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 Fanatic
Aug 27, 2004
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Toronto, ON
poop_on_you wrote:
Aug 24th, 2009 6:02 pm
But what's the reason for your suspicion? Fundamentally, the housing market still looks healthy relative to the deteriorating economic condition.
pitz and I are pessimistic for the same reason, I think.

Your cost of buying a house with borrowed money (assuming no pre-payments) is:
down payment + (mortgage payment * number of payments)

Rewriting this equation a little, you get
cost = down payment + (mortgage payment(price, interest rate, number of payments) * number of payments)
(i.e. mortgage payment is a function of price, interest rate, and number of payments)

The total cost can't change much unless people's incomes have grown. If you can afford to spend $500K nominal dollars over the next 25 years, then that's all you can spend.

What has happened in the past decade is that the total cost has stayed roughly constant (or increased a teeny bit faster than inflation). The PRICE has gone way up, but INTEREST RATE has gone way down (my parents thought 7.75% for a 5 year fixed rate mortgage was a sweet deal in 1996 - now it's what? 4.5%? less?) and NUMBER OF PAYMENTS has gone way up.

In other words, CHEAP DEBT over longer periods of time is enabling people to buy houses at increasing sticker prices. The total cost is roughly the same, maybe a teeny bit higher. But HOW you reach that cost is out of whack. And it's much risky, too: what you want as a buyer is LOW price, LOW number of payments, and high interest rate (if the price and the loan length is low, who cares? you'll pay the loan off quickly and get out of debt). That's what things were like in the 80s when people bought houses, lived really frugally for 2-4 years, and had the house paid off. Try doing that now.
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Jun 19, 2006
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VivienM wrote:
Aug 24th, 2009 6:05 pm
Today, though? A tiny condo is $300K. 25% is $75K. How many years of working do you need to save that? First you have big student loans to pay off, then I'd guess that unless you're VERY frugal, making VERY big bucks, or living with your parents, you'd need another 4-5 years MINIMUM to save $75K.
But let's say that condo dropped by 50%. So $150k. Probably in-line with construction costs on such a unit, given normal labour and input prices. A condo has very little land, so land prices not really an issue. A 25% downpayment on $150k is what, $40k? I think someone could save for that in 4-5 years. And pay it off in 15-20 years without a lot of issue.

That's healthy to me. Not this buy for $300k with 0% down, and be broke for the rest of your life BS.
And by the time you get your $75K, the way things have gone in the past couple of years, your tiny condo would now be $500K. So now you need another $50K more...
Yeah...see how ridiculous current prices, nevermind predictions of future growth are??

Sometimes common sense has to be applied to numbers before you take them at face value. Just like with tech stocks -- could tech companies that were just burning cash, and making no sales, do anything but go bankrupt? Of course not. But looking at those charts back in 2000, it seemed as though the Nasdaq was just a few stops away from hitting 10,000, after rushing up to 5,000 so quickly.
Putting a huge down payment on a house in the inflated, debt-fuelled insane market of the past few years is near impossible. You might as well put 5%, lock in your house price, get a 35 year amortization and hope for the best (or that so many people get screwed too that the government bails you out)...
Or just tough it out and wait till prices crash to something that's actually reasonable and sustainable. And if governments bail people out, by devaluing money, wouldn't that just push up the value of other assets that aren't excessively priced (relative to earnings and cashflows) up even further??
"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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Feb 6, 2008
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http://en.wikipedia.org/wiki/Real_estat ... indicators

If you want to do some real research, here are the indicators I was talking about earlier.

price to income ratio
housing debt to income ratio
housing debt to equity ratio
price-rent ratio
etc

Or you can look at the published reports that already have them done for you.
Deal Addict
Sep 24, 2002
1066 posts
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Toronto
This has been a great debate, pitz, look forward to your posts!
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poop_on_you wrote:
Aug 24th, 2009 6:02 pm
But what's the reason for your suspicion? Fundamentally, the housing market still looks healthy relative to the deteriorating economic condition.
Its not though. Volume has collapsed, and what little volume exists, are extremely leveraged buyers. Most people are buying with zero down. Is it possible to buy with less than zero down in the future, when people can't even afford zero down? zero-down is already infinite leverage; is it possible to have more than infinite leverage??

