in Toronto happened in 1992 through 1996 essentially thought the downturn started in 1989.

My point is that at say 5%, rents (provided they stay at present levels) can support a property with zero revenue or slightly negative cash flow whereas in 1990, that was not the case with 13% interest rates.

My comments about Florida deal with the condo market. Let me give you my own example. We purchased in late 1980's for $62000USD a 1 bedroom condo. In 2000 it was worth about $70,000. By 2002, 135,000. 2004: 240,000. 2006 it hit about $350,000. Today it is back around $120-140,000. You can see what I was talking about with the trebbling and the fall back to less than 1/2 of the peak. None the less your point is taken. I simply wished to show that TO in 1985-1989 had similarities to the last 10 years in Florida in this market vs. about 100 (or say you are correct 136% increase over 10 years.) We both agree Vancouver is and remains ridiculous. And should China implode, all bets for Vancouver and Toronto, let alone China are off.

Finally, we all find CondoGeorge to be extremely positive about the market. We find it enjoyable to keep encouraging him to post. It makes to give us opposite views, as opposed to all of us agreeing to varying amounts.

 

[paperchopper]

Prime could easily go from 1 to 3-4% by the Spring, and mortgage rates would go up even more as they would price in the upwards price velocity.

All I'm saying this is a textbook real estate bubble. All the real estate companies, mortgage companies, finance ministers etc are out in full force denying it, meanwhile the writing is on the wall.

It would suck royally to commit to a $400K mortgage, commit your life savings when you have 0 job security, the economic outlook is uncertain and that $450K condo will be worth <$250K, leaving you forking out $3000+ a month and netting you nothing in return.

 

[simuls]

Based on what?

I said it was a guess but your selective quote ignored the first part of the sentence. It's simply based on my small, little observation on the ground in tons of empty condo showrooms downtown. As I've said all along I really hope that my feeling's regarding this bubble are wrong - if RE continues to appreciate I definitely end up coming out ahead - I just don't think I am and have yet to see any information that will show me otherwise. Now, if November thru May's numbers don't continue the downward spiral of prices (as we've seen over the past 5 months) then we'll know who was wrong and who was right.

Simuls,
See CG's post above.
What do you think of Bayside?
Realizing that you and I are on the same page expecting a decline (just somewhat different as to the exact amount).

Will that be the next " hot spot "?

I think CG is right, but the prices are still out of whack. I don't think many people realize how close the DVP is to Yonge St. For eg., the Distillery District, Corktown, West Don Lands - these are all closer to the subway and downtown than Liberty Village or West Queen West - an entire km closer! This eastern edge will be prime RE for the next 20 years and it's the only place in TO that I would put my money right now (I would not extend that over the DVP however unless what's happening to the Gardiner happens there and I don't see that for 40 years). You can find certain developments, including Riverside for less than $500/ft and if you're buying several you could probably get around $4-450. As is clear, I don't think now's a good time to buy as there's a correction coming (or it's already started), but in about 3-5 years, this would be my play.

 

[interested]

Prime could easily go from 1 to 3-4% by the Spring, and mortgage rates would go up even more as they would price in the upwards price velocity.

All I'm saying this is a textbook real estate bubble. All the real estate companies, mortgage companies, finance ministers etc are out in full force denying it, meanwhile the writing is on the wall.

It would suck royally to commit to a $400K mortgage, commit your life savings when you have 0 job security, the economic outlook is uncertain and that $450K condo will be worth <$250K, leaving you forking out $3000+ a month and netting you nothing in return.

On the first point re interest rates I expect a rise but not to that degree that fast. But possible. I agree with your point that velocity of rise may influence mortgage rates since banks will not want to lend at low rates if they expect a continued increase in price.
On the second point we agree.

 

[interested]

You guys know nothing about RE investing. RE is always a sound investment, when you can purchase a property and rent it out, and generate equity. Over the long term, you build equity. As the bank realizes you know what the hell you're doing and that you're a good steward of their capital, they will bestow more upon you, making both you and them very rich in the long term as you leverage their capital to build equity for yourself while earning ridiculous amounts of interest for them.

You cannot do this when the own-rent ratio is too high, as it is now, above 2:1. So the only point to buying today is to either a, live somewhere (but you can rent cheaper, so why buy?), or to, you got it, speculate.

As soon as the majority of market participants are speculators, then that is the very academic definition of a bubble.

You may be right. Maybe none of us but you knows anything about real estate investing.

However, whatever your point, it is unnecessary to be derogatory to those on this forum.

