Wednesday, October 28, 2009

Buying a house is not an investment


Vic said...

Desjardin report out today saying affordability is erroding. Thats funny,didn't the VREB,CMHC and CREA all tell us this is the buy of a lifetime ?

Housing affordability eroding, study says

The rebound in Canada's housing market has been so sharp that affordability is eroding, a new study say.

The Desjardins Affordability Index, reported quarterly by Desjardins Economic Studies, dipped below its historic average in the third quarter, meaning houses were less affordable to purchase, after a little more than a year in affordable territory.

Vancouver is “by the far the country's most expensive market, with an average home price of $603,165 in the third quarter. From the second to third quarters, the market saw prices explode, rising an average of $92,499.”

HouseHuntVictoria said...

I can't believe that they'd suggest houses were "affordable" over the past year. Compared to what? Their previous peak? Just because there was a 9% national dip in prices doesn't mean that houses became "affordable" they just became "less bubbly" but they still remained in bubble price territory.

Skeptic said...

Mr. Market loses confidence in all the recovery talk.

TSX for last week

Vic said...

From Garth's Blog, looks like the top is in,look out below :

OTTAWA (CP) – Bank of Canada governor Mark Carney has repeated his concern that Canadians may be getting in over their heads in the purchase of homes, saying the government has ways of slowing the market. Carney told a Senate committee Wednesday afternoon that the central bank is conducting an analysis of whether Canadians are taking on too much debt, particularly in buying homes.

“If this were to persist, there are other options. The housing market is subject to considerable regulation and policy influence.

“That would be the way to approach it.”

HouseHuntVictoria said...


That's assuming that Carney chooses to acknowledge the bubble. Given his track record, I'm not holding my breath.

Ryan said...

He might acknowledge the bubble if it affected southern Ontario.

Reid said...

We complain about high prices in Victoria, but I was at a friends place in North Vancouver and they are currently selling and buying. The prices there are totally out of control and make Victoria look like a bargain. If there ever was a real estate bubble, just look there. I was out looking with them and the equivalent house to that in which I live (which I estimate to be worth about $700k-$725k in Victoria) would be worth at least $1.3 million where they live in North Vancouver. Our place is really close to ocean and shopping, yet these houses are far from ocean or shopping.

I assume when people from Vancouver come to Victoria they think they just landed in heaven.

HunnyD said...


When I was going to university in the late 90's, I used to take my uncle's cab out on Friday and Saturday nights. When I graduated in 2001, Empress Taxi bought Beacon Taxi, and were selling taxis to individual owners for ~$30k. If you were to try to purchase a cab today, it would cost you in the neighbourhood of $250k to $300k. I don't understand it.

From the anecdotal stories I've heard, this is the rational I've come up with. In Greater Vancouver, it costs at least $500k to purchase a taxi and anywhere from $400-600k ( I know I am being conservative) to purchase a home. Between 2003 and 2007), what some of these Greater Vancouver cab drivers did was sell their home and cab on the mainland and moved over to the Island, which at the time had much cheaper real estate, and much cheaper rates to purchase a taxi. Real estate value escalation was a global phenomenon....the taxi phenomenon, I'm not sure about. Currently, the income/debt servicing is probably on par with Vancouver, but b/w 2003- 2007, there was a much more favourable balance here. At that time, those guys could sell their cab and purchase a job AND a home for the same price. That was a long way of saying, Yes that I agree with your statement "I assume when people from Vancouver come to Victoria they think they just landed in heaven." It's even more amplified when your coming from Surrey!

omc said...

The difference is that there are no jobs here. I point to most people that the low unemployment rates are mostly due to the fact that unemployed people don't move here to look for work. There is actually a fair amount of opportunity in the vancouver area, though the wages are far lower compared to the rest of the country. The rest of the country other than here that is.

I hope carney doesn't move on the bubble for a bit, like after the olympics. The bigger it gets, the bigger the pop.

hp said...

If Carney can change CMHC policies, then he could have a big effect on the housing bubble. All it takes is a tightening of lending standards. Minimum 10% down instead of 5%. Increase the mortgage insurance fees and not allow them to be added on to the mortgage balance.

Skeptic said...

