Monday, April 23, 2012

Who is to blame for Canada's housing bubble?

Its so easy to point fingers.

Banks. The government. Local politicians / mayors. The real estate industry. The housing industry. Greedy sellers.

Canada’s housing market has been relatively stable for over a decade, with the notable exception of Toronto and Vancouver which are the country’s hottest real estate markets. As Canada’s largest city Torono's home prices have risen 10.5% over the past year alone. The condo industry in Toronto is so hot that there is now three times as many cranes dotting Toronto’s skyline as there are in New York City.

Many real estate analysts are becoming increasingly worried that Toronto, Vancouver and Calgary are in an American-style housing bubble which could lead to an implosion of prices and a recession.

The analysts are not alone. Bank of Canada Governor Mark Carney is sounding the alarm over the growing level of household debt, while maintaining the overnight lending interest rate at a near-record low level of 1%. Mark Carney's hands are a bit tied in this matter. He can't raise interest rates without risking being the needle which bursts the bubble.

What is bizarre is the economy in Toronto and Vancouver are both stagnant and yet the prices are rising unusually fast. In contrast cities like Edmonton and Saskatoon where the economy is booming but home prices are stable.

Some people argue that the Canada Mortgage and Housing Corporation’s (CMHC) policies are to blame because they encourage overseas investment in Canadian real estate. They claim that investors from overseas have corrupted the system and is creating an artificial and potentially dangerous real estate bubble that will ultimately lead to a recession in Canada.

There is of course a quick and easy solution to this. Ban overseas investors from buying homes and condos in Canada.

The CMHC controls the majority of Canada's mortgage insurance and securitization markets and guarantees all (100%) of the principle balances and interest rates on insured residential mortgages.

The problem is that the Bank of Canada has such low interest rates that in combination foreign investment and low interest rates in causing the bubble to grow at an exponential rate. Investors are particularly attracted to Toronto and Vancouver's markets because of the recent history of rising housing prices.

Another problem is Canada's artificially low interest rates have been kept low for since 2008.

The longer interest rates remain low and investors keep flooding the real estate bubble the worst it will be when the bubble bursts and a market correction takes place.

Trying to prevent a correction however might make foreign investors skittish and cause them to withdraw from the Canadian real estate market in a hurry. Thus a preventive measure could even kickstart the market correction.

Foreign investors are not wholly responsible for creating Canada's housing bubble. Investors are sheep. They go where they see a financial opportunity with little risk.

Foreign investment is normally a good thing. It creates jobs and adds to the local economy. More condos and homes being built means more money for developers and construction works. More rental properties become available. The problem however is that investors have a tendency to flood markets. The home prices and rental prices go up, people get into household debts they cannot afford due to outrageous mortgages... and when the fit hits the shan everyone with a mortgage loses their shirts.

While its true that in Canada we crave foreign investment, that is only true so long as the investors stay the course and don't all back out at the same time. We need to avoid an artificially inflated housing market that will bring the whole economy crumbling down when the bubble bursts (see the USA, circa 2007-09).

So who does the bulk of the blame lay with then? The answer is the blame can be placed squarely on government policy.

By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans whether you are a foreigner or a Canadian. A foreigner with a good credit rating can invest in Canadian real estate, borrow money from the Canadian government to invest in our own housing market... and if anything goes wrong they're not Canadian and don't have to face any financial responsibility here. If everything goes smoothly for the duration they eventually withdraw their money (with a decent profit) and put it to use elsewhere.

Having such weak policies and lending standards is Canada's Achilles heel.

A report from the Reason Foundation in the USA found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Governments simply cannot price risk accurately while banks and private lenders have every incentive to price risk appropriately because its their money on the line. If the government loses money its the taxpayer that ends up with burdened and governments are far too willing to take unnecessary risks when there is no incentive to insure success.

If we were to try to prevent an American-style housing bubble bursting we should not have the Canadian government guaranteeing mortgages. Let the banking industry put the money up themselves and take on the risk.

After all why should taxpayers be asked to take on the risks of bankers and foreign investors? If people want to invest in Canada, fine, but they should do so without using government money as collateral.

