Baby, we got a bubble!?

[Eug]

Yeah, I've always wondered about the logic about selling a home that you live in to rent instead, trying to time the market. It's not like playing stocks, because with stocks the commissions are like $10 and you don't actually need to own that stock in the first place.

OTOH, with a home it's often a 5% commission for the sale, and then when you buy later you're paying all sorts of taxes. Plus if you sell you need to spend a whole bunch of time packing and then spend more money moving, also you have to find a new place to rent. Then there's the lawyer's fees, etc. You might need a 15% drop just to break even, esp. if you consider your time and hassle.

 

[klb86]

http://torontorealestateboard.com/market_news/market_watch/index.htm
http://torontorealestateboard.com/m...ket_updates/news2012/nr_market_watch_0712.htm
http://torontorealestateboard.com/market_news/market_watch/2012/mw1207.pdf

August 3, 2012 -- Greater Toronto REALTORS® reported 7,570 sales in July 2012, representing a decline of 1.5 per cent compared to 7,683 sales reported in July 2011. The decline was most pronounced in the condominium apartment segment in the City of Toronto. Total sales in the rest of the Greater Toronto Area (GTA) were up compared to the same period last year.

“Very strong annual sales growth in the first half of 2012 and an earlier peak in sales this spring compared to 2011 help explain more moderate sales this summer. New mortgage lending guidelines and the additional upfront cost of the City of Toronto land transfer tax also prompted some households to put their buying decision on hold,†said Toronto Real Estate Board (TREB) President Ann Hannah.

The average selling price in July 2012 was $476,947 – up by four per cent compared to July 2011. The MLS® Home Price Index (MLS® HPI)* composite index, which allows for an apples-to-apples comparison of benchmark home prices from one year to the next, was up by 7.1 per cent year-over-year.

2012-07: $476947
2012-06: $508622
2012-05: $516787
2012-04: $517556
2012-03: $501614
2012-02: $502508
2012-01: $463534
2011: $451436

So, GTA prices peaked in April-May, but it's still not clear if this is a long term peak or just that spring boost. All 2012 monthly prices are higher than the average 2011 prices though

And condo prices in Toronto down 1% y/y, sales down 13%.

 

[Eug]

That's it? With all the doom and gloom about condos these days, I might have expected a bigger drop for condos.

 

[Riverdale Rink Rat]

Yeah, I've always wondered about the logic about selling a home that you live in to rent instead, trying to time the market. It's not like playing stocks, because with stocks the commissions are like $10 and you don't actually need to own that stock in the first place.

OTOH, with a home it's often a 5% commission for the sale, and then when you buy later you're paying all sorts of taxes. Plus if you sell you need to spend a whole bunch of time packing and then spend more money moving, also you have to find a new place to rent. Then there's the lawyer's fees, etc. You might need a 15% drop just to break even, esp. if you consider your time and hassle.

Well, in our particular case we were looking to downsize to capture leveraged gains and eliminate the leverage (i.e. pay off the mortgage). Realizing those gains cost us a 5% commission + moving expenses (lawyer was round off error). While I wouldn't do it once a year, after five years in the same house it was more than OK. Unless you were in real estate and doing it as your sole source of income, less than five years is a lot of family disruption.

 

[Eug]

Direct downsizing does make more sense. You're selling a house, to buy another one and you capture a bit of cash in the process. However, if you're selling at the peak, you're also buying at the peak, unless you go into a rental for a few years.

The group I was talking about is those who sell and then rent, with the intent to rebuy a similar (or even bigger) house in a few (or half a dozen) years. It's not common, but I've heard a few say they've done this... back about 5 years ago or so. Ouch. Timing the market is hard... and my earlier point was that what makes it even harder are the direct and indirect costs of buying and selling, which simply don't exist with something like stocks.

 

[James]

That's a good point to make. On that note, I think we can all agree that for those looking at a property as a primary residence, timing the market is not entirely feasible. There are too many factors involved and a property isn't exactly a liquid investment. In the case of a primary residence, I believe it all comes down to one's personal finances. If the numbers work for you, then the importance of market trends can be minimized.

An investment property, on the other hand, has a much more direct relationship to the market than one's personal finances. Obviously the finances have to be there but the swing of the market introduces an inherent risk to an investment which otherwise would be downplayed in a primary residence.

 

[Riverdale Rink Rat]

Direct downsizing does make more sense. You're selling a house, to buy another one and you capture a bit of cash in the process. However, if you're selling at the peak, you're also buying at the peak, unless you go into a rental for a few years.

