# Why are Canadian Home Prices So High ?



## sags

I have never heard a good answer for why Canadian home prices are so much higher than the US.

Middle class Americans and Canadians earn roughly the same incomes, but Americans have some distinct advantages to buying a home that aren't available to Canadians. One would think those advantages would make American homes more expensive than Canadian homes.

1) Mortgage interest deductible from income taxes.

2) 30 year fixed rate mortgages.

3) More geographical selection..........from sunny beaches to northern climates to desert locations.

4) The US economy is recovering at a faster rate than the Canadian economy. 

For some examples of homes sold..........a link to a realtor in Arizona showing his past sales. It is the same scenario across the US.

http://www.zillow.com/profile/damianjgodoy/

Comparing to a similar home in Canada...our homes are priced at least 50% - 60% higher than American homes.

If Canadian home prices fell to the level of American home prices........it would be a catastrophic drop for many Canadians.

That is IF our prices dropped to the same level as American homes, but there is no evidence that should be the comparison.

Realtors and banks are talking about a "soft landing" of 10% decline. 

I am not sure where they come up with that number either though. 

It doesn't seem to be relative or compared to anything else, and they never seem to quantify how they arrive at their projected numbers.


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## Just a Guy

If you compare "pre-2008 meltdown" the numbers were much closer. So, the obvious answer to your inquiry is...because the USA has already had their correction and canada hasn't.


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## james4beach

Here are the reasons I believe Canadian home prices are very high.

1. A general credit bubble in Canada: lots of credit availability and Bank of Canada fuelling the fire with record low rates
2. Classic bubble mentality (I must buy before it goes higher / home prices can only go up) that hasn't burst yet
3. CMHC providing huge stimulus, juicing the mortgage market to the tune of a few hundred billion$, a large % of our GDP
4. Government prevented natural correction in 2008 by using CMHC to alleviate burden of mortgages on the banks, which eased balance sheets and _stimulated credit growth_
5. No limiting constraints (yet). Examples would be a spike in unemployment or a rise in interest rates.
6. A derivatives bubble among the big banks -- huge growth, more than 10% a year growth in off balance sheet derivatives. The derivatives on interest rates and mortgages act as hedging vehicles and reduce the perceived risk on real estate debt. This is another element of stimulating credit growth

Note that in point 4, if the government hadn't artificially stimulated credit, we would have had a natural correction as banks would have curbed their lending. Instead, by using CMHC (and Bank of Canada + CPP actually) we removed the market's ability to naturally discover its limits.


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## james4beach

And here are the mappings of my above points to the parallel US situation

1. US banks "innovated" credit instruments, exotic mortgages. The US Federal Reserve encouraged them, for instance Greenspan directly endorsed option ARM mortgages.
2. Classic bubble mentality is always the same classic bubble mentality
3. Fannie Mae and Freddie Mac. Theirs was riddled with fraud. Hopefully the CMHC is not.
4. US government tried the same thing. The difference was that their credit market deteriorated beyond what the bailouts could absorb.
5. The US * did * have limiting constraints: unemployment and rise in defaults
6. Same derivatives bubble. This is what took down most of the big banks


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## sags

Looking at the data, for whatever technical reasons.........as listed by James4Beach, it appears the divergence occurred as noted by JustAGuy..........around 2006.

Until then........US home prices were worth slightly more than Canadian home prices, but they tracked in tandem with each other.

In 2005, US home prices took a steep dive....while Canadian home prices continued to rise at an even greater pace than before.

The BMO bank reported that US home prices are 63% higher than similar Canadian homes are today.........and are 50% higher after accounting for currency differences.

If a correction comes........a soft 10% decline may be wishful thinking.........based on nothing much more than hope.

Edit........looking at the graph, it appears that after a delay, Canadian home prices started to follow the US trend downwards around 2008 - 2009, but suddenly reversed direction and started climbing again.

Did something significant happen in housing in 2009 to suddenly reverse the downward trend, because that is one very steep "V shaped" turnaround ?


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## MrMatt

sags,
First median home prices for new houses aren't much higher in Canada. It really matters how you measure home prices. In comparable neighbourhoods I think you'd be surprised at what the actual prices are.

Massive foreclosures have totally destroyed home values in some areas, then there are large areas where the house prices have fallen to near zero. (swaths of detroit are like this)

The US overbuilt then had a housing crash, which depresses prices. 

4. It's easy to "recover faster" when you fell farther. The Canadian economy didn't fall as bad as the US.

What is the average income in Arizona you were comparing to? Which Canadian equivalent did you use?


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## Homerhomer

one major difference is that we can't walk away from the house that is underwater like you could in US, here you have to declare bankruptcy, that is a major factor the crash here may not be as severe when it comes as it was in the US. The other two main factors may not come for a while, rising rates will be a disaster so the government will try to maintain them low, and unemployment may not rise with US recovering.

Around here farmers have for sale signs on their lands everywhere, eventually it will be overbuilt and oversupplied, but for now there are line ups anytime a new subdivision goes on sale. Immigration is a big factor as well, when this stops so will the crazy price increase.
Furthermore in comparison to global prices Canada is dirt cheap, compare Toronto to Paris, Tokyo, New York and many other place and you will see we are not that expensive.

Meanwhile in Marathon ON you can buy a nice house for $60K, who says Canadian RE is expensive?
http://www.realtor.ca/propertyDetails.aspx?PropertyId=14596378


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## Just a Guy

Remember that real estate has a built in delay between cause and effect because there are locked in terms.

In the states, they has a weird system to make homes more affordable (since Bush said every American deserved home ownership). They set up mortgages at say 3% where for the first half the payment had no interest tacked on and the second half of the mortgage then "ballooned" to include 6% interest (thus it averaged 3%). Unfortunately, people couldn't afford this new payment...so a solution was found.

People could refinance their places (up to 110% of their value) after only 2.5 years, rolling the interest, and maybe a few credit cards, into the mortgage and resetting the effective interest rate back to 0%, while having virtually no effect on their payment.

Around 2003 or so, some big hedge fund managers started to figure this out, and they saw that some of the derivatives with "AAA" ratings were build on houses that couldn't be paid for if the music stopped. So they looked to create a new product to bet against the housing market, the credit default swap.

Goldman and AIG happily sold this new product cheap to the first few buyers, why would anyone bet against "AAA" products? But, as demand started to grow, they soon started to look into what these guys were buying and soon saw the truth...

They put some pressure on the government (and raised the rates on credit default swaps) to rein in the insanity...so at renewal time having a pulse no longer was enough to qualify and mortgages started to go into default. As the banks were forced to pay out the credit default swaps, their need for money increased and their risk tolerance decreased...so the house of cards collapsed...

In Canada, our lending criteria has always been higher, but it won't protect us from the rising interest rate. True, the shock won't be as bad as facing a 6% increase most likely, but even a 2-3% increase would be a significant "surprise" at renewal time (go punch the numbers in and see for yourself).

The government banned 40 and 35 year mortgages and I think we are just seeing those people hit their renewals because I've been able to pick up a lot of properties out of foreclosure in the past year. 

When interest rates increase, you'll slowly see our house of cards collapse after about 4-5 years as mortgages come up for renewal...the delay is because most mortgages are locked in. If they raise the rates only 0.5% each year, people renewing today could probably handle it, but those renewing in 5 years will face a 2.5% increase...the guys who renew in year 6 (having dodged the bullet initially, will be facing a 3% increase). Think about coming up with an extra $75-$100/month for each 1% increase for every $100k you borrowed.

With real estate, you have to think long term...

Also, remember that CMHC doesn't insure the buyer, it insures the bank. If you default on your mortgage, CMHC will pay the bank the difference and expenses, but then they will come after the buyer for the money. The only way to not be on the hook is to declare bankruptcy. Most people think that CMHC protects them, but that's not true.


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## carverman

Homerhomer said:


> Meanwhile in Marathon ON you can buy a nice house for $60K, who says Canadian RE is expensive?


But what can you do in Marathon, ON with a population in 2011: 3,353 besides work in a pulp mill?..,which went bankrupt.
http://www.northernontariobusiness....wnfield-company-takes-over-Marathon-mill.aspx

I drove by it many years ago with practically my eyes closed, NOTHING there, and like any ONE industry town, once the main employer shuts down,
the real estate goes for a <#^&*>, because without any potential jobs for people to relocate there, there is no future prospect of living there..
unless you happen to own a grocery store or a 7/11 with a gas bar. 
2011: Marathon ONt:Total private dwellings: 1,653, so with so little housing available, why aren't the real estate prices there skyrocketing?

Lots of things are more expensive here in Canada. Building materials for one, municipal taxes, construction labour rates and the profit margins for new homes as well as hjomes being "priced to what the market will bear" in some locations, like the major cities, where the demand may be a lot higher because there are more jobs to attract
people and homebuyers.


> People can easily find steady work in urban cities, or surrounding areas near to big urban cities. So that means people tend to flock to the biggest cities in the country, in hopes of finding something better than limiting themselves to some mid-sized town that may not have enough employment to offer.


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## Homerhomer

Just a Guy said:


> The government banned 40 and 35 year mortgages and I think we are just seeing those people hit their renewals because *I've been able to pick up a lot of properties out of foreclosure in the past year. *
> 
> When interest rates increase, you'll slowly see our house of cards collapse after about 4-5 years as mortgages come up for renewal...the delay is because most mortgages are locked in. If they raise the rates only 0.5% each year, people renewing today could probably handle it, but those renewing in 5 years will face a 2.5% increase...the guys who renew in year 6 (having dodged the bullet initially, will be facing a 3% increase). Think about coming up with an extra $75-$100/month for each 1% increase for every $100k you borrowed.
> .


Interesting, are you around GTA? I have been looking to downsize but the way market is around here it is pretty difficult to find a property that makes sense, didn't think there would much in terms of foreclosures around here, would love to pick one up ;-)

On a 500k mortgage the 2.5% increase would mean about $700 extra in monthly payments (25 years term), with so many around here getting mortgages even higher than that to get into the housing market even this will create havoc ;-)


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## Just a Guy

If you renew at 25 years, you are setting yourself up to rent from the banks for the rest of your life. If you never drop the amortization at renewal, you never pay the property off.

When the correction comes, you'll be underwater and need to come up with the difference or lose your house. Sure, you can delay the inevitable with creative financing, but that never works out long term...

As for the GTA, here is life outside of it. Tthere aren't a lot of foreclosures anywhere in Canada...yet. However, 5 -10 years ago there were none and most houses were selling in bidding war frenzies.

Lending has gotten very tight, worse than in 2008/9. Rate increases are coming, the government has wanted to for years, they are just trying to mitigate the damages it'll cause by trying to close off the money...but governments rarely get things right when they try to control it...


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## Just a Guy

I also think that the different provinces will be affected differently. Vancouver may correct less las they have limited space (ocean on one side, mountains on three), but the suburbs won't be so lucky. Alberta and Saskatchewan will suffer less, the Maritimes may be okay as well since they were always cheap, and they are building oil and gas industries...but they still have to overcome generations of bad decisions and attitudes...

Not sure what the GTA has to offer which could protect them...especially if the financial industry collapses with the real estate market...

You may get your smaller place fairly cheap in a few years...


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## Pluto

james4beach said:


> And here are the mappings of my above points to the parallel US situation
> 
> 1. US banks "innovated" credit instruments, exotic mortgages. The US Federal Reserve encouraged them, for instance Greenspan directly endorsed option ARM mortgages.
> 2. Classic bubble mentality is always the same classic bubble mentality
> 3. Fannie Mae and Freddie Mac. Theirs was riddled with fraud. Hopefully the CMHC is not.
> 4. US government tried the same thing. The difference was that their credit market deteriorated beyond what the bailouts could absorb.
> 5. The US * did * have limiting constraints: unemployment and rise in defaults
> 6. Same derivatives bubble. This is what took down most of the big banks


I agree with Greenspan. ARM's are the best way to go. One saves a ton of money. He didn't advocate lying on loan applications. he didn't advocate giving mortgages to everyone who walked in the door. It isn't fair to blame him for what caused their crash.


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## the_apprentice

Just a Guy said:


> As for the GTA, here is life outside of it. There aren't a lot of foreclosures anywhere in Canada...yet. However, 5 -10 years ago there were none and most houses were selling in bidding war frenzies.


I've witnessed a few friends, co-workers, and acquaintances (ages 18-24) move out to Alberta recently because they couldn't "afford" anything here. They all come from wealthy families and would have unbelievable support had they chosen to stay. Not only that, but they saw a healthier job market in that province (demand, wages) as an alternative to Ontario (where everyone is becoming a teacher). It's going to be very interesting to see what happens in the next few years.


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## Pluto

I'm wondering if we can form the question more sharply. The question is, why are Canadian home prices so high? My question is high compared to what? or Where? Tokyo? Singapore? Berlin? Paris? San Fransisco? New York? London? Mexico city? Rome? and so on. 

What I'm suggesting is there needs to be a more comprehensive comparison. Say compare Toronto and Vancouver to some world wide locations. It may be Canadian cities are not over valued compared to them. And with our falling dollar our homes may look really cheap to outsiders.


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## MrMatt

Homerhomer said:


> one major difference is that we can't walk away from the house that is underwater like you could in US, here you have to declare bankruptcy, that is a major factor the crash here may not be as severe when it comes as it was in the US. The other two main factors may not come for a while, rising rates will be a disaster so the government will try to maintain them low, and unemployment may not rise with US recovering.


It matters what state you're in. There are recourse and no recourse states.


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## carverman

Just a Guy said:


> If you renew at 25 years, you are setting yourself up to rent from the banks for the rest of your life. If you never drop the amortization at renewal, you never pay the property off.


Well said. I don't understand why people even think of taking on 25 or 30 year mortgages. 

That is basically like you say, "renting from the banks" with very little equity, except the increase in property values in your area over time. If you need to sell, that is about the only thing that you can walk away with and if you consider the real estate commission of 5%, in most cases not even that!

What is the difference between outright renting, and putting your money in the bank to grow interest?
Nothing. In the end, when you rent for 25 years, you get shelter for your money..and no equity.
If you pay off the mortgage in 20 years or less (15 in my case), you do have some equity when you need
to sell and that equity in your principle residence in Canada is still income tax and capital gains free.


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## carverman

Pluto said:


> What I'm suggesting is there needs to be a more comprehensive comparison. Say compare Toronto and Vancouver to some world wide locations. It may be Canadian cities are not over valued compared to them. And with our falling dollar our homes may look really cheap to outsiders.


Housing in most large cities in the world is very expensive, a lot more expensive than Toronto (not sure about Vancouver or Calgary).

