Baby, we got a bubble!?

[Eug]

Housing market charts:

2009 summary

Greater Toronto REALTORS® reported 87,308 MLS® transactions in 2009 – a 17 per cent increase over 2008. This result included 5,541 sales in December. The 2009 result was in line with the healthy levels of sales experienced between 2004 and 2006, but lower than the record of 93,193 set in 2007.

“After a slow start to the year, existing home sales rebounded during the second half of 2009,†said TREB President Tom Lebour. “As consumer confidence improved, many households moved to take advantage of affordable home ownership opportunities in the GTA. The strong residential real estate sector was a key contributor to overall economic recovery in Canada.â€

The average home price in 2009 climbed four per cent to $395,460. The average price for December transactions was $411,931.

“Market conditions became very tight in the latter half of 2009. Sales climbed strongly relative to the number of homes listed for sale, resulting in robust price growth that more than offset average price declines in the winter,†said Jason Mercer, TREB’s Senior Manager of Market Analysis. “A greater supply of listings in 2010 will see home prices grow at a sustainable pace.â€

In December, the median price was $349,000, from the $305,000 recorded during December of 2008.

 

[The Condo Observer]

Bubble Theroists

I am not convinced either that we have the fundamentals of a bubble. I am not saying that there cannot be a pullback, but I only see that happening if there are localized shocks - namely massive and sustained job losses in the core. The hysteria generated from a heady combination of low interest rates and low supply in the second half of 09 will subside....and the market will balance off in 10, perhaps retreating from current highs. The wildcard this year will be the fabled "oversuppy" that will come on stream in 10....But even this might be overstated..

Buyers of projects coming on stream in 10 purchased in 05/06. If we are to believe the stats, 70 percent of these are owner-occupied. The balance are investor purchases. This is the supply component that we must be concerned about. Will investors flip their units after registration, or will they rent them out? Will the majority of these units be one bedrooms? One plus dens? Or have these investors already flipped on assignments to end-users, as the assignment market is apparently heating up? Lots of variables that could tip things one way or the other....

 

[interested]

..

Buyers of projects coming on stream in 10 purchased in 05/06. If we are to believe the stats, 70 percent of these are owner-occupied. The balance are investor purchases. This is the supply component that we must be concerned about. Will investors flip their units after registration, or will they rent them out? Will the majority of these units be one bedrooms? One plus dens? Or have these investors already flipped on assignments to end-users, as the assignment market is apparently heating up? Lots of variables that could tip things one way or the other....

I believe there is also some interesting observations that can be drawn from the last big oversupply condo market in 1989. It took until 1992 when the prices bottomed with capitulation. however, if one observes what happened, there were some sales in 1990, then more in 1991 and then even more in 1992/1993 as poorly capitalized investors finally could not carry the financial burden. However, if one looks at what a condo cost in 1988/1989 say about $200K for a 1 bedroom that rented at $1500 with 12% interest rates on say $150K mortgage or $18000 interest alone, those investors were heavily negative when condo fees, taxes, insurance were factored in.

Today, the condo is say $250K for the 1 bedroom. Rent is $1400. If one assumes $200K mortgage at even 5% that is $10000 interest. Condo fees say $3000/year and taxes $3000/year or $16000, the rent covers. If rents go down to $1000-1200 because of over supply, that still leaves the investor carrying$1500 to $4000/year. I would suggest alot of investors could manage that and therefoe unless the situation stays bad for far longer than 3 years, or the interest rates really spike as opposed to 1 or 2 % increase, I believe alot of investors would ride out the storm. The situation is vastly different if there is alot of supply, no renters and rents drop more dramatically. But we have not seen $1200 for a 1 bedroom in at least 5 years (for a $250K condo) and this would be a very extensive drop. I don't know when $1000 got you a 1 bedroom condo but it must be close to 10 years I would think if memory serves well though I do admit I can be corrected on this fact.

My point: Barring a severe overglut, significant interest rate increases(greater than 3% or even 5% from current, and a significant rent drop in theorder of 20-35%, I do not believe we will see a mad dash for the exits. Of course if my hypothesis is wrong, all bets would be off (we end up with a Florida/Arizona style meltdown.)

