Baby, we got a bubble!?

[DearSummer]

It appears that you fail to grasp simple concepts of investment. Stocks are volatile and if they are bought on margin and drop significantly the bank will sell your stock. Whereas, if the real estate market corrects and the value of your property drops in value temporarily, just as the stock might, there is no impact on your mortgage. And even if you are unable to service the mortgage you are legally entitled to many months grace period under the law before a lender can ultimately foreclose on its mortgage.

This lesson is free the next one will cost you

You must be a real hit at parties.

 

[interested]

agreed

Also fromt the quote: CN Tower wrote: Theoretically I agree with you. However, practically speaking people don't utilize very much leverage in the stock market and it isn't as easily available or cheap. If you buy on margin and the market moves against you the bank will sell your stocks to protect itself. That doesn't happen in the real estate market where property values are not marked to market daily.

If you owned a rental property in 2008 you would have coasted through the financial crisis with little impact and steady cash flow.

If you owned high margined stocked in 2008 you would very likely have been completely wiped out and quite possibly hit with a big tax bill.

That's the difference."

Hold on guys. Yes a 5 year fixed mortgage and the market adjusts, the bank is not calling your loan. This is predicated on the 5 year period improving.
If you had a 5 year mortgage in 1989 in 1994 your property if it was a condo was probably down at least 30%. Granted the loan rates dropped as well.My point is that it depends on when you have to negotiate your 5 year renewal.

As relates to stocks. CNTower is correct. Margins in the stock market are rarely over 2:1 and few people buy at 5:1 which would be the equivalent of 20% down on a property.

However, many of the condos now are not in positive cash flow at over $600/sq.ft. It is a question not only of the morgage rate but the staying power of those who are cash negative and further if there is a market decline and people trying to get out with others desperately trying to cover their mortgages, rents will likely drop as desperate landlords drop rents to try and hold onto properties to "ride it out" further aggravating the situation.

 

[Condo George]

http://www.canadianrealestatemagazine.ca/news/item/2084-more-appetite-for-condo-units-poll-indicates

 

[interested]

^^^
The lack of knowledge out there is shocking. Clearly the Ontario economy is not doing well, the debt levels rising and yet the article says people think Ontario is doing better. It simply is not.
I am happy that people buy but I believe most people unfortunately are not financially literate enough to make these decisions. I do not mean to be condescending...just pointing out that "blind faith" is not a reasonable investment strategy.

 

[DearSummer]

BoC held the rate at 1% today, marking 4 straight years at this level. Neutral on further raises/cuts: "The bank is neutral with respect to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks," the bank said.

http://www.cbc.ca/news/business/bank-of-canada-holds-interest-rate-at-1-again-1.2708512

Fed is also signalling it will hold rate until the economic recovery is crystal clear. Looks like mid-2015 is the earliest things could start to move now. We're entering dangerous territory if we have 0% or 1% interest rates when the next recession hits. If history is a guide, we should hit another economic skid in the next few years.

 

[TheKingEast]

^^^
The lack of knowledge out there is shocking. Clearly the Ontario economy is not doing well, the debt levels rising and yet the article says people think Ontario is doing better. It simply is not.
I am happy that people buy but I believe most people unfortunately are not financially literate enough to make these decisions. I do not mean to be condescending...just pointing out that "blind faith" is not a reasonable investment strategy.

People are buying because they don't want to miss out or fear being priced out of the market if they wait. As someone who's looking for a new place...I have been dealing with this first hand. I think I may be priced out if I wait any longer. But at the same time feel property is way overvalued. So, do I take the plunge and take advantage of the historically low interest rates or sit on the sidelines and either be priced out in a year or 2 or take advantage of the number of people who will be giving their condos away if the rates go up and the market tanks?

People are going all in on real estate right now. That worries me.

 

[DearSummer]

People are buying because they don't want to miss out or fear being priced out of the market if they wait. As someone who's looking for a new place...I have been dealing with this first hand. I think I may be priced out if I wait any longer. But at the same time feel property is way overvalued. So, do I take the plunge and take advantage of the historically low interest rates or sit on the sidelines and either be priced out in a year or 2 or take advantage of the number of people who will be giving their condos away if the rates go up and the market tanks?

People are going all in on real estate right now. That worries me.

What percentile of income do you think you are in Toronto? If you can't afford it, how can others? If you are going to be priced out, wouldn't others as well?

The logic that you should buy now or be prices out forever is hilarious to me. It's the exact type of thinking that accompanies an irrational bubble.

 

[TheKingEast]

What percentile of income do you think you are in Toronto? If you can't afford it, how can others? If you are going to be priced out, wouldn't others as well?

The logic that you should buy now or be prices out forever is hilarious to me. It's the exact type of thinking that accompanies an irrational bubble.

That's the thing. Are people really aking $150K/yr sitting on $100K downpayment?

 

[interested]

People are buying because they don't want to miss out or fear being priced out of the market if they wait. As someone who's looking for a new place...I have been dealing with this first hand. I think I may be priced out if I wait any longer. But at the same time feel property is way overvalued. So, do I take the plunge and take advantage of the historically low interest rates or sit on the sidelines and either be priced out in a year or 2 or take advantage of the number of people who will be giving their condos away if the rates go up and the market tanks?

