A 50% Drop in Values?

I’ve said before that the market will change, because it always does.  That means we’ll see some reversals in pricing, and we’ll see drops in volumes.  How much will prices and volumes drop? I can’t say.  But, as someone pointed out earlier, we have seen drops in value in the 50% area before.  ’81/82 saw a doubling of values and then roughly 40%  drop across the board.  Clearly some properties didn’t lose 40% of their values…but other lost even more than that.

Jeff expressed the view that the market is currently 100% over-valued (hopefully he didn’t mean it was over-valued by 100% of its value! 🙂 ) and that a 50% decline was in order.  I wondered, as I drove around, what that would mean for some people.   Consider these numbers:

An investor has a three property portfolio currently valued (conservatively) at $500,000.  Its mortgaged for 50% of value, and has slightly positive cash flow.   The properties are all very rentable.  The investor is a long term holder in his 40s. What happens if values drop 50% and the portfolio is only worth $250,000?

Does the picture change if the investor bought the properties 5 years ago, at which time they were positive cash flow with 25%-40% down? 

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108 Comments

Filed under Investment Approach

108 responses to “A 50% Drop in Values?

  1. M-

    An anecdotal story from a close family friend– last night I went to a dinner with some good friends. One of their friends recently sold their Coal Harbour view apartment for $1.0M, and has since bought into Duke on Dunbar.

    In the spring of this year, a few units similar in size and view to hers sold for $1.4M-1.5M. In the summer, she decided to sell her unit. Her realtor advised her that the market had changed, and she wouldn’t be able to get quite as much as the spring comps. She listed her unit for $1.3M. After a few months of inactivity– not even any nibbles, she accepted a lowball offer of $1.0M. It was the only offer she had received, and she was happy to have sold.

  2. Strataman

    “and has slightly positive cash flow. The properties are all very rentable.” The question would be, in a theoretical drop 0f 50 % would the properties still rent at a slightly positive cash flow, or would rents go down due to an influx of desperate speculators trying to tread water. Personally I think in the scenario imagined (50% drop), rents for properties would drop somewhat(not 50 % but probably 10 to 15 %). I believe more than a slightly positive cash flow would be required.

  3. $fromA$ia

    Don’t tell me….

    Why didn’t she wait till next year’s Q1!!!?

    Every other seller has pulled their investments off the market for that reason?

    Ok, Ok I am being sarcastic. I am also glad that she cashed in.

    Rob, If I was forty and have 3 investment home I purchased years ago then I wouldn’t worry.

    On the other hand if I am in one of CHMC’s zero down mortgages at this time I would be holding on to my kahuna’s!!!

    Yikes!

  4. M-

    $fromA$ia, actually, she’s still bullish on RE. She didn’t cash in– she spent her million at Duke on Dunbar.

  5. coco

    “An investor has a three property portfolio currently valued (conservatively) at $500,000. Its mortgaged for 50% of value, and has slightly positive cash flow. The properties are all very rentable. The investor is a long term holder in his 40s. What happens if values drop 50% and the portfolio is only worth $250,000?”

    One should consider what age they want to retire and what age they wish to stop being a landlord. A massive amount of baby boomers will be retiring, downsizing and selling investment properties all at the same time, so demand will shift to other types of properties catering more to retirees.

    There has also been talk of future stock market corrections and housing price corrections as the boomers “sell off” for retirement.

  6. Domus

    I think a long-lasting (3 or more years) 50% drop is pretty disastrous whatever the circumstances.

    The reason is simple and is called `opportunity cost’. In that period of time, other assets will be appreciating, meaning a substantial reduction in relative wealth.

    Notice: I am not saying people will lose all their wealth. They still have houses. It’s just that other people will be making much more money for a long interval of time and will be able to buy even better houses.

    The most striking thing about housing downturns can be seen in families which bought at different stages of the cycle: the once who bought off-peak tend to live in much nicer and better located homes. The ones who bought at the peak, are often stuck with the units which they are unwilling to sell at lower prices. This is based on experience of many decades.

  7. VAB

    I think a 50% drop is what it would take to bring mortgages back in line with rents. Rents, however, are unlikely to go down much so long as renting remains a little cheaper than buying, which even with a 50% drop in purchasing prices would still be true.

    If your hypothetical investor holds properties that are cash flow positive, then he must have bought them a long time ago, so seeing the portfolio half does not necessarily mean that he is worse off than when he bought in, no?

  8. $fromA$ia

    VAB, I think your right.

  9. RE_Owner

    “A massive amount of baby boomers will be retiring, downsizing and selling investment properties all at the same time, so demand will shift to other types of properties catering more to retirees”.

    Can I ask coco?

    Well, then they should be moving to somewhere?? If not into their grave as soon as they retire. That will beg the demand for home for seniors and immigrants are needed to clean their spit bowls.
    Where will all those immigrants live? and who will teach their kids…………and…..and….

  10. RE research

    50% drop? keep dreaming Rob. My model, which tracks 18 data points, points to a 70% drop followed by a 15% recovery within 30 months after the initial drop.

    mkrealty research

  11. Domus

    News from the UK:

    “Average prices of prime London property for sale fall for the second month in a row.

    * Average prices are down 1.3% since August 2007, wiping over £14,000 off the average value of a prime London property.
    * New property stock floods the market, up 11.8% on last month and 30.3% on last year”

    That’s a 15% drop in year, if it keeps up. Let’s even say that the drop is just 10% in a year. That would still mean 100,000 pounds down (roughly 200K $CAD) on a property worth a million pounds…..it’s starting to happen elsewhere.

  12. M-

    Domus, a point of curiosity– if a “prime” London property is worth around 1M pounds, and those properties are declining, then what’s happening to the low-end properties that regular folks buy?

  13. Domus

    Good question, I don’t know the answer to that. The market feeds from the bottom, so that cannot be good news for low priced properties….

    It seems to me Britain is following the US down the drain. The next months will be interesting.

  14. Dude

    When boomers retire, they will be moving into a 2×10 Real Estate. It’s called the grave. People don’t live forever.

    The cycle will be from a 1200 sq/ft to a 300 sq/ft retirement home then to a 20 sq/ft grave.

    Guess what, we might have more land!!!

  15. paulb

    creepy post Dude

  16. coc0

    RE Owner,

    Numerous studies have been done on the sheer number of baby boomers retiring in both the U.S. and Canada in the future. They don’t think that immigration will be able to fill the voids.

    “The study, Building Bridges Across Generations in the Workplace, written by Sylvain Schetagne, Senior Research Associate at the CCSD, points out that few in Canada’s government, industry and labour circles are sufficiently aware of the potential seriousness of the problem. The baby boomers continue to be Canada’s demographic heavyweights. This fact, combined with decreased fertility rates, means that Canada’s workforce is aging. In the year 2000, workers aged 35 to 54 represented fully half the workforce in Canada, compared to just over one-third of the workforce of 25 years ago. The eldest among the baby boomers have already reached what some people refer to as early retirement age: 55 years. The fact that the transition period between work and retirement now begins at a younger age than it did even a few years ago adds momentum to a phenomenon that should give pause to policy-makers.”

    “The report points out that the mass retirement of baby boomers in the coming years could entail many risks. Some of the possible effects outlined in the report include: a general labour shortage, or a shortage of skilled labour; a decrease in the productivity and competitiveness of Canadian companies as a result of the loss of experienced and competent personnel; increases in social costs for those left behind due to the smaller number of workers; and, a drop in levels of financing for social programs.”

