# Consequences of being under water on mortgage in Canada



## none

Hi,

This is strictly a hypothetical question. I'm currently out of the housing market and a believer in a substantial correction needing to occur in the housing market. Regardless, I'm happy renting so I suppose that should be good enough.

I'd like to understand better what the consequences of being underwater on your mortgage are. For example, if I suddenly find myself underwater by 100K and want to move what are my options? Obviously if I sell house and I have 100K to pay off balance no big deal but what if I don't? What are my options?

Thanks, I'd like to learn more about this.


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## andrewf

Bankruptcy?

I think if you continue to live in the home and service the mortgage, the government will insure your mortgage when you want to renew. Presumably to prevent a market meltdown or forced sales due to insufficient equity. But you probably won't be able to move or port your mortgage. 

Interesting question, maybe someone else knows...


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## none

I thought perhaps an unsecured line of credit at a ridiculously high interest rate.


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## james4beach

lol how could you ever be under water, everyone knows Canadian home prices only go up (just like the USA)!

Seriously though, I don't know and I'd love to find out too. Although I can offer these words of wisdom from an American friend, who wrote this in 2007. Please remember he's being funny



> I hate all these articles in the mainstream press entitled "What to do if you fall behind on your mortgage payments"
> 
> The first piece of advice they give is to "contact your lender". What a bunch of crap! "Hi, umm, my mortgage is adjusting from $1800 per month to $2900 per month, and I take home $2400 per month. Can you like, lower my payment or something". NO!
> 
> Here's my advice if you are facing a rate adjustment you can't afford:
> 
> 1. Quit paying your mortgage, taxes and insurance immediately. No sense in pouring another nickel down the hole. Don't keep making payments until it adjusts - stop making payments right now.
> 
> 2. Rent an apartment for 1/2 of what your unadjusted mortgage rate was before your credit gets whacked. Buy a car if you need to. Use the cash you're saving on not making the mortgage payments to shore up your finances. Move out of the house. Be sure to take the doorknobs, plumbing fixtures and furnace with you. Sell them on E-Bay right away.
> 
> 3. Don't contact the bank or anyone. Just forget about the house and let somebody else worry about it.
> 
> 4. Hire a lawyer to right letters to the three credit reporting agencies claiming that a fraudulent mortgage was taken out in your name and denying all responsibility for it. Make references to "pending litigation". Deny that you ever lived in the home. Slip the clerk in the apartment complex $200 to write a letter claiming that you've lived there for over a decade. Deny, confuse, and deny.
> 
> 5. Shrug it off. You lost a house, so what. Everyone else did too.


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## GoldStone

I doubt that bankruptcy would help. Bank can garnish your salary to recoup the loss.


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## doctrine

1. Don't move. You won't have any issues renewing your mortgage provided you're still making your payments, even if you're theoretically under water
2. Rent it out while you recoup your money. Maybe you can get enough rent to cover your mortgage payment. 
3. Sell and take the 100k loss
4. Start renovating to increase the value of your home. This could end up increasing your losses however
5. Stop paying your mortgage payment and go live on the street or move in with friends
6. Stay in your house, but start accepting boarders to increase your income

Just some thoughts off the top of my head. Renting is not a bad idea, especially if its substantially cheaper than owning, which depends on the market. On the west coast like I am, it's definitely better to rent.


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## bgc_fan

doctrine said:


> 1. Don't move. You won't have any issues renewing your mortgage provided you're still making your payments, even if you're theoretically under water
> 2*. Rent it out while you recoup your money. Maybe you can get enough rent to cover your mortgage payment. *
> 
> Just some thoughts off the top of my head. Renting is not a bad idea, especially if its substantially cheaper than owning, which depends on the market. On the west coast like I am, it's definitely better to rent.


I've heard of stories where this happens. Due to the nature of the job (moving all the time) and unforgiving housing markets, one person ended up with multiple properties and multiple mortgages, but was able to rent out to recoup the mortgage payments. Maybe it all worked out for him in the long run.


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## Rusty O'Toole

Typically what happens is this. Homeowner calls real estate agent, says he wants to sell house for $450,000 that he paid $200,000 for 10 years ago. RE agent tries to explain that the house is only worth $375,000. Homeowner protests that the neighbor sold his house for $450,000 last year and his house is way better than the neighbor's. RE agent explains the market has softened since then and prices are off $75,000. HO insists on listing house for $450,000 and of course, it sits there.

After a year HO says the hell with it, I'm not moving, I'll fix up the old dump and stay put. So the house gets taken off the market.

This is why the Canadian market never seems to crash the way the US market does. Canadian banks don't do the crazy no down payment loans. Homeowners have equity and they have the ability to make the payments. They don't dump their houses and run away, consequently we don't see 30% to 50% drops in home prices.

For all those waiting for the Canadian real estate crash, who have been patiently waiting for 5 years, it already happened. Go back to 2007 and 2008, you will see a dip of 10% that lasted about 2 months. That was it. That was our crash. It looks like a pimple on the chart.

As for the next crash, it may be happening right now for all I know. Sales are slowing but prices are not dropping. I don't expect them to, except in crazy markets like Vancouver and Toronto, which account for less than 1% of the Canadian market. If you see prices dip 10% that's it, that's the crash. Van and TO may see 30 or 40% but I wouldn't even count on that.


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## Rusty O'Toole

The US mortgage situation is so messed up by outright fraud that thousands and thousands of homeowners have not paid a mortgage payment in 5 years and still have not been evicted.

On the other hand, some people who never had a mortgage have been evicted at gun point.


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## CanadianCapitalist

Rusty O'Toole said:


> Typically what happens is this. Homeowner calls real estate agent, says he wants to sell house for $450,000 that he paid $200,000 for 10 years ago. RE agent tries to explain that the house is only worth $375,000. Homeowner protests that the neighbor sold his house for $450,000 last year and his house is way better than the neighbor's. RE agent explains the market has softened since then and prices are off $75,000. HO insists on listing house for $450,000 and of course, it sits there.


LOL. Exactly what happened at our neighbourhood when we were selling our home last summer. HO listed the home at $360K just before we did. I asked HO how he came up with the price. Answer: I bought last year for $335K. After expenses, the cost was $343K. I put a 5 percent mark up for agent's commission and the total is $360K. The house sat in the market until the listing expired, HO pulled the home off the market and decided to renovate.


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## Berubeland

"For Now" if you are underwater and making your payments you will be able to renew your mortgage. However a few consequences of being underwater come to mind.

1. - No Rate Shopping - You won't be able to move your mortgage elsewhere.
2. - You might get a really bad rate from your bank because the risk of your stinky underwater mortgage. 
3. - Your bank or credit union may want out of the mortgage business altogether in which case no one will take your mortgage. 

I'm pretty sure if you read the fine print on your mortgage...they have no obligation to renew your mortgage although that has been traditional in Canada.


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## andrewf

Are you trolling, Rusty?

Vancouver and Toronto are not "1%" of the housing market.

You must have a short memory if you forget all the housing bubbles Canada has had in the past. Toronto in the late 1980s, Vancouver in the 1990s, etc. Your argument seems to be 'it's different here'. I hate to break it to you, but it's not. 

As far as all the things we don't have in Canada... up until the summer we did have 0% down mortgages in the form of cash back mortgages. In some ways Canada is not as bad as the US was at its peak. But in other ways, Canada's housing market is more vulnerable. More people in Canada have floating rate mortgages, and 5 year terms are the norm, meaning there is refinancing risk (the US norm is 25-30 year terms with fixed interest rates).


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## NotMe

"For example, if I suddenly find myself underwater by 100K and want to move what are my options? Obviously if I sell house and I have 100K to pay off balance no big deal but what if I don't? What are my options?"

Your options depend on what you're willing to do. You could for instance move, keep your old house and rent it out, using the rent cheques to pay the mortgage. As long as the mortgage keeps getting paid, someone please correct me but I don't think the banks here at least have a history of not renewing mortgages they approved in the previous term (assuming you've been paying, etc). So if you buy a house for $500K in 2007 and have a mortgage of say $350,000, and the 'value' (value without actually having a contract is hard to determine) has fallen to say $250K, I'm not sure the banks would do anything. If you keep paying your new mortgage, they win. If you default and they claim the house, they get an asset worth $250K and will sue you for whatever balance you owe on your mortgage (plus interest, penalties,plus plus plus). So they win again.

Alternatively you can get a line of credit, sell off the house, and use the proceeds + line of credit to pay off the mortgage (plus fees). Another option is to sell the house, not pay the mortgage, and get sued by people who keep lawyers in shark tanks for fun and pay. Or don't pay, and declare bankruptcy and go through that life.


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## none

Thanks for the replies. I wanted to avoid the 'housing bubble' debate as the two sides (particularly the home owner side) is extremely passionate about it being different this time (although lacking convincing evidence) compared to the coming correction side (who has data and history on their side). 

I'm a reader of Garth turners blog and I must say he's convincing.


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## HaroldCrump

none said:


> I'm a reader of Garth turners blog and I must say *he's convincing*.


Yep, very.
In fact, he has been equally convincing for...let's see...the last 8 years at least.
Just as he was very convincing when he was pumping Nortel stock in 2007 - 2008.
Just as he was very convincing when he was telling everyone to dump all stocks in spring of 2009.

Garth Turner is the best contrary indicator.


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## CanadianCapitalist

Rusty O'Toole said:


> As for the next crash, it may be happening right now for all I know. Sales are slowing but prices are not dropping. I don't expect them to, except in crazy markets like Vancouver and Toronto, which account for less than 1% of the Canadian market. If you see prices dip 10% that's it, that's the crash. Van and TO may see 30 or 40% but I wouldn't even count on that.


Andrew has a good point. TO+Van make up 55% of the Canadian market:

http://www.housepriceindex.ca/default.aspx?langue=EN


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## HaroldCrump

To the OP - define "underwater".
Underwater based on who's assessment?

The banks play a game in collusion with the CMHC and the NAS property appraisal services.
They will assess your property to be whatever they want it to be...who is to say it's wrong?

This game will go on as long as possible.
As long as sales volumes are down, but the prices hold up, this game will go on.
They will keep assessing home values to be whatever they want it to be.


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## andrewf

Garth is more of a story-teller. Stories can be compelling but wrong. I like Ben Rabidoux's blog the Economic Analyst. He's more of a numbers guy... Either way it doesn't look pretty for Canadian housing. The optimistic case for Canadian housing is we are in a new high cost regime and that it stays expensive forever (in price/avg family income terms) and thus prices grow at the rate of wage growth, in the 3% range. I think that's very optimistic... The historical case is that housing does what it always has: revert to the long term trend. It can do this through price declines and income/rent growth. The long term trend is about 30 - 40% below current prices at the moment...

Whichever case we're in, it makes sense to rent for the time being. I can rent for about half the cost of owning at the moment. I'm much better off saving aggressively and investing in assets other than real estate.


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## Rusty O'Toole

andrewf said:


> Are you trolling, Rusty?
> 
> Vancouver and Toronto are not "1%" of the housing market.
> 
> You must have a short memory if you forget all the housing bubbles Canada has had in the past. Toronto in the late 1980s, Vancouver in the 1990s, etc. Your argument seems to be 'it's different here'. I hate to break it to you, but it's not.
> 
> As far as all the things we don't have in Canada... up until the summer we did have 0% down mortgages in the form of cash back mortgages. In some ways Canada is not as bad as the US was at its peak. But in other ways, Canada's housing market is more vulnerable. More people in Canada have floating rate mortgages, and 5 year terms are the norm, meaning there is refinancing risk (the US norm is 25-30 year terms with fixed interest rates).


No I am not trolling and my memory is fine. Bought my first rental property, a nine unit apartment house, in 1974. Go look at a map, if Toronto and Vancouver occupy even 1% of Canada's land mass I will eat the map.

The worst drop I remember was in 1990. Real estate was on the bargain table. After a crazy run up not justified by any fundamentals in the late 80s prices dropped 40%. I remember looking through the MLS book the RE agents used at the time, 25% of the listings were Power of Sale.

This was totally predictable, in fact I had been warning it was coming for 5 or 6 years and for 5 or 6 years I was totally wrong. Then, all of a sudden, I was right.

Actually it is different here. Canada is a different country from the US with different laws, different government, different banking system, the works. We even have our own flag.

I specifically excluded Toronto and Vancouver, and any other crazy markets that have seen insane appreciation and stratospheric prices. I am talking about ordinary run of the mill Canadian rural areas, towns and cities where 90% of us live.

Go look up the house prices for your area. I know where I live, there was a short lived drop in house prices right after the US collapse. I got scared and sold some good rental properties, to my regret as I will never be able to replace them for the price I sold them at. Since then I have been waiting for Canada's collapse which never came. Until it dawned on me to go back and look at the charts and there it was, a tiny dip of about 10% that lasted a couple of months.

This is typical. I have been fooled waiting for the drop in prices after other events like a big plant closing etc. that never happened. This led me to ask around, which led me to the conclusion I stated above, that Canadian home owners seldom get caught in a negative equity, can't afford the payments situation and when real estate dips they usually sit tight. Sure there may be a few who are forced to sell at discount prices but not many. Therefore we usually have a slowdown rather than an outright collapse.

Everyone forgets that before a diver can take a swan dive he has to climb up to the high board and before you can have a bust you have to have a boom. Show me prices rising at 25% a year for 5 or 6 years, not justified by any logic or reason, and I will show you a bubble about to burst. We haven't had that here in small town Canada although, as I don't mind admitting, for cities that have had crazy booms, a bust would not surprise me.


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## none

andrewf said:


> Garth is more of a story-teller. Stories can be compelling but wrong. I like Ben Rabidoux's blog the Economic Analyst. He's more of a numbers guy... Either way it doesn't look pretty for Canadian housing. The optimistic case for Canadian housing is we are in a new high cost regime and that it stays expensive forever (in price/avg family income terms) and thus prices grow at the rate of wage growth, in the 3% range. I think that's very optimistic... The historical case is that housing does what it always has: revert to the long term trend. It can do this through price declines and income/rent growth. The long term trend is about 30 - 40% below current prices at the moment...
> 
> Whichever case we're in, it makes sense to rent for the time being. I can rent for about half the cost of owning at the moment. I'm much better off saving aggressively and investing in assets other than real estate.


