# How to best hedge against a possible collapse of the CA real estate market?



## lowent (Oct 1, 2009)

In the vein of "hope for the best, plan for the worst", how would one best hedge against a collapse of the CA real estate market (aside from selling home and renting)?

Short (or buy puts of) REITs?

Short CA banks?

Buy USD assets?


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## Belguy (May 24, 2010)

This doesn't address your questions, but I thought that this related article might be of interest:

http://www.economist.com/node/21540231


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## andrewf (Mar 1, 2010)

The bubble in Canadian real estate is really a bubble in residential real estate. I don't think we necessarily have a problem with commercial RE. Since the recession of the early 90's (that created the Bay Adelaide stump--partially finished structure in DT Toronto--that stood as a reminder of the dangers of commercial RE excess for 20 years), developers have become much more cautious in Canada, at least when they are building something for their own portfolio. For residential, that discipline is gone. The market for new rental accomodation is nearly non-existent, so developers are largely selling condos to undisciplined individual investors (specuvestors h/t rachelle) to then rent out at a loss. This is the part of the market that is at great risk. It's also the hardest to get exposure to, since there are no REITs crazy enough to operate in this market. There are some apartment reits, but they are not quite the same thing.


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## jcgd (Oct 30, 2011)

I keep it simple and don't over-weight with RE. Think of it as an allocation just like everything else. (RE including houses, commercial building, REITs, etc.)If you owe $75k on a mortgage but have $200k savings you are probably okay. If you have a $500k mortgage and $3472 in savings you are facing a lot of risk and are completely over weighed in real estate.


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## andrewf (Mar 1, 2010)

Your mortgage isn't RE exposure, it is a 'negative bond' or 'short bond' exposure. Your RE exposure is the value of the properties you own.


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## jcgd (Oct 30, 2011)

I see a mortgage like leverage. If the house loses value you still over the debt. Is this wrong?


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## kcowan (Jul 1, 2010)

jcgd said:


> I see a mortgage like leverage. If the house loses value you still over the debt. Is this wrong?


No that is correct. However your equity play on RE is more dramatic. So if you have 10% equity and the property increases by 10%, you get 100% return. But if it decreses by 10%, you are wiped out. The mortgage does not change so it correctly considered negative bond.


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## jcgd (Oct 30, 2011)

Oh, I see. Thanks for the explanation.


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## crazyjackcsa (Aug 8, 2010)

You could see your house, and then buy another after the collapse. Or what you could do is sell houses you don't own, and then buy them for less when the collapse occurs.


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## 50invester (Feb 10, 2010)

I know many on this fourm will chuckle, but Garth is no idiot. Read some of his blog. Just don't read everyday as it will get monotenus. 

http://www.greaterfool.ca/


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## Causalien (Apr 4, 2009)

After much searching. This is the only one I find where one can most easily bet against CA real estate market.

https://www.intrade.com/v4/markets/contract/?contractId=734327


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## lowent (Oct 1, 2009)

Another option might be to short the mortgage insurer Genworth (MIC) as a proxy for the overall CA real estate market.


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## rookie (Mar 19, 2010)

50invester said:


> I know many on this fourm will chuckle, but Garth is no idiot. Read some of his blog. Just don't read everyday as it will get monotenus.
> 
> http://www.greaterfool.ca/


i completely agree with him and hence was looking for ways to short the GTA housing market. my feelings got strengthened when my masseuse mentioned that they bought a home in the GTA for 800k. both she and her husband are massage therapists, have 2 teenage kids and they used the gains from their town home to put down 20% on that house. i can make an approximate guess on what their income would be. if they can get a mortgage for 600k...

when i questioned her, her answer was 
"interest rates are so low now and they will be for time to come. world economy is not doing so well so i am confident that rates will not go up for a long time"

and with this outlook, out she goes and gets a 600k mortgage, being in the service industry!!!


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## Causalien (Apr 4, 2009)

Rookie. I just want to make absolu-fricking-sure that there's no bullshit in your story. 

Because this is equivalent to the shoe shiner buying stock story. If this is happening. **** is about to hit the fan.


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

Why the surprise? We've been reading tons of evidence about this here in CMF for months/years. Young couples spending $640K on houses with baby and 2nd one on the way. Commuting, no e savings, no money for DP and then later down the line when they've built up equity they are right away leveraging RRSPs or HELOC to buy more housing. 

According to some posters here, the only way RE is headed is up.

Don't wonder why interest rates remain low - the gov't and RE lobby doesn't want the housing gravy train to come crashing to a halt. This is also good for municipalities, don't forget, who are collecting property tax % based on these inflated prices.

I think my income is quite good/above average but sorry, there is no way I can afford a $640K house, no friggin' way.

When they are forced to raise interest rates then say goodbye to your "equity" and have fun paying back your HELOC.


