Personal Finance

Another real estate bubble?

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  • Dec 17th, 2013 5:22 pm
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Poll: Are we in a 2nd real estate bubble?

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Deal Addict
Feb 9, 2005
4169 posts
16 upvotes
Bullseye wrote:
Aug 27th, 2009 8:05 am
It's my understanding from past posts that pitz, i6s1, and VivienM are all renters, is that correct guys? Did any of you cash in on the real estate boom in recent years, or did you rent throughout?

I just want to clarify this, as there has been a lot of talk about bias on the part of bankers, government, and real estate boards, who all allegedly fiddle data to skew it in the favour of a rebounding market, which benefits them.

If there is bias on the other side, due to say, bitterness on missing the boat, I think we should be aware of it.
I notice you left me out of that list of RE bears. I guess maybe you already recall that I have stated I bought long enough ago that I have did get in on the Vancouver boom.

I haven't capitalized on it though for a few reasons. For starters, I didn't grossly overpay for my place and I happen to like it. No-one will argue that owning has it's benefits. Also, I'm married and it's pretty clear I wouldn't be able to convince my wife to rent a place instead. There's a certain stigma with renting vs buying and it being "throwing money away" based on "conventional wisdom" that is simply fallacious in the current environment. The fact that everyone blindly believes this "conventional wisdom" is one of the root problems, but I digress.

Anyhow, with 55+% paper gain in property value while I've only managed to grow my salary by 20%, I think you'd have a hard time saying I'm bitter about missing the boat.

But that brings up an interesting point. I was early in my career and able to grow my salary agressively, if I was 6 years younger, but still managed to get my current wage, my chances of ever owning property in Vancouver would look pretty dismal. (Well, maybe not quite, given that right now I could still leverage low interest rates, low downpayment requirements, and long ammortizations to get my foot in the door but as pitz says, this is basically buying a lottery ticket.) That is what really concerns me and the clearest sign that a correction is required.

You may argue those that missed the boat are doomed to rent for the rest of their lives, but my counter argument is that if prices don't drop, rents must also rise to an unafordable level to compensate the landlords for the opportunity cost of their investment. I suppose maybe the younger "middle class" in Vancouver is doomed to choose between a life of poverty or moving away.
Banned
Jun 19, 2006
9349 posts
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Nyte wrote:
Aug 27th, 2009 12:58 pm
Why not just finance a car at a low rate and put your extra money in something that yields much more than what you're paying in interest.
That's a logical fallacy, because the low interest rate involved with doing a car lease, invariably, arises from paying too much for the car in the first place!


Unless you want a new car every few years, I don't see how leasing would have helped you.
In the past few years, leases were calculated with residuals that are much higher than actual market experience, especially on SUVs and luxury cars. This had the effect of keeping the payments to a minimum.

A lease is merely the amortization of the difference between the purchase price of the vehicle, and the residual value, at a certain interest rate.

People are literally returning cars to lessors right now that have residuals that are thousands of dollars higher than the car could actually be sold on the open market for. VivienM is referring to taking advantage of that.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
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Aug 13, 2002
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pitz wrote:
Aug 27th, 2009 1:02 pm
That's a logical fallacy, because the low interest rate involved with doing a car lease, invariably, arises from paying too much for the car in the first place!
Except I was talking about financing. You negotiate the price of the car before you bring that into the picture, so it doesn't really apply.
pitz wrote:
Aug 27th, 2009 1:02 pm
In the past few years, leases were calculated with residuals that are much higher than actual market experience, especially on SUVs and luxury cars. This had the effect of keeping the payments to a minimum.

A lease is merely the amortization of the difference between the purchase price of the vehicle, and the residual value, at a certain interest rate.

