# Crash Talk



## dogcom (May 23, 2009)

I am hearing a lot of crash talk in the media again this summer and they are talking a drop in the tune of 25% in the next 3 years. 

How have you positioned yourself for the next correction? Do you like to speculate or just take advantage of situations to improve your life and financial well being when the time is right?

For myself I sold my house 3 months ago and bought a new home putting me mortgage free with money left over to renovate to make the house the way I want it. I am doing most of the work myself but i am calling in qualified plumbing and electrical people to finish those tasks even though I could do it myself. I feel if and when I sell again those receipts will be good to show buyers who did those important tasks. It will also help when insuring my home.

I feel I could have waited and rented for awhile and would probably have done better buying a home at a cheaper price. But when it comes to my principal residence I have rules against any kind of speculation. But I will take advantage of situations when they are presented as long as it improves my quality of life.


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## Easy Does It (Sep 24, 2010)

I’m not surprised by a 25% correction. I sell mortgages for a living and things have been getting more and more difficult trying to make people qualify for the size of mortgages they need. Rates are much too low and people honestly believe real estate only goes up and trust me, I hear it all daily. I know I’ve crunched some numbers out of curiosity to account for shorter amortizations and used a 6% rate as a gauge and the average result was people qualifying for 40% less money than they had before. Every possible metric, valuation that can be applied to real estate indicates new highs across the board. Unfortunately the obvious is being ignored since real estate only goes up. My fear is that people bank on the best case scenario to make their decisions and don’t bother thinking about the worst case again because real estate only goes up. On average people have lost perspective on how much say 500K really is. 500k is not really 500k but X amount monthly stretched over 30 years. When rates start to move up then people will realize truly how much money their mortgage is and this will cause great distress among highly leveraged borrowers. If you happen to be in a position to buy a house in a neighborhood you love all cash and plan on living in it for a good 10 years I wouldn’t even bother reading about real estate forecasts and being worried about it, not worth it in my opinion. 

EDI


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## andrewf (Mar 1, 2010)

My problem is that I understand what $500k is. It makes me very reluctant to buy when it makes absolutely no financial sense to do so.

In my rent vs buy calculations, I assume 5% cost of capital. I think that's already a pretty aggressive assumption--I can't imagine why some people are assuming 2.25% cost of capital. The problem comes when you have to add in the ~1% for property tax, and at least 2% for repairs and maintenance (it seems most calculators don't factor this cost in). The only way I could tilt the calculation in favour of buying is to assume pretty healthy price appreciation--it just doesn't strike me as likely.


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## Easy Does It (Sep 24, 2010)

Selling mortgages has scared me to death. I sold a rental property a few years ago and kept another only because the LTV is very low. I currently rent and this is how I looked at my numbers. I used a 4% yearly average gain for real estate. I added up mortgage payments with property taxes, maintenance Heat and hydro if I was to buy. I took this total amount and subtracted the rent I currently pay and this is how it works out. First is I don’t have to cough up any down payment, I avoid land transfer taxes and lawyer fees and other disbursements. I also have no selling costs if I decided to leave and the best part of all is that the difference between what a property would cost me if I buy and my current rent gives me enough cash to equal a 4% gain in real estate had I bought with no exposure to a potential drop in real estate values. Until this changes I am more than happy renting.


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## Cal (Jun 17, 2009)

I agree w Andrew above. I work hard for my money, and can't fathom paying what some people are asking for their homes right now. It doesn't make the greatest financial sense.

I can't see a 'crash' until next year at the earliest....IMO the current market depends upon where rates are at.


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## dogcom (May 23, 2009)

It is interesting to talk to people in different times in their lives. Mortgage is very scary at this time and i wouldn't go in at this time.

Having said that a mortgage is always a very scary thing at any time. For me I am talking mortgage free so I don't have the same level of risk. So how are others here handling this crazy realty market?

Thanks for the comments easy does it, andrewf, and cal it is interesting how you guys see the situation we see ourselves in.


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## sags (May 15, 2010)

I have a negatively skewed view of real estate, as we didn't live in an area that was ever a "bubble". On a couple of sales we barely broke even after real estate fees, and a couple we made a few thousand dollars.

I also remember paying 19% for mortgage interest for a lot of years, and never experienced anything less than 7.9% before we sold our last home. I remember the lawyer commenting on the 7.9 wondering where we got "such a good rate". We also signed 5 year amortizations....my fault I guess.

Too many people today, not only believe interest rates will always stay low, because the government doesn't want to hurt homeowners, and buying a home is an easy way to make a pile of money.

As Peter Schiff has said.......why wouldn't people buy, when lenders are throwing money at them and saying you can't lose. If the home goes up.....you keep the money. If it goes down......you walk away but you didn't have anything to start with anyways. And as he said, if it is that easy to make 100,000 a year on a house, why not buy 2 or 3 of them and make 300,000 a year. Why work, when all you have to do is live in a house?

A very rude awakening is coming for people in Canada though. You can walk away........but the debt follows you like a bad rash. Bankruptcy is a rough cure.

Still.......here in Southwestern Ontario, regular older homes didn't get too far out of whack.........so a 25% cut would maybe be 30,000 or so. But the new homes are really overpriced for this neck of the woods. Those people, usually first time homebuyers with young kids, are going to get crushed. Not only will they find themselves with a house that is worth less than their mortgage, but they may have to pack up the kids and move to a rental.........and that is about the last thing they want to do.

Andrew is right...........500,000 dollars...........let that roll around for awhile.

That is a lot of moolah...........and it will be over 1.000,000 by the time the people pay it off........well over a million with maintenance costs and taxes added in.

So, if you make 50,000 per year for the next 30 years, it is pretty well all going into the house...........

It is going to get really ugly in some places.


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## sags (May 15, 2010)

Even if prices don't fall from where they are, I think the high prices are causing a lot of pain to those on the edge.

I know a couple who bought a home only a few years ago. Within two years of purchasing, they remortgaged to pay off other debt.

