# are we not in a real estate bubble right now?



## bh23 (Apr 16, 2010)

With interest rates only going up...cmhc upping the minimum requirements for obtaining a mortgage...the addition of the hst....and the simple fact that real estate is too expensive right now. How is it that we are not in a bubble?


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## Berubeland (Sep 6, 2009)

The idea is that we want to slow down the bubble before it gets too big and pops. 

That's what all those initiatives are about. Slowing down the market so it can be more balanced.


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## JAV (Mar 14, 2010)

Berubeland said:


> The idea is that we want to slow down the bubble before it gets too big and pops.
> 
> That's what all those initiatives are about. Slowing down the market so it can be more balanced.


How likely is it that government initiatives and interest hikes will simply will ease prices back down to earth? Like this was planned all along? Sound management of the economy?

Greed and fear. We've had the greed, the fear is coming...


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## andrewf (Mar 1, 2010)

Indeed--letting the air out slowly rather than having it blow up in our faces. I'm expecting very low price growth for a few years, even if we see a return to good economic growth. Not sure we'll see a decline of more than 5% or so nationally. My main concern would be Vancouver. That's a bug in search of a windshield, to borrow the metaphor.


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## the-royal-mail (Dec 11, 2009)

The problem with this thread is it is far too general, as are most national news items about RE.

All the generalities in the world cannot account for the numerous local factors that affect prices and demand. The rules are very different in Windsor vs. Ottawa vs. Winnipeg vs. Calgary. Rural or urban? Nice clean neighborhood or downtown slum?

You need to look at your provincial and local market (and even right down to the neighborhood you want to buy in) to get a sense for what's really going on in your area. If prices are down 25% in Windsor and up 5% in Calgary, telling the Calgary buyer in a nice neighborhood that prices are down on average is kinda pointless.

To discuss this on a countrywide or general basis is kinda pointless IMO.


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## bh23 (Apr 16, 2010)

I guess we shall see...but homes are too expensive, rates will rise...seems like a no-brainer that values will drop.


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## NorthernAlex (Jul 26, 2009)

bh23 said:


> With interest rates only going up...cmhc upping the minimum requirements for obtaining a mortgage...the addition of the hst....and the simple fact that real estate is too expensive right now. How is it that we are not in a bubble?


I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!

Some local markets will have to deflate, but won't pop! 

Fundamentally we are in good shape.


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## JAV (Mar 14, 2010)

NorthernAlex said:


> I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!
> 
> Some local markets will have to deflate, but won't pop!
> 
> Fundamentally we are in good shape.


Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.

I read the other day that the average Canadian has total debt to income levels of 143%, which is the highest in the world. 

Later I read that according to Stats Can, consumer spending has not dipped but continues to grow month on month. 

Are the two related? Would the cost of servicing this debt not push more people than normal to sell their house when rates go up? Increases in supply puts downward pressure on prices. Add that to what's been mentioned already by bh_23, does this not spell lower prices for housing?

Again, I just don't understand the fundamentals that everybody in the real estate game keep mentioning. I do know from reading the newspaper that in January 2009, a market correction of around 5% was expected for the year. Instead, a 20% increase occurred. Now, I'm to believe that regardless of reckless borrowing, interest rate increases, HST, etc, the Feds and their new mortgage regs coupled with the BoC have created a fluffy pillow that the market will comfortably land on. This Canadian management of economic policy is surely the envy of the world and I'm finding it difficult to comprehend.


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## Sherlock (Apr 18, 2010)

^^ You need to read Garth Turner's blog.

http://www.greaterfool.ca/


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## Berubeland (Sep 6, 2009)

Sherlock, 

I have read Garth Turner's blog. 

I don't agree with a lot of what he says. He's been crying that the sky is falling for years. That doesn't mean it's true. 

It's a virtual certainty that at some point the real estate market in Canada will readjust. That does not mean the Garth Turner is right about what he says.

Let me give you an example : If I go outside every day and say "its raining" even if I live in the Sahara desert I will end up being right some day. Then I can say hey I said it was raining and I was right so I'm a genius. It's just not so I'm sorry. Even a broken clock is right twice a day. 

While I do think people should be cautious in this real estate market about getting themselves over extended I do not tell people to sell and go live in an apartment either. That's just dumb.


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## NorthernAlex (Jul 26, 2009)

Jav; 

Like mentioned in one of the other posts here: We can't say in general that RE in Canada is too expensive. There are hot spots, which will heat up in cool down. Vancouver, Alberta aso. It is always a cycle. These cycles are needed to "flush" fresh money into the market and to get to the new high. Expenses are increasing, expenses are increasing, too. 

Compare RE prices to other cities in the world. Toronto/Montreal/Ottawa prices to Paris, Tokyo, London, Moscow aso. These cities are still more expensive than our cities.

The general point I am saying is: RE in a healthy or upcoming area will ALWAYS increase in value. The only thing you need, maybe, is time if you bought too high. If someone buys a house with 5% down and wants to own a $600,000+ house, well, than his start was wrong from the beginning and will lead to a price correction due to the foreclosure of this person (economic Darwinism), but the market will absorb that very qiuckly.

I am not saying that there won't be a price CORRECTION. But only a correction. A correction means for me that a the whole RE market won't get hammered, but local market maybe (like Windsor because of the uncertainty what GM is going to do), but not the market in general. 

In regards of the mentioned 143% income level: I don't know these numbers, but always refer to "lifestyle inflation", which is definitely a main reason for that. Adding now a low financial down payment won't help of course. As harsh as it sounds, but not everyone can afford a house.

