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Baby, we got a bubble!?

Johnzz
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UT Member Join Date:Oct 2008
Location:London, UK
Posts:342I just took a stroll down memory lane and read through the early posts on this thread. Interesting to note how pretty much all fellow UT members fostered a negative attitude to real estate investment back then. I basically gave up trying to argue “in-favor” of real estate two years ago as I was only flamed out by everyone (not on this specific thread though). Not to say things can’t reverse (although I doubt it), let’s take a look at how correct these calls for doom and gloom have been since I posted this data below (post #54):


Originally Posted by Johnzz
Average GTA House Price
Year Price % Increase
1966 $21,360 0.00%
1967 $24,078 12.72%
1968 $26,732 11.02%
1969 $28,929 8.22%
1970 $29,492 1.95%
1971 $30,426 3.17%
1972 $32,513 6.86%
1973 $40,605 24.89%
1974 $52,806 30.05%
1975 $57,581 9.04%
1976 $61,389 6.61%
1977 $64,559 5.16%
1978 $67,333 4.30%
1979 $70,830 5.19%
1980 $75,694 6.87%
1981 $90,203 19.17%
1982 $95,496 5.87%
1983 $101,626 6.42%
1984 $102,318 0.68%
1985 $109,094 6.62%
1986 $138,925 27.34%
1987 $189,105 36.12%
1988 $229,635 21.43%
1989 $273,698 19.19%
1990 $255,020 -6.82%
1991 $234,313 -8.12%
1992 $214,971 -8.25%
1993 $206,490 -3.95%
1994 $208,921 1.18%
1995 $203,028 -2.82%
1996 $198,150 -2.40%
1997 $211,307 6.64%
1998 $216,815 2.61%
1999 $228,372 5.33%
2000 $243,255 6.52%
2001 $251,508 3.39%
2002 $275,231 9.43%
2003 $293,067 6.48%
2004 $315,231 7.56%
2005 $335,907 6.56%
2006 $351,941 4.77%
2007 $376,236 6.90%
2008 $379,347 0.83%
The average yearly compounded growth of a home in the GTA during this period was 7.09%.

Now we can add:

2009 $395,400 4.25%
2010 $431,463 9.10%
2011 $477,407 10.65% (April)

As I said in this original post 2 1/2 years ago:

Originally Posted by Johnzz
Most central bankers in the world (FOMC, ECB BoC, BoJ, etc…) have explicit (or implicit) goals to maintain inflation between 1% and 3% per year forever. This is easy to do as we now have a “fiat” (paper) monetary system. Most systems withdrew from the gold standard (money supply based on amount of gold in the vault) after Richard Nixon in 1971. It is now extremely easy for central bankers to maintain a positive inflationary environment as they just print more money (or type a few keys on a keyboard). The next few years will prove to be difficult for central bankers (no question) but don’t you worry, central bankers will prevail (I wouldn’t bet against them!). Basically, the way most financial systems work today, inflation acts as a form of stealth tax on the masses. Your living standards are continuously eroded by inflation (a dollar today will be worth about 1 cent next century). The reason governments support this system is that it’s a great way to secretly reduce national debts. These huge gov’t debts continuously decrease in relation to the overall economy, thus becoming more manageable and easier to pay off.

This is the beauty of real estate investment. Provided you invest in the right area at the right price, don’t over leverage (never invest with just 5% down), and are prepared to wait, you will handsomely out perform most any other asset class. You’re basically taking advantage of the system in the same manner as governments. Let it work for you and not against you!
2008 sure feels like a long time ago, but events have basically unfolded as predicted. Furthermore, central banks will continue holding target rates well below inflation, thus maintaining negative "real" rates for the foreseeable future. Nominal rates can certainly rise, but they'll remain below inflation. During a sustained period of negative real interest rates, wealth transfers from the savers (people who buy bonds, gic's, etc) to debtors (Governments and other borrowers).

Take a look at this new working paper from Carmen Reinhart:

https://www.imf.org/external/np/semi...2/pdf/crbs.pdf

Here’s a quote:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.

Unfortunately for retirees, negative real rates are here to stay. Hmm... If financial repression worked so well for governments to reduce debt after World War II, I wonder if they'll try it again?

I suggest building your investment portfolio around this premise.


Sorry, this post wasn't directly related to Aura, but I believe any purchaser in this building will not regret it!
Last edited by Johnzz; Today at 06:46. Reason: additional point

Copied from another thread posted by Johnzz. KA1
 
Canadians borrowing more against their homes

Fifteen per cent of Canadian homeowners took money out of their homes last year, at an average amount of $30,000, new data showed Wednesday.

