# Understanding Housing Collapse



## Iccarus (May 25, 2012)

Been reading this forum for a long time, and have been able to learn a moutain of information from the many self-made experts in here. One thing I have never been able to fully grasp though is why owning a house that you paid 250,000 for, and having housing prices plummet to where the house you bought at 250,000 is now worth 190,000 forces people to sell. Their mortgage payment has not changed from when they first purchased the home (unless interest rates creeped up a bit) but why is this generating forclosures? Are people put off by the fact that their house is undervalued? Won't corrections come to fruition and provide them with an apprecation in value over time again? Maybe I'm missing something. Thankyou to anyone who can give me a better understanding of what's going on here.


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## Jungle (Feb 17, 2010)

You said it, as long as you can make the payments your house will be yours. The OSFI just released they are going to back off possible legislation that would make banks approve you all over again every time your mortgage term is up. So change a job with lower salary/ mat leave whatever, and you could be screwed. They are not doing this now for the reason that if you are showing history of making payments OK, that is enough reason to leave you alone. 


However, losing your job, becoming disabled, etc or have financial hardship, you could be forced to sell.


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## HaroldCrump (Jun 10, 2009)

Iccarus, the way to look at this situation is this : house prices do not drop 25% ($250k > $190K) for no reason.
There is usually a recession going on, a credit crunch going on, or some other significant reason that causes such a drop.
That same reason also causes widespread unemployment.
Often times, both spouses are left without work at the same time (the "Two Income Trap").

So employment is the key factor here that determines whether people sell or not.
And when there are more sellers than buyers, what happens - yep, prices go down.


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## Iccarus (May 25, 2012)

HaroldCrump said:


> So employment is the key factor here..


Ah yes, I forgot to factor in the cause of the downturn. Its the combination of the lack of income and the devaluing that is causing it all. Thankyou very much, it seems so simple now, I feel kind of dumb for not connecting the dots.


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## mind_business (Sep 24, 2011)

To add to Harold's post, there's a lot of people who can just barely afford their mortgage and living expenses during good times, let alone during a recession ... even when only one spouse loses their job.


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## phrenk (Mar 14, 2011)

Jungle said:


> The OSFI just released they are going to back off possible legislation that would make banks approve you all over again every time your mortgage term is up.


The fact that OSFI backed off from legislation requiring re approval when mortgage term is up or requiring HELOC to be amortized is a clear sign they are getting extremely nervous and know that the slightest catalyst will have bring the housing collapse in full swing.


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## fraser (May 15, 2010)

We are in the process of selling our house and downsizing.

Our real estate agent tells us that when the mortgage expires and is up for renewal, some lenders are asking for a new appraisal on the home. In some cases this appraisal comes in at less than the outstanding mortgage balance. The bank then asks the mortgagee to pay the mortgage down to the appraised value. The bank or mortgage company does not want, for example, to hold a $250K mortgage on a house that is now only worth $190K. Our agemt tells us that some people are being forced to sell. This is in the Calgary market where prices are still not what they were at the height of the market in 2007/2008. This is especially true for those homes where the owner may be depending upon some sort of mortgage helper that the bank will not include in their calculations. Not sure how common it is, but this is what we were told. Not a great situation for some folks to be in.


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## Potato (Apr 3, 2009)

Some people just have to sell: Howard mentioned unemployment, but there's also divorce, having to move for a job, and I'm sure some other factors that aren't coming to mind at the moment. If you're underwater, then that process gets even more painful and could lead to foreclosure. Plus there's always a (very) small background level of people that just simply have bad credit and have to bail on their house or get foreclosed on when they run into any kind of large financial stress (like a major repair, or an emergency last minute bachelor party in Vegas).


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## Rusty O'Toole (Feb 1, 2012)

Typically, in Canada people are not forced to sell because they do not have giant mortgages they can't afford to make payments on. When real estate dips, they put their house on the market at an unrealistic price and it sits there forever. They refuse to take a loss. Eventually they take the house off the market and decide to keep it, maybe fix it up, add another room or something rather than move.