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## rookie (Mar 19, 2010)

okay, i have another appointment with her tomorrow. so hold on to your guns till my response. i will try to get more accurate details without seeming (hopefully) nosy. but here are the hard facts that i already know:

1) both husband and wife are RMTs
2) 2 teenage kids with PS3s etc
3) 2 cars
4) 800k home. i know thats the going price in the area she mentioned for a 3500 sqft SFH
5) 20% down. she mentioned her mortgage payments are about 2200 per month. i just now pulled out a mortgage calculator and thats approximately the figure it shows for a 600k mortgage amortized over 30yrs at a variable rate of 2.15%
6) they immigrated to canada in 2005/2006. she went to RMT college for 2 yrs after that. so no income during that time.

i hope she is not lying though. most of the personal stuff, i already knew. so she cannot be lying about them unless she goes around with a fictitious persona. only the mortgage part is what i learnt from my last visit and i do not see any reason for her lying to me about that.

let me know if we shd get any other data from her. i will keep her identity confidential. hope we are not intruding too much into her personal life. if you guys think so, do let me know and we will stop here.


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## rookie (Mar 19, 2010)

come on TRM, a 640k home after 20% down would cost you less than 2k per month over 30 years (from the same calc). cant you afford just that much???


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## Causalien (Apr 4, 2009)

Because of the ones I read, their incomes vs the houses they bought still seems possible to muddle through albeit painful. At least according to my own estimate of their income. But 640k... I won't even touch that with double what I used to make in a stable job, of course, I am assuming massage therapist makes less than my old stable job.

And I've been predicting a rise in interest rate for the past 2 years and have been wrong. So I am more cautious on this front. We won't raise interest until US is out of recession. But by that time, it's our turn to go into recession.


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## Causalien (Apr 4, 2009)

Yeah, I think we are overstepping our boundaries. Just ask her whether or not she's worried about meeting the next mortgage payment and if she'd like some experts going through her numbers and making suggestions. 

I already know what I need to know.


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## rookie (Mar 19, 2010)

its not just the constant and low interest rate they are banking on. they are also relying on ever increasing value. she seemed happy because a similar home on her street was sold for 900k recently and thats how our conversation began. she was happy that her equity had increased by 100k in less than a year.


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## Four Pillars (Apr 5, 2009)

Causalien said:


> Yeah, I think we are overstepping our boundaries. Just ask her whether or not she's worried about meeting the next mortgage payment and if she'd like some experts going through her numbers and making suggestions.


She's already bought the house. If she's not asking for help, I'd say leave well enough alone.


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## blin10 (Jun 27, 2011)

people been saying how bubble will burst since 2006, and what happened?


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## rookie (Mar 19, 2010)

well US bubble did not burst until 2007, although people started betting on it from 2003. agreed that canadian lending is much more contained than theirs, but the prolonged low interest rate is definitely hiding a lot of wolves in sheep's clothing.


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## hboy43 (May 10, 2009)

rookie said:


> . both she and her husband are massage therapists, have 2 teenage kids and they used the gains from their town home to put down 20% on that house. i can make an approximate guess on what their income would be. if they can get a mortgage for 600k...


ROFL. Many here consider me foolish because I buy stocks with a 1.5% to 5.5% (portfolio yields 3.4% in aggregate) dividend with borrowed money at 3%. Oh, debt is about $230K against equity > $1M. So I have about 77% "down". Not paying for any kids, cars, or houses currently.

It just boggles my mind what people pay for RE in the big cities.

hboy43


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## blin10 (Jun 27, 2011)

rookie said:


> well US bubble did not burst until 2007, although people started betting on it from 2003. agreed that canadian lending is much more contained than theirs, but the prolonged low interest rate is definitely hiding a lot of wolves in sheep's clothing.


usa real estate didn't get destroyed because of interest got high so I don't see your point here...


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## rookie (Mar 19, 2010)

so what do you think is the cause for home prices to increase more than 2x from 2002 to 2008?


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## Lephturn (Aug 31, 2009)

rookie said:


> so what do you think is the cause for home prices to increase more than 2x from 2002 to 2008?


Easy - low interest rates combined with the securitization of mortgage debt and the socialization of mortgage guarantees. In the US that is.


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## HaroldCrump (Jun 10, 2009)

Lephturn said:


> Easy - low interest rates combined with the securitization of mortgage debt and the socialization of mortgage guarantees. In the US that is.


And how is that different here?
Each of those 3 things you listed are present here as well.


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## Causalien (Apr 4, 2009)

Nothing in the 3 process can be easily shorted. That's the only difference I can see.

FNMA and FMAC were public. I'd like to short CMHC to tell our politicians that I don't want my tax dollar guaranteeing this mess.


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## rookie (Mar 19, 2010)

HaroldCrump said:


> And how is that different here?
> Each of those 3 things you listed are present here as well.


actually, the recent change in laws are slightly more sterner than our counterparts. the amount that can be borrowed is limited by what the borrowers qualify for the 5 yr fixed rate. maybe lending policy is a little more stricter here but definitely not enough. I would hate to see the govt bailing out the CMHC with my tax $


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