 

[cdr108]

alot of interesting views and opinions.

urbanation expects 17,000 condo units registering in 2010 in GTA.

from what i've read, many indicate new condo pre-construction sales were predominantly to first-time buyers and investors, 40% and 40%, respectively. unfortunately, there aren't hard stats to back those statements.

since most first-time buyers are either renters or living at home, that means that rental stock becomes added to the current rental inventory once the buyers take occupancy.

that may mean upwards of 10,000 additional rental units flood the market, ultimately affecting rents asked/received.
will that cause rent to drop 20-35% ... unlikely, but certainly stay stagnant or decrease 5-10% when you consider the incentives given (ie. free months, tv, etc).


one more thing that has me scratching my head ...
i've recently read that Benjamin Tal of CIBC fame thinks TO real estate is inflated by 10% but haven't found any reports/charts from him to back his claim;
while some others state we are 30% over-valued with data supporting this theory.

IIRC, there were many pre-construction projects in 2006 in the dt areas bordering Dufferin to Distillery to Bloor to Lakeshore that were selling around $300-350 PSF range.
these same projects and recently released ones are now asking/getting $500+ PSF, which equates to 50% appreciation in the last 3 years.

thoughts ???

 

[The Condo Observer]

No more thoughts here...I would just be adding to the speculation. We are all operating in an environment where information is imperfect, we are filling in the gaps, coming to conclusions where facts are scarce, projecting our imaginations...Bubble theorists abound, as indeed they have since the early part of the last decade when the condoization of Toronto started.


I said it before, we are establishing a "new normal" in the downtown core, and I suspect that new baseline/ benchmark is higher than we previously imagined. Its now also rooted in the massive paradigm shift towards urban living (a function of demographics, immigration, different generational tastes and values), so factors outside of the pure finance and economics are contributing to that "new normal"....I dare say that developers are building that premium into new projects preconstruction prices...

My advice is to get in when its still marginally affordable, as soon the day will come when it will no longer be...Find a good value in resale or new constrcution, lock in a long term rate - even seven to ten yrs, so that your cash flow is predictable, and make a piece of DOWNTOWNreal estate a part of your overall long term portfolio

 

[daveto]

TCO, notwithstand the macro-economic arguments, I think that a fundamental shift in the the demographic/residential structure of a city could certainly explain the resiliance of Toronto's market.

However I've spoken elsewhere on the board about how Canada as a whole has seen equal or larger price increases.
http://www.urbantoronto.ca/showpost.php?p=360103&postcount=33

Do you believe that your arguments apply to the country as a whole? Or only to our downtown condo market, and that the rest of the country's price increases are unmerited?

 

[TrickyRicky]

dpylyp, I'm not exactly sure what your post was suggesting. I'm not suggesting that a bubble exists or does not. What I was suggesting is that the fundamental financial position of the average Canadian is about "as solid as the Canadian shield", meaning less solid than they believe. And that home prices are one of the fundamental parameters holding up this belief.

Crashes don't occur when people believe that their position is weakening, they occur when people falsely believe their position is strong, when it is infact weak. I think sentiment by blogger on websites presently errs to the pessimistic but sentiment (where it really counts) of the average Canadian errs to the overly optimistic. Erring to the overly optimistic is generally a good life view, but it causes inherent instability in a system.

The counter point you bring up regarding home equity is similar in nature to the one brought up about immigration to the city. What were the conditions during other down-cycles in the real estate market in this city? Were home equity stakes and immigration levels also high during these periods? If they were we can assume these factors to not be important to the discussion. I believe that the market cascades to the negative when the general optimistic sentiment is undercut by the marginal actors. Optimism turns to panic reluctantly but on a razors edge.

 

[The Condo Observer]

TCO, notwithstand the macro-economic arguments, I think that a fundamental shift in the the demographic/residential structure of a city could certainly explain the resiliance of Toronto's market.

However I've spoken elsewhere on the board about how Canada as a whole has seen equal or larger price increases.
http://www.urbantoronto.ca/showpost.php?p=360103&postcount=33

Do you believe that your arguments apply to the country as a whole? Or only to our downtown condo market, and that the rest of the country's price increases are unmerited?

I agree with those analysts who advocate a highly localized approach to dissecting prices, sales and performance. My comments are local to toronto, as an aggregated market. I simply do not track other markets. Even within toronto, it should be noted that sub markets are performing differently in this recovery phase. But to repeat, my take on things usually refer to the core...I believe that the best returns for investors will be realized via condos in the core. This is where the new normal in urban living will take place. Its pretty exciting.

 

[daveto]

I agree with those analysts who advocate a highly localized approach to dissecting prices, sales and performance. My comments are local to toronto, as an aggregated market. I simply do not track other markets. Even within toronto, it should be noted that sub markets are performing differently in this recovery phase. But to repeat, my take on things usually refer to the core...I believe that the best returns for investors will be realized via condos in the core. This is where the new normal in urban living will take place. Its pretty exciting.

