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
Dec 26, 2006
2884 posts
31 upvotes
Douces wrote: Does anybody have any thoughts on the real estate market in Ottawa? It's pretty stable in general, no?
I'd say it's being sustained by gov't workers.. who can map out their future earnings fairly accurately.

That being said, the houses are still overpriced.
The wonderous minds of some RFDers:
nx2k wrote: so let me get this straight
if you did the crime, you should do the time?
Jr. Member
Aug 10, 2009
158 posts
Ebola wrote: I'd say it's being sustained by gov't workers.. who can map out their future earnings fairly accurately.

That being said, the houses are still overpriced.
I've noticed that the condos downtown have suddenly become very overpriced...many with multiple offer situations. I guess all the government workers are buying in
Deal Addict
Oct 1, 2006
2154 posts
1760 upvotes
Montreal
poop_on_you wrote: 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.
Just check the source you provided and you will see you got the numbers wrong:
http://www.torontorealestateboard.com/c ... mw0905.pdf

Image on the first page.
Deal Expert
Mar 23, 2009
18390 posts
4758 upvotes
Toronto
Germack wrote: Just check the source you provided and you will see you got the numbers wrong:
http://www.torontorealestateboard.com/c ... mw0905.pdf

Image on the first page.
"In May the median price was $337,000, from the $338,000 recorded during May of 2008."

I cannot confirm the median pricing for Oct. 2003, but it appears to be well under $300000.
Banned
Jun 19, 2006
9349 posts
54 upvotes
HolyPotato wrote: 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.
There is also a 'salary premium' paid in those cities, which can explain the higher prices, but not the higher multiples. To explain the higher multiples, essentially, you are back to speculation, in particular, the willingness of people not in the paid workforce, to spend larger chunks of their income on urban living, versus moving somewhere else.

For instance, although I live in a rural area, I see it a lot here; families with 5 kids living in small houses, who would like to upsize, but can't really do it -- and then 'grandma' living alone, in a large house, mostly empty, who is sacrificing a good retired standard of living, merely to hold onto the house.

"Grandma"'s hoarding of real estate, by refusing to sell, causes the young family who actually needs and could use the space, to be priced out. And "Grandma" is hurt because she could be travelling, etc. -- enjoying her retirement years, on the extra thousands she'd be saving every year just by living in a properly sized condo or town house.
Why is the premium so much more for owning?
One could argue that someone living in the GTA, close to a subway line, can avoid purchasing a car (or a second car). That has value, although, I would also then argue that having a subway line nearby is a service that ultimately is paid for through taxes. And that, in the case of the TTC, taxes and user fees have been too low to maintain the service on a sustainable basis.

It is also reasonable to think that employers will pass on some of the savings from having people working in 'the downtown core', to the workers themselves, in the form of higher salaries. Businesses lease downtown office tower space because they can literally put thousands of employees within minutes of each other, for meetings, etc., and theoretically, this improves productivity. But in the age of telecommunications, video conferencing, and electronic documentation, this is becoming questionable too.
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.
An interesting anecdote I've heard tossed around is the story of 2 King Street West. Someone bought in 1989 at the top of the bubble for $120M in 1989. Went into foreclosure in 1997, and the bank was only able to earn $14M from the sale.

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 :)
Urban, but commercial too. Seriously, how many small businesses do you know of that have had the life sucked out of them by greedy landlords? Small business is what runs Canada, and the sort of rents they've been forced to endure for most of the past decade, without making very much money, has been horrendous.
"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)
Banned
Jun 19, 2006
9349 posts
54 upvotes
Douces wrote: I've noticed that the condos downtown have suddenly become very overpriced...many with multiple offer situations. I guess all the government workers are buying in
That might be the case; a 'government worker', can go 0% down, with the CMHC insurance (or 5% down, with a 5% kickback from a bank or vendor). If they can't sell the house for at least what they paid for it, they can 'stick' their employer (the government of Canada) with the loss, under a relocation program, when they request a transfer out of the Ottawa region.
"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)
Sr. Member
User avatar
Feb 6, 2008
664 posts
20 upvotes
Germack wrote: Just check the source you provided and you will see you got the numbers wrong:
http://www.torontorealestateboard.com/c ... mw0905.pdf

Image on the first page.
Actually you are right.
Their format was confusing. I thought the box in the middle was for median price for the 2003 figure. I don't know why the put Agincourt as a feature in there.
http://www.torontorealestateboard.com/c ... mw0310.pdf

I guess a fair comparison would be median price of single detached houses.