I invest in multi res and other positive cash flowing properties and bought a lot (for my take) in the last 18 months. I will switch soon to my HOLD mode to consolidate and wait for the next opportunity. Even if the market correct itself- I don't care. As long as I can rent the places (which I can, due to the more difficult mortgage environment aka. more tenants), I am good, because I am in for long.

Berubeland mentioned it somewhere correctly: CMHC is taking the right steps to deflate the potential bubble.

My 2c for now. Have a great day.



JAV said:


> Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.
> 
> I read the other day that the average Canadian has total debt to income levels of 143%, which is the highest in the world.
> 
> ...


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## dagman1 (Mar 3, 2010)

@NorthernAlex:

I have to disagree. I think there is a lot of compelling evidence that we are in a major bubble in Canada right now.

To start, Toronto, Montreal or Vancouver are not anything close to cities like New York, Paris, Tokyo, etc. If you think so, you are living in a dream world. Those cities not only have massive populations that Canadian cities do not, but are the financial hubs of the world.

To understand how we are overpriced, just look at two indicators: the rent price versus the buy price for the same home, and the average income versus the average home price.

In most major cities, the rent price to the buy price is way out of line, so much so that you'd be crazy to buy instead of rent (yet people keep buying). In Vancouver or Toronto, you can rent a two bedroom downtown condo for somewhere in the $2000-2400 range. Yet the same place will cost you 450,000 to 600,000 in each city respectively, plus monthly condo fees. The cost of carrying the mortgage far exceeds the rental price. That is about as good as it gets for indicating the prices are way out of line.

Not to be left out, the average household income in Canada is something like $70,000 and the average home price is $340,000. That's just unsustainable considering the numbers alone (never mind relatively to other countries).

Now also consider rising interest rates in the near future (just look to that mortgage study), increasing taxes to cover our deficit, as well as the large number of baby boomers with no savings except that which is tied up in their home.

Most people who believe otherwise are those who have some sort of vested interest in real estate staying expensive, such as real estate agents or mortgage brokers.


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## NorthernAlex (Jul 26, 2009)

What is a major bubble for you? If the price drops 15%? 50%? 75%? Where? Canadawide or just in some local markets?

No doubt, that the Vancouver/Toronto market is overheated- and we saw a small drop in YYZ within the last 18 months. But we also saw a rebound. This was a *correction*! Correction is good and the market needs it. But these doomsayer shouting about a BUBBLE are just wrong. The market will *not* tank Canadawide 50%. 

Whoever buys a 600,000$ condo in Toronto will definitely (hopefully?) make more than 70,000$/yr and hopefully has a good down payment. Who is forcing them to buy there? Common sense should say that it doesn't make sense to buy there if you didn't have a huge heritage. Again, lifestyle inflation. They need to ask themselfs: _"Can I afford to pay the mortgage if I lose the job and need 6 months to get a new one?"_ Do they know that they maybe have to live there for some years until they break even again? Was this considered in the purchase process? 

Why do people line up in Toronto to purchase a condo which is not build in the next 18 months and already pay 20% down? Why do they do that? *Missing due diligence.* Yes, they will lose money! But who said spending money smart is easy?

Wherever a hot market is, people will go over their limit. Like in an auction. "Another $1,000".

I don't see at all a bubble in Canada. I see overheated local markets (YYZ and its Condo market, but Canada is not only a condo market). I see hot markets and see dying markets here in the north. And all of them will have to deal with their issues.

Most people who believe otherwise are those who are filled with bitterness, because they did got burned or said that there was a bubble 8 years ago and didn't see a 50% drop!


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## Cal (Jun 17, 2009)

To me a bubble would be a 20% change.

My only argument for Northern Alex would be that the 'correction' you mentioned within the last 18 months was completely due to interest rates dropping to never before seen lows. That is about to change.

The biggest indicator for me to evaluate what direction the RE market is going in would be the average income to average price ratio. Which completely varies from area to area.

I am not convinced that there is or is not a bubble in the RE market. (as a generalization) But I really have no interest in paying what sellers are asking these days.

The money in RE, as in many other investments is really made moreso on your purchase price. Agreed that over time RE will rise. As will inflation. But the profit will be made upon a good buying price. A good selling price just juices a little more profit.


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## canadianbanks (Jun 5, 2009)

dagman1 said:


> @NorthernAlex:
> 
> I have to disagree. I think there is a lot of compelling evidence that we are in a major bubble in Canada right now.
> 
> ...


Very well put! I've been presenting the same arguments for the last 2-3 years, but very few were willing to listen until recently. Now that a few of my friends have lost their high-paying jobs (they never thought this can happen, after all "it's different here" works until it doesn't), they have changed their tune very quickly. Now they are realizing that their huge mortgages are liability, which they might not be able to afford very soon.

The way I see it once we are past the top of this bubble (the top was very likely this April or will be May at most), the prices in major bubbly centers like Vancouver, Toronto, and Calgary will come down crashing possibly 30%+ for 2 short years. After that it will be a slow grind down of 4-5% per year until bottom in 4-5 years.

The US homeowners never thought housing can depreciate, before their bubble burst, and many didn't believe that the bubble was deflating after the fact, however their denial didn't stop housing from crashing.

Did I mention that the US financial and housing troubles are far from over?

http://www.reuters.com/article/idUSN1418760920100514


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## dagman1 (Mar 3, 2010)

NorthernAlex said:


> What is a major bubble for you? If the price drops 15%? 50%? 75%? Where? Canadawide or just in some local markets?


