Liberty

The problem wasn't just the overvaluation, it was the whole structure of the market; classifying crap as triple A, creating derivatives on these to compound the risk, nobody holding on to what they underwrote, so standards went down a lot because everybody just dumped the risk on someone else, high leverage everywhere making everything more brittle, implicit government support, socially acepted liar's loans, etc

What do you mean? Why does it have to be explained any more than the fact that people were willing to bid things up in any other bubble (Nortel shares, Las Vegas houses, tulip bulbs, whatever). Nobody's saying that the market isn't hot or that there isn't real demand. The problem is that people are overpaying and many people who probably shouldn't be buying are buying because of FOMO/now-or-never/social pressure/cashback mortgages/family giving them a downpayment/the belief that nowhere else is worth putting money into/whatever.

Good stuff, thanks.

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

Where are you? Are you comparing buying & renting an equivalent house? But you are right, there are definitely other considerations (pros and cons) to renting and buying that can pull things in one direction or the other.

Indeed. What they forget is that with upside potential comes downside potential (and since a lot of people are super-levered in their houses, a drop of 5-10% can wipe out many people's equity, and more than that can drag them underwater). And if I build up equity outside of the place where I live, I can invest it, and there is upside (and downside) there too. It's not like the only alternative to putting money in a house is putting it under a mattress.

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually. No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will). Another thing that most people don't realize: If you have a huge mortgage, you are renting, even if you don't realize it. Rather than renting a house or an apartment, you are renting a big pile of money from the bank, which you then turned around and bought house with. If the cost of paying interests on that pile of money plus maintenance and taxes (all the thing you don't pay as a renter) are higher than the rent on the equivalent property, why buy it? By saving the difference (and more) I can build equity faster, with less hassle, and if I wait for a less overheated market to buy, I can save on that side too (and all the saved interest over time).

I think two big factors encourage canadians to put everything they have in real estate. During the 2000s, they've been burned many times by the stock market. GICs and savings accounts aren't attractive either because of the low interest rates. On the other hand, houses have been going up fast as far as anyone can remember (which isn't very far), and it doesn't cost much to get into a very expensive house (a few years ago you could do 0% down and amortize over 40 years, now it's mostly 5% down and 25 years, but you also have tons of lease-to-own schemes and cashback mortgages which mean pretty much 0% down). And since people buy houses like they buy cars - they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?). It's basically a momentum strategy. People are piling on the thing that has been going up and getting out of the things that have been going down. There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money". I also think that, perversely, what happened in the US reinforced the bubble here because when things didn't go down much, it cemented in most people's minds that Canada was immune. Americans, who had the bargains of a lifetime in RE recently, weren't buying because they had a very fresh memory of a painful event. All of this probably helps explain why the saving rate is just 4% (US is 30% higher at 5.25%, iirc -- that's pretty damn low too, but 4% is really really low. A high-earning $100k/year household could maybe buy a Camry after saving for 5-6 years...). All the reasons used now to explain why Canadian RE is different and solid sound to me like "halo effect" artefacts. Just like a company doing well is said to have good management, a good strategy, good products, etc, and as soon as it starts to go wrong then it has bad management, bad strategy, etc, I expect that when things go wrong suddenly Canada will become a country with crappy weather, where it gets dark at 4 PM for half of the year, a moribund economy, too much dependency on commodities, big structural issues at the provincial level, high taxes, crumbling infrastructure, etc.

I'd argue that your endpoint for the U.S. is skewing the data. The housing market in the U.S. is not functioning properly. So you can say that Canada is overvalued, relative to the U.S. But it might be more accurate to say the U.S. is undervalued, relative to Canada. Both are probably true but using the U.S. as your measuring stick exaggerates the overvaluation. You don't agree that the US was in a housing bubble in 2007 and that Canada is now way way higher than that point? Other indicators are also pretty high, like the 165% debt-to-income level, rents-to-buying ratios, inflation has been low and house prices usually track inflation, etc. Liberty I agree that Canada's housing market - especially in Vancouver , where I am, has gone nuts and a correction is overdue. However, I do not believe we have the same issue as that of the US bubble experience in 2007 /08 though -- I guess it depends how you define "same", but in broad strokes, Canadians are paying more than they can afford for housing, and that will stop at some point. Sentiment will change. If you look at the charts I posted, there was a correction in the early 1990s and it took until the middle 2000s to get back to the previous high in real terms, but everybody in the country has already forgotten that these things can happen.

I'd argue that your endpoint for the U.S. is skewing the data. The housing market in the U.S. is not functioning properly. So you can say that Canada is overvalued, relative to the U.S. But it might be more accurate to say the U.S. is undervalued, relative to Canada. Both are probably true but using the U.S. as your measuring stick exaggerates the overvaluation. You don't agree that the US was in a housing bubble in 2007 and that Canada is now way way higher than that point? Other indicators are also pretty high, like the 165% debt-to-income level, rents-to-buying ratios, inflation has been low and house prices usually track inflation, etc.

Not being the worst in the world is hardly a great consolation. I probably wouldn't buy RE in these markets either unless renting is even more overpriced (which it isn't where I am). Canada and the US are neighbours with very interlinked economies and have traditionally more or less tracked each other.

