Personal Finance

How do you determine if housing is overvalued?

  • Last Updated:
  • Mar 18th, 2014 7:33 am
Tags:
None
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary

How do you determine if housing is overvalued?

Everyone goes on about how RE is in a bubble/overpriced/people are extending themselves too much etc..

But I rarely see people says "Anything over X is too much"

I'll give you an example:
I just bought a house in the suburbs of Calgary.

Price per square foot: 237
Mortgage amount to income: 4.25
Age: 24

It's a new home, which will be completed in October.

Did I make a mistake? Did I pay too much? Will the price drop 20,000 in the next 2 years?

Go!
62 replies
Deal Addict
User avatar
Mar 23, 2011
2204 posts
1395 upvotes
Etobicoke
The price may go down $20k, if if the interest rate goes up even 0.50% the you are better off than have waited to buy in two years.
I also think that RE in Calgary is different than toronto and Vancouver which many are assumed to be overpriced.
-----------------------------------------------------

"It's better to be dead and cool...than alive and uncool!"
Banned
User avatar
Feb 15, 2008
26318 posts
3242 upvotes
Calgary
Generally when we talk about valuation, we have to deal in averages and medians. Not referring to the individual circumstances of an individual who may or may not be buying above or below his 'station' (your numbers would imply that you're making a dramatically higher-than-average amount for a 24-year-old, so I would suggest that there is likely a very significant risk to your income).

Historically, housing being priced at 2.5-3X average income is normal. A bargain is below 2X average income. Expensive is above 3X income. So if your purchase metrics are representative of Calgary, then the losses could be quite considerable as housing reverts, as it cyclically must, from being over-expensive, to being excessively cheap. If you do the 'math', the losses would be considerably greater than $20k in such a scenario.

IMHO, "price per square foot" isn't much of a meaningful metric, as the big costs for housing these days are in the land and for the interior finishings.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Member
Jan 7, 2014
247 posts
35 upvotes
Richmond Hill
no..housings are overvalued and we are headed for a huge housing crash. Price will soar to a new high this year and it will never come back down

be warned...
Deal Expert
User avatar
Apr 21, 2004
58648 posts
24637 upvotes
JamJam23 wrote: Everyone goes on about how RE is in a bubble/overpriced/people are extending themselves too much etc..

But I rarely see people says "Anything over X is too much"

I'll give you an example:
I just bought a house in the suburbs of Calgary.

Price per square foot: 237
Mortgage amount to income: 4.25
Age: 24

It's a new home, which will be completed in October.

Did I make a mistake? Did I pay too much? Will the price drop 20,000 in the next 2 years?

Go!
Aren't you suppose to ask these questions first before taking the plunge?

Stop! :)
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
Mark77 wrote: ...
Historically, housing being priced at 2.5-3X average income is normal. A bargain is below 2X average income. Expensive is above 3X income. So if your purchase metrics are representative of Calgary, then the losses could be quite considerable as housing reverts, as it cyclically must, from being over-expensive, to being excessively cheap. If you do the 'math', the losses would be considerably greater than $20k in such a scenario.
Is that the total price of the house or what you have to borrow (mortgage) to buy that house? If you make $100k, you'd be hard pressed to find a house for $300k in any of the booming markets.
Banned
User avatar
Feb 15, 2008
26318 posts
3242 upvotes
Calgary
ksgill wrote: Is that the total price of the house or what you have to borrow (mortgage) to buy that house? If you make $100k, you'd be hard pressed to find a house for $300k in any of the booming markets.
Total price of house. And of course you won't find housing that cheap, because, as the argument goes, there is a credit-driven bubble pretty much across Canada.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary
I don't think house price to income really matters if we're talking about affordability, mortgage to income is what matters.

And price per square foot definitely matters, one person might pay 450k for an 1800 sqft (250 $/sqft) house and the other might pay 450k for an 800 sqft condo (562 $/sqft). Thats how I determine how much house I'm getting for my money.
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary
My point is: people always say "houses are overpriced", by saying that, you are implying that houses have a "correct price", but I rarely see anyone give any numbers (ie Toronto should have a $300 / sqft average)
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary
Mark77 wrote: your numbers would imply that you're making a dramatically higher-than-average amount for a 24-year-old, so I would suggest that there is likely a very significant risk to your income.
The whole point of giving the numbers like I did is that you have no idea what my income is. Maybe the mortgage is 250,000 (roughly 1054 sqft at 237 $/sqft, depending on the down payment). Then my income is 58,000 (4.25 income to house ratio)
Deal Addict
User avatar
Jul 26, 2004
1281 posts
26 upvotes
Vancouver
If you plan on being able to pay off the mortgage, then no. If you are worried that prices will drop in the future and worried about getting underwater on your mortgage because you can't afford the payments if the interest rates go up then the answer is yes!
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary
lazarus wrote: If you plan on being able to pay off the mortgage, then no. If you are worried that prices will drop in the future and worried about getting underwater on your mortgage because you can't afford the payments if the interest rates go up then the answer is yes!
I don't think determining house value would be based on how "worried" a person is, or how they feel. Shouldn't there be some cold hard numbers involved?

