Canuckleheads are overpaid and have crap mortgages

[Jacob]

If I had listened to DGuller back in the early 90s when I bought my first property I would still be renting and waiting for the crash.  My net worth would also be significantly less.

Sometimes it pays not to listen to your accountant.

Um, the early 90s were the last noticeable housing slump.  People back then might have told you not to buy, but only because they were saying real estate never goes up in value so it's a lousy investment.

Um, we have had this discussion before BB.  In the Vancouver market the slump didnt hit until about the mid 90s - a few years after I bought my first property.  But it wasnt much of a slump at that.  Within a very short period - I cant remember exactly - the market had rebounded and all those poor DGs who were waiting for it to actually crash were left out in the cold.

Yeah, I got a buddy who's been telling me about the impending crash since about 1999 and has stayed out of the property market since then. The crash would have to be pretty significant for him to end up ahead now.

[Malthus]

When I was in business school, we were taught that 5 years is the threshold of long term.

If that's the case, we are passing two "long terms" since I actually started to seriously look into real estate (I started looking 10 years ago and bought 8 years ago), and three "long terms" since I heard that the Toronto/Vancouver housing market was in a bubble, better wait it out (late 90s).

[Barrister]

If I had listened to DGuller back in the early 90s when I bought my first property I would still be renting and waiting for the crash.  My net worth would also be significantly less.

Sometimes it pays not to listen to your accountant.

Um, the early 90s were the last noticeable housing slump.  People back then might have told you not to buy, but only because they were saying real estate never goes up in value so it's a lousy investment.

Um, we have had this discussion before BB.  In the Vancouver market the slump didnt hit until about the mid 90s - a few years after I bought my first property.  But it wasnt much of a slump at that.  Within a very short period - I cant remember exactly - the market had rebounded and all those poor DGs who were waiting for it to actually crash were left out in the cold.

Yeah, I got a buddy who's been telling me about the impending crash since about 1999 and has stayed out of the property market since then. The crash would have to be pretty significant for him to end up ahead now.

If he'd been investing the extra money that would have gone towards his mortgage it wouldn't have to be very significant at all.  WHile obviously 1999 is a bad year to start a comparison, if he'd been "dollar averaging" his investments over the last 15 years he'd have made a very handsome return.

[Jacob]

If he'd been investing the extra money that would have gone towards his mortgage it wouldn't have to be very significant at all.  WHile obviously 1999 is a bad year to start a comparison, if he'd been "dollar averaging" his investments over the last 15 years he'd have made a very handsome return.

Maybe he has been, I don't know.

But yeah, '98-'99 was funny like that. My office was full of guys trading stocks all the time online, passing hot tips back and forth, bragging about their smart bets, and reading stock websites like crazy. They all had some sort of system, and they were all convinced they were super smart and ahead of the curve. Then that stopped.

A few years later, it seemed like most of those guys got into poker. Again, reading the sites, talking big about how smart they were, having systems, reading books and websites, and being convinced they were super smart, making money, and were ahead of the curve. That has about petered out now too.

[Malthus]

If I had listened to DGuller back in the early 90s when I bought my first property I would still be renting and waiting for the crash.  My net worth would also be significantly less.

Sometimes it pays not to listen to your accountant.

Um, the early 90s were the last noticeable housing slump.  People back then might have told you not to buy, but only because they were saying real estate never goes up in value so it's a lousy investment.

Um, we have had this discussion before BB.  In the Vancouver market the slump didnt hit until about the mid 90s - a few years after I bought my first property.  But it wasnt much of a slump at that.  Within a very short period - I cant remember exactly - the market had rebounded and all those poor DGs who were waiting for it to actually crash were left out in the cold.

Yeah, I got a buddy who's been telling me about the impending crash since about 1999 and has stayed out of the property market since then. The crash would have to be pretty significant for him to end up ahead now.

If he'd been investing the extra money that would have gone towards his mortgage it wouldn't have to be very significant at all.  WHile obviously 1999 is a bad year to start a comparison, if he'd been "dollar averaging" his investments over the last 15 years he'd have made a very handsome return.

My understanding is that, historically over the past 50 years or so, stocks outperform real estate on average as an investment by a goodly margin.

The problem is that, purely as a practical matter, few actually have the financial discipline to invest in equities with the same sort of fanaticism that the banks have in insisting on being repaid ... in short, that for the average idiot, a mortgage acts as "forced savings".

Also, those worried about real estate bubbles really ought to be equally worried about stock market bubbles. At least if a real estate bubble pops, you still have a house to live in. If a stock market crashes, and you have invested every penny into it, you are fucked.