The USA is already starting down that path. People looking to get a home purchase loan are now looking at companies which guarantee their own mortgages. ie. Mortgage Solutions of Colorado and similar companies are reducing (or removing entirely) their dependence on government guarantees.

Part of it may be because companies have realized that the American government isn't going to guarantee mortgages willy-nilly any more. Another part of it is Americans have become much more scared of mortgage contracts signed during a bubble and they think it is less risky to deal with a company which has its own money and isn't borrowing against itself to prop up its business.

Sadly I don't think Canada will learn from the USA's mistakes. We are just going to repeat the problem.

Friday, April 20, 2012

Condo maintenance fees

My buddy Carmen hates condos.

And its very easy for me to agree with his reasons. Its the outrageous maintenance fees that some condos charge. (Over $600 is considered outrageous.)

The reality is that some condos are built poorly. Most condos have extra costs associated with security guards, lawn maintenance, clean hallways, garbage removal and fixing the structure of the building.

But its the fixing of the building structure that is the real issue with some of the newer buildings. In Canada we have the added problem of Canadian winters can be really harsh on the building's materials, but there are other common problems as well.

Common Causes of Higher Fees

#1. Electrical Upgrade

#2. Renovations of Foyer, Laundry

#3. New Elevators

#4. New Windows / Insulation

#5. Pool service and maintenance going up

#6. Administrative / Legal bills

#7. Common Area Electricity (elevators, hallway lights, etc) skyrocketing prices

#8. Property Taxes on the grounds go up

#9. Reserve fund for future repairs

#10. Insurance costs go up

Some condos even include cable TV and electricity within units, which can fluctuate.

What makes matters worse is that when fees go up they rarely go back down. Which begs the question, why would anyone want to buy a condo if some places charge such outrageous condo fees?

I think its completely unexpected. People buy into a new glass condo, expect everything to be wonderful, then the window seals break (a common problem with glass condos in Canada), the inert gas insulation leaks out and suddenly the heating and cooling costs for the entire building skyrocket.

All it takes is something unexpected to happen and WHAM, maintenance fees go up.

The advice then that should be given to condo buyers is buyer beware. Look at the maintenance fees the place is charging. How new is the elevators? Is the building structure glass or concrete?

FACT: The glass condos in downtown Toronto have the highest average maintenance fees in North America. Why? Leaking insulation and the repair costs. Toronto has been building glass condos like crazy, mostly in the downtown core because everyone wants a chic looking building, but totally ignoring the problem of Canadian winters.

According to city planner Greg Kuenzig the condos on Toronto's waterfront are "the future slums of Toronto", not just because of shoddy architecture, but because they were mostly purchased by overseas investors and then rented out.

And renters are much harsher on buildings because they simply don't care. And because the investors don't want to pay as much for maintenance the buildings suffer due to neglect and mistreatment. Combined with shoddy workmanship and Kuenzig says those condos will eventually be sold off at lower prices when the maintenance fees skyrocket and that will attract more lower income people, slowly turning the Toronto waterfront condos into a slum. It has happened before in other cities for the same reasons.

The end result is that there is a small number of condos out there which are built properly (have passed the test of time) and they're usually older buildings made of concrete. Lower maintenance fees and a concrete structure. It may not be as pretty to look at like a glass building, but at least you won't be overcharged for living in it.

In other news there is also a correction in condo market prices coming in the next 3 years. People looking to sell would be wise to sell now BEFORE the market becomes flooded with cheap condos.

There is also the chance that foreign investors in Toronto condos might all pull out when the market corrects itself. It happened in Miami recently. Investors caused a huge bubble in Miami's condo market, but then when property values plunged in 2008 all the investors sold off their properties in a rush and the prices plunged even further.

Sales in Miami have started to rebound and prices go up a little bit due to bargain hunters but many condo buyers and investors lost their proverbial shirts.

According to real estate research firm Urbanation 60% of recent condominium buyers in Toronto are investors who bought their units from developers before construction began... and then sold their condos once the construction was finished. They flipped it fast for a profit.

