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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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Banned
Jun 19, 2006
9349 posts
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poop_on_you wrote: I
Back in the 89 crash, mortgage arrears didn't climbed past 1%.
Yet that didn't stop the Toronto market from sliding 30-50%, from levels that, statistically, weren't even as 'bubbly' as they are today.

The 5% arrears in the US is a systematic failure. The US market crash is a result of subprime loans leveraged with CDOs.
I thought the root cause of the US crash was an epidemic of lending amounts of money to people who could not possibly ever afford to repay. Not subprime, not CDO's.

I don't believe Canadian lenders widely used financial instruments such as CDOs to hedge. So they didn't have the "insurance policy" which allowed them to do high risk lending. I could be wrong here, but I don't know where to find the information for this.
The Canadian lenders have CMHC to insure all their sub-prime stuff. But CMHC ultimately takes the losses, not the banks. That's why the banks have been under very little pressure. Its an implicit method of robbing the taxpayers, versus the explicit bailouts that have been required in the USA.

Where are you seeing the data that suggests a 30%-50% drop over 5 years?
Well, all you have to do is compare US cities, to Canadian cities, to predict the 30%-50% drop. Compare Houston against Calgary. Dallas against Edmonton. Toronto against San Francisco. Vancouver against Seattle. Windsor against Detroit. Atlanta or Chicago against, say, Winnipeg. There's no reason why a house should cost 2-3 years worth of labour income in Atlanta, but 4-6 now in Winnipeg. There's no reason why you can buy a nice 2500-3000 square foot house with a big lot and pool in Houston for $250-$300k, but struggle to find anything comparable in Calgary for less than $700k.
The current equity market is expecting a recovery some time in 2010. If unemployment keeps rising and the current economy doesn't recover, you won't get returns anywhere, not just real estate.
Asset types need not be correlated. For instance, the tech stocks kept going down in 2003-2004, while the housing bubble was inflating.
Any bad news that comes out, equity market will be the first to react since that is the most volatile.
Bad news may very well be a good thing for the equity markets, as higher unemployment = lower labour costs and a greater length of time in a low interest rate environment, which is definitely beneficial for the commodities and export industries.

For instance, with all the out of work tradesmen these days, labour costs in the oilsands are coming down dramatically. Millions of laid-off tradespeople around North America are now competing for limited oilsands jobs, which means that there's not going to be many of those $200k a year paycheques going around. This means big profits for the oilsands developers ahead, which will show up in stock market returns.
"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 9, 2003
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poop_on_you wrote: I plotted the historical mortgage arrears from the data here
http://www.cba.ca/contents/files/statis ... 050_en.pdf


Back in the 89 crash, mortgage arrears didn't climbed past 1%. The 5% arrears in the US is a systematic failure. The US market crash is a result of subprime loans leveraged with CDOs. I don't believe Canadian lenders widely used financial instruments such as CDOs to hedge. So they didn't have the "insurance policy" which allowed them to do high risk lending. I could be wrong here, but I don't know where to find the information for this.

How many people back then had negative equity?

Back then, as we've already agreed, people bought houses that cost 2x annual income. They had 25% or more saved for a down payment. They could afford 10%+ interest rates, because that was average. At most, they had a 25 year term, which means that they were putting a lot more towards principal each month. (10%+ interest provides a huge incentive to pay down principal instead of eating out and going on vacation.) Almost everyone was on 5 year terms. They didn't spend the equity in their house as fast as it grew, because it wasn't cheap to borrow against equity.

It's a whole new ballgame now. 1/3 of people are on variable rates - which are essentially the same as US ARMs if interest rates return to their historic averages. Add the fact that 1/5th of people on 5 year rates come up for renewal every year, and you've got half your population at a severe interest rate risk every year. They have no equity to begin, and build very little, because most people are on 35 year terms.