Well I guess this has turned into a 'will the housing market crash or not?" thread.

I'm with you, my house is great and I rent it for far less than I could own it for. I've also completely bought into the 'renting is freedom!" Freedom from house renos (even if I want them but if I can't do them because I'm renting then I just don't care) and I can move to a new neighbourhood if my neighbour is a jerk, or I want my kid in a better school or if I just get tired of Victoria.

Anyway, what brings this to mind is I have a colleague who is actively in the process of buying a house in Victoria. Although she has many advanced degrees, to me at least, it looks like she is making an amazingly stupid decision that is going to have life altering financial consequences.

Then again, perhaps my predictions, like Garths will be wrong. Maybe the Canadian government will do the classic kick the can of this financial mess (like they did in 2008) to the next party and then claim credit for the good times when the other party has to make the hard decisions.


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## CanadianCapitalist

andrewf said:


> Whichever case we're in, it makes sense to rent for the time being. I can rent for about half the cost of owning at the moment. I'm much better off saving aggressively and investing in assets other than real estate.


I don't see renting half the cost of owning in my neck of the woods in Ottawa.

Example:
Home worth $335K. Rents for $1,600 per month. Rental: $19,200 per year.
Home carrying cost: between $11,750 (at 3.5%). Prop taxes: $3,000. Insurance: $1,000. Maintenance: $5,000. Total: $21K. That's about 10 percent higher than renting. 

Another examples: 490K house. Renting for $2,200.

That said, I think real estate's best returns are in the past. We've had more than a decade of strong price gains. That will end at some point. Trees do not grow to the sky.


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## Charlie

In many US states -- California included -- I think lenders can only go after your home and not your other assets. So if you're underwater you can hand over the keys, take a hit on your credit rating and move on. They also encourage borrowing by allowing a tax deduction for all home mortgage interest, regardless of the use of the funds. Not so here. You're on the hook for the full amount. So although your home is collateral for your mortgage, the debt is personal and the lender has a full claim on your stuff if you default. 

The impact of being underwater are the ones noted by berubeland and others -- renewal inflexibility etc. The US is simply messed up. I recall a basketball player making $10m+ defaulting on a $1.5m mortgage because the house was worth substantially less.


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## MoneyGal

Rusty O'Toole said:


> No I am not trolling and my memory is fine. Bought my first rental property, a nine unit apartment house, in 1974. Go look at a map, if Toronto and Vancouver occupy even 1% of Canada's land mass I will eat the map.


We define market share by *land mass*?


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## none

CanadianCapitalist said:


> I don't see renting half the cost of owning in my neck of the woods in Ottawa.
> 
> Example:
> Home worth $335K. Rents for $1,600 per month. Rental: $19,200 per year.
> Home carrying cost: between $11,750 (at 3.5%). Prop taxes: $3,000. Insurance: $1,000. Maintenance: $5,000. Total: $21K. That's about 10 percent higher than renting.
> 
> Another examples: 490K house. Renting for $2,200.
> 
> That said, I think real estate's best returns are in the past. We've had more than a decade of strong price gains. That will end at some point. Trees do not grow to the sky.


In Victoria we live in a 600K house (which amazingly actually isn't that nice). We pay $2000 a month.

I'm been thinking a lot of how to really price home ownership. For example, I don't fully agree with your math in your post as far as the carrying cost go.

I think it should be more like:
(Cost of house - down payment) * (mortgage interest rate - inflation rate) + (money in house * (reasonable stock market return - inflation)) + Insurance + maintenance + closing costs/years of ownership - home appreciation rate * Cost of house.

The way to make owning a house cheaper (although riskier is actually to mortgaged to the hilt).

Assuming 3.5% interest rate, 2.5% inflation rate; 100,000 down, 5% in stock market and no appreciation the payout is:
(500K * (3.5% - 2.5%)) + (100K * 3%) + $1000 + $4000 + (600K * 3%)/10 - (600K * 0%) = 
$5000 + $3000 + $1000 + $4000 + $1800 - 0 = $14,800

Hmm, that actually surprised me. I'm still thinking about this equation a bit and I just added the first part of doing the differential between inflation and rates. Seems like all things staying the same that even at these house prices that home ownership is cheaper than renting (I pay $24,000 a year in rent). Of course if interest rates go up at all or housing declines at all then the picture changes.

Am I doing that right?

*EDIT:*
I found the error, the equation above doesn't account for inflation effects on the house. Therefore above the house is actually exactly pacing inflation. It should be:
(Cost of house - down payment) * (mortgage interest rate - inflation rate) + (money in house * (reasonable stock market return - inflation)) + Insurance + maintenance + closing costs/years of ownership - (home appreciation rate *- inflation rate* * Cost of house).

In that case, assuming above than yearly house ownership changes to $14,800 + (600K * 2.5%) = $29,800

That makes more sense (or at least agrees with my preconceived belief system)


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## RBull

MG I was reading this thread and wondered the same thing.

Sorry to the OP for continuing OT.


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## andrewf

CC, it depends on your housing needs and what market you're looking at. For the market I'm looking at, the cost of owning is just about double (2 bed condo).

Figures:

Rent: 900 (utilities included), 10,800 per year

Condo:

$250k 2 bedroom condo
3.5% cost of debt $8,750/year
$350 condo fees + $75/month utilities = 425 *12 = $5,100 / yr
Property tax at 1.25% of value, $3,125/year
Insurance $500/yr
Maintenance $2500 (kitchen, appliance and bathroom amortization, say).

= $19,975 / year

To be fair, I'm not renting something that is as nice as your average 2 bed condo. Such a condo might rent for $1200-$1400. On the other hand, I think 3.5% opportunity cost is too low. Interest rates could easily rise by even 1.5%, and at 5% cost of debt, these comparisons aren't even close.


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## andrewf

MoneyGal said:


> We define market share by *land mass*?


I took that as trolling, too. That's just patently ridiculous.


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## andrewf

none, you're forgetting property tax in your equation. In my area, it is 1.25% of assessed value.


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## none

New equation

(Cost of house - down payment) * (mortgage interest rate - inflation rate) + 
(money in house * (reasonable stock market return - inflation)) +
Insurance + 
maintenance + 
closing costs/years of ownership +
Property taxes (purchase price * 1.25%) -
(home appreciation rate - inflation rate * Cost of house).
---------------------------------
(600K - 100K) * (3.5% - 2.5%) + 
(100K * (5% - 2.5%)) + 
$1000 + 
$4000 + 
(600K * 3%)/10 + 
(600K * 1.25%) - 
(0 - 2.5 * 600K). 
===============================
$ 5000
$ 2500 
$ 1000
$ 4000
$ 1800
$ 7500
$15000
---------
$36800

Thanks Andrew, that makes sense to me (although the $4000 a year in maintenance sounds a bit high to me - regardless, still quite a but more than 24K).
Thanks for the help.


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## CanadianCapitalist

none said:


> Thanks Andrew, that makes sense to me (although the $4000 a year in maintenance sounds a bit high to me - regardless, still quite a but more than 24K).
> Thanks for the help.


I personally think your assumption of 0% nominal home price increase to be reasonable. But your model above is extremely sensitive to future home prices. If you instead assume a 2.5% nominal home price increase, your model will tell you that cost of home ownership is just $22K per year, which is lower than your rent. Assume a drop in home value of 2.5% per year and homes are more than doubly expensive when compared to renting.


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## andrewf

It's also sensitive to interest rates. Push rates up to 5 or 6% and see what happens...


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## none

andrewf said:


> It's also sensitive to interest rates. Push rates up to 5 or 6% and see what happens...


Absolutely to both comments. I do computer modelling as a living and I find it useful to build a model to fully realize my assumptions.

It would actually be fairly straight forward to do some mcmc with the interest rates following different distributions to really get a good handle on things. Then again, I think that's a bit over kill basically because the unexpected can always happen - for example, I really believe that Garth Turner was right about house correction in 2008 - it was hard to predict that the Canadian government would implement policies that would ultimately inflate the bubble further. Canada just has to keep the almost free money (after taking inflation into account) and housing would likely stay high - than again, the consequences to the rest of the economy could be quite dire.


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## andrewf

Timing is always difficult. The government essentially reflated the housing bubble with first time homebuyer credit, low interest rates, home reno tax credit, loose lending standards, massive growth in CMHC insured assets.


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## none

I just plugged it all in a spreadsheet - fun to see the numbers jump around. Thanks for all the help.

I feel really bad for those who bought houses in Van, TO, and Victoria (and others) and it's their first house. They are basically screwing themselves for their entire lives because they fell for the con (just my opinion though).


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## andrewf

I feel bad for my coworkers who live in one condo and own two in preconstruction. It's a touchy subject, but I feel they are taking a lot of risk. They think they've found a sure-fire way to double their money.


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## none

andrewf said:


> I feel bad for my coworkers who live in one condo and own two in preconstruction. It's a touchy subject, but I feel they are taking a lot of risk. They think they've found a sure-fire way to double their money.


I don't doubt it's a touchy subject!

Sad thing is is that it actually is really really sad. I know quite a few people who lost 100K + on houses in the states. These are life altering sums of money. Buy stock on leverage? No that's WAY to risky. Buy real estate on leverage - that's a sure thing.

Anyway, time will tell. The way I think about it is if the crashers are right, we will be ahead by $250K or more over 10 years, if we're wrong (but housing doesn't increase by much) we've had missed out on making 10 or 20K. Big deal. I'll take the safer route that would make/save A LOT more cash thank you very much.


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## andrewf

I agree that 'upside risk' in house prices is a lot less than downside risk. It's like saying in 1999 that US stocks can rise further, or stay at 35 CAPE forever. People actually convince themselves that this time is different.


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## Eclectic12

Rusty O'Toole said:


> .... This is why the Canadian market never seems to crash the way the US market does. Canadian banks don't do the crazy no down payment loans. Homeowners have equity and they have the ability to make the payments. They don't dump their houses and run away, consequently we don't see 30% to 50% drops in home prices...


Good points .... though I'd also add in the another "US only" factor. With US mortgages tax deductible, there is less incentive to pay off the mortgage quickly, especially if one believes one's job is safe.

Some of the more sophisticated US co-workers I had were selling every couple of years to capture gains in the housing price and moving further out. I'm sure they still had a mortgage but suspect that it much smaller than others who took the "why give a tax deduction up" route.


Cheers


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## NotMe

none said:


> I just plugged it all in a spreadsheet - fun to see the numbers jump around. Thanks for all the help.
> 
> I feel really bad for those who bought houses in Van, TO, and Victoria (and others) and it's their first house. They are basically screwing themselves for their entire lives because they fell for the con (just my opinion though).


I think you need to qualify that a bit. My wife and I bought our first (and only so far) house in Toronto in 2007 (and yes, back then bubble talk was all the rage too). I don't feel particularly screwed over. Now my good friend, who just bought a house that is double the size of mine at 2500 sq ft in Milton - he I think is screwed. People have been living in my neighbourhood since 1940, and in my house in particular since 1960 or so (bought in Don mills, priced out of the beach even then!). Milton, I joke that my gps can't find his house, it just says 'here there be dragons.' I'm making an assumption that centrally located, well known neighbourhoods with mature trees, known schools, and industry will be reasonably ok and maintain their value in the future. My house in toronto allows my wife and I to work at well paying careers in marketing and finance, without tacking on a 3 hour round trip commute at the end of the day. There are tradeoffs to this life - we have only one child, and plan to keep it that way - but that's more daycares fault than the cost of our house. Not everyone who wants to live in Toronto and owns is a fool, and would rather rent. I like owning, but am certainly familiar with the added costs it incurs too.

Also, on a separate note, yes talking about landmass as market share is ridiculous. While it's true that in the US most people don't live in major cities (remember, that's 300 million people spread across a reasonably temperate landmass) we have 30 million people, the majority of Canadians (greater than 75%) live clustered together within 100 miles of the US border. So you can't just 'exclude' Toronto and Vancouver from any chat about real estate.


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## andrewf

I tend to agree that centrally located, detached homes will tend to be hurt less by price declines. Condos and outlying homes will be hurt more. But that isn't to say house prices can't or won't decline in the city. If -20 or -30% sounds like 'not too bad' to you, then you should be fine. It also depends on how 'hot' your neighbourhood is. Already some particularly hot neighbourhoods in Vancouver and Victoria are down over 10%, and the correction hasn't even really gone into full swing yet.


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## none

Sure - I try to look at this from a financial aspect only as the value of owning is different for different people. I've owned a house in the past and I'm kind of over the feel good feelings of it all. Owning a house is a lot of work and stressful and I found a massive time suck (we had a fixer upper). To me, a house is just that - a house, wood, brock nails etc. The home part is my family and they are there regardless of whether we own these inanimate objects or not (or rent them from a landlord rather than rent from a bank). I'm at the point in my life where inanimate objects aren't really worthy of my affections.

I've put together this small spreadsheet if anyone is interested in the small model I threw together. Before I started thinking about this as deeply I would have been very surprised to realize how expensive home ownership truly is.

I'll likely pull the link after a while so it doesn't kill my dropbox quote.

https://dl.dropbox.com/u/7107830/cost of home ownership.xls

Any feedback for improvements would be welcomed.


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## Eclectic12

Charlie said:


> In many US states -- California included -- I think lenders can only go after your home and not your other assets. So if you're underwater you can hand over the keys, take a hit on your credit rating and move on....


Interesting ... I seem to recall during the dotcom bust that a US investigative journalism show complained that CEOs were buying huge Florida estates as when the company declared bankruptcy, the Florida home was excluded. So the "poor" CEO had a $26 million dollar home and the shareholders received nothing.





Charlie said:


> ... They also encourage borrowing by allowing a tax deduction for all home mortgage interest, regardless of the use of the funds...


I'm not sure what the "regardless of the use" part is about.

Not so here. You're on the hook for the full amount. So although your home is collateral for your mortgage, the debt is personal and the lender has a full claim on your stuff if you default. 




Charlie said:


> ... The US is simply messed up. I recall a basketball player making $10m+ defaulting on a $1.5m mortgage because the house was worth substantially less.


I think it was broader than that. I seem to recall several commentators pointing out that it was "normal" to approve someone who didn't have enough income for the house they were buying, based on "your salary will increase so don't worry" and "if you salary doesn't increase, you can always sell at a profit".