[Malthus]

If he'd been investing the extra money that would have gone towards his mortgage it wouldn't have to be very significant at all.  WHile obviously 1999 is a bad year to start a comparison, if he'd been "dollar averaging" his investments over the last 15 years he'd have made a very handsome return.

Maybe he has been, I don't know.

But yeah, '98-'99 was funny like that. My office was full of guys trading stocks all the time online, passing hot tips back and forth, bragging about their smart bets, and reading stock websites like crazy. They all had some sort of system, and they were all convinced they were super smart and ahead of the curve. Then that stopped.

A few years later, it seemed like most of those guys got into poker. Again, reading the sites, talking big about how smart they were, having systems, reading books and websites, and being convinced they were super smart, making money, and were ahead of the curve. That has about petered out now too.

I knew some guys who quit their day jobs, went into day-trading full time in the late 90s. I sorta lost track of them, as I knew them through work - I wonder how that worked out for them.

[Ideologue]

Better than investing in the higher education bubble.  "Zero" is a lot better than "negative hundred thousand with no BK protection."

[Malthus]

Better than investing in the higher education bubble.  "Zero" is a lot better than "negative hundred thousand with no BK protection."

I was going to make some jokes about this, but I was restrained by some vestigal stirrings of concience.  Yes, that does indeed suck, and in my opinion, we as a society are selling young people short, and we are going to pay a price for that.

[Barrister]

My understanding is that, historically over the past 50 years or so, stocks outperform real estate on average as an investment by a goodly margin.

The problem is that, purely as a practical matter, few actually have the financial discipline to invest in equities with the same sort of fanaticism that the banks have in insisting on being repaid ... in short, that for the average idiot, a mortgage acts as "forced savings".

Also, those worried about real estate bubbles really ought to be equally worried about stock market bubbles. At least if a real estate bubble pops, you still have a house to live in. If a stock market crashes, and you have invested every penny into it, you are fucked.

On the one hand I'll admit - for me a mortgage (together with a pension plan) acts as "forced savings".  I've never saved as much as I should be, but those forced savings have given me a pretty decent amount of equity over the last 10 years.

However, there's a pretty strong argument to be made that a housing bubble will be dramatically more devastating than a stock market bubble.  The reason is simple - margin.  Most people do not borrow the money they use to invest in the stock market, or if they do the margin is low.

When it comes to housing, however, a huge number of people have bought houses with very little money down, or if they did have a significant downpayment, they have obtained lines of credit leaving them with very little equity in their home.  As a result even a fairly modest decrease in house prices will leave a lot of people underwater.

[Malthus]

My understanding is that, historically over the past 50 years or so, stocks outperform real estate on average as an investment by a goodly margin.

The problem is that, purely as a practical matter, few actually have the financial discipline to invest in equities with the same sort of fanaticism that the banks have in insisting on being repaid ... in short, that for the average idiot, a mortgage acts as "forced savings".

Also, those worried about real estate bubbles really ought to be equally worried about stock market bubbles. At least if a real estate bubble pops, you still have a house to live in. If a stock market crashes, and you have invested every penny into it, you are fucked.

On the one hand I'll admit - for me a mortgage (together with a pension plan) acts as "forced savings".  I've never saved as much as I should be, but those forced savings have given me a pretty decent amount of equity over the last 10 years.

However, there's a pretty strong argument to be made that a housing bubble will be dramatically more devastating than a stock market bubble.  The reason is simple - margin.  Most people do not borrow the money they use to invest in the stock market, or if they do the margin is low.

When it comes to housing, however, a huge number of people have bought houses with very little money down, or if they did have a significant downpayment, they have obtained lines of credit leaving them with very little equity in their home.  As a result even a fairly modest decrease in house prices will leave a lot of people underwater.

Yes, allowing people to borrow too much with too little down is stupid, which is why I'm glad the Canadian gov't at least has put the kibosh on 40- and 30-year mortgages and such foolishness, and raised the maximum borrowing against house value to 80%, and forced a 20% down payment on million-dollar houses.

I have never really understood how being "underwater" on real estate is so very harmful to individuals, other than psychologically. You owe more than the property is worth to be sure, but seems to me the risk is to the lender. The real concern, I would have thought, is interest rates going up so you can't pay.

[Barrister]

Yes, allowing people to borrow too much with too little down is stupid, which is why I'm glad the Canadian gov't at least has put the kibosh on 40- and 30-year mortgages and such foolishness, and raised the maximum borrowing against house value to 80%, and forced a 20% down payment on million-dollar houses.