How do people afford to buy a house in NYC, or even a downtown NYC apartment at the prices they are asking today?

What is it that makes housing so expensive in NYC, or London, or Tokyo? 

Why do people that work there not choose to live 30 km outside of the city (or even farther) and
commute into their work each morning, and thereby avoid the high cost of housing inside the major cities?

Question 1: Why do people pay the exorbitant real estate prices on condos in down town Toronto, 
when they might be able to afford a bigger home in the suburbs... about 30 to 50kms outside the GTA?

Question 2: Why are people willing to pay those high asking prices?


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## Just a Guy

carverman said:


> If you pay off the mortgage in 20 years or less (15 in my case), you do have some equity when you need to sell and that equity in your principle residence in Canada is still income tax and capital gains free.


I think this is also a bit of a misunderstanding for the majority of people. If you pay off your house, even in 15 years, it's unlikely you made any money if you sold. People always say, I bouht my house for $X and I sold it for $Y and made a bundle...

What they never factor in, of course, is all the hidden expenses. Even at 3%, over the life of the mortgage, you are paying more than the purchase price in interest. Then you factor in property taxes, realtor fees, maintenance, improvements, etc. and you're no where near making a profit in the majority of cases. If the interest rates are at the historical 8%, you pay more than three times the purchase price in interest alone over a 25 year mortgage. Not many people sell the house 4x higher than they bought (purchase price + interest).

Sure, you may have a forced savings plan, but it's certainly no investment...even if prices increase.

There is a big difference between a home and an investment, but few people seem to know that.


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## Just a Guy

Pluto said:


> I'm wondering if we can form the question more sharply. The question is, why are Canadian home prices so high? My question is high compared to what? or Where? Tokyo? Singapore? Berlin? Paris? San Fransisco? New York? London? Mexico city? Rome? and so on.
> 
> What I'm suggesting is there needs to be a more comprehensive comparison. Say compare Toronto and Vancouver to some world wide locations. It may be Canadian cities are not over valued compared to them. And with our falling dollar our homes may look really cheap to outsiders.



Think supply and demand here...the population of any of these major cites (with the exception of Toronto) have very limited real estate compared to the available land and population. As I said before vancouver has mountains and oceans limiting the area.

Tokyo has a huge population. Most of Europe has housing handed down...they aren't building new stuff, there's no place to do it...they have to build upwards, but that would mean displacing hundreds who are already crammed in...

Here in Canada, we've got tons of land...even the "small" yards in Vancouver or Toronto are huge compared to Europe. Canada should be cheaper...heck, we've got more land than the USA and 1/10th the population...there's no supply problem here...


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## wert

Just a Guy said:


> I think this is also a bit of a misunderstanding for the majority of people. If you pay off your house, even in 15 years, it's unlikely you made any money if you sold. People always say, I bouht my house for $X and I sold it for $Y and made a bundle...
> 
> What they never factor in, of course, is all the hidden expenses. Even at 3%, over the life of the mortgage, you are paying more than the purchase price in interest. Then you factor in property taxes, realtor fees, maintenance, improvements, etc. and you're no where near making a profit in the majority of cases. If the interest rates are at the historical 8%, you pay more than three times the purchase price in interest alone over a 25 year mortgage. Not many people sell the house 4x higher than they bought (purchase price + interest).
> 
> Sure, you may have a forced savings plan, but it's certainly no investment...even if prices increase.
> 
> There is a big difference between a home and an investment, but few people seem to know that.


Almost every property has a positive net cap rate assuming it gets rented. That is above any capital appreciation, which long term is at or above inflation. If you choose to live in your property and forgo the rents, you are essentially paying that investment to yourself. Over periods longer than 10 years, it is most likely you have gained.

Now it is entirely possible you could rent and choose an investment that outperforms real estate, but that is not a given.


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## carverman

Just a Guy said:


> I think this is also a bit of a misunderstanding for the majority of people. If you pay off your house, even in 15 years, it's unlikely you made any money if you sold. People always say, I bouht my house for $X and I sold it for $Y and made a bundle...


I don't agree with your logic. The primary purpose of a house that you own is : 1) to provide shelter and 2) to have some equity in it from a mortgage that you pay off faster (if you can afford biweeky payments) and some additional equity in real estate prices, over say.. 1 year. 

In 18 years since I bought my house and paid off the mortgage in 10 years, the value of my house has at least
doubled in the time that I have lived in it. IF I had chosen to rent, the rent would have increased at least 1.5 times by now, since I first bought it.
If the rental 18 years ago would have been $900 a month for a 4 bedroom semi-detached home, it would not be the same today, neither would a 3 bedroom apartment either...rents always increase after the lease expires.
Now I can't determine how much I saved by paying off the mortgage faster (about 10 years rather than 15 as when I first took out the mortgage with CIBC, but suffice to say that the $600 a month, even though the interest charged was less after 10 years and the principle was decreasing, I could roughly say $500 x 12 months x 6 = $6,000 x 5 = *$30,000 saved in interest*by paying off the mortgage sooner. 

That $30K that I didn't end up paying the bank ended up as either some savings or extra money that I had to spend on other things in my life..like divorce lawyers..sigh!




> What they never factor in, of course, is all the hidden expenses. Even at 3%, over the life of the mortgage, you are paying more than the purchase price in interest.


Ok, but at some point, you do end up with equity in the home that the gov't cannot tax you on and even with real estate prices rising modestly over 10 years or more, you actually have some equity and *don't forget SHELTER*..which always costs you real money, no matter how you chose to live..
unless of course, you can live for free with your parents. 



> Then you factor in property taxes, realtor fees, maintenance, improvements, etc. and you're no where near making a profit in the majority of cases.


?? Show me the data to support your case!
Yes, home ownership does require maintenance..(ie a new roof maybe every 20-25 years and upgrades to suit your life style) ..and even if you don't get back $ for $ on the upgrades and repairs....you still have:
*1) SHELTER and 2) EQUITY. * and 3) NOBODY can kick you out..unless your don't pay your mortgage payment
or property taxes. Things like insurance and taxes, you cannot factor these into this argument.

IF you rent, you still need tenant insurance in case another tenant in your building leaves a stove unattended, and the fire burns your unit or smoke damage..so whether you OWN OR RENT..fire insurance is a necessity.

*Property taxes*: OK this is one area that a renter has an advantage over a tenant renting all his/her life.
Property taxes can be quite significant..mine are about $275 a month currently, and for that, I get very little except
garbage pickup and maybe a snowplow on the street in the winter..t*he rest goes to the City of Ottawa and the school boards..*...somebody has to support them..:biggrin:

However, even landlords have to pay property taxes, and do you think that they just absorb these taxes? 
No, they pass on the taxes in the rental of the house or apt unit to the tenant in the form of RENT.
So in the end, even with a 1 year lease, the property taxes are reflected in the rent. 



> If the interest rates are at the historical 8%, you pay more than three times the purchase price in interest alone over a 25 year mortgage. Not many people sell the house 4x higher than they bought (purchase price + interest).


*Ok, this is one area that is pure speculation.** Nobody can predict whether interest rates go up drastically* (as they did in the 80s), or stay historically low as they are today. 

This is definitely a gamble in life, just like knowing how long* you will be around *as well.
While we can look back at what has happened in the past..NOBODY even with a 'crystal ball" can determine what can
happen 1 year from now, let alone 5 or 10 years from now. Banks always take the approach that "someday" interest
rates will go up..and that is reflected on the 1 yr/2yr/3yr and 5yr interest rates.
So, depending on comfortable you are at gambling, *you take the option that is currently the least cost to you.*. However,if you are really worried about the future enough to lock in at a higher interest rate for 5 years..it's your call! 



> Sure, you may have a forced savings plan, but it's certainly no investment...even if prices increase.


That is where we agree to disagree. Besides a TFSA, where you can only put in $5500 a year
without incurring penalties from the gov't, *where else can you live in your home (SHELTER) and have it
appreciate over time in terms of market value?..and sell it TAX FREE? *

Sure you can jump around with this stock, or that mutual fund and maybe gain more for the same money 
that you would have invested in your home..but in the end... you *will be sent a tax slip on your investments* from the financial institutions and you have to determine how much of what you earned... goes to the gov't in the form of income taxes and what you have left....unless of course you have discovered an offshore tax haven.



> There is a big difference between a home and an investment, but few people seem to know that.


Yes..there is a difference..and the difference is: INVESTMENTS deal with money..and you are subjected to
interest rates rising or falling, the uncertainties of the stock markets and financial markets (ie the "crash"
in the US in 2008/2009), *and the tax man always wanting their share*..
you can be a millionare on paper with your investments one year... 
and then...a maybe a poor man the next year, when the financial world goes for a ....well...

BUT ..in the end...your home will always be there to give you SHELTER from the wintry blasts, even if you
can't jump for joy EXCLAIMING "Yippee..I'm a millionaire....on paper that is! 

I remember all those Nortel investors..who thought they had "it made"...with their Nortel shares..which became worthless "toilet paper" EVENTUALLY. Now if they had bought real estate and sold it...would that same real estate be
completely worthless?

I REST MY CASE.


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## sags

All I know is that even in current low interest rates, I can't buy a similar townhouse for the equivalent of the rent we pay.

The "why" is simple.....the landlord built the units in the 1960s. They paid 1960s prices to build them and the mortgages are long paid off.

My rent is reflected by my landlords cost..............not their competitors cost, or the cost of buying a similar place in 2014.

What it means is that we have a substantial savings for renting over buying. 

I think the rent/ownership debate is impossible to prove for either side.........as it is local and dependent on so many other factors.

Homeowners can acquire equity in their homes............and renters can acquire equity in the money they save by renting.

What they do with the "equity" is up to them.

Some homeowners never touch it and pay off their homes as soon as possible. Many others continually re-borrow their equity and never own their homes.

Some renters spend all the money they save by renting. Some other renters invest or save the extra money.

In either situation..........it is all up the individuals.


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## sags

I remember the Nortel mania well. 

Nortel made the main stream news that the stock price was falling.

For some reason, people latched onto the idea that the lower values were an aberration, that would soon be corrected.

People that I worked with, who had no previous experience in the stock markets, were setting up accounts and buying Nortel stock.

Suddenly, everyone at work was reading the stock quotes and listening to financial news. 

They all became experts in the stock market overnight.

I heard the news as well........and looked into it. When I saw how many outstanding shares the company had........I wasn't interested.

I know people who invested everything they had and borrowed everything they could to plow it into Nortel.

As the Nortel stock prices kept falling, they became desperate and everyone was talking about ......"averaging down".

It was simple, they said. Lowers the cost of each share.........so we can make a profit..........easy.

People borrowed from their parents to buy more Nortel. It was a feeding frenzy at the cafeteria phones as everyone had to call "their" broker to buy more shares. They were calculating how many shares they had to buy to break even again. It was a full scale panic in progress.

Well we all know how that story turned out. they were still buying Nortel shares to "average down" right down to the last days

Many lost everything they had saved over 20 years..........everything........ and owed money as well.

I wonder, when I listen to the young people in our family, discussing the $400,000+ homes they bought and talking about how much their house has gone up in value......if this isn't much the same as the hysteria and mania surrounding Nortel.

Irrational exuberance..........tunnel vision.........whatever to call it.

Of course, they don't know much about the BreX or Nortel sagas. They don't know much about 20% mortgage interest rates.

All they know is........they buy a house with the bank's money........live in nice surroundings.........and make lots of free money.

Easy peasy.............What is there not to like in that ?


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## Just a Guy

wert said:


> Almost every property has a positive net cap rate assuming it gets rented. That is above any capital appreciation, which long term is at or above inflation. If you choose to live in your property and forgo the rents, you are essentially paying that investment to yourself. Over periods longer than 10 years, it is most likely you have gained.
> 
> Now it is entirely possible you could rent and choose an investment that outperforms real estate, but that is not a given.


You obviously haven't been reading a lot of the other proposed "investments" people post here...

At these prices, very few properties would cash flow...unfortunately most people seem to believe, like you, that any piece of real estate will make money. It's not true, probably why so many people lose money in real estate. Today is one of the hardest times to be a true real estate investor because there is next to nothing on the market.


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## Just a Guy

Carverman,

You are taking a general statement and applying it to one specific case, your own, which is nor the common way.

Most people don't pay off their mortgages in less than 25 years, most people take more than 25 years on average.

Most people don't stay in the same house, the average canadian moves every 7 years on average.

As a landlord, I can tell you rent doesn't always go up at the end of the lease. If you get a good tenant, you keep them happy.

Insurance as a landlord is cheap (about $200/yr), insurance as a tenant is cheap (about $150/year) insurance as a homeowner is a lot more comparably (around $1000).

Property values are generally reassessed when there are sales...commercial buildings aren't assessed very often, I can tell you that my rental's are assessed quite low, and I've taken the time to keep them low through tax appeals, I pay a lot less property taxes than my neighbours.

If you have a paid off house, yes you save money...though most people don't save any of it, they spend it.

My point wasnt to debate renting vs. owning, only to point out that houses don't appreciate as much as people think. I sold a house after living in it for 10-12 years, it more than doubled in value...when I sat down and crunched the numbers, had I had a mortgage on it, I would have just broken even on my "investment" which is doing very well in my opinion. Oh, and Wert, I look at making it a rental, but there's is no way it would have cash flowed at it's sale price...though it could have funded the purchase of a lot of ones that could.

My mother often sold places for less than she bought being a victim of a poor economy...and she was owning in the double digit mortgage era...

I believe she only sold one place for mor than she bought it for and was quite proud that she'd "made money"...until I pointed out that she'd built the garage, landscaped the place, poured the driveway...all of which cost about the same as her "profits"...I didn't point out the interest she'd paid....


