Real estate in Calgary - another bubble?

[malcolmk14]

We own an inner-city semi-detached infill in a neighbourhood that is quickly filling up with them. We bought for about $645 in 2016 and the last six months or so, similar properties have been disappearing within days in the mid-high 800's. It's crazy. Tear-down 50's bungalows in our neighbourhood are going for over $650k now.

Tempting to sell and move out to the suburbs but we'll probably hang around a few more years.

[calgarygeologist]

Originally Posted by malcolmk14

We own an inner-city semi-detached infill in a neighbourhood that is quickly filling up with them. We bought for about $645 in 2016 and the last six months or so, similar properties have been disappearing within days in the mid-high 800's. It's crazy. Tear-down 50's bungalows in our neighbourhood are going for over $650k now.

Tempting to sell and move out to the suburbs but we'll probably hang around a few more years.

I'm tempted to sell my house and condo and move to the Caribbean. Houses in my hood have been listing around $1M or more. Time to cash in.

[CaptainYooh]

Originally Posted by calgarygeologist

I'm tempted to sell my house and condo and move to the Caribbean. Houses in my hood have been listing around $1M or more. Time to cash in.

What’s stopping you? (Honest question, no sarcasm).

[calgarygeologist]

Originally Posted by CaptainYooh

What’s stopping you? (Honest question, no sarcasm).

Mostly kid's schooling. My youngest is halfway through school and disrupting that might not be the best thing. I could probably find a decent private school somewhere but it is a gamble.

[nik-]

At this rate you're going to have to sell that house and downsize in order to give them enough of a down payment to buy a house.

[btimbit]

Originally Posted by calgarygeologist

I'm tempted to sell my house and condo and move to the Caribbean. Houses in my hood have been listing around $1M or more. Time to cash in.

My parents just did exactly that now that they're retired

[Bonded]

It’s wild. I have a century house that I’m renting out. 3 years ago it was 1900 and now there are multiple applicants at 2600. I’m tempted to sell and clip but I don’t think it will go below where I bought it

[blankall]

Originally Posted by nik-

At this rate you're going to have to sell that house and downsize in order to give them enough of a down payment to buy a house.

Naw. In ten years his house will be worth double. He'll take out a mortgage on the massive equity in his house to give his kid who will be in their 30s just enough of a downpayment to buy a really crappy condo. It is the way (at least in Canada).

[Leondros]

Originally Posted by The Yen Man

House prices have gone up, but condos have stayed pretty much flat. My condo on Mark on 10th I bought 8 years ago has maybe gone up $20K from when I bought it.

I get that everyone wants to live in a detached house, but if we're talking about just homes in general (including condos), Calgary's still affordable enough for the median household income (last I looked up, it was $98K), that I honestly do not see any bubble bursting anytime soon.

Sold my mark on 10th condo last month for an 8% loss. 1 bed 1 bath. Bought in 2013 presale… it was about 30% underwater before this boom.

[Weitz]

I love the idea of a 1 bed 1 bath but buying one just seems like lighting money on fire.

[Yoho]

Originally Posted by blankall

A combination of immigrants/foreign investors and people who already have money, particularly baby boomers. The housing market is no longer supported by young working families.

Edit: to add to this, as the population grows and the housing stock remains relatively stable, a greater percentage of the bottom earners/net worth become irrelevant to the discussion, as they were never going to be able to afford housing in the first place. For example, if you only have $100k to spend, and the cheapest home is $250k, then you losing your job is irrelevant, as far as the housing market goes. We're at a place now where such a large percentage of the population is already outside of the market, that it would take an astronomical amount of unemployment to shake the market. Even then, that may not cause as drop as investors would probably still continue to scoop up homes, buying in multiples.

We’re also at a place where those that are in the market are highly levered and are very susceptible to interest rate hikes and job loses. It’s not just low income earners who lose jobs.

Investors will be no where to be found when *%#! hits the fan.

Investors will have a tough enough time getting rent once layoffs start

Before every recession you hear the same thing “we are in a bubble” this time is different.

[Slava]

Originally Posted by Yoho

We’re also at a place where those that are in the market are highly levered and are very susceptible to interest rate hikes and job loses. It’s not just low income earners who lose jobs.

Investors will be no where to be found when *%#! hits the fan.

Investors will have a tough enough time getting rent once layoffs start

Before every recession you hear the same thing “we are in a bubble” this time is different.

Well people are highly levered, but that’s real estate for most people all the time. You’re putting down a smaller percentage and the remainder is borrowed money. I agree that people are susceptible to rate hikes, and job losses, but I do wonder when that’s not the case?

I’m not sure there’s a recession imminent. Honestly, we’ve heard about the imminent recession for about 18 months now. At what point is that call just wrong? Eventually, we’ll have another recession, but it’s hard to say when that happens. Things could slow, not technically recede, and then we recover?