Cheers


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## Charlie

the 'regardless of use' bit means they get to deduct the interest whether the funds were used to buy the home, for investments, a renovation, or for a new car or boat. Makes no difference. Refinancing (within certain limits) is just as deductible as the original buy. Just another way they were encouraged to over finance and discouraged from keeping equity in their homes. 

And you're right about the lending company fiascoes too. (and the Florida homestead thing).


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## Eclectic12

andrewf said:


> I tend to agree that centrally located, detached homes will tend to be hurt less by price declines. Condos and outlying homes will be hurt more. But that isn't to say house prices can't or won't decline in the city ...


True ... any major changes in what's driving the market in a particular area likely will affect that area (i.e. downtown). 

I can recall co-workers commenting that the downtown condo prices in Toronto were nuts but "I'm tired of the commute and my job is downtown so I'm paying the price". If enough businesses put staff in the outlying areas and/or enough people who are willing to commute won't pay the higher price and/or there's too much "buy then then flip when it's build" is going on - particular areas can be hurt.




none said:


> ... I've owned a house in the past and I'm kind of over the feel good feelings of it all. Owning a house is a lot of work and stressful and I found a massive time suck (we had a fixer upper). To me, a house is just that - a house, wood, brock nails etc. The home part is my family and they are there regardless of whether we own these inanimate objects or not (or rent them from a landlord rather than rent from a bank). I'm at the point in my life where inanimate objects aren't really worthy of my affections ...


That's where different people get different things out of home ownership. I was sick of landlords, noisy fellow tenants and not being able to have a garden. Both houses I've bought were not fixer uppers and I've been quite happy with the peace/quiet etc.

If I make out well financially - so be it. If I did not buy a house to make money.


Cheers


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## Rusty O'Toole

You might be surprised to find that interest rates do not affect home sales as much as you think. I lived through the bone crushing interest rates of the late seventies - early eighties (9% - 12% - 16% - 18% - 22%) yes there was a time when people bought houses with 22% interest rate mortgages. My brother held off buying for several years, waiting for prices and payments to come down but they never did. He ended up buying 30 miles away from his job (cheaper houses) and getting a lucky deal on the mortgage (16%) from a relative. Kept the house for 5 years, made the payment every month and ended up selling for what he paid for it. His logic was, after waiting for several years as prices and interest rates only went up from too high to ridiculous to insane, he couldn't stand the idea of being priced out of the market forever so he bought.

Others bought with 13% mortgages, 5 years later had to refinance at 20% and couldn't afford the payments. The bank threw them out and put the house under power of sale. It didn't sell so 6 months later they offered it back to them. They took it - for the same money they owed and a 15% mortgage.

There were even mortgages where the monthly payment did not cover the interest. The principle slowly grew through the life of the mortgage.

So don't tell me anything is impossible. I have seen things that should have been impossible and inconceivable in any decent country.


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## none

I'm a Bayesian - everything is possible but some things are far more probable than others.


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## andrewf

Rusty, what matters is real interest rates, not nominal rates.


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## MoneyGal

none said:


> I'm a Bayesian - everything is possible but some things are far more probable than others.


OOOOOOh, good one.


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## MoneyGal

andrewf said:


> Rusty, what matters is real interest rates, not nominal rates.


And merci for this! I'm just going around voting on my fave posts now.


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## sags

Given the number of jobs dependant on home construction, renovation, and retail related sales and services, a home price decline over years, is a very bad indicator for the economy.

We all...........owners and renters.........best hope Canadian home prices don't collapse........or it will get really messy in a hurry.

I think Mark Carney knew what was coming and grabbed the opportunity to get away and Flaherty is continues to give his economic version of a porridge forecast.


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## sags

If a person is underwater by 100,000 today, what is there to say they won't be underwater 150,000 in 6 months?

What would be the answer for that problem?


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## Potato

none, I've already solved that problem: Rent vs. Buy: The Investment Spreadsheet

As for "centrally located, detached homes" (or condos with a water view, or townhomes by the university, or whatever other hot aspect you think makes a sub-segment of Toronto or Vancouver immune): the thing is, that's a common belief. So it's already priced in, giving centrally located houses just/nearly as much room to fall. 

Rusty: LOL.



Rusty O'Toole said:


> if Toronto and Vancouver occupy even 1% of Canada's land mass I will eat the map.


All humour aside, Toronto and Vancouver (GTA & GVR) are 0.98% of Canada's land mass. To one significant figure...


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## none

Potato said:


> none, I've already solved that problem: Rent vs. Buy: The Investment Spreadsheet
> 
> As for "centrally located, detached homes" (or condos with a water view, or townhomes by the university, or whatever other hot aspect you think makes a sub-segment of Toronto or Vancouver immune): the thing is, that's a common belief. So it's already priced in, giving centrally located houses just/nearly as much room to fall.
> .


That's a pretty elaborate spreadsheet - kudos! I don't see where inflation is addressed it though, am I missing it?


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## Potato

Figures are in nominal dollars; you can set rent inflation in C10-C12, and house appreciation in O6-O8.


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## the-royal-mail

none, I have viewed your spreadsheet and I agree with your logic. You're exactly right in that these are simply houses, material possessions and whether you pay the bank/city hall/condo fees or the LL every month you still have to spend the money and there is no guarantee you'll get it all back on a house sale. You may end up losing big, as happened with me a few years ago. Past performance does not guarantee future results.

I don't agree with some of your assumptions, such as a 5% stock market return (most people these days are not achieving those sorts of returns) and the rate of inflation which I believe to be closer to 8-10% rather than the bogus number the govt is feeding us. Look at how your costs of gasoline (look at how much the price of gas has gone up each year for the past 15 years), housing (look at the insane valuations of houses today compared to 10 years ago), rent (mine has gone up 7% over the past 2 years), insurance, taxes/fees/premiums/surcharges/fines/levies and much more. When you add it all up the rate of inflation is a heck of a lot higher than the 1.5% your spreadsheet contains. 

Note that just because I disagreed with some of your numbers doesn't mean I disagree with your logic. It's bang on. So I tweaked the numbers in your spreadsheet a bit. 

P.S. No need to quote when replying to a specific person, just address them by name if need be.


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## andrewf

the-royal-mail said:


> rate of inflation which I believe to be closer to 8-10% rather than the bogus number the govt is feeding us.


You're kidding, right?


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## kcowan

MoneyGal said:


> We define market share by *land mass*?


And we eliminate Alberta and Ottawa in our home-spun tales. What a crock!


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## NotMe

Wow, lots of response to my line about 'centrally located toronto houses'. I didn't mean to start a debate, I thought I was stating a fact - people have wanted to live in these locations for decades, and so based on that I'm making an assumption that people will still want to. Yes, industry might leave the city, but it seems unlikely in my lifetime that Toronto still won't be the centre for the finance, legal and marketing world in Ontario. (It's a gamble.). 

One thing I find funny in this whole part of this thread about will there be a crash or won't there is that people won't accept that the opposite of their views is a possibility. It's possible there will be a significant decline in prices; it's also possible there won't be, or there even an increase. Instead it's all 'world is doomed!' or 'prices will only go up!'. I merely talk about my own life as that's the gamble I'm taking, that my house won't depreciate in value to a point it becomes a problem when I sell. And when I sell is the key word - until then, an increase of 30% or a decrease of 30% has no effect on my life whatsoever. Unemployment, injury or divorce are far more of a threat to my financial well being than a decrease of 20% in perceived property values when I have money coming in and I'm paying the bills. 

And for one last bit of contrary thought, though I'm a yuppie homeowner with a kid in private school, we also drive a 12 year old mazda and are hammering our mortgage with extra payments, carry no consumer or student debt, and have well funded retirement and education accounts. And personally in my age group (37), I don't feel that we're that alone with our friends - no keeping up with the jones here.


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## MoneyGal

NotMe said:


> And for one last bit of contrary thought, though I'm a yuppie homeowner with a kid in private school, we also drive a 12 year old mazda and are hammering our mortgage with extra payments, carry no consumer or student debt, and have well funded retirement and education accounts. And personally in my age group (37), I don't feel that we're that alone with our friends - no keeping up with the jones here.


I don't think that's contrary thought here. I don't know whether I'm a yuppie but I'm a 45-year-old homeowner with a kid in private school who just replaced a 14-year-old car with a 4-year-old car, etc. etc. etc. I think this whole board is pretty much non-Joneses (or alternately that "keeping up with the Joneses" has an entirely different meaning here).


----------



## andrewf

We have to keep in mind that when we're talking about the national or urban-area housing markets, we're not precluding the possibility that some areas will do better than others. There is a substitution effect at play, but the magnitude of price changes will vary by area and dwelling type.


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## NotMe

Yes but I think a lot of people on this board think they're the minority. I think there's more non-jones out there than we let on. (and yes, I also recognize there are many who live beyond their means).


----------



## MoneyGal

I should probably start a separate thread on this topic, if I could figure out what the topic actually is. I am *mystified* by the seeming spending patterns of some of the people I work with (i.e., not my "chosen" group of friends whom I would expect to nominally share the same values). I honestly don't understand why they make the financial choices they make, and by how they make it work.


----------



## Eclectic12

NotMe said:


> Wow, lots of response to my line about 'centrally located toronto houses'. I didn't mean to start a debate, I thought I was stating a fact - people have wanted to live in these locations for decades, and so based on that I'm making an assumption that people will still want to. Yes, industry might leave the city, but it seems unlikely in my lifetime that Toronto still won't be the centre for the finance, legal and marketing world in Ontario. (It's a gamble.)...


I guess it depends on which people one is rubbing shoulders with. I've known lots of people who want nothing to do with a Toronto house, centrally located or otherwise. Then too, there's my sister and brother-in-law who were only in Toronto long enough to build the work experience so they could move out of Toronto. Add to that those who are in say Oakville (the house was paid off in three years so I don't think it was money that put them in Oakville).




NotMe said:


> ... One thing I find funny in this whole part of this thread about will there be a crash or won't there is that people won't accept that the opposite of their views is a possibility...


For better or worse, this seems to be another topic that people take a position on and anything but that position is lunacy. :rolleyes2:




NotMe said:


> ... And when I sell is the key word - until then, an increase of 30% or a decrease of 30% has no effect on my life whatsoever. Unemployment, injury or divorce are far more of a threat to my financial well being than a decrease of 20% in perceived property values when I have money coming in and I'm paying the bills...


That's where people seem to confuse why they have bought and/or any paper gains with why others have bought (similar to the "it's happy days or it's impending doom") so that there is no allowance for different values/reasons.




NotMe said:


> ... And for one last bit of contrary thought, ... carry no consumer or student debt, and have well funded retirement and education accounts. And personally in my age group (37), I don't feel that we're that alone with our friends - no keeping up with the jones here.


Congratulations! This is impressive.


Cheers


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## Berubeland

I've thought about this a lot and it is clear that there is something very tangible about real estate that appeals to people at a very primal level. There's just something about owning your own piece of earth. Some of this is cultural. 

The other fact is that a house has some utility to it in that unlike Ma Bell stock you actually live in it. Yes it costs money but you're also getting the use of it.

I work for landlords, I like landlords, but I do not like/trust all landlords. I do not enjoy being messed with or being told to move. This kind of security is very important to me.

@Rusty = Confirmation bias. http://en.wikipedia.org/wiki/Confirmation_bias


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## Rusty O'Toole

Speaking of confirmation bias. I have been seeing predictions of a real estate crash coming to Canada for the last 5 years.At first, I believed it. In fact I saw a crash coming as soon as the American market started to crumble, before any predictions appeared in the media. I believed in it strongly enough to sell some properties I should have kept.

I was wrong. When the crash never happened, I revised my views in the light of new information. What do you do when you are wrong?


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## Sampson

the-royal-mail said:


> I don't agree with some of your assumptions, such as a 5% stock market return (most people these days are not achieving those sorts of returns)


Really? Evidence please?

1yr returns for the S&P500 and TSX (SPY and XIU) excluding dividends have been 12.6% and 4.4% respectively.

Also, what is your reasoning that future returns will be depressed going forward?


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## Sampson

NotMe said:


> While it's true that in the US most people don't live in major cities (remember, that's 300 million people spread across a reasonably temperate landmass)


This is also not true. NYC and LA alone account for nearly 10% of the population. Now include centres like Chicago, Boston, Miami, SF Bay Area, Seattle, Portland, Denver Houston, Dallas, New Orleans and all the other > 1M centres and all of a sudden it's clear America is very city centric as well.


----------



## NotMe

Sampson said:


> Really? Evidence please?
> 
> 1yr returns for the S&P500 and TSX (SPY and XIU) excluding dividends have been 12.6% and 4.4% respectively.
> 
> Also, what is your reasoning that future returns will be depressed going forward?


good point. And why do people always exclude dividends? Big 5 banks are paying about 4.5% returns in dividend payments alone, and have for years.


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## Sampson

MoneyGal said:


> (or alternately that "keeping up with the Joneses" has an entirely different meaning here).


If by keeping up, this means balancing budgets, saving for retirement and other goals, maximizing government-backed savings programs, and finding ways to keep an old-a$$ car running...

yeah, plenty of us around this forum.


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## NotMe

"This is also not true. NYC and LA alone account for nearly 10% of the population. Now include centres like Chicago, Boston, Miami, SF Bay Area, Seattle, Portland, Denver Houston, Dallas, New Orleans and all the other > 1M centres and all of a sudden it's clear America is very city centric as well"

Good point, I should have said that better. All I meant is that the population distribution relative to geography is far more even in the US than Canada - complete with significantly (a) more big cities and (b) much bigger / wider cities. I wonder if you overlaid a map of NYC on top of Toronto, with the centre of each on top of each other - how far out would NYC stretch out? Pickering?


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## HaroldCrump

Sampson said:


> Really? Evidence please?
> 1yr returns for the S&P500 and TSX (SPY and XIU) excluding dividends have been 12.6% and 4.4% respectively.


I suspect he means standard equity mutual fund returns, which is what the vast majority of Canadian investors still hold (the recent ETF revolution notwithstanding).


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## andrewf

To say that housing is overvalued does not mean you know it will correct on a particular time frame. When none said he is a Bayesian, it means his knowledge is a matter of estimated probabilities given known information. When something is overvalued, it will tend to revert to its longer term mean valuation. This is not the same thing as saying that a bubble can't continue a while longer. 

