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
Oct 1, 2006
2004 posts
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Montreal
pitz wrote:
Aug 27th, 2009 9:23 pm
Well now, wouldn't the world be a better place if everyone was a CFA, armed with knowledge of CAPM, and had rational expectations for the future of incomes, interest rates, and the ability of our economy to sustain certain activities, relative to others??

People who mis-price equity, paradoxically, usually end up losing all of theirs. The crowd that wishes that prices remain artificially high -- are actually sowing the seeds of destruction in the market, by encouraging over-building, high rates of capital taxation, and under-investment in the 'rest' of the economy. CMHC's wreckless actions are just compounding the future losses they will incur on mortgage insurance.

The 'system' is, fortunately, self-correcting. Unfortunately, it claims many victims along the way.
I am not a bitter renter, neither do I have anything against RE investing. I have been a RE investor myself. The thing that scares me most is that most people investing in RE have absolutely no clue about RE investing at all. They do not know what CAP rates are, underestimate costs and buy way overpriced cash flow negative properties. A lot of people are going to loose sooner or later a s***load of money.Oh well at least thanks to these fools I can take my early retirement with 38.
Deal Expert
Mar 23, 2009
17256 posts
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Germack wrote:
Aug 27th, 2009 9:13 pm
I wish people would finally understand opportunity costs. Not many people do. These are real costs and it does not matter at all whether it is your primary residence or a rental property.
I'm not sure you understand my point. The point was that some people are willing to accept somewhat higher costs for primary home ownership, although some of the benefits of home ownership are hard to put into basic raw numbers.

You can argue opportunity costs, but then again one might argue a primary residence is worth a price premium because of factors such as not having the numerous restrictions encountered a rental dwelling.

I personally think it's well worth it, but you may disagree. As you may have guessed, I prefer owning to renting (having lived in many rental places). There are arguably more restrictions with condo ownership than with ownership of detached homes, but even condo ownership is more pleasant IMO than renting, but does not make sense for those looking only for the short term.

Germack wrote:
Aug 27th, 2009 9:41 pm
I am not a bitter renter, neither do I have anything against RE investing. I have been a RE investor myself. The thing that scares me most is that most people investing in RE have absolutely no clue about RE investing at all. They do not know what CAP rates are, underestimate costs and buy way overpriced cash flow negative properties. A lot of people are going to loose sooner or later a s***load of money.Oh well at least thanks to these fools I can take my early retirement with 38.
This are arguments against real estate investing and real estate speculation, and I do not disagree with that in that context.
Member
Nov 14, 2007
332 posts
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pitz wrote:
Aug 27th, 2009 3:51 pm
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!).
First, that is a rare case when kids want to keep the house, the majority of people pay taxes when they either sell their own, or sell inherited property.... Second, it would be stupid to keep the property if the value has appreciated significantly.... find a better investment vehicle when you make 100% profit!
Not to mention that people with poor financial planning deserve to pay high taxes.
Third, yes, I want to leave my kids with 200K, not 100K... I am sure they will be happy to pay 10K more in taxes and make 180K instead of 90K.
pitz wrote:
Aug 27th, 2009 3:51 pm
Rising house prices means that the government takes an ever increasingly large chunk of the house, as capital gains tax, when you sell it.
That is the strange argument I was referring to, again, paying larger capital gains should not be excuse why you should not make more profit..... do you really prefer to make 0 profit so that you pay 0 taxes? that is just stupid.
If you think that way, you should never invest in anything: stocks or property, just keep wasting your money on useless crap so you don't pay any capital gain.
pitz wrote:
Aug 27th, 2009 3:51 pm
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
Well, I understand your reasoning, but that is not why they really do it, the people who voted them will get really angry if their assets kept shrinking.... that is a better incentive.... the same argument could be used against growth, the government makes more money from growth, but growth is not a bad thing even when the tax share increases.
pitz wrote:
Aug 27th, 2009 3:51 pm
and to manipulate stats, if necessary?
C'mon, lets not get into conspiracy theories... lets keep this thread civil, shall we?
pitz wrote:
Aug 27th, 2009 3:51 pm
You think government confiscation is a good thing???
This is not confiscation, it is called business, if people are stupid enough to keep their investment when it appreciated so much and pay so much tax, they deserve to lose the tax money. Thats basic investment 101.
pitz wrote:
Aug 27th, 2009 3:51 pm
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 agree that inflation is a problem but mostly not because of capital gain taxes, but rather effect on affordability and quality of life, and eventually it can lead to economic collapse. But in Canada, inflation is not very high, considering
A) we are not printing money like crazy as our neighbours south of the border, and
B) Our economy is tied to resources, which increases the dollar making imports cheaper.
C) The Bank of Canada is not as aggressive with rate cuts as other banks.