Now they are in over their head again and fighting over selling the house or not. They don't think they will get enough to pay the mortgage and real estate fees. They have no money for food or anything else. Everything goes into the house. They are broke all the time and worried about their jobs.......they worry about having to take a couple of days off because of illness.........and they are going to live like this for 25 more years?

Been there........done that.........not good.........not good at all.

I would rather join Bubbles in his garden shed........than live like that again.


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## sprocket1200 (Aug 21, 2009)

being mortgage free or not doesn't change the full risk being taken...


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## Berubeland (Sep 6, 2009)

I'm amazed myself at all the crash talk going on these days. Rob Carrick and Larry Macdonald and Mark Carney are sounding more like Garth Turner every day. 

The problem as I see it is that people choose not to count what they pay for their house or car or furniture when it's financed. 

Take for example a $500,000 house amortized over 30 years. 

For a 30 year mortgage for $500,000.00 at the rate of 4.14%, your Monthly payment is $2,417.37

$500,000 = $870,253.20 plus property taxes, maintenance, insurance, repairs. 

I get the point that there is a difference between a house and a home but in some cases buyers are offering rather foolish amounts of money for houses and people are saying yes. At what point is it worth it to sell? 

Landlords are even worse, they don't need to buy a second third or 10th house but they still do. If the returns don't justify the expenditure without capital appreciation then what's the point? 

Another major point is that there hasn't been a crash for 20 years, just a couple blips, the general public is not well known for having a long memory and most people have never experienced a crash. As a group we don't learn from mistakes of the past. 

For my part, I have never personally experienced a crash but I know people that have. One of my teachers in property management school was unable to close on her house even with $80,000 down, the bank wanted another $60,000 to give her a mortgage. She lost her deposit. The house had declined that much in value. 

Then my ex lost 6 houses and his marriage in the same crash. 

Another friend and his wife had to take on 2 jobs each to pay their house payments when interest payments went up to 17%...

Many landlords who have been in the business for 30-40 years have lost or barely hung onto their properties. 

I worked in a building that changed hands 6 times during the commercial deleveraging that went on...

Then there's the States...interestingly enough we tend to follow their fashion styles with a lag of several years, I wonder if Real Estate is the same?


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## kubatron (Jan 17, 2011)

6 houses, wow.

rates won't go up to 17% or the like, therefore those stories from the 80s are just that, stories.

i also sell mortgages for a living and am seeing more and more of my clients buy homes (or condos) they _can_ afford, rather than stretching themselves. perhaps I've ingrained some knowledge into the agents I work with, or some safer strategies. At the end of the day I'm comfortable paying interest and taking a huge mortgage because my quality of life means a lot to me, and I love my home, and neighbours, and the fact my entire family can be with me anytime I want. Home is home, can't put a price tag on it.


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## kcowan (Jul 1, 2010)

A real estate correction is inevitable. The question is how fast and how much? And mortgage renewals after 5 years will be at what rate? Our financial people have done everything they can to prevent a sudden decline. Will it be enough?

Property outside the lower mainland in BC is already correcting.


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## kubatron (Jan 17, 2011)

I want you to quantify that a correction is inevitable. By how much? When? How are you so sure?


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## sags (May 15, 2010)

The reality of the US housing price decline, was higher than most pessimistic predictions, and prices continued to fall by another 4% in April. The only thing selling now are bank foreclosures, and there are 50 foreclosed homes available for every 1 sold.

All of the data indicates home prices will fall.

By how much is anyone's guess, but once people believe homes are falling in value.............they stop buying and wait for the bottom.


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## kcowan (Jul 1, 2010)

Vancouver is being held up by Chinese speculators entering the market with all-cash. They will continue to play as long as it goes up. Once it stops, so will they. Thisi happened in Toronto in 1990 even though the HK takeover was in July 1, 1997. Prices declined from 1990 until 1997.

Real estate is more complex because you can buy new construction with a nominal down payment. If the trend turns, you just walk away. Because you do not live in Canada, the seller has no recourse.

If I could tell you exactly when, I would be making a lot of money! It is overdue only because the US meltdown has called for drastic measures, never before seen here.


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## HaroldCrump (Jun 10, 2009)

I'm a little surprised by all this crash talk, not because I don't believe RE is significantly overpriced (I believe so).
However, a bubble crash (in any market such as the dot com bubble crash) is usually triggered right when everything is at peak, everyone is supremely optimistic, overconfident, and on the surface everything is hunky-dory.
That's when the bubble pops.

On the other hand, by the time there is widespread discussion of a crash, it is usually well underway.


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## kubatron (Jan 17, 2011)

kcowan said:


> Vancouver is being held up by Chinese speculators entering the market with all-cash. They will continue to play as long as it goes up. Once it stops, so will they. Thisi happened in Toronto in 1990 even though the HK takeover was in July 1, 1997. Prices declined from 1990 until 1997.
> 
> Real estate is more complex because you can buy new construction with a nominal down payment. If the trend turns, you just walk away. Because you do not live in Canada, the seller has no recourse.
> 
> If I could tell you exactly when, I would be making a lot of money! It is overdue only because the US meltdown has called for drastic measures, never before seen here.


Oh, so you believe that we are exactly like the US and thus since they failed, we will fail, too?

THAT is your analysis?

Please.


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## dogcom (May 23, 2009)

Berubeland I do remember a crash from the early 80's in Vancouver. It was very different from today in that everyone was buying before prices went higher and inflation was a big problem. Gold, silver, real estate and speculation was at a fever pitch and there was nothing that would stop it.

Today we have what Haroldcrump just said and it is very strange. That is why I keep my feet on both sides which is mortgage free but still in and in the best possible area I could find. 

I realize however my scenario is not possible with others earlier in their real estate lives. So I wonder how they are buying and hedging against the worst.


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## Berubeland (Sep 6, 2009)

Gold, silver, real estate and speculation was at a fever pitch and there was nothing that would stop it.

Really...that sounds like nothing we are currently experiencing. What is the price of gold these days? 

What is the rent/buy ratio in your area? 

Isn't the debt level of Canadians at an all time high? 