  17. Geezer

    “When boomers retire, they will be moving into a 2×10 Real Estate. It’s called the grave. People don’t live forever.

    The cycle will be from a 1200 sq/ft to a 300 sq/ft retirement home then to a 20 sq/ft grave. ”

    Great, thanks for reminding me!

    Here’s another more positive take on it:

    Large numbers of people are complaining that they can’t afford to buy.

    Old geezer croaks and leaves his mortgage free home and other assorted investments to be shared amongst 5 or 10 young relatives (nieces, nephews and the like).

    Suddenly they can now all afford a down payment on a house in Abbotsford or a condo nearer downtown.

    Now let’s think about it. 5 or 10 young folks with new wealth multiplied by the sharply increasing number of old geezers croaking. That sounds like a prescription for a rising RE market to me. It might not be so good for the stock market though.

    Just my 10 cents. Aaaagh, croak.

  18. paulb

    Lets see the data that points to a 70% drop re research

  19. Domus

    Geezer, who is buying the old man’s house in the first place? The whole problem is that there is not one buyer for any old guy…..think again.

  20. /dev/null

    Last year: “50% drop? Never gonna happen.”
    Now: “50% drop. What would it mean?”

    Sea change.

  21. vanreal

    Have you lost your mind Rob. A 50% drop. I guess you have gone to the bear side. Remind me not to use you as an agent.

  22. RE_Owner

    Domus.

    Investors are always looking for such properties. Whalley in surrey is the prime example. The lots were bought years ago before they were assembled and that paved the way for all those multiple housing that are now being built.
    If anyone is thinking of 50% drop before they purchase will probably never be able to buy real estate ever.

  23. News Flash

    “Jeff expressed the view that the market is currently 100% over-valued (hopefully he didn’t mean it was over-valued by 100% of its value! ) and that a 50% decline was in order.”

    You can buy cash flow property with 50% down now. So if prices declined 50% you could buy a cash flow property with 0% down. I would buy cash flow houses (with 0% down) until I ran out of time to collect the rent cheques. Then I would hire Rob to collect them for me.

    If it sounds too good to be true… well you know the story… ain’t ever gonna happen.

  24. James

    the only people who think there is going to be a 50% drop are the idiots on the real estate boards who have nothing to do but speculate.

    What if an asteroid hits the earth??? whatever.

    Do you really think that all the banks (in canada) would continue borrowing money if a 50% drop was was probable. O ya… you do.

    The presidents and the managers of all the banks are idiots and know nothing…

    jeepers

  25. News Flash

    “An anecdotal story from a close family friend– …One of their friends recently sold their Coal Harbour view apartment for $1.0M…
    In the spring of this year, a few units similar in size and view to hers sold for $1.4M-1.5M…She listed her unit for $1.3M. After a few months of inactivity– not even any nibbles, she accepted a lowball offer of $1.0M. It was the only offer she had received, and she was happy to have sold.”

    M: Tell us the building address and square footage / floor level.

    Let me guess it’s a secret. Only your secret realtor Jeff knows.

  26. Jeff

    James,
    “we have seen drops in value in the 50% area before. ‘81/82 saw a doubling of values and then roughly 40% drop across the board”
    given the recent run-up it is highly probable that we revisit history.

  27. mk-kids

    Anyone catch “The Passionate Eye” tonite on cbc newsworld… “mortgage meltdown” – it was a very interesting expose and by all accounts, the worst is yet to come… “we’re in the 1st quarter of a 4 quarter game” – a vivid analogy & the problem is global, everyone will be affected, its a matter of degrees. The problem with the system is that nobody really knows who’s holding the bad loans and what the value (or lack thereof) of them really is.

    Buckle up folks.

  28. News Flash

    “A massive amount of baby boomers will be retiring, downsizing and selling investment properties all at the same time, so demand will shift to other types of properties catering more to retirees.”

    Baby boomers are the wealthiest generation ever. They are buying second homes not down sizing.

  29. Jeff

    If M can provide the address… I’ll post some analysis such as a CMA on the property.

  30. chip

    The UK is in for a nasty ride. Even as their economy has grown at a pretty good clip in the last several years, their debt-to-GDP ratio has climbed because like the good socialists they are, they have spent like no tomorrow. According to some studies, the Greater London region is the only area in the country that does not have more than half of its GDP derived from the government.

    And London has been booming largely because Sarbanes-Oxley drove so much business out of New York: a situation unlikely to last as the US reconsiders this ludicrous law.

    Since selling my London flat a few years ago I’ve noticed that prices in the building have been largely unchanged since. This plateau is going to become a nose dive very soon.

  31. deb

    Passionate eye was really interesting. All this has me wondering about the future effect on the stock market and peopl’e investments. So much is unknown.
    Any thoughts on that?

  32. Priced Out

    I think 50% drops can happen in a major recession. Once all the Olympic and condo building ends in a couple of years, then what? Huh? What are these tradesmen (and tradeswomen) going to do? And all the condo marketers (those poor souls)?

    2010: Building over, years of high dollar killing tourism and film/tv, forestry long gone, hangover of Olympic debt. MASSIVE RECESSION, worse than the 80s. The only thing missing is an NDP government, and we may get that to. Actually, who cares, Liberals governments are just as bad (you’ll see).

    How are we going to avoid this? There is no magic rabbit to pull out of the hat once the credit dries up.

  33. $fromA$ia

    Wow we’ve managed 32 comments with none from SATV so far….

    Should we be so lucky?

  34. $fromA$ia

    Cough…clears thought…guys theres apprentices at my work that have bought in with zero down.

    They have no money for any activities they say but the do say they have a place to rest their head at night.

    CHMC is responsible? Only to the bank and the apprentices well they get screwed over.

  35. Attn Jeff & Newsflash!

    You are both asking for street address, etc, in order to do a CMA.

    As far as I know, all agents have access to mls data. So, unless the said property was sold privately, I think it is quite simple for any BC agent to find out which Coal Harbour view apartment(s) sold for $1.0M, and also what sold at Duke on Dunbar in the same price range.

    Surely, it can’t be that difficult, as both properties will show as P(pending), or S (sold). In fact the buyer’s and seller’s name are both listed for each condo’s history. Thought Jeff would know this basic stuff. Right, Rob?

  36. Domus

    James:

    you said “Do you really think that all the banks (in canada) would continue borrowing money if a 50% drop was was probable. O ya… you do. The presidents and the managers of all the banks are idiots and know nothing…”

    Here are some recent headlines from Bloomberg and MarketWatch:

    “UBS: Further Writedowns Possible” (they lost $4.1 billion in the past quarter).

    “Countrywide reports $1.2 billion loss”

    “AIG may take $9.8B Hit”

    “Merrill Reports $8 Billion Write Down” (yes, this is a loss as well…the CEO resigned yeaterday, by the way)

    “BofA Visits the Confessional” (Bank of America Corp.’s third-quarter net income fell 32% from a year ago as trading losses, write-downs on a wide variety of loans and soaring reserves for likely future loan losses undermined profit).

    James: on what planets are you leaving? Do you think brokers were lending their own money? Wake up, mate!

  37. Jeff

    prettywoman,
    this city happens to be a little bit big for me to just figure it out… and many condos in Coal Harbour sell for $1m. The sellers name is on a listing, but the buyers name is not reported on the MLS sold. the use of pending does not exist in Vancouver; however, when I worked in Toronto it did. In Vancouver a property is either active or sold.
    please people, grow up… I am a Realtor.

  38. TI

    50% drop is reasonable.

    After oil crisis, the housing market usually faces a big correction.