I am not saying we shouldn't worry about inflation, especially after the purchase and sale agreement the BoC did last spring, but our worry should not be as big as that down south.
Anyway, the inflation debate is a big topic, we should probably avoid it here not to derail this thread
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Jun 19, 2006
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albatman wrote:
Aug 27th, 2009 11:57 pm
First, that is a rare case when kids want to keep the house, the majority of people pay taxes when they either sell their own, or sell inherited property.... Second, it would be stupid to keep the property if the value has appreciated significantly.... find a better investment vehicle when you make 100% profit!
Not to mention that people with poor financial planning deserve to pay high taxes.
Third, yes, I want to leave my kids with 200K, not 100K... I am sure they will be happy to pay 10K more in taxes and make 180K instead of 90K.
No, 10% of their house is being chopped off and being given to the taxman under the inflation scenario. Whereas, under the non-inflation scenario, 0% of the house is given to the taxman.

Get high enough inflation, and eventually, the government owns pretty much everything.

That is the strange argument I was referring to, again, paying larger capital gains should not be excuse why you should not make more profit..... do you really prefer to make 0 profit so that you pay 0 taxes? that is just stupid.
If you think that way, you should never invest in anything: stocks or property, just keep wasting your money on useless crap so you don't pay any capital gain.
The thing is, its impossible to make a profit with a house! Its just a house, its an inanimate object, it doesn't produce anything! Its only value, ultimately, is what you can rent it out for, or the rent you can avoid paying someone else!

Homeowners should be wishing that their prices go *down*. Why? Because re-investment of cashflows is less expensive, into additional property.

I personally am glad that my stocks, and the stock market has gone down. Because I'm literally taking my dividends and my other earnings right now, and buying things for 50% off, in most cases! *And* those pesky people in government aren't begging to confiscate a portion of my portfolio in the form of capital gains tax! Yet the productive capacity of my portfolio is unchanged (in fact, despite this economic crisis, dividends have grown!).
C'mon, lets not get into conspiracy theories... lets keep this thread civil, shall we?
Not conspiracy theories. Simple math. Governments already tax the sh*t out of housing, by imposing property taxes, by imposing taxes on the income that comes from property. And you're actually *wanting* to bend over and pay taxes on capital?
This is not confiscation, it is called business, if people are stupid enough to keep their investment when it appreciated so much and pay so much tax, they deserve to lose the tax money. Thats basic investment 101.
Houses themselves don't appreciate. What they're measured in depreciates. When governments destroy the value of money, they create gains in the prices of hard assets, and those hard assets are then taxed through capital gains.

Its not that a $100k house is now 'worth' twice as much if it goes up to $200k. Its just that $200k of cash is worth half as much, priced in houses, than it was previously. The worth of an asset is defined as its utility, and ultimately, the economic output of that house is identical before, and after an inflation.
I agree that inflation is a problem but mostly not because of capital gain taxes, but rather effect on affordability and quality of life, and eventually it can lead to economic collapse. But in Canada, inflation is not very high, considering
High inflation translates into massive taxes on capital, and taxes on capital absolutely kill investment and prosperity. Taxes on income are onerous enough, but when you start taxing capital, regardless of whether it actually generates useful economic output, that means that you're seeing some crazy high tax rates.


A) we are not printing money like crazy as our neighbours south of the border, and
B) Our economy is tied to resources, which increases the dollar making imports cheaper.
C) The Bank of Canada is not as aggressive with rate cuts as other banks.
All true. Which is why, I acknowledge, that Canada will likely do better, although I suspect the main beneficiaries of such better performance are likely to be business owners, rather than property owners, in the long term.
Anyway, the inflation debate is a big topic, we should probably avoid it here not to derail this thread
Its an interesting topic as it relates to real estate, and as it relates to just how motivated a taxpayer-funded Government of Canada would be to report true and accurate data, especially if it meant the gravy train of high tax revenues would come to an end.
"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
Germack wrote:
Aug 27th, 2009 9:41 pm
I am not a bitter renter, neither do I have anything against RE investing. I have been a RE investor myself. The thing that scares me most is that most people investing in RE have absolutely no clue about RE investing at all. They do not know what CAP rates are, underestimate costs and buy way overpriced cash flow negative properties. A lot of people are going to loose sooner or later a s***load of money.Oh well at least thanks to these fools I can take my early retirement with 38.
Well I agree that a lot of people are just jumping on the bandwagon not understanding basic economics of it.
But don't forget that the majority of buyers are not using it for investment property, and rather for principal residence.
for that you need to factor in:
A) no capital gains when you sell
B) you don't pay rent
C) There are tax benefits to owning principal residence (tax deductions, HBP..etc.)
D) unlike rentals, you can do whatever you want with your property.

second point improves your CAP rate (You had to pay rent anyway, i.e. 100% occupancy, without advertising etc) I know a lot of people that paid less or slightly more money to service their mortgage than they used to just simply renting. That becomes a no brainer.

