From the anony­mous writ­ers of www​.toron​to​con​dobub​ble​.com (how can you trust any­one who won’t put their name to their opinion?)

The short answer is YES.

Com­ment: The shorter answer is NO.

If you think Toronto is becom­ing Man­hat­tanized, I’ve got bad news for you: it’s not. The truth is that there’s a large hous­ing bub­ble in Toronto, and there will most def­i­nitely be a mar­ket crash over the next sev­eral years as a result. In the arti­cle below I will prove this based on my analy­sis of the mar­ket. But before we dive in, we should cover the basics:

Com­ment: Funny, every­one pre­dict­ing a crash for the past decade has been wrong. Heck, Garth Turner has made a liv­ing out of mak­ing the same pre­dic­tion month after month, year after year. Never being right. But this time, these guys, they are going to be right!

What is a hous­ing bubble?

A hous­ing bub­ble occurs when real estate prices rapidly rise above what is sup­ported by fun­da­men­tals and then quickly fall to a nor­mal level. If you were to map a trend line for the aver­age price of a home in the GTA, you would see that cur­rent prices are about 16% above the 30 year average.

Com­ment: NO. A bub­ble is defined as a rapid rise in price fol­lowed by a crash. You can­not have a bub­ble with­out a crash. Thus, we have no bub­ble. Never mind the fact that the 5.6% aver­age price increase annu­ally we have seen, maybe 4% after infla­tion, is pretty hard to call a rapid rise. Not like the late 1980s where prices dou­bled from 1986 to 1989, going from $138,925 to $273,698. The crash­ing down to $206,490 in 1993. A rise of 97% fol­lowed by a drop of 25% – all in a span of 8 years. That is a pretty good exam­ple of a crash. Since prices lev­eled off in 1996 and started to rise, we have gone from $198,150 to $497,412, a rise of 151% in 16 years. So the late 1980s saw 97% in 4 years, a basic annual rate of 24.25% per year, while this cur­rent boom is 9.44% per year. With no crash. So yeah, I sure see the sim­i­lar­i­ties… not.

But draw­ing con­clu­sions based on a trend line alone is fool­ish. You have to look at other fun­da­men­tals such as income growth, house­hold indebt­ed­ness and price-to-rent ratios in order to see the full picture.

Com­ment: No, you really don’t. And if you do, you have to look at them the right way, which you won’t. But don’t worry, I cer­tainly will!

And that’s exactly what I’ve done. After ana­lyz­ing the num­bers, I’ve come to the con­clu­sion that real estate in Toronto is over­val­ued by 20% to 30% (depend­ing on the area).

Com­ment: I LOVE that con­cept: “over val­ued”. Based on what? Oh right, your opin­ion… yeah, that counts for a lot. Never mind the 343,000 peo­ple (85,731 sales with a buyer, seller and 2 real­tors) involved in the GTA real estate mar­ket in 2012. No, their actual money and pur­chase agree­ments count for noth­ing. The banks that lent the money to buy most of them. The sell­ers who accepted all those offers. No, the opin­ion of this anony­mous write is SO much more author­i­ta­tive. And what is even fun­nier, the writer of this never does get around to “prov­ing” the 20–30% over val­ued statement.

Fur­ther­more, the more desir­able the neigh­bor­hood is, the worse the crash will be. Places like Yorkville, For­est Hill, the Beaches, Rich­mond Hill and Oakville will see the worst declines in my opinion.

Com­ment: That is one of the dumb­est things I have ever read. And I have read a LOT of stu­pid stuff regard­ing Toronto real estate. The bet­ter neigh­bour­hoods are going to see the worst price drops? Con­trary to EVERYTHING ever said or writ­ten about real estate. Against all evi­dence to the con­trary. Opposed to the past mil­lion sales? Oh, this is rich!

Now, telling you my pre­dic­tion is easy enough but show­ing you how I came to this con­clu­sion is lit­tle more com­pli­cated – so bear with me. Let’s first start by turn­ing back the clock and revis­it­ing 1989.

Com­ment: Yes, let’s. And I will be along to be the voice of reason.

The Toronto Hous­ing Bub­ble of 1989

Whether you knew it or not, there was a huge real estate bub­ble in the mid to late ’80s. Prices went up by more than 100% in less than five years and then crashed by 40% over a period of seven years.

Com­ment: Nope, as shown above, prices rose 97% in 4 years and then fell 25% in the fol­low­ing 4 years. Let’s get the num­bers right to begin with. I will send any­one the data if they want to dou­ble check it for themselves.

Below is a chart that shows the scale of the GTA bub­ble back in the ’80s:

Com­ment: Look at chart 3 below, it shows recent year’s price increases and the bub­ble of the 1980s. Look at the sharp peak (run up fol­lowed by drop off) and com­pare that the the slower and more grad­ual rate of increase from 1996 until now. NOT the same thing!

In the ’80s, inter­est rates were north of 10% and so was the min­i­mum down pay­ment. The 5% down pay­ment was intro­duced in 1992 as a trial and offi­cially accepted only in 1999. Need­less to say, if you think that poor lend­ing stan­dards are nec­es­sary for a hous­ing bub­ble to occur, you are wrong. In fact, the key les­son from the last real estate bub­ble in Toronto is that you do not need to have low inter­est rates or sub prime lend­ing stan­dards for a bub­ble to occur. Nev­er­the­less, Canada still had bad lend­ing habits over the past decade, but more on that later.

Com­ment: In the 1980s, mort­gage rates ranged from a low of 10.20% in March of 1987 to a high of 21.46% in Sep­tem­ber 1981. Kind of hard to gen­er­al­ize with “more than 10%”. But to be accu­rate, the meat of the bub­ble from 1986 to 1989 had inter­est rates in the 10.20% – 12.72% range.

I often hear from home­own­ers who say that real estate is local – they tell me that they live in a great neigh­bor­hood and prices will not go down in their area. Sorry guys, but you’re liv­ing in a fan­tasy land: when the mar­ket goes south, it affects every­one. It’s just a mat­ter of the degree.

Com­ment: Cor­rect. And the bet­ter neigh­bour­hoods ALWAYS fare bet­ter. Which is why the good neigh­bour­hoods of the past 40–50 years are still the good neigh­bour­hoods. My father lives near Yonge & Eglin­ton, cer­tainly one of Toronto’s most desired places to live. His house sky­rock­eted in price in the late 1980s, then fell. Now it is up again. His house is worth $1 mil­lion, easy. So how is it that good neigh­bour­hoods get hit worse?