I would say 20%+ in major urban centers such as Toronto, Vancouver and Calgary. Some U.S. analysts have put Canadian real-estate overvalued on average as much as 27%.



> No doubt, that the Vancouver/Toronto market is overheated- and we saw a small drop in YYZ within the last 18 months. But we also saw a rebound. This was a *correction*! Correction is good and the market needs it. But these doomsayer shouting about a BUBBLE are just wrong. The market will *not* tank Canadawide 50%.


As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.



> Whoever buys a 600,000$ condo in Toronto will definitely (hopefully?) make more than 70,000$/yr and hopefully has a good down payment. Who is forcing them to buy there? Common sense should say that it doesn't make sense to buy there if you didn't have a huge heritage. Again, lifestyle inflation. They need to ask themselfs: _"Can I afford to pay the mortgage if I lose the job and need 6 months to get a new one?"_ Do they know that they maybe have to live there for some years until they break even again? Was this considered in the purchase process?
> 
> Why do people line up in Toronto to purchase a condo which is not build in the next 18 months and already pay 20% down? Why do they do that? *Missing due diligence.* Yes, they will lose money! But who said spending money smart is easy?


Aren't you just proving my point that real-estate prices have been bid way beyond their true value? 

Some claim that bubbles cannot occur because people act rationally on all available information. IMHO, the lay person is not rational, in fact, most don't have much common sense at all, they buy because rates are low and because of past performance of real-estate, caught up in bidding wars and influenced by the media, without any consideration to the actual worth of shelter.

I used the condo market as an example, because rentals are readily available, but the same hold true for the housing market.



> Most people who believe otherwise are those who are filled with bitterness, because they did got burned or said that there was a bubble 8 years ago and didn't see a 50% drop!


Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.

What do you think is going to happen when prices depreciate even 10% on that new $700,000 mortgage? Do you think people will want to keep paying the interest on that mortgage when their house is now only worth $630,000? What about a 20% drop?


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## Berubeland (Sep 6, 2009)

This might sound funny in the context of this argument but as I was driving around I saw another abandoned house today. Right at the corner of O'Connor & St Clair. That's about 6 abandoned houses I know of in Toronto so far. 

Anyways the problem with residential real estate is that people don't make rational decisions. Investments that don't cash flow. Let me liken it to the stock market. There are always people who will buy a slick sales pitch rather than substance. These people will get burned. 

People have told me I'm stupid for making the choices I make. Old car, small unimpressive house, its not sexy. Even in business most people would rather have someone agree with them and blow sunshine up their *** then have someone tell them what they are doing doesn't work and to try something different. 

I was having this discussion today with a real estate agent. Right now people are putting crazy prices up on their buildings with no numbers to back them up. You wouldn't believe it. 

Anyways the way around that is to reverse engineer your numbers and offer that. 

In Toronto properties are selling at 5% cap rates 

Net Operating Income/Purchase Price = Cap Rate

NOI = Gross income less all expenses

So if you have a building with a net operating income of 

$100,000/.05 =$2,000,000 or less is your target price. 

Lets say you can increase the rents by $20,000 per year your building will be worth 

$120,000/.05 =$ 2,400,000

And that my friends is where the money is.


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## NorthernAlex (Jul 26, 2009)

Berubeland, I think that dagman1 is referring to personally occupied Single Res. 

MultiRes or cash-flowing investments are another ball game and where we feel home, so to speak.


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## NorthernAlex (Jul 26, 2009)

Let me guess- the same analysts who didn't see the US mess coming? 



dagman1 said:


> As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.


A correction was there, indisputable! Toronto's prices dropped and sales dropped,too. But they also recovered. Maybe too fast, but different story.




dagman1 said:


> Aren't you just proving my point that real-estate prices have been bid way beyond their true value?
> 
> Some claim that bubbles cannot occur because people act rationally on all available information. IMHO, the lay person is not rational, in fact, most don't have much common sense at all, they buy because rates are low and because of past performance of real-estate, caught up in bidding wars and influenced by the media, without any consideration to the actual worth of shelter.
> 
> I used the condo market as an example, because rentals are readily available, but the same hold true for the housing market.


No, I am proving my point that we have individual local markets, which are overheated and which will correct them-self. I call a 20% drop a correction, not bubble. A bubble is a province/countrywide drop like seen in the US. Where all prices were hammered over these mentioned 20%. Where you see 50% or so. Technically spoken I would maybe that Windsor experienced a bubble, but actually not. It was a "sell off on bad news". 



dagman1 said:


> Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.


Of course you can guess. I was replying to your "Most people who believe..", where I think that you maybe had some bad experience. Yes, I have a "substantial position in RE", because I believe in what I do and that I do it good. I write dozens of offers, get refused a dozen times. I was told once that it is only a good offer if you are a little bit embarrassed. All my deals in 2010 and 2009 were private. I even posted one of my deals back a few months.



dagman1 said:


> What do you think is going to happen when prices depreciate even 10% on that new $700,000 mortgage? Do you think people will want to keep paying the interest on that mortgage when their house is now only worth $630,000? What about a 20% drop?


Well, here is again the "Lifestyle Inflation". If they can afford to buy and support a 700k home, than I would say "HOLD". Don't sell with a loss (except you can use the loss with previous gains). It will come back to the 700,000$ and even more, but it will take its time (if the area is not dying). I think that I could afford a $700k house, but I can't deduct the mortgage and can let the money work better for me elsewhere. 