Not saying that principal residence should not be considered as investment, quite the opposite... it SHOULD, but you should consider other factors when talking about principal residence.
Deal Expert
Mar 23, 2009
17256 posts
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Toronto
pitz wrote:
Aug 28th, 2009 12:16 am
I personally am glad that my stocks, and the stock market has gone down.
Wow. Rationalization at its best.

Personally, I'm glad I took much of my money out of the stock market before the market went down.

Houses themselves don't appreciate. What they're measured in depreciates. When governments destroy the value of money, they create gains in the prices of hard assets, and those hard assets are then taxed through capital gains.

Its not that a $100k house is now 'worth' twice as much if it goes up to $200k. Its just that $200k of cash is worth half as much, priced in houses, than it was previously. The worth of an asset is defined as its utility, and ultimately, the economic output of that house is identical before, and after an inflation.
Housing prices have historically increased slightly faster than inflation (but not as fast as the stock market).
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Jun 19, 2006
9349 posts
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EugW wrote:
Aug 28th, 2009 12:24 am
Wow. Rationalization at its best.
Wow, I'm re-investing my cash-flows dirt cheaply. Homeowners are re-investing their cash-flows into the sky-high, inflated housing market, or aren't re-investing at all because they can't afford to! (ie: their houses are wearing out, or they're paying $500 for a set of $200 bathroom taps at Home Depot, or inflated prices for contractors).

Personally, I'm glad I took much of my money out of the stock market before the market went down.
Congratulations, you got lucky this time on market timing, but did you get back in at the 'bottom'? And what did your trading cost you in terms of taxes, and expenses?
Housing prices have historically increased slightly faster than inflation (but not as fast as the stock market).
The data that I've seen shows a return that's less than inflation, *and* that is exclusive of property taxes, maintenance, etc. Even Robert Shiller (Yale), probably one of the most respected economists in the area of housing, hasn't been able to find any evidence that housing has increased faster than inflation over the long term, and he studied the market going back to the 1700s!
"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 Expert
Mar 23, 2009
17256 posts
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pitz wrote:
Aug 28th, 2009 12:39 am
Wow, I'm re-investing my cash-flows dirt cheaply. Homeowners are re-investing their cash-flows into the sky-high, inflated housing market, or aren't re-investing at all because they can't afford to! (ie: their houses are wearing out, or they're paying $500 for a set of $200 bathroom taps at Home Depot, or inflated prices for contractors).
? Why would somebody buying a house have to spend $500 for a set of $200 bathroom taps? That makes no sense at all. They could buy a $100 tap, or they could wait for a $200 tap to go on sale for $155.

Meanwhile my rental places I stayed at would provide me the $30 ones.

Congratulations, you got lucky this time on market timing
Indeed. It was luck. I don't claim to be able to predict the future with confidence.

but did you get back in at the 'bottom'?
Did some investments on the way down, and some on the way up.

And what did your trading cost you in terms of taxes, and expenses?
Expenses low. Taxes were capital gains taxes of course.

The data that I've seen shows a return that's less than inflation, *and* that is exclusive of property taxes, maintenance, etc. Even Robert Shiller (Yale), probably one of the most respected economists in the area of housing, hasn't been able to find any evidence that housing has increased faster than inflation over the long term, and he studied the market going back to the 1700s!
Canadian prices since the 50s have increased at around 1.5-2% faster than inflation. I don't know what the prices did before the 50s.
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Apr 21, 2004
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How prevalent is the practice of investors naming their children as owners of real properties and by providing gift money for the d/p? Can the CRA challenge these claims when there are monthly utility bills under the children's names? Just curious...
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Jun 19, 2006
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EugW wrote:
Aug 28th, 2009 12:48 am
? Why would somebody buying a house have to spend $500 for a set of $200 bathroom taps? That makes no sense at all. They could buy a $100 tap, or they could wait for a $200 tap to go on sale for $155.
Well, profit margins in the entire supply and labour chain for house building materials and housing labour are excessive. Things are so inflated that a set of taps that are built in China for less than $100, and ordinarily would sell for $200 (ie: 100% profit margin, typical of stuff imported from China), go onto the shelves at Home Depot for $500. Same with lumber -- lumber prices and house prices were extremely well correlated in the USA, with the lumber peak occurring at almost the same time as the house price peak!

