Can the Bank of Canada orchestrate a soft landing in housing?
OCTOBER 17, 2011
CREA released their latest resale figures and the Bank of Canada released some rather downbeat business outlook data. Unfortunately, that will have to wait until tomorrow. There’s only so much brain juice to go around. Today, I’ve used my daily ration looking at soft landings in real estate.
Can the Bank of Canada orchestrate a 'soft landing'?
I've had several people email me the following article asking if the Bank of Canada is going to try to raise inflation as a means of causing a soft landing in the housing market:
Bank of Canada to get marching orders to look beyond inflation targeting- Globe and Mail
Some key quotes:
"The new five-year mandate is likely to include a forceful assertion of what he calls “flexible inflation targeting,” or his right to respond to economic shocks or dangerous buildups of credit by taking longer than usual to bring inflation to the central bank’s 2-per-cent target."
"Mr. Carney has kept his benchmark interest rate on hold in the face of hotter-than-expected inflation, judging that securing the recovery is more important than being precisely on target."
I don’t think this is earth-shattering news. Carney doesn’t want to have to raise rates during an anaemic recovery just because inflation pressures hit 3% when it means crushing the economy in the process. I don’t think that’s shocking.
I have no doubt that Carney and company would love for inflation to buoy income growth and consumption. It’s also very clear that Carney is concerned with house prices at their current levels. That was made that abundantly clear in a recent speech in Vancouver and confirmed in the Bank’s latest financial review.
They get the problem, as does any person willing to look at the rate of growth in house prices relative to all fundamentals. Sure we can at least debate what the next decade will hold for housing, but unless a person is entirely disconnected from reality, it should not escape us that house prices (and debt levels) cannot outpace incomes, GDP, inflation, and rents by 2-3 times into the indefinite future. It’s the height of folly to believe they can.
That leaves really only a handful of options going forward:
- 1) In theory, the housing market could continue to rise, though modestly, while underlying fundamentals catch up. The problem is that once we strip out housing-related industries, we find that the rest of the economy has experienced near-zero real GDP growth since 2006. This argues very strongly that economic growth, and hence income growth, will be hard to come by apart from continued strong gains in housing.
- 2) Another option is that house prices fall, eventually realigning with fundamentals. I know it’s a shocking thought, but it happens more regularly than people realize...just not in the past 20 years. To assume that this represents a stable norm and house prices never fall in Canada is to give in to that wonderful psychological tendency known as recency bias.
- 3) The other possible option is that housing flat lines while fundamentals catch up. This is the popular “soft landing” thesis. It’s not impossible, but it is highly unlikely. And although it is every central banker’s wet dream to gently inflate their way out of a consumer credit bubble, it will be exceptionally difficult to orchestrate a soft landing in the credit-driven housing market in this manner.
Why a soft landing in general is unlikely:
The reality is that sharp deviations from fundamentals seldom correct by moving sideways. In real terms, prices have risen higher and for a longer length of time than at any point in time over the past 40 years (as far back as there is data on house prices). Relative to underlying fundamentals, things have never looked so ugly (unless, of course, we look at ‘affordability’, which, as I showed yesterday, is a nearly useless metric).
Don’t take my word for it. What does the research say on the likelihood of a soft landing?
Let’s start with a fascinating 2006 article from the Evolutionary and Institutional Economics Review journal, titled, “Real estate price peaks- A comparative overview.” Among their key findings:
"First, we emphasize that the real estate price peaks which are currently under way in many industrialized countrie...share many of the characteristics of previous historical price peaks.
In particular, we show that: (i) In the present episode real price increases are, at least for now, of the same order of magnitude as in previous episodes, typically of the order of 80% to 100%. (ii) Historically, price peaks turned out to be symmetrical with respect to the peak; soft landing, i.e., an upgoing phase followed by a plateau, has rarely (if ever) been observed."
Rarely if ever observed, eh?
Let’s not stop there. Consider an article titled, “Crashes in Real Estate Prices: Causes and Predictability,” published in the journal Urban Studies in July 2010. It had the following to say:
"A systematic deviation of a price from its fundamental value over a sustained period of time, on the other hand, can only be the result of speculation. Such deviation is thus called a speculative bubble."
"History tells us that the faster and larger the bubble inflates, the more likely it will burst in the less benign way."
This is an observation made not only by academics who study the real estate markets, but also by some of the best Wall Street money managers and analysts who recognize that all asset markets go through booms and subsequent pull-backs. Consider the first four of legendary investor Bob Farrell’s ten rules of investing, which can be applied quite nicely to real estate:
- 1) Markets tend to return to the mean over time
- 2) Excesses in one direction will lead to an opposite excess in the other direction
- 3) There are no new eras -- excesses are never permanent
- 4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Clear enough?
Why a soft landing via rising inflation is nearly impossible:
Here’s where things get interesting. Those with some understanding of finance and economics understand that there are essentially two significant interest rates that are important for the housing market: One is set by the Bank of Canada and typically dictates the interest rate you pay on revolving credit or variable rate mortgages. The other is determined in the bond market and dictates the price you would pay for a fixed mortgage.
To repeat: One is set by the Bank of Canada while the other is set in the bond market. While the bond market can force the Bank of Canada to ‘defend’ its rate in the event of rising bond market rates, the BoC can do so only at great risk. The reality is that when it comes to interest rates, the power is ultimately in the hands of the bond market.
While some have suggested that the Bank of Canada can hold interest rates low, allowing more credit to flow into the market and keeping payments on variable mortgages low to keep prices buoyant, things are never so simple.
In 2010, mortgage financing rules were changed so that people hoping to take advantage of ultra low variable mortgage interest rates (based on the overnight rate at the Bank of Canada) would have to still qualify for a mortgage amount using what is called the Mortgage Qualifying Rate (MQR). This rate is based on the yield of the 5 year bond.
Said very simply, even if someone wants to take advantage of a ridiculously low 2.2% variable rate mortgage, the amount they qualify for is based on the mortgage qualifying rate, which is currently 5.29%. So where someone’s salary might afford them a larger approved mortgage if the lending bank used the 2.2% in their calculations, they are forced to calculate their mortgage using the 5.29% instead, meaning that their total mortgage would actually be smaller. It hasn’t been an issue yet for the real estate market since the 5 year bond yield (upon which the mortgage qualifying rate is based) has fallen from 3% in April 2010, when the changes were made, to 1.6% today:
But let’s connect the dots to see why this is problematic to the ‘soft landing’ crowd: Interest rates in the bond market reflect a risk premium (to compensate for the fact that a borrower could default) and an inflation expectation (to compensate for lost purchasing power if the money is repaid in borrowed dollars).
It’s this second point that is most important. The bottom line is that if inflation were to begin rising, and traders believed it would remain high, the interest rate on the 5 year bond would begin rising. But since all mortgages are now qualified based on interest rates set in the bond market, it would nonetheless have the effect of constricting new credit entering the system. And with house prices at such extremes relative to incomes, and with savings rates at such paltry levels, people sure won’t be buying them at these levels without having access to cheap and abundant credit.
