Baby, we got a bubble!?

[daveto]

Eug, thanks for the clarification on your earlier post.

As fodder for discussion for the board I offer up the following charts of Price to Income, and Price to Rent from from the OECD (unfortunately only to 2007)
http://www.tradersnarrative.com/global-real-estate-ratios-show-extent-of-bubble-2066.html

And for those interested in the "price to income" barometer for housing prices globally, the following report (Q3 2008 data) is quite comprehensive.
http://www.demographia.com/dhi.pdf

 

[interested]

Do we have a bubble/R/E investing

First time poster on UT website. I have read with intrigue the varied opinions on bubble/no bubble and am impressed by the widespread thoughts on this matter and the insight shown by a number of posters, whether I agree or disagree. As a small investor in a few condos in downtown, I would like to express a different view I feel, that of an older investor interested not in flipping but in simply preserving wealth and providing a source of income for retirement. That said, I believe that investors like myself are leary of the stock market, get virtually no return on bonds/GIC's etc. and are therefore prepared to sit on rental real estate that returns much lower than the cap rate being quoted. this group of investors are well capitalized and believe over the long term that real estate will improve in value. That said, it is of concern when investors "speculate" to flip or have bare minimum down payments or realtors buy to flip as these weaker landlords who get into trouble decrease the rental values for all of us, as well as property values. I recall the 1989 downturn and that condos could not be "given away" until about 1996 and it was a slow recovery thereafer. However the interest rate difference between then and now means most could hold on I suspect for quite a few years without having to sell, though perhaps incurring small losses. that said, I believe the condo market, and in downtown in particular is being overbuilt, and landlords should count on lower than todays rentals when these properties are ready (and lower sale prices than today). Will we crash like the US and Florida, California, and Arizona in particular. I doubt it but I believe that a small downward adjustment is likely over the next few years. One final note: There is only 1 New York in North America. Toronto is a very distant 2nd and comparable to Chicago, LA, and perhaps Miami as "financial centers" and I use that expression loosely. These 3 markets have been somewhat disastrous of late. Again, as we are the prominent financial hub in Canada, I think we are somewhat protected but certainly not totally.
I look forward to the ongoing lively spirited discussion on this great forum.

 

[TrickyRicky]

It seems that the Bank of Canada is concerned with one of the issues I brought up, debt servicing costs. The actual price of properties (up, down, sideways) may not really be the main issue. The main issue effecting owners, buyers and sellers alike will be a run-up of debt servicing and property expense costs.

This is not to suggest interest rates or taxes or utility costs will skyrocket or reach uncharted territory. What I am saying is that properties are being priced to perfection under exceptional conditions. This means that a return to historic norms will be difficult to a significant and growing number of people. The longer rates stay low the more individuals become snared and dependent on exceptional conditions. Small changes then have the capacity to produce significant events.

The amount of pull-back in prices, if any, will depend on how financially resilient people are to weather the certain increase in debt servicing and property carrying expenses moving forward, and the timing of when these costs will start impacting their bottom lines. Remember, it doesn't matter if the average Canadian owns most of their home and has a job. The market will turn on the incremental changes and the size of the marginal groups.

 

[interested]

Small changes then have the capacity to produce significant events.

The amount of pull-back in prices, if any, will depend on how financially resilient people are to weather the certain increase in debt servicing and property carrying expenses moving forward, and the timing of when these costs will start impacting their bottom lines. Remember, it doesn't matter if the average Canadian owns most of their home and has a job. The market will turn on the incremental changes and the size of the marginal groups.

Agree to a point. The chain is only as strong as the weekest link and therefore at the margin, costs will come down. the question after that however is: what if there is money(investors/ more conservative capitalized owners) on the sidelines who feel the market has over run by perhaps 10% or 20% and then steps in to buy at a point where those buyers feel there is a return to value. It will boil down to supply and demand eventually.

That said, I agree that conditions have been "idealized/allow to bubble" with near zero bank rates and 35 year mortgage terms. the question you correctly elude to is: what is there that can possibly go more right vs. what can go wrong. Interest rates can only go up from here. 35 years is the max mortgage and thank goodness the government realized this problem (though somewhat late it is not in Canada in the same degree as in the US). there seems to be little left that can drive prices up significantly.

And yet I would be less than candid if I did not acknowledge that when I bought at $280/sq. ft in downtown in 2001 on paper I thought we were near the peak then. $280 sounds pretty good now though it did not seem so in 2001 but then who predicted less than 5% mortgages
(let alone some at 1.6% variables!!) that said, I don't know what more could happen to make things even more affordable.

 

[EXgeMMy]

IMO, 35yrs/5%, 40/0 mortgages did not make home ownership more affordable, it just drove up the prices even more.