Aren't incomes not increasing? 

Isn't the world economy in the toilet? 

So why exactly is our real estate going higher?

Aren't 17,000 new condos coming online in Toronto alone this year? With many of those buildings up to 60% rentals owned by "investors" that don't come close to breaking even? 

Haven't mortgage rules been tightened in an effort to stop the increases...with no effects.

Aren't we at the highest level of home ownership ever? 70% or so

Don't we have the lowest interest rates ever? 

It doesn't make sense, the only thing driving this market is the fanatical belief that RE prices always keep going up. 

The only question left to answer in my mind is when and how much is this going to collapse?


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## dogcom (May 23, 2009)

I suppose it sounds a lot like we are experiencing today except for inflation was much higher and interest rates were on the verge of going to the moon.

Back then however the threat of deflation if interest rates go up was not really there. Today we are dealing with the possibility of run away inflation or just as easily the onset of deflation. So it is hard to sidestep the real estate market hoping for a crash, but at the same time it is hard to buy at these price levels. So it is interesting to know how people have set themselves up with all the uncertainty that is out there today.

If you go back to last year where I live they were calling for a nice correction then only to have the market go up 43% by the end of Feb. 2011.


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## financialnoob (Feb 26, 2011)

kubatron: Even the Canadian Real Estate Association is expecting prices to drop in 2011. They've modified their predictions for 2011 numerous times, the latest predicting a slight drop in prices by 1.3%. 

That's far below the crash talk, but that's also an organization with an extreme bias towards talking up home prices. If even they are predicting prices will drop, there must be some significant problems they see, which Berubeland has covered very well in her post.


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## kcowan (Jul 1, 2010)

dogcom said:


> ...If you go back to last year where I live they were calling for a nice correction then only to have the market go up 43% by the end of Feb. 2011.


You can go back 5 years in my area yet the bubble just keeps on expanding...bit as Berubeland says, the key ratios of price/rent and price/salary are way out of whack. So it is not a question of whether but a question of when!


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## kubatron (Jan 17, 2011)

financialnoob said:


> kubatron: Even the Canadian Real Estate Association is expecting prices to drop in 2011. They've modified their predictions for 2011 numerous times, the latest predicting a slight drop in prices by 1.3%.
> 
> That's far below the crash talk, but that's also an organization with an extreme bias towards talking up home prices. If even they are predicting prices will drop, there must be some significant problems they see, which Berubeland has covered very well in her post.


Whatever CREA says, believe the opposite.

A mediocre price drop (or in this case, a flatline) is inevitable.


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## Berubeland (Sep 6, 2009)

See the real driver behind the real estate market and the stock market as well is public sentiment. 

Flatline is not an option. Both these market either go up or down. Has anyone ever seen the stock market close at the same level for a week? 

It reminds me a little of an afternoon I spent a long time ago chasing 5 rams that had escaped their pen. Unpredictable behaviour, the occasional butt in the ***, lots of me chasing them down trying to herd them in their pen only to have them dart to the left or right at the final moment. 

Because I work in this business, I see a lot of stuff that doesn't make financial sense right now. I see these individual acts accumulating in a dangerous accretion point. What will the key log be? I don't know. But I do know there's a lot of pressure built up. 

When the public sentiment turns that's when it all goes nuts...these articles by respected journalists and Mark Carney's warnings about the credit splurge and the bank reports are all foreboding signs.


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## Jon_Snow (May 20, 2009)

There is some serious denial going on in this thread.  (You know who you are).

A significant real estate correction in Canada is a sure thing, to think otherwise is to abandon all common sense. A bubble of epic proportions has inflated before our eyes...


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## dogcom (May 23, 2009)

I have long given up on any sanity on the key ratios kcowan, like you said we will just have to wait and see when a correction will finally arrive.

Like berubeland said it is all about sentiment in both the stock market and the real estate market.


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## andrewf (Mar 1, 2010)

What is that saying?

The market can stay irrational longer than you can stay solvent?

There must be some sort of correction coming. The tough part is that it may still be five years away. I suspect it might take inflation pushing interest rates up. Inflation is not yet bad enough to warrant overly painful screw-tightening from the Bank of Canada, but it could get there.


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## kcowan (Jul 1, 2010)

Speaking for Vancouver, the Gulf Islands are now in decline by 25%. Chilliwack is showing signs of the start of a decline. It is like the sharks are circling. I sense that the time is nigh! Maybe the next 6 months...


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## financialnoob (Feb 26, 2011)

kubatron said:


> Whatever CREA says, believe the opposite.
> 
> A mediocre price drop (or in this case, a flatline) is inevitable.


I'm confused. You say to believe the opposite of what CREA says. Then you say what they said is inevitable.

Berubeland: I don't think I've ever met anyone who chased around rams for a day 

andrewf: I agree, while we can see the correction coming, it's going to take a while before it hits home.


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## Berubeland (Sep 6, 2009)

HaHa I was 12 and it was my first job on a horse farm. I had to go get something in one of the sheds and left a gate open. After all there was nothing in sight. An hour later I notice the 5 rams and figured out that I had disobeyed the golden rule of farming... never leave the gate open 

I was terrified that my boss would find out and fire me although in retrospect considering my pay of free horse riding lessons it was probably unlikely. 

So I chased those rams by myself and of course there were 5 of them and only one of me. They were both faster and smarter than I was. Hours later the boss showed up by then I had probably run several marathons, I was red faced, sweaty and on the verge of tears. I can assure you that rams do indeed butt people and that it's a lot funnier when it happens to someone else. http://www.youtube.com/watch?v=hD73kksP1RY&NR=1

After the inevitable talking to about always closing gates the boss walked over to the herding dog and in about 20 seconds the dastardly rams were securely penned up. 

Lesson learned, never leave a gate open, and dogs are much better at herding sheep than me.


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## Cal (Jun 17, 2009)

I do find it funn how some people can't even fathom a 10% correction in RE prices. I mean the markets correct by this every so often. As do commodities. Same with stuff on sale at Wal-mart.