New data from the Canadian Association of Accredited Mortgage Professionals Wednesday showed that Canadians took out $26 billion worth of equity from their homes in 2010, an increase on the $20 billion taken out in 2009.

The most popular use for those funds was home renovations, with 36 per cent of the 2,000 Canadians the group surveyed for the report saying that was their plans for the money they withdrew.

But investments (28 per cent) replaced debt consolidation (19 per cent) as the number two use of home equity takeout.

"As economic confidence returns in Canada, many survey respondents have told us they now feel comfortable using some of that equity to improve their homes and to invest," CAAMP CEO Jim Murphy said.

Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty are two high profile names who have repeatedly voiced concerns over Canadians' debt loads in recent months.

On average, Canadian homeowners have $222,000 in home equity, equal to 66 per cent of the value of their homes.

Approximately three million Canadians have no debt on their homes. And the report estimates that 79 per cent of mortgage holders have at least 25 per cent worth of equity in their homes, and roughly three per cent have "negative equity" — meaning they owe more on their home than it would be worth if they sold it.

The average down payment for a home purchased in the last 12 months was 30 per cent, up from 26 per cent for homes purchased two years ago.
Click to expand...

And a similar article from Globe and Mail
http://www.theglobeandmail.com/glob...y-lines-of-credit-220-billion/article2018424/

And as policy makers worry whether homeowners will find themselves in trouble as interest rates rise, the study found that 63 per cent have fixed-rate mortgages that won’t change until their term expires. Thirty per cent have variable rates, which are more susceptible to interest rate fluctuations.

Meanwhile, only 22 per cent of all mortgage holders have amortization periods longer than 25 years. The government also clamped down on 35-year amortization periods in January, making 30-years the longest amortization period allowed
Click to expand...
 
Last edited:
klb86 said:
New data from the Canadian Association of Accredited Mortgage Professionals Wednesday showed that Canadians took out $26 billion worth of equity from their homes in 2010, an increase on the $20 billion taken out in 2009.

The most popular use for those funds was home renovations, with 36 per cent of the 2,000 Canadians the group surveyed for the report saying that was their plans for the money they withdrew.
Click to expand...
I borrowed from my HELOC in 2010 for a home renovation. I was actually going to wait to do it a few years later, but couldn't pass up the home renovation tax break the Conservatives implemented. That expired Feb. 2010, which meant you had to have the work done in 2009 or early 2010 to qualify. There were also eco tax breaks that I took advantage of. Those expired March 2011, which meant you had to have the work done in 2010 (or earlier) or early 2011 to qualify.

http://www.fin.gc.ca/act/hrtc-cird/hrtc-cird-eng.asp
http://www.ecoaction.gc.ca/ecoenergy-ecoenergie/index-eng.cfm


But investments (28 per cent) replaced debt consolidation (19 per cent) as the number two use of home equity takeout.
Click to expand...
I am not a fan of the Smith Maneuver, but those who actually did that in 2009-2010 benefitted greatly from it.


The average down payment for a home purchased in the last 12 months was 30 per cent, up from 26 per cent for homes purchased two years ago.
Click to expand...
Nice to hear.
 
Last edited:
Regarding the average down payments rising; I am suspecting there has been perhaps some movement in 2nd, 3rd time buyers who have gained equity in their homes. I would be suprised if there was more equity from first time buyers, given that prices have increased more than wages which would make it more difficult to muster the 5 or 10% down payments.

So, I am postulating that a 2nd time buyer had a rise in his equity because his first home went up.

For eg. If someone bought 5 years ago a condo for $200K and it is now worth $260K, they would now have presumably $60K + if they had 10% down $20K for 80K of a down payment. If they now purchased $400K, they would have a 20% ($80K) down payment. Note this is predicated on the rise in property value.

With deference to Johnzz, even a 5% drop in prices would lower the equity back to 15% and a 10% drop in prices bring back the individual to the 10% original down payment range (though granted on a property worth twice as much as when the original property purchase was first made.

I am just not sure that the rosy picture being painted about the amount of equity is real because it is predicated on above average returns for the 2010 and the up to 2011 April numbers.
 
The average down payment for a home purchased in the last 12 months was 30 per cent, up from 26 per cent for homes purchased two years ago.
Click to expand...
I wonder what the figure is when counting only first time home buyers.
 
Polkaroo said:
I wonder what the figure is when counting only first time home buyers.
Click to expand...

