Baby, we got a bubble!?

[Eug]

daveto,

Ignoring extra transaction fees for the time being:

If you bought in Oct. 2008, and then sold in Jan. 2011, you would actually be 9% ahead.
If you bought in Aug. 2008 (which was the 2008 peak), and then sold in Jan. 2011, you would actually be nearly 7% ahead.

And of course, you still need to live somewhere. Whereas I may agree that speculation in the housing market may not be the best idea right now, when you buy a home to live in it for an extended period and you can afford it, then that's a completely different kettle of fish.

I don't think your smoking analogy is a very good one. If he lights his house on fire, and the fire department doesn't make it in time and the house burns down, then he loses the house and his family dies of smoke inhalation.
If he buys an affordable house to live in for an extended period, and then the real estate market drops 20%, then he continues to live there and make his mortgage payments. Somebody buying an affordable home doesn't need intervention to keep it.

---

BTW, if you were very bullish about real estate in early 2008, I'm not sure you were looking at things completely objectively. Now you've swung to the other extreme. Why such a big change in such a short time?

From my posts it should be clear by now I am not a big bear. However, it should also be clear I am not a bull. I think the info out there most suggests somewhere in between, and so I'm somewhere in between too.

 

[daveto]

daveto,

Ignoring extra transaction fees for the time being:

If you bought in Oct. 2008, and then sold in Jan. 2011, you would actually be 9% ahead.
If you bought in Aug. 2008 (which was the 2008 peak), and then sold in Jan. 2011, you would actually be nearly 7% ahead.

And of course, you still need to live somewhere. Whereas I may agree that speculation in the housing market may not be the best idea right now, when you buy a home to live in it for an extended period and you can afford it, then that's a completely different kettle of fish.

I don't think your smoking analogy is a very good one. If he lights his house on fire, and the fire department doesn't make it in time and the house burns down, then he loses the house and his family dies of smoke inhalation.
If he buys an affordable house to live in for an extended period, and then the real estate market drops 20%, then he continues to live there and make his mortgage payments. Somebody buying an affordable home doesn't need intervention to keep it.

---

BTW, if you were very bullish about real estate in early 2008, I'm not sure you were looking at things completely objectively. Now you've swung to the other extreme. Why such a big change in such a short time?

From my posts it should be clear by now I am not a big bear. However, it should also be clear I am not a bull. I think the info out there most suggests somewhere in between, and so I'm somewhere in between too.

Eug, in response to your points

1. a) Is there a typo in your figures - perhaps #2 was supposed to be 19%?
b) Are these nominal, or are they net of 6% inflation?
c) Excluding transaction costs?? I didn't know that was an option.

2. I 100% agree that there is nothing wrong with buying a home, regardless of the current state of the price cycle. In the same way that there is nothing wrong with buying oranges or a ferrari. However, many people are borrowing money to buy real estate due to a) unsustainably low rates and b) an expectation of almost guaranteed speculative profits.

3. You're entirely right about my outlook in early 2008. I'd never really studied the subject or read anything about it. I had the same perspective as most people - informed by MSM and marketing/propaganda, and thinking it was easy money. Once I applied a little common sense and analysis to it, I was shocked by the things I learned. I don't think I'm at an extreme. Rather, I'm a one eyed man in a land where most are still as blind as I was in early 2008. Again, nothing wrong with owning RE. But there is something VERY wrong if it represents the majority of one's assets.

 

[Eug]

Eug, in response to your points

1. a) Is there a typo in your figures - perhaps #2 was supposed to be 19%?
b) Are these nominal, or are they net of 6% inflation?
c) Excluding transaction costs?? I didn't know that was an option.

a) No, Teranet's numbers indicated 9% (2011-01 vs 2008-10) and 6.7%(2011-01 vs 2008-08 peak) respectively.
b) No, these are not inflation adjusted numbers.
c) I suppose you can sell privately to reduce transaction costs, and the good news is that nowadays cheaper MLS listing services are starting to appear too.

3. You're entirely right about my outlook in early 2008. I'd never really studied the subject or read anything about it. I had the same perspective as most people - informed by MSM and marketing/propaganda, and thinking it was easy money.

Strangely enough, most people I know are nowhere near that bullish... except a few people from Asia looking at the Vancouver market.

Again, nothing wrong with owning RE. But there is something VERY wrong if it represents the majority of one's assets.

I don't think there's anything wrong with real estate representing the majority of one's assets. If you're going to spend $2000 a month on housing, it often makes just as much sense to put it towards a mortgage as it does to pay a landlord.

 

[jeff316]

I don't think there's anything wrong with real estate representing the majority of one's assets. If you're going to spend $2000 a month on housing, it often makes just as much sense to put it towards a mortgage as it does to pay a landlord.

I think this is the strongest driver of young people entering the housing market in urban areas. Rents are at levels that do not make renting more financially compelling.

This is particularly true if you're looking for multi-bedroom apartments or houses. You can pay 2000$ a month to live in someone else's house, or you can pay 2000$ a month to live in "your own". Now, that's not the soundest rationale for entering the market, but that's the calculus for many.