Revised figures

http://www.torontorealestateboard.com/c ... t_2003.pdf
http://www.torontorealestateboard.com/c ... mw0310.pdf
Rent for 2 bedroom apt Oct 2003: $1,740
Singled Detached Oct 2003: $320,000
I will change it to 35 year amortization for single detached.
You can get a rough rent to own ratio of
1 year rent/1 yr home equity for Oct 2003 = 2.28

http://www.torontorealestateboard.com/c ... rt0509.pdf
http://www.torontorealestateboard.com/c ... mw0905.pdf
Rent for 2 bedroom apt May 2009: $1,850
Singled Deatched May 2009: $410,000
1 year rent/1 yr home equity for May 2009 = 1.89

This is -17% change.
I will change my stance that the current housing market value is 17% more than 2003 comparing to rent. Though it could be the case where the market was undervalued in 2003. I guess you could reasonably say that there can possibly be a 17% correction coming later if you think 2003 levels have the correct intrinsic value.

My formula is missing a lot of info though. If you have the population stats, you could get a better figure. According to a study by UBC, Toronto is still balanced with rent as of 2008.
http://www.publicaffairs.ubc.ca/media/r ... 8-120.html
Sr. Member
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Feb 6, 2008
664 posts
20 upvotes
pitz wrote: Practically speaking, that means about -50%, since the above criteria usually corresponds to 3X salary, and in Canada, the multiplier is 6X salary right now. Which would also correspond well with equality between Canada and the USA in terms of pricing.
I was just looking this up.
According to the most recent data comparing 265 markets from
http://www.demographia.com/dhi.pdf

Canada has an average affordability index of 3.5 (housing price is 3.5 times the household income, but this is probably not a national average, but a metropolitan average). The highest is Austrailia with 6.0, which I find quite surprising.

Some of the cheapest cities to live in Canada are
Cape Breton, NS at 2.1X
Thunder Bay, ON with 2.2X
Windsor, ON at 2.3X

Vancouver is ranked 4th severely unaffordable internationally and highest in Canada at 8.4X.
262 34 Canada Vancouver, BC 8.4 $492,600 $58,400

Toronto is not in the severely unaffordable list with 4.8X.
190 29 Canada Toronto, ON 4.8 $324,700 $67,100
Deal Expert
Mar 23, 2009
18390 posts
4758 upvotes
Toronto
poop_on_you wrote: Though it could be the case where the market was undervalued in 2003. I guess you could reasonably say that there can possibly be a 17% correction coming later if you think 2003 levels have the correct intrinsic value.
I might guess some homes in Toronto were at fair value at around 2004ish.

Even if your 17% number were correct, it's possible a correction could be larger, as it may overshoot the average price trend curve on the way down to bottom. OTOH, a retreat to the average price trend curve could be manifested by a price stall, where the trend curve gradually catches up to to prices in a flat market or a market that shows only slight price declines over a period of years.

In any case, I have no plans to move. I wouldn't complain if I got only an average of 2% per year over the next 25 years. (That'd represent only a 64% price increase after 25 years.) I'd be more concerned if I planned to sell in the next 5 years though.

poop_on_you wrote: http://www.demographia.com/dhi.pdf

---

Vancouver is ranked 4th severely unaffordable internationally and highest in Canada at 8.4X.
262 34 Canada Vancouver, BC 8.4 $492,600 $58,400

Toronto is not in the severely unaffordable list with 4.8X.
190 29 Canada Toronto, ON 4.8 $324,700 $67,100
Well, Toronto is in the "seriously unaffordable" category though, with "severely unaffordable" starting at 5.1. ;)

P.S. It's interesting that Calgary and Toronto were both at 4.8.
Sr. Member
User avatar
Feb 6, 2008
664 posts
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EugW wrote: I might guess some homes in Toronto were at fair value at around 2004ish.

