Canadians Precariously Close To Financial Instability

[ontariolandlord]

QUOTE (ThomasBeyer @ Sep 17 2010, 08:51 PM)
indeed ... we (as real estate investors prudently levered with decent cash-flow and a 5+ year view on any asset) are hedged either way !!



And, as always, if folks and alarmists are on both sides of the fence: neither is right and it will be in the middle of the road .. more or less !!! no hyper-inflation .. but no "great depression" deflation either !!




Excellent post. Real estate is a media punching bag. We just keep trucking along, blue collar never give up style.

 

[JDaley]

QUOTE (ThomasBeyer @ Sep 17 2010, 08:51 PM)

QUOTE (bizaro86 @ Sep 17 2010, 07:38 PM)


Inflation is coming, and there will be a spike in prices. One of the things that will spike in price is real estate. And interest rates won't start going up in earnest until that inflation starts becoming visible, in things like higher real estate prices.



We won't get higher interest rates and a huge drop in prices. It'll either be one or the other. If the economy double dips, real estate prices will be lower, but so will interest rates. If inflation spikes, interest rates will go up, but so will prices and rents.




indeed ... we (as real estate investors prudently levered with decent cash-flow and a 5+ year view on any asset) are hedged either way !!



And, as always, if folks and alarmists are on both sides of the fence: neither is right and it will be in the middle of the road .. more or less !!! no hyper-inflation .. but no "great depression" deflation either !!






Thomas, I think you missed the point, prices have dropped in some key markets; in Calgary home prices are still off the market highs of 2007 - home prices in Calgary aren't likely to recover to 2007 levels in the next year or the year after that with inflation a possibility and with it, the corresponding increase in interest rates. Price corrections in Vancouver, Victoria and Toronto are a possibility, particularly in Vancouver. Refinancing will be a problem for persons (highly) levered in these markets and who purchased during the market highs - interest rates will tighten the money supply however the major difficulty investors will face is refinancing (the difference) ` just as in the US. A 15-20% price correction will do it. The CPI strips out real estate; inflation and interest rate increases are driven by the increase in the money supply (stimulus money). Residential real estate prices have traditionally been driven by affordability, or wage increases ` one well-known measure of affordability is the cost ratio of a home to the gross salary of the purchaser, say 1:2 or 1:3 in the past, in most key markets today this ratio is 1:5 or higher. Home prices in the US began the downward trend in 2006, this was asset deflation while commodity prices such as oil/fuel increased at the same time reaching a peak price in the summer of 2008, this was price inflation. So as you can see, asset deflation and price inflation (which lead to higher interest rates) do happen at the same time. You may recall, prior to Lehman interest rates (short and long term) were expected to go much higher. You can cash flow a property and have a 5 year time frame, however if the price of your asset drops below your ability to refinance it, you have a problem - some REIN members have already experienced this. This is the main point.







I agree there will always be renters, even in a sever recession, just as there will always be people employed, even in a depression.

 

[Thomas Beyer]

QUOTE (JDaley @ Sep 18 2010, 12:00 AM) ..So as you can see, asset deflation and price inflation (which lead to higher interest rates) do happen at the same time. ..
I am confused. Inflation is inflation, i.e. money looses value i.e. things money buys increase in price.

Of course, some markets go up and othrs down .. or some assets within some markets (say Vancouver) go down and others up .. what is your point ? I don`t follow ..

QUOTE (JDaley @ Sep 18 2010, 12:00 AM) .. .. You can cash flow a property and have a 5 year time frame, however if the price of your asset drops below your ability to refinance it, you have a problem - some REIN members have already experienced this. This is the main point.
Correct .. as too many folks paid too much in 2007/208 for the realistic rent or where too levered !

It doesn;t make sense to buy a 400K or even 300K house and rent it for 1500 as some (but not too many) REIN members did ! The REIN model works only in some markets and for some type of homes, such as: townhouses, smaller homes, suited homes

QUOTE (JDaley @ Sep 18 2010, 12:00 AM) ..I agree there will always be renters, even in a sever recession, just as there will always be people employed, even in a depression.
Yes, buying with no mortgage is lower risk .. I understand that ! Buying sensibly levered makes more sense .. with slightly higher risk and far (!!!!) higher returns .. even in a flat market !