    What goes up comes down.

  39. TI

    Jeff –

    I am not a Realtor.

    I want to know that any procedure corrects the sale numbers if some reported sales default.

    Thanks

  40. Jeff

    TI,
    Yes. A collapsed sale is reported to the RE Board.

  41. Jay from the original blog

    Personal gut feeling is 50% is unrealistic. 35% however is a distinct possibility IMO. Thumb in the air guess based on what my buddy paid for his house about 6yrs back and what his neighbour currently has his place (nearly identical) on the market for.

    Investors that bought on sound footing would be fine. The question is how well the speculators would fare, how large this group is, and thus, what kind of impact they would have on the market by wanting or needing to pull out.

  42. DWB

    “Does the picture change if the investor bought the properties 5 years ago, at which time they were positive cash flow with 25%-40% down?”

    It sure does. This young 40 year old investor just got the best reward from the market possible.

    He’s a long-term investor right? Well, now he has the opportunity to buy additional cash-flowing properties to add to the three profitable ones he’s already holding.

    That scenario would certainly be what every investor dreams about.

    The hypothetical investor will be no doubt holding on to his three current properties and buying, hand over fist, thanking his lucky stars that this fire sale opportunity has come about in Vancouver, one of Canada’s most desirable cities to live.

    This begs the following question:

    Would others be doing the same? I know I’d be accumulating these deeply discounted bargain properties. No doubt. Wouldn’t everyone who participates on this blog be out house hunting? (Or would they be holding out saying everyone who was buying at 50% off was crazy as “everyone” is expecting a 75% haircut?)

    Makes me wonder if this 50% drop scenario would be short lived… thanks to today’s bears with cash on the sidelines entering the market & buying as the scenario they so passionately envisioned has actually materialized?

  43. coco

    Newsflash,

    I was talking when all the baby boomers retire in the future, not what they are buying now.

  44. coco

    Paulson Says U.S. Hasn’t `Hit Bottom Yet in Housing’

    http://tinyurl.com/ytp9lk

  45. coco

    Subprime Problems Continue To Climb, Key Indexes Show

    http://tinyurl.com/285l9s

  46. coco

    Pope & Talbot files for creditor protection
    Jobs and operations at main B.C. subsidiary in doubt while the lumber industry braces for poor year-end numbers

    http://tinyurl.com/253ea7

    (has pulp mills in Nanaimo and MacKenzie, sawmills in Grand Forks, Castlegar, Midway, Fort St. James and Nakusp)

  47. coco

    HSBC Bank Canada has C$380 mln of nonbank ABCP (2 pages)

    http://tinyurl.com/ypjrje

  48. coco

    Directors urged to ask questions about ABCP crisis
    (commercial paper – Canada)

    http://tinyurl.com/2ct3l6

  49. coco

    Sorry, posted all the news links on wrong thread.

  50. abc

    It is certainly a useful exercise to ask oneself about how their financial affairs will do in a major downturn. The outcomes depend on what triggered the downturn in prices. If it were just a case of psychology, with no downturn in the economy, then the suggestions of don’t worry, buy more, seem reasonable. If the economy goes into the tank, then perhaps vacancies will increase.In this case the fact that the units are very rentable could insulate the owner to some degree. Or there could be a natural disaster, eg all the units are in Richmond and there is a flood. This is possibly a very different situation. As mentioned by another, there is also the issue of lost opportunity, and the degree to which this is weighted depends on the objectives of the investment and the investor.

  51. jesse

    ABC documentary on Mortgage Meltdown (seen last night on CBCNW)

    http://tinyurl.com/2t6mvf

  52. e

    bear in mind that this past few years has been unprecedented in terms of real estate — not only in Canada, but in the world. as such, what will happen, may be unprecedented as well. two things:

    one:
    i have seen a graph (i may still have it on another computer), which tracks real prices of california real estate, and it shows that it always returns to a certain level after each cycle. because this tracks inflation adjusted prices, it implies prices will increase 2-3% a year — which is what we’ve heard all along.

    that same graph also extrapolated a 75%+ drop in real estate prices by 2013 (basically from peak to trough). however, bear in mind that 2013 is 6 years away, and inflation at 2-3%/yr, implies 16% over 6 years. As such, the impact in terms of nominal prices from the start of this year would be “only” 54% as seen in your posted prices.

    many areas in socal are already down 17% YOY, and i have seen some properties down 20-30% from peak prices. so this would imply a 25-35% further discount (roughly). this isn’t that much. means you can get a cheap 1 br in OC in socal for $120k or so (rather than the $160k right now (the original listed at peak was 260k). said unit is currently rented at $1100.

    two:
    then theres another theory as well. didn’t somebody say 1% is a reasonable rent guideline? so $1100 for a to-be 120k unit would be reasonable.

    interesting how they align.

    of course this doesn’t mean anything for vancouver b/c we have the olympics 😉
    (but we have less jobs than before, and seemingly worse weather than a few years ago, and less immigration than before).

  53. Anonymous

    For all of those who are guessing how far things will fall here’s a few well researched methods:

    Method 1: 200-150 rule.

    This is the easiest to calculate. If total cost is beyond 200x monthly rent prices will drop unless there is an equalizing increase in the local economy. In a normal market prices sit below 150. (the problem with this calculation is it’s a very house-by-house method, it’s not easy to calculate large areas without a lot of number crunching)

    Method 2: 3-4x rule.

    Median housing prices should be 3-4x median household income in a normal market. Pretty easy. GV Median household income is approximately 64,000 (extrapolated from 2005 numbers and prior trend). Median home price is $726,000.

    The number SHOULD be 3-4 in a sane market. In Vancouver it’s 11.34375

    To put that another way real estate in Vancouver is 325% of where it should be, or we are due for a 70% haircut. That’s the price it should SETTLE at, not the trough price.

    Last but visually easiest is this. Real Estate does not appreciate over time if you factor in inflation. The post ’80s period has been an exception to the previous 100 years of history. Whenever there is a bump the trendline is resumed. Think about it. All emotional BS aside, it’s just a commodity and it can only maintain a price that the market will bear if it kept going up exponentially eventually nobody could afford to buy. The people who owned would be the richest in the world but they couldn’t sell.

    For the last I wish I had a link to an updated VHB graph, anyone still have the old VHB graph around? The “you are here” one.

  54. Anonymous

    Sorry I grabbed the wrong number, Median home price should be $535k, still over double where we should be but not quite as bad as I’d said.

  55. foo

    The problem is not what happens to the cash-flow positive investor with a 3 house portfolio.

    It’s not even what happens to the specu-flipper who gets their equity wiped out and can’t make the mortgage payments.

    It’s what happens to the economy when people stop feeling wealthy, and start hunkering down instead of spending.

    Bursting bubbles are never any good for anyone, even for the cash-flow positive investor who hasn’t lost any money on their portfolio. Maybe it’s their job they lose instead…

    And when buyers dry up, you don’t want to be in the position where you need to liquidate your portfolio to generate some cash for an emergency…

  56. Tony Danza

    News Flash said: “You can buy cash flow property with 50% down now. So if prices declined 50% you could buy a cash flow property with 0% down. I would buy cash flow houses (with 0% down) until I ran out of time to collect the rent cheques. Then I would hire Rob to collect them for me.”

    So why didn’t you do this when prices were 50% of what they are now? You and Geezer should in theory have bought every single house and condo for sale a few years ago.