Said another way, if the cost and/or availability of credit were to constrict, to whom would current owners be selling to realize current prices? Maybe a wealthy, cash-toting foreigner if they are exceptionally lucky. But that wouldn’t be the fate of the vast majority.
The reality is that a soft landing in real estate is exceptionally unlikely. The balance of probabilities leans strongly towards a house price correction.
Cheers,
Ben
Posted in:
112 Comments
@Ben
you said"
If variable rate mortgages again touch 4% and fixed rates touch 7%, which they will in time, it means interest rates have doubled from current levels, despite the fact that even these higher figures are well below the long-term average. This will almost certainly happen within a decade. Do we really believe that incomes will double over that time? Do we really want to run debt burdens up to levels last seen in the 80s with interest rates roughly 1/6 the level they were then? Do we really want to ratchet up debt burdens when all it would take to double interest payments at current levels is to move the fixed and variable rates to 4% and 7% respectively? Do we really not see why that would be exceptionally bad if that were to happen? If you understand this, you see why low interest rates are not the saviour of the housing market. If not, there’s still time to buy before you’re priced out forever. -Ben"
So if rates go up, you don't think inflation wil be going up and wages and housing at the same, just interest rates? I am not sure what you mean here - can you clear up please
To be clear, I don't think interest rates OR inflation are going anywhere fast. My point is to refute the bull nonsense that somehow interest rates can stay low while incomes rise significantly. It ain't gonna happen.
Low rates and raising incomes will only come from corporate balance sheets benefiting from lower costs, I can see that, however not in general. But if rates go up, we both know that housing will BENEFIT as inflation blows wind into all assets and yes you will have higher wages in that environment.
Ben,
I appreciate your work a lot but I think you are starting to suffer from confirmation bias lately.
Here are some facts:
Inflation rate in UK came at 5.2% , interests rates close to 0, house prices stable. It has been like this for the last 3 years.
Inflation here is in the 4% range with house prices stable and interest rates set to stay low for very long time, as much as it pleases our government.
Did you read yesterday on G&M that the government is looking to relieve the BoC from her inflation fighting mandate?
Same thing in the US, the PPI came at 6.9% annualized, look for CPI tomorrow.
If you think that the bond markets control the interest rates you are a fool and I will quit reading your blog. Bond rates are controlled by the central bank in all the countries with an independent monetary policy.
I have been saying since you started the blog that this was the scenario for our RE, prices stable with inflation in the 4 to 6% for another 10 years and interest rates close to zero.
Eventually real estate prices will look reasonable after this.
I know it sucks for the savers, but we live by the law of the majority and as it happens that majority is deep in debt now and it needs low interest rates.
Expect high inflation for the foreseeable future, stable real estate prices and general declining standard of living.
So a whole bunch of people got in over their heads, speculators went crazy, and it's what - majority rule? Now, if you had said "manipulation rule" or "absence of free market" rule, "moral hazard rule", I might agree with you.
The only reason this has not imploded is because of direct government intervention - my government too. Moral hazard me and we might talk.
"If you think that the bond markets control the interest rates you are a fool and I will quit reading your blog."
Have a look at the movement in the 5 year BoC bond yield:
http://www.bloomberg.com/quote/GCAN5YR:IND
Then go back and re-read the post.
You're wrong. See ya!
Ben, I dont know what you want to show with that chart.
The BoC can come any time ant declare to be purchaser of the 5 year at 1% for unlimited amounts. The yield will be automatically 1% for as long as they want.
What can the bond market do?? Here is a clue for you: nothing
Look at what the FED is currently doing, after targeting the short end with QE1 now they are bringing down the yields on the 30 years and 10 years. Why? Because central bankers aka governments have unlimited buying power. They print money out of thin air. We end up paying for it in the form of inflation. Actually inflation is a government hidden tax.
There is 90% correlation between the interest rates the central banks set and the yields on the bonds. The idea that there are bond vigilantes out there is total crap.
Where are the bond vigilantes in the UK , US and Canada with inflation running above 4% and yet 5 year bonds yielding below 2%??? This situation has been going on for 3 years so you cannot call that transitory. Bond vigilantes are a myth. There are only central bankers.
Look at Greece, Italy and Spain just to name 3 and tell us that bond vigilantes don't exist...
If you want to see bond markets at work
http://www.creditwritedowns.com/2011/10/credit-revulsion-belgium.html
The work of central bankers or of bond vigelantes? Granted none of these countries control the central bank so they can't print but a country that prints to get out of trouble will eventually pay the price. Even a reserve currency as powerful as the US dollar. Canada certainly couldn't get away with doing what the Americans are doing.
European countries do not have an independent central bank like UK, US or Canada.
ECB operates in a completely different manner. Get your facts correct.
It shows you have no understanding of bond markets at all.
Greece, Spain or Belgium cant print Euros. There is a world of difference with Canada, US or UK.
So Canada is immune to bond vigilantes? We can just keep our own interest rates low since we are all in deep debt and everything will be OK? That's great news! I guess I can go and borrow more! See you at the mall!
Yes, borrowing when interest rates are lower than the inflation rate is an excellent idea. So if you can borrow at less than the inflation rate and put that money to work to generate a small return, by all means do so, you will get a double whammy, the spread on the inflation rate and the return on your investment.
The problem in our current economic situation is to find a profitable venture. There arent many.
So basically there is no limit to how much a central bank can print to keep interest rates low if I understand what you are saying Mr. Paradox? There will be no ill effects for a currency that needs to print to keep interest rates low? Seems to have done wonders for a few countries...
I'm not a bond expert but this is not complicated stuff! Economic 101 at best...
I don't think you have a firm grasp of all this but at least you have a cool bug. Where did you get it?
I am not saying there is no consequences to printing money.
This was not the issue.
We are already suffering those consequences with high inflation in the most depressing economic times. Where do you think 4% inflation is Canada is coming from with such low economic activity.
The issue was that bond vigilantes will drive us our interest rates. That is total crap. Rates will go up whenever Carney feels like they need to go up. It is as simple as that.
CAD is way stronger than it should be anyway. I see its value at 70 cents in not the too distant future and that will please many people in Canada, including Carney.
Stop making me laugh so hard. You guys are really making my day. Too funny.
Higher prices will be the new normal as they have always been over the last 100+ plus years in Canada. Nobody needs to generate a soft landing as long as low unemployment is around. Canada has great jobs for everyone and is a small population growing with most of it cities at the top of desired places to live in the world. People want to live here and will pay for it.
Remember, a small town in China is 35M people !! That is our whole country. We are on the global stage right now, Carney is being lifted to the top of the helm for making this country great and navigating really well. As more people notice, they will come to Canada and want to Canada to part of many more things - business, etc. We are in a great spot globally, you should be proud.
"Nobody needs to generate a soft landing as long as low unemployment is around. Canada has great jobs for everyone..."
Deep analysis. And how has the housing boom itself generated employment growth?
Better read up on that:
http://www.theeconomicanalyst.com/content/where-housing-goes-so-goes-can...
"low unemplyment"
"Canada has great jobs for everyone"
"a small town in China is 35M people !!"
You are a moron. Plain and simple.