If we get another 20% crash, there will be far, far more people with negative equity then there were back in 89. I posted a link that shows that roughly half of foreclosures in the US were because of negative equity, not Subprime, not job loss, not ARMs.




poop_on_you wrote: Where are you seeing the data that suggests a 30%-50% drop over 5 years? Your 30%-50% drop is purely based on unemployment and rising interest rates?

30-50% drop would return real estate to historical valuations, compared to inflation and earnings.
poop_on_you wrote: I don't know what kind of unemployment rate you are expecting. But if unemployment keeps climbing, you won't see rising interest rates. Monetary policies are designed to combat inflation/deflation. They will only change it if they think the economy has recovered from deflation to inflation. The government would rather have a few years of slow growth, then a huge crash followed by quick recovery.
Rising unemployment or inflation would cause house prices to fall. So even if they are mutually exclusive, (and they aren't, see stagflation), they both have the same result on house prices.

Rising unemployment would force the government to either borrow or print money. Printing money is obviously inflationary, and will cause lenders to charge a higher premium, leading to higher interest rates. If the government borrows money, it competes with other borrowers, causing higher interest rates. Either way, there's no way out of this mess without killing house prices.

poop_on_you wrote: Here is the historical unemployment data from statscan:


Rising unemployment rate has slowed down a little now. I think people are just starting to realize that maybe the magnitude of this recession is not as high as they thought last year where people were panicing for a 2nd great depression. The aggressive monetary policies have helped a lot and they are still currently in place.
It's because of cheap money. When you have essentially no cost on borrowing money, you can keep an economy afloat no matter how bad it needs a correction. Of course, it can't last. If we're at 9%, and the highest rate in 40 years is 12%, just wait until interest rates start ticking up.
poop_on_you wrote: The current equity market is expecting a recovery some time in 2010. If unemployment keeps rising and the current economy doesn't recover, you won't get returns anywhere, not just real estate. Unless you put all your money in government bonds and hold until maturity, you will lose money in every investment if the market doesn't recover. Any bad news that comes out, equity market will be the first to react since that is the most volatile.
That's true. But most people aren't leveraged into the stock market 20:1 or infinity, like they are in real estate. Further, the stock market has already corrected, real estate has only started.
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Aug 27, 2004
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Toronto, ON
i6s1 wrote: (10%+ interest provides a huge incentive to pay down principal instead of eating out and going on vacation.)
And that, right there, is the biggest problem with the current model.

When you're paying 2.25% on your prime HELOC, why not go on vacation?

When you're paying 0% interest on your spectacularly overpriced car, why put down any money? Why pay it off early?

This use of cheap debt to prop up inflated prices perverts every incentive that people would otherwise have to get out of debt.

In the 1980s, people had all kinds of stories about how they and their spouse lived crazily frugally for two or three years to pay off the 15% interest mortgage. Then once the mortgage was paid off, they'd have the first kid. Nowadays, with 2.25% and a mortgage for 4-6X annual income instead of 2, you'd have to live crazily frugally for a decade... and you'd save a lot less money by doing so.
Banned
Jun 19, 2006
9349 posts
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i6s1 wrote: How many people back then had negative equity?
There was negative equity in the GTA/Calgary/Vancouver markets when they underwent their real estate corrections in the 80s and 90s. Many people just walked away. Many banks failed or folded/were acquired including Royal Trust and others.
(10%+ interest provides a huge incentive to pay down principal instead of eating out and going on vacation.)


People had rising incomes as well, because inflation was relatively high. There is no inflation today, and definitely no income growth.
Almost everyone was on 5 year terms. They didn't spend the equity in their house as fast as it grew, because it wasn't cheap to borrow against equity.
Yup, home equity loans were basically unheard of 20 years ago, and even then, only peddled to doctors/lawyers/engineers, who made very solid income to be able to pay them back.