----------



## RBull

Just a Guy said:


> Carverman,
> 
> You are taking a general statement and applying it to one specific case, your own, which is nor the common way.
> 
> Most people don't pay off their mortgages in less than 25 years, most people take more than 25 years on average.
> 
> Most people don't stay in the same house, the average canadian moves every 7 years on average.
> 
> As a landlord, I can tell you rent doesn't always go up at the end of the lease. If you get a good tenant, you keep them happy.
> 
> Insurance as a landlord is cheap (about $200/yr), insurance as a tenant is cheap (about $150/year) insurance as a homeowner is a lot more comparably (around $1000).
> 
> *Property values are generally reassessed when there are sales...commercial buildings aren't assessed very often, I can tell you that my rental's are assessed quite low, and I've taken the time to keep them low through tax appeals, I pay a lot less property taxes than my neighbours.
> *
> If you have a paid off house, yes you save money...though most people don't save any of it, they spend it.
> 
> My point wasnt to debate renting vs. owning, only to point out that houses don't appreciate as much as people think. I sold a house after living in it for 10-12 years, it more than doubled in value...when I sat down and crunched the numbers, had I had a mortgage on it, I would have just broken even on my "investment" which is doing very well in my opinion. Oh, and Wert, I look at making it a rental, but there's is no way it would have cash flowed at it's sale price...though it could have funded the purchase of a lot of ones that could.
> 
> My mother often sold places for less than she bought being a victim of a poor economy...and she was owning in the double digit mortgage era...
> 
> I believe she only sold one place for mor than she bought it for and was quite proud that she'd "made money"...until I pointed out that she'd built the garage, landscaped the place, poured the driveway...all of which cost about the same as her "profits"...I didn't point out the interest she'd paid....


This is interesting. It sounds like some incompetent property tax administrators. In my area assessments and appeals are directly related to other homes in the immediate neighbourhood, however I have no experience in what you are describing as commercial property. Although in my experience it's easier keeping an existing assessment down than a new assessment on a recent purchase. Here in our province assessments are a dogs breakfast where new construction and new sales higher assessments heavily subsidize taxes because the vast majority of homes are under assessed, vs the law stating all homes are to assessed be at market value....notwithstanding the assessment tax cap nonsense too.


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## lonewolf

I recently read Canadians are big buyers of real estate in the US. Seams like Canadians really like their real estate @ this point in the cycle.


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## kcowan

Here is the latest Teranet house price index:









Note that the Index values were established in 2003.


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## sags

From what I have read, home sales have stalled in the US.

It isn't that Americans don't want to buy homes, but it is hard to qualify for a mortgage there.

A lot of Americans are still suffering from the negative affects to their credit, that came with the recession.

So much so........that it has been proposed to change the method of credit reporting in the US to include forgiveness for defaults during the recession, as "one off" events.

That would immediately raise credit scores for millions of Americans who defaulted on their mortgages or other debts, and they could immediately start to buy homes again.


----------



## carverman

sags said:


> All I know is that even in current low interest rates, I can't buy a similar townhouse for the equivalent of the rent we pay.
> 
> The "why" is simple.....the landlord built the units in the 1960s. They paid 1960s prices to build them and the mortgages are long paid off.


You make an interesting point there..but in most cases, the landlords will set the rent at what today's current market will bear. If rents were (as an example..$500 a month at 1960 prices for a townhome or a large apt), they are not going to be offered at that price today.

Secondly, the rents always go up after the lease expires..and that would hold true no matter when the rental units are built, even if they were built in the 50s or before. property taxes, heating if included in the rent, water and maintenance costs are factored in to rents upon renewal, subject to the maximum allowable increase under the landlord-tenant act. 



> My rent is reflected by my landlords cost..............not their competitors cost, or the cost of buying a similar place in 2014.
> What it means is that we have a substantial savings for renting over buying.
> 
> I think the rent/ ownership debate is impossible to prove for either side.........as it is local and dependent on so many other factors.


You are in a unique rental situation and not every situation can always be a win for the renter. 



> Homeowners can acquire equity in their homes............and renters can acquire equity in the money they save by renting.
> What they do with the "equity" is up to them.
> Some homeowners never touch it and pay off their homes as soon as possible. Many others continually re-borrow their equity and never own their homes.
> Some renters *spend all the money they save by renting*. Some other renters invest or save the extra money.
> 
> In either situation..........it is all up the individuals.


Yes, it is up to the individual's preferences. Some prefer to take the money saved in renting and buy that new
car every 3-5 years....vehicles while giving one satisfaction are generally depreciating assets...unless of course,
you happen to own some classic car that is garaged and not ever driven from the 60s or earlier, and classic car collectors are willing to pay inflated prices for a car in mint condition.:biggrin:

Another thing..true inflation, not that "goobly **** number' that Stats Canada hand us every year, is eating up
any gains realized on savings as well..as well as the gov't wanting their fair share...inflation gobbles up a 
subtantial portion of your savings in terms of buying power every few years as prices go up..just take a
walk down any grocery isle to get an appreciation of how much it costs to put food on the table.
Not saying that everyone pulls out a chunk of their savings to buy groceries..just using the example that
that bag of groceries that costs $50 today cost only about $20 in the mid 60s...


----------



## andrewf

So Teranet's Toronto index was about 92 ten years ago and 164 today. Extending a 3% growth trend from 2004 (long term real estate returns are roughly equivalent to inflation) gives an expected index value of 123.6. That indicates that mean reversion would see a 25% decline... Of course, it's always 10% declines forecasted in the media, no matter what base we're starting at.

For those skeptical of such low RE returns in the long term, here is the US equivalent of the Teranet index (Case Shiller). The 25 year return from 1987 to 2012 was 2.3%.

http://upload.wikimedia.org/wikiped...iller_index.png/1024px-Case-Shiller_index.png


----------



## carverman

sags said:


> I remember the Nortel mania well.
> 
> I know people who invested everything they had and borrowed everything they could to plow it into Nortel.
> 
> People borrowed from their parents to buy more Nortel. It was a feeding frenzy at the cafeteria phones as everyone had to call "their" broker to buy more shares. *They were calculating how many shares they had to buy to break even again. It was a full scale panic in progress.*


I worked for Nortel for almost 25 years. I never bought Nortel stock with my own money, although Nortel did put some money in in my employee savings plan in the form of Nortel stock, that I cashed out before 2000.

*I saw what was happening before 2000 and shook my head to myself..*.CEO Roth was taking too many risks, walking out on a limb, and not watching his cash flow, convinced by some management training "guru in California"..PHD <forget his name> , where all the top executives went for seminars on corporate guidance to increase profitablilty... PHD.."piled higher and deeper' as they say, but he had them around his little finger thinking that
that was the way things would go....so they should get on with it and "get on the bandwagon"..or as they mentioned
in a corporate video that we saw..'the train is leaving..either you are with us..or you will be left.. behind!"...:barbershop_quartet_ great slogan..for a corporate vision..uh huh! 

Convinced that the internet would expand beyond their wildest dreams, they decided that they really needed to go out an buy all these DOTcom companies to capitalize on their "investment" for the future, as CEO Roth had set a vision that Nortel would be a 30 BILLON US company by 2001. 
Wow! Nice technicolor dream there, but unfortunately after spending all their cash reseves like drunken sailors
on shore leave, Nortels' cash cupboard was getting "quite bare" by this time..and their customers, the US Telcos deferred orders, due to oversupply of their services to their customers... and then it started to get badddddd..as the cash flow was not there any more, as they had enjoyed in the 80s and 90s. They were losing money and couldn't pay the dividends any more on their stock, so some investors started the downward trend to start selling out early..

*Nortel bought companies that they did not understand, and had no current use for.*..that was the beginning of their downfall...if they couldn't use the companies they bought in their line of business..digital telephony..there was no need to be major stockholder in those companies, as most of them had no real product to offer..dotcom "losers", but they now were..and these companies were affecting their cash flow and bottom line as pretty much all of them were in the RED ink.

The biggest mistake I saw back in 1999 was when they bought Bay Networks )and changed their name from
Nortel to NORTEL NETWORKS (the "Networks" due to acquisition of Bay Networks), and because rather than make a partnership deal with Cisco (routers) they wanted to do it on their own, buying out Bay Networks for a ridiculous some for around 3.9 Billion US..forget exactly, but it was a very large amount of cash and stock that had the Bay Networks stockholders were jumping for joy..running to their banks on their lucrative windfall. 

However, their routers proved to be unpopular because most of the industry had CISCO routers and did not want to mix their inventory..so that very expensive acquisition eventually flopped, and in the last few years before the big crash in the US in 2008, Nortel was UNLOADing their DOTcome acquisitions at fire sale prices..pennies on the dollar as the DOTcom hype collapsed.

I saw the 'writing on the wall" long before it happened. 



> Many lost everything they had saved over 20 years..........everything........ and owed money as well.
> 
> 
> 
> 
> I wonder, when I listen to the young people in our family, discussing the $400,000+ homes they bought and talking about how much their house has gone up in value......if this isn't much the same as the hysteria and mania surrounding Nortel.
> 
> 
> 
> The age old adage "never to put your eggs in one basket and never count your chickens before they are hatched"
> has to apply to investments..and stay away from the media hype.
> 
> Big difference here. A house is an investment, true enough and if you overbuy and lose your job and the real estate market does a "periodic adjustment' as what happened in Toronto in an overheated real estate market in the mid 80s, yes you can take a financial bath as they say..but still, the family home gives you one thing that all the stock and paper investments in the world can't give you...shelter from the storm.
> 
> Most of your monetary investments (except maybe gov't bonds) , will not provide "shelter" from a financial market meltdown.
Click to expand...


----------



## emperor

Houses are expensive because people believe they need them and are willing to pay anything to get them. Most people that don't like high house prices suffer from the same condition, they are just not willing to pay the price. Forget about housing altogether, use your money to save and invest in something, get a reasonable place to rent with a roommate or two and call it good, you don't need a house.


----------



## MrMatt

sags said:


> All I know is that even in current low interest rates, I can't buy a similar townhouse for the equivalent of the rent we pay.
> 
> The "why" is simple.....the landlord built the units in the 1960s. They paid 1960s prices to build them and the mortgages are long paid off.


Your "why" is wrong.
The reason rent is cheaper than a mortgage is because your landlord is bad at capital allocation. 

Rent should be enough to pay for the property + Profit.

The cost of the property is the opportunity cost of the equity + Loan interest, it doesn't matter how much equity one has 0% or 100%, the cost is basically consistent (assuming mortgage rate/ cost of capital are the same)
In addition there are the other costs, property tax, insurance, maintenance, administration.

To be fair if they're old and long paid off, the capital gains could be significant, which can shift, but if the rent is much below the comparable mortgage, it's just bad business.


----------



## Just a Guy

You know, not every landlord tries to maximize their profits and gouge their renters. The typical mortgage payment, that with an interest rate over 3%, has more than 50% of it composed of interest. Considering a mortgage payment is the biggest expense in property ownership, having it paid off does lower the cost significantly.

Further, most buildings are mortgaged at commercial rates, not personal rates, so the mortgage payment for an apartment is significantly higher than for a house. Only TD is offering the same rates anymore. Everyone else is at least 50% higher 4.5%).

Most landlords make a lot of profits once the property is paid off. If they aren't buying more, they don't always need to maximize profits, or even follow the market, so they don't.

I know one landlord in the same building as me, a little old lady, who charges nearly half of what I do, and my rents are also below market in that place. She's got no clue as to what market rents are, doesn't need more money, and likes her tenants who've been there forever...

Her tenants know they are getting a deal, so they are on their best behaviour...and, as they say in the commercial, that's priceless.

At her age, she doesn't need to be the richest person in the cemetery.


----------



## Beaver101

carverman said:


> ...
> 
> The age old adage "never to put your eggs in one basket and never count your chickens before they are hatched"
> has to apply to investments..and stay away from the media hype.
> 
> Big difference here. A house is an investment, true enough and if you overbuy and lose your job and the real estate market does a "periodic adjustment' as what happened in Toronto in an overheated real estate market in the mid 80s, yes you can take a financial bath as they say..but still, the *family home gives you one thing that all the stock and paper investments in the world can't give you...shelter from the storm.
> 
> Most of your monetary investments (except maybe gov't bonds) , will not provide "shelter" from a financial market meltdown*.


 .. +1 .. and renting is not feasible if there'll be kids or a growing family. 

House prices are high now because "investors" are flipping inside and out with favourable interest rates. Soon the market will be upside down. :biggrin:

Nortel saga - 3 words summary - bright and greedy executives. :rolleyes2:


----------



## MrMatt

Just a Guy said:


> You know, not every landlord tries to maximize their profits and gouge their renters.


If the landlord is choosing a lower ROE that's his choice. However from a capital allocation standpoint you shouldn't tie up capital in an under-performing asset.


----------



## carverman

Just a Guy said:


> You know, not every landlord tries to maximize their profits and gouge their renters. The typical mortgage payment, that with an interest rate over 3%, has more than 50% of it composed of interest. Considering a mortgage payment is the biggest expense in property ownership, *having it paid off does lower the cost significantly.*


"lowers cost" significantly, sure, so does that mean that since my mortgage is paid off, and I want to rent out my house...and I don't really need the money, "because I can't take it with me", so I should advertise that I will be renting it out cheap cheap!
Maybe because of some text in the Bible that tells us not to make a profit at somebody's expense..so I will rent it out below market rates..because I can, and maybe for a few years too, while the roof deteriorates and the heating needs replacement, and the other maintenance will be "free for me"...
... so being a "good citizen", I will rent it out for just the taxes and insurance.



> Most landlords make a lot of profits once the property is paid off. If they aren't buying more, they don't always need to maximize profits, or even follow the market, so they don't.


I see a flaw in your logic...so by your thinking, you would also work for minimum wage, because you don't believe to "maximize your income", while you can in your working years? 



> I know one landlord in the same building as me, a little old lady, who charges nearly half of what I do, and my rents are also below market in that place. She's got no clue as to what market rents are, doesn't need more money, and likes her tenants who've been there forever...
> Her tenants know they are getting a deal, so they are on their best behaviour...and, as they say in the commercial, that's priceless.
> At her age, she doesn't need to be the richest person in the cemetery.


Sure, you can charge whatever you want in rent, and pay the taxes and repairs out of your own pocket..but that is just not good business sense.


----------



## Pluto

Just a Guy said:


> What they never factor in, of course, is all the hidden expenses. Even at 3%, over the life of the mortgage, you are paying more than the purchase price in interest.


I'm not sure this is accurate. Supposing someone bought a 200,000 condo near GTA, and borrowed 150000 @ 3%. I get a little over 45000 in total interest payments over 25 years. I might have goofed in my calculations, but I think not. Too, over 25 years it is not inconceivable that the market value in 25 years would be over 500,000. 

I get your point that there would be maintenance, taxes, some improvements and so on. Even so, it isn't clear that this would be a losing proposition or that the interest payments over 25 years is more than the purchase price.


----------



## Eclectic12

MrMatt said:


> The reason rent is cheaper than a mortgage is because your landlord is bad at capital allocation...
> 
> To be fair if they're old and long paid off, the capital gains could be significant, which can shift, but if the rent is much below the comparable mortgage, it's just bad business.


This is great in theory ... but as my co-worker keeps saying - if his rent was comparable to a mortgage, he would be shopping for and buying a house.

