Baby, we got a bubble!?

[jeff316]

Fair enough. I thought that your "everyone.." statement was for people on this board who are less than excited about the future of Toronto r/e ... like me and many others.
Just out of curiosity - going back to your "11 friends" statement: you said only one put less than 20%. How much would you say was the average % downpayment? And what was the typical price of r/e you guys were buying?

Oh my apologies, I didn't mean for it to be interpreted that way.

Again, it's totally anecdotal but to answer the question, of this admittedly narrow and unrepresentative sample (adding a woman I know who bought a condo with less than 20%) - 10/12 deposits above 20% - 2 deposits of 20%, 5 deposits between 25%-35%, 3 put down 50% or more (all of these were previous property owners moving up the ladder); 11/12 in City of Toronto, most in the old city of Toronto; half purchased semis/townes, 2 purchased condos, and 3 purchased detached houses (1 of those in Burlington); re: prices, the 2 condos were 350k and 370k, house in Burlington was 420k, 7 between 450k and 575k, two around 700k (including one crazy guy who only put down 10%, though he has a household income above the rest of us.)

We talk about this stuff pretty openly because our pay is fairly transparent and we're all at that new family needing space stage. Random observations...the only ones moving to the burbs are the ones with one partner who works out there already, otherwise the view is it's not workable with kids unless you have family picking up the slack...Most are concerned re: potential crash but desire to be close to work/kids and space needs proved paramount and a few were burned by waiting out the last few years while prices outpaced their savings...I can say that a few expressed an interest in renting but the feeling/finding of this group is that 3-bed rental stock is limited - old highrise with no a/c or yard or expensive new 3bed condos and whole-house rentals...Residual bad experience with previous rentals is high, likely influencing things...Although the CMHC cut off is 20% most seem to view 25% as the safe minimum (even though most get it that no "safe" minimum exists)...I would say 1/3 see it as an investment, 2/3 don't (e.g lifestyle choice/perk they are fortunate to afford (for now.)) I don't see a reason for people to be fudging it but as always take with a grain of salt. Hope that helps.

 

[Eug]

The September Teranet numbers should be out soon, but for the last 13 years from August 1998 to August 2011, the Toronto House Price Index has gone from 68.25 to 137.01. That represents an average increase of 5.5% per year. (Note that the first Toronto numbers in the graph are from July 2011. There are no records before that for Toronto.)

The consumer price index from 1998 to 2011 would put $68.25 at $90.01 now, which means an inflation rate of about 2.1%.

---

Meanwhile, the Star has an article about a house sold in 1906, resold in 2011:

http://www.moneyville.ca/article/1091881--is-home-ownership-really-a-smart-investment?bn=1

$1200 --> $825000. Annual rate of return is 6.4% over 105 years.

---

So, weirdly enough, the annual price increase according to Teranet for Toronto over the last 13 years is actually lower than the annual price increase over the last 105 years for this particular house in Riverdale.

 

[daveto]

The September Teranet numbers should be out soon, but for the last 13 years from August 1998 to August 2011, the Toronto House Price Index has gone from 68.25 to 137.01. That represents an average increase of 5.5% per year. (Note that the first Toronto numbers in the graph are from July 2011. There are no records before that for Toronto.)

The consumer price index from 1998 to 2011 would put $68.25 at $90.01 now, which means an inflation rate of about 2.1%.

---

Meanwhile, the Star has an article about a house sold in 1906, resold in 2011:

http://www.moneyville.ca/article/1091881--is-home-ownership-really-a-smart-investment?bn=1

$1200 --> $825000. Annual rate of return is 6.4% over 105 years.

---

So, weirdly enough, the annual price increase according to Teranet for Toronto over the last 13 years is actually lower than the annual price increase over the last 105 years for this particular house in Riverdale.

What bizzarely bad math in this article. Even more shocking is that none of those who took the time to comment at Moneyville seemed to actually check the math and notice the error.

In particular:
"The challenge was to compare apples to apples. We had the home’s sale price going back to 1906, but the Bank of Canada’s inflation records don’t begin until 1914. Toronto Stock Exchange records start in 1919.