    It’s called psychology, not many people are able to handle loss of capital and continue investing in the same asset class. Survival instincts make us adverse to losses that is why you hear of people “chasing returns” we look at past performance and buy what made money. When what we bought doesn’t live up to past returns we sell (at a loss to preserve capital) and buy the next thing we find that made money in the past. That is why investors typically under perform the markets long term.

  57. abc

    “You can buy cash flow property with 50% down now. So if prices declined 50% you could buy a cash flow property with 0% down.”

    Except that I’m not sure who would lend to you at a good rate with 0% down. Also, interest rates may have gone up, so the average property may no longer be cash flow positive. And a property which is full now may spend part of its time being vacant in a downturn. etc, etc.

  58. abc

    Foo, excellent comments. I will only point out that there are people who consistently benefit from bubbles. The simplest thing is to do is to avoid things that smell like a bubble, and buy in during the subsequent hangover.

  59. DaMann

    Exactly Tony Danza

    Like I say to people now, in 2000 you couldn’t give away RE in this town. It only became world class in 5 years? Wow what a fast change. The only thing that changed is psychology. When it changes back the other way, look out. People often say that if it drops 20% everyone will buy back in who were waiting. Not exactly, the mentality will be that it will go lower so wait, the same mentality that some have when it’s going up.

    This market is built on 95% hype and 5% fundamentals, I’m still trying to figure out the 5%

  60. Ed Bear

    Sea change indeed. I’m amazed that this discussion is actually happening on this site.

  61. An

    Jeff:
    ““we have seen drops in value in the 50% area before. ‘81/82 saw a doubling of values and then roughly 40% drop across the board”
    given the recent run-up it is highly probable that we revisit history.”

    Were you around in 82?

    A successful accounting friend moved here last month from Ontario. He found a great job with in days, but is still looking for an apartment to rent.

    That’s not the type of story you would hear back then.

    I’m not saying it isn’t possible but “highly probable” is highly unlikely :)…

  62. jesse

    “As such, the impact in terms of nominal prices from the start of this year would be ‘only’ 54% as seen in your posted prices.”

    IF the AVERAGE real appreciation is 2-3% then prices must dip BELOW the average to revert the long-term trend back to the mean. This unfortunately would mean more than 54% nominal price drops.

    Watch the ABC Mortgage Meltdown documentary. The part I like is Bob Schiller showing Amsterdam house prices from the 1600s to present. If prices increased 2-3% per year in real terms, as you suggest, then real prices would be 3000 times as high as 400 years ago. They aren’t.

  63. VAB

    When we talk about how much things will go down, it’s important to keep in mind that different properties will be worth different amounts. Many properties have had major upgrades. They are going to hold value better. Some neighborhoods have been gentrified. Those neighborhoods should hold on to some of the value of that gentrification. The Drive, for example, is not going to go back to 1990s prices.

    On the other hand, you’ve got rat-infested shoe boxes five blocks from the nearest store selling for a million bucks. That’s the sort of place that is really going to correct.

  64. /dev/null

    An, if housing prices begin to decline then all the speculators sitting on empty condos will try to bail. If they can’t they’ll rent them out in an attempt to slow their losses.

    Your accountant friend will have lots of choice soon enough.

  65. BBY

    This blog entry is from a realtor? Why would a realtor in the hyper-hyped GV market publish anything to support the housing bubble theory? Or has he cashed out and is now waiting to feed on the hangover? Is this post a way to trigger the hangover? Curiouser and curiouser…

    I suspect that the hangover will begin before the Olympics. And will really gather steam after the Olympic gypsies leave town, which will free up a whole lot of rental accomodation… Wonder if interest rates will go up as well? That’s what really contributed to the early 80s crisis.

  66. Marko

    “An investor has a three property portfolio currently valued (conservatively) at $500,000. Its mortgaged for 50% of value, and has slightly positive cash flow. The properties are all very rentable. The investor is a long term holder in his 40s. What happens if values drop 50% and the portfolio is only worth $250,000?”

    I’m not a banker so I am just curious what the response of the mortgage lender would be to this kind of drop in property values. Do the banks care if the value of the asset falls below (well below) the value of the mortgage (I imagine a lot of lenders would be, for lack of a better term, “freaking out”)? What happens when the investor/home owner goes in to renew his/her mortgage?

    I would describe the scenario Rob paints here as being on the rosy side compared to people I know who have bought with 10% down or less and a few who have taken out sizable home equity loans.

  67. coco

    B.C. government eyes carbon tax in next budget
    Levy on gasoline could be a start, says finance minister

    http://tinyurl.com/ysxy65

    Also ICBC considering pay per kilometer driving insurance rates.

    Metro Vancouver (former GVRD) to increase property taxes next year for roads/transit, considering toll roads.

    Convention center cost overruns now may go over the overruns. If the Olympics don’t generate enough revenue to pay for these venues or anything else, taxes will go up.

  68. Tony Danza

    Geezer said: “Old geezer croaks and leaves his mortgage free home and other assorted investments to be shared amongst 5 or 10 young relatives (nieces, nephews and the like).

    Suddenly they can now all afford a down payment on a house in Abbotsford or a condo nearer downtown.

    Now let’s think about it. 5 or 10 young folks with new wealth multiplied by the sharply increasing number of old geezers croaking. That sounds like a prescription for a rising RE market to me. ”

    Geezer, Have you considered the possibility that you may end up having to liquidate your real estate once your mini Geezers wise up and decide they aren’t going to foot the bill for your generations health care? Think about it, health care demand (and subsequently health care costs) will sky rocket once you geezers succumb to the ravages of time. I smell a privatized health care system on the horizon! And boomers selling their second homes to pay for dialysis machines…

  69. Anonymous

    “Your accountant friend will have lots of choice soon enough’

    The accountant is currently renting and waiting to buy when it makes sense.

  70. Priced Out

    Florida update:

    http://www.nbc-2.com/articles/readarticle.asp?articleid=15468&z=3&p=

    “Although the buyers are there, some home prices are at 2002 levels.”

    Good thing we have the Olympics or that might happen here.

    “She and her husband just bought in a gated community. The house had been on the market at one point for $370,000. They paid $245,000 not wanting to look a gift horse in the mouth.

    “Unless you’re psychic, it’s the only way to predict when the market will bottom and what it will do. You just have to look back at history. If you do your research just a little bit, you’ll see that now is a good time to buy,” said Marinescu.”

    While I’m happy for you that you didn’t buy at the peak, Mrs. Marinescu, don’t kid yourself, the party is just beginning.

  71. e

    An: re: your friend analogy in the 80’s. its called market psychology. when things are very expensive, some people will not buy (they wait for things to get cheaper). when things get cheaper, they get too greedy and want to wait it more and/or there is negativity in the market and nobody wants to buy.

    it takes strength to buy in a weak market. as commented before, nobody wants to buy thinking next year they will have made a bad decision.

    however, if you take advice from warren buffet, you would buy when there is value, and/or when there is blood on the streets (everybody selling).

  72. Priced Out

    Anyone else watching the older parts of Coquitlam? Nothing is moving in the middle to upper market. Single family homes and townhouses aren’t selling at all. The only thing selling is condos.

  73. BBY

    Condos are selling. Yet more condo developments are racing for completion before 2010. I have heard that there is currently a “hidden” condo glut fueled by investor owners unable to rent out their shoebox units. When current tenants move into their newly purchased units, and the Olympic gypsies leave town, wouldn’t this create a few more empty units? My burning questions are: A) who are currently buying condos (how many investors/flippers/residents) B) What does the hidden condo glut really look like?

