Shorting Canada and the Housing System [Archive]

proust

Nov 9th, 2009, 12:46 AM

Can someone tell me why people believe residential RE is a good investment? Why doesn't everyone looking to buy a home just rent for the next few years and buy in when the speculators leave in droves?

Because as far as they remember housing prices have seemed to continue to go up and they assume they will continue to do so ....... everyone hears about this eventual decline, and theyve been hearing about it for years and years and years and staying on the side lines while housing prices continue to rise and they hear about how their co-workers friends brother made a killing flipping a condo ... and now, finally, with these low rates they say 'screw it, nows the time, I want a piece of the action', and jump in.

Does this line of reasoning *really* perplex so many people? I dont follow the housing markets .... I am not a statistician or involved in anything related to tracking trends .... I am however a typical Average Joe consumer and this is what I notice: Housing prices continue to increase. As far as I can remember (~10yrs) they have continued to go up. Whats the cause? No idea. Thats why I like reading this forum and reading peoples opinions. I can relate to the picture of the guy above and see why people are jumping in ........ whether its the right or the wrong move is open to debate .....

As for my opinion, I believe someone should buy a house or condo when they want or need a place to live and not due to market speculation.

pitz

Nov 9th, 2009, 12:46 AM

Bleh, can't we just consolidate all of these RE bull and bear threads into one master thread??

Seriously, you don't win any friends by discussing this topic anymore, I've found, either on RFD, or with real-life friends.

Both sides can use their own logic until they are blue in the faces. And both sides, at some point, are right.

I'm a huge fan of home ownership, and believe, in the long term, that it offers far lower costs than renting.

Why? Its not "because renting is paying someone else's mortgage" (a common used house salesman quote). Its because "renting is paying a huge tax to the government".

But I'm not going to come here and argue that Canadians should take on a debt that is impossible to repay, just to save themselves from paying tax to the government.

barking frog

Nov 9th, 2009, 01:04 AM

Coming from Alberta, it's clear that Canada isn't immune to mad housing bubbles like in the US.

extraleanham

Nov 9th, 2009, 04:37 AM

VivienM

Nov 9th, 2009, 07:59 AM

An example in the article put the monthly cost of a mortgage on a Vancity condo to be $3718/month when the corresponding rent was $2300/month...
Can someone tell me why people believe residential RE is a good investment? Why doesn't everyone looking to buy a home just rent for the next few years and buy in when the speculators leave in droves?

Why, ten years ago, did people pay big bucks for pets.com (and others) stock when there was NOTHING in the company's business plan to suggest it was about to become very profitable?

Same reason as this: people are perfectly willing to pay $150 for something that, based on its fundamentals, should be worth $20, if they think they can find a sucker who will buy it for $170. And that suckers buys at $170 because they figure they can sell for $190. At some point, the world runs out of suckers. The beauty of real estate, though, is that Mr. Carney and the real estate echo chamber created a whole new round of suckers this year, just as the market SHOULD have cooled off...

I'd say that's the very definition of a bubble: an asset is priced without any consideration of its underlying economic value.

VivienM

Nov 9th, 2009, 08:01 AM

why is renting paying a tax to the govt? you mean because increase in value of principal residence is tax-free?

I'm assuming pitz is referring to the major government subsidies for housing. Like, say, the low interest rates.

Who do you think that money is coming from? It's coming from the sucker who is renting and trying to save up a decent down payment. THAT sucker is getting 1.05% on his/her savings (i.e. below the 2% inflation target, so presumably losing money in real terms), and that money goes right into the pockets of those who have giant mortgages.

pitz

Nov 9th, 2009, 09:23 AM

I'm assuming pitz is referring to the major government subsidies for housing. Like, say, the low interest rates.

Nope.

I'm referring to income tax. When you make a rent payment to a landlord (or a mortgage payment to a bank), the landlord or the borrower pays a 30%-40% rate of income tax on the payment, for the priviledge of having entered into a credit transaction (ie: having a mortgage), or into a rent agreement (ie: for renting).

Its pretty simple; try these three scenarios on for size:

Scenario A:
Principal Residence
No Mortgage
Live Rent-free

Income tax paid to government = $0 on rent, on interest income, or capital gains on appreciation.

Scenario B:
Rented Residence
Owner is a professional with a high income in Alberta.
Net rent is $10,000/year

Income tax paid to government = $3900/year ( + cap gains for appreciation)

Scenario C:
Mortgaged Residence
Mortgage holder is a chartered bank
Net Interest is $10,000/year

Income tax paid to government = >$3200/year (Corporate income tax rate @ 32% + bank surcharges) (+ cap gains for appreciation on mortgage)

As you can see, by owning a principal residence, and having the mortgage completely paid off, the government collects the least amount of income tax possible.

Practicaly speaking, what this means, is that, in Scenario B and Scenario C, the people who are renting to you (either money, or the house), need to overcharge you by roughly 30-40% just to pay the greedy government its share of taxes.

So thats why I am in favour of home ownership (with paying off any debt financing as fast as possible). In the long run, and done at the right price it is the least-cost way of acquiring use of such an asset.

(bolded/underline portion is very important. don't think for a moment that I've gone completely bonkers by slamming the high cost of housing in other threads, and then coming to this thread and arguing the opposite.)

slavka012

Nov 9th, 2009, 09:59 AM

Nope.

I'm referring to income tax. When you make a rent payment to a landlord (or a mortgage payment to a bank), the landlord or the borrower paying a 30%-40% rate of income tax on the payment, for the priviledge of having entered into a credit transaction (ie: having a mortgage), or into a rent agreement (ie: for renting).

Its pretty simple; try these three scenarios on for size:

Scenario A:
Principal Residence
No Mortgage
Live Rent-free

Wow, your logic is really, really screwed up. You ever care to think one step ahead, or, in this, case, one step back?

How do you get to own the house with no mortgage without earning the money first and hence paying the govt income tax? Yeah the difference is totally huge between Scenario A and B.

You should get some basic education and read a lot prior to starting making your own judgments.

Owning house has nothing to do with taxes to the govt. Earning money, however does. So go live on welfare if you don't want to pay taxes.

pitz

Nov 9th, 2009, 10:03 AM

Wow, your logic is really, really screwed up. You ever care to think one step ahead, or, in this, case, one step back?

Look.

Own your own home, have no mortgage = no government income-taxxing the sh*t out of either you, or your lenders.

Rent or have a mortgage = government is looking for tax $$$ every time money changes hands.

Its a pretty simple argument. The government would suffer immensley if everyone were to own their principal residences, paid-up, without a mortgage.

No longer would they have a banking industry to tax. No longer would they have landlords to tax.

The bigger bubble the government can 'blow' in house prices, the more renters and mortgage people they, in the long run, create.

This is why you see CMHC promoting its 35-year mortgage bullsh*t, instead of promoting, "buy a sensible and affordable house, pay for it in 10 years, and enjoy the rest of your life mortgage-free". Ever see a government advertisement that tells you to not go into debt? Of course not.

How do you get to own the house with no mortgage without earning the money first and hence paying the govt income tax? Yeah the difference is totally huge between Scenario A and B.

Well, in all 3 scenarios, the government still gets income tax on employment income earned. I was specifically referring to the additional income tax that is payable as the result of one's arrangements for housing.

You should get some basic education and read a lot prior to starting making your own judgments.

I beg your pardon??

slavka012

Nov 9th, 2009, 10:12 AM

Look.

Own your own home, have no mortgage = no government income-taxxing the sh*t out of either you, or your lenders.

Rent or have a mortgage = government is looking for tax $$$ every time money changes hands.

Its a pretty simple argument. The government would suffer immensley if everyone were to own their principal residences, paid-up, without a mortgage.
Good attempt at thinking for a 2nd grader. First, corporations (as is the case with most of apartment buildings) do not pay anywhere close to 30-40% on income. The pay tax on net profit. Second, so you don't spend money on rent, what do with it? Stockpile? The moment you spend it the recipient is taxed on some of the money received. Unless you pay 'cash' for everything.

pitz

Nov 9th, 2009, 10:20 AM

Good attempt at thinking for a 2nd grader.

Grow up.

First, corporations (as is the case with most of apartment buildings) do not pay anywhere close to 30-40% on income. The pay tax on net profit.

Yes they do. There are depreciation items, and financing is deductible but at the end of the day, the income from capital is taxed at corporate income tax rates.

If a owner uses financing, someone has to pay tax on the proceeds of the financing. Whether that be grandma with her GICs, or some appartment dweller with a savings account, or anyone inbetween.

Second, so you don't spend money on rent, what do with it? Stockpile?

Invest it. Create jobs. Build factories. Or yeah, stockpile. Buy yourself more stuff. What's your point? Do you schlep yourself out of bed every morning wanting to be a slave to your banker and the government by having a big mortgage or tax payment?

The moment you spend it the recipient is taxed on some of the money received. Unless you pay 'cash' for everything.

Sure. My point is that, if as many people as possible owned, without mortgages, their principal residences -- then the government wouldn't have as much tax revenue, and therefore, could not be wasteful. The financial sector would be a much smaller portion of the economy. Resources that are wasted in government or in finance, could be used to accomplish the more important goals of society -- ie: energy independance, pollution reduction, ending poverty, inventing a better iPod, etc.

slavka012

Nov 9th, 2009, 10:26 AM

My point is that, if as many people as possible owned, without mortgages, their principal residences -- then the government wouldn't have as much tax revenue.

Ok, I give up. Somebody take over, please.

DearSummer

Nov 9th, 2009, 10:26 AM

Grow up.

Yes they do. There are depreciation items, and financing is deductible but at the end of the day, the income from capital is taxed at corporate income tax rates.