Below is a map of Toronto which demon­strates the hous­ing blood­bath between 1989–1996:

Com­ment: That makes no sense, not when aver­age prices for the entire city only fell 28% in that time. In 1989, the aver­age Toronto house was $273,698 and in 1996 it was $198,150. That is a drop of $75,548, which is 27.7% of $273,698. No other way to do the math. So how can it be that the areas shown on this map range from 31–51%? When the AVERAGE for all of them was less than 28%? As usual, you have the doom­sters using fuzzy math or incor­rect num­bers or just plain bias to prove a point that does not exit. This is like me telling you that the aver­age of 2, 2 and 3 is 5. I think your grade school math tells you that is wrong.

As you can see, down­town prices declined by whop­ping 50% in seven years. (You can read more on Toronto’s mar­ket crash in the early ’90s here.)

Com­ment: And what is now the C01 dis­trict, encom­pass­ing City­Place and Lib­erty Vil­lage and King West, was noth­ing but rail yard and aban­doned fac­to­ries in the late 1980s. It is not the same place as it is now. Hell, I went to the sales cen­tre for the first town­houses on Douro Street back in 1998 and it was noth­ing but gravel and hulk­ing fac­to­ries and ware­houses, pop­u­lated mainly by heroin and hook­ers. Of course it took a hit! Same with C08, which cov­ers Cork­town and Regent Park and Cab­bage­town. I grew up there in the 1970s and 1980s, it was a dump, the last place any­one wanted to live. This was still the time of sub­ur­ban growth and flight to the edges of the city. Things have changed SO much since then that this com­par­i­son is mis­guided at best, or out­right spin at worst.

Present Bub­ble vs. ’80s Downturn

Afford­abil­ity

So how do you com­pare the hous­ing bub­ble of late ’80s to the present bub­ble in Toronto? Many peo­ple believe that because inter­est rates were north of 10% in the ’80s and today they are below 3%, home prices are afford­able in the GTA and thus there is no hous­ing bub­ble at all.

Com­ment: Well yes, that is the basis of it all. Let’s take the peak of the bub­ble – in 1989 houses were $273,698 and inter­est rates were between 11.75% and 12.72%, so we can use the aver­age of 12.24%. So, with 10% down, as pre­vi­ously noted was the min­i­mum down pay­ment, the monthly mort­gage pay­ment was $2,634.97 – in 1989 dol­lars. Using the Bank of Canada infla­tion cal­cu­la­tor, we get $4,399.97 in 2013 dol­lars. Tak­ing the most recent mid-April fig­ures, we have an aver­age price of $578,327 for Toronto. Using cur­rent 2.99% mort­gage rates and 10% down, this monthly mort­gage would be $2,509.76. So it costs almost $2,000 LESS per month to buy a house today. Hell, even with a 3.09% mort­gage and only 5% down, the mort­gage cost is $2,697.70 a month. So yes, hous­ing is MUCH more afford­able now than it was in 1989.

What you should know is that afford­abil­ity indexes, such as the one by RBC, tend to mask the under­ly­ing home price over­val­u­a­tion due to the low inter­est rates. In his report on the Cana­dian hous­ing bub­ble, Alexan­dre Pestov proved that if you equal­ize the inter­est rates, hous­ing in Toronto would be just as unaf­ford­able today as it was in the ’80s.

Com­ment: But the low inter­est rates are not going away. The high rates of the 1980s were due to reces­sion­ary issues from the late 1970s through to about 1985. Rates were high­est in the mid­dle of it, around 1981. As the world econ­omy improved, rates fell and people’s incomes rose. Which is a lot of what fueled the bub­ble. How you “equal­ize” inter­est rates I have no idea… and why would you? The world was a dif­fer­ent place then, you can­not sub­tract 1 from both sides of the equa­tion and make them bal­ance out. Peo­ple make more money now, espe­cially with sig­nif­i­cantly more dual-income house­holds. That is why first time buy­ers can afford $600,000 houses. They tend to make over $120,000 as a cou­ple which means they can eas­ily afford the $2,500/month it costs to pay the mort­gage. Espe­cially when the aver­age 2-bedroom condo costs the same to rent! Why would you NOT buy?

Price and Time Scale

When you account for infla­tion, the aver­age house price in the GTA is 14.4% above the peak reached dur­ing the late ’80s. Does this mean that the cur­rent bub­ble is larger than it was 24 years ago? Not really, as you have to keep in mind the time scale.

Com­ment: No, it means noth­ing. Every­thing rises in price over time – from cars to choco­late bars to houses.

Dur­ing ’80s bub­ble, hous­ing prices dou­bled in less than five years. When prices bot­tomed in 1996, the aver­age house price in the GTA was still about a third higher than it was in 1985. Why is that? Well, a few things changed – the pop­u­la­tion increased, land became more scarce, and incomes grew.

Com­ment: Amaz­ing, some of the same fac­tors putting upward pres­sure on the mar­ket today.

Sim­i­larly, some of the price growth today is jus­ti­fied by increas­ing pop­u­la­tion and more restric­tive land poli­cies such as the Green­belt. Prices won’t fall back to 1996 level.

Com­ment: Really? A lot of your com­padres say they will.

Nev­er­the­less, the hous­ing bub­ble in the ’80s was so large that even today about a third of Toronto is still in red when you com­pare infla­tion adjusted hous­ing prices between 1989 and 2012. The aver­age price of a house down­town today is still below the price it was in the late ’80s.

Com­ment: While I do not have the detailed stats (and doubt this anony­mous writer does either) to com­pare just down­town, but I can show that the 1989 aver­age price of $273,698 is worth $457,031 in cur­rent dol­lars. And the cur­rent aver­age price is $578,327. So I don’t see how the cur­rent price is lower than it was in 1989.

Com­ment: This is the stu­pid­est chart I have ever seen. Or it is just the biggest lie I have ever seen. Noth­ing in Toronto, not a sinle prop­erty has gone down in price in the past 24 years. Not one. I could have bought a house in 1989 and burned it down and still sold the land for more today. Just for kicks, I pulled the num­bers for C08, the down­town east, for 1989. Of 180 free­hold sales on MLS, the aver­age sell­ing price was $359,363 in 1989 dol­lars. That is $600,077 in cur­rent dol­lars. The 58 sales so far this year have aver­aged $913,796 – a rise of 52%. As for con­dos, in 1989 the aver­age sell­ing price was $199,998, or $333,964 in cur­rent dol­lars, with this year’s sales to date aver­ag­ing $429,745 – a 29% increase. And this chart says this area went DOWN 9% dur­ing this time. The actual data shows an increase of 29% – 52% depend­ing on hous­ing type. Again, I can pro­vide my data to any­one for their own analy­sis, just ask me.

