Baby, we got a bubble!?

[Johnzz]

Canada’s financial capital is on track to become one of the largest global banking centers—overtaking London in the number of banking jobs by 2017, according to Moody’s Analytics.

http://www.gfmag.com/archives/146-j...ondon-as-a-hub-for-bankers.html#axzz1n61wtlOV


Toronto to overtake London in banking

Toronto’s financial district—known as Bay Street after the thoroughfare that cuts through its middle—has 320,000 financial -services jobs to London’s 400,000. But Toronto is expected to add about 100,000 banking jobs between now and 2020, while London is expected to lose a further 30,000 jobs over the same period, on top of the 60,000 positions lost in London during the first two years of the recent financial crisis.

It also confirms that the British capital has failed to staunch the outflow of high-paying jobs in its once-flourishing banking sector as the country’s economy struggles with spending cutbacks and the biggest drop in living standards since the 1930s.

“London has seen its best days,†says Mark Hopkins, senior economist at Moody’s Analytics and author of the study. “Toronto is up and coming with a bright future.†The main reason for this sea change comes from the fact that Canada’s major banks sailed through the financial meltdown of 2008 with solid balance sheets and no need for government bailouts.

As a result they became the new global standard for financial stability, replacing their Swiss counterparts, and Canada has emerged as a financial safe haven. “The secret to their success is being conservative,†says Hopkins of Moody’s Analytics.

As a result, instead of dealing with widespread layoffs seen in New York and London, Toronto is seeing job growth and a real estate boom in its downtown core. Many of the new jobs on Bay Street are expected to come from a sharp increase in foreign investors buying up Canadian assets, equities and bonds as a hedge against economic turmoil.

But from a corporate and commercial perspective, the Canadian banking system is somewhat less attractive. Canada’s small cabal of tightly regulated banks are perhaps the least competitive in the G7. This makes it possible to earn huge profits from domestic operations without making risky investments outside their borders.

 

[KA1]

Johnzz, your post confirms what I have been saying for too long -- core downtown R/E market is different than GTA, that, in turn, is different than the rest of the country. There is no bubble in the core downtown R/E market.

You, however, wait for the 'doomers and gloomes' ,led ably by Interested, to devour you for your post stating that it is only one of many different opinions and things are going to be different this time.

Perhaps, you might wish to put on your armour

 

[interested]

Canada’s financial capital is on track to become one of the largest global banking centers—overtaking London in the number of banking jobs by 2017, according to Moody’s Analytics.

http://www.gfmag.com/archives/146-j...ondon-as-a-hub-for-bankers.html#axzz1n61wtlOV


Toronto to overtake London in banking

Toronto’s financial district—known as Bay Street after the thoroughfare that cuts through its middle—has 320,000 financial -services jobs to London’s 400,000. But Toronto is expected to add about 100,000 banking jobs between now and 2020, while London is expected to lose a further 30,000 jobs over the same period, on top of the 60,000 positions lost in London during the first two years of the recent financial crisis.

It also confirms that the British capital has failed to staunch the outflow of high-paying jobs in its once-flourishing banking sector as the country’s economy struggles with spending cutbacks and the biggest drop in living standards since the 1930s.

“London has seen its best days,” says Mark Hopkins, senior economist at Moody’s Analytics and author of the study. “Toronto is up and coming with a bright future.” The main reason for this sea change comes from the fact that Canada’s major banks sailed through the financial meltdown of 2008 with solid balance sheets and no need for government bailouts.

As a result they became the new global standard for financial stability, replacing their Swiss counterparts, and Canada has emerged as a financial safe haven. “The secret to their success is being conservative,” says Hopkins of Moody’s Analytics.

As a result, instead of dealing with widespread layoffs seen in New York and London, Toronto is seeing job growth and a real estate boom in its downtown core. Many of the new jobs on Bay Street are expected to come from a sharp increase in foreign investors buying up Canadian assets, equities and bonds as a hedge against economic turmoil.

But from a corporate and commercial perspective, the Canadian banking system is somewhat less attractive. Canada’s small cabal of tightly regulated banks are perhaps the least competitive in the G7. This makes it possible to earn huge profits from domestic operations without making risky investments outside their borders.

Quite the contrary to Ka1's post if this is truly what ends up happening, then it is clearly a big positive for real estate in the core. I don't know if this will happen but if so the 100K jobs relatively well paying and the spin off jobs they would generate would in fact be a huge positive for the downtown core.

This is the first that I see of this and thank Johnzz for posting it.