On a side note, I would venture to guess that 100% of home purchasers "plan on being able to pay off the mortgage".
Banned
User avatar
Feb 15, 2008
26318 posts
3242 upvotes
Calgary
JamJam23 wrote: The whole point of giving the numbers like I did is that you have no idea what my income is. Maybe the mortgage is 250,000 (roughly 1054 sqft at 237 $/sqft, depending on the down payment). Then my income is 58,000 (4.25 income to house ratio)
I live in Calgary and have a pretty good idea of what new builds are being offered at. But anyways, if your income is dramatically above that of your age group, education level, etc., as it likely is given your stated metrics, you certainly should question the sustainability of such and factor such into your overall 'affordability' math as well.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Banned
User avatar
Feb 15, 2008
26318 posts
3242 upvotes
Calgary
JamJam23 wrote: I don't think determining house value would be based on how "worried" a person is, or how they feel. Shouldn't there be some cold hard numbers involved?
On a side note, I would venture to guess that 100% of home purchasers "plan on being able to pay off the mortgage".
My suggestion has been, when doing calculations of 'affordability' on a macro basis (ie: over a significant population), that a true long-term mortgage rate be used in the calculations. Long-term as in 25 years.

Using short-term rates is problematic as they will change significantly over the overall amortization of the loan, as one cycles through the renewals, or chooses a truly floating rate. 7-8% interest rates, not 3-4%, is where I personally would be calculating long-term affordability. With the expectation that, at some point in the cycle, there is going to be a temporarily significant excursion even above the averages.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Deal Guru
May 1, 2012
10538 posts
11427 upvotes
Toronto
Man, Mark what is this crap you're spewing here. You cannot seriously believe these things you're saying. I mean just read it... how in the world anyone takes these opinions serious is beyond me.

Where the hell in the world do you find housing at 2-3x income. This is laughable. Even in Buffalo NY (where no one wants to live), the ratio is higher than 3. And what is this absolute garbage you're talking about normal interest rates being 7-8%. When was the last time there was a sustained period of interest rates that high. Like 20 years ago, for the duration of just under 2 years. Jesus Christ man, why are you doing this to the OP? He's just trying to look for some advice.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
Anikiri wrote: Man, Mark what is this crap you're spewing here. You cannot seriously believe these things you're saying. I mean just read it... how in the world anyone takes these opinions serious is beyond me.

Where the hell in the world do you find housing at 2-3x income. This is laughable. Even in Buffalo NY (where no one wants to live), the ratio is higher than 3. And what is this absolute garbage you're talking about normal interest rates being 7-8%. When was the last time there was a sustained period of interest rates that high. Like 20 years ago, for the duration of just under 2 years. Jesus Christ man, why are you doing this to the OP? He's just trying to look for some advice.
This made me laugh out loud.
Deal Addict
Nov 24, 2004
4664 posts
1242 upvotes
Toronto
JamJam23 wrote: My point is: people always say "houses are overpriced", by saying that, you are implying that houses have a "correct price", but I rarely see anyone give any numbers (ie Toronto should have a $300 / sqft average)
The number that is most relevant here is the ratio of prices to incomes. This link gives trends in average price to average after-tax income ratios for several western Canadian cities, to 2011: http://theeconomicanalyst.com/content/h ... ies-part-1

For most big cities in Canada, price-to-income ratios are far higher than what has been seen historically. In many cases, the ratios are higher than they have ever been. Low interest rates, changes in mortgage lending patterns, and a changing attitude to debt can explain much of this.
Member
Sep 23, 2013
271 posts
61 upvotes
Calgary
Anikiri wrote: Man, Mark what is this crap you're spewing here. You cannot seriously believe these things you're saying. I mean just read it... how in the world anyone takes these opinions serious is beyond me.

Where the hell in the world do you find housing at 2-3x income. This is laughable. Even in Buffalo NY (where no one wants to live), the ratio is higher than 3. And what is this absolute garbage you're talking about normal interest rates being 7-8%. When was the last time there was a sustained period of interest rates that high. Like 20 years ago, for the duration of just under 2 years. Jesus Christ man, why are you doing this to the OP? He's just trying to look for some advice.
Well to be fair, I've already bought the house. I'm just curious what people think, and how people determined whats overvalued, and what's "too much".
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
JamJam23 wrote: Well to be fair, I've already bought the house. I'm just curious what people think, and how people determined whats overvalued, and what's "too much".
Beyond an academic debate, there is no such thing as 'overvaluation'. A thing is worth whatever the other person is willing to pay for it.

Would one say that antique cars are overvalued when you can buy a new car for much less (and it is more reliable). I don't think you bought an overvalued house but there no telling what the market will do over the next few years... if that makes any sense.
Deal Addict
Nov 24, 2004
4664 posts
1242 upvotes
Toronto
JamJam23 wrote: Well to be fair, I've already bought the house. I'm just curious what people think, and how people determined whats overvalued, and what's "too much".
You're really asking two questions here, as far as I can tell.

The first question you're asking is "was my house too expensive", and only those who have a lot of experience with Calgary real estate -- neighbourhoods, comparables, etc. -- can answer that.

The second question is "did I take on too much debt to buy my house", which has to do with your income, risk tolerance, job security, likelihood you will have to sell in the near future, etc.

You can partially answer that second question my stress-testing your personal finances -- if your income remains stagnant and all your other expenses increase with CPI, and you need to renew your mortgage in five years' time at 5 or 6%, can you handle it? Hopefully you've done some of that math already.

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)