If a owner uses financing, someone has to pay tax on the proceeds of the financing. Whether that be grandma with her GICs, or some appartment dweller with a savings account, or anyone inbetween.

Invest it. Create jobs. Build factories. Or yeah, stockpile. Buy yourself more stuff. What's your point? Do you schlep yourself out of bed every morning wanting to be a slave to your banker and the government by having a big mortgage or tax payment?

Sure. My point is that, if as many people as possible owned, without mortgages, their principal residences -- then the government wouldn't have as much tax revenue, and therefore, could not be wasteful. The financial sector would be a much smaller portion of the economy. Resources that are wasted in government or in finance, could be used to accomplish the more important goals of society -- ie: energy independance, pollution reduction, ending poverty, inventing a better iPod, etc.

How you managed to twist this thread into yet ANOTHER thread about how great engineering is and how terrible the financial is is hilarious.

Your argument makes no sense. Hardly anybody can afford a house without a mortgage. Any tax considerations are just one element involved in making a real estate decision.

If it's cheaper to rent than to own without a mortgage, why does it matter what is happening with the taxes? IT DOESN'T!

pitz

Nov 9th, 2009, 10:34 AM

How you managed to twist this thread into yet ANOTHER thread about how great engineering is and how terrible the financial is is hilarious.

Yet the word, "engineering" doesn't even appear in a single post in this thread. So what's your point?

If you want to talk 'engineering', consider government and income tax to be a sort of parasitic 'drag' on financing, rental transactions, or the economy more broadly. Drag is an irreversible process; drag does not perform physical work, but merely increases the entropy of an overall system. Many engineers spend their entire lives trying to come up with ways to reduce drag.

The most prosperous and efficient economies are those with the least amount of 'drag'.

Your argument makes no sense.

It makes plenty of sense.

Hardly anybody can afford a house without a mortgage. Any tax considerations are just one element involved in making a real estate decision.

Sure, that's why I strongly advocate buying a house, and paying it off in 10 years or less, and living rent and mortgage free thereafter.

If it's cheaper to rent than to own without a mortgage, why does it matter what is happening with the taxes? IT DOESN'T!

Right now, it is cheaper to rent, because we're in a very unusual situation in the market, a 'bubble' as the OP termed it. That's why I'm saying, "buying a house is a good thing instead of renting, but make sure you can pay it off quickly, and make sure you don't overpay".

simms

Nov 9th, 2009, 10:39 AM

I understood as long as the cost of renting was cheaper than the cost of a mortgage, then you should rent and invest the difference.

pitz, I'm not clear on B and C.
B uses after tax money to pay rent, but some of that is deductible on the property tax credit.

C says that you pay $10k in interest. Where's the payment of principal?

pitz

Nov 9th, 2009, 10:45 AM

pitz, I'm not clear on B and C.
B uses after tax money to pay rent, but some of that is deductible on the property tax credit.

The property tax credit is exactly that -- for property taxes.

The landlord, upon receiving the rent cheque in Scenario B, sends the government 30-40% of it (typically), after depreciation and expenses.

If the landlord finances the property, then he gets to deduct, but then, the financier has to send the government 30-40% of the associated income on the debt instruments used by the landlord.

And of course, every time money changes hands, there's a cost involved with that.

C says that you pay $10k in interest. Where's the payment of principal?

Repayment of principal isn't taxable to a lender. If I borrow $500k, and repay $600k, ($100k interest), only the $100k in interest is taxable, not the $500k principal.

extraleanham

Nov 9th, 2009, 12:22 PM

AllWheelDrift

Nov 9th, 2009, 12:43 PM

well, there are 35 million people in Canada and 6000 million on the outside who want in.
:confused:

So except for about 13% of the people on the planet, everyone wants to live in Canada? Give me a break.

kashirin

Nov 9th, 2009, 12:47 PM

well, there are 35 million people in Canada and 6000 million on the outside who want in. Greedy landlords and property owners will always demand more immigration to boost up housing costs even if it puts their own kids out of work and out of the housing market. We are a very selfish and short sighted people.

People with money are not interested in Canada

other 6000 million who want in earn less than 1 dollar a day at their countries and even if they are allowed in - there are no jobs for them here even for minimum wages

how do you want them to fuel housing market?

brunes

Nov 9th, 2009, 01:16 PM

An example in the article put the monthly cost of a mortgage on a Vancity condo to be $3718/month when the corresponding rent was $2300/month...

It's so weird because on the east coast it is the opposite situation and has been for the past 10+ years. Rent is *always* higher than mortgage cost. IE my mortgage, even if I was paying 5%, would be less than $600 / month ( $750 / month incl. property tax ). Meanwhile I could *easily* rent my house for $1200+ / month. It has been this way as long as I have "left the nest", and AFAICS is the same dichotomy in any major city in NS or NB. There is always a high demand for quality rentals it seems. Meanwhile they keep building more and more condos but not any apt. buildings.

morglum82

Nov 9th, 2009, 01:20 PM

I agree with Pitz on the tax issue, here's how I would explain it :

Scenario A
Person A owns a house, lives in it.
Person B owns a house, lives in it.
No tax paid.

Scenario B:
Person A owns a house, and rents it to Person B who lives in it and pays a 1000$ rent. Of those 1000$, let's say 100$ are paid in tax on profit.

Person B also owns a house and rents it to Person A who lives in it and pays a 1000$ rent. Of those, let's say 100$ are paid in tax on profit.

In this scenario, both persons are 100$ short because of taxes :they pay 1000$ to rent a house, yet only get 900$ net from their house.

Donomight25

Nov 9th, 2009, 03:33 PM

pitz

Nov 9th, 2009, 03:47 PM

In this scenario, both persons are 100$ short because of taxes :they pay 1000$ to rent a house, yet only get 900$ net from their house.

Yup, any time you have a transaction in finance, or in renting -- 'the government' is going to collect tax.

Pay enough of that 'tax' compared to your peers -- and sooner or later, your peers will have a lot more money than you.

The government encourages high house prices, as a means of encouraging high mortgages (= tax revenue), and as a way of inflating income tax revenues on rental properties.

This is why renting, or having a mortgage is bad, and ownership without a mortgage is best.

Obviously most people cannot immediately pay the full purchase price, but for most people, the best returns are to be had in aggressively paying down one's mortgage, and to cut the amortization to 10 years, instead of this 35-year nonsense which just keeps you a slave to the banking-government complex.

simms

Nov 9th, 2009, 04:23 PM

This is why renting, or having a mortgage is bad, and ownership without a mortgage is best.

Obviously most people cannot immediately pay the full purchase price, but for most people, the best returns are to be had in aggressively paying down one's mortgage, and to cut the amortization to 10 years, instead of this 35-year nonsense which just keeps you a slave to the banking-government complex.

So what's the best way of navigating around this conundrum?
1st (and best option): Rent cheaply until you can afford to buy a house outright, and when you do buy a house, try to buy during a "housing crisis"?
2nd (and more realistic): Save up for a 20%+ downpayment while renting cheaply; when ready to buy take a 10 year mortgage, roll up all savings/extra cash and eliminate the mortgage as soon as possible?

Sounds about right?

One of the best "rent vs. buy" calculators I've seen: http://michaelbluejay.com/house/rentvsbuy.html#taxschemes
If it's not accurate to $100, the guy pays you $200... it's designed for US but can work for Canada if you uncheck "Mortgage interest deduction" and hike up the capital gains tax.

smihaila

Nov 9th, 2009, 05:40 PM

Pitz, regarding scenario A (owning your house, paid in full, no mortgage), isn't the annual property tax also a form of theft from us? Other than that I incline to agree with you.

pitz

Nov 9th, 2009, 05:42 PM

Pitz, regarding scenario A (owning your house, paid in full, no mortgage), isn't the annual property tax also a form of theft from us? Other than that I incline to agree with you.

Scenarios A, B, and C all involve annual property tax. So I didn't feel it was worth mention in the example (as its not a differentiating factor). Property tax isn't 'theft' per se, it is a tax in exchange for services, and cannot be avoded.

Logically, someone in A, B, and C would also carry insurance, even though an owner-occupant isn't obliged to.

B & C also require that the homeowner maintain their property at a certain level (someone with a mortgage is legally obliged to do any/all necessary repairs to preserve the value of the collateral). Whereas, A has the option of making repairs or not -- as it is his property!

extraleanham

Nov 9th, 2009, 08:45 PM

So what's the best way of navigating around this conundrum?
1st (and best option): Rent cheaply until you can afford to buy a house outright, and when you do buy a house, try to buy during a "housing crisis"?
2nd (and more realistic): Save up for a 20%+ downpayment while renting cheaply; when ready to buy take a 10 year mortgage, roll up all savings/extra cash and eliminate the mortgage as soon as possible?

Sounds about right?

One of the best "rent vs. buy" calculators I've seen: http://michaelbluejay.com/house/rentvsbuy.html#taxschemes
If it's not accurate to $100, the guy pays you $200... it's designed for US but can work for Canada if you uncheck "Mortgage interest deduction" and hike up the capital gains tax.

I dont think there is a way around it. You certainly cant predict when the market is at a low. Markets can remain overpriced for 30 years. Save your money and pay off your mortgage as soon as possible. Live in a smaller house to save money. Houses though are the main status symbol . You can damage your childrens self-esteem by living in a small house, I guess. Your wife may be more likely to leave you etc. There is a reason why people buy nice cars and big houses. Everything is a competition. small house =ugly wife=ugly children=ugly grandchildren

DearSummer

Nov 9th, 2009, 09:50 PM

Yup, any time you have a transaction in finance, or in renting -- 'the government' is going to collect tax.

Pay enough of that 'tax' compared to your peers -- and sooner or later, your peers will have a lot more money than you.