I would point out to others who believe the core or the City of Toronto will only go up that I respect posts like this because at least there is a rational as to why it might further increase as opposed to just "hype" that it will increase as a matter of course.

I do not know that 100K jobs come over the next 8 years of higher paying jobs even with their spin off jobs necessarily translates into increases in real estate prices but it should cushion forces in the other direction.

I am not convinced that on its own this represents a game changer and justification for the "it's different here in Toronto" than elsewhere in the World but at least if believed it provides a factual reason to at least have some hope. That said, a lot can happen between now and 2020. As well, other articles I have seen have suggested that Canada is no where near as well off to weather another financial crisis should it occur again since level of debt is far higher than it was in 2008 and the Governments have since swung into large deficits.

Out of curiousity, are Moody's Analytics part of Moody's rating agency who so accurately classified Asset Backed Commercial Paper as AAA rated?

 

[interested]

From Jamie Johnson:
I know he has a vested interest as a real estate broker:

http://by165w.bay165.mail.live.com/...mid=ccb2a4b2-5eb5-11e1-a917-002264c17c5c&fv=1
Why do Developers Charge $800/sf for Pre-Construction Condos in Toronto

The simple answer is because they can and there are enough people who will blindly pay it. But do the math – from both potential buyers (just investors) and the developers’ point of view.

For investors, when they buy at $800 they are betting or guessing that resale prices will be at that level in four years. Currently prices are $500+.IN fact in the core resale say is $550+ but I believe all the numbers (see below) have been massaged a bit to overemphasize the point that resale is a better deal than Precon which I will assume most of his agents and agency are selling and therefore competing for buyers to represent). If you assume an average rate of appreciation of 5% then you will only get to $600+. At 7% (not likely) the number is $650+. If capital gains are not the reason that investors buy, then it must be rental income. The best returns are usually with studios. So take a 400sf studio costing $500,000.(This I assume is a typo and he meant to put in $320,000K) Assume it rents for $1400 (in four years time)(this is essentially present rent for a bachelor or minimally higher in the core so let's allow $1500/month) and that taxes and condo fees combined are $300/mo.(condo fees and taxes would be closer to $500 based on taxes of close to 1% of $320 and fees of 50 cents or $200/month) The return on your investment before financing is 2.6%!( in fact with my assumptions $12000/year net- 1500+HST commission (13%) + $300 insurance/year so say approximately $10,000/year net on $320,000K which is approximately 3.1%) If you finance you have negative leverage! We know that many non-resident investors pay cash. But their bottom line is still 4%!
(I am not sure how he knows this as fact but I suspect he is using a figure he has heard bantered around or expressed personally to him...I am not sure that this is a requirement and would contradict other sources which suggest money is being parked here for security reasons and looking for capital preservation as opposed to a return on the actual capital which would be of secondary importance).
Now let’s look at the developer. We know he can build for $200+/ sf and soft costs (commissions to agents and other fees from architects to advertising) will come in at another $100+/sf. We are told that the culprit in rising prices is land costs. Take a parcel of land that will convert into 400 units at an average size of 700 sf. Land costs of $100/sf would translate into a purchase price of $28 million. At $200/sf, land costs would be $56 million. So the total cost to developers is $500/sf at the outside. To prove my point, Menkes bought 90 Harbour St. for $76 million and intends to build 1400 condo units on the site (plus a commercial tower). At $100/sf the price is $98 million and the commercial is free!!

Something tells me that if we could get pre-construction condo prices back down to $600/sf, everyone would be happy again. The market would continue in a healthy state for years to come. Investors would continue to buy, end users would not get priced out of the market, developers would still be making money (maybe not as obscene as before) and yes – Realtors (that’s me) would still have product to sell and resell!!
This last paragraph assumes developers would choose to market at $600 when they can sell at $800 according to his first opening sentence so why would they leave $200/sq.ft. on the table? This will only happen when the locals stop buying (are priced out) and further the investors whether foreign or local decide prices are too high and developers cannot unload at higher prices...in other words when supply outstrips demand. In the mean time, agents who sell Precon are only too happy to "advise" their clients to purchase at present prices since they make 4% commission( more than on resale with little or no work )

 

[gtp3]

This is my first post on this thread. I want to mention that I have appreciated the logic and rationale that goes into some very informative commentary, and even when there is some bias, it usually forms a great discussion.