Since there is a difference, he's been renting for eight years plus.


There's a bit of a sweet spot, IMO as pricing the rental too close to what mortgages are going for is going to push those running the numbers out of a rental and the rental price being too low is reducing the potential return.




MrMatt said:


> If the landlord is choosing a lower ROE that's his choice.
> However from a capital allocation standpoint you shouldn't tie up capital in an under-performing asset.


Is it worth spending the money to acquire new tenants who may or may not take care of the place for the sake of maximising ROE?
There are costs involved in such a situation.

Then too, if it's truly under-performing - how easy will it be to sell and moving the proceeds into something else?
Selling may mean capital gains taxes to pay as well.


Cheers


----------



## Just a Guy

Pluto said:


> I'm not sure this is accurate. Supposing someone bought a 200,000 condo near GTA, and borrowed 150000 @ 3%. I get a little over 45000 in total interest payments over 25 years. I might have goofed in my calculations, but I think not.


You did goof, I just punched it in to td's online calculator...150k at 3%, 25 year amortization, 10 years fixed term (the most it can do), gives you $38k in interest payments after 10 years...you still have 15 more to go, and still owe $102k of the original $150k.


----------



## Pluto

Just a Guy said:


> You did goof, I just punched it in to td's online calculator...150k at 3%, 25 year amortization, 10 years fixed term (the most it can do), gives you $38k in interest payments after 10 years...you still have 15 more to go, and still owe $102k of the original $150k.


You realize that interest on a mortgage is front loaded. I'd say that after 10 years there is only about 8 or 9 thousand in interest left. so I'll stick with my original estimate of total interest. The calculator I use can handle the entire 25 years.


----------



## Just a Guy

MrMatt said:


> If the landlord is choosing a lower ROE that's his choice. However from a capital allocation standpoint you shouldn't tie up capital in an under-performing asset.


Ei don't think you understand the profits that can happen in real estate, so let's take some real numbers from the average of the last 6 places I bought in the past year.

Average purchase price was $75k. Average rent is over $1050/month (about 10-15% below market average). I put in about $5000 to renovate them, but managed to finance these places 100% including my renos, so I've got none of my own money invested. My mortgage payment is a out $200 biweekly (I want them paid off in 17 years or less), my taxes(after appeals) averages less than $75/month, insurance (after shopping around) comes in at $10/month, condo fees are around $325 including heat and water. So let's say I currently make $200/month in profits. I don't really want to make a ton more, because 50% of whatever I earned goes to taxes (if I raise the rent to market value, I only get to keep $50-75 and the chances of having tenants move or skip out potentially increase). If my places are vacant, I raise the rent up closer to market, but if I've got a good tenant, I don't raise the rents often.

In 17 years (let's assume everything stays the same for inflation adjusted values), I no longer have a mortgage payment and my profits grow to over $600/month. All for an initial investment of nothing. 

If done properly, you don't have under performing assets in real estate. Have I maximized my profits? No, but I've tripled my income by doing nothing. If I own 10 places, I'd be making 6k/month (72k/year retirement funds) do I really need more? I'd rather have quiet tenants.


----------



## Just a Guy

Pluto said:


> You realize that interest on a mortgage is front loaded. I'd say that after 10 years there is only about 8 or 9 thousand in interest left. so I'll stick with my original estimate of total interest. The calculator I use can handle the entire 25 years.


Just punched in 102k and got another 22k in interest, with 40k owing, and then another 3k in interest to finish it off...So, it's a little higher than you said (around $65k), and lower than I said...but, that being said, I don't believe for a second that interest rates will stay at 3% for 25 years...


----------



## Pluto

Just a Guy said:


> Just punched in 102k and got another 22k in interest, with 40k owing, and then another 3k in interest to finish it off...So, it's a little higher than you said (around $65k), and lower than I said...but, that being said, I don't believe for a second that interest rates will stay at 3% for 25 years...


I suspect that your second calculation was done on the assumption that it was a whole new mortgage, in which case, more interest was front loaded. I think you are doing the first 10 years twice, but mortgages don't work like that. I still stick with my original approximate $45000 in total interest which is nowhere near the original purchase price. don't yo have one of those old fashioned mortgage table books?


----------



## sags

Exactly..........JustAGuy...........

The steady flow of profits from the 1200 rental units built in the 1960s and 1970s has financed all their other ventures.

Aren't they in the position that a lot of landlords would just love to be in, and are striving for?

The investments 50 years ago..............are paying big dividends for the founder's children and grandchildren today.

It sounds like JustAGuy is slowly building a similar future for himself and family.......and doing it the right way.


----------



## Just a Guy

The funny thing is, when the owner dies, a lot of the kids just want to cash out for the capital gains because they don't want the hassles of being a landlord. A small three storey walk up can easily generate $25000/month, but they want the $750k cash...

Like lottery winners, they are broke in a couple of years...


----------



## sags

Garth Turner shows a beauty of a home that sold in Vancouver for $2.6 million.

Check it out...........if you want a good laugh.........

http://www.greaterfool.ca/2014/09/22/not-alone/

A bidding war of people with more more money than brains...........


----------



## MrMatt

Just a Guy said:


> Ei don't think you understand the profits that can happen in real estate, so let's take some real numbers from the average of the last 6 places I bought in the past year.
> 
> Average purchase price was $75k. Average rent is over $1050/month (about 10-15% below market average). I put in about $5000 to renovate them, but managed to finance these places 100% including my renos, so I've got none of my own money invested. My mortgage payment is a out $200 biweekly (I want them paid off in 17 years or less), my taxes(after appeals) averages less than $75/month, insurance (after shopping around) comes in at $10/month, condo fees are around $325 including heat and water. So let's say I currently make $200/month in profits. I don't really want to make a ton more, because 50% of whatever I earned goes to taxes (if I raise the rent to market value, I only get to keep $50-75 and the chances of having tenants move or skip out potentially increase). If my places are vacant, I raise the rent up closer to market, but if I've got a good tenant, I don't raise the rents often.
> 
> In 17 years (let's assume everything stays the same for inflation adjusted values), I no longer have a mortgage payment and my profits grow to over $600/month. All for an initial investment of nothing.
> 
> If done properly, you don't have under performing assets in real estate. Have I maximized my profits? No, but I've tripled my income by doing nothing. If I own 10 places, I'd be making 6k/month (72k/year retirement funds) do I really need more? I'd rather have quiet tenants.


Just A Guy, 
You're renting at more than a comparable mortgage, which is what you should do.
Like you said, you're making $200/month in profit with no capital tied up. The rent you're charging is MORE than the comperable mortgage, which is the opposite of the case I was commenting on.

Imagine you could only get $400/month for the unit, suddenly this investment has a pretty poor return.


----------



## Pluto

Just a Guy said:


> You know, not every landlord tries to maximize their profits and gouge their renters. The typical mortgage payment, that with an interest rate over 3%, has more than 50% of it composed of interest.


50% or more of each payment in interest is only in the beginning, usually the first 5 years. As time goes by the % of the payment that is interest gets smaller and smaller. By the time one gets half way through the amortization period, most of the interest has been paid.


----------



## Pluto

Just a Guy said:


> Ei don't think you understand the profits that can happen in real estate, so let's take some real numbers from the average of the last 6 places I bought in the past year.
> 
> Average purchase price was $75k. Average rent is over $1050/month (about 10-15% below market average). I put in about $5000 to renovate them, but managed to finance these places 100% including my renos, so I've got none of my own money invested. My mortgage payment is a out $200 biweekly (I want them paid off in 17 years or less), my taxes(after appeals) averages less than $75/month, insurance (after shopping around) comes in at $10/month, condo fees are around $325 including heat and water. So let's say I currently make $200/month in profits. I don't really want to make a ton more, because 50% of whatever I earned goes to taxes (if I raise the rent to market value, I only get to keep $50-75 and the chances of having tenants move or skip out potentially increase). If my places are vacant, I raise the rent up closer to market, but if I've got a good tenant, I don't raise the rents often.
> 
> In 17 years (let's assume everything stays the same for inflation adjusted values), I no longer have a mortgage payment and my profits grow to over $600/month. All for an initial investment of nothing.
> 
> If done properly, you don't have under performing assets in real estate. Have I maximized my profits? No, but I've tripled my income by doing nothing. If I own 10 places, I'd be making 6k/month (72k/year retirement funds) do I really need more? I'd rather have quiet tenants.


So using your figures $200 bi weekly for 17 years. That's 442 payments @ 200 each = for a total of $88,400.00. So there is no way that the interest alone is greater than the purchase price.


----------



## Just a Guy

MrMatt said:


> Just A Guy,
> You're renting at more than a comparable mortgage, which is what you should do.
> Like you said, you're making $200/month in profit with no capital tied up. The rent you're charging is MORE than the comperable mortgage, which is the opposite of the case I was commenting on.
> 
> Imagine you could only get $400/month for the unit, suddenly this investment has a pretty poor return.


I've never said most real estate is a good investment these days. In fact I discourage many of the people who want to start because they can't find similar properties and their numbers are nowhere close. I don't buy places I think would rent so poorly.

I very much doubt that rents could drop down to $400/month (including utilities) in the major cities where I buy since I can't remember a time when the rents were actually that low, but that is one of the reasons I pay the place down so aggressively (the other is I know the interest rate hike is coming there is no way I'm getting away with 3% for 17 years).

So, if rents drop, there are a couple of options I could do. First I could refinance and change the mortgage payment (I could go to a 30 year monthly payment). Next, being on the board, I'm sure we could lower the condo fees. It's rare that they get lower, but if rents drop by 65%, there is a huge problem with the entire economy so costs have probably decreased as well.

Finally, I could purchase more places at a lower rate which generate profits at $400 rents and average my way out of the mess...or I could walk away and have lost nothing but my credit rating since I didn't put in any of my own money.

Truth be told though, if rents dropped to rates of the 70's (I'm guessing this may be the time period) I think everyone would be in a lot of trouble...worse than the Great Depression.

What is more likely to happen is inflation will lower the buying power of the dollar, so I'll probably be making higher rents (though the actual buying power will remain relatively the same) and paying off my property with more buying power. So, while my rents may be $2000/month (equivalent to today's $1050), my purchase price of 80k hasn't changed, so I could pay it down with the extra $950 benefitting from inflation.


----------



## Just a Guy

Pluto said:


> So using your figures $200 bi weekly for 17 years. That's 442 payments @ 200 each = for a total of $88,400.00. So there is no way that the interest alone is greater than the purchase price.


We're already having this discussion in a different thread, it has something to do with the online mortgage calculator I used, and some rounding off that I did to keep the numbers simple (things like an extra 20 dollars every 52 weeks adds up over 17.9 years, also my interest rate is below 3%). You'll notice in the original posting that I state "is a out" which was an autocorrection of "is about". 

I've acknowledged that I'm wrong that it'll cost the purchase price at 3%, though I was talking 25 year amortization not 17.9 (or whatever bi-weekly rapid works out to exactly)...

I can also say, there is no way I'll have a 3% interest rate for the life of my mortgage. 

Punch some numbers in to a mortgage calculator and see how soon it is before a typical 25 year mortgage starts generating as much interest as the purchase price...probably won't be much higher interest rate...then try a 30 year amortization...

I've been buying properties for a number of years, and I'm still not used to rates this low...I can however, remember double digit mortgages, which people here seem to think are fictitious.


----------



## Berubeland

In the GTA certainly the rental price is unlinked from the purchase price of the home. The rental market is defined by the rental competition in your area at the time. When we go out to do a listing we bring a market survey and if the owner's price is not realistic, we do not take the listing. The market survey consists of 3-4 similar property in the surrounding area. 

Most landlords are losing money if they bought in the last 5 years if you calculate management, vacancy and turnover and property management and rental fees. The apartment will likely need some paint as well when rerented. Maintenance fees are constantly going up. 

I've heard but can't say for sure that there is a sizeable contingency of foreign investors that are buying up condos just as capital preservation. They don't even rent them out in some cases. They just want a relatively safe place to park money outside their country. Chinese and Middle Easterners. Not being Chinese or middle Eastern they don't generally have too much to do with me.


----------



## nobleea

sags said:


> Garth Turner shows a beauty of a home that sold in Vancouver for $2.6 million.
> 
> Check it out...........if you want a good laugh.........
> 
> http://www.greaterfool.ca/2014/09/22/not-alone/
> 
> A bidding war of people with more more money than brains...........


That was in Sydney, Australia, not Vancouver.


----------



## sags

nobleea said:


> That was in Sydney, Australia, not Vancouver.


You are right..............my mistake.

Thanks for the correction............


----------



## sags

Berubeland said:


> I've heard but can't say for sure that there is a sizeable contingency of foreign investors that are buying up condos just as capital preservation. They don't even rent them out in some cases. They just want a relatively safe place to park money outside their country. Chinese and Middle Easterners. Not being Chinese or middle Eastern they don't generally have too much to do with me.


That would be similar to a report on CNBC about billionaires and the world's wealthiest, holding a high % of their wealth in cash.

They don't care about the "loss to inflation" and are interested in capital preservation, after losing so much in the last recession.

http://www.cnbc.com/id/102021996


----------



## NotMe

Back to OP question - prices are high because that's what people are paying for them. In other words, the market sets the price, just like it does for everything else. (It's why the Amazon Fire Phone is 99 cents and the iPhone 6 is $600 or whatever).

That's it, that's all. 

Now I think your real question is "Should Canadian prices be as high as they are?" and I don't know the answer to that. I just know today's market, not tommorow's. Everything else, including well reasoned arguments, is still conjecture.


----------



## Siwash

Homerhomer said:


> Interesting, are you around GTA? I have been looking to downsize but the way market is around here it is pretty difficult to find a property that makes sense, didn't think there would much in terms of foreclosures around here, would love to pick one up ;-)
> 
> On a 500k mortgage the 2.5% increase would mean about $700 extra in monthly payments (25 years term), with so many around here getting mortgages even higher than that to get into the housing market even this will create havoc ;-)


@Homer, why not rent for a few years? Sell now and get something decent... we did that... our rent is 1800 SFH on a 1/3 of an acre... GTA.. bungalow.. Loving it...

We are waiting out this craziness... if it corrects great, if it doesn't our cash is piling up right now in HISA, GICs and TFSAs


----------



## Siwash

NotMe said:


> Back to OP question - prices are high because that's what people are paying for them. In other words, the market sets the price, just like it does for everything else. (It's why the Amazon Fire Phone is 99 cents and the iPhone 6 is $600 or whatever).
> 
> That's it, that's all.
> 
> Now I think your real question is "Should Canadian prices be as high as they are?" and I don't know the answer to that. I just know today's market, not tommorow's. Everything else, including well reasoned arguments, is still conjecture.