Think of it this way: you could be the person with dot-com stocks in 1999 gloating that everyone who said the market was in a bubble in 1998 was wrong...


----------



## andrewf

I also didn't touch the statement that 'most people live in rural areas'. It's also totally false. The vast majority (>80%) live in 'urban' areas. Some of those are small cities, but cities nonetheless. Canada is one of the most urban countries in the world.

I think people who don't live in the big cities sometimes don't grasp just how many people live there. Peel Region (Mississauga and Brampton) have more people than Saskatchewan, Manitoba, or any of the Atlantic provinces.


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## Sampson

HaroldCrump said:


> I suspect he means standard equity mutual fund returns, which is what the vast majority of Canadian investors still hold (the recent ETF revolution notwithstanding).


But those investors never achieved real returns of 5%


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## HaroldCrump

Sampson said:


> But those investors never achieved real returns of 5%


Right, and that's the point the-royal-mail is making.
A model that depends on 5% real returns is not realistic for a vast majority of individual investors.


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## none

HaroldCrump said:


> Right, and that's the point the-royal-mail is making.
> A model that depends on 5% real returns is not realistic for a vast majority of individual investors.


I just had 5% as a guess. I didn't put too much work into defending that number. I think it was more/less reasonable for me.

Sometime I find this type of modelling is actually a great exercise to really focus on ones assumptions and see how things interact with each other. For example, the model is completely insensitive to inflation - I found that surprising. Also, it becomes obvious (it wasn't to me at least at first) that money really is almost free right now. Inflation and interest rates are close to the same (we can debate what the REAL inflation rate is I guess) but really, it seems one should be not paying off ones mortgage at all and putting it all in the market (assuming a decent return).

Anyway, all this was likely obvious to everyone. I'm relatively new to thinking about these things and I find simple models such as these are great at clarifying things in that they force you to really look at, and quantify, your assumptions.

I think Rusty mentioned that that people don't allow for the chance that a crash may not occur. I think your logic error there is kind of foxnews-esque in that opposing opinions don't deserve equal weight. I cut Garth Turner some slack over the lack of a housing crash in 2008 in Canada because it should have occurred but government policies stept in and made the mess we are in now. If one was going to put odds for a housing crash in the next 5 years - I don't really know as I would really have to think this through but off the cuff I'd say 70/30 - with perhaps 5% of the 30% resulting in further real estate increases. I cannot defend those numbers though.

Interesting discussion.


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## Sampson

HaroldCrump said:


> A model that depends on 5% real returns is not realistic for a vast majority of individual investors.


I'm not sure why a model of 'most' investors is even relevant. If the model applies to our own situation, it is good enough for me. None of us are that 'altruistic' and care enough that other Canadians achieve these returns. If my portfolio can attain the 5%, then that's the only value I care about, not an average return, nor what others could achieve.


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## Sampson

As none points out, establishing the model for him/herself and determining what either what ROR are required to meet goals, or changing savings rates given different ROR is part of the purpose. Whether the actual ROR will fits is to be determined, but 5% is/was achievable, and presumably continues to be.

No one has actually stated any reason why it will not be possible in the future. Again, we don't need to model an average Canadian, we know they are debt ridden and don't save money at all, we need to have a working tool that we individually can use for planning purposes.


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## Eclectic12

Sampson said:


> I'm not sure why a model of 'most' investors is even relevant.
> 
> If the model applies to our own situation, it is good enough for me. None of us are that 'altruistic' and care enough that other Canadians achieve these returns. If my portfolio can attain the 5%, then that's the only value I care about, not an average return, nor what others could achieve.


IMO, it applies because as I read the posts, the 5% was a guess - not what an individual has the skills and knowledge to achieve.
Having watched others try DIY investing because they guessed they could beat 5% in a rising market and then give up as they did substantially worse, it seems to me that the average investor is a reasonable reality check.

Now if someone else has the knowledge, then by all means - adjust the model to it suits the individual.


Cheers


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## Sampson

Yabbut.

Then Monte Carlo simulations are the only way to go. How can any of us prescribed fixed ROR for any savings/retirement/investment model for an extended duration? The discussion began with using the housing market as example, but here there are many reasons listed why future returns might be depressed compared to historical values. People have listed everything between rentwnership cost ratios, threat of increasing interest rates, migration patterns etc as reasons.

Statements like assuming 5% returns on equity markets or inflation = 8-10% are also guesses - in this case, with no support. In fact, looking over the thread of 2012 investment returns, MOST people handily beat 5% (reporting bias, maybe).

Now if we started to discuss the probability of achieving those returns if we use 'average' investment practices and vehicles, then yeah, Harold is right, low probability - but that's a whole different topic.


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## none

The difference of 1 or 2% in returns has relatively little effect on the total amount (1K to 2K resp; again obvious in hind site).

The reason you put it in a spreadsheet is so it can be modified. If you disagree with the 5% for your purposes change it. That's the whole point of using a spreadsheet rather than submitting a picture.


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## Cal

CC I actually have 2 buddies who sold and are renting, they are both in condos. In Toronto you can find places to rent for less than it would cost to carry the monthly mortgage (not to menton the loss of the investment potential from the downpayments). I am sure it depends on what type of property and what are you are looking as well. Both of their landlords are subsidizing their rent.


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## Berubeland

My dearest Rusty, 

*It is not about being wrong or right, it is about the numbers.* Is there going to be a reversion to mean? Are the prices of real estate going to follow inflation? It rent/buy affordability ratio completely out of whack? Do landlords all over Canada pay for their tenants to live in their houses? 

The answer to all those questions is yes. 

Do you think it's beneficial for a property manager, which happens to be a person who deals with landlords every single day, to tell her clients, potential clients and the entire internet that real estate is well over valued? 

The answer to that is no. 

I love numbers in a way that you will never understand, they don't lie, cheat, steal or misinform, if you want to know the truth, buy some ear plugs and learn more about forensic accounting. 

Is the market completely irrational? Is it propped up by our government? 100% to both those questions. Do you know what happens to the economy when real estate tanks? The USA had a depression and they're still not out of it. So what you think crappy little Canada is going to defy gravity?

Rusty I want to be wrong but I'm not. 

I'm from the hick town of Temagami population 500. When the real estate market in Toronto collapses, you'll buy a house there for 50% off too.


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## none

@Berubeland: Great thoughtful post. I disagree with you that numbers don't lie. Numbers by themselves in isolation, of course, do not but numbers like that are contain very little information and are generally of little use. 

It's the context that surrounds that data and how these numbers are interpreted that is useful - and can be very difficult.

2+2 obviously =4 but saying exactly when, and by how much, the RE market will correct in Canada is not as easy a question to answer.


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## james4beach

Sampson said:


> Statements like assuming 5% returns on equity markets or inflation = 8-10% are also guesses - in this case, with no support. In fact, looking over the thread of 2012 investment returns, MOST people handily beat 5% (reporting bias, maybe).


One year returns don't mean much at all of course. Here's what underpin my projections: Canada and USA have perpetual zero interest rate policy. The only historical example of ZIRP before this was Japan. Why everyone keeps ignoring Japan, I'll never figure out.

Over the last 20 years the Nikkei return was about -2% per year. The S&P 500 return was 6% per year. I average those (one an extreme bull, the other a long-term bear) and get an estimated long-term stock return of 2% a year. Add in dividends and I estimate total return of around 5% per year. Unfortunately long term inflation in Canada also runs around 4%-5%.

Basically, I estimate that stocks will just barely keep up with inflation. I project *zero real returns in stocks*, based on the two largest economies of the last few decades.


----------



## andrewf

James, using the Nikkei in your sample for average returns ignores the fact that 20-odd years ago, the Nikkei was at a CAPE of over 80x. It was the king of bubbles.

I like CAPE because it has reasonable predictive powers (with decent size error bars). The US at CAPE 22-23 has projected real returns of 3 or so over the next decade. Canada is a bit better, and EAFE is quite a bit better.


----------



## NotMe

@ Berubeland - You make some valid points, but also remember "there are lies, damned lies, and statistics." Numbers don't lie, but they can be interpreted in wildly different ways. Though I do totally agree with your last point - when the big city's sneeze, the small towns are going to get a cold.


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## james4beach

andrewf said:


> James, using the Nikkei in your sample for average returns ignores the fact that 20-odd years ago, the Nikkei was at a CAPE of over 80x. It was the king of bubbles.
> 
> I like CAPE because it has reasonable predictive powers (with decent size error bars). The US at CAPE 22-23 has projected real returns of 3 or so over the next decade. Canada is a bit better, and EAFE is quite a bit better.


20 years ago was 1993, and the Japanese bubble had already burst and had fallen more than 50% off its peak. So I'm not comparing markets right from the Japanese top.

How do you know the USA and Europe right now aren't the king of all stimulus-induced bubbles? They've had historically unprecedented intervention and I think earnings have been artificially inflated, by a lot. This would not show up in CAPE (cyclically adjusted price earnings), so CAPE wouldn't realize that earnings are greatly inflated right now because bad assets that drag down earnings have been moved to the public balance sheet. Nor would CAPE pick up the incredible Canadian stimulus due to real estate and CMHC (government) hiding the mortgage debt burden. Real estate linked industries in Canada amount to about 28% of GDP!

In USA & Europe: many business problems - including debts - have been offloaded to government, especially in the financial sector. This greatly inflates the earnings from financial companies. As Kyle Bass puts it: "This is not a cyclical rebound from the crisis that we had two years ago, where you should be buying stocks because the P/E ratio is low, comparatively speaking, with the rest of the S&P years. Because the E is wrong ... if you take all the bad assets and put them on the public balance sheet, earnings are going to look good."


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## andrewf

James, unless you believe that earnings have been artificially inflated for 10 years, then no, CAPE would still show overvaluation. Besides, the same would apply to Japan in the 1980s, and their CAPE was still 4x current levels for USA at their peak.


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## james4beach

andrewf: Yes I do actually think that American earnings have been inflated for the last decade. Federal Reserve activities changed dramatically after the year 2000. Remember that Greenspan flooded the market with money and inflated the housing bubble, creating a huge short-term economic boom. When that ended, the US Treasury & Federal Reserve together propped up the financial sector by lending them money and offloading their bad debts. This inflated financial earnings tremendously. Now the current game is QE and buying US Treasuries to keep interest rates low. So over the last 10 years, it's been just one form of market intervention after another.

All of those interventions have consequences. So far all the consequences have been stuffed away on public and pseudo-public (Fed) balance sheets. When you look at simplistic measures like P/E & CAPE you totally neglect the government side of the equation. This has the danger of coming back to bite you when eventually the governments can no longer take the burden for all of private industry's failings (including in Canada where the government is burdened with $800 billion in mortgages).


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## Berubeland

none said:


> @Berubeland: but numbers like that are contain very little information and are generally of little use.
> 
> It's the context that surrounds that data and how these numbers are interpreted that is useful - and can be very difficult.
> 
> 2+2 obviously =4 but saying exactly when, and by how much, the RE market will correct in Canada is not as easy a question to answer.


I completely agree that there is no one on the planet that can tell you exactly when a bubble is going to bust. I am neither psychic or omnipotent. 

@ none - those numbers actually contain a lot of really fantastic information and are very useful. 

Let me use an analogy here because real estate is such a charged subject. Seismologists still cannot predict earthquakes or volcanos with any great accuracy. All they can do is measure the stresses and strains and say where geologic activity is going to occur. So they look at their reports and say there is going to be a severe earthquake in California, there is a lot of stress there. 

They can't say when. Does that mean it's a good idea to build on a fault line? Does that mean "those numbers don't mean anything" Definitely not. So I get you're an unbeliever, you build your house on a fault line, see nothing happens and build a whole subdivision and then send the seismologist a Christmas card every year to let him know he's wrong and you're ok. 

Every year the seismologist breathes a sigh of relief, he has friends and family that live in your subdivision. He's happy to be wrong, but every year he looks at his numbers and see the pressure and stress is building up and up and up so that whenever the "event" happens it will be very significant. 

So imagine you are the seismologist and you see this folly going on. No matter how the cookie crumbles you're toast. 

Also in regards to the quote "lie, damn lies and statistics" is complete hogwash, I can't even find out who said that. I'd like to offer up a competing quote however. Uhmmm "Godzilla is coming"


----------



## none

@Berubeland

I think I explained myself poorly - what I meant was that it's the context surrounding the numbers that really contain the information the numbers by themselves only contain a limited amount of information - sort of like the idea that not losing in the stock market sounds great, until you put in the context that all the indexes went up 20% that year (as an example). Without understanding the context in which data are in, numbers can lie, from what you perceive them to mean. As another example: "The GDP of a country went up 20% - which could mean the country is doing great! but then you realize that the country had to cut town all their forest to achieve this" - BAD". That's all I meant by what I said.

As someone who does statistics the statement: ""lie, damn lies and statistics"' is thrown around a lot by people who don't know what they are talking about. Actually, if you plan on lying, why try to use statistics at all?? Doing stats can be A LOT of work! Seriously, just lie and skip that statistics part. In reality, using statistics makes it much harder to lie as it allows others to look closely at your assumptions and methodology. Sure, perhaps the ignorant find it more convincing if you say it's 'statistics' but you can convince the ignorant with just about anything without stats (e.g the bible: There is a man living in the clouds helping the red sox win and African children to starve to death - Yeah THATS convincing!!)


----------



## andrewf

James, why did CAPE work in Japan, which had much the same trouble with credit-fueled growth, off-balance sheet liabilities, etc. What was different about Japan?

You're arguing "this time is different". The standard of proof is pretty high for that, I think.


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## andrewf

Berube: I think it's very easy to lie with statistics. Most people don't have the sophistication to understand the tricks being used. 

There is a book out recently called Bad Pharma, about how pharmaceutical companies manipulated the results of their studies/trials to essentially trick regulators and doctors. So, the FDA is (or ought to be) very sophisticated, but even they can and have been tricked using statistics.


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## james4beach

andrewf said:


> James, why did CAPE work in Japan, which had much the same trouble with credit-fueled growth, off-balance sheet liabilities, etc. What was different about Japan?
> 
> You're arguing "this time is different". The standard of proof is pretty high for that, I think.


