Baby, we got a bubble!?

[Johnzz]

What appreciation (annual?) are you expecting? And what overall depreciation would reduce your equity to zero?

Hi daveto,

I'm happy to receive a “nominal†gain of 3% per year over the long run. I don’t concern myself with any single year’s gain/loss (as long as it averages out).

I generally keep my equity level at 30%. When this level increases or approaches 40%, I simply extract the extra 10% and purchase additional properties. I only purchase properties which meet my price/location criteria and only if the macro fundamentals continue to look favourable.

My rent covers all associated costs. As a result, a nominal gain of 3% produces a 10% return on funds invested (due to 3X leverage). This is the minimum I expect on average.

Of course, I’ve exceeded this benchmark every year for 10 years and wouldn’t be surprised if things underperformed at some point. Thing is, I just don’t see that happening anytime soon. I work in the financial industry and study macroeconomic trends extensively. I recognise the future risks to our financial system and how profound things will change. There will be losers, but also winners.

 

[Johnzz]

You think it is possible for banks to offer mortgages at an interest rate below the rate of inflation?

You just don't understand do you...

 

[daveto]

You just don't understand do you...

I'm an actuary.

As such I think I have a basic understanding of interest rates, inflation, and real vs nominal returns.

But I'm always willing to learn more. Hence my questions to you.

 

[Eug]

I also foresee a shortage of larger condos. That's why I bought a 2 bed+den. I do think the correction, in the realm of 10-15% off current prices will affect the smaller units much more than the larger units.

I'm not sure I agree with that.

Also, sales are up 7% from 2007, not 13.4% (ie 8476 divided by 7915).

You are right. I was obviously looking at some wrong numbers.

The average price increase of 7.3% is nominal, before adjusting for 4% inflation to provide a real increase of 3% since 2007.

I'm not sure what the inflation rates have been in the last two years, but as I've said before in other threads, what's probably more important to a lot of people purchasing homes as their primary residences is the actual sale price, not the valuation after inflation, at least in the context of a pullback. Whether that's a smart way to look at things or not is a different question.

To put a different spin on it though, while it is an impressive increase considering the overall state of the economy, it's not an outrageous one, and some might argue such increases are actually sustainable.

I do predict a pullback eventually, but then again, I've been predicting a pullback since 2005. It sort of happened in 2008, but then all of that pullback was erased in 2009, and then some.

 

[movieguy]

Why all the comparisons to the US?

Maybe someone can shed some light, but from all the reports I've read and docs I've watched, the financial and real estate market closer resembling ours is Britain.

- few ARM and sub-priming like Canada
- same consumer debt-to-income ratio
- lower mortgage debt-to-income ratio than Canadians
- higher immigration and positive capital flow than Canada
- lower rate of inflation than Canada
- same affordability (income to average house price) ratio
- same employment levels and median income
- more government-back home affordability programs
- required 10% or more minimum deposits compared to as low as 0% for Canada during the haydays.

Yet they went through a crash. To me, that just shows Canada is long overdue for a price correction. What we didn't experience here was a credit crunch, perhaps because the bank of Canada was buying up all the mortgages. What do you guys think?

 

[Eug]

I think there is a good chance of a pullback, but like I said I've been saying that since half a decade ago.

Meanwhile those who tried to time the market by selling their primary homes back then are hurtin', if they want to get back into home ownership that is.

 

[Johnzz]

I'm an actuary.

As such I think I have a basic understanding of interest rates, inflation, and real vs nominal returns.

But I'm always willing to learn more. Hence my questions to you.

Sorry, I misread your comment earlier as I was rushing out.

Yes, I believe it’s possible for variable mortgage rates to remain below inflation for a time (as they are now).

 

[cdr108]

Sorry, I misread your comment earlier as I was rushing out.

Yes, I believe it’s possible for variable mortgage rates to remain below inflation for a time (as they are now).

ummm, CPI was -0.9% in Sept 2009, so wouldn't that make mortgage rates ABOVE inflation? so technically, we had deflation ...

http://www.bankofcanada.ca/en/index.html

 

[Johnzz]

You think it is possible for banks to offer mortgages at an interest rate below the rate of inflation?

I should also mention that even long term mortgage rates can remain below inflation whilst central banks are purchasing government bonds, thus pushing down yields artificially…

 

[Johnzz]

ummm, CPI was -0.9% in Sept 2009, so wouldn't that make mortgage rates ABOVE inflation? so technically, we had deflation ...

http://www.bankofcanada.ca/en/index.html

Core inflation was 1.5% in September. My variable mortgage rates are currently 1.35%.

 

[Bubba]

Why do so many people find it hard to believe that prices in Toronto can continue to increase? Has anyone here look at house prices in New York, London, Paris, Hong Kong, even BC? We are still extremely well priced in comparison to most major cities.

 

[daveto]

Core inflation was 1.5% in September. My variable mortgage rates are currently 1.35%.

Some variable rates from 14+ months ago (ie prime minus 0.9) are indeed below present core inflation. But this is an historical anomaly, and was not intended nor priced for by the banks.

Banks are not offering prime minus 0.9 now. Now the lowest is 2.25, which is above core inflation.

 

[safeashouses]

Hi daveto,

I'm happy to receive a “nominal†gain of 3% per year over the long run. I don’t concern myself with any single year’s gain/loss (as long as it averages out).

I generally keep my equity level at 30%. When this level increases or approaches 40%, I simply extract the extra 10% and purchase additional properties. I only purchase properties which meet my price/location criteria and only if the macro fundamentals continue to look favourable.

My rent covers all associated costs. As a result, a nominal gain of 3% produces a 10% return on funds invested (due to 3X leverage). This is the minimum I expect on average.

Of course, I’ve exceeded this benchmark every year for 10 years and wouldn’t be surprised if things underperformed at some point. Thing is, I just don’t see that happening anytime soon. I work in the financial industry and study macroeconomic trends extensively. I recognise the future risks to our financial system and how profound things will change. There will be losers, but also winners.

Financing long term assets with short term debt is extremely dangerous and will get you into trouble. Just ask Paul Reichmann.

Your strategy may have worked previously and I congratulate you on your success (I've had great success in real estate too but don't feel the need to boast about my track record here, it's quite irrelevant to the discussion) but if you believe that you can continue to borrow money at under 2% then you are grossly mistaken.

A prudent investment is one that compensates the investor for the risk assumed and with all the challenges associated with owning real estate (vacancies, commissions, repairs, etc) I don't think that a 3% return unleveraged really cuts it- do you? If so let's talk. I've got more property available for 3%+ returns than you can likely finance with your heloc facility,

 

[Johnzz]

I've got more property available for 3%+ returns than you can likely finance with your heloc facility,

Who's bragging now?

Funny, I don't remember saying all my debt was short term. Anyways, how is that a concern of yours.

 

[safeashouses]

Who's bragging now?

Funny, I don't remember saying all my debt was short term. Anyways, how is that a concern of yours.

I'm not concerned about you John. I'm merely attempting to give the forum a clearer picture of the situation.

Goldman Sachs can borrow at 0% and lend or invest at 3% and make a billion dollar doing so because they know they can run back to Papa Ben for more cash if they fail. Do you (or any of us mere citizens) enjoy the same luxury in your world?