The Toronto hous­ing prices of the late ’80s are not jus­ti­fi­able today, even with the City of Toronto adding 400,000 more res­i­dents and the GTA adding nearly two mil­lion peo­ple over past two decades. The fact that a third of Toronto hous­ing prices are still below the 1989 peak proves how ridicu­lous hous­ing prices were in 1989.

Com­ment: Are you nuts? If you offered some­one a prime Cab­bag­town Vic­to­rian for $600,000 there would be a 23-person bid­ding war! Because that is 40% less than it would be listed for. And that is the current-dollar equiv­a­lent in price, that is the price you claim is unsus­tain­able. Yet prices almost dou­ble that are being sus­tained year after year. And you are still wrong, or lying, because prices are not below 1989 lev­els. I could work out the other dis­tricts, but I don’t have the time. I chose one at ran­dom and proved the chart wrong, that is enough for me. I have cast doubt on your math, that is all I need to do.

Yet, over­all the aver­age price of a house in Toronto is 14% above the 1989 level. In places like East York and the Beaches, prices are over 40% above the 1989 peak. Are those price lev­els jus­ti­fied by the fun­da­men­tals? I don’t think so. One could spec­u­late that the two main rea­sons why prices have reached today’s highs are bad lend­ing stan­dards and low inter­est rates.

Com­ment: With 1989 prices adjusted to $457,031 in today’s dol­lars and the most recent aver­age for 2013 being $578,327, the actual dif­fer­ence is 26.5% higher now. Again, your math is WAY off… And of course every­thing rises – when I was a kid, it cost me $0.20 for a sub­way ticket. That is $0.43 in 2013 dol­lars. Yet a child’s ticket today is $0.75 – more than 74% higher! Is that price sus­tain­able? Is it above fun­da­men­tals? And can some­one explain to me just what the heck “fun­da­men­tals” are?

Bad Lend­ing Standards

One of the rea­sons that the hous­ing prices are so high today is because of the Cana­dian Mort­gage and Hous­ing Cor­po­ra­tion (CMHC) tin­ker­ing with the mort­gage rules. While lend­ing rules in Canada were not as bad as those in the United States, 40 year mort­gages with a zero down pay­ment was clearly a pretty bad idea. Even 30 and 35 year mort­gages did more harm than good as it intro­duced arti­fi­cial demand which fur­ther pushed the hous­ing prices higher. Kevin from the Saska­toon hous­ing bub­ble blog did a won­der­ful job sum­ma­riz­ing the CMHC rule changes below:

Com­ment: And yet prices have risen over 4% since the last round of rule tight­en­ing in July 2012… And they have risen 31% since the first rule tight­en­ing in 2008. So yeah, it must be the lax lend­ing that is fuel­ing the price growth – as opposed to high demand and low sup­ply, dif­fer­ent demo­graph­ics, new trends in urban vs. sub­ur­ban liv­ing, green­belt pro­tec­tion and the like. Naw, they had noth­ing to do with it.

1954 – In 1954, the fed­eral gov­ern­ment expanded the National Hous­ing Act to allow char­tered banks to enter the NHA lend­ing field. CMHC intro­duced Mort­gage Loan Insur­ance, tak­ing on mort­gage risks with a 25% down payment

1954–1990 – Some­where along this time, 10% became min­i­mum down payment.

Com­ment: What? You quote some­thing you don’t even know? Some time in a 36 year span?

1992 – 5% was intro­duced as a trial run, then offi­cially accepted in 1999.

2001 – Gen­worth (GE Cap­i­tal) enters the Cana­dian mort­gage insur­ance market.

2001 – CIBC offered below-prime mortgages.

Pre-2003 – CMHC: 5% down with price limit depend­ing on area, 25 yr amor­ti­za­tions, no price limit if 10% or more down

Com­ment: Again, what is with the vague dates? If you include it in your time line, you need a firm date. I mean, 1842 is tech­ni­cally “pre-2003″ as is 1989 and 2002. Which year is it?

Sep 2003 – CMHC: 5% down, 25 yr amor­ti­za­tions, removed all price ceil­ing lim­i­ta­tions. Now any mort­gage would be insured regard­less of the cost.

Mar 2004 – CMHC: Flex-Down prod­uct allows 5% down to be bor­rowed and 1.5% clos­ing costs to be bor­rowed (essen­tially zero down, but 95% insured)

Mar 2006 – AIG enters the Cana­dian mort­gage insur­ance market

Com­ment: No. AIG has NEVER been in the Cana­dian mort­gage mar­ket. CMHC and GEMI are the only ones.

Mar 2006 – CMHC: 0% down, 30 yr amor­ti­za­tions (Gen­worth announces 35 yr amortizations)

Jun 2006 – CMHC: 0% down, 35 yr amor­ti­za­tions, inter­est only pay­ments allowed for 10 years

Nov 2006 – CMHC: 0% down, 40 yr amor­ti­za­tions, inter­est only pay­ments allowed for 10 years

Oct 2008 – CMHC: 5% down, 35 yr amor­ti­za­tions, investors need 5% down.

Com­ment: Up until now, rules had been loos­ened, no one is argu­ing that. But from 2006 to 2008, prices rose only 7.8%, while the increase was 31% from 2008 to 2012 when the rules were being tight­ened. It is easy to see that looser prac­tices pro­duced lower annual price increases than stricter rules (7.8% / 2 = 3.9% per year vs. 31% / 4 = 7.8% per year ion VERY basic terms). So the ini­tial argu­ment that lax lend­ing fuels higher prices is obvi­ously wrong.

April 2010 – CMHC did some minor tight­en­ing of their guide­lines, investors need 20% down.

March 2011 - CMHC only allows 30 yr amor­ti­za­tions, restric­tions on pulling equity out

July 2012 – CMHC only allows 25 yr amor­ti­za­tions and fur­ther restricts pulling out equity.

Due to the CMHC relax­ing mort­gage rules from 1999 through 2006, we saw dra­matic price increases. If there were no 30, 35 and 40 year mort­gages and the down-payment was kept at 10%, one could assume that the prices would still be below the 1989 peak.