Look, I love my country, but this argument is getting stupid. I've travelled and lived all over the world, and while Canada has many great characteristics, it isn't perfect. Some Canadians are starting to believe the 'we are the best' hype from Vancouver, the mainstream media, and the government, to the point of being blind. Canada is great, but it can be extremely cold and depressing in the winter, and wet far more than it is warm and sunny. While not as extreme as in Europe, our taxes are high, and our housing costs are ridiculous. The cost of education no longer match wages, and most of the middle class has been decimated and has turned to working multiple service industry jobs. The only reason why the party is still going is because of super low interest rates and new social acceptance of massive personal debt.
From an investor's standpoint, Canada is nice. But it is expensive and it isn't THAT nice. Travel a bit.
I would add to that the destruction of community live through 'diversity'. Our major cities are being swarmed by masses of third world country bumpkins, all of whom aspire to own a house and live in isolation from their neighbours. You have to hunt pretty hard to find a neighbourhood where people actually interact and know one another.
Research suggests that ethnic and cultural diversification creates major problems with respect to coordination, shared values, crime and all the rest. (e.g., http://bowlingalone.com/)
Just wait till the ##$# hits the fan, and we see increasing civil strife. It won't be long before flash robberies and riots are taking place here.
@Jim: Your quote is really ignorant: "Our major cities are being swarmed by masses of third world country bumpkins, all of whom aspire to own a house and live in isolation from their neighbours"
How many 3d world countries have you travelled to? Have you bothered to really get to know "all" of these billions of people well enough to know their aspirations? Is your 'knowledge' about 'all' the people from 3d world countries just a conspiracy theory based on anecdotal evidence and teaching from another racist?
Sean - I probably wouldn't agree with "country bumpkins," but selling our country out to the highest bidder, filling it up with whoever will come, is not good policy.
Landlord, is this a form of satire?
"Higher prices will be the new normal as they have always been over the last 100+ plus years in Canada. "
What exactly does this mean? That there have never been housing crashes? I guess Vancouver in 81 didn't happen. (To name but one).
Great jobs for everyone?
Your post is so obviously idiotic that I am guessing that you are engaged in some sort of parody.
> In 2010, mortgage financing rules were changed
Once the brown stuff really starts to hit the fan, I have no doubt they'll soften the rules again or come up with some hare brained scheme like a $25k home buyers tax credit, hoping they can't kick the can just a bit longer until they're out of office. Prices are so out of whack that letting them fall back in line with fundamentals is political suicide.
The "soft landing" argument seems a bit odd to me, foremost because Canada does not have one market. If the government wants to orchestrate a soft landing, it either orchestrates a soft landing country-wide through country-wide policies or monitors each market individually to orchestrate a plethora of soft landings. Both in sum produce the same result from a macro perspective. If the countrywide policy is adopted, it goes to reason that some "overheated" markets experience a hard landing, and indeed cannot avoid it.
If you think the latter, that the government will target each market individually, well, do you really think the government has the time or ability to servo each market to keep the porridge "just right" in every bowl across the country? If you think yes, HAHAHAHAHAHAHAHA!
At that same Vancouver speech Carney in fact did challenge regions and municipalities (he used the word "communities") to consider policy to accomplish some of their goals. He said this in part to acknowledge that monetary policy can be too blunt a tool to manage individual markets. I saw this as a call to arms! Planned immigration, density usage, tax everything you don't want such as excessive debt, excessive house prices. Do this regionally, Carney said so.
@zeodown I didn't see that in the speech text. Were those comments off the record? Somehow I think the solutions that would bring in a housing crash is precisely the thing a local government wouldn't want on its conscience, and by conscience I mean reputation.
Yes Jesse it must have been the Q and A, sorry about that. Naturally he didn't give up much off script, but that bit came out of a question on HAM. I use a different language and goals when I describe possible measures because for me lower prices are desirable (personally and for society - it's a waste of capital and it encourages other wastes of capital like excessive transportation infrastructure). I completely agree that local governments don't usually share the goal of lower prices. What they might like though is more empowerment to make adjustments in the evolution of prices and development mix. It's too easy for local governments to rely on CMHC and BoC policy that is designed for the whole country and it doesn't work well enough.
How about variable PST on mortgage insurance? The province could double or triple the cost of MI as a policy tool to encourage/discourage it as needed. Sorry, still dreaming.
@zerodown, thanks for this.
Here's a couple of "zany" ideas:
- Increase property taxes
- Rezone
But first and foremost the Bank of Canada is being disingenuous. There are "local" measures the federal government can take by implementing rental equivalence for all CMHC-insured loans, and refusing to insure any loan above, say, $400K. Further, OSFI can aggressively implement Basel III on mortgage loans as soon as possible, and even better implement higher reserves on properties whose cap rates are low, the old countercyclical reserves Carney likes talking about.
Nonetheless, I'm reasonably convinced that there will be a crash of foreign investment (and foreign-derived income) that will put pressure on house prices in certain markets. I think Carney knows this too, but I'm not convinced he understands how a quickly-slowing Chinese economy could impact Canadian exports, at least I've never seen him raise it as a risk.
Hey whaddya know: http://www.cbc.ca/news/business/story/2011/10/18/canada-china-economy-ci...
I can't help but thinking my thesis might be a bit off, now that CIBC is endorsing similar sentiments...
I agree that wages, inflation, interest rates and economic growth are going nowhere fast. This could last for years, not months.
So what's the strategy for potential home buyers? Put your dreams on hold for the next decade to wait for some potential real estate correction to bottom out? Or get on with your life and stop living in fear?
It seems as though the never-ending mantra of this blog is to prove that one day the real estate market will change. How prophetic.
"How prophetic."
As opposed to "real estate only goes up", "this time it's different", or "buy now or be priced out forever"? How insightful.
Yeah, great come-back Ben.
How about,"might as well buy now and buy for the long-term. because neither Ben nor anybody else has a clue when this market will change."
How about "take your money and leave."
What do you mean by 'fear'?
I make six figures. I also rent. Introspecting, I do not recall creeping around in 'fear' at the thought of high housing prices. Instead, I simply have no interest in buying at current prices.
There's an old adage: "one gets rich by buying assets on sale". Also: "buy low sell high".
If I am unwilling to buy stocks while they are being chased by the masses, why on earth would I sign up for hundreds of thousands of dollars in debt at a time when housing is acknowledged as pricey?
I rent, save cash like a maniac, and plan to swoop in on bargains when I see them.
I see no bargains in Canada, at the moment. The United States is getting there, but not this country.
At no point does 'fear' enter into the equation.
I don't agree with you about inflation going no where fast. Our course, it is likely that you and I have different definitions about inflation.
It is impractical to track macro inflation trends via things like CPI. It is far more effective to view the inputs into the economy: money supply + available credit. If money supply and credit supply decrease, it has a deflationary effect. Ben makes a valid point that the credit supply is tightening by having the MQR.
Housing is a lagging indicator not a leading one.
Look over the past 3 years and tell me what you see money + credit supply doing. IMO, 2008 was near the peak of the credit cycle. Deleveraging will take place globally and it will be forceful enough to swamp the Canadian economy, which is vulnerable via the population's balance sheet.
landlord - please tell me what are you smoking out there, I too want to be happy with no reason.
