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Baby, we got a bubble!?

TCO I feel is correct regarding the phenomenon. However, I shudder everytime I hear the "new normal". "Things are different this time" arguments were used to explain why technology stocks justified the 2000 valuations before they came down, why house prices can only go up and never correct to a significant degree downward.

Shtopor makes some very good points that could easily derail house prices at least to some degree. I am not suggesting a crash. However, I think one has to be cautious when pointing to "things are different this go around/new normal now exists".

People need shelters - it distinguishes risk level of technology stocks from one of real estate completely. If bubble ever comes, speculator will stop flipping and things will get slow. Home owners though will not suffer the loss as long as not selling their homes and waiting for the market return. At least real estate price is an upward trend for the century (with inflation adjusted) - that everyone should be in consensus.
 
People need shelters - it distinguishes risk level of technology stocks from one of real estate completely. If bubble ever comes, speculator will stop flipping and things will get slow. Home owners though will not suffer the loss as long as not selling their homes and waiting for the market return. At least real estate price is an upward trend for the century (with inflation adjusted) - that everyone should be in consensus.

In theory you are correct. People need shelter. However, there is a problem I would suggest with this logic. Speculators/investors and even end users have "commoditized" housing so that it it is not just a place that homeowners use for shelter and therefore it is incorrect to infer that one will not suffer a loss. While the end user purchases a home to live, there are enough investors/speculators to impact a home's end use. The most recent true crash of 1989 took until approximately 2003 to get back to 1999 levels. Alot of people can not wait 14 years to get back their investment non inflation adjusted. As well, say there was an economic serious setback and the figure of 30% quoted of investors/flippers/speculators was correct. If they dump en masse, the valuations drop, people who have mortgages that where above water are now below. they go to refinance and now need more equity to qualify. they do not have that equity and have to sell thereby aggravating the cycle. this is exactly what is happening in florida and Arizona and California as well as other states (saved perhaps only by 1st home buyer incentives, cheap money and the government guaranteeing mortgages/loans. The point is the marginal next sale is what will dictate the general trend in the market and if more are selling/have to sell, prices will drop. I am not suggesting that is what will happen here in Canada. I am simply saying it is incorrect to take the narrower view that housing is simply shelter. That was true until it began trading a bit like a commodity (which also explains why it has grown so much in value). If it was just shelter, then it should increase by the cost of living increase to build replacement dwelling and by no more(assuming available land on which to build).
 
. At least real estate price is an upward trend for the century (with inflation adjusted) - that everyone should be in consensus.

I'm not sure that is necessarily true. Consider the following graph for australia and the US for the last 130 years.
http://www.debtdeflation.com/blogs/wp-content/uploads/2009/04/IMG0031_46434765.PNG

Also consider that even Teranet's paired cohorts samples don't reflect renovation/improvement costs between sale points.

Consider also that for every lower Manhattan where prices have appreciated dramatically, there is a Detroit where prices have crapped out.

Even if we concede that prices appreciate above inflation, that doesn't consider the money potentially lost from investing in better returning asset classes.

Allow me to clarify that I'm not "anti-real estate" as an asset class, nor am I opposed to home ownership or investment. However my profession is risk pricing and management (I'm an actuary), and I'm pro-asset diversification and pro-"buy low and sell high".
 
What is the source of that observation?

http://www.caamp.org/meloncms/media/CAAMP Fall Survey 2009 Fact Sheet FINAL_2.pdf

http://www.caamp.org/meloncms/media/CAAMP Fall 2009 Mortgage Industry Snapshot Report.pdf


"Average amount of equity Canadians holding a mortgage have in their home is $142,000, representing 52 per cent of the value of their homes. Approximately one third of homeowners do not hold a mortgage and have an average $322,000 of equity in their homes. Overall, Canadian homeowners have 74 per cent equity in their homes."


there are lies, damn lies, then there's statistics ...

Our survey asked homeowners for both their remaining mortgage principal (if applicable) as well as the current market value of their home,

in a rising RE value market, one always has a higher % of value of their property (assuming one hasn't taken out an equity loan).

example:
5 years ago, one bought a $300K property with $30K dp @ 5% 5yr / 35yr:
today, the remaining mortgage is ~$255K and it's now valued at $450K;

even though the buyer has only contributed $45K in equity ($30K dp + $10K principal repayment) which equates to 15% of the original purchase price,
they theoretically have 45% equity based on the way it's calculated = $255K/$400K.

if values were 10% lower, one would have only 37% equity;
if values were 20% lower, one would have only 29% equity;
if values were 30% lower, one would have only 19% equity.

as long as values rise or maintain their levels, we can all join the bandwagon and praise the higher Canadian % equity stakes vs. the US counterparts,
but as soon as valuations decline, we're in for a doosy.
 