Com­ment: Prices rose 54.1% from 1999 to 2006 – and then 41.3% from 2006 to 2012 as the rules were tight­ened. And the 2006–2012 period included the 2008 reces­sion and the minor dip in the real estate mar­ket. Doing the sim­ple divide thing, we have 9.02% annual price increases with “loose” mort­gage rules and, remov­ing the 0.01% increase from 2008 to 2009, we have 8.26% price increase with “tighter” mort­gage rules. So these loose rules accounted for an extra 0.76% price increase every year – this is what we are call­ing “dra­matic”? Less than 1% dif­fer­ence? As for mak­ing assump­tions based on sce­nar­ios that do not exist, it is point­less and moot. I can always assume I will buy a huge house if I win the lot­tery… And really, even if we play by your rules, not hav­ing the longer amor­ti­za­tions means prices would have risen by 0.76% less per year and they would be maybe 5–6% lower than they are today.

Low Inter­est Rates

After the hous­ing crash in the United States, it seems that the Cana­dian gov­ern­ment real­ized what they had done. So start­ing in 2008, they began revers­ing the changes made to the amor­ti­za­tion rules. But even after killing the 40, the 35 and finally the 30 year mort­gages, the prices still kept going up. Why? Record low inter­est rates.

Com­ment: Yes, which was very smart. Amor­ti­za­tion peri­ods have NOTHING what­so­ever to do with what hap­pened in the US, but what­ever. The US crash was based solely on preda­tory lend­ing prac­tices, cor­rupt invest­ment banks and peo­ple who did not read the fine print.

In fact, all growth from 2009 through 2013 can be attrib­uted mostly to the record low bor­row­ing costs. Peo­ple started to believe that this is a gen­er­a­tional oppor­tu­nity to buy – when in fact it was a bear trap.

Com­ment: Really? How is it then that 2007 had more sales than any other year, ever, but had mort­gage rates as high as 6.75%? Rates were more than dou­ble what they are today, yet there were almost 9% more sales than there were last year with 3% range rates. The aver­age mort­gage rate since the start of 2008 has been 5.72% and the cur­rent RBC posted rate is 5.14% – a dif­fer­ence of only 0.58%. Wow, so low… And we can even go back to 2000, just for kicks. The aver­age from Jan­u­ary 2000 to April 2013 is 6.43% on posted rates. We have seen LOW rates for quite some time now, pretty much since we first saw single-digit mort­gage rates start­ing around 1992. But amaz­ingly enough, when rates fell from a high of 12.72 in April of 1989 (pretty much the high­est point of the bub­ble) they dropped to a low of 7.71% in Decem­ber of 1993 (the low point of the first drop). So rates falling 5.01% in four years was cou­pled with a price drop of 24.6%. How does that fit your model?

In my opin­ion, and when adjusted for infla­tion, hous­ing prices in Toronto will return to the 2008 lev­els at the min­i­mum. Prices were already over­val­ued back in 2008, and then they increased another 30% over the next five years. For that exact rea­son it is my pre­dic­tion that prices will drop any­where between 20% and 30% depend­ing on the area.

Com­ment: But as I have said before, your opin­ion does not carry more weight that the 350,000-odd peo­ple involved in a years’ real estate trans­ac­tions. Add in mort­gage folks, home inspec­tors, mouthy friends and fam­ily giv­ing their opin­ion and more – and you could have up to 1,000,000 involved in the sales in a given year. And you think that your sin­gle opin­ion out­weighs all of them? My pre­dic­tion is that over any 5-year term from here until for­ever, prices in Toronto will never fall. Ever.

All this hous­ing price growth is phony. Prices did not increase because we make sub­stan­tially more money today. The growth was arti­fi­cial due to the gov­ern­ment tin­ker­ing with the mort­gage rules, and the emer­gency inter­est rates (which, by the way, are pretty much still in place today).

Com­ment: Price growth is not phony, houses cost more today than they did in the past. That is real my friend. And incomes are up, in fact, we do make more money today. And more cou­ples buy­ing homes have dual incomes, which was not the case a gen­er­a­tion ago. When you have a cou­ple mak­ing $120,000 between them, they can afford a fair bit. And that is the aver­age buyer today, trust me, I meet them every day. Inter­est rates are low, which helps, no one is deny­ing that. But the banks are keep­ing them there because it is prof­itable to do so. The big 5 in Canada are still mak­ing about $1 bil­lion (with a ‘b’) in PROFIT every quar­ter. Not rev­enue, profit. RBC made $2.07 bil­lion, TD made $1.79 and CIBC made $798 mil­lion to name 3 of the big 5. So they are quite happy to leave rates where they are and keep peo­ple buying.

As prices kept going up and more peo­ple qual­i­fied to pur­chase a home, soci­ety was led to believe that prices always go up and that you can actu­ally make a liv­ing by flip­ping houses. At the same time, Cana­di­ans ignored the hous­ing melt­down in the USA and truly believed that we were dif­fer­ent. Our bank­ing sys­tem is great­est in the world and we are a resources exporter and thus we are unique and dif­fer­ent… right?

Com­ment: Yes, many believe they can make money flip­ping. They are wrong. There are no more “deals”, you can­not get a house for cheap. If it would sell for $500,000 with $100,000 in renos, then it is priced at $400,000. Sell­ers are a LOT smarter than they were in the past. Add in com­mis­sions, land trans­fer tax and legal fees and it gets pricey. I think the real­ity of flip­ping has been exposed and that whole trend has passed. And we are dif­fer­ent from the US. If I have to explain all of the dif­fer­ent ways, then you are too far gone to help.

The truth is, Canada is no dif­fer­ent and is gov­erned by the same fun­da­men­tals as the rest of the world.

Com­ment: No. We are not the same as China or South Africa or Spain. Any­one who thinks so is not too smart.

Toronto Hous­ing Mar­ket is Out of Sync with the Fundamentals

Record House­hold Debt

Cana­di­ans did not get richer. While Sco­tia Bank likes to tell you that “You’re richer than you think”, one wise­man from Toronto once said it much bet­ter: “We’ve lever­aged you more than you think”.

Com­ment: Except that the aver­age Cana­dian income rose 2.8% last year. But yes, we do have too much debt, no one will argue that. But, mort­gage debt is not bad debt, there is an asset and a long term use. But debt to buy TVs or vaca­tion, that is ter­ri­ble debt.

The cor­re­la­tion coef­fi­cient between the debt-to-income ratio and the national ter­anet index is a stag­ger­ing 0.98, or in other words, almost per­fect. The debt-to-income ratio cur­rently stands at a record level of 164.7% – mean­ing that Cana­di­ans are stretched to the limit.