Should they be this high? Lets consider the simple fact that my wage and your wage are barely keeping up with inflation. So no, this is NOT justified... and the labour market isn't even doing well.. not much job creation outside of Alberta


----------



## Siwash

Pluto said:


> I'm wondering if we can form the question more sharply. The question is, why are Canadian home prices so high? My question is high compared to what? or Where? Tokyo? Singapore? Berlin? Paris? San Fransisco? New York? London? Mexico city? Rome? and so on.
> 
> What I'm suggesting is there needs to be a more comprehensive comparison. Say compare Toronto and Vancouver to some world wide locations. It may be Canadian cities are not over valued compared to them. And with our falling dollar our homes may look really cheap to outsiders.


Okay, lets compare Toroto to Chicago, a city that is much more closely aligned to a world class status... Bigger metro area (9 mill), extremely important city in terms of finance, transport, manufacturing, etc... bigger better world class universities.. a spectacular waterfront (without an ounce of exaggeration), and so on... 

Check out what real estate costs there... I live in the GTA but I am very familiar with Chicago as I have family there... It kicks *** compare to T.O. in numerous departments... but their real estate is much cheaper...


----------



## Siwash

carverman said:


> Housing in most large cities in the world is very expensive, a lot more expensive than Toronto (not sure about Vancouver or Calgary).
> 
> How do people afford to buy a house in NYC, or even a downtown NYC apartment at the prices they are asking today?
> 
> What is it that makes housing so expensive in NYC, or London, or Tokyo?
> 
> Why do people that work there not choose to live 30 km outside of the city (or even farther) and
> commute into their work each morning, and thereby avoid the high cost of housing inside the major cities?
> 
> Question 1: Why do people pay the exorbitant real estate prices on condos in down town Toronto,
> when they might be able to afford a bigger home in the suburbs... about 30 to 50kms outside the GTA?
> 
> Question 2: Why are people willing to pay those high asking prices?


It's a myth that toronto condos are expensive.. some buildings are, but you can get decent ones for under $350, even under 300K...700 square foot or bigger.. it's semis and detached that is expensive - by Cdn standards


----------



## Siwash

Just a Guy said:


> I think this is also a bit of a misunderstanding for the majority of people. If you pay off your house, even in 15 years, it's unlikely you made any money if you sold. People always say, I bouht my house for $X and I sold it for $Y and made a bundle...
> 
> What they never factor in, of course, is all the hidden expenses. Even at 3%, over the life of the mortgage, you are paying more than the purchase price in interest. Then you factor in property taxes, realtor fees, maintenance, improvements, etc. and you're no where near making a profit in the majority of cases. If the interest rates are at the historical 8%, you pay more than three times the purchase price in interest alone over a 25 year mortgage. Not many people sell the house 4x higher than they bought (purchase price + interest).
> 
> Sure, you may have a forced savings plan, but it's certainly no investment...even if prices increase.
> 
> There is a big difference between a home and an investment, but few people seem to know that.


Agreed


----------



## NotMe

Should they be this high... hmmm to quote Keynes

"The market can remain irrational longer than you can remain solvent"

In other words, the shoulds is a dangerous game to play. 

It may well be that housing prices never go down again in my lifetime. It's in the realm of possibility.


----------



## sags

Seems the CMHC are wondering why Canadian prices are so much higher than US prices as well.

_“CMHC is analyzing these differences, in order to understand the reasons for the price differential, be they structural, temporary or reflective of relative overvaluation in Canada,” it added._

_Average Canadian home prices at the end of 2013 were about $400,000 on a cost-adjusted basis, compared with about $250,000 in the U.S._

http://www.cbc.ca/news/business/cmhc-probing-canadian-house-premium-to-u-s-prices-1.2843924


----------



## Nemo2

sags said:


> _Average Canadian home prices at the end of 2013 were about $400,000 on a cost-adjusted basis, compared with about $250,000 in the U.S._


When averaging the U.S. prices do they factor in all those $1 houses in Detroit (and elsewhere)?


----------



## Aliciadottor

*Geelong rental manager*

Why are home prices so high and when will they fall details http://www.cbc.ca/news/business/why-are-home-prices-so-high-and-when-will-they-fall-1.1350007







........................................
*Geelong rental manager*


----------



## Jorob199r

Cheap credit is the reason for high home prices. People are just playing with Monopoly money, so why not bid higher.
I would love for interest rates to go up. Sadly, I don't see it happening anytime soon.


----------



## banjopete

I think a huge part of it is that people don't understand their own finances beyond "I get this much on payday, minus my monthly payment for the mortgage is x, the car is x, the LOC is x, the credit card is x, child support is x" and so on, if there is still paycheque left over that means they can afford more monthly payments. Sadly I suppose that makes me a doomer but I don't have a lot of faith in my co-workers. I would bet, 9 times out of 10 that if you asked someone to even roughly diagram a time to buy vs time to keep saving/renting decision it would be laughable. Personal finances are the last taboos where I hang out. We have general apathy when it comes to employee matched rrsp contributions, how does one explain this?

Employer: I'll give you a 5% raise this year if you're willing to put aside 5% of your own paychecque.
Employee: mmm, is this a trick
Employer: no.
Employee: let me think about it
Employer: no problem you can sign up anytime and we'll match when you're ready if you go that way
Employee: okay that sounds better

This is exactly why we don't see DB pensions in most workplaces anymore, the smoke and mirrors of scary DIY rrsp decisions means this great perk is rarely taken advantage of so the employers save tons of money while looking like a great company.

Anyway I've wandered way away from my main point which is that most people are d u m b when if comes to anything remotely financially related, that is why home prices are so high in canada.


----------



## Hollisterpatric

*Property Management Geelong*

Why are home prices so high and when will they fall http://www.cbc.ca/news/business/why-are-home-prices-so-high-and-when-will-they-fall-1.1350007







.............................................
*Property Management Geelong*


----------



## RBull

Nemo2 said:


> When averaging the U.S. prices do they factor in all those $1 houses in Detroit (and elsewhere)?


Good point. 

I believe there are even some where people will pay or give you something to take them.


----------



## fraser

We have been living in a rental condo in Calgary for 18 months after 35 years of owning our own home. Prices have gone up, but our after tax investment returns have exceeded these increases. We stopped looking to buy when the market here became silly.

What has hit home to us is the economics of condos. We are far better off financially to rent at the moment. Our landlord makes 2.5 percent BEFORE assessments. A prior years condo assessment swallowed up 6-7 years of that return. No rush to buy for us-especially with the declining price of oil.

I believe that Canadian housing prices, in some markets, are overpriced. The Governor is right. Problem is some people do not want to hear it.


----------



## CharlesF.Donahue

Over the past several years, we’ve experienced an unmatched credit boom driven not only by low interest rates, but also by the availability of easy credit. While the increase of immigration and international money may have played out a role in real estate prices in Toronto and Vancouver.


----------



## none

It's driven by what charles says but also belief. Buying houses in many places just doesn't make economic sense but Canadian's have been conned into believing houses never go down or buy into that silly belief that you don't lose money until you sell.

I have a feeling that once people losing money on houses becomes the norm the general risk averse canadian psyche will kick and and sales will tank.

Then again who knows - belief is a powerful thing. The tulip bulb craze lasted 3 years and that was just for stupid flowers.


----------



## Romy

Because Canada is in a real estate bubble. Once mortgage interest rates rise, the bubble will burst. Might take a few more years.


----------



## sags

Suncor announced another 1000 to the rising number of layoffs in Alberta.

I hope people have money tucked away to weather the financial storm that appears to be bearing down on them.


----------



## CrashTestSnoopy

Romy said:


> Because Canada is in a real estate bubble. Once mortgage interest rates rise, the bubble will burst. Might take a few more years.


Might even take longer than that with BoC interest rate cut announcement. I've been looking to buy and would rather just bite the bullet on these inflated prices than to wait years for a significant correction.


----------



## MoreMiles

It is over priced for local Canadians but not immigrants with oversea money. Ask any knowledgeable realtor, the hottest properties are those around 1 to 2 million dollars. Chinese immigrants buy them in cash so local buyers do not win in multiple offers. This past weekend, there was this house in Thornhill listed for $1.4 m and sold in 1 week with 7 offers, all Chinese, for $1.6m so how do local income or mortgage have to do with the price? And guess what?! His neighbour will now sell their house for $1.6 m because the bar has just been raised.

Local residents on mortgage can only afford condos now in core Toronto unless you live in Ajax or Newmarket.


----------



## Just a Guy

With this rate cut, we can probably expect housing to increase in prices as people can now afford to finance more...


----------



## Siciliano698

"The Financial System has come close to a meltdown, the first time since the Great Depression, that is the crucial difference this time."

He said the Capital Base of banks has become severely impaired and are unwilling to lend on the money provided to them by Central Banks, but they will lend on property until they realise that the price of property is dependent on their willingness to lend against it,the unwillingness of banks to pass on their funding will render an economic slowdown and bring us into the end of an era.

This is quoted from George Soros from one of his books.... are we heading towards this point in Canada in regards to real estate and economics?


----------



## Just a Guy

Except that banks aren't lending as freely on property right now. I was talking to my mortgage broker the other day and he said he could get clients a credit card large enough to buy a house, but couldn't qualify them for a mortgage because of the ways banks are ignoring net worth in favour of reported income.

I've seen banks refuse to lend anything on clear title properties...forget 80% LTV, not 50% LTV, I mean 0%. That makes me think they either don't see real estate as safe (which I doubt because they'll lend you an unsecured loan) or the Feds are making it too restrictive.


----------



## sags

Some have viewed the TD Bank's decision not to lower interest rates in lockstep with the BOC, as a sign the banks are concerned about further mortgage lending.

I am not sure it is all that easy to secure a LOC these days, but perhaps because default on a home represents a big cost to the banks to maintain the property until it is sold.

Banks aren't set up to manage real estate portfolios, and may find it easier to write off LOC defaults as a business loss, than maintaining homes.

I remember destroying unsold new auto parts, because it was easier and more profitable to destroy them and claim the tax benefits, than to merchandise them.


----------



## HaroldCrump

If none of the major banks are lowering their mortgage rates because of BOC cut as well as falling GOC bond yields, then there will be another cut coming, possibly in the spring, in time to boost the spring home sales.
If oil prices do not recover through the summer, expect at least 1 more rate cut by Sep. possibly 2 more (overnight rate down to 0.25%).


----------



## CrashTestSnoopy

In retrospect to the 07/08 financial crisis, I remember shopping for homes and the market had not really dropped. In fact homes on premium lots did not budge at all. We eventually settled on one in the midst of a bidding war and paid more than the asking price. At the time, we were worried it might not ever be worth more than 400k. Now having sold it and shopping around, even 500k backing on to a ravine with the left side facing a park is unheard of unless you look in the extreme boonies. 

In hindsight 200/225 the rates at the time were already very low. I think prime at the time in 09 was 2.25? Every bank we inquired with were trying to lock us into a 5 yr fixed rate going with the scare mongering pitch lines “It may go up soon so better to lock it in” “I’m trying to protect you while the rates are low.” “You never know what will happen next year.” 5 yr fixed at the time was around 4% and being first time home buyers, we did not know better and were going to nod our heads with the 5 yr fixed. Fortunately some “revolutionary” lady at TD was going on a locking spree with her clients on 1 yr fixed rates at 2.25% and that’s when I realized after more inquiries that even if it goes up, it wouldn’t be that much if at all and every year I could just negotiate the rate. I went back to the “specialist” that was going to lock me in at 5 yrs and that straighten him up to eventually give me 1.85% I still remember vividly the rates we settled on the years afterwards. Year 2 was 1.75% then 1.9% 1.99% and last year was 2.39% I negotiated every single year with the following sentence “This bank is giving me x% on a 1yr fixed. Can you beat this?” 

So yes the rates did eventually go up but really by how much compared to a compounded 5 years at 4%? I’m not going to do the math in this post but that’s a lot of money saved that could have easily gone to the banks. People need to be more informed.

I’m kind of going off on a tangent here but the hindsight 200/225 I was trying to get at is I believe given the global financial uncertainty at the time, BoC kept the rates low to prevent a meltdown similar to the US. This as a result gave foreign investors opportunity to buy properties here that was essentially free money at those rates. (It’s still free money right now in my opinion). As a result, our economy benefitted from foreign RE investment and fast forward 5 years from today, it doesn’t seem like this will change. Rates wise, we are pretty much going back to the same 2.25 - 2.75% range. The only difference is, Canadians are now feeling the pinch with foreigners / investors that have drove up the RE prices during all this time. It didn’t happen overnight but it had been consistently going in one direction. Up. If property A is sold for 1.5m, guess what property B right next door is going to be listed for. 

There are lots of discussions in regards to this and all sorts of finger pointing. I mentioned the foreigners / investors but I don’t mean they are the problem. There were opportunities and they took them. Who allowed them these opportunities? That’s a different discussion. Our economy needed the money (without the foreign investors, would we have been in a recession a lot sooner?), we as a country are essentially a one trick oil pony, and here we are today. 

I guess what I’m trying to say is, as much as I almost feel like a 2nd class Canadian citizen, there’s no point to feel angry or frustrated with the current situation that is unlikely going to change. It will be hard to find another property we can call home but eventually we will find it. Sure, I can settle for a box in the sky, but I’m not actually there yet and will do what I can for something better. Adapting is key whether it’s your financial situation, demands of the economy and compromises that you once would not consider.


----------



## lightcycle

CrashTestSnoopy said:


> In hindsight 200/225 the rates at the time were already very low.
> [...]
> I’m kind of going off on a tangent here but the hindsight 200/225


Sorry, this kind of stuck out for me cause you used it twice, but 200/225 is actually bad vision. It means you can see at 200 feet what the average person can see at 225 feet. I think the expression is "hindsight is 20/20"...


----------



## CrashTestSnoopy

lightcycle said:


> Sorry, this kind of stuck out for me cause you used it twice, but 200/225 is actually bad vision. It means you can see at 200 feet what the average people can see at 225 feet. I think the expression is "hindsight is 20/20"...


I'm well aware of the "hindsight is 20/20" expression and the 200/225 is my twist on it. That is my vision for the past 20 yrs whether I'm staring 10 hours a day on a screen, reading a book in dim light or using natural correction methods. Also, I'm not a financial analyst or anyone with expert advice so my hindsight will never be 20/20 in financial matters. What I write about is just based on my experience and hopefully it may help others. I also find writing sometimes helps me think better when I'm not sure about something. 20/20 is too absolute for me, so I'd rather take a more modest approach.