Globe and Mail article today:

The great B.C. real estate bust

And so it went across B.C. By the summer of 2009, dozens of retirement and recreational projects involving tens of thousands of homes resided in some stage of panic, resignation or abandonment. The media poster child for the phenomenon was Len Barrie’s Bear Mountain Resort near Victoria. Yet that project, well on its way to a build-out value estimated at $2.5 to $3.2 billion, was in much better health than many of its imitators.

Last November, around the time that work on Bear Mountain began to dwindle, a $600-million development called Wyndansea, on Vancouver Island’s west coast, had already been granted protection (later rescinded) under the Companies’ Creditor Arrangement Act. On the island’s east coast, another Bear Mountain doppelganger, Cliffs Over Maple Bay, had already fallen into receivership.

hp said...

Buying a house is not an investment in Kitimat, where 535 people are losing their jobs, as the pulp mill shuts down at the end of January. This is a big employer there, and it is going to be a big shock to their economy. Kitimat Mill Closure

Here is a quote from the article:
"Bar manager Melissa Mitchell said her brother, who works at the mill, is a single father, has a mortgage and just bought a new truck and car."

Skeptic said...

Guess what happens to 1 to 30 year bond rates and US mortgage rates now that the US Fed has ended their buying spree?

Bloomberg - Fed Ends Treasury Buys That Capped Rates, Stabilized Housing .

Will Carney stop buying Mortgage Backed Securities and let the banks compete for mortgage funds in the open market?

Vic said...

The Kitimat mill closure is going to hurt bigtime,especially when it came out of the blue. Most mill shutdowns the people usually had a heads up months/year before. Used to work there in my younger years and there are many people that go there and become lifers. Many that are not trades guys either that can take their skills elsewhere. There will be some serious fire sales up there. Sad to see.

Happy Owner said...

Reid Said...

"I assume when people from Vancouver come to Victoria they think they just landed in heaven."

Reid said this in comment to his trip to vancouver and his comparison to home prices.

Well, living in van for most of my life and then moving to vic, I would say (forgetting re prices for a moment) that yes victoria is paridise.

Once you include re prices, this is indeed paridise.

The hopeless renters in this town really don't know what will hit them in the next 5 - 10 years. If you don't own here soon, you won't be able to live here.

Just Jack said...

Hey, Sitting Pretty has become Happy Owner.


msr said...

The hopeless renters in this town really don't know what will hit them in the next 5 - 10 years. If you don't own here soon, you won't be able to live here.

Wow, there's stupid and then there's weapons grade stupid.

msr said...
This comment has been removed by the author.
Mr.4AM said...

Happy Owner said "If you don't own here soon, you won't be able to live here."

Yes, so you better rush out and look for one of these signs, and I hope you've lost a few pounds, cuz your realtor's car has also had a face lift.


trick or treat!

Vic said...

"Wow, there's stupid and then there's weapons grade stupid."

Must be a delayed reaction to a lifetime of breathing the Vancouver smog.

omc said...

hmmm. Lets see, the mainstream media and the government are warning about the real estate bubble. When we went out looking at houses the realtor sits us down and gives us a heart to heart on the market and how risky it is to buy right now. But bubbles/sitting pretty/happy owner says we should all run out now and buy, buy, buy. I'll get right on that.

In 5-10 years time my family is going to be in great shape, just like we are now, because we are financially prudent.

Betcha houses are worth less in 1 years time than they are right now bubs.

Just Jack said...

Okay, note to self. Don't post at midnight because then you do inane things like state the obvious. :-)


Skeptic said...

Globe and Mail:

Easy credit, soaring prices raise new housing fears.

Canadians are in the midst of a mortgage binge, taking out home loans at a pace that's nearly 8 per cent faster than a year ago. The point of a record-low borrowing rate and new fiscal incentives, such as allowing first-time home buyers to use a bigger chunk of their registered retirement savings plans as down payments, was to stir the animal spirits of consumers spooked by the financial crisis. But now, as the recession eases, officials in Ottawa and the analysts who advise large institutional investors on where to put their money are suddenly paying closer attention to the effect of all this stimulus on the longer-term prospects of Canadian consumers.

