Baby, we got a bubble!?

[Eug]

I don't know about other cities, but I do know that Vancouver had a similarly huge price peak around that time. Why do I know this? Because a friend's family bought around that time, and then they lost several hundred thousand dollars in equity in their home in just a few years. (They bought a luxury home in Shaunessey.)

---

BTW, if we're to accept that Toronto trend curve as reasonably accurate (for Toronto), which is to say that home prices have outpaced inflation over the last 15 years (but not over the last 20 years), then that would suggest that 2009 prices are probably around 10% too high, compared to that trend curve.

So normalization of prices to the trend curve means 10% drop in prices in real inflation-adjusted dollars. There are a number of ways this could happen.

1) Prices could flat-line for many years. With the economy improving, inflation would increase, and after a few years, inflation would catch up. This is the "soft landing" some predict. This is also the easiest for people to swallow. ie. If someone buys a house for $400000 and after 4 years it's still $400000 (but in 2014 dollars), the real inflation adjusted price has dropped, but I suspect most non-investors wouldn't actually care that much because they're living there anyway.

2) Prices could drop 10% or perhaps a bit more (as I had been predicting) over a couple of years so that prices were actually slightly under that trend curve. This would annoy a lot of people, but wouldn't necessarily be unhealthy.

3) Prices could drop much more, perhaps 20% or more. This would far overshoot that trend curve.

IMO, Flaherty is probably aiming for something between #1 and #2. It would be enough to annoy some people but would be enough to control the market while talking tough without decimating the market.

My gut feeling (without data to back that up) is that adopting a 7.5% minimum down payment policy, perhaps with a maximum 30-year amortization period could achieve this, without having to resort to significantly increased interest rates which would cause problems for the rest of the economy. Then, later as interest rates slowly increase in the future, price increases can be further moderated compared to inflation.

 

[daveto]

I don't know why it is so absurdly difficult for me to find a Canada avg house price graph on the internet. I know they have been published, and I've certainly seen them.

But in the interim, here is a graph from UBC Sauder school showing Toronto prices in real terms.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

The following graphs for Montreal, Vancouver and Calgary show much smaller bubbles in the 80s compared to Toronto.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-montreal.pdf
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-vancouver.pdf
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-calgary.pdf

If someone can find the Canada graph that eludes me, that would be much appreciated.

 

[interested]

I don't know about other cities, but I do know that Vancouver had a similarly huge price peak around that time. Why do I know this? Because a friend's family bought around that time, and then they lost several hundred thousand dollars in equity in their home in just a few years. (They bought a luxury home in Shaunessey.)

---

So normalization of prices to the trend curve means 10% drop in prices in real inflation-adjusted dollars. There are a number of ways this could happen.

1) Prices could flat-line for many years. With the economy improving, inflation would increase, and after a few years, inflation would catch up. This is the "soft landing" some predict. This is also the easiest for people to swallow. ie. If someone buys a house for $400000 and after 4 years it's still $400000 (but in 2014 dollars), the real inflation adjusted price has dropped, but I suspect most non-investors wouldn't actually care that much because they're living there anyway.

2) Prices could drop 10% or perhaps a bit more (as I had been predicting) over a couple of years so that prices were actually slightly under that trend curve. This would annoy a lot of people, but wouldn't necessarily be unhealthy.

3) Prices could drop much more, perhaps 20% or more. This would far overshoot that trend curve.

IMO, Flaherty is probably aiming for something between #1 and #2. It would be enough to annoy some people but would be enough to control the market while talking tough without decimating the market.
My gut feeling (without data to back that up) is that adopting a 7.5% minimum down payment policy, perhaps with a maximum 30-year amortization period could achieve this, without having to resort to significantly increased interest rates which would cause problems for the rest of the economy. Then, later as interest rates slowly increase in the future, price increases can be further moderated compared to inflation.

there is on the globeinvestor site on line an article today suggesting that the Bank of Canada will not raise interest rates to combat rising house prices but rather leave it to fiscal policy (Mr. Flaherty) to encourage the lenders to put in more conservative practices. Apparently the government is "studying" its options.

 

[interested]

I agree we may see a 10%, even up to 15 or 20% decline but then it should catch back up in the next 3-4 years. Let's hope for the first scenario of stagnant prices for a few years and a catchup after. I do not believe the doom and gloom bust predictions of some posters but it is human nature to have difficulty accepting significant drops in asset valuations. Easy to climb up on the horse. Tough to get off. Humans accept that things can increase 30% in short order but can't accept the opposite scenario, yet logic dictates if the first can occur, why not the second..

 

[simuls]

If you look at the graph Eug posted, it only goes to mid-2009 and all of 2009's price gains were in the 2nd half of the year. I think if that line continued into Jan 2010 and the most recent average sale price is correct, we're actually above the highest price point in Toronto's history and about 15% above the trendline. Also, while I don't consider housing in Toronto to be in a big bubble state, I do consider condo's, so while an overall 10% drop might occur, it could be much larger depending on the type of housing. In the core, there's no more room to build houses, but plenty of room for condos.