The government encourages high house prices, as a means of encouraging high mortgages (= tax revenue), and as a way of inflating income tax revenues on rental properties.

This is why renting, or having a mortgage is bad, and ownership without a mortgage is best.

Obviously most people cannot immediately pay the full purchase price, but for most people, the best returns are to be had in aggressively paying down one's mortgage, and to cut the amortization to 10 years, instead of this 35-year nonsense which just keeps you a slave to the banking-government complex.

You seriously posted all this to point that out? Owning a home is better than having a mortgage or renting? WHAT A REVELATION!

The question of when it's best to rent/buy comes down to doing a calculation for your specific situation.

ShopSmart

Nov 9th, 2009, 10:33 PM

http://globaleconomicanalysis.blogspot.com/2009/11/canadian-says-short-canada.html

Interesting article about how day-by-day the CMHC is turning into Freddie and Fannie. Time to take the blinders off...

Facts:
- Housing prices continue to increase as Canadians take on more debt
- Canadians put a lower and lower downpayment on their homes (6% in 2007)
- Mortgages continue to be a higher and higher percentage of salaries and wages
- A low interest rate continues to fuel this rampant move

An example in the article put the monthly cost of a mortgage on a Vancity condo to be $3718/month when the corresponding rent was $2300/month...
Can someone tell me why people believe residential RE is a good investment? Why doesn't everyone looking to buy a home just rent for the next few years and buy in when the speculators leave in droves?

I've been saying this for the past year or so. The Canadian govt has been purposely encouraging low-middle income people to go into debt to prop up the real estate and mortgage markets.

When this crash comes it's going to be nasty but it will hopefully be great for low income people who are currently renting and saving...so keep saving your pennies for that day because the opportunity only comes once in a while. Don't listen to the people who are already invested in real estate and have a vested interest in their properties retaining their value.

The fact is that inflation is getting bad and going to be worse. Remember when gas was in the 70s? It wasn't that long ago. Remember when taxes were half of what you pay now? Not that long ago. Get ready for a hike. Remember when taking the transit was less than a buck? It wasn't that long ago. Get ready for a hike.

Inflation is worsening and has been for a while. It's just that they've been manipulating the statistics. Oldest game in the book for the sheep/masses. Tell them it's low. And it must be low. They should have increased interest rates a long time ago. But now the bubble is enormous. I can't wait for the pop. A lot of people will lose. But at the same time a lot of people will win. Rules of the game. In order for people to win there will be losers. Let's hope the politicians will not continue to bail out the losers thereby enabling more stupidity and more mismanagement of the economy.

extraleanham

Nov 9th, 2009, 10:40 PM

I've been saying this for the past year or so. The Canadian govt has been purposely encouraging low-middle income people to go into debt to prop up the real estate and mortgage markets.

When this crash comes it's going to be nasty but it will hopefully be great for low income people who are currently renting and saving...so keep saving your pennies for that day because the opportunity only comes once in a while. Don't listen to the people who are already invested in real estate and have a vested interest in their properties retaining their value.

The fact is that inflation is getting bad and going to be worse. Remember when gas was in the 70s? It wasn't that long ago. Remember when taxes were half of what you pay now? Not that long ago. Get ready for a hike. Remember when taking the transit was less than a buck? It wasn't that long ago. Get ready for a hike.

Inflation is worsening and has been for a while. It's just that they've been manipulating the statistics. Oldest game in the book for the sheep/masses. Tell them it's low. And it must be low. They should have increased interest rates a long time ago. But now the bubble is enormous. I can't wait for the pop. A lot of people will lose. But at the same time a lot of people will win. Rules of the game. In order for people to win there will be losers. Let's hope the politicians will not continue to bail out the losers thereby enabling more stupidity and more mismanagement of the economy.

we have had deflation for past 9 months. the expected inflation rate is about 2 percent for next 30 yrs. the govt can control inflation and there is nothing good about inflation so it will remain low. people are buying 30 yr bonds that yield 4%. inflation is dead.

Icedawn

Nov 9th, 2009, 11:30 PM

I gotta say pitz, your arguments often seem consistent with a world view that misses the “big picture”. Creating a lexicon on the fly, it just seems to be that you undervalue the work of the people who “enable”, while you significantly overvalue the work of “producers”. It’s great to think you live in an Ayn Rand-ian world where anybody with a work ethic and the right ideas can work themselves up from nothing, but in reality, two things you commonly rail against, government and banking, play an incredibly important role in first a) creating an environment where that “producer” both exists and has the capacity to innovate and b) allocating the necessary capital to help produce whatever that producer is making.

Back to the actual point of the thread, I see it as all coming down to speculation…. even if you think the housing market will crash and therefore stay out of the market in the meantime, you too are merely speculating. So the question then becomes, okay, fine, what makes you a better speculator? Are you more informed? Smarter? Have the pulse of the housing industry? Why are you right in thinking that the housing market will go down, and all the other speculators who think the housing market will go up are wrong?

At least personally, I’m far more willing to hedge my bets and not be a speculator in the housing market. Since I have no special knowledge or information, I’d rather create a situation in which I just don’t care anymore whether or not housing prices are going up or down and I can live my life by taking risks (and speculating) in other areas I’m more familiar and expert in.

What that meant for myself was buying into the market despite any speculative opinions I may have. Given the current low cost of capital, I could further decrease my risk by not only buying into the market, but buying one of the largest places I could afford, as close as possible to the “family home” I want in the future. I may “make” money, I may “lose” money, but at the end of the day, I don’t really care anymore as, given the high correlation between what I have now and what I want as a permanent home, it doesn’t really make a difference.

DearSummer

Nov 9th, 2009, 11:38 PM

bcbgboy13

Nov 10th, 2009, 08:45 AM

Live in a smaller house to save money. Houses though are the main status symbol . You can damage your childrens self-esteem by living in a small house, I guess. Your wife may be more likely to leave you etc. There is a reason why people buy nice cars and big houses. Everything is a competition. small house =ugly wife=ugly children=ugly grandchildren

I had to fix this one for eternity!

AllWheelDrift

Nov 10th, 2009, 12:11 PM

I had an urge to dig through William Bernstein's The Four Pillars of Investing to find what he derives as conditions for a speculative manias (aka bubbles) based on past manias.

There will always be speculative markets in which the old rules seem to go out the window. Learn to recognize the signs: technological or financial "displacement," excessive use of credit, amnesia for the last bubble, and the flood of new investors who swallow plausible stories in place of doing the hard math.
When this happens, keep a close hold on your wallet and remember John Templeton's famous warning: The four most expensive words in the English language are, "This time, it's different."

Financial "displacement" - CMHC and 35 year ammortizations combined with nearly a decade of low interest rates (including current unprecedented lows.)
excessive use of credit - 5% down, cash back mortgages
amnesia for the last bubble - "real estate always goes up"
flood of new investors who swallow plausible stories in place of doing the hard math - "renting is throwing money away"

Little Tim

Nov 11th, 2009, 11:04 AM

Two comments:

1. Explain to me what a society would look like without taxes (i.e. no government). How do we get roads? How do we pay for environmental regulations that ensure that our food, water, and air are relatively safe? How do we get education? How do we get law enforcement? How do we get railroads and Internet infrastructure? How do we pay for the less fortunate who are not able to make enough money to pay for all the things government (i.e. taxes) normally pays for? I realize that there is a lot of waste in government, but when the alternative is anarchy I'll gladly pay my taxes.

2. We rent out our basement and don't pay any taxes on the income. Are we doing anything illegal? No. We declare the income on our tax returns and then deduct all eligible expenses (a percentage of heating costs, property taxes etc). Not much profit left at the end of the day to be taxed on.

pitz, your logic really does not add up in most cases.

sixsixii

Nov 11th, 2009, 05:16 PM

Two comments:

2. We rent out our basement and don't pay any taxes on the income. Are we doing anything illegal? No. We declare the income on our tax returns and then deduct all eligible expenses (a percentage of heating costs, property taxes etc). Not much profit left at the end of the day to be taxed on.

pitz, your logic really does not add up in most cases.

I question your logic in the above post. If your deductible rental expenses are so high that the taxable rental income is zero then please explain to us your logic behind renting out part of your home? The fact is you just unknowingly admitted to lying about your expenses on the tax return. Good luck at your next audit.

smihaila

Nov 11th, 2009, 05:43 PM

Two comments:

1. Explain to me what a society would look like without taxes (i.e. no government). How do we get roads? How do we pay for environmental regulations that ensure that our food, water, and air are relatively safe? How do we get education? How do we get law enforcement? How do we get railroads and Internet infrastructure? How do we pay for the less fortunate who are not able to make enough money to pay for all the things government (i.e. taxes) normally pays for? I realize that there is a lot of waste in government, but when the alternative is anarchy I'll gladly pay my taxes.

I'm sorry, but I find your perspective quite communist - a sign that you got used too much with a socialist/nanny state.
IMHO the best model would be a purely transactional/contractual one. Remember the "middle class" in the past times, when everyone had its own company/small entrepreneurship and they were practically exchanging services. Also, I don't need the Government to take care of my pension. Give me the money and I'll try to manage it myself. Why is Gov. considering all of us irresponsible?

pitz

Nov 11th, 2009, 05:44 PM

2. We rent out our basement and don't pay any taxes on the income. Are we doing anything illegal? No. We declare the income on our tax returns and then deduct all eligible expenses (a percentage of heating costs, property taxes etc). Not much profit left at the end of the day to be taxed on.

But you're still being taxed on the profit, and since you used the basement as a rental, it is possible that you will be further taxed on a portion of the capital gains if you took a charge for depreciation.

pitz, your logic really does not add up in most cases.

Others would disagree. Someone who rents, or has a mortgage, is feeding the government a lot more money, directly or indirectly, than their peers who have their houses paid off.