30-50% drop would return real estate to historical valuations, compared to inflation and earnings.
These things always overshoot too. Just like the stock market fall recently. Give it a few years, people will be buying houses for 2X income once again.
Rising unemployment would force the government to either borrow or print money. Printing money is obviously inflationary, and will cause lenders to charge a higher premium, leading to higher interest rates. If the government borrows money, it competes with other borrowers, causing higher interest rates. Either way, there's no way out of this mess without killing house prices.
Or, ideally, reflating the economy through some other asset class, ie: the stock market, which would hopefully generate the sort of economic activity necessary to give people good salaries to pay off their loans. That's the ideal case.

Quite frankly though, at least in the USA, there's almost next to nothing to invest in. Not because of valuation, but simply, because most of the 'economy' there was built on the quicksand of retail, and consumer spending. There are no new Intels, Microsofts, or Cisco's in the pipeline, waiting to generate massive profits. Every industry in the USA is pretty much tapped out, and completely devoid of future R&D potential.

It's because of cheap money. When you have essentially no cost on borrowing money, you can keep an economy afloat no matter how bad it needs a correction.
Well even that starts to fail, kind of like all the drugs they gave Michael Jackson to put him to sleep. Pretty soon, even 'no cost' borrowing doesn't even work. I don't think anyone has any idea how dire the situation is right now in the United States; they are literally one failed bond auction away from complete economic collapse. Its "game over" once China decides to finally pull the plug.
That's true. But most people aren't leveraged into the stock market 20:1 or infinity, like they are in real estate. Further, the stock market has already corrected, real estate has only started.
Yup. The natural response is to fear the stock market, because its been the subject of so much volatility, but statistically, volatility is risk, and risk is related to return. People get rich by buying things cheap, and selling them when they're expensive. Cheap things are insanely volatile. Expensive things are not. That's why we get the people here saying that its insane to be investing in businesses right now, with all the volatility, when exactly the opposite is true -- its insane to not be investing in stocks right now.
"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 9, 2003
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Langley
You know, you'd think that the Canadian government could watch the house of cards collapse in the US and learn something from it. Instead, they're just learning how to build the house higher.
Deal Fanatic
Aug 27, 2004
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Toronto, ON
i6s1 wrote: You know, you'd think that the Canadian government could watch the house of cards collapse in the US and learn something from it. Instead, they're just learning how to build the house higher.
Well, what do you think the government should do? (keeping in mind that the recession requires interest rates to be low)

Stop insuring > 25 year mortgages and require a 10% down payment? That'd make real estate crash nicely. :)
Deal Addict
Oct 1, 2006
2153 posts
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Montreal
The government of Canada wanted to help low income families to be able to afford a home by decreasing the down payment required and increasing the maximum amortization time period allowed. Unfortunately they achieved the opposite. Homes are now unaffordable even for the middle class in several Canadian cities.
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VivienM wrote: Well, what do you think the government should do? (keeping in mind that the recession requires interest rates to be low)

Stop insuring > 25 year mortgages and require a 10% down payment? That'd make real estate crash nicely. :)
The recession doesn't require rates to be 0.25%, but the low interest rates helps the stock market as well.

Stopping 30/35 year mortgages would be good. So would putting an end to zero-down gimmicks, force people to have 10%. Instead of a lump sum fee that gets amortized over the mortgage term, force people to pay a declining monthly insurance fee until they get to 25% equity. (That would encourage someone to save for a significant down payment and then pay down the mortgage.) Require a higher credit score then the current minimum of 600. Ban HELOCs that put your equity under 25%. End securitization that puts the default risk with anyone other then the lender.

Some of these ideas could be phased in slowly to reduce their impact, and they'd have the effect of returning prices closer to normal without directly being the cause of a crash. It should have started after the US bubble burst, but all they really did was lower the longest insurable term from 40 to 35, which has minimal effect.
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Germack wrote: The government of Canada wanted to help low income families to be able to afford a home by decreasing the down payment required and increasing the maximum amortization time period allowed. Unfortunately they achieved the opposite. Homes are now unaffordable for the middle class in several Canadian cities.
Yup. It's like they didn't really get that adding more buyers to an illiquid market would cause prices to go up. But don't get me wrong, I'd still rather have the conservatives in there then anyone else.
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Feb 6, 2008
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i6s1 wrote: How many people back then had negative equity?

