# Only 20% overvalued?



## james4beach

Perhaps good news, Fitch says that Canadian housing is only 20% overvalued

http://www.cbc.ca/news/business/housing-prices-20-overvalued-in-canada-fitch-warns-1.2706388

Housing better stay high if we want our beloved banks to stay "healthy" and brag to the world about how immune we are from banking troubles!


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## Just a Guy

Most housing is protected by CMHC, or the banks only finance 80%...which, by your numbers, says the banks are perfectly safe. The tax payer who technically back CMHC, homeowners, and the next generation may not get off so lucky...


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## Pluto

james4beach said:


> Perhaps good news, Fitch says that Canadian housing is only 20% overvalued
> 
> http://www.cbc.ca/news/business/housing-prices-20-overvalued-in-canada-fitch-warns-1.2706388
> 
> Housing better stay high if we want our beloved banks to stay "healthy" and brag to the world about how immune we are from banking troubles!


In Vancouver average house prices dropped about 20% from the 1994 peak. It took until 1998 to bottom out. The banks were fine. Folks who bought the average house in 1994 had to wait until 2003 to break even. 

Other facts: Average prices in Van were 200,000 in 1998, and took about 6 years to double to 400,000 by 1994. Then it took 12 years to double after that. Toronto followed a similar pattern, although the years are different. Toronto peaked in 1989 and it took about 22 years to break even. yes, 22 years. In 2011 the prices were only slightly higher than they were in 1989. It took 7 years for the To market to bottom out from over 400000, to below 300000 (in 2012 dollars). The pattern is basically this: some years of annual price gains, and then a lengthy consolidation period after which there are further price gains. We are probably near the beginning of a consolidation period, and I don't really see that as a threat to the banks. It might be a bit of a shock to first time buyers who are expecting equity gains, only to find they have to wait maybe 5, 10 or 20 years years to break even. 

Notwithstanding the price drops during those consolidation times, I don't recall the banks being in serious trouble.


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## james4beach

Pluto said:


> In Vancouver average house prices dropped about 20% from the 1994 peak. It took until 1998 to bottom out. The banks were fine.


In 1994, debt to income ratio was approx 90%. Today it's over 160% ... people have *nearly double* the debt burden (vs income) they did in the 90s.

In 1994, home prices were 3.4x income. Today, home prices are 5.0x income.

So this is dramatically different than past frothy periods in housing. Homeowners' debt burdens are much higher, they are carrying more consumer debt and have to not only make their mortgage payments, but the interest payments on all the rest of their debts.

At the height of the US housing bubble, they achieved 5x price to income ratio. After correcting, the US ratio dropped back down to 3x... about where Canada used to be.

We're still up at 5x. The math is all here, it's pretty obvious what all of this indicates. The fact it hasn't unravelled yet doesn't mean it's not coming. But year after year, people observe that it "hasn't crashed yet" and therefore all is well.


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## james4beach

Just a Guy said:


> Most housing is protected by CMHC


It's not direct mortgage exposure that threatens the banks, it's


 The sharp contraction in economic activity that would occur, as housing is nearly 1/3 our economy
 Sharp contraction in consumer spending, since it's also tied to levitating real estate
 Steep rise in bankruptcy rates and bad loans
 People being unable to make their other loan payments
 Decline in real estate collateral on their books
 Defaults on loans they made to homebuilders and condo builders
 Off balance sheet derivative losses, since loan losses and defaults -> derivative volatility -> leveraged losses


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## NorthernRaven

james4beach said:


> It's not direct mortgage exposure that threatens the banks, it's
> 
> 
> The sharp contraction in economic activity that would occur, as housing is nearly 1/3 our economy


???. Construction (residential, non-res, engineering and repair) was 6% of GDP in 2012. Even adding other ancillary bits, "housing is nearly 1/3 our economy" seems fairly bogus. Construction hit around 24% of GNP in Ireland in 2006, for a better example of a crazed economy!


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## NotMe

james4beach said:


> We're still up at 5x. The math is all here, it's pretty obvious what all of this indicates. The fact it hasn't unravelled yet doesn't mean it's not coming. But year after year, people observe that it "hasn't crashed yet" and therefore all is well.


All good points. But (And keep in mind, I actually believe a price correction is coming) I think it's also fair to say that many people who have said that a pricing correction is coming (and again, I'm one of them) don't always admit that they might be wrong, since well... it hasn't gone down for a long time (I first called a coming pricing correction in 2002 when I bought my loft). Just saying that it's hard to predict the future.


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## birdman

Don't fret James4Beach the banks are fine and yes, they have made mistakes and there are risks but that is the business they are in. I believe 1983 or thereabouts is about the only time I can recall that any of the big 5 Cdn banks have lost money and I believe that for the most part they have never missed paying a dividend. In the early 80's rates went up to 22.75% (prime rate) and of course businesses failed and property values crumbled. Rest easy.
In regards to property values, it seems that most of the higher increases are centered in a few cities and in the case of Vancouver I expect a lot of this is foreign ownership. Also, lots of people pay cash or sell there house and upgrade and still have low loan to value mortgages. Furthermore, banks and other F/I's often have different loan to value ratios for expensive properties. For example, maybe they only lend 75% of the first $400,000. or so and then 50% of the balance. 
In regards to your subsequent post there are a couple of things I can add with the first being that over the past few years I understand that lending to contractors, builders, and developers require pre sales in an amount to pay out or significantly reduce the lenders exposure. The old day are gone. I'm also not so sure of this debt to income ratio and its relevance. We bought our first house in a good part of Vancouver for 18,500. and our combined income was 5500. pa. had 3500. as a DP, borrowed 5,000. from the Bank and paid it off in 2 years, and assumed the underlying mortgages on the property. I guess our consumer debt to income ratio was 200% but it was fine in my books. Does not the same apply now in that if a couple has an annual income of say $150,000. and they borrow $300,000. for a $450,000. house that their debt to income is 200%. Again, it seems good to me and where is the problem?. Not so sure everything can be painted with the same brush but perhaps I'm missing something?
Yes, financial institutions have risk when there is a downturn in the economy but they also have a large % of their loans to very good consumers and big business like Suncor, Telus, BCE, TCP, CU, and other large companies. If these companies go down the tube and the economy collapses then they will have issues, but won't we all.


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## Just a Guy

james4beach said:


> It's not direct mortgage exposure that threatens the banks, it's
> 
> 
> The sharp contraction in economic activity that would occur, as housing is nearly 1/3 our economy
> Sharp contraction in consumer spending, since it's also tied to levitating real estate
> Steep rise in bankruptcy rates and bad loans
> People being unable to make their other loan payments
> Decline in real estate collateral on their books
> Defaults on loans they made to homebuilders and condo builders
> Off balance sheet derivative losses, since loan losses and defaults -> derivative volatility -> leveraged losses


I don't think you really understand how banks make money.

The banks will not be hurt their profits will still come in in the form of higher interest rates, the spread, and leverage.

For each dollar they have on deposit, they can lend out 7-20+ dollars (the number changes, and is regulated, but is usually over 10). Let's go with the low rate mortgage...

You deposit 10k into a savings account, for which they pay basically zero. They lend out a 100k mortgage at 3%. In reality, they are not making 3% on that mortgage! they are making 30%. Plus, the mortgagee paid for CMHC insurance...and they lose their house, bank forecloses, and sells the property for $50k. CMHC pays the bank the "lost" 50k plus expenses then goes and tracks down the original purchaser to see if they are worth suing to get the money back...if not, the taxpayer picks up the slack.

Now, imagine the money banks make on higher priced loans like cars, unsecured lines of credit, high risk, etc. plus they get to "write off" all the bad loans so their tax bill is pretty low.

Generally, in a bad economy, the government increases the lending ratio...back in 2008 it was getting close to 20x their deposits.

It is generally hard for banks to lose money...only when they get too greedy are they even at risk...and then the government straps in and gives them cash or regulates them to stop. That's why banks are complaining that the Feds have made lending rules tighter, it's cutting into their cash cow.


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## fatcat

forget the metrics and forget the numbers
young people and immigrants WANT to own their own home
and canada is looking like one of the better countries to be in to try to survive the next 50-100 years which might be very tough around the world


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## Mortgage u/w

I chuckly everytime I read or hear about "market corrections", "crashes", "increasing rates", etc. I don't see any of this happening. I may be in the minority thinking this but forcasting the market is as hard as predicting red/black on a roulette table. There may be indicators out there that may "suggest" a correction or what-have-you, but its not as simple as a math equation with a defined answer. The market is driven by you and me. You want to sell, I want to buy. That equation will never change. You can analyse and re-analyse all the data you want....but as long as rates stay low, housing will remain affordable and people will keep buying. The day they increase rates is the day the economy is rock solid and on the rise.....and people will buy more than ever!


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## birdman

Just a Guy said:


> I don't think you really understand how banks make money.
> 
> The banks will not be hurt their profits will still come in in the form of higher interest rates, the spread, and leverage.
> 
> For each dollar they have on deposit, they can lend out 7-20+ dollars (the number changes, and is regulated, but is usually over 10). Let's go with the low rate mortgage...
> 
> You deposit 10k into a savings account, for which they pay basically zero. They lend out a 100k mortgage at 3%. In reality, they are not making 3% on that mortgage! they are making 30%. Plus, the mortgagee paid for CMHC insurance...and they lose their house, bank forecloses, and sells the property for $50k. CMHC pays the bank the "lost" 50k plus expenses then goes and tracks down the original purchaser to see if they are worth suing to get the money back...if not, the taxpayer picks up the slack.
> 
> Now, imagine the money banks make on higher priced loans like cars, unsecured lines of credit, high risk, etc. plus they get to "write off" all the bad loans so their tax bill is pretty low.
> 
> Generally, in a bad economy, the government increases the lending ratio...back in 2008 it was getting close to 20x their deposits.
> 
> It is generally hard for banks to lose money...only when they get too greedy are they even at risk...and then the government straps in and gives them cash or regulates them to stop. That's why banks are complaining that the Feds have made lending rules tighter, it's cutting into their cash cow.



I don't think you have your facts correct and financial institutions do not and cannot lend out their deposits more than once. If they have say 100 million on deposit, they deduct their reserve requirements of around 10% and then lend out the other 90 million. Thats it, they can only lend it out once. They could conceivably sell these mortgages but then they would not have the interest income. They don't make 30% and the average interest rate spread is probably closer to 2-3%. Suggest you check out their financial statements, albeit they are complicated. I am aware of how this misguided theory is rationalized but it is incorrect and not factual. Also, in regards to interest rate spreads and financial margins this area is very complicated and involves interest rate risk management and the matching of the terms of deposits and loans to minimize risk. Again, this area is not as simple as you suggest. This too is covered in the notes to the financial statements. I could expand on this further but this is not practical in this forum.


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## james4beach

Mortgage u/w said:


> I chuckly everytime I read or hear about "market corrections", "crashes", "increasing rates", etc. I don't see any of this happening.


Right, just because the USA, UK, and every other western country went through this real estate cycle -- except us -- doesn't mean it _has_ to happen. (I'm being sarcastic)

Newsflash. Immigrants go to those countries too



fatcat said:


> forget the metrics and forget the numbers
> young people and immigrants WANT to own their own home


I want to become an astronaut, doesn't mean it's going to happen. Young people can't find stable jobs, they can't find decent income, and they sure as hell can't afford a home. I'm a young guy making close to six figures and even I can't afford a home --- I don't have any job stability.

Immigrants also love a whole bunch of other countries that experienced real estate bubbles.


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## fatcat

james4beach said:


> Immigrants also love a whole bunch of other countries that experienced real estate bubbles.


ok, you tell what country offers a better opportunity than canada and gives immigrants a reasonable shot of getting in ? ... last time i looked the usa takes 1/10 the legal immigrants that canada does 

where is the better opportunity ? ... i'm not suggesting that canada doesn't have problems, we certainly do

i am suggesting that compared to other countries that take immigrants and offer a decent shot at becoming middle class and getting decent health care and living in a mostly free society, canada ranks pretty high... you tell me who ranks better ?


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## Just a Guy

frase said:


> I don't think you have your facts correct and financial institutions do not and cannot lend out their deposits more than once. If they have say 100 million on deposit, they deduct their reserve requirements of around 10% and then lend out the other 90 million. Thats it, they can only lend it out once. They could conceivably sell these mortgages but then they would not have the interest income. They don't make 30% and the average interest rate spread is probably closer to 2-3%. Suggest you check out their financial statements, albeit they are complicated. I am aware of how this misguided theory is rationalized but it is incorrect and not factual. Also, in regards to interest rate spreads and financial margins this area is very complicated and involves interest rate risk management and the matching of the terms of deposits and loans to minimize risk. Again, this area is not as simple as you suggest. This too is covered in the notes to the financial statements. I could expand on this further but this is not practical in this forum.


True, they are not making 30% directly, but they are lending out 10 times the amount they have on deposit so they are virtually making 30% through leverage. You are correct that I simplified things as it is complex, but the banks have the ability to leverage their loans, something the general public can't do. I can't lend you more money than I have, so if I charge you 3%, that's all I get...banks may lend out money at 3%, but they are lending out 10 times what they have, making the equivalent of 30% return on their money...