That said, I do agree with your point that the rent to own ratio is unfavourable now. Hence, I have not bought in the past almost 3 years any investment property for precisely that reason. The one that I purchased is presently up about 25%. However, it may well be down by 25% from purchase price within 3 years when ready. I am just not so knowledgeable as to know for sure. I have learned to be humble through past mistakes. Remarkably, I have learned that even with reasonable intelligence and knowledge, one simply cannot predict what will happen though one can anticipate trends. There are too many factors at play which my simple brain cannot assimilate all at once. Just when I think I have issues figured out, something happens to suprise me on the upside or downside. For eg. Did you think we would see Bank Rates at 0.25% or less in the US just 3 years ago (just before the meltdown.) Maybe you did but you get my point. Alot of smart people didn't see it coming or perhaps we all blindly chose not to see it.

As well, 3 and 1/2 years ago I purchased something for personal use and as such, I appreciate that I may not be making the best investment decision. That does not matter to me because that was not a "pure investment" but rather a luxury that I feel I can afford to treat myself to and do not expect to be forced to sell at a bad time.

As you said, over the long term, I will build equity. Even if it takes 20 years to do it. LOL

 

[X2 Buyer]

"Average downpayment is approximately 7% in Canada"

- I do not know if it is only me surprised to see only 7% average on down payment. I have primarily been in Chinese community plus my workplace (Caucasian dominated workforce)...almost over 90% people I know who have owned a house the average down payment is at least 20%. GTA picture may get skewed vs. whole Canada and the sample size from my own experience is small I realize; however it is just hard for me to be convinced. How about everybody else here? People that you know, on average what the % on all of your sample group's down payment?

Another question simply from Economic 101 if everybody remembers your first Economic course: increase inflation rate will drive/keep down interest rate, so I do not see any sudden burst caused by that (un-affordability). Debt-income ratio? If I were being able to afford $250K loan previously (7% i/r) so I can afford $500K loan today (3.5% i/r), correct? Not even mentioning some of people still have prime minus 1 or 1.5 rate. Unless there is huge supply vs. little demand but currently I do not think it is the case. People are afraid of the price drop so stop buying (panic effect?), but are there enough real demands, that will balance the supply?

I only believed the burst could happen following world wide financial crisis; everything will be plumed no matter what.

We haven't seen an obvious inflation here yet but in China gold price just surged - people store every commodity possibly to prevent money devaluation.

So my understanding this is what happening currently - stock goes up, as well as bond, futures, gold, basically everything, so no difference in R/E. I am not saying it is not at risk just what will trigger the burst eventually (other than the world-wide financial crisis) - just all of sudden? I just cannot get my head around. IMO the market will be adjusted downward reasonably that is more realistic to me.

 

[interested]

"Average downpayment is approximately 7% in Canada"

- I do not know if it is only me surprised to see only 7% average on down payment. I have primarily been in Chinese community plus my workplace (Caucasian dominated workforce)...almost over 90% people I know who have owned a house the average down payment is at least 20%. GTA picture may get skewed vs. whole Canada and the sample size from my own experience is small I realize; however it is just hard for me to be convinced. How about everybody else here? People that you know, on average what the % on all of your sample group's down payment?

Another question simply from Economic 101 if everybody remembers your first Economic course: increase inflation rate will drive/keep down interest rate, so I do not see any sudden burst caused by that (un-affordability). Debt-income ratio? If I were being able to afford $250K loan previously (7% i/r) so I can afford $500K loan today (3.5% i/r), correct? Not even mentioning some of people still have prime minus 1 or 1.5 rate. Unless there is huge supply vs. little demand but currently I do not think it is the case. People are afraid of the price drop so stop buying (panic effect?), but are there enough real demands, that will balance the supply?

I only believed the burst could happen following world wide financial crisis; everything will be plumed no matter what.

We haven't seen an obvious inflation here yet but in China gold price just surged - people store every commodity possibly to prevent money devaluation.

So my understanding this is what happening currently - stock goes up, as well as bond, futures, gold, basically everything, so no difference in R/E. I am not saying it is not at risk just what will trigger the burst eventually (other than the world-wide financial crisis) - just all of sudden? I just cannot get my head around. IMO the market will be adjusted downward reasonably that is more realistic to me.

I am not sure your first hypothesis is correct because while the interest would be 1/2, remember that one pays in a mortgage principal and interest back, albeit it mostly interest in the early stages of the mortgages. the other problem is that if prices drop, people who bought at a higher property value lose their equity and hence do not qualify when it comes time to remortgage.