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I'm not sure that is necessarily true. Consider the following graph for australia and the US for the last 130 years.
http://www.debtdeflation.com/blogs/wp-content/uploads/2009/04/IMG0031_46434765.PNG

Even if we concede that prices appreciate above inflation, that doesn't consider the money potentially lost from investing in better returning asset classes.

Allow me to clarify that I'm not "anti-real estate" as an asset class, nor am I opposed to home ownership or investment. However my profession is risk pricing and management (I'm an actuary), and I'm pro-asset diversification and pro-"buy low and sell high".


X2 buyer:
I think DaveTO makes a great point and talks to what I was trying to get at. I am not anti realestate as well. In fact, I believe in in it long term
but Dave's point must be appreciated that the investment despite being "shelter" can lose money and further one must always evaluate it not only as shelter but as an investment and compare it to other investments. The fact that one lives in it, gets better tax treatment with it, and enjoys it does not change that it is still an investment (at least for a significant number of people in the market: more so since it has been commoditized as I discussed in previous post)
 
I'm not sure that is necessarily true. Consider the following graph for australia and the US for the last 130 years.
http://www.debtdeflation.com/blogs/wp-content/uploads/2009/04/IMG0031_46434765.PNG

Ok take the 100 years back and here is the 55 years graph for only Toronto. http://www.torontohomes-for-sale.com/Toronto-average-property-prices.html

Market correction is not same as bubble burst. Will 2010-12 become as bad as 1989? IMO today's market is much healthy so the likelihood is low therefore under this context "Shelter" theory makes perfect sense.

For those who can afford home at one time and all of sudden cannot, there are a couple of situations I can imagine.

- Losing body of family or ability to work - well you need to get proper insurances to protect your family, especially when you still have high mortgage balance.

- losing jobs - if the economic is recovering you can find an alike one. So, the discussion may should focus on the economic trend instead of housing? How today's economic, job market outlook so that it influences people's capability to pay off mortgages. How big is the impacted group we talk about here.

For investors, I am pretty sure people will agree real estate market is more comfortable get into rather than stock market or FX market. And, investing is so called investing, the rule number one is high risk high return. Any one of investors should understand it fully and be well prepared before they get into playing a role.
 
Ok take the 100 years back and here is the 55 years graph for only Toronto. http://www.torontohomes-for-sale.com/Toronto-average-property-prices.html

Market correction is not same as bubble burst. Will 2010-12 become as bad as 1989? IMO today's market is much healthy so the likelihood is low therefore under this context "Shelter" theory makes perfect sense.



For investors, I am pretty sure people will agree real estate market is more comfortable get into rather than stock market or FX market. And, investing is so called investing, the rule number one is high risk high return. Any one of investors should understand it fully and be well prepared before they get into playing a role.

I do not believe that you can take the "shelter theory in isolation". It may make sense for some purchasers but to assume this is the only scenario for all situtations runs the risk of missing other outcomes.

As for investors/speculators, I argued in another location that the situation is very different from 1989 and the markets crazy price escalation over 1985 to 1989. However, I recall speaking to someone in 1988 who made $40K, had 4 kids, and was sitting on 24 houses at various stages of construction rolling over each profit as he went. He ultimately lost everything (and incidently is a millionaire again playing the same game in the last 10 years but more conservatively now). the point I am trying to make is how many out there are there like him? And when/if there is a market reversal, what happens when he loses and dumps all on the market. Please realize that I appreciate this is not investing but speculating. My concern is if there is enough of this approach being done, and enough of a rate increase, the cascading effect could easily cause the "shelter theory" to disintigrate. How many people have you heard of who say they are not interested in renting and are only buying for price appreciation? that group represents a significant risk to the overall market if enough cannot carry for whatever reasons. I am not saying the shelter theory is wrong, only that once should not eliminate the possibility of more extreme events derailing it, however "sensible" it is.
 
For investors, I am pretty sure people will agree real estate market is more comfortable get into rather than stock market or FX market. And, investing is so called investing, the rule number one is high risk high return. Any one of investors should understand it fully and be well prepared before they get into playing a role.


it's funny but there's a contradiction there.

the notion that RE is less risky than stock market, etc is what got alot of people into trouble;
and unfortunately RE is still touted by many as a sure thing.

ask yourself, how many times have you heard RE investing having any risk except from some fellow members here who try to give a balanced view with pros/cons/data. (forget doomers that say values will drop by 50% without any supporting facts, etc)

almost every time i hear a RE agent quoted, it's always a good time to buy;
RE always goes up; buy before you get priced out; etc.

there are many out there that think the past 15 years of unprecedented RE appreciation is normal, especially those in the 20-35 year old (ie typical 1st-time buyer) and alot of RE agents are touting that to buyers.

there's also an erroneous statement by many that say we won't have a dramatic correction b/c interest rates will not hit the rates of 15-20% from the late '80s.
while i agree that those rates will most likely not be seen, we don't need to see those exact figures to have a dramatic effect.

when the BofC bank rate is at 0.50% (and 5-yr/10-yr bond yields are 2.70-3.65%), an increase of a few hundred basis points to a historical average of 5.00% (6.50%) will/can have a similar effect by increasing the monthly mortgage payment by 30+% ...
 