The group I was talking about is those who sell and then rent, with the intent to rebuy a similar (or even bigger) house in a few (or half a dozen) years. It's not common, but I've heard a few say they've done this... back about 5 years ago or so. Ouch. Timing the market is hard... and my earlier point was that what makes it even harder are the direct and indirect costs of buying and selling, which simply don't exist with something like stocks.

I have a friend in my shinny hockey group that is in your second scenario. And, who knows, maybe I am, too, as we won't start looking until we're back in Toronto next summer.

 

[brockm]

That's it? With all the doom and gloom about condos these days, I might have expected a bigger drop for condos.

Prices are sticky. You need to look at time-on-market, too. Sellers will hold out for the best price unless they get desperate.

 

[avenirv]

That's it? With all the doom and gloom about condos these days, I might have expected a bigger drop for condos.

maybe it just started....

 

[daveto]

Wow. What a brutal month.

Some notes

1. Inventory usually drops approx 5% June to July. This year, the inventory decreased by 0.1%.
http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

2. New listings at the highest since 2008.
http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

3. Average prices usually drop 3.5% June to July. This year the drop was 6%
http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

4. Median prices usually drop 2% June to July. This year the drop was 4.5%
http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

In summary, seasonally adjusted prices dropped 2.5% in a one month. That is the 2nd worst month in the last 5 years, exceeded only by the 2008 Sept to Oct drop of 4.5% (seasonally adjusted).

ps. thx to www.guava.ca for the graphs

 

[Eug]

Interesting, but then again from those graphs it looks like in 2012, the spring price boost was somewhat larger than average too, compared to previous years excluding 2011. Furthermore, prices now remain significantly higher than they were at the beginning of the year.

http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

Also, prices today are around 25% higher than they were 5 years ago. That sounds like a lot, but ends up only being about 4-5% per year.

 

[Riverdale Rink Rat]

Interesting, but then again from those graphs it looks like in 2012, the spring price boost was somewhat larger than average too, compared to previous years excluding 2011. Furthermore, prices now remain significantly higher than they were at the beginning of the year.

http://ccmn41lv2h65votlvb823a1s2shm...ner=spreadsheets&parent=http://www.google.com

Also, prices today are around 25% higher than they were 5 years ago. That sounds like a lot, but ends up only being about 4-5% per year.

That's still a lot in real estate. Long run price increases for RE are inflation or inflation+1% at best, IIRC.

 

[Eug]

That's still a lot in real estate. Long run price increases for RE are inflation or inflation+1% at best, IIRC.

That's incorrect. Since 1953, home price increases in Toronto have been 2-3% higher than inflation. It's true that some of the increases have been due to bigger and more complex homes being built though.

For the Consumer Price Index, it was 14.0 in 1953, and 119.9 in 2011. BTW, from 2006 to 2011, the CPI has increased from 109.1 to 119.9, so we're talking about a 10% increase just from inflation, after 5 years.

 

[daveto]

That's incorrect. Since 1953, home price increases in Toronto have been 2-3% higher than inflation.

Eug, when comparing RE price increases over many years, its important to measure peak-to-peak, and trough-to-trough. My guess is that you're using a data source that quotes up until the present, which is a peak and thus overstates the figure. If you had used the same data, but ending at the trough of 1996, the figure would be understated

 

[Eug]

TREB historical sale prices are here. I have a 1953 number, but these numbers start at 1966. 1996 is the bottom of the trough after 1980s, and the lowest average price since 1987. For 1996 and 2011, I've put in brackets the ratio vs. 1953 numbers.

1953 average price $14424
1953 CPI 14.0

1996 average price $198150 (13.7X)
1996 CPI 88.9 (6.4X)

2011 average price $465412 (32.3X)
2011 CPI 119.9 (8.2X)

Whether you choose 1996 or 2011, you can see that home price increases in Toronto far outpace inflation, even when you're talking the bottom of the trough in 1996.

Interestingly, the rate of change in price from 1953 to 1996 is higher than the rate of change in price from 1996 to 2011. The former is greater than 6% per year, but the latter is less than 6%. Part of the difference may be due to inflation rates, since inflation rates in recent times have been lower than some periods in our history, but overall it works out to somewhere around the 6% range nominal. This means that the rate of increase in nominal home prices in the last 5 years (unadjusted for inflation) is actually lower than historical norms.

6%!