This is why dips in Canada are usually small and short lived. There may be a few houses dumped on the market because the sellers have to move, or divorce, death etc. but usually the listings get thin in a down market.

The American situation is totally different. In the US in the 2000s they were handing out mortgages like candy at Halloween. 100% financing or more, to people who did not qualify by any rational standard, mortgages that had to be renewed every 2 or 3 years, and whose only hope was that prices would rise enough to bail them out. When prices dipped it started an avalanche of defaults and foreclosures that has not ended yet.

Basically the whole thing was a series of scams, where crook mortgage lenders and big banks kept passing the hot potato to some other sucker until Uncle Sam ended up bailing out the whole mess and sweeping it under the rug.


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## sags (May 15, 2010)

I would think HELOC loans in an area where home prices are falling, would get close scrutiny from lenders.


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## HaroldCrump (Jun 10, 2009)

fraser said:


> Our real estate agent tells us that when the mortgage expires and is up for renewal, some lenders are asking for a new appraisal on the home. In some cases this appraisal comes in at less than the outstanding mortgage balance. The bank then asks the mortgagee to pay the mortgage down to the appraised value. The bank or mortgage company does not want, for example, to hold a $250K mortgage on a house that is now only worth $190K.


I am not sure if that is entirely true.
You see, the CMHC (i.e. the tax payers) have guaranteed the full _appraised_ value of the home.
The CMHC owes the bank the extra $60K (in your example).

The bank does not have the risk, it has been transfered to CMHC.
In your example, the home-owner can say "screw you" to the bank and walk away.
Sure, their credit will be trashed, they can't borrow for 10 years, but they can walk away.

The bank will then turn around, sell the property for $190K, and ask the CMHC to foot the extra $60K.
That is the whole point of CMHC guaranteed appraisals.


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## Just a Guy (Mar 27, 2012)

I'm surprised no one has brought up bank capitalization. The bank is required to hold a certain amount of assets and then are allowed to lend out a multiple of that amount. If the bank's capitalization is lowered, the call in loans, if you can't pay, they foreclose and try to sell the asset. This lowers their loans and increases capitalization. It doesn't happen much in Canada, as the banks aren't the investment houses you see in the states, but it played a role down south.

Also, if you read your mortgage, there is a clause where they can ask you to pay the difference between the appraised amount and the loan...but if you're a solid customer, they generally leave you alone. They have enough problem cases to worry about, not to mention the problems that would ensue from them calling in all the underwater loans.


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## Jungle (Feb 17, 2010)

I think the bank can also sue you in Canada if that's the case. (from what I've read) ^^

So it could be a painful walking away, unlike in the states where you just give your keys back to the bank. Maybe that is the difference.


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## HaroldCrump (Jun 10, 2009)

There is no point suing someone who can't even make a mortgage payment.
Even if they get a judgement againt this person, what are they gonna take (other than the house)?
There are probably no wages to garnish anyway.


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## Berubeland (Sep 6, 2009)

My thoughts are that public sentiment is the single most important factor in the downturn. 

Many States are recourse in the US and rates of default are about the same. 

First of all, a house is fundamentally not an investment it is a place where people live to get out of the cold and wet. 

For the last 20 years real estate has been on an upward trajectory. Not always but in general. Everyone "knows" this. Your mom knows, your sister knows, your spouse knows etc. 

So when you have a valuable increasing asset, no one wants to let go of that. People will beg borrow and steal to make those payments. 

Now imagine a world where the house you bought 10 years ago and made the payments on is worth less than you paid for it. So your wife loses her job, how motivated are you to keep paying specifically towards this loser asset? Especially if you can go rent the same or similar house down the street for half the price? What exactly are you killing yourself for? Why skip a meal or eat KD for a week to keep screwing yourself with paying double to live in a place worth less than you paid for it 10 years ago? 

I've been observing people on this planet for 38 years and I can assure you that people find reasons and justification for their actions in whatever circumstances they find themselves in. In some cases you can see people manufacturing excuses for their behaviour right before your eyes. That's just the way people are. 

People will hate houses and hate real estate by the time this winds up. There will be no newbie investors coming on CMF asking if they should buy a house and rent it out. It will seem ludicrous to even suggest it. Of course that will be the best time to buy.


