# New York Times article on Canadian real estate bubble



## brad (May 22, 2009)

Interesting piece in today's NY Times:

http://www.nytimes.com/2010/03/20/business/global/20real.html?hpw


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## high octane (Jul 21, 2009)

> American-style amortization periods stretching beyond 25 years were also relatively unknown in Canada.


Really?

Seems more to me like the Cdn bank profits saved them more than stingy lending. I know people with 0/40 mortgages in Canada

How do they think that the housing market will settle out in the spring when people start selling? As far as I know, when someone sells their home they BUY another one, no?


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## Larry6417 (Jan 27, 2010)

*Huh?*



high octane said:


> Really?
> 
> Seems more to me like the Cdn bank profits saved them more than stingy lending. I know people with 0/40 mortgages in Canada
> 
> How do they think that the housing market will settle out in the spring when people start selling? As far as I know, when someone sells their home they BUY another one, no?


Could you explain what you mean? "Cdn bank profits saved them more than stingy lending." Not really. Canadian Banks, unlike American banks, keep mortgages on their balance sheets, Therefore, Canadian banks are very interested in the quality of those mortgages. American banks tended to sell mortgages as mortgage-backed securities and absolved themselves of all responsibility once the MBS were sold. That practice has been blamed for at least part of the real estate crisis. Also, Canadian banks had higher capital requirements.

You may know people with zero-down, 40-year mortgages, but I'll bet you know very few. That mortgage is very rare in Canada, especially with the clamp down on loose mortgage lending. 

I'm not sure what your point is when you say that people buy another home as they sell. So what? Buying another home as you sell doesn't guarantee that housing prices will remain firm. As interest rates rise, I believe housing prices will fall. Whether prices will crash remains to be seen. Economists with a good track record, like David Rosenberg, are stating that housing prices are excessive.
See www.theglobeandmail.com/globe-inves...-on-a-delicate-housing-bubble/article1396658/


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## Cal (Jun 17, 2009)

10 years ago, I had only heard of 30 year mortgages in the US, and 25 years in Canada as being the longest amortization periods.

Now it does seem to be very common in both countries to have longer amortization periods.

The mentality now seems to be more about monthly carrying cost, rather than the purchase price, rate, terms etc.

In a rising RE market, yes people definitely buy another home when they sell. In a falling market (see the US currently) not so much.

high octane - And if you could explain what you mean? "Cdn bank profits saved them more than stingy lending." I didn't get that one either....


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## takingprofits (Apr 13, 2009)

There are a couple of interesting charts that compare the US and Canadian housing markets since 2000 at http://bubblemeter.blogspot.com/2009/12/housing-canada-vs-united-states.html

Seems to me that some have been calling the price increases in Toronto and Vancouver "bubbles" for decades.

It is normal for house prices to go up when interest rates for down and for house prices to go down when interest rates go up.The prices do not plummet as with bubbles in stocks unless the market is flooded by defaults though - and that is unlikely to happen in Canada given the differences in lending practices from the states.


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## high octane (Jul 21, 2009)

Larry6417 said:


> You may know people with zero-down, 40-year mortgages, but I'll bet you know very few. That mortgage is very rare in Canada, especially with the clamp down on loose mortgage lending.


Actually lots of my peers had $0 down because they believe buying a house is always smarter than renting even if you have no down payment. Based on their disposable income and the price of their houses, I can only assume most of them are more than 25 yrs



Larry6417 said:


> I'm not sure what your point is when you say that people buy another home as they sell. So what? Buying another home as you sell doesn't guarantee that housing prices will remain firm. As interest rates rise, I believe housing prices will fall. Whether prices will crash remains to be seen. Economists with a good track record, like David Rosenberg, are stating that housing prices are excessive.
> See www.theglobeandmail.com/globe-inves...-on-a-delicate-housing-bubble/article1396658/


I was commenting on the original article which predicted that housing prices will settle back down when it warms up and more people start selling.

So they are assuming more supply vs demand when summer comes and people put their houses on the market, and I'm pointing out that it's a moot point if they all buy another house, no?..


