Drive behing the Market? Status Fad?

[cdr108]

To each his own...some people are renters and some people are purchasers - only one major difference....people that rent and continue to rent will never have a chance to make money off of real estate, while people who buy have an extremely good chance of making money off of real estate. There is no comparison, really. Sitting on the sidelines and waiting for some magic number that signifies a balanced market is un-realistic. When prices were at their lowest last year after the downturn and you didn't buy, then when will be a good time to buy? When interest rates start rising? I live for today, and in the moment so to speak. Nobody ever flourished financially by sitting on the sidelines with cash in hand waiting for the market to rebalance!

that's one way to look at it ...

there are many who bought in the late 80's who would disagree with your statements and saw their values decline 50% in few years until 1995 when the markets started to recover.

during that time, many lost their homes since they didn't have enough equity which would allow them to re-finance ... sounds familiar doesn't it (ie. south of the border, et al)

so those ppl didn't even get the chance to 'ride-it-out' so to speak.

and those who bought in the late 80's and were able to wait it out, had to wait almost 20 years just to see the value get back to the purchase price ... no appreciation over 20 years and all the interest, maintenance, taxes, etc to have to deal with.

 

[simuls]

that's one way to look at it ...

there are many who bought in the late 80's who would disagree with your statements and saw their values decline 50% in few years until 1995 when the markets started to recover.

during that time, many lost their homes since they didn't have enough equity which would allow them to re-finance ... sounds familiar doesn't it (ie. south of the border, et al)

so those ppl didn't even get the chance to 'ride-it-out' so to speak.

and those who bought in the late 80's and were able to wait it out, had to wait almost 20 years just to see the value get back to the purchase price ... no appreciation over 20 years and all the interest, maintenance, taxes, etc to have to deal with.

Yes, this happened but if you look at Toronto historically, this was an anomaly and the fact that we didn't return to parity with 1992 prices until 2006 should indicate that the current value of real estate is anything but overvalued - especially when talking about homes (not condos, as they're another entity entirely and can be built at almost anytime).

 

[safeashouses]

CMHC - Canada's Breaking Point

To the OP- read this informative and insightful blog post and you'll better understand the origins of the current mortgage hysteria post-credit crisis and the enormous risks unwillingly thrust on the Canadian taxpayers.

http://americacanada.blogspot.com/2009/07/cmhc-and-our-government.html

Pay attention the following chart as well. It explains a huge amount of the appreciation seen in the housing market since 1995.
http://3.bp.blogspot.com/_0YOsyi5WbLY/SmTOTt7CvAI/AAAAAAAAAG0/lZzqmPhrAKA/s1600-h/Mortgage+Credit+Outstanding3+%28June09%29.Bmp

The foregoing spells massive government bailout at some undetermined point in time not too far in the distant future.

 

[daveto]

Yes, this happened but if you look at Toronto historically, this was an anomaly and the fact that we didn't return to parity with 1992 prices until 2006 should indicate that the current value of real estate is anything but overvalued

Simuls, I'm not sure I understand the logic behind your point?

Prices are higher in real terms currently than at Toronto's last peak. We agree that the prices from the last peak were severely overvalued. Family incomes in real terms have remained flat over the past 20 years. So doesn't that in fact indicate the opposite of what you are concluding? Doesn't it prove that Toronto RE is indeed the most overvalued it has ever been? Or if you allow for appreciation (2% above inflation in the "true real value" of Toronto RE, does it not prove only that the market is perhaps less overvalued than 20 years ago?

Going further, if one wishes to fairly compare prices 20 years ago to now, I think we should compare the various inputs into the housing price.
-8% vs 4% mortgage rates should inflate current prices more.
-25% downpayment vs 0-20% downpayments now should inflate current prices more
-far higher proportion of freehold in 1989 than now should lower current avg prices now
-far larger properties in 1989 (more freeholds, and larger condos) than now should lower current avg prices.

I don't know how to property weight the influence of the above 4 factors. The first two should increase current avg prices, and the last two should lower current avg prices (all in comparison to 20 years ago)

http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

To each his own...some people are renters and some people are purchasers - only one major difference....people that rent and continue to rent will never have a chance to make money off of real estate, while people who buy have an extremely good chance of making money off of real estate.

MM, sorry, but not true. A more accurate summation of the differences would be "people that rent and continue to rent will never have a chance to make money nor lose money off of real estate, while people who buy have an extremely good chance of making money off of real estate. (albeit far less than if they had invested in almost any other asset class)"

Nobody ever flourished financially by sitting on the sidelines with cash in hand waiting for the market to rebalance!

MM, true of course. But only if the person also invests in nothing else during that time. But self-evidently not true if one invests in other asset classes. Ultimately the secret to making money is simple. Buy low and sell high. The secret to losing money is equally simple. Buy high and sell low. You and I simply differ about which asset classes are currently valued low, high or fairly.