People are literally returning cars to lessors right now that have residuals that are thousands of dollars higher than the car could actually be sold on the open market for. VivienM is referring to taking advantage of that.
Which was why I said "unless you want a new car every few years" as it is still not a good deal because of the way a car depreciates. Otherwise, you're basically spending a lot to save a little.
Deal Addict
Feb 9, 2005
4169 posts
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Nyte wrote:
Aug 27th, 2009 1:14 pm
Except I was talking about financing. You negotiate the price of the car before you bring that into the picture, so it doesn't really apply.
Well, if you're negotiating, unless you tell them you are paying cash they will assume financing. If you really believe it doesn't matter, tell them you want to pay cash, and once you've negotiated a price, turn around and say you've changed your mind and are going to use their financing instead. Watch how quickly they backpedal or invent financing fees.
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Aug 13, 2002
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GonePostal wrote:
Aug 27th, 2009 1:24 pm

You just assume. Look it up. 50-60% don't ever refinance. And don't turn your TV on to do research.
So you're saying 40-50% DO refinance. That's still a lot of people to me.
Deal Addict
Jan 11, 2004
1277 posts
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Nyte wrote:
Aug 27th, 2009 1:31 pm
So you're saying 40-50% DO refinance. That's still a lot of people to me.
It's not everyone and it's not the way of life.

I've decided to delete my post. No point arguing with Pitz. He will never admit he doesn't know everything. I had a friend that does risk analysis of MBS and he shares my analysis.
Banned
Jun 19, 2006
9349 posts
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GonePostal wrote:
Aug 27th, 2009 1:24 pm
Most people who took out these bad subprime loans are not refinancing.
A very common loan structure in the USA was a 'piggyback loan', which was actually the simultaneous granting of a 1st and 2nd mortgage, the 1st mortgage being a traditional 'conventional' mortgage, the 2nd mortgage, being a very high rate one. The 2nd mortgage is not exempt, and cannot be 'walked away' from.

Either way, if you 'google' stuff, you'll see that there are literally millions of 'serial refinancers', who, every couple of years, as prices went up, particularly in places like California, refinanced into lower interest rates and lower payments, and also did equity extraction at the same time. These loans are now defaulting in large numbers.

Just because you saw it on "TV" doesn't make it true. Seeing things on "TV" doesn't mean it's true. Anyone can sell you anything. But once you get down to it, reality is very different.
I rarely watch TV, but you'd have to have been blind to not see all the crazy advertising over the past few years from the refinancing companies. In many cases, people who once had prime loans, ended up refinancing into subprime loans simply because they were running out of equity to extract.
Did you read anything I write?
Did read *anything* I wrote?
I said they would issue you a 1099 for a cancellation of deb income tax. But as a home owner you are covered by the excemptions. Doesn't matter if
What exemptions?? Got any sources?
Your claim that you will get a bill in the mail and have to pay for it in a year is WRONG. Much like many of your other points.
Not true. Just like many of your other posts. Your claims are getting to be fairly on the ridiculous side, really.
You just assume. Look it up. 50-60% don't ever refinance. And don't turn your TV on to do research.
I've assumed nothing. And your 50-60% number is way low. Maybe 50-60% don't refinance within the same year, but those 30-year loans, the average life of them, is only like 5 years or so, I've heard. Which means that loans are frequently getting refinanced. Although, in a rising interest rate environment, this may very well stop, hence, all the out-of-work mortgage brokers in the US right now.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Deal Fanatic
Feb 1, 2006
9565 posts
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Muskoka
pitz wrote:
Aug 27th, 2009 12:50 pm
Affordability under traditional criteria for a typical new graduate professional in engineering/accounting/law (no more than 1/3rd income, 25 year amort, @ long-term interest rate average).
Why stick with 'traditional criteria' when that criteria has changed? There is a 'new normal' now, longer amortizations and lower downpayments are here to stay, and that affects traditional affordability ratios. Combine that with rates that can be locked for longer terms, and it's not hard to see some support for current prices in some cities.

Right now, a couple making around $80k combined could qualify for a $400k home, with 10% down, on a 10 year, 5.25% mortgage. The mortgage payment would be $2k/month.

So even though the mortgage is 4.5x their income, the payments are only 30% of their income, and that rate is locked for ten years. Hence the 'new normal'. If they grow their incomes at a reasonable rate, they could potentially pay that mortgage off before they are subject to rate exposure again. At the very least, they would be looking at a much smaller mortgage at the end of 10 years.

$80k is not much above the average income for Toronto, and $400k still gets you a decent place in the city, or a nicer place in the GTA.