 

[Eug]

If you look at the graph Eug posted, it only goes to mid-2009 and all of 2009's price gains were in the 2nd half of the year. I think if that line continued into Jan 2010 and the most recent average sale price is correct, we're actually above the highest price point in Toronto's history and about 15% above the trendline. Also, while I don't consider housing in Toronto to be in a big bubble state, I do consider condo's, so while an overall 10% drop might occur, it could be much larger depending on the type of housing. In the core, there's no more room to build houses, but plenty of room for condos.

My eyeball guesstimate for Q3 2009 prices according to that trend line was around 8% above the trend, which is why I said 10% more than the trend for 2009 overall for Toronto. Not sure if 10% is accurate, maybe it's more like 12%. However, 15% might be a tad high (but maybe not, I dunno). Whatever the case, 10-15% is probably in the right ballpark.

Your comment about price drops varying on housing type does have merit, and IIRC some recent articles suggested that price increases in recent months have been higher on high priced homes more so than on low priced homes. However, I suspect that is because in some areas, prices on luxury homes dropped more than on low priced homes last year.

If prices were to drop again, maybe this will happen again. It would follow that rule of thumb that when a bubble hits, often times the luxury market get hits the hardest.

 

[interested]

In the core, there's no more room to build houses, but plenty of room for condos.

I posted elsewhere before but I saw a study which indicated that there was 3 year supply at the rate of consumption downtown in about 2007 of Class A land in the downtown core. (I searched but could not find it: sorry) This I understand is land where it is essentially land value ( parking lots, old structures worth no more than the land). After that, one proceeds to Class B and C land in which the structures are worth more than the land. This means that construction costs will increase as the land component will be higher. I would also suggest if there is a slowdown, most downtown real estate has been owned for a long time and likely few of those owners would be forced to sell at distressed prices. Rather, I would think they would wait for the next economic recovery to sell the property to developers who think they can build at a profit. Hence, I would think that the land costs will continue to increase, thereby making projects more expensive to build going forward. so there may not be quite as much room for condos, or at least if there is they will have to increase in price assuming construction costs stay constant or increase only by inflation.

 

[interested]

My eyeball guesstimate for Q3 2009 prices according to that trend line was around 8% above the trend, which is why I said 10% more than the trend for 2009 overall for Toronto. Not sure if 10% is accurate, maybe it's more like 12%. However, 15% might be a tad high (but maybe not, I dunno). Whatever the case, 10-15% is probably in the right ballpark.

Your comment about price drops varying on housing type does have merit, and IIRC some recent articles suggested that price increases in recent months have been higher on high priced homes more so than on low priced homes. However, I suspect that is because in some areas, prices on luxury homes dropped more than on low priced homes last year.

If prices were to drop again, maybe this will happen again. It would follow that rule of thumb that when a bubble hits, often times the luxury market get hits the hardest.

I feel 10 to 15% could certainly happen. Trends come back to the norm over time. However, others talk of the "new norm" which I think is worrisome when they do that things have "fundamentally changed". Usually, in fact there is no "new norm", just explanations of why things are different this time. Let's hope as you said before, prices just stagnate 2-3 years and the trend line catches up rather than a precipitous fall and then eventual recovery. Not really good for anywone.

the comment about luxury is definately correct. It did drop much more as it was the trade up homes and people with money who were most worried. They in turn have returned and this drives up the average cost. Vancouver, the most expensive market had the largest percent sales increase and that drives up Canada wide prices in a skewed fashion (as do) the Calgary and Toronto markets.

final comment is also correct. Luxury gets hardest hit but not always first. The thinking is that those in the luxury market understand better what is going on and therefore see things earlier and react. I am not sure that is always the case. Few of the smart bankers seemed to appreciate the speculative bubble Wall Street was creating or at least acknowledged it. If the market is small and limited, desirable locations will hold up actually better as there were wait lists before to get into those locations and there are enough well healed individuals waiting to purchase who do not live "pay check to pay check". That said, however, luxury ultimately in areas where there is more product does get hit and when/if it drops, it tends to drop more both in absolute dollar terms and percentage terms (since it is not a need but a want for most people.)

 

[daveto]

With respect to the discussion about the accuracy of the data in the graphs at the Economist...

Page 4 of this CREA report shows prices increased from approx $125k to $325k, 1988 to 2009 (not adjusted for inflation). That is a 160% increase.
http://www.crea.ca/public/news_stats/pdfs/sept09rpt_e.pdf


The Bank of Canada inflation calculator, shows a 60% cumulative inflation 1988-2009.
http://www.bankofcanada.ca/en/rates/inflation_calc.html

Thus, CREA's inflation adjusted price increase 1988-2009 is (260%/160% minus 100%)=63% increase.

This contrasts with the Economists graph which shows a virtually zero increase in the avg price for this period.

 

[interested]

With respect to the discussion about the accuracy of the data in the graphs at the Economist...

Page 4 of this CREA report shows prices increased from approx $125k to $325k, 1988 to 2009 (not adjusted for inflation). That is a 160% increase.
http://www.crea.ca/public/news_stats/pdfs/sept09rpt_e.pdf


The Bank of Canada inflation calculator, shows a 60% cumulative inflation 1988-2009.
http://www.bankofcanada.ca/en/rates/inflation_calc.html

Thus, CREA's inflation adjusted price increase 1988-2009 is (260%/160% minus 100%)=63% increase.