 

[safsad]

One unusual aspect about economists is they can explain why you would get high interest rates for the next few years.You would then hear just as good an argument for why there should be low interest rates.
It`s clear nobody knows.but we have historically low rates-they will go up and they have in the last few months.In the Gta you can see the market softening pretty swiftly and more will come.However my wife says that I have been saying this for the last few years!

 

[Thomas Beyer]

QUOTE (safsad @ Sep 18 2010, 10:48 AM) ..
It`s clear nobody knows.but we have historically low rates-they will go up and they have in the last few months...
actually they have gone slightly DOWN in the last few months .. 5 year money now @ 3.7% or so ..

variable money at 2.3% !!

 

[Rickson9]

QUOTE (safsad @ Sep 18 2010, 01:48 PM) One unusual aspect about economists is they can explain why you would get high interest rates for the next few years.You would then hear just as good an argument for why there should be low interest rates.

Very true. This is why I don`t like spending time on prognostications of the future.

 

[Berubeland]

JDaley,

I agree with what you say. In my business I have seen a great deal of people who own subsidized housing

Landlords who have bought at too high a price and are now paying into their properties because they did not account for management, maintenance or vacancy expenses.

Not REIN members per se.

Also at Thomas`s level of multi family investing those factors are calculated in or the bank won`t even finance you.

It is possible to buy even in this market, but investors will have to stop counting on appreciation entirely and rely on the income of the property relative to it`s price or other ways to add value...

I do my bit to spread the message as far and wide as possible.

I`m guessing housing rental has seen his share of this kind of "investment" that doesn`t pay, where the owner has no back-up plan.

 

[Thomas Beyer]

QUOTE (Berubeland @ Sep 18 2010, 09:07 PM)
..



It is possible to buy even in this market, but investors will have to stop counting on appreciation entirely and rely on the income of the property relative to it's price or other ways to add value...

..


sure .. but then certain asset classes should not be bought, e.g.: stocks or single family houses if there is realistically no equity upside !



HOWEVER, realistically, one can factor in AT LEAST inflation, or 3-4% on average annually .. not every year of course .. but over an average 10 years perhaps.



Do you honestly expect houses in major urban areas with job growth and in-migration to be flat in value FOR TEN YEARS ???

 

[JDaley]

QUOTE (ThomasBeyer @ Sep 18 2010, 10:26 AM) I am confused. Inflation is inflation, i.e. money looses value i.e. things money buys increase in price.

Of course, some markets go up and othrs down .. or some assets within some markets (say Vancouver) go down and others up .. what is your point ? I don`t follow ..

It doesn`t seem like you fully understanding what inflation is or what drives it, it isn`t as simple as markets going up or down or people buying more of a thing as you say. I`ve repeated my point in about three pages, housing rental and a few others picked it up in a single go and rephrased it, you might want to try reading their posts instead. For a guy with allot of doors, you sure have allot of time on your hands to post as often as you do, must be nice

Anyway, that`s enough for me.

 

[Thomas Beyer]

QUOTE (JDaley @ Sep 19 2010, 06:26 PM)
.. you sure have allot of time on your hands to post as often as you do, must be nice

time is the most democratic resource on the planet !



Everyone has 24 hours per day !!

 

[Berubeland]

QUOTE (ThomasBeyer @ Sep 19 2010, 03:27 PM) sure .. but then certain asset classes should not be bought, e.g.: stocks or single family houses if there is realistically no equity upside !

HOWEVER, realistically, one can factor in AT LEAST inflation, or 3-4% on average annually .. not every year of course .. but over an average 10 years perhaps.

Do you honestly expect houses in major urban areas with job growth and in-migration to be flat in value FOR TEN YEARS ???

Appreciation and the effects of inflation are the icing on the real estate investment cake. The investment must be bought according to fundamental valuations that don`t count on these factors to succeed.

Paying extra for a property than would be warranted by a sustainable plan that includes allowances for vacancy, property management and maintenance is like giving away your icing when you buy the cake.

Don`t give away your icing

 

[jwilbrin]

QUOTE (JDaley @ Sep 19 2010, 07:26 PM) For a guy with allot of doors, you sure have allot of time on your hands to post as often as you do, must be nice

Having the time to so generously share his knowledge and experience with all the forum members is a luxury Thomas now gets to enjoy as a result of his successful investment strategies and business plan which has brought him the kind of success most members can only dream of.