So A does not equal B. I don't see anything interesting so far. Where is the analysis? Can you arbitrage? Economists call housing nontradable goods for a reason. Just like I wouldn't pay $60k for a Toyota Corolla, I won't pay the multiples of replacement cost, rents, income, inflation, etc, that houses are going for in my area right now, so I'm happily renting until things are more rational. Also, I can judge sentiment by talking to people and reading, and it is not a healthy market to be a buyer in right now. There's bubble "can't lose/FOMO" mentality, though that's starting to soften around here (apparently not in GTA and Van, though). http://i.imgur.com/D21t9IJ.png http://i.imgur.com/K8ELThh.png http://i.imgur.com/i7WKdkR.png http://i.imgur.com/qVwu5Vy.png

Thought this was interesting. According to the Canadian Real Estate Association (not exactly a transparent organization, but still), the average house in Canada was $470k as of January 2016. http://www.crea.ca/housing-market-stats/national-average-price-map/ Van and Toronto are really driving it, though: http://www.cbc.ca/news/business/housing-crea-january-1.3449838 According to Statscan, the median household income in 2013 was $76k (or about $38k per person if you assume two earners). Median house price in the US seems to be around $185-215k depending on the source.

Prem Watsa in the recent Fairfax letter:

I thought it was interesting that the average new detached home in the US is about 400 square-feet larger than the average new detached house in Canada. Another thing to keep in mind when comparing prices. http://www.demographia.com/db-intlhouse.htm

46-minute interview with Dr. Malone and Dr. Richard Green.

I'm not sure what you mean by mean-revert. Do you mean that they would converge to the average margin in the rest of the economy as a whole, or with other sectors? I don't think we'll ever see companies like Visa and Mastercard and Johnson & Johnson and Microsoft and Google have gross and operating margins similar to retailers or miners or carmakers. The industry dynamics are just too different. Some individual companies could lose their way, squander their edge, get their moat breached, or maybe even whole industries could be impaired by government regulation, but I think that's different from saying that there's a secular force pushing the margins in those industries down to the level of other industries. Some businesses are just better than others, that's a fact of life.

People also forget the change in composition of the SP500 over time. High-margin software and healthcare businesses (for example) weren't as large a part of it before, so it's expected to see margins increase. People compare today's SP500 with the SP500 of the 1970s as if it was actually the same thing, but I'd be curious to see how many companies are the same, and how much even those that remain have changed over time (not saying it's always for the better, but there's certainly a difference).

Why is the end of 2008 a reference number? Maybe the number was too low at the time because of panic? Quick look at Morningstar shows a 10-year total return CAGR on the SP500 of 4.47% and of 3.03% for 15 years. Not exactly a golden era. Picking start and end points matters a lot.

If this was a simple shift in the supply-demand equilibrium because of growing population, wouldn't rents be up with the prices of housing? As things are, as far as I know, the ratio of owning to renting is out of whack with historical normals and with the averages in other countries. As for supply, I've seen the statistic a few times in recent years that Toronto had more condos under constructions than all of the other cities in North-America. http://www.cbc.ca/news/business/130-highrise-building-projects-in-toronto-lead-north-america-1.2504776 Most people I know have these beliefs about canadian RE: 1) It can't go down. 2) It'll keep rising at rates similar to the past decade. 3) FOMO, buy now or be forever priced out. 4) HELOCs are free money.

The RE logic of the rest of the world? What is it? Over the long-term, housing tends to follow inflation and incomes. When it diverges from that for too long, it tends to come back to it. Let's look at the alternative. Let's say what's going on right now in Canada is normal and will keep going on. So in 10-15 years, regular Canadians will have 1-2 million dollar houses while americans are in their 350k houses? First time buyers will get mortgages over half a million to get a crappy starter house, something that would cost more than $2k/month just to service the interests at a more normalized 5% (don't believe interest rates will normalize within 10-15 years?). How high will debt levels be by then? They're already at very elevated levels right now, above where Americans where in 2007... The rate cut by the BoC stirred the pot, but that can't go on forever either. I believe that when something can't go on, at a certain point it must stop. Who knows when... But I'd rather buy after that happens than before.

Talking about something for a long time doesn't mean you don't have a point, and being wrong about one aspect of something doesn't mean you're wrong about all of it, just like people who started warning about the dot com bubble in 1997 or 1998 weren't necessarily completely wrong. Timing's always hard, but we all have to do what we feel makes sense. I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

I don't think he foresaw interest rates stay near zero for this long, as most didn't. That doesn't mean that his argument about canadian RE being disconnected from fundamentals isn't right, just that he got the timing wrong (that's always the hardest thing to get -- ask Burry). In fact, the longer this goes on, the worse it's probably going to be in the end. I'm happy to keep renting, in the meantime. I don't know about elsewhere in the country, but in my area, I've definitely felt a plateauing and softening in the past year. I know people who've tried selling a house for months and given up, there's a million condos for sale in a 10 km radius, we've tracked many houses that have been for sale for a very long time and aren't moving. I don't know what will make sentiment change further, maybe interest rates at some point, maybe prolonged low oil prices, maybe just RE-fatigue or something else. But I know that when house prices disconnect from incomes for this long, the difference is debt, and that can't pile on forever. Same for something that everyone knows can't fall -- it has to fall. Stability creates instability because it drives people to go too far and do things they shouldn't do. edit: BTW, to make things clear, the part in bold in the cwericb quote above is written in a way that makes it appear like it's from four years ago, but it's from today's post: http://www.greaterfool.ca/2016/03/06/suck-it-up-3/ He might have said similar things four years ago, though.

I also recently read Frackers, last summer, so I feel like I know him just a tiny bit. Always sad when situations like these happen, regardless of whether it's a suicide or not and of whether he was guilty of what he was accused of.

Mrs comments: https://twitter.com/mrsmoneym/status/703751806325641220 https://twitter.com/mrsmoneym/status/703747460384948224 https://twitter.com/mrsmoneym/status/703748858224865280