----------



## lightcycle

Ok. Makes sense.


----------



## CharlesF.Donahue

Cost of building in Canada is 150% higher than the US - taxes, cost of labor, materials, homes have to be insulated, serviced land. However, when it comes to the costs of goods in Canada, they are also higher than in the US.


----------



## CrashTestSnoopy

Almost everything is higher in Canada. Colder as well and a crappier economy. The 2 main reasons I haven't gone south yet is health care and less chance of getting shot being up here.


----------



## OhGreatGuru

Just a Guy said:


> Think supply and demand here...
> 
> Here in Canada, we've got tons of land...Canada should be cheaper...heck, we've got more land than the USA and 1/10th the population...there's no supply problem here...


This is a bit of myth, fostered by Canada's large land area. The amount of land in areas where people actually want to live and can find work is much more limited. And the amount of immediately developable land is even smaller, and mostly owned by an oligopoly of large development companies.


----------



## sags

OhGreatGuru said:


> This is a bit of myth, fostered by Canada's large land area. The amount of land in areas where people actually want to live and can find work is much more limited. And the amount of immediately developable land is even smaller,* and mostly owned by an oligopoly of large development companies*.


The bolded part is so true.

A friend and myself were clearing land of some trees, that was owned by a guy who was developing building lots from his 100 acres on the edge of the city.

"These lots you are clearing" he said, " I will sell for $100,000 each. Those lots across the road I will sell for more".

I asked him "why the difference in price" and he laughed and said............."because I can".


----------



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## hyperthermia

One of the reasons is the income level in Canada is very high. 

The average family income nation wide is about or just over $100,000 now, with a median of about $80,000 (significantly higher than the US and most Western European countries). Not to mention on top of that the interest rate is next to nothing and there are so many rich people moving to Canada each year (mostly Vancouver). 

Pretty much everybody I knew from junior high, high school, and uni are now getting paid between 60-100k+ and we are all in our mid-20s. Basically each one of us is able to afford a small condo or even a small semi-detached somewhere in the GTA as long as we don't have much debts.


----------



## CrashTestSnoopy

Keep in mind our costs are higher. Gross pay is just a pretty number while Net pay is the reality after significant filtering of it. We pay more for just about everything so subtract net with expenses and this is why some can't afford to buy even a condo despite low interest rates. Unfortunately, the market is still dictated by demand and it won't slow down even if some people can't keep up with it.


----------



## Causalien

Just some interesting data. Word on the street is that Vancouver detached houses are being sold at about 40% higher than last year. This is a larger increase than the 20% I observed previously. Bidding war is back apparently and the supply is half of last year.

Don't get why, everything points to foreign exchange, but our government already cut off the Chinese immigration. My sources observed a significant increase in new Chinese immigrants. It seems that all those people who bought houses but were living in China have since moved their family over this year... Probably due to the tightening of immigration law that actually forces you to be in Canada for 6 months at a time instead of the loop hole before.


----------



## Cdnwife

Just went to someone's home (they rent In Vancouver near Marpole) to discover a for sale sign. It went up last week while he was on vacation and the property has already sold. 1.2 M for a tear down. The lot is not huge so this just blows my mind.


----------



## Causalien

Cdnwife said:


> Just went to someone's home (they rent In Vancouver near Marpole) to discover a for sale sign. It went up last week while he was on vacation and the property has already sold. 1.2 M for a tear down. The lot is not huge so this just blows my mind.


Got an estimate for squarefootage?


----------



## diharv

According to Garth Turner's latest post the theory that rich foreigners coming to Canada ,buying up everything and driving up the realestate prices is largely a myth propagated by realtors to get people to " buy now or be shut out of the market forever because real estate never goes down and this time it's different ".
http://www.greaterfool.ca/


----------



## sags

The average household income in Vancouver is $73,000 per year.

The average house cost is $1,300,000

Extreme leverage at record low interest rates, with substantial risk taken on by parents mortgaging their own homes to finance their kid's purchase, drives the market.

How people can live when they spend all of their net income on housing is beyond my comprehension.

If these $1.3 Million dollar homes were brand new, well built luxury homes that will require little maintenance for 25 years, then maybe they could tough it out.

But they aren't. These are "average" homes, often older and requiring a lot of ongoing maintenance.

Been there.........done that. It costs a lot of time and money to keep an old home in good shape.

I did most of the work myself, and we still spent, spent, spent. How "handy" are all these homeowners ?

It seemed like I was at the home hardware store every other day for something.

The home price crash in Vancouver............if it does happen...........is going to be epic.


----------



## Cdnwife

Causalien said:


> Got an estimate for squarefootage?


Just under 3900sqft for the lot. Apparently plans are to build a duplex. The lot in Burnaby across from a daycare is splitting into two and each home 1.888M. Craziness.


----------



## james4beach

I think these are the main reasons Canadian home prices are so high:

1. It's been a long time since Canadians have been burned and felt pain from rapidly declining home prices -- this lack of fear results in over-confidence and leveraged risk-taking

2. The government has aggressively inflated the real estate market using CMHC, which has grown a huge balance sheet and which underpins the entire Canadian housing market

3. The Bank of Canada aggressively inflated the real estate market with record-low (near zero!) interest rates for a prolonged time

4. Bail-outs of the Big Five banks (from the Federal Reserve, Bank of Canada, CMHC, and CPP) during the 2008 crisis prevented a normalization of both home prices and lending risk. Thus, instead of adjusting to real risks, both lenders and borrowers continued their trajectory as if nothing has happened. This is actually the point at which Canadian debt-to-income ratios starts to really go nuts and Canadian home prices diverge from US and other global home prices. Just look at the charts and you'll see it.


----------



## lonewolf

There is talk of getting rid of Fanni & Fredi Frankenstein in the United States. Getting rid of 30 year mortgages will lower prices on homes. Buyers will have less cash when they can not use 30 years worth of future earnings to purchase a home. Maybe CMHC will be abolished in Canada ?

Jamesforbeach is right CMHC has helped pushed up home prices. ( who knows how much corruption tax payers & home buyers are paying to CMHC, If it is anything close to Fanni & Fredi it is not good ) 


The government is not efficient all the student loans they provide @ the drop of a hat, push up the cost of going to school by giving students more money they can put towards education.

They try to make it more affordable for things like housing & education & they (government) just makes matters worse


----------



## Davis

It's easy to throw around allegations like corruption as long as you don't have to provide evidence. I'm not saying that lonewolf beats his wife everyday. Really I'm not.


----------



## dotnet_nerd

Davis said:


> It's easy to throw around allegations like corruption as long as you don't have to provide evidence. I'm not saying that lonewolf beats his wife everyday. Really I'm not.


How about you Davis? Have you stopped beating your wife?


----------



## Davis

Don't have a wife, so the issue doesn't come up.


----------



## lonewolf

I remember reading a few years back it was something like ten or 100 of thousands of accountants needing a decade or 2 to figure out all the money that has been scammed from Fanni & Fredyfrankienstien

I say get rid of CMHC just so the possibility of it happening here is eliminated. Are people here scamming CMHC I do not know I just say get rid of the potential so it cant happen.


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## Just a Guy

I know that CMHC has been scammed, I've seen many properties that have had "questionable" financing done to them over the years. 

Personally, I've never used CMHC in my life, as I don't like paying fees and it doesn't protect the buyer, but I do understand why it exists. 

P.S. I routinely beat my wife and kids...usually at cards, but also most games.


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## james4beach

CMHC doesn't have to involve fraud to be dangerous. There's danger simply due to them pumping up the real estate market... banks can dump real estate risk to the government (CMHC) which causes a huge stimulus effect.

The government (i.e. you and I) take on the risk that the banks have offloaded. If that $800 billion portfolio ever turns sour -- which it will, eventually -- the federal government will be in a very tough position.

Nothing comes for free. The current perception is that CMHC stimulates the housing market without any ill effect. The problem though is that the government has taken on the risk, and it could result in them facing future losses, which would mean they'd have to raise taxes or print money.


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## sags

I know that "appraisals" for us when we owned our home, consisted of the mortgage person asking us what we thought our house was worth.

After they put down the number, they would say........."there, now you have lots of equity in the house".

Only once can I remember a guy actually coming to look at the house. He measured this and that and was there for an hour or so.

His appraisal came in so low that the bank threw it out and made up their own number.

I doubt CMHC ever looks at a single property they insure.


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## Davis

So it's a good thing that this insurance program levies premiums on insured mortgages, and that CMHC has tightened the screws so that it is more difficult to get mortgage insurance (no 30-year mortgage amortizations, applicatns have to be able to afford a five-year fixed-rate mortgage even if they are getting a variable rate or shorter term mortgage, etc.) This doesn't scream great risk to me at all. That and the fact that CMHC was created in 1944 tells me that it is not a disaster waiting to happen. 

Could be it be that critics of CMHC are in the pay of private mortgage insurers? I don't have evidence of that, but I'll just plant the notion in people's minds by asking the question.


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## sags

Might the biggest danger be in the derivatives that banks have been selling for years as AAA CMHC guaranteed mortgage bundles ?

It is a CMHC guarantee to private investors that the underlying asset will not fall in value, and the investment will always be worth at least 100%.

Should Canadian home prices fall and the underlying securities become worth less than 100%, investors will be lined up at the CMHC door for their insurance money.

Remember the big smozzle in the US over who owns the mortgage ? 

A home owner signs the deal with the bank and they sell the mortgage to someone else who could sell it to someone else.

They had a terrible time in the US trying to figure out who exactly owns the mortgage.

The mortgage companies couldn't prove they owned the mortgage for lack of documentation, so they had "robo signers" illegally making up documentation.

There were lots of stories of people who simply refused to pay until ownership was proven in court............and it never was.

Strange that after watching what happened in the US, our bank regulators allowed the same thing to happen in Canada.

I read the government has changed the rules on the banks selling derivatives now, but there is still all those billions in outstanding liabilities.


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## Just a Guy

Davis said:


> So it's a good thing that this insurance program levies premiums on insured mortgages, and that CMHC has tightened the screws so that it is more difficult to get mortgage insurance (no 30-year mortgage amortizations, applicatns have to be able to afford a five-year fixed-rate mortgage even if they are getting a variable rate or shorter term mortgage, etc.) This doesn't scream great risk to me at all. That and the fact that CMHC was created in 1944 tells me that it is not a disaster waiting to happen.
> 
> Could be it be that critics of CMHC are in the pay of private mortgage insurers? I don't have evidence of that, but I'll just plant the notion in people's minds by asking the question.


Hosing prices have never seen a spike in housing prices like the past 20 years since 1944. Home prices have been inflated by cheap money (low interest) and high demand. As sags pointed out, if the values correct, then we'll see a crisis.

In the last two years, I've seen houses sell for 50% of their previous sold price (usually around 2007/8). Real estate prices tend to lag the factor which triggers it. If interest rates went up a couple of points, I'd expect the real crisis wouldn't hit for 3-5 years as mortgages come due for renewal and values drop because people can't sell.

The news reports out of calgary right now are nothing...if oil doesn't increase, that market will really get hit hard in a couple years. Right now, the breaks were applied by the market, but no seller is actually dropping their prices because they can still afford to wait (if you read the newspapers however, they are implying panic). If nothing sells for a few months, then. We may see prices start to correct a little...

If the jobs are lost however, and people are forced to sell because they are unemployed for a year or two, THEN we'll see something interesting in terms of market movement and panic. Suddenly calgary, darling of the real estate market in 2013/14 may become the next Detroit (okay, maybe that's a bit much, but it'll be a financial nightmare full of foreclosures).


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## sags

Toronto realtors and the media proudly announce that the "average" home in the GTA now costs more than 1 million dollars.

But there is a slight problem with that.

CMHC only offers insurance on homes up to 1 Million dollars, and without the necessary $240,000 down payment, buyers are heading over to see the friendly subprime mortgage lenders.

The subprime lenders offer a down payment in the form of a second mortgage on the property, for slightly higher fees.............like 12% interest.

They are a small dent in the market now at 3%.........but continue to gain market share.

Benjamin Tal, chief economist for the CIBC bank says CMHC rules are forcing people into the arms of the subprime lenders, and the limit is arbitrary.

But today, Mr. Tal was on BNN showing charts that explain how jobs part time low income jobs have been rising for decades, while full time well paid jobs have fallen off a cliff.

How does Mr. Tal expect the low income part time workers to afford homes, that a million dollar insurance limit is too low ?

But then...........the average family income in Toronto is a whopping $72,000.

A whole lot of Canadians are in for a rude awakening. Interest rates start climbing...........layoffs.........stagnant wages........demographics.........collateralized mortgages.........HELOCs........

Private mortgage insurer Genworth in the US is barely avoiding bankruptcy. Some say they are forgiving loans to hide the rise in defaults.


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## sags

JAG

From what I read on Garth Turner's blog, the lenders don't have to wait for renewal to demand the difference. (variable rate mortgages)

_An industry site, MortgageBroker News, broke the story this week that the bank has changed the fine print in its contracts for conventional (no CMHC insurance) variable-rate mortgages – the kind where your interest charge rises each time the central bank causes primes to move. But it’s not rising rates the bank is worried about, rather falling real estate values.

Here’s the change:* If, at any time or for any reason*, the value of your house drops to a level which results in your mortgage exceeding 80% of it, the bank can demand you write a cheque to cover the difference. If you don’t, your mortgage goes into default. You also have the right to have your property appraised (at your cost) to prove it’s worth at least 80% of the loaned amount, whenever the bank demands such proof.
_

http://www.greaterfool.ca/2014/01/22/surprise-8/


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## Just a Guy

They don't have to wait, but they generally won't rock the boat unless something big threatens them. If they need liquidity for example. Otherwise they may leave you alone until something, like a renewal draws their attention...


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## carverman

sags said:


> A whole lot of Canadians are in for a rude awakening. Interest rates start climbing...........layoffs.........stagnant wages........demographics.........collateralized mortgages.........HELOCs........


You must have that Crystal Skull (as in Indiana Jones movie) that you are staring into to get this dire prediction, SAGs,



> *Canada could be facing a mortgage nightmare in the next few years with an estimated 30,000 subprime loans* - now dubbed "orphan loans" - coming up for renewal in the next few years, according to a report in the Financial Post.
> 
> So concerned about the situation at hand, *the industry recently approached the federal government with a request for a bailout - specifically to participate in a $1-billion fund to help finance the coming flood of orphan mortgages. *Several alternative mortgage lenders began lobbying the government in the spring 2009 on the same issue but still have not gotten a response.



http://www.mortgagebrokernews.ca/ne...mess-on-the-horizon-financial-post-43659.aspx
What happened in the US in 2008/2009 could happen here as well.