I really have a problem with your statement - "Canada has great jobs for everyone and is a small population growing with most of it cities at the top of desired places to live in the world".
The only people that can afford to come to Canada and to buy (or even rent) a property to live in are the investment class people. They have their factories in China with the cheap labor there, which they are not going to relocate to Canada obviously with the cost of labor here. So they buy a property here, plant their kid to the free Canadian school and their parent to the free health care. And go back to China to do their business, pay their taxes there, nothing to Canada, they are not even going to apply to get the Canadian citizenship because China does not allow the dual citizenship.
Their kids and parent of course consume here but not that much to offset the expenses the country carries to keep them esp. their parents. These people (millionaires) have nothing to do in Canada until they get old - they are going to retire in Canada later, this is the common plan.
And this is the reason the investment group allowance number was cut down.
We need the normal immigrants here, that are going to come to live, to work and to pay taxes here as the population ages fast. But they are not going to come as the life became to expensive here - the housing cost is draining all their money and it is getting very widely known. To qualify for 500K mortgage they need the income of 170K a year. Which is not going to happen. And they leave this country even if they come here initially, they are going to other more affordable places.
Re. unemployment rate. I told that before that with the system we have in place now when only EI recipients are getting registered when they paid - we have no freaking idea how many people are out of work. The EI system is set up that way that recent immigrants and high school graduates can not get EI and be registered in any sense, so the officially quoted unemployment rates are greatly irrelevant to the real situation.
they also spend money in canada not just one sided
Yes, come one, come all, the country is up for sale. Landlord is in the house.
And speaking of interest rates I thought the following data would be interesting as we all tend to forget what is happening everywhere else in the world (as if there is nobody out there but us). What is very notable about some of the numbers is just how high interest rates are in the BRIC countries for example, but also in the wider Euro region (non-member) states and even North Africa.
Lets keep in mind that we are living in a low interest rate myth right now. A true fantasy that cannot be sustained forever as Ben has pointed out in the past. The Bond markets will ultimately decide and some are already saying that the bond market is on the brink of rolling over after a 40 year bull run. We should also bear in mind that over 60% of the worlds population is already facing interest rates far higher than our own. Rates like Brazil's astounding 12% interest rate.
Curiously they have unusually high inflation rates and so the question must asked whether our own tracking is providing honest numbers. Many say that our inflation numbers are badly massaged and the real rates could be as high as 10% including the US despite its housing bust and deflation.
Country-- Inflation rate:-- Interest rate
China 6.1 6.6
India 9.0 8.25
Brazil 7.3 12.0
Russia 7.2 8.2
Australia 3.6 4.7
Egypt 8.2 8.25
Poland 3.9 4.5
Hungary 3.6 6.0
Turkey 6.2 6.0
I want to point something else out for the people who like gold. Notice that for most of these countries the interest rate is higher than the inflation rate. As a general rule this is not a positive indicator for gold prices on world markets. I don't know if that information is very useful to anyone else but it sure tells me something and it is a curious omen for the future to my way of thinking.
Any opinions anyone?
Farmer,
Yes, our metrics for calculating inflation have been changed over the years. That makes it difficult to compare historical values.
Have they been massaged? There are many who believe so, including John Williams of ShadowStats. I think a sober look at the incentive structure shows that the government has an incentive for underestimating inflation via its CPI metric.
If you take a look at reports from the Bureau of Labor Statistics on finished goods, agricultural products and the like, you can clearly see double digit price increases on average. Some of this is due to supply and demand in commodities (e.g., low soybean yields, shortages of wheat in Russia last year, etc). Whatever the case, consumers are facing double digit increases in many products, particularly foods.
The BRIC countries indeed have high rates of interest. They also appear to have lower debt levels. I know little about them, so I can't comment further.
Good post.
Stupid text editor on my computer....all the data (above) got squashed together. Sorry. Hopefully you can figure it out anyway. There are two sets of numbers for each country.
How cute. Everyone just keeps going for the interest bait and doesn't realize tightening has already started amongst institutional funds and inter-bank lending. This is getting passé but I'll say it again: When the market stops lending, everything stops.
http://www.bankofcanada.ca/wp-content/uploads/2011/10/slos_autumn2011.pdf
http://i53.tinypic.com/s1t3sl.png
Greg, can you please explain for the stupid people like myself how do you make this conclusion from the report that lending conditions are continued to ease?
This report is based on Q3 lending conditions amongst financial institution that shows easing had reached all time lows in 2011, however, notice the bounce off the lows that would indicate lending conditions started to tighten some time in the last month or so. More importantly, you will notice in chart 1 that tightening increased prior to 2008 indicating that financial institutions started to withdraw funds before the mortgage crises even started.
By looking at the chart below, you will notice how 5yr bond yields correlated with easing conditions until 2007. After 2007, yields and lending conditions diverged and created a 'lock-up' in the financial markets due to financial institutions purchasing bonds rather then lending to the market. http://i53.tinypic.com/5bwvix.png
The reason was mainly due to bad economic data and foreclosure rates hitting new highs that led lenders to believe that business and home owners would default on their payments. Therefore, one can easily see how bad economic data triggers the catalyst (market lending) first.
ben, i asked you a question where you think RE drops - 5%, 10%, etc? Why do you delete the posts?
Was anyone around in 1981/1982?? I was and man did it hurt. I had blindly bought my first apartment building and before it closed interest rates sky rocketed up to almost 20%. With years of experience and study I know now what happened. The bond market ruled. Investors started demanding a higher yield on bonds and it had a direct and totally uncontrollable affect on mortgage rates. I don't believe we are going to see a change for a number of months - who knows how many - 6, 12, 18, 24 months?? Just be sure that it will happen. And for those who think that Canada with its measly 2% to 3% of the world economy, is so special, be aware that bond rates are set on the international stage and Mr. Carney will not be able to control it.
In Alberta the government did give a rebate to home owners with mortgages above a certain amount that I cannot exactly remember, but I think it was 11%, and that is about the only way a government can get a grip on mortgage rates when the bond asserts it's mind.
Yes, I remember, I held over it and today am happy to have. Long term holding, house is not a stock. I also never got a margin call on my house.
I'm still getting quite shocked that some people believe that inflationary pressure is the only way for the interest rates to rise while there is (albeit an extreme example) of Greece with 172% yield on its dept in the middle of the deflation. The ghosts of bond market seem to ignore Canada for now...
Hey Ben,
I have been reading your blog for a while now. I like what you are doing, and think you are doing a great job. Keep it up. I just have this much to say: I think it is obvious by now that real estate is a speculative object, so all these good fundamental we discussing here although it is very interesting to read, they have absolutely no relavancy in what we are trying to do. I think we need to shift our paradigm a bit and look at mass behaviour. We have a lower top in the technical curve, when this sucker stop going up right at the 61.8% retracement mark or even the 78.6% retracement mark, we can pull the housing bulls' pants off and ramp it up their *^%&* ass.
Interesting story today int he Financial Post: http://business.financialpost.com/2011/10/18/torontos-condo-boom-about-t...
Yes, very interesting article about a report from Merrill Lynch that compares the condo boom in Kelowna B.C. to the City of Toronto. The population of Kelowna as of 2010 was 106,000.
