Baby, we got a bubble!?

[TrickyRicky]

^Fair enough. There was a crash in 1987 and a smaller secondary event in 1989. These details aren't really the main point of the argument, which is concerned with how we view events and the relative insignificants of a 6-month horizon.

However, if we could revisit the actual events I listed and compare (end of) 1987 to the 1993 housing bottom (depending where). I'm sure people who have 5-year mortgage terms that bought in the last few years would take no comfort in the date of their renewal obligation if we project that 1987 is to 2008 as 1993 is to 2014.

Of course we need to be careful about projecting forward historical events as each event has it's own unique features. We can count on history repeating itself but we can't really predict how and when with great accuracy. The point to take away is that if there is a next housing bottom it could still be several years away.

 

[BobBob]

On the other extreme, we have the time scale imposed by the pace of our biological lives. Postponing a big life move like the purchase of a home for 5 or 10 years for the hope of maybe profiting from a deep decline in values (but, historically speaking, most likely not) is a difficult sell for most people, I would think.

 

[ponyboy]

it is hard to get the timing right.

I would like to purchase a house with my partner, but we can't really afford the modest $800K Seaton Village or Annex semi that we most want, and the affordability metrics are distorted by rates that can't possibly be sustained over the life of a mortgage. Why can't we get more honesty from our representatives and institutions about long-term affordability so we have modest growth rather than boom-bust cycles? It seems deeply irresponsible to me.

Our government seems hell bent to prop it up as long as possible through monetary policy and backdoor CMHC assurances to banks to lend. I'm not sure they (govt, media driven by RE ads, etc) did that as well in the past, but might all of this stimulus and sucking of sales from the future make any future correction bigger than need be? Meanwhile, we will rent and try not to get caught up in the insatiable urge to own, as much as we hope to some day. Does anyone on here who purchased a house or condo come to regret it? If so, why?

 

[kondoz]

I think people are far too focused on short-term time frames. I think for a whole set of reasons (technology, the short-term fixation of stock market culture etc.) people want trends to occur quickly. Time and time again however we see that in real estate trend timing may be vital but it is extremely difficult.

Take a 6 month window for example. Everyone wants to know what will happen 6 months from now. People who predict correctly 6 months on are called heros, people who are wrong are called morons. But wait a second. This might be an extreme example, but take the guy who bought in 1989 and had to wait until 2005 for his property value to return to its point of origin. 6 months represents 3% of the time frame between these points. During this period prices did two general things, they went down, and then they went back up. So 6 months represents an essentially insignificant amount of time in that general cycle. If you predicted prices rising or falling during some 6 month period during that cycle your prediction was essentially of no significant value.

This does not mean there are not over-arching factors that will drive the market up or down or flat. What it means is that the fall in prices this spring and the rise in prices this summer may actually be insignificant events compared to the general trend. Predicting that prices will rise or fall and being years off in timing is actually not as inaccurate as you may think.

In 1989 the stock market crashed. The following events, directly related to the subsequent recession, forget about the details of the events just how they relate to the 1989 event:

-1989 stock market crash
-GST starts 1991 (2, 6-month periods later)
-O&Y bankcrupt 1992 (5, 6-month periods later)
-unemployment peaks 11.6% 1992 (5, 6-month periods later)
-Housing bottoms I think 1993 (7, 6-month periods later)
-PC government fails 1993 (7, 6-month periods later)

Convert these dates into our present situation. This is a thought exercise, it is not ment to be a factual prediction, just something to illustrate time periods:

-2008 stock market crash
-HST starts 2010 (3 6-month periods later)
-Promenant developers go bankrupt 2011
-unemployment peaks 2011
-Housing bottoms 2012
-Major change of government 2012

Thanks TrickyRicky. I like your thinking. It is a nice way to conceptualize everything without being caught up in the month-to-month trends.

