Why would ANYONE buy a House NOW?

[CanadianCapitalist]

Originally Posted by fishnguy

So again, I restate my question: Provide a realistic scenario that has house prices rising in the next few years. Really....think about it. Not gonna happen.

I don't know and I don't care. You may well be right that prices are headed for a drastic fall. I just don't know. Note that price decrease or price increase aren't necessarily the only two scenarios. Prices could be stagnant over many years resulting in a correction in inflation-adjusted prices. I've been reading about an impending correction in housing prices since 2005. Maybe it will finally happen in 2009. Who knows?

[Genius Boy]

I think it's absolutely stupid not to look at investments on a one-to-one basis. If a house is massively undervalued, such that it's 50% below where it was one or two years ago, in a blue-chip neighbourhood, then why wouldn't you buy it?

Purchasing houses like stocks isn't looking at the generalized landscape and saying, ohhh ... the housing market is going down, let's not buy houses. Rather, it's an individual house/condo evaluated within a neighbourhood looking at the fair market value of the property.

We recently bought a commercial condo that was privately sold and was significantly (i.e. hundreds of thousands) under market value. We've rented it out, at a 12% starting capitalization rate. As the mortgage goes down and the property appreciates, that capitalization rate is going to grow over time. Do we think it's a stupid investment? Hell, no. My rent is going to pay off my place in 10 years, unless I use the money to leverage off buying other investments.

If you can pick the cherries in this fruity market, you're going to make money ... but it takes time to research and identify appropriately good properties. Blanket statements of panic are geared towards the stupid.

This is also the time to negotiate. If you can get a 10-20% buyer's premium, then you should do so. Just remember 40% of the market has to move on an annual basis (due to new jobs in other cities, or the need to upgrade/downgrade their home) ... so you have the power to negotiate.

[stephenheath]

Wrong. You are assuming that we are currently at fair market value and that the massive price appreciation of the past 10 years was justified based on wage inflation. If this was the case, then yes, any significant decline would be followed by a reversion upwards back to the mean. However, when average price to average income is currently over 4 ...

Maybe you aren't understanding the model that has frequently been used on Garth's site regarding historical price appreciation. The point is that historically, over time, a certain pattern has been followed, and currently, prices are well above where that pattern says they would be. If, however, this year, prices drop to where the pattern indicates they should be, then according to the VERY SAME model, subsequent years would see small price appreciation. Now, the MODEL may very well be wrong, but you cannot simultaneously argue that the model is correct and prices are too high, and the model is wrong so it's prediction of what will happen when prices return to the trend... take your pick.

Now, if you want to talk average prices to average income, you are talking a different model, and one that, in my opinion, is even more broken. Not only has average income been calculated differently historically, but currently it is calculated by including the income of everyone over 18. In other words, you and I have an income of $50,000... the average is $50,000. We include our wives who are stay at home spouses. Now the average is $25,000. We include our 18 year old kids who are living at home because they are pursuing higher education and now using that methodology, average income is $16,600... and we still haven't thrown in our retired parents and grandparents whose income is growing inside RRSP's and TFSA's and therefore is not counted either. And let's talk average house prices. This number comes from all of the real estate transactions in a year. Let's say there are two houses for sale, both $200,000. With our $50,000 income looks like the pattern is holding up well. Ohoh.... one of the big wigs down in Oakville just sold his $7 million dollar house. Normally it would be drowned out by the large number of other sales, but because of the current RE decline, and you and I are the only ones buying, it's just changed the average house price from $200,000 to $2,466,000. But wait... we're ALSO forgetting that the most desirable locations can command a premium as well, and many people will willingly choose to pay more than 3 times their yearly income if they feel they can afford it to get a home in the right place, near a good school district, etc. If those are a higher proportion than normal, again, it will throw off your model.

And stepping away from "models", which to be honest are next to useless if they're simple enough that we can calculate them in 30 seconds, let's look at what else drives cost. Obviously, the cost of raw materials, land, permits and labour has an effect as well. If a starter house cannot be made for less than $200,000, then there will be very few houses sold for less than that, mostly those requiring work or forced sale. It won't matter if average income is $30,000, that's the price and it might just mean a lot fewer people own homes and must rent instead. This to me is what causes me to agree the most with you that prices will come down. With the market currently crashed, depending on where government stimulus money is spent, lumber and construction labour may go down. Even land may go down in price, although I'm less confident of that happening, after all, as the adage goes, "they aren't making any more of it".