Of course people have to pay taxes, but there's no reason for someone to want to deliberately pay more than their peers. The reason why homeowners are able to accumulate wealth is because they're paying 30-40% less for their housing, than their renting or mortgaged peers.

pitz

Nov 11th, 2009, 05:47 PM

pitz

Nov 11th, 2009, 05:54 PM

You seriously posted all this to point that out? Owning a home is better than having a mortgage or renting? WHAT A REVELATION!

Exactly :). If people would only realize that before getting into these 35-year, 0% down suicide loans... The goal should be ownership, without a mortgage, of a reasonable house, ASAP.

"reasonable house", meaning, something that's proportionate to one's position in society. A doctor/lawyer/engineer should not just buy a 1-bedroom wood-building condo in Forest Lawn (or NE Calgary), and call that 'reasonable'. Lol.

The question of when it's best to rent/buy comes down to doing a calculation for your specific situation.

Using reasonable numbers and assumptions that are connected to reality. Which is something that has been sorely lacking in the past number of years.

Little Tim

Nov 11th, 2009, 05:55 PM

I question your logic in the above post. If your deductible rental expenses are so high that the taxable rental income is zero then please explain to us your logic behind renting out part of your home? The fact is you just unknowingly admitted to lying about your expenses on the tax return. Good luck at your next audit.

I knew that question was going to come up! :)

OK, for those that have no experience with being a landlord and those that are too lazy to look this up:

T4036 (http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html)

Expenses that can be deducted:
Advertising
Insurance
Interest
Maintenance and repairs
Management and administration fees
Motor vehicle expenses
Office expenses
Legal, accounting, and other professional fees
Property taxes
Utilities

From the guide:
"If you rent part of the building where you live, you can
claim the amount of your expenses that relate to the rented
part of the building. You have to divide the expenses that
relate to the whole property between your personal part
and the rented part. You can split the expenses using
square metres or the number of rooms you are renting in
the building, as long as the split is reasonable. "

Basically, my tenant helps pay part of my utilities, insurance, maintenance, property taxes and other expenses. Sometimes expenses equal income, meaning no income tax is paid. However, the assumption is that you will eventually turn a profit, so this can't be a zero-sum game forever.

Still, we will never pay income tax on the full amount of the rent we are charging, which means pitz' argument falls a little short.

pitz

Nov 11th, 2009, 06:02 PM

Still, we will never pay income tax on the full amount of the rent we are charging, which means pitz' argument falls a little short.

Not exactly. It just means that you're not charging enough rent to make your activity profitable, after paying associated expenses.

And if you're paying mortgage interest (and deducting it) -- then whomever you are paying the mortgage interest to, is paying taxes on the mortgage interest you pay.

Hence, my argument does not fall short at all :).

DearSummer

Nov 11th, 2009, 07:00 PM

Exactly :). If people would only realize that before getting into these 35-year, 0% down suicide loans... The goal should be ownership, without a mortgage, of a reasonable house, ASAP.

"reasonable house", meaning, something that's proportionate to one's position in society. A doctor/lawyer/engineer should not just buy a 1-bedroom wood-building condo in Forest Lawn (or NE Calgary), and call that 'reasonable'. Lol.

Using reasonable numbers and assumptions that are connected to reality. Which is something that has been sorely lacking in the past number of years.

How long do you think it would take your average Canadian to get enough money to pay off a mortgage in 10 years? Hardly anybody makes enough to make that a reasonable goal unless you're talking about buying a house much later in life than most want to.

pitz

Nov 11th, 2009, 07:18 PM

How long do you think it would take your average Canadian to get enough money to pay off a mortgage in 10 years?

When prices are a reasonable multiple of income (ie: somewhere between 2-3X income, depending on interest rates), average Canadians who live reasonable lifestyles shouldn't have problems paying off their mortgages.

Hardly anybody makes enough to make that a reasonable goal unless you're talking about buying a house much later in life than most want to.

Not at all. Talk to people who bought houses in the 70s for reasonable amounts, not the inflated prices (relative to incomes) of today. People in the 50s, 60s, and 70s had savings rates of 10-20%, which mean they could make a few extra mortgage payments per year with ease, and get the house paid off in 10 years if they had a good job and were otherwise thrifty. And just one pre-payment early in an amortization can knock off many payments at the end of an amortization, if you do the math, in a higher interest rate environment.

Don't attack my comments based on the premise that today's pricing is 'normal'. Its not. Even a decade ago, anyone contemplating a 35-year mortgage would have been called 'insane' by most people. Today, people are taking them out by the hundreds of thousands.

upupnorth

Nov 11th, 2009, 08:04 PM

Communist? Very funny. Good luck paving your own road, building your own hospital bed, and don't forget to get some clean water! Etc etc etc

I'm sorry, but I find your perspective quite communist - a sign that you got used too much with a socialist/nanny state.
IMHO the best model would be a purely transactional/contractual one. Remember the "middle class" in the past times, when everyone had its own company/small entrepreneurship and they were practically exchanging services. Also, I don't need the Government to take care of my pension. Give me the money and I'll try to manage it myself. Why is Gov. considering all of us irresponsible?

VivienM

Nov 12th, 2009, 12:49 AM

How long do you think it would take your average Canadian to get enough money to pay off a mortgage in 10 years? Hardly anybody makes enough to make that a reasonable goal unless you're talking about buying a house much later in life than most want to.

See, as pitz pointed out, that's the problem of the "cheap debt, giant amount borrowed" model.

a) It'll take you a hell of a lot longer to pay back the giant amount,
b) The benefit of prepayments when your rate is 2.25% is a HELL of a lot lower than when your rate is, say, 7.75%...

So basically, you have to do a hell of a lot more cost-cutting in your budget to pay off the mortgage early, and you get a whole lot less in exchange for that cost-cutting.

You can see the evil of this much more easily with car loans. Instead of spending $32K on a car and borrowing the money at 8%, the manufacturer will sell it to you at $40K, and lend you the money at 0% (which really means that the car division cuts the financing division a cheque for $8K to cover the interest).

Guess what.
a) If you need to sell the car early for $20K because your wife is expecting triplets, you've been transferred to Australia, or whatever, you're out a hell of a lot more cold hard cash.
b) If you want to pay it off early, you're lining the pockets of the automaker.

In the car case, it's a shell game that's bad for the consumer. Worst case scenario (for them), automaker makes the same amount of money as if they had sold it for a fair price and lent you the money at a fair rate. Best case scenario, you need to pay off the loan early, and they get an unexpected windfall.

Same deal applies with cheap giant mortgages, except the seller (who makes off like a bandit) and the subsidizer (me, getting my beautiful 1.05% interest rate on my "high interest" savings account) are different people.

Sadly, we live in a world filled with suckers, crooks, and real estate agents who think cheap debt is good. It's not. Cheap debt is either an accounting trick (the car case) or a transfer of wealth from savers to sellers (the housing case).

pitz

Nov 12th, 2009, 01:22 AM

Sadly, we live in a world filled with suckers, crooks, and real estate agents who think cheap debt is good. It's not. Cheap debt is either an accounting trick (the car case) or a transfer of wealth from savers to sellers (the housing case).

Yeah I just wonder, how badly are people going to suffer for this?

Will the 20 or early 30-somethings get big enough raises throughout the long careers ahead of them, in order to compensate for such a rampant transfer of wealth from the working young, to the non-working elderly (ie: home sellers)?

Will we devolve into a situation that's unfolding in the United States where basically everyone under 35-40 in the bubble states are now in the process of defaulting or filing for bankruptcy?

Where's the catalyst to bring back jobs in Canada/USA, considering that nearly our entire economies are structured around finance and real estate, and really, very little else?

Will the people who acted prudently and refused to pay the hyperinflated prices be rewarded? Will savers extract their revenge on spenders?

History provides answers to many of these questions, and the outcomes aren't pretty.

sixsixii

Nov 12th, 2009, 02:42 AM

I knew that question was going to come up! :)

OK, for those that have no experience with being a landlord and those that are too lazy to look this up:

T4036 (http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html)

Expenses that can be deducted:
Advertising
Insurance
Interest
Maintenance and repairs
Management and administration fees
Motor vehicle expenses
Office expenses
Legal, accounting, and other professional fees
Property taxes
Utilities

From the guide:
"If you rent part of the building where you live, you can
claim the amount of your expenses that relate to the rented
part of the building. You have to divide the expenses that
relate to the whole property between your personal part
and the rented part. You can split the expenses using
square metres or the number of rooms you are renting in
the building, as long as the split is reasonable. "

Basically, my tenant helps pay part of my utilities, insurance, maintenance, property taxes and other expenses. Sometimes expenses equal income, meaning no income tax is paid. However, the assumption is that you will eventually turn a profit, so this can't be a zero-sum game forever.

Still, we will never pay income tax on the full amount of the rent we are charging, which means pitz' argument falls a little short.

Altruism now, and a sprinkle of profits later (or not, but lets hope so). It's hard to compete with landlords like you.

Although I wish to see prophecies of Pitz come to fruition, I also have a nagging feeling that the RE bubble will not be allowed to burst in any significant way. Another troubling fact is that massive mortgage debt is now socially acceptable and considered completely normal among young people. All indicators point to a period of stagnation or a moderate drop in RE prices in the near future, followed by slow growth.

pitz

Nov 12th, 2009, 02:52 AM

All indicators point to a period of stagnation or a moderate drop in RE prices in the near future, followed by slow growth.

All indicators???

Come on.. Every other industrialized nation, except Canada, is pretty much at -50% right now, give or take, from the peaks.

"moderate drop" my a*s. :twisted: More like a nightmare for practically everyone who owns RE, and major economic dislocation for an entire sector of the economy.