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## Larry6417 (Jan 27, 2010)

high octane said:


> Actually lots of my peers had $0 down because they believe buying a house is always smarter than renting even if you have no down payment. Based on their disposable income and the price of their houses, I can only assume most of them are more than 25 yrs


Lots of your peers have zero-down mortgages? I'll take your word for it. However, truly zero-down mortgages are unusual. Even under the old rules 5% was the minimum down payment. A former mortgage broker I know told me that "helpful" (less scrupulous?) brokers would arrange zero-down mortgages. Mortgagors would borrow the down payment from another source, so the entire amount was borrowed. However, especially with the new rules, this practice will likely be less common.

Your peers are mistaken if they think that buying is always better than renting.



high octane said:


> I was commenting on the original article which predicted that housing prices will settle back down when it warms up and more people start selling.
> 
> So they are assuming more supply vs demand when summer comes and people put their houses on the market, and I'm pointing out that it's a moot point if they all buy another house, no?..


Housing moves in cycles. In Edmonton I've seen prices gyrate (up and down) even with lots of buyers and sellers.


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## Larry6417 (Jan 27, 2010)

takingprofits said:


> There are a couple of interesting charts that compare the US and Canadian housing markets since 2000 at http://bubblemeter.blogspot.com/2009/12/housing-canada-vs-united-states.html
> 
> Seems to me that some have been calling the price increases in Toronto and Vancouver "bubbles" for decades.
> 
> It is normal for house prices to go up when interest rates for down and for house prices to go down when interest rates go up.The prices do not plummet as with bubbles in stocks unless the market is flooded by defaults though - and that is unlikely to happen in Canada given the differences in lending practices from the states.


So bubbles in real estate can't happen in Canada? It may more difficult, but it can definitely happen. In Alberta there have been several real estate booms and busts over the past few decades. 

In Vancouver see http://housing-analysis.blogspot.com/2009/06/greater-vancouver-inflation-adjusted.html

Year-over-year changes in Vancouver can be drastic. Most people would consider a 20-30% drop to be steep. Housing prices have far outpaced income in Vancouver. I suspect we'll see more than a normal drop with rising interest rates.

Also, see www.vancouversun.com/story_print.html?id=2482683&sponsor=


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## Y&T2010 (Dec 29, 2009)

Yeah, I sure hope that the bubble will burst in Vancouver. It's getting really quite ridiculous. I don't know how on earth these people are affording the 1.6 million dollar homes that is the average price in Vancouver West (I assume home equity and people who don't actually work in Vancouver).

Our income isn't keeping up with the housing costs. Most people are putting away 40%+ of their pretax income for shelter, when the recommendations are <32%.

Hopefully with the new mortgage rules, there will be some sort of correction in prices.


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## takingprofits (Apr 13, 2009)

Larry6417 said:


> So bubbles in real estate can't happen in Canada? It may more difficult, but it can definitely happen. In Alberta there have been several real estate booms and busts over the past few decades.


I did not say the can't happen. I said that prices don't plummet drastically unless there are lots of mortgage defaults - which is what is happening in the US. Given our lending practices a flood of defaults is not on the horizon. 

Alberta has had boom and bust in the past which has caused a bubble-like drop on prices. Calgary in the 1980's comes to mind. There were lots of defaults made worse by the fact that in Alberta a homeowner can walk away from their obligation essentially without penalty. That is what they did - threw the keys on the counter and left just, as they are doing in the US now.

As far as mortgages go, Alberta has more in common with the the US than other provinces do. You can't do that in the rest of Canada.

Prices in Vancouver will drop when interest rates rise but are unlikely to suffer a major Alberta style correction unless there are a flood of foreclosures and that is not on the horizon unless the world economy totally melts down.


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## Berubeland (Sep 6, 2009)

First of all in Toronto and Vancouver there are boom and bust cycles on a regular basis. 

The biggest problem in the States is not that people can walk away from their house without penalty actually in many States that is not the case. Much of the problem now is due to the way banks and lenders dispose of defaulted property. In a time when credit and mortgages were difficult to get lenders flooded the market with defaulted property bringing the prices down. It still is like a yard sale for houses. 

Here in Canada the lender has a fiduciary duty to get the best price for the property and it is put on the regular house market with an agent on the MLS. The lender can be sued by the old owner of the house if there is any funky business. 

Now there is the problem that many people are underwater on their houses which will make it impossible to renew their mortgage why struggle for years to pay a high payment when you know that you will not be able to get a mortgage even if you make your payments?

What will catch up to us here in Canada is that houses are becoming unaffordable. For years we have increased the number of buyers my decreasing the requirements. Inititally you had to have 25% down to buy a house then 20% all the way to 0% down each reduction in downpayment increased the number of people who could buy. More buyers means more competition and higher prices. 