And labour wise, things have been ludicrous. Carpenters making more money per hour on the job than degreed consulting civil engineers! $30/hour painters! Etc., etc.
Canadian prices since the 50s have increased at around 1.5-2% faster than inflation. I don't know what the prices did before the 50s.
Because of interest-rate-related repricing, and actual growth in the size and quality aspects of construction. In the 50s, a typical new-build house was much smaller. In the 50s, a typical house wasn't equipped with a dishwasher, washer, dryer, flat-screen TV, or Ethernet in the walls! Now all these items get rolled into the stats. Also, insulation, energy efficient furnaces, landscaping, etc., is all more sophisticated today than in the past.
"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 Expert
Mar 23, 2009
17256 posts
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pitz wrote:
Aug 28th, 2009 1:03 am
Well, profit margins in the entire supply and labour chain for house building materials and housing labour are excessive. Things are so inflated that a set of taps that are built in China for less than $100, and ordinarily would sell for $200 (ie: 100% profit margin, typical of stuff imported from China), go onto the shelves at Home Depot for $500
That's the beauty with owning. You can go as expensive or as cheap as you want with stuff like bathroom fixtures. I have nice ones in my ensuite, and cheap ones in the basement.

What always annoyed me with rental places is the landlords would provide the cheapest stuff possible. Yes, you saved money, but often because you got low end stuff... once they actually got around to fixing the thing, which might be weeks to months later.

$30/hour painters!
Painting was one of the things some of the landlords allowed you to do. However, last I checked, the painters cost the same whether it was a house or a rental. ;) As for me, I just did the painting myself in my owned home, although I might hire someone to do it in the future.

Because of interest-rate-related repricing, and actual growth in the size and quality aspects of construction. In the 50s, a typical new-build house was much smaller. In the 50s, a typical house wasn't equipped with a dishwasher, washer, dryer, flat-screen TV, or Ethernet in the walls! Now all these items get rolled into the stats. Also, insulation, energy efficient furnaces, landscaping, etc., is all more sophisticated today than in the past.
No surprise there. However, the bottom line is that home prices have gone up since the 50s faster than inflation.
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Aug 27, 2004
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EugW wrote:
Aug 28th, 2009 1:08 am
No surprise there. However, the bottom line is that home prices have gone up since the 50s faster than inflation.
And they've been going up way way way more than inflation in the last ... 5-7 years or so.
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Feb 6, 2008
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A few more things about real estate that differentiates from other investments:
- The revenue you can generate is not just from capital appreciation. You can get a lot of money from renting it out partially.
- Mortgage interest, property tax, renovations and other rent related expenses are partially tax deductible
- If you have a business, you can write off even more tax
- The principal residence has no capital gains
- Also consider the rent expense you saved from owning
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Nov 14, 2007
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pitz wrote:
Aug 28th, 2009 12:16 am
No, 10% of their house is being chopped off and being given to the taxman under the inflation scenario. Whereas, under the non-inflation scenario, 0% of the house is given to the taxman.
WOW... just wow... you obviously don't understand the basics of investment. By your logic, why do you invest in the stock market? if you make money on your stocks, you will pay taxes too!!!
pitz wrote:
Aug 28th, 2009 12:16 am
The thing is, its impossible to make a profit with a house! Its just a house, its an inanimate object, it doesn't produce anything! Its only value, ultimately, is what you can rent it out for, or the rent you can avoid paying someone else!
A house is just like any other commodity, don't tell me that people should not invest in commodities either! We are running out of land to fit the increase in population, so obviously that commodity should appreciate just for that simple fact. It should also appreciate with inflation as a commodity. These are economics 101. If you don't understand this, you should just keep your money under your mattress!

Also, a house provides you shelter or to the person who stays in it. so it produces income for the duration of its life, just like any type of business.
pitz wrote:
Aug 28th, 2009 12:16 am
I personally am glad that my stocks, and the stock market has gone down.
OK, there is no more reason to debate with you, your understanding of investment is upside down.... nobody should be happy when their stocks go down... that just stupid. The objective of investing into anything, is that the value at the end increases, if you know that the value is decreasing, you should not be happy..... you are better off keeping your money in cash.
Deal Fanatic
Aug 27, 2004
6670 posts
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Did any of you guys see the article in today's Globe and Mail about people buying condos for their 18 year old university-bound kids?

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