It is the same with stocks, if I buy too high I have to wait until the stock gets there again where I want it. price vs. time. Except that the company worsen.

I just don't see the BUBBLE. I see overheated local markets, but I wouldn't buy there a) an investment (no positive cash flow possible) or b) move there. And these overheated markets are always there.

Again: Any kind of investment needs skills or trust and shouts out loud for Due Diligence. Why do people spent more time in analyzing their new car than about the real estate, which will have approx. 20x the value of their cars.

Anyhow, have a great evening all!


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## JAV (Mar 14, 2010)

NorthernAlex said:


> Jav;
> 
> Like mentioned in one of the other posts here: We can't say in general that RE in Canada is too expensive. There are hot spots, which will heat up in cool down. Vancouver, Alberta aso. It is always a cycle. These cycles are needed to "flush" fresh money into the market and to get to the new high. Expenses are increasing, expenses are increasing, too.
> 
> ...


Thanks, I appreciate your response.

I think you're right in that Canada will probably not suffer a nationwide collapse in RE prices, it will depend on local factors. Having said that, isn't that what happened in the US? Prices collapsed in places like California, Florida, Arizona which dragged the national average way down.

Whether national or local, a 20% "correction" seems like an Orwellian term for bubble popping IMO. It is what it is. Gov use the words "user fees" and "premiums" when they mean tax. People in RE use "correction" to allow wiggle room when explaining why it looks like one, acts like one and prices drop, but still it's different somehow. Whatever. Not all bubbles are big and not every one makes a big mess when it pops. Anybody who chews bubble gum can tell you that.

Anyway, thanks again.

For you information, here are two articles relating to Canadians personal debt levels.

http://www.financialpost.com/story.html?id=3013137

http://www.financialpost.com/story.html?id=3015558


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## dagman1 (Mar 3, 2010)

Still so sure?: http://www.theglobeandmail.com/report-on-business/shine-comes-off-housing-boom/article1591578/


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## Berubeland (Sep 6, 2009)

Yes.


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## Larry6417 (Jan 27, 2010)

*What's in a name?*

Some of the argument here is over semantics. What constitutes a "bubble" vs merely "overpriced"? What's a "crash" vs a "correction"? A 10% "correction" is enough to demolish 100% of equity for many, so colour me on the "bubble" side.


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## JAV (Mar 14, 2010)

Larry6417 said:


> Some of the argument here is over semantics. What constitutes a "bubble" vs merely "overpriced"? What's a "crash" vs a "correction"? A 10% "correction" is enough to demolish 100% of equity for many, so colour me on the "bubble" side.


100% agree. According to some (likely to have a vested interest), if it crashes like the US it's a bubble. If it does not replicate that completely, it's a "correction". The proof of the "correction" over a "bubble" relies on the fact that a US style collapse is unlikely here. Not sure if this is because as Canadians we must first and foremost define ourselves as "not-American" or if RE bubbles come in only one size and flavour.


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## houska (Feb 6, 2010)

In my mind, a "correction" is a temporary dip or pause that makes most people get nervous, but ultimately does not have a significant long term negative lifestyle impact for most of them. A "crash" or "bubble burst" is a significant drop that significantly negatively affects the financial flexibility of most participants and takes a number of years for them to recover.

I think the stock market drop in 2008 was a small crash, since it has put a dent in the retirement plans of many people, and few people were disciplined enough to invest in enough to be close to breaking even, even after the run-up last year.

On the other hand, according to housepriceindex.ca, Toronto real estate prices dipped 10% in late 2008 and early 2009, but recovered within one year. I don't think that had too much of an impact on most people. Ergo that's a 10% correction that's a far cry from a crash....


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## Sampson (Apr 3, 2009)

houska said:


> I think the stock market drop in 2008 was a small crash, since it has put a dent in the retirement plans of many people


Small crash? I'd be worried to know what you think a normal or large crash would be. Sure people who stayed invested probably came out okay, but I know many people who cashed out and never got back in.


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## houska (Feb 6, 2010)

Sampson said:


> Small crash? I'd be worried to know what you think a normal or large crash would be. Sure people who stayed invested probably came out okay, but I know many people who cashed out and never got back in.


I shouldn't have used the word "small". 

That being said, the NASDAQ index fell about 75% off of its peak in 2000-2002. In the five years after that, it had only increased to about 40% below the peak value. That's clearly a big crash.

The TSX as well as the S&P 500 fell about 50% from their peaks in the latest crisis, though (before the most recent tumble) they had recovered to about 20% below peak, in one year.

You are right about the impact on people. Many jumped out at the bottom and did not get the run up, so have felt a huge impact. 

Let's hope that the same won't happen if/when/where real estate prices go down 10-25% as many people seem to predict. Though also as others have pointed out, 10-25% gets pretty magnified if you're leveraged - though if you sit tight, if we get back to 4-7% annual increases after that it doesn't take too long to dig yourself back out of the hole if you don't panic (and don't need to move).


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## K-133 (Apr 30, 2010)

First there was the greed, and now comes the fear.

Just as there are those here who would rather ignore the risks of a market burst, there are also those with biases on the other end of the spectrum. They are here presenting claims of 10-25% 'corrections'. I'm not entirely certain what market this group represents, but I believe the most appropriate opinion to our (Canada's) situation is somewhere in the middle. Therefore I expect an overall stagnant real estate economy.

To be clear, I am quite heavily invested into the real estate market, but am also realistic enough to sense that things don't stay hot forever (nor do they stay cool). Even our sun is cooling off. My philosophy is simple - People will always need a place to live.