Back then, as we've already agreed, people bought houses that cost 2x annual income. They had 25% or more saved for a down payment. They could afford 10%+ interest rates, because that was average. At most, they had a 25 year term, which means that they were putting a lot more towards principal each month. (10%+ interest provides a huge incentive to pay down principal instead of eating out and going on vacation.) Almost everyone was on 5 year terms. They didn't spend the equity in their house as fast as it grew, because it wasn't cheap to borrow against equity.
Where are you seeing the historical data? I would be interested in seeing a comprehensive historical real estate price, income, and population density. If you have those, please post them.

I don't know the population density 20 years ago, but I don't believe it's nearly as condensed as now. If you don't take population density and immigration into account, there are still affordable places right now. Windor is 2.3X, and it's only 4 hours away from Toronto. Toronto has changed a lot in the last 20 years and prices will need to reflect that.


i6s1 wrote: It's a whole new ballgame now. 1/3 of people are on variable rates - which are essentially the same as US ARMs if interest rates return to their historic averages. Add the fact that 1/5th of people on 5 year rates come up for renewal every year, and you've got half your population at a severe interest rate risk every year. They have no equity to begin, and build very little, because most people are on 35 year terms.

If we get another 20% crash, there will be far, far more people with negative equity then there were back in 89. I posted a link that shows that roughly half of foreclosures in the US were because of negative equity, not Subprime, not job loss, not ARMs.
Again, where are you seeing the data with 1/3 of people on variable rates and 1/5th with fixed? I'd be interested in seeing mortgage type market shares.

If you want to compare to the US, Canadian owners still maintained strong equity.
http://www.rbc.com/economics/market/pdf ... n_0209.pdf
http://www.td.com/economics/special/gb0409_housing.pdf

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[IMG]http://i32.tinypic.com/2mpk849.png[/IMG]





i6s1 wrote: 30-50% drop would return real estate to historical valuations, compared to inflation and earnings.
Post your valuation method.


i6s1 wrote: Rising unemployment or inflation would cause house prices to fall. So even if they are mutually exclusive, (and they aren't, see stagflation), they both have the same result on house prices.

Rising unemployment would force the government to either borrow or print money. Printing money is obviously inflationary, and will cause lenders to charge a higher premium, leading to higher interest rates. If the government borrows money, it competes with other borrowers, causing higher interest rates. Either way, there's no way out of this mess without killing house prices.
There is no inflation right now, only deflation. Inflation was at -0.3% in June and -0.9% in July.
http://www.canadianeconomy.gc.ca/Englis ... lation.cfm
If you just held cash in the last 2 months, you are richer now.

When you have rising unemployment, there is usually no economic growth and it will be a contraction or deflation, like what we have right now. Stagflation only happens when the government restricts labour market. That's the opposite of what they want right now.

Interest rates will only be raised when BoC feels confident that the economy has recovered or that inflation has been out of control, which is not the case.


i6s1 wrote: It's because of cheap money. When you have essentially no cost on borrowing money, you can keep an economy afloat no matter how bad it needs a correction. Of course, it can't last. If we're at 9%, and the highest rate in 40 years is 12%, just wait until interest rates start ticking up.
That is precisely what they are trying to do. They are trying to prevent a crash. A lot of indicators have shown signs of recovery already(though that doesn't mean it will recover). Companies earnings are up. Retail sales are up. I would say the government is doing a fairly good job considering the magnitude of the recession.