Garth is not the only one predicting significant price declines. As far as basing current predictions on past record, that's like saying that guys who have been absolutely bang-on so far are most likely to be right going forward. [...] Can they justify their position based on current research? If so, they are worth listening to. If not, who cares about them.

Has Peter Schiff been amazingly accurate? He did predict the subprime collapse, but not the most accurate timing of it, and as part of his prediction he predicted that the USD would fall against world currencies, and instead it rose tremendously, and in the process of following his advice, lost people that invested with him a LOT of money... I wouldn't call that amazingly accurate personally. But lets replace Peter Schiff with Warren Buffet, George Soros, or some of the other people that not only have made predictions, but have made lots of money following through on their predictions. If Warren Buffet happened to be interested in Canadian Real Estate and he were calling a bottom right now, while Garth was still suggesting another 10-15% to drop, you can bet I would assume Warren is right and do my own, personal, research to confirm that. Does that mean I would skip what I feel is the most crucial step, doing my own, personal research, because I am that confident in WB? HELL No! We're talking about MY money now, and NONE of these guys cares 2 figs about my money, they're busy caring about their own, and the money that is entrusted to them.

The point that I am trying to make that I'm obviously not making too clear is that you and I have a limited amount of time to spend actually researching a prospective transaction (as opposed to what we are basically doing now, reading it because we're interested in general, and shooting the shit about it)... but if you had a 24 hour option on buying a house tomorrow, you'd have a tight window of figuring out what you wanted to do, and a good chunk of that would be crunching your numbers. There are hundreds of real estate pundits, and you feel getting a sampling of what they are saying might be worthwhile, but which ones do you hit? The ones with the fanciest web pages? The ones most likely to reinforce your own beliefs? Or the ones most likely to have useful insights? And while I will grant you that doesn't necessarily have to be the one with the most impressive track record, I do believe it is most likely... after all, fool me once, shame on you, fool me twice...

So again, I restate my question: Provide a realistic scenario that has house prices rising in the next few years. Really....think about it. Not gonna happen.

I've already provided you one using the very same model that Garth is using to come up with the 10-15% figure but you didn't like it. In fact, forget the model, the simple phrase "hits bottom this year, next four years show small growth coinciding with inflation" covers it. So let's look at the realistic part, shall we? I doubt growing with inflation would strike anyone as unrealistic, we all know prices rise, so it must be the "hits bottom this year" part.

Let's see why hitting bottom this year COULD happen. It is doubtful that flippers are buying in this market, and any that are dumping extra units will probably have done so by the end of the year, so that downward pressure will drop. In addition, anyone who is in a position NOT to sell will likely wait until a better time for sellers, which will leave only those who have to sell, and thus, are most prepared to take lower prices. Once the floor has been reached, it will become the norm that is used for comparables for future sales. Finally, this year will have a very large number of job losses and people may feel it is best to sell early if they get a pink slip.

On the flip side, we might not reach the bottom this year because even though there are lots of people losing their job, they get almost a year of EI which they might use to stall a bit before selling the house, and of course, there are some predictions that the job losses will continue into 2010. If new home prices are also a driver, then it will be hard to say a bottom is reached until a bottom is reached in commodities and labour, which may or may not happen this year depending on how quickly countries with savings deploy them into restoring their domestic economy, which would in turn increase the price of commodities.

And what does this all come down to? A guess. Garth is guessing it has 10-15% to go without a specific time frame. I'll go one better. For my local market, which is Halton/Peel, I think we've had our first big drop as the flippers and forced sales have already cleared out and less properties are going up for sale. There will be another big drop sometime before next spring as the automakers go bankrupt or restructure and make a large number of people redundant, which will result in a bad spring sales season that hits bottom. During the summer next year we'll finally see some trickle down effects of stimulus spending and economic realignment in other countries, and the pace of job losses will slow (although we'll still be losing some jobs each year through to at least the fall of 2010), which will slowly improve customer confidence. During this time, a lot of real estate agents, unable to make sales, will leave the field, which will make spring of 2011 a very good time for the agents that remain as sales pick up. The agents remaining are so busy that they give an impression of urgency to buyers and we start seeing some fast sales on the best properties, with prices increasing only on the gems. The media switches from full on doom and gloom to full on cheerleading and the impression, true or not, of a bottom having been passed is latched on to, and it becomes another self-fulfilling prophecy, as so many emotional ones are when your currency is fiat. So there you go, bottom in the summer of 2010, prices going up on the best properties spring of 2011. That's my prediction, but I freely reserve the right to be completely wrong. We can touch base again in a couple years and see how well I did

[CanadianCapitalist]

And let's talk average house prices. This number comes from all of the real estate transactions in a year. Let's say there are two houses for sale, both $200,000. With our $50,000 income looks like the pattern is holding up well.

