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(Pictured, Vancouver) House prices are going through the ceiling in many large urban centres worldwide. But UK-based contributor Sandeep Parwaga warns that this presages a crash.
Quote:
Editor's Note- I don't agree with the assumptions expressed below. A house is an excellent investment, although not in inflated markets. As long as interest rates remain low, I don't see a crash. Posting this for a change of pace.)
by Sandeep Parwaga, PhD
Robert Kiyosaki famously said ''A house isn't an asset, it is your biggest liability'. It seems to be a hidden truth many haven't heard of. In the Anglo-American sphere, people are thought-trained that owning a property is the highest aspiration in life. I realized what a fraud this was. Tragically, this belief encouraged the 2008 mortgage crisis, and may be fuelling the next.
Nothing has changed today, as debt-based bubbles have bloomed all over again, including in the car loan, student loan, and housing sectors. Are we facing another disaster? The housing market is yet an old but familiar indicator.
GLOBAL HOUSING MARKET IN A BUBBLE
The global housing market is in a state of total madness. Prices have been going up irrationally over the years. With real jobs and wages declining, it becomes harder for younger, first-time buyers to purchase their own home. At first sight, I thought that this would never change, but there may be something sinister on the horizon. The situation is reminiscent of the pre-2008 crisis. It is happening all over the world, including in the UK, USA, Canada, and Australia. A couple of factors has fuelled this situation.
Quantitative easing and low interest rates have caused the flow of large amounts of capital into the housing market and lead to a massive increase in prices. When interest rates will inevitably go up to counter inflation, the consequences will be horrendous for the housing market.
Though banks claimed to have tightened their lending rules, it doesn't appear to be the case. Loose lending is still a problem in the housing market which inevitably increases the number of sub-prime mortgages on an immense scale.
Investors are an integral part in the dynamics of the housing market. When they sense that things turn against them, they could be the first to exit early. I predict we will continue to see this happening, as government policies make it less attractive to be a property investor. Fund freezes have returned in the UK at several fronts and are yet another worrying sign. Also, as the economy in foreign countries stymies, foreign buyers will eventually decline as well.
The market thrives on supply and demand. Unfortunately, this has become a massive illusion. People are less and less able to afford a house. How can demand be going up? Besides the demand side being a fraud, I suspect the supply side is too. Banks have loosened their lending rules to construction companies again that are building properties which will eventually sit empty. China is famous for this and may be a lesson for the future. The central bankers need to keep the housing market in an artificial supply and demand scenario to keep the game going, including through schemes as in 2) and 5). Any downturn could lead to a crash.
Government help: In the UK, the government rolled out the help to buy scheme, which allows buyers to only put down a 5% deposit. It doesn't take a genius to see that this is absolutely crazy as these buyers are massively over-leveraged.
Prices will eventually see a stagnation and decline, like it is starting to happen in the UK, China, or Canada. The price can't go up forever, and has to have some relationship to the reality of average people. People who took out mortgages on high house prices could get suckered once this happens. Owners would be paying more on their house than it will be worth, called negative equity. This could be another flashpoint.
WHY IS A HOUSE NOT AN ASSET?
Some may have been curious with the above quote from Kiyosaki. If this would be taught and spread it could change people's attitudes towards property, and prevent future disasters. Let me give some points to explain the quote.
a house, in reality, is like a car. You use it and therefore it depreciates its value. Unlike cars where the price only goes down, house prices are going up due to market forces i.e. central banker policy, not due to its inherent value.
An asset, to my knowledge, does not bring with it the high maintenance costs in order give it a value. A house is a major liability due to its maintenance costs.
An asset generates wealth. As above, a house over time costs you on top of the basic commitments. Therefore a house cannot be termed an asset.
Let's say you own your house and rent it out. Ok, the rent generates wealth. But if something disastrous happens to the house and it requires substantial amounts of funds to fix, part of the initial wealth generation will inevitably go to fixing the house. You lose the wealth and are back to or near zero. Tenants may also be unreliable with payments. Hoping that this doesn't happen is speculation, which is not a characteristic of an asset.
You own your house and are seeing a massive increase in the price over the years. You made a profit. As highlighted above, this is mainly due to market forces. This is in par with a speculative gain rather than a sound asset.
