Baby, we got a bubble!?

[interested]

Long day so I'm just going to type my thoughts as they come into my head.


Back to the topic, is there a bubble? To me a bubble is where the prices are inflated 30%-100% of where the fundamentals are saying. The only argument I hear are that rates are too low and unemployment is high....well that may be true, but real estate is not something linear where a+b+c=bubble, its a functional system that is the culmination of many factors acting in unison. Today, like in 2005, there are factors for and against buying...if you go back into this topic you can get my opinions.

I think there are alot of issues going on in the world which are much larger than people may be thinking about. You have the US economy stil very depressed our major trading partner. You have very real problems in Euroland with Greek possible defaults, the PIIGS countries whose finances are questionable as well. Now they are saying that the concern is that China has a r/e bubble forming and that the government is trying to control this. They say if the R/E market in China does deflate that people will stop or decrease their purchasing, exactly where right now the world is counting on getting any growth. What if these events happen, the economy does stagnate. Wages have not increased the last 10 years anywhere near the increase in house prices and one would postulate reasonably that prices are not sustainable at these levels so when/if things do slow, it may be much larger an issue than just looking at local interest rates, local prices and jobs here. I have not read your previous posts from years ago so I apologize if I do not adequately reflect your views or am repeaing what you said.

I like you do not know if we have a bubble. the only thing that is clear I believe is that prices cannot continue their upward march in the absense of major increases in productivity, wages and better employment conditions. Historically r/e estate goes up by inflation and this is not what has been reflected the last 10 years though in Toronto we were starting from a period of 10-13 bad years to get back to 1989 levels.

 

[ILuvTO]

One official stat I have yet to see published is one that shows what % of mortgages were for more than three times the buyers income. To me, that is the key. If people are using too much of their pre-tax income to buy a home, then that could lead to trouble once rates go up. People can afford to service larger debts now with such low interest rates. But what happens when those people with mortgages for more than 3x their income have to renew at higher rates? And if the number of people who have bitten off more than they can chew is a significant amount, then we could be in for a rude awakening once rates go up.

If anyone has seen an official stat for the GTA, please let me know as I am very curious to see it.

 

[daveto]

... what happens if there is say a 10% decrease in price and the individual has to remortgage?

I looked into this a few months ago. Apparently, the original CMHC insurance will still be in place as long as the mortgage is with the original vendor. Thus the vendor would not have any risk at providing a mortgage amount greater than the decreased value of the home. However, this would substantially reduce the homeowners negotiating power and likely result in a higher mortgage. The homeowner would be trapped, unable to afford to sell or to move to a new provider, and stuck paying a higher than market mortgage rate.

If anyone has any factual information to the contrary, I welcome their corrections.

 

[BrianPersaud]

take a look at the CAAMP survey, they have the only published statistics. See here

 

[BrianPersaud]

I looked into this a few months ago. Apparently, the original CMHC insurance will still be in place as long as the mortgage is with the original vendor. Thus the vendor would not have any risk at providing a mortgage amount greater than the decreased value of the home. However, this would substantially reduce the homeowners negotiating power and likely result in a higher mortgage. The homeowner would be trapped, unable to afford to sell or to move to a new provider, and stuck paying a higher than market mortgage rate.

If anyone has any factual information to the contrary, I welcome their corrections.

How big of a number do you expect that to be?

I know where you are going with this. You may think that a lot of Canadians don't have equity in their homes...so if prices fall when rates go up lots of people are underwater like in the US.

The US is totally different system:
-NINJA loans (canada no)
-Tax deductable mortgages encouraging people to keep high balances (canada no - in fact we pay down faster because your home is the last tax shelter we have)
-non-recourse mortgages (canada no)

thats why people had no equity there

 

[daveto]

How big of a number do you expect that to be?

I know where you are going with this. You may think that a lot of Canadians don't have equity in their homes...so if prices fall when rates go up lots of people are underwater like in the US.

The US is totally different system:
-NINJA loans (canada no)
-Tax deductable mortgages encouraging people to keep high balances (canada no - in fact we pay down faster because your home is the last tax shelter we have)
-non-recourse mortgages (canada no)

thats why people had no equity there

???

Brian, I'm not "going" anywhere with this and I have no idea how big a number it might be. Interested asked a question (which I duly quoted), and I provided an answer. As I mentioned, I invite any factual corrections. I presume you're confirming my answer? Beyond that, if you want to editorialize that is up to you.

 

[BrianPersaud]

???

Brian, I'm not "going" anywhere with this and I have no idea how big a number it might be. Interested asked a question (which I duly quoted), and I provided an answer. As I mentioned, I invite any factual corrections. I presume you're confirming my answer? Beyond that, if you want to editorialize that is up to you.