Absolutely laughable.
Appraiser said: "So what's the strategy for potential home buyers? Put your dreams on hold for the next decade "
Why do people dream about having a home ??? What's so special about it??? I rent a pretty nice house, save money, feed my TFSA and RRSP, and have plenty of dreams. A lot of those dreams I've already started to realize because I have disposable income that I wouldn't have if I had decided to own (rent from the bank) a house (pilot license/flying airplanes as opposed to new shingles and basement foundation...lol ) . Anyways... In the future I will have enough savings to BUY (not rent from the bank), and I won't be in huge debt, losing sleep about a leaking roof, broken furnace, or worrying about falling prices. Dreams?? The home-ownership dream is an abused concept by realtors, mortgage brokers, banks, and underwater homeowners (misery loves company).
We're creating... an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property. -George W. Bush, October 2004
We all know how the onwership society experiment ended. Lots of crushed dreams down there. There are TONS of charts (thanks Ben) , articles, blogs, and news articles to prove that Canada is pretty much following the same path that the U.S took in the mid 2000's. What's that ? It's different here ?
Yeah, sure. This won't end well. ....Sigh.....
The vast majority of renters have a dream and that dream is to one day wake up a home-owner. And that's a fact.
There are three kinds of people in the world: Home-owners, those that want to be home-owners, and a small self-delusional group that pretend to be happy renting.
Your condescension is duly noted. However, one might laugh at a mortgage holder in a highly leveraged market, and a potentially illiquid one, as refering to himself as an "owner".
Renting offers flexibility, something with my job is much needed. Some might say renting is my sweet-spot. I've talked down my rent to a couple hundred dollars, and don't see how the home owner is making any money from me.
I don't mind sitting on a crap-load of money because I choose not to be the greater fool. You know you are not a home-owner until you pay off your house. The way house prices have gone in some of the big cities and the use of HELOC, I don't think Generation Squeeze have any idea what they are getting themselves into.
@Petr:
Really? You've talked your rent down to "a couple hundred dollars" ? Wow - that's sounds pretty typical and attainable for the masses - not!
Please tell me you don't live in a garden shed, or the trunk of a car.
Appraiser - have you learned why home ownership rates cannot make it to 100% yet?
Its not hard to lower your rent. All you have to do is tell them to lower it or your leaving. I liked your joke about the garden shed btw... not. Who are you trying to be with that comment - Borat?
Yeah, just tell your landlord to lower the rent or you're leaving? Right.
I am a landlord, have been for years. Never once had a tenant pull that one off on me.
It would be. "see 'ya later renter",just give me proper notice (or I'll keep that last month's rent cheque) and I'll have another tenant (paying more) before your car (or bicycle) hits the end of the driveway. Laughable.
Get real. You probably live in your mom's basement too.
I'll write that down on my list of who gives a shit.
Don Matrelli - well said!
These are not typical times. Something has to happen before house prices drop significantly. Rising of interest rates, unemployment spike...but what if in an effort to prop up house prices Canada offered some tax incentive...like the mortgage interest income tax deduction in the USA? That would help support current prices.
Impossible?
Why do house prices need to be "propped up" or "supported" or need "tax incentives"? Because people got in over their heads? Talk about MORAL HAZARD!!!
It's a classic Ponzi scheme. The first ones in and out are the winners. They will keep the game going as long as they can, continuing to suck others in from the bottom in order to line their pockets. You don't learn about Ponzi schemes by being bailed out; you learn from feeling some pain.
Housing should not be "propped up". In nature, if you step out too far on a limb, you're liable to fall. You can't have something for nothing.
I agree with you...however, the rabble will be very upset if their house prices started tanking. In the spirit of the article there are plenty of ways the powers that be could keep the ponzi going...or perhaps "soften the landing".
Well - at some point of the RE market detachment from the income growth there is nothing that could be done to keep it going up, if the patient is dead you can give him all the oxygen you want and it won't make him get up again. There are simple not enough people left with no debt and enough income to get qualified for the mortgage at the current prices. Tax incentives are given AFTER you bought the house - and you have to be able to afford it. So again - no eligible buyers that are willing and able to play this stupid game.
Unless they decide to sell out Canada cheaply - to increase the investment immigration quote significantly and lower its threshold.
Either way I expect the rent rates drop in the next year as a consequence massive buying of condos for investment. Thank you landlord and Appraiser, keep buying, and Sam - keep overbuilding, this is exactly what is needed to bring the rent down.
With regards to the argument of the 5 year posted rate being used for qualification purposes and the importance of the bond market, this is just a policy measure in place based on the current market conditions. By the same token it can easily be changed at any time to lessen the blow of rising interest rates in the future so I don't really buy this argument
In general I see home ownership as pretty much the only forced savings plan available to the masses and therefore people should not hesitate to buy if they have the means to do so. When to buy is irrelevant for people buying their primary residence. As long as real estate, like stock, is held as a long term investment (lets say 25yrs) you will increase your net worth. Try and find a chart that proves otherwise.
Moreover, when interest rates go up revolving debts such as Visa and LOC's are immediately impacted. Generally speaking most people will fight tooth an nail to keep the roof over their head. They will sell off toys and even default on their credit cards well before they will be forced to sell their homes. It's the speculator who will be forced to dump their properties at a potential loss.
With Vancouver real estate, prices can vary significantly from neighborhood to neighborhood ( if your address has East vs.West it can be $200k+ difference with two comparible houses only a few 100 metres apart) Where I am going with this is that the inevitable price drop that is coming will be felt hardest only in those specific area's where there has been rampid speculation. In "true" neighborhoods where local residents actually live and raise their families you have not seen the same type of price increases as those speculative area's like Vancouver Westside or Richmond etc. (same reason that snowbird states got hit so hard Arizona/Florida) Most CREA reports provide general regional price changes, and if you dive in deeper you can see that a very small segment within a given region can have a large impact on these numbers.
I do fully expect a 20% pull back in "regional" real estate prices, however this will not likely happen in many of the area's where local families live because they have no immediate reason to sell.
Basically I am hypothesizing that there are in fact two separate real estate markets, not totally unconnected, however the affects of higher interest rates can be vastly different. It's these unoccupied condo towers all throughout GVRD and GTO which will be hit very hard in the future, but of course the headlines will read "Vancouver and Toronto Real estate prices drop by 20%...
" As long as real estate, like stock, is held as a long term investment (lets say 25yrs) you will increase your net worth."
It amazes me how the adage of buying low and selling high is so often forgotten. It's not about increasing net worth, it's about maximizing net worth.
And I read the crux of your comment 5 years ago, from someone in another country. Guess which one. I do wish you all the best with the buying high thing, though. THIS time... LOL
Yah, on average people that bought prior to the crash of late 80's, had recovered their values only 15+y later. That is, they did not get ahead for the good 15years, 15 years of lost opportunities. I don't know about anyone else, but there are only a few productive decades in one's life and the loss of almost 1/2 of them is simply horrible.
@ Planner: Bravo!
I agree: Bravo! Did you read the whole comment, Appraiser?
Stop living in fear Jimmy. Do what Planner says and buy a home for the long haul, support the economy and stop making your landlord rich.