Germack

Nov 12th, 2009, 08:15 AM

All indicators???

Come on.. Every other industrialized nation, except Canada, is pretty much at -50% right now, give or take, from the peaks.

"moderate drop" my a*s. :twisted: More like a nightmare for practically everyone who owns RE, and major economic dislocation for an entire sector of the economy.

I agree with you that RE is heavily overvalued in Canada and prices will fall sooner or later, however why do you always "make up" these extremes numbers which are just completely wrong.

VivienM

Nov 12th, 2009, 08:17 AM

Another troubling fact is that massive mortgage debt is now socially acceptable and considered completely normal among young people.

As I said in another thread, young people were raised on hefty doses of student debt. Debt is like most things - once you're desensitized, who cares about a little bit (or a lot) more? Thanks Mike Harris!

Really, I think most people just assume that the property will be sold at a profit LONG before the 35 year mortgage is paid off. Oh speculators...

slavka012

Nov 12th, 2009, 08:45 AM

Altruism now, and a sprinkle of profits later (or not, but lets hope so). It's hard to compete with landlords like you.

Although I wish to see prophecies of Pitz come to fruition, I also have a nagging feeling that the RE bubble will not be allowed to burst in any significant way. Another troubling fact is that massive mortgage debt is now socially acceptable and considered completely normal among young people. All indicators point to a period of stagnation or a moderate drop in RE prices in the near future, followed by slow growth.
Don't you see that his expenses would not have changed, if did not rent? All those a fixed expenses. Now that he rents, he gets some tax break.

GonePostal

Nov 12th, 2009, 09:05 AM

All indicators???

Come on.. Every other industrialized nation, except Canada, is pretty much at -50% right now, give or take, from the peaks.

"moderate drop" my a*s. :twisted: More like a nightmare for practically everyone who owns RE, and major economic dislocation for an entire sector of the economy.

Stop making up numbers.

http://www.redflagdeals.com/forums/does-make-sense-buy-house-when-youre-still-single-811199/5/#post9730096

Little Tim

Nov 12th, 2009, 09:36 AM

Don't you see that his expenses would not have changed, if did not rent? All those a fixed expenses. Now that he rents, he gets some tax break.

Thank you. At least someone gets it. For example, property taxes and heating bills are the same whether we have a tenant or not. It is beneficial for us to deduct those expenses from our rental income.

Now, pitz and Vivien, I believe in essence nobody is disagreeing with you. We have entered an era of cheap debt and rampant consumerism that is not healthy financially in the long run. Obviously it would be better if people actually had earned the money before they spent it or made sure that they had reasonable expectations of paying any debt back in a short time frame.

However, the simplistic arguments and flat out made-up statistics that you use certainly aren't doing you any favours.

For example, Vivien's example about car loans where a higher sticker price makes up for lower interest rates. I'd like to see that backed up with some factual information, because that is just an assumption. There's plenty of good deals to be had out there if you only know how to haggle and negotiate, and with fierce competition between automakers and dealerships you can play them against each other. I'm sure they all wish it was as simple as you state.

Also, pitz' little "statistic" about all other industrialized nations being -50% in their RE market. Seriously, pitz. How do you expect us to listen to anything you're saying when you're just making things up?

pitz

Nov 12th, 2009, 09:38 AM

Stop making up numbers.

http://www.redflagdeals.com/forums/does-make-sense-buy-house-when-youre-still-single-811199/5/#post9730096

Why do you just cherry pick numbers when you attack me? Look at Japan. They're even worse than 50%. That's why I said, "give or take". Either way, you get the point -- the losses in price have been catastrophic, and that's why you have the situation of mass defaults in the US right now.

Sheesh, if you don't like me, just say so. Its not my fault that I'm your intellectual superior.

DearSummer

Nov 12th, 2009, 10:10 AM

When prices are a reasonable multiple of income (ie: somewhere between 2-3X income, depending on interest rates), average Canadians who live reasonable lifestyles shouldn't have problems paying off their mortgages.

Not at all. Talk to people who bought houses in the 70s for reasonable amounts, not the inflated prices (relative to incomes) of today. People in the 50s, 60s, and 70s had savings rates of 10-20%, which mean they could make a few extra mortgage payments per year with ease, and get the house paid off in 10 years if they had a good job and were otherwise thrifty. And just one pre-payment early in an amortization can knock off many payments at the end of an amortization, if you do the math, in a higher interest rate environment.

Don't attack my comments based on the premise that today's pricing is 'normal'. Its not. Even a decade ago, anyone contemplating a 35-year mortgage would have been called 'insane' by most people. Today, people are taking them out by the hundreds of thousands.

Stop making up numbers. The highest the savings rate has ever been in Canada was 11.2%. And guess what? That was in the 80s. Not the 50s, 60s, or 70s.

Canada's real estate market is HEALTHY. We're not the U.S. We don't have the same lending practices. After one of the biggest global economic meltdowns in history house prices have already recovered. Also, we barely have any mortgage defaults because we have much stricter lending rules.

Read this:

Meanwhile, 0.26 per cent of mortgages nationally were in arrears in April, a number that has held fairly steady since 2004.

"And by implication, the foreclosure rate remains quite low -- if not historically low -- in Canada," Guatieri said. "And it's miles different from the U.S. situation."

STOP MAKING STUFF UP. DO SOME RESEARCH.

cmyden

Nov 12th, 2009, 10:54 AM

GonePostal

Nov 12th, 2009, 10:58 AM

Why do you just cherry pick numbers when you attack me? Look at Japan. They're even worse than 50%. That's why I said, "give or take". Either way, you get the point -- the losses in price have been catastrophic, and that's why you have the situation of mass defaults in the US right now.

Sheesh, if you don't like me, just say so. Its not my fault that I'm your intellectual superior.

Cherry pick? I think you are the one that is cherry picking numbers. You are going to use Japan as more of a direct comparable then the USA and UK? The fact remains your statement that Real Estate in the "industrialized" world is has not seen negative 50 - 60% losses. Please give me some more examples of countries that saw negative 50 to 60% losses in RE in the industrialized world. The only examples are small places like Iceland or Zimbabwe.

I posted numbers from the largest economy in the world and one of the largest economies in Europe. How exactly is that cherry picking?

Either way the prices losses have been catastrophic is correct. But you go around quoting numbers and facts that are clearly wrong. It's absolutely comical some of the stuff that you post.

And nice job at trying to troll me into an angry rant where I would insult you. I can very easily admit that I really don't like you. I would just wish you could admit when you are _clearly_ wrong.

GonePostal

Nov 12th, 2009, 11:05 AM

Mortgage lender warns of housing bubble

http://www.yourhome.ca/homes/realestate/buyingahome/article/724613--mortgage-lender-warns-of-housing-bubble

"Low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road, says the president and CEO of ING Direct Canada."
If you look closer into the article they are using figures from the Toronto RE market. Other markets around Canada haven't seen the huge run up that Toronto has. I agree that the RE market in Toronto isn't sustainable right now.

pitz

Nov 12th, 2009, 11:16 AM

However, the simplistic arguments and flat out made-up statistics that you use certainly aren't doing you any favours.

Nobody's been making up statistics. Don't know where you're getting that from. Prices have dropped dramatically everywhere in the industrialized world, and they're only being held artificially high in Canada right now because the government is buying nearly all of the mortgages, at below-market rates, that banks can make, through the CMHC and other entities.

For example, Vivien's example about car loans where a higher sticker price makes up for lower interest rates. I'd like to see that backed up with some factual information, because that is just an assumption. There's plenty of

Its not an assumption. For the past number of years, firms such as GM were offering 0% financing, while their finance arms (ie: GMAC) were facing finance costs of 8-9% in the bond market. VivienM used logic to come to the conclusion that cars were, hence, 20-30% overpriced, based on the implied subsidy of GMAC by GM when a car was sold and financed.

Also, pitz' little "statistic" about all other industrialized nations being -50% in their RE market. Seriously, pitz. How do you expect us to listen to anything you're saying when you're just making things up?

Did you miss the words, "more or less"? Really, it depends as well, what currency you quote real estate in (in gold, for instance, a currency -- RE has lost > 50%). But that's not the point. If you want to take issue with numbers, fine. But saying I'm 'making things up', that's just not right and has no basis in reality.

GonePostal

Nov 12th, 2009, 11:36 AM

Nobody's been making up statistics. Don't know where you're getting that from. Prices have dropped dramatically everywhere in the industrialized world, and they're only being held artificially high in Canada right now because the government is buying nearly all of the mortgages, at below-market rates, that banks can make, through the CMHC and other entities.

Its not an assumption. For the past number of years, firms such as GM were offering 0% financing, while their finance arms (ie: GMAC) were facing finance costs of 8-9% in the bond market. VivienM used logic to come to the conclusion that cars were, hence, 20-30% overpriced, based on the implied subsidy of GMAC by GM when a car was sold and financed.

Did you miss the words, "more or less"? Really, it depends as well, what currency you quote real estate in (in gold, for instance, a currency -- RE has lost > 50%). But that's not the point. If you want to take issue with numbers, fine. But saying I'm 'making things up', that's just not right and has no basis in reality.
More or less?
For the US case

Best case
(32.5% - 50%) / 50% = 35% margin of error

Worst case
(32.5% - 50%) / 60% = 46% margin of error

In my books more or less doesn't mean 35-45% margin of error. Why even post "numbers" if they are so inaccurate? Don't post numbers you have no idea are correct or not.

Currency exchange has NOTHING to do with Real Estate values. You can quote the value of real estate in any currency and the drop would be the same. Unless you are talking about converting the past numbers at the historical conversion rate (month or day or year?). Then you just are trying to put up a smoke screen in the form of Forex exposure. US Real Estate isn't down! It's actually up 100000000000000% when measured in Zimbabwe's currency!