Now requirements have been increased.... which reduces the amount of buyers. If there comes a point where there are less buyers than sellers we will see a price adjustment. 

Todays' housing market is all about affordability. If you can get people to buy houses with 0% down and 40 year mortgages the banks profit and house prices go up. 

Now i'm not sure when but with the gap between the average price of a house in Toronto and the average salary I can't see anything but a correction in the future. But there is no way that it will be a country wide collapse like in the States mostly because our legislation is protective of the banks, and buyers, and sellers. Our laws are not skewed in favour of big business and our government takes an intermediary role between business and consumers.


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## Shayne (Apr 3, 2009)

I don't think the rules changed enough to stop people from buying property. You can still get 0% down 35 year mortgages. They are suitable for some people and are not suitable for others.

Those leveraging with rentals at 5% down will be effected much more than those buying for owner occupied.


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## Berubeland (Sep 6, 2009)

The rules changed as far as I know everyone needs 5% down and everyone needs to qualify for a 5 year mortgage at fixed rates even if they get a variable rate mortgage. 

As I have said before... I know a lot of investors and none of them get CMHC financing on single family home, they just don't want to pay the fees. These are landlords who have multiple properties. Further it is almost impossible to buy a place that has positive cash flow in Toronto and most of them just aren't buying right now. I had an investor who was looking to buy a few months ago and the bank wanted 35% down on a second property.


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## Shayne (Apr 3, 2009)

Berubeland said:


> The rules changed as far as I know everyone needs 5% down and everyone needs to qualify for a 5 year mortgage at fixed rates even if they get a variable rate mortgage.
> 
> As I have said before... I know a lot of investors and none of them get CMHC financing on single family home, they just don't want to pay the fees. These are landlords who have multiple properties. Further it is almost impossible to buy a place that has positive cash flow in Toronto and most of them just aren't buying right now. I had an investor who was looking to buy a few months ago and the bank wanted 35% down on a second property.


Yes you need 5% down, but that can come from 5% cash back from the lender, effectively giving you 100% financing. Depending on a person's financial situation it is not actually a bad deal right now.

I am going to take a look at the difference between putting 5% down and using a cash back program. I will let you know what the difference actually is.

***Update*** Taking all things into account, using a cash back mortgage costs a person $92.72 a month on a $300K property above what putting 5% down would cost. I am going to spell out the calculations and the methodology in my blog later in the week.


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## Cal (Jun 17, 2009)

CMHC loophole, for 5 year terms or longer, posted on greaterfool.ca today:


'Says the corp (CMHC):

* For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate, and the contract interest rate.

OK, that’s consistent. CMHC even makes a point of defining the ‘benchmark rate’ as “the Chartered Bank – Conventional Mortgage 5-year rate.” That, as I said, is currently about 5.3%.

But, dig the next sentence:

* For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.

That’s called a loophole. And this one is big enough to fit a housing bubble through.

It simply means if a lender grants a 5-year mortgage, the new rules do not apply. No benchmark rate. No posted rate. No making sure the borrower is protected if interest rates zoom higher. No 5.3% used as the standard. The rate can be pretty much whatever the lender can live with. For example, today you can get a 5-year fixed home loan for 3.6% – which means a first-time homebuyer qualifying at that level could be nicely creamed when he or she faces renewal in 2015 at twice the cost.

It also means this: If you borrow on a term of three years, you have to qualify at 5.3%. But if you borrow on a term of five years – when mortgage rates are destined to be higher – you can get the same sized loan with significantly less income.'


So if you get a term of 5 years or longer, you can qualify for less than the posted 5 year rate. Hopefully rates won't be too much higher in 5 years.


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## Berubeland (Sep 6, 2009)

I'm not saying there won't be some people who make imprudent mortgage choices of use loopholes to get around the intent of the changes.

There will be people affected when house prices correct but we will not see 25% of houses underwater in Canada. 

By and large Canada is in a very difficult situation, our major trading partner the US is in major financial trouble, I think Flaherty is right to take any changes to our housing policy slowly. An over correction of the housing bubble may well spiral us into a severe recession. 

And in fact we are not talking about all of Canada we are mostly talking about Toronto and Vancouver. What impact will this have on the rest of Canada if draconian measures are taken to clamp down on the housing bubble in major cities?