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## CharlesF.Donahue

The major truth about the Canadian housing market are firstly we have seen that a market was continues to live in a estate of euphoria and confusion. 
The main reason is that the US government has decided to add a stronger jobs that was around 195,000 last month, which is one of the reason for the rising of market. From this market was gain the 1% profit, the home price of market is so high because the Canada’s unemployment rate didn't budge last month.


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## Jagt Mirage

While I'm bullish on RE, I'm not foolish enough to leverage over 80% on my properties. That's just asking for trouble. On the other hand, Garth Turner has been a well-known RE bear and spewing the same apocalyptic prophesy about a US style housing collapse here for years. So I'd take what he say which a huge grain of salt.


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## OnlyMyOpinion

Calling him well known gives him too much credit.


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## none

Jagt Mirage said:


> While I'm bullish on RE, I'm not foolish enough to leverage over 80% on my properties. That's just asking for trouble. On the other hand, Garth Turner has been a well-known RE bear and spewing the same apocalyptic prophesy about a US style housing collapse here for years. So I'd take what he say which a huge grain of salt.


It's hard to predict irrational exuberance. The dot-com bubble lasted far longer than many people predicted but it came crashing down eventually even though lots of people yelled: "This is different!". As for housing, the only way for house prices to stay where they are is if interest rates NEVER increase. Interest rates will eventually - that's not a question and the raging US economy may drag our rates with them. Tick toc.


My take on Garth is that of course he's right but he's just loud. MANY people believe the same as him - it's not that insightful really.


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## Jagt Mirage

none said:


> It's hard to predict irrational exuberance. The dot-com bubble lasted far longer than many people predicted but it came crashing down eventually even though lots of people yelled: "This is different!". As for housing, the only way for house prices to stay where they are is if interest rates NEVER increase. Interest rates will eventually - that's not a question and the raging US economy may drag our rates with them. Tick toc.
> 
> 
> My take on Garth is that of course he's right but he's just loud. MANY people believe the same as him - it's not that insightful really.


you're suggesting that housing appreciation is only due to low interest rates, which I think it's pretty easy to prove is false. If you look at overall RE prices over the last 50 years you'll see a very predictable, almost linear growth curve with a correction every 10/15 years or so. Alot of those gains are during times of high interest. While higher interest rates will no doubt slow down the red hot housing market, I'm highly skeptical that it'll cause the market to crash unless it propagates some sort of chain-reaction like it did in the US market with US lenders and bad debt, which Canadian banks have proven to have much less exposure to in the last few years due to its much more regulated market.

As for calling Garth "right", that's like saying anybody who predicts something will happen given an indefinite amount of time is right, even if it takes him decades of being wrong.


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## sags

OnlyMyOpinion said:


> Calling him well known gives him too much credit.


Aside from differing with some on real estate values, he has given a lot of good advice and insight, especially in the last year when he included many other topics in his blogs.

(Buying US real estate at the bottom, having a well diversified portfolio, discussing interest rates and economic policy, retirements, and TFSAs)

Is there another former Minister of Revenue giving daily insight into the inner workings of government in Canada ?

Besides.............Harper dislikes him so he can't be all bad


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## none

Jagt Mirage said:


> you're suggesting that housing appreciation is only due to low interest rates, which I think it's pretty easy to prove is false. If you look at overall RE prices over the last 50 years you'll see a very predictable, almost linear growth curve with a correction every 10/15 years or so. Alot of those gains are during times of high interest. While higher interest rates will no doubt slow down the red hot housing market, I'm highly skeptical that it'll cause the market to crash unless it propagates some sort of chain-reaction like it did in the US market with US lenders and bad debt, which Canadian banks have proven to have much less exposure to in the last few years due to its much more regulated market.
> 
> As for calling Garth "right", that's like saying anybody who predicts something will happen given an indefinite amount of time is right, even if it takes him decades of being wrong.


Actually you're only partly correct. Yes, houses tend to increase in value, however, much of this is illusion. Much of the appreciation is due to inflation and not due to gains. That's why investing wins over the long term. let's look at the US mark b/c the data are better (and please, save the CANADA is different stuff).









People don't buy houses - they ALWAYS rent them. What I mean is that the decision is based on carrying costs - not really the purchase price. I ask you this: IF interest rates were 10% - would houses still be sold at today's prices? Of course not, the carrying costs would simply be too much. THat is why there is a very strong correlation, and a likely causal mechanism, between low interest rates (and please save the causation does not mean causation argument: I'm a statistician, I get it - the trick is that it doesn't preclude causation either but actually suggests it).

As for Garth being right, of course he is. Prediction is a tough game and timing many things is difficult. It's like timing the market. Can I predict whether I'll be positive or negative in 3 years? Not all that well but can I in 20 ? ABSOLUTELY.

The only way the Canadian market can stay at it's current level is if interest rates NEVER go up. Not now, not in 5, 10, or 50 years. When they do, people will either not be able to afford their houses or the rent vs buy equation will further go into the rent camp and people will realize that buying houses at the current levels is stupid and they will rent, which will reduce demand, and reduce prices.


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## Jagt Mirage

none said:


> Actually you're only partly correct. Yes, houses tend to increase in value, however, much of this is illusion. Much of the appreciation is due to inflation and not due to gains. That's why investing wins over the long term. let's look at the US mark b/c the data are better (and please, save the CANADA is different stuff).
> 
> View attachment 4001
> 
> 
> People don't buy houses - they ALWAYS rent them. What I mean is that the decision is based on carrying costs - not really the purchase price. I ask you this: IF interest rates were 10% - would houses still be sold at today's prices? Of course not, the carrying costs would simply be too much. THat is why there is a very strong correlation, and a likely causal mechanism, between low interest rates (and please save the causation does not mean causation argument: I'm a statistician, I get it - the trick is that it doesn't preclude causation either but actually suggests it).
> 
> As for Garth being right, of course he is. Prediction is a tough game and timing many things is difficult. It's like timing the market. Can I predict whether I'll be positive or negative in 3 years? Not all that well but can I in 20 ? ABSOLUTELY.
> 
> The only way the Canadian market can stay at it's current level is if interest rates NEVER go up. Not now, not in 5, 10, or 50 years. When they do, people will either not be able to afford their houses or the rent vs buy equation will further go into the rent camp and people will realize that buying houses at the current levels is stupid and they will rent, which will reduce demand, and reduce prices.


ok. so now you've added another factor: inflation. Then do you care to explain why Canadian inflation has never been above 3% in the last 5 years (and it's only ever close to 3% in one year 2011, most years were between 1-2 and a few were under 1% and yet my house has been appreciating at more than double that rate each and every year ? granted, it doesn't happen in every market, and I'm not professing that it does happen in every market, but definitely in some markets RE easily beats most forms of investment，　ｇＴＡ　ｂｅｉｎｇ one of those. I may not be a statistician (but I am a data guy FYI), but that's pretty clear to me housing appreciating is due to more than just interest and inflation. If overnight there is a mass increase in interest rate as you suggest, sure there will be stagnation, if even a correction, but it won't last. In 2-3 years it'll recover and continue on it's upwards trajectory. If you study the CREA data you'll see that in the last few corrections, basically all the corrected value was erased in about 3-4 years, and afterwards it just resumed it's upward trend, and if you superimpose Canadian inflation data you'll see that the appreciation rate far outpaces inflation.

As for Garth being right again.. no I don't think it is. If his position is that housing prices EVENTUALLY corrects and drops compare to the previous year. Then sure he's right. But it's also an irrelevent and pointless prediction, as pretty much everybody knows that and has been historically proven. But that's not what he's predicting. Ever since atleast 2010 I've read his words suggesting a correction will happen THE FOLLOWING YEAR, which it hasn't yet. So he's been wrong atleast 5 times without being right once. If eventually 10 years from now there is a correction, does that make all his wrong predictions right? no, I'm afraid it doesn't. Taking 15 wrongs to make one right doesn't mean you've always been right.


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## Just a Guy

If you truly believe inflation has remaind under 3%, then you obviously don't actually do any of the shopping. It's well known that the government changes the basket of goods they use to calculate inflation to ensure the appearance of inflation remains low. My food costs have increased well beyond 3%, my bills may not, but the amount I get has decreased (manufacturers have reduced the amount in a package, yet charge the same), and the products I buy have also changed (less steak, more pasta).

As for the historical increase in prices, it was very steady, until the last say 15 years, then there is a sharp incline.

Historical data, outside of GTA and Vancouver, suggests that house prices should be about 2.5-3x the average yearly income. The historical average mortgage rate used to be 8%. The price of a home was based on its affordability based on the income of the buyer.

When money got cheap, people could afford to pay more. Realtors changed their tactics to "buy the most house you can afford", as it increased their commissions. Banks, who make a killing on mortgages, became addicted to increased profits, so lending criteria was softened...

The number of new houses however, remained fairly low compared to the number of new buyers (it takes a lot less time to create a buyer by lowering criteria than it does to build a house), so a supply and demand balance became unbalanced.

People like Bush said, "everyone deserves to own their own home"...

Now you have multiple people looking at a limited supply, money is cheap, people can afford to bid up the price of homes, since they can still make the payments...so prices increased. 

Interest rates continued to decrease, making people qualify for even more amounts, all to be thrown at homeowners in an effort to "get the house they deserved". 

Many people today have the most home that they can afford...minimum downpayments, longest amortization, at interest rates below 3%...and most of them haven't had a raise in years.

What happens if interest rates rise, and they go for their renewal and face a significant increase in their required payments? It doesn't take much of a rise in interest rates to affect they payment significantly (play with a payment calculator if you don't believe me). They are forced to sell, or get a raise.

What happens when a lot of people all want to sell at the same time, but the number of qualified buyers goes down? The pendulum swings the other way...you either have to cut your price and take a loss, or walk away. If the place is CMHC insured, the banks, while complaining publicly, don't care because they can sell it low, get their money and a new mortgage on the place to boot...as long as CMHC lasts at least. 

If interest rates rise, I thin the sure money is on a huge correction in home prices. Back to where it should be on the chart after the dust clears (it'll overcorrect first of course).


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## marina628

I don't think there is any logical explanation for what is occurring in the markets these days ,Bowmanville is not Toronto and in November a house sold on a street for $260,000 and last week the identical house sold for $304,000 with less upgrades. We seen a house listed for $350,000 go for $420,000 last week and our agent told us the Toronto buyers are coming as far east as Newcastle and bidding up the homes. When we bought our first home we were only 24 years old and we believed we should be mortgage free by the time we are 50 so you spend that last 10-15 years of work socking away for retirement. We were so surprised to see friends and some family who owned a home for 20 years go to take out new 25 year mortgages on bigger homes and I bet some of them in their 50s still have 25 years to go to pay the house off.
I have a friend who did one of these 40 year mortgages to move from a townhouse to a nice detached in Whitby and she was 54 when she did this LOL


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## OnlyMyOpinion

marina628 said:


> we believed we should be mortgage free by the time we are 50 so you spend that last 10-15 years of work socking away for retirement. We were so surprised to see friends and some family who owned a home for 20 years go to take out new 25 year mortgages on bigger homes and I bet some of them in their 50s still have 25 years to go to pay the house off. I have a friend who did one of these 40 year mortgages to move from a townhouse to a nice detached in Whitby and she was 54 when she did this LOL


We've seen this among some as well. Haven't asked them what their plan is, so can only guess that it may be a combination of: i the kids are gone and aren't costing us so we have more money, ii we are in our peak earning years so have more money, iii we need a bigger house for all of this stuff, iv we don't really have a plan and dont' realize how quickly the next 15 yrs will go and we're ready to retire - oops, what about the mortgage and this expensive big house?


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## marina628

I also do not understand the logic of 2 people with their kids gone off deciding that is the time to upgrade to a bigger home ,I admit my home is large but I had my brother ,my parents and our kids all living here until a year or so ago and I need the space so i can move around in my wheelchair without taking out some walls lol .My brother in law is 60 years old and he and his wife and going to build on a 2 level addition this year so they can have a master and nice bath on main floor rather than just sell the darn thing and buy a bungalow.Of course they will be borrowing for this too...


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## Jagt Mirage

Just a Guy said:


> If you truly believe inflation has remaind under 3%, then you obviously don't actually do any of the shopping. It's well known that the government changes the basket of goods they use to calculate inflation to ensure the appearance of inflation remains low. My food costs have increased well beyond 3%, my bills may not, but the amount I get has decreased (manufacturers have reduced the amount in a package, yet charge the same), and the products I buy have also changed (less steak, more pasta).Now you have multiple people looking at a limited supply, money is cheap, people can afford to bid up the price of homes, since they can still make the payments...so prices increased.
> 
> Interest rates continued to decrease, making people qualify for even more amounts, all to be thrown at homeowners in an effort to "get the house they deserved".
> 
> Many people today have the most home that they can afford...minimum downpayments, longest amortization, at interest rates below 3%...and most of them haven't had a raise in years.
> 
> What happens if interest rates rise, and they go for their renewal and face a significant increase in their required payments? It doesn't take much of a rise in interest rates to affect they payment significantly (play with a payment calculator if you don't believe me). They are forced to sell, or get a raise.


Couple of things. First None is suggesting that inflation is the cause for housing increase, that and low interest. As he didn't state any specific group of products I'm assuming he means the official CPI rate and my assertion is overall inflation can't be the only factor influencing housing appreciation, as the rate of "inflation" for homes far exceeds that of the average CPI inflation rate.

Secondly, I disagree that any significant portion of the homeowners are barely making minimum payments. The bank's are regulated to specifically prevent that from happening. Sure you can go to a B lender to get more risky mortgages, but I think the idea that they comprise any significant portion of all the outstanding mortgages is grossly exaggerated. 

