Baby, we got a bubble!?

[Eug]

We have a frothy situation, but I would not be at all surprised to see it just go bubbling on for some time... and could then just slowly fizzle out to the mean.

 

[KA1]

KA1,
..you seem to talk quite a bit about just barely surviving and worse case scenarios in your post. It seems to me that you have lost your confidence in the current RE market but have tough time admitting that.

I have lost confidence in the current market, yes. Prices are insane now and they can not stay that way or even go up 10% per year or so. However, I have not completely turned sour on the market.

I will jump in when I feel the time is right. And that right time is not now.

 

[KA1]

http://www.moneyville.ca/article/10...nters-as-investors-dominate-condo-market?bn=1

 

[CN Tower]

Rastani merely speaks the truth. I, like Rastani, am positioned to make a lot of money in the event of an economic collapse? Why? Because I'm on the other side of the trade. I do not believe that Western governments are on a sustainable course, and as such, I have chosen to bet against them with credit default swaps and short positions on currencies.

I'm sick and tired of people who think this is somehow immoral. It's not immoral. What's immoral is governments and central banks putting people in this position to begin with. Not that people like me actually try to protect our wealth the only way we can.

When people like me make windfall profits, we're called "greedy speculators". No. We're the rational ones. We make money because we're right. Not because we're wrong. When speculators speculate wrong, they have potentially unlimited losses. It's a huge risk to make massive bets against Greece, or Portugal. But if I turn out to be right, it is only because I was right about one thing: Greece and Portugal are in too much debt and cannot pay it back.

All of these moralizers talking about preying on the weak and what-not are so tiring. Countries that default are not weak. They're stupid. They collectively chose to vote for governments that would put social spending ahead of fiscal responsibility. And I am supposed to feel guilty about actually preserving my capital because of the fact that I don't suffer along with them, for the mistakes that they, not I, made.

This applies to the North American real estate bubble, and the real estate crash in the United States in 2008. It was a product of artificially cheap credit created by the government, not but private business. Everyone wants a cheap mortgage, so the politicians appoint central bankers who'll be good boys, create insane amounts of demand deposits in the central bank coffers, and then go out and let primary lenders leverage the hell out of it -- we pay for it in consumer inflation, and housing prices rise double-digits every year, far out-pacing wage growth. Everybody thinks we're getting richer, and then realty gets imposed by the fact that houses are depreciating assets that only go up in price if there are more buyers than sellers. When the buyers dry up, the market collapses.

Then, every armchair economist decides it was all the greedy bankers fault and the "speculators".

Do you know who the biggest speculator in the market is? It isn't me. It's your average family going out and buying a $750,000 home in Richmond Hill on 4x leverage through a cheap artificially low-rate mortgage.

Long live short sellers like me. We represent reality. Sorry you don't like it.

Brock,

Me thinks thou dost protest too much.

What are you shorting, exactly? I am curious. Do you fancy yourself the next John Paulson?

 

[Eug]

I still don't understand why people keep saying that buying a home to live in is RE speculation. That just doesn't make any real sense. You have to live somewhere, and those people spending $750000 on a house might just like having a nice house with a nice yard in a nice neighbourhood. Go figure.

 

[Admiral Beez]

I still don't understand why people keep saying that buying a home to live in is RE speculation.

If you're buying something with prior intent to sell it later at a presumed higher value, then you're speculating in real estate.

According to the CHMC there are an average of 450,000 re-sales of existing houses in Canada each year. There are 11,500,000 households in Canada, which means 4% of all houses change hands each year. So, the question is how many of these folks are buying with the assumption that they can sell at a higher price later? Those are your speculators.

 

[Eug]

If you're buying something with prior intent to sell it later at a presumed higher value, then you're speculating in real estate.

Not really. Like I said, we all have to live somewhere. The real speculators are those who buy properties purely as an investment.

Yes, I plan on selling my house later, at higher value. But that "later" might be a decade or two later, or perhaps when I get carried out in a box.

According to the CHMC there are an average of 450,000 re-sales of existing houses in Canada each year. There are 11,500,000 households in Canada, which means 4% of all houses change hands each year. So, the question is how many of these folks are buying with the assumption that they can sell at a higher price later? Those are your speculators.

So 96%, or even say 80% (over several years) aren't speculators then? That's what I was saying - most people who buy a house aren't really RE speculators.

 

[Kenny]

I still don't understand why people keep saying that buying a home to live in is RE speculation. That just doesn't make any real sense. You have to live somewhere, and those people spending $750000 on a house might just like having a nice house with a nice yard in a nice neighbourhood. Go figure.

Speculation - Wikipedia, the free encyclopedia:

In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum.

 

[Eug]

Thanks for demonstrating your 1337 Googlepedia ski11z, but it seems you need to have missed the point.

