Garth Turner - Real Estate in Canada

[Liberty]

Except renting has no upside; owning does !     That's what the RE-owners will tell you LOL.

Indeed. What they forget is that with upside potential comes downside potential (and since a lot of people are super-levered in their houses, a drop of 5-10% can wipe out many people's equity, and more than that can drag them underwater).

And if I build up equity outside of the place where I live, I can invest it, and there is upside (and downside) there too. It's not like the only alternative to putting money in a house is putting it under a mattress.

[wachtwoord]

they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money".

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually.

No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will).

Another thing that most people don't realize: If you have a huge mortgage, you are renting, even if you don't realize it. Rather than renting a  house or an apartment, you are renting a big pile of money from the bank, which you then turned around and bought house with.

If the cost of paying interests on that pile of money plus maintenance and taxes (all the thing you don't pay as a renter) are higher than the rent on the equivalent property, why buy it? By saving the difference (and more) I can build equity faster, with less hassle, and if I wait for a less overheated market to buy, I can save on that side too (and all the saved interest over time).

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

1) Much much less flexible (if you want to move you need to find a seller)
2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence
3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

[lessthaniv]

http://www.bnn.ca/News/2015/10/6/Canadas-real-estate-market-wont-crash-says-Riocans-CEO.aspx

[Liberty]

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

1) Much much less flexible (if you want to move you need to find a seller)
2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence
3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

Where are you? Are you comparing buying & renting an equivalent house?

But you are right, there are definitely other considerations (pros and cons) to renting and buying that can pull things in one direction or the other.

[Liberty]

For those not familiar, this is what many people do to get around the 5% downpayment rule. On TD's website:

[wachtwoord]

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

1) Much much less flexible (if you want to move you need to find a seller)
2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence
3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

Where are you? Are you comparing buying & renting an equivalent house?

But you are right, there are definitely other considerations (pros and cons) to renting and buying that can pull things in one direction or the other.

Netherlands.

[50centdollars]

http://finance.yahoo.com/news/warren-buffett-explains-why-market-bubbles-occur-190745165.html

[Liberty]

http://finance.yahoo.com/news/warren-buffett-explains-why-market-bubbles-occur-190745165.html

Good stuff, thanks.

“It’s a totally sound premise that houses will become worth more over time because the dollar becomes worth less,” he said. “It isn’t because — you know, construction costs go up.  So it isn’t because houses are so wonderful, it’s because the dollar becomes worth less, and that a house that was bought 40 years ago is worth more today than it was then. And since 66 or 67 percent of the people want to own their own home and because you can borrow money on it and you’re dreaming of buying a home, if you really believe that houses are going to go up in value, you buy one as soon as you can.  And that’s a very sound premise.”

That's how it starts.

"Soon the price action — or at some point the price action takes over, and you want to buy three houses and five houses and you want to buy it with nothing down and you want to agree to payments that you can’t make and all of that sort of thing, because it doesn’t make any difference:  It’s going to be worth more next year," Buffett said.

And it's not just the homebuyers.

"[The] lender feels the same way," he said. "It really doesn’t make a difference if it’s a liar’s loan or you know what I mean?  [Unintelligible] something because even if they have to take it over, it’s going to be worth more next year.  And once that gathers momentum and it gets reinforced by price action and the original premise is forgotten, which it was in 1929.”

"...the price action becomes so important to people that it takes over the -– it takes over their minds, and because housing was the largest single asset, around $22 trillion or something like that, not above household wealth of $50 trillion or $60 trillion or something like that in the United States.  Such a huge asset.  So understandable to the public -– they might not understand stocks, they might not understand tulip bulbs, but they understood houses and they wanted to buy one anyway and the financing, and you could leverage up to the sky, it created a bubble like we’ve never seen."

[scorpioncapital]

I cannot justify residential real estate as having higher avg annual gains over many years than most quality stocks/companies. Either the world is upside down due to something (low interest rates?) or BC is so exceptionally desirable that like a high PE stock it will grow into the valuations. But I'm not sure how regions and countries can be measured for value. Some criteria might be climate, space, social system, taxes, etc..

[gary17]

So how do we explain the phenomenon that many listings in Vancouver are now getting multiple offers - so for each one accepted offer there are 4 or 5 or even more groups that have not found a "home".  I made an offer for a duplex a few weeks ago - I went $100k over asking but was the bottom 3 of 12 offers - the accepted offer was $221k over asking.  I am and many of those making The offer are not developers speculating.  we are simply trying to find a place to live !

I wonder if there is data from census or whatever that would allow us to look at the demand side of the market more scientifically.