Vancouver is a different story.
Banned
Jun 19, 2006
9349 posts
53 upvotes
GonePostal wrote:
Aug 27th, 2009 1:37 pm
It's not everyone and it's not the way of life.

I've decided to delete my post. No point arguing with Pitz. He will never admit he doesn't know everything. I had a friend that does risk analysis of MBS and he shares my analysis.
No point arguing with you, since you're quite willing to bring complete mistruths to the table. Seriously, grow up, and stop resorting to personal attacks whenever someone calls you out as being completely wrong.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Deal Addict
Feb 9, 2005
4169 posts
16 upvotes
Bullseye wrote:
Aug 27th, 2009 1:39 pm
Why stick with 'traditional criteria' when that criteria has changed? There is a 'new normal' now, longer amortizations and lower downpayments are here to stay, and that affects traditional affordability ratios. Combine that with rates that can be locked for longer terms, and it's not hard to see some support for current prices in some cities.

Right now, a couple making around $80k combined could qualify for a $400k home, with 10% down, on a 10 year, 5.25% mortgage. The mortgage payment would be $2k/month.

So even though the mortgage is 4.5x their income, the payments are only 30% of their income, and that rate is locked for ten years. Hence the 'new normal'. If they grow their incomes at a reasonable rate, they could potentially pay that mortgage off before they are subject to rate exposure again. At the very least, they would be looking at a much smaller mortgage at the end of 10 years.

$80k is not much above the average income for Toronto, and $400k still gets you a decent place in the city, or a nicer place in the GTA.

Vancouver is a different story.
Obviously it's possible to make the current numbers work with the new criteria, but the question is, is the new criteria sustainable? The "new criteria" is much more interest rate sensitive. Sure the couple you describe is able to withstand the rate changes because of the long term, but their counterparts looking to enter the market when rates are higher would need prices to come down and as a result the multiple will come down as well. Hence even though some form of the "new criteria" will work, prices will be more volatile and corrections are still imminent as interest rates will almost certainly rise.

BTW, the median household income in the 2007 census was about 64k so I'd say 80k is a fair bit above the average though I won't say it's unreasonable for a couple looking to buy a home to be earning such a combined income.

On the whole, Toronto prices don't look *that* bad I suppose, but Vancouver is seriously out of whack, as it seems even you would agree.
Deal Fanatic
Feb 1, 2006
9565 posts
733 upvotes
Muskoka
AllWheelDrift wrote:
Aug 27th, 2009 1:56 pm
Obviously it's possible to make the current numbers work with the new criteria, but the question is, is the new criteria sustainable? The "new criteria" is much more interest rate sensitive. Sure the couple you describe is able to withstand the rate changes because of the long term, but their counterparts looking to enter the market when rates are higher would need prices to come down and as a result the multiple will come down as well. Hence even though some form of the "new criteria" will work, prices will be more volatile and corrections are still imminent as interest rates will almost certainly rise.

BTW, the median household income in the 2007 census was about 64k so I'd say 80k is a fair bit above the average though I won't say it's unreasonable for a couple looking to buy a home to be earning such a combined income.

On the whole, Toronto prices don't look *that* bad I suppose, but Vancouver is seriously out of whack, as it seems even you would agree.
I guess the point I was making with my example is that a fairly average couple buying now in most parts of the country could do so without onerous payments, and without endangering their future. Even if prices plunged, they could just stay in their home, and continue to pay it off. Their net worth would take a hit, but their day to day lives wouldn't be much affected.

I do agree that going forward, as rates rise, affordability will suffer, and prices will stagnate or drop. Likely the latter. I'm a RE bear as well, even though I own, and will continue to own. I am just not as vocal about it as some others here.
Deal Addict
Feb 9, 2005
4169 posts
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Bullseye wrote:
Aug 27th, 2009 2:29 pm
I guess the point I was making with my example is that a fairly average couple buying now in most parts of the country could do so without onerous payments, and without endangering their future. Even if prices plunged, they could just stay in their home, and continue to pay it off. Their net worth would take a hit, but their day to day lives wouldn't be much affected.