Increasing interest rates will help make renting more attractive but it is still quite expensive to rent a transit-accessible two or three bedroom unit in the city.

 

[Eug]

I think this is the strongest driver of young people entering the housing market in urban areas. Rents are at levels that do not make renting more financially compelling.

This is particularly true if you're looking for multi-bedroom apartments or houses. You can pay 2000$ a month to live in someone else's house, or you can pay 2000$ a month to live in "your own". Now, that's not the soundest rationale for entering the market, but that's the calculus for many.

Increasing interest rates will help make renting more attractive but it is still quite expensive to rent a transit-accessible two or three bedroom unit in the city.

I think one advantage to renting is that sometimes you actually do get more "value" to your dollar, in a way (if you ignore the fact that as a renter you don't own anything).

For that kind of coin it's easier to to rent an older unit that is a little bit bigger. If you buy, for the same amount of money, you'll probably end up in a smaller place..

Which brings me to another point. New builds are getting more expensive, but not by as much as $/sq. ft numbers would make you believe. There has been a long and gradual shrinkage in the size of units, which means that these are still "affordable". Too small for my tastes, but within reach of first time buyers.

Note that this all applies to new renters, those who are looking now. The math is different for those who have been renting already for the past 10 years or whatever. They get protected if they are continuous renters.

When I moved out of my 1 bedroom 700+ square foot place steps away from Yonge & Bloor in the late 90s, I was only paying around $700 per month including parking. After I moved out, they jacked up the price to over $1000.

 

[daveto]

I think this is the strongest driver of young people entering the housing market in urban areas. Rents are at levels that do not make renting more financially compelling.

This is particularly true if you're looking for multi-bedroom apartments or houses. You can pay 2000$ a month to live in someone else's house, or you can pay 2000$ a month to live in "your own". Now, that's not the soundest rationale for entering the market, but that's the calculus for many.

Increasing interest rates will help make renting more attractive but it is still quite expensive to rent a transit-accessible two or three bedroom unit in the city.

Jeff, there are a large number of properties listed on MLS for both rent and sale. In every listing that I found, based upon the asking prices, it was significantly cheaper (20-40%) to rent than to own (even at current interest rates.)

The argument of "why pay your landlord's mortgage?" is a marketing hook and nothing more. Renting is almost always cheaper. Anyone who argues the contrary is usually leaving out key costs (property taxes, transaction costs, maintenance costs, opportunity costs from other investments forgone).

Find a suitable 2/3 bedroom transit accessible unit and do the math, and then see what you can rent for that money.

Again, I'm not arguing against owning a home. There are many great things that come with that, and it is very attractive for a family. But the argument that it is cheaper than renting simply isn't true.

 

[hodgkinsken]

Note that this all applies to new renters, those who are looking now. The math is different for those who have been renting already for the past 10 years or whatever. They get protected if they are continuous renters.

When I moved out of my 1 bedroom 700+ square foot place steps away from Yonge & Bloor in the late 90s, I was only paying around $700 per month including parking. After I moved out, they jacked up the price to over $1000.

Perspective in the "new" market.

I rented my current place at the Vu in Dec 2009. 1+1 with a terrace on the 4th floor with parking -> $1600

Current rents for comparable units are at $1800.

12.5% increase in little over a year.

 

[jeff316]

Re: Eug, agreed on the older units. I think there are some really decently-valued apartments in older buildings. I was in one on St. Clair a couple years back - two bedroom, probably 900 sqft or so, costing 1500$ including parking and utlities. If you can go without a dishwasher, granite counter tops and a modern-looking washroom, those are the places to look.

Jeff, there are a large number of properties listed on MLS for both rent and sale. In every listing that I found, based upon the asking prices, it was significantly cheaper (20-40%) to rent than to own (even at current interest rates.)

The argument of "why pay your landlord's mortgage?" is a marketing hook and nothing more. Renting is almost always cheaper. Anyone who argues the contrary is usually leaving out key costs (property taxes, transaction costs, maintenance costs, opportunity costs from other investments forgone).

Find a suitable 2/3 bedroom transit accessible unit and do the math, and then see what you can rent for that money.

Again, I'm not arguing against owning a home. There are many great things that come with that, and it is very attractive for a family. But the argument that it is cheaper than renting simply isn't true.

The argument isn't that owning is cheaper than renting.

The argument is that, at current rental rates, owning isn't much more expensive than renting.

That's the hook. For about the same or a little bit more, you can 'built some equity', have 'a place to call your own' and get all the emotional benefits of homeowning blah blah blah and all that crap.

The going rate for a decent subway-accessible three bedroom house rental runs from about 1800 to 2300$. Usually plus utilities.

That's pretty much equal to a mortgage (plus taxes and maintenance (or condo fees)) in many decent areas of the city.

Apartments are a bit more affordable, but three-bedrooms are a bit more scarce and the quality of the places can be hit and miss.