...at least until we digitize physical selves.

In my opinion, a correction is a natural event in a well balanced economy. Its similar to the manner in which a river forms a straight line from point A to point B, but does not consistently travel in that exact direction. In a continuously growing economy there is a average direction, with many ups and downs along the way.

I feel that we are at the ceiling for Real Estate of what we can expect from the market, and I expect corrections in regularly fluctuating markets such Toronto, Calgary and Vancouver. This is far from abnormal for these markets. The interesting thing is that this ceiling also applies to normally steady markets, which see consistent but modest increases year over year. This will be interesting to observe, and if we use history as a compass, we should expect an average of a stagnant economy in these markets over the next couple of years followed again by growth.

I think 5 years of stagnant activity as the linked article describes is a stretch at the very end of what I expect to be realistic. Really, its nothing more than the safe thing to say. If this is so, we'll have much more to worry about than our condos, houses and land. Interestingly enough, it is fairly clear to me that the future of all of Canada's sub-economies hinges on how well our government prepares us for the future. I am fairly confident with our current direction as global leaders.

I previously decided to board the train and am now along for the ride. With or without our shirts, we'll see each other on the other side of this unkown tunnel ahead.


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## Doug Out West (Apr 25, 2010)

I look back to Ont in late 80s. After the peak in 89 went sideways and down for 10 years. So yes 

I don't think we'll have a bubble like in the states. Differences:

1 they can walk away from mortgage we can't
2 right after peak econ went into to deep recession
3 interest rates will rise but slowly and many in last few years were going long so will be less of a shock

Will it be a good time to be a homeowner ? no but the 90 was bad and the 2000's was good.

All this talk of unaffordable, we've hear it for 30 years. Vancouver has always been $$$.


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## dagman1 (Mar 3, 2010)

K-133 said:


> My philosophy is simple - People will always need a place to live.


It's great that you have a philosophy, but it really doesn't mean anything.

It's funny talking to people about real-estate. They say, but "we have X number of immigrants to the GTA per year, and they need somewhere to live!" This is their rationale that house prices will continue to go up.

Econ. 101 people: housing is all supply and demand (and also interest rates and availability of credit), and if there is too much supply, there is more competition among sellers, and prices will go down.

So, yes, people will always need a place to live, but if there is an oversupply of houses, that is irrelevant, because they will be prepared to pay less.


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## dagman1 (Mar 3, 2010)

I'd just also add, that if you say "I think the market will stay flat," you need to provide some rationale besides a lot of people are bearish and a lot of people of bullish, so I'll just cut down the middle.

There is a lot of evidence that real-estate is overvalued. I don't see the other side really justifying their conclusions.


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## K-133 (Apr 30, 2010)

dagman1

I think that you're looking at the immediate future, where people like myself are looking 5, 10 and 15 years down the road. My perception of the short-term future is that it is simply a hurdle. The only justification to my opinion that I have any interest in providing are my financial statements. I've made good and bad decisions, but all that really matters is the overall picture i.e. the finish line.

From an investment perspective, if you're looking to optimize short-term success in your portfolio, then real estate is likely a risky avenue for you. The 'other side', as your refer the group, typically gears their strategies toward long-term growth. 

Your argument of value is flawed, because it eludes to a fraction of the economic set. These subsets are very likely the demonstrate high correlation to the performance and actions other economies; culture, industry, global, environmental, household, <you name it>. In this system, I consider real estate to be more of an indicator to the health of these economies and the overall system. 

The risks you've presented are real - it would be foolish to deny that. Negative risk cannot be eliminated, but it can be managed. When you make a decision to move forward with something, you are accepting the inherent risks whether you are aware of them or not - they are always there. The 'other side' has typically accepted those risks, and those who best understand the risks can better prepare to manage them. 

I'm certain by the time I retire that I will have a much more diversified investment portfolio, but for the time being, I am focused in the area of real estate because I am best equipped as a person right now to manage this area and its risks.

As far as I'm concerned, the greatest risk to the real estate economy right now is not price, but an over crowded group of short-term investors - buying pre-construction and selling 1-3 years post-construction. The value which these investors provide to the system is not great enough to justify their withdrawals. I think that we will see this group thin out with the increase of required investment to 20%. Hopefully, that action was not too late.

The next greatest risk is probably personal / household financial management - supporting the notion that the real estate economy can be considered an indicator.

Any correction I expect to see will be in response to the bigger picture of the Canadian economy. We saw highly unexpected gains in this past year, I believe, because of confidence in the Canadian economy. Over the next few years, I expect this confidence will cool off a bit and hopefully egos will be brought down as well - as such I also expect the real estate to cool (0-2% growth), possibly chill (1-10% losses) but not shatter (drops >10%). I consider anything in or above the 10% range a very bad signal of the health of the general economy.


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## chaudi (Sep 10, 2009)

*Niagara, St catherines*

What do think about a decent house in the Niagara region at say 150k in the bubble? What sort of price correction should i expect? Worse case scenario. What do you guess the value would be in 5 or 10 years?


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## GeniusBoy27 (Jun 11, 2010)

Hmmm ... worse case, I'd say about 10%. However, the future value of a property should not be the main reason to invest in a house. 

I have no clue about the Niagara region. I think it's a matter of demand and supply, and I don't see the demand in Niagara per se, unless you're talking about Niagara on the Lake by the wineries and so-forth.