It is interesting how RE can be so emotional, and how many people can't even forsee a 10% decline. Even if it is for a short period of time. 

Whether a correction of 10% happens or a crash (which to me would be a price reduction of 20%, in a short period of time) to the general RE market, remains to be seen.

I just find some of the mentality towards the RE markets to be rather closed minded.


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## HaroldCrump (Jun 10, 2009)

I agree, Cal, but there has to be a catalyst...a trigger that will initiate the correction/crash.
It could be any factor, maybe not even accounted for yet.

However, I do not see a correction/crash until the current zero interest rate environment persists.
Overly liberal home buying rules, coupled with zero real interest rates, are helping to keep the RE boom going.
The govt. will do whatever is required to prop up the RE market, even if it means high inflation.

I believe the market can easily absorb upto a 200 bps increase in interest rates.
If/when we are at that point in the near future, it's be worth watching how this plays out.


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## Munns (Aug 2, 2010)

I'm in Montreal where I would say we are definitely headed for correction but if I had to guess I don't think it will be as much as 25%. I expect to lose some 'equity' in the house I own, but I also have a young family and am 20+ years away from retirement, so I don't foresee liquidating this asset anytime soon either.

To answer the OP re preparing: currently carrying no debt other than the mortgage, locked into an excellent 5 year rate last winter, am making regular extra payments and planning a lump sum principle prepayment in the coming months. This should get the mortgage down significantly so that by renewal time, whatever the rates may be, we should be OK. We have a rental unit as well, so the building is self-subsidizing to a certain extent.

This time last year I was contemplating (dreaming??) a recreational property and/or a move to the swankier neighbourhood, but due to the current conditions and what I can't help seeing up ahead, I've scratched those off the list.


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## dogcom (May 23, 2009)

Munns sounds like you have it well under control to the point that a correction could set you up nicely if you wanted to move up to a better neighborhood. I know your house price will drop along with everything else but the price gap usually shrinks when moving up in a correction. 

I am surprised to hear you say Montreal needed a correction. I didn't think it had gone up in price like Toronto or Vancouver.


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## financialnoob (Feb 26, 2011)

Berubeland: That's hilarious, and horse riding lessons are great compensation for a day's work. Much better than my first job on the farm corn detasseling.

It's certainly humbling to know you're inferior to a small animal. I've felt that way every day since we got a cat.

Cal: I know what you mean. It's like they've been brainwashed or something. I like RE as an investment, but some of these people are drinking more Kool Aid than some cult members. It's kind of scary.


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## Square Root (Jan 30, 2010)

@Cal. i agree that people get too emotional about real estate. they also under estimate the chance of a correction and over estimate the returns on holding real estate. I use 1997 as a benchmark as that is when we bought some real estate and some bank stock as well. Real estate is now worth 2.5 times what I paid while the bank stock is up 4 times. Real estate required lots of maintainance, etc while the bank stock paid a 3% dividend every year. Real estate provided lots of enjoyment while the bank stock provided lots of money. You need both. 
i think there will be a retrenchment in real estate prices caused by an increase in interest rates. Don't know when or how drastic. Don't really care either.


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## sags (May 15, 2010)

As soon as the bond market gets a whiff of real estate values dropping down, they will slap risk premiums on mortgage paper and interest rates will go up.

That...........and the fact that everyone is looking for money these days.


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## kubatron (Jan 17, 2011)

Jon_Snow said:


> There is some serious denial going on in this thread.  (You know who you are).
> 
> A significant real estate correction in Canada is a sure thing, to think otherwise is to abandon all common sense. A bubble of epic proportions has inflated before our eyes...


this sort of typical nonsense is why I keep visiting this forum.


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## kubatron (Jan 17, 2011)

financialnoob said:


> I'm confused. You say to believe the opposite of what CREA says. Then you say what they said is inevitable.


I misspoke (or miswrote)

CREA is full of s__t, and I never trust their numbers. That being said, a flatline in prices could happen, as could a 5-10% drop. From what number?

Further explanation,

I paid $500K for my house at the peak in 08, May to be exact. My neighbour sold for $540 3 years later, I felt like a sucker. Then, 3 doors down sold for $650 about a month ago, I feel like a champ. Same exact house, apples/apples comparo.

Now, tell me, 10% from $650? From $540? From $500?

And, if I'm not selling, do I care if there is a correction?

Unless it goes 10% from my number, then I'm still in the black, no?

Furthermore, if I am like most people here, and living for the long term, why do I care if prices go down so much? I'm not a fool that lives in a dump, and rents, and prays that prices drop (meanwhile they go up), or rents a nice house and pays a tonne in rent (yes, rent / vs / buy argument can be made here), and waits for prices to drop. I like where I live and that's more important than the price my house is worth.

What I'm getting at is all this talk of market crash is so incredibly boring, and none of you could be right, or one, or all. Ultimately unless you're heavily speculating on your home, who cares? TO me a home is more than an investment.

And finally, in most of the open houses I have been to lately in my surrounding area, guess what I see. No, not rich white families, but rich asian and middle eastern families. And having spoken to numerous agents and the families themselves, I've realized there are so absolutely many people wishing to live here and wanting to park their money here in real estate, that it boggles the mind. I mean in Toronto proper, not the suburbs. 

When you compare it apples to apples, you still get decent value in Toronto for $500K, although the prices have gone up relative to income.

I hope I haven't contradicted myself too much, and I hope you're all wrong. WHo knows, you could be right, but your "It has to happen" argument is boring and full of holes (as you may poke holes in mine)


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## Easy Does It (Sep 24, 2010)

I think that it’s easy to forget that when we speak of a real estate correction it usually implies that many people will end up losing enough money to really set them back. Even if real estate prices were to move sideways and you happen to have bought a house with 5% down once you factor in all the expenses you will have lost money. I can say that this year I have seen clients do well over the past several years and unfortunately I have seen some clients take a serious hit which came as a total surprise to them. One that stands out was a client that just could not sell her property. When she finally sold the property her goal was to port her mortgage but a few things stood in the way of being able to do so. The main problem was that she just didn’t have any cash at all as she was banking on a profit from the sell. She didn’t have any money to make up the shortfall for when the sale closed and she didn’t have any money for a down payment which meant she had to discharge her current mortgage and this came with a penalty. It was actually really sad because in her mind she never once imagined that this could happen. Imagine not having enough money in the bank to make up the shortfall needed so that you can actually sell your property, it was an absolute mess and really sad to see someone go threw this. She was moving across the country so she had no choice but to sell. 