So we opted to track gains from 1947 onward, seven years after Gunn’s death, when the house sold for $6,300. We found that in those 64 years, the house appreciated at an average annual rate of 2.3 per cent, adjusted for inflation. (Inflation averaged 3.9 per cent during the same period, largely because of spikes in the 1970s and early ’80s.)

But the increase from $6.3k to $825k in 64 years is not a 6.2.% gross (2.3% net) but actually a 7.9% gross, or 4.0% net of inflation (presuming their inflation calculation was correct).

Notwithstanding the calculation errror, it is misleading to compare the price increase ending at the current peak. A more accurate calculation would be to also look at the price to the recent trough (1996?) and average the two values.

Also, their contention that the TSX has produced returns of 3% net of inflation doesn't hold water. Probably they looked only at the values of the TSX, and didn't include dividends (which would bring it up to the 8%+ that most studies have concluded)

 

[TrickyRicky]

"So, weirdly enough, the annual price increase according to Teranet for Toronto over the last 13 years is actually lower than the annual price increase over the last 105 years for this particular house in Riverdale."

Eug, I don't really think that is strange. If they are in the same ballpark it could even be evidence of the opposite of what you are implying. My line of reasoning is that if you look at the size of the GTA in 1906 relative to the size of the GTA now in 2011, the rate of growth of value of the property must be somewhat linked to the rate of growth of the city region. We are growing much more slowly now in the last 13 years than we were earlier in the past century.

jeff316, I'm not suggesting that your particular anecdotal evidence is factually incorrect but I would add that financial position is like sex. If you ask someone about their sex life they are likely to default to two strategies a) boast if on balance that strategy has a high enough risk of credibility b) give average statistics if on balance the risk of boasting is not high enough to be credible. That is fundamental human behaviour.

Your anecdotal evidence is credible in giving a picture of what kind of housing solutions your peers and hence your demographic are pursuing but I am skeptical that they paint a complete accurate financial picture. For instance the average person in your peer group likely could only afford a greater than 20% downpayment if they got financial help from third party sources such as one of their parents that they are reluctant to disclose. Furthermore, most people even high income earners live paycheque to paycheque, not necessarily based on need but on lifestyle costs.

 

[daveto]

"So, weirdly enough, the annual price increase according to Teranet for Toronto over the last 13 years is actually lower than the annual price increase over the last 105 years for this particular house in Riverdale."

Eug, I don't really think that is strange. If they are in the same ballpark it could even be evidence of the opposite of what you are implying. My line of reasoning is that if you look at the size of the GTA in 1906 relative to the size of the GTA now in 2011, the rate of growth of value of the property must be somewhat linked to the rate of growth of the city region. We are growing much more slowly now in the last 13 years than we were earlier in the past century.

Eug/Tricky, its just one house out of 2 million on the GTA. It truly has virtualy no relevance whatsoever as an indication of price changes in the GTA over that period. One might as well point to a 90yr old grandfather who smokes as evidence that smoking extends life.

jeff316, I'm not suggesting that your particular anecdotal evidence is factually incorrect but I would add that financial position is like sex. If you ask someone about their sex life they are likely to default to two strategies a) boast if on balance that strategy has a high enough risk of credibility b) give average statistics if on balance the risk of boasting is not high enough to be credible. That is fundamental human behaviour.

Agreed. Consider this recent UK survey about driving skill. People are rarely honest with themselves, let alone others.
http://www.chapmancentral.co.uk/wiki/Road_safety/Overestimation_of_skill

A survey of British motorists[1] found that:
40% rated the overall standard of driving as bad but only 2% rated their own driving as bad
24% rated the overall standard of driving as good, but 75% rated their own standard as good

 

[cdr108]

Meanwhile, the Star has an article about a house sold in 1906, resold in 2011:

http://www.moneyville.ca/article/1091881--is-home-ownership-really-a-smart-investment?bn=1

$1200 --> $825000. Annual rate of return is 6.4% over 105 years.
.

and what about the cost of mechanical updates over the 105 years like furnaces /ac units, ductwork, plumbing, electrical; plus
capital improvement addeds to the original cost like bath and kitchen renovations, lighting, extensions, roofing, etc, that should be done every 20-25 years or so?

i've been told maintenance and upkeep costs of real estate can be the equivalent of rent, and let's not forget the cost of interest throughout the mortgage.