i6s1 wrote: That's true. But most people aren't leveraged into the stock market 20:1 or infinity, like they are in real estate. Further, the stock market has already corrected, real estate has only started.
Again, the home owner's equity is not 20:1. It's more like 1/(50%-70%) according to the data I posted. Maybe you are thinking of new buyers.
Even so, where are you getting this info that everybody buying a house right now has 0-5% down payment? It'll be hard getting a house with just a 5% deposit nowadays.
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Are you guys making claims based on some data you've seen or are you just guessing?
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Nov 24, 2005
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MisterM wrote: Calling it a bubble might be too strong, but prices in the GTA will definitely fall. It's simple math: when interest rates go up, house prices will come down.
lol! i wish reality would be that simple. there's absolutely no simple math. if that was the case, than everyone would be real estate or stock investors.
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Jun 19, 2006
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poop_on_you wrote: I don't know the population density 20 years ago, but I don't believe it's nearly as condensed as now. If you don't take population density and immigration into account, there are still affordable places right now. Windor is 2.3X, and it's only 4 hours away from Toronto. Toronto has changed a lot in the last 20 years and prices will need to reflect that.
Wouldn't incomes also reflect any sort of 'changes' in Toronto? I mean, if Toronto is this great place, that generates all this wealth, then the average income would grow along with house prices.

A high multiplier is implying that incomes in Toronto are going to rise rapidly. Is there anything on the horizon that suggests that everyone in Toronto is going to get a huge raise in the next few years, to pay the inflated prices?

What about rents? If Toronto was such a vibrant, fast-growing place, then wouldn't rents also reflect this??
If you want to compare to the US, Canadian owners still maintained strong equity.
Because the CMHC is propping the prices up, and the statisticians are looking the other way!! Its a matter of causality; if you want to argue that the Canadian market is solid because of 'strong equity', then you can't argue that the equity is strong in the Canadian market because the Canadian market is solid. That's a recursive argument with no base case! And is a logical fallacy.

Besides, your charts show that US equity was also strong, until the crash. Why did the crash occur? Because fundamentals re-asserted themselves, ie: the base case, of the requisite conditions for affordability, was exposed, and it varied dramatically from the recursive case.
Post your valuation method.
2-3X income, what's affordable to the average person with long-term interest rates, and 1/3rd of family income. Sustainable levels of RE wealth compared to other balance sheet assets and debt. Plenty of independant ways to come to the conclusion that the market is 30-50% overpriced.
Interest rates will only be raised when BoC feels confident that the economy has recovered or that inflation has been out of control, which is not the case.
Policy rates don't need to rise in order for mortgage rates to rise! All it takes is a shifting preference in the eyes of bankers towards other forms of lending. Maybe stock loans are more attractive than RE loans, for instance.
doesn't mean it will recover). Companies earnings are up. Retail sales are
Yeah earnings are up because salaries and expenses are down.
Again, the home owner's equity is not 20:1. It's more like 1/(50%-70%) according to the data I posted. Maybe you are thinking of new buyers.
Even so, where are you getting this info that everybody buying a house right now has 0-5% down payment? It'll be hard getting a house with just a 5% deposit nowadays.
Well, that ad outside those Toronto townhouses seems to suggest otherwise. I suppose our other poster could drive over and get pictures, for your edification? I don't believe he's lying. "No approval required". "0% interest". Sounds easy to me. Seriously, there's no serious capital behind any of the buyers in the market these days.
"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
6823 posts
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Toronto, ON
i6s1 wrote: Ban HELOCs that put your equity under 25%.
Wait a second. You can get a HELOC with less than 20% equity? (or are you just suggesting changing the minimum from 20 to 25%?)
Sr. Member
Jul 29, 2009
895 posts
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VivienM wrote: Wait a second. You can get a HELOC with less than 20% equity? (or are you just suggesting changing the minimum from 20 to 25%?)
I know some of the readvancable products advertise being able to access up to 95% of the home value through the HELOC portion.

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