Personal Finance

Another real estate bubble?

  • Last Updated:
  • 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
Oct 1, 2006
1906 posts
1073 upvotes
Montreal
pitz wrote:
Aug 27th, 2009 3:51 pm
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.

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.
I do not get it. Option 1 is way better for the government and the kids.
Deal Fanatic
Aug 27, 2004
6503 posts
141 upvotes
Toronto, ON
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. Unless you want a new car every few years, I don't see how leasing would have helped you.
a) If the automakers refuses to guarantee that their product will be worth something by offering a decent lease offer, why should I put my money where they refuse to put theirs?

One of the things many anti-leasing people ignore is that, with a leased car, if the thing is bad quality, depreciates faster-than-expected, or is generally undesirable on the used market, it's the lessor (who usually is the manufacturer) who bears the loss. If you buy the car, whoooops, it's the buyer's money going up in smoke.

b) If you're looking at certain expensive brands with a sketchy reliability reputation, why would you want to keep the thing one day past its warranty end?
Deal Fanatic
Aug 27, 2004
6503 posts
141 upvotes
Toronto, ON
Bullseye wrote:
Aug 27th, 2009 1:39 pm
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.
Hold on. 30% of their PRE-TAX INCOME?

Now, a couple making $80K combined will get taxed less than a single person making $80K, but... it seems to me that 30% of your pre-tax income being spent on your mortgage, not including property taxes, utilities, maintenance, condo fees (if applicable), etc. is very, very, very high.

By the time you've added all that stuff up, you're going to be looking at 40% of pre-tax income spent on housing. How much money will be left for other things? Cars? Kids? Clothes? Vacations? etc.

(By comparison, my current rent, including utilities, is 21% of my pre-tax income...)
Deal Expert
Mar 23, 2009
16518 posts
3570 upvotes
Toronto
When it comes to investments, in a way my goal is to pay as much tax as possible.

ie. I want to max out my RRSP and TFSA, and then make so much money on my other investments that I'm paying lots and lots of tax.
Deal Addict
Jan 11, 2004
4860 posts
456 upvotes
Victoria
AllWheelDrift wrote:
Aug 27th, 2009 1:00 pm
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.
Emphasis mine. This is the real reason a crash will occur. If the average joe can no longer afford to buy a house then the market is doomed. This is already the case in Vancouver and other areas of BC. It's only a matter of time now.
Not a political sig
Deal Fanatic
Aug 27, 2004
6503 posts
141 upvotes
Toronto, ON
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..
That's not how car financing works anymore.

You negotiate a sale price with the dealer. Say, $2000 less than MSRP.

The way it works now:
a) You pay cash (or borrow the money elsewhere), and they give you a manufacturer cash rebate on top ($3K, say), or
b) You finance, and the manufacturer's financing division gives you a subsidized rate (e.g. 1.9% for 72 months).

The simple fact of the matter is that cars are overpriced. They CANNOT sell them without these kinds of incentives.

Now, if you don't have the cash or a prime HELOC, it turns out that b) is the better deal compared to alternative financing and a). But... here's the catch. Let's say in two years you're married and your wife is pregnant. You need to sell the coupe. Whooooooooops, the amount you owe (and that you must pay off) is based on the inflated sale price, while the price you'll get is based on real used market prices, so in effect, you're going to get spectacularly screwed.
Sr. Member
Dec 9, 2007
537 posts
13 upvotes
VivienM wrote:
Aug 27th, 2009 5:27 pm
Hold on. 30% of their PRE-TAX INCOME?

Now, a couple making $80K combined will get taxed less than a single person making $80K, but... it seems to me that 30% of your pre-tax income being spent on your mortgage, not including property taxes, utilities, maintenance, condo fees (if applicable), etc. is very, very, very high.

By the time you've added all that stuff up, you're going to be looking at 40% of pre-tax income spent on housing. How much money will be left for other things? Cars? Kids? Clothes? Vacations? etc.

(By comparison, my current rent, including utilities, is 21% of my pre-tax income...)
Typical ratio requirements from lenders are:

GDSR <=32%
TDSR <=40% (perhaps up to 42%)

GDSR = costs associated with home/ rental costs (taxes, utilities and mortgage payment/ rent)

TDSR = total monthly servicing of debt & home/ rental costs

These are based on Gross dollar amounts not net amounts. While 30% is quite high it would be within the acceptable tolerance of lenders in Canada assuming that 30% includes heating costs and taxes.

Here is my 2 cents worth after spending last night reading through all the back and forths, data and opinions. Is the market expensive? Absolutely! Is it poised for a crash, maybe but I would say that is unlikely to happen broadly across the country. I am guessing prices will flatten or pull back 5-10% at an aggregate level. I think the only places where I would be concerned about home prices is in some of the large urban areas that have seen crazy run ups in price.