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## Rusty O'Toole (Feb 1, 2012)

Just a Guy said:


> I'm surprised no one has brought up bank capitalization. The bank is required to hold a certain amount of assets and then are allowed to lend out a multiple of that amount. If the bank's capitalization is lowered, the call in loans, if you can't pay, they foreclose and try to sell the asset. This lowers their loans and increases capitalization. It doesn't happen much in Canada, as the banks aren't the investment houses you see in the states, but it played a role down south.
> 
> Also, if you read your mortgage, there is a clause where they can ask you to pay the difference between the appraised amount and the loan...but if you're a solid customer, they generally leave you alone. They have enough problem cases to worry about, not to mention the problems that would ensue from them calling in all the underwater loans.


It's worse than you think. Let's say a bank has reserves amounting to 3% of their capitalization. This is the case with a lot of banks today. Now suppose they re evaluate all the mortgages they have on their books to reflect collapsing real estate and it turns out their loan portfolio is only worth 80% of what they thought. Their reserves are wiped out and they are technically bankrupt.

This is why so many US banks are in deep trouble, and why people are still living in their houses 3 years after they stopped making payments. They can't foreclose and take all those losses because if they do, the bank is ruined. But as long as they do nothing they can hold that mortgage on the books at face value.


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## crazyjackcsa (Aug 8, 2010)

To go along with sentiment, there's also the feeling of "getting out while the getting is good," even if it isn't. If your house lost 20% in the last year, and you here in the media that housing is going to lose another 20% you may try to sell at a loss, or just give up on the whole thing. At which point it becomes self fulfilling.


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## Chris L (Nov 16, 2011)

Berubeland said:


> My thoughts are that public sentiment is the single most important factor in the downturn.


This is exactly it. People follow their emotions which are tied directly and indirectly to other people's emotions. In other words, people herd. Once people decide that RE isn't god, they'll move on to something else en masse. 

I was at a real estate investment club meeting and one investor was dying to just grab any student house she could find. She was literally begging another investor to part with his student house. She never even asked him for a price. She just wanted it.

When people like that aren't around anymore, then RE is going to drop.

It's funny trying to apply 1 reason as to why RE dropped in the US. People think it had to do with easy credit or bad borrowing when all it had to do was with a change in buyer sentiment. All of the sudden, buying RE wasn't what people did and so prices dropped. Now you can't convince masses of people to buy. The real investors are snapping up RE (capitulating) the market.

I just sold off one of my rentals as well. I'll wait until things look favourable (if ever). If not, that's fine. I'm not investing in RE because I see other people do it or because of what it's done in the past.

So, to sum up...people sell off because it's not cool anymore. They want to do the cool thing and the new cool thing in some near future will be renting. The life of a renter is going to sound pretty good in a few years. You can probably give plenty of good reasons right now to justify renting over buying. The only difference is that the mass of people doesn't "know" them right now, but they will. It will be all over tv, radio, and your friends and mother-in-law will be telling you how cool and smart it is.


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## Rusty O'Toole (Feb 1, 2012)

"It's funny trying to apply 1 reason as to why RE dropped in the US. People think it had to do with easy credit or bad borrowing when all it had to do was with a change in buyer sentiment. All of the sudden, buying RE wasn't what people did and so prices dropped. Now you can't convince masses of people to buy. The real investors are snapping up RE (capitulating) the market."

That's not it. Some big banks and mortgage lenders turned the mortgage and real estate market into a giant trillion dollar Ponzi scheme. Eventually the whole scam collapsed, the way pyramid schemes always do. The government bailed out the crooks and swept the problems under the rug. The whole real estate market is still poisoned by bad mortgages and frauds that have never been sorted out or prosecuted and probably never will be.