In California, yeah, it was possible to have more than infinite leverage, because they had a "125% negative amortization option ARM". That's why California is home to -70% declines in many areas, instead of just the 50% declines more typical of the rest of the country.
I don't know what excess supply you are talking about. I'm from GTA, so that's the only city I've looked at. Housing starts are down, permits are down, population is up, though unemployment is also up. It's not like they are building new houses all over downtown everywhere. All the new houses are on the edge of the city.
"Supply" is manifested in many forms. It can be anywhere from empty skyscraper condos, to unused rooms sitting in baby boomers' houses which are unused and unwanted, the cash wanted by boomers to retire (now that their stock portfolios have been devastated).

So don't expect to see all the excess 'supply' just to be in one place with forsale signs on it. But you will see it in rents, eventually.
"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
Aug 27, 2004
6503 posts
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Toronto, ON
pitz wrote:
Aug 24th, 2009 6:16 pm
But let's say that condo dropped by 50%. So $150k. Probably in-line with construction costs on such a unit, given normal labour and input prices. A condo has very little land, so land prices not really an issue. A 25% downpayment on $150k is what, $40k? I think someone could save for that in 4-5 years. And pay it off in 15-20 years without a lot of issue.

That's healthy to me. Not this buy for $300k with 0% down, and be broke for the rest of your life BS.
I agree. But... how long until it crashes?

The government, certainly, will do everything in its power to prevent such a crash. Look at what's happened in the past 6 months. I actually wonder if the central bank, government, etc might just adopt an inflationary policy to bail out people who are underwater on big loans on overpriced assets. Hey, if nominal incomes and the price of things (other than cars/houses/other things fuelled by cheap debt) rise 40%, then all of a sudden things are back in order.
pitz wrote:
Aug 24th, 2009 6:16 pm
Or just tough it out and wait till prices crash to something that's actually reasonable and sustainable.
I thought that might happen this year.

Instead, we're seeing another cheap-debt-fuelled buying spree. Houses selling for more than asking in less than a week, the prices going up, and people happily borrowing giant sums at low interest rates, encouraged by every idiotic talking head saying 'oh, interest rates are low, it's a great time to buy'.
Deal Addict
Oct 1, 2006
1906 posts
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Montreal
poop_on_you wrote:
Aug 24th, 2009 5:22 pm
Rent for 2 bedroom apt Oct 2003: $1,740
Median price Oct 2003: $345,058


Rent for 2 bedroom apt May 2009: $1,850
Median price May 2009: $337,000
1 year rent/1 yr home equity for May 2009 = 1.65
Basically you are saying house prices decreased in Toronto from 2003 to 2009. LOL, that's BS. When I use the numbers from Teranet, house prices increased by 17.2% where as rents increased only by 6%.
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Dec 27, 2006
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Vancouver
Pitz is like the Nouriel Roubini of real estate. One of these years he will be right, and then everyone will forget about the 99% of the times he's been wrong. It's easy to call for a real estate correction when you do it every time, all the time.

For every reason he has why the housing market is overpriced, I can come up with a reason why it's sustainable. The fact is, no one knows what will happen, just like they have no clue where the stock market will be in 6 months.

As an aside, it would be nice if all of these figures were actually supported by sources. A lot of these claims are being accepted as fact, without any basis.
Deal Addict
Sep 24, 2002
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pitz, how then do you explain the absolutely crazy prices of New York, London, Paris, Tokyo, Shanghai, etc.? A bubble waiting to burst?
Deal Fanatic
Aug 27, 2004
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Toronto, ON
el_diablo007 wrote:
Aug 24th, 2009 9:29 pm
pitz, how then do you explain the absolutely crazy prices of New York, London, Paris, Tokyo, Shanghai, etc.? A bubble waiting to burst?
I'm not pitz... but...

1) Those are places with some crazy high-income people. When the avg Goldman Sachs employee gets a $700K bonus, expensive real estate may not be out of line with incomes

2) They are places where it is impossible to create more reasonably accessible housing. So you end up having a two-tier system: new housing is built that's a long commute away and affordable, and very well-located housing costs a fortune.
This can be contrasted with other cities where there is plenty of spare land/infrastructure to create new suburbs.

Toronto is somewhere in between. On the one hand, there's plenty of room for more suburbs. On the other hand, decades of ideologically-driven neglect of transportation infrastructure means that commuting from those suburbs to downtown is more difficult than it ought to be.

But a lot of jobs are in the 905 anyways...
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Jun 19, 2006
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el_diablo007 wrote:
Aug 24th, 2009 9:29 pm
pitz, how then do you explain the absolutely crazy prices of New York, London, Paris, Tokyo, Shanghai, etc.? A bubble waiting to burst?
There's legitimate land shortages in those cities. Not Toronto/Vancouver/etc., where most of the development outside of the downtown core, is single family homes, not even packed in very densely.