Com­ment: True, but the level has been drop­ping, albeit slightly.

Say­ing that hous­ing prices will con­tinue to rise is fool­ish. If prices keep going up, that will mean a fur­ther increase of house­hold debt. The Bank of Canada already esti­mates that 10% of Cana­di­ans are vul­ner­a­ble to higher inter­est rates. And the more debt we accu­mu­late, the more vul­ner­a­ble we make our­selves. The sooner we pay back our debts the better.

Com­ment: How can it be fool­ish when prices have risen 2328.17% since 1966? And no year out­side of the crash of the early 1990s has had prices go down? Only 6 out of the past 47 years have had price drops. When 87% of years rise in price and the over­all trend is up, it would be fool­ish to think that a 47-year trend will sud­denly reverse. Even if prices fall 30%, let’s play the game. Then what? Do they then stay sta­tic at that level? Do they fall more? Rise? What hap­pens? All you doom-bots claim that prices will fall, but no one has a plan for the day after. Even you have to admit that with prices that low, buy­ers will go nuts and demand will sim­ply push prices right back up again. Think of all the first-time buyer moan­ing about high prices, think what hap­pens to them when that $600,000 house drops to $420,000. I bet 23 of them bid it back up over $500,000. That is why such a huge price drop is sim­ply not pos­si­ble. There are too many peo­ple wait­ing for it, hop­ing it hap­pens, ready to buy…

In 2011, Mark Car­ney said this: “Cana­di­ans have now col­lec­tively run a net finan­cial deficit for more than a decade, in effect, demand­ing funds from the rest of the econ­omy, rather than pro­vid­ing them, as had been the case since the Leafs last won the Cup.” Let me trans­late the last sen­tence for you: we have been liv­ing beyond our means for more than a decade.

Com­ment: Again, no one denies this. But it is not just real estate that he was talk­ing about. He was talk­ing about debt in gen­eral. All of it – from cars to TVs to vaca­tions and houses too.

Price-to-Rent Ratio

If you divide the sell­ing price of a condo or home by its yearly rent you would arrive at the price-to-rent ratio. If the ratio is between 1 and 15, that indi­cates that it is much bet­ter for you to buy the place, rather than rent. If it is between 16 and 20, that means that it is bet­ter for you to rent the place, rather than buy. Finally, if the ratio is above 20, that means that is much bet­ter to rent.

Com­ment: Which is as mean­ing­less a com­par­i­son as there is.

I man­aged to find one prop­erty on Kijiji that was listed for rent and for sale. This prop­erty was a ‘one bed­room plus den’ at 832 Bay Street. It was listed for sale at $385,000 and also was listed for rent at $1700. The price to rent ratio for the prop­erty is 18.9 and thus it was obvi­ous that it would be a much smarter deci­sion to rent this prop­erty. In fact, most one and two bed­room apart­ments in new condo build­ings that I found on Kijiji had a price-to-rent ratio between 15 and 22.

Com­ment: First off, I find it strange that some­one who claims to have decades of MLS data has to search Kijiji for this infor­ma­tion. A lit­tle disin­gen­u­ous I think… Any­way, most starter type con­dos around City­Place (a hive of rental activ­ity) aver­age around $330,000 or so. They also rent for an aver­age of around $1,660. This gives a ratio of 16.6. Woo. If I divide the monthly rent by pi I get 528.7 – which means just as much. What is impor­tant is that an investor with 20% down (your min­i­mum from above) pays $1,527 per month for their mort­gage, taxes and condo fees. So they gen­er­ate $133 in monthly cash flow. That is why investors buy them – they make money and with a vacancy rate south of 1% they have ten­ants lined up to get in. Maybe it makes more sense for the renters to rent (stu­dents, tem­po­rary hous­ing, don’t have a down pay­ment, etc.) but it always makes more sense to own.

Above is a chart pro­duced by the IMF. As you can see, Toronto had a price-to-rent ratio of 37 in 2010. Right now it is prob­a­bly around 40, con­sid­er­ing that prices shot up by 15% in Toronto in the last two years. Below is the same chart with my 2013 price-to-rent esti­mate (past the red line):

Com­ment: Heck, I just showed it is 16.6 in one area of the city, you had another sin­gle exam­ple that was 18.9 – where the hell does 40 come from? And funny how you pre­dict that prices will INCREASE on this chart (push­ing up the price-to-rent ratio) yet a few para­graphs up from here you pre­dict “that prices will drop any­where between 20% and 30% depend­ing on the area”. Should your chart not reflect your prediction?

Now it should be noted that the IMF price-to-rent ratio is twice of my cal­cu­la­tions for Toronto’s new con­dos, and there can be many rea­sons for such a dis­crep­ancy. Regard­less, the key mes­sage from the chart above is that Toronto is in hous­ing bub­ble ter­ri­tory. Remem­ber the Toronto hous­ing bub­ble in 1989? Now look at the chart above. The price-to-rent ratio was at 30 and then it dropped to around 21 by 1996. Look where it was in 2010, at 37, and in 2013 it is prob­a­bly past 40.

Com­ment: Your chart is utter horse pucky. Pulling the stats, in April 2010 the aver­age sale price for a 1-bedroom condo around City­Place was $320,602 and the aver­age rent was $1,531 – for a ratio of 17.5. I don’t know if you are just wrong or if you are will­fully mis­lead­ing peo­ple, but you need to re-check your data. You are so far off it is not even funny.

From the price-to-rent per­spec­tive the mes­sage is clear: Toronto is in a hous­ing bub­ble. Recently the IMF pub­lished another update on the Cana­dian hous­ing mar­ket, and below is a chart which shows that Canada is about 60% above its his­toric price-to-rent ratio. Now look at the US, which recently had its hous­ing bub­ble burst, and finally look at Japan which had its bub­ble burst back in the late ’80s.

Com­ment: No, just because you make up a stat does not mean you can use it to say some­thing is or is not a bub­ble. As with any def­i­n­i­tion of bub­ble, you have to have a crash to have one. We have no crash, thus no bub­ble. You also need a rapid and severe increase – we have 16 years of sin­gle digit growth, which is hardly severe or rapid. And the chart below con­tra­dicts what you and I both say. Even with your ridicu­lous claim of a ratio of 40 and my real­is­tic proof of one closer to 16, this chart says we are around 160? And it is national, so it is moot. Rents in Van­cou­ver have noth­ing to do with prices in Monc­ton and nei­ther has any­thing to do with Toronto.