But if prices drop they won't be able to flip those properties for a profit. They will be taking losses or forced to hold onto the properties until the market recovers. Right now stagnant rent prices means if they hold on to their properties they will be taking a risk from that too because when property values drop so does the amount people are willing to pay for rent... and if the property is leveraged or mortgaged it will be shirt losing time.

The chances of correction is also increased by Canada's low interest rates.

"The longer we are in this super low interest-rate environment, the greater the potential for a big correction," says Andrew La Fleur, a condominium broker with RE/MAX LLC.

Thursday, April 19, 2012

Cheap Condos in Toronto

If you've been following MY QUEST FOR A CONDO then you know I am trying to trade up and eventually get a condo in Toronto... via trading for it!

Now some of you might think, hey, there can't be that many cheap condos in Toronto that people would actually trade for it.

Oh but you're wrong!

A simple trip to and you can browse the interactive map halfway down the page.

Lets see... Lets select condo / other, list price between $25,000 and $50,00, condo apartment and see what comes up...

5 results! I have organized them below by maintenance costs.

11 Brunel Crt, 3109, Toronto
MLS#: C2310293
Rms: 1 Beds: 1 Washrm: 1
Maint: $40

208 Queens Quay St, P320, Toronto (Oh but wait that is a parking space, not a condo.)
MLS#: C2306313
Maint: $50

340 Dixon Rd, 1508, Toronto
MLS#: W2323286
Rms: 4 Beds: 1 Washrm: 1

4645 Jane St, 526, Toronto
MLS#: W2296915
Rms: 5 Beds: 2 Washrm: 1
Maint: $610

320 Dixon Rd, 2313, Toronto
MLS#: W2326631
Rms: 5 Beds: 2 Washrm: 1
Maint: $740

So yes, it is possibly to find really cheap condos in Toronto. 3 out of the 5 have some weird maintenance fees, which suggests to me there is something wrong with the buildings and that is why they keep dropping the price.

Okay, lets do this again and this time I will change the price range to $50,000 to $75,000.

21 results with maintenance fees varying between $50 and $750. Pretty nifty.

Lets say I traded my way up during My Quest for a Condo until I get a something reasonably valuable... like a luxury car or a yacht. I should be able to trade that for a condo.

Or I could hold out and aim for something nicer around $150,000 or $250,000, which was my original goal when I started this quest. And if condo prices drop in the next year then people may be looking to get rid of their bad investment.

The point is that its doable. And I am just the man to get it done.



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American real estate websites are interesting

For fun I sometimes look at real estate websites in the USA. I especially like real estate websites from Hawaii, just because its exotic.

Lets take for example, a website which specializes in Memphis real estate investing which basically means they take your money and invest it in rental properties, rent the property out and then you receive a portion of the rent.

Its an interesting concept... but what is more interesting is the question of how much these properties are actually worth. Remember that Memphis was hard hit during the US recession of 2007-2009.

From 2006 to early 2009 the median prices of homes in Memphis dropped from $105,000 and dropped down below $75,000. Right now the median price is hovering around $85,000.

Compared to prices here in Toronto, real estate in Memphis is dirt cheap.

Now I admit that is not as cheap as some other locations (ie. Detroit), but it is still a bargain.

What does therefore is hunt around for bargains, then flip them as rental properties and eventually (when the real estate market has recovered) sell it for a profit.

Lets say you buy a property for $100,000 and rent it out for $1,000 per month. 2 years later, depending on the demand, you might be able to sell the same property for $110,000... and better yet you've pocketed $24,000 (minus property taxes, income taxes, maintenance costs and lawyer fees) from the rent.

If you look at the ROI (Return on Investment) for many of the properties on it varies between 32% and 48%. It really makes you realize that renters in the USA are getting bushwhacked by high prices and that investors are cleaning up and laughing all the way to the bank.