People are going all in on real estate right now. That worries me.

the problem is people are going all in on real estate, the stock market and every asset class. This is driving up the price of everything. People are taking the attitude that it is a good time to get debt as interest rates are at 50 year lows. The problem is as has been said TheKingEast, when interest rates do reverse finally at some point.....expect all asset classes to drop. Remember your debt/mortgage will not.
The real issue is: can you afford to carry and do you have enough of a down payment. If you think you are reasonably secure with your job and won't have to move at a time other than of your choice, then you can get in.
Some will say buy...others not. Only you can judge on your circumstance.
The problem is that the fear of being priced out drives up the prices to a point (nobody knows when the ceiling is reached) and at some point people decide it is simply not economical or can't afford to buy any more...the psychology shifts, and then you can't sell or you do so at a loss. Hence the questions to you about your own personal situation.

 

[greenleaf]

What percentile of income do you think you are in Toronto? If you can't afford it, how can others? If you are going to be priced out, wouldn't others as well?

The logic that you should buy now or be prices out forever is hilarious to me. It's the exact type of thinking that accompanies an irrational bubble.

It's a few years out of date, but some downtown household income is in a graph here on p5 (19% of downtown households have income of higher than $150k): http://www1.toronto.ca/city_of_toronto/city_planning/sipa/files/pdf/ldc2011_final_pressres.pdf

 

[TorontoMike$$]

CG - Good call ; )

TORONTO, July 16, 2014 -- Toronto Real Estate Board President Paul Etherington announced that TorontoMLS home sales through the first 14 days of July 2014 were up by 11.6 per cent year-over-year to 3,891. New listings were also up compared to the same period in 2013, but by a lesser annual rate of 9.7 per cent.

“There are two key takeaways from the July mid-month results. First, given the continuation of strong sales growth, it is clear that buyers are still attracted to affordable home ownership options in the GTA. Second, if new listings growth begins to outpace sales growth, we could start to see an improvement in the overall supply of homes for sale. This would be a relief for some buyers who have been hard pressed to find a home that meets their needs in this tight market,” said Mr. Etherington.

The average selling price for sales reported during the first two weeks of July 2014 was $549,174. This result was up by eight per cent compared to the same period in 2013. The strongest rates of price growth were reported for semi-detached houses and townhouses in the City of Toronto.

“Annual average price growth remains in the high single-digits or low double-digits for many home types across the GTA. It is possible that we could see more choice for buyers in the second half of 2014 in the form of increased new listings. A sustained increase in choice for buyers could serve to gradually ease the pace of price growth in some market segments,” said Jason Mercer, the Toronto Real Estate Board’s Senior Manager of Market Analysis.

 

[James]

In the prime neighborhoods, household incomes are definitely above $100k. You can check the Realtor.ca site and click on the Demographics tab when you're viewing a property to see a rough breakdown. I think it's a combination of dual income families just as much as individuals earning an above average income who choose to live in these areas. I'm not sure how old or accurate these figures are (MLS gets the info from a third party who compiles it from Statistics Canada data).

 

[TheKingEast]

the problem is people are going all in on real estate, the stock market and every asset class. This is driving up the price of everything. People are taking the attitude that it is a good time to get debt as interest rates are at 50 year lows. The problem is as has been said TheKingEast, when interest rates do reverse finally at some point.....expect all asset classes to drop. Remember your debt/mortgage will not.
The real issue is: can you afford to carry and do you have enough of a down payment. If you think you are reasonably secure with your job and won't have to move at a time other than of your choice, then you can get in.
Some will say buy...others not. Only you can judge on your circumstance.
The problem is that the fear of being priced out drives up the prices to a point (nobody knows when the ceiling is reached) and at some point people decide it is simply not economical or can't afford to buy any more...the psychology shifts, and then you can't sell or you do so at a loss. Hence the questions to you about your own personal situation.

Yea. We're trying to time the market which is just not really practical if you want to live your life.

 

[TO_Guy]

Ah I see so it's OK when you identify risks with margin investing but not OK when I identify risks with owning rental estate. Thanks for that.

Finance 101 says when considering risk/return, you look at the beta of an investment, which essentially measures its volatility relative to the overall market. Higher volatility equates to a riskier asset and higher the expected return. Using the beta of any Canadian residential REIT as a proxy, you can see RE, historically and over the long term, is a much less risky asset than equities. Sure, most people are highly leveraged when investing in RE and that equates to more risk (but also greater gains) but that variable aside (i.e. RE vs. equity investing on margin) and with the expected return that is commensurate with the risk (i.e. beta) in mind, you can see which asset class has actually performed better over the last 5 years.

 

[DearSummer]

Finance 101 says when considering risk/return, you look at the beta of an investment, which essentially measures its volatility relative to the overall market. Higher volatility equates to a riskier asset and higher the expected return. Using the beta of any Canadian residential REIT as a proxy, you can see RE, historically and over the long term, is a much less risky asset than equities. Sure, most people are highly leveraged when investing in RE and that equates to more risk (but also greater gains) but that variable aside (i.e. RE vs. equity investing on margin) and with the expected return that is commensurate with the risk (i.e. beta) in mind, you can see which asset class has actually performed better over the last 5 years.

My point was that owning rental property has more risks than simply your asset depreciating. You might not get a good tenant (i.e. they may not pay you, destroy the house, etc.). You might not get a tenant at all, etc. A single home in a single neighbourhood has way more risk than the Canadian real estate market as a whole or a REIT because those things are diversified and a single home isn't.

Trying to look backwards and say an asset that returned less than another was actually better because of the beta is ridiculous. You can't look in the rear view mirror and say "well equities are way riskier therefore the return isn't as good as real estate". Maybe they are riskier, but they still outperformed real estate.