I'm just saying that CAPE is not the only metric, and it's incomplete particularly with respect to government intervention. Where does CAPE take into account government and central bank offloading of earnings-impeding liabilities? Nowhere.

I think the level of intervention and manipulation was much higher this time around in America than in Japan. And much more secretive. Many have observed that the Federal Reserve has stepped well outside their mandate. They even turned down freedom of information requests. Bloomberg's case went all the way to the Supreme Court, which eventually forced the Fed to reveal its 2008 activities.

TARP was also a huge chunk of money that is largely unaccounted for. Even politicians are in a situation where they don't know where the country's money ended up. On top of that you have the Federal Reserve, an opaque entity, engaged in a tremendous amount of intervention since 2007.


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## none

Yeah, they weren't 'tricked with statistics'. You can lie with statistics but you can just outright lie. 

It's like saying you shouldn't read anything at all because it can lie. Sure, that's true too but does that mean you don't read anything?

Like I said before, statistics make it harder to lie to those that know what they are doing. You can just as easily just use words to lie to people who don't know what they're doing as well.


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## NotMe

I've never fully understood why any argument that suggests new facts / interpretations is lumped into the "this time is different" mantra. Yet no one has to argue that 'this time is the exact same situation as what happened XXX years ago." Which might be a harder argument - history really doesn't repeat itself exactly.


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## the-royal-mail

The prolem with stats is they are manipulated by the presenter and used in confirmation bias to suit their particular ideology.

For example, I can present a stat that proves the glass is half empty and you can present one which proves it is half full. We can argue all day and both sides have their heels dug in. The stats are really meaningless because people who feel strongly about various subjects will simply practice confirmation bias.


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## james4beach

"This time it's different" is often about how you frame "this time" (what time period?) and is "different" (which is pretty subjective)... so pretty hard to apply.

I do agree that history tends to serve as a guide, and history repeats itself. History teaches us that a market that is heavily manipulated by its government and heavily in debt, tends to underperform and then if the debt keeps growing - it fails. History also says that long periods of currency devaluation results in destruction of the currency and often the end of a country, but most certainly the destruction of wealth.

All of those statements are applicable to USA, Europe, and Japan. They're all very deep in debt and devaluing their currencies at an alarming rate. This is why I expect low market returns going forward. I do believe in historical lessons, and history says the USA, Europe (including UK) and Japan are on a fast road to self-destruction.


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## none

@NotME

When you look at this:
http://www.aei-ideas.org/wp-content/uploads/2013/01/homeprices1.jpg

and then this:
http://www.investingintelligently.com/wp-content/uploads/2006/08/a_history_of_home_values.png

It should give you pause to consider the saying: _Those who cannot learn from history are doomed to repeat it._ - George Santayama


----------



## none

the-royal-mail said:


> The prolem with stats is they are manipulated by the presenter and used in confirmation bias to suit their particular ideology.
> 
> For example, I can present a stat that proves the glass is half empty and you can present one which proves it is half full. We can argue all day and both sides have their heels dug in. The stats are really meaningless because people who feel strongly about various subjects will simply practice confirmation bias.


Yeah, that's not how stats works. Sorry, I do statistics for a living and really, sorry to be rude but you don't know what you're talking about.

Instead it would likely go like this:
Presenter: The glass is half empty!
You: The glass is half full!

Decision: Wait, we're being idiots, it means the same thing, lets go drink beer. At least that's how I hope it would turn out.

Stats (at least in the frequentist paradigm) is a way of determining the probability of whether an outcome could have arisen just by change. Like I've said before, if you claim something to someone who is ignorant and they buy it because you put a metaphorical statistical lipstick on a pig, they would probably buy it without all the stats at all. Why use stats when you can just lie outright?


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## andrewf

Because usually when people say that this time is different, they are wrong. Sometimes they are right, but the burden of proof is on them. I'm not persuaded. The Fed did not invent graft, implied subsidies or misallocation of capital.


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## andrewf

Lying with statistics usually involved messing with samples, etc. Deliberately introducing bias to get the result you want, or failing to compare things that are directly comparable. Ie, testing a drug against placebo alone rather than the best alternative drug.


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## none

That's not statistics - that's just lying.


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## andrewf

Yes, that's why I said it was lying with statistics. They hid their lies using statistics as obfuscation. Similar to hiding lies with dense language/legalese.


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## Sampson

Statistics like any math can be based on poor assumptions, or be based on asking the wrong questions a priori.

The math itself is neutral and as none points out, often simply a descriptive measurement. Are questions framed in a way to get the statistically supported outcomes one wishes to achieve, absolutely, but that doesn't take merit away from the math.

We have sent people to the moon, no lying in that, well, except for that studio in Hollywood with Neil Armstrong's footprints


----------



## NotMe

james4beach said:


> "This time it's different" is often about how you frame "this time" (what time period?) and is "different" (which is pretty subjective)... so pretty hard to apply.
> 
> I do agree that history tends to serve as a guide, and history repeats itself. History teaches us that a market that is heavily manipulated by its government and heavily in debt, tends to underperform and then if the debt keeps growing - it fails. History also says that long periods of currency devaluation results in destruction of the currency and often the end of a country, but most certainly the destruction of wealth.
> 
> All of those statements are applicable to USA, Europe, and Japan. They're all very deep in debt and devaluing their currencies at an alarming rate. This is why I expect low market returns going forward. I do believe in historical lessons, and history says the USA, Europe (including UK) and Japan are on a fast road to self-destruction.


I have a degree in history, I think history does repeat, but doesn't repeat itself exactly and it's hard to tell what will repeat, and what won't. For example, you take a specific event - devaluation of the currency which resulted in the destruction of a country - and apply that to the US, Europe, Uk, etc. However, it's just as probable I can take an event in history, like how the US pulled out of the Great Depression, or pulled itself together after the Civil War, or elected a black president 40 years after the Watts riots, as an example of how it's unwise to bet against America either.


----------



## NotMe

none said:


> @NotME
> 
> When you look at this:
> http://www.aei-ideas.org/wp-content/uploads/2013/01/homeprices1.jpg
> 
> and then this:
> http://www.investingintelligently.com/wp-content/uploads/2006/08/a_history_of_home_values.png
> 
> It should give you pause to consider the saying: _Those who cannot learn from history are doomed to repeat it._ - George Santayama


Santayama also said that a fanatic is someone who redoubles their efforts after losing sight of their goal... one of my favourite expressions.

As for your example - and please everyone remember, I'm neither a rampant housing bull or a raging bear - I am aware of pricing indexes, and robert shiller, and have felt prices to be overpriced since I bought my first loft.. in 2002. I merely want to suggest that what goes up... doesn't necessarily have to come down, or mirror what happened in the US exactly. Canada does have different laws surrounding mailing in your keys to your lender, how mortgages were granted (though there was 0% down, I also remember practically having to give blood to get my mortgage in 2007 and I have a great history) etc. So yes, I totally agree that overall, the numbers do indicate a housing decline in the offing... but I don't get your first graph for instance. It shows a steady climb of house prices in Canada, that's lasted 6 years longer than the US one. So is one interpretation that assuming we're at the peak (?), that it will show a steady decline spread out over twice as long? (I'm really asking, as I'm not sure how to fully interpret this.... and reconcile that with the fact that in my neighbourhood (don mills and lawrence) I've personally watched the 'sold' signs happen pretty fast.


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## Murph

Rusty O'Toole said:


> Typically what happens is this. Homeowner calls real estate agent, says he wants to sell house for $450,000 that he paid $200,000 for 10 years ago. RE agent tries to explain that the house is only worth $375,000. Homeowner protests that the neighbor sold his house for $450,000 last year and his house is way better than the neighbor's. RE agent explains the market has softened since then and prices are off $75,000. HO insists on listing house for $450,000 and of course, it sits there.
> 
> After a year HO says the hell with it, I'm not moving, I'll fix up the old dump and stay put. So the house gets taken off the market.
> 
> This is why the Canadian market never seems to crash the way the US market does. Canadian banks don't do the crazy no down payment loans. Homeowners have equity and they have the ability to make the payments. They don't dump their houses and run away, consequently we don't see 30% to 50% drops in home prices.
> 
> For all those waiting for the Canadian real estate crash, who have been patiently waiting for 5 years, it already happened. Go back to 2007 and 2008, you will see a dip of 10% that lasted about 2 months. That was it. That was our crash. It looks like a pimple on the chart.
> 
> As for the next crash, it may be happening right now for all I know. Sales are slowing but prices are not dropping. I don't expect them to, except in crazy markets like Vancouver and Toronto, which account for less than 1% of the Canadian market. If you see prices dip 10% that's it, that's the crash. Van and TO may see 30 or 40% but I wouldn't even count on that.


You should go back and check prices from the 1990s-2000, markets moved sideways for years, I bought a place in 2001 for less than the owner had paid 10 years earlier, market might not crash but if it sits idle or decreases moderately over a while losses can add up. With the whole boomer demographic, low rates that will eventually increase, and record debt I wouldn't be surprised if we see stagnant house prices for several years. It wont be a repeat of the U.S crisis but probably wont be pretty either...


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## blin10

people keep saying "low rates that will eventually increase", you think it will increase 5+% over night with weak economy? you think government that stupid to destroy this country ?... increase by how much? 0.0001% is also an increase, will that effect anything? there needs to be a resolution with USA and Europe before anything


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## andrewf

Short-term interest rates in Canada are determined by the overnight rate, which is set by the Bank of Canada to maintain its inflation rate target of 1-3%. Longer term rates are set by the bond market, which reflect expectations of future inflation and interest rates. Fixed rate mortgages are driven by the bond market. It's quite possible for the yield curve to rise in anticipation of improved economic activity (or inflation) before BoC acts to raise short term rates.


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## blin10

andrewf said:


> Short-term interest rates in Canada are determined by the overnight rate, which is set by the Bank of Canada to maintain its inflation rate target of 1-3%. Longer term rates are set by the bond market, which reflect expectations of future inflation and interest rates. Fixed rate mortgages are driven by the bond market. *It's quite possible for the yield curve to rise in anticipation of improved economic activity (or inflation)* before BoC acts to raise short term rates.


right, that ain't happening anytime soon


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## Murph

blin10 said:


> people keep saying "low rates that will eventually increase", you think it will increase 5+% over night with weak economy? you think government that stupid to destroy this country ?... increase by how much? 0.0001% is also an increase, will that effect anything? there needs to be a resolution with USA and Europe before anything


So you think the BOC is going to leave interest rates at historic lows for the next 30 years ?

If the interest rate would increase only 2% that makes a world of difference on a 500 K mortgage, you can crunch the numbers yourself to find out:

https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi/start

Thats 500 $ extra every month.

As for rates, well looks like the fed is changing its tune, maybe BOC will eventually follow:

http://www.businessweek.com/news/20...utures-are-little-changed-before-housing-data


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## none

Agreed murph. 

I have a friend with a condo in Vancouver that has decided rather than sell her condo now and take a bit of a hit she is going to rent it out.

My prediction is that she's going to be on the hook for about a 200K loss (loss in value plus subsidizing her tenant) in about 2 years when she'll sell.

I found this great quote on a blog about the Canadian housing market: *"How will the situation resolve itself? In all likelihood the correction will also follow the path of the US – a multi-year housing crash which ruins the lives of countless Canadians and takes down much of the economy with it."*

People think Vancouver is different. The crash occurred in San Diego. I've lived in both cities and SD is a hell of a lot nicer than Vancouver!

blog I stole quote from: http://northamericaneconomics.com/category/canada/


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## andrewf

But Vancouver has immigrants, and hardly any immigrants move to San Diego!

/sarcasm


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## none

andrewf said:


> But Vancouver has immigrants, and hardly any immigrants move to San Diego!
> 
> /sarcasm


I know right? To me I am continually amazed at people who don't thinks there's a bubble. I look at the data and really can't get an idea how they couldn't be. How can Canada be the only place on the planet in all recorded history that have such rapid appreciation of house prices be permanent?


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## blin10

where did I mention any time frame ? and why did you pick 30 years?... BOC is going to leave low rates until USA and Europe stabilize and there will be a clear picture which is not happening anytime soon... and why would they increase by 2%, if anything it'll be a very slow process over years and years... unlike in States, in Canada to get 500k mortgage you have to prove a bunch of stuff that you're making enough, they're not giving mortgages away left and right... i'm not a real estate bull, I'm just tired of same bs over and over and over how bubble will burst, it's been going on for over 10 years now....



Murph said:


> So you think the BOC is going to leave interest rates at historic lows for the next 30 years ?
> 
> If the interest rate would increase only 2% that makes a world of difference on a 500 K mortgage, you can crunch the numbers yourself to find out:
> 
> https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi/start
> 
> Thats 500 $ extra every month.
> 
> As for rates, well looks like the fed is changing its tune, maybe BOC will eventually follow:
> 
> http://www.businessweek.com/news/20...utures-are-little-changed-before-housing-data


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## andrewf

So, what do you think is happening in Vancouver and Victoria right now? Prices are down... not a correction?


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## none

I think people also think a housing bubble deflates like a stock market bubble. It can take years for a housing market to deflate. I thought Paul Krugmans article in the NYtimes in 2005 was quite good.

http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=0

At least for Vancouver condo's - as it pertains to inventory you can see here that inventory is rising much like it did during the deflation in 2008:

http://vancouverpeak.com/attachment.php?aid=29

This time, however, the government isn't going to step in to prop it up.


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## james4beach

none said:


> People think Vancouver is different. The crash occurred in San Diego. I've lived in both cities and SD is a hell of a lot nicer than Vancouver!


Agreed. Sigh... I've been wanting to find a job in SD.

Many of the same bullish arguments for housing were used in America. For places like Miami, they used to say: there's so much immigration bringing in new people, and there is so little space, that condos can only go up! Well Miami had one of the worst condo crashes.

I think everyone underestimates the power of credit expansion and low interest rates. We have that in Canada ... ridiculously low borrowing rates, 165% debt to income ratio, CMHC giving $800 billion mortgage stimulus. Even if interest rates stay low, the debt interest burden keeps building up for consumers. And unless their incomes keep going up, it's not sustainable. Real incomes have been stagnant for about 30 years.