I live in Oshawa (suburb of Toronto) and price increases have been quite moderate for a number of years and homes are very cheap in comparison to Toronto (get a great 5-10 year old, 2600+ sqft home with 4 bedrooms and a good sized yard for ~$350K). So am I scared about the value of my property? Not at all given I plan to live there for 10-20 more years if not longer (so I can deal with the ups and downs) and if anything as prices continue to rise in Toronto more people will go to burbs looking for better value.

Also looking at rural areas outside the GTA where I grew up housing prices are already quite low to begin with. If there is a bubble it will likely be localized to urban centres.
Deal Expert
Mar 23, 2009
16518 posts
3570 upvotes
Toronto
whodaphucru wrote:
Aug 27th, 2009 5:44 pm
Typical ratio requirements from lenders are:

GDSR <=32%
TDSR <=40% (perhaps up to 42%)

GDSR = costs associated with home/ rental costs (taxes, utilities and mortgage payment/ rent)

TDSR = total monthly servicing of debt & home/ rental costs

These are based on Gross dollar amounts not net amounts. While 30% is quite high it would be within the acceptable tolerance of lenders in Canada assuming that 30% includes heating costs and taxes.

Here is my 2 cents worth after spending last night reading through all the back and forths, data and opinions. Is the market expensive? Absolutely! Is it poised for a crash, maybe but I would say that is unlikely to happen broadly across the country. I am guessing prices will flatten or pull back 5-10% at an aggregate level. I think the only places where I would be concerned about home prices is in some of the large urban areas that have seen crazy run ups in price.

I live in Oshawa (suburb of Toronto) and price increases have been quite moderate for a number of years and homes are very cheap in comparison to Toronto (get a great 5-10 year old, 2600+ sqft home with 4 bedrooms and a good sized yard for ~$350K). So am I scared about the value of my property? Not at all given I plan to live there for 10-20 more years if not longer (so I can deal with the ups and downs) and if anything as prices continue to rise in Toronto more people will go to burbs looking for better value.

Also looking at rural areas outside the GTA where I grew up housing prices are already quite low to begin with. If there is a bubble it will likely be localized to urban centres.
Perhaps, and some urban centres more so than others. Vancouver is particularly at risk IMO. Toronto in general is at less risk, although if declines do come, Toronto will likely see downward pressure as well, esp. at the high end of the market (so it could hit the particularly wealthy neighbourhoods the most, where average homes are 7-digit prices). It should be noted though that many suburbs saw prices go up as fast as the cities they serve, so they're at risk too.

The one thing to consider is the possibility that the BoC is able to keep interest rates relatively moderate. We all know that BoC rates will go up, and go up significantly. However, it's so low now that even moderate rate increases won't be the end of the world on prices. It will serve as downward pressure on prices, but that downward pressure may be low enough that prices may stay relatively stagnant, or price decreases might be less than 10% in some areas. With that, and time, the price might actually be eventually appropriate for the historical price curve.

To put it another way:

If a $500000 house is 10-15% too expensive now, one possibility is that there might be a big crash, and it loses 25% of its value, only to regain that missing 10% later. That's kinda what happened in the US. Prices arguably way overshot true value on the downside.

Or, another possibility is that the price will drop 10-15%, back to the appropriate price curve.

Or, another possibility is that the price will drop 0-5%, but will stay there for a number of years, so that the increasing appropriate price curve eventually catches up with that number due to inflation. Some people argue that in reality that is still a bigger price drop than that 0-5% would suggest, but IMO most people wouldn't actually care that much if it's their primary home.

Now, if interest rates hit double digits, then a true crash is virtually guaranteed. However, I personally am not expecting that any time soon, with soon meaning within the next 5 years (which is when most mortgages reset).
Deal Fanatic
Aug 27, 2004
6503 posts
141 upvotes
Toronto, ON
EugW wrote:
Aug 27th, 2009 5:59 pm
Some people argue that in reality that is still a bigger price drop than that 0-5% would suggest, but IMO most people wouldn't actually care that much if it's their primary home.
And if it's a primary home that's useful in the long run.

e.g. for a young couple living in a 1 or 2 bedroom condo, ooooops. If they plan to have kids, that condo has to go.

This is part of the problem with the current market. Instead of first-time buyers being mostly couples buying homes big enough for the family size they plan to have and staying in those homes for 20 years, you have a gazillions singles, couples, etc buying undersized properties to "build equity".
Deal Expert
Mar 23, 2009
16518 posts
3570 upvotes
Toronto
VivienM wrote:
Aug 27th, 2009 6:03 pm
And if it's a primary home that's useful in the long run.

e.g. for a young couple living in a 1 or 2 bedroom condo, ooooops. If they plan to have kids, that condo has to go.
Not necessarily immediately though.

