Baby, we got a bubble!?

[daveto]

Our market has not sky rojeted as much as markets in other cities. .

That's like the fat kid saying he's not fat, because there is someone fatter.

. The Stats Canada numbers are not that accurate.

And you know this how?

The average salary for two professionals working in these jobs combined are around $100k (based on 50k each). That means these folks can afford to buy units up to 400k, and that is what we see happening

So they get a unit 30% smaller than 10 years ago?

I doubt very much we will see any large corrections here unless the rates go up by 3-4% on 5 year mortgage rates. The worst case I see is more flat growth in prices until salaries catch up.

Indeed. Mortgage rates could NEVER reach 7%. That's just crazy talk.
And certainly if mortgage rates stay low, then housing prices could NEVER decrease. That is definately NOT what is happening in the US.

And what exactly is "flat growth"?

 

[ponyboy]

I follow this thread, and agree that we are in for some kind of correction. But when, and how long will it take? My challenge is this -- my wife and I currently rent a really sweet loft downtown, but she badly wants to buy. I've run the numbers, and we pay about 40% of what it would cost to own this place (including all costs, even using "emergency" mortgage rates), and maintain the freedom to move elsewhere (and be kicked out of course). It's a sweet deal. She has the ownership bug, and my efforts to persuade her to look at the facts don't seem to change her view. She feels that our life is somehow not complete until we have a mortgage like our other friends (and can paint walls, etc). I'm inclined to continue to resist, but neither of us want to wait much more than 2 years because we want to settle in and have a family. Most housing bubbles take several (e.g. 5) years to unwind. When are the politicians going to stop monkeying around with the housing market (or be forced to by the bond market)?

Any advice on what to do?

 

[AKS]

There is no major economy in the modern world whose RE prices have ever remained above 4x income. NEVER.
It is hubris to believe that Canada will be the first.

Tokyo condos' average price 8 times annual income

http://www.japantoday.com/category/business/view/tokyo-condos-average-price-8-times-annual-income

Of course, that's not the reality for the population. If you read the comments, most people don't even make that much. Average income is 4-5 million yen. 12.7x - 16x income. The stats come from high income people buying who can afford to buy it at 8x income. The publication is quite old 2008 but real estate prices haven't gone anywhere. Neither up nor down. I can attest to their income. JET teachers get paid around 4M. And I've heard, that's more than what normal Japanese teachers there get paid. If you want to talk about other factors like living expense. It's not any cheaper than here. Unless you go no frills like standing up to eat or sit at a cart stand or something. It could be around $6-10 for a bowl of noodles. $2 for pop drink. $6 for coffee, $10 or so for McD meal. If you go to restaurants to eat, it costs upwards of $20. Cheapest place is the dollar store to buy every day stuff and snacks. Income tax is lower, but I don't think that offsets it by all that much. Of course, rental doesn't come cheap. But I don't think it could justify the cost of buying to rent.

Perhaps your statement should be reworded to "North America" instead of modern world.

 

[daveto]

Tokyo condos' average price 8 times annual income

http://www.japantoday.com/category/business/view/tokyo-condos-average-price-8-times-annual-income

Of course, that's not the reality for the population. If you read the comments, most people don't even make that much. Average income is 4-5 million yen. 12.7x - 16x income. The stats come from high income people buying who can afford to buy it at 8x income. The publication is quite old 2008 but real estate prices haven't gone anywhere. Neither up nor down. I can attest to their income. JET teachers get paid around 4M. And I've heard, that's more than what normal Japanese teachers there get paid. If you want to talk about other factors like living expense. It's not any cheaper than here. Unless you go no frills like standing up to eat or sit at a cart stand or something. It could be around $6-10 for a bowl of noodles. $2 for pop drink. $6 for coffee, $10 or so for McD meal. If you go to restaurants to eat, it costs upwards of $20. Cheapest place is the dollar store to buy every day stuff and snacks. Income tax is lower, but I don't think that offsets it by all that much. Of course, rental doesn't come cheap. But I don't think it could justify the cost of buying to rent.

Perhaps your statement should be reworded to "North America" instead of modern world.

Your link refers to only condo prices. And NOW, and not over the long term.

Also the article states "A condo unit is usually judged to be adequately priced if its price is within a range of up to five times the amount a worker earns annually.", and seems close to confirming my original statement that anything beyond 4x is overpriced.

Finally, Japan's lengthy period of low interest and low mortgage rates is what makes these overprices properties viable. Eventually, longterm, things will return to normal.

 

[interested]

Your link refers to only condo prices. And NOW, and not over the long term.

Also the article states "A condo unit is usually judged to be adequately priced if its price is within a range of up to five times the amount a worker earns annually.", and seems close to confirming my original statement that anything beyond 4x is overpriced.

Finally, Japan's lengthy period of low interest and low mortgage rates is what makes these overprices properties viable. Eventually, longterm, things will return to normal.

Actually Dave, Japan has been in a secular decline for 15 years now with no sign that things are going to improve with aging population. Japan continues because its debt is over 50% owned by Japanese so they are not going to be forced by an outside debtor to make drastic moves. I guess things may return to "normal" as you suggest, but if it takes another 15 years is it realistic to expect people to take 30 years to make a decision to buy if that is what they wish to do. I am referring to Ponyboy's dilemma as expressed a few posts ago.



