Calgary Real Estate predictions?

[Cowboy89]

Originally Posted by hulkrogan

I think counting on retiring off of rental properties is safe if you expect them to be paid off and worth what they currently are in 25 years or whenever the mortgage is done.

Realistically in 25 years rent should be up and you should be pulling in a bit of profit month to month, and if your house is $400,000 now, I think it's a safe assumption it will be $400,000 then.

Counting on it to be worth $1,000,000 you could be screwed.

But if someone is trying to be conservative and 'safe' why would they own a bunch of assets whose values are highly correlated to each other as the sole basis of their retirement?

[AFireInside]

Originally Posted by Realtor 1

I work with several first time home buyers. They have just recently entered the work force and will be making more money in no time. It is smart of them to get in right now even if it means a couple less bar nights or vacations.

This is the opposite of smart.

These people are just entering the workforce, therefore have little idea how safe and secure their jobs are. If a downturn occurs they are likely some of the first to be let go since they are at the bottom of the totem pole.

Secondly, tell those that did the same thing in July of 2007, ask some of those people if it was smart now that their properties are worth 50,000 less than they paid for it.

Now to be fair I don't know their situation so their jobs may be secure, but it certainly is not smart to over leverage yourself.

Smart would be to to work for a couple years, save as much as humanly possible (this is where fewer bar nights comes in) and put down a nice big down payment of 10% or more.

[bomber317]

Originally Posted by Cowboy89

But if someone is trying to be conservative and 'safe' why would they own a bunch of assets whose values are highly correlated to each other as the sole basis of their retirement?

In some people's eyes, the definition of safe could correlate to having "real estate that never goes down" instead of having a diverse portfolio that includes investments in the form of stocks/bonds/GICs/cash/real estate.

[Cowboy89]

Originally Posted by AFireInside

This is the opposite of smart.

These people are just entering the workforce, therefore have little idea how safe and secure their jobs are. If a downturn occurs they are likely some of the first to be let go since they are at the bottom of the totem pole.

Secondly, tell those that did the same thing in July of 2007, ask some of those people if it was smart now that their properties are worth 50,000 less than they paid for it.

Now to be fair I don't know their situation so their jobs may be secure, but it certainly is not smart to over leverage yourself.

Smart would be to to work for a couple years, save as much as humanly possible (this is where fewer bar nights comes in) and put down a nice big down payment of 10% or more.

I agree with the sentiment of your post but not with the last paragraph.

Even then in that scenario all your net worth is tied in one asset that's levered. This whole cultural belief that the first order of business of adulthood after landing a career is to own property is a problem. All a person should feel a need to do is put shelter above their head and aquire it in whatever method they see fit, buying or renting so they don't have to live in a cardboard box. We need to drop the stigma of buying is always better than renting, because in many cases it's not.

[chemgear]

Originally Posted by Slava

Well if the thread was started and the price was at $410 and now its at $389 then we're looking at about 5%? I don't know though...maybe I'm missing that posters point or missing something there.

It is definitely worrisome how many people are counting on their home(s) to fund their retirement (to get back to a point made by Claeren on this page). I've talked to a lot of boomers who all feel that way, and while that might work for some people it can't support them all.

That demographic issue leaves me unsure of how best to play it though....I just don't want to rent!! Probably that is more based on mindset as opposed to anything else.

Yeah, not sure myself. I've just been looking at the decreasing prices and sales since I joined and will admit that I didn't necessarily plow through all the posts from day one of the thread.

The demographic issue is another good point. I can't quickly find a better graph of the data but there was this for 2005:



As the "boomers" get older, retire and presumably downsize/sell their current home for cash - exactly who is supposed to buy these homes? Given the smaller and smaller wedges of upcoming vintages of adults, wouldn't the supply of (unsold) homes get larger and larger? I realize some people think HAM (hot asian money) or immigrants will save places like Vancouver but will it really offset such a trend? Who knows.

[mykalberta]

For me in 2006 the problem was that rent was going so high that it only made sense to pay a few 100 extra and put that towards a mortgage instead of renting.