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## Ben (Apr 3, 2009)

Cal said:


> CMHC loophole, for 5 year terms or longer, posted on greaterfool.ca today:


Canadian Mortgage Trends does a good job of covering this topic. See March 8 post "Five Year Funnel". 

Also related is another thread on this forum titled "Will the new Mortgage Rules Affect You?"


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## Spidey (May 11, 2009)

While we may be in for a correction or perhaps a period of stagnant price increases, I don't think you could characterize most Canadian real estate as a bubble and I don't believe that the situation is at all similar to what has been happening in the US. Perhaps Vancouver and Toronto could be in for greater corrections but as was mentioned, boom and busts are typical in those markets. In Ottawa much of the price increase seems to be due to a shortage of supply -- for whatever reason homeowners are not listing to the same extent as is usual.

When you read about some of the practices that had been going on in the US which often involved:

- giving mortgages to anyone with a pulse 
- cold-calling to convince already over indebted homeowners to take on additional debt at an extremely low initial rate with most not reading the fine print stating that the rate would significantly increase at a future date
- then repackaging and selling those mortgages for a profit while collecting a bonus for the business (which provided little incentive to care about the quality of the debt).

It was obviously only a matter of time before the house of cards fell down. I've never heard of any of these practices happening in Canada.


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## Cal (Jun 17, 2009)

Ben said:


> Canadian Mortgage Trends does a good job of covering this topic. See March 8 post "Five Year Funnel".
> 
> Also related is another thread on this forum titled "Will the new Mortgage Rules Affect You?"


Actually on the other thread, I didn't even get 'it' the first read through. I thought the GT article explained the 'five year funnel' clearer.

And yes Canadian Mortgage Treads does a good job on this topic too. Thx.


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## Ben (Apr 3, 2009)

Cal said:


> Actually on the other thread, I didn't even get 'it' the first read through. I thought the GT article explained the 'five year funnel' clearer.
> 
> And yes Canadian Mortgage Treads does a good job on this topic too. Thx.


Yep. The other thread is full of misinformation and corrections, so it is a confusing read.


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## takingprofits (Apr 13, 2009)

Spidey said:


> While we may be in for a correction or perhaps a period of stagnant price increase


I agree with your thoughts about "a period of stagnant price increase" - which would mean a price correction over a longer period of time. It happens with stocks all the time. With real estate, as an example, Winnipeg endured such a correction over a period of more than a decade. It is the way real estate markets correct when a flood of foreclosures are not present. Prices just don't go up anymore or go up and down within a range but nothing dramatic.


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## Larry6417 (Jan 27, 2010)

takingprofits said:


> I did not say the can't happen. I said that prices don't plummet drastically unless there are lots of mortgage defaults - which is what is happening in the US. Given our lending practices a flood of defaults is not on the horizon.
> 
> Alberta has had boom and bust in the past which has caused a bubble-like drop on prices. Calgary in the 1980's comes to mind. There were lots of defaults made worse by the fact that in Alberta a homeowner can walk away from their obligation essentially without penalty. That is what they did - threw the keys on the counter and left just, as they are doing in the US now.
> 
> ...


Homeowners in Alberta can walk away from mortgages without penalty? That's news to me. Some US states have non-recourse mortgages, but I've never heard of that in Alberta. I can assure you that my mortgage was a recourse one i.e. I was liable for the full amount. Let me put it this way: Can you imagine any Canadian bank lending under thoses circumstances? I can't - at least not without much higher interest rates to compensate for higher risk. 

From the graph on one of the websites linked in a prior post, Vancouver has seen 20-30% year-over-year declines in the past. In other words, Vancouver has already seen "Alberta-style" declines. There's no reason why the same can't happen again.


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## takingprofits (Apr 13, 2009)

Info about Alberta's non recourse mortgages can be found several places on the web. At least one of our esteemed hosts here have mentioned it in their blogs as well. 

I was going from memory about the 1980's recession - here is a recent Globe article referring to non-recourse mortgages. I was not aware but Saskatchewan also has non-recourse mortgages but of course they did not suffer from the burst of a real estate bubble the way Calgary did in the '80s so that was never widely publicized. Back then, when it was actually happening, the fact that people were able to walk away from their mortgages in Alberta was widely talked about and reported on. I have also read on the web that Alberta may have tightened up their mortgage laws since the '80s - that back then all mortgages were non-recourse where now only those without CMHC Financing are. Not sure about that though.