Technically, they are only making 3% on the total...you have me there, but that's an accounting trick to hide their real profits. You and I couldn't do this.

Leverage is a powerful tool, about the only way the average person can benefit from it is in real estate or margin accounts.


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## marina628

We put our cottage on the market last weekend expecting we wont sell it until next year or later ,it did not even make it online before we had three showings and a firm offer for full list.The only reason we will wait until next year to sell another property is the tax implications but I think the increases have to slow down soon but I don't see them falling back 20% just a bit flat.


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## birdman

Just a Guy said:


> True, they are not making 30% directly, but they are lending out 10 times the amount they have on deposit so they are virtually making 30% through leverage. You are correct that I simplified things as it is complex, but the banks have the ability to leverage their loans, something the general public can't do. I can't lend you more money than I have, so if I charge you 3%, that's all I get...banks may lend out money at 3%, but they are lending out 10 times what they have, making the equivalent of 30% return on their money...
> 
> Technically, they are only making 3% on the total...you have me there, but that's an accounting trick to hide their real profits. You and I couldn't do this.
> 
> Leverage is a powerful tool, about the only way the average person can benefit from it is in real estate or margin accounts.


Sorry, I don't agree and they don't lend it out 10 times-only once. Trust me, I was the CEO of a billion dollar F/I and nothing would have made me happier than lending the billion dollars out 10 times. Furthermore, if you had 1 million on deposit you can only lend out 900,000. and the remainder must stay on deposit as reserves. These reserves earn far less interest than the mortgage or other type of loans thus eroding your financial margin.


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## Just a Guy

I think you are misunderstanding me...the banks lend out 10x what they have on deposit. Thus, they only pay interest on 1/10 of what they generate interest on...and they only pay out a small amount of interest compared to what they generate from that deposit. They don't lend out the same money multiple times...that's not what I'm saying.

It's the same as if I put down $10,000 to control a $100,000 house, which generates $12,000/year rent. My return on investment is 120%, not 12%. (Yes, I know I'm cutting out expenses, I'm just trying to illustrate).


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## NorthernRaven

I think you are confusing capital with deposits, and misinterpreting leverage. A bank might start up with $15 million in capital, and take in $85 million in deposits, which are liabilities. That doesn't mean they make $1 billion in loans, unless they want a nice vacation at a federal facility. They might lend out $90 million, and they are lending 6 times their _capital_. The $15 million capital is the $10,000 in your house example, and is what is first to absorb losses, it is what their return is calculated on. The $85 million doesn't belong to them.


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## Just a Guy

Try this...

http://en.m.wikipedia.org/wiki/File:Fractional-reserve_banking_with_varying_reserve_requirements.gif

Banks create money out of thin air. I do the same thing with real estate.

Say I borrow 100% of a house (let's say it's worth 100k). I borrow all the money for the place agree to pay the bank interest, property taxes, etc. and the renters pay me enough rent to cover all expenses. 20 years later, the house is all paid off and I go to sell it. It's now appraised at 500k thanks to inflation, so my personal net worth now increases by a realized $500k which came into my pocket from no money invested by me. I created wealth in my pocket from other people. Heck even if it dropped to 50k, I still created money in my pocket from nothing. 

Let's say, I started by buying one house at 20 years old for 100k, paid it off completely in 20 years (rent covers expenses) and refinanced it for 90% and bought 9 more 100k places using a 10K down payment on each from the refinance. In 20 years, they are paid off and I refinance them all and do it one more round. At 60 years of age, assuming no increase in value, I've got a net worth of 10 million dollars with a 0% rate of return.


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## birdman

Northern Raven you are correct. They lend out 10 times their capital and their deposits are not leveraged. A simple look at the institutions balance sheets and income statements will confirm this. 
"Just A Guy": If you wish to continue this discussion and feel it not not belong on this thread please feel free to PM me.


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## Just a Guy

Technically speaking banks aren't even limited by their deposits when it comes to making loans, but I thought that concept may have been even harder for people to understand, but this article explained it quite well I thought...

http://www.winterspeak.com/2009/09/loans-create-deposits-how-banks.html


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## james4beach

fatcat said:


> ok, you tell what country offers a better opportunity than canada and gives immigrants a reasonable shot of getting in ? ... last time i looked the usa takes 1/10 the legal immigrants that canada does
> 
> where is the better opportunity ? ... i'm not suggesting that canada doesn't have problems, we certainly do


Europe, and for instance UK, are pretty hot destinations for immigrants including very wealthy immigrants. As I recall, the UK faced not one but two housing over-valuations and price declines since 2000.

As far as I know, Australia is the only other country that, like Canada, hasn't seriously corrected yet.

By the way new data about the hot housing market is in, today.

Toronto home prices: 7 times income
Vancouver home prices: 10 times income

Given that the US is at 3:1 and Canada's historical avg is closer to 3, can you tell me what level you think is too high? Will you be concerned when home prices are 50 times income?


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## KaeJS

james4beach said:


> I'm a young guy making close to six figures and even I can't afford a home --- I don't have any job stability.


You make 6 figures and you can't afford a home?

I think you are just saying this to prove a point you are trying to make. If not, then you need to re-evaluate your finances. I would give anything to make 6 figures... Life would be so easy.


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## Just a Guy

If he lives in Vancouver, a six figure salary probably couldn't buy a home...in Newfoundland, it could probably buy a good chunk of the province...


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## james4beach

KaeJS said:


> You make 6 figures and you can't afford a home?
> 
> I think you are just saying this to prove a point you are trying to make. If not, then you need to re-evaluate your finances. I would give anything to make 6 figures... Life would be so easy.


I can't afford a home due to lack of job stability and a poor employment environment. Most of my office got laid off a couple years ago, and I was so relieved that I didn't own a home. Some other guys kept their homes but moved to other parts of Canada and the USA, now they've got property taxes to keep paying and a home they can't live in.


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## KaeJS

Just a Guy said:


> If he lives in Vancouver, a six figure salary probably couldn't buy a home...in Newfoundland, it could probably buy a good chunk of the province...


He lives in Ontario.



james4beach said:


> I can't afford a home due to lack of job stability and a poor employment environment. Most of my office got laid off a couple years ago, and I was so relieved that I didn't own a home. Some other guys kept their homes but moved to other parts of Canada and the USA, now they've got property taxes to keep paying and a home they can't live in.


You don't want the burden of tenants, I presume?


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## birdman

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

Just A Guy: Somewhat complicated but the foregoing titled "Repeat After Me: Banks Don't Lend Out Reserves" explains the matter in detail.


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## Just a Guy

I never said they lend out reserves, I said they lend out 10x what they have in reserves. So, if they have $10,000 in reserves, they can write loans for $100,000. Charging 3% interest on 100k of loans (virtual money) means they are generating 30% interest on their reserves (actual money). The 90k difference doesn't really exist anywhere except on paper.


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## birdman

I know you didn't say they lend out reserves but you did say they lend out 10 times what they have on deposit which is where I disagree. I hope you read the entire article which I feel explains the situation.
Thats it for me, got things to do and enjoy your day.


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## Just a Guy

"Here is the link between reserves and bank lending. Reserves go down when banknotes increase. Banknotes increase when borrowers take the money they borrowed out of the bank and part or all of the money remains in cash, rather than being re-deposited in the banking system. For an individual bank, the link between reserves and loans is an indirect and largely uncontrollable one. Individual banks can try to "get rid of" their excess reserves by making new loans, and, to the extent that the deposits so created leave their bank and, importantly, do not return as new deposits (the bigger the bank the less likely this condition is to hold), this will work for them. But for banks as a whole, new lending leads to a reduction in reserves only to the extent that the deposits created move into cash in circulation. Take an extreme case where the deposits created by the new loan just move from one deposit account to another; then there is no reduction in reserves. This is a far cry from the notion that, at will, individual banks can extinguish their reserves by initiating new lending, let alone that banks in aggregate can."

From what I read here, if the money goes back into the bank, then they can lend it out, up to the fractional amount...of course, if they spend it it's in circulation and they can't...unless whoever they spent it on deposits it's back into the bank...

I think we may just be arguing semantics here...I admit I oversimplified the discussion, but I still stand by the fact that banks make a lot of money and can downplay it with acceptable accounting. I don't think banks would suffer if housing corrected.


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## NorthernRaven

I think I see the problem. You are using phrases like "_the banks lend out 10x what they have on deposit._" That makes it sound like the amount of money _customers_ have deposited with the bank. If customers deposit $85 million, the banks _can't_ go make $850 (10x) in loans. But I think you mean they can have outstanding loans that sum up to many times the amount of money they have left over (the bank may keep that leftover "on deposit" with a central bank, or in whatever liquid form is approved).

Note that how much they can lend will depend on their capital, not customer deposits. If a (simplistic) bank has $10 million in capital and regulators impose a 10% capital ratio, they can only make $100 million in loans, even if they have, say, $250 million in customer deposits sitting around idle. Their risk/leverage will be based on their capital (which is theirs to risk), not customer deposits, which isn't.


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## Mortgage u/w

james4beach said:


> Right, just because the USA, UK, and every other western country went through this real estate cycle -- except us -- doesn't mean it _has_ to happen. (I'm being sarcastic)


You can be sarcastic all you want.....but years have passed and keep passing us by and we're still waiting for this 'bubble' to burst. So if it happens to other countries, it must happen to us too, right? Ok.

Stats are just that - stats. If stats can definately predict the future, then get me all the stats on lotteries!

All I'm saying is, sure there will be ups and downs in anything that involves money. But a bubble burst? Crash? Really? Sorry, I don't see it. I will just keep buying while everyone else waits for I don't know what....but as the saying goes; time is money!


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## Sixth_Circle

james4beach said:


> The math is all here, it's pretty obvious what all of this indicates. The fact it hasn't unravelled yet doesn't mean it's not coming. But year after year, people observe that it "hasn't crashed yet" and therefore all is well.


When it happens, it will be like Russian Roulette. BANG. And then all the pundits will say "we should have seen this coming", like they do for every bust.



KaeJS said:


> You make 6 figures and you can't afford a home?


In our case, my wife and I can afford to buy a home, we just don't want to. Rent is much cheaper than purchasing in the area we are living in, and we have our mobility and a more efficient, easy lifestyle. Job moves to Ottawa? No problem. Don't like the neighborhood anymore? No problem. An appliance not working? No problem. Never have to shovel or mow or spend weekends on the roof or digging in the yard (by choice; it's understood some folks actually enjoy these things).

The rent vs. buy decision was much more of a no-brainer (buy, fool!) in the past. People often held jobs for decades, during which they stayed rooted in a location where they raised their families, and many marriages and family units remained intact or lived within driving distance. Not the case any more. It's a different landscape, and society and culture are favouring those who can easily move where the jobs are, who have financial liquidity and are not overburdened with debt, and who can live, work, and play in efficient, walkable, and amenity-filled neighbourhoods and cities, often far-flung from where they were born and raised.

Home ownership is now an emotional need and a lifestyle choice. It used to be a very secure path to healthy equity and a "stake" in social standing, class, and adulthood. Not sure this will be the norm going forward, especially as the appeal of the burbs continues to melt due to factors like high costs of gas, diminished quality of life due to long commutes, and the massive time and money-suck of McMansion maintenance. The next few decades will likely see a suburban exodus back into the cities. Even suburban planners recognize this as they are currently trying to build mini-downtowns into their cores.


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## MrMatt

Wikipedia has a nice illustration of fractional reserve banking.

http://en.wikipedia.org/wiki/Fractional_reserve_banking#Example_of_deposit_multiplication


It's simple, when you lend your money to the bank, they're allowed to lend most of it out to other people. 
Their re-lending is subject to a whole raft of restrictions


To people who decry this as unfair, don't lend money to banks. Why would banks go through all the trouble to hold onto your money and track it, unless they were paid to do so?


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## HaroldCrump

Undoing fractional reserve banking essentially means undoing over 600 years of modern financial infrastructure, practices, and standards.

Can an economic system not based on fractional reserve banking work - absolutely !
In fact, such systems "worked" for several centuries prior to the dawn of capitalism in the later stages of the middle ages.

However, a sort of pseudo-fractional reserve banking has always been in effect even during the mercantile ages.
Money lenders, traders, and other bourgeoisie would accept collateral but lend out more than that.


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## james4beach

Sixth_Circle said:


> When it happens, it will be like Russian Roulette. BANG. And then all the pundits will say "we should have seen this coming", like they do for every bust.


The amazing thing to me is that we've experienced a great luxury here in Canada: that the Americans had a real estate bubble, and crashed, first.

As a result we have all these experts in the USA who have analyzed this situation, they understand what lead up to it and they know what a bubble looks like in hindsight.


 high consumer debt -- high debt-to-income ratio
 high home prices -- high home price to income ratio
 exuberant purchasing -- bidding wars, buying condos without seeing them!
 low interest rates and people only looking at interest payments
 mortgage securitization (think CMHC here) that frees banks from considering risk
 unsound economy -- stagnant wages and job instability
 high rates of construction and vulnerability to over-supply, e.g. Toronto condo cranes
 a pervasive opinion that housing will always go up, and at a high % annual rate

Yes the Americans had another factor too, very relaxed mortgage origination practices and much loan fraud. They also securitized mortgages more aggressively. OK so we share something like 8 out of 10 common parts of the story. These things are never identical, but we sure as hell have a common looking story.

