Baby, we got a bubble!?

[daveto]

There are a lot of people and organizations who are incented to tell you that now is a good time to buy real estate - the realtor, the banks, the city/province (due to land transfer taxes), the developers, the media (who sell advertising to the developers/realtors).

But who benefits if you don't buy real estate? Who is incented to tell you that now is a bad time to buy real estate?

I suggest that the worst thing that anyone can do is to listen to the many people who profit if you buy real instead, and instead only listen to those whose livelihood does not depend directly or indirectly upon the real estate market.

 

[interested]

I believe one can listen to "experts" in a field but as dave says: weigh the information critically and draw conclusions based "on the big picture".
Also, do not believe that the Canadian economy is doing as well as is being put out there. For example, they stated that 80% of the jobs lost have been recovered since the start of the 2008 recession. However, if one looks more critically, compared to 2007: full time jobs are 102 (if 2007 is 100). Part time jobs are 108. So there has been an increase of 8% in part time employment vs. 2% in full time employment from the year before the recession. The job losses in Ontario are manufacturing (higher paying). The gains are Service industry (generally lower paying). Yet the " experts say things are very good here. Also, I do not know what the relative ratio of part time/full time jobs are but it does not alter the underlying point. Also, how many people are "self-employed" since they don't want to say unemployed and how many "under employed". All I am saying is one should ponder the data but use judgement in drawing conclusions from it. I am not saying things are bad in Canada, I am just saying they are perhaps not as rosy as being presented.

 

[cdr108]

this was posted in another thread but i think it's appropriate here:

scenario:
1 bedroom condo for $320,000 with 20% down payment


here are some #s:

assuming $256,000 mortgage for 3-year term/25-year amortization @ 4.89% fixed:
http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp

total mortgage payments (not including maintenance fees, property taxes, etc): $53,025
total principal repayment: $17,018
total interest paid: $36,007

------


back to the original thread, if we assume $256,000 mortgage for 5-year term/25-year amortization @ 4.89% fixed (3 and 5 year rates seem to be the same as most FI are offering discounts on 5-year terms):

http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp

total mortgage payments (not including maintenance fees, property taxes, etc): $88,375
total principal repayment: $29,814
total interest paid: $58,561

so during those 5 years, one has 'paid themselves' $29,814 (ie. principal repayment) while almost $59K has gone to interest paid ... just like paying a landlord but the landlord is the bank, to which you have a contractual liability/obligation of $256,000.


the main issue for the debate of whether it's better to buy now, or to rent and wait has to do with one's assumption of where they see RE prices will be:

if there is a 10% decrease in 5 years, well one has LOST ALL of the principal repayments and you're no better off but there is still the initial $64,000 DP ... still have ~20% equity;

if there is a 20% drop in 5 years, one has LOST ALL of their $64,000 DP but still have paid down $29,814 ... ~10% equity but will that be sufficient to qualify for mortgage renewal ?!?;

if there is a 30% plunge in 5 years, one has lost $96,000 which means ALL of the $64,000 DP and $29,814 in principal repayments are GONE + NEGATIVE EQUITY ! ! !

 

[CN Tower]

Remember 1 thing: Who writes up most of the mortgages? Answer: Banks.
Who is carrying alot of mortgages on their books: Banks.
Who is ultimately responsible and will suffer if there is a marked downturn with major writedowns of their net asset base: Banks. (as well as CMHC: Read Government ie. the taxpayer).

Incorrect.

Virtually all the net mortgage debt issued since the depths of the credit crunch starting in early 2009 has been transferred to CMHC's balance sheet. It is CMHC, ie the taxpayers, that shoulders the risk of a downturn in the housing market, not the commercial banks directly.

Without CMHC's backdoor bailout our 'world class banks' would have suffered a similar fate to many of the large financial institutions down south. Make no mistake. Canada is not immune and our debt to GDP levels rival those of the US as well. I can't understand why we are continuously portrayed as so fiscally prudent on the global scale. I recognize that it's all relative but we are just as burdened with huge budget deficits and an enormous debt load as our neighbours as you can see from the chart.

Perhaps one of you experienced eco majors can help me reconcile what I believe to be such a gross public misconception and even mass manipulation of the Canadian public by our leaders.

For your reference:

http://www.billjaquette.net/wp-content/uploads/2009/12/nationaldebtbygdp.gif

 

[interested]

I did realize that CMHC has taken alot of the bank mortgages off the books. However, I was trying to make a point that still there is alot of mortgages on their books remaining and Mr. Gauthier is employed by a major bank.