This is a greatl chat
1) No one argue against holding RE for the LT doesn't work, it has done so over the last 100+ years
2) Being a renter last couple of years has cost people 30% + or more (stocks, wasting money on renting and missing the upside)
This leaves us with what does Ben think that prices will drop in RE??
OK. In a recent article posted here:
http://www.theeconomicanalyst.com/content/housing-cycles-and-birds-eye-v...
Ben reviewed the stats about upturns and downturns on the global housing markets. The typical (median) value of the upturns was calculated as 24-28 quarters and for the downturns it is 18 quarters. In case if we are at the top of the market, it is going to go down for a median 18 quarters before it starts to grow again. 18 quarters is 4.5 years to go down and 24 quarters to go up - 6 years. If we dream that in the first half of these 6 up years the value will return to the previous high and overgrow it later, the current mark will be reached in about 7.5 years. It may grow further. If it grows further by lets say 20% than it will be all you make on this growth in 10 years, less than 1% a year. If you like it - go for it. On the other hand the deviation from the medium was very large so it may be not the 7.5 years to start to grow again but 10 or 15.
Average family stays in their owned house for about 10 years based on the life cycles. If they bought the home at the start of the upturn or the end of the downturn - they gain, otherwise they have more chances to loose than to gain. If they are going to stay put for 25-30 years - they have more chances to gain some modest gain between all these upturns/downturns cycles, again depends on where they bought. Current situation looks like the peak of the upturn more than anything. I would say it is 80 % that the RE market is going to go down in the next few years versus 20% that it will still grow.
But all of these prognostics are really irrelevant to the buy now versus not to buy now question for most of the folks. At the current prices people that do not own their home will not be approved for the mortgage regardless at what rate they are pre-evaluated - fixed or variable, given the sky high cost of the housing in Canada.
Being a renter is going to be very nice very soon - all of the people that bought the properties for the speculation will find that they are only able to sell at the loss, so they will be trying to hold it as long as they can and rent it out to get some money flow. The rental market is going to be flooded with the condos and houses. We already see it in Vancouver - in Richmond there are many houses that were seen on the MLS list for sale make a transition to the rental pool. It cost less to rent than to own here, with the other regions to follow as the overbuilding continues.
This was the same logic behind the structured mortgage products in the US....untill it was proven incorect. Housing has tracked inflation, or has risen roughly an amount to compensate for loss of purchasing power.
I am surprised at the critcism of renting, particularly when renters are needed to underpin speculative inventory, and therefore overall prices. In other words, you guys need to pursuade enough of the other 30% in so that you can unload and rent , for "free" on the profits generated on a non taxible basis. Nice plan. Good luck.
Perhaps a more interesting question might be: what alternative investment product, item or area might pose a danger to real estate by attracting money from a potentially illiquid and inventory laden area, to a more promising and undervalued one? Or how much foreign property that is leveraged, has been used as collateral for loans for real estate in other jurisdictions? And what circumstances might present a credit or cash call?
If you can't answer that, it might be time to think carefully about this.
There's only one safe asset where smart money has fled to over the past 10 years and will continue to go in the next decade—Gold.
Not even Vancouver RE has kept up with Gold returns. http://www.chpc.biz/images/SEP11-Value_Gold.jpg
http://greshams-law.com/wp-content/uploads/2011/10/Canada-Real-Interest-...
Don't bother Appraiser, you'll lose this debate hands down.
It looks to me like two decades of deflation ahead for all commodities, including Vancouver real estate.
http://i51.tinypic.com/2r551r5.jpg
Be sure to let the rest of us know when you have your house built of gold finished. Then maybe you can move out of your mom's basement.
"In general I see home ownership as pretty much the only forced savings plan available to the masses and therefore people should not hesitate to buy if they have the means to do so"
-People should save, but should they really follow advice that suggests they have no discipline to do so outside a mortgage? Pretty condescending.
Anyway, it's not, potentially, the only strong incentive to save. The likelihood that the welfare state is going bankrupt might lead people to think that they need to save like folks in China. Alternatively, if you think we will always be able to afford a minimal safety net, even when the number of elderly dependents goes up significantly, people need to consider that when it comes to health care, there is no way that state insurance is going to be able to pay for all the possible therapies and drugs that will likely become available in future if we maintain a science-based economy. More and more there must develop two systems, one for the basic needs and one for all the things that will help you live longer and better, but only if you can afford it. If that's right and it becomes increasingly clear, people will have more incentive to save and question where they are really getting the most investment bang for the buck.
@JWG
No doubt I'm being condescending to say that people don't have the discipline to save. But unfortunately the fact is that a large % of Canadians are not maximizing RRSP's (18% of earned income less any PA), TFSA's ($5k per yr) or using any other savings vehicles to save for their future. Many are saving nothing at all.
I tried to find some specific stats to back this up, but the only ones that are readily available are based on "total contributions" made by Canadians and this information is not useful for presenting a realistic picture of what most average Canadians are actually saving. I imagine that the Big banks have some reasonably good data on this...
The key reason I have no faith in people having the discipline to save is the consumerist society that we live in. I work in the Financial Planning industry, and I can speak from experience that there is a very large number of people out their that spend more money per month on their smart phone bill than they put away for thier future. Another example is how much people spend per month on new car payments. Very common to see $500-$700 month (lease or finance) going out towards a piece of metal that is going to end up in the scrap yard rendered useless in 10-15 years. Are the majority of these same people also contributing $500/month+ to their savings plans...absolutely not.
If you are reading this post then you are probably not one I would group in this catagory of "the masses", but can you see why buying a home for many Canadians is prudent financial advice?
Planner - these people are going to feel PAIN one way or another.
If they buy now and they had a down payment, they are going to lose. You know that! Things do NOT go up forever, no matter how much you wish them to. There are only so many Greater Fools and eventually the Ponzi runs out of them.
If they don't buy now and keep renting and spending, they also lose.
They need to feel some pain. Pain is the greatest teacher - the only teacher. It focuses your mind like nothing else.
If we want people to be independent of government, save for their own futures, let them grow up. The policies of the government have made dependents out of people, bailing them out, propping up markets. Of course, they're only doing this for the banks, but still the policies end up propping the people up too.
Let them make mistakes and deal with the consequences. The country will be better for it.
backwardsevolution
"If we want people to be independent of government, save for their own futures, let them grow up. The policies of the government have made dependents out of people, bailing them out, propping up markets. Of course, they're only doing this for the banks, but still the policies end up propping the people up too."
I understand your point, but following that kind of reasoning would be catestrophic to the economy in the short term and no government wanting to retain office will ever let that happen. My argument is for LONG TERM home ownership of a primary residence (and I ignoring short term fluctuations) and my rational is to assist in preventing a large scale "prop up" in the future. Thankfully stats show Canadian homeowner rates are in the 70% range. My fear is that since you can't force people to save ( other than CPP) and those that don't save enough ( victims of consumersim) will most definitely rely on government support in the future at the expense of you and me. As long as people own a home with the goal of having it paid off by retirement they will have some options (scale down, sell it and rent, use proceeds to fund lifestyle etc).