In my condo complex, several couples were childless for several years, then had a kid, and then stayed several years until the kid was closer to going to elementary school. By that time, they were already about 6-7 years in their condo.

Now, if even after 5 years (when the kid is ready for grade 1), after an initial dip the condo is worth exactly the same as they paid for it, that would be tough luck for the family but not the end of the world. That's my point. It wouldn't be doom for the market, just not great for the market.
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User avatar
Aug 13, 2002
3307 posts
26 upvotes
VivienM wrote:
Aug 27th, 2009 5:20 pm
a) If the automakers refuses to guarantee that their product will be worth something by offering a decent lease offer, why should I put my money where they refuse to put theirs?

One of the things many anti-leasing people ignore is that, with a leased car, if the thing is bad quality, depreciates faster-than-expected, or is generally undesirable on the used market, it's the lessor (who usually is the manufacturer) who bears the loss. If you buy the car, whoooops, it's the buyer's money going up in smoke.

b) If you're looking at certain expensive brands with a sketchy reliability reputation, why would you want to keep the thing one day past its warranty end?
As you may have noticed from the other thread, I'm not anti-leasing. I disagree with your first point though. The auto maker has no direct control over the resell value of the car. Over the short run, that's much more driven by things like people's perception rather than the actual quality, the state of the economy, etc. Your second point only really holds for those brands.
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Jun 19, 2006
9349 posts
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Germack wrote:
Aug 27th, 2009 5:08 pm
I do not get it. Option 1 is way better for the government and the kids.
Are you crazy? No its not. The 'kids' have to sell some other investments, or go into debt, just to keep the property. That's insane.

How is having 10% of a person's inheritance going to the government 'better...[for] the kids'??
"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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VivienM wrote:
Aug 27th, 2009 5:32 pm
The way it works now:
a) You pay cash (or borrow the money elsewhere), and they give you a manufacturer cash rebate on top ($3K, say), or
b) You finance, and the manufacturer's financing division gives you a subsidized rate (e.g. 1.9% for 72 months).
Fair enough.
VivienM wrote:
Aug 27th, 2009 5:32 pm
Now, if you don't have the cash or a prime HELOC, it turns out that b) is the better deal compared to alternative financing and a). But... here's the catch. Let's say in two years you're married and your wife is pregnant. You need to sell the coupe. Whooooooooops, the amount you owe (and that you must pay off) is based on the inflated sale price, while the price you'll get is based on real used market prices, so in effect, you're going to get spectacularly screwed.
Well that's just bad planning.
Deal Fanatic
Aug 27, 2004
6503 posts
141 upvotes
Toronto, ON
Nyte wrote:
Aug 27th, 2009 6:44 pm
As you may have noticed from the other thread, I'm not anti-leasing. I disagree with your first point though. The auto maker has no direct control over the resell value of the car. Over the short run, that's much more driven by things like people's perception rather than the actual quality, the state of the economy, etc. Your second point only really holds for those brands.
I disagree. The automaker controls:
- reliability
- brand's reputation (i.e. the quality of the products they sold in the past, the general desirability of their products, etc.)
- price of new cars of the same model (if they stick a $10K rebate next year, well... that'll make the resale value drop)
- production volume (if you massively increase production of a niche car, e.g. New Beetle/PT Cruiser/Camaro/etc, it'll be far less valuable used than if it was produced in lower quantities).
... if not other things.

If you buy the car, then they've got their money, and that's it. They can sell you a quality product (Toyota), or they can run to the bank having sold you a cheap product for an inflated price (automakers managed by MBAs); either way, it doesn't matter for them in the same way as it does if they're the ones guaranteeing the resale value...
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Jun 19, 2006
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EugW wrote:
Aug 27th, 2009 5:28 pm
When it comes to investments, in a way my goal is to pay as much tax as possible.
That's a damn sh*tty goal. Shouldn't your goal be to maximize your overall wealth over the long term, wealth being your purchasing power in goods and services. How is seeing your investment hyperinflating going to facilitate that? Wouldn't you rather own 10 relatively realistically priced houses, instead of 2 or 3 very inflated ones?

I don't know about you, but I like to see real growth in my investments. I have no problem paying tax on real growth. I do have a problem paying tax on growth that isn't real, ie: a house, after 10 years, is still a house, regardless of the price. Why should I be forced to carve 10% of the house out, and send it to the government, when I want to sell?
ie. I want to max out my RRSP and TFSA, and then make so much money on my other investments that I'm paying lots and lots of tax.
That's insane. Inflation is *bad* for investors who buy things that have capital gains tax, because the utility of the asset has not increased, while the tax on it has.
"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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