 

[jeff316]

jeff316, I'm not suggesting that your particular anecdotal evidence is factually incorrect but I would add that financial position is like sex. If you ask someone about their sex life they are likely to default to two strategies a) boast if on balance that strategy has a high enough risk of credibility b) give average statistics if on balance the risk of boasting is not high enough to be credible. That is fundamental human behaviour.

Your anecdotal evidence is credible in giving a picture of what kind of housing solutions your peers and hence your demographic are pursuing but I am skeptical that they paint a complete accurate financial picture. For instance the average person in your peer group likely could only afford a greater than 20% downpayment if they got financial help from third party sources such as one of their parents that they are reluctant to disclose. Furthermore, most people even high income earners live paycheque to paycheque, not necessarily based on need but on lifestyle costs.

I think what is most interesting about this discussion is that people dismiss anecdotes for their naturally biased nature and tiny sample size, yet overlay their own assumptions about those anecdotes to suit their viewpoint assuming that their assumptions are more representative of reality. Which I guess is human nature and a big reason this debate is so polarized.

 

[Eug]

What bizzarely bad math in this article.

I just ignored all that math, as it's not really relevant to this discussion. All I was interested in was the buy price and the sell price.

One might as well point to a 90yr old grandfather who smokes as evidence that smoking extends life.

It's funny you should mention that. I've used that example before to illustrate that smoking isn't necessarily a good predictor for all humans for time of mortality, esp. in certain circumstances. My own grandfather lived until 99, and was a heavy smoker until his 80s, and a light smoker in his 90s. ie. There may be certain trends attributable to certain factors, but prediction of outcome based on those factors may not be accurate. You can't predict a person's date of death by just knowing s/he smokes, nor can you predict the date of a pullback just by vague ideas about interest rates.

and what about the cost of mechanical updates over the 105 years like furnaces /ac units, ductwork, plumbing, electrical; plus
capital improvement addeds to the original cost like bath and kitchen renovations, lighting, extensions, roofing, etc, that should be done every 20-25 years or so?

i've been told maintenance and upkeep costs of real estate can be the equivalent of rent, and let's not forget the cost of interest throughout the mortgage.

What about them? My whole point is that the 5.5% per year return average (and that's not indexed to inflation) over this last 13 year "boom" isn't really all that unusual, if you compare to the longer term.

If you compare against that one house, that boom's return is lower than that house's average over the past century (and change), even after considering the multiple booms and busts.

It's true that this one house isn't necessarily representative of the greater market, but it may just suggest that the rise isn't quite as crazy as some make it out to be.

 

[daveto]

I just ignored all that math, as it's not really relevant to this discussion. All I was interested in was the buy price and the sell price.

When one number is wrong, there are usually others.

It's funny you should mention that. I've used that example before to illustrate that smoking isn't necessarily a good predictor for all humans for time of mortality, esp. in certain circumstances. My own grandfather lived until 99, and was a heavy smoker until his 80s, and a light smoker in his 90s. ie. There may be certain trends attributable to certain factors, but prediction of outcome based on those factors may not be accurate. You can't predict a person's date of death by just knowing s/he smokes, nor can you predict the date of a pullback just by vague ideas about interest rates.

Agreed. All one can do is price accordingly. (btw, I'm an actuary)

...it may just suggest that the rise isn't quite as crazy as some make it out to be.

Agreed. Many markets have seen greater rises over shorter timeframes, including Toronto in the 80's. I don't think this rise has been crazy, nor do I think the subsequent decrease would be crazy. Just a standard 15-30% oscillation around the long term trend.

 

[cdr108]

I just ignored all that math, as it's not really relevant to this discussion. All I was interested in was the buy price and the sell price.


It's funny you should mention that. I've used that example before to illustrate that smoking isn't necessarily a good predictor for all humans for time of mortality, esp. in certain circumstances. My own grandfather lived until 99, and was a heavy smoker until his 80s, and a light smoker in his 90s. ie. There may be certain trends attributable to certain factors, but prediction of outcome based on those factors may not be accurate. You can't predict a person's date of death by just knowing s/he smokes, nor can you predict the date of a pullback just by vague ideas about interest rates.