An excerpt from the article...

In most Canadian provinces mortgages are recourse, which allows lenders to go after other assets. The exceptions are Saskatchewan and Alberta (although in Alberta high-ratio mortgages are recourse).

This has not been a widespread issue in Canada because our housing market has been much stronger than in the United States, and we haven't seen people trying to walk away from homes that have dropped sharply below the value of their mortgages. That did happen back in the 1980s in Alberta, when the housing market there collapsed.


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## Larry6417 (Jan 27, 2010)

I've looked at the link you provided, and it grossly oversimplifies the situation. See www.greaterfool.ca/2009/09/26/your-mortgage/

In AB the mortgagee can still seize the property to sell it and sue you for the difference even if you have a conventional mortgage. High-ratio mortgages are still recourse loans. Also, I question the practical significance of this fact. Many lenders will obtain personal pledges as well (true in my case, I had a conventional mortgage). Lenders may have less recourse in AB, but that's a long way from saying that Albertans can walk away from mortgages without penalty.


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## takingprofits (Apr 13, 2009)

This thread is supposed to be about the chances of a US stlye housing collapse in Canada , not about the history of Alberta's mortage regulations. Larry, the walking away from the mortgage thing was brought up in reference to the effect it had in Calgary in the 1980's to show how that housing collapse was different - it did happen and had a real effect on the burst of that housing bubble. I did not say it could happen now or was likely to happen again. I also said that the "rules" may have changed since then from what I read online, making it harder for Albertans to walk away. 

Barring another global recession worse that we just experienced it is unlikely that Canada will experience the bursting of what some are calling a bubble. We may correct sideways for years but prices should not plummet overnight. 

In Canada, when house prices suffer a major drop it has always been as the result of a recession and prices recovered after a year or two. Not the big wealth destroyer we are seeing in the US. No reason to not buy a house today (even if the big one hits tomorrow) if you plan on living there for 5 or more years. 

In the US - the housing situation was the reason for the recession and the reason for the continuing weakness. That is not the usual way things happen. In Canada, house prices recover when the recession is over. In the states, they need house prices to recover to be the catalyst to lead them out of the current situation.


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## Cal (Jun 17, 2009)

What is the difference in a decrease in prices vs a bubble popping?

To me a bubble would be at least a 10% drop in 1 year....maybe more...all the papers talk about bubble this and that. Not sure if there is a bubble. There are some silly asking prices though.


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## Larry6417 (Jan 27, 2010)

Bubbles pop, and injure the unwary on both sides of the border. A 10-20% drop is more than enough to eliminate 100% equity for many buyers because of the leverage used in real estate. People are kidding themselves if they think this can't happen in Canada. Vancouver is the most expensive city in the world (as measured by housing prices vs. income). Betting that prices will stagnate rather than fall seems awfully optomistic.


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## MoneyGal (Apr 24, 2009)

Sometimes this thread makes me feel really old.  I have owned a couple of different personal residences over my adult lifetime, and one I sold at a fairly significant loss. (I got divorced; moved cities. Hung onto the house for a full year waiting for prices to recover before I hit my personal breaking point and sold to be free to start anew.) Plus I grew up in that bubbliest of cities, Calgary, in the bubbliest of industries (oil and gas!) and saw my parents and their peers buy and sell in all kinds of markets. 

Whether or not there is a bubble, and how we would know; and whether it will pop - for me, personally, the underlying message is that rising house prices are not a given. The NY Times published a different article about this issue this past weekend - the author writes that, when he was offered what now seem like foolhardy mortgage terms, _Like so many other relatively comfortable Americans who were just coming of ownership age, I had nothing against which to judge the situation; this was the only kind of housing market my wife or I had ever known. _

For me, this is a key insight. Maybe the loss of equity in a personal residence is something you have to experience before it really feels real. And maybe you need to feel the effects of that loss of equity before you get just how pervasive the assumption of continually rising prices - whether in real estate or equities or the economy in general or ALL of these things - is in North America. 

/philosophical musings; I have work on my desk...