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## Chris L (Nov 16, 2011)

Rusty O'Toole said:


> "It's funny trying to apply 1 reason as to why RE dropped in the US. People think it had to do with easy credit or bad borrowing when all it had to do was with a change in buyer sentiment. All of the sudden, buying RE wasn't what people did and so prices dropped. Now you can't convince masses of people to buy. The real investors are snapping up RE (capitulating) the market."
> 
> That's not it. Some big banks and mortgage lenders turned the mortgage and real estate market into a giant trillion dollar Ponzi scheme. Eventually the whole scam collapsed, the way pyramid schemes always do. The government bailed out the crooks and swept the problems under the rug. The whole real estate market is still poisoned by bad mortgages and frauds that have never been sorted out or prosecuted and probably never will be.


There was a demand by people who acted irrationally toward an asset. It was lubricated by easy credit, not created by it. It was people's sentiment that lead to it's demise and easy money was simply the enabler, not the cause. The actual cause is the people - the end user.

What will cause RE in Canada to decline? Let's look to Vancouver. What's causing it to decline right now? All of the rest of Canada seems to continue booming, and yet Vancouver is declining. Why? Buyer sentiment is changing...and yet credit still flows freely. Canadian RE has been doomed ever since it decoupled from fundamentals like a solid economy and rising incomes.

What's the cause of a crack addict? Crack?


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## Chris L (Nov 16, 2011)

Let me try this another way. 

The dealer isn't the cause of drug abuse. Drug abuse is created by the end user. No one shoved mortgages up anyone's you know what.

I would go one step further by saying that US RE was crashing before the drug was taken away. 

The drug dealer took the drugs away when it was obvious the addict wouldn't be able to repay the dealer. Something similar will happen in Canada and whatever precipitates it will be (wrongfully) called it's cause. However the real cause is human emotion.

It's a confusion of cause and effect. 

Watch for a change in buyer sentiment to precipitate a drop in Canadian RE. It's already starting to happen. You can see it in the comments section of the globe and mail. Two years ago, the comments were all pro RE. Completely backwards from right now. Now people even hate RE agents of all people...you know, another crack dealer. Pretty soon it will be greedy banks. These are all illusions. The cause is in the mirror.


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## kcowan (Jul 1, 2010)

Chris L said:


> Let's look to Vancouver. What's causing it to decline right now? All of the rest of Canada seems to continue booming, and yet Vancouver is declining. Why? Buyer sentiment is changing...and yet credit still flows freely. Canadian RE has been doomed ever since it decoupled from fundamentals like a solid economy and rising incomes.


Vancouver demand by Chinese investors has dried up. It was the quick path to immigration but no longer. Locals have not got the message yet but they will.


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## Chris L (Nov 16, 2011)

kcowan said:


> Vancouver demand by Chinese investors has dried up. It was the quick path to immigration but no longer. Locals have not got the message yet but they will.


HAM [hot asian money] was slight of hand invented by real estate agents. It represented an extremely minor subset of buyers, but it worked to fan the flames and drive prices up even higher. If you do enough research, you'll find that the helicopter rides hired out to these Chinese "buyers" were actually local real estate agents posing.

I didn't mention in the other posts that Canadian attitudes about real estate are quite resilient and we'll weather the storm more than in the US. Meaning, even if our equity drops significantly, if we can, we'll hold on for the ride and resist selling.

Therefore, while houses will change hand at lower valuations, it will happen only at the fringe to people who have to move, or can not make other sacrifices to keep their home. I do however think that this margin is quite significant and larger than ever before. It's also probably going to take a decade to unravel. The downsizing boomers will come in later on to add even more downward pressure on prices as they come to realize that home ownership isn't for the elderly. A house will once again become nothing more than a home (as it was when boomers first bought). We'll repeat the cycle when the average person has forgotten the lesson learned.


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## Rusty O'Toole (Feb 1, 2012)

"Let me try this another way. 

The dealer isn't the cause of drug abuse. Drug abuse is created by the end user. No one shoved mortgages up anyone's you know what."

But they did shove mortgages up anyone's you know what. Dozens of fly by night mortgage companies used the cleverest advertising and promotion tricks they could find, to entice people into signing up for mortgages. The loan officers for these companies were induced to maximize fees and profits using every trick they could find. People with good credit were signed up for sub prime mortgages because the fees and interest rates were higher. Borrowers were induced to lie on their applications. If they wouldn't lie, the company would fill out the forms and lie for them. Lenders pushed loans they knew the borrower could never pay off. They even offered what they called NINJA loans (no income, no job, no assets) and what they frankly called "liar's loans".