It’s an incredibly interesting time though. The consumer is strong, spending money and job losses are low along with unemployment. On the other hand, rates are rising, lending is slowing and there are deflationary factors as well.

[Yoho]

Originally Posted by Slava

Well people are highly levered, but that’s real estate for most people all the time. You’re putting down a smaller percentage and the remainder is borrowed money. I agree that people are susceptible to rate hikes, and job losses, but I do wonder when that’s not the case?

I’m not sure there’s a recession imminent. Honestly, we’ve heard about the imminent recession for about 18 months now. At what point is that call just wrong? Eventually, we’ll have another recession, but it’s hard to say when that happens. Things could slow, not technically recede, and then we recover?

It’s an incredibly interesting time though. The consumer is strong, spending money and job losses are low along with unemployment. On the other hand, rates are rising, lending is slowing and there are deflationary factors as well.

Rarely has an inverted yield in the bond market been wrong about an upcoming recession.

[Slava]

Originally Posted by Yoho

Rarely has an inverted yield in the bond market been wrong about an upcoming recession.

Yeah, but seriously it inverted in 2019 and then Covid hit. So, technically I guess it was right in that instance, but hardly an indication of forecasting anything. Would we have seen a recession anyway? Maybe.

I think it’s indicated 7 of the past 8 or something like that, and others say every recession since 1955. It doesn’t give you any timing for this, and it’s commonly “within about 18 months”. I wonder about how useful that is?

And realistically, for people around my age, we’re conditioned to think a recession is a crushing, existential threat, because of the carnage of 2008-09 and the tech wreck. It doesn’t have to be like that though. This could be a “dish pan” recession where it’s slightly negative, without catastrophic job loss and economic calamity, and then a recovery. If we indeed have a recession.

I would argue that 2008-09 was more than “just a recession”. We were in recession in September 2008, and then the financial crisis really gained steam. We had some issues ahead of that with Bear Sterns and I think Countrywide, but when Lehman Bros. collapsed along with AIG it went to another level. We were staring into the abyss financially and the economy was frozen. It was incredibly dangerous, and that’s what most of us today think of when we think of a recession.

[blankall]

Originally Posted by Yoho

We’re also at a place where those that are in the market are highly levered and are very susceptible to interest rate hikes and job loses. It’s not just low income earners who lose jobs.

Investors will be no where to be found when *%#! hits the fan.

Investors will have a tough enough time getting rent once layoffs start

Before every recession you hear the same thing “we are in a bubble” this time is different.

It's a lot more complicated than that:

1. We have a massive housing shortage and record numbers of new Canadians. It's not just immigrants as the Babyboomers' kids, who are the largest cohort ever, are having their own kids. There's all sorts of pent up demand as people, now into their 30s and 40s, have been waiting for an opportunity to jump in. The effect of the housing shortage is evident in rental rates too. Increased rent also means increased tolerance for higher mortgage payments.

2. Increased interest rates are a worry, but people have options. Most people who bought 5 years ago, and are now coming up for renewal, have lots of equity in their home and aren't simply going to walk away from a home, as people did during the last big crashes. For example, people can refinance and start over again on a new 30 year term. Not ideal, but better than missing payments or being forced into a lowball sale.

3. The investors will likely never go away. At least not in the biggest markets. For example, if detached housing in Toronto or Vancouver dropped to even $1.4 million, you'd see investors falling over themselves to buy them. That's already happened 3 times in the last 15 years during the "adjustments". These cities are growing so rapidly and there's no way to create more detached housing there. In fact, detached housing in these cities is quickly disappearing as density increases.

4. Have housing prices increased all that much in the last five years? Or is our dollar just worth 30% or so less?

5. The generational wealth gap is massive, and, thereby, so is the gap between haves and have nots. Many of these highly leveraged properties were bought with the help of wealthy parents. These parents can continue to bail out their children. Housing payments up by $2k? Guess how can step in and close that gap.

[opendoor]

Originally Posted by Yoho

Rarely has an inverted yield in the bond market been wrong about an upcoming recession.

While that's true, I'd argue that the current bond/treasury yields are less market influenced than in the past. In the US at least, the Federal Reserve is deliberately keeping short-term yields high by borrowing trillions of dollars from money market funds and banks at ~5% interest. Effectively, they're paying investors in order to shrink the treasury market; the idea being that if that money flowed into treasuries, short-term yields would be forced downwards which would undermine the effects of their rate hikes.

So essentially, in the current situation the central banks are intentionally trying to invert the yield to achieve their policy goals, whereas yield inversions in the past were more driven by market sentiment. Presumably the latter would be far more predictive of a recession than the former.

