Baby, we got a bubble!?

[lafard]

I don't know where Calgary came from. Its prices are on par with Toronto's and incomes are much higher. Toronto is far bigger.

On the other hand, Calgary's prices are down 15% already and dropping fast. Same as Edmonton. They never had the 09-10 recovery Vancouver and Toronto did, it was more of a slowing of the drop. That might change the perspective a bit. It's not different there.

 

[Eug]

As for Calgary, I don't know that I agree with you. I think what Professor Shiller is referring to is the fact that if Calgary is dependent on oil, which it has been historically, and prices drop and we have a bust; not only will jobs and oil portfolios likely be devasted, but so too will its housing market and the Calgary economy. I believe he is simply applying the hedging theory of spreading ones eggs and that Calgarians may have too much invested in Calgary with their homes, jobs and oil dependency/shares.

However, in the midst of a recover like what we're having nowy if you short oil, you're likely to lose money. Why not put that extra cash towards the mortgage? That's a guaranteed rate of return, and will also help to ensure you have sufficient equity in the property to ride out a storm. If you short oil, you may benefit when it does drop, but that may be cancelled out in the period where you lose money because oil prices are rising.

IMO a more conservative (ie. safe) pseudo-hedge may just be to pay down the mortgage with any extra funds you have lying around (as long as there is some emergency stash in a TFSA or whatever).

 

[Kenny]

Why not put that extra cash towards the mortgage?

Because it's a bad investment. A variable mortgage might be around 2%. You can get that much in a TFSA bank account.

 

[interested]

I don't know where Calgary came from. Its prices are on par with Toronto's and incomes are much higher. Toronto is far bigger.

On the other hand, Calgary's prices are down 15% already and dropping fast. Same as Edmonton. They never had the 09-10 recovery Vancouver and Toronto did, it was more of a slowing of the drop. That might change the perspective a bit. It's not different there.

I may be wrong but I believe Calgary went up much faster over the past few years. It actually surpassed Toronto prices a few years ago when it has always been cheaper than Toronto. So, even if it did not have the 09-10 recovery, Calgary has experienced a much larger increase in percentage terms prior to the price drops.

Toronto's economy is still more diverse than Calgary's. Calgary has experienced much more boom/bust than Toronto in the past for this reason and therefore perhaps Calgary is at more risk. Remember, if oil prices do drop significantly then Calgary suddenly gets hurt very badly and prices would drop for real estate presumably as it has in the past. Toronto has a broader base so it would take a series of events; the manufacturing sector which has already been decimated to a degree, the financial sector, and perhaps other areas of the economy. The point being that it should be at less risk unless more things go wrong in Toronto vs. 1 thing having to go wrong in Calgary.

 

[interested]

However, in the midst of a recover like what we're having nowy if you short oil, you're likely to lose money. Why not put that extra cash towards the mortgage? That's a guaranteed rate of return, and will also help to ensure you have sufficient equity in the property to ride out a storm. If you short oil, you may benefit when it does drop, but that may be cancelled out in the period where you lose money because oil prices are rising.

IMO a more conservative (ie. safe) pseudo-hedge may just be to pay down the mortgage with any extra funds you have lying around (as long as there is some emergency stash in a TFSA or whatever).

an equally good and logical approach. They both accomplish the same; decreasing your overall exposure. However, with this strategy as you provide it, you have less money at risk but are losing on the housing. With Prof. Shiller's approach, while your house may be dropping because of falling oil prices, you should actually be making money on the shorting of oil which presumably would render you more neutral in this scenario.
Of course, if Prof. Shiller is wrong and there is no downward turn in oil, then your approach will pay off better since there would be no down and only upside potential. (You will not have incurred the cost to short the oil which would be "out of the money" if there was no correction)

I believe his suggestion is to keep you neutral and in the game in the event that there is a downturn. Your approach also accomplishes that goal.

 

[interested]

Because it's a bad investment. A variable mortgage might be around 2%. You can get that much in a TFSA bank account.

Or you may get less if you invest in stocks and they go down. Of course, you could buy dividend producing vehicles or REITS and presumably do better.

Also, I don't think that $5000 when an average house is say around $400000 is the issue. I mean, that $5000 is only 1.25% and surely that is not the order of magnitude of correction that I think Eug or Dr. Shiller or I am worried about. If it is a 10% correction, you are talking about $40000 and then it would be easier to short oil to cover this and more doable than with one's TFSA.

Or, have I got this idea wrong?

 

[Kenny]

Or, have I got this idea wrong?

Sorta. I'm just sayin' that it may not be the best idea to pay down your mortgage more than you need to when rates are super low. There's lots of low risk ways to earn more than the mortgage interest. A TFSA savings account is actually a very poor choice.

 

[Eug]

The problem here is that very few people have a 2% interest rate, and $5000 is a TFSA isn't a huge amount of room.

 

[KA1]

http://www.theglobeandmail.com/repo...s-most-at-risk-to-debt-shocks/article1900170/

 

[interested]

From the National Post today:

http://www.financialpost.com/person...rices+softer+than+expected/4257274/story.html

TTAWA — New home prices edged up 0.1% in December, according to Statistics Canada, with Winnipeg leading the gains.