Buying where it's cheaper isn't always wisest if you're looking at the economic value in the long-run. If you had magical glasses to see in the future, you should buy where growth is going to occur. Look at transportation corridor growth (i.e. where is the GO going to extend to?) and look at access points, and regeneration of parts of the city.

I have my opinions where I think things will go and areas that would be beneficial. Niagara is a little too far out to get that benefit. 

So the question is ... do you want to specifically live in Niagara? Would it be good for work, etc? 

If I remember correctly chaudi, you travel out of the country a lot, but you want to stay near Toronto. You don't want to continue to pay for storage ... I think going north (toward Barrie and Orillia) or east (toward Oshawa) has far more potential than Niagara has, because of the GO directions northwards and eastward. How much size do you need? Is a condo okay, or do you need a house?


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## 412driver (Apr 30, 2010)

I am not one to really believe that the sky is falling (aka Turner), but back in 2008 I was looking at an apartment in BC's Okanogan that was listed for 369K. I thought, no, that's nuts. Found out the other day it is now listed at 269K !! That is down 100K. 

I think it totally depends on where you are. For example, even in the US, there are "desirable" areas that have not lost much of their value but go downtown Detroit and you can buy a house for 1000 bucks. Do I want to live in Detroit? Do you? Exactly!

There will be some great deals to be had in the near future because people over extended with their lust for the easy money that was out there and now are wallowing in debt that will get more expensive by the day...

The worlds markets are not in great shape, true. But is it the end of the world? Nope, not yet......


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## JayRoc (Apr 4, 2009)

Are we in a US style bubble right now? Unlikely. But I do think we are in a bubble. Think about it - Canadian's have the highest debt/income ratio in the Western world - we owe $1.44 for every dollar we earn. We are more in debt than the Americans! Interest rates are rising....people who took those low mortgages are going to be surprised when the rates go up.
Friends keep saying how much their properties have gone up over the past couple of years or so....some as much as $200,000. Unless their salaries have gone up the same, how exactly are people going to afford housing? I think we're in a situation similar to a pyramid scheme; the last person holding the title is going to hurt.
My 2 cents.


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## Sherlock (Apr 18, 2010)

JayRoc said:


> Friends keep saying how much their properties have gone up over the past couple of years or so....some as much as $200,000. Unless their salaries have gone up the same, how exactly are people going to afford housing?


That's just the GTA, GVA, etc. In other places for example Windsor, houses still cost the same as they did 10 years ago.


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## JayRoc (Apr 4, 2009)

Actually Sherlock, that's in Winnipeg!


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## dagman1 (Mar 3, 2010)

Sherlock said:


> That's just the GTA, GVA, etc. In other places for example Windsor, houses still cost the same as they did 10 years ago.


Exactly. That's what's funny about these people saying that they are making a long term play on real-estate. Historically, real-estate has averaged poor returns, much worse than bonds and equities.

The only real way to make safe money on real-estate is this: use your good credit to finance a house, rent it out to someone who has poor credit or is not disciplined enough to save, so as to have that person else pay into the equity. But the prices and rents have to be right to make it worthy pursuit, which is not the case right now. 

Otherwise, you can try to flip in a hot market, but you are naive if you think you aren't just gambling. In that case, there is really no difference between playing real-estate or, say, commodities.


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## GeniusBoy27 (Jun 11, 2010)

Dagman:

I will disagree, because the advantage of real estate over stocks and commodities is the leverage component of real estate, and that's never factored in your calculations above. You're comparing apples to oranges.

So even though prices may historically be lower, the profits may be higher, because I'm not using all of my money for the property. In fact, the majority owner of my property is the bank. The key factor is ROI (return on investment). 

If you're holding on to property forever, maybe that's not the ideal circumstance. However, one of my properties which has a mixed commercial/residential usage, was bought at 10% down. So for example purposes, let's make the numbers easy.

The purchasing price was $300,000. I put $30,000 down (+fees, insurance, land transfer), which worked out to say $15,000 extra. I renovated for another $25,000. So I put in $70,000 of my own cash.

The real value of the property was independently evaluated at $550,000. (I got it in a distress sale). So if I sold it in a year's time after having lived in it. I would have made $180,000-agent fee-lawyer fee-mortage penalty (and so on) ... so let's call that $40,000 for a total profit of $140,000 (for easy calculation purposes). My ROI is 200%.

Of course, this is all theoretical, and as I hold my property for longer, my ROI would greatly diminish. But even if I held on to it for 10 years, that's still a minimum ROI of 20% per year! Give me any investment that gives me a ROI of 20%, and I"m investing in it.

There are flaws in this calculation above. But for simplistic illustration purposes it will do.

However, I converted this into a cash-flow positive rental property after a year, generating $3,500 a month gross, and about $2,000 a month net (after property taxes, mortgage interest, maintenance, insurance, and a 10% factor for extra repairs and vacancy, etc.) If I decide to sell, the power of the leverage is where the value is. You're making money using the bank, but there is a risk involved if you can't ensure cash flow is sufficient that your property is making money.

As well, you do have that appreciation on the property, plus the return on rents. In my scenario, this is a no brainer. The rent/purchase price is about 10%, which is the answer to an automatic buy scenario.

I'm not saying put all your eggs in one basket ... not at all. In fact, I divest with a mixture of stocks, mutual funds, DRIPs, etc. But real estate, if you're willing to invest, pick apart the value properties (just like stocks), can make you money by using the power of the leverage of the bank. 