I wanted to comment on the article above, suggesting that Toronto does not have the fundamentals to support the real estate prices that we are currently seeing (If we look at real estate from a long-term perspective, house pricing needs to be supported by income, population growth, immigration, etc.) However in the short-term, there are levers that can be pulled to change this. I am mainly referring to interest rates in this case, which has been made artificially low for quite some time now, and has given Canadians a false sense of affordability. Even at these current price levels, the interest rates are holding things together, and keeping us from unravelling. With respect to the articles that speak to house prices vs. income levels being at historical highs, I don't see how we can look at house prices in isolation. I agree that these low interest rates are here for the short term, and when it starts to creep back up a lot of us will start to feel the squeeze.

I also believe that the pre-construction market is great for buyers during a time of relatively higher interest rates. If affordability is a function of savings, income, house price and interest rates, then during a period of higher interest rates, and (relatively) lower house prices is ideal since no interest will be paid even though a low house price has been locked in. Many buyers of real estate capitalized on this opportunity around 2006 where the bank rate was 4.5% compared to 1.25% now. Purchase precon in 2006 obtaining a great deal (compared to today's pricing) and at the same time, probably looking at occupancy in 2009 or 2010 when rates were significantly lower and prices were significantly higher. At that point, the owner could either sell for a healthy profit or take out a mortgage at historically low rates.

I think that the current low rates are largely responsible for pre-construction being unattractive in recent times.

 

[macookie]

I feel we need Macookie to distinguish the housing in the Toronto vs. the condo market. There really is no room to build houses in the main central part of Toronto (other than infil) and I believe there is demand which will continue for this. That said, the overbidding is prompted/supported by ridiculously low interest/mortgage rates. Eventually rates will either come up or the alternative is the realization will set in that the economy has and continues to flounder and hence further increased pricing in the absence of wage increases to support it is unsustainable and the correction will occur. The longer the imbalance continues, the more significant the pain will be.

Both housing and condo prices will decrease, but condo's first. Why... well condos are today's start home... then those nice rational smart people then buy bigger homes, puting their equity into those bigger homes, but are likely at the 40% debt ceiling because rational smart people buy the biggest home they can afford... when it comes to financing those mortgages as they move up the property ladder... realtors make larger commission so then push people into the more expensive homes. So affordabilty, and the ability to finance their other dreams and the notion that we all have to be better than the Jones next door with will push people to spend more than then make... car payments, trips, and other toys and consumer goods... yeah it all good... but when those at the bottom end refuse or stop playing the game, or can't afford to enter the market... the whole house comes down. Condo's first, houses second. So, with all the expenses that come with home ownership increasing... and disposal income shrinking, and a downward pressure on incomes, and the potential for another US debt-ceiling clusterfuck prior to the US election coming in Sept/Oct... the Portugal credit crisis which is next... and the downgrade on Ontario debt... there's just so to overcome... but hey... if we get through it... great... I'll be wrong... but I'll have a higher income... so I'll qualify for a larger mortgage... or I can move back to Windsor, Ontario and buy a 3-bedroom starter home for $30K. but... With so much of Toronto economy dependent on R/E... do you really think it's going to be a soft landing?

 

[interested]

Both housing and condo prices will decrease, but condo's first. Why... well condos are today's start home... then those nice rational smart people then buy bigger homes, puting their equity into those bigger homes, but are likely at the 40% debt ceiling because rational smart people buy the biggest home they can afford... when it comes to financing those mortgages as they move up the property ladder... realtors make larger commission so then push people into the more expensive homes. So affordabilty, and the ability to finance their other dreams and the notion that we all have to be better than the Jones next door with will push people to spend more than then make... car payments, trips, and other toys and consumer goods... yeah it all good... but when those at the bottom end refuse or stop playing the game, or can't afford to enter the market... the whole house comes down. Condo's first, houses second. So, with all the expenses that come with home ownership increasing... and disposal income shrinking, and a downward pressure on incomes, and the potential for another US debt-ceiling clusterfuck prior to the US election coming in Sept/Oct... the Portugal credit crisis which is next... and the downgrade on Ontario debt... there's just so to overcome... but hey... if we get through it... great... I'll be wrong... but I'll have a higher income... so I'll qualify for a larger mortgage... or I can move back to Windsor, Ontario and buy a 3-bedroom starter home for $30K. but... With so much of Toronto economy dependent on R/E... do you really think it's going to be a soft landing?

Agree that condos will come down first. I also agree with your rationale that houses may drop as well. I am not as sure they will drop quite as much though as I think there may be more sustainable demand, even if not as great as it is now to drive prices for houses than the overbuilt condo market.

While you point out a lot of things that can/may go wrong, and I have no disagreement with a lot of these comments since I share some of the beliefs, there will still be a requirement for some event to trigger the unravelling.