Yet we are *so over-confident, so obnoxious*, in Canada that we think: "this time it will be different".

Even with American experts, on the heels of their recent education on the topic, telling us: Canada is in trouble and it's going to blow up in our faces. Guys like Shiller, and agencies like Fitch. You don't like me, you think I'm a prickly pear? Fine, but please for the love of god, listen to some of the experts.

Yet we ignore them, head in the sand, "it can't happen here because... um, immigrants, and land is limited, and everyone needs housing, and our banks are better"

Those are the same things everyone in the world said. Well maybe not the Spaniards, but everyone else


----------



## NotMe

You know this whole thread reminds of the basic problem that I see everywhere on this topic: those convinced of a correction refuse to acknowledge the fact they might just be wrong on the timing - and refuse to even address this as possibility (Garth Turner, I'm looking at you). I mean calling an event (the extinction of all life on Earth is a certainty, not a possibility, a certainty as the sun's gas is not infinite) is not the same as calling the timing of an event (the sun will burn out, but what do I care if it's in a million years). I see a price correction as the same way. I do think a price correction is likely; but I admit it's a possibility (and not a one in a billion, I'd say 1:10) chance that many properties in Toronto won't see a correction. 

Real estate is not a national product; it's a local commodity. The US did experience a severe real estate correction as a whole; but that doesn't mean that an apartment in NYC was ever in the realm of the affordable for the average person either.


----------



## KaeJS

fatcat said:


> forget the metrics and forget the numbers
> young people and immigrants WANT to own their own home
> and canada is looking like one of the better countries to be in to try to survive the next 50-100 years which might be very tough around the world


This is everything.

fatcat, you hit it, buddy.

Forget the metrics, forget the numbers. (and this is not a sarcastic post. I am serious.)


----------



## Sixth_Circle

We are seeing the population being manipulated into what basically amounts to a slave class. You can't come out and say, "We want to enslave you", so governments do it slowly, at the behest of global corporate and financial interests. This is accomplished through the removal of jobs that promise pensions, stability, or benefits, and the increase of personal and household debt. Never before in history have people been so goaded (many of them willingly) into taking on such astronomical levels of debt. Once you are firmly indebted to those in control of your basic needs and freedom, you are pretty much a slave. Either that, or you lose everything and end up on the street or in jail or maybe chewing a bullet.

Education (public, that is) gets gutted so people don't develop the ability to think critically, but learn instead how to follow orders and look to authority for instructions. People get fat and watch endless hours of reality TV. Health declines. Newspapers are purged of thoughtful reporting by real journalists and filled with vapid stories about Kim Kardashian's big fat *** and how so-and-so might just have a baby bump. Anxiety and anti-depressant medications are dispensed and gobbled like candy; no one can function without "something" to get through the day. The result is bullying suicides, mass shootings, and a general increase in mental instability.

The rug will eventually be pulled out, the music will suddenly stop, and once their clouded brains are clear, everyone will be standing there in the dust and ashes wondering how they were so duped. We are seeing the largest wealth transfer (i.e. robbery) in human history taking place right before our eyes.


----------



## Sixth_Circle

NotMe said:


> The US did experience a severe real estate correction as a whole; but that doesn't mean that an apartment in NYC was ever in the realm of the affordable for the average person either.


I love Toronto as much as the next guy. But in no way, shape, or form is TO anywhere near a NYC. Property here is way overvalued, for a variety of reasons (primarily greed), and though continued outmigration from the other provinces and rural areas will continue to funnel into the major cities, I think lifestyles are changing and home ownership will not be as compelling or attractive to the next generations.


----------



## KaeJS

Sixth_Circle said:


> The rug will eventually be pulled out, the music will suddenly stop, and once their clouded brains are clear, everyone will be standing there in the dust and ashes wondering how they were so duped. We are seeing the largest wealth transfer (i.e. robbery) in human history taking place right before our eyes.


I agree with everything you have said except for the part above.

The rug will never be pulled out. People will never realize or see how they are being duped. If they don't see it by now, they never will.


----------



## Just a Guy

No one says you have to abdicate your ability to teach your children, or learn on your own. When I was a kid, they said tv would rot our brains and turn us into button pushers...for some, I'm sure it did. I chose a different path.

When I was growing up the promise of go to school, get a good job, retire at 65 was still being preached...unfortunately the reality was there were no jobs...did I sit around and collect welfare, feeling sorry for myself? I'm sure some did.

When I got injured at work, I could have started drinking, got addicted to pain meds, whatever...I didn't know much, if anything about investing, I couldn't work, had a family to support, so I learned.

I recently bought a place in foreclosure, the bank had to evict the tenant...the guy walked away from all his stuff and I got the fun job of disposing of it after 30 days...I got to see his parts of his life...wedding certificate, prescription meds from a work related injury, divorce papers, bills mounting up...living in a smelly mess.

I realized that this could easily have been me.

It's always easy to blame the system, government, big business, circumstances whatever...

The hard part is taking responsibility and changing yourself. 

I raise my kids to overcome challenges and achieve what they desire, despite the obstacles, but that's not how I was raised. They may not get to do things the exact way they want to, but I have little doubt they will achieve their goals in some fashion. They don't "go with the flow and hope for the best", they take what they are given and bend it to their will.


----------



## NotMe

Sixth_Circle said:


> I love Toronto as much as the next guy. But in no way, shape, or form is TO anywhere near a NYC. Property here is way overvalued, for a variety of reasons (primarily greed), and though continued outmigration from the other provinces and rural areas will continue to funnel into the major cities, I think lifestyles are changing and home ownership will not be as compelling or attractive to the next generations.


I wasn't comparing Toronto to NYC (which I agree, laughable). I was simply saying that even though as a whole, the US did experience a pretty severe correction, there were numerous pockets in which that did not apply so it's somewhat misleading to omit that information. Whether that pattern happens again if or when the canadian market corrects, we'll see.


----------



## Siwash

fatcat said:


> forget the metrics and forget the numbers
> young people and immigrants WANT to own their own home
> and canada is looking like one of the better countries to be in to try to survive the next 50-100 years which might be very tough around the world


and if the economy "might be very tough" in other countries around the world, who will Canada export its commodities to? Aside from a a bloated real estate/construction sector, thats the only thing keeping us from 3rd world status..

We are very close to this crumbling.. an interest rate hike here, another stretch of poor jobs reports there, and this could unravel very quickly.


----------



## Siwash

NotMe said:


> I wasn't comparing Toronto to NYC (which I agree, laughable). I was simply saying that even though as a whole, the US did experience a pretty severe correction, there were numerous pockets in which that did not apply so it's somewhat misleading to omit that information. Whether that pattern happens again if or when the canadian market corrects, we'll see.


"pretty severe"? It knocked the middle class of america to its knees....


----------



## Siwash

KaeJS said:


> You make 6 figures and you can't afford a home?
> 
> I think you are just saying this to prove a point you are trying to make. If not, then you need to re-evaluate your finances. I would give anything to make 6 figures... Life would be so easy.




My household income is closer to 200 K than 100K. I refuse to buy a home right now.. found a great bungalow on a big lot in suburban toronto that is a LOT cheaper to carry than a purchased home... crash, no crash, I am happy renting and investing (and saving) my money... it took GTAers almost 20 years to break even after '89.


----------



## Mortgage u/w

Siwash said:


> My household income is closer to 200 K than 100K. I refuse to buy a home right now.. found a great bungalow on a big lot in suburban toronto that is a LOT cheaper to carry than a purchased home... crash, no crash, I am happy renting and investing (and saving) my money... it took GTAers almost 20 years to break even after '89.


So basically you think real estate is a poor investment and owning a home does not interest you? Or are you waiting like all the others for some sort of a correction? Either way, the correction will last another 20 years, right? I'm confused. Your savings is seemingly up there but you have no intention on spending it right now? Since you are timing the real estate market, when will you know is the right time to buy?

Personally, I don't think you should put off owning your own home because you believe a market crash is coming. No one will take your home away from you - crash or no crash.


----------



## Berubeland

I work in the industry and I agree with Siwash, real estate is really over valued and propped up by vapors. The rental market is soft. I don't know where this 1.4% vacancy rate is coming from as far as I can see there is no shortage of rental condos. Rent prices are not going up, they are going down slightly. 

I don't see the fundamental strength in the market. What I see is many ordinary people buying a lottery ticket and trying to cash out.


----------



## Siwash

Berubeland said:


> I work in the industry and I agree with Siwash, real estate is really over valued and propped up by vapors. The rental market is soft. I don't know where this 1.4% vacancy rate is coming from as far as I can see there is no shortage of rental condos. Rent prices are not going up, they are going down slightly.
> 
> I don't see the fundamental strength in the market. What I see is many ordinary people buying a lottery ticket and trying to cash out.


that 1.4% figure is probably fabricated.. i will soon be posting about a bad experience with the RE industry.. i don't trust TREB, CREA or RE brokerages one bit.. stay tuned


----------



## Siwash

Mortgage u/w said:


> So basically you think real estate is a poor investment and owning a home does not interest you? Or are you waiting like all the others for some sort of a correction? Either way, the correction will last another 20 years, right? I'm confused. Your savings is seemingly up there but you have no intention on spending it right now? Since you are timing the real estate market, when will you know is the right time to buy?
> 
> Personally, I don't think you should put off owning your own home because you believe a market crash is coming. No one will take your home away from you - crash or no crash.


right now yes.. and the stock mkt has outperformed over past 30 years..


----------



## Pluto

Siwash said:


> right now yes.. and the stock mkt has outperformed over past 30 years..


I'm not knocking your rental strategy, as obviously it works for you and renting vs buying in the hot cites of Toronto and Vancouver makes a lot of sense currently. 

Too, the stock market has outperformed over 30 years in a way. However, I made a phenomenal return in real estate between 2000 and 2010 and I couldn't have even come close in stocks. Part of the reason is the leverage available in housing. Usually comparisons between stocks and house prices do not account for leverage. For instance, with a house you can control say a 400,000 asset with maybe 70,000 down payment. With stocks, it is difficult for most to get a stable $400,000 stock portfolio with a 70,000 down payment. I think banks would laugh me out of the place at making such a loan request. Too, if one adds a rental suite to their home, that makes it even better. Additionally, upon sale of a home, say 20 or 30 years later, even though paid partly for with a rental suit, the capital gains are tax free. My guess is it would be tough for stocks to beat it over 30 years due to 1. rental suit 2. leverage, and 3. tax free capital gains (of primary residence). 

Even so, I support your rental strategy right now in the area you are in. Makes a lot of sense, as the bust will come. After the bust there will be plenty of time for buyers to get into a home before the next lengthy run up in prices. 

Outside of the dangerous To and Van monsters, I think home buyers can do fine. In most towns they can get a nice home for maybe 350,000 with not much fear of a crash.


----------



## Just a Guy

I don't see how you can say that when ten-fifteen years ago that 350,000 house was selling for less than half that. I don't think home ownership is a great idea at these prices.


----------



## Siwash

Pluto said:


> I'm not knocking your rental strategy, as obviously it works for you and renting vs buying in the hot cites of Toronto and Vancouver makes a lot of sense currently.
> 
> Too, the stock market has outperformed over 30 years in a way. However, I made a phenomenal return in real estate between 2000 and 2010 and I couldn't have even come close in stocks. Part of the reason is the leverage available in housing. Usually comparisons between stocks and house prices do not account for leverage. For instance, with a house you can control say a 400,000 asset with maybe 70,000 down payment. With stocks, it is difficult for most to get a stable $400,000 stock portfolio with a 70,000 down payment. I think banks would laugh me out of the place at making such a loan request. Too, if one adds a rental suite to their home, that makes it even better. Additionally, upon sale of a home, say 20 or 30 years later, even though paid partly for with a rental suit, the capital gains are tax free. My guess is it would be tough for stocks to beat it over 30 years due to 1. rental suit 2. leverage, and 3. tax free capital gains (of primary residence).
> 
> Even so, I support your rental strategy right now in the area you are in. Makes a lot of sense, as the bust will come. After the bust there will be plenty of time for buyers to get into a home before the next lengthy run up in prices.
> 
> Outside of the dangerous To and Van monsters, I think home buyers can do fine. In most towns they can get a nice home for maybe 350,000 with not much fear of a crash.


on taxes, if you've invested through your RRSPs and TFSAs does this not mitigate the tax burden issue? This is what I ave done buying index funds through sheltered accounts.


----------



## Pluto

Just a Guy said:


> I don't see how you can say that when ten-fifteen years ago that 350,000 house was selling for less than half that. I don't think home ownership is a great idea at these prices.