The chart below shows the Cana­dian price-to-rent ratio between 2000 and 2012. Notice the dip in 2008 and how quickly the ratio went back up. While the US ratio was going down, Cana­di­ans were con­vinced that they were dif­fer­ent and thought that high real estate prices were jus­ti­fied in their coun­try, so the ratio and the prices went back up.

Com­ment: Again, what the hell do France and Aus­tralia have to do with Canada? Or Toronto, more specif­i­cally? We are talk­ing about one city, how does a coun­try on the other side of the planet have any­thing to do with Toronto? This is just plain dumb. I don’t even know how to prop­erly rebut this…

Com­par­a­tively speak­ing, rents are too cheap and houses are too expen­sive in this coun­try. This will cor­rect itself – as it always does. The price-to-rent ratio will return to the mean and so will the hous­ing prices.

Com­ment: Rents are too CHEAP? Try say­ing that to the condo renters in Toronto pay­ing $2,650 for the median 2-bedroom unit. Plus hydro. Or $1,760 for the median 1-bedroom condo with park­ing? You are say­ing that is cheap? This is another rea­son why the real estate mar­ket is so strong – the monthly cost to buy a $500,000 house with 5% down at 2.99% (includ­ing prop­erty taxes and every­thing) is $2,535. LESS than rent­ing the aver­age 2-bedroom condo.

Price-to-Income Ratio

His­tor­i­cally speak­ing, the aver­age house should cost about three times your annual salary. If it costs less than three years worth of your salary then it is con­sid­ered afford­able. If it costs more than three years worth of your salary, then it is unaf­ford­able. Accord­ing to Demographia, if the house costs more than five years of your annual salary then your house is severely unaffordable.

Com­ment: His­tor­i­cally speak­ing, measles killed mil­lions – but that is not the sit­u­a­tion today. And hous­ing today is not the same as it was for my par­ents or my grand­par­ents. Stop speak­ing his­tor­i­cally, it is meaningless.

The price-to-income ratio for a city or a nation can be cal­cu­lated when you divide a median house price by median house­hold income. Below is a chart which com­pares national price-to-income ratios in the USA and Canada. Look­ing from the price-to-income per­spec­tive, the Cana­dian hous­ing bub­ble exceeds the sever­ity of the United States bub­ble in 2006.

Com­ment: Price to income is the stu­pid­est mea­sure­ment there is. No one buys a house (or a car, for that mat­ter) based on the sticker price. They buy it based on what they can afford per month. The way you buy a house is to take your monthly income, take a per­cent­age of it to devote to a mort­gage, then use the cur­rent rate to cal­cu­late what you can spend. What mat­ters is what the aver­age house costs per month. I have done this cal­cu­la­tion repeat­edly, but will do it again for you now. Let’s go back to 1989 when the aver­age price was $273,698 and mort­gage rates were around 12%. Monthly pay­ments with 10% down would have been $2,592.70 – or $4,329.39 today. Mid-April’s aver­age price was $578,327 (April being the high point of the year, price-wise, the 2013 over­all aver­age would be lower) and at 2.99% and 10% down the mort­gage pay­ment is $2,509.76 in cur­rent dol­lars. So the monthly cost today is $1,800 less than it was in 1989. Sure, the sell­ing price is higher, but the monthly price is much much less.

The cur­rent price-to-income ratio in Canada is unsus­tain­able and the ratio will return to the mean, which is 20% below the present value. I think Garth Turner is cor­rect with his prog­no­sis of a 15% cor­rec­tion nation­wide – and that he may even be too conservative.

Com­ment: Let’s not even talk about a guy who has been wrong for 10+ years now… his opin­ion no longer matters.

Let’s turn our atten­tion to the local mar­kets and look at the indi­vid­ual Cana­dian cities. In the first chart below, you can see the median house price ver­sus the median house­hold income in major Cana­dian cities.

Com­ment: Because other cities mat­ter when dis­cussing Toronto real estate how?

The sec­ond graph below maps the actual price-to-income ratios. Remem­ber, any­thing below 3 means afford­able, above 3.1 unaf­ford­able, above 4.1 seri­ously unaf­ford­able and above 5 severely unaffordable.

Com­ment: And what is the Toronto’s income? Where did you get it from? What price did you com­pare it to? With­out that infor­ma­tion, the chart is useless.

After look­ing at the last chart, some may argue that beau­ti­ful cities like Van­cou­ver or Toronto deserve to be more expen­sive than places like Guelph or Thun­der Bay. After all, every­body wants to live in Toronto or Van­cou­ver… right?

On top of that, peo­ple want to live in nice neigh­bor­hoods such as For­est Hill or Yorkville. Peo­ple who tend to live in those places also tend to make more money in order to afford such places.

Com­ment: And there are many peo­ple who want to live in Leslieville or Riverdale and they can, because you do not need as much money to buy here. And com­par­ing 10,000 square foot cen­tury man­sions in Rosedale to the aver­age house is more than a lit­tle disingenuous.

Below I cre­ated a price-to-income map for the City of Toronto. The hous­ing prices are based on the 2012 TREB num­bers, while the area income was cal­cu­lated indi­vid­u­ally for each CMA area. I would say that my map is on the con­ser­v­a­tive side as I assumed 40% income growth from 2005.

Com­ment: Again, with­out the data, it is hard to know how accu­rate this map is. Con­sid­er­ing all of your other charts are com­pletely wrong or sim­ply mis­lead­ing, I expect this one is also incor­rect. Never mind that you admit that you too 2005 income num­bers and sim­ply added what­ever you felt like to bring it to 2012 num­bers. And again, I find it VERY strange that you have access to the annual sales data by dis­trict for the GTA, yet had to resort to Kijiji for rental prices (above).

The pat­tern is clear: the more expen­sive the neigh­bor­hood, the higher the price-to-income ratio. Peo­ple who make the most money lever­age them­selves the most. Yorkville and For­est Hill have some of the high­est price-to-income ratios in the city. This is one of the rea­sons why these par­tic­u­lar areas will decline the most.

Some even say that the high price-to-income ratios in these cities demon­strate their class. But oth­ers have dif­fer­ent views about it. For instance, Amer­i­can econ­o­mist Robert Shiller believes that the more won­der­ful a city is, and the more glam­our it has, the higher the chances that city will expe­ri­ence a bub­ble. It already hap­pened once before in Toronto, and now it is hap­pen­ing again.