QUOTE FROM PONYBOY: I follow this thread, and agree that we are in for some kind of correction. But when, and how long will it take? My challenge is this -- my wife and I currently rent a really sweet loft downtown, but she badly wants to buy. I've run the numbers, and we pay about 40% of what it would cost to own this place (including all costs, even using "emergency" mortgage rates), and maintain the freedom to move elsewhere (and be kicked out of course). It's a sweet deal. She has the ownership bug, and my efforts to persuade her to look at the facts don't seem to change her view. She feels that our life is somehow not complete until we have a mortgage like our other friends (and can paint walls, etc). I'm inclined to continue to resist, but neither of us want to wait much more than 2 years because we want to settle in and have a family. Most housing bubbles take several (e.g. 5) years to unwind. When are the politicians going to stop monkeying around with the housing market (or be forced to by the bond market)?

Any advice on what to do? END QUOTE
Ponyboy: Happy wife=Happy life; as the fortune cookies say. I am glad you have 2 more years in your time frame. If when prices start to decline, the "urge to buy will decrease I believe. It is human nature to say if I can buy cheaper tomorrow why would I buy today?
That said, this refers to the "intangeable" when one wishes to just own one's own home.

However, like the marriage ref show (which I have seen only once but it was funny) I am going to side with you (since I have only heard your side of the argument). 40% of the cost to rent vs. owning. Being totally objective as you are being it is a slam dunk. I would if you have not done it already show your wife how much more down payment in 2 years you would have, assume prices are the same in 2 years and show her how much less mortgage you will have and how much sooner you pay off your mortgage. 2 years now might well save you 5 years at the back end if you have a larger down payment. I know these are rational but cold arguments and at some point you have to bow to your wife's wishes. It would be unfair to keep her out of a house if she has her heart absolutely set on it. Not all decisions as I have posted before are purely financial.

arguments compared to the fuzzy feeling of "its mine" but until I knew everything was going to work out

 

[paperchopper]

I think 'brutal' and 'reckoning' are a bit more imperative than irrational exuberance, considering the fact that the first refers to a classic RE bubble has unfolded many times and catastrophically crippled most developed economies, whereas the latter at the time was an unseen valuation on a new breed of stocks.

Anyways, my point is, and I'll repeat it again, that anyone who buys RE that in a market with the same identical conditions as in other RE bubbles that have seen peak-to-trough drops of 30-50%+ and resulted in many homeless/bankruptcies is the weaver of their own misfortunes. Expect absolutely no sympathy what so ever, and I mean none, when your little $400k condo is being short saled for $125k by the bank and somebody comes in and negotiates it down to $90k cash, while you're still saddled with the $350k mortgage.

This is intellectual masturbation here, repeating the same thing over and over. It's hilarious, quite really. Now we're resorting to personal insults, questioning my age, my supposed 'hubris'. As I stated before, I'm an investment banker with desk time on mortgages, right at the peak of the US RE Bubble. I essentially was one of the bankers that made the bubble, so I'm uniquely qualified to speculate on whether something is a RE Bubble or not, and I can say, unequivocally, Canada will crash and go bankrupt.

Cheers.

 

[interested]

Since the country will now go bankrupt Paperchopper, are you ridding yourself or suggesting ridding ourselves of all C$ or most other than living expenses and investing in either commodities (such as oil or gas or gold), shorting USD and Euro because they have similar problems and most report that the USD is in secular decline and the Euro's very existence is being questioned. Are you buying shares? Bonds? Hi yield bonds?

I am not saying this lightly as I am asking a very serious question. It is OK to say that the Canadian real estate will implode. The logical next question is "where do you think one can hide"?

I look forward to your insight.

 

[Roy G Biv]

I essentially was one of the bankers that made the bubble, so I'm uniquely qualified to speculate on whether something is a RE Bubble or not, and I can say, unequivocally, Canada will crash and go bankrupt.

And you wonder why people are "resorting" to insults?

Anyways, since people can't seem to help themselves and banks are inherently evil, the government needs to regulate the shit out of your industry.

 

[paperchopper]

I didn't mean bankrupt literally per say, well perhaps Canada will resort to an IMF Loan just as Ireland and Iceland did, who knows, but more in the terms of rampant deflation/biflation as banks and debtors attempt to deleverage. Money will be in short supply, hence the deflation. People will hoard money, and the central bank will attempt to print itself out of the mess much like Bernanke is attempting to do so now. As I stated before, Canada is especially vulnerable to going bankrupt as the crown corporation CMHC has nearly $1 trillion or more than $1 trillion in unfunded liabilities, with only $9-10 billion in assets. The taxpayer guarantees the rest. When the bubble bursts, and the bond vigilantes get a whiff of it, they will punish Canada relentlessly. Canada pays approximately 4-5% on it's debt, those rates will instantly shoot up to 9-10%+ and austerity measures will need to be brought into place to pay for the increased deficit, which would go from $55B to about $100-200B a year. Canada's economy, based 20% on construction, would collapse even harder than Ireland's, which only had a 15% connection to construction. Taxes would easily skyrocket, EI would go up, CPP would go up, HST would go from 13% to 15-18%, etc etc.