Well the fact they have doubled over 10 to 15 years doesn't seem to be abnormal. These house prices in smaller cites and towns will likely go sideways and/or pull back a bit. And if they pull back 20% before inching back up, the dollar amount isn't as devastating as 20% on a million or so. I guess my point is that housing in these smaller cheaper areas doesn't look as scary as To, or Van. Doesn't Lethbridge real estate look more normal to you than Van or To?


----------



## Pluto

Siwash said:


> on taxes, if you've invested through your RRSPs and TFSAs does this not mitigate the tax burden issue? This is what I ave done buying index funds through sheltered accounts.


In an RRSP you are hooped because when you take it out everything, capital gains included, is taxed as income. Profit on the house is tax free. In my opinion one is better off owning stock outside an RRSP due to the tax issue. TFSA's are fine. Consider a stock outside an RRSP: it can grow indefinitely with out paying tax - just like in a RRSP - until you sell. When you sell you pay tax on 1/2 the gain. If that stock was in an RRSP, you pay tax on the entire gain (when you take the money out.) 

If someone has a pension plan, it could be they are better off having no RRSP due to the fact that buy and hold stock strategy means you pay no tax until you sell, and then the tax is only on 1/2 the gain vs tax on the entire gain with the RRSP. RRSP's are a double edged sword, and I'm not convinced of their value in some circumstances. They can be good if, one is self employed with a very high income, and when they retire, their marginal tax rate drops. But if one's marginal tax rate stays the same upon retirement, and upon withdrawing $, the after tax benefit isn't clear. 

Anyway, I think you are wise to rent right now as the TO market is really goofy, it seems. 
A few years after the bust, it might be advantageous to buy for reasons previously stated: leverage, maybe some rental income, Tax free capital gains, and you get to live in your investment. You might find you get 20% to 30% return on equity (down payment) which is tough to beat in the stock market.


----------



## Just a Guy

No, overpriced is overpriced. Vancouver and Toronto have always been more expensive, even before the run up. Lethbridge wasn't...and there is a reason for that. People want to live in Vancouver because of where it is. It has mountains on 3 sides and an ocean on the other. There is a reason why Surrey is so much cheaper relative to Vancouver. Toronto is the business capital, located on a Great Lake...not to mention they think it's the centre of the universe.

Lethbridge has trees that grow at an angle because of the perpetual wind. There is no real demand built up to live there, and plenty of space for them to expand if they needed to.

Now, having said all that, if I found a rental in lethbridge that I could buy under 100k, I may look at it...at $350k I'm wasting my time. The nice thing about real estate is, both places can exist on the market at the same time. Heck, cheap places even appear in Vancouver and Toronto once in a blue moon.

A good investor doesn't overpay just to get into the market. Remember, if your down payment is 20% and you get a 20% correction, you are out 100%...not so in the stock market. Also, stocks generally don't cost more money after you purchase them, unlike real estate.


----------



## Pluto

Just a Guy said:


> No, overpriced is overpriced...
> 
> Now, having said all that, if I found a rental in lethbridge that I could buy under 100k, I may look at it...at $350k I'm wasting my time. The nice thing about real estate is, both places can exist on the market at the same time. Heck, cheap places even appear in Vancouver and Toronto once in a blue moon.
> 
> A good investor doesn't overpay just to get into the market. Remember, if your down payment is 20% and you get a 20% correction, you are out 100%...not so in the stock market. Also, stocks generally don't cost more money after you purchase them, unlike real estate.


I get the impression that the type of place you buy for 100,000 is not a 2000 sq ft family home on a 6000 sq ft lot, in move in condition, but I could be mistaken. 
Can you describe what you buy for 100,000?


----------



## Just a Guy

A 2000 sq ft home on a big lot doesn't make as much as a 1000 sq ft 2-3 bed apartment or townhouse. It's also harder to rent, and costs more to maintain. 

For 350k, I could own 3-4 properties that generate cash flow as opposed to one. Each one able to generate capital gains, also giving me 3-4 properties I could sell as opposed to one.

Also, most of what I buy is at least 25% below market, so I've got a built in cushion. True, most have to be reno'd but most places can be fully done for less than $5000 in supplies.

If these places generate $1000/month my 350k generates more than yours does I'd bet.


----------



## Siwash

Pluto said:


> In an RRSP you are hooped because when you take it out everything, capital gains included, is taxed as income. Profit on the house is tax free. In my opinion one is better off owning stock outside an RRSP due to the tax issue. TFSA's are fine. Consider a stock outside an RRSP: it can grow indefinitely with out paying tax - just like in a RRSP - until you sell. When you sell you pay tax on 1/2 the gain. If that stock was in an RRSP, you pay tax on the entire gain (when you take the money out.)
> 
> If someone has a pension plan, it could be they are better off having no RRSP due to the fact that buy and hold stock strategy means you pay no tax until you sell, and then the tax is only on 1/2 the gain vs tax on the entire gain with the RRSP. RRSP's are a double edged sword, and I'm not convinced of their value in some circumstances. They can be good if, one is self employed with a very high income, and when they retire, their marginal tax rate drops. But if one's marginal tax rate stays the same upon retirement, and upon withdrawing $, the after tax benefit isn't clear.
> 
> Anyway, I think you are wise to rent right now as the TO market is really goofy, it seems.
> A few years after the bust, it might be advantageous to buy for reasons previously stated: leverage, maybe some rental income, Tax free capital gains, and you get to live in your investment. You might find you get 20% to 30% return on equity (down payment) which is tough to beat in the stock market.


I've considered this about RRSPs... I have debated whether I should have invested in RRSPs at all as both me and the wife have DB plans as teachers... maybe we should just max out in the TFSAs and stop investing in the RRSPs. 

thanks for the tip.


----------



## Nemo2

Siwash said:


> as both me and the wife have DB plans as teachers....


English teachers?


----------



## Siwash

Nemo2 said:


> English teachers?


No, elementary and high school science


----------



## KaeJS

The thing is....

Real estate is "not" overvalued.

It is expensive in certain parts, but it is not overvalued as a whole. The reality is that people that live in Toronto can afford to live in Toronto. People that live in Lethbridge can afford to live in Lethbridge.

I cannot afford to live in Toronto, nor would I want to live in Toronto. I live about an hour or so from Toronto. In 2012, I paid $235k for a 1400sq ft, 3 bedroom, 2+1 bathroom townhome with garage and finished basement. The house was move-in ready and it was built in 2004/2005.

It is perfectly affordable. Of course, it is tough for me because I am on my own and only make $40k/year. But, imagine how easily affordable this becomes if you have a couple, each making $50k/year? It becomes a joke.

Two people making a combined income of $100k/year can easily afford to pay $235k for a townhome with 3 bedrooms.

For people who buy in Toronto, they must be able to afford it. Otherwise, they wouldn't be buying in Toronto. The banks do the assessments (and yes, sometimes they are a little risky), but they always take into consideration capital, capacity and credit. They aren't going to loan to someone that does not have the ability to pay the loan.

If the RE market crashed, the banks would not be happy.

I think the word "overvalued" is the wrong choice of word. Some people might be uncomfortable buying a home that costs so much (and I would be, too) but there are still many properties that are easily affordable and in areas where jobs are available.

This is the reason that RE prices will not fall.

Keep in mind also that a lot of immigrants to not adapt the western lifestyle. They are many groups of people who have more than 2 people living in a home and contributing to payments and maintenance. That makes it a whole lot more affordable. Imagine 2 people making $60k/year and one person making $40k? Now you've got a $160k combined income in one home.


----------



## KaeJS

Berubeland said:


> Rent prices are not going up, they are going down slightly.


I do agree with this, Berube.

I have been looking to sap an extra $50/month from each of my tenants for the past couple months. I have been reluctant to do so since I am scared of the tenants moving and finding another place to live. I don't think this will happen - but there is always the possbility. I have seen similar places for rent that are about $50/month cheaper. This would then make me $100 more expensive per month. That might be enough to have people move. I'm not sure.

I have been thinking of maybe increasing it after September, since that is when the rental properties should be filled up by students and less people move around Christmas time. I think October might be a good time to give the notice of the increase from a strategy point of view.


----------



## Just a Guy

KaeJS said:


> The thing is....
> 
> Real estate is "not" overvalued.
> 
> It is expensive in certain parts, but it is not overvalued as a whole. The reality is that people that live in Toronto can afford to live in Toronto. People that live in Lethbridge can afford to live in Lethbridge.


I agree with you except, you forgot to add "*at these interest rates*". 

I, at least, have always said that interest rates had to go up to correct the bubble.

Personally, I think that is one of the reasons why it's so hard to borrow money today compared to even 2007/8, or any other time. I think banks realize that money is about to become more expensive, and thus aren't lending it easily. Of course, if you're already in debt, I think there are some lean times coming.


----------



## KaeJS

There is no doubt that interest rates will make it make it more difficult to afford a home.

At this point in time, though, I feel that the rates will be moving up so slightly that people will have enough time to adjust to it, which will prevent a crash from happening.

What will push rates up at an exponential rate? There's nothing that I can currently see on the horizon..


----------



## Siwash

KaeJS said:


> The thing is....
> 
> Real estate is "not" overvalued.
> 
> It is expensive in certain parts, but it is not overvalued as a whole. The reality is that people that live in Toronto can afford to live in Toronto. People that live in Lethbridge can afford to live in Lethbridge.
> 
> I cannot afford to live in Toronto, nor would I want to live in Toronto. I live about an hour or so from Toronto. In 2012, I paid $235k for a 1400sq ft, 3 bedroom, 2+1 bathroom townhome with garage and finished basement. The house was move-in ready and it was built in 2004/2005.
> 
> It is perfectly affordable. Of course, it is tough for me because I am on my own and only make $40k/year. But, imagine how easily affordable this becomes if you have a couple, each making $50k/year? It becomes a joke.
> 
> Two people making a combined income of $100k/year can easily afford to pay $235k for a townhome with 3 bedrooms.
> 
> For people who buy in Toronto, they must be able to afford it. Otherwise, they wouldn't be buying in Toronto. The banks do the assessments (and yes, sometimes they are a little risky), but they always take into consideration capital, capacity and credit. They aren't going to loan to someone that does not have the ability to pay the loan.
> 
> If the RE market crashed, the banks would not be happy.
> 
> I think the word "overvalued" is the wrong choice of word. Some people might be uncomfortable buying a home that costs so much (and I would be, too) but there are still many properties that are easily affordable and in areas where jobs are available.
> 
> This is the reason that RE prices will not fall.
> 
> Keep in mind also that a lot of immigrants to not adapt the western lifestyle. They are many groups of people who have more than 2 people living in a home and contributing to payments and maintenance. That makes it a whole lot more affordable. Imagine 2 people making $60k/year and one person making $40k? Now you've got a $160k combined income in one home.


I don't agree. Salaries have not gone up for MOST people in the GTA. In fact, they've gone down in many cases if you factor in inflation, as meagre as it it today. Salaries and the general state of the economy are definitely disconnected from the state of the RE market. People are much more comfortable with debt today than they were 30 years ago. That's fine if you can carry it. If there's a change in that equation though, like even a modest hike in rates, then watch out. Peoples' tolerance for risk today will be dearly regretted one day. No savings, no investments... I hope they can live on a pension, if there's one left...


----------



## Just a Guy

KaeJS said:


> There is no doubt that interest rates will make it make it more difficult to afford a home.
> 
> At this point in time, though, I feel that the rates will be moving up so slightly that people will have enough time to adjust to it, which will prevent a crash from happening.
> 
> What will push rates up at an exponential rate? There's nothing that I can currently see on the horizon..


 It doesn't have to be exponential, each 1% increase in rate equates to nearly $100 more a month for each $100k of debt. Of course, only those on a variable rate would notice until renewal time...

Imagine your reaction when you are told, after making your mortgage payments for the past 5 years thinking everything is fine, that you now need another $700/month to keep your house...


----------



## KaeJS

Just a Guy said:


> It doesn't have to be exponential, each 1% increase in rate equates to nearly $100 more a month for each $100k of debt. Of course, only those on a variable rate would notice until renewal time...
> 
> Imagine your reaction when you are told, after making your mortgage payments for the past 5 years thinking everything is fine, that you now need another $700/month to keep your house...


Right, but everyone has a different renewal period. So, you would see this sort of thing happen over time. I would imagine as this news is broken to clients, the amount of rent that will be charged to tenants will also increase.

Suddenly, the guy who owns a house and is renting it out will need to cover x amount of dollars more, which means his tenants will also have to pay x amount of dollars more, so, in theory, it _should_ all be relative. (Hopefully). :biggrin:


----------



## Just a Guy

Unless you were a smart investor and didn't buy places at rates that are too high. There's a reason why my purchases are well below 100k in most cases. I also aggressively pay them down at these rates.

I ask you where the money comes from? When's the last time you got a $700 after tax raise?

No, people will try to sell, the market will flood and prices will drop. The early renewers may got out lucky, but most people will lose their shirts.