  74. Anonymous

    Marko:

    “I’m not a banker so I am just curious what the response of the mortgage lender would be to this kind of drop in property values. Do the banks care if the value of the asset falls below (well below) the value of the mortgage (I imagine a lot of lenders would be, for lack of a better term, “freaking out”)? What happens when the investor/home owner goes in to renew his/her mortgage?”

    Ta tar! In steps the CMHC and bails the banks out! Now offering insurance on 0% down 3rd 4th hell 28th properties!

    Your tax dollars hard at work, helping keep the bubble inflated until after the next election.

    The Government should be saving for a rainy day instead of cutting taxes and they KNOW it! The CMHC is going to cost Canadians billions in insurance payments to big banks in the next few years.

  75. robchipman

    Some great comments. Thanks!

    Strataman:

    Its possible that rents coukld drop. Currently two of the properties (the scenario is based in a real example are under-rented and one is near market rent).

    VAB:
    As mentioned, its not a hypothetical portfolio. The first property was acquired 4 years ago. If values drop 50% and they still cash flow, that would tend to be a positive input for value, no?

    RE research:

    Love to see the research. Got a website? Care to post it here? (BTW, the 50% number comes from Jeff, not me. Best to direct the dream warning to him).

    /dev/null

    The question is a question, not an answer in and of itself. I’m still holding, not selling. But, take your comfort where you can find it!
    Vanreal:

    50% comes from Jeff. Remind me not to use you as a proof-reader! 🙂

    News Flash:
    “So if prices declined 50% you could buy a cash flow property with 0% down. I would buy cash flow houses (with 0% down) until I ran out of time to collect the rent cheques. …If it sounds too good to be true… well you know the story… ain’t ever gonna happen”.

    Interesting analysis.

    DWB:

    “This young 40 year old investor just got the best reward from the market possible…. now he has the opportunity to buy additional cash-flowing properties to add to the three profitable ones he’s already holding…That scenario would certainly be what every investor dreams about”.

    Again, this isn’t hypothetical, but based on some actual properties that I manage. With a doubling of values over the past few years I would think its a pretty common scenario.

    e:

    My feeling, based on looking at rental properties for over two decades, is that a rent multiplier of 100 (rent is $1000/month, price is $100,000) is absolutely awesome. You can’t usualy find something in the Lower Mainland that meets that criteria. (If you can, buy it).

    Anonymous

    “Method 1: 200-150 rule…Method 2: 3-4x rule…”

    I like your approach, but differ a little from you on the numbers.

    Foo:

    “And when buyers dry up, you don’t want to be in the position where you need to liquidate your portfolio to generate some cash for an emergency…”

    The guy owns multiple properties and they’re cash flow positive. Wouldn’t you expect a guy like that to have other options? Look at one property: he buys for $100, with $25 down, and gets positive cash flow. Property doubles in value to $200. He takes another $25 out, and its still positive cash flow. Maybe he paid off his house. Maybe he bought some stock. Whatever. Unless he blew the $25 he has, after gotten his money back, plus he held the property to boot. (And he’s done this 3 times). He’s into the properties for $0 plus a promise to pay. (He’s only exposed if he loses the tenants, and right now two of the three are under-rented).

    Tony Danza
    “So why didn’t you do this when prices were 50% of what they are now? ”

    One problem is that you needed the 25% down a few years ago. Rules have now changed. CMHC insures 0% down investor loans now, correct?

    Despite that, 4 years ago a lot of guys (my clients and myself included) were buying. Geezer and Newsflash may have done so as well.

    “When what we bought doesn’t live up to past returns we sell (at a loss to preserve capital) and buy the next thing we find that made money in the past. That is why investors typically under perform the markets long term”.

    Except in this case the original investment was recovered,(bought for $25 down, remortgaged later and took out the original dp)

    abc:
    “Except that I’m not sure who would lend to you at a good rate with 0% down”

    Investors can get stuff with 0% down now, the neg cash flow loss is a write off, and you don’t need other property to qualify like we used to have to do. Lending rules may change, of course.

    “Also, interest rates may have gone up, so the average property may no longer be cash flow positive. And a property which is full now may spend part of its time being vacant in a downturn. etc, etc.”

    It has always been thus. Nature of the beast. If that scares you, don’t buy real estate.

    Da Mann:

    “Like I say to people now, in 2000 you couldn’t give away RE in this town. It only became world class in 5 years? Wow what a fast change. The only thing that changed is psychology”.

    Yeah, I remember that psychology change. A friend described it to me thus: “The Liberals are going to come in, make some heinous cuts, and at the end of the day the economy will be doing great and everyone will be happy”; I’m not sure his political or economic analysis was correct, or even well reasoned, but I can tell you that attitudes to real estate seemed to change overnight.

    It was tough then, btw, to get a neg cash flow property as an investor. You required 25% down, and that generally made things positive, so no write offs for high income earners.

    An:

    Yup, I was here. Saw it happen up close. If you were here then you’ll remember it was a lot different than the run up we’ve had over the past several years. Much easier to predict (and I remember people doing it at the time, more effectively than they do now).

    Marko:

    Property values drop, you keep paying the mortgage, bank doesn’t say boo. (Yeah, if we have a major economic meltdown all bets are off, but otherwise, the mortgage renews, all things being equal).

    10% down, remortage, take the downpayment out, you’ve recovered, and are on the hook for the promise to pay. The exposure is clear, and the protection just as clear (don’t buy what you can’t hold, or if you must, then don’t try to hold what you can’t hold – sell before then. I recommend the former, not the latter, but that’s just me).

    Taking a home equity loan is not usually an investment. I’m not going to try to justify living beyond your means.

  76. jesse

    “So if prices declined 50% you could buy a cash flow property with 0% down. I would buy cash flow houses (with 0% down) until I ran out of time to collect the rent cheques. …If it sounds too good to be true… well you know the story… ain’t ever gonna happen”

    What sort of interest rate could you get on a 0% down loan after a 50% (and counting) decline in the value of the asset that is backing up the loan? Hint: it is a bit more than what you can get now, CMHC or no.

  77. Tony Danza

    Rob,
    Investors will always be buying real estate no matter the health of the market, I am not arguing that point. The point I am trying to make (and if you read the post I was replying to you should easily understand) was that real estate investors have never and will never be able to support an irrational market. News Flash argued that there are so many investors waiting to snap up investment properties that prices can not fall 50%. I argue that if this is the case why do we have cycles in our real estate market, or any market for that matter? Interested to learn more about your new economic paradigm…

  78. M-

    Rob: “the neg cash flow loss is a write off” – my understanding of tax law is that you can’t run a business that knowingly loses money.

    A business is a venture to make money. Expenses or losses can occur, but it’s not a business if you know it’s going to lose money year after year. Speculating on capital gains is not really a business. Careful, because the CRA can go after an “investor” who loses money every year knowing that the situation isn’t about to change.

  79. robchipman

    Tony:

    I’m just answering a couple of your questions. I think its important to note that lending rules have changed substantially (should I capitalize SUBSTANTIALLY?) That’s one reason why people didn’t buy everything 5 years ago. You needed actual cash (not as big of an obstacle today, and that’s a genuine change). Second, some guys did buy.

    In regard to buying bad investments that made money in the past, this wasn’t a bad investment, even with a 50% drop in values. All the original investment was recovered, leverage is conservative, it carries itself, there is mortgage paydown, and an income stream.

    If your argument is that investors can’t support an irrational market I’ll buy the premise (I don’t recommend, across the board, buying investment real estate right now; there have to be some good motivations that differ from the run of the mill). That said, after a 50% decline, with cash flowing properties at 25% down, will it still qualify as an irrational market? That’s where you lose me.