The point being you have to spend money, whether through rent, or through a mortgage, to live somewhere. The value here is not necessarily the return on the initial investment, but the fact you're not living under a bridge.

 

[KA1]

http://www.theglobeandmail.com/repo...perty-boom-starting-to-wobble/article2184937/

 

[Admiral Beez]

That's what I was saying - most people who buy a house aren't really RE speculators.

Can I end this circular argument if I say you're right? If so, here goes.....

Eug, you're right, people have to live somewhere, they have to either rent or buy housing. We shouldn't be referring to people that buy housing as speculators, even those that buy with the plans or hope to sell at a profit in the very near or distant future.

There's it is finished.

 

[CN Tower]

Interesting discussion. Let me share a brief anecdotal experience:

A friend whom I would euphemistically describe as unsophisticated in the financial world but ultra knowledgeable in the world of housing construction was describing a potential deal to me once recently and he mentioned how someone buying his spec home could expect to sell the home for xx% more down the road. I inquired why he thought the home would appreciate in 5 years and he looked at me completely dumbfounded as if to suggest that it is a GTA home buyer's constitutional right to 5%+ annual price appreciation in their principal residence. If memory serves I believe his actual words were don't you think a home buyer who lives in a house for 5/10 years is ENTITLED to some appreciation on his investment? I wonder how the 2005 Chicago home buyer would react to this sort of question.

While I don't believe that a typical buyer enters into a transaction banking the profit at the other end of the deal many years down the road there is an inherent expectation of it. Personally I believe that appreciation we have witnessed is a result of the 20 year bull market for bonds that ended several years ago and that appreciation beyond that point has been nothing but powerful government intervention in the mortgage financing markets and propensity of the sitting governments to keep the music playing just long enough to get re-elected.

The foregoing does little to explain the investor condo market that really has a rhythm of its own quite counter logical to investment parameters (political and perceived economical safe haven status) but one that certainly generates enormous benefits to the GTA through the ancillary industries that feed off housing.

I am still shaking my head at the $550psf pre-construction sale at Regent Park. That piece is the poster boy for condo bubble in my mind if there ever was one.

 

[brockm]

You miss the fundamental point. The only reason why that house is $750,000 to begin with, is that everyone is competing with leverage. Prices are based on what people are willing to pay. And what they're willing to pay, is what the banks are willing to lend them. And what they're willing to lend them is based on the availability of credit. And the availability of credit is largely a nexus of government controlled interest rates and insurance subsidies (CMHC).

Cut off the head of the snake -- artificially low interest rates, and insurance subsidies -- and that house loses 30-60% of it's value within 12-24 months. And poor people don't end up having to pay the price inflation it costs to subsidize that lending to begin with.

Given that over 60% of new condos in Toronto are investment properties, purchased on leverage (mortgaged), I'd venture to say that the majority of the price rises have more to do with low interest rates than the desirability of downtown living, since the majority of those condos are subleased and that those doing the buying seemingly have no intention of living in the units they're purchasing.

So even the quote-unquote investors are relying on leverage to buy. The fundamental marginal factor driving prices -- and prices are set at the margin -- is all that debt competing for supply.

Bubble? Yes. Toronto's condo market has all the hallmarks of an explosive bubble in the offing. You can put as much lipstick on it as you want. The market is highly speculative. And as I've previously said, I put no timeline on it. It could burst this November for all I know. People are stupid. But if you have equity, I'd get out now.

I have always believed that real estate pricing is a function of rent. And I believe economic history, and the collapsing of housing bubbles around the world continually reinforce that view. Eventually prices come back down to their classical rent-price ratio. Which is about 0.2 to 0.4. Right now the rent price ratio in Toronto is near 2.0. Which is even more f**king crazy that the ratios during the housing bubble that deflated in the late 70s / early 80s. By about a factor of two.

Real estate capital market experts, of course, rationalize Toronto as being an exception to the rule -- they always do, in every market, every time. People want to believe something that's too good to be true is true. Unfortunately, reality has a funny way of re-asserting itself.

By historical standards, Toronto's real estate prices are at least 40% overvalued based on market rents. And based on income-to-price ratios, even higher (the relationship between people's income, and the value of their homes). And based on their non-mortgage consumer debt burden (currently at an all-time high).

 

[Eug]

So what's your prediction then?

 

[redfirm]

Brockm,
I joined this thread 6 months ago by posting the article from Vanity Fair on Irish r/e bubble. Moral of that story: fundamentals and leverage. There was nothing really spectacular in that article, but I thought that it would be nice to get my point across with some recent example (other than just US). Guess what the first reaction of some of the people here was? Canada is not Ireland, we are different, yada, yada...