Similarly, I wonder how much of that 4% increase from 26 to 30% derived from the elimination of 40 yr amortizations, and how much was a willing choice by the purchaser.
 
daveto said:
One of the interesting similarities between the UK and Canadian housing markets, is that the mortgages in both markets are fairly short term at 3-5 years. This contrasts with somewhere like the US with 25 year terms.
Click to expand...

Are you sure about that? I'm not saying you're wrong but that certainly wasn't the case when I lived there. It was like the US system. When my family came to Canada we thought the renegotiate every few years idea quite bizarre.
 
Wooba, I don't know how long ago you lived in the UK? Maybe they changed. But now, every UK mortgage site I go to is chock full of 2-5 yr terms.
 
Lots of data here.

Average GDS ratio in 2010: 19.6% [32% is a general maximum guideline.]
Average TDS ratio in 2010: 28.9% [40-42% is a general maximum guideline.]
Percentage of insured borrowers who would have TDS ratios over 45% if rates rose to five percent: 1% or less
Number of insured home buyers in 2010 with TDS ratios of 45%+: 2,000-2,500 (out of 9.45 million home owners)
Percentage of mortgagors who say they would not be “concerned” about their ability to handle a $300+ monthly payment increase: 66%
Percentage of mortgagors who say they have no ability to handle increased monthly payments at all: 3-4%

Full report here.
 
Last edited:
I read this article this morning as well.
GDP is not "GDP". The article makes a lot of sense. I suspect Canadian figures are less propped up than in the US but still significant.
 
Eug said:
Lots of data here.

Average GDS ratio in 2010: 19.6% [32% is a general maximum guideline.]
Average TDS ratio in 2010: 28.9% [40-42% is a general maximum guideline.]
Percentage of insured borrowers who would have TDS ratios over 45% if rates rose to five percent: 1% or less
Number of insured home buyers in 2010 with TDS ratios of 45%+: 2,000-2,500 (out of 9.45 million home owners)
Percentage of mortgagors who say they would not be “concerned†about their ability to handle a $300+ monthly payment increase: 66%
Percentage of mortgagors who say they have no ability to handle increased monthly payments at all: 3-4%

Full report here.
Click to expand...

I find this interesting:

•Percentage of Canadians who buy homes each year: 4.5%-5.5% [It’s almost counterintuitive that such a small percentage of the market drives home prices for the rest of the population.]
 
Actually, I don't think it is counterintuitive. I am actually surprised it is as high as 5%. The smaller the inventory and the less people moving means that those
at the margin become that much more important.

By way of example. There are 10 million homes say in Canada. 800,000 are for sale. Say there are 300,000 which are in need of serious repair, not nice or
incorrectly priced. Hence 500,000 available for the 500,000 looking. the first 300,000 get sold. Now you have 200,000 looking for the best of what is left
in the residual 200,000 and anything decent is going to get bid up. I appreciate this example does not allow for new inventory but there is also new purchasers
to be considered.

The point is that there are people are the margin who are deciding the price because they are buying what is on inventory at any time.

Now add that there have been investors buying as well, the investor looks at rate of return. If money can be made and the investor is willing to accept that
rate of return, the investor will bid accordingly. At present the cheap availability of capital is meaning we are drawing investors and a number of marginal
investors, hence artificially driving demand; at least compared to what it would be if capital costs were at historic levels.
 
http://www.theglobeandmail.com/news...-in-obesity-diabetes-epidemic/article2024476/

Link to an article in today's The Globe and Mail touting the 'healty lifestyle' of people living downtown -- walk to organic cafe or yoga class -- as compare to detachment, obesity and, in turn, diabetes for individuals living in the 'urbs.

Now the readers of The globe and Mail -- educated, highly educated, financially secure in their chosen profession, young seniors and soon to be young seniors -- will start looking for a 'dig' downtown, for living 'healthy' golden years.

This means that a 'bubble' will not bust -- especially in the downtown --. There was no bubble to burst, to start with. Instead prices will,steadily, keep going up.

Indididuals who had forecasted 15% decline in the prices to year 2008 levels, backed up, in a case or two, with technical and financial analysis of past data, will now wring their hands and try to figure out as to how did they go wrong.

Individuals, who have gone with their 'gut' feelings and purchased a unit in 'Pace' -- ignoring the current status of the location -- with a vision of the neighbourhood in a few years, will pat their backs.

Then, there will be others who will, with a bit of pride I might add, will reap the benefits of their 'exuberance' and buying a unit in S/L and the likes.

Read the article and see if you have any different take.
 
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