----------



## Siwash

KaeJS said:


> Right, but everyone has a different renewal period. So, you would see this sort of thing happen over time. I would imagine as this news is broken to clients, the amount of rent that will be charged to tenants will also increase.
> 
> Suddenly, the guy who owns a house and is renting it out will need to cover x amount of dollars more, which means his tenants will also have to pay x amount of dollars more, so, in theory, it _should_ all be relative. (Hopefully). :biggrin:


Do you know how difficult it is to raise rent in Ontario? You have to do major renos to the unit and show receipts to justify... we have rent control... My family owns apartment buildings in T.O. They can't even kick out their tenants if they need to.


----------



## KaeJS

Siwash said:


> Do you know how difficult it is to raise rent in Ontario? They can't even kick out their tenants if they need to.


Oh yeah. I forgot about that.

Damn. It's a good thing I have "licensees" instead of tenants. Phew.

Then, I guess raising the rent is a problem I never even thought about. LOL. That actually does become a little bit scary... Sheesh.


----------



## james4beach

KaeJS said:


> If the RE market crashed, the banks would not be happy.


They would also not be solvent. Banks will live or die by whether real estate stays high.


----------



## Janus

james4beach said:


> Yet we are *so over-confident, so obnoxious*, in Canada that we think: "this time it will be different".
> 
> Even with American experts, on the heels of their recent education on the topic, telling us: Canada is in trouble and it's going to blow up in our faces. Guys like Shiller, and agencies like Fitch. You don't like me, you think I'm a prickly pear? Fine, but please for the love of god, listen to some of the experts.
> 
> Yet we ignore them, head in the sand, "it can't happen here because... um, immigrants, and land is limited, and everyone needs housing, and our banks are better"


I couldn't agree with you more. I'm looking forward to scooping up some Canadian assets when this happens. Because the hubris on this topic (generally - I'm not calling out anyone specific in this thread) is so thick that you can smell the correction coming from a mile away. Will it take longer than we expect? Of course it will, these things always do. Everyone who called the US crisis called it in 2005.



james4beach said:


> They would also not be solvent. Banks will live or die by whether real estate stays high.


That's right. They talk about a very low risk of a housing correction simply because nobody has the balls to do the modeling and see what would actually happen to our financial institutions.


----------



## lightcycle

Janus said:


> I'm looking forward to scooping up some Canadian assets when this happens. Because the hubris on this topic (generally - I'm not calling out anyone specific in this thread) is so thick that you can smell the correction coming from a mile away. Will it take longer than we expect? Of course it will, these things always do. Everyone who called the US crisis called it in 2005.


As far as I see it, both sides are gambling. A homeowner is gambling that that price will either appreciate or stay level in the future regardless of economy and rate increases. However, you are gambling that the home prices won't appreciate by 80% from current values and then "correct" by only 20%. Not much scooping up to be done when you've sat out on most of the boom.

I find it funny how the prevailing attitude on the board is quite negative towards the investing permabears who have missed out on the current stock market runup, but totally opposite when it's the renters who have missed the same runup in the real estate market.


----------



## Siwash

lightcycle said:


> As far as I see it, both sides are gambling. A homeowner is gambling that that price will either appreciate or stay level in the future regardless of economy and rate increases. However, you are gambling that the home prices won't appreciate by 80% from current values and then "correct" by only 20%. Not much scooping up to be done when you've sat out on most of the boom.
> 
> I find it funny how the prevailing attitude on the board is quite negative towards the investing permabears who have missed out on the current stock market runup, but totally opposite when it's the renters who have missed the same runup in the real estate market.


As I've stated above, my rent is a lot cheaper than carrying the home I'd like to buy (and could easily qualify for). I am saving and investing in the meantime so I don't think I have "missed" anything, to be quite frank. Carrying costs including a mortgage, property taxes and maintenance would be over $1200 more per month for me or close to $15,000/year... that'a lot of cash. Houses where I am looking to eventually buy have not increased any where close to that amount per year even in this stupid silly run up on prices. So, I am ahead of the game. When we decide to buy (if we do) we will have an even fatter pile of cash for a downpayment.


----------



## Siwash

And my above numbers do not include unforeseen expenditures... you know those repairs/issues the previous owner neglected to tell you about and inspector missed... my buddy bought close to where we rent. Spent tens of thousands in repairs recently (not home improvement). He's regretting his purchase now but won't say it... it has put a lot of finical pressure on them as they aren't rich by any stretch. 

If my roof collapses tomorrow, as long as I'm not in it at the time (!), I don't have to worry about my insurance premiums going up and paying a big deductible.. by the way, renters insurance is a quite a bit cheaper than home owners insurance... $380 vs $1000+


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## lightcycle

All very valid points, but you fail to mention the huge equity gains that homeowners have experienced to offset those costs. I think it's great that the houses you're looking at did not noticeably appreciate in the last few years, but the reality is that most homeowners who jumped into the market in the last few years experienced 6-figure (tax-exempt) gains in their equity on a leveraged 5-figure investment. Hard to replicate in the stock market unless you bought on margin.

The gamble most potential homeowners take sitting on the sidelines is that the market may never come back to them. That they could face renting for the long, foreseeable future because the upside potential in equity gains may never be as great as the short-term past. That's fine if you only see a silver lining in not having to pay mortgage, repairs, insurance, etc. But not so great if you need the long-term security of not facing potential eviction every time you renew your rental agreement.


----------



## HaroldCrump

siwash said:


> as both *me *and the wife have db plans as teachers...





nemo2 said:


> english teachers?


Rotfl


----------



## al42

but you fail to mention the huge equity gains that homeowners have experienced to offset those costs.

I agree, we moved from a 150K bungalow in the Montreal area to a 300k bungalow in Burlington in 1999.
Sold the Burlington house for 525K in 2004 and moved north to the Georgetown area to a 2 story house that cost 360K.
We've since sold that house for 575K and moved a little further west towards Guelph and paid 425K for another bungalow.
Similar houses in this area are now selling for 525K to 575K.
So the way i look at it we are ahead of the game.


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## Just a Guy

lightcycle said:


> All very valid points, but you fail to mention the huge equity gains that homeowners have experienced to offset those costs. I think it's great that the houses you're looking at did not noticeably appreciate in the last few years, but the reality is that most homeowners who jumped into the market in the last few years experienced 6-figure (tax-exempt) gains in their equity on a leveraged 5-figure investment. Hard to replicate in the stock market unless you bought on margin.
> 
> The gamble most potential homeowners take sitting on the sidelines is that the market may never come back to them. That they could face renting for the long, foreseeable future because the upside potential in equity gains may never be as great as the short-term past. That's fine if you only see a silver lining in not having to pay mortgage, repairs, insurance, etc. But not so great if you need the long-term security of not facing potential eviction every time you renew your rental agreement.


Have many homeowners ever actually run the numbers on the true cost of home ownership? As a real estate investor, I have. When you factor in the interest you pay on the mortgage, the real estate fees when you buy and sell, the maintenance costs, upgrade costs and the taxes...not any of the cost of living expenses like utilities or insurance which is sometimes covered by rent, you'll find (especially when talking about the mortgage's interest) that you really are not making anywhere near six figure tax free returns in most cases.

In most cases, even with this huge run up, people only break even.

People who make money in real estate are ones who get other people to pay for all the expenses as well as the cost of the property, namely landlords. True, it's not tax free, but it's a real profit not a profit if I ignore the real costs associated with owning.

As for "potentially facing eviction every time you renew", if your a good tenant, or live in Ontario, that's not going to happen in most cases. If you're a homeowner however, you may be facing a similar problem when your mortgage comes up for renewal and you face a rate increase. If you factor in an extra $100/month increase for every $100k borrowed for each 1% increase, many people could be looking at a $500-$1000 increase in their home payment.

Many home owners are, in reality, only renting from the banks...while paying for all the maintenance no upgrades to boot.

Now, I'm not saying there aren't benefits to home ownership but, in reality, if you run the numbers, the benefits aren't as good as you think.


----------



## lightcycle

Just a Guy said:


> In most cases, even with this huge run up, people only break even.


To me, when I see "break even", it reads "rent-free"...

I doubt many homeowners look as their primary residence as an investment vehicle. To most of them, the mortgage is a form of forced savings that at the end of the mortgage will give them the dual advantages of freer cash flow and a chunk of equity/capital that they would not have otherwise had if they had spent a life of renting.

And being a good tenant means nothing if the owner wants to sell the place or move in himself.


----------



## Just a Guy

I just ran some actual numbers, loosely based on my real life (I didn't carry a mortgage, not move in these exact time periods, but it serves as a good example). 

My first house was worth about $100k, mortgage rates at the time were around 8%. I lived in it for about 7 years and sold it for $130k (a 30% tax free gain! not bad, not great when you factor in the time). Had I had a mortgage, it would have cost me over $50k in interest for that same time period, for a loss of $20k without factoring in realtor costs, improvements or maintenance.

The next house I bought was $179k, but the interest rates had dropped to about 4.5%, over the next 10 years interest cost me another $70k, but my house was owned during the boom and more than doubled to about $400k when it sold. I put in new hardwood floors, redid the bathroom, landscaped, insulation, new furnace, new hot water tank, fixed it up to sell, paid a realtor...I broke even on this one maybe, may e I even made up for the loss on the first one.

Next house, unfortunately, was bought after the boom for about $500k, at 3% for 5 years, I'd have paid another $70K+ in interest! and that doesn't include the thousands I put into renos...

Now, if I compare that to my rentals...I've always bought below $100k, even in the last year. I've always financed 100%. My renos to the place usually cost about $5000 maximum. All costs and expenses (including property taxes and my accountant's fees) are covered by the rent, at these interest rates, I even make a healthy profit on top of costs. All the rentals benefit from increases in the market and, because I own a bunch, there are a lot of tax advantages which let me write off a lot of the profits, those that I can't are only taxed at capital gains if I decide to sell...as long as I don't sell the appreciate tax differed. In 17.5 years the places would be paid off completely, by someone else. If the market corrects by 50%, they are still worth somewhere around $50k (tax free as it's a capital loss which I could use to offset other investments) each with no loss to me.

Now, there are benefits to being a home owner, I am one and don't regret it, but don't confuse it with being a good investment.


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## lightcycle

Just a Guy said:


> Now, there are benefits to being a home owner, I am one and don't regret it, but don't confuse it with being a good investment.





lightcycle said:


> I doubt many homeowners look as their primary residence as an investment vehicle.


----------



## Just a Guy

lightcycle said:


> To me, when I see "break even", it reads "rent-free"...
> 
> And being a good tenant means nothing if the owner wants to sell the place or move in himself.


Nothing is free, if I look at the maintenance and improvement costs, the property taxes, and just extra costs (increased insurance increased utilities, etc.) I probably would pay "rent" on top of a mortgage payment if I had one.

Speaking as a landlord, true landlords would probably never move into one of their profitable rentals...nor would they want to sell one. These things are cash machines. Plus, a good renter is golden. If I get one, I go the extra mile to keep them happy. Never raise the rent, upgrade their place periodically, etc.

Don't confuse speculators with investors...true real estate investors are different from people who buy houses to rent or flip.

As for "people don't look at their residence as an investment vehicle", then why do most people refer to it as "their biggest investment"? I think the home represents the largest "savings" for most of the population...as sad as that is.


----------



## lightcycle

There's a fundamental disconnect in your messaging.

Your espouse the benefits of renting, yet as a landlord, you financially benefit from renters who build you equity. Because you realize that there is an exploitable monetary delta between ownership and renting.

Why deny another potential owner from eliminating that profit delta (bypassing the landlord) and building their own equity?

That was a rhetorical question...


----------



## Just a Guy

Actually, I say owning to live in is not a good investment, owning a rental is.

In the case of home ownership, your landlord is the bank, not the homeowner. I think that is the error in your understanding.


----------



## lightcycle

Owning to live means that the bank stops being your landlord at the end of the mortgage.

Renting to live means having a landlord for the rest of your life.

Where is the error of my understanding here?


----------



## HaroldCrump

A profitable landlord is recovering all of his/her costs, including mortgage interest, property taxes, maintenance, etc. and *then *layering a % of profit on top of everything else.
Therefore, the L/L is yet another middleman between the occupant and the bank, which is ultimately financing the whole thing.

Assuming other costs (maintenance, property taxes, insurance, etc.) are equal between the two scenarios (renting vs. owning), an owner should be paying less for the same property over time.
Of course, this is assuming that the L/L is not losing money or barely breaking even, which may not be a good assumption these days with such high prices for SFH.

The reason renting may appear to be less expensive than owning is because most SFH owners will not own rent the equivalent property if they were renting.
They'd instead be renting an apartment in a high rise, or a condo.

And vice versa...when a renter living in a high rise apartment building chooses to become a home-owner, chances are they will buy a SFH or a condo in a nicer building/better neighborhood.
So the comparison is not exactly apples-to-apples.


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## Just a Guy

How many people do you know who are mortgage free? Plus, there are still taxes, maintenance, upgrades...most people I know pay their entire lives.

Again, not against home ownership, I just don't think it's as rosy as people think. If I invested the difference in the cost of renting vs the cost of ownership, could I be further ahead? Of course, most renters would never invest the difference...


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## Just a Guy

Harold, most profitable landlords have owned properties since before the boom, that's why it can be profitable. It's nearly impossible to find a good investment property at today's prices, so investors aren't buying.