I live for today, and in the moment so to speak

I myself yearn for the days of blissful ignorance from yesteryear. The days I could live on pizza, and trip on E at late night raves. But now, sadly, my brain is in constant overdrive and it demand of me that I make decisions (those darn voices in my head!!). I make no judgement about which approach to life is better, or leads to happiness. Regards

 

[TrickyRicky]

The elephant in the room is low borrowing costs. That is pretty well the major driving force.

Psychologically, I think there are some really interesting thinks at play. New buyers don't have any experience with real estate downturns and old buyers have been climbing the property ladder for so many years now they conveniently discount their own experience. With cheap credit available for so long I think a lot of people are living and have expectations of living beyond their means. They also seem to impose constraints on their decision-making as though they wield financial clout beyond their means.

Here is the story of a typical profile of a buyer bidding on a house in the old city of Toronto, fiction but amalgamation of real people:

A couple in their early thirties who spent their 20's in urban settings. All their friends are buying real estate and talking about their renovations. They are thinking about starting a family some time and are being pressured to buy because it is "the smart thing to do" by their boomer parents. They have virtually no savings, they can't save much because their lifestyle eats up almost all their disposable income and they often have to carry credit card balances. Their parents etc. are willing to pony up much of their down payment, a fact they would never admit to their peers. They think 20 percent is an onerously high and safe downpayment amount. They put down less than 20 percent on the home with a mortgage that has a greater than 25 year ammorization period. They buy in a marginal area they believe to be up-and-coming or cool. It's a fixer upper. The have barely ever touched a hammer but watch lots of HDTV. They won a bidding war after raising their "maximum" price they could afford by $100,000 (15-25% of the entire price of the property) but they had to buy now because prices are only going higher and higher. Also, they gave themselves 2 months to find the house because x starts teaching again in the fall and house hunting would be too distracting. Besides, they already had to sacrifice their vacation to y to look for the house. They caved on price because they were so disgruntled at loosing bidding wars and the pressure to buy now was too intense. They basically followed around the same dozens of people just like themselves bidding on the same houses in the same neighbourhood weekend after weekend. But that's just how things are these days, besides they are happy now that they bought something.

I unfortunately believe people like this will find the next decade of their life financial difficult. The story of real estate is not going to be one of collapse and drama, it is going to be about lowered expectations and monotony and struggle.

 

[MadMax]

When you talk about other asset classes, by that you mean stock and bonds right? So last year when the market took a nose dive and google was selling at $247/share you invested all of your savings you have earned (while renting) into the market and now that it has doubled you've earned a small fortune, correct? If anyone including myself could time the market so perfectly, we would all be millionaires and wouldn't have to work a day in our lives. I'll invest in what has proven to be a safe bet since the romans built their empire and the one thing they valued more than anything....real estate!

 

[lordmandeep]

You cannot time the market.

On march, 8th 2009 things looked like crap and then on March 9th on after-wards people went nuts on the stock market.


So I think the real estate market in Toronto is just plain weird imo.

 

[cdr108]

When you talk about other asset classes, by that you mean stock and bonds right? So last year when the market took a nose dive and google was selling at $247/share you invested all of your savings you have earned (while renting) into the market and now that it has doubled you've earned a small fortune, correct? If anyone including myself could time the market so perfectly, we would all be millionaires and wouldn't have to work a day in our lives. I'll invest in what has proven to be a safe bet since the romans built their empire and the one thing they valued more than anything....real estate!

so how is it that Toronto or Canada for that matter, so isolated from the world around them that has experienced a global RE collapse ???

 

[MadMax]

so how is it that Toronto or Canada for that matter, so isolated from the world around them that has experienced a global RE collapse ???

I think there are many factors at play but here are a few off the top of my head:

1) Strong emigration compared to other cities
2) Strong Banking System
3) Relatively Low Unemployment
4) Steady RE appreciation
5) Low interest rates

If you take a look at places in the U.S. where a major collapse occured (ie.Florida) you will see a big gap in the amount of new comers arriving to their respective cities. Other cities that have strong immigration like New York, Boston, or LA had hugely inflated re values and the market could not sustain it.

Our banks didn't provide 30, 35, 40 year mortgages with zero down, interest only such as the fiasco down south. Some started to, but quickly realized what was happening which didn't cause too many foreclosures and therefore didn't decrease re values.

Even though recently our unemployment rates have gone up slightly, they have been very low compared to other metropolitans in the US and throughout the world. All the more interesting is Ontario has been the hardes hit (especially manufacturing) moreso because of the high Canadian dollar and the provincial and federal governments than anything else, and still we are strong re wise.

