Baby, we got a bubble!?

[Eug]

Although intuitively it may make sense that the percentage of first-time home buyers may be decreasing, I think that's tempered by the fact that condos are getting a lot smaller these days.

The cost of entry is increasing, but not by as much as some may think, since the decreases in unit sizes are partially compensating for that.

It used to be that 1-bedroom was standard for a near-entry-level condo. Well, it's still standard, except that a 1-bedroom in 2012 is 25% smaller than it used to be.

 

[daveto]

What I want is data on first-time home buyers as a percentage of the market over time. I don't have this data, and I'm trying to figure out how to compile it. But my hypothesis is, that their contribution to the housing market has been diminishing steadily over the past ten years, and has probably dropped off substantially since 2008.

I would expect to see real estate investors picking up all the slack (and then some) from that drop.

If my hypothesis is correct, and the data does reflect that, then I would double-down big time on my prediction of a >20% drop in prices.

I think home ownership rates would support/disprove the assumption about a lack of first time buyers. A decreasing rate suggest a lack of first time buyers, whereas an increasing rate suggest more first time buyers, and a flat rate suggests a balanced market.

Since our home ownership rate has been increasing, I think that suggests the market has been fueled by an increased number of first time buyers.

I think something like this report would contain all the date needed. Unfortunately it only goes up until 2006
http://www.statcan.gc.ca/pub/11f0019m/11f0019m2010325-eng.pdf

This site has a table updated to 2011 showing 70%
http://theeconomicanalyst.com/content/visualizing-dangers-mass-psychology

http://theeconomicanalyst.com/sites/default/files/article_inside/2011/05/home_ownership_rates_0.jpg

 

[brockm]

I think home ownership rates would support/disprove the assumption about a lack of first time buyers. A decreasing rate suggest a lack of first time buyers, whereas an increasing rate suggest more first time buyers, and a flat rate suggests a balanced market.

Since our home ownership rate has been increasing, I think that suggests the market has been fueled by an increased number of first time buyers.

I think something like this report would contain all the date needed. Unfortunately it only goes up until 2006
http://www.statcan.gc.ca/pub/11f0019m/11f0019m2010325-eng.pdf

This site has a table updated to 2011 showing 70%
http://theeconomicanalyst.com/content/visualizing-dangers-mass-psychology

http://theeconomicanalyst.com/sites/default/files/article_inside/2011/05/home_ownership_rates_0.jpg

Well, I was referring specifically to Toronto's condo market, so I don't think we can deduce my hypothesis is correct or false based on national data.

 

[brockm]

To expand on my last post, TD and BMO's data have both pegged Toronto's condo market to be anywhere from 40-60% investor owned. With investors representing the vast majority of sales in new properties. Like I said, I don't have firm data on these breakdowns. But from talking to some friends who work in real estate capital markets with the big banks, I'm eighty percent sure that the percentage of sales to investors has been increasing steadily over time.

When I couple the affordability data -- which is readily available -- with real wage growth lagging far behind price appreciation, and with consumer debt levels at historical highs, it seems intuitive to me that first-time home buyers must be diminishing in Toronto's housing market.

But, like a broken record, I'll say again: I don't have that data.

 

[interested]

To expand on my last post, TD and BMO's data have both pegged Toronto's condo market to be anywhere from 40-60% investor owned. With investors representing the vast majority of sales in new properties. Like I said, I don't have firm data on these breakdowns. But from talking to some friends who work in real estate capital markets with the big banks, I'm eighty percent sure that the percentage of sales to investors has been increasing steadily over time.

When I couple the affordability data -- which is readily available -- with real wage growth lagging far behind price appreciation, and with consumer debt levels at historical highs, it seems intuitive to me that first-time home buyers must be diminishing in Toronto's housing market.

But, like a broken record, I'll say again: I don't have that data.

I can't provide any data but I would support the logic and conclusions you are proposing. I don't think there is much doubt that investors are a larger portion of the downtown TO condo market than say 5 years ago.

However, it will depend on the intention and proportion of the investors. If the investors were in to flip and make a quick buck, and cannot or are unwilling to close/rent out, and this group represents a significant amount of the investors, then your conclusions about a large correction (hard landing and severe) will prove correct I believe.

If there are a fair number who are willing to hold and rent out, and assuming there are renters and rents hold reasonably steady (perhaps large assumptions), then the correction will be softer and less severe.

The one thing we can reasonably assume is that builders will overbuild and there will be a period of softness, price declines. The question in my mind will be is how much overbuild, with how much overhang of product and for how long. All of these are unknown. We already know a number of new projects are being cancelled, and I can't help but feel that at low interest rates as they are now, with no sign of immediate increase (Europe just on the verge of recession, China slowing markedly, US economic data not as rosy as last year even) that unless investors start losing their jobs or were shear gamblers with no possibility to close, they will hold on and can for a long time, even with mild negative cash flow. (Not that I am advocating negative cash flow but believe that people with jobs, and those investors who were not cash poor and intended to rent, will last in the current environment at least 3 if not 5 years before finally capitulating.) I base this on the experience from 1989 to 1992 when the investors finally en masse through in the towel as it were and carrying charges were much higher and negative cash flow worse than today with 3-4% mortgage rates (or even lower in some cases).