If I'd hold onto my first house which I bought for 100k, it would have been profitable today as a rental...today it's worth $350k, and would not be a profitable rental.


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## HaroldCrump

For a renter to come out ahead of the home-owner over the long run, a couple of conditions must exist:

#1 - The L/L in question must either be losing money or breaking even after mortgage interest, maintenance, insurance, etc.
#2 - The renter in question must invest the "difference" in securities with a higher IRR in the long-run than residential R/E


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## lightcycle

Just a Guy said:


> How many people do you know who are mortgage free?


A lot. But it may just be me.

Regardless, being mortgage free isn't even the end-game. It's building equity. Something that as a landlord you should know very well first-hand, but you're either being very coy about it, or... what?


----------



## HaroldCrump

Just a Guy said:


> Harold, most profitable landlords have owned properties since before the boom, that's why it can be profitable. It's nearly impossible to find a good investment property at today's prices, so investors aren't buying.
> 
> If I'd hold onto my first house which I bought for 100k, it would have been profitable today as a rental...today it's worth $350k, and would not be a profitable rental.


Right, so the key metric here in the cap rate.
At current cap rates, the vast majority of wannabe R/E "investors" / landlords are losing money.
They are probably just convincing themselves that they are "long term investors".


----------



## Pluto

KaeJS said:


> The thing is....
> 
> 
> 
> I cannot afford to live in Toronto, nor would I want to live in Toronto. I live about an hour or so from Toronto. In 2012, I paid $235k for a 1400sq ft, 3 bedroom, 2+1 bathroom townhome with garage and finished basement. The house was move-in ready and it was built in 2004/2005.
> 
> It is perfectly affordable. Of course, it is tough for me because I am on my own and only make $40k/year. But, imagine how easily affordable this becomes if you have a couple, each making $50k/year? It becomes a joke.


did you consider giving yourself a 10% raise by renting out one bedroom, to a mature college student, or working person?


----------



## Pluto

Just a Guy said:


> Have many homeowners ever actually run the numbers on the true cost of home ownership? As a real estate investor, I have. When you factor in the interest you pay on the mortgage, the real estate fees when you buy and sell, the maintenance costs, upgrade costs and the taxes...not any of the cost of living expenses like utilities or insurance which is sometimes covered by rent, you'll find (especially when talking about the mortgage's interest) that you really are not making anywhere near six figure tax free returns in most cases.


I think when running these expense numbers one should subtract what they would have paid in rent.


----------



## KaeJS

Pluto said:


> did you consider giving yourself a 10% raise by renting out one bedroom, to a mature college student, or working person?


I currently make $1050/month net from my rental income. I have 2 roommates in the home.

I have tried with 3 people, but it has always been a problem. Roommates complain it is too loud. Two of the rooms are fairly close together and there are complaints of TV's being on and this and that. It's too hard to get people with matching working/lifestyle schedules. More headache than it's worth.


----------



## KaeJS

Pluto said:


> I think when running these expense numbers one should subtract what they would have paid in rent.


Agreed.

My Mortgage + Property tax payment is $1200/month.
If I rented just a room for myself, I would pay at least $500/month.
Since I am receiving $1050 in rental income, $1050 + 500 = $1650/month.

Plus, consider that of the $1200/month I pay, $500 of that is equity. So you can add that $500 as well, so it's really $1050 + 500 + 500 = $2050.

Then I have bills and maintenance, which equates to about 400/month. $1200 + 400 = 1600.

From this point of view, $2050 - $1600 = $450 profit/month without any capital/housing appreciation.


----------



## Pluto

Just a Guy said:


> I just ran some actual numbers, loosely based on my real life (I didn't carry a mortgage, not move in these exact time periods, but it serves as a good example).
> 
> My first house was worth about $100k, mortgage rates at the time were around 8%. I lived in it for about 7 years and sold it for $130k (a 30% tax free gain! not bad, not great when you factor in the time). Had I had a mortgage, it would have cost me over $50k in interest for that same time period, for a loss of $20k without factoring in realtor costs, improvements or maintenance.
> 
> The next house I bought was $179k, but the interest rates had dropped to about 4.5%, over the next 10 years interest cost me another $70k, but my house was owned during the boom and more than doubled to about $400k when it sold. I put in new hardwood floors, redid the bathroom, landscaped, insulation, new furnace, new hot water tank, fixed it up to sell, paid a realtor...I broke even on this one maybe, may e I even made up for the loss on the first one.


With respect to your first house, a 20,000 loss over 7 years. Could you have rented a similar house for a total of 20,000 over 7 years? You see, if you didn't own it, and rented it, it probably would have cost you more to rent it over 7 years. 20,000/ 7 = 2857 per year. To me, that is cheap living and a renter could not have achieved that. Even if you added in maintenance and Realtor costs, I suspect it would still be reasonable.

Had you rented that house for say, $1000 / mo for 7 years, it would have cost 84000 in rent. Compared to your ownership loss of 20000, you made out great.

Too, you mention that the same house now has a market value of 350,000. Had you rented that house to live in, vs owning it, for all these years, the owner, your landlord, would have been the financial winner.


----------



## Pluto

KaeJS said:


> I currently make $1050/month net from my rental income. I have 2 roommates in the home.
> 
> I have tried with 3 people, but it has always been a problem. Roommates complain it is too loud. Two of the rooms are fairly close together and there are complaints of TV's being on and this and that. It's too hard to get people with matching working/lifestyle schedules. More headache than it's worth.


Way to go. As long as you rent out less than 50% of the property, you retain your tax free capital gain status. To me, what you are doing is potentially better than an RRSP.


----------



## Siwash

HaroldCrump said:


> Rotfl


I didn't realize we were posting threads on the New Yorker... holy anal batman


----------



## Siwash

Just a Guy said:


> Have many homeowners ever actually run the numbers on the true cost of home ownership? As a real estate investor, I have. When you factor in the interest you pay on the mortgage, the real estate fees when you buy and sell, the maintenance costs, upgrade costs and the taxes...not any of the cost of living expenses like utilities or insurance which is sometimes covered by rent, you'll find (especially when talking about the mortgage's interest) that you really are not making anywhere near six figure tax free returns in most cases.
> 
> In most cases, even with this huge run up, people only break even.
> 
> People who make money in real estate are ones who get other people to pay for all the expenses as well as the cost of the property, namely landlords. True, it's not tax free, but it's a real profit not a profit if I ignore the real costs associated with owning.
> 
> As for "potentially facing eviction every time you renew", if your a good tenant, or live in Ontario, that's not going to happen in most cases. If you're a homeowner however, you may be facing a similar problem when your mortgage comes up for renewal and you face a rate increase. If you factor in an extra $100/month increase for every $100k borrowed for each 1% increase, many people could be looking at a $500-$1000 increase in their home payment.
> 
> Many home owners are, in reality, only renting from the banks...while paying for all the maintenance no upgrades to boot.
> 
> Now, I'm not saying there aren't benefits to home ownership but, in reality, if you run the numbers, the benefits aren't as good as you think.




Excellent points... The true cost is rarely ever considered by the homeowner...


----------



## Just a Guy

Pluto said:


> With respect to your first house, a 20,000 loss over 7 years. Could you have rented a similar house for a total of 20,000 over 7 years? You see, if you didn't own it, and rented it, it probably would have cost you more to rent it over 7 years. 20,000/ 7 = 2857 per year. To me, that is cheap living and a renter could not have achieved that. Even if you added in maintenance and Realtor costs, I suspect it would still be reasonable.
> 
> Had you rented that house for say, $1000 / mo for 7 years, it would have cost 84000 in rent. Compared to your ownership loss of 20000, you made out great.
> 
> Too, you mention that the same house now has a market value of 350,000. Had you rented that house to live in, vs owning it, for all these years, the owner, your landlord, would have been the financial winner.



But, that was just in interest...I also maintained the house, upgraded it, paid property taxes, all things that added to the cost of living there. I could have easily spent more than 60k over those 7 years.

The point, however, was most people say "I bought for 100k and sold for 130k making a 30k profit tax free"...which wasn't the case.


----------



## Just a Guy

lightcycle said:


> A lot. But it may just be me.
> 
> Regardless, being mortgage free isn't even the end-game. It's building equity. Something that as a landlord you should know very well first-hand, but you're either being very coy about it, or... what?


What goes up, also comes down... 

I've bought 5 or 6 properties in the past year which last sold for more than double what I paid for them (all were last purchased 3-5 years ago)...those people didn't benefit from "building equity", in fact I'd bet they are all in personal bankruptcy now. For several years before 2013, I hadn't bought a property as there was nothing on the market that I could make money with.

At these inflated prices, most houses will probably lose equity in my opinion. At some point the music will stop and a lot of people will get caught holding the bag. Times are changing, there aren't a lot of properties available, but there are more than there have been in a long time...to me that's could mean many more to come. That and the fact that the banks are making it real tough to borrow...tougher than 2008.


----------



## Pluto

Just a Guy said:


> But, that was just in interest...I also maintained the house, upgraded it, paid property taxes, all things that added to the cost of living there. I could have easily spent more than 60k over those 7 years.
> 
> The point, however, was most people say "I bought for 100k and sold for 130k making a 30k profit tax free"...which wasn't the case.


yes, I see your point, many people don't subtract their expenses from their profit. 

Too, as an owner for those 7 years, I think you made out ok vs renting. And had someone rented it out for 1000 a month + some increases over the years, put 60,000 into it, and sold it recently for 350000, they would have made out ok.


----------



## Just a Guy

Not a typical scenario though...back then rents were a lot less, housing has never increased like it did, and that house probably won't go up 3.5x (if it does, we.re in a lot of trouble) for a long time. I think our neighbours rented at the time, I believe it was around $650-$700/month, according to the mortgage calculator, my mortgage would have been $756/month.

In hind site, it's easy to say it was a good investment, but it took 60+ years to go from $15000 (original sale price) to 100,000. I know today I wouldn't buy the place as a rental...the money's been made.


----------



## lightcycle

Just a Guy said:


> At these inflated prices, most houses will *probably* lose equity in my *opinion*


"Probably"... An "opinion"...

You've basically brought it back full circle to my original point: that it's a gamble on both sides whether you jump in or sit on the sidelines.


----------



## NotMe

"In most cases, even with this huge run up, people only break even."

Just a comment on that quote above from another poster - I think it's important to note that you didn't break even, you lived for free. That ain't half bad, as people say.

(also although I am a homeowner I'm also a huge advocate of renting - having done both - so please don't call me a bear/bull/deer/chicken/frog). Just I think that's an important point to note.


----------



## Just a Guy

lightcycle said:


> "Probably"... An "opinion"...
> 
> You've basically brought it back full circle to my original point: that it's a gamble on both sides whether you jump in or sit on the sidelines.


Your right, the difference is, mine is an educated opinion, vs. "wishful thinking" in my opinion. I don't claim to know the future, but I'm pretty sure that, when interest rates increase, things will get ugly. I've never claimed differently, check my posts. I've had "skin in the game" for a long time. I've watched markets for a lot longer than that, I remember the 80's, I read history, and I've watched others do things right and wrong.

I'm the first to admit that I've been very lucky with my investments...but at some point, you are either the luckiest person alive, or maybe you are smart enough to know how to avoid common mistakes. I wouldn't be as wealthy today without the run up in housing prices and stocks...I could have been even wealthier had I leveraged my original house and bought 9 more places...in hindsight anyone could be rich. With my opinions though, I did manage to become wealthy and only catastrophic failure will make me poor.

If you think I'm wrong, buy houses. If you think real estate will always go up, don't worry about the prices.

The entire forum is about opinions. There are always people though who are more experienced, and may be worth listening to in my opinion. 

With every market there are those who predict everything is fine, and those who say the sky is falling. Most only do so with no backing evidence. I've provided reasons why I think the market will correct, you can chose to believe it or not. I don't state you shouldn't buy real estate, in fact I often point out the properties I'm buying right now...the difference is, I also point out what I'm buying is significantly discounted to today's prices, because I believe real estate is generally overpriced, and you can't make a profit at these prices.

There are many cases on this forum where people post properties, and present their numbers...at 3%, with no equity pay down, they can make enough (if they don't include any vacancy or expenses) to break even...hoping for capital appreciation...

Then they, and others, defend this as a great investment, despite what experienced investors tell them...

The same thing happens in the stocks section, or people who want to start their own businesses...

It's all opinion. 10 years from now, that internet stock with no revenues could be worth a fortune, that guy who wanted to start a business selling eggs to chicken farmers may be successful, that house they bought for a rental may be worth millions...

The nice thing about the forum is you can chose to believe who you want, it's your neck not mine...I've got nothing to lose. Get in the game, put your money on the table and prove me wrong, I'll honestly be happy for you...of course, I'll have benefitted as well since I'm also in the game, I'm just playing by my rules.

I always and amazed at how many people will sideline coach, some strongly, but are unwilling to step up. If I'm wrong, it costs me money, if they are wrong...


----------



## the_apprentice

Here's the thing... I won't disagree with you, but I am bullish on Real Estate (regardless of current prices).

