Bubble I think I know why

[ddkay]

I don't think the notion that Carney and Harper can prevent a crash helps. Everyone buys thinking the government is responsible for letting prices get out of hand and consequently fixing them. For everyone. Because that's why we elect them. And if they don't fix it, they won't get relected. That's how democracy works. Until your country becomes insolvent. But insolvency won't ever happen to us because we turn dirt in the ground to useful stuff people use and will do that forever until it runs out. Also the resource curse is a myth.

[tinypotato]

I think there are several reasons for the RE bubble. Being from Vancouver provides an interesting perspective as well.

1. Stocks are risky but RE is safe - I think this myth has to do with the fact that stock prices are very transparent, quoted publicly and change microsecond to microsecond. People are tempted to look up the value of their stocks more frequently. With a house the value is less transparent so people assume that the price they paid is the minimum they can get in a sale. Imagine if someone different rang your doorbell every minute and offered a different price to buy your home; sometimes up 20k, sometimes 20k less, etc. - I think the perception of real estate would change in a hurry.

2. Low rates - The persistence of low rates has created an entire generation of people who are used to free money. I'd bet that most people don't even know the relationship between interest rates and RE valuation...at least not many people in Vancouver. A by-product of low rates is the increasing property values creates the euphora of ever increasing prices. People ignore the rate of return generated by the actual property and are willing to pay any price since there is always someone else to sell to for even more!

I can't begin to count the number of times I hear "it doesn't matter what rent return I get, since the value will go up!"....sigh

3. Banks / Realtors - They've created the great myth that rent is throwing away money. Why pay someone else's mortgage..blah blah blah. While I agree that these concepts are valid and true under many circumstances, it's not a universal rule. Taking a big mortgage really is just renting money. Besides, the other person's mortgage pays the bank shareholder's dividends...

When people go out for dinner, are they worried that they're paying for the restaurant owner's mortgage? Every time you spend money anywhere you are paying someone else's mortgage, for their vacation, etc....

4. Parents - Asian parents....enough said....

[Causalien]

I think Zillow ( A canadian startup) played a role in US real estate downfall by giving almost real time prices on houses sold.

Funny they can't operate in Canada because our laws prevents that.

[HaroldCrump]

I don't think the notion that Carney and Harper can prevent a crash helps.

Often the steps taken to prevent a situation ends up triggering the situation it was trying to prevent.
The super low interest rates, the lax lending rules, etc. policy that the govt. has adopted to prevent the RE market from crashing could end up causing the crash a few months/years from now.

And typically the real crash occurs months before the folks on main st. realize that there is a crash underway.
For instance, we were still partying in the summer of 2008 on the TSX (when it soared above 15K), while in reality the crash had already happened several months ago.

[Uranium101]

When will be the crush?
I want to buy a house with cash lol. and I am not paying 600k for a small house.

[Causalien]

Often the steps taken to prevent a situation ends up triggering the situation it was trying to prevent.
The super low interest rates, the lax lending rules, etc. policy that the govt. has adopted to prevent the RE market from crashing could end up causing the crash a few months/years from now.

And typically the real crash occurs months before the folks on main st. realize that there is a crash underway.
For instance, we were still partying in the summer of 2008 on the TSX (when it soared above 15K), while in reality the crash had already happened several months ago.

I went back to my financial logs and confirmed that 2006 the subprime sector got wiped out. Then 2007 is the hard confirmation of a death cross.

Excerps:

The Logs

September 2006, The subprime mess started where default rate started to rise and reports of illiquidity started appearing. These subprime mortgage companies have a valuation of several hundreds of millions in market value. Amongst those, the biggest of them is CFC (Countrywide Financial). We see the first dip in the market as the smart people sold and got out of everything. However, the overall stock market continued to climb

The climb continued till summer 2007, the subprime sector has been completely wiped out and reports of defaults started appearing in Alt-A loans (the next tier).