You are making things up. Everyone knows Real Estate prices are down in many nations across the globe. The 50 to 60% was a PURE fabrication.

GonePostal

Nov 12th, 2009, 11:47 AM

Why do you just cherry pick numbers when you attack me? Look at Japan. They're even worse than 50%. That's why I said, "give or take". Either way, you get the point -- the losses in price have been catastrophic, and that's why you have the situation of mass defaults in the US right now.

Sheesh, if you don't like me, just say so. Its not my fault that I'm your intellectual superior.

Had some extra time and decided to look into it more.

Japan from the PEAK which was in the early 1990's to today has lost an average of 40% of their value. The large cities such as Tokyo fared worse seeing 65% declines.

But their problems date back to the early 1990's and to a totally different recession.

For this recession they haven't fared as poorly as you make it out. As this articles lays out they have been hit hard but have only seen high single digit price declines.

http://www.globalpropertyguide.com/Asia/Japan/Price-History

Again I am sorry to say (well not really sorry) that you are wrong and making facts and figures again.

AllWheelDrift

Nov 12th, 2009, 11:58 AM

If you look closer into the article they are using figures from the Toronto RE market. Other markets around Canada haven't seen the huge run up that Toronto has. I agree that the RE market in Toronto isn't sustainable right now.
Actually, Toronto's run up over the past 3 years or so has been quite came compared to the likes of Vancouver, Calgary, and Edmonton.
http://www.chpc.biz/images/OCT09-6City.jpg

pitz

Nov 12th, 2009, 12:02 PM

Again I am sorry to say (well not really sorry) that you are wrong and making facts and figures again.

As I said, I did not make up any numbers. Sorry, you're wrong again.

DearSummer

Nov 12th, 2009, 12:09 PM

pitz always makes stuff up. Here's a nice gem from him:

I calculated, in at least 2 or 3 ways, why engineers (and other professionals) need $200k/year to break even. One was based on the NPV model. One was based on historical housing affordability. The other was based on their pay relative to the compensation of other professionals in industry.

$200k/year might seem like a lot of money to you, but when you pay all the expenses of living a middle-class lifestyle (which are only going up) out of it, its really not.

Apparently you need to earn $200k/year to "break-even" on an undergraduate degree and live a middle-class lifestyle.

I'm still waiting to see those numbers pitz. Let's see your "model".

GonePostal

Nov 12th, 2009, 12:15 PM

Actually, Toronto's run up over the past 3 years or so has been quite came compared to the likes of Vancouver, Calgary, and Edmonton.
http://www.chpc.biz/images/OCT09-6City.jpg

I should have said the pace of the last few months is unsustainable. 20% year over year in a recession is definitely not sustainable.

I agree in a big picture sense (as your graph shows) the RE market in the GTA has been much more reasonable. That is part of the reason why the contraction in prices wasn't as harsh also.

GonePostal

Nov 12th, 2009, 12:23 PM

As I said, I did not make up any numbers. Sorry, you're wrong again.

I provided FACTS and FIGURES as to why you are wrong. It's much easier to debate when you don't hold yourself to that standard. Just conjecture and inferences that are based loosely on "facts". Shows intellectual laziness at best and at worst trolling.

It's not because you are bearish on Canadian Real Estate. I read several blogs that show the bearish argument on Canadian Real Estate. I think it's important to hear both sides of the story. The difference between you and them are they provide facts and figures to support their opinions.

You are made in the mold of what I like to call a "dream stealer". The guy that is perpetually negative and will always tell you why you shouldn't do something.

Real Estate is going to crash!
Engineering especially Electrical Engineering is a dead end!
Bankers/Financiers are crooks!
Alberta's economy is dead!
Saskatchewan is dead!

I really don't understand how anyone can think you have any credibility.

Darkique

Nov 12th, 2009, 01:09 PM

pitz always makes stuff up. Here's a nice gem from him:

Apparently you need to earn $200k/year to "break-even" on an undergraduate degree and live a middle-class lifestyle.

I'm still waiting to see those numbers pitz. Let's see your "model".

Hahahahahaha I had a good laugh when i read this.

pitz

Nov 12th, 2009, 01:18 PM

Hahahahahaha I had a good laugh when i read this.

So GP takes my comments completely out of context, selectively quotes, ignores important qualifying statements, and then uses those comments in an ill-fated attempt to smear me.

Pretty sad.. But I knew this thread was 'off the rails' as soon as people (like him) started attacking me personally, and not my ideas... Typical tactics of my intellectual inferiors, I must say.

BTW, I stand by that $200k comment, and I laid out the inputs in the thread in which I made that claim.

Little Tim

Nov 12th, 2009, 01:23 PM

So GP takes my comments completely out of context, selectively quotes, ignores important qualifying statements, and then uses those comments in an ill-fated attempt to smear me.

Pretty sad.. But I knew this thread was 'off the rails' as soon as people (like him) started attacking me personally, and not my ideas... Typical tactics of my intellectual inferiors, I must say.

Well, dear pitz, it's hard not to attack when 'RE prices have dropped 50% across the industrialized world' is presented as fact.

As I've said before, you present some valid ideas, but please refrain from backing them up with fabricated statistics. In the end that will ensure that nobody will take anything you say seriously. Remember the boy who cried wolf...?

pitz

Nov 12th, 2009, 01:29 PM

Well, dear pitz, it's hard not to attack when 'RE prices have dropped 50% across the industrialized world' is presented as fact.

See, you're misquoting me. I said, "more or less, give or take". Is 50% meaningfully different than 40%? 60% (for Japan)? Of course not. Either way, its a cataclysmic collapse in prices in a highly leveraged environment. I can see you attacking me if I claimed a precise number, ie: -48.8538283%, and 'made that up'. But I gave a rough number, and qualified it with a bunch of words that, to any informed reader, should have let to an interpretation that it was a rough estimate.

If someone wants to come in with the absolute precise numbers (which aren't, in pith and substance, different than my -50% claim), then they're obviously welcome to. Anyways, I don't lose any sleep over the attacks; if I said -40%, some doofus would be attacking me because the actual number was -38.8385% or - 42.53232%, or whatever the precise number is.

As I've said before, you present some valid ideas, but please refrain from backing them up with fabricated statistics. In the end that will ensure that nobody will take anything you say seriously. Remember the boy who cried wolf...?

I have not fabricated any statistics whatsoever. And the boy who cried wolf eventually encounted a wolf and needed assistance, so let's keep the fairy tales where they belong, and not ruin whatever is left of this thread.

DearSummer

Nov 12th, 2009, 01:51 PM

BTW, I stand by that $200k comment, and I laid out the inputs in the thread in which I made that claim.

Please pitz, enlighten us. I can't wait to see how one would need $200,000/year to live a middle-class lifestyle.

GonePostal

Nov 12th, 2009, 01:52 PM

See, you're misquoting me. I said, "more or less, give or take". Is 50% meaningfully different than 40%? 60% (for Japan)? Of course not. Either way, its a cataclysmic collapse in prices in a highly leveraged environment. I can see you attacking me if I claimed a precise number, ie: -48.8538283%, and 'made that up'. But I gave a rough number, and qualified it with a bunch of words that, to any informed reader, should have let to an interpretation that it was an estimate.

I have not fabricated any statistics whatsoever. And the boy who cried wolf eventually encounted a wolf and needed assistance, so let's keep the fairy tales where they belong.
Attacking you personally?

You are the one going around calling me your intellectual inferior.

Second if you state numbers they should be REASONABLY accurate. You on the other hand are WAYYY off base. I provided your margin of error and they are too inaccurate. I also proved you wrong that Japan didn't see > 50% drop in this recession. From their ALL time peak their prices have dropped ~40% and only in the worst areas ~65%.

pitz

Nov 12th, 2009, 01:54 PM

Please pitz, enlighten us. I can't wait to see how one would need $200,000/year to live a middle-class lifestyle.

Please use the search feature buddy, I am not going to re-hash all the calculations (and the debate, esp. over discount rates) here. $200k salary is what is required to purchase a house, fitting of a degreed professional, in most of Canada's major cities, given a 2-3X multiplier of house prices versus salary, at current pricing.

To the point of this thread, either we're going to see a housing price collapse, or strong wage and price inflation, as the outcome of house prices being so seriously out of whack with prices on other consumer goods, wages, etc.

Little Tim

Nov 12th, 2009, 01:56 PM

pitz, this is how you do it: find a source, dig out the numbers, build a case.

Global Real Estate Trends (http://www.scotiacapital.com/English/bns_econ/retrends.pdf) from Oct 1, 2009.

Excerpt:

Real home prices declined in 9 of the 10 countries
tracked in 2008. In Australia, inflation-adjusted
prices were flat on average, but had moved into
negative year-over-year territory by the second half
of the year.

Countries that experienced the biggest boom have
generally faced the biggest bust. Ireland recorded by
far the largest trough-to-peak real appreciation,
totalling almost 300% from 1993-2006, based on
annual average prices. It has also suffered one of the
largest price corrections to date, at more than 25%.
Real home prices in the United Kingdom climbed
170% from 1996-2007, but have subsequently fallen
close to 20%.

The somewhat smaller, though still sizeable price
gains in Spain (128% from 1997-2007), France
(111% from 1998-2007) and Australia (103% from
1997-2008) have been followed by relatively modest
price declines of 11%, 10%, and 6%, respectively, to
date. Real price appreciation in Canada (66% from
1999-2007) and Italy (61% from 1998-2007) falls at
the low end of the pack, as does the subsequent
retracement (8% and 1%, respectively, based on the
latest data available).