Economists had expected the federal agency’s new home price index to rise 0.2% in December, following a 0.3% advance in the previous month.

The index showed a 1.1% gain in Winnipeg, as well as a 0.3% increase in Halifax and a 0.2% rise in Toronto and Oshawa.

The biggest decline was in Windsor, Ont., down 0.6%, followed by Montreal and Quebec, which both recorded a 0.3% drop.

The slower pace of price increases reflects a weakening in Canada’s housing market.

On Tuesday, the Canadian Real Estate Association revised up its outlook for housing resales in 2011, but is still calling for sales to fall 1.6% this year to 439,900 units and for prices to edge up by only 1.3% in each of 2011 and 2012.

Meanwhile, Canada Mortgage and Housing Corporation said the seasonally adjusted annual rate of housing starts totalled 170,400 units during in January, down more than 10% from 2010’s total of 189,930 units.

Read more: http://www.financialpost.com/person...han+expected/4257274/story.html#ixzz1Db5MXBVU

Slightly off topic:

I notice a few units have come on the market in a building which is excellently run but older. Prices have been dropping by 5-10% over the past couple of months there. I think one agent put a unit on the market not realizing its size and underpriced it but this caused an immediate 5% drop in price on another unit that is smaller. The other unit had been dropped 5% after sitting on the market for a couple of months last month, so this is quite a significant price drop.

I wonder if this is others experience.

I have heard from some realtors that the rate of listings growth was about double the sales for January in the core. Is this true? And if so, are we starting finally to see a realignment of prices even with the prolongation to mid March of the 35 year mortgage and people rushing in. I ask because if this is any indication, it does not bode well going forward.

 

[TCW]

e on the market in a building which is excellently run but older. Prices have been dropping by 5-10% over the past couple of months there. I think one agent put a unit on the market not realizing its size and underpriced it but this caused an immediate 5% drop in price on another unit that is smaller. The other unit had been dropped 5% after sitting on the market for a couple of months last month, so this is quite a significant price drop.

I find it very hard to believe an agent would be that incompetent and under price a unit by accident. I would assume they are under pricing it on purpose and holding back offers.

Hard to say without knowing the building and seeing the listings, if you want to post that info I'm sure you'll get a few replies from people who are more knowledgeable than me.

 

[interested]

I must say that I have had a few dealings with different agents in the past 3 years. (I have sold 3 and bought 2 other properties. On the sale side:

One who told me to accept an offer the same day that I got another offer 15% higher on a property when I told the agent that they were grossly underestimating the value of the property.

One where I said to price 8% higher and was told that I was 10% or more overpriced only to have the property sell within 3 weeks at full asking price ( at the 10% higher price than the agent originally suggested). Different agent from #1 above.

On the third one I suggested a price that was also 7-8% higher than what the agent wished to list for initially(different city and therefore different agent) only to have the property sell the first day listed with 2 competing offers at full asking price.

So, in the case that I was quoting which involves a downtown TO condo, I would suggest that the agent might not in fact appreciate the size of the property being listed within the building or perhaps it is a family situation to move the property quickly because I know it is empty and the proceeds going to extyended family.

I prefer not to identify the building on this forum. That said, the first 3 examples where in fact not condominiums and not in the downtown core.

 

[cdr108]

Slightly off topic:

I notice a few units have come on the market in a building which is excellently run but older. Prices have been dropping by 5-10% over the past couple of months there. I think one agent put a unit on the market not realizing its size and underpriced it but this caused an immediate 5% drop in price on another unit that is smaller. The other unit had been dropped 5% after sitting on the market for a couple of months last month, so this is quite a significant price drop.

I wonder if this is others experience.

I have heard from some realtors that the rate of listings growth was about double the sales for January in the core. Is this true? And if so, are we starting finally to see a realignment of prices even with the prolongation to mid March of the 35 year mortgage and people rushing in. I ask because if this is any indication, it does not bode well going forward.

it could be a marketing strategy to elicit buyers; motivated sellers; maybe the agent realizes there are many competing units listed in the building/area; the agent/seller understand that the new CMHC rules will lower borrowing/purchase capital by 8-10% since it's very likely that closing will be after March 18, 2011; or all of the above !?!?!

 

[interested]

While I think some agents/sellers do marketing strategies, I believe that it is rather the market is a bit softer. We are talking about units in the 1500-1800 sq.ft. range, older building at the $700K mark or around $400/sq.ft. Traditionally, most sales have averaged about 20 days in the building in the past couple of years.

this is of course just my belief. And as I said, the unit in question that came on relatively inexpensively in my view for the size (compared to previous sales) may well be because it is vacant and an inheritance issue.... so maybe motivated sellers as per your example cdr.

 

[greenleaf]

I know what's going south of the border may be seen as irrelevant to what is happening here, but history has been known to repeat itself:

Housing Crash Is Hitting Cities Thought to Be Stable
By DAVID STREITFELD
Published: February 13, 2011

SEATTLE — Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping.

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.

In the last year, Seattle homeowners experienced a bigger price decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.