    I think you’re also taking NF’s argument a little far. He said “I would buy cash flow houses (with 0% down) until I ran out of time to collect the rent cheques”, and I think a lot of people would agree with him. His point seems valid. If a 50% drop meant that property ownership was free, wouldn’t that tend to increase valuations?

  80. Geezer

    Domus wrote:
    Geezer, who is buying the old man’s house in the first place? The whole problem is that there is not one buyer for any old guy…..think again.

    Remember how supply and demand works? Now let’s think, one old geezer drops out of the market forever and 5 or 10 younger folks with significant deposits enter the market for the first time. Hence, one empty house and ten new buyers on the market. Multiply by the number of financially comfortable geezers falling off our perches. Still sounds like an increase in demand to me.

    Tony Danza wtote:

    “You and Geezer should in theory have bought every single house and condo for sale a few years ago.”

    Yeah, 20/20 rearview vision is great isn’t it? Happily, my pre-existing RE holdings have done quite nicely thanks.

    Tony Danza also wrote:

    “Geezer, Have you considered the possibility that you may end up having to liquidate your real estate once your mini Geezers wise up and decide they aren’t going to foot the bill for your generations health care? Think about it, health care demand (and subsequently health care costs) will sky rocket once you geezers succumb to the ravages of time. I smell a privatized health care system on the horizon! And boomers selling their second homes to pay for dialysis machines…”

    Yes, I considered that but we live in a democracy and I’ve been watching the politicians pussy footing around doing any of the long overdue changes to the medical system for years, the screams of anguish are already deafening with our present level of service.

    Your scenario would require the voting support of large numbers of the following groups. Geezers; their loving children; anybody else waiting to inherit parts of the geezer’s “intact” estates; the folks over 40 who are just starting to realize that they will need medical care in the future; plus a good chunk of the government health care workers. What do you think the odds are for a political party that alienates that lot?

    Like it or not we are stuck with public medicine, we can only hope that the introduction of some private competition will improve its efficiency.

  81. $fromA$ia

    Did anybody hear in the news that Canadian exporters are begging the BOC to lower rates to offset the high Canadian dollar’s effect on Canadian business?

    Anybody want to engage this topic and how any moves by the BOC may change real estate market conditions?

  82. Anonymous

    Geezer,

    As you geezers die off, there may be 5 young waiting geezers at first. Please remember that you outnumber all the younger geezers so there are not 5 or 10 youngers waiting. There are .7

  83. robchipman

    And that’s the real challenge. Will we get enough immigration, or will fertility change enough for us to maintain our lifestyle? The challenge to real estate pales in comparision. We have too many people on the planet for current consumption levels, and not enough of them in our little corner of it to maintain…current consumption levels 🙂

  84. News Flash

    TD:
    “So why didn’t you do this when prices were 50% of what they are now?”

    I did.

    “You and Geezer should in theory have bought every single house and condo for sale a few years ago.”

    As stated by Rob, a few years ago you needed 25% down. And don’t forget rents are up 40% as well. So with a 50% drop you would be buying at 4 year ago prices, need no money down and get 40% more in rent.

    It is as likely to happen as the bank lending you money at a lower rate than you can earn in a GIC.

    Ain’t gonna happen.

  85. News Flash

    Jesse: “What sort of interest rate could you get on a 0% down loan after a 50% (and counting) decline in the value of the asset that is backing up the loan? Hint: it is a bit more than what you can get now, CMHC or no.”

    Today I can get the same interest rate with 0% down as 25%+ down. Why? Because CMHC is guaranteeing the lending institutions money. There is zero risk on the part of the lender and some lenders actually offer better rates to low and no down payment mortgages because of this. All you have to do is qualify with CMHC. If you have cash flow property it is a done deal.

  86. News Flash

    TD: “News Flash argued that there are so many investors waiting to snap up investment properties that prices can not fall 50%.”

    I didn’t say that, but what I meant was prices cannot fall 50% due to rents supporting the prices long before they get that low. Remember the fundamentals everyone keeps talking about?

    “I argue that if this is the case why do we have cycles in our real estate market,”

    Each market has different drivers. The cycles in Vancouver’s real estate market with respect to price declines align with significant interest rate hikes. With the US already lowering rates and the buck at $1.05 it doesn’t look like that is happening anytime soon. Until then the party is still on.

    “Interested to learn more about your new economic paradigm…”

    Glad you want to learn, but it is not a new paradigm.

  87. $fromA$ia

    Newsflush,

    CHMC is becoming a risk like sub-prime was to the U.S.

    Include the cost of housing in assessing your salary and our/your income money is worthless.

  88. doubter

    Yet again, all our speculation and all the “signs” and “fundamentals” don’t seem to make a whit of difference to the Vancouver market.

    “The average selling price of a house in Vancouver and its immediate suburbs reached $819,794 last month, with townhouse condos nudging $600,000 and apartments $400,000.”

    From: http://tinyurl.com/2tdzqh

    Sigh.

  89. DWB

    Rob:

    Just to clarify, my point was a pullback of 50% would be a welcome event for a young invesor who could add more properties to his existing three at an enormous 50% discount. Was never doubting the authenticity of the example that your example was common & very real.

    I say this because I myself am holding property in a tiny market outside of B.C. in another province some very small condos from 2003 when they were purchased. I’m likewise 40ish and have a long term vision. This small market has appreciated a little, not much & nothing to get excited about at all, but I am thankful. They are and always have been since day 1 cashflow positive.

    Great for the ones I’m holding, but a challenge for me in that I’d like to accumulate more to add to the existing stock.

    So, within this long-term vision lies a hope that a 20% pullback would occur so I can continue to hold, yet continue on my accumulation plan. A 50% haircut and I’d be doing backflips of joy, seeing as I’d still have the small condos performing as well as I’d be loading up on new inventory at bargain prices.
    —————————————————————–

    “’This young 40 year old investor just got the best reward from the market possible…. now he has the opportunity to buy additional cash-flowing properties to add to the three profitable ones he’s already holding…That scenario would certainly be what every investor dreams about’.

    Again, this isn’t hypothetical, but based on some actual properties that I manage. With a doubling of values over the past few years I would think its a pretty common scenario.”

  90. Tony Danza

    Geezer, “the folks over 40 who are just starting to realize that they will need medical care in the future; plus a good chunk of the government health care workers. What do you think the odds are for a political party that alienates that lot?

    Like it or not we are stuck with public medicine, we can only hope that the introduction of some private competition will improve its efficiency.”

    It won’t matter what the odds are of a political party alienating the boomers. The taxation required to support the boomer generation into retirement will crush the x and y generations. The fact that we live in a democracy won’t stop the younger generation from leaving to escape an oppressive tax regime. Government and smart boomers will have no choice but to ease the burden on the supporting population. Of course there will be wailing and gnashing of teeth from the usual suspects.

    The way Canadian and US demographics are shaping up your dream of 5-10 gen x’ers clamouring for your property will likely be inverted. There will more likely be 5-10 boomers trying to unload a house for every interested whippersnapper. This isn’t revolutionary thinking it’s well supported in marketing and economics literature.

  91. Tony Danza

    “I’m just answering a couple of your questions.”

    Rob,

    My questions were rhetorical. You cherry picked one small part of my post. I can’t argue with someone that doesn’t even understand my argument. There are posts below mine that clearly understood what I was arguing so it couldn’t have been too hard to follow.