By way of eg. Let's say: buy today at $400K. Put down 20% or $80K. Mortgage is $320K.
Property drops by just 20%: $80K. Your equity now is ZERO. Mortgage is still $320K. Unless you have enough of a down payment again, don't qualify and have to sell, further fuelling the downward spiral for all. So while you could afford the higher mortgage in theory, you have to remember a lot of people are locked in with a big principal amount which is a problem when the market is dropping. Remember X2, leverage is a 2 way street. When things go up 20%, your equity goes up 100% or doubles. However, a 20% decline as in this example, wipes out 100% of your equity. All you would have is the principal repayment you would have made on the mortgage which would be minimal in the first few years.

As for what could happen to destabilize: 1) a terrorist attack, sends stock markets plummetting, fear sets in, people don't make purchases, real estate stops.
2)Ireland defaults, followed by Portugal and Greece. Euro zone can tolerate that. Spain next (11%of the economy of the Euro zone). Euro comes under pressure, uncertainty, Euro devalues, less Canadian exports to Europe (they can't afford it). US dollar becomes go to place. Commodity prices drop (Europe using less) Canada economy is hurt. Jobs are lost, people feel less secure, don't purchase Real Estate.
3) China has a property bubble burst, suddenly less available investor capital, stop investing or decrease investment in Canada, demand dries up.
4) China has rampant inflation, government cranks up interest rates further, Yuan appreciates, China becomes less competitive, buys less from Canada and repatriates their money.
5) War breaks out between North and South Korea or in the Middle East.
6) Major banks default around the world as there is another ticking time bomb e.g. "derivatives" that implode.

These are just 6 that come to the top of my head. And then there are all those you or I could not anticipate.

the point is, investor sentiment and perception become very important. If people become paralyzed as happened after the Subprime in 2008, the "world as we know could rapidly unfold".

 

[Condo George]

Global credit crisis Prime 2.25% plus 1.5% because Cdn Banks were scared

Now after 75 pts up, Prime 3.00% -.90 = 2.10 net

So even after the rates hikes which scared everyone into sitting on the sidelines all summer, we are lower than 2008/2009 on vrm

5 yr fixed 3.44%

Geez I miss this board, you guys have a good one going on

 

[interested]

Global credit crisis Prime 2.25% plus 1.5% because Cdn Banks were scared

Now after 75 pts up, Prime 3.00% -.90 = 2.10 net

So even after the rates hikes which scared everyone into sitting on the sidelines all summer, we are lower than 2008/2009 on vrm

5 yr fixed 3.44%

Geez I miss this board, you guys have a good one going on

George, this is not a good thing. This is because the economy in most of the world is not good. Look at US, PIGS, and now concerns with China inflation. Mark Carney would be raising interest rates if he could but he can't for fear of killing the Canadian economy which still relies to a great degree on exports, 65% of which is to our friends to the South who are in all the trouble. If the US economy were going, interest rates and I can assure you mortgage rates variable or fixed would be much higher.

The bond market is accepting low returns and hence mortgages are low because the bond market at least is for now signalling they don't see growth coming back soon and are still pricing in the possibility of a double dip recession, which does not bode well for real estate.

That said, the real estate market continues to defy gravity and maybe you are right, TO will hit $1000/sq. ft. by 2014. I just don't think so but was curious to get your thoughts.

Lively discussion is fun, isn't it??

 

[X2 Buyer]

1) first hypothesis - I was talking about the cause of the drop so at the pre-stage of the drop not during the drop
2) a lot could've happened hypothetically -

- "a terrorist attack" or "wars" well what the difference if this happen today vs. any time being

- Not only Chinese investors invest in Canada. China's situation currently is to prevent the world hot money getting into the R/E market for bubble so where the hot money will choose to go after being refused there.

- Europe situation & bank issues - they are partially what I mentioned world wide effect.

- Commodity price drop from whichever the reason, wouldn't it be off-set by the inflation effect from US $ dilution?

Last point agreed - people's perception always play the big role. Just one addition, people need shelter. Canada is an immigration country. Immigrants love to have their own home rather than rental.

 

[Condo George]

Spike in Can inflation will be short lived, if not gov stim pkgs will be reversed and we go back to 29, I dont think they will let that happen imo

Bond market and Cdn banks ....... if they see trouble coming .90 off prime will not happen, when there are issues in 08/09 plus 1.5

 

[Condo George]

Vancouver will not be #1 spot for investment in 2011, alot of new buyers coming to Toronto folks that have been absent for some time

 

[interested]

Vancouver will not be #1 spot for investment in 2011, alot of new buyers coming to Toronto folks that have been absent for some time

Facts or figures to support this George?
Or is this based on what you have heard from your clientele?

 

[Condo George]

Its what I see in my everyday business and my instinct that Toronto will surpass Vancouver