Go to San Francisco and look at how dense they pack houses into some of the neighbourhoods there; you'll laugh at how un-dense Toronto/Vancouver is in comparison.
Jobu wrote: ...
Well actually Jobu, we had a thread revived here a week ago, that pretty much showed I was almost 100% on the money with respect to the solvency of US banks. Really, its simple math, and logic. Housing prices at 6X income are not sustainable. Its "game over" when professionals can't afford using traditional criteria. And for every GS employee in NYC, there's literally thousands of workers who scrape by barely making their appartment rents, so there's not the huge base of income to support those prices either.
"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)
Jr. Member
Jul 1, 2008
185 posts
15 upvotes
Toronto
how then do you explain the absolutely crazy prices of New York, London, Paris, Tokyo, Shanghai, etc.? A bubble waiting to burst?
pitz wrote:
Aug 25th, 2009 2:43 am
There's legitimate land shortages in those cities. Housing prices at 6X income are not sustainable. Its "game over" when professionals can't afford using traditional criteria. And for every GS employee in NYC, there's literally thousands of workers who scrape by barely making their appartment rents...
There is a "metropolitan" premium for certain cities, but that should equally be reflected in the rent to live there, partly in the cost for a type of unit, and the square footage, etc., of that unit. As evidenced in NYC by the thousands who barely make their rent.

So Toronto is more expensive than London, Ontario, and rightly so -- I wouldn't call that component of it evidence for or against a bubble. From my own informal housing search, I'd guess that Toronto is approx. 20-30% more expensive to rent in than London, Ontario is. However, owning in Toronto is approximately 45% more.

Why is the premium so much more for owning?

Much more importantly IMHO, what is the relationship between the rent and the cost to buy? This is where I see strong evidence of a bubble. I'd be surprised if a potential landlord who bought today in Toronto could do much better than break even, and that's on the back of record low mortgage rates.

Pitz is like the Nouriel Roubini of real estate. One of these years he will be right, and then everyone will forget about the 99% of the times he's been wrong. It's easy to call for a real estate correction when you do it every time, all the time.
I personally also think that Canadian urban real estate is long overdue for a correction, but the real estate market is illiquid and emotional, so it could take a while (and will probably wait another ~year until rates start going up). Of course, some people believe that real estate will never go down, so even admitting that one of these years he'll eventually be right is saying a lot :)
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Feb 6, 2008
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Germack wrote:
Aug 24th, 2009 6:50 pm
Basically you are saying house prices decreased in Toronto from 2003 to 2009. LOL, that's BS. When I use the numbers from Teranet, house prices increased by 17.2% where as rents increased only by 6%.
I am not saying anything. I am only citing what TREB reports in their data based on MLS. You can call BS on TREB if you want. I try to be as objective as possible in my research by comparing the most relevant data.

I haven't seen the rent index for Teranet and I don't know how they compiled that data since they don't really have access to rental information. I know for their market index, their calculation method is not just a price average so their rental index must have similar weighting. The Teranet Housing Price Index was still declining 5.0% since last year from last quarter's data.

Post your sources.
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Dec 27, 2006
1892 posts
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pitz wrote:
Aug 24th, 2009 6:23 pm
Its not though. Volume has collapsed, and what little volume exists, are extremely leveraged buyers. Most people are buying with zero down. Is it possible to buy with less than zero down in the future, when people can't even afford zero down? zero-down is already infinite leverage; is it possible to have more than infinite leverage??

In California, yeah, it was possible to have more than infinite leverage, because they had a "125% negative amortization option ARM". That's why California is home to -70% declines in many areas, instead of just the 50% declines more typical of the rest of the country.



"Supply" is manifested in many forms. It can be anywhere from empty skyscraper condos, to unused rooms sitting in baby boomers' houses which are unused and unwanted, the cash wanted by boomers to retire (now that their stock portfolios have been devastated).

So don't expect to see all the excess 'supply' just to be in one place with forsale signs on it. But you will see it in rents, eventually.

Good stuff.. spot on! Common sense and logic has been tossed out the window for fear of not being able to jump on the housing train... irrational exuberance.
Sr. Member
Jun 12, 2007
950 posts
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GTA
pitz wrote:
Aug 25th, 2009 2:43 am
There's legitimate land shortages in those cities. Not Toronto/Vancouver/etc., where most of the development outside of the downtown core, is single family homes, not even packed in very densely.
How are Paris and London different than Toronto and Vancouver? They are not on an island like Montreal, so why would they have legitimate land shortages? Moscow is also very expensive, right in top 5 most expensive cities in the world, do you think Russia has shortage of land too ;)

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