 

[interested]

IMO, 35yrs/5%, 40/0 mortgages did not make home ownership more affordable, it just drove up the prices even more.

I agree it did drive prices up more. My point and I apologize if unclear was that anything that could drive up prices more has already been tried which is why I believe prices may fall somewhat.

 

[js97]

It's a classic ponzi scheme. Developers continue to raise prices, and investors seeing the appreciation, continue to buy expecting the next one to come. I would just hate to be that last investor that buys in at the peak.

A lot of wealth has been created over the last 10 years in real estate by fliping and buying up. This is only sustainable when you have continuous flow of entry buyers willing to take the properties at the lower end of the price spectrum.

Toronto entry salaries don't justify 300k for a 600sqf condo.... but it seems like we have a lot of international and babyboomer savings keeping this market going.

Yes it's a bubble... it's just a matter of when it hits the peak.

 

[interested]

A lot of wealth has been created over the last 10 years in real estate by fliping and buying up. This is only sustainable when you have continuous flow of entry buyers willing to take the properties at the lower end of the price spectrum.

Toronto entry salaries don't justify 300k for a 600sqf condo.... but it seems like we have a lot of international and babyboomer savings keeping this market going.

Yes it's a bubble... it's just a matter of when it hits the peak.

I believe when looked at over 10 years this is certainly true to a degree and is borrowing from future price appreciation. However, if one looks longer, say multiple decades, and even centuries in older countries in Europe, there has been a steady slow appreciation of prices over time due to inflation alone.

As long as governments flood the market place with low interest cash, expect the bubble to keep inflating. the question is will it be a slow hiss leak type decent or a big pop like in Dubai, Spain, England, and parts of the US.
I favour the former.

Agree salaries do not justify the prices but it must be remembered that in N.A. home ownership is a dream that alot of Europeans do not have. They know they will not own a house, be in a rental situation for life as prices are so high and yet property doesn't depreciate significantly with the exception of the above countries(which had 100-200% price appreciation over the past decade and not the approximately 60% we have had) and therefore I do not believe we should have a big pop. If developers keep building massively however, we risk the pop scenario. Let's hope for some decorum in the market place for all concerned, that developers build somewhat less and that buyer demand eases slowly and more resale product hits the market without a large increase in rates and an orderly transition with flat or small price decreases occurs.

 

[Eug]

Housing market has big cracks

So while it's true that Canada's banks are financially sound, it's less clear that homeowners are being similarly prudent.

Too many appear to be blindly following Americans down a path of excessive debt, enticed by low rates. The ratio of mortgage debt to household incomes in Canada recently hit a record 70 per cent, up from 65 per cent a year ago. And 40 per cent of home buyers are opting for short-term, variable-rate mortgages, which will eventually ratchet up, leaving some owners in deep financial trouble.

Canadian authorities have seen the U.S. movie; they helped fuel the hot market in Canada, and presumably they know how to cool it. The Bank of Canada would raise its key interest rate and Canada Mortgage and Housing Corp. would wind down its purchases of insured mortgages from commercial banks.

Brace yourself for a rough 2010.

 

[interested]

Housing market has big cracks

So while it's true that Canada's banks are financially sound, it's less clear that homeowners are being similarly prudent.

Too many appear to be blindly following Americans down a path of excessive debt, enticed by low rates. The ratio of mortgage debt to household incomes in Canada recently hit a record 70 per cent, up from 65 per cent a year ago. And 40 per cent of home buyers are opting for short-term, variable-rate mortgages, which will eventually ratchet up, leaving some owners in deep financial trouble.

Canadian authorities have seen the U.S. movie; they helped fuel the hot market in Canada, and presumably they know how to cool it. The Bank of Canada would raise its key interest rate and Canada Mortgage and Housing Corp. would wind down its purchases of insured mortgages from commercial banks.

Brace yourself for a rough 2010.

EUG, I assume from the part you are quoting of this article., you expect 2010 to be a rough ride and with a significant burst. Are you expecting 30% or even 50% like is seen in florida and Arizona and /or even more price declines?

 

[MadMax]

EUG, I assume from the part you are quoting of this article., you expect 2010 to be a rough ride and with a significant burst. Are you expecting 30% or even 50% like is seen in florida and Arizona and /or even more price declines?

Haha....this sounds so familiar, 2006, 2007, 2008, 2009, and now 2010. When are we ever going to face the fact that interest rates won't be going up ever, and there are thousands and thousands of first time buyers, empty nesters, international investors, and other markets to sustain the trend and establish new "NORMS" for the valuation of our Canadian Real Estate home index. This is like the movie "Groundhog Day" with Bill Murray except the movie was a lot funnier...