[bizaro86]

Originally Posted by opendoor

While that's true, I'd argue that the current bond/treasury yields are less market influenced than in the past. In the US at least, the Federal Reserve is deliberately keeping short-term yields high by borrowing trillions of dollars from money market funds and banks at ~5% interest. Effectively, they're paying investors in order to shrink the treasury market; the idea being that if that money flowed into treasuries, short-term yields would be forced downwards which would undermine the effects of their rate hikes.

So essentially, in the current situation the central banks are intentionally trying to invert the yield to achieve their policy goals, whereas yield inversions in the past were more driven by market sentiment. Presumably the latter would be far more predictive of a recession than the former.

The Fed has always controlled short term rates using the discount window, that's how the target rates work.

Longer rates are definitely a market forecast of future rates, and right now the market still thinks central banks are going to have to start cutting fairly soon. I think some of that is a political forecast not an economic one - market participants believe in the Fed put (which had existed in every market issue since 2008). The market believes the Fed will push more for the economy than inflation if push comes to shove.

I think a big part of the reason short rates are so high is because of Central Bank independence though. Governments are running huge deficits (which are very stimulative/inflationary) while central banks are trying to pull back that stimulus using interest rates.

All that to say, it's hard to predict what will happen when fiscal policy and monetary policy are both pushing very hard, but in opposite directions.

[opendoor]

Originally Posted by bizaro86

The Fed has always controlled short term rates using the discount window, that's how the target rates work.

But the amount of money they're holding in deposit (and thus keeping out of the treasury market) isn't even in the same universe as prior yield inversions. Pre-2008, the Federal Reserve's balance sheet was exceptionally modest by today's standards. But right now they're holding about $6T in deposits from banks and money market funds.

And that shows up in yields. Historically in the US, the 3-month Treasury yield is virtually always lower than the Federal Funds rate; usually ~-50 bps pre-2008 and ~-10bps post-2008. And in pre-recession and/or during rate hike situations, it tends to drop even more; it went -100 bps before the 1990 and 2001 recessions and -120bps before 2008. But right now it's positive at about +10 bps. And in the Fall it was +60 bps. That is very abnormal, historically.

And you see the same effect with other short-term yields as well. In this current cycle, 1-and-2-year treasuries are have had notably higher yields relative to the Federal Funds rate than they have historically.

So all that is to say, short-term treasury yields are being pushed up by a fair bit due to the Federal Reserve's holding more money in deposit. And in most cases, that increase in the spread is close to the amount of the yield inversion we've seen. So without that abnormal premium on short-term treasuries existing, there wouldn't be much of an inversion at all. That's what I mean when I say it's less market driven than prior examples.

That's not to say I don't think there will be a recession (I think there will be). But I don't think we can directly compare this current yield inversion (and in particular it's magnitude) to prior examples without accounting for the very different context.

[bizaro86]

Originally Posted by opendoor

But the amount of money they're holding in deposit (and thus keeping out of the treasury market) isn't even in the same universe as prior yield inversions. Pre-2008, the Federal Reserve's balance sheet was exceptionally modest by today's standards. But right now they're holding about $6T in deposits from banks and money market funds.

And that shows up in yields. Historically in the US, the 3-month Treasury yield is virtually always lower than the Federal Funds rate; usually ~-50 bps pre-2008 and ~-10bps post-2008. And in pre-recession and/or during rate hike situations, it tends to drop even more; it went -100 bps before the 1990 and 2001 recessions and -120bps before 2008. But right now it's positive at about +10 bps. And in the Fall it was +60 bps. That is very abnormal, historically.

And you see the same effect with other short-term yields as well. In this current cycle, 1-and-2-year treasuries are have had notably higher yields relative to the Federal Funds rate than they have historically.

So all that is to say, short-term treasury yields are being pushed up by a fair bit due to the Federal Reserve's holding more money in deposit. And in most cases, that increase in the spread is close to the amount of the yield inversion we've seen. So without that abnormal premium on short-term treasuries existing, there wouldn't be much of an inversion at all. That's what I mean when I say it's less market driven than prior examples.

That's not to say I don't think there will be a recession (I think there will be). But I don't think we can directly compare this current yield inversion (and in particular it's magnitude) to prior examples without accounting for the very different context.

I agree with all of that. My point was more that the reason the Fed has been so aggressive taking in cash (imo) is that fiscal policy is hugely stimulative, and the money supply has been increasing very fast. Interest rates alone are a weak way to counteract that, so they're basically engaging in quantitative tightening via the discount window.

[calgarygeologist]

Another ridiculously priced house went up for sale in my hood yesterday. It was purchased 2 or 3 years ago, very minor work was done on the house and it was listed for about 40% more than the previous sale. If anyone pays close to $1M for this house I will be shocked.