Ironically, it could just be oil...With it now at $108/barrel and climbing, oil may in fact represent the equivalent of an interest rate rise despite the Fed and Bank of Canada and other Central banks attempts at quatitative easing since oil plays not only into gas and transport but the cost of goods, plastics etc. and eat into consumers reserves leaving less money for other goods...eg. housing costs/purchases for other goods in the economy.

 

[macookie]

Ironically, it could just be oil...With it now at $108/barrel and climbing, oil may in fact represent the equivalent of an interest rate rise despite the Fed and Bank of Canada and other Central banks attempts at quatitative easing since oil plays not only into gas and transport but the cost of goods, plastics etc. and eat into consumers reserves leaving less money for other goods...eg. housing costs/purchases for other goods in the economy.

Canada has lots of oil... so Toronto won't have an issue, Alberta will ship it free to Ontario. Otherwise a negative economic loop might happen in which higher gas prices, reduce disposal incomes, which cut into income of other canadians... which feeds negatively... into low incomes for everyone... and that's not good for people who are trying to keep on with the Jones in the suburbs, and in Toronto neighbourhoods. And... secondly... those higher gas prices might cause inflation... which increases the chances of BOC to raise interest rates prior to end of 2014... (but those that locked in their mortgage rates have 5 years before worrying about that.)... but yeah... yikes if it's oil that kills us... but really Toronto is a diverse city, wherein 2/3 of it's economy is not based on R/E.

 

[cdr108]

Canada has lots of oil... so Toronto won't have an issue, Alberta will ship it free to Ontario. Otherwise a negative economic loop might happen in which higher gas prices, reduce disposal incomes, which cut into income of other canadians... which feeds negatively... into low incomes for everyone... and that's not good for people who are trying to keep on with the Jones in the suburbs, and in Toronto neighbourhoods. And... secondly... those higher gas prices might cause inflation... which increases the chances of BOC to raise interest rates prior to end of 2014... (but those that locked in their mortgage rates have 5 years before worrying about that.)... but yeah... yikes if it's oil that kills us... but really Toronto is a diverse city, wherein 2/3 of it's economy is not based on R/E.

see macookie, nothing to worry about !

 

[PinkLucy]

Both housing and condo prices will decrease, but condo's first. Why... well condos are today's start home... then those nice rational smart people then buy bigger homes, puting their equity into those bigger homes, but are likely at the 40% debt ceiling because rational smart people buy the biggest home they can afford...

You are forgetting a very large segment of the condo market -- baby boomers, who are downsizing from those big homes they worked their way up to. It's a huge demographic, and they are definitely moving into condos. Condos have the young starters and the older established downsizers -- not a lot of people in between though.

 

[cdr108]

You are forgetting a very large segment of the condo market -- baby boomers, who are downsizing from those big homes they worked their way up to. It's a huge demographic, and they are definitely moving into condos. Condos have the young starters and the older established downsizers -- not a lot of people in between though.

while somewhat true about the downsizing boomers, they aren't seeking the 500 sf 1 bedroom units that proliferate many of the dt condos. my guess is they require at least a 2 bedroom unit that's efficiently and well designed of at least 850 sf. there aren't many of those in the newer projects, but more common in older products from 5-25 years ago.

the first wave of boomers are from 1945 so they are 66/67 yrs old now, and i don't see them selling off their SFH to move into condos.
some may downsize to smaller SFH of 1,500 sf from the mcmansions.

from my observations of the generation before them, many stayed in their residence until either their health declined significantly so they required nursing homes (infirmed ? ), or death.

 

[PinkLucy]

True, they (ok, we ) prefer the larger units, and while it's difficult to find them in a lot of the developments it's not impossible (I'm living in one now), and some developers have revised plans based on that demand. Others would be smart to plan accordingly!

 

[ILuvTO]

Another bear article linked in today's G&M:

http://theeconomicanalyst.com/content/where-we-stand

A lot of graphs and charts.

 

[Kenny]

Canada has lots of oil... so Toronto won't have an issue, Alberta will ship it free to Ontario.

I hope you were you being sarcastic? Oil is a commodity.

 

[cdr108]

True, they (ok, we ) prefer the larger units, and while it's difficult to find them in a lot of the developments it's not impossible (I'm living in one now), and some developers have revised plans based on that demand. Others would be smart to plan accordingly!

hi PinkLucy, if you don't mind, could you tell us more info like age even though we know you're a BB, and how large a unit did you 'downsize' to? i know every situation will be different but there may be trends.

as i indicated, from my observations of the generation before BB (from 1910-1930), many stayed in their residence until either their health declined significantly so they required nursing homes (infirmed ? ), or death.