Had I been able to rent my 2 bedroom 3rd floor apartment in sunnyside for 750 there is no way I would have moved out.

I had been working full time for 3 years at that point.

[AFireInside]

Originally Posted by Cowboy89

I agree with the sentiment of your post but not with the last paragraph.

Even then in that scenario all your net worth is tied in one asset that's levered. This whole cultural belief that the first order of business of adulthood after landing a career is to own property is a problem. All a person should feel a need to do is put shelter above their head and aquire it in whatever method they see fit, buying or renting so they don't have to live in a cardboard box. We need to drop the stigma of buying is always better than renting, because in many cases it's not.

No I absolutely agree with you 100%. I was referring more to that particular situation brought forward, where the couple was going to buy a property.

Everyone has to weigh their situation differently. Right now for even for myself, I could likely get a condo similar to the apartment I'm renting right now, for near the same money. For those who want to live in a condo it might make sense to buy.

I have no intentions of living in a condo so renting this apartment is still cheaper than buying. When it gets to the point that I'm only saving a couple hundred a month by renting then I will reconsider my situation.

[kevman]

Originally Posted by Slava

Well if the thread was started and the price was at $410 and now its at $389 then we're looking at about 5%? I don't know though...maybe I'm missing that posters point or missing something there.

Apparently my numbers made no sense...

What I was trying to say is that while the median has only gone down 5% the actual cost of purchasing a home has gone WAY down. Or in other words the price people are willing to pay has gone WAY down.

In my example I used a mortgage with 5% down over 25 years as the cost of home ownership. A first time home buyer in June 2007 that purchased a home had to pay, or was "willing" to pay, $2,796/month to purchase an average home in Calgary. Today a first time home buyer has to pay, or is "willing" to pay, $2,086/month for that same average home. Therefore, the mortgage monthly payment someone is willing to pay to purchase a home has gone down much more then 5%.

Obviously if you're selling these numbers mean nothing. As is the case if you plan to purchase your next home with cash.

However I felt they might be an indicator of the actual strength of the housing market. If interest rates go up 2% (from a BOC average of 4.7% to 6.7%) and the average Calgary home buyer is still only willing to spend $2,086/month then the median price of homes must come down to $320,000. ie $2,080/month at 6.7% over 25 years translates into a mortgage of ~$300,000 which is a home of ~$320,000 with 5% down.

Obviously this is an extreme case and 2nd home buyer/cash buyers offset this number. I just thought it was an interesting way to look at the actual cost of buying a home.

Or maybe I'm out to lunch... Oh man I really hope that made sense to at least one person...

[Travis Munroe]

So what do you suggest I tell these early 20s buyers. There is a chance that the market slides for the next 10 years so do not buy?
The market does not have to spike for them to be successful in their investment. Real Estate is one of the safest investments (for its return) available to people.
I guess those who say it is not a good idea for these early 20's university graduates working in land mgmt or other stable industries need to tell me what they think is smart. I understand everyone has a take however sacrificing a few bar nights per week or vacations per year is a small price to pay to own a place.

[V]

Originally Posted by kevman

Apparently my numbers made no sense...

What I was trying to say is that while the median has only gone down 5% the actual cost of purchasing a home has gone WAY down. Or in other words the price people are willing to pay has gone WAY down.

In my example I used a mortgage with 5% down over 25 years as the cost of home ownership. A first time home buyer in June 2007 that purchased a home had to pay, or was "willing" to pay, $2,796/month to purchase an average home in Calgary. Today a first time home buyer has to pay, or is "willing" to pay, $2,086/month for that same average home. Therefore, the mortgage monthly payment someone is willing to pay to purchase a home has gone down much more then 5%.

Obviously if you're selling these numbers mean nothing. As is the case if you plan to purchase your next home with cash.