Even if your 17% number were correct, it's possible a correction could be larger, as it may overshoot the average price trend curve on the way down to bottom. OTOH, a retreat to the average price trend curve could be manifested by a price stall, where the trend curve gradually catches up to to prices in a flat market or a market that shows only slight price declines over a period of years.

In any case, I have no plans to move. I wouldn't complain if I got only an average of 2% per year over the next 25 years. (That'd represent only a 64% price increase after 25 years.) I'd be more concerned if I planned to sell in the next 5 years though.



Well, Toronto is in the "seriously unaffordable" category though, with "severely unaffordable" starting at 5.1. ;)

P.S. It's interesting that Calgary and Toronto were both at 4.8.
The price to rent ratio only really gives you an idea of the intrinsic value for long term trend predictions. For one of the largest metropolitan cities, 4.8 is not bad at all. You can't realistically expect Toronto to be just as affordable as Thunder Bay. Also, it doesn't take into account of the premiums such as a coastal city. I would want to live on a beach even if it costs a little more. Though I probably wouldn't want to pay double the price.

For short term predictions, you will need to see the household debt, home owner's equity and general economic data. A selling frenzy would only be triggered by high delinquency rates. The mortgage arrears for Canada are extremely low right now at sub 0.5% and it doesn't look like it'll shoot up any time soon. Even when unemployment kept rising in recent months, people were not forced out of their homes. Nobody is forced to sell their homes, why would the price come down?

You can say it's either CHMC skewing the data(which I don't think they have a reason to contrary to what pitz believes), or that the Canadian mortgages were mostly not subprime and the Canadian home buyers are generally not big risk takers.

The debt and equity levels reflect the delinquency figures.
[IMG]http://i27.tinypic.com/rsdlbo.png[/IMG]



If I were to make a prediction, I'd guess that real estate market will stagnate for a few years just like every other investment depending on how fast the economy recovers. This is the same thing as a crash/recovery scenario in the long term with no growth. As far as "bubble" goes, I don't see any signs that it will crash any time soon. The things I would be worried about is just general economic conditions and that applies to everything, not just real estate. The manufacturing sector took a big hit in Ontario and unemployment is still rising. I just hope the conservatives don't pull away from their recovery plan too soon.
Banned
Jun 19, 2006
9349 posts
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poop_on_you wrote: For short term predictions, you will need to see the household debt, home owner's equity and general economic data. A selling frenzy would only be triggered by high delinquency rates.
But you don't really need a 'selling frenzy' for prices to go down. You need a situation where the buyers simply dissappear, or are unwilling to place bids at what houses formerly were 'worth'.

I agree that its not too likely that, in Canada, we'll see a 'collapse', where there is a bunch of foreclosures. There simply isn't a lot of explicit inventory sitting out there. But what we may very well see is a class of two kinds of people:

a) Those who bought houses 2000-2008, who are paying on them for the rest of their lives, and can't accumulate any retirement savings, because their entire income is sucked up by the payments, esp. with rising interest rates;

or b) Those who stayed out of the market, and will now see their investments in things such as businesses, skyrocket in value, as the stock market adjusts itself into a valuation in-line with housing.

For instance, the TSX is roughly on track, in the next year, to earn 1000. Recently, it was priced at 10,000. Assuming inflation at 2%, and real economic growth of 2%, that's a 14% rate of return, after-tax.

A $400k house in Edmonton is good for $2000/month in rent, and costs ~1%/year to maintain. So $20k/year. That's 5%, *pre-tax*. Tax rates are typically 30%, so the after-tax 'earnings yield' on that house is only 3.5%.

So one plausible scenario is that the TSX index goes up to 14%/3.5% = 4 * 10,000 = 40,000. While housing remains stagnant.

Where do you want to be then? Stuck paying out 50% of your income on mortgage payments (which may very well go higher, as banks push the interest rates up!) on an asset that's in stagnation, or participating in a revaluation of the stock market upwards?