I do agree that going forward, as rates rise, affordability will suffer, and prices will stagnate or drop. Likely the latter. I'm a RE bear as well, even though I own, and will continue to own. I am just not as vocal about it as some others here.
Yeah, in many parts of the country, it's possible to buy now and be fairly secure. Whether it's a good idea or whether they actually are taking out 10 year mortgages is another question.

I must admit I tend to get a bit focused on my local market (Vancouver). "Bubble" is probably a bit of a strong word for many Canadian RE markets, but for the likes of Vancouver, Calgary, and Edmonton, charts like this make it pretty clear they are in bubble territory. http://www.chpc.biz/Major_Cities_Chart.htm Places like Toronto, Ottawa, and Montreal will probably experience a correction rather than a crash when interest rates rise.
Banned
Jun 19, 2006
9349 posts
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Bullseye wrote:
Aug 27th, 2009 2:29 pm
Even if prices plunged, they could just stay in their home, and continue to pay it off. Their net worth would take a hit, but their day to day lives wouldn't be much affected.
Yup, that's reality. A contagion of foreclosures is not the inevitable outcome of housing price declines.

Some people will just end up getting good deals on houses, that's all, at some point in the future. Kind of like sometimes people get good deals on LCDs during the Dell Days of Deals events that are advertised here on RFD. A LCD doesn't go up or down in price because of the cost of financing it. Why would a house? What business it anyways, of the person you're buying it from, whether its being bought with cash or credit?
I do agree that going forward, as rates rise, affordability will suffer, and prices will stagnate or drop. Likely the latter. I'm a RE bear as well, even though I own, and will continue to own. I am just not as vocal about it as some others here.
I don't explicitly own, but I stand to inherit, easily, more than the national average worth of real estate, so I'm not a disinterested party. My angle on this situation is that overvaluation in RE deprives the rest of the economy of badly needed investment capital, thus, paradoxically, suppressing RE prices in the future.

I want a strong Canada [and United States], that can sustainably support itself, and its RE industry in the long run. One that has good labour mobility, is able to match the brightest people to the most thought-worthy jobs. RE overvaluation just makes real estate agents, bankers, and homebuilders disproportionately wealthy, compared to the true wealth creators in society -- the engineers that invent things, the factory workers that make them, and the savers who finance them.

Artificially high RE prices also increase costs for long-term owners of RE, because high prices become an excuse to raise taxes. Also, capital gains taxes are higher with higher prices.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)
Member
Nov 14, 2007
332 posts
1 upvote
pitz wrote:
Aug 27th, 2009 2:53 pm
Also, capital gains taxes are higher with higher prices.
That is strange argument!
would you rather make 100K profit and pay 20K of it in taxes, or make 200K profit and pay 40K in taxes.

paying more in capital gain is no good excuse not to earn more money.
Banned
Jun 19, 2006
9349 posts
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albatman wrote:
Aug 27th, 2009 3:46 pm
That is strange argument!
No it's not. Say, for instance, you bought a $100k property as a rental or even as a vacation home, and held it for 10 years. You then die.

If it goes up to $200k -- your kids owe the government 10% of the house (ie: 20% of the $100k gain!).

If it stayed at $100k -- your kids owe the government 0% of the house (ie: 20% of the $0 gain!).

Rising house prices means that the government takes an ever increasingly large chunk of the house, as capital gains tax, when you sell it.

Either way, the kids get the house. But in the first scenario, they (or the estate, properly) has to come up with $20k in cash -- often through an interest-bearing bank loan!). In the second scenario, there is no tax owing.

Do you now understand why the Government of Canada (and all its agencies, ie: the CMHC, StatsCan, the banks, etc.) have *huge* incentive to keep prices artifically high, and to manipulate stats, if necessary?
paying more in capital gain is no good excuse not to earn more money.
High rates of asset inflation, along with capital gains taxes, as the above example has shown, means that the government will confiscate an increasingly large portion of an asset when it changes hands.

You think government confiscation is a good thing??? High inflation, particularly in asset prices, results in massively increased taxes on capital. Which is hugely problematic for so many reasons, not only in real estate, but also, in the industrial sector with machinery.
"I worked with several H1B employees that were/are borderline ********. One of them wanted to spray an electrical patch panel with solvent to see if it would make the “network go faster”". <--- lol (source)

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