CONCLUSION
The bubble phenomenon has engulfed the housing market again. I am sensing that when the housing market unravels, it will be crashing worldwide and be worse than 2008. Collateralized debt obligations have returned in the UK, USA (even under new names), and Canada. And like in pre-2008, they may be a warning sign that something is going to happen. I'm not an expert by any means, but it is quite obvious that we have been indoctrinated and mislead on a massive scale. The mentality that we should all own a house because a house is an asset is logic defying, and it is time that people get informed because it can change tragic outcomes. I am not saying a house isn't a great thing. I want to own my place too, but one has to be realistic about it. See it as your dwelling, not an investment.
Not everyone will be able to ever afford a house. The winners in the market are those that are informed. Unfortunately many will be hurt. As for me, I will wait for the circus to unwind, have little to no debt, and in the meantime invest in safe assets and save the money to buy my place outright. So before you commit to a house at this time think hard, and don't assume that things will stay as they are, because they won't.
Your piece on the housing nonsense reminds me of a quote by none other than Paul Warburg who said:
"The world lives in a fools paradise based upon fictitious wealth, rash promises and mad illusions. We must beware of booms based upon false prosperity which has its roots in inflated credits and prices."
Whatever Warburg was he was no fool watching as he did the crash of the roaring 20's. I think we are all going to wake up to a world very different from the one we went to sleep in any day now? Reminds me of the scripture:
"Look, I come like a thief! Blessed is the one who stays awake and remains clothed, so as not to go naked and be shamefully exposed." Rev. 16:15
Sandra writes:
Oh, please. What is this business about buying a house as an "investment" we never hear the end of? We need a place to live, right? If we do not buy a house, then we will have to rent one or else rent an apartment, unless one enjoys all the advantages of residing under a bridge. There are no other options. Couch surfing with one's spouse and family? I don't think so. This was barely touched on.
The disadvantages of renting are just as numerous as owning your own house, if not even greater. You are still paying for the repairs and taxes, only it's indirect. A landlord can decide he wants to re-do all the suites in an apt. block, which happened to someone I know. Total renovation even though the suites were all perfectly livable and in good condition. (I've seen some of them.) The tenants were not given a choice whether or not to have their particular suite renovated. The increase in rent was ghastly and quite a few of the tenants are old people.
Suppose large numbers of people decide to heed the advice that buying a house is a "poor investment". Where do they go? Who do they sell their house to, if nobody wants to be a homeowner? Who's going to own all those houses and apartment blocks? Are a few very rich people going to come along, buy up everyone's house, and then rent it out to them? Instead of dealing only with the government (who you pay your house taxes to), you then have to abide by the landlord's endless rules and regulations, too. If you want a dog or a cat, you'll have to pay extra rent, for just one example, if they let you have one at all.
There's no free lunch. Life is hard and staying alive is expensive.
Thanks for listening. As you can see, this topic is like waving a red flag in front of a bull where I am concerned.
I found this on one of my favorite conspiracy sites... cliffs anyone?
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Let me say this. If you are a home owner and even if the market crash you don't actually lose anything till you sell the house below what you pay for.
Also with how Vancouver it is now I don't see the bubble burst. Is all about supply and demand. There are way more people moving into BC than there are housing for that demand. That's why there is close to a 0% vanacy rate for rental markets.
So you work all your life for a home but the guy that invested his money into a business instead can come along after the crash and use his invested money to buy a handful of homes.
Quote:
Originally Posted by zyzzjr
Nopes. House prices are going to the moon my friend.
[IMG][/IMG]
Thats quite the idea! floating (a few feet off the ground) houses by way of air balloons! When you look at it... youre not free in this country... I can not go anywhere in this province and build a shelter for myself... its illegal!
I've been hearing about the "great Vancouver housing crash" and how the housing bubble is going to burst for the past 15 years... and yet, somehow, it continues to go up
The only thing that is going to have any impact on the market is if the government steps in does at least 3 of the following:
a) Totally shut out foreign ownership
b) Come down hard on taxing speculative flippers
c) Introduce legislation that either limits how much property you can own, or introduce heavy penalties on those amassing properties
d) Create new rules that prevent companies from holding private residences in trust
Generally speaking, I am against government influence on the free market... with that said, globalization has created a huge market for property in Canada, which is severely limited in supply by comparison. I kind of feel at this point that Canada should be looking at protectionist measures for property.
You can already see these issues being raised as key election issues in BC. Both the NDP and Green party want to introduce new rules that will no doubt have an impact on the housing market. Even if the Liberals get in again, they are likely going to take further action to cool the market.