I do think you could do this yourself, assuming you had enough spare cash. My uncle David and an investment partner did this years ago back during the 1970s and 1980s. They bought several properties near Niagara Falls, waited for them to shoot up in value and then sold them all. Then (for fun) the two of them had the bank give all the money to them in cash, bought some champagne and rolled around in the cash. My uncle even has photos of the event of him and his buddy rolling around drunk in all the cash.

So you can make a lot of money investing in real estate. You can go through a company or broker that specializes in it or you can do it by yourself or with an investment partner.

And in places like the USA where the economy collapsed a few years ago its easier to find deals where if you invest wisely (and spread the money over multiple properties, thus alleviating the risk) you can make a bundle.

During the height of the recession in Detroit there was properties being sold for $1. Just one dollar. They had been seized by the federal government for failure to pay back taxes. If a person wanted to buy those properties they could fish around, check which properties could be snapped up for $1 and whatever the back taxes were and they could get a chunk of land which 10 years from now might be worth $50,000 to $100,000 or more when the economy has recovered and Detroit becomes a desirable place to live in again. Too late now. All the really nice properties have been snapped up.

Cities like Memphis in comparison are less risky. The economy there is better. The prices are higher and the ROI is less, but at least there is comparatively little risk.

Food for thought.

Downtown Toronto condos hits $360,892 average price

Toronto condos are going up like crazy... but so are the prices.

Here's some interesting stats for you:

#1. Available listings in the GTA are up 14% in the first quarter of 2012, thanks to rapid condo construction.

#2. Sales for the same period are up 2% compared to the same period in 2011. (Some buyers are hoping increased supply will lower prices, but so far this isn't happening.)

#3. The average sale price in the GTA is up 3.7% in the first quarter of 2012 — $334,952 compared to $322,857 in 2011. (Stats from the Toronto Real Estate Board TREB.)

#4. Prices of downtown condos are up to $360,892 in the first three months of 2012, up from $348,779 a year ago. Up 3.4%.

#5. House prices are in the GTA are up 10% compared to 2011, so the housing market is going up faster than the condo market. (The Toronto housing market is going up due to bidding wars and shortage of supply.)

#6. Since March of 2011, the condo sales to listings ratio — a key real estate barometer for determining whether it’s a seller’s or buyer’s market – has gone from 49% cent to 40%. 30% is considered a buyer’s market.

The advantages of owning a condo downtown is you don't really need a car (or parking, which in downtown Toronto costs an average of $4000 per year).

Another thing that is fueling demand is investors. People who buy condos and then end up renting them out (and eventually selling the condo for a profit later). Investors make up approx. 9% of condo buyers in Toronto.

But what about maintenance fees?

Well according to research Toronto condo buyers are more willing than any other Canadian condo dwellers to pay the highest monthly maintenance fees — 17% said they’d pay more than $600 per month, compared to 10% nationally across Canada — for the convenience of living near transit and other amenities.

Myself? I would prefer something in the range of $150 to $250 per month for maintenance.

Which brings me to another topic... MY QUEST FOR A CONDO.

Sorry if I seem like I am beating a dead horse but this pet project of mine is still in its early stages.

I am trying to trade one thing for another thing and eventually get myself a condo. I started with a Hot Wheels 2008 Dodge Challenger car, I traded it to Ryan Anderson from Brampton for a Mastercraft Digital Multimeter Kit and now I am looking for a 2nd trade.



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Why I want a condo in Toronto

I love Toronto.

But I guess I am not much of a traditionalist because I don't really want a house right away. Later, when I have multiple children to worry about, then I can start thinking house.

But right now I am a young male bachelor and I like a nice view. I like apartments. Love them. My first view wasn't even in an apartment, it was a dorm room at York University on the 11th floor and I got a nice view of the campus.

I also lived off campus and later I lived in South Korea. Somewhere on my computer is the view from my apartment in Seoul (Suyudong district) but I can't seem to find the photo.

My current apartment is on the 4th floor. No need for the elevator, but I can still see the trees below and the horizon skyline. Maybe its the artist in me that craves a view.

Not that the artist wouldn't enjoy gardening (ooo... I could make a Korean style rock garden...) but for a variety of other reasons I prefer condos.