 

[simuls]

There are a lot of people and organizations who are incented to tell you that now is a good time to buy real estate - the realtor, the banks, the city/province (due to land transfer taxes), the developers, the media (who sell advertising to the developers/realtors).

But who benefits if you don't buy real estate? Who is incented to tell you that now is a bad time to buy real estate?

I suggest that the worst thing that anyone can do is to listen to the many people who profit if you buy real instead, and instead only listen to those whose livelihood does not depend directly or indirectly upon the real estate market.

I was shocked to find out how in bed with CREA Urbanation is - cosponsoring events, etc.. I used to think their numbers were trustable, but clearly that's a mistake as well.

 

[cdr108]

I was shocked to find out how in bed with CREA Urbanation is - cosponsoring events, etc.. I used to think their numbers were trustable, but clearly that's a mistake as well.

i'm not sure if you noticed but several former high profile staff of Urbanation now work for developers ... former President Jeanhy Shim now sales and marketing manager for Streetcar Developments, and former executive VP Jane Renwick now vice-president for the Onni Group of Companies

 

[urbandreamer]

The entire real estate industry is, like many industries, based on cronyism and consumerism....I'll pass.

I always found those fluff pieces quoting Jeanhy Shim or Jane Renwick annoying--but very revealing.

 

[KA1]

http://www.theglobeandmail.com/repo...-vigour-as-consumer-hopes-dim/article1643294/

Link to a news item in Saturday's The Globe and Mail discussing the possibility of 'deflation' in US.

Can Canada be far behind?

 

[daveto]

http://www.billjaquette.net/wp-content/uploads/2009/12/nationaldebtbygdp.gif

Huh? Since when is the US federal debt at $8T? These figures are significantly out of date.

But one thing to consider about the national debt of various countries. Different countries offload debt into various government agencies to a lesser or greater degree. Also, different countries offload debt to corporations or private citizens to a lesser or greater degree. And similarly, different countries offload debt to provincial or municipal levels to varying degrees.

It is not as simple as comparing federal debt, or federal+provincial debts.

And in looking at the debt figures, one should also consider who owns the debt, and what is the duration (ie how long before you need to refinance it).

ps. On that note, one of the interesting things about the UK is they have one of the longest durations of the sovereign debt. They are at 13 yrs, vs 4-6 ys for most every other western country. And with their recent austery package, I like what they are doing over there. I like the prospects for the pound and the UK economy over the next 10 yrs.

 

[AHK]

Incorrect.

Virtually all the net mortgage debt issued since the depths of the credit crunch starting in early 2009 has been transferred to CMHC's balance sheet. It is CMHC, ie the taxpayers, that shoulders the risk of a downturn in the housing market, not the commercial banks directly.

Without CMHC's backdoor bailout our 'world class banks' would have suffered a similar fate to many of the large financial institutions down south. Make no mistake. Canada is not immune and our debt to GDP levels rival those of the US as well. I can't understand why we are continuously portrayed as so fiscally prudent on the global scale. I recognize that it's all relative but we are just as burdened with huge budget deficits and an enormous debt load as our neighbours as you can see from the chart.

Perhaps one of you experienced eco majors can help me reconcile what I believe to be such a gross public misconception and even mass manipulation of the Canadian public by our leaders.

For your reference:

http://www.billjaquette.net/wp-content/uploads/2009/12/nationaldebtbygdp.gif

CN Tower - did you note the source for the statistics and graphic you cited - it is the CIA World Factbook. In Canada, the Federal Debt as of the end of the most recent fiscal year, March 13, 2010, in millions, is: $ 510,666, as reported in the March Fiscal Monitor (at the bottom of the report). URL for the March Fiscal Monitor is: http://www.fin.gc.ca/fiscmon-revfin/2010-03-eng.asp

On the other hand, to make the United States look good, the CIA excludes the money the US Government has borrowed from the Social Security Trust Fund (along with other pre-funded programs) to pay its current operating expenses - as though the money will not need to be paid back, as the baby boomers age and claims on the pre-funded programs mount. The American government reports daily on its consolidated debt position (Federal government direct debt, not included underfunded future obligations of the Social Security, Medicare and Medicade programs, along with the underfunded public sector pension programs of all levels of government). As of Thursday, July 15, the direct debt of the US Federal Government - from the Treasury Direct - Debt To The Penny web site: The Debt to the Penny and Who Holds It - was $ 13,240,228,521,494.88

Debt Held by the Public Intragovernmental Holdings Total Public Debt Outstanding

07/15/2010 8,687,401,404,190.30 4,552,827,117,304.58 13,240,228,521,494.88

URL for the US Treasury Department web site is: http://www.treasurydirect.gov/NP/BPDLogin?application=np

In other words - without a detailed understanding of their methodology, it would appear that the CIA report is comparing apples to oranges in how they define debt in the various countries, with the effect that the USA is in much better shape compared to the other countries than is really the case.