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## blin10

you forgetting one major point, Canada doesn't give out mortgages left and right to everyone...



james4beach said:


> Agreed. Sigh... I've been wanting to find a job in SD.
> 
> Many of the same bullish arguments for housing were used in America. For places like Miami, they used to say: there's so much immigration bringing in new people, and there is so little space, that condos can only go up! Well Miami had one of the worst condo crashes.
> 
> I think everyone underestimates the power of credit expansion and low interest rates. We have that in Canada ... ridiculously low borrowing rates, 165% debt to income ratio, CMHC giving $800 billion mortgage stimulus. Even if interest rates stay low, the debt interest burden keeps building up for consumers. And unless their incomes keep going up, it's not sustainable. Real incomes have been stagnant for about 30 years.


----------



## none

First, that's not true - there were quite a few 0% mortgages and 'cash back' mortgages out there.

Subprime had an effect but it's more things turning to normal - Canadians are mortgaged to the hilt so much that over 50% of people who took cash from their RRSP using the home buyers plan can't even come up with the $1500 a year to pay it back. They'd rather take the tax hit. That's very telling.

I am going to be kind of sad when things do take the big dive as I have lots of friends who will basically be ruined. Big deal, I get to buy a house for cheap then? Who cares, it's just a stupid house.


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## blin10

you're trying to convince yourself how you are so smart renting and all other house owners are idiots... have few friends like you, they were telling me same thing 10 years ago and guess what? they're still renting and my house close to doubled in value... i'm open minded and i'm not expecting same growth again and I can see how there might be pull back, but you also need to understand there's a good chance housing can maintain this level for years and even slowly go higher... Toronto is unofficial capital of Canada and compare to other capital cities around the world housing is still not expensive


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## none

A house not increasing in value is losing value.

It took 20 years for houses in toronto to recover their inflation corrected values from the bubble in 1990.

20 years to make 0% on an investment is a long time to wait.

I made my cash in Res RE and cashed out. If I jump in now I may make maybe 10 - 20K after closing costs but I definitely won't lose 200K which is what I think is the much more likely scenario after looking at the data.

I'd be happy if I was wrong, I don't want lots of my friends to be broke because they made (what I think) is a very stupid financial decision.

Time will tell.


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## blin10

wrong, if you have a paid off house it's earning close to 4% return annually , here's how... let's take area I know, 800k house rents for 3000$ a month, that's 4.5%, let's say after few expenses it's 4%... if you rented that house you would be burning $36,000 per year... now, let's look from a different angle, a lot of people bought that house for 500k, so it's earning them 7%... yes, you might say they had to still pay that 500k or 800k, but I'm just pointing out, with a paid house you don't need to pay rent and it's not loosing anything, it's making you $ you don't even know



none said:


> *A house not increasing in value is losing value.
> *
> It took 20 years for houses in toronto to recover their inflation corrected values from the bubble in 1990.
> 
> 20 years to make 0% on an investment is a long time to wait.
> 
> I made my cash in Res RE and cashed out. If I jump in now I may make maybe 10 - 20K after closing costs but I definitely won't lose 200K which is what I think is the much more likely scenario after looking at the data.
> 
> I'd be happy if I was wrong, I don't want lots of my friends to be broke because they made (what I think) is a very stupid financial decision.
> 
> Time will tell.


----------



## none

Here is how the math works:

Buy house for 800K

Property taxes: 10K
closing costs (3%): 24K/10 years
Maintenance: 3K
Interest (3%): 24K
Inflation(2%): 20K
House maintains price in real time dollars: 0

Cost to own: 59.4K per year; rent is 36K per year. Cost of ownership is 23.4K over renting.

You are missing some important variables in your maths.

==== PAID HOUSE
with a paid house you need to consider the maintenance costs/property taxes and most importantly the opportunity costs of having money sitting in a house.

I fully agree with you that buying a house that is appreciating at a rate higher than the costs above is a brilliant decision, much like paying a MER of 3% for a mutual fund that appreciate at 10% is an awesome idea. I just don't see that happening in the near future.

Now, on the west coast of Canada and Toronto, I find it hard to imagine a scenario where buying over renting is a good idea.


----------



## sags

Millions of baby boomers are reaching 65 each year for the next 7-8 years.

Many have no savings, no pensions, and have the choice of working until they drop, getting a reverse mortgage, or selling the house.

When their homes, which may have been purchased 40 years ago for 60,000 go on the market..........they have lots of room to come down and still get a pile of cash out of their homes.

Recent home buyers don't have the same flexibility on price.

People who bought years ago at lower prices..........and after years of payments..........have some equity and can weather the storm.

People who bought with 0-10% down, and are maxed out on affordability buying a home at it's peak price...............are screwed.


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## blin10

dude stop pulling numbers out of nowhere just to feel warm and fuzzy inside, you don't read what I write do you? I said with a paid off house. In Ontario, property tax is not 10k, it's 5k and i know that 100%. Inflation eats renting money as well and rent goes up. Closing costs I don't get where you got that number from. Maintenance is nowhere near 3k. Interest again I said paid off house.


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## none

Opportunity cost. A house not increasing in value is losing value at the inflation rate (plus maintenance etc)

Rents are far below ownership costs that is why a correction is inevitable.


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## blin10

far below ? might be a bit below but not far below


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## SpIcEz

blin10 said:


> you're trying to convince yourself how you are so smart renting and all other house owners are idiots... have few friends like you, they were telling me same thing 10 years ago and guess what? they're still renting and my house close to doubled in value... i'm open minded and i'm not expecting same growth again and I can see how there might be pull back, but you also need to understand there's a good chance housing can maintain this level for years and even slowly go higher... Toronto is unofficial capital of Canada and compare to other capital cities around the world housing is still not expensive


Capital?

There is no such thing as an unofficial capital. Biggest city =/ capital. 

Its a metropolis ok, capital no.


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## SpIcEz

blin10

Saying maintenance is no where near 3000$ on an 800 000$ home is disingenuous.

The standard calculation is 1% annually which would make it 8000$.

You can maybe go through several years without any big costs, but it'll catch up eventually. 

Also, you need to take into account not just repairs, but snow plowing, grass cutting, and all other expenses related to the house, that a renter wouldnt be paying.


----------



## Murph

blin10 said:


> wrong, if you have a paid off house it's earning close to 4% return annually , here's how... let's take area I know, 800k house rents for 3000$ a month, that's 4.5%, let's say after few expenses it's 4%... if you rented that house you would be burning $36,000 per year... now, let's look from a different angle, a lot of people bought that house for 500k, so it's earning them 7%... yes, you might say they had to still pay that 500k or 800k, but I'm just pointing out, with a paid house you don't need to pay rent and it's not loosing anything, it's making you $ you don't even know


Don't quite understand what you mean here, are you renting the place out or living in it ? If your living in it then it isn't returning anything, unless you decide to sell.

As pointed out, you have to calculate the opportunity cost of investing 500K in the house. You could just as well invest it somewhere else (i.e equities) and have a similar return (4%-7%) and also have capital appreciation.


----------



## andrewf

blin10 said:


> I said with a paid off house.


Opportunity cost applies whether there is a mortgage or not.



> In Ontario, property tax is not 10k, it's 5k and i know that 100%.


In 'sauga, property taxes are 1.25% of assessed value.




> Inflation eats renting money as well and rent goes up.


Yup. Though my rent has stayed the same for 5 years...



> Closing costs I don't get where you got that number from.


Land transfer tax for Ontario alone ranges from 0.5-2%. Same again for Toronto, if you live there. An $800k property would face $24,200 in Toronto. Plus legal, etc.

http://www.fin.gov.on.ca/en/tax/ltt/index.html
http://www.landtransfertaxcalculator.ca/#MunicipalLandTransferTax



> Maintenance is nowhere near 3k.


So roofs, kitchens, bathrooms, decks, driveways, landscaping, windows, furnaces, etc. don't need periodic replacing? Even if you replace these items once every 30 years, I bet it would cost $90k.


----------



## NotMe

What kills me, and I wish we could all just abide by it, is the idea that all renters are envious poor little homeowner wanna-be's, and all home owners are smug idiots who will get their day of reckoning. People should be capable of having two opposing thoughts in their head without going insane. For me, the truth is what I wrote earlier - that as a homeowner, unemployment, divorce or injury (ironically, not death) are greater threats to my economic well being than any home price fluxation. That may not be for all, but it's likely a larger chunk of people than we think.

@ the maintenance cost being a % of cost. Is that still a realistic expectation, given that house price no longer = size of property? For instance, there's no way a 2500 sq. ft house in Trenton that might cost $250,000 costs in maintenance 3x less than a 1200 sq house that sold for $750,000 at bayview/lawrence.


----------



## none

NotMe said:


> @ the maintenance cost being a % of cost. Is that still a realistic expectation, given that house price no longer = size of property? For instance, there's no way a 2500 sq. ft house in Trenton that might cost $250,000 costs in maintenance 3x less than a 1200 sq house that sold for $750,000 at bayview/lawrence.


I could go with that. Although I think there has been some increases in wages of contractors during the last 10 years I don't think it rose at the same rate as the housing bubble - so I agree with you there.

Still, I don't think 3K on average per year is out of line. I mean a roof alone needs to be replace every 15 years, furnace prob every 15, water heater, driveway, deck etc etc etc.


----------



## carverman

blin10 said:


> dude stop pulling numbers out of nowhere just to feel warm and fuzzy inside, you don't read what I write do you? I said with a paid off house. In Ontario, property tax is not 10k, it's 5k and i know that 100%. Inflation eats renting money as well and rent goes up. Closing costs I don't get where you got that number from. Maintenance is nowhere near 3k. Interest again I said paid off house.


Agreed. Buying is always better than renting because if you are paying $1500 a month to rent a house vs $1500 towards a mortage, in 10 years,
you will have paid $180k in rent for which you have absolutely no equity..or paid that money into a mortgage and have that money build equity, that you can sell later.
The trick here is not to buy into an inflated market.


----------



## carverman

none said:


> Still, I don't think 3K on average per year is out of line. I mean a roof alone needs to be replace every 15 years, furnace prob every 15, water heater, driveway, deck etc etc etc.


Unless you buy a building that needs a new roof already, it is very doubtful that you need to set aside $3k per year for maintenance.
My house built in 1971 is 42 years old.

The roof was already past it's 20 year expected lifetime when I bought it. I replaced it for $4800 about 5 years later. I don't expect to have to replace the roof for another 15 years or so.

Driveway is also 42 years old. I get it resealed every 2 years for $60 in coal tar pails from CTC.
Plumbing no problems

Hot water tank I own..ok that was about $600 , 13 years ago.

My gas furnace is 19 years old and still going strong with a maintenance plan. No plans on replacing it unless the heat exchanger cracks..everything else can be replaced under the maintenance plan $233 a year.
My taxes are about $2500 a year.

Two years ago, I did have a costly repair, the A/C went and I had to replace the entire a/C at a cost of $2400..so yes for that year and that year only..you could say it cost me almost 3,000 in repairs.

Since 1996 when I bought it for $121K, i have had shelter, my own place to do as I wish and equity building up even if it's a slow growth area.
it is now valued at close to $300K on the resale market. ($80K Mortgage paid off in 2002, when I retired.

In the 16 years since I've lived here..it's cost me about $10,000 in repairs (less than $1k per year) and some of the repairs were major items that don't need to be done every year.

Had I rented for 16 years at say $1000 per month..I would have paid out $192,000 in rent!

Buying and paying off the mortgage, I have about 275 to 300K in equity, if I need to sell and go into a retirement home some day.


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## andrewf

My parents had wind storm that damaged the roof of their house. Insurance got a quote of $27k to replace. It was a 20 year old roof and was just about ready for replacement. Shingles have improved in that time, so new roofs might last longer if properly vented.


----------



## jcgd

After thirty years of paying a mortgage and you own the home, the renter could have equivalent equity in cash or stock or whatever from the savings over owning. You have I run through the calculations for both to know what's better in the end.


----------



## Eclectic12

SpIcEz said:


> ... Also, you need to take into account not just repairs, but snow plowing, grass cutting, and all other expenses related to the house, that a renter wouldnt be paying.


Hmmm ... so where the landlord has a contract to have the parking lot plowed, you don't think that the renter pays for it? What about repairs to underground parking garages - is the landlord giving the renter a free gift? 

Same for property taxes, roofs, hot water heaters etc.

The difference is that the landlord can spread the costs over more people as well as write off the expenses on their taxes versus the home owner. Then too, the home owner is not tied to whatever some one else wants/contracts for (ex. I've bought used for tools, appliances etc. for much less). 

And sure, I've had to pay for snow shovels (the snow scoop was $3 at a garage sale), lawn mowers ($300 plus one $90 tuneup plus gas divided by fifteen years) but for the items you mention, my time seems to be the most expensive part of the equation.




Murph said:


> ... As pointed out, you have to calculate the opportunity cost of investing 500K in the house. You could just as well invest it somewhere else (i.e equities) and have a similar return (4%-7%) and also have capital appreciation.


Good point ... though if you are taking advantage of the opportunity to invest, it would seem you are one of the few. 

Most I've talked to who argued for this scenario when I ask what money they've redirected to investments have either a low or zero number in response. Some paid off BMWs and Audi's in the rental parking lot though ...




andrewf said:


> So roofs, kitchens, bathrooms, decks, driveways, landscaping, windows, furnaces, etc. don't need periodic replacing? Even if you replace these items once every 30 years, I bet it would cost $90k.


That they do ... but how much of the "maintenance" costs on the average home owner's really are maintenance? 

If home owners check their receipts, how many needed a replacment stove and the receipt will show an expense that is twice what was needed as the home owner decided to get the latest/greatest stove or decided to remodel the entire kitchen? 


IAC, it will be interesting to check my records. So far I'm at 16 years of home ownership where the 1% says I should have paid $30K in maintenance and I'm coming up with about $8K spent. I'm sure there's odds and ends I'm forgetting but adding in the roof I might need in about five years, it's peanuts compared the 1% amount that will have been added in the meantime.


Cheers


----------



## none

I think you guys are missing the point here. The only stupid thing about buying a house 10 years ago was buying one. Really, everyone who knew should have put 0% down and bought as many as possible. Practically everyone who bought in 2002 and held until 2010 made gobs of cash. The thing to realize here is if you only bought one, then you didn't think houses would go up as much as they did, because fundamentals at the time predicted they wouldn't. 