That is a common attribute among truly successful enterpreneurs -- they enjoy giving back and sharing what they have learned.

If I remember the rules of my high school debate class correctly, the first person who starts throwing insults is usually the one who is losing

 

[housingrental]

Hi Thomas
To answer your question YES
Not only flat but likely 5-10% plus downside and slow and stable uptick to 2020 being very similar price levels +/- for houses in the vast majority of centres in Canada
I anticipate places like Calgary and Vancouver to UNDERPERFORM this

QUOTE (ThomasBeyer @ Sep 19 2010, 06:27 PM) sure .. but then certain asset classes should not be bought, e.g.: stocks or single family houses if there is realistically no equity upside !

HOWEVER, realistically, one can factor in AT LEAST inflation, or 3-4% on average annually .. not every year of course .. but over an average 10 years perhaps.

Do you honestly expect houses in major urban areas with job growth and in-migration to be flat in value FOR TEN YEARS ???

 

[housingrental]

I support Thomas`s persistence prescence on REINspace.
It helps me to rationalize my usage.

QUOTE (ThomasBeyer @ Sep 19 2010, 10:29 PM) time is the most democratic resource on the planet !

Everyone has 24 hours per day !!

 

[Thomas Beyer]

QUOTE (Berubeland @ Sep 20 2010, 05:41 AM) The investment must be bought according to fundamental valuations that don`t count on these factors to succeed.
True in theory .. a stock is bought on a P/E basis .. a property on a CAP rate basis .. (same thing, btw) .. so a 12.5 P/E is an 8% CAP rate .. a 16.6 P/E is a 6% CAP rate, a 10 PE is a 10% CAP rate etc. ....

In Theory, ALL of these earning are paid to investors/owners for them to get an 8% (or 6% or 10%) yield.

BUT IN PRACTICE: much of the earning gets re-invested in the asset or stock to build future earning growth, for higher values tomorrow !

Thus, all assets we buy are usually in much better shape a few years later .. prettier, better managed, better tenants, painted, new carpets, new bathrooms, ... with higher rents .. and as such more valuable .. even if "the market" is flat.

Who would buy stocks if the assumption is: no value growth ?

Who would buy real estate if the assumption is: no value growth ?

 

[Rickson9]

QUOTE (jwilbrin @ Sep 20 2010, 11:11 AM)
If I remember the rules of my high school debate class correctly, the first person who starts throwing insults is usually the one who is losing

I agree! Although I first learned thsi concept from my parents.

 

[gwasser]

QUOTE (ThomasBeyer @ Sep 20 2010, 10:23 AM) True in theory .. a stock is bought on a P/E basis .. a property on a CAP rate basis .. (same thing, btw) .. so a 12.5 P/E is an 8% CAP rate .. a 16.6 P/E is a 6% CAP rate, a 10 PE is a 10% CAP rate etc. ....

In Theory, ALL of these earning are paid to investors/owners for them to get an 8% (or 6% or 10%) yield.

BUT IN PRACTICE: much of the earning gets re-invested in the asset or stock to build future earning growth, for higher values tomorrow !

Who would buy stocks if the assumption is: no value growth ?

Who would buy real estate if the assumption is: no value growth ?

I am reading this book: The great reflation" by J. Anthony Boeck. One thing that it help me realize is that appreciation, something that we`re stuggling with on this forum (is it speculative or should it be included in our analysis?), comprises of two components. Thomas also mentions this issue.

Now that we are in for a period of relatively modest appreciation, this issue is becoming more and more important. The book mentions the term disinflation - when stocks are valued on ever lower - or more conservative - P/E ratios you see companies like Microsoft falling in value inspite of consistently better earnings. With a falling interest regime and rates as low as 10% how much should one pay for $1 of Microsoft`s earnings? $10 plus a premium if the earnings grow fast?

Now in a low interest setting of 1% how much do you pay for the same $1 in earnings? $100 plus a premium for earnings growth? This is what has happened over the last decade or 2, inflation came down and so did interest and therefor $1 earned 20 years ago was only worth $10 and now it is worth $100. That is called disinflation. Of course other things in this Asset Inflation (other name for disinflation) are market mood - in a bullish market investors are overconfident and pay high prices while in a bear market they are scared and don`t buy at even the lowest prices. In a rising interest and inflation setting rather than Asset Inflation we`re more likely to experience Asset Deflation something likely to happen over the coming decade and this is what makes our real estate investment analysis so difficult.