Some new condos however have problems. Despite their ultra modern designs they're not that energy efficient. The architects designed them for a southern climate and Canadian winters can see the temperatures drop below -40. When that happens the seals around the glass break, the inert gases between the glass panels leak out and the building loses its insulation. Wham! Suddenly the maintenance fees skyrocket because the cost of keeping the building warm in the winter and cool in the summer skyrocket. They skyrocket even more when the building is repaired every couple years due to a faulty design.

For this reason I prefer OLD condos. Tried and tested. Brick. Concrete. They may not look fancy or energy efficient, but they are more energy efficient than a building that wasn't made to withstand Canadian winters.

Which brings me to the topic of MY QUEST FOR A CONDO.

My theory is that if I keep trading up for something more valuable from something relatively cheap (in this case a Hot Wheels car) that I will eventually get a condo. (Yes, some people do trade real estate if the price is right.)

Basically when it gets really going I will be trading furniture, motorcycles, trucks, boats, unique valuable items and so forth until I eventually get to some big ticket items.

And if I am lucky the Toronto condo market will collapse and some people will be looking to get rid of their property anyway. ie. Investors from overseas who lost their shirts and would be willing to trade for a houseboat.

I like houseboats. I would totally live in one of those too. My Quest for a Houseboat??? Whatever.

So far I have 1 trade under my belt.

On April 17th 2012 I traded my Hot Wheels 2008 Dodge Challenger for a Mastercraft Digital Multimeter Kit with Ryan Anderson, a real estate agent from Brampton.

Included in the trade is a link to your website (or a charity website of your choice).

What will be my next trade? I wonder.

It could be anything... a samurai sword, a guitar, a bicycle, tools, espresso maker, archery equipment, a laptop... anything desirable that is easily trade-able due to its rarity, value or usefulness.



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Tuesday, April 17, 2012

My Quest for a Condo: First Trade Made!

April 17th 2012 - Earlier today I made the first trade in My Quest for a Condo.

In case you're not familiar with this what I am doing is starting with something small and then trading up for something bigger... and bigger and bigger... Until I eventually own a condo!

That is the final goal. A condo here in Toronto.

I started with a Hot Wheels 2008 Dodge Challenger. Approx. value $2.

My very first trade has netted me a Mastercraft Digital Multimeter Kit, which according to my research would cost you $49.99 + 13% HST if you purchased it brand new from Canadian Tire.

This one is brand new. Never even been used. Multimeter kits are used for measuring electrical currents in buildings and electronics. Handy for anyone who is an electrician, engineer, a nerd or just likes having handy tools in their home. This particular digital multimeter also comes with a wirecutter/wirestripper, a needle nose plier, cables and a case for carrying them all in. Very handy.

I got it from Ryan Anderson, a real estate agent from Brampton who specializes in investment properties. Thank you Ryan for making my first trade a great success.

So now I have something much bigger for trade. So if anyone out there has something they don't need any more and they need a Digital Multimeter Kit let me know.

As trades go this is a pretty big one. I wasn't expecting to get into the $50 range so soon. If I continue to double my trade value it shouldn't take too many trades until I reach the $260,000 mark... which is enough to get a condo here in Toronto.

Let the quest continue!



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It took me forever to get this photo off my cellphone. My apologies for the grainy quality of it (bad lighting). The photo is of Ryan Anderson with his new Hot Wheels Dodge Challenger.

Monday, April 16, 2012

My Quest for a Condo continues...

Tomorrow I am meeting with Ryan Anderson (a real estate agent from Century 21) to discuss trading something for my Hot Wheels 2008 Dodge Challenger as part of My Quest for a Condo.

Awhile back I thought it would be fun to make a small YouTube video for every trade I make and watch as the list of items grow.

To this end I've decided to make a video of my Hot Wheels 2008 Dodge Challenger while I still have it in my possession. And here it is:

Just think of all the fun you could have with that! :)

While I was at it I also filmed my old 1980 Kidco car and working (sorta) key. To be fair those keys were always a pain, but so worth all the fun that came with them.



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