 

[interested]

Haha....this sounds so familiar, 2006, 2007, 2008, 2009, and now 2010. When are we ever going to face the fact that interest rates won't be going up ever, and there are thousands and thousands of first time buyers, empty nesters, international investors, and other markets to sustain the trend and establish new "NORMS" for the valuation of our Canadian Real Estate home index. This is like the movie "Groundhog Day" with Bill Murray except the movie was a lot funnier...

I personally expect some minimal price adjustments. No crash.
that said, how many times have heard new "Norms". "It is different this time" only to find out that it was not. As someone with "skin in the game", I admit I don't know the answer but I am not one in the doom and gloom camp. that said, I was wondering if EUG is?

 

[Eug]

EUG, I assume from the part you are quoting of this article., you expect 2010 to be a rough ride and with a significant burst. Are you expecting 30% or even 50% like is seen in florida and Arizona and /or even more price declines?

As someone with "skin in the game", I admit I don't know the answer but I am not one in the doom and gloom camp. that said, I was wondering if EUG is?

No. I'm just posting the article. While he presents both sides, it seems the author is suggesting a bust is imminent.

For Toronto, I've been predicting a 10-15% pullback... from 2007 levels. However, I've been predicting that since 2007. I have some "skin" in the game, but it doesn't concern me as much as some since a lot of that skin came from a couple of situations that mitigate the concern:

1) It's my primary home, not an "investment" per se.

2) My first big real estate foray started in the late 90s, but this was a condo townhouse... and I happily watched it increase in price until I sold in 2007. And that was my primary home too.

3) I cashed in a bunch of stocks and mutual funds in 2006 and 2007 and stuck the cash in the bank, and then used the money for a downpayment for a detached house. I also put all the proceeds from the sale of my condo into the mortgage for the detached home. So, I have lots of equity in my home, and I am on track to have it paid off in less than 10 years.

4) I don't like renting.

5) The following year, the worlds' economies imploded. So, had I not put my money into a home I would have been much worse off, as I sold much of my stock/mutual funds near 2007's peak. The "safest" hedge might have just have been to get out of both the stock market and the real estate market, but then I wouldn't have a place to live. See #4 above.

I find that when my predictions come true (but note that they often don't), I'm usually 2-3 years too early. I was worried that the stock market would drop significantly (although not to the extent that it did), which is why I started cashing out as early as 2006, even though I wasn't planning on buying until 2007-2008.

6) When I did buy in 2007, I was worried the market was already too high, but not outrageously so, and I felt that in 2007, 2005ish price levels were more reasonable. That's where the 10%+ comes from. I told myself if prices dropped 10% I could accept that, but if prices dropped over 20%, I'd be very annoyed. Note also that I bought in a buyers' market at significantly less than asking price, and I sold my condo at the same time in a bidding war at significantly higher than my asking price. In truth, I think the house I bought was overpriced, but the price I paid for it was reasonable. The price I got for selling my condo was noticeably higher than I was expecting though.

As for 2010, I think there is potential for a rough ride, but my guess is that interest rates will not rise suddenly. They will rise, but I think it's less likely they'll hit say 7% for a 5-year fixed in the next two years. If this prediction is correct, this will put downward pressure on prices, but hopefully won't cause a sudden and big crash. The rougher ride may be in 2011-2012 as interest rates continue to rise. But even then, I'm not predicting a big crash.

 

[Kenny]

When are we ever going to face the fact that interest rates won't be going up ever

Ever?

http://www.thestar.com/printarticle/738720

Royal Bank economists say the Bank of Canada will be among the next group of central banks to move off floor-low rates, with the Canadian bank's overnight rate finishing 2010 at 1.25 per cent. And RBC economists say they believe the trend-setting rate could rise to as much as 3.5 per cent in 2011.

 

[The Condo Observer]

Let's not forget that real estate is an investment option, and many individuals who are getting zero in GICs, dont like the volatility of stocks, look at real estate as a means of improving returns in the medium to long term. There are many buy-and-hold investors in the investor universe. Not all investors are flippers. Flipping is an expensive proposition nowadays, with developers charging assignment fees, or if later on, having to pay closing charges and then RE fees....

Personally, I hope rates rise and supply on the resale side improves, and starts to deflate this so called bubble before it gets to that point we all fear....

My CIBC guy must have been one of the few advocating locking in slightly higher fixed five year rates....these low variable rates are a short term thing. Buyers should always do their numbers on the higher five year fixed rate

That said, I also think we are establishing a new normal for this city...and somehow feel things are going to keep trending upwards, even if it flattens out a bit next year...

What I want for this city is visionary leadership, to take us into the new era. We must trade on our strengths NOW, and set ourselves up for the years ahead as a city and province where business can thrive. We also need the job growth.