Doesn't matter how educated you may be (or think you are), it's still a guess. I have purchased a second property earlier this year because I have found value in the second property (as well as the 1st) and see much potential for growth in the area. I'm only 26 and may not have the amount of experience you do, but people I've known have been bearish on Real Estate for the last 20 years. Everyone needs a home which makes it a necessity, and "now" is always the best time to buy; I'm in it for the long-run anyways. You seem to have been quite successful with real estate. I respect your view and I wanted to share a different perspective.


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## Just a Guy

I don't disagree with you either, but I will emphasize your point "I found value in the second property". I too am buying "now", but I'm not buying just anything.

I've often said you can find a deal in real estate if you look...which may be better than the limited stock market. However, I also think the *majority* of places are too expensive to buy and still make money.

In the stock market, I made a lot of money with Apple. Do I like the company, yes I do. Would I buy at today's prices, no I wouldn't. The easy money's been made, the chances of it doubling are slim (it's already close to being the most valuable company in the world again which makes no sense to me), so other stocks look better. Will I sell, not yet, I don't see any reason to and it's still a good company...at the price I bought in at, I can't lose, so I can afford to gamble.

"Now" is always the best time to invest, *if* there is a good investment. Investing isn't about timing, it's about the product you are buying. It's a zero sum game, for me to realize profits, someone else has to pay the price. You can't win at any cost.


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## Pluto

lightcycle said:


> "Probably"... An "opinion"...
> 
> You've basically brought it back full circle to my original point: that it's a gamble on both sides whether you jump in or sit on the sidelines.


"Gamble" is too strong of a word. In rolling dice playing against the house there is no way to improve your chances (except by cheating, and cheating doesn't count). In real estate and stocks There are many things one can do to improve ones odds of making money, and reducing the probability of losing. 

Instead of gamble, its a judgment call. Some people's judgment is better than others. And good judgment can be learned by those who are willing to learn.


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## Pluto

the_apprentice said:


> Here's the thing... I won't disagree with you, but I am bullish on Real Estate (regardless of current prices).
> 
> Doesn't matter how educated you may be (or think you are), it's still a guess. I have purchased a second property earlier this year because I have found value in the second property (as well as the 1st) and see much potential for growth in the area. I'm only 26 and may not have the amount of experience you do, but people I've known have been bearish on Real Estate for the last 20 years. Everyone needs a home which makes it a necessity, and "now" is always the best time to buy; I'm in it for the long-run anyways. You seem to have been quite successful with real estate. I respect your view and I wanted to share a different perspective.


I think "guess" is too strong of a word. "Guess" and "Gamble" tends to make every ones judgment equal, but it isn't so. Its entirely possible what you see as value, is. But if you are guessing, it may not be. Back in the 1980's there was an Ontario real estate guru advising people to get rich buying and renting out residences. After the bust, he went bankrupt. the leverage got him. or was it bad judgment? He was eternally bullish and used too much leverage. And you hear of that Rich Dad, Poor Dad guy whose wife got into buying rental properties? After the US real estate bust, I didn't hear anything more about her. 

You don't give any figures about why you think you can survive a downturn. If you are guessing, and too optimistic, I suspect you might get wiped out. Too,"I'm in it for the long run" is sometimes a rationalization for paying too much.


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## the_apprentice

That's why I love to read more than I post here, you guys always have something I can learn from.

"I'm in it for the long-run" is the worst case scenario and there is always a Plan A, Plan B, and Plan C. All plans were given given plenty of thought without going into too much depth.


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## Just a Guy

What happens when, after the correction, you go for a renewal and the banks asks for a current appraisal...you find the appraisal comes in below your equity, and they ask you to make up the difference? It can, and has happened in the past...making payments often isn't enough...being in for the long run can have unforeseen consequences to those who have only seen the boom years...


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## KaeJS

This thread is getting scary.

Anyone want to buy my house? :biggrin:


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## the_apprentice

^how much? Lol

We would all be screwed if that were to happen. Everyone would be directly affected.

Based on your replies you always mentioned the "negative" scenario. Although it may be a possibility, I think we can all agree we don't see that happening. You're bearish that's fine, but you need to understand the people who are bullish. Still, I would be prepared for it. I just think you took the devils advocate route because I posted my age, but I could be wrong.

To each his own...


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## Pluto

the_apprentice said:


> You're bearish that's fine, but you need to understand the people who are bullish. Still, I would be prepared for it. I just think you took the devils advocate route because I posted my age, but I could be wrong.
> 
> To each his own...


Nothing to do with your age. 
Can you help me out in understanding the bullish? 
Some details/facts would be helpful concerning why you believe the way you do.


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## Just a Guy

I don't judge on age, you may be surprised at my age...

I mention the negative scenario these days because that's mostly what I see. It's not as easy to make money in real estate today as it was back in say 2000. To me, that just means you have to be careful with what you purchase. If the market corrects, it will be a buyer's market and there will be a lot of money to be made...

Funny thing is, that works in stocks too.

Remember the little used mantra, buy low, sell high.

Most "experts" seem to preach the opposite.


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## My Own Advisor

I hope the market corrects. This is a good thing as a buyer (stocks, real estate, other).


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## the_apprentice

Let me correct myself by saying that I am bullish on my real estate investments, but do think the overall market is overvalued.

Although I did say that the current market seems overvalued, I still believe these high prices are here to stay; and I am speaking specifically for the GTA/Toronto. Toronto as a city has a lot of upside to it (TONS of opportunity) and will continue to boom. My thoughts are that the market will stagnate once the interest rate rises. We have another 2 years or so before that happens, which could potentially bring prices down to as much as 15% DEPENDING on LOCATION!


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## Just a Guy

Ontario's provincial debt is as high today as Canada's federal debt in the 80's, with no signs of slowing. The manufacturing industry is suffering. The financial industry is tied to the economy...why exactly will Toronto survive the correction unscathed?

I would think Alberta, lowest debt in Canada, is fairly insulated as long as oil is in demand (last to fall, lowest collapse). Saskatchewan has oil and didn't run up as high...I think the Maritimes may benefit (actually grow?) from the refineries and off shore development, plus they are the lowest prices in Canada to begin with...Vancouver has climate and a lack of expansion...not so good an outlook for the rest of that province though...


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## Pluto

the_apprentice said:


> Let me correct myself by saying that I am bullish on my real estate investments, but do think the overall market is overvalued.
> 
> Although I did say that the current market seems overvalued, I still believe these high prices are here to stay; and I am speaking specifically for the GTA/Toronto. Toronto as a city has a lot of upside to it (TONS of opportunity) and will continue to boom. My thoughts are that the market will stagnate once the interest rate rises. We have another 2 years or so before that happens, which could potentially bring prices down to as much as 15% DEPENDING on LOCATION!


I wish you the best of luck, but I get the feeling you are walking into a buzz saw. I know people in To who were going to be multi millionaires by buying second houses and renting them out in 89, 90. Two three years later they were very subdued and even depressed looking. They didn't talk about their financial problems, but one could easily imagine. Location is relevant, but not everything. The value of investments will adjust downward, as rates go up. 
I'm assuming you have looked at a historical price graph of To prices, and noticed the busts after the booms, and how long it takes for a new boom to emerge? Are you sure you can survive the next bust? Just a gut feeling - you seem way too optimistic.


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## Just a Guy

He could be fine...

Apprentice, would you be willing to post your numbers on your investments? Purchase price, rent, expenses, etc.? It'll be quite obvious how safe an investment you've got...

Sometimes people surprise you, there was a guy in a different thread who I thought was probably in deep trouble...it turned out that, with his large down payment, he'd probably be okay. From his talk, I was pretty sure he'd be in trouble.

I think most investors gain paranoia with experience...and a little paranoia makes you a better investor. When I started to really invest seriously, I couldn't afford to lose...I was injured, broke, and had a young family to support. That kind of pressure inspires you to make sure you'll be successful in the long run. 

Surviving the hard times is when you know your a good investor, anyone can make money in a boom. There's a reason so many people are anti-investing when you talk to them...a lot got burned over the years. Ever wonder why all those "flip this house" type shows, which were everywhere on tv a few years ago, all but vanished? They turned into renovate your home type shows...though, I have noticed a few making a comeback.

Of course, if you're drinking the KoolAid at one of those seminars provided by people at REIN, well be content in the knowledge that you'll make other rich when they buy your foreclosures... I've made a lot of money from former REIN "investments", after they went into foreclosure.


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## KaeJS

Because the financial system is so dependent on RE prices, the Bank of Canada, Government, Financial Institutions and all the other parties involved will ensure that rates do not increase exponentially over a short period of time.

People in the "higher ups" understand how devastating a correction or crash might be at this point in time for 90% of the population and for the financial system. There will be no quick increase in rates. The rates will go up, but it will be such a slow process that the RE market will be flat for a number of years. There will be no boom, there will be no bust. Essentially, the cycle is going to be on pause. By pausing the cycle, this will (hopefully) allow wages to increase, or, at the least, will allow people to eliminate some of their debt, making living more affordable and making Canadian RE Prices more relative to other parts of the world.

I find it extremely hard to believe that rates are going to increase fast and high enough to cause a collapse or correction.

I do not disagree with anyone in terms of rates increasing, or the fact that an increase in rates makes it more difficult to afford a home. That is just common sense and economics 101.

What I am looking at is the bigger picture. Forget your Joe Blow buying a house down the street or renting it out. Forget the young 28 year old family. It's not even about these people. It's about the Canadian economy and the financial structure that Canada has built (and sort of got themselves in a pickle). Some people are a little bit too concerned with themselves, when in reality, it has nothing to do with the average investor or home owner.

Plus, I also feel that some underestimate how many wealthy people there are and how attractive Canada still is as an investment.

You must look at all factors. It's not just about the RE market. It's about climate, jobs, healthcare, political stability, laws, transportation, cleanliness, etc.
Toronto (for example) is still one of the cleaner cities to live in throughout the entire world. Healthcare is a big motivator for foreign buyers, as well.

As I have said upthread, one must also consider that the western way of living (the "white people" way), is that you grow up, get a job, and get your own life. Most parents are ready to get rid of their kids at 20 years old. In other cultures, that is almost never the case. Most middle eastern or asian cultures have multiple people living in a home and contributing. So what if the mortgage was to increase by $500/month? If you split that between 4 contributors in a house hold, that's a mere $125/month/person, which is absolutely feasible. All of those westerners or white people who can't afford their homes any longer because you have the husband working and the mother staying at home with the baby might be forced to sell. And if they have to sell, well, I'm sure there will be immigrants waiting to purchase their home.

There will be no decline. There will be no growth for investors.

The real estate market will be flat, because it's much more than just interest rates we are talking about. It's deeper than that. Interest rates are just the snow that has settled above the ice. There's still a lot of hungry fish swimming around in the waters below.


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## KaeJS

And as for my opinion on which is better in terms of renting vs. owning -

At this current time, I don't really feel like either is better. They both have pro's and con's and in this type of market, I would say they end up being about the same. Although I am a homeowner, I can see both sides of the coin. I still, however, would never rent. But that is more due to a lifestyle choice than an investment choice.


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## Just a Guy

Interesting idea...

Now, how will the "average" Canadian react to them losing their homes only to have imegrants buy them up? I know canada is a fairly apathetic place, but that kind of thing usually (if history is any indication) usually builds some resentment, racism and a call for protectionism...if nothing is done, it can lead to uprisings...

We could be in for so e interesting times...


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## the_apprentice

KaeJS said:


> I find it extremely hard to believe that rates are going to increase fast and high enough to cause a collapse or correction.
> 
> What I am looking at is the bigger picture.
> 
> Plus, I also feel that some underestimate how many wealthy people there are and how attractive Canada still is as an investment.
> 
> You must look at all factors. It's not just about the RE market. It's about climate, jobs, healthcare, political stability, laws, transportation, cleanliness, etc.
> Toronto (for example) is still one of the cleaner cities to live in throughout the entire world. Healthcare is a big motivator for foreign buyers, as well.
> 
> There will be no decline. There will be no growth for investors.


Excellent post! Couldn't agree more.


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## Siwash

KaeJS said:


> And as for my opinion on which is better in terms of renting vs. owning -
> 
> At this current time, I don't really feel like either is better. They both have pro's and con's and in this type of market, I would say they end up being about the same. Although I am a homeowner, I can see both sides of the coin. I still, however, would never rent. But that is more due to a lifestyle choice than an investment choice.


I rent. Lifestyle?? I get up every morning go to work, come home mow the lawn, make dinner, watch some TV... go on vacation, see friends, invite them over for a BBQ...

What is different? I pay 40% less to live here than if I had bought the place! 

Canadians are generally anti-renting. They have an emotional attachment to their home that is not necessarily a healthy attachment. I still live in a home. My memories and the things I truly love - my wife, family, friends, hobbies and interests... aren't diminished because I rent. 

Fact is, if you are thinking of buying now for the first time, you really should think twice. 2002 might have been an opportune time to buy - 2014 not so much... but buying opportunities will return sooner than you think.


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## Siwash

_*"I find it extremely hard to believe that rates are going to increase fast and high enough to cause a collapse or correction."
*_


the_apprentice said:


> Excellent post! Couldn't agree more.