However I felt they might be an indicator of the actual strength of the housing market. If interest rates go up 2% (from a BOC average of 4.7% to 6.7%) and the average Calgary home buyer is still only willing to spend $2,086/month then the median price of homes must come down to $320,000. ie $2,080/month at 6.7% over 25 years translates into a mortgage of ~$300,000 which is a home of ~$320,000 with 5% down.

Obviously this is an extreme case and 2nd home buyer/cash buyers offset this number. I just thought it was an interesting way to look at the actual cost of buying a home.

Or maybe I'm out to lunch... Oh man I really hope that made sense to at least one person...

I just bought a house and the only factor I used to pick my target house price range was the monthly payment. I knew that buying a 500k house would mean I could comfortably handle the mortgage payment, but buying a 550-600k house would mean I would be very strapped for cash, leaving me in a vulnerable position. So I looked for houses in the 500k range.

I don't know if you and I are the only ones that look at this sort of thing, but I understand exactly where you're coming from.

[kevman]

Originally Posted by Realtor 1

So what do you suggest I tell these early 20s buyers.

Well as a 20 something buyers here's my outlook:

A home should never be treated as an investment but rather a place to live. I'll buy a home when I can comfortably afford the payments on the type of place I'd like to buy. That way I'm not worried about the market leaving me behind or crashing through the floor. As far as I'm concerned I don't even need house prices to drop to become more affordable. Even factoring in rent my down payment is increasing faster then house prices effectively narrowing the gap betwen the house I want and the price I want to pay.

That and I still believe prices are coming down...

[macker]

Originally Posted by bomber317

In some people's eyes, the definition of safe could correlate to having "real estate that never goes down" instead of having a diverse portfolio that includes investments in the form of stocks/bonds/GICs/cash/real estate.

Reminds me of good old Jacob Fuggers logic.....
"Divide your fortune into four equal parts : stocks, real estate, bonds and gold. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate : during deflation, you lose on real estate and win on bonds, while your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts." Jacob Fugger the Rich 1459-1525 and considered to be one of the richest people of all time.

[V]

Originally Posted by Realtor 1

So what do you suggest I tell these early 20s buyers. There is a chance that the market slides for the next 10 years so do not buy?

Well, that would just be bad business, wouldn't it?

Besides, who are you to determine what level of risk this couple is comfortable with?

One might argue that you're in a position of authority and shouldn't use your influence to convince people in that situation to leverage themselves hundreds of thousands of dollars into debt, but I wouldn't listen to them.

[Cowboy89]

Originally Posted by Realtor 1

So what do you suggest I tell these early 20s buyers. There is a chance that the market slides for the next 10 years so do not buy?
The market does not have to spike for them to be successful in their investment. Real Estate is one of the safest investments (for its return) available to people.
I guess those who say it is not a good idea for these early 20's university graduates working in land mgmt or other stable industries need to tell me what they think is smart. I understand everyone has a take however sacrificing a few bar nights per week or vacations per year is a small price to pay to own a place.

I don't think it's your duty to tell them anything of the sort. By the time you're involved they already want to buy property, and your job is to act as an agent in the execution of the transaction. Presumably if you perform those duties admirably there's nothing else to say or do. The reasons for such purchase should be outside the purview of advice from a realtor.

As for safety of investment, there's nothing 'safe' involved in borrowing 95% of an illiquid asset's market value for it's purchase, real estate, stocks, bonds or otherwise.

[1stLand]

For someone looking at getting into the real estate market (1st Time Homebuyer) who does not have job security or is just entering the job market.

1. Do not over-extend yourself - Buy something you can afford (ie: Condo's / Townhome)
2. Prepare to own this home for atleast 5 years
3. Expect fluctuations in the value of your home for the next few years
4. Budget for repairs and miscellaneous expenses
5. Take on a room-mate if possible

[The Yen Man]

Here's something I've been thinking lately. Lets say you've saved enough to put down 20% on a home. If you were confident in your abilities to earn a 10% return, wouldn't the smart thing be to put down as little down payment as possible and invest the rest of the money? So if you put down 5% and keep 15% to invest, you're paying a 3% (or whatever your mortgage interest rate is) to borrow another 15% from the bank. That's a 7% return.