My biggest fear is not a drop in price necessarily but more of a fear in regards to rate. In the 90’s when rates went up to 20% this actually happened and it’s not a story. Will rates go up to 20% again? Who knows but rates hardly need to move up that much to seriously affect a home owners cash flow. Keep in mind that in the 90’s rates went from 12% to about 20% which isn’t quite a doubling in rates. Well today if rates were to double roughly from were they were this year you wouldn’t even touch 8% and historically 8% isn’t really that high, I would say it’s modest. 

One thing that I have noticed while speaking to clients is how wide spread speculation on real estate has become for many average people who know very little about saving or investing now suddenly become so sure of themselves and tell me even before they close on the property how much money they will make. This is even more pronounced when clients call me to refinance their property. I ask them how much they think they could sell the house for currently (often they have only owned their home for under 2 years) and they will usually give me a value that could be anywhere between 30-40% more. These numbers are just massive. Here’s an example of something I’ve seen. A client couldn’t sell his house for 220K. He decided to refinance 6 months later because he couldn’t sell. I asked him how much his house was worth and he said 220K, even though it had been listed at that price for 6 months. Tired of not being able to sell he decided that he wanted to pull out 40K and renovate the house because now he was sure he could sell it for 300K. The lender requested an appraisal and it came in 170K. The client couldn’t believe it so I ordered another and again came in at that value. In the end he pulled out his 40K and started renovating. Since then his house is still for sale. Unfortunately the current real estate boom has turned many average people into speculators with many of them not even knowing what that actually means. A little over a year ago a read a CMHC report where they talked about the current state of the condo market and one key number they mentioned that stuck with me was that they estimated 65% of condo sales in Toronto where to speculators or better yet people who had no intention of living in it. 

A few weeks ago I was out with the GF looking at open houses for fun and walked into a rental property. The agent asked me what I thought and I said that if the property could carry itself at a minimum it could be interesting. His response? He just started laughing and said, Ya Right! 

Overall rates are of big concern and people’s automatic assumption that a huge profit will be made scares me.


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## KaeJS (Sep 28, 2010)

Easy Does It said:


> A little over a year ago a read a CMHC report where they talked about the current state of the condo market and one key number they mentioned that stuck with me was that they estimated 65% of condo sales in Toronto where to speculators or better yet people who had no intention of living in it.


I read this article, too.

It blew my mind. The thing I think people overlook often is that the RE market is still based on supply/demand.

Eventually, the demand is going to drop off a cliff. Sure, we have foreigners buying. But foreigners are famous for buying houses and have many people live under one roof. Who are these foreigners going to sell their houses to? 

More houses are being built, More people are struggling to save money, More foreigners are buying property.

And yes, EasyDoesIt, as soon as rates go up and people start to get even poorer/sell/default/ the demand will fall even further, and then supply will start to increase because people will be selling and downgrading, and supply will remain high because the rates are high so nobody will want to purchase.

Less demand + More supply = Cheaper houses.

Foreigners can't sell to themselves if they're all trying to make money on it.


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## Berubeland (Sep 6, 2009)

I'm with Easy Does it on this one... 

Another thing people don't realize is how soft the condo market already is for rentals...I'm pretty aggressive with my pricing strategies and one way to impress your bosses is to get them more money. I've been managing a few condos at Sherway Gardens and it's a beautiful new building. Even starting 2 months ahead of time I have been unable to rent one for $1300. The market is that soft. It wouldn't take much to have to drop the price from 1200 and he's already putting in $100 per month each.

And...he has two more under construction. Plus I've picked above average tenants for him, he hasn't had to fix or repaint anything in three years...the tenants are that clean. I haven't even had to wipe down a countertop. 

But really the greatest loss as I see it is that real estate investing used to be something that required more than buying something and waiting.


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## K-133 (Apr 30, 2010)

> And, if I'm not selling, do I care if there is a correction?


There in lies the truth. So long as you have adequate equity in your property, you will survive through it.


When talking about a crash, comparing Canada to the US is comparing chocolate to mangos. The underlying principles are very different. The crash in the US affected so many because it was rooted with the banks, and a system which spanned their geography. Most people lost their homes because they were taken from them. I think too many overlook what is really happening down there. Whether are banks are sturdy enough remains to be seen however, I have much more faith in this aspect of our system. Keeping this in mind, I would not be surprised to see corrections in isolated markets of varying degrees. As a side, I'd like to point out that foreign investment is a very very small portion of Canadian RE investments (yes, including Vancouver).

Overall, I think that our government has done a fairly good job at recognizing the risks and responding to them. There's always more that can be done but don't discount their recognition of these risks, and the implications they have on the Canadian economy as a whole.

With it mind of what RE represents to the Canadian economy, I'd like to slap some sense into many of the alarmists. I sense a pleasure which some find in the potential harm of others. This seems quite ignorant, as if there's one thing we can learn and compare with the crash in the US, it is that near *everyone* will be hurt by such a dramatic shock to the macro system. That is everyone except those who have more money than we can dream of. Continue educating, and stop hoping for such an event. The shock is not inevitable, it is manageable, and for the good of everyone, we should push to see it managed rather than hold pride in seeing ourselves to be _right_.


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## andrewf (Mar 1, 2010)

You should go back to 2000 and tell everyone to keep Nortel's stock over $100.

At some point, the fundamentals catch up with you, for better or worse. It just is.


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## K-133 (Apr 30, 2010)

You're right, I'm starting to catch on. Time to sell my energy stocks, and encourage Canada to producing oil and natural gas. I mean, who can afford to pay $1.25/L for gasoline? There's no way those prices will continue to rise. Its risen more than income over the past 30 years! Energy; a fundamental sector that's about to go bust.

