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With interest rates only going up...cmhc upping the minimum requirements for obtaining a mortgage...the addition of the hst....and the simple fact that real estate is too expensive right now. How is it that we are not in a bubble?
 

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The idea is that we want to slow down the bubble before it gets too big and pops.

That's what all those initiatives are about. Slowing down the market so it can be more balanced.
How likely is it that government initiatives and interest hikes will simply will ease prices back down to earth? Like this was planned all along? Sound management of the economy?

Greed and fear. We've had the greed, the fear is coming...
 

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Indeed--letting the air out slowly rather than having it blow up in our faces. I'm expecting very low price growth for a few years, even if we see a return to good economic growth. Not sure we'll see a decline of more than 5% or so nationally. My main concern would be Vancouver. That's a bug in search of a windshield, to borrow the metaphor.
 

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The problem with this thread is it is far too general, as are most national news items about RE.

All the generalities in the world cannot account for the numerous local factors that affect prices and demand. The rules are very different in Windsor vs. Ottawa vs. Winnipeg vs. Calgary. Rural or urban? Nice clean neighborhood or downtown slum?

You need to look at your provincial and local market (and even right down to the neighborhood you want to buy in) to get a sense for what's really going on in your area. If prices are down 25% in Windsor and up 5% in Calgary, telling the Calgary buyer in a nice neighborhood that prices are down on average is kinda pointless.

To discuss this on a countrywide or general basis is kinda pointless IMO.
 

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Discussion Starter #6
I guess we shall see...but homes are too expensive, rates will rise...seems like a no-brainer that values will drop.
 

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With interest rates only going up...cmhc upping the minimum requirements for obtaining a mortgage...the addition of the hst....and the simple fact that real estate is too expensive right now. How is it that we are not in a bubble?
I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!

Some local markets will have to deflate, but won't pop! :)

Fundamentally we are in good shape.
 

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I don't think that we are in a bubble. ... a bubble pops and creates a big bang- like our neighbors south had it. Won't happen here!

Some local markets will have to deflate, but won't pop! :)

Fundamentally we are in good shape.
Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.

I read the other day that the average Canadian has total debt to income levels of 143%, which is the highest in the world.

Later I read that according to Stats Can, consumer spending has not dipped but continues to grow month on month.

Are the two related? Would the cost of servicing this debt not push more people than normal to sell their house when rates go up? Increases in supply puts downward pressure on prices. Add that to what's been mentioned already by bh_23, does this not spell lower prices for housing?

Again, I just don't understand the fundamentals that everybody in the real estate game keep mentioning. I do know from reading the newspaper that in January 2009, a market correction of around 5% was expected for the year. Instead, a 20% increase occurred. Now, I'm to believe that regardless of reckless borrowing, interest rate increases, HST, etc, the Feds and their new mortgage regs coupled with the BoC have created a fluffy pillow that the market will comfortably land on. This Canadian management of economic policy is surely the envy of the world and I'm finding it difficult to comprehend.
 

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Sherlock,

I have read Garth Turner's blog.

I don't agree with a lot of what he says. He's been crying that the sky is falling for years. That doesn't mean it's true.

It's a virtual certainty that at some point the real estate market in Canada will readjust. That does not mean the Garth Turner is right about what he says.

Let me give you an example : If I go outside every day and say "its raining" even if I live in the Sahara desert I will end up being right some day. Then I can say hey I said it was raining and I was right so I'm a genius. It's just not so I'm sorry. Even a broken clock is right twice a day.

While I do think people should be cautious in this real estate market about getting themselves over extended I do not tell people to sell and go live in an apartment either. That's just dumb.
 

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Jav;

Like mentioned in one of the other posts here: We can't say in general that RE in Canada is too expensive. There are hot spots, which will heat up in cool down. Vancouver, Alberta aso. It is always a cycle. These cycles are needed to "flush" fresh money into the market and to get to the new high. Expenses are increasing, expenses are increasing, too.

Compare RE prices to other cities in the world. Toronto/Montreal/Ottawa prices to Paris, Tokyo, London, Moscow aso. These cities are still more expensive than our cities.