People are quoting these crazy prices but in my opinion the re values in this city and throughout Canada have been relatively steady compared to other cities throughout the world. RE values in places like Spain, Ireland, England, Australia grew tremendously in a short period of time. Although we are continually heading upwards, it is not over a short period but rather sustained growth over time.

And the clincher has been our country's strategic decision to keep interest rates low, giving average families a chance to save money and locking in to a term that will enable them to make monthly payments without having to worry about declining home values, and not being able to make their monthly payments.

 

[Shtopor]

MadMax why don't u go to USA and tell them your "off the top of your head " thoughts about Rome, real estate and STRONG Canadian Banking system.
Let me remind you that when US congress was deciding on 700 bln stimulus for US economy , here, in Canada, we quietly gave to our strong banks 75 bln (if consider that size of US is 10 times what Canada is then u got the picture, if not then pick up a few formulas off your top off the head), and by we I mean you , me and other 33 mln of Canadian taxpayers gave it to our banks.
Put yourself in the shoes of bankers, would u ever give mortgage at those % to youngsters who has no money down if not CMHC that "insures" it.
CMHC insures around 600 bln of mortgages and has 8 bln in its pocket.
U need to read more and type less my friend, cause for anybody who understands what is happening in the economy and real Estate as part of it its pretty obvious that government that influences it through low interest rate is trying to avoid real estate collapse as that would consiquetly bankrupt CMHC.

 

[Pretzel]

People who have been waiting to get into the Real Estate market will back “prices will adjust sooner or laterâ€

People who are hoping to make money off the RE market will always back “prices can only go higherâ€

If you can afford to put 25% down and pay your mortgage comfortably then that’s all that matter!

 

[MadMax]

MadMax why don't u go to USA and tell them your "off the top of your head " thoughts about Rome, real estate and STRONG Canadian Banking system.
Let me remind you that when US congress was deciding on 700 bln stimulus for US economy , here, in Canada, we quietly gave to our strong banks 75 bln (if consider that size of US is 10 times what Canada is then u got the picture, if not then pick up a few formulas off your top off the head), and by we I mean you , me and other 33 mln of Canadian taxpayers gave it to our banks.
Put yourself in the shoes of bankers, would u ever give mortgage at those % to youngsters who has no money down if not CMHC that "insures" it.
CMHC insures around 600 bln of mortgages and has 8 bln in its pocket.
U need to read more and type less my friend, cause for anybody who understands what is happening in the economy and real Estate as part of it its pretty obvious that government that influences it through low interest rate is trying to avoid real estate collapse as that would consiquetly bankrupt CMHC.

Sorry I don't quite comprehend your rebuttal here....I was simply stating some factors as to why OUR real estate market hasn't collapsed and other countries with similiar status have. I think you proved one of my points in your last sentence....if anybody needs to read more and type less it's you my friend because your thoughts are quite incoherent and difficult to follow.

 

[jacek.mazurek]

Some interesting facts

I noticed some mention of how Toronto compares or should I say how Toronto DOESN'T compare to other large international cities. Here are some interesting facts...

Countries that faced the biggest upside, took the biggest hit.

Ireland recorded the most significant swing with home appreciation up almost 300 per cent from 1993 to 2006. Since then, it has contracted by about 25 per cent.

United Kingdom prices, which rose 170 per cent from 1996 to 2007, have fallen by about 20 per cent.

Canadian prices on the other hand appreciated 66 per cent from 1999 to 2007. But prices have fallen only 8 per cent since then.

The U.S. market seems to defy the rule, however. Prices went up 50 per cent from 1996 to 2005. Yet, residential real estate took the biggest blow falling 29 per cent since then.


Our appreciation seems to have been more steady, which might explain we were not hit as hard.

To the comment that Canada gave their banks $75bln, I have to disagree. If we did give banks cash, it was a loan and a loan only. The government did not buy worthless banks assets as happened in the US. The CDN government mearly offered up cash to create liquidity, but did not give it as a handout. Do you agree?

Jack

 

[lordmandeep]

I actually remember reading in the Toronto Star two weeks ago that the Govt may actually make a profit over that 75 billion loan.


Really it was not a bailout, it was just a confidence boost.

 

[Shtopor]

MadMax below are your points:

1) Strong emigration compared to other cities (invalid , immigration can't fuel
prices of RE)
2) Strong Banking System (wrong , I explained it earlier)
3) Relatively Low Unemployment (Low was 1.5 years ago, not anymore)
4) Steady RE appreciation (lol, RE doesn't go down because of "Steady RE appreciation, very much valid point)
5) Low interest rates ( finally you arrived to the ONLY reason why RE prices haven't tanked , yet)
Of course for audience to whom cater Mass Street Media ( who in turn heavily dependent from RE and auto advertisers) the soup of your points is very much valid.