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## Ben (Apr 3, 2009)

MoneyGal said:


> Whether or not there is a bubble, and how we would know; and whether it will pop - for me, personally, the underlying message is that rising house prices are not a given.
> 
> Quote from NYT: _Like so many other relatively comfortable Americans who were just coming of ownership age, I had nothing against which to judge the situation; this was the only kind of housing market my wife or I had ever known. _
> 
> For me, this is a key insight. Maybe the loss of equity in a personal residence is something you have to experience before it really feels real. And maybe you need to feel the effects of that loss of equity before you get just how pervasive the assumption of continually rising prices - whether in real estate or equities or the economy in general or ALL of these things - is in North America.


Great post Moneygal. Spot on.


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## bigcake (Apr 3, 2009)

Larry6417 said:


> Bubbles pop, and injure the unwary on both sides of the border. A 10-20% drop is more than enough to eliminate 100% equity for many buyers because of the leverage used in real estate. People are kidding themselves if they think this can't happen in Canada. Vancouver is the most expensive city in the world (as measured by housing prices vs. income). Betting that prices will stagnate rather than fall seems awfully optomistic.


Vancouver is cheaper than many Asia cities.


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## Brad911 (Apr 19, 2009)

Cal said:


> ....The mentality now seems to be more about monthly carrying cost, rather than the purchase price, rate, terms etc....


That is the core problem for my generation at this present moment. I don't know of anyone who put down 0% on their mortgage, but a large number of my peers (friends, family or co-workers) in the 20-35 yr old range only put 5-10% on their first home as a downpayment vs. the 20% I was adament I would put down on our first home we bought in June 09. I don't know of anyone I work with or know my age who has put down more than 15%; some family members have.

The monthly carrying costs is the main focus. My generation wants what my parents have right now without having to put in the years of hard work that got them to where they are today. That's what happens when debt is easily accessible and everything can be financed. I mainly run on the idea that if I don't have the money (for material purchases) that I simply don't buy it until I do. I am sadly not the majority within my generation though (28).


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## brad (May 22, 2009)

Brad911 said:


> That's what happens when debt is easily accessible and everything can be financed.


That's it, and I suspect the root cause is credit cards, which are essentially mortgages on training wheels. Credit cards teach young people that they can have whatever they want today and pay for it tomorrow. When it comes time to buy a house, they simply extend the same approach to their mortgage.


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## Sampson (Apr 3, 2009)

brad said:


> Credit cards teach young people that they can have whatever they want today and pay for it tomorrow.


I don't think it's necessarily credit cards which are to blame. To be honest, parents have to hone up to not providing enough financial education to youth as to how those cards should be used.

I got my first credit card before I was 15. I've never had any debt until I bought my first house. I've been responsible and continue to be so with my spending and I can attribute all of this to the values and money skills I learned from my parents.


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## brad (May 22, 2009)

Sampson said:


> I've been responsible and continue to be so with my spending and I can attribute all of this to the values and money skills I learned from my parents.


Yes, but you also have to remember that many teenagers go through a rebellious period and tend to do the exact opposite of what their parents teach them. We are frugal and responsible with money, yet my 20-year-old stepdaughter has been very adamant about rejecting our example and everything we've tried to teach her. She is beyond hopeless with money and recklessly overspends. She's an extreme case (her paycheques are being garnished by a collection agency and yet she still spends like there's no tomorrow), but most of her friends are the same way.

I'm not implying in any way that these kids are "victims" of credit cards or the companies that provide them, but I do think that making credit cards available to people at an early stage of their lives when they tend to be at their most irresponsible and impulsive might be a mistake. There's a legal drinking age for a reason; maybe the legal age at which credit cards become available should be 21?


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## takingprofits (Apr 13, 2009)

Articles and talk about real estate bubbles seem to be always there. The same people who will say you shouldn't time the stock market try and time the real estate market. Fear of bubbles is really just market timing in the end.

Just like in the stock market, trying to time the market can be costly. A friend of mine in Toronto considered buying a house back in the 1980's and every year since. He would do all the research and listen to all the pundits and then not buy because he was afraid the market was in a bubble.

He eventually bought 2 years ago (still afraid he was buying in a bubble) and the house he could of bought in the 1980's for $250,000 (which he would have needed to spend for what he wanted at that time) ended up costing him $650,000 - and was not in an area he preferred because his preferred area was now out of his price range. Listening to the talk of a bubble in Toronto real estate ended up paralyzing him and it cost him a lot of money in the end. Any drop in the Toronto market was never deep enough (it could go down more!)

If one is planning on moving again in a couple of years it is wise to wonder where the market is heading - otherwise trying to time the market is a waste of time and money.