It really makes you wonder what the housing market might look like in 5 or 10 years from now. Is it going to be a good place to invest your money, or is it going to be a continued target of government until investors give up and move on.
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^^ there are tons of loop holes with foreign investor or house flipping.
If the gov really wants to cool the market all they need to do is ban all foreign investor from buying. As long as the money use to purchase is not local it is consider as foreign. This will close a lot of loophole such as using a dummy company to buy or using trust funds. Make it so if people are buying with cash, the cash needs to be in the Canadian banks/Canadian stocks/Bonds for at least 5 years. There also needs to be traits to follow where the money comes from so if there are anything that's illegal we can spot it right away.
No one in our gov have the guts to do that though since our economy is relying on foreign investor. Once foreign money stops Canada is going back into recession.
^^ there are tons of loop holes with foreign investor or house flipping.
If the gov really wants to cool the market all they need to do is ban all foreign investor from buying. As long as the money use to purchase is not local it is consider as foreign. This will close a lot of loophole such as using a dummy company to buy or using trust funds. Make it so if people are buying with cash, the cash needs to be in the Canadian banks/Canadian stocks/Bonds for at least 5 years. There also needs to be traits to follow where the money comes from so if there are anything that's illegal we can spot it right away.
No one in our gov have the guts to do that though since our economy is relying on foreign investor. Once foreign money stops Canada is going back into recession.
I don't disagree at all
I think that the housing boom here has been driving a shit load of jobs in real estate sales, new home construction, and residential renovations
Cut off the outside taps and cool the market too much, and you are likely to have a rapid meltdown of support jobs
However, you are also presuming that the elected government is going to put considerations for the economy over vote winning socialist promises. The fact of the matter is the majority of British Columbian's are getting squeezed out of the market and can no longer afford to buy. That translates into votes for candidates that are willing to bring in legislation that will restrict or even ban foreign buyers.
Just as an example: http://www.bcgreens.ca/housing
*Increase foreign buyers tax to 30% throughout BC
*Nail short term flippers (including less than 5 years buy/sell)
*Tax people who own expensive homes WAY more
I do actually agree that it will have a negative affect on the economy, but it seems like an inevitable outcome as the idea continues to gain support among voters
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^^ I am sure that's what most BC in wants. I also agree the gov will "try" to do something the housing market. However I don't feel like the policy they are actually going to use will have much of an impact like the 15% foreign tax that was impose last year. It didn't really have much of an impact since there are so many loopholes with it.
The gov "might" make promise big but in reality they will do very little. A lot of the party do accept donations from these big crop that have some dealings with the real estate market. Is also not just a province matter is also a federal matter and I don't see how the federal will do anything at all. Beside do these political party wants to get blame for ruining the economy for short term (5 to 10 years of recession) or ride the game out and milk it as long as possible and worry about the housing issue till next election or the next party to come in party to worry about it?
None of the gov party really have a long term plan (10+ years). All they do is make promise for short term, looks good in their term and not to deal with long term plan/effect what their policy have.
^^ I am sure that's what most BC in wants. I also agree the gov will "try" to do something the housing market. However I don't feel like the policy they are actually going to use will have much of an impact like the 15% foreign tax that was impose last year. It didn't really have much of an impact since there are so many loopholes with it.
The gov "might" make promise big but in reality they will do very little. A lot of the party do accept donations from these big crop that have some dealings with the real estate market. Is also not just a province matter is also a federal matter and I don't see how the federal will do anything at all. Beside do these political party wants to get blame for ruining the economy for short term (5 to 10 years of recession) or ride the game out and milk it as long as possible and worry about the housing issue till next election or the next party to come in party to worry about it?
None of the gov party really have a long term plan (10+ years). All they do is make promise for short term, looks good in their term and not to deal with long term plan/effect what their policy have.
All excellent points
I still feel that within the next 5 to 10 years, one of the parties is going to go ahead and take action on speculation, and probably some kind of a short sighted knee jerk reaction.
Voting? Government looking out for the little guy... are you guys serious?
1 People cant afford to have children, so that means for every couple(parents) that dies, one child\person remains.
2 People cant afford houses now... where is the demand? Once the crash happens and recession hits... jobs will dry up (no cash flow) and there still wont be a demand.
edit - 3 new buildings could outpace foreign demand
Like the US housing crisis, its going to happen here too.
Quote:
Published on Apr 20, 2017
Josh Sigurdson talks with author and economic analyst John Sneisen about a recent shocking development in Canada as the Bank of Montreal is now bundling uninsured mortgages. A first for Canadian bonds!