Part of appreciation is also due to rent increases, inflation etc. These are more intrinsic value increaes. As Thomas points out if inflation was 3% then your property value is likely to go up by that much and leverage will amplify that all the way up to 12 or 15%.

To evaluate a property you need to look at cash-flow as a measure of safety or risk. The higher the cash flow the lower the risk of a forced property sale. It tells you very little about appreciation and your final ROI.

ROI is the measure that tells you the rate your networth (or better equity invested) will increase. It is the real measurement of success. That is why leverage makes real estate so attractive - because other investment classes are often considered less suitable for using leverage and leverage increases ROI. So really, ROI is in the end what counts. Problem of ROI is the speculative component - disinflation. How do we break that out and separate it from from the appreciation that we can likely count on?

 

[athurart09]

QUOTE (ThomasBeyer @ Sep 13 2010, 02:39 PM)
I tend to agree .. more or less .. without being an expert in stats or economics. One reason is that too many people have TOO BIG A HOUSE .. and the second that they drive TOO BIG A CAR. I call this "house poor" i.e. despite having a nice job and a nice income the payment on the house and the 2 cars every month makes you poor.



When I arrived in Canada in 1986 in my mid to late 20's I owned nothing (except a used bicycle and less than $1000 cash). I was astounded how big a house people had when in their late twenties ! 3000 sq ft, double car garage, two cars, .. and a view that this is normal.



One reason for this indulgence is that cars can be leased for next to nothing down .. and houses can be bought with 5% down .. both essentially enslaving you to the bank !



Instead of renting from a landlord, and being flexible to move (up, down or sideways) any move now costs you ten's of thousand of dollars in mortgage break fees and realtor fees !



A CMHC policy of more money down (say 10% for your first home, 20% for any subsequent, capped at a value that states "small is beautiful") and a more strict lending policy for car loans or leases would change that.



Canada's financial strength was well admired during the crisis .. but what was not mentioned was that it did and continue to rely heavily on high demand resources and in-migration.



So yes, more savings and less big a house or car (until you can truly afford it) is in order in Canada !!



How about this: increase gasoline taxes by 500% from currently 20 or 30 cents to $1.20 to $1.50, add a 15% luxury good on every car over $20,000 and reduce CMHC insurance lending guidelines as stated. Not in a year .. but perhaps phased in over five .. beatifully simple without disrupting the economy too fast but to ensure saner consumption, a greener planet and a cleaner personal balancesheet !


I agree with you!

 

[Rickson9]

How does increasing gasoline tax by 500% impact police, ambulance, fire, public transit, school bus, and handicap shuttle services? How does it impact farmers and the military?

I work for big pharma and they provide a car and pay all expenses. How will they deal with this increase in gasoline expenses?

What are the other consequences of increasing gasoline tax?

 

[Smitty]

"Who would buy stocks if the assumption is: no value growth ?"
Not saying (what I am about to say) this a good thing, in fact, I think it should be curbed, but many Wall Street firms now specialize in high frequency trading that are high volume trades that are aimed at capturing micro profits inflated by the volume and frequency. And Goldman Sachs is the "great vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money” poster child for this style

Just saying millions of dollars are being made every month by huge firms who are definitely buying and selling, all of which this activity has nothing to do with fundamental models or valuations.

On a more human, practical level, a few - not many, by a long stretch - of my trading friends are kicking my real estate portfolio`s butt by medium term (say, positions held for 2 to 48 months) trading of stocks and options, some of which are long, some of which are short positions, some of which are based on fundamentals, some of which are based on technicals. But trading is definitely a niche thing unsuitable for most personalities; real estate a far easier method of creating wealth and cash flow.

So back to real estate; to support REIN`s point of view, and a POV that Thomas has espoused, true wealth can be created by intelligent purchasing and then waiting 5 to 10 to 25 years for mortgage paydown, all the while having a positive cash flowing property.

The true fact of the market ALWAYS having the available renters, PLUS the enviable quality of taking a long term point of view / having patience, PLUS having the reserves to ride out cycles, PLUS impeccable property management EQUALS the math and the foundational basis that most people - including REIN members should take when approaching real estate.

Or, as stated by Don, like a broken record; "this is not a get rich quick scheme".

Smitty