 

[TrickyRicky]

Personally I don't like the idea of waiting to time markets to buy your own home. Just do it when you have the need and the means (this means to me greater than 25% of the value of the property in cash). This very well may mean your financial goals will be delayed. It sucks but as Gandalf said, all we can do is do the best we can with the times given to us.

That said I don't think people should ever sleepwalk into something that is the largest single financial decision in most of their lives. Many people I know have critically undeveloped senses of the relative weight of choice and risk particularly over time. Infact I find this fascinating because it is so prevalent that it must have it's origins in basic human behaviour.

Speaking of basic human behaviour, I think one of the most important aspects of owning your home that isn't talked about much is the way that people are much better at solving problems with fixed boundaries. Infact the government and financial institutions count on this. A problem with open boundaries would be one like "How do I make a million dollars?". Very few people can solve this problem conceptually and sustain the actions required to realize this goal. Yet countless people make a million dollars by owning a home and simply solving the fixed boundary problem of "how do I keep my home?". Bubble or no bubble we are deep in a debt pile and the government and financial institutions are counting on legions of home-owners to grab their shovels and dig us out of this mess collectively by each solving the problem of "how do I keep my home?". The more you overstretched yourself to obtain home ownership, the tougher this problem will be to solve in the near future.

 

[Therion]

Why can't we get more honesty from our representatives and institutions about long-term affordability so we have modest growth rather than boom-bust cycles? It seems deeply irresponsible to me.

Well, monetary policy is influenced by many other things besides housing prices. When interest rates were lowered to their current levels, it was mostly to spur lending in general, which has come to a screeching halt in the U.S. Carney had to keep up with the U.S. just to keep the Canadian dollar from exploding, which would have destroyed several sectors of Canadian industry. The sudden rebound in housing was an unfortunate side-effect.

 

[tempperm]

On the other extreme, we have the time scale imposed by the pace of our biological lives. Postponing a big life move like the purchase of a home for 5 or 10 years for the hope of maybe profiting from a deep decline in values (but, historically speaking, most likely not) is a difficult sell for most people, I would think.

Agreed. But nobody thinks they ll have to wait 5-10 years. People on the sidelines are probably thinking they' ll wait 1 year which becomes 2. Then by year 5 u feel really screwed. We purchased at the peak in 2007 - obviously I don' t regret financially right now but even if my home were to lose 10-15% I don't think I would regret. Since our purchase we've gotten married and now have a kid.

Current low interest rates are tempting and at the same time scary. Assuming our status(age/finance/personal) was the same as back in 2007, I would buy. Money is nice but life is short.

 

[MAU]

Current low interest rates are tempting and at the same time scary. Assuming our status(age/finance/personal) was the same as back in 2007, I would buy. Money is nice but life is short.

Live for today or save for tomorrow. It's all a trade off and there's no right answer. Just be aware of what you could be trading for the privilege of owning today. If you believe house prices are 15% overpriced, your options could be: a) Buy a house today, at a premium, and pay a mortgage for 35 years (until your retirement!) or b) Wait out the peak of the market and buy the same house for 25 years of mortgage payments.

And 15% is merely a correction. A small wait could save many, many years of mortgage payments for no extra effort. I'm not talking about waiting for the bottom of the market, just avoiding the peak.

 

[BobBob]

A small wait could save many, many years of mortgage payments

It could, but it could also end up costing you more. The point is, it's almost impossible to know.

 

[daveto]

It could, but it could also end up costing you more. The point is, it's almost impossible to know.

There are some things that we know as fact. One of them is that nationwide Canadian housing prices as a multiple of average income (5x+) are substantially higher at present than all the other G8 countries.

We also know that the US multiple peaked at just over 5x, before it reduced down to its present multiple of 4x.

We also know that no other G8 country has an equivalent agency to the CMHC (in it's $ scale of support for new mortgage origination)

 

[MadMax]

There are some things that we know as fact. One of them is that nationwide Canadian housing prices as a multiple of average income (5x+) are substantially higher at present than all the other G8 countries.