The general point I am saying is: RE in a healthy or upcoming area will ALWAYS increase in value. The only thing you need, maybe, is time if you bought too high. If someone buys a house with 5% down and wants to own a $600,000+ house, well, than his start was wrong from the beginning and will lead to a price correction due to the foreclosure of this person (economic Darwinism), but the market will absorb that very qiuckly.

I am not saying that there won't be a price CORRECTION. But only a correction. A correction means for me that a the whole RE market won't get hammered, but local market maybe (like Windsor because of the uncertainty what GM is going to do), but not the market in general.

In regards of the mentioned 143% income level: I don't know these numbers, but always refer to "lifestyle inflation", which is definitely a main reason for that. Adding now a low financial down payment won't help of course. As harsh as it sounds, but not everyone can afford a house.

I invest in multi res and other positive cash flowing properties and bought a lot (for my take) in the last 18 months. I will switch soon to my HOLD mode to consolidate and wait for the next opportunity. Even if the market correct itself- I don't care. As long as I can rent the places (which I can, due to the more difficult mortgage environment aka. more tenants), I am good, because I am in for long.

Berubeland mentioned it somewhere correctly: CMHC is taking the right steps to deflate the potential bubble.

My 2c for now. Have a great day.

Can you elaborate on that please? I'm not looking to argue, I'm simply a layman looking to understand what's going on.

I read the other day that the average Canadian has total debt to income levels of 143%, which is the highest in the world.

Later I read that according to Stats Can, consumer spending has not dipped but continues to grow month on month.

Are the two related? Would the cost of servicing this debt not push more people than normal to sell their house when rates go up? Increases in supply puts downward pressure on prices. Add that to what's been mentioned already by bh_23, does this not spell lower prices for housing?

Again, I just don't understand the fundamentals that everybody in the real estate game keep mentioning. I do know from reading the newspaper that in January 2009, a market correction of around 5% was expected for the year. Instead, a 20% increase occurred. Now, I'm to believe that regardless of reckless borrowing, interest rate increases, HST, etc, the Feds and their new mortgage regs coupled with the BoC have created a fluffy pillow that the market will comfortably land on. This Canadian management of economic policy is surely the envy of the world and I'm finding it difficult to comprehend.
 

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@NorthernAlex:

I have to disagree. I think there is a lot of compelling evidence that we are in a major bubble in Canada right now.

To start, Toronto, Montreal or Vancouver are not anything close to cities like New York, Paris, Tokyo, etc. If you think so, you are living in a dream world. Those cities not only have massive populations that Canadian cities do not, but are the financial hubs of the world.

To understand how we are overpriced, just look at two indicators: the rent price versus the buy price for the same home, and the average income versus the average home price.

In most major cities, the rent price to the buy price is way out of line, so much so that you'd be crazy to buy instead of rent (yet people keep buying). In Vancouver or Toronto, you can rent a two bedroom downtown condo for somewhere in the $2000-2400 range. Yet the same place will cost you 450,000 to 600,000 in each city respectively, plus monthly condo fees. The cost of carrying the mortgage far exceeds the rental price. That is about as good as it gets for indicating the prices are way out of line.

Not to be left out, the average household income in Canada is something like $70,000 and the average home price is $340,000. That's just unsustainable considering the numbers alone (never mind relatively to other countries).

Now also consider rising interest rates in the near future (just look to that mortgage study), increasing taxes to cover our deficit, as well as the large number of baby boomers with no savings except that which is tied up in their home.

Most people who believe otherwise are those who have some sort of vested interest in real estate staying expensive, such as real estate agents or mortgage brokers.
 

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What is a major bubble for you? If the price drops 15%? 50%? 75%? Where? Canadawide or just in some local markets?

No doubt, that the Vancouver/Toronto market is overheated- and we saw a small drop in YYZ within the last 18 months. But we also saw a rebound. This was a correction! Correction is good and the market needs it. But these doomsayer shouting about a BUBBLE are just wrong. The market will not tank Canadawide 50%.