Larry MacDonald wrote about this problem many times in his blog and suggested that the Teranet National Bank Home Price Index adopts a far better methodology:

House Price Index

[RetireIn10Years]

It really depends on where you are. If you're in Vancouver, yes absolutely there is little debate that prices are heading down, and buying now - unless you're getting it 20 to 35% below the lowest sold similar place (ie: below current market value) - would be ill advised. The affordability with rates being down is a bit of a misconception - these rates won't stay, and the people buying now with 35 year mortgages will not be able to afford much when they have to renew at 7 or 8%. The bubble is slowly bursting, and as the olympics wrap up, and the 1000's of condos continue to hit the market, the condo flippers will continue to try to give* their condos away. (*In fact what there are many instances of right now is people offering to give you their deposit if you just assume the overpriced contract).
Some good blogs (yes, they're bearish but they offer hard data to back up the claims and dig through the RE bs that real estate agents would like you to believe
http://housing-analysis.blogspot.com/
http://vancouvercondo.info/

[Germack]

The real estate boom we have been seeing for the last several years worldwide is just not sustainable. We need to live somewhere and this is going to cost us money. If we rent a place or buy a place it does not matter. It will cost us money in the long term. Most people just do not realize how much money a house is really going to cost them and especially how much more it is going to cost them due to the recent run up of prices.

Lets assume person A bought a house before the real estate boom for $200K and person B bought the same house a few years later for $400K. Both person live in the house for 40 years.

The cost of ownership for person A is X. The cost of ownership for person B is x+ $1,471,684 assuming a mortgage interest rate/opportunity cost of 5%.

It will cost person B close to 1.5 million dollar more to live in this house as compared to person A.

[frdsmth9]

Now is the time to buy if you need a home and your job is reasonably secure. It is time to go back to the way things used to be - a hone purchase is supposed to be for years to come, otherwise it would be called a lease.

[Brad911]

I am in the camp that believes home prices will fall and need to fall. To me it's the simple math of affordability. Over the past eight years housing prices have outpaced real income growth (growth of incomes after inflation) of nearly 2-3x. That is not sustainable and only supported by low interest rates, 40 year mortgages and heavily discounted variable mortgages (vs. prime).

That sets up a very unforgiving scenerio for most Canadians as incomes will not rise fast enough to meet current housing prices even if they stagnate.

I'm purchasing my first home for a few reasons:
- The purchase price is at a 20% discount to the replacement value of the property (if it burned to the ground, what it would cost me to rebuild)
- The home is in an area that I see myself, future wife and family remaining in
- Location, location, location: I'm in the heart of a city with a 1/2 acre lot and a 5 min walk to work
- I've known the house my entire life (elderly neighbour growing up) and it's in original condition: I know what is behind every wall, under every floor and the house is rock solid. No reno surprises
- My capital position is sufficient that I can place almost 50% down onto the price of the home if I wished to.

[seven3]

How much impact do people anticipate from foreign investment $ in Vancouver real estate. I agree that the price of a house in Vancouver, relative to the average incomes seems outrageous (a couple with income of $170k probably can't afford a house here)...

So, yeah, I'm in the camp "hoping" that prices will come down more; but if there's continuous influx of foreign $ ...will we ever see a drop?

Maybe the mkt is not supported by domestic buyers...

[takingprofits]

This same discussion comes up with every market cycle and 100% of the time the house prices are way higher by the time the next cycle arrives.

A friend of mine in Toronto used the excuse that the bottom had not yet come to put off buying a home in the '80's and then again in the '90's. By the time he got around to purchasing last year he paid double what he would have paid if he would have not been waiting for the housing market to bottom. He also could no longer afford to buy in the area he preferred - prices had risen far to high.

He probably paid the equivalent of a house in rental payments while waiting for the housing market to bottom.

One thing about buying a house - when you look back after 20 years of mortgage paying - your monthly payments are rarely higher than they were to begin with - and are usually inconsequential compared to your income which has gone way up in that time.

If you are renting however you can be assured that the rent you are paying is substantially higher than it was 20 years ago and will continue to go higher.

It is always a good time to buy a house if you plan on remaining a homeowner for the long term.