In a deflationary environment, cash is king. Luxury assets are typically illiquid as well, compounding the pain from a rapidly deflating asset.

 

[urbandreamer]

^Well if that happens I'll just move back home, aka Texas.

 

[daveto]

The following link provides an excellent analysis on the effect of decreased down payments and increased amortizations over the past 10 years in Canadian RE.

One of the key issues that most people don't seem to want to acknowledge is that many many buyers proceed to buying (or upgrading) because prices have been increasing for the past 10 years and they believe they will continue to increase. But the increase has been substantially supported by the lower down payment, longer amortization, and decreasing mortgage rates of the past 10 years. It is similar to a car facing increased wind resistance and a heavier load, but offsetting the drag by increasing the throttle.

What do you think happens when the throttle is at maximum (ie the lowest minimum down payment, the longest amortization, and the lowest interest rates)

...actually, I think I know the answer...
it doesn't affect us because of foreign investors... or....
my property is different from all those others... or...
nobody can time the market...
etc, etc

http://financialinsights.wordpress.com/2010/12/15/the-great-mortgage-amortization-debate/

Some points of note:
* In 1999, the National Housing Act and the Canada Mortgage and Housing Corporation Act were modified allowing for the introduction of a 5% down payment

* In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.

* In 2005 and 2006, CMHC began insuring 30, then 35 year amortization mortgages.

 

[paperchopper]

And you wonder why people are "resorting" to insults?

Anyways, since people can't seem to help themselves and banks are inherently evil, the government needs to regulate the shit out of your industry.

That's exactly what caused the mess-- government regulation. The US federal government created Fannie and Freddie, and they took any risk off the banks making mortgages. The same exact thing has happened in Canada with the CMHC-- the federal government has allowed the banks to make gigantic profits with absolutely no risk to them. Do you think the banks would have made even 10% of the loans they have the last 5 years had it not been for the CMHC? Repeat after me-- HELLLLLLLLLLLLLLLLLLLL NO!

Government attempts at socializing losses is at the root of all evil.

 

[paperchopper]

Furthermore I would say that approximately 80% of our mortgages were Fannie or Freddie mortgages, and we traded about $70 billion a month. Our desk wasn't even that big. That's what caused the RE bubble.... subsidizing mortgages and allowing people to run up prices.

If RE were a normal market sans subsidization, ie 20 year amortizations, 7-8% interest rates, 20-25% downpayments, then housing would average probably around $175-200k versus the $350k it is now. Instead we're at 35/40 year amortizations, an inherently evil 1.75-2.1% interest rate and -25 to 5% downpayments (Yes, you get 'paid' to go into perpetual debt).

 

[interested]

So Paperchopper, you envision a Japanese style deflation only more severe and more rapid, is that correct?

Would you hold Canadian dollar cash since you feel it will be devalued? My question is not academic, but practical. Where would you invest, even if it is cash, or alternatively would you buy short term sovereign or corporate debt (more risk) and in what currency. If you believe that Canada will crash, will the C$ in your view say go back towards 60 cents USD since the US has already had alot of its problems wrung out and even as it continues, it has already taken a huge leg down as it were already?

I am seeking a true picture to help all of us on this forum plan for the "future after the bubble". This would be a sensible thing for us to do.

I know you have said you are totally out of R/E so you have the conviction of your beliefs. Are you sitting with cash bringing in0.000000000000001% or something close? It is fine to say no R/E, etc., but one has to have an alternate plan.

 

[paperchopper]

Interested, honestly, I'm not clairvoyant, and nobody else is on Wall Street. It's all about risk, the probability of something unwanted occuring. People make money on Wall Street by consistently playing risk right, not by predicting the future. That's impossible. Right now, IMO, cash and gold is king. Wait for a massive correction, as in corrections prices tend to significantly go below historical norms. That's when you buy.

The USD/CAD may go back down to 0.60, but I doubt it, given the speed at which Bernanke is printing. Canada has commodities, or at least has the perception of having them. We are actually quite bad at extracting our resources and have very low productivity, but we're still perceived as having $$$. If Carney raises rates to attempt to deflate the bubble, USD/CAD will go lower, ie the loonie will be worth more since US interest rates are extremely low. But then again, if the bubble does burst catastrophically, some people may avoid the loonie like the plague. I'd say prepare for both outcomes.

Canadian RE is stupid to be in right now. Nobody can afford housing, it's a massive bubble, it will crash. You might as well put your money into the craps table. I'd sell now. As I said before, Brampton is having a foreclosure crisis right now, everybody is walking away from their houses, the Brampton RE board hasn't posted numbers in 4 months (!!!!). Sales are down 70-80%. Unfinished houses. It's exactly like the RE crash in the US. But the RE boards are desperately trying to keep it hush hush, lol. Then Carney came out yesterday with his prophetic warning, Harper also rung the alarm bells, Flaherty too...... the end has come for Canadian RE.