Even when unemployment kept rising in recent months, people were not forced out of their homes. Nobody is forced to sell their homes, why would the price come down?
Ummm, plenty of people are 'forced to sell their homes'. When people die, their homes get sold. When they move, they have to sell. Just because there's no liquidity in the market, doesn't mean that prices themselves are static, and unchanged. Lots of people got into the trap as well, of thinking they could just hold their Nortel shares, and magically, they'd be worth $100 again! How did that work out? Lol.
You can say it's either CHMC skewing the data(which I don't think they have a reason to contrary to what pitz believes)
CMHC has every reason in the world to skew data, or to present data in a light that's most favourable of them. You are aware of their massive financial interest in the market, are you not, through mortgage insurance?

One thing I've heard anecdotally happening in the housing market is under-the-table payments, or 'rebates' from vendors, just to keep reported prices higher. For instance, in Calgary, condominium projects are being sold "with a free car!" or a free Hawaiian vacation. The value of the car or vacation is not being subtracted from the reported value, thus, artificially inflating the value.
, or that the Canadian mortgages were mostly not subprime and the Canadian home buyers are generally not big risk takers.
Anything CMHC insured *is* subprime. And CMHC insurance has been 'involved' in most originations in Canada. Much to the credit of the USA, 'subprime' has mostly dissappeared, while in Canada, you just walk into any branch of any bank, and you can get approved on the spot for a no-money-down, subprime loan.
The debt and equity levels reflect the delinquency figures.
"Equity" dissappears awfully fast when the fundamentals catch up to the market. If you look at the rest of the balance sheet of Canadians, its been devastated.
As far as "bubble" goes, I don't see any signs that it will crash any time soon. The things I would be worried about is just general economic conditions and that applies to everything, not just real estate. The manufacturing sector took a big hit in Ontario and unemployment is still rising. I just hope the conservatives don't pull away from their recovery plan too soon.
I see the entire housing market being supported by the government at this point (ie: the CMHC), and even the CMHC, and even the government, aren't going to be able to resist the forces of nature. Artificially high prices today will just exxagerate the overbuilding, especially in places where things have completely gotten out of hand, and ruin the value of houses further for those who don't have a huge time horizon to wait for immigration and population growth to 'catch up'.
"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)
Banned
Jun 19, 2006
9349 posts
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poop_on_you wrote: Toronto is not in the severely unaffordable list with 4.8X.
190 29 Canada Toronto, ON 4.8 $324,700 $67,100
I'd like to know, WTF I could buy, that's not rat-infested, in Toronto, for $324k??
"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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pitz wrote: I'd like to know, WTF I could buy, that's not rat-infested, in Toronto, for $324k??
Affordability doesn't mean you get backyard, a deck and a double garage.

It's probably the median price including condos and town houses. The May 2009 median price was $337k reported by TREB. They probably just got their data from the local real estate board of different cities.
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pitz wrote: But you don't really need a 'selling frenzy' for prices to go down. You need a situation where the buyers simply dissappear, or are unwilling to place bids at what houses formerly were 'worth'.

I agree that its not too likely that, in Canada, we'll see a 'collapse', where there is a bunch of foreclosures. There simply isn't a lot of explicit inventory sitting out there. But what we may very well see is a class of two kinds of people:

a) Those who bought houses 2000-2008, who are paying on them for the rest of their lives, and can't accumulate any retirement savings, because their entire income is sucked up by the payments, esp. with rising interest rates;

or b) Those who stayed out of the market, and will now see their investments in things such as businesses, skyrocket in value, as the stock market adjusts itself into a valuation in-line with housing.
Pretty sure most of class b) is not going to skyrocket to where they were last year before August. When you lose 50% of your money, you will have to gain 100% just to break even.


pitz wrote:
For instance, the TSX is roughly on track, in the next year, to earn 1000. Recently, it was priced at 10,000. Assuming inflation at 2%, and real economic growth of 2%, that's a 14% rate of return, after-tax.

A $400k house in Edmonton is good for $2000/month in rent, and costs ~1%/year to maintain. So $20k/year. That's 5%, *pre-tax*. Tax rates are typically 30%, so the after-tax 'earnings yield' on that house is only 3.5%.