Note: The major subprime players are: New Century Financial (NEW), Fremont General (FMT), HSBC (HBC), Citigroup (C), Countrywide (CFC), Washington Mutual (WM)

February 2007, Asian market crashed for 15%, S&P followed. In hindsight, this is also where the 100 SMA crossed 200 SMA and the net cash flow is out

March 2007, Estimated 1.3 Trillion subprime mortgage outstanding, with 600 billion made in 2006 which represents 40% of mortgage loans. In the years 2004 and 2005, it account for only 20%. The year 2007 sees the peak delinquency of loans originated in 2003 and 2004.

March 12 2007, New Century Financial shares suspended trading.

[Potato]

When will be the crush?
I want to buy a house with cash lol.

You'll have to be very patient. On the one hand, we don't have jingle mail and all the other positive feedback elements that sped up the US crash; on the other, after witnessing that wreck the common buyer may be a little quicker to slam on the brakes, slowing things faster here once the correction does start. Assume the two factors roughly cancel and our unwinding will proceed at about the same rate as the US.

So if you've spotted the bubble with good timing near the top (and weren't early like myself or Mike Burry or whatever), then for the US experience that would be sometime around 2006, maybe even as late as 2007. When is the time to buy? It's still not clear if it's bottomed yet, but maybe around 2011/2012 you agree that even if there is more downside, the fundamentals are back in line and that it's worth the risk to buy again.

That's a good 5 years or so.

The debate still rages about where the bottom will be, and how close the US is now, but maybe you figure once the major declines started to peter out in 2009 was close enough; that would still be 3 years from the peak you'd have to wait.

Similarly, if in Toronto you had spotted the problems close to the peak in 1989, you'd have had to wait 3-4 years before you'd want to pencil "house shopping" into your day planner.

Real estate is not a fast-moving, efficient market, so patience will be required. But a 30% correction on a $600k house is $180k, and that savings can be even greater if renting is cheaper while you wait.

[Uranium101]

You'll have to be very patient. On the one hand, we don't have jingle mail and all the other positive feedback elements that sped up the US crash; on the other, after witnessing that wreck the common buyer may be a little quicker to slam on the brakes, slowing things faster here once the correction does start. Assume the two factors roughly cancel and our unwinding will proceed at about the same rate as the US.

So if you've spotted the bubble with good timing near the top (and weren't early like myself or Mike Burry or whatever), then for the US experience that would be sometime around 2006, maybe even as late as 2007. When is the time to buy? It's still not clear if it's bottomed yet, but maybe around 2011/2012 you agree that even if there is more downside, the fundamentals are back in line and that it's worth the risk to buy again.

That's a good 5 years or so.

The debate still rages about where the bottom will be, and how close the US is now, but maybe you figure once the major declines started to peter out in 2009 was close enough; that would still be 3 years from the peak you'd have to wait.

Similarly, if in Toronto you had spotted the problems close to the peak in 1989, you'd have had to wait 3-4 years before you'd want to pencil "house shopping" into your day planner.

Real estate is not a fast-moving, efficient market, so patience will be required. But a 30% correction on a $600k house is $180k, and that savings can be even greater if renting is cheaper while you wait.

I understand, I will give it another 10 years.
Just one thing I have noticed is that when most people said it's a bubble, then it's not a bubble ready to burst any time soon.
We just have to wait for awhile.

[Square Root]

Real estate has an almost mythic role for most people. Not rational. We just bought a house in Arizona and if you want to be cured of the real estate myth come down here and talk to the people whose homes are under water and worth less than half of what they were in 2006. Even in Canada my bank shares have done better than Toronto real estate over a 15 year period.
Go figure.

[Fain]

Real estate has an almost mythic role for most people. Not rational. We just bought a house in Arizona and if you want to be cured of the real estate myth come down here and talk to the people whose homes are under water and worth less than half of what they were in 2006. Even in Canada my bank shares have done better than Toronto real estate over a 15 year period.
Go figure.

Your bank shares do better but wouldn't real estate come out on top because of the greater leverage you can get.