Whoever buys a 600,000$ condo in Toronto will definitely (hopefully?) make more than 70,000$/yr and hopefully has a good down payment. Who is forcing them to buy there? Common sense should say that it doesn't make sense to buy there if you didn't have a huge heritage. Again, lifestyle inflation. They need to ask themselfs: "Can I afford to pay the mortgage if I lose the job and need 6 months to get a new one?" Do they know that they maybe have to live there for some years until they break even again? Was this considered in the purchase process?

Why do people line up in Toronto to purchase a condo which is not build in the next 18 months and already pay 20% down? Why do they do that? Missing due diligence. Yes, they will lose money! But who said spending money smart is easy?

Wherever a hot market is, people will go over their limit. Like in an auction. "Another $1,000".

I don't see at all a bubble in Canada. I see overheated local markets (YYZ and its Condo market, but Canada is not only a condo market). I see hot markets and see dying markets here in the north. And all of them will have to deal with their issues.

Most people who believe otherwise are those who are filled with bitterness, because they did got burned or said that there was a bubble 8 years ago and didn't see a 50% drop!
 

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To me a bubble would be a 20% change.

My only argument for Northern Alex would be that the 'correction' you mentioned within the last 18 months was completely due to interest rates dropping to never before seen lows. That is about to change.

The biggest indicator for me to evaluate what direction the RE market is going in would be the average income to average price ratio. Which completely varies from area to area.

I am not convinced that there is or is not a bubble in the RE market. (as a generalization) But I really have no interest in paying what sellers are asking these days.

The money in RE, as in many other investments is really made moreso on your purchase price. Agreed that over time RE will rise. As will inflation. But the profit will be made upon a good buying price. A good selling price just juices a little more profit.
 

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@NorthernAlex:

I have to disagree. I think there is a lot of compelling evidence that we are in a major bubble in Canada right now.

To start, Toronto, Montreal or Vancouver are not anything close to cities like New York, Paris, Tokyo, etc. If you think so, you are living in a dream world. Those cities not only have massive populations that Canadian cities do not, but are the financial hubs of the world.

To understand how we are overpriced, just look at two indicators: the rent price versus the buy price for the same home, and the average income versus the average home price.

In most major cities, the rent price to the buy price is way out of line, so much so that you'd be crazy to buy instead of rent (yet people keep buying). In Vancouver or Toronto, you can rent a two bedroom downtown condo for somewhere in the $2000-2400 range. Yet the same place will cost you 450,000 to 600,000 in each city respectively, plus monthly condo fees. The cost of carrying the mortgage far exceeds the rental price. That is about as good as it gets for indicating the prices are way out of line.

Not to be left out, the average household income in Canada is something like $70,000 and the average home price is $340,000. That's just unsustainable considering the numbers alone (never mind relatively to other countries).

Now also consider rising interest rates in the near future (just look to that mortgage study), increasing taxes to cover our deficit, as well as the large number of baby boomers with no savings except that which is tied up in their home.

Most people who believe otherwise are those who have some sort of vested interest in real estate staying expensive, such as real estate agents or mortgage brokers.
Very well put! I've been presenting the same arguments for the last 2-3 years, but very few were willing to listen until recently. Now that a few of my friends have lost their high-paying jobs (they never thought this can happen, after all "it's different here" works until it doesn't), they have changed their tune very quickly. Now they are realizing that their huge mortgages are liability, which they might not be able to afford very soon.

The way I see it once we are past the top of this bubble (the top was very likely this April or will be May at most), the prices in major bubbly centers like Vancouver, Toronto, and Calgary will come down crashing possibly 30%+ for 2 short years. After that it will be a slow grind down of 4-5% per year until bottom in 4-5 years.

The US homeowners never thought housing can depreciate, before their bubble burst, and many didn't believe that the bubble was deflating after the fact, however their denial didn't stop housing from crashing.

Did I mention that the US financial and housing troubles are far from over?

http://www.reuters.com/article/idUSN1418760920100514
 

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What is a major bubble for you? If the price drops 15%? 50%? 75%? Where? Canadawide or just in some local markets?
I would say 20%+ in major urban centers such as Toronto, Vancouver and Calgary. Some U.S. analysts have put Canadian real-estate overvalued on average as much as 27%.