 

[aop]

Hi Everyone, I have a few questions for you all. I am very new to the real estate market. I am considering buying a condo in Toronto, but am becoming fearful of this "bubble." I also think about what happened in the US and wonder if that can even happen here? and does that mean people here will lose jobs too due to a housing bubble? Right now I am renting and if I owned i would be paying about $350 extra per month which is not much at all. But what I am being told by people is that whatever I buy will depreciate by unto 30% or more. That seems like a huge amount. I know there is no way to tell the future. If I stay renting and move into a somewhat better apartment I may pay more per month and still spend about $18 000 a year on rent waiting for condo prices to come down, but I am not sure if it is worth it to wait or just go ahead and buy?

 

[cdr108]

Hi Everyone, I have a few questions for you all. I am very new to the real estate market. I am considering buying a condo in Toronto, but am becoming fearful of this "bubble." I also think about what happened in the US and wonder if that can even happen here? and does that mean people here will lose jobs too due to a housing bubble? Right now I am renting and if I owned i would be paying about $350 extra per month which is not much at all. But what I am being told by people is that whatever I buy will depreciate by unto 30% or more. That seems like a huge amount. I know there is no way to tell the future. If I stay renting and move into a somewhat better apartment I may pay more per month and still spend about $18 000 a year on rent waiting for condo prices to come down, but I am not sure if it is worth it to wait or just go ahead and buy?

you either pay rent to a landlord, or pay 'rent' via a mortgage to a bank.

the reality is the majority of your mortgage in the first few years is nothing more than interest payments.
you barely touch the principal.

some people consider having a home (ie. house or condo) as stability, but in an economic downturn, it can turn into an anchor for several reasons:

• one may be forced to sell at a discount, thus suffer a financial loss
• it impedes mobility if it prevents one from moving to another location for better prospects
• depending on your purchase price, what does the 10/20/30% equate to in $ ? would you pay anything near that in rent?
• are you able to wait it out for the long-term, meaning 10 years or so if there is a true global recession?

 

[aop]

you either pay rent to a landlord, or pay 'rent' via a mortgage to a bank.

the reality is the majority of your mortgage in the first few years is nothing more than interest payments.
you barely touch the principal.

some people consider having a home (ie. house or condo) as stability, but in an economic downturn, it can turn into an anchor for several reasons:

• one may be forced to sell at a discount, thus suffer a financial loss
• it impedes mobility if it prevents one from moving to another location for better prospects
• depending on your purchase price, what does the 10/20/30% equate to in $ ? would you pay anything near that in rent?
• are you able to wait it out for the long-term, meaning 10 years or so if there is a true global recession?

Thank you for your comments. I never thought about the mobility issue - that makes sense because its much easier to sublet a rental than to sell a property to move to a new location. If i purchased the condo I like right now and it dropped 10-30% it would be about 27 000-81 000. I probably would not sell the condo for a long time as i am buying it to live in it. I think the part that I get really stuck on is the prices for such small condos it just seems they are over priced to me. I think I would feel bad if it went down in price once I buy it, but I am assuming it will eventually go back up? It does seem condos are still selling but maybe just taking a longer time to sell because most of the ones i have really liked ended up sold.

 

[dlam]

Just want to chime in on this discuss about buying a condo, i had the same thoughts about buying about 1.5 yrs ago. i too was looking long term, so for me I want to buy a 2 or 2+ bedroom unit that i can grow into. 1 or 1+ bedroom unit is too small, and there are too many of them in the market to compete with. so I tried to find units that are large enough for small families with maybe up to 2 kids, families that want the city living and not move to the suburbs. I think there's a market for that in the future for all those young professionals living in condos now, they would want to continue that same lifestyle in a larger unit and not be forced to live in the burbs. ofc, there are many other factors to consider: access to public transportation, school network, building amenities in relation to maintenance fees, etc.

 

[aop]

Just want to chime in on this discuss about buying a condo, i had the same thoughts about buying about 1.5 yrs ago. i too was looking long term, so for me I want to buy a 2 or 2+ bedroom unit that i can grow into. 1 or 1+ bedroom unit is too small, and there are too many of them in the market to compete with. so I tried to find units that are large enough for small families with maybe up to 2 kids, families that want the city living and not move to the suburbs. I think there's a market for that in the future for all those young professionals living in condos now, they would want to continue that same lifestyle in a larger unit and not be forced to live in the burbs. ofc, there are many other factors to consider: access to public transportation, school network, building amenities in relation to maintenance fees, etc.

You gave me something to think about. Mostly I have looked at 1 bedrooms 500 sq ft approximately and I know there are a lot of them in the market. Part of me thinks if I wait maybe I can get a 1 bedroom + den or 2 bedroom in my price range. I think I am just fed up with renting and a big cockroach infestation in my building doesn't help me - I almost feel I will make a emotional decision to move based on that alone.