I have never really understood how being "underwater" on real estate is so very harmful to individuals, other than psychologically. You owe more than the property is worth to be sure, but seems to me the risk is to the lender. The real concern, I would have thought, is interest rates going up so you can't pay.

It is my understanding there are still numerous ways to buy a house with even less than 5% down.

There is significant risk to a homeowner to be "underwater".  First is DGuller's favourite - the term mortgage.  If you're underwater and the term is up the bank will refuse to renew your mortgage for the amount owing, and may well foreclose (and go after you for the remainder).  Second is it locks you into your home against your will.  Want to move across the country to pursue a better job?  Want to downsize your house to cut down on expenses?  Sorry, your house is unsellable because you're underwater on your mortgage.

[Malthus]

Yes, allowing people to borrow too much with too little down is stupid, which is why I'm glad the Canadian gov't at least has put the kibosh on 40- and 30-year mortgages and such foolishness, and raised the maximum borrowing against house value to 80%, and forced a 20% down payment on million-dollar houses.

I have never really understood how being "underwater" on real estate is so very harmful to individuals, other than psychologically. You owe more than the property is worth to be sure, but seems to me the risk is to the lender. The real concern, I would have thought, is interest rates going up so you can't pay.

It is my understanding there are still numerous ways to buy a house with even less than 5% down.

There is significant risk to a homeowner to be "underwater".  First is DGuller's favourite - the term mortgage.  If you're underwater and the term is up the bank will refuse to renew your mortgage for the amount owing, and may well foreclose (and go after you for the remainder).

I don't understand the sense of this strategy.

Bank: you owe us $10 and your house is only worth $8. We want our $10 back now.

Homeowner: I haven't got your $10. Every cent I have, I put in this house worth $8. If you let me, I'll keep paying what I owe, until I've paid off my debt. 

Bank: no, we need our $10 now. We are going to foreclose. We well sell your house in a depressed market, maybe only getting $7. Then, we will pay a heap of legal fees in a futile attempt to get you to pay the remaining $3. Likely this will simply force you into bankruptcy, and make the housing market crisis worse in the bargain thus further depressing the value of all our other security, but we don't care! 

Second is it locks you into your home against your will.  Want to move across the country to pursue a better job?  Want to downsize your house to cut down on expenses?  Sorry, your house is unsellable because you're underwater on your mortgage.

This is true, but presumably not permanent.

[Ideologue]

Also, it's a really privileged thing to crybaby about--with the (big) caveat regarding still having the job you had to buy the house in the first place.

[Malthus]

Also, it's a really privileged thing to crybaby about--with the (big) caveat regarding still having the job you had to buy the house in the first place.

A couple of lawyers and an actuary arguing about the relative value of real estate versus equities is usually enough to set the masses to sharpening the guillotine in the first place ... 

[Barrister]

Yes, allowing people to borrow too much with too little down is stupid, which is why I'm glad the Canadian gov't at least has put the kibosh on 40- and 30-year mortgages and such foolishness, and raised the maximum borrowing against house value to 80%, and forced a 20% down payment on million-dollar houses.

I have never really understood how being "underwater" on real estate is so very harmful to individuals, other than psychologically. You owe more than the property is worth to be sure, but seems to me the risk is to the lender. The real concern, I would have thought, is interest rates going up so you can't pay.

It is my understanding there are still numerous ways to buy a house with even less than 5% down.

There is significant risk to a homeowner to be "underwater".  First is DGuller's favourite - the term mortgage.  If you're underwater and the term is up the bank will refuse to renew your mortgage for the amount owing, and may well foreclose (and go after you for the remainder).

I don't understand the sense of this strategy.

Bank: you owe us $10 and your house is only worth $8. We want our $10 back now.

Homeowner: I haven't got your $10. Every cent I have, I put in this house worth $8. If you let me, I'll keep paying what I owe, until I've paid off my debt. 

Bank: no, we need our $10 now. We are going to foreclose. We well sell your house in a depressed market, maybe only getting $7. Then, we will pay a heap of legal fees in a futile attempt to get you to pay the remaining $3. Likely this will simply force you into bankruptcy, and make the housing market crisis worse in the bargain thus further depressing the value of all our other security, but we don't care! 

Second is it locks you into your home against your will.  Want to move across the country to pursue a better job?  Want to downsize your house to cut down on expenses?  Sorry, your house is unsellable because you're underwater on your mortgage.

This is true, but presumably not permanent.

I would suggest that the bank is unable to issue you a new mortgage when the value of the mortgage is greater than the value of the home.