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it's funny but there's a contradiction there.

the notion that RE is less risky than stock market, etc is what got alot of people into trouble;
and unfortunately RE is still touted by many as a sure thing.

ask yourself, how many times have you heard RE investing having any risk except from some fellow members here who try to give a balanced view with pros/cons/data. (forget doomers that say values will drop by 50% without any supporting facts, etc)

almost every time i hear a RE agent quoted, it's always a good time to buy;
RE always goes up; buy before you get priced out; etc.

there are many out there that think the past 15 years of unprecedented RE appreciation is normal, especially those in the 20-35 year old (ie typical 1st-time buyer) and alot of RE agents are touting that to buyers.
True, a lot of first time buyers may be naive about these sorts of things, but I'd like to hope that the majority of posters here aren't quite that naive. (Some here may be, but hopefully not the majority.)

Personally I think real estate agents are quite useful for helping me in my home purchases and sales, but I don't look to a real estate agent for if/when-bubble prognostications. TREB is also very useful for its stats, but I always take their spin with a grain of salt.
 
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it's funny but there's a contradiction there.

the notion that RE is less risky than stock market, etc is what got alot of people into trouble;
and unfortunately RE is still touted by many as a sure thing.

ask yourself, how many times have you heard RE investing having any risk except from some fellow members here who try to give a balanced view with pros/cons/data. (forget doomers that say values will drop by 50% without any supporting facts, etc)

almost every time i hear a RE agent quoted, it's always a good time to buy;
RE always goes up; buy before you get priced out; etc.

there are many out there that think the past 15 years of unprecedented RE appreciation is normal, especially those in the 20-35 year old (ie typical 1st-time buyer) and alot of RE agents are touting that to buyers.

there's also an erroneous statement by many that say we won't have a dramatic correction b/c interest rates will not hit the rates of 15-20% from the late '80s.
while i agree that those rates will most likely not be seen, we don't need to see those exact figures to have a dramatic effect.

when the BofC bank rate is at 0.50% (and 5-yr/10-yr bond yields are 2.70-3.65%), an increase of a few hundred basis points to a historical average of 5.00% (6.50%) will/can have a similar effect by increasing the monthly mortgage payment by 30+% ...

I totally agree.
This is the point I tried to put forth. A balanced appreciation of the risks and to introduce factors to others younger than myself who have not witnessed the realignment of prices in the past and therefore cannot fully understand/appreciate the possibility of it recurring.
15% will not occur unless we have severe stagflation. governments around the world are too coordinated to allow such an increase. In fact, we had 20% in 1981, 13% in 1987, 7-8% in 1993 with the market fading. The trend is downward and I agree that historic average is likely as far as things could get before the economy would again stall and interest rates (and housing prices) would drop.
 
The reason we need to concern ourselves with those at the margins and less with those sitting tight, is that those buyers at the margins are setting the market value and dictating the asset liquidity for all. So it's fine saying that most people own their own homes, have high equity stakes and could afford to keep their home even if they took an income hit or expenses were to rise.

But the real question is what are the equity stakes and financial positions and resilience of those people actually buying? If it is weak this undermines the financial postion of all people who must act. The market sets the actual value of the property at the point of sale. If you can't sell that value is actually zero. The good thing is that most people have the ability to not act or delay action (buy or sell or refinance). They sit tight. But as we can see in the US right now, the longer the down-turn the more people get caught because they can no longer afford not to act. Once they act they get caught and their once strong position is revealed to be weak.

Re: real estate as an investment. Of course real estate is a great way to make money. Why would anyone bother discussing it if they didn't think otherwise? That said there are many niches and strategies. There is no time where some strategy or another can't make you money. However conversely there are times when some strategies will cause you to loose everything.
 
Compare countries' house-price data over time

http://www.economist.com/displaystory.cfm?story_id=14438245

1. Click every country
2. Adjust the date to 2008 Q1-2009 Q3 (most recent data)

Guess what country beats them all?

We're #1! (bubble!) We're #1 (bubble!) We're #1 (bubble!)

The whole friggin' planet people! Come on! What makes Canada so immune to forces affecting the entire world? 4 little letters...CMHC....

Yeah, Vancouver is worse, but Toronto is a close second and gaining ground. This goose is cooked.
 
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CN Tower, I agree with your conclusions. However, something is wrong with the Economist's data. For example, their data is showing that Canadian prices from 1980 to 2008 have declined 20%+ vs avg income.(?!) Similarly, it shows prices in real terms virtually unchanged 1987 to 2009.

A shame, because I've been looking for a data source like what they have there. Easy to read, good reputation, etc. I'll be looking that the economist's reports with a much more critical eye from now on.:eek:
 

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