Now that I'm all stocked up on gold, I'll be ready to pillage what will be left of the world. I hear zombies are allergic to it as well.


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## andrewf (Mar 1, 2010)

Huh?

You may have had a point in August 2008 when oil prices hit $147 for WTI crude.

The market frequently overshoots levels that could be justified by the fundamentals because market participants get caught up in a 'greater fool' speculative frenzy. In the long run, these conditions can't persist.


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## I'm Howard (Oct 13, 2010)

No Real Estate market exists, but Real Estate Markets exist.

Down town T.O Condos may take a 20% hit, Lawrence Park will still get bidding wars.


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## HaroldCrump (Jun 10, 2009)

Crude oil is certainly not in bubble territory, not even close.
Prices at the pumps are not $1.25 because of crude oil.
It's because of taxes.


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## kcowan (Jul 1, 2010)

I'm Howard said:


> Lawrence Park will still get bidding wars.


and Lawrence Park North where I sold 2 years ago.


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## HaroldCrump (Jun 10, 2009)

*Royal LePage admits RE peak*

First time since spring of 2009 have I heard an industry insider moderating their expectations.

http://ca.finance.yahoo.com/news/Royal-LePage-says-housing-capress-3037897980.html?x=0

*Canada's hot housing market appears to be at its near-term peak, with current high prices concealing early signs of moderating market, according to a new survey released Thursday by Royal LePage.

"We expect price gains to moderate considerably in the latter half of 2011, which should reduce the stress associated with purchasing a new home."*

Most of the report is full of optimism and euphemism and carefully avoids the word _correction_.

I'm wondering if the insiders have already seen the signs and are gradually preparing us.


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## andrewf (Mar 1, 2010)

If this is the peak, when do we expect the trough? 3 or 4 years out?


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## kcowan (Jul 1, 2010)

Looks like we are due for a correction in the next little while?


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## andrewf (Mar 1, 2010)

What does that have to do with real estate?


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## Square Root (Jan 30, 2010)

i've lived through a couple of real estate corrections. My experience is as follows: 1) It can be sudden(spring of 1987) 2) Often caused by rising rates 3) All residential properties are affected (sometimes to differing degrees) 4) When there is a feeling that prices are not going up, ie no rush, bidding wars disappear. 5) If you think prices are falling you wait until they stabilize to buy. This causes them to fall further. 
I don't wish a RE correction on anyone. But as several have stated if you aren't trying to sell it doesn't matter much to you. Given CMHC guarantees I would not think the banks would suffer much. The only RE I would consider buying is in Arizona but in no hurry. Now that was a correction!


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## HaroldCrump (Jun 10, 2009)

The banks on both side of the border (and across the pond for that matter) will do whatever it takes to keep rates as low as possible for as long as possible.
It is highly convenient that the items of consumption that matter most to households are not included in the core CPI basket of goods and services [sic].

It is further ironical that the so called "foreign investors" supposed to be speculating in our RE markets have been created by us in the first place.
I'm not denying their existence - just saying that we created them by exporting inflation to the emerging economies.
Then the newly wealthy in those countries come back into our RE market and inflate the prices.
How convenient.


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## financialnoob (Feb 26, 2011)

kubatron: I agree that CREA shouldn't be trusted, especially since they revised their prediction for 2011 multiple times. I'm simply pointing out that even an organization with a financial interest in wanting prices to keep rising is admitting there is some trouble on the horizon.

You're right that if you're not selling, the correction is irrelevant. There's no point living with every up and down of the market.

But there are some fundamental issues here that go beyond a simplified "it has to happen" argument, and I think that's what you're overlooking. The increase in mortgage to income ratio from 3.5:1 to 5.5:1 is significant, and only manageable with a low-rate environment. The government modifying mortgage rules multiple times in the past year indicate they recognize the issue and are trying to slow things down. Plus there are historically high debt loads and debt-to-income ratios. A lot of the growth over the past few years does not appear sustainable.


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## kcowan (Jul 1, 2010)

andrewf said:


> If this is the peak, when do we expect the trough? 3 or 4 years out?


In the GTA, the last bubble cause a 7 year decline to the bottom. Since 1997, the balloon has just kept expanding.

The S&P chart indicates that a correction may happen in the next few months. That will impact real estate values.


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## andrewf (Mar 1, 2010)

I'm skeptical of the really detailed entrails-reading of technical analysis. To me, that chart is only saying we could have a 5% or 50% correction.


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## Jungle (Feb 17, 2010)

GTA: TREB released June's numbers. June saw a 21% increase in sales from last year. Average price was 9.5% higher. 

Here is the interesting stat: *Listings are down 24%..* from last year. There is less inventory compared to lasy year. What does that mean for the GTA? There's more demand then supply? 


http://www.torontorealestateboard.com/consumer_info/market_news/mw2011/mw1106.pdf


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## kcowan (Jul 1, 2010)

Jungle said:


> *Listings are down 24%..* from last year.


That is great. Means that only serious sellers are trying to sell. Fewer tire kickers on the sell side.


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## sags (May 15, 2010)

What motivates buyers to purchase a house after a severe run up in prices?

1) Fear.......that they will be priced out of the market.

2) Greed....that they will make an easy profit as real estate continues to rise.

3) Desire....they want to own and live in their own home, regardless of prices.

Fear, greed or desire.........not exactly the most trustworthy emotions.


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## KaeJS (Sep 28, 2010)

But it really needs to stop somewhere.

When a persons house is worth 11x their salary... Something has to give.

Either house prices are dropping, or salaries are increasing.

And I don't think its the salaries, especially with the way the economy is. Have fun trying to ask your manager/boss for a raise so you can buy a home LOL.


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## HaroldCrump (Jun 10, 2009)

KaeJS said:


> But it really needs to stop somewhere.
> 
> When a persons house is worth 11x their salary... Something has to give.
> 
> Either house prices are dropping, or salaries are increasing.