This contrasts with the Economists graph which shows a virtually zero increase in the avg price for this period.

I have a question and I don't know the answer Dave. From 1987 to 2009, houses increased in size and in the quality of what they put in them. Hence, would not the average price have gone up just based on this? I believe they talk about an average 2 story 3 bedroom home or 4 bedroom home of about 2000 ft to compare but are we comparing apples to apples?

 

[daveto]

I have a question and I don't know the answer Dave. From 1987 to 2009, houses increased in size and in the quality of what they put in them. Hence, would not the average price have gone up just based on this? I believe they talk about an average 2 story 3 bedroom home or 4 bedroom home of about 2000 ft to compare but are we comparing apples to apples?

I don't know the answer either. There was nothing in the Economist's notes that I saw that advised they were basing the figures on a particular house type.

I'd also note that condos have been decreasing in size over the past 20 years, and this understates the true price appreciation. I think a better measure would be $/sf, and perhaps a further adjustment to reflect how urban prices vs more rural prices can skew samples.

If there are extenuating details for how/why the Economist's data differs so markedly, then the onus is on them to explain those details (which I don't see anywhere)

 

[interested]

I don't know the answer either. There was nothing in the Economist's notes that I saw that advised they were basing the figures on a particular house type.

I'd also note that condos have been decreasing in size over the past 20 years, and this understates the true price appreciation. I think a better measure would be $/sf, and perhaps a further adjustment to reflect how urban prices vs more rural prices can skew samples.

If there are extenuating details for how/why the Economist's data differs so markedly, then the onus is on them to explain those details (which I don't anywhere)

Agree with your last statement. On one note though, condo's only started to decrease significantly in 2000 year onwards in size. As well, we went through alot of house size escalation in the 1990's and early 2000's with the McMansions.

 

[simuls]

Sales to listing ratio's have been off the charts jumping from 12% last March (firmly buyers territory) to 60% in October (ridiculously sellers territory). However, in the past two months, this number has dropped down to 41%. While two months does not a trend make, without a lot of new construction coming online yet it seems like inventory is beginning to materialize and/or sellers are backing off. That, coupled with the dollars' drop of more than 4 cents, leaves a lot of room of the BoC to raise interest rates starting in July. This will be a very very very interesting year!

 

[interested]

Sales to listing ratio's have been off the charts jumping from 12% last March (firmly buyers territory) to 60% in October (ridiculously sellers territory). However, in the past two months, this number has dropped down to 41%. While two months does not a trend make, without a lot of new construction coming online yet it seems like inventory is beginning to materialize and/or sellers are backing off. That, coupled with the dollars' drop of more than 4 cents, leaves a lot of room of the BoC to raise interest rates starting in July. This will be a very very very interesting year!

Simuls, one interesting caveat. some of the "experts" (gleaned from a couple of the banks economic forecasts) call for the C$ to drop possibly to 85 cents by mid year but then approach parity by the end of the year or mid next year. Not so sure if the Bank of Canada is following these experts but if so, I think they might be very cautious about increasing rates at least until there are signs of US economic recovery. They are still our biggest trading partner and like it or not, our livelihood and economic prosperity is linked to them to a significant degree. Canada raising interest rates without the US doing something similar will result in a more rapid assent of the C$. As well HST coming in July of this year should dampen house sales, at least new product over $400K. Until there is more confidence (and so far this year the stock market is down 5% which doesn't make middle age/tradeup buyers more confident), I cannot see much hope for alot of movement by these buyers. In other words, while product will come on the market, I am not sure it will be in the mid range in Toronto. First time buyers generally are younger, have not been burnt in their nest egg, and do not have the experience to draw from. Remember, once burnt, twice shy. Also, as mentioned before, we are drawing alot of sales forward due to HST and the low interest rates giving people a sense of urgency.I agree will be an interesting year for sure.

 

[Shtopor]

It is really interesting to read opinions on this thread regarding a bubble issue. My coworker just bought house (1 week ago) in King City ( Younge/King st.) for 450K, he bought it from those who got this very same house in May for 385K (he borrowed somehow 5% for downpayment somewhere). He is a self employed and told me for the fun of it he went to his bank (RBC I believe) and asked them if he can get around 400K, in shortl they said no way, only if he has 10/15% down and show sufficient last 2 years income(which he didn't have). To make story short, he went back to his RE agent who hooked him up with mortgage broker who did the trick. He got 425K. It is stories like this ( i know a few more as I work on construction sites and meet a lot of folks) that make me firmly believe we are in a bubble. Salaries are stagnant for the past 10 years at least, while RE skyrocketing. CMHC insures right and left at taxpayer expence (when time comes to pay), if CMHC sole reason is to help homeowners to have affordable housing, why they insure 2nd, 3rd, ... houses ? How does that help to keep housing affordable? I don't even raise moral issues with our polititians buying votes through CMHC (feel homerich policy).