No doubt, that the Vancouver/Toronto market is overheated- and we saw a small drop in YYZ within the last 18 months. But we also saw a rebound. This was a correction! Correction is good and the market needs it. But these doomsayer shouting about a BUBBLE are just wrong. The market will not tank Canadawide 50%.
As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.

Whoever buys a 600,000$ condo in Toronto will definitely (hopefully?) make more than 70,000$/yr and hopefully has a good down payment. Who is forcing them to buy there? Common sense should say that it doesn't make sense to buy there if you didn't have a huge heritage. Again, lifestyle inflation. They need to ask themselfs: "Can I afford to pay the mortgage if I lose the job and need 6 months to get a new one?" Do they know that they maybe have to live there for some years until they break even again? Was this considered in the purchase process?

Why do people line up in Toronto to purchase a condo which is not build in the next 18 months and already pay 20% down? Why do they do that? Missing due diligence. Yes, they will lose money! But who said spending money smart is easy?
Aren't you just proving my point that real-estate prices have been bid way beyond their true value?

Some claim that bubbles cannot occur because people act rationally on all available information. IMHO, the lay person is not rational, in fact, most don't have much common sense at all, they buy because rates are low and because of past performance of real-estate, caught up in bidding wars and influenced by the media, without any consideration to the actual worth of shelter.

I used the condo market as an example, because rentals are readily available, but the same hold true for the housing market.

Most people who believe otherwise are those who are filled with bitterness, because they did got burned or said that there was a bubble 8 years ago and didn't see a 50% drop!
Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.

What do you think is going to happen when prices depreciate even 10% on that new $700,000 mortgage? Do you think people will want to keep paying the interest on that mortgage when their house is now only worth $630,000? What about a 20% drop?
 

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This might sound funny in the context of this argument but as I was driving around I saw another abandoned house today. Right at the corner of O'Connor & St Clair. That's about 6 abandoned houses I know of in Toronto so far.

Anyways the problem with residential real estate is that people don't make rational decisions. Investments that don't cash flow. Let me liken it to the stock market. There are always people who will buy a slick sales pitch rather than substance. These people will get burned.

People have told me I'm stupid for making the choices I make. Old car, small unimpressive house, its not sexy. Even in business most people would rather have someone agree with them and blow sunshine up their *** then have someone tell them what they are doing doesn't work and to try something different.

I was having this discussion today with a real estate agent. Right now people are putting crazy prices up on their buildings with no numbers to back them up. You wouldn't believe it.

Anyways the way around that is to reverse engineer your numbers and offer that.

In Toronto properties are selling at 5% cap rates

Net Operating Income/Purchase Price = Cap Rate

NOI = Gross income less all expenses

So if you have a building with a net operating income of

$100,000/.05 =$2,000,000 or less is your target price.

Lets say you can increase the rents by $20,000 per year your building will be worth

$120,000/.05 =$ 2,400,000

And that my friends is where the money is.
 

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Berubeland, I think that dagman1 is referring to personally occupied Single Res.

MultiRes or cash-flowing investments are another ball game and where we feel home, so to speak.
 

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Let me guess- the same analysts who didn't see the US mess coming?

As canadianbanks pointed out, we had a drop because of lack of confidence amidst a world-wide recession, then prices rebounded because of a return to confidence, the lowest mortgages rates in years, the announcement that mortgage rules will be tightened in the future, and the advent of the GST in Ontario and B.C. There was no correction as you claim. Only incentives to purchase.
A correction was there, indisputable! Toronto's prices dropped and sales dropped,too. But they also recovered. Maybe too fast, but different story.


Aren't you just proving my point that real-estate prices have been bid way beyond their true value?

Some claim that bubbles cannot occur because people act rationally on all available information. IMHO, the lay person is not rational, in fact, most don't have much common sense at all, they buy because rates are low and because of past performance of real-estate, caught up in bidding wars and influenced by the media, without any consideration to the actual worth of shelter.

I used the condo market as an example, because rentals are readily available, but the same hold true for the housing market.
No, I am proving my point that we have individual local markets, which are overheated and which will correct them-self. I call a 20% drop a correction, not bubble. A bubble is a province/countrywide drop like seen in the US. Where all prices were hammered over these mentioned 20%. Where you see 50% or so. Technically spoken I would maybe that Windsor experienced a bubble, but actually not. It was a "sell off on bad news".