 

[marsh]

Re buying a condo - I think fundamentally its a personal decision. As this thread as shown, the debate about where the condo market is going is very complex and everyone has their own opinions. Yes - you should be aware of overall market conditions and the potential downside risk but I think you need to consider your own fundamentals. How secure do you feel in your job? What kind of down payment do you have (do you have more than the minimum down payment)? What other debts do you have? Do a budget and make sure you can afford it and make sure you have room in your budget for some short-term savings; as well consider the impact of potential mortgage rate increases. Where do you see your life being in couple of years? Moving is expensive. (You don't want to buy 500 square foot condo if you don't think you'll be unhappy with it in couple of years due to changes in your life - e.g. marriage/babies) etc. Where do you want to live? Consider location. A condo in key location will hold its value much better.

 

[interested]

Thank you for your comments. I never thought about the mobility issue - that makes sense because its much easier to sublet a rental than to sell a property to move to a new location. If i purchased the condo I like right now and it dropped 10-30% it would be about 27 000-81 000. I probably would not sell the condo for a long time as i am buying it to live in it. I think the part that I get really stuck on is the prices for such small condos it just seems they are over priced to me. I think I would feel bad if it went down in price once I buy it, but I am assuming it will eventually go back up? It does seem condos are still selling but maybe just taking a longer time to sell because most of the ones i have really liked ended up sold.

To me this is at the heart of your decision. If you would truly feel badly and I think most of us would agree now that prices are not increasing if indeed they are decreasing, I think you have answered your own question.

That said, if you go back in this thread, it has been pointed out many times that it is different to buy a condo to live in than to invest. There are intangibles which you have eluded to....pride of ownership, not being told you have to move because landlord wants to sell, freedom to decorate etc.

However, unless you are sure you will stay for at least 5 years, I would suggest as has been mentioned the costs to buy/sell will more than offset any likely gain and personally would think your downside risk is greater than any upside potential you may believe is there. Can I be wrong...absolutely....we may all be on the site who believe fundamentals are out of whack and prices continue to defy historical experiences.

However, those who ignore history are doomed to repeat its mistakes and the past has told us that real estate is cyclical and we have just experienced a 15 year bull cycle so....

 

[Eug]

I've said this before, but when I bought I said I would be unhappy if prices dropped 15% vs. my purchase price, but ultimately it wouldn't be a big deal in practical terms because I wasn't planning on moving anyway, and I had way more equity than that in the home already.

I would NOT be unhappy if prices stagnated and the price were exactly the same. Yeah, after including inflation it'd mean a price drop, but psychologically it's nowhere near as significant. Judging by my friends, family, and acquaintances, I think most people feel the same way. Even if you stay in a home for 5 years and you sell it for the same amount you bought it for, that's kinda OK for most people, even considering the fact you've lost money to land transfer taxes and realtors' commissions.

To change the subject:

We all know that condo building has skyrocketed in downtown Toronto, but we should also reiterate that apt. building construction is virtually non-existent now. Condos ARE the new rental stock. Investors buy condos, yes, and many investors are fickle, but many are more than willing to just continue keeping that real estate to rent out, esp. when there is a healthy rental market like there is in Toronto. In fact, AFAIK, the vacancy rate in Toronto is actually worse in 2012 than it was in 1994 when I moved to Toronto. (If not worse, it's at least comparable.) This is despite the fact there are a bazillion more condos in 2012 than there were in 1994. And furthermore, rental prices are still climbing.

I still think there is overbuilding of condos, and I also think that prices are getting a bit frothy, but declarations that Toronto is going to have a large crash imminently aren't really based on good reasoning and fact IMO. I do also wonder how much of this is wishful thinking by those hoping to enter the market after such a crash.

 

[James]

To me this is at the heart of your decision. If you would truly feel badly and I think most of us would agree now that prices are not increasing if indeed they are decreasing, I think you have answered your own question.

That said, if you go back in this thread, it has been pointed out many times that it is different to buy a condo to live in than to invest. There are intangibles which you have eluded to....pride of ownership, not being told you have to move because landlord wants to sell, freedom to decorate etc.

However, unless you are sure you will stay for at least 5 years, I would suggest as has been mentioned the costs to buy/sell will more than offset any likely gain and personally would think your downside risk is greater than any upside potential you may believe is there. Can I be wrong...absolutely....we may all be on the site who believe fundamentals are out of whack and prices continue to defy historical experiences.

However, those who ignore history are doomed to repeat its mistakes and the past has told us that real estate is cyclical and we have just experienced a 15 year bull cycle so....

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.

 

[LostinTO]

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.

True, but the previous bull market was not driven by 2.99% mortgage rates, cashback incentives, 40-year amortization periods, professional and amateur flippers, etc. Personally, I think an asymptotic drop in prices over the next decade may be an incorrect assumption.