As John breaks down, BMO is doing exactly what banks did in the U.S. in 2005-2008 leading to the housing bubble burst and recession.
To understand this, one must understand collateralized debt obligations (CDO) which basically means that banks are selling packages of almost entirely bad mortgages. Included in the packages are a few good mortgages which allow them to rate the packages by the top two or three loans and then sell them to people, pushing them into debt.
The market manipulation is starting to hit its peak in Canada. Artificial markets always eventually come crashing down. As the housing bubbles in Toronto and Vancouver grow to all time highs and cause massive instability, it's important to get out of the system.
People are much better off decentralized and insured with sound money instead of thinking their house is an asset or piggy bank.
Normally I tend to disagree or just fail CIC's post, but this part is a scary reality many face now.
Many of my friend who aren't financially savvy/fortunate to have a rich dad bought into housing, which is fine and all. But what's not fine is that they are literally putting their entire disposable income after bringing the basic necessity to the table into housing.
There's little to none of their money invested into their retirement. Come retirement, what are they going to do? Reverse mortgage so they can rely on their assets to death? Then what is the point? They suffered most of their working life just to afford the house, and at the end, how much "luxury" can they afford with the house post-retirement?
Assuming that, adjusted to inflation, a house 1M today is 5M by the time they retire (yes, I'm being generous on the figure) but everything is increased 5-fold. What they can do is still what they can do 1M today, so I think it's fair to use current as model. Let's say today they need 50k to get by in Van, factoring pension, they need to withdraw 30k from the house, that 1M is going to last them 33yrs but again, with little to no luxury in their life. So they worked their ass off for the entire life just so they can live the same way (albeit not showing up to work everyday) for the rest of their life?
This is fucked up on so many levels if one really think about it. A home should not be an investment vehicle and neither are they a good one. My parents never touched residential RE in their entire investment life and they turned out more than fine.
Let me say this. If you are a home owner and even if the market crash you don't actually lose anything till you sell the house below what you pay for.
Also with how Vancouver it is now I don't see the bubble burst. Is all about supply and demand. There are way more people moving into BC than there are housing for that demand. That's why there is close to a 0% vanacy rate for rental markets.
That's what I've been telling everyone that I know. As long as you have a house or more, it's hard to lose money because you can rent it out.
The only way you'll lose is if people stop coming to BC and starts moving out and you have no way to pay for the mortgage of all the property you owe.
First off, how much drop in value in percentage is defined as a crash?
Given how overpriced the real estate prices today. If there is a 20% drop in value, I would have no problem taking out a huge loan and starting buying properties in well off areas like Downtown, West Vancouver, Vancouver West...etc.
Vancouver real estate in my own opinion is pretty unique. The city highly diversified, so in the market you are not just competing with locals that are move up in the social ladder, but also wealthy buyers from around the world. I honestly don't see how the market is going to crash at all, or even have a significant long term decline like Japan.
If there is a 20% drop in value, good luck getting a loan.
Quote:
Originally Posted by beebob
First off, how much drop in value in percentage is defined as a crash?
Given how overpriced the real estate prices today. If there is a 20% drop in value, I would have no problem taking out a huge loan and starting buying properties in well off areas like Downtown, West Vancouver, Vancouver West...etc.
Vancouver real estate in my own opinion is pretty unique. The city highly diversified, so in the market you are not just competing with locals that are move up in the social ladder, but also wealthy buyers from around the world. I honestly don't see how the market is going to crash at all, or even have a significant long term decline like Japan.
CiC do you rent or own? maybe some background info about yourself instead of these conspiracy theorist articles from around the world.
We also have a very active thread about real estate where this has all been discussed and I never see you participate in there.
You dont think the US housing crisis and global banks causing a depression was engineered? If not tell us how the world works. Some people here will end up in Canadian tent cities and wont have internet access for me to say "I told you so".
I live with my divorced mother... and banned from said thread for pointing out evidence that governments scan cities from the sky, with thermal cameras, looking for heat signatures of illegal dwellings... like someone living inside a shed of a residential backyard.
That's what I've been telling everyone that I know. As long as you have a house or more, it's hard to lose money because you can rent it out.
The only way you'll lose is if people stop coming to BC and starts moving out and you have no way to pay for the mortgage of all the property you owe.
I wouldn't say that. If your mortgage is $700k or more, you're losing money by renting it out in this market. The monthly mortgage with 20% would be around $3,500/month.
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