As long as a comparison of the monthly rent-to-mortgage cost is pretty even, it's going to entice a lot of people into the market (even if that isn't a comprehensive rationale for such a decision.) The problem is that a lot of those buyers don't calculate the potential rent-to-mortgage comparison five years down the line.

 

[Eug]

Of course monthly costs also depend on how much equity there is in the place. A lot of people can put down > 25% right off the bat.

 

[Kenny]

Perspective in the "new" market.

I rented my current place at the Vu in Dec 2009. 1+1 with a terrace on the 4th floor with parking -> $1600

Current rents for comparable units are at $1800.

12.5% increase in little over a year.

Well, the Vu was just released to owners in October 2009. A lot of the amenities were not completed, yet, in December. That might account for the discount.

 

[KA1]

http://www.theglobeandmail.com/repo...-prices-to-creep-up-this-year/article1981663/

 

[interested]

All these arguments about rent to own are based on the lowest mortgage rates virtually in history and certainly for the past 50 years. So, owning can only get more expensive as interest rates rise. The upside risk to owning far outweighs in my opinion buying at current prices. I believe that 2008 was about the last time that buying made sense.

Regarding VU, Kenny is correct. I recall when I got my new condo in 2005 to rent out I initially had to accept below market rent. Reason: alot of competition and incomplete amenities. Rents went up when tenants changed. Rents are up about $50/sq.ft. for one bedrooms in the core in the past 5 months or so (as per condosplus review). This is due to not too many new projects hitting the market in the first 1/2 of the year. I expect over the next year or 2 alot of new units to hit and expect price pressure to the downside again. Perhaps erasing the $50 price increase.

I am a landlord and admit it. I also have not purchased anything since 2008 since I cannot make the math make sense.

I again reiterate, the hay day for real estate was propelled by a 30 year decrease in the medium term bond interest rates. It only stands to reason, assuming all other factors stay the same, that rising medium term bond rates yields more expensive mortgages, less affordability, price pressure on houses with first decreased sales followed ultimately by decreased prices. As daveto has said just recently, and I concur, I personally would not buy at these prices. While I may be wrong, investing is about assessing risk/rewards. At present valuations, in my opinion, the upside potential is far outweighed by the downside risks.

 

[Eug]

Interestingly I was just talking to a friend who owns and manages apt. buildings. They're now getting investment capital from others to buy more apartment buildings. The market speculation that exists in the condo market is virtually non-existent for apt buildings, and so they are willing to buy in 2011 if the ROI is OK, and the buildings have reliable renters.

The so-called price bubble risk doesn't really concern them as much since they're more interested in the stable income stream, and yes renting in 2011 still can provide a decent income stream vs. initial investment, if you're a large enough investor that you can buy more than just single condo units in overpriced downtown pre-builds.

 

[interested]

Interestingly I was just talking to a friend who owns and manages apt. buildings. They're now getting investment capital from others to buy more apartment buildings. The market speculation that exists in the condo market is virtually non-existent for apt buildings, and so they are willing to buy in 2011 if the ROI is OK, and the buildings have reliable renters.

The so-called price bubble risk doesn't really concern them as much since they're more interested in the stable income stream, and yes renting in 2011 still can provide a decent income stream vs. initial investment, if you're a large enough investor that you can buy more than just single condo units in overpriced downtown pre-builds.

Actually Eug, the problem with apartments is as you know few new ones have been built due to rent controls. Those that have tend to be luxury units which can command big dollars. Pension funds especially and private equity is looking to get some returns with low bond yields and have alot of money to deploy. There was an article in one of the papers (Globe and Mail I believe a few months ago) saying that the apartment supply is sitting in small landlords hands and the value/apartment is being bid up as pensions/private equity look for some return. However, apartments do not command the same money that the new condo supply is getting but also it is still much cheaper to buy older apartments. So the return as a percentage on an older apartment is better than the condo. The real issue not being addressed is the costs to maintain these older apartments and in some cases is making them uneconomic. As well, they are going more for that stable supply of renters who will remain renters for long periods and more entry and mid level units than the condo with granite, hardwood etc.

 

[Eug]

Actually Eug, the problem with apartments is as you know few new ones have been built due to rent controls. Those that have tend to be luxury units which can command big dollars. Pension funds especially and private equity is looking to get some returns with low bond yields and have alot of money to deploy. There was an article in one of the papers (Globe and Mail I believe a few months ago) saying that the apartment supply is sitting in small landlords hands and the value/apartment is being bid up as pensions/private equity look for some return.

Yes, there are some REITs too that are looking for apts too, but it's still not quite the same thing as individual investors paying high dollar for individual condos.

However, apartments do not command the same money that the new condo supply is getting but also it is still much cheaper to buy older apartments. So the return as a percentage on an older apartment is better than the condo. The real issue not being addressed is the costs to maintain these older apartments and in some cases is making them uneconomic. As well, they are going more for that stable supply of renters who will remain renters for long periods and more entry and mid level units than the condo with granite, hardwood etc.

The business plan should always including costing for maintenance and other costs.