Understanding Housing Collapse

[Rusty O'Toole]

The mortgage mess in the US is the result of deregulation. Starting in Reagan's day and continuing to the present time, the regulations that dated to the Great Depression of the thirties, and which prevented a recurrence, were dismantled at the request of the financial industry. They took advantage of the newly created loopholes to drive a fleet of Brinks trucks through. When the pyramid collapsed they got a bailout from the government. There was no long term planning at all. Hell, I knew the whole thing went against hundreds of years of banking experience from the start. I thought the government, banks, and regulators had some clever new way of preventing all those mortgages from defaulting. Turned out they didn't. In fact the once you get looking into it, the mess just gets worse and worse, and filled with fraud at every turn.

The Big Short is a good book to start with. There are lots of web sites that cover it. There is one called Market Ticker that was started in 2007 to document the whole thing in real time but there are others.

[Chris L]

Rusty O'Toole, what you're describing in the sequence of events that precipitated the crash, but it wasn't the cause of it. When there wasn't enough support for house prices, they dropped. It's as simple as that. The credit problems exists here too, it's just that we haven't bled out the last fool from his beliefs about the asset. People who do drugs because someone else puts it in front of them is a fool. People who bid up RE until it's detached from fundamentals is also a fool. I can get crack...and so can you. We just don't because it's foolish. But if everyone else is doing it, we don't think it is. When people on average think RE is foolishly priced, the average person will stop buying and they'll pass this attitude along which will precipitate a housing correction. You're still confusing cause and effect. Outside effects can exacerbate a bubble, but they don't cause it. Outside forces can also help help pop the bubble.

[Lephturn]

What kind of shape is the Canadian real estate market in? I enjoy this site and there is an interesting report with some good data in it here:
http://www.canadianmortgagetrends.co...2012.html#more

Homeowners with 25% or more equity: 83%

This kind of thing will change quickly if RE prices drop drastically, but the data seems to indicate that the Canadian market is not all that close to the edge. I wonder what equivalent numbers were in the US in say 2006?

[Chris L]

I think people underestimate how strong a force is herding in people. They see two overvalued markets (van and TO) and think everywhere else is okay. However, they don't account for how easily sentiment can change on a larger scale in people. Why have prices doubled in almost every single market across the world at the same time? Wide scale herding. Once Canada trends in the other direction, it will happen everywhere, in all markets. North Bay has doubled in price over the last 10 years! Why? They get HGTV and talk to their neighbours too! Collectively we came up with the idea that it made sense to invest in RE! When that changes...we'll all hear about it.

[blin10]

imo compare to other capital cities around the world toronto is pretty cheap still... around the world in major capital cities you need close to a mill just for a decent condo, here you can get a very nice house

[Eclectic12]

Rusty O'Toole, what you're describing in the sequence of events that precipitated the crash, but it wasn't the cause of it. When there wasn't enough support for house prices, they dropped. It's as simple as that. The credit problems exists here too, it's just that we haven't bled out the last fool from his beliefs about the asset.

[ ... ]

I guess ... but at the same time, when the mortgage is tax deductible, where it is a disadvantage to pay it off earlier, smart people are selling their homes every three years to lock in a $400K+ gain in the US in 2001 and the lender approves a $300K mortgage on a $40K salary as "we both know your salary is going to go up before the mortgage term expires" - that makes for an extreme drop-off when market sentiment turns.

So yes - there are similar factors but IMO, there are a lot of factors that make this an apples or oranges comparison. Never mind that when the Canadian banks were screaming for de-regulation to relax the underwriting criteria/loss provisions so they could compete with US banks, the Canadian gov't didn't bite. (Though some bank CEOs later claimed it was their idea instead of the gov't.)

I can recall a reality cable TV show on helping to homeowners stage/sell their US home in early 2008. Each spouse had their own home which they were selling to pay for their new "everybody under one roof" home that was just finishing being built. The couple was not too happy to hear that based on the expert's research of the area, the softening RE market - the advice was if they wanted to sell, they should list both houses at $500K below their current asking price each (i.e. a total hit of $1 million compared to selling earlier and renting during the build).