The concern is that people are taking on too much debt on the assumption that interest rates will stay low for a very long time, making Canadian consumers far more sensitive to the effects of housing and other asset-price bubbles.

Animal Spirit said...

Skeptic and all,

This is a really interesting discussion. What we have learnt is:
1 - it was an intentional policy choice to lower interest rates to boost consumer spending in the late winter/early spring.
2 - this policy was successful in keeping the wealth effect going - people feel like they still have money because their biggest asset (house prices) stayed the same or increased in value. Consumer confidence stayed high in Canada as a result, unlike in the U.S.
3 - this also caused the CMHC book value to increase substantially
4 - CMHC therefore took on substantial risk related to house prices decreasing
5 - the size of the CMHC book and the risk associated with it have now caught the attention of the most senior policy makers.
6 - they now have a conundrum. Do we: (a) increase interest rates (or raise downpayments/reduce amortizations) to deflate the housing bubble; or (b)keep the status quo and risk an even larger CMHC meltdown in the future.

The outcome is anyone's guess.

As for the G&M article, "The point of a record-low borrowing rate and new fiscal incentives, such as allowing first-time home buyers to use a bigger chunk of their registered retirement savings plans as down payments, was to stir the animal spirits of consumers spooked by the financial crisis." - this is exactly why I changed my name from Dumb Canuck to Animal Spirit in the summer - animal spirits are at play.

Fortunately or unfortunately there are two types of animal spirits - the psychological positive (which was used) and the psychological negative (which logically has to balance out the positive unless we are all on anti-depressants). Pump the positive too far, and dragons appear.

Just Jack said...

My vote is that the government will keep pumping the real estate market and continue to increase the CMHC/taxpayer exposure. At this point what difference does it make if CMHC is backing half a trillion or goes to a trillion in mortgage backed securities the effect of the implosion is just as severe for the Canadian taxpayer. We have passed the point of no return, and have to keep goosing the market until the USA pulls out of its recession and we can piggy back our economy onto theres. If we get the timing right, a deep recession is adverted. Get it wrong, and you might as well plant banana trees in your back yard, because we will have an economy as bad as any equatorial third world country - and the government that goes along with it.

Robert Reynolds - GBA said...


Animal Spirit said...

Robert - damn, that up arrow looked like a period on my blackberry - couldn't figure out what you meant!

Should have mentioned, that there is of course option c) - that is, the range of possibilities between a) and b)

Another interesting tidbit in the G&M article was the comparison to war bonds. Could people have actually committed such signficant dollars to essentially carry out government policy, not realizing what their long term person cost was (i.e. with higher interest rates in the future). Is there not a similarity to indentured labour (Wiki - An indentured servant is a laborer under contract to an employer for a fixed period of time, typically three to seven years, in exchange for their transportation, food, clothing, lodging and other necessities. Unlike a slave, an indentured servant is required to work only for a limited term specified in a signed contract)

Just Jack said...

Slave or indentured servant.

Is that like the difference between paying off your mortgage to the bank and never paying off your mortgage to the bank?


talus said...

Kind of cool...

Global Debt Comparison Map

Anonymous said...

Some people still think buying a house in Victoria is an investment.

Kids in Victoria blog

Victoria Real Estate Investors Club

omc said...

I know a fair amount of people who are "real estate investors", meaning that they have investments in real estate. However, I don't know of any that are buying in this crazy market.

The kids in victoria blog seems to be a better indication on who is buying right now. A new family who obviously doesn't have any money, or else they wouldn't have such a "low" price range. Low as in lower range of monthly payments in this super low interest rate market.

I know of too many younger families in financial trouble because of buying houses inthe last few years. I can pretty much see the future for them. It's a shame.

Just Janice said...

I can see a new catch phrase catching on:

"But the bank made me do it!"

Just Janice said...

I can see a new catch phrase catching on:

"But the bank made me do it!"

Robert Reynolds - GBA said...

Real estate market in recovery: CMHC

Gprofessionals said...

I don't want to believe that buying a house is not an investment rather I would say it is an investment as real estate prices are at their bottom right now due to housing bubble, and with slight improvements in it, prices will surely go up to its normal or even higher. So, it is an investment as far as I am concerned.
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