I was referring to the comment that interested made that you quoted

 

[BrianPersaud]

Take an example of 550 Wellington 1 Bdrm Bought for $200,000 in 2006 coming to occupancy now...just for math sake it mortgaged to 100% LTV

Mortgage ~ $1000/mth 5% + 35 amortization
Property Tax + Maint ~ $ 500/mth


They can rent for about $1450-$1500/mth (Freed's people say $1600)...essentially breaks even

Cashflow comment should be taken into context of the comment that I quoted that to risk manage for a price decrease when doing a refinance to invest: buy a property that cashflows.


***I am not advocating, as CN Tower would imply by his Tom Vu comment, that you can buy at 550 Wellington for $200,000 today by taking a seminar.***

 

[urbandreamer]

What's interesting is I was talking to a friend's friend (who's a hot shot real estate broker) and their advice: stay out of real estate until interest rates rise above 4%--and it will happen. So many people will be unable to afford their mortgages etc that prices shall crash. Dumb money is buying real estate now. (Yes, that includes dumb Chinese investors foolishly dumping US dollars for Canadian property.)

 

[cdr108]

What's interesting is I was talking to a friend's friend (who's a hot shot real estate broker) and their advice: stay out of real estate until interest rates rise above 4%--and it will happen. So many people will be unable to afford their mortgages etc that prices shall crash. Dumb money is buying real estate now. (Yes, that includes dumb Chinese investors foolishly dumping US dollars for Canadian property.)

i think it's more like dumping RMB from a Chinese RE bubble and transferring that cash to Canadian RE, which is also in a bubble but definitely not as frothy as their local market.

 

[MAU]

Take an example of 550 Wellington 1 Bdrm Bought for $200,000 in 2006 coming to occupancy now...just for math sake it mortgaged to 100% LTV

That's not a valid comparison. I bet you could get even better results if you used 2001 prices. The real test is: do the numbers work with 2010 prices?

 

[Johnzz]

Dumb money is buying real estate now.

Hmm...

Sure, think of them as dumb, if it makes you feel better.

Perhaps you're still a little bitter after missing last year's 20% house price sale?

 

[interested]

Take an example of 550 Wellington 1 Bdrm Bought for $200,000 in 2006 coming to occupancy now...just for math sake it mortgaged to 100% LTV

Mortgage ~ $1000/mth 5% + 35 amortization
Property Tax + Maint ~ $ 500/mth


They can rent for about $1450-$1500/mth (Freed's people say $1600)...essentially breaks even

Cashflow comment should be taken into context of the comment that I quoted that to risk manage for a price decrease when doing a refinance to invest: buy a property that cashflows.

Rents are $1450 to $1500 for a 1 bedroom in the city right now. However, I recall they were around $1500 in 2001 as well. In other words, not much change in rental rates. You cannot buy today at 2006 prices

***I am not advocating, as CN Tower would imply by his Tom Vu comment, that you can buy at 550 Wellington for $200,000 today by taking a seminar.***

Rents are $1450 to $1500 for a 1 bedroom in the city right now. However, I recall they were around $1500 in 2001 as well. I bought 600 sq. ft. at the time and said I will rent for $1200 as there will be a glut in 2004. New building unfinished amenities initially and I got $1300 though now almost $1500/month. In other words, there has not been much change in rental rates once buildings are complete. You cannot buy today at 2006 prices today and I suspect the same condo is at least $250K today assuming 500 sq. ft and $500/foot. As well, if there is glut and there is alot of product coming on the market shortly, why can't rents actually decrease again (at least somewhat)?

 

[interested]

That's not a valid comparison. I bet you could get even better results if you used 2001 prices. The real test is: do the numbers work with 2010 prices?

Mau, I did not see your response when I responded to Brian's post. I agree totally with you. and the answer is the numbers do not work and that assumes rents stay where they are. Will rents go up. I guess eventually but I suspect as more product comes on the market, rents will in fact go down over the next year or two (though I am not expecting a big crash in rents).

 

[interested]

Hmm...

Sure, think of them as dumb, if it makes you feel better.

Perhaps you're still a little bitter after missing last year's 20% house price sale?

that's 20% after a 15 percent short term decline. That is not really a fair statement. And remember, what can go up 20% over a year can just as easily come down that fast. I will go out on a limb and hazard a guess that prices will resemble in 2011 2008 and or the early 2009 and not the "present buying" due to artificial deadlines of low interest rates, HST considerations, and lack of product on the market that presently exists.
I am not saying major trough just a normal realignment of prices. Besides the 20% quoted is great if you were buying to sell within 1 year. Great if it happens and you time perfectly but surely this is not a normal expectation for those who bought in March 2009 at the bottom of the market or they were absolutely brilliant (or perhaps lucky??)