Com­ment: Nice, let’s ask some guy who lives in another coun­try to ana­lyze one city’s real estate market…

Shiller on Toronto’s Condo Bub­ble

Robert Shiller became one of the most influ­en­tial main­stream econ­o­mists in the world after he pre­dicted the hous­ing crash in the United States. In an inter­view back in 2012, he called Canada’s real estate mar­ket a bub­ble. Shiller com­pared Van­cou­ver to Cal­i­for­nia (which expe­ri­enced more than a 40% crash) and Toronto to Boston (where prices have cor­rected by 30%).

Com­ment: And yet, with­out the crim­i­nal bank­ing prac­tices, sub prime mort­gages, no-income mort­gages and the like – how are we in any way the same? Van­cou­ver house prices were fuelled by wealthy Asian immi­gra­tion, mainly, plus land short­ages (due to moun­tains and the ocean). California’s issues were fuelled by Wal­mart employ­ees talk­ing out $600,000 mort­gages on houses they were told would rise in value. Then their rates tripled, after they leased a Hum­mer, and they found out that they could not afford $3,000 mort­gage pay­ments along with $1,000 car pay­ments on their $8/hour part time job. BIG DIFFERENCE.

The above graph doesn’t look too dra­matic, but Shiller explained that while Toronto’s hous­ing prices have risen slowly and steadily, they still rose by a lot. Between 1998 and 2012 Toronto’s prices went up by 72% when adjusted for infla­tion. Shiller believes that Toronto can cor­rect as much as Boston did – even though Toronto is Canada’s finan­cial cen­ter. Finally, Shiller also men­tioned that he wouldn’t buy a condo in either in Toronto or Van­cou­ver. In his opin­ion, con­dos tend to be too volatile.

Com­ment: Par­don my lan­guage, but WTF? What the heck does Boston have to do with Toronto? This writer is com­par­ing Boston to Toronto, France to Canada, and Cal­i­for­nia to Van­cou­ver. What does any of that have to do with the price of a condo on Front Stree? NOTHING. He is sim­ply grab­bing ran­dom data to sup­port a pre-conceived and non-existant posi­tion. Hell, he even tried to use Mon­treal rents to prove a Toronto bubble…

Major Finan­cial Insti­tu­tions Expect a Downturn

BMO, IMF, Fitch, The Econ­o­mist, Car­ney and TD all expect a reverse in the Cana­dian real estate mar­ket in Canada. Below is a sum­mary of their doom and gloom predictions.

Com­ment: This is just too easy…

From BMO’s May 3^rd Talk­ing Points news release: “…the sag­ging hous­ing mar­ket showed signs of sta­bi­liz­ing, with Van­cou­ver home sales down “just” 6.1% y/y in April ver­sus an aver­age drop of 23% in the prior 12 months and Toronto down 2.1% ver­sus a –9% trend. After a steady stream of fore­cast cuts in the past year, we found our­selves in the happy posi­tion of upgrad­ing our 2013 GDP call this week, albeit by 1 tick to 1.6%.” Not a sin­gle men­tion of real estate being over val­ued by 10%.

In the IMF’s Feb­ru­ary 4^th issue of Canada: Selected Issues they state that “while house prices seem some­what over­val­ued at the national level in Canada, the risk of a severe hous­ing bust is reduced by the strong bal­ance sheet and con­ser­v­a­tive lend­ing prac­tices of Cana­dian banks, the recourse nature of mort­gage loans, and the broad scope of government-backed mort­gage insur­ance.” They never state that hous­ing prices are 10–15% too high, but they do con­duct an eco­nomic exer­cise where they assume hous­ing prices fall by 10–15%. Seems to be a pur­pose­ful mis-statement. The only sim­i­lar state­ment they make is the fol­low­ing: “With cur­rent house prices and con­struc­tion activ­ity at his­tor­i­cal highs, an adjust­ment is likely to take place in the com­ing years.” But they do not quan­tify it.

I can­not find any infor­ma­tion on the Fitch web­site deal­ing with Cana­dian real estate, never mind any­thing as spe­cific as men­tioned here. But I do have to say that I have no idea who they are and am not that con­cerned about what a cor­po­rate rat­ing com­pany from New York has to say about Ontario real estate.

The Economist’s infor­ma­tion is about a year old now and has been shown in the mean­time to be wrong. Again, not sure how much stock I put into what a UK mag­a­zine has to say about Toronto real estate. They are a mag­a­zine based in another con­ti­nent… how much can they know about us? I can­not find where they say that our hous­ing is over­val­ued, but they did say this in the March 30^th print edi­tion: “House prices are still ris­ing every­where except Van­cou­ver, but hous­ing sales and hous­ing starts have dropped. Ana­lysts are divided on whether this sig­nals the begin­ning of a crash, or just a pause before a new burst of activ­ity in the com­ing months, which are tra­di­tion­ally the hous­ing market’s busiest.” And we have now seen that April is up quite sig­nif­i­cantly over Q1.

You quoted Mark Car­ney as say­ing there had been an adjust­ment in the mar­ket. Well, yes, there has been, sales went down for a while after the new mort­gage rules came into effect. Will it have an effect into the future? Likely… but Car­ney does NOT say that he expects real estate to drop. Our writer is imply­ing that, but read the words, he does not say that. He said that in Feb­ru­ary of this year in an inter­view with CTV, cau­tion­ing peo­ple not to expect their home to be their nest egg. Another pur­pose­ful mis-representation.

Finally, the TD quote? It says they expect real estate to increase 2% this year and 3.5% each year there­after. That means they think hous­ing prices are going UP not, down. And the only men­tion I can find ref­er­enc­ing them and a 7% mort­gage rate is this arti­cle. It does not seem to exist out­side of this piece, another fab­ri­cated piece of data it seems.

Lis­ten to Real Estate Agents with a Grain of Salt

Com­ment: Of course! We are all liars and are in on it!

Whether real­tors know real estate or not doesn’t really mat­ter. For the past decade they have enjoyed a 6% yearly salary increase thanks to the ris­ing hous­ing prices (when keep­ing their sales vol­ume con­stant). At the same time, unions all over Canada were fight­ing big cor­po­ra­tions and gov­ern­ment in order to get at best their annual 3% salary increase.