Rates only have to go up a point of two... that would/could add several hundreds to a mortgage payment and SINK the many people who are over-leveraged. That is a fact.


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## Sixth_Circle

lightcycle said:


> All very valid points, but you fail to mention the huge equity gains that homeowners have experienced to offset those costs.


The past decade has been highly unusual. The mistake is thinking it will continue like that forever. 

The other thing to consider is that equity is just a number on a piece of paper, and does not exist unless the home is sold or you borrow against it. Equity will not buy you a meal, pay your bills, or fund an emergency repair, unless you have traded some of it for more debt. And once you sell and realize your gains (after subtracting taxes, interest, maintenance costs, inflation, etc), the market has likely moved with you, so you might have to take out another mortgage if you move to another home or settle for a less-desirable location. Your rent will likely be much more than you were paying for your mortgage each month. You will likely be priced out of your own home or neighbourhood.

There is no doubt that the post-WWII suburban boom was great for home ownership, as families and jobs were somewhat stable. But times and lifestyles have changed. Ownership is becoming more and more of an anchor as families split, women no longer need men to provide for them, and people move to better job opportunities. And home maintenance and regular trips to Home Depot are seen as a burden when folks would rather be out for dinner, seeing a show, or pursuing their personal interests. There is nothing attractive, in a practical sense, about being enslaved by a house. People (especially first-time buyers) are still responding to real estate with emotions rather than rationality. 

People often say we have no freedom because we rent. We can't paint or renovate the way we want. But who really cares? We chose a unit that meets our tastes, and we actually have more freedom as we can leave and go wherever we want, whenever we want. Is it perfect? No. But neither is ownership. Both have their pros and cons, and you can make either option work.


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## Siwash

Pluto said:


> I wish you the best of luck, but I get the feeling you are walking into a buzz saw. I know people in To who were going to be multi millionaires by buying second houses and renting them out in 89, 90. Two three years later they were very subdued and even depressed looking. They didn't talk about their financial problems, but one could easily imagine. Location is relevant, but not everything. The value of investments will adjust downward, as rates go up.
> I'm assuming you have looked at a historical price graph of To prices, and noticed the busts after the booms, and how long it takes for a new boom to emerge? Are you sure you can survive the next bust? Just a gut feeling - you seem way too optimistic.


Agreed.. the very unsettling difference b/w 1989 and today's madness is that 25 years ago people still had some semblance of sanity and did not borrow 95% or more like people so commonly do today.. they are setting themselves up for a mighty fall. Look at debt to earnings ratios today. They have doubled in a generation! people owe $1.65 for every dollar earned... crazy! Good luck, apprentice.. I hope you have a backup plan.


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## Siwash

Sixth_Circle said:


> The past decade has been highly unusual. The mistake is thinking it will continue like that forever.
> 
> The other thing to consider is that equity is just a number on a piece of paper, and does not exist unless the home is sold or you borrow against it. Equity will not buy you a meal, pay your bills, or fund an emergency repair, unless you have traded some of it for more debt. And once you sell and realize your gains (after subtracting taxes, interest, maintenance costs, inflation, etc), the market has likely moved with you, so you might have to take out another mortgage if you move to another home or settle for a less-desirable location. Your rent will likely be much more than you were paying for your mortgage each month. You will likely be priced out of your own home or neighbourhood.
> 
> There is no doubt that the post-WWII suburban boom was great for home ownership, as families and jobs were somewhat stable. But times and lifestyles have changed. Ownership is becoming more and more of an anchor as families split, women no longer need men to provide for them, and people move to better job opportunities. And home maintenance and regular trips to Home Depot are seen as a burden when folks would rather be out for dinner, seeing a show, or pursuing their personal interests. There is nothing attractive, in a practical sense, about being enslaved by a house. People (especially first-time buyers) are still responding to real estate with emotions rather than rationality.
> 
> People often say we have no freedom because we rent. We can't paint or renovate the way we want. But who really cares? We chose a unit that meets our tastes, and we actually have more freedom as we can leave and go wherever we want, whenever we want. Is it perfect? No. But neither is ownership. Both have their pros and cons, and you can make either option work.


Very well stated.


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## Pluto

KaeJS said:


> Because the financial system is so dependent on RE prices, the Bank of Canada, Government, Financial Institutions and all the other parties involved will ensure that rates do not increase exponentially over a short period of time.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> There will be no decline. There will be no growth for investors.
> 
> The real estate market will be flat,


I'm not too sure about that. A top priority job for central banks is inflation fighting. Changes in inflation will be a huge factor in when and how much rates go up. If inflation goes too high, they won't care about home owners, or investors. They expect individuals to do their own due diligence and be prepared for the worst. The Bank of Canada and the US fed, will not allow runaway inflation to protect some investors who paid too much with too much leverage. 

In TO, average home prices went down over 20% between '89 and about 1994. I don't recall the interest rate moves of those times, but it wouldn't be a waste of time to obtain the historical interest rates for that time period to compare to home prices....Actually, now that I have checked, there were aggressive rate hikes commencing around 1987 that preceded the house price decline. Those in control didn't care who would get wiped out, as cooling the economy to contain inflation was more important.


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## HaroldCrump

Pluto said:


> A top priority job for central banks is inflation fighting.


Correction - the top priority job for central banks is _*creating *_inflation - not fighting to reduce it.
Haven't you noticed - every single major world central bank has categorically stated that their goal is to create inflation (the number usually thrown around is 2%) and achieve _*nominal *_GDP growth.
That is what _inflation targeting _means i.e. we endeavor to create core inflation up to 2%.


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## Just a Guy

I realize that Canada's fed is different Than the US one, and our banks are different...but, if you look at the USA, I wouldn't trust the financial industry to "do the right thing" for the economy. They've never done it in the past if they think they could get away with making more money...

Read some of Michael Lewis's comments...in liar's poker (when he was on insider) he tried to expose the shenanigans...instead, his book became a "how to" manual. In the big short, he says the stuff that happened in the 80's with liar's poker were minor compared to what happened in the 2000's...

What did the financial institutions do with all the bail out money they were supposed to lend to restart the economy in 2008, paid out bonuses to their executives and kept the rest...

If you're counting on the financial system to save us, we're in big trouble...


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## Just a Guy

HaroldCrump said:


> Correction - the top priority job for central banks is _*creating *_inflation - not fighting to reduce it.
> Haven't you noticed - every single major world central bank has categorically stated that their goal is to create inflation (the number usually thrown around is 2%) and achieve _*nominal *_GDP growth.
> That is what _inflation targeting _means i.e. we endeavor to create core inflation up to 2%.


I think they are very modest in their statements, and wildly successful in their achievements...I'd love it if inflation was anywhere near as low as 2%...my buying power says it's in the high double digits...


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## HaroldCrump

Just a Guy said:


> I think they are very modest in their statements, and wildly successful in their achievements...I'd love it if inflation was anywhere near as low as 2%...my buying power says it's in the high double digits...


Yup, _that_ is a separate issue, and one we have discussed several times over.
I am in complete agreement with you - I consider true consumer/household inflation to be in the high double digits as well.


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## Just a Guy

High inflation is a good reason to buy real estate though...if you buy a place in today's dollars and pay them off in the devalued tomorrow's dollars...real estate does generally keep it's value in terms of inflation.

Perhaps, for that reason, the people who say there will not be a correction may be right...


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## HaroldCrump

Just a Guy said:


> I realize that Canada's fed is different Than the US one


How is our BOC any different than the Fed?
In anything, the BOC is the tail wagging the dog.
Our currency & economy is inexorably deeply pegged to the US, and we cannot afford to diverge too much in terms of rates, regardless of inflation levels, household debt levels, and housing bubbles, etc. in Canada.
The BOC will not do anything that may make our CAD$ significantly stronger than the USD.



> What did the financial institutions do with all the bail out money they were supposed to lend to restart the economy in 2008


They speculated that money in the equity & derivatives market, *exactly* what the intent was.
The true intent was never to lend to the mom & pops & small businesses.
The bailout was meant to be leveraged back into the risk markets (equity, bond, derivatives, etc.)

In addition, the result of the 3 rounds of Q/E have been that the banks, hedge funds, and investment banks have been able to dump their sovereign bonds back on the balance sheet of the Fed, and gained further liquidity to speculate further.



> paid out bonuses to their executives and kept the rest...


Oh yeah, that too :biggrin:


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## Pluto

HaroldCrump said:


> Correction - the top priority job for central banks is _*creating *_inflation - not fighting to reduce it.
> Haven't you noticed - every single major world central bank has categorically stated that their goal is to create inflation (the number usually thrown around is 2%) and achieve _*nominal *_GDP growth.
> That is what _inflation targeting _means i.e. we endeavor to create core inflation up to 2%.


Yes, the do want some inflation. They fear deflation too. That doesn't mean they won't aggressively fight it if it goes over their target. I think you are overstating your point.


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## HaroldCrump

Just a Guy said:


> if you buy a place in today's dollars and pay them off in the devalued tomorrow's dollars...


That assumes that the typical household income goes up along with inflation.
That is the only way to pay off debt devalued in real terms.
However, that is not happening (at least not for the average consumer/worker bee).
In fact, all data points that incomes are stagnant (in fact, down in real terms) over the last decade.

As long as that continues, high debt cannot be paid off with devalued dollars in the future.
If anything, that devaluation is working _*against *_the average home-owning household.


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## HaroldCrump

Pluto said:


> Yes, the do want some inflation. They fear deflation too.


Somebody ought to tell them that Goldilocks is only a fairy tale...


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## Just a Guy

Our bank lobby hasn't been able to overturn all the regulations that were put into place after the Great Depression (to stop the very practices that helped create the depression) as successfully as the USA was...our banks couldn't follow suit in lending and speculating like the USA did...they wanted to, but we are still more regulated so they couldn't...

As I recall, we were getting close to changing the laws, but that got quiet after the collapse, so I'm not sure where we stand now...

History is a very repetitive cycle...and each time we repeat it, we swear we're smarter...


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## Just a Guy

HaroldCrump said:


> That assumes that the typical household income goes up along with inflation.
> That is the only way to pay off debt devalued in real terms.
> However, that is not happening (at least not for the average consumer/worker bee).
> In fact, all data points that incomes are stagnant (in fact, down in real terms) over the last decade.
> 
> As long as that continues, high debt cannot be paid off with devalued dollars in the future.
> If anything, that devaluation is working _*against *_the average home-owning household.


Yeah, assuming a local income...I suppose that's why people trust in the "sell the country to immigrants" solution.

I was just reading Demons under they microscope, which chronicles the development of sulpha drugs...interesting that the German chemical industry was one of the only industries to profit during hyper inflation because it had export sales and could be paid in "outside" currency.

Wonder how to pull that off in a world where all the "outside" currencies are basically in the same boat...we could be in for some interesting times...


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## My Own Advisor

Markets down over 200 points today.

Would need to see more big drops in the markets, PLUS, a big drop in RE, to get to your 20% overvalued prediction.


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## Arshes76

Pluto said:


> Way to go. As long as you rent out less than 50% of the property, you retain your tax free capital gain status. To me, what you are doing is potentially better than an RRSP.


Can you elaborate on this 50% rule? i thought unless you have a seperate suite your principal residence remains tax exempt.


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## Pluto

Arshes76 said:


> Can you elaborate on this 50% rule? i thought unless you have a separate suite your principal residence remains tax exempt.


 Any profit on the sale of your principle residence is tax free. However, if you rent out more than 50% of your principle residence, you lose the tax free status. In the later case, profit on the sale of your house is taxed as a capital gain. I don't know about the separate suite/no separate suite thing. As far as I know, if you want to keep tax free status, you have to rent out less than 50% of the property. "property" includes land use too. So maybe one rents out 2 bedrooms of a 3 bedroom place, it doesn't necessarily mean they have exceeded the 50%.


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## Arshes76

Pluto said:


> Any profit on the sale of your principle residence is tax free. However, if you rent out more than 50% of your principle residence, you lose the tax free status. In the later case, profit on the sale of your house is taxed as a capital gain. I don't know about the separate suite/no separate suite thing. As far as I know, if you want to keep tax free status, you have to rent out less than 50% of the property. "property" includes land use too. So maybe one rents out 2 bedrooms of a 3 bedroom place, it doesn't necessarily mean they have exceeded the 50%.


I had to double check this, as most tax rules arent really that blank and white. Purpose and intention are usually considered.
But according to this, if you have a 4 bedroom house and if you rent out 3 rooms, the house is still considered your principal residence because the main purpose of the home is to have it as your principal residence, the rentals are "ancillary" to its main use.

http://www.nnsl.com/frames/newspapers/2009-08/jul6_09wong.html


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## Just a Guy

I believe it depends more on if you write off parts of your house, you're not allowed to double dip as it were.


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## Pluto

I think the following is correct, even if still a bit vague. 

http://canadianmoneyforum.com/archive/index.php/t-9877.html

I'm not sure of the source of the 50% cut off, but was told that if you rent out more than 50% they are more likely to question the purpose of the property.


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