What about them? My whole point is that the 5.5% per year return average (and that's not indexed to inflation) over this last 13 year "boom" isn't really all that unusual, if you compare to the longer term.

If you compare against that one house, that boom's return is lower than that house's average over the past century (and change), even after considering the multiple booms and busts.

It's true that this one house isn't necessarily representative of the greater market, but it may just suggest that the rise isn't quite as crazy as some make it out to be.

my point was directed to the article and not you specifically.

there's alot more to purchasing real estate than the 'sale price' ... all the accessory fees, taxes, capital improvements, etc throughout the timeline used for the article.

 

[cdr108]

Agreed. Many markets have seen greater rises over shorter timeframes, including Toronto in the 80's. I don't think this rise has been crazy, nor do I think the subsequent decrease would be crazy. Just a standard 15-30% oscillation around the long term trend.

i agree full heartedly.

it's funny how some would think a 15-30% decrease as being alarmist and/or "doom and gloomers".

i consider myself a realist and i guess the reason i try to have people objectively analyse the r/e market as opposed to listen to agents/developers recommendation to 'buy, buy, buy' blindly, is that i know people and family who bought at/near the peak of the 1980s and either struggled financially for many many years just to make mortgage payments; sold at a huge loss; or had to declare bankruptcy.

buying and overspending at/near the peak based on financing with lowest interest rates in history, with no where to go but up, is a recipe for disaster IMO.

 

[Eug]

i agree full heartedly.

it's funny how some would think a 15-30% decrease as being alarmist and/or "doom and gloomers".

i consider myself a realist and i guess the reason i try to have people objectively analyse the r/e market as opposed to listen to agents/developers recommendation to 'buy, buy, buy' blindly, is that i know people and family who bought at/near the peak of the 1980s and either struggled financially for many many years just to make mortgage payments; sold at a huge loss; or had to declare bankruptcy.

buying and overspending at/near the peak based on financing with lowest interest rates in history, with no where to go but up, is a recipe for disaster IMO.

That sounds like the same statements I heard back in 2007, or 2005 for that matter.

It's odd that so many seem to believe they can accurately predict the future. Were you saying the same things in 2007? 2009? 2010? Did you claim success in your predictions in 2008? What happens if your predicted pullback doesn't happen until 2015, after yet another 15% rise?

 

[daveto]

That sounds like the same statements I heard back in 2007, or 2005 for that matter.

It's odd that so many seem to believe they can accurately predict the future. Were you saying the same things in 2007? 2009? 2010? Did you claim success in your predictions in 2008? What happens if your predicted pullback doesn't happen until 2015, after yet another 15% rise?

Oh, Eug, you smooth talking bear baiter, you!

In answer to your questions.
1. So what. We all agree that the "when" is difficult to predict.
2. People accurately predict the future all the time. We're not talking about lottery numbers here.
3. Yes.
4. Yes.
5. So what. It's not like I'm 100% investing in short term real estate puts that expire next month.

 

[Eug]

Oh, Eug, you smooth talking bear baiter, you!

In answer to your questions.
1. So what. We all agree that the "when" is difficult to predict.
2. People accurately predict the future all the time. We're not talking about lottery numbers here.
3. Yes.
4. Yes.
5. So what. It's not like I'm 100% investing in short term real estate puts that expire next month.

Well, if you repeat the same mantra every year, then eventually you might be right. However, that could be explained just by dumb luck as far as I'm concerned.

To put it another way, a "foolish" uber-optimist are far more correct than the self-proclaimed serious and thoughtful doom-and-gloomers over the past decade.

I personally think the most responsible approach is caution as opposed to the extreme view on either side, with the caveat that any of the possibilities may occur, and that one cannot predict with any real reliability a very specific time frame for such a pullback.

So, I would consider anyone who overextends himself and leverages himself up the yin yang (eg. Smith Manoeuvre) to invest in real estate (or anything else for that matter) probably foolish. However, I also think someone who sells his primary home and starts renting only because he's trying to time the real estate market is probably also foolish.

 

[KA1]

I personally think the most responsible approach is caution as opposed to the extreme view on either side, with the caveat that any of the possibilities may occur, and that one cannot predict with any real reliability a very specific time frame for such a pullback.

Nice to know that the principles of 'Quantum Physics' apply to Toronto R/E as well.