Imagine how bad things could be if the boomer generation was not blessed with DB pensions (which are disappearing today) and the sizeable net worth they hold in their primary residences...they for sure wouldn't be put out on the street when their limited savings ran out and I envision a very long line up at the public trough...
I know there are a lot of people who don't max out their RRSPs. And while, yes, many people are stupid in their addictions to smart phones and expensive cars, in many cases, their failure to save must be because their debt, and especially their mortgage, is consuming their income. Then there are not insignificant numbers who just don't make enough to save much.
So the question of priorities remains. I was just wondering: if it is possible to strongly advise someone to buy a home as a way of forced savings, why couldn't it be possible for the investment culture to strongly advise people to seek other vehicles for savings and perhaps put the fear of a miserable old age into it, given the demograhic trend towards increasing numbers of elderly per worker.
But your last question, re prudent financial advice, over the long term it may well be generally true. But prudent financial advice has to step away from generalities to note present market conditions and our likely position given that capitalism and markets have long shown themselves to be cyclical in nature. Someone advising a house purchase in the spring of 1929, as a savings vehicle, was not doing anyone a favour. Of course I recognize it is very hard for an advisor to go our on a branch and say that now is like 1929 or 30-1; an advisor shouldn't say it unreservedly as if he were sure of it; but that possibility should come up in your conversations, it seems to me. The arguments for debt deflation seem rather compelling and at least worth a fair hearing it seems to me. But how many advisors would have the courage to suggest people "invest" a good chunk in cash?
The high cost of living and excessive debt loads from large mortgages and consumer debt are most certainly the reason why people have no means to save. But are you saying that if the mortgages were smaller that the the excess cashflow would automatically flow into investment savings? I wish this were true, but more likely there would be some coresponding increase in consumption. People will always find ways to spend money...renovate the home, buy a hot tub etc. It could be that there would simply be a shift from mortgage debt to even greater consumer debt which is much more damaging.
From the perspective of financial advise, most advisors would agree that diversification is key. Unfortunately people seem to have singular preferences/bias as to what they are comfortable investing in...gold, real estate, energy stocks and much of it is based on current conditions. I just think that starting out with your home as your "financial foundation" is not a bad idea and it is one that is easily accepted by people. I find implimenting strategies to help people pay off their mortgage faster much easier that convincing them to consider other investment vehicles...most of this is due to a general lack of trust in the investment industry as a whole and rightly so do to it's track record. Thankfully I specialize more cash management I am not an Investment Advisor!
Your last point, with inflation being 2-3% and cash paying 1%, cash is definitely a tough proposition.
One would think that someone who specializes in cash management would know the role of cash in a market downturn, then again, stating that saving cash is a tough call shows you've gained plenty of experience only in a bull market.
Standard cash management advise which I adhere to is that one should always hold ~3-6 months of salary in cash as an emergency fund. ( depends on your job security) If you think that holding large sums of cash is going to make you money then you obviously have no investment experience in either bull or bear markets.
What happens to cash purchasing power in a market correction?
I love the market timing argument. Yes, there is always a place for cash in a portfolio but unless you have a crystal ball good luck with the timing. Most people holding cash sit on the sidelines forever speculating where the bottom is. (Much like renters looking to buy a home)
Does a market correction mean that every asset in your portfolio declined? I sure wouldn't want someone with your philosophy guiding my investments...
Ahhh, like always you so called professionals prop yourselves up by comparing your expert advise to the average person who has absolutely no knowledge or willingness to learn value investing--if they only knew how every bank representative (right out of high school) allocates there portfolio using an online market mix tool predetermined by the bank--then when they lose their money, the bank tells them 'don't worry' the market will come back, as they realize years later that their portfolio has gone no where.
This seems to be the LONG TERM argument, that in belief, a person shouldn't worry about a major correction because someday, long into the future (when their hair is grey), your home will be worth more then you bought it for. Idiocy!
So yes, if you're lazy, stupid and looking for a 'sign here' investment that will be growing in nominal terms and falling in real terms for the next decade or two, a Canadian home is for you.
BTW, go to Switzerland where home ownership is %30 and people (who rent) are educated enough to manage their finances or own a business--see if anyone is living a stressed and fearful life.
I do agree with what your saying, but I would argue that those that lost money did not adhere to their original long term strategy and probably acted on emotion, and made changes due to current market conditions. Look at an Andex chart, pick any date in history and almost any asset class and take a look at the 20 year performance. The other reality is that many novice investors do not fully understand the risks of the investments they are buying in the first place, much blame could be blamed on inexperienced or commission driven sales people in the investment industry...thoughts?
Let me repeat it again for the nominal heads. "that will be growing in nominal terms and falling in real terms"
Now go read and study 'inflation adjusted terms.'
S&P 500 http://www.worststockmarketcrashes.com/wp-content/uploads/2011/04/inflat...
US Home Prices Pre-Crash http://i47.photobucket.com/albums/f187/norakemetrics/economics/us-histor...
US Home Prices Post-Crash http://1.bp.blogspot.com/_JtcAf5d8LPc/TP_6gPmsCmI/AAAAAAAAACo/wr0PvLSb9T...
But..but..this is Canada, it can't happen here, absolutely impossible!
I see your point. It's noteworthy that Americans are now saving more, now that they have hit the debt wall and facing fears of old age without much social security. For some people that's what it takes. I think you're right about what many people would do if their mortgages were less taxing. However, maxxing out your RRSP, if you could, instead of paying more taxes would seem a no brainer. I'd be curious to hear how many people you meet are such no brainers.
I'll just add, in defense of the no brainers, however, that while a lack of savings discipline is a real problem, the desire to participate in consumer society is not generally pathological. Consumerism is the means we have developed to keep people from turning their resentments into political and personal violence, and for the most part it works. Which is why few people take the sight of the OWS crowd playing activist with their dear smartphones as a serious, let alone coherent, political threat.
Great points!
"However, maxxing out your RRSP, if you could, instead of paying more taxes would seem a no brainer. I'd be curious to hear how many people you meet are such no brainers."
With regards to this comment, assuming we are still comparing the concept of buying a home at today's high costs vs. renting and making no brainer RRSP contributions for tax savings today, I think it's too difficult to analyse for the masses. You have to take into consideration things like respective tax brackets and expected ROR. Every dollar that comes out of an RRSP is taxed at your highest marginal tax rate. What about self employed who show next to no income on paper and RRSP's aren't much of an option?
Yes you pay 100's of thousands in net interest amortization costs to ultimately own a home, but the alternative of LT renting washes much of this disadvantage out. Obviously I advicate for owning a home and saving/investing, but when comparing just these two options a principal residence with its capital gains exemption is hard to argue against.
Financial Planning begins with understanding ones cash flow and too be honest most people that I see do have above average incomes so they in turn have the means in place to property diversify and take advantage of options available to them (retirement and estate planning, risk management etc.) This does not come without sacrifice and often significant changes to how they were previously mismanaging their money ;)
Every Canadian should have a financial plan but at a minimum I would just like to see a personal budget in place so as to get a handle on expenses. From here so many options can be explored.
true, thanks
A better question might be: I wonder if anyone can orchestrate a soft landing in the stock market?
http://www.cbc.ca/news/business/story/2011/10/18/mutual-fund-sales-septe...