The end they had in view was to maximize their profits by sucking in the public on bad loans. They didn't care what happened to the loans or the borrower. They cared only for their own fees.

These fly by night mortgage lenders quickly flipped the loans to one of the big banks like Goldman Sachs for a profit. The big banks then bundled or packaged the loans together and used them as collateral to borrow from other banks, pension funds, hedge funds etc. by selling mortgage backed bonds. They knew perfectly well the mortgages were bogus. All they wanted was to palm them off on a sucker before they blew up. It is a documented fact that while one department was selling these to investors, another department was buying credit default swaps on them, confident that they would soon blow up. There are emails in which these bank employees referred to the investment they were selling as "vomit" and "dog crap".

The rating agencies got in on the action too. They would rate practically anything investment grade if it was packaged right and you paid the right fee.

The whole thing was a scam from top to bottom. If there were no innocent parties, the poor suckers at the bottom who only wanted a decent house to live in, were the least sophisticated and the least to blame. They only did what they were supposed to do, what they have been told to do all their lives, take part in the American Dream and listen to the financial advice of the big banks.

Eventually the whole scam exploded as all the world knows. Then the big banks got a bailout from the government and whole mess got shoved onto the taxpayers. Since then the suckers have lost their homes, their savings, their jobs, their freedom and possibly their minds.

The big banksters continue to collect their multi million dollar bonuses.


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## Rusty O'Toole (Feb 1, 2012)

I also disagree with the thesis that drug abuse problems are created by the end user. All the evidence I have seen is that drug use is not a very big problem until someone dumps large amounts of a drug on the market. The drugs create the demand, not the other way around. This has happened several times in the last 75 years in the US. In every case the CIA was behind the sudden influx of drugs. It was part of their program to raise money to fight Communism by supporting the rebels in whatever country they were interested in, and the rebels' finances were always based on drugs.

If you don't like the CIA theory, go look up the Opium Wars in China in the 1840s. England wanted to sell large quantities of Indian opium in China to redress their balance of trade on Chinese tea, and to pay the tax deficits of the Indian government. The Chinese government was opposed to turning their people into drug addicts. The English won, and opium became a terrible problem in China.

This is history, and completely verifiable. It may not be the history you learned in school, or see on TV, but it is true nevertheless.

To go on with the story, China did not succeed in stamping out the opium trade until the Communist takeover in the late 40s. The ragtag and bobtail of Chiang Kai Shek's army ended up in the mountains of Vietnam, Laos and Cambodia. When the CIA went looking for rebels to fight against Communist North Vietnam, that is where they found them. Air America was set up to support them and one of its biggest jobs was exporting opium. A lot of American soldiers in Vietnam took drugs and a lot of drugs were sold into the US and around the world. This is why there was so much heroin in the US in the fifties and sixties.

There is nothing very secret about this, not now. It was very hush hush at the time but these things have a way of coming out, after they no longer matter and it is too late to do anything about them.

You could also look up the role of the CIA in flooding Los Angeles with crack and cocaine in the eighties, in support of the Sandanistas. Or the way Bill Clinton protected the flood of drugs coming through Mena Arkansas when he was governor. It's all documented now, now that it no longer matters.


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## sags (May 15, 2010)

I could understand a person staying in their undervalue home, if it was the perfect home for them, had great scenery or whatever turned their crank..............but people were paying $800,000 to 1 million or more for crack shacks.

Spending the rest of their life in a dump wasn't the plan. 

They thought they were going to unload it to a greater fool for a tidy profit.

It doesn't look like that is going to happen now.........at least in Vancouver where prices have fallen and listings are the highest they have been in 10 years.


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## Rusty O'Toole (Feb 1, 2012)

Vancouver and Toronto are weird but they are not Canada. Take a map of Canada and color Vancouver and Toronto in red. You will have 2 tiny dots on a large map. The rest of the country is a very different market, in fact it is many different markets.