Cheers

[Rusty O'Toole]

Rusty O'Toole, what you're describing in the sequence of events that precipitated the crash, but it wasn't the cause of it. When there wasn't enough support for house prices, they dropped. It's as simple as that. The credit problems exists here too, it's just that we haven't bled out the last fool from his beliefs about the asset. People who do drugs because someone else puts it in front of them is a fool. People who bid up RE until it's detached from fundamentals is also a fool. I can get crack...and so can you. We just don't because it's foolish. But if everyone else is doing it, we don't think it is. When people on average think RE is foolishly priced, the average person will stop buying and they'll pass this attitude along which will precipitate a housing correction. You're still confusing cause and effect. Outside effects can exacerbate a bubble, but they don't cause it. Outside forces can also help help pop the bubble.

The cause of the crash was the boom. The cause of the boom was free and easy mortgages offered as part of a racket to enrich a lot of greedy sociopaths.

boom -> bust. I can't believe how many people cannot see that. They seem to think house prices doubling and redoubling in a few years was healthy while the correction back to sane price levels was some kind of unforseeable tragedy.

Canada did not have the mad boom and did not have the disastrous bust. Notice I said Canada not bloody Toronto and Vancouver. In 2008 I got panicked out of some good real estate investments by the US debacle. I thought Canada would follow suit. We did, for about 2 months, to the tune of 5% or 10% drop. Since then the properties I dumped have gone up 25% or 30%.

Now it is 5 years after the US market cracked and some people are still eagerly looking forward to a Canadian real estate slump. They remind me of the "experts" in 1945 who predicted another great depression after WW2. The economy went straight up for 25 years with hardly a glitch. They finally got their "postwar recession" in the 70s.

[Chris L]

The cause of the crash was the boom. The cause of the boom was free and easy mortgages offered as part of a racket to enrich a lot of greedy sociopaths.

boom -> bust. I can't believe how many people cannot see that. They seem to think house prices doubling and redoubling in a few years was healthy while the correction back to sane price levels was some kind of unforseeable tragedy.

Canada did not have the mad boom and did not have the disastrous bust. Notice I said Canada not bloody Toronto and Vancouver. In 2008 I got panicked out of some good real estate investments by the US debacle. I thought Canada would follow suit. We did, for about 2 months, to the tune of 5% or 10% drop. Since then the properties I dumped have gone up 25% or 30%.

Now it is 5 years after the US market cracked and some people are still eagerly looking forward to a Canadian real estate slump. They remind me of the "experts" in 1945 who predicted another great depression after WW2. The economy went straight up for 25 years with hardly a glitch. They finally got their "postwar recession" in the 70s.

If you can find an exceptional deal...by all means snap it up. In my neck of the woods I'm seeing squat. It will take some time before something decent comes along. It's been like this since 08 as you mention. We'll retrace those steps on the way down. Be patient, attitudes can change suddenly. Even just having a few less interested buyers will go a great deal to providing better deals. I can't really compete with 2% money.

We all know why 08 was short-lived. Low interest rates changed buyer sentiment. Funny enough, low interest rates had no effect on the US. Sentiment changed for good there.

[Jay]

On Toronto, Vancouver vs the rest of Canada.... I tend to agree with the previous posters who were saying that the health of the real estate market is largely a case of sentiment. If that's the case, if those two markets go bust (or even decrease 15% over 3 years), I have a hard time believing that it won't have some effect on people's attitudes toward real estate in the rest of the country. I think once people's attitudes change, buyers will start waiting longer, playing hard ball with sellers, etc. Once there are headlines about prices falling (even a small amount), people who can wait will wait...causing markets to stall, and prices to fall for people who have to sell...inventories begin to mount. Some will attempt to cash in their home investments before things get worse - further increasing inventories. Perhaps some bargain hunters who've been sitting on the sidelines waiting for drops will cushion things.. but I'm not sure their numbers are great enough to make a difference. Interest rates won't be getting much lower. I'm no real estate expert, but given what I do know about human psychology, I have trouble envisioning a "soft landing". Locally in Ottawa, I see some evidence that this already starting to an extent (the real estate stats don't mesh with what I'm seeing on the ground) - though we've got other factors dragging on real estate.

[kcowan]

So far we are only seeing softness in Alberta and BC. It will get attention when it hits Toronto.