We also know that the US multiple peaked at just over 5x, before it reduced down to its present multiple of 4x.

We also know that no other G8 country has an equivalent agency to the CMHC (in it's $ scale of support for new mortgage origination)

Well then.....thank GOD for CMHC. Hallelujah!

 

[cdr108]

There are some things that we know as fact. One of them is that nationwide Canadian housing prices as a multiple of average income (5x+) are substantially higher at present than all the other G8 countries.

We also know that the US multiple peaked at just over 5x, before it reduced down to its present multiple of 4x.

We also know that no other G8 country has an equivalent agency to the CMHC (in it's $ scale of support for new mortgage origination)

According to the following report from May 2009 for Q1 the average was 3.1x for US ...
http://www.demographia.com/db-ushsg2009q1.pdf


Median Multiple (House Price/Household Income) Trend (Table 4): Historically, the Median Multiple (median house price divided by median household income) has averaged 3.0 or less in the United States.

Pre-Housing Bubble: Before the housing bubble (1980-2000), the Median Multiple averaged 2.9. The average in More Prescriptive Markets was 3.4, with the Ground Zero Markets at 3.8 and the Other Prescriptive Markets at 2.9, The More Responsive Markets had an average Median Multiple of 2.5.

Peak of the Bubble: The third quarter of 2007 represented the peak of the housing bubble in many markets. By this point, the Median Multiple averaged 4.6. The average in More Prescriptive Markets was 5.8, with the Ground Zero Markets at 7.3 and the Other Prescriptive Markets at 4.8, The More Responsive Markets had an average Median Multiple of 3.2.

Phase I: At the end of Phase 1 (third quarter of 2008) the Median Multiple had dropped to 3.9. The average in More Prescriptive Markets was 4.6, with the Ground Zero Markets at 5.2 and the Other Prescriptive Markets at 4.2, The More Responsive Markets had an average Median Multiple of 3.0.

Phase II: The most current data indicates that the Median Multiple has dropped to 3.1, nearly to the historic ratio of 2.9. The average in More Prescriptive Markets was 3.6, slightly above the pre-housing bubble average of 3.4. The Ground Zero Markets fell to 3.8, equaling the pre-housing bubble level. The Other Prescriptive Markets dropped to 3.5, still above the pre-housing bubble level of 2.9, The More Responsive Markets had an
average Median Multiple of 2.6, just above the 2.5 pre-housing bubble level.


ummm ... aren't Freddie and Fanny Mac of the US much higher ???

EDIT:

There was another chart indicating slightly different ratios using MAJOR METROPOLITAN MARKETS ...

Pre-Bubble (1980-2000 Average): 3.4
Housing Bubble (2007: 3rd Quarter): 5.8
Housing Bubble (2008: 3rd Quarter): 4.6
Housing Bubble (2009: 1st Quarter): 3.6

 

[daveto]

Well then.....thank GOD for CMHC. Hallelujah!

lol. sure, but it's a gov't agency following short term political direction. Is that really what you want to build upon for the valuation of your largest asset?

 

[daveto]

ummm ... aren't Freddie and Fanny Mac of the US much higher ???

CDR, great source for the stats above. wrt Freddie/Fannie, it is actually the FHA which covers the high ratio (80%+) mortgages.http://www.fha.com/

They are on track for $440b of mortgages in 2009. Proportionately that would be $44b for Canada, and much smaller than the CMHC's $130b+

 

[MadMax]

CDR, great source for the stats above. wrt Freddie/Fannie, it is actually the FHA which covers the high ratio (80%+) mortgages.http://www.fha.com/

They are on track for $440b of mortgages in 2009. Proportionately that would be $44b for Canada, and much smaller than the CMHC's $130b+

I think we need to see a significant increase in defaults before we should start worrying about the fallout and effect that may or may not happen to our homes and our Government sponsored mortgage insurer...I just don't see that happening...yet.