Of course, this all hinges on your confidence in earning that 10% per year.

[macker]

David Rosenberg said recently that there is another 20% drop to come in US real estate so where does that leave us... I agree with what Bill Gross said recently that Canadians are in denial if they aren't willing to learn from the US experience over the past few years. Once these things correct they don't just bounce back right away and it takes years and years to have a sustainable recovery.

So we have many of analysts and experts and even bank of Canada officials giving out warnings and people still think that we operate on different metrics here.....go read http://www.amazon.ca/This-Time-Diffe.../dp/0691142165 and tell me that things don't have to correct. This book tells you everything you need to know in a very logical manner, or for more specific info http://canadabubble.com/

[Cowboy89]

Originally Posted by The Yen Man

Here's something I've been thinking lately. Lets say you've saved enough to put down 20% on a home. If you were confident in your abilities to earn a 10% return, wouldn't the smart thing be to put down as little down payment as possible and invest the rest of the money? So if you put down 5% and keep 15% to invest, you're paying a 3% (or whatever your mortgage interest rate is) to borrow another 15% from the bank. That's a 7% return.

Of course, this all hinges on your confidence in earning that 10% per year.

It doesn't rely on your confidence to earn that 10% but rather your actualy ability to do so. Many people have confidence to do that, very few if any can. Maybe I've been reading too much Benjamin Graham lately, but I don't see that being viewed as a smart move either.

[chemgear]

Originally Posted by The Yen Man

Here's something I've been thinking lately. Lets say you've saved enough to put down 20% on a home. If you were confident in your abilities to earn a 10% return, wouldn't the smart thing be to put down as little down payment as possible and invest the rest of the money? So if you put down 5% and keep 15% to invest, you're paying a 3% (or whatever your mortgage interest rate is) to borrow another 15% from the bank. That's a 7% return.

Of course, this all hinges on your confidence in earning that 10% per year.

Hmm interesting. But I guess part of that is assuming that the house you've put 5% down on is going to hold the exact same value year after year in order for that 7% return to hold true (also assuming as you say you can make 10% per year on your own with the remaining funds.) And ignoring inflation for the sake of calculations/sanity.

The problem might be if housing prices go down, even a little. With a 1% drop in price, you'd have to make up a further 6-7% on top of your 10% to make up the difference due to the larger proportion of what you've borrowed versus the 15% invested.

(Good heavens I hope I sorta have the numbers right there. Somebody let me know if I messed up - sorry in advance.)

Theoretical House Price: $100,000
5% downpayment: $5,000
15% invested: 15,000
10% return on $15,000: $1,500
Risk of possible drop in house price of 1%: $1,000
New return needed to account for 10% AND the 1% drop in house price: $1,500 + $1,000 = $2,500 (which would be 17% per year on the $15,000 investment.)

EDIT: Actually, perhaps a more interesting view is what rate of return would you need to hold steady if prices dropped by 1%.

That would be $1,000 due to the price drop, and $450 in additional interest (3%) that you wouldn't have been paying if you had used the $15,000 as a larger downpayment. So you would need to make $1450 or just under 10% just to keep up without inflation factors IF prices dropped 1%.

Of course all this is theoretical and VERY rough/doesn't include other obvious things like risk, moving costs, compound interest effects, investment costs, etc . . .

[Travis Munroe]

Originally Posted by 1stLand

For someone looking at getting into the real estate market (1st Time Homebuyer) who does not have job security or is just entering the job market.

1. Do not over-extend yourself - Buy something you can afford (ie: Condo's / Townhome)
2. Prepare to own this home for atleast 5 years
3. Expect fluctuations in the value of your home for the next few years
4. Budget for repairs and miscellaneous expenses
5. Take on a room-mate if possible

-Taking on a room mate leads to more issues than it would if you just purchased a place you could afford on your own.
- Why prepare to live in the place for 5 years. My last 2 foreclosures will see at least $30,000 in instant equity. Why wouldnt they sell in a couple years if there was a life change.