Or, indebtedness increases, which is what we are seeing now.
The "new normal" will be that people never pay off the mortgage.
Soon we will have multi-generation mortgages.


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## dogcom (May 23, 2009)

Haroldcrump is right there are still different ways to keep this ball game going.

Mortgages could become the new rent in that we never pay it off but it will still be a lot cheaper then renting over long term. I am no expert on this but I believe this is common over in Europe. 

In fact I asked someone who owned a flat in London why he bought it instead of renting. He told me that the mortgage payments were a lot cheaper then if he paid rent for the same place. He also said that you save big money on your income taxes if you buy a place before your 30th birthday. 

I also read on a different note in the news paper last week that 57% of first time buyers in BC are putting down 25% or more on their home purchase.


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## sags (May 15, 2010)

I don't see anything wrong with very long, inter-generational mortgages.

In fact, I see them as a viable way to support housing prices, so that Canada doesn't experience the same kind of devastating downward spiral as the US, while at the same time allowing people to live within their means, avoiding the compilation of non-mortgage debt from other borrowing.

It also would allow long term investment opportunities, for the millions of retirees who wish to trade accumulated cash for long term income.

Lowering the amortization period for mortgages, has the same affect as saying to a new car buyer.....you can finance a new car but you have to pay it off in 12 months, so your payments will be 3,000 a month. In actual fact, the amortization of a car, has continued to lengthen from traditional 36 months to 84-96 months. This is for a declining asset, that depreciates over time and will eventually be worth nothing. Yet, for homes.......we go the other direction.

Quality homes are built to last forever, provided the owners maintain them. Every city has examples of century homes, that have been totally remodelled and are virtually brand new.
Whole areas of cities, have experienced a resurgence as young people move in and update the housing. The land and location are the attraction.

Struggle our whole lives, during the period we have the greatest need for money the most, so we can sell the home and retire, when we need the money the least......looks contrary to common sense.


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## Cal (Jun 17, 2009)

To take this thread in a slightly different direction. I also find it interesting how many people out there, go on the recommendation of the bank, for how much house they can buy, and how much they can carry.

Really, for most people this is the biggest investment they will ever make, and they have no clue as to how much they can really afford.

It is in the banks best interest to recommend to stretch your max as far as possible.

I don't mean to paint the banks as the evil villain, moreso that many homebuyers don't have a true concept of their own, as to how much they can afford to spend on a home.

Don't even get me started on the HGTV show roperty Virgins...


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## Square Root (Jan 30, 2010)

intergenerational mortgages? Really? Sounds a bit like the historical US mortgage system of 30 year fixed rate morgages. Pretty clear that system had serious flaws. Tax incentives to take mortgages or buy homes tends to incent speculation and over investment in housing. Why would we as a society want to increase housing prices anyway? Isn't affordable housing a better objective?


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## KaeJS (Sep 28, 2010)

Square Root said:


> Why would we as a society want to increase housing prices anyway? Isn't affordable housing a better objective?


Yeah. Really.

If you ask me, a home is somewhere you go when you have nowhere to go.

... And to pay, what? $450k for the average house in the GTA...

Just to go somewhere when you have nowhere to go?
You'll be there all the time cause you won't have any money to go out!


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## HaroldCrump (Jun 10, 2009)

KaeJS said:


> If you ask me, a home is somewhere you go when you have nowhere to go.


No, that's what a _house_ is. A _home_ is different.


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## ddkay (Nov 20, 2010)

My grandmother bought a one storey 2 bedroom bungalow for $66,000 in what was considered "cottage country" Toronto in 1977. Now it's just part of the GTA, a few blocks south of Hwy 407 on the West end of the city.

Inflation adjusted (let's say the average inflation rate bt 1977-present is 3%), today it "should be" priced at 3%*34 years, or $133,320. Instead MLS listings in the neighbourhood show similar 2-3 bedroom homes for asking $400,000 to $800,000, and one on the same street for $600,000.

Meanwhile in the last 15 years, the local grocery shut down so the nearest place to do shopping is 10 minutes by car in a different municipality and she doesn't drive so we have to order her food from grocerygateway.com, nearby strip malls have vacant lots and are struggling to attract businesses. One of three elementary schools have shut down and students were reassigned to another district.

What's improving? Nothing except the increase in house prices. The neighbourhoods "intrinsic value" peaked 15 years ago. All her friends moved away ages ago, the neigbhourhood has a completely new demographic. No one can convince my grandma to sell and move with us or into a retirement home in the city. She's obviously unconditionally happy not cashing in and staying put? If her home actually does begin to lose value, will she react? We'll see... but by then it's usually too late.


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## andrewf (Mar 1, 2010)

We don't need to guess. Bank of Canada has an inflation calculator. Inflation between 1977 and now was 3.8% compounding annually for an increase of 261%. 66k would be worth 238k today.


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## Square Root (Jan 30, 2010)

@ddkay not sure what your point is re your grandmother?


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## Berubeland (Sep 6, 2009)

I read this relevant article on Twitter 

Permanently High Plateau Theory Touted for Australia Housing; Real Estate ... - HoweStreet.com http://bit.ly/qhMlWk

It's like Mash reruns...pretty much all the same...


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## dogcom (May 23, 2009)

Protect yourself but also realize that home prices can stay high and higher for a very long time. So make it your home at an affordable price as haroldcrump alluded to and not your house like some kind of stock purchase.

To me home prices do not follow any rules like stocks do and at the same time can hurt you very bad like in the US or Japan after the stock boom. 

When you look at owning for a far more affordable price then you would rent for the long term like in Europe it does make you think what affordable really is.


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## kcowan (Jul 1, 2010)

I heard a real estate guru today saying that Vancouver house prices are flat for modest homes that the average working family buys and that all the inflation is in the high end properties that appeal to investors. FWIW


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## ddkay (Nov 20, 2010)

@SquareRoot It was just an example of a particular neighbourhood where house prices are fundamentally unjustifiable. Sometimes house prices increase because its neighbourhood is improving. E.g. a long-term transportation route like subway or LRT built beside it, or a business improvement area is established and they upkeep the community with streetscape improvements, bring in new businesses and make the community more prosperous and a comfortable place to live. There's still froth in housing prices, but it's not as bad as the neighbourhood where the business community is sinking while house keep going up. The latter is an obvious bubble. I wouldn't be surprised to find similar cases all across Canada. And people are completely oblivious to it... for now.