The U.S. market stands out from the rule. The
cumulative trough-to-peak rise in inflation-adjusted
U.S. home prices was just 50% from 1996-2005, the
lowest among the eight countries with price gains.
Yet, U.S. residential real estate has suffered the
largest downward price adjustment to date (29%). Riskier mortgage
lending, and the resulting surge in foreclosures and distressed sales,
appears to be the main factor behind the unusually large
retrenchment.

........................

pitz, please enlighten me as to where you came up with that 50% (give or take) figure again? I just can't remember if you quoted a source or not.

GonePostal

Nov 12th, 2009, 02:02 PM

Please use the search feature buddy, I am not going to re-hash all the calculations (and the debate, esp. over discount rates) here. $200k salary is what is required to purchase a house, fitting of a degreed professional, in most of Canada's major cities, given a 2-3X multiplier of house prices versus salary, at current pricing.

To the point of this thread, either we're going to see a housing price collapse, or strong wage and price inflation, as the outcome of house prices being so seriously out of whack with prices on other consumer goods, wages, etc.
Where did you get this 2-3x multiplier from?
How do you know house prices are so seriously out of whack? You have never provided evidence of this. Just opinions passed off as facts.

pitz

Nov 12th, 2009, 02:04 PM

pitz, please enlighten me as to where you came up with that 50% (give or take) figure again? I just can't remember if you quoted a source or not.

I didn't quote a source, and there are multiple sources of data, and multiple ways of interpreting such. USA might be -29% (according to your source), but the US dollar index has also dropped significantly, thus, masking some of the drop. And averages often differ from medians, and pricing in the USA is still, according to some, artificially high, because of government subsidies of banks there.

We've really run off the rails here though; I don't think that anyone has fundamentally disagreed with me -- that the collapse in prices everywhere else in the world (other than Canada) has been severe.

The question really is, can Canada really avoid the same fate as has beset the rest of the industrialized world?

pitz

Nov 12th, 2009, 02:09 PM

Where did you get this 2-3x multiplier from?

That's been the traditional range of house prices as multiples of income, for the 50s, 60s, 70s, 80s, and 90s. I'm sure you'll find a few exceptions at certain points in time if you go into the data in-depth, but nothing like what is seen today.

How do you know house prices are so seriously out of whack? You have never provided evidence of this.

Let's see. AllWheelDrift made a good post about what defines a bubble. Low downpayments. Excessive optimism. Oversupply relative to demand. Speculative activity. Prices in some parts of Canada that require >80% of household income to support a mortgage on. No private sector issuance of new mortgages, Etc., etc. Are you a used house salesman or something?

Nyte

Nov 12th, 2009, 02:20 PM

T
For example, Vivien's example about car loans where a higher sticker price makes up for lower interest rates. I'd like to see that backed up with some factual information, because that is just an assumption. There's plenty of good deals to be had out there if you only know how to haggle and negotiate, and with fierce competition between automakers and dealerships you can play them against each other. I'm sure they all wish it was as simple as you state.

If you want proof of this, go look on a site like Edmunds under current incentives for various cars. You often get the choice between low dealer financing or a large rebate for cash or external financing.

cmyden

Nov 12th, 2009, 03:16 PM

Here's why I think RE is overpriced in Calgary (and applies to Vancouver & Toronto as well)..

http://money.cnn.com/magazines/fortune/price_rent_ratios/

I think it would be fairly safe to conclude that those cities that deviated the most from their long term P/R ratio were the ones that fell the furthest.

With that in mind, I guess the question becomes, how far did we deviate from our own historical P/R ratio?

I think the best analysis of it that I've seen so far is from Kevin over at EHB...

http://edmontonhousingbust.blogspot.com/2009/05/price-to-rent-ratios.html

He wrote the article based on my suggestion, after I became curious about just how high our P/R ratio had become in Alberta (and he's great at digging up data).

By his calculation, the long term average (since 1990) for Calgary condos is 15, or 180X. For Edmonton it is 150X.

"So it's interesting to note some of those figures with our findings above. Firstly, that the nationwide ratio in the US was generally between 10-14. This would certainly describe Edmonton's situation until the run up... and would largely also ring true for Calgary though they were closer to 15, so they were close."

"In any case, Calgary would be at the high end, while Edmonton would be right in the mix. So it's interesting to compare the peaks, Calgary at 25.4, and Edmonton at 22.9. These ratios are very close to those experienced in Boston, NY, LA and south Florida."

There are numerous reasons I like the price/rent ratio...

1) If you want to be an independent adult you essentially have two "product lines" to choose from, the ownership product and the rental product. They are the biggest competition for each.

2) Supply & demand are factored into both products. If the local economy suddenly becomes hot/cold, this is reflected in both products.

3) Inflation/deflation and wage increases/decreases are factored into both sides.

To me the only factor that remains is speculation. Rent prices aren't really subjected to wild swings based on speculation the way home prices are.

It's ridiculous to suggest that 150X is some magic ratio that is relevant for all markets. If you do a Google search for price/rent ratios you will find all sorts of discussion in various markets.

Some examples...

San Diego

---------

http://piggington.com/what039s_an_acceptable_pricerent_ratio_in_san_dieg o

"I think the historical average for San Diego is somewhere around 150-160.

My breakdown would be (using current rates)

1) Fantasy investors dream - < 80

2) Ideal (cash flow investment) - 80-120

3) Break even investment - 120-140

4) Rent neutral - 140-180

5) Overpriced - 180-220

6) WTF Bubble territory 220+"

Boston
------

http://www.boston.com/realestate/news/blogs/renow/2009/06/im_a_fan_of_ren.html

"You are correct. I didn't make this entirely clear in my comment, but the numbers in Rona's first example are not just good, they are very good. As I have said before, a rough price target for rental properties is usually somewhere around 100-150x gross monthly rent."

http://www.erica.biz/2008/when-should-you-buy-real-estate-and-when-is-it-better-to-rent/

http://www.nytimes.com/2008/05/28/business/28leonhardt.html?_r=1&pagewanted=all

So it really is just a generalization or 'rule of thumb' that gets thrown around, but I have yet to find an investment article that quotes a 200X or higher price/rent ratio as anything but extremely high, for any city.

One can see that the current median rental price for a SFH in Calgary is $1600/month...

http://tinyurl.com/ygt7uj2

and the current median price is $410k month to date for October to rent from a bank.

Which translates to a price/rent ratio of 256.

Virtually every investment article or book that I've ever read has quoted a price/rent ratio of 150X being 'normal' and anything above 200X being outrageously overpriced.

In the U.S., the most desirable areas along the coast (ie San Fran) usually hover around 200X.

To reach a ratio of *only* 200X, one of the following would have to happen...

- median rent would have to increase to $2050 from where it is now (it's fallen about 8% since spring)

or

- median prices would have to fall to $328k (20% decrease)

or the two would meet somewhere in the middle.

OR have we reached a new paradigm where price/rent ratios remain a good 50% higher than historical levels ?

If we truly have reached a 'new paradigm', and our P/R ratio is now to stay at 200X or greater, what caused this change exactly? Why did the ownership product become so much more valuable than the rental product?

What truly makes our market so different now than the past that would affect this ratio?

Some more charts...

Relationship between Calgary house prices and economic activity in Alberta...

http://calgaryrealestatemarketblog.files.wordpress.com/2008/02/long_term_relationship_between_calgary_house_price s_and_alberta_economic_activity_diverge_large.png

Calgary Inflation Adjusted House Prices
http://img85.imageshack.us/img85/4922/calgaryinflationadjustede7.png

Never underestimate regression to the mean!

I used to be one of those who thought that Alberta's economy was 'special'. I thought there might be a perfectly valid reason why house prices doubled while inflation and wages only increased by 18%. After all, we have all that oil, and look how valuable that is!

The more I looked into it though, the more I came to realize that we were just caught up in the same credit bubble as everyone else. Every city, state, province, country comes up with their own reasons for justifying why prices skyrocketed in their area during the same period of time.

It's going to be interesting to see if the CMHC becomes our version of Freddie Mac / Fannie Mae.

Ultimately, I think the blame can only be put on one person, the one in the mirror. We fell into the same debt trap as the Americans, with their overconsumption, and having to have the same granite countertops and stainless steel appliances, while sitting on our oversized couch, watching our oversized TV, with the same 'real estate reality tv shows'.

It turns out we're really not different, but perhaps the way we choose to deal with it will be.

pitz

Nov 12th, 2009, 03:29 PM

cmyden, I've long insisted that an appropriate comparison for the Alberta cities is, at best, Houston or Dallas.

Why? Because house prices, at best, should be based on the discounted value of future rents (imputed or actual).

The discount rate in Houston or Dallas is high, because Texas has oil (similar to Calgary/Edmonton and Alberta), and has a fairly risky economy and employment market that rises and falls with commodities (to wit: oil and gas).

I don't see why this isn't the case in Alberta. High risk economy = lower housing prices relative to incomes. Diversified economy (which Alberta is not) = higher housing prices.

Only conclusion I can personally come to is that Alberta's real estate pricing is based solely on a speculative bubble, much like you've concluded.

Saskatchewan is even worse. The only thing driving the market there is Alberta refugees coming in after having cashed out of their properties there. The rest of the economy continues to deteriorate, lately, at an ever-increasing rate.

cmyden

Nov 12th, 2009, 03:39 PM

GonePostal

Nov 12th, 2009, 04:36 PM

A good analysis on the rising debt levels in our economy...

http://americacanada.blogspot.com/2009/10/when-home-prices-rise.html

America Canada and Kevin's Edmonton Housing Bust blog are probably my 2 favorite as far as analysis of Canadian real estate...

http://www.edmontonhousingbust.blogspot.com/

They both put a lot of work into digging up numbers and crunching the data.

Seriously, if you have any interest in the topic, do yourself a favor and skim over the 100 posts that Kevin has made in the last year or so.