I bought houses in small town Ontario in the last year or 2, for $85,000 to $175,000 that would have cost half a million, a million or more in Vancouver or Toronto. I don't understand those markets and wouldn't touch them. I'll stick to the other 99.999% of the country.


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## kcowan (Jul 1, 2010)

The thing about the collapse, is that is dependent on attitudes. It has nothing to do with logic. And if housing collapse in Toronto, it is game over. That does not matter to savvy investors outside the GTA, but it is the way Canada goes.


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## Berubeland (Sep 6, 2009)

Has anyone considered the fact that part of the reason there was this loosey goosey credit situation in the USA is because everyone, mortgage brokers, bankers, real
estate agents were also drinking the Kool Aid?

Lets take for example the ramification of foreclosure in a rising market...nothing even a year later, there's equity in the house. So why would any of these people care if there is a foreclosure in a year or two, they will be able to get all/most of their money back without a problem. There was a complete lack of understanding about the risks of widespread foreclosure. 

In a falling market, it's an entirely different story. My theory is that most people including the ones in the mortgage industry and banking thought everything would be just fine. Also individually they thought they were only approving one or two bad ones and thinking it didn't matter simply because no one foresaw how the entire market would unravel. Can you predict which raindrop is the one that overcomes the accretion point? 

Our housing market is like bone dry tinder just waiting for a spark to ignite it. The actual spark doesn't matter.


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## uptoolate (Oct 9, 2011)

I enjoyed reading the thread. I didn't see it mentioned (though it may have been) but the book 'The Big Short' by Michael Lewis was a great review of how mortgage debt that was essentially junk status was packaged and then sold and resold as solid investment grade derivatives. The details will never be entirely known by the public of course but the book and others like it give a taste of how the average Joe was taken for a ride. At the end of the day, I think Jack Nicholson said it best, "You can't handle the truth." We'll never know for sure and I'm sure many of the experts still don't know how it got away from them - and of course it's not that important to them as almost all of them got away with it! Ca-ching! (and that isn't the sound of cell doors closing!)


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## Rusty O'Toole (Feb 1, 2012)

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.


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## Chris L (Nov 16, 2011)

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.


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## Lephturn (Aug 31, 2009)

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.c.../caamps-spring-mortgage-report-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?


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## Chris L (Nov 16, 2011)

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.


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## blin10 (Jun 27, 2011)

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


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> 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


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## Rusty O'Toole (Feb 1, 2012)

Chris L said:


> 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.


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## Chris L (Nov 16, 2011)

Rusty O'Toole said:


> 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.
> 
> ...


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.


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## Jay (May 9, 2012)

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.


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## kcowan (Jul 1, 2010)

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


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## Chris L (Nov 16, 2011)

Jay said:


> 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.


Don't forget "investors" who are either breaking even month-to-month hoping for price appreciation or even investors who are subsidizing tenants by a few hundred a month. Once price declines seem certain, there will be a huge rush for the exit.

I don't know many people who don't have investment properties anymore. Those who don't are certainly talking about getting one. Ten years ago, I was all by myself, I felt unique, and Robert Kiyosaki was just getting the word out! It's amazing to talk to people about RE now...everyone wants to grab a piece.


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> Don't forget "investors" who are either breaking even month-to-month hoping for price appreciation or even investors who are subsidizing tenants by a few hundred a month. Once price declines seem certain, there will be a huge rush for the exit.
> 
> I don't know many people who don't have investment properties anymore. Those who don't are certainly talking about getting one. Ten years ago, I was all by myself, I felt unique, and Robert Kiyosaki was just getting the word out! It's amazing to talk to people about RE now...everyone wants to grab a piece.


Interesting ... YMMV as when I was in Waterloo, I had five co-workers with rental properties. Here in Ottawa, I have yet to find anyone, unless renting a room counts (i.e. one person).

The "DIY buy low, fix, rent for a couple of years and sell for a gain" RE investor can't find anything that is cheap enough or has a chance of being cash flow positive so he is out of the market. He'd be happy to change this, if a bargain comes along.