Thirdly, while I agree interest rate rise will affect the housing market you're forgetting something. Who sets the interest rate? The Bank of Canada。 Do you really think the BoC will raise rates to the level where it would propagate mass foreclosures? Give Poloz a bit more credit. He's not stupid. The general rules are unless there is significant inflation, BoC would rather keep rates low to promote growth, and as we've already talked about earlier, the official rate of inflation is well below BoC target of 3%. So the argument is then, what happens if inflation goes up? well, if we go by what None is suggesting, housing prices would've gone up too. So you see, the argument is a self-defeating one. You guys are saying RE will tank if rates go up.. but rates won't go up　ｕｎｌｅｓｓ　ｉｎｆｌａｔｉｏｎ　ｉｓ　ｈｉｇｈ，　ｗｈｉｃｈ　ｍｅａｎｓ　ＲＥ　ｉｓ　ｄｏｉｎｇ　ｗｅｌｌ　ａｎｄ　ａｐｐｒｅｃｉａｔｉｎｇ．


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## none

Jagt Mirage said:


> Couple of things. First None is suggesting that inflation is the cause for housing increase, that and low interest. As he didn't state any specific group of products I'm assuming he means the official CPI rate and my assertion is overall inflation can't be the only factor influencing housing appreciation, as the rate of "inflation" for homes far exceeds that of the average CPI inflation rate.


No, I said that historically houses on average increase in value close to inflation. Something else has happened in the last decade+ indicating a new reality or something else. Like extremely low interest rates that results in a 500K house at 2.5% costing the same as a 250K house at 5%. It's the same monthly payment. The carrying costs are the same. It's obvious what's going on here.



Jagt Mirage said:


> Secondly, I disagree that any significant portion of the homeowners are barely making minimum payments. The bank's are regulated to specifically prevent that from happening. Sure you can go to a B lender to get more risky mortgages, but I think the idea that they comprise any significant portion of all the outstanding mortgages is grossly exaggerated.


Whether this is true or not I don't know. I do know that people do not losing vast amounts of money. Once that starts to happen the rats will flee the ship. This always happens in financial markets, particularly bubbles. Canada is a average to below average country - Canadian will act the same.



Jagt Mirage said:


> Thirdly, while I agree interest rate rise will affect the housing market you're forgetting something. Who sets the interest rate? The Bank of Canada。 Do you really think the BoC will raise rates to the level where it would propagate mass foreclosures? Give Poloz a bit more credit. He's not stupid. The general rules are unless there is significant inflation, BoC would rather keep rates low to promote growth, and as we've already talked about earlier, the official rate of inflation is well below BoC target of 3%. So the argument is then, what happens if inflation goes up? well, if we go by what None is suggesting, housing prices would've gone up too. So you see, the argument is a self-defeating one. You guys are saying RE will tank if rates go up.. but rates won't go up　ｕｎｌｅｓｓ　ｉｎｆｌａｔｉｏｎ　ｉｓ　ｈｉｇｈ，　ｗｈｉｃｈ　ｍｅａｎｓ　ＲＥ　ｉｓ　ｄｏｉｎｇ　ｗｅｌｌ　ａｎｄ　ａｐｐｒｅｃｉａｔｉｎｇ．


They may have to. If the US starts doing very well (seems like it) the bank has a choice, raise interest rates or end up with a 50 cent dollar which will tank our economy further.

This is like a global warming denier debate.


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## Jagt Mirage

none said:


> They may have to. If the US starts doing very well (seems like it) the bank has a choice, raise interest rates or end up with a 50 cent dollar which will tank our economy further.
> 
> This is like a global warming denier debate.


really?.. and who's playing the part of Al Gore I wonder in this case. FYI, BoC really won't mind if our currency drops from where it is, and no, lower currency won't necessarily tank our economy, on the contrary, it may well boost it as low currency ｂｏｏｓｔｓ exports and Canada is an export nation. Ofcourse if everybody else's currency goes down guess where the US economy goes unless they also devalue their own currency? Macroeconomics isn't about absolutes, it's all about balance. It's not like low currency = bad, inflation = bad, high interest = bad。

FYI, I would LOVE it if the　ＲＥ　ｍａｒｋｅｔ　ｃｏｒｒｅｃｔｓ．　Ｍｏｒｅ　ｂｕｙｉｎｇ　ｏｐｐｏｒｔｕｎｉｔｙ．


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## andrewf

Even if BoC does not raise rates, if the Fed does Canadian 5 year bond yields will likely rise, and that is what fixed rate mortgages are priced on. It may shift more people to take variable rate mortgages, but BoC would likely raise rates shortly thereafter. Historically, policy rates in the US and Canada tend to move more or less in lockstep.


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## GOB

Garth is good to read with a grain of salt. He's been dead wrong about interest rates. Looks like he will be wrong again because he was convinced the U.S. would be raising in June. That is now far from a sure thing. Frankly, he's been wrong about the housing market too, though I've been right alongside him in that. He accuses various parties of massaging information to suit their agenda. He's right about that, but he doesn't seem to realize that he does the exact same thing! 

He's a great resource for basic information and people new to the idea of personal finance. But when he goes deeper, it's clear he's guessing and not very well either. It is a disservice those who are overly impressionable when he makes his prognostications seem like sure things.


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## Just a Guy

Jagt,

Don't mix my message with none's. Mixing the two and then saying they cancel each other is rather silly. 

While I agree with none, that historically housing used to keep up with inflation, I mean it kept up with the actual price of living, not some made up government number. 

I agree the Feds control the rate, and I also agree they currently seem to realize that raising the rates would tank the market, that's not to say the next government won't try to raise it thinking that they know better. Have you never seen a political party do something really stupid that's had dire consequences? If not, look up the NEP, the ndp in Ontario, heck any government in Ontario lately, BC politics...actually, now that I think about it any politics. 

The other thing to consider is what if they face something worse than a housing market tank, and it's the lessor of two evils? The Feds have been hinting they want to raise rates for years, but they can't. 

My bet is that stupidity will eventually win out, as it usually does, and rates will go up.


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## RBull

Jagt Mirage said:


> Couple of things. First None is suggesting that inflation is the cause for housing increase, that and low interest. As he didn't state any specific group of products I'm assuming he means the official CPI rate and my assertion is overall inflation can't be the only factor influencing housing appreciation, as the rate of "inflation" for homes far exceeds that of the average CPI inflation rate.
> 
> Secondly, I disagree that any significant portion of the homeowners are barely making minimum payments. The bank's are regulated to specifically prevent that from happening. Sure you can go to a B lender to get more risky mortgages, but I think the idea that they comprise any significant portion of all the outstanding mortgages is grossly exaggerated.
> 
> Thirdly, while I agree interest rate rise will affect the housing market you're forgetting something. Who sets the interest rate? The Bank of Canada。 Do you really think the BoC will raise rates to the level where it would propagate mass foreclosures? Give Poloz a bit more credit. He's not stupid. The general rules are unless there is significant inflation, BoC would rather keep rates low to promote growth, and as we've already talked about earlier,* the official rate of inflation is well below BoC target of 3%.* So the argument is then, what happens if inflation goes up? well, if we go by what None is suggesting, housing prices would've gone up too. So you see, the argument is a self-defeating one. You guys are saying RE will tank if rates go up.. but rates won't go up　ｕｎｌｅｓｓ　ｉｎｆｌａｔｉｏｎ　ｉｓ　ｈｉｇｈ，　ｗｈｉｃｈ　ｍｅａｎｓ　ＲＥ　ｉｓ　ｄｏｉｎｇ　ｗｅｌｌ　ａｎｄ　ａｐｐｒｅｃｉａｔｉｎｇ．


BOC target rate is 2%.


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## RBull

GOB said:


> Garth is good to read with a grain of salt. He's been dead wrong about interest rates. Looks like he will be wrong again because he was convinced the U.S. would be raising in June. That is now far from a sure thing. Frankly, he's been wrong about the housing market too, though I've been right alongside him in that. He accuses various parties of massaging information to suit their agenda. He's right about that, but he doesn't seem to realize that he does the exact same thing!
> 
> He's a great resource for basic information and people new to the idea of personal finance. But when he goes deeper, it's clear he's guessing and not very well either. It is a disservice those who are overly impressionable when he makes his prognostications seem like sure things.


Good accurate summary.


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## kcowan

marina628 said:


> My brother in law is 60 years old and he and his wife and going to build on a 2 level addition this year so they can have a master and nice bath on main floor rather than just sell the darn thing and buy a bungalow.Of course they will be borrowing for this too...


This is a big part of the inertia/frictional costs of ownership. They will make really bad financial decisions to avoid/postpone the inevitable.


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## Just a Guy

The other part is, people will only sell at a loss if forced to. When real estate prices collapse, many people will stay put, still thinking their houses are worth what they paid for it when they calculate their net worth. If they aren't forced to sell, they'll continue to pump money into a bad asset, thinking that someday it'll recover...

They may be right of course, or they may just die and the inheritors will sell the place at a loss and not care since they didn't put anything into it and they just want the money.

The only real time you know what real estate is worth is the day you clear the cheque you were given for it.


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## Spudd

Yeah, people REALLY don't want to sell at a loss. We made an offer on a house that was listed for 235k, we offered as high as 220k, and the sellers would not go lower than 227.5k because they didn't want to sell at a loss. For 7.5k they could have sold the house which has been on the market for ~ 2 years but they wouldn't do it.


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## none

It's a really odd psychology and people do it with stocks too. I think the thinking 'you haven't lost anything until you sell' is completely idiotic. It implies that current value is irrelevant which I KNOW nobody believes. Who isn't disappointed when their stock bumps up 50% compared to declining by 50%?. Current value is how much it is worth, full stop. Speculate all you want.

I find it interesting here in victoria everyone compares their houses to the peak 2010 and are 'waiting for the market to recover' to sell their houses. What they fail to realize is the market declining by another 20% would likely be a better version of 'market recovery' than prices bumping back up 10%.

Anyway, whatever, it's almost (and really shouldn't be) almost a religious belief at this point. Yes, home owners have done reasonably well (although not as well as many think when you compare to investing over the last 10 years) and they are convinced that owning a house is a non-stop win. That's their choice but it's similar to twitter. There's no way twitter should be at $48 but it is. Go figure..... As I've said many times: belief is a powerful thing.


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## Just a Guy

I remember hearing, when I was younger, people said, "you make your money when you buy, not when you sell". Originally, I thought that was not really true but now, after years of buying low, I can see how it's true. I've bought stocks and real estate in all markets, but I've only bought at prices I thought were low, and it's done quite well for me.

With real estate, it's more likely to find that one place selling cheap sine, with stocks, it's not a single market with one set price. That's part of the reason I've preferred real estate over this boom, someone is always desperate to sell if you look, which means there is money to be made,


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## sags

People will really dig in on their prices, when they "have" to sell for a certain price to pay off the mortgage, the mortgage break up fees, and the real estate and moving expenses......just to break even on what they paid. The concept of actually losing money on a house isn't possible in their minds.

Watch some Peter Schiff debates before the housing collapse in the US. People were mocking, laughing and giggling at his forecast that home prices could actually fall 20 -30%. "How ridiculous is that", they said. US home prices fell in some places by 70% and still haven't recovered. People are still well underwater in their mortgages and can't sell or move, after 7 years. They "could" have sold, but chose not to, and suffered the consequences.

It is in our DNA to believe that "our stuff" is worth more than everyone else's stuff.

Our home is always better........our kids are always smarter or more athletic......and we work harder than anyone else.

I was at a very nice Salvation Army Thrift store the other day. I took my grandson to look around and was amazed at the quality of what they had for sale.........for dirt cheap.

Fancy dishes, pictures, wall art,...........all kinds of really neat stuff.

I bought a vintage tin bread box...........have been looking for one a long time, and my grandson bought a puzzle and a book............total cost $10.00

Every estate sale, auction or trip through a Sally Ann reminds of how much more I value my stuff............than anyone else would.

As a buyer and seller of all kinds of stuff over the years, ..........I learned it is a lot easier to buy it than to sell it.

That includes houses and cars.

The one thing most people have a hard time collecting...........is money.

As a nation, we don't put a lot of value on money, or we would be "collecting" a lot more of it.

We would rather buy a house and have no money...........than save the money and have no house.


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## Eclectic12

sags said:


> Aside from differing with some on real estate values, he has given a lot of good advice and insight, especially in the last year when he included many other topics in his blogs.
> 
> (Buying US real estate at the bottom, having a well diversified portfolio, discussing interest rates and economic policy, retirements, and TFSAs)


US RE bottomed in the last year?




sags said:


> Is there another former Minister of Revenue giving daily insight into the inner workings of government in Canada ?


I'm not sure how much of the inner workings he picked up in a bit over five months as Minister of Revenue ... the gov't in general he had something like eight years as an MP.


Cheers


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## sags

No my bad..........he recommended buying US real estate years ago, when it was dragging along the bottom and nobody would touch it.

US real estate hasn't fully recovered, but values have risen substantially from the bottom.

As for his role in government, he has said he was party to some bad decisions, like opening up RRSPs to borrow for down payments, so he had some influence while he was there.


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## none

People who try to predict rates in any short term period are just guessing, that's it. Long term, yes, rates will go up (just as we all generally assume that the stock market follows a random walk with drift model) but short term who knows.


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## Canuck

GOB said:


> Garth is good to read with a grain of salt. He's been dead wrong about interest rates. Looks like he will be wrong again because he was convinced the U.S. would be raising in June. That is now far from a sure thing. Frankly, he's been wrong about the housing market too, though I've been right alongside him in that. He accuses various parties of massaging information to suit their agenda. He's right about that, but he doesn't seem to realize that he does the exact same thing!
> 
> He's a great resource for basic information and people new to the idea of personal finance. But when he goes deeper, it's clear he's guessing and not very well either. It is a disservice those who are overly impressionable when he makes his prognostications seem like sure things.


nailed it!


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## My Own Advisor

Canuck said:


> nailed it!


Right on!!


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## kcowan

He makes his living by getting readers. How he does that does not matter...


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## Hawkdog

Money is fleeing China by hook or by crook. The country needs it to stay if it wants to have a bright future.

China tops the world in many things. But one thing it's probably not proud of is its position as the No. 1 exporter of illicit funds. More than $1.25 trillion drained out of the country between 2003 and 2012, according to a report from Global Financial Integrity.

More than 18,000 Chinese citizens are "economic fugitives." And there are more and more every day.

This is why property markets continue to inflate in parts of Canada, California, New York City and Washington, D.C., among other places. Foreign investment in U.S. property nearly doubled to $22 billion between March 2013 and March 2014.

Chinese cash accounts for nearly a quarter of the money foreign buyers spent on U.S. real estate last year.

Meanwhile, Chinese entrepreneurs have become quite innovative in finding ways to get money out of the country. They have a shell company overbill by two or three times for goods shipped to the mainland. Or they bill for millions of dollars of services that are never performed.

Of course, the old-fashioned methods still work as well. Wealthy Chinese stuff suitcases with cash, jewelry and gold and take extended "vacations" with no intention of going back.

This is a big problem for China. And it gets worse every day.

http://linkis.com/oxfordclub.com/R1nXs


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