TCO! you sly fox You sidestepped my question, didn't you!
Good for you for staying on message...politicians everywhere would be proud of you!!

But just to clarify...
As a real estate professional, you have no opinion about why Canada's nationwide market is seeing price increases even higher than Toronto's despite not having the benefits of Toronto's "new urban living excitement" ?

 

[dpylyp]

very specific in the neighbourhoods

I am centered to the 427 corridor in Etobicoke and have incorporated the condo density into my working canvassing,
That said I want to look at two specific locations
Essex I & II 500 units
Nuvo 1 & II 700 units
Park Nuvo approximately 90% sold out per my visit last week. Built adjacent to the Kipling Subway (proposed future expansion + court house on Westwood theatre site + new film studios at 777 Kipling Ave)

of all four building less that 6 are available for sale and 2 are actually under contract. Lets do a ratio 5 / 1300 ? ok 25 / 1300
There is no product.

OK Different site
Port Royal Place Michael Power
11, 15, 17 Michael Power 600 units
7, 9 Michael Power 400 units
5 Michael Power 200 units
3 and 1 are separate building with a common pod and are selling /sold
Lets do a ratio 8 /1200 OK 25 /1200
There is no product

All these details and sold stats are maintained and updated monthly on my sites.

Shopping Downtown with clients leads to the same conclusion with every unit pushing otself into multiple offer territory

I drove past Widdicombe and Warrender last week (both have HUGE billboards advertising one two and three bedroom units)

I am not pressing to buy. I am not pressing to dump and run.
If you are buying be prudent Buy what you can afford.
I am just tired of bubble bubble bubble

Bubbles require inventory, an excessive quantity of inventory.
we do not have that situation.

When inventory comes onto the market that exceeds demand there eventually will be a balance.

This CAAMP - Canadian Accredited Association of Mortgage Professionals piece is a really informative read.

http://www.caamp.org/meloncms/media/CAAMP Fall 2009 Mortgage Industry Snapshot Report.pdf

 

[The Condo Observer]

tco! You sly fox you sidestepped my question, didn't you!
Good for you for staying on message...politicians everywhere would be proud of you!!

But just to clarify...
As a real estate professional, you have no opinion about why canada's nationwide market is seeing price increases even higher than toronto's despite not having the benefits of toronto's "new urban living excitement" ?

i am not a real estate professional!!

But, to answer your question, I would not want to hazard a broad brush opinion on the Canada wide phenomenon. Call it post recession exuberance? Certainly low interest rates today is bringing forward loads of activity...I think all markets will balance out in the months to come, as new product comes to market and rates creep up...

 

[X2 Buyer]

I said it before, we are establishing a "new normal" in the downtown core, and I suspect that new baseline/ benchmark is higher than we previously imagined. Its now also rooted in the massive paradigm shift towards urban living (a function of demographics, immigration, different generational tastes and values), so factors outside of the pure finance and economics are contributing to that "new normal"....I dare say that developers are building that premium into new projects preconstruction prices...

Fully support the "new normal" per se..

 

[Shtopor]

Looking at the disscussion here I have a filling that 90% here own a property
(mortgaged/paid) owners, pulling charts and persuade each other that prices are ok and
there is no bubble.
If you look at recent history ONE and only ONE thing that reversed the process of falling prices last winter was ridiculosly low interest rates that gov. enforced.
Question is how long will government hold those rates. That is a question you should ask each other on this board. Second thing is if/when CMHC will require higher downpayment. Third if/will CMHC lower ammortization period.
Then and only then you can pull your charts and show them to each other on this board.

 

[interested]

Fully support the "new normal" per se..

TCO I feel is correct regarding the phenomenon. However, I shudder everytime I hear the "new normal". "Things are different this time" arguments were used to explain why technology stocks justified the 2000 valuations before they came down, why house prices can only go up and never correct to a significant degree downward.

Shtopor makes some very good points that could easily derail house prices at least to some degree. I am not suggesting a crash. However, I think one has to be cautious when pointing to "things are different this go around/new normal now exists".

 

[MAU]

I said it before, we are establishing a "new normal" in the downtown core, and I suspect that new baseline/ benchmark is higher than we previously imagined. Its now also rooted in the massive paradigm shift towards urban living (a function of demographics, immigration, different generational tastes and values), so factors outside of the pure finance and economics are contributing to that "new normal"....

My advice is to get in when its still marginally affordable, as soon the day will come when it will no longer be.

Yikes. That sounds like a bubble to me.