To quote the bank of Canada: "'Real wealth is … gained through hard work, it's not through some magical asset inflation.' —Mark Carney, Bank of Canada"

What we are talking about is buying a house now (or buying one in key locations such as Vancouver, Victoria, Toronto). Currently it costs far more to own a house than it does to rent it and therefore, the only reason to buy a house is because you are speculating that the house will go up even more. This is the definition of a bubble - it really is that simple.. I read Garth Turner's blog (I'm sure you can tell ) and I read a really good comment in the comment section. I'll leave it here:

_"It is a common and unavoidable question. People naturally want to know. When? They need certainty. But if Garth, or anyone, knew WHEN, they’d be a member in the very exclusive and rarefied club of clairvoyants, able to see the future, currently numbering zero.

So when as in date and time, is a fool’s errand. Anyone who claims to be able to tell you, is scamming you.

When as in conditions, now we’re getting somewhere. The easy answer is when renting is cheaper than owning. Even if house prices continue to decline, every month that you own in this scenario you are coming out ahead of renters. Prices cannot continue to fall much lower than this, because investors will step in to buy well priced properties they can rent out for a profit. Rents ultimately support house prices, just like earnings support stock prices. They can only diverge for so long. Long term you cannot go wrong with value.

Conversely, when it is more expensive to own than rent, owners are falling behind renters every month they own, unless they are able to sell for much more than they bought to make up the difference. And after property taxes, maintenance/upkeep, transaction costs, renovations and assorted operational expenses, the difference is much larger than they might believe.

Will prices ever fall to that level? In some places, they definitely will. In others, they will remain stubbornly high. And to dispel the last false hopes, if it is well out of your range today, it will continue to be out of your range."_


----------



## Four Pillars

NotMe said:


> @ the maintenance cost being a % of cost. Is that still a realistic expectation, given that house price no longer = size of property? For instance, there's no way a 2500 sq. ft house in Trenton that might cost $250,000 costs in maintenance 3x less than a 1200 sq house that sold for $750,000 at bayview/lawrence.


Yeah, the % of cost rule is silly. Here's how I do it:

http://www.moneysmartsblog.com/estimate-budget-home-maintenance-costs/


----------



## HaroldCrump

none said:


> To quote the bank of Canada: "'Real wealth is … gained through hard work, it's not through some magical asset inflation.' —Mark Carney, Bank of Canada"


Is this the same dude who lowered interest rates to create the largest credit bubble in Canada, possibly the largest credit bubble in the entire G20 right now?
And is this also the same dude who, along with Finance Minister Flaherty, engineered the biggest housing bubble since 1980?
And inflated the balance sheet of the federal govt. (via ever increasing CMHC loans)?

He sure can talk about _magical asset inflation_ :rolleyes2:



> I read Garth Turner's blog


Is this the same dude that was pumping Nortel stock through his newsletter and blog, literally months before it went bankrupt?
And is this the same dude that was screaming everyone to dump all their stocks in the Spring of 2009, literally days before the biggest bull market in the last 4 years?

He sure has a great crystal ball :rolleyes2:

I don't think there is any absolute answer to whether one should own or rent at this time.
It depends on _what else_ the individual is doing with their savings.

If you have a conservative mortgage with an aggressive amortization, and are carefully paying it off, you will build your equity.

On the other hand, if you are renting and then blowing away your savings on useless consumer stuff, after 10 years of renting, you will still have nothing to show for your "smart" decision to rent.

To get truly ahead with renting, you have to save the balance, invest carefully, and make those investments grow consistently to match the assets of a home owner with a paid off mortgage.


----------



## none

HaroldCrump said:


> f you have a conservative mortgage with an aggressive amortization, and are carefully paying it off, you will build your equity.
> 
> On the other hand, if you are renting and then blowing away your savings on useless consumer stuff, after 10 years of renting, you will still have nothing to show for your "smart" decision to rent.
> 
> To get truly ahead with renting, you have to save the balance, invest carefully, and make those investments grow consistently to match the assets of a home owner with a paid off mortgage.


You don't build equity if the house goes down in price.
If rather than saving then you are spending the money you save you don't end up saving at all.
Currently, to get ahead in renting you don't need to do anything at all. You can spend all the money you save renting as as long as you are not taking out loans to buy things at least you are not losing money on real estate.

Like I've said before, I save 12,000 a year by renting (assuming interest rates stay at 3% and housing paces stay static in 2013 dollars) . If housing goes down 25% over 10 years (in inflation corrected dollars) I will save $270,000. If I spend all that money on hookers and booze I'll be no worse off financially but also have the benefit of having a lot of very special memories.


----------



## SpIcEz

Eclectic12 said:


> Hmmm ... so where the landlord has a contract to have the parking lot plowed, you don't think that the renter pays for it? What about repairs to underground parking garages - is the landlord giving the renter a free gift?


I agree, it is not a free gift. However, the owner does have to pay for those services.

If I compare renting (example) for 1200$/month with owning at 1200$/month, but forgot to factor in all of the costs of owning, which include those services as a maintenance cost, then I am comparing apples to "illusions".

My point is simply to not forget the whole picture and factor in ALL the costs.

I have nothing against owning, but people do not take the time to make thorough decisions.

It is not as simple as Owning ---> Renting.

For example: If you move allot, or dont think you'll be in the same city 5-8 years from now, renting is most likely a better option if you factor in ALL of the costs of ownership.

I agree with none, that if you are disciplined and save and invest extra money you would have put towards ownership, it might just be a better idea to rent during a bubble.


----------



## carverman

none said:


> To quote the bank of Canada: "*'Real wealth is … gained through hard work*, it's not through some magical asset inflation.' —Mark Carney, Bank of Canada"


Ya right! He's one to talk. Gave up the BOC job for a more lucrative job with the Bank of England. I'm sure he's never done a days "hard work" in his life...and he
gave us plastic money before he's leaving.


----------



## carverman

SpIcEz said:


> I agree, it is not a free gift. However, the owner does have to pay for those services.
> 
> If I compare renting (example) for 1200$/month with owning at 1200$/month, but forgot to factor in all of the costs of owning, which include those services as a maintenance cost, then I am comparing apples to "illusions".
> 
> My point is simply to not forget the whole picture and factor in ALL the costs.
> 
> I have nothing against owning, but people do not take the time to make thorough decisions.
> 
> It is not as simple as Owning ---> Renting.


You can lose in investing..and you can lose in realestate sometimes. However, a house that you own is a real tangible asset..it's shelter. 
You can sit and count your worth on paper until the next stock market crash..


----------



## none

And pretty much no-where is BC does buying make sense: http://www.theprovince.com/news/Where+cheaper+more+likely+rent/6612302/story.html


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## none

carverman said:


> You can lose in investing..and you can lose in realestate sometimes. However, a house that you own is a real tangible asset..it's shelter.
> You can sit and count your worth on paper until the next stock market crash..


This is a common misconception because you are buying on leverage and thus your investment can end up being less than zero. Put 50K down, the house declines by 100K and your 50K investment suddenly turned into a loss of 50K (where you don't even get credit for the loss!).

At least with highly speculative stocks (not on leverage) the worst you can do is lose all your money - with houses you can lose more than all of your investment.


----------



## HaroldCrump

none said:


> Like I've said before, I save 12,000 a year by renting (assuming interest rates stay at 3% and housing paces stay static in 2013 dollars) . If housing goes down 25% over 10 years (in inflation corrected dollars) I will save $270,000. If I spend all that money on hookers and booze I'll be no worse off financially but also have the benefit of having a lot of very special memories.


You will probably have a lot more than just "special memories" ;o)
You will have nasty things that require antibiotics and injections to cure :rolleyes2:

Anyhow, your perceived "savings" of $270,000 is only wishful thinking in your mind.
You would have, instead, spent several hundreds of thousands on rent for 25 years and would have nothing to show for it (at least nothing other than the needles and antibiotics mentioned above).

A paid off home can be leveraged for retirement (through a reverse mortgage or by selling outright).
It can also be rented out, while the home-owner (now retired) can supplement his/her CPP + OAS with the rent money and live someplace warm[er].
The home can be gifted to kids or grand-kids.
It can be bequeathed to kids or grand-kids.

There are many, many possibilities.

Instead, you are willing to bet one one single scenario that home prices will be 25% lower after 10 years.

I may agree that buying an over-priced home, esp. with a low downpayment and a long amortization is not the right thing to do now.
But to argue that buying a home is a bad idea under any circumstances is not right.

You are reading too much Garth Turner.


----------



## none

I never said any circumstances - I said now when rents are so far below buying.

BTW, I've owned a house, I sold it in 2010 and did pretty well. I take no credit for it, the market should have corrected in 2008 but F stepped in and repumped it up.

It's just amazing the arrogance of Canadians when it comes to housing like Canada is at all special - it's not, it's a poorly diversified resource based economy.

Anyway, 3 years from now we can revisit this and one can tell the other - 'i told you so'


----------



## andrewf

Eclectic:

If your repair expense is only $8k in 16 years, I'm assuming you have a rising deferred maintenance liability. Houses are depreciating assets, constantly in a state of falling apart. Even if you don't do the deferred maintenance, it impairs the value of the property if you ever choose to sell.

I'll grant you that it was a great idea to buy 16 years ago (in retrospect). If I owned now, I wouldn't sell for lifestyle reasons. But if you were a first-time buying in Vancouver, Victoria or Toronto now, would you really think it was a good time to enter the market?


----------



## Eclectic12

none said:


> I think you guys are missing the point here.


And I'd say there's several points being missed.




none said:


> The only stupid thing about buying a house 10 years ago was buying one.


For me it was nineteen years ago and the latest sell/buy was six years ago.

Of course in hind sight, my dad's suggestion to buy a house near the university and rent it out while being an onsite landlord would have worked out well with something like a $50K buying price .... :rolleyes2:




none said:


> ... What we are talking about is buying a house now (or buying one in key locations such as Vancouver, Victoria, Toronto).


I didn't want to buy one in Toronto nineteen years ago, fourteen years ago (my sister did then sold about five years later) and wouldn't want to today.


Cheers


----------



## Eclectic12

SpIcEz said:


> I agree, it is not a free gift. However, the owner does have to pay for those services.


The only situation I see the landlord paying for it is if enough rental units are empty. 

The landlord can use his rents to pay for it and write the expense off against rental income collected to pay less income tax. So unless the rental is empty, I don't see how the landlord is "paying" and the renter "is not paying".

The renter seems to be in the same situation as a house owner, where the expense is not tax deductible. The advantages the renter has are that the expense is spread across more rental units and if they choose to move to a building that does not offer that feature, they may be able to avoid it. 

Note that there is flexibility for the home owner as I've lived in some neighborhoods where four neighbors split the cost/expenses of a snow blower so that all benefited for a reduced fee.




SpIcEz said:


> If I compare renting (example) for 1200$/month with owning at 1200$/month, but forgot to factor in all of the costs of owning, which include those services as a maintenance cost, then I am comparing apples to "illusions".
> 
> My point is simply to not forget the whole picture and factor in ALL the costs.
> 
> I have nothing against owning, but people do not take the time to make thorough decisions.
> 
> It is not as simple as Owning ---> Renting.


Which is why I was pointing out that it's great to start with a "rule of thumb" maintenance cost but YMMV. 




SpIcEz said:


> For example: If you move allot, or dont think you'll be in the same city 5-8 years from now, renting is most likely a better option if you factor in ALL of the costs of ownership.


Probably ... but then again, the American co-workers who were moving every two to three years to lock in the $250K+ gains in their houses would argue they did well by moving repeatedly.




SpIcEz said:


> I agree with none, that if you are disciplined and save and invest extra money you would have put towards ownership, it might just be a better idea to rent during a bubble.


That's the part that was missing IMO - being disciplined to use the advantage being offered.


Cheers


----------



## none

I lived in the States during the housing slump. Before, things sounded EXACTLY like here: 'you're just throwing money away','buying wil always recover' blah blah blah.

I personally know too many people who lost 100K+ on their houses and were forced to sell so I've seen the damage that these loses can take on families and friends.

I just find it really weird that people will risk SO much to buy an asset at the market peak AND on leverage AND in the hopes to make a little bit of extra cash but at the risk of losing A LOT. Especially when you could just pocket realized gains by renting.

I find it a bit of a contradiction that the housing bulls also rapidly pay down their mortgage - i.e. safe guaranteed low return because the stock market is too risky. _Very very_ strange.


----------



## Eclectic12

andrewf said:


> If your repair expense is only $8k in 16 years, I'm assuming you have a rising deferred maintenance liability.


Why would you assume a deferred maintenance liability? 

There's a new furnace, a new window and four appliances in the expense total that I recall. In fact, another part of the total is for a new bathroom sink which replaced the functional old/chipped one in preparation for selling. Additionally, there's the cost for replacement shingles that the twice a year roof check identified as needing replacement.

To restate my point - while 1% is a reasonable guess, YMMV dramatically.




andrewf said:


> I'll grant you that it was a great idea to buy 16 years ago (in retrospect). If I owned now, I wouldn't sell for lifestyle reasons. But if you were a first-time buying in Vancouver, Victoria or Toronto now, would you really think it was a good time to enter the market?


I didn't want to buy in Vancouver or Toronto nineteen years ago and based on lifestyle, don't want to buy there now. I'm less familiar with Victoria. :biggrin:


Cheers


----------



## andrewf

Deferred maintenance includes selling a house with a 1970s kitchen and pink bathroom. Appearance matters and materially affects sale prices. If you don't periodically update kitchens and baths, the value of the home will reflect the fact that they are fully depreciated.


----------



## none

andrewf said:


> Deferred maintenance includes selling a house with a 1970s kitchen and pink bathroom. Appearance matters and materially affects sale prices. If you don't periodically update kitchens and baths, the value of the home will reflect the fact that they are fully depreciated.


But maybe if you wait long enough that green stove will come back into style.

Everything old will be new again


----------



## Murph

I cashed out my rental property and principle residence last year, made a tidy profit but in no rush to buy right away. Happy renting and saving cash. I invested some of the profit since I think equities will outperform real estate over the next 10 years. Quite happy just receiving dividends, and not having to worry about shitty tenants, neighbors, fixing toilets, running after the rent, condo fees, repairs and on and on. When it makes sense to buy I will jump back in, but prices are ridiculous right now.