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## Larry6417 (Jan 27, 2010)

takingprofits said:


> Articles and talk about real estate bubbles seem to be always there. The same people who will say you shouldn't time the stock market try and time the real estate market. Fear of bubbles is really just market timing in the end.
> 
> Just like in the stock market, trying to time the market can be costly. A friend of mine in Toronto considered buying a house back in the 1980's and every year since. He would do all the research and listen to all the pundits and then not buy because he was afraid the market was in a bubble.
> 
> ...



There's always talk of real estate bubbles because there usually are real estate bubbles, at least somewhere. I think your comparison of real estate to the stock market is flawed. The stock market is relatively efficient (I don't believe it's perfectly efficient) because information is freely available and widely disseminated. Investors can easily find company financials, projections, general economic information, and other company information. Can you access the full information on the MLS through the internet? If not, and most retail investors can't, then real estate isn't as efficient as the stock market. Thousands, perhaps tens of thousands, of professionals continually evaluate the stock market for price inefficiencies. Can you say the same for real estate? Do thousands of realtors evaluate your neighborhood on an ongoing basis? If not, then the real estate market is not as efficient as the stock market. Can you buy or sell a home with a click of a button? If not, then the real estate market is not as liquid as the stock market. I also believe that short-term timing of the stock market is futile. But I don't believe that the real estate market can be directly compared to the stock market.

Let's return to the example of your friend. First, I don't think it's wise to extrapolate generalities ("can't time the real estate market") from specific incidents. Second, many investors can't separate returns from inflation. I don't know when your friend started looking, so I assumed a start date of 1983 for calculation purposes. That's a period of 25 years. Do you know what rate of return grows $250,000 to $650,000 over 25 years? The rate of return is a whopping... 3.9% - not much higher than the rate of inflation. It's not as if your friend missed the deal of a lifetime. In fact, he may have worsened his financial situation by buying a place he doesn't want at too-high a price. Also, that 3.9% return isn't even a 3.9% net return. It's 3.9% minus inflation, minus home insurance, minus property tax, minus cost of upkeep, minus legal fees/commissions.


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## Cal (Jun 17, 2009)

Brad911 said:


> That is the core problem for my generation at this present moment. I don't know of anyone who put down 0% on their mortgage, but a large number of my peers (friends, family or co-workers) in the 20-35 yr old range only put 5-10% on their first home as a downpayment


That is easy to do when all that generation knows is rising RE valuations. Why tie up more of your equity? (assuming they have more equity) Same thing happened in the states...everyone thought RE only rose in value.

None of those people owned houses or thought about RE in the early 90's.


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## Potato (Apr 3, 2009)

Larry6417 said:


> I think your comparison of real estate to the stock market is flawed. The stock market is relatively efficient (I don't believe it's perfectly efficient) because information is freely available and widely disseminated.



And of course, the fact that financial markets are more efficient because almost all the players have the same goal: to make money. In the real estate market that's not necessarily the case, some people want to own just for the sake of owning, etc.


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## takingprofits (Apr 13, 2009)

You know, I was not going to respond to Larry because his comments were off topic again and someone has the last word and I could tell it was not going to be me. Now with Potato piling on I just can't let this ridiculous notion that the real estate market is somehow flawed be left for future readers to be misinformed.

The efficient market theory was in existence long before personal computers and online brokers. 

Values in both stocks and real estate are determined the same way - by what educated buyers are prepared to pay and what educated sellers are prepared to accept, That is the basic principal behind the appraisal performed on your house when applying for a mortgage. A market is a market.

How do home buyers and sellers become educated? The same way stock buyers and sellers become educated - by being involved in the market. A home buyer becomes educated by looking at lots of home for sale and comparing their asking and selling prices over a period of time. It is a very rare buyer who will make an acceptable offer until they feel completely knowledgeable about the home's value and that includes the "people want to own just for the sake of owning" Potato refers to.

And of course it is a rare seller who will accept an offer until completely comfortable that the offer is not below market value. 

Anyway, I am done. Feel free to pile back on...


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## andrewf (Mar 1, 2010)

The Efficient Market Hypothesis is just a handy theoretical construct. Many markets are quite inefficient (say, private equity) while some are quite efficient (bonds, and to a lesser extent, equities). I'd say real estate is definitely less efficient than these. There is a high degree of information asymmetry between buyers and sellers, and buyers frequently misprice properties.


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