  92. Tony Danza

    “what I meant was prices cannot fall 50% due to rents supporting the prices long before they get that low. Remember the fundamentals everyone keeps talking about?”

    News Flash,

    You mean the price to rent ratios of 400-600+? Or do you mean the average home price that’s 11 times average income?

    “Glad you want to learn, but it is not a new paradigm.”

    Really? I guess Vancouver must have its own definition of paradigm then, brilliant.

  93. jesse

    “All you have to do is qualify with CMHC. If you have cash flow property it is a done deal.”

    That’s good. Sounds like all you need is a pulse. You may be right that things have permanently changed and I’m genuinely glad things have worked out for you but don’t be surprised if banks stop picking up the phone at some point in the future.

  94. Warren

    News Flash: As stated by Rob, a few years ago you needed 25% down. And don’t forget rents are up 40% as well.

    Rents are up 40%? Got a source for this?

  95. Anonymous

    Rents are definitely up but I doubt it’s 40%.

    I suspect, although I have no hard data that when prices fall so will rents. There will be a lot of supply coming on line and a decent percentage of specuvestors are leaving properties empty so long as the appreciation outpaces the carrying costs. Between those factors there will be a glut of rentals following the bust, which will mean that rental prices drop and many of those properties that are currently cash flow positive will begin to dip into the red.

  96. robchipman

    M-

    The legal definition of profit is a lot different from the everyday definition. When I first began examining this issue I found that very interesting, and I’m not clear on all its implications. That said, your warning is well taken, and I’m not recommending losing money in order to avoid taxes. I’m recommending minimizing taxes while making money, and I’m recommending doing that legally. That may require the advice of a competent tax accountant.

    Writing off interest on money borrowed to acquire an income producing asset will always be ok, IMHO; the court cases I’ve seen generally push the envelope in ways that seem a tad abusive. I’ll repeat: You’re right to advise people to be careful, and I echo those sentiments. The people I know who do this aren’t pushing the envelope.

    Tony:

    Slow down, big fella! You haven’t made much of an argument based on the example and you really didn’t even address NF’s point very well. I’m not too sure you should conclude that anyone questioning you doesn’t get your point.

    He said he’d buy lots of income properties if he could do so with 0% down. You seem to have countered that “Survival instincts make us adverse to losses” and that psychology fuels the market.

    I’m not sure what I missed. I’ve said that psychology plays a big part in the market, just as you have (I’ve even said it on this thread), but I also pointed out that in my example there was no loss. The opportunity to crystalize the capital gain at the hypothetical peak was lost, true, but the investor already had his investment returned, 100%, and retained cash flow positive properties. He has cash flow for free. There is no loss to trigger survival instincts. (Which is why some peope say the investor would be jumping for joy, and looking for more properties).

    If you’re arguing that other people with different circumstances will experience other things – hey, point taken. Great argument.

    If you’re arguing that great returns won’t fuel up the market overnight after a crash – couldn’t agree more, and I’ve said the same myself on multiple occassions. I think its fair to say that NF may be stretching on that point – but he does have some basis, nevertheless.

    If values fall 50% on a downtown condo we’ll see them at what? $175k? I rent those for $1200-$1300 now. That’s more like a $140 rent multiplier. Now, considering that the interest is a write off, that CMHC will insure 0% down investor mortgages, and that amortizations can be stretched to 40 years, am I a complete moron to wonder: will changes to mortgage lending change our traditional metrics at all?

    Jesse:

    Like it or not, the mortgage industry has seen more change in the last 5 years than it saw in the previous 35. 0% down CMHC insured investor mortgages, where the investor pays the premium, and writes it off. Why wouldn’t the bank answer the phone? CMHC is trying to defend monopoly-like market share against new competitors who want to eat their lunch. That’s a simple fact. You do have to qualify with CMHC, and that’s not always as easy as it sounds, but it is easier now than it was in the past.

    Warren:

    I don’t have stats indicating rents are up 40% across the board, but some of my rents are certainly up that much (existing tenancies remain somewhere between the same and 4%/year).

  97. jesse

    “0% down CMHC insured investor mortgages, where the investor pays the premium, and writes it off. Why wouldn’t the bank answer the phone? ”

    You make it sound like the bank assumes no risk. This is untrue. The bank still needs to service the loan and can only collect insurance after a long foreclosure process. Regardless of this glorious insurance product, the bank wants return on its money and will not enter deals it knows will likely fail, something that it might think much more likely if prices drop and nobody knows when it will stop. Insurance claims amount to zero return at best. Not good business.

    Also if by some bizarre twist of fate prices do drop 50% I would be surprised if CMHC did not adjust their insurance rates upwards. This only exacerbates the loan serviceability.

  98. jesse

    FWIW, the government of the past 15 years has become very adept at passing on costs to constituents and away from the tax base. It is one reason why they have a surplus. Don’t assume they won’t find a way of keeping CMHC defaults off the books — this could involve tighter handling of insurance payouts and a sudden halting of the more risky insurance products. It is not in the government’s interest to make people oblivious to risk as it is they who need to clean up any mess that results from reckless risk taking.

  99. Tony Danza

    Rob, I’m not arguing that your example is irrational or that investors won’t buy when prices start falling, I’m arguing that NewsFlash’s conclusion that prices can’t drop x% because investors will prop up the market is irrational, sorry for the misunderstanding, I should have made that more obvious.

    As far as new paradigms go if you think that the RE market in Vancouver or anywhere else will be supported by 0 down specuvestor mortgage insurance then you don’t understand how psychology works in the market place.

  100. robchipman

    Jesse:

    You’re stretching, I think, in painting the picture as bleakly as you are. CMHC makes a killing on premiums, which is why other people want a piece of that pie. Yes, when an insured mortgage goes south the bank has a headache, but the loss is insured, the borrower paid the premium, and the majority of insured loans didn’t go south. They don’t lose the way they do on uninsured mortgages. Try a lowball offer on an insured foreclosure and you’ll see what I mean (most of my foreclosure listings have come from the insurer, after the bank has waited the requisite time frame – funnily enough they don’t seem to be price motivated during that time! 🙂 )

    BTW, the foreclosure process (for the bank) on an insured mortgage takes less time than an unisured mortgage.

    That is not to say that I think it will be easy, and if I gave that impression I want to clear that up. You need to qualify with CMHC. CMHC wants to compete badly right now, and is demonstrating that constantly, which makes it easier to get money. The bank, in other words, isn’t the obstacle, and won’t be the obstacle – it is and will be CMHC.

    Did you know, in the good old days, (like 5 years ago), banks would try to make you go CMHC on some investment props just so they could have the insurance? It was a belt and suspenders kind of thing.

    So…nobody is saying the bank will enter deals it knows will fail. We’re just saying that CMHC takes the risk, and charges the borrower, which makes it much easier for the bank, and CMHC is under pressure from the competition to continue this way. CMHC is clearly the choke point, but theyre trying to ínsure as much as possible. (Check out http://www.canada.com/nationalpost/financialpost/story.html?id=52d91d1a-4c0c-4dda-88ff-0e4e1acb280e
    – if you could see the original paper you’d see a timeline of CMHC changes since 2003. They’re important.

    TD:

    I think we agree. If we have a 50% drop and the metrics become absolutely mouth watering, does anyone think that a lot of people will snap up real estate? The majority of people (including bears on this blog who claim otherwise) will be gunshy. I’ll point out a wicked deal and they’ll chuckle. Still, NF has a bit of a point, and we’ve seen his dynamic in action both in the real estate market and the stock market. For that reason, while I can see a correction coming I don’t see a 50% haircut in the offing (unless we see something else, like double digit interest rates).