Actually, if I had to guess, you have a substantial position in real-estate at the moment, probably having made a recent purchased.
Of course you can guess. I was replying to your "Most people who believe..", where I think that you maybe had some bad experience. Yes, I have a "substantial position in RE", because I believe in what I do and that I do it good. I write dozens of offers, get refused a dozen times. I was told once that it is only a good offer if you are a little bit embarrassed. All my deals in 2010 and 2009 were private. I even posted one of my deals back a few months.

What do you think is going to happen when prices depreciate even 10% on that new $700,000 mortgage? Do you think people will want to keep paying the interest on that mortgage when their house is now only worth $630,000? What about a 20% drop?
Well, here is again the "Lifestyle Inflation". If they can afford to buy and support a 700k home, than I would say "HOLD". Don't sell with a loss (except you can use the loss with previous gains). It will come back to the 700,000$ and even more, but it will take its time (if the area is not dying). I think that I could afford a $700k house, but I can't deduct the mortgage and can let the money work better for me elsewhere.

It is the same with stocks, if I buy too high I have to wait until the stock gets there again where I want it. price vs. time. Except that the company worsen.

I just don't see the BUBBLE. I see overheated local markets, but I wouldn't buy there a) an investment (no positive cash flow possible) or b) move there. And these overheated markets are always there.

Again: Any kind of investment needs skills or trust and shouts out loud for Due Diligence. Why do people spent more time in analyzing their new car than about the real estate, which will have approx. 20x the value of their cars.

Anyhow, have a great evening all!
 

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Jav;

Like mentioned in one of the other posts here: We can't say in general that RE in Canada is too expensive. There are hot spots, which will heat up in cool down. Vancouver, Alberta aso. It is always a cycle. These cycles are needed to "flush" fresh money into the market and to get to the new high. Expenses are increasing, expenses are increasing, too.

Compare RE prices to other cities in the world. Toronto/Montreal/Ottawa prices to Paris, Tokyo, London, Moscow aso. These cities are still more expensive than our cities.

The general point I am saying is: RE in a healthy or upcoming area will ALWAYS increase in value. The only thing you need, maybe, is time if you bought too high. If someone buys a house with 5% down and wants to own a $600,000+ house, well, than his start was wrong from the beginning and will lead to a price correction due to the foreclosure of this person (economic Darwinism), but the market will absorb that very qiuckly.

I am not saying that there won't be a price CORRECTION. But only a correction. A correction means for me that a the whole RE market won't get hammered, but local market maybe (like Windsor because of the uncertainty what GM is going to do), but not the market in general.

In regards of the mentioned 143% income level: I don't know these numbers, but always refer to "lifestyle inflation", which is definitely a main reason for that. Adding now a low financial down payment won't help of course. As harsh as it sounds, but not everyone can afford a house.

I invest in multi res and other positive cash flowing properties and bought a lot (for my take) in the last 18 months. I will switch soon to my HOLD mode to consolidate and wait for the next opportunity. Even if the market correct itself- I don't care. As long as I can rent the places (which I can, due to the more difficult mortgage environment aka. more tenants), I am good, because I am in for long.

Berubeland mentioned it somewhere correctly: CMHC is taking the right steps to deflate the potential bubble.

My 2c for now. Have a great day.
Thanks, I appreciate your response.

I think you're right in that Canada will probably not suffer a nationwide collapse in RE prices, it will depend on local factors. Having said that, isn't that what happened in the US? Prices collapsed in places like California, Florida, Arizona which dragged the national average way down.

Whether national or local, a 20% "correction" seems like an Orwellian term for bubble popping IMO. It is what it is. Gov use the words "user fees" and "premiums" when they mean tax. People in RE use "correction" to allow wiggle room when explaining why it looks like one, acts like one and prices drop, but still it's different somehow. Whatever. Not all bubbles are big and not every one makes a big mess when it pops. Anybody who chews bubble gum can tell you that.

Anyway, thanks again.

For you information, here are two articles relating to Canadians personal debt levels.

http://www.financialpost.com/story.html?id=3013137

http://www.financialpost.com/story.html?id=3015558
 
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