P.S. I double checked the prices yesterday. It was actually bought for $30,000 in 1977 and appraised at $450K most recently. So inflation adjusted at 3.8% should put it at $86,130. Add two lanes to the nearby arterial route, more subdivisions with tract housing, the private highway (407-ETR), a natural gas line and it's suddenly worth $364K more. Sounds amazing - 37% annual gain. Let's say the grocery store comes back, a community centre opens, if the valuation rate holds this little suburban house 2 hrs rush-hour commuting distance from downtown TO will be worth almost $2 million 12 years from now (2023). Will average couples looking for their first house easily afford the $500,000 (25%) downpayment here? Maybe after living in their parents basement for 4 years and saving almost every penny from their $70K+$70K salaries? Possibly, but not probably.


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## sags (May 15, 2010)

Given the numbers provided by Andrew, the first home I bought in 1979 (78,000) and sold a few years later (85,000), would barely cover inflation if sold today (230,000).

It is a nice home.......but not much of a pure "investment" it would appear.

It looks to me that if you are fortunate enough to buy a home, and then experience a housing bubble in your area, a person can make a lot of money in real estate, for doing nothing more than living in the house.

When we purchased the home in 1979, I was earning about 8.00 per hour. When I retired in 2005 I was earning 35.00 per hour, and my wife was earning 5.00 per hour in 1979 and was earning 18.00 dollars per hour in 2006.........so..........the lesson here was that had we had stayed living in that first home, the monthly cost of housing would have decreased sharply as a % of our overall income. For that reason, I look back at selling that home as one of my biggest financial mistakes.

I remember it being a selling point in home ownership in those days, that you would earn more money in future years, and it would be easier to carry the mortgage. I don't believe I have ever heard that anymore......even from the real estate people, as a reason to buy a home.

Under those conditions, home ownership is very attractive, but I don't think we have, or expect that kind of wage inflation anymore.


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## dogcom (May 23, 2009)

Interesting points made there sags as people point out inflation but not wage inflation.

It also seems that the crash talk is getting even louder as I am reading about it almost everyday in the newspaper.


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## andrewf (Mar 1, 2010)

Sags, keep in mind that part of the return on your home is the rent you didn't have to pay less maintenance, taxes, insurance and mortgage interest. It may or may not make the investment look better once you net all those things out. In many areas, especially outside of the large cities, it is more cost effective to buy.


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## sags (May 15, 2010)

I tend to agree with you Andrew.

In most places in Canada, a home may not be as good as an investment as stocks may be, but it is a long term investment, and there are other tangible benefits.

One argument for home ownership, offered up by the CEO of ReMax makes logical sense, I think.

People aren't saving in other areas of their lives such as RRSPs, and a home purchase is a form of forced savings. It may not be the best or wisest use of their money......but it is the only one that many people will use and is better than nothing. 

Given the propensity of many of us to spend everything we earn, how many people would really "invest" the savings resulting from rent vs buying scenarios?

I understand the numbers, and the philosphy.......but after owning homes all my life, and now being a renter.........I still have the desire to own a home.............just the way it is.


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## andrewf (Mar 1, 2010)

30k in 1977 to 450k in 2011 is an 8.3% compound annual return in nominal terms. If you net out inflation over that time, it is a 4.3% real return. Of course, this is like ignoring the coupons on a bond when saying what the total return is. A 4.3% real return is not bad, but it is not spectacular. Equities have outperformed that significantly over that period.


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## K-133 (Apr 30, 2010)

andrewf said:


> 30k in 1977 to 450k in 2011 is an 8.3% compound annual return in nominal terms. If you net out inflation over that time, it is a 4.3% real return. Of course, this is like ignoring the coupons on a bond when saying what the total return is. A 4.3% real return is not bad, but it is not spectacular. Equities have outperformed that significantly over that period.


andrewf; for my own number crunching could you provide me a reference to your 1977 vs 2011 house cost numbers? Based on $450k, you're obviously not speaking to Canada-wide averages, so what market are you pointing to?


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## andrewf (Mar 1, 2010)

ddkay said:


> P.S. I double checked the prices yesterday. It was actually bought for $30,000 in 1977 and appraised at $450K most recently. So inflation adjusted at 3.8% should put it at $86,130.


FYI, for long time periods, you can't calculate inflation as rate per year x number of years, like 3.85%*34. You need to punch 1.0385^34 into your calculator or excel. The first method gives 130.9% increase, the second gives 261% increase. (and the second is correct)

Not to be too much of a stickler. I have a degree in math, so this is like an english major nitpicking grammar.


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## dogcom (May 23, 2009)

According to this article http://ca.finance.yahoo.com/news/Vancouver-real-estate-prices-afp-3867314975.html?x=0 who cares what real Canadians can or can't afford. It will be interesting to see if another buying spree comes through or not before the next Chinese new year.


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## Sustainable PF (Nov 5, 2010)

kcowan said:


> A real estate correction is inevitable. The question is how fast and how much? And mortgage renewals after 5 years will be at what rate? Our financial people have done everything they can to prevent a sudden decline. Will it be enough?


My first mortgage in 2006 was 3.89% over 5, fixed.
My latest mortgage in 2010 is 3.62% over 5, fixed.

Before and after the market tank when things were supposed to be rosey and when they were supposed to be bleak - pretty much the same rate.

Just sayin' ...


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## Andrej (Feb 25, 2010)

When the economy is rosey and rates are next to nothing, once things turn bleak, where are rates going to go? I guess for you the only room they had to drop and stimulate was .27%. 

I think the million dollar questions are:
Will the US be forced to raise interest rates? 
Will Canada be forced to follow?
When will this happen? If it does.


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