Of course, the government saw this, because the speculation was driving up property prices in big cities, and insisted on a 20% minimum down payment on investment properties (i.e. properties that aren't your first home) ... so the leverging factor has been decreased, but it's still there. You just have to spend the time educating yourself which properties truly have value.


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## dagman1 (Mar 3, 2010)

I'm not sure what you are disagreeing on. So you are able to provide me a fictitious (or real) scenario where you made money on real-estate. So what? I never said you couldn't make money on real-estate, only that it was difficult in this market and most certainly risky, much more than people acknowledge at the moment.

Like any investment, your ability recognize under priced assets (i.e. your distress sale), buy them under priced, and hold on to them until you can sell them for their true value, is how you make money. Those who are the best at identifying these assets will always make money. But increased competition makes this increasingly difficult (as is the case with real-estate at the moment: currently there is easy access to credit, low interest rates, the ability to be highly leveraged, plus it's an emotional purchase for many).

The fact that real-estate is leveraged is irrelevant. If you like, you can trade on a margin with your brokerage too. And with any leveraged investment, you have more risk. 

What do you think happens to your $30,000 when the price of your $300,000 house decreases a mere 5%? Well, you paid $15,000 in transactions costs plus you had $30,000 in equity, for $45,000, now you have $15,000 in equity, for a total loss of 66.6%. Not only that, but you can even go negative in equity, which you'll owe the bank, since you can't simply walk away from the house without declaring bankruptcy.

There is no different between real-estate and other forms of investment. The investment has the ability to create income as well as appreciate in value, just like any stock. The only difference is that you are the one managing the investment, rather than some executive. And just like any stock it can be a good buy or a bad buy.

I'm not here to dump on real-estate as an investment. I'm really just trying to inject some common sense into the debate. I personally own a property in a depressed market (that is why it's cash-flow positive). But to be honest, although it makes some money, it's really not that great of an investment (after maintenance and some unexpected costs, I made no money last year).


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## dagman1 (Mar 3, 2010)

I'll also add that the majority owner of the property is not the bank. It's you and only you: you owe the bank $300,000, a loan that is secured against an asset, which is the house. Just as you get to keep the difference if there is a gain, you will also be liable for the difference if there is a loss. The only way to make the bank take the loss is to declare bankruptcy.


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## GeniusBoy27 (Jun 11, 2010)

Dagman:

I'll agree to that statement. The loss potential is high too. With any investment that's leveraged, the potential for loss is equally high, and can be exponentially higher.

The scenario is real, and the circumstances were ideal. It's finding the gems in the rough, so to speak, that are important. If they're not there, perhaps investing in equities/bonds are ideal.

With regards to the statement, who really owns the place, well, technically speaking if you only put 10% down, the bank really does own the other 90%. But with regards to gains and losses, you're absolutely right. You're responsible.


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## dagman1 (Mar 3, 2010)

Yeah, I don't think we ever really disagreed, I think you took issue with my comment about poor returns, but of course you can enhance returns with any investment with leverage. I don't think leverage on real-estate is actually less risky than leverage on certain blue chip securities, although I think the perception is otherwise, because people are used to buying houses on leverage and securities are more liquid.

Not to nitpick, but technically and practically speaking (for example, you can sell, encumber, renovate, etc. the property as you wish) you do own the real-estate, and you owe the bank the mortgage. It isn't until you default that the bank has the power to take control of the asset.


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## Cal (Jun 17, 2009)

CREA reduces property price expectations again. On the Friday of a long weekend. Nice. Makes me wonder if they know what they are doing, or if they are just trying to squeeze the last bit of juice out of the lemon.

http://www.cbc.ca/money/story/2010/07/30/crea-housing-forecast.html


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## GeniusBoy27 (Jun 11, 2010)

Hmmm ... I don't really listen to CREA. The only thing that matters is buy and sell where I want to buy and sell.

If someone more neutral says something ... I'm far more likely to listen.


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## hughm (Nov 1, 2010)

very interesting discussion. 

I have just experienced the property bubble burst in Ireland first hand. I am relocating to Canada next year and I am looking very carefully at the market and the "fundamentals" over there before buying a house.

My house in Ireland which I bought in 2001, dropped 50% from it's peak in 2007. Allowing for inflation it is now back to the price that I paid for it and prices have not bottomed out yet. That was a very dramatic and painful correction that MOST people didn't think would happen.

All our political leaders said "don't worry" there will be a SOFT LANDING. Our Real Estate professionals all said there was no bubble, that all the fundamentals were good. We still had inward migration (over 500,000 in 4 years) so demand was high. We had the Celtic tiger. Any economists or commentators who dared to say we have a bubble and it was going to burst were branded as unpatriotic and talking down the economy. Basically spoil sports.

But it was all an easy cheap credit fuelled illusion and with the help of an extenal shock, it burst. Granted we had different factors which made it much worse and longer lasting such as huge public sector overspending, inflated salaries, an overdependence on tax revenue from real estate sales and construction jobs and a Gov stimulating the market further. 

You cannot depend on the opinion of people with vested interest in the property market. 

As a rule of thumb, if your house costs more than 25 times the annual rent you could get for it, then it is probably overpriced from an investment perspective? If investors aren't buying houses then prices are usually too high. 

do you have properly stress tested mortgages, especially on the properties bought over the past 3 years at the top of your market? If not then when interets rates increase by 1.5% or if unemployment rises, many people will have difficulty meeting their repayments. This has HUGE knock on affects. Canadians already have a very high % of household income allocated to housing compared to other countries. If the cost of paying for your house increases by 10% that takes a significant amount of money out of ordinary people's pockets which in turn takes it out of the ecomony. 