Read it again Appraiser until your brainless head understands what you just posted.
"Investors cashed in mutual funds last month as market turbulence prompted an exodus from equities, industry figures show."
Now that the smart money has 'cashed in' they are ready to short assets that morons like you hold in a few clicks of a mouse--all while the stupid money (indebted homeowners) is distracted watching nightly TV shows in their elegant (ikea) furnished homes.
That's the way markets work Appraiser, we make money up and down!
Stop living in fear Greg. Take all of your supposed profits and buy something real - like a house for example. That's why they call it real estate.
Besides, your mom probably wants you out of the house.
Every time you respond with a comment like that you lose more creditability by not backing up your argument with any investment sense or financial criteria, therefore you try to single someone out and claim they live in a basement or are living in fear, when it is true that only a pathetic RE bull as yourself comes to a bearish RE blog to refute intelligible information on the status quo.
It is also true that your argument consists of the latest monkey headline that you Google every night to keep you assured that everything is ok, and quiet frankly, your recommendations are very misleading and dangerous to average working families. One can see why it is in your interest to keep the housing party going before fixing the economy, that's how it works right Appraiser? Get the last few suckers in before you dump your property right?
People will figure out the game sooner then you think Appraiser. Learn what the Hundredth Monkey Effect is and how fast it can all go down.
Listen to Planner Greg, he has solid advise that runs precisely along the same lines as mine. The vast majority of people who don't own a home of their own end up blow their money. In theory renting and investing the difference makes all kinds of sense, until you realize that very few can actually do it.
If you believe that is poor advice then you're just not paying attention. Those with experience in the real world know how it works. Those who read charts and graphs all day long while postulating theories about how the world should behave, end up making predictions that never come true and spending inordinate amounts of time trying to vindicate their wayward musings afterwards.
P.S. Do you actually think that anyone believes that you are a successful day trader and not some loony, xenophobic conspiracy theorist?
I am a conspiracy theorist if that's what you wish to call it, but better that then a psychotic blogger that posts as multiple users to defend his point. One has to wonder what interest a RE bull has to constantly be here bashing factual information with nonsense.
I think you have more then a troll on this blog Ben.
The only "psychotic" on this board appears to be the one who incessantly posts cryptic, if not indecipherable references, displays clearly racist tendancies and presents with a somewhat troubling side-order of monkey fetish.
Now who could that be?
The one who makes imaginary friends to agree with himself.
Ben, please, you have to do more moderation on this forum, some people like Appraiser have no argument to present and stick to the school grade bully instead. I propose to remove all personal attacks posts, they make the reading very stressful and complicated. I agree with Greg that the posts by a few people here looks to have a goal to discredit your blog and to turn away the readers.
The only thing imaginary is that you pose as a successful day-trader. Laughable.
Hey: How about that TSX eh? Down over 200 points today.
It wasn't long ago that the Dow was 1800 points behind; now it's less than 400!
I know, I know, let's not talk about that - let's keep dumping on real estate - right?
Hey landlord. Change my carpet, put it in a new air conditioner and give me a new dishwasher... or I'm outta here. What's your response?
Maybe you're just an old fashioned guy Appraiser but there are ETFs that allow you to short the market. From what Greg posted the other night you would have made 3.33% shorting stocks in one day! Can't do that with real estate can you.
http://tmx.quotemedia.com/quote.php?qm_symbol=HXD
Yeah Chris, geat observation. Isn't hindsight wonderful?
Tell me something though, what's going to happen tomorrow?
Why would you compare stocks to RE- They have different risk profiles. The post is about a soft landing and alternative investments for Renters. If you rent and go into a GIC, you have very little risk. If you own a home and a GIC you have more risk. That makes perfect sense, but if you rent and have stocks, you have more risk then a home + GIC. It's a useless argument to talk about day trading stocks vs owning RE. I have not touched a stock in 30 years, only RE and I look at my friends who went into all those Income Trust scams, etc...they are renting and hating owners. To each is own. No one can time RE, Stocks, Interest Rates, etc. They are all modern tools of finance, along with Credit cards. If you are smart, you can enjoy you free trip with Aeroplan points and not pay cent in interest, others might have paid that free trip 10X over collecting points and paying interest. In general, I honestly believe Canadians are a cheap, frugal bunch that quickly pay off debt and are not like US folks living meal to meal. Canada will be fine and we should ensure that everyone is gainfully employed and support our schools to product the top people in the world.
Landlord - it is amazing where do you get these ideas (i.e. I honestly believe Canadians are a cheap, frugal bunch that quickly pay off debt and are not like US folks living meal to meal.) Nothing even close to the reality of today. The huge amount of the consumer debt in Canada is one of the most worrisome factors of the economy here and the one that is going ultimately limit any further increases in RE and other investment.
Did even you read Ben's article on a Canadian debt?
it was posted here:
http://www.theeconomicanalyst.com/content/imf-warns-canadian-debt-while-...
but I can post a quote from it:
"IMF warns on Canadian economy and consumer debt levels:
The International Monetary Fund has released their North American Regional Economic Outlook
http://www.imf.org/external/pubs/ft/reo/2011/whd/eng/pdf/wreo1011.pdf
It contains a few interesting tidbits for us Canada econo-watchers.
Their general outlook can be summarized in this key paragraph:
Significant risks stem from the uncertain global environment, as well as potential fragilities in domestic consumption. International risks include a weaker-than-expected U.S. and global outlook, which could trigger a reversal in commodity prices. On the domestic front, consumption might moderate more than expected from a large retrenchment in highly indebted households amid concerns of a drop in house prices. The latter are estimated to be above levels dictated by economic fundamentals in some key provinces."
This echoes warnings from the Bank of Canada in their summer review.
I think why you are confused Olga - people are allowed to have debt. Just because it's small or big is meaningless. It's debt servicing you have to focus. They can pay the bills, make the payments and live comfortably is most important. Canada has great jobs, people are doing fine. RE might be flat for a couple of years or take a dip, I have no magic ball.
If you rent;
LOSE
1) Rates go up
2) Housing goes up
3) Rent goes up
4) No equity or forced savings
WIN
1) if housing drops BUT you have to then look at what rates are in the market to purchase that home, and how much you wasted in renting vs how much you actually saved by waiting
A long term RE graph in Canada has always gone up, along the way, folks have said it's a bubble, etc and waited and waited and waited. By now they would have paid off the home and have no equity or anything to pass to family. Think about it long and hard Olga, even if the housing prices went down and jobs started getting harder - INTEREST RATES WOULD GO DOWN.
Churchill - "It's not your spending that's the problem, it's your income"
Are you proposing that the current interest rate is going to stay like this forever, if not get lower?
If so, I can see why you think the way you do. But if you're wrong, it's going to be a world of hurt, especially when you say that it's "debt servicing you have to focus" on. Debt = slavery is going to take on a whole new meaning when you have to service your debt till you're 85.
It is perhaps ironic, or maybe just plain sad that peer pressure is no longer constrained to drugs, booze and smokes...and teenagers. Yes, for the modern age we now have adults and real estate.
Beautiful.