Baby, we got a bubble!?

[daveto]

At the same time, keep in mind that even though we've seen a 15-year bull cycle in the Toronto real estate market, a deflation in the market will not mean a return to prices 15 years ago. The previous peak in 1989 followed with a steady drop bringing price levels down to 1987 levels...and this took a span of about 7 years (circa 1996), before ramping up to what we have today.

The analysts have already predicted a 10-15% drop over the course of the next few years followed by a plateau period. If we overlay the cycle from 1989, we'd expect property values to drop to 2010 levels by 2019.

The price drop from 1989 to 1996 was 40% (adjusted for inflation).
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

The increase from 2010 to 2012 has been 10% net of inflation (10% nominal 2010-2011 July, 4% nominal 2011 to 2012 July, so 14% minus 4% inflation)

A 40% decrease from 2012, using 2010 as the base year, would be a drop from 110 to 66. That is 34% below the 2010 level (back to early 2000 levels, net of inflation)
A level of the early 2000s by 2019 would indeed be a return to the prices of 15 years ago (ie approx 2003 vs 2019).

James, just to be clear....all I did was use your exact logic, but correct the mechanical errors in your math and/or the figures you were using.

 

[interested]

James,
I believe daveto has done the math correctly.
Math aside, I do not believe we are going to see 2003 prices.

In fact, my belief is that if things get bad we will maybe see 2008 prices revisited. However, I think we have to make a distinction between PRECON where I believe prices on resale of $700/sq.ft. could in fact hit $500-550/sq.ft. again but RESALE which is at $550/sq.ft. I doubt will drop below $450. In other words, Precon which includes future appreciation and a $100-$150/sq.ft. premium may quickly evaporate to a $50 new premium.

 

[daveto]

TREB midmonth #s.
http://www.torontorealestateboard.c...market_updates/news2012/nr_mid_month_0812.htm

Sales YOY down 7.6%
Condo sales YOY down 21%
Non-condo sales YOY even

Prices YOY up 9.%
Condo prices YOY down 1%
Detached prices up 12% (including 28% price increases YOY in 416! Did someone buy a $100m mansion?)

 

[klb86]

TREB midmonth #s.
http://www.torontorealestateboard.c...market_updates/news2012/nr_mid_month_0812.htm

Sales YOY down 7.6%
Condo sales YOY down 21%
Non-condo sales YOY even

Prices YOY up 9.%
Condo prices YOY down 1%
Detached prices up 12% (including 28% price increases YOY in 416! Did someone buy a $100m mansion?)

416 prices up 13.5% y/y....

416 condo prices down 3% y/y

 

[interested]

Does someone have median prices please. Much more relevant as previously discussed. Especially since we are looking at condos in the core and more and more "smaller units" coming on line.

 

[wang888]

i think builders will just stop releasing new precon if the demand is not there, just look at concord park place in north york... they have not released a new building this year since there are still units for sale at tango 2

 

[interested]

i think builders will just stop releasing new precon if the demand is not there, just look at concord park place in north york... they have not released a new building this year since there are still units for sale at tango 2

That would be good but I am not sure it will hold. For e.g., a smaller builder with 1 or 2 buildings will release. Concorde will try and sell more existing product because it is competing with itself at that location so why release another similar location building. However, if the competitor owned the land next door, he would hope to get the sales and therefore offer a product.

The above said, I expect more buildings will be on hold.... and then after the glut works it way through 3-5 years, we may see shortages potentially again. In other words, boom/bust cycles with excess/deficient demand/supply as has happened time and again in the past.

 

[cdr108]

i think builders will just stop releasing new precon if the demand is not there, just look at concord park place in north york... they have not released a new building this year since there are still units for sale at tango 2

yes and no.

that example is slightly different because one developer owns the land in the entire area.
no point in competing against yourself with another pre-con project.

however, in an area when other developers own adjacent lands, one may feel they have a better or more marketable product than a competitor and release a pre-con.

much has been talked about what percentage of pre-con sales goes to investors and what percentage of that are local vs. foreign.
40-70% have been thrown around so it's not an exact estimation. i've also read from developers that they even market foreign buyers and i've seen alot of advertisement in local chinese, arabic and jewish publications - don't know if they are doing the same in overseas publications.

as some have mentioned, if local buyers default, the developer has recourse.
if it's a foreign buyer, good luck chasing someone in dubai, china, israel, etc.

in addition, all the developers seem to be very bullish on condos.
i don't know how much that is reality or just marketing BS.
if they truly do believe their own spcheel (sp?), there is a high probability of over developing and offering more product than demand.

 

[James]

The price drop from 1989 to 1996 was 40% (adjusted for inflation).
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

The increase from 2010 to 2012 has been 10% net of inflation (10% nominal 2010-2011 July, 4% nominal 2011 to 2012 July, so 14% minus 4% inflation)

A 40% decrease from 2012, using 2010 as the base year, would be a drop from 110 to 66. That is 34% below the 2010 level (back to early 2000 levels, net of inflation)
A level of the early 2000s by 2019 would indeed be a return to the prices of 15 years ago (ie approx 2003 vs 2019).

James, just to be clear....all I did was use your exact logic, but correct the mechanical errors in your math and/or the figures you were using.