Would an external force, such as continued world recession, leading to reduced demand for commodities and in particular reduced demand for oil, wood and other building materials affect your economy? Would it lead to lower economic activity and ultimately higher unemployment and LOWER CONSUMER CONFIDENCE.
If so then house prices will fall.

As long as your economy continues to show positive growth and people feel safe and secure and confident and can weather a few rate increases, then the chances of a complete property crash are much lower. 

Personally, from a completely impartial point of view, I believe that your housing market has overheated and prices will come back. Hopefully, thanks to your financial regulation and proper control over your banks lending practices, your mortgages are more robust you will get the soft landing that we missed out on in Ireland.


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## hboy43 (May 10, 2009)

Hi:

Much to my suprise, my 25 year ownership of a house in Ottawa returned a capital gain of 2.9% PA while inflation was something like 2.0% PA. Just got the cheque last Monday. Of course, all the money was made in the last 7 or 8 years, the first 17 or 18 years were weak. So in my opinion, if not an absolute bubble, certainly a relative one in comparison to 2 decades back.

I am delighted to be out of the landlord/real estate business.

hboy43


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## kcowan (Jul 1, 2010)

Canada's housing bubble?


> Recent government data shows that the average Canadian with a two-story home spends almost 50% of his household income on mortgage servicing, with the average is closer to 70% in red-hot markets like Vancouver...
> "the track of Vancouver housing prices matters far beyond the province of British Columbia"


.


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## K-133 (Apr 30, 2010)

http://www.obj.ca/Canada---World/20...y-expert-to-claim-prices-should-ring-alarms/1


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## K-133 (Apr 30, 2010)

And yet another article on the subject.

http://www.moneyville.ca/blog/post/893796--why-we-won-t-see-a-housing-collapse


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## Berubeland (Sep 6, 2009)

Hmmmm, I actually read the Star this weekend was that article after the one that states the men are getting Brozillians in record numbers? or was it before the 6 page insert asking people to send their gold watches for a massive cash payout? 

You might want to read this instead... there's some nice graphs there showing that it's taking longer to sell a home and prices are falling relative to listing price and this in some of the hottest areas in the city 

http://www.leslievillepost.com/2010/11/19/leslieville-riverdale-beaches-real-estate-trends/

Not to mention that earlier this year in May/June prices were up 16% year over year and in the 6 months since then we are now at -1% year over year. That's a 17% drop in a few months.


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## Sustainable PF (Nov 5, 2010)

Large markets are having an appropriate price correction. Smaller cities are not seeing nearly the same results as are being reported in the metropolitan centres.


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## hughm (Nov 1, 2010)

I'm looking to relocate to either Oakville or Burlington. Right now, do you feel the prices are inflated in these areas?

I plan to rent for a year and then buy.

what % correction do you expect to see over the next 12 months?


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## dogcom (May 23, 2009)

What makes you think there has to be a correction in the next 12 months. If we are in a true recovery cycle and the economy creates jobs and so on then maybe house prices go up instead.


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## Jungle (Feb 17, 2010)

hughm said:


> I'm looking to relocate to either Oakville or Burlington. Right now, do you feel the prices are inflated in these areas?
> 
> I plan to rent for a year and then buy.
> 
> what % correction do you expect to see over the next 12 months?


I think we could see a 5% discount in that area, as house buying is slowing down a bit. Problem is that everyone you ask will have a different opinion. Some think we are due for a major crash, others think it will flat line.


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## JAV (Mar 14, 2010)

dogcom said:


> What makes you think there has to be a correction in the next 12 months. If we are in a true recovery cycle and the economy creates jobs and so on then maybe house prices go up instead.


That's a very interesting scenario where prices continue to rise. Can you offer a theory? The argument these days seems to be between sideways prices or a correction.


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## dogcom (May 23, 2009)

The word recovery describes the possibility of house prices going up in the next 12 months. I was reading in the Financial Post today that Canadian businesses are pouring money into productivity enhancing machinery and equipment to the tune of a 28.7% increase in the 3 months period ended Sept. 30.

So machinery and equipment usually means Ontario so that is good for Ontario. Also as jobs increase wages will be steady or could climb and consumer confidence rises. More people now qualify for credit pushing the housing market. I know I am playing a little devils advocate here but still a recovery is here at this moment.

Look at Vancouver in 2007 you would be certain that housing was heading down and down hard. On another forum I was laughed at and called stupid for owning real estate. Well the opposite happened and my house many others in Vancouver have since increased a lot. Does that mean it might crash this year. Yeah sure it might but that is the way it is.


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## JAV (Mar 14, 2010)

I suppose the word recovery would imply a return to normal times and values rising. However, one could not describe the last 15 months in Canadian real estate as normal. Since rates are bound to go up and wages already lag house prices, it would have to be incredibly strong growth to push values higher. It's possible, not sure how likely though given that growth stumbled in Q3 (interestingly a drag on the economy downward was real estate). We'll see. Not saying prices will crash, but they are already down in Toronto.


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## kcowan (Jul 1, 2010)

JAV said:


> ...Not saying prices will crash, but they are already down in Toronto.


During the last correction, prices edged downward over a period of seven years. This would be classed as a correction rather than a crash. Even flat would be a reversal, especially in inflationary times.


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## the-royal-mail (Dec 11, 2009)

hughm said:


> I'm looking to relocate to either Oakville or Burlington.


Where will you be working?


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