I do agree that real estate is an amazing way to build wealth, but it has to make sense and be at reasonable price. I just don't see a buyers market right now or really interesting deals, the math just doesn't make sense...


----------



## carverman

none said:


> But maybe if you wait long enough that green stove will come back into style.
> 
> Everything old will be new again


What's wrong with that kitchen? It has warmth.

Upgrading a home requires careful consideration and depends on how long you plan to live in your home. Unless the kitchen or bathroom is become
so old it is practically unattractive with problems, spending tens of thousands to renovate in order to sell it doesn't always make economic sense.
There was a house next to me, that changed hands about 3 times in the last 4 years. The last owner spent $40K to upgrade the kitchen, bathrooms
and heating system and then tried to put it on the market at much higher than the average prices of comparable homes in my area.
Not only did it take much longer to sell, but the seller ended up taking a big discount on the asking price in order to finally sell it..so he may
have been substantially out of pocket on the renovations, and chances are that only living for less than 2 years, there was no real equity in it.

I get a laugh of these young couples buying some very old Toronto homes (Love it or List it episodes) for a bargain at $450K and then find out that
they have to spend anywhere from $80K upwards to renovate it to their liking in order to stay in the downtown core. These homes were around $30k
to $40k in 1972, when I bought my first home in Toronto. I too renovated and upgraded the plumbing (lead water pipes) and knob and tube wiring
but in the end, I barely got back what I put in it.


----------



## Eclectic12

andrewf said:


> Deferred maintenance includes selling a house with a 1970s kitchen and pink bathroom. Appearance matters and materially affects sale prices. If you don't periodically update kitchens and baths, the value of the home will reflect the fact that they are fully depreciated.


I understand the general point but unless one is buying such a house with the pink fixtures to start with (and hopefully adjust the offer to factor in the upgrades) how often is it going to apply? Is it really a rising amount that should be dealt with via scheduled spending, let alone considered maintenance?

Regular updates to the kitchen/bathroom puts one at risk of following what's popular so that when selling, there's another update required does it not? (ex. pastel colour bathrooms are popular now, update it and when selling, it is a detraction.)


Since my kitchen is wood coloured, has white appliances with black trim and the batchroom fixures are white - should I need updates to sell, IMO it's more likely a one shot deal for particular parts instead of something that needs regular overhauls every five years or so.


Cheers


----------



## andrewf

Yes, kitchens and baths depreciate. I don't think this is controversial. An old kitchen, even if not particularly offensive, is not worth the same as a new kitchen. Home prices would tend to reflect that.

Edit: in other words, if you don't spend money updating things like kitchens, baths, windows, the the cash cost of this deferred maintenance comes out of the sale price.

Now, of course, it is more economical to not do these things, as ROI on renovations are usually negative (other than cosmetics like paint). But part of the cost of owning is this depreciation of the value of the house if you don't maintain it. You bear that cost whether you update it or not. A renter either moves to a nicer place for the same rent or his landlord maintains the property appropriately.


----------



## NotMe

carverman said:


> I too renovated and upgraded the plumbing (lead water pipes) and knob and tube wiring
> but in the end, I barely got back what I put in it.


You do realize that means you lived for free, right? Not such a bad deal. And I could find a nice old Toronto home for $450K I'd gladly throw $100K at it - my friend just bought a new house out in Milton for $450,000 and you couldn't pay me to live there. But obviously he likes it, so everyone values different things differently.


----------



## andrewf

Free except for opportunity cost on his equity, mortgage interest, property tax, insurance, etc.

It's like how I live for free except my rent. :rolleyes2:


----------



## MoneyGal

And, uh, inflation.


----------



## HaroldCrump

MoneyGal said:


> And, uh, inflation.


Inflation is only 1%.
That is what StatsCan and the BoC say :rolleyes2:


----------



## none

Nailed it.

Why is doing the full math that hard?



andrewf said:


> Free except for opportunity cost on his equity, mortgage interest, property tax, insurance, etc.
> 
> It's like how I live for free except my rent. :rolleyes2:


----------



## none

andrewf said:


> Yes, kitchens and baths depreciate. I don't think this is controversial. An old kitchen, even if not particularly offensive, is not worth the same as a new kitchen. Home prices would tend to reflect that.
> 
> Edit: in other words, if you don't spend money updating things like kitchens, baths, windows, the the cash cost of this deferred maintenance comes out of the sale price.
> 
> Now, of course, it is more economical to not do these things, as ROI on renovations are usually negative (other than cosmetics like paint). But part of the cost of owning is this depreciation of the value of the house if you don't maintain it. You bear that cost whether you update it or not. A renter either moves to a nicer place for the same rent or his landlord maintains the property appropriately.


It is a little weird how people think that they need to get a house perfect to be 'sell ready' to get top dollar. They end up paying $20K to renovate a kitchen which allows them to get an extra 10K on their house. Great example of the current stupidity in the Res housing market.

We bought our house in 2004 and the kitchen was an absolute disaster. We never did reno it because my wife wanted her retirement dream kitchen - granite countertops stainless steel appliances... Me? I wanted Formica counters and white appliances that I bought off craigslist from people who just moved into their newly reno'd houses that had white appliances but they wanted stainless - best deal out there for appliances.

Anyway, at sale time I spent all this time thinking of renoing the kitchen. Instead, I just knocked off 10K of the price - making it under most of the other houses in the area and it sold private sale in 5 days. Easy peazy.


----------



## MoneyGal

Gosh, I don't know, I seem to be reading many rosy posts about how great it was when GICs paid 8%. :cower:


----------



## Four Pillars

MoneyGal said:


> Gosh, I don't know, I seem to be reading many rosy posts about how great it was when GICs paid 8%. :cower:


Unfortunately, most people don't seem to understand the relevance of inflation to the discussion.


----------



## HaroldCrump

none said:


> I personally know too many people who lost 100K+ on their houses and were forced to sell so I've seen the damage that these loses can take on families and friends.


Those people were over-leveraged to begin with.
Many in Canada are also over-leveraged (such as the 0% down, 35 and 40 yr. mortgages).

If you consider a house purchase like any other consumer item purchase, such as a car or appliances, and don't over-leverage, you won't be affected by market corrections.
Sure, a huge crash, such as 25% or more will affect you.
Which is why it is important to have at least 20% equity in the house before going-in (via the downpayment), have an aggressive amortization schedule, and have emergency funds available.

Ideally, you should also have some other cash or investments that you can sell fairly easily to top-up your equity in case the mortgage becomes underwater.



> I find it a bit of a contradiction that the housing bulls also rapidly pay down their mortgage - i.e. safe guaranteed low return because the stock market is too risky. _Very very_ strange.


For those that cannot beat the _after-tax_ cost of their mortgage through investments, it does make sense to pay down the mortgage.



> Especially when you could just pocket realized gains by renting.


But you don't, unless you invest and are able to make the investments grow.

Your entire logic is based on evaluating a house as an investment.
Consider it a consumer product like a car and treat it as such.
Don't over pay, don't over leverage, pay it off as soon as you can, and don't count on any appreciation when you sell - just like a car.

For investment real-estate, yes, I agree you have to evaluate it exactly like any other investment.

And in case you don't realize, I am actually agreeing with you that residential real estate is significantly over-valued these days, pretty much coast-to-coast (except perhaps certain pockets, for various reasons).
However, the rhetoric that anyone buying a home is in for a huge financial disaster is just as incorrect and over-generalized as _renting is throwing money away_.
If you are renting and not investing your savings (real or perceived), you are indeed throwing money away.


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## andrewf

Well, that should be included in opportunity cost.


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## none

HaroldCrump said:


> And in case you don't realize, I am actually agreeing with you that residential real estate is significantly over-valued these days, pretty much coast-to-coast (except perhaps certain pockets, for various reasons).
> However, the rhetoric that anyone buying a home is in for a huge financial disaster is just as incorrect and over-generalized as _renting is throwing money away_.
> If you are renting and not investing your savings (real or perceived), you are indeed throwing money away.


Those are all fair points. I would just add that if you rent and not investing your savings right now (as you say throwing away your money) - and as you say housing right now is over priced - then to maintain the logic in your argument then buying a house right now (or within the last 2 years) is also throwing money away. I fully agree - that was, I think, the point of this tangent.


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## HaroldCrump

none said:


> then to maintain the logic in your argument then buying a house right now (or within the last 2 years) is also throwing money away.


Yes for the last 2 - 4 years, housing has been highly over-priced, fueled by irresponsible mortgage lending rules and near 0% interest rates.
Esp. in most major cities and suburbs.

This market is essentially for those that have 30% down payment to "throw" at M$ properties.


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## none

Hey! I think arrived at mutual agreement! Have a great day!


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## Sixth_Circle

We sold our house in a Halifax suburb in 2011, then rented in Halifax for 1.5 years before relocating to Toronto (again, as renters). Our housing profits were invested in a balanced portfolio which has been doing quite well.

The 2-bed, 2-bath (< 900 sq/ft) condo we are leasing was previously on the market for almost $500K, but didn't sell after several months so the owners decided to lease. We are paying $1900 plus hydro. Condo fees in this building are approx $350-400, taxes probably $2500 or so, all of which the landlord takes care of in addition to their mortgage and all maintenance/repair costs. For us, right now, it seems a better choice to rent as buying would tie up a lot of our "active" money, and no matter how I slice the math, it is cheaper to pay the rent and bank some savings, grow "equity" in the more liquid portfolio. At least until it makes sense to buy. With new condos going for absolutely insane prices (around us, $500-700K gets you maybe 800 sq ft), it is hard to get excited about ownership. After seeing both sides of the fence, I see ownership as a burden, not a joy. But again, we are a couple without kids who would rather walk the beach and take in some culture than mow the grass or re-shingle the roof. Bottom line is to view it more as a lifestyle choice than an investment.

Also, the freedom renting provides is extremely important for us right now. My wife's office is already talking about relocating and they have only been in the current spot for less than 5 years. I work from home so I can work anywhere. If they go to Mississauga or Scarbourough or Markham we can easily follow. But hopefully they stay put  But it is nice knowing that if we find an area or building we like better, there is only 60 days notice required and we are gone. On the downside, you never know what you will get with a landlord, especially the "reluctant" types who will soon be flogging their failed investment suites. And they can sell at any time, forcing you to relocate. 

That is the major rub; the loss of control over your housing. At first it was a difficult adjustment to go from King of Your Castle to "chump" renter, but we look at it now as having greatly improved our freedom, options, and overall lifestyle.


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## none

I know what you mean: We currently have a steal $2000 a month rent for a 600K house (based on assessment) in a fantastic neighbourhood.

I'm afraid the landlady is going to figure out how to do math and either increase our rent (which she hasn't done in the last 2 years) or sell the place. As much as I like our house there is no way I would buy it for 600K. I'll wait 4 years and buy it for 400K thank you very much.

If she does ask us to move that is going to be one massive pain in the ***. We've been avoiding sigining a lease just so that she doesn't look at the math of it all and increase our rent. Maybe I should do the lease thing as although it's a risk to raise our rent at least that buys us certainty for a year.

There are many pros and cons to renting/owning - the financial side though right now renting is a no brainer.

We sold our house in Halifax in Early 2010. The couple who bought it has done a ton of renos on the place, they're nice people, and now have a kid or two. I kind of feel bad for them because I'm pretty sure that if prices do fall the way I think they will then buying that house is going to be a financial decision they will regret the rest of their lives. Oh well, such is life.


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## none

This is interesting. It looks like another website is mirroring this one but changing the user names.

Very weird.

http://www.naijafinder.com/real-est...uences-being-under-water-mortgage-canada.html


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## andrewf

Google trolls, I guess? First time I've seen a site scrape a forum for content...


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## Eclectic12

andrewf said:


> Yes, kitchens and baths depreciate. I don't think this is controversial. An old kitchen, even if not particularly offensive, is not worth the same as a new kitchen. Home prices would tend to reflect that.
> 
> Edit: in other words, if you don't spend money updating things like kitchens, baths, windows, the the cash cost of this deferred maintenance comes out of the sale price ...


IMO, it's more of a range where the home owner doesn't want to be on either end.

The low end is the pink bathroom - if it's out of fashion, the selling point is going to be hammered. There was a house on my street up for sale with lime green in the bath room (i.e. toilet, tub, sink, counters). Several of the people walking through when I was there were commenting on how much they were discounting potential offers to compensate for the upgrades required.

The high end is where the updates are being done every couple of years. Even if the buyers keep the offer high, it's a drop in the bucket compared to what has already been spent. Or the other version of the high end is gutting the house so that the one or two updated rooms aren't sticking out like sore thumbs.


If one sticks in middle to just above middle, then there won't be a buyers dropping prices (or worse, walking away) and there won't be gobs of cash going into renos.


Of course part of the equation is the house itself - I know several people who dug into far more detail about a house because the house was forty years old but the kitchen was vastly updated compared to the rest of the house. The message that sent was that there were hidden problems that updates were meant to hide.


Cheers


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## HaroldCrump

none said:


> This is interesting. It looks like another website is mirroring this one but changing the user names.
> Very weird.


Interesting indeed...that site is scrapping content from multiple forums, it seems.
CC and FT would be interested to see this, I'm sure.

I haven't seen this type of scrapping before (outside of a search engine).


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## Clacker

HaroldCrump said:


> Interesting indeed...that site is scrapping content from multiple forums, it seems.
> CC and FT would be interested to see this, I'm sure.
> 
> I haven't seen this type of scrapping before (outside of a search engine).


That's nuts! I wonder what kind of a scam angle they're going for? Ad revenue from search hits?


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## marina628

I seen this back in 2007/2008 on one of my old webmaster forums , our traffic was /is about 18000 Alexa rating and people scrap the content in hopes they will get same ranks in Google and make the Adsense revenue as well.I have even seen original websites get a penalty for duplicate content because others have copied it.As a website owner I would be reporting it to Google and their ISP immediately before they negatively affect the rankings.


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## catedav

There are many countries suffering from under water mortgages not just in Canada. A California-based mortgage solutions firm has a novel concept to curb the amount of underwater mortgages. The idea is to use the power of eminent domain, where local governments would “condemn” the underwater home loans and drive a refinance.


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