Thanks for the comments and critique. I believe we are looking at the same data but applying it differently. The reason why I didn't factor in a similar 40% decrease (as per 1989) for the 2012 model is because the 1989 peak was attained via a very rapid rate of increase from about 1985 onwards. While there was a ~40% decrease from 1989 to 1996, there was also a 40% increase from 1987 to 1989. Since the increase from 2010 to 2012 was more in line with 20% or so, I transposed the same trend in reverse for the next 7 years based on this slope. Now granted, statistics is a science of manipulating numbers. We've just extrapolated the data using a different statistical method.

CLARIFICATION: While there was a ~40% decrease from 1989 to 1996, the quantitative value of this decrease (not factoring in inflation) was in essence the same as the quantitative value of the increase between 1987 to 1989.

 

[cdr108]

Thanks for the comments and critique. I believe we are looking at the same data but applying it differently. The reason why I didn't factor in a similar 40% decrease (as per 1989) for the 2012 model is because the 1989 peak was attained via a very rapid rate of increase from about 1985 onwards. While there was a ~40% decrease from 1989 to 1996, there was also a 40% increase from 1987 to 1989. Since the increase from 2010 to 2012 was more in line with 20% or so, I transposed the same trend in reverse for the next 7 years based on this slope. Now granted, statistics is a science of manipulating numbers. We've just extrapolated the data using a different statistical method.

a 40% increase does not equal a 40% decrease:

ie. start point of 100:
an increase of 40% = 140;
a decrease of 40% from 140 = 84

 

[James]

a 40% increase does not equal a 40% decrease:

ie. start point of 100:
an increase of 40% = 140;
a decrease of 40% from 140 = 84

You are correct, which makes the 1989 conditions that much more severe as far as the rate of increase. The 40% decrease from 1989 to 1996 as cited by daveto would actually mean the increase from 1985 to 1989 was more in the range of 66% which translates to a linear rate of appreciation of 13.5% per year for 4 years straight.

 

[daveto]

The 40% decrease from 1989 to 1996 as cited by daveto would actually mean the increase from 1985 to 1989 was more in the range of 66% which translates to a linear rate of appreciation of 13.5% per year for 4 years straight.

Three things:
First, I didn't cite the 40% decrease. I cited the UBC Centre for Urban Economics & Real Estate/Royal Lepage study. It is this Sauder study that provides the data illustrating the 40% decrease.

Second, the 40% decrease does not "actually mean the increase from 1985 to 1989 was more in the range of 66%". I presume you've derived the 66% increase, as the necessary increase such that a subsequent 40% decrease would return the price to starting point (ie 166 x 60%=100). But that is not what you wrote. And further, the price increase from 1985-1989 was 85%, not 66%.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

Finally, while the annual price increases from 1985-1989 was certainly higher than 1996-2012, the cumulative price increase 1996-2012 was higher.

 

[interested]

Three things:
First, I didn't cite the 40% decrease. I cited the UBC Centre for Urban Economics & Real Estate/Royal Lepage study. It is this Sauder study that provides the data illustrating the 40% decrease.

Second, the 40% decrease does not "actually mean the increase from 1985 to 1989 was more in the range of 66%". I presume you've derived the 66% increase, as the necessary increase such that a subsequent 40% decrease would return the price to starting point (ie 166 x 60%=100). But that is not what you wrote. And further, the price increase from 1985-1989 was 85%, not 66%.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf

Finally, while the annual price increases from 1985-1989 was certainly higher than 1996-2012, the cumulative price increase 1996-2012 was higher.[/QUOTE]


The 2 major differences with the 40% decrease or whatever it is ultimately determined to be from 1989-1992 and then to 1996 before it started to increase again are as follows:
1) a rapid assention (over 4 years of 85%) resulted in a 40% decrease. If the increase over 12 years is say 120%(from 1996 to 2012...Dave you can correct the figures) this is unlikely to result in anywhere near as dramatic a decrease. I would compare this to Florida/Arizona etc. where prices doubled/tripled in 6 years approximately and they had up to 65% decreases...however other markets which did not have these increases experienced less severe declines ( from 25-40% I believe)...still significant but not as drastic and therefore more likely I believe to be what will happen in TO and some other Canadian markets.
2) The 13-15% carrying costs vs. 3-5% will also prevent the dramatic slides in my opinion.

 

[daveto]

Interested, the reference to a repeat of the 1989 to 1996 slide came from James, and I was only correcting the numbers he had used.

I would agree that there are many differences between the price appreciation 1985-1989 and 1996-2012. I think many would agree the former was driver by large & rapid interest swings. While the latter had interest decreases that were long and relatively slow moving in absolute terms, there were other factors such as the CMHC changes, more foreign investors and also demographic pressures.

Whether it might be a long slow slide, or something quicker? I don't know, but my guess is something in the middle of the two options, but a lot can change given the macro-economic times we live in.

Finally, re the change from 1996-current, sure, 120% net of inflation is what that graph is showing.

 

[AKS]

Finally, re the change from 1996-current, sure, 120% net of inflation is what that graph is showing.

But due to the drop back to 1987 prices, if you talk about overall price changes (ignoring the short anomaly), it should actually range from 1987 to 2012 with 120% increase. Is a doubling of prices over 25 years a bubble?

From the chart between 1974 to 1987 (13 yrs) prices increased from $50 to about $180. That's over 200%. How come no cried bubble?

Actually are you calculating from the blue or red line?