So one plausible scenario is that the TSX index goes up to 14%/3.5% = 4 * 10,000 = 40,000. While housing remains stagnant.

Where do you want to be then? Stuck paying out 50% of your income on mortgage payments (which may very well go higher, as banks push the interest rates up!) on an asset that's in stagnation, or participating in a revaluation of the stock market upwards?
I'm not even going to ask you how it's "roughly on track" to earn 1000, and never mind the fact that we still had a contraction(deflation) last quarter. But how did you manage to ADD the 2% inflation onto your return? You know in most valuations, inflation goes on the denominator right?
http://www.investopedia.com/terms/i/inf ... return.asp

If I were you, I'd put more of your portfolio on bonds since you don't seem to know what you are doing. Probably should play safer.



pitz wrote: Ummm, plenty of people are 'forced to sell their homes'. When people die, their homes get sold. When they move, they have to sell. Just because there's no liquidity in the market, doesn't mean that prices themselves are static, and unchanged. Lots of people got into the trap as well, of thinking they could just hold their Nortel shares, and magically, they'd be worth $100 again! How did that work out? Lol.
Go ahead and try to find foreclosed homes in Toronto. Even if you find one, it'll probably still be at market price.

Oh, the Nortel trap, you mean like the commodity trap last year which is what most of TSX consisted of?


pitz wrote: CMHC has every reason in the world to skew data, or to present data in a light that's most favourable of them. You are aware of their massive financial interest in the market, are you not, through mortgage insurance?

One thing I've heard anecdotally happening in the housing market is under-the-table payments, or 'rebates' from vendors, just to keep reported prices higher. For instance, in Calgary, condominium projects are being sold "with a free car!" or a free Hawaiian vacation. The value of the car or vacation is not being subtracted from the reported value, thus, artificially inflating the value.


Anything CMHC insured *is* subprime. And CMHC insurance has been 'involved' in most originations in Canada. Much to the credit of the USA, 'subprime' has mostly dissappeared, while in Canada, you just walk into any branch of any bank, and you can get approved on the spot for a no-money-down, subprime loan.
Yes anecdotal opinions from an internet guy is the most reliable information there is. I will go by that and disregard all the other real data since they are all fudged even though a lot of them show negative impacts.


"Equity" dissappears awfully fast when the fundamentals catch up to the market. If you look at the rest of the balance sheet of Canadians, its been devastated.
Post the "rest" of the balance sheet.


pitz wrote: I see the entire housing market being supported by the government at this point (ie: the CMHC), and even the CMHC, and even the government, aren't going to be able to resist the forces of nature. Artificially high prices today will just exxagerate the overbuilding, especially in places where things have completely gotten out of hand, and ruin the value of houses further for those who don't have a huge time horizon to wait for immigration and population growth to 'catch up'.
I mean, sure go ahead and keep believing that equity will go up if real estate tanks. I mean, real estate is not a huge part of the overall economy at all. When real estate crashed, US equity market skyrocketed afterwards right?



Sorry to resort to sarcasm, but it's really not worth having an intelligent discussion with you. I'm mostly only here to see if anyone has any actual information that I haven't seen before. So far, you've only completely made up yours.
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Btw, just to be clear, I don't necessarily think it's a bad idea to invest in equities right now. I still have equities in my RRSP and some in my cash account. But it's a little ridiculous to assume that equity will skyrocket when the economy doesn't recover and real estate tanks. Speculation is in all types of investments, especially equity. If the global economy doesn't recover, most investments will be flat in the long run. Maybe you can try to hedge it with gold. It was one of the best performing stocks in my portfolio.

Equity has always been for people with a higher risk appetite. If that's your thing, sure go ahead and knock yourself out. Lots of really smart people get insanely rich from it. But seriously for you, I would strongly suggest a higher bond split.

Real estate is usually for people that want a home. A place where they can install a nice home entertainment system. A place where they can have a BBQ out on the deck. A place where they can have a house party on weekends. Whatever possible opportunity cost I incur, personally I think it's worth it for the utility of owning a home. Plus, you still have to pay rent if you don't own. That is part of your cost as well.

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