So - the figures cited in your post have little or no relevence to the discussion at hand, and are very misleading as well.

AHK

 

[myfive]

http://www.theglobeandmail.com/repo...-vigour-as-consumer-hopes-dim/article1643294/

Link to a news item in Saturday's The Globe and Mail discussing the possibility of 'deflation' in US.

Can Canada be far behind?

Yeah..this talk has been going on for some time. Fighting deflation was presumably Bernanke's key calling card to the position as fed chair. Other's i follow as well say deflation is remote. The U.S. has been pouring money into the system with their printing presses and feel it's just a matter of time before it takes hold.

It seem Stagflation is more likely. Rising prices with little or no growth in the U.S.

It's interesting the mixed messages we keep getting here in Canada. We begin to question why there is talk of rates going up when our growth and the global economy seem so fragile. Let's just hope they are getting it right if they raise another .25. I'd be happier without the rise as i feel they may be overreacting to the made in canada stimulus spending that was induced by the implementation of the HST. I think all spending will naturally cool down anyways and they really don't need another rate hike.

Having said that, if they are factoring all this in, pouring through all the numbers, crossing their T's and dotting their I's and they still conclude we need a rate hike, this has to be seen as quite bullish for the canadian economy, for jobs, and ultimately for real estate. (no, we're not going to see an interest rate spike anytime soon!).

 

[simuls]

I agree that we won't see any interest rate spikes soon, but considering 70% of Canada's trade is with the US, if they lag, we do. If you've been watching the numbers, Canada's have been great but very consistently lagged the US by about two months (time it takes from an American ordering something from Canada for it to go through the pipeline). The bad news is that the poor numbers we've been seeing for the past month in the US will show up here in August. There's no escaping it. The US recovery effort has failed miserably and we're inextricably linked to it unless our business people smarten up and become innovators and drastically improve our brutal productivity numbers.

As for the bubble of the title. I definitely hear a hissing sound and it's getting louder.

 

[interested]

I agree that we won't see any interest rate spikes soon, but considering 70% of Canada's trade is with the US, if they lag, we do. If you've been watching the numbers, Canada's have been great but very consistently lagged the US by about two months (time it takes from an American ordering something from Canada for it to go through the pipeline). The bad news is that the poor numbers we've been seeing for the past month in the US will show up here in August. There's no escaping it. The US recovery effort has failed miserably and we're inextricably linked to it unless our business people smarten up and become innovators and drastically improve our brutal productivity numbers.

As for the bubble of the title. I definitely hear a hissing sound and it's getting louder.

Agree with this post. To suggest that with in fact almost 75% of our exports going to the US and all the talk of possible further incentives in the US, I don't see how this can translate into anything but some headwinds for Canada ahead. For all the talk that we are not as dependent on the US, it is just not the case.
As well, 12% of our exports go to Europe which is having alot of its problems and I believe 10% goes to Asia (and now we hear China's stimulus may be wearing off and less growth expected). Canadians are more in debt that they were 2 years ago and have been using to a degree their equity in their homes as a piggy bank much as did the Americans. this phenomenon is just 2 years behind. The households in Canada are carrying more debt.
I agree with Simuls: there is a hissing sound and it will get louder. I just hope we don't hear a big "pop". (I do not expect a pop by the way but I do expect louder hissing.)

One additional point: Even if Carney increases (which I believe he stilll at least once in the next 2 cycles interest rates),interest rates remain extremely accommodative. So as not to confuse the markets (markets hate uncertainty as we all know), he will raise likely 1/2% this year yet though perhaps not the 3/4 to 1% predicted for the year and may pause then so as to maintain credibility but not significantly harm the accomodative monetary stance. Present rates are still very historically low and the last thing he needs is a big pop in the housing market. So if he can let air out slowly, this would be viewed probably as a good thing from a policy point of view.

 

[urbandreamer]

Holy crap, over 60 condos for sale in one City Place building? Yikes. Ask is way too high here: http://www.realtor.ca/propertyDetails.aspx?propertyId=9693587 I'll bid $130,000 cash.