I do read those blogs on a semi regular basis. But I would caution you to do your own analysis on the numbers. Some of what they present is very biased.

http://americacanada.blogspot.com/2009/10/when-home-prices-rise.html

Just as an example.

His point that _total_ outstanding residential mortgage credit has been on a very steep accent shows that there is a "bubble". Well think about it some more. There are many circumstances when TOTAL outstanding residential mortgage credit can increase dramatically and not cause a bubble. Things like immigration/population growth, trend of less people per household, etc. The graph is more dramatic then the poster lets on. There is no direct correlation without more supporting evidence.

The graph of credit to income is pretty good. In my opinion it is still 1 degree of separation away. People are taking on more credit no doubt but this doesn't directly relate to bubble in housing. Remember it wasn't so long ago that conventional mortgages went from being 25% down to 20% down. All things being equal the graph would increase just based on this fact. Perfectly sound secure buyers are putting down 5% less today then before this requirement was relaxed. (I am purposely steering away from elephant in the room CMHC). Again this graph needs more supporting evidence before any direct conclusions can be drawn from it.

The last graph is conjecture and his own personal opinion on where things are going.

I can see the POV from the other side and he does make valid points. Nothing wrong with being a bear as long as you base it on facts and figures.

pitz

Nov 12th, 2009, 05:22 PM

I do read those blogs on a semi regular basis. But I would caution you to do your own analysis on the numbers. Some of what they present is very biased.

In the case of the "America Canada" blog, the dude is obviously a political activist who is absolutely alarmed at what he's seeing. So of course he's biased.

His point that _total_ outstanding residential mortgage credit has been on a very steep accent shows that there is a "bubble".

Why would the rate of change (ie: a steep ascent) change dramatically? The trends of immigration, shrinking size of families, etc., have been intact for at least a decade or two. One trend that is intact is that the average age of Canadians is getting older. This would imply that mortgage credit should be shrinking (as people retire their debts before they retire), and not vice versa, if we're not in a bubble.

There is no direct correlation without more supporting evidence.

So do you have an alternative explanation that would justify such an acceleration in credit outstanding? A bubble is one that obviously comes to mind...

conventional mortgages went from being 25% down to 20% down. All things being equal the graph would increase just based on this fact. Perfectly sound secure buyers are putting down 5% less today then before this requirement was relaxed. (I am purposely steering away from elephant in the room CMHC). Again this graph needs more supporting evidence before any direct conclusions can be drawn from it.

I'm not sure if you can really draw valid conclusions from the 20-25% issue (which is, fair enough, legitimate), without discussing how many mortgages are actually given under those terms, relative to CMHC mortgages, and segregating the data accordingly.

America Canada has posted data showing dramatic growth in the CMHC portfolio though, which, on a per capita basis, is even more alarming than what went on at Fannie Mae/Freddie Mac.

I can see the POV from the other side and he does make valid points. Nothing wrong with being a bear as long as you base it on facts and figures.

The disturbing thing, at least to me, is that basically every bit of 'growth' that's been in North America, in the past decade, has been linked to finance or real estate in some form or another. Accelerating mortgage credit wouldn't be a problem if the non-real-estate/non-finance economy was actually growing in a meaningful way. Alberta's seen some growth, yes, because of the massive energy infrastructure buildout there. But the rest of North America, its been, more or less, a 'lost decade'.

VivienM

Nov 12th, 2009, 05:40 PM

For example, Vivien's example about car loans where a higher sticker price makes up for lower interest rates. I'd like to see that backed up with some factual information, because that is just an assumption. There's plenty of good deals to be had out there if you only know how to haggle and negotiate, and with fierce competition between automakers and dealerships you can play them against each other. I'm sure they all wish it was as simple as you state.

Open your eyes.

See, a few years ago, things were simple. There were THREE incentive options:
a) a cheap financing option
b) a leasing offer
c) a big cash discount.

GM's "current offers" web page, for example, clearly listed all three, next to each other.

If you did the math, it turns out that all three options were roughly worth the same. Sure, you "saved" $5000 in interest by getting 0% financing, but hey there was a $5000 offer if you paid cash (or obtained cash from some other lender)

The leasing offers are mostly gone nowadays. And yes, the cash rebates have shrunk. Why? Smart people took their HELOCs and paid cash for the cars. And smart people are bad for business.

Also, read automakers' financial reports from a few years ago. GMAC was profitable, say, but GM's car operation was not. Why not? Because the way the accounting worked, GM paid GMAC for the interest on the car loans it gave.

But honestly, it's plain common sense. You cannot, even in today's absurd world, borrow money at 0% on a 'secured' loan backed with collateral that's worth 30% less than your loan amount (remember, value of a car drops at least 30% when you leave the dealer's lot).

Therefore, if automakers are offering 0% financing, then it means that they're borrowing the money from somebody else for more, then playing accounting games. And that IMPLIES that you're paying for the 0% through a higher sticker price.

GonePostal

Nov 12th, 2009, 08:14 PM

In the case of the "America Canada" blog, the dude is obviously a political activist who is absolutely alarmed at what he's seeing. So of course he's biased.

Why would the rate of change (ie: a steep ascent) change dramatically? The trends of immigration, shrinking size of families, etc., have been intact for at least a decade or two. One trend that is intact is that the average age of Canadians is getting older. This would imply that mortgage credit should be shrinking (as people retire their debts before they retire), and not vice versa, if we're not in a bubble.

It's a very easy equation. More family = More homes = More mortgages = More TOTAL credit. A better measure is a per capita debt load. Is it worse to have a million people with $1 of debt or 1 with $500,000. Total outstanding mortgage debt means very little without supporting data. As with most things it's not a direct 1-to-1 correlation.

So do you have an alternative explanation that would justify such an acceleration in credit outstanding? A bubble is one that obviously comes to mind...

I do, but I was just pointing out his forecast was more of an opinion then anything else. It's like the part of the "debt do us part" show where the host says "if you continue down this path you will be in debt $70 million dollars in 3 years". That slope is not sustainable and not probable. It is one of the scenarios (one of the worst case) but far from the average case.

I'm not sure if you can really draw valid conclusions from the 20-25% issue (which is, fair enough, legitimate), without discussing how many mortgages are actually given under those terms, relative to CMHC mortgages, and segregating the data accordingly.

I was saying even minus the CMHC mortgages, there would be an built in increase in the numbers. So it is very hard to separate from this measure what was due to the lower down payment or increased housing prices or lower down payments. So again this measure isn't as direct as it could be.

The elephant in the room is the graph of income versus property value. If you look at that it doesn't paint as grim of a picture that the previous graphs do. We did overshoot the fundamentals and that's why we have seen the pullback. But we didn't overshoot anywhere as much as the US.

pitz

Nov 12th, 2009, 08:51 PM

It's a very easy equation. More family = More homes = More mortgages = More TOTAL credit. A better measure is a per capita debt load. Is it worse to have a million people with $1 of debt or 1 with $500,000. Total outstanding mortgage debt means very little without supporting data. As with most things it's not a direct 1-to-1 correlation.

But we were discussing the rate of change of outstanding credit, not the absolute amount of outstanding credit. The rate of change is problematic without anything fundamentally happening in the economy that would indicate that accelerating credit expansion is appropriate.

Wouldn't lower interest rates, in an economy that hypothetically, doesn't have a 'bubble', imply a slowing or reversal of mortgage credit expansion, as mortgage repayment mostly becomes principal, and not interest?

The elephant in the room is the graph of income versus property value. If you look at that it doesn't paint as grim of a picture that the previous graphs do. We did overshoot the fundamentals and that's why we have seen the pullback. But we didn't overshoot anywhere as much as the US.

"America Canada" argues that we're at roughly 7X income to house price, which is far more than the 5X interval that is claimed for the United States at the peak. So far more overshoot, not less.

Maybe $300-$500/barrel oil, and skyrocketing salaries will save us though. Who knows. I'd rather be in oil stocks if that's the case, and that's exactly where I am :). Kinda wish the housing construction industry would lay off all its workers so the oil companies can hire them on for cheap and keep the cost of trades down in the oilsands especially.

GonePostal

Nov 12th, 2009, 10:22 PM

But we were discussing the rate of change of outstanding credit, not the absolute amount of outstanding credit. The rate of change is problematic without anything fundamentally happening in the economy that would indicate that accelerating credit expansion is appropriate.

Wouldn't lower interest rates, in an economy that hypothetically, doesn't have a 'bubble', imply a slowing or reversal of mortgage credit expansion, as mortgage repayment mostly becomes principal, and not interest?

The rate of change doesn't tell you anything in itself. Other then the fact that mortgage credit is expanding. It could be more home being built and being bought. It could be the same homes are changing hands but getting more expensive. It could be the same homes with larger LTV.

The fact still remains that looking at that graph tells you nothing by itself. You can infer and extrapolate all you want, but without supporting evidence you are just guessing. You can't just look at a graph and be like "WHOA! Something unusual is happening" and attribute it to negative causes. The importance of that graph is not that total outstanding credit is accelerating but rather why is it doing that?

"America Canada" argues that we're at roughly 7X income to house price, which is far more than the 5X interval that is claimed for the United States at the peak. So far more overshoot, not less.

Maybe $300-$500/barrel oil, and skyrocketing salaries will save us though. Who knows. I'd rather be in oil stocks if that's the case, and that's exactly where I am :). Kinda wish the housing construction industry would lay off all its workers so the oil companies can hire them on for cheap and keep the cost of trades down in the oilsands especially.

This here is up for debate. Depending on what metrics you look at Canadian housing is over valued or about par. Usually people who try to apply American metrics to the Canadian market end up concluding that we are grossly over priced. Others like the IMF think we are at or slightly above par.