... not that this is a scientific survey ... :biggrin:


Cheers


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## Chris L (Nov 16, 2011)

I'm in a university town so everyone has a student rental or wants one because it's the only RE asset with the potential to be cashflow positive. However, most go only semi-full and getting tenants is a lucks game due to a huge surplus of these houses. The quality of tenants is also a crap-shoot. However, people need to live through the experience on their own before they realize it's not for them. It would be an interesting survey to know just how many landlords their are right now versus a few years ago. You'd think it would be tied to home-ownership? At 70% homeownership, how many are left renting? I think it's decoupled from this stat though. As in I think many units are vacant and being subsidized by low interest rates and the owners.


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## Lephturn (Aug 31, 2009)

Chris L said:


> 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?


How about this - it hasn't increased in real price at all. The currency has been devalued over 10 years so it has only increased in nominal value but not in terms of purchasing power.


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## Berubeland (Sep 6, 2009)

Are you in North Bay Chris? I happen to like North Bay as a long term investment because of it's geographic position as a hub of all major Highways going through the north.

The only people who seem to want student rentals are the people who don't have on or haven't had one. I do know one guy who made a fortune renting out rooms to students but...he was there everyday monitoring, fixing and having a real presence there. There's not a management company on earth that can provide that level of service. Most of the people who make money in student rentals are there daily or every other day.


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## Sampson (Apr 3, 2009)

Forget student housing.

In Calgary we are fortunate in some senses - although finding cash flow positive properties is very rare and largely dependent on rock bottom interest rates.

However, we have an excellent tenant pool. Many young professionals, mid-twenties to mid-thirties whom have decent paying jobs, often expensive hobbies (i.e. spending much of their hard earned cash and saving at relatively low rates), and are on the cusp of home ownership. Many are looking to find a place for 2-5 years, save up some money, then buy a home for themselves.

These are also people who are beginning to settle down and therefore want a place to feel like and call home, and often a very tidy. I posted some of my experiences on a different thread, but even though temptation might arise to buy more real estate, I would have to be more selective of the property and its ability to attract a specific type of excellent tenant pool. If one were ever to rent to students, aim for graduate students. Similar MO as above sample tenant, but no money and sometimes longer term.


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## Chris L (Nov 16, 2011)

I grew up in North Bay and am currently living in Southern Ontario. North Bay has been stagnant for my entire life although prices are astronomical right now. The tenant pool is atrocious with lots of bad tenants. Things my be different now although my brother owned a rental there 7 years ago and sold out to move up here. I don't see much of a future for the North although who knows. It's an AWESOME place to summer though and possibly retire. It's got great access to plenty of lakes and nature.

Here is the current sentiment, and I think this counts for something: 67% agree with a crash and 33% against. This wasn't so just a while ago. When the mass changes their ideas....

http://www.theglobeandmail.com/globe-investor/great-debate/


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> I'm in a university town so everyone has a student rental or wants one because it's the only RE asset with the potential to be cashflow positive. However, most go only semi-full and getting tenants is a lucks game due to a huge surplus of these houses. The quality of tenants is also a crap-shoot. However, people need to live through the experience on their own before they realize it's not for them. It would be an interesting survey to know just how many landlords their are right now versus a few years ago. You'd think it would be tied to home-ownership? At 70% homeownership, how many are left renting? I think it's decoupled from this stat though. As in I think many units are vacant and being subsidized by low interest rates and the owners.


Ahh ... that explains a lot. When I left Waterloo, a lot of new places were being completed in preparation for the double-cohort when grade 13 was retired. I always wondered if that would drive up the vacancy rate about four or five years later when the numbers returned to more of the usual.

The one place I rented in university, the landlords though they'd be in the business for a long time. However, as they had to deal with tenants messes, the quality of tenant going down and their sons refusing to provide cheap labour, at the end of the day, they decided about six years was plenty.

They made out well capital gains-wise as they claimed to have bought for $60K, put some money into converting the dining room, garage and basement into four additional rooms. I believe I saw it listed for $135K and it sold quickly.


Maybe the local landlord's association (if willing) could provide some perspective?


Cheers


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