    You can dismiss it as “specuvestor” mortgage insurance if you like, but you can’t argue that the change has been made, and will have an effect. Its not a new paradigm, but it is a new factor, and only one of many.

    I think its ironic that if I cited those factors as reasons for an unsustainable bubble (evidenced by rising prices that aren’t disputed) I think I’d get pretty wide acceptance (“its these irrational products the prop up this irrational bubble…”), but if I cite those same products (and new ones coming down the pike) as reasons why the crash won’t be so hard people won’t buy it. That’s not to dismiss psychology, but it is to give credit to those who try to make (any) product more affordable so that they can sell more of it. I think we can agree that one of the the most widely and most intensely marketed products these days is…money.

  101. Geezer

    Anonymous wrote:

    “As you geezers die off, there may be 5 young waiting geezers at first. Please remember that you outnumber all the younger geezers so there are not 5 or 10 youngers waiting. There are .7”

    Sorry, I don’t mean to be rude (just humorous) but it seems you haven’t thought this through very well. I once heard somebody say that the worlds population must have been much larger thousands of years ago because each of us has two parents and their parents each had two parents, etc…. That wasn’t you was it?

    Do you really think that Vancouver is going to see a 30% shrink in population when we live in such a crowded global community?

    During the next 20 years we will see the greatest transfer of wealth in the history of the planet, from dying geezers to younger folks. Also, I was not talking about each geezer leaving his/her assets to be shared amongst the entire population of Canada at the rate of a few cents each I was talking about it typically being left to small groups of 5-10 younger folks. In the case of 5 inheritances each would get the equivalent of a 20% down payment on a similar home plus one fifth of all other accumulated assets which, in some cases, will be significantly more than their share of the home value.

    Under this inevitable scenario the number of new people entering (or moving up) the property market with new found, medium to large down payments will likely be greater than ever before in history. You tell me what impact that is likely to have on the market. Sorry if you don’t like that idea but do the math, or get a wealthy geezer to adopt you, then my prediction will sound good.

    Tony Danza wrote:

    “It won’t matter what the odds are of a political party alienating the boomers. The taxation required to support the boomer generation into retirement will crush the x and y generations.”

    Firstly, the Canada pension plan is currently in good enough shape to easily outlast me. The medical plan will need changes but there are plenty of inefficiencies that can be removed before services need to be further rationed. Most boomers have enjoyed living in unprecedented times of increasing prosperity which hopefully (probably?) will continue for you, or do you believe that man’s progress will suddenly reverse and bring increasing poverty and lower standards? Pretty gloomy view if you do, have you considered suicide? (Bad humor again – sorry)

    Also, remember that it’s not just the boomers who would be alienated by any party that goes to the polls saying “let’s abandon the old folks to die or lets confiscate your inheritance to pay their medical bills”. You would also alienate all of those other groups I mentioned in my previous post. Do the math.

    Tony Danza also wrote:
    The way Canadian and US demographics are shaping up your dream of 5-10 gen x’ers clamouring for your property will likely be inverted. There will more likely be 5-10 boomers trying to unload a house for every interested whippersnapper. This isn’t revolutionary thinking it’s well supported in marketing and economics literature.”

    Sounds like another vote for an end to the supply and demand theory and a shrinking Canadian population. I can’t see that happening in this crowded world but I will concede that the impending massive transfer of wealth probably bodes better for the lower end of the property market than the high end. It depends on how many inheritances go to existing home owners wanting to move up versus wannabe 1st time buyers.

    I don’t pretend to know which segment will benefit most or when the transfer of wealth will really take off but I anticipate the market as a whole is likely to see a huge run up when that trend gathers momentum.

    At risk of being overly repetitive – Vancouver’s future = same size land base + growing population + large numbers of people suddenly inheriting large chunks of money = ??

  102. Tony Danza

    Geezer, Nice argument, but all you have proven is that you have a limited understanding of demographics, economics or Canada’s immigration policy. Before you make some argument that Canada will ramp up immigration to solve the imbalance in our demographics you should do a Google search for “Canadian immigration policy and demographics”. There are also many recent articles (some by the notoriously bullish NAR) about North America’s (the US is in the same demographic boat) impending real estate supply glut as it relates to our demographics. In a nutshell there will not be enough population after the boomer generation winds down to absorb all of the boomer’s real estate, even if we live one person to a house. So the windfall inheritance you see your progeny reaping may be much less than you anticipate.

    I am not trying to be a doom and gloomer, just being realistic and cognizant of both sides of the coin. Of course it could all end up being wrong.

  103. Geezer

    Well actually, according to the official predictions, my understanding of population growth looks just fine. Of course a book or magazine article titled “Population growth – more of the same” probably wouldn’t sell very well as one that says “The sky is falling”.

    Here’s what the UN is predicting globally:

    The world’s population is expected to rise by 40 per cent, from the current 6 500 million to 9 100 million, by 2050, according to a report from ‘The United Nations’ (’The UN‘).

    “Between 2005 and 2050, nine countries — India, Pakistan, Nigeria, Congo, Bangladesh, Uganda, the USA, Ethiopia and China — are likely to contribute half of the world’s population increase, the report says.”

    You will note that some of the biggest sources of future population growth are also amongst our biggest sources of immigration, (India, China, Pakistan). Our huge neighbour the USA is on the list too.

    If you want something a little closer to home here is what the GVRD researchers are saying. Looks like a pretty good supply of new housing will be needed to hold them all wouldn’t you agree?

    GVRD Population Projections by Local Health Areas

    http://tinyurl.com/2kje4e

    Personally I don’t care what the trend is in 2050 and I’m not sure the trend 20 years from now will have any impact on me either, except of course, burial lots will probably be more expensive. 🙂

  104. Geezer

    Oh, I forgot to mention, I don’t have any progeny (that I know of) thank God. Just some other relatives who might get lucky if they keep being nice to me.

    Also, I don’t really know what will happen either. We could have a third world war, a plague, a massive earthquake or any one of many more unexpected events that could either push up or push down RE values.

    You pay your dime and you take your chances. So far I’m ahead of the game but nothing is certain except death and taxes.

  105. Anonymous

    The problem is, as geezers get older they realize they can’t make ends meet any more and get a “home equity loan” to tide them over, then they sell and spend years or decades in expensive retirement homes living off the sale of their house. Usually there’s not 100% home equity to spread around.

    Also, 20% down payment on a 2.5 million dollar house (extrapolation based on your assumption that things will keep going up of the avg cost by the time your “wealth transfer” happens) still means that people getting started in the work force can’t even pretend to hope that maybe somehow if they eat dirt, buy nothing, walk to work etc. that they can make payments. What’s the monthly payment on a 2 million mortgage these days?

    Think it through! Don’t just come up with some trite crap and feed us your line of BS.

  106. Anonymous

    I went and answered my own question. $13,000 per month. Your “lucky young couple” would have to earn over $300,000 yearly.

    Why wouldn’t they take the money and move to Halifax where they can buy a mansion with NO mortgage?

  107. Geezer

    Oh, ok, I am looking forward to spending my twilight years in grinding poverty and without medical care, Vancouver’s population will decline by 30%, RE values will revert to the wage/price ratios of 50 years ago and people at the lower end of the wage scale will once again be able to buy single family homes in Burnaby on a single income.

    You are right, all the shifts in prices I have seen over my quite long life are unsustainable and are about to reverse, probably next week.

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