Com­ment: And unions get ben­e­fits and sick days and all that good stuff. They get paid vaca­tion, I don’t. I have to pay my com­pany to work for them, I also have to give them a cut of every deal I make. I have pay for all of my own adver­tis­ing, mar­ket­ing, etc. And my com­mis­sions have been shrink­ing. Ten years ago things went from 6% split between both sides to 5%. Now, list­ing agents are lucky to get 1%. Regard­less of what you hear about us get­ting 6%, that is a big load. Buy­ing agents usu­ally get 2.5% but 2.25% and 2.0% are get­ting more com­mon. List­ing agents have gone from 3% to 2.5% to 1% or less now. And all of the “com­mis­sion free” com­pa­nies are tak­ing our busi­ness and low­er­ing our pay. It is not as sweet as the writer makes it out to be. I work for myself, with all of the asso­ci­ated efforts and costs that entails. Would I trade it for some $120,000 union gig with 4 weeks paid vaca­tion, sick days and full ben­e­fits? I just might…

The issue is not whether real­tors deserve a 6% annual boost or not, the issue is whether they have a con­flict of inter­est when it comes to ris­ing hous­ing prices – because who wouldn’t enjoy a 6% annual gain? This con­flict of inter­est means that real­tors view the hous­ing mar­ket through rose col­ored glasses. After all, when you ask a real estate agent whether it is a good time to buy or sell, the answer will always will be the same.

Com­ment: Oh yes, because ris­ing prices are 100% because of real­tors – not the actual sell­ers, the ones who own the houses. No no no, good sell­ers would love to give their homes away for a fair price of $200,000 to any lovely fam­ily that asks, but evil real­tors force them to list it for $499,000 and twist their arms into accept­ing the high­est bid of $587,000. Poor poor sell­ers, hav­ing to take triple the money for their house. Get real. And no, when it comes time to buy and sell, their are dif­fer­ent times that are bet­ter than oth­ers. Ask me, I will tell you. But you didn’t ask, you just made a neg­a­tive gen­er­al­iza­tion instead.

False Jus­ti­fi­ca­tion for Ever Ris­ing Real Estate Prices

1. Toronto is run­ning out of land
Hong Kong, Tokyo and Lon­don were also run­ning out of land until their bub­bles burst. Land scarcity does play a role in ris­ing hous­ing prices, and this is one of the rea­sons why the ’80s bub­ble bot­tomed 30% above where it started. The real fun­da­men­tals that drive up the cost of real estate are higher wages, credit and inflation.

Com­ment: Well, the big hunk of water to south kind of pre­vents build­ing on it, doesn’t it? And the pro­tected green spaces do not allow for houses. Most land within 50km of the CN Tower has already been built on, so where does the new space for a sub­di­vi­sion come from? Tell where you could build 100 detached homes within 1km of Yonge Street, south of the 401? Nowhere, that’s where. And if you could, the houses would be worth $3 mil­lion each. That is why con­dos are being built, you can put a lot of homes on a small piece of land. And you quote 3 of the most expen­sive cities to live in in the world to make his point. Tokyo is the world’s most expen­sive cities, with many con­dos lit­tle more than clos­ets because of the cost of land, which is pretty lim­ited on an ISLAND. This does not sup­port your point.

2. For hous­ing prices do go down you need a reces­sion and increased unem­ploy­ment
Actu­ally, it is the other way around. The most recent exam­ple of this is the United States. They had a reces­sion and high unem­ploy­ment in the after­math of the hous­ing bust. Here is an awe­some arti­cle by Ben Rabidoux which shows that the econ­omy goes the same way as housing.

Com­ment: No, any num­ber of dif­fer­ent things can cause hous­ing prices to go down. The US hous­ing crash was cou­pled with their eco­nomic crash, both tied into the same prob­lems. Yet here in Toronto, the reces­sion (that was not tech­ni­cally a reces­sion as we never had the sequen­tial quar­ters of neg­a­tive growth) did not cause house prices to go down. Dur­ing the reces­sion of the early 1980s, prices in Toronto did not go down. Right now the Cana­dian econ­omy is slow, but real estate is not. Beware of Ben Rabidoux, he writes like this arti­cle and seems to say the same things as Garth Turner. Both of which have been quoted in this blog and proven wrong.

3. Real estate is an invest­ment, every­one knows that
It’s true that you can profit with real estate, yet as Shiller showed, over a long enough time period, hous­ing prices fol­low infla­tion, incomes and the GDP.

Com­ment: But it should not be. I will give you that, the past decade or so of price increases have made peo­ple think of their houses as invest­ments. Yes, they will be worth more in the future, but they are not the way to increase wealth or make money. A house is some­where to live, peo­ple need to remem­ber that.

4. The GTA receives over 100,000 immi­grants per year
Phoenix also expe­ri­enced huge inflows of peo­ple dur­ing its hous­ing bub­ble. Yet, even with peo­ple mov­ing into the city, prices still crashed. Like­wise dur­ing ’80s bub­ble – peo­ple were mov­ing into the city until it burst. Once the hous­ing mar­ket crashes Canada-wide, and the GDP growth slows or even goes neg­a­tive, expect less immi­grants com­ing into the country.

Com­ment: No it does not. There were years where it was so, but we are more in the range of 70–80,000 new peo­ple annu­ally. And they all need some­where to live. With some 28,000 con­dos com­plet­ing this year and maybe 50% of that in houses, where are they all going to live? This is why the vacancy rate is 1% and renters get in bid­ding wars. And why the real estate mar­ket keeps ris­ing. Until the demand eases, the sup­ply will con­tinue to be sought after.

Cur­rent Sta­tus of the Hous­ing Bubble

For the lat­est mar­ket update on Toronto’s real estate, click here.

We are at the top of the bub­ble right now from the price per­spec­tive. From the sales per­spec­tive, the bub­ble has burst. For exam­ple, in 2012 new condo sales have crashed by 43%. In a few years there will be barely any cranes on Toronto’s skyline.

Com­ment: WRONG. If the bub­ble had burst, prices would be falling. Read the def­i­n­i­tion of a bub­ble. Since prices have risen for about 50 straight months, we can­not have a burst bub­ble. Sim­ple. New condo sales are down because there are fewer projects. And you are wrong with your fig­ures, sales dropped 36% NOT 43%. To quote Urba­na­tion, the author­ity on the Toronto condo mar­ket: “The 17,997 new con­do­minium apart­ment sales real­ized in the Toronto CMA in 2012 was above the ten-year aver­age, but below the five-year aver­age. While the ten­dency is to focus on the large dif­fer­en­tial between 2012 and 2011 – annual new sales activ­ity declined 36% (10,193 sales) from last year – the Toronto CMA new con­do­minium apart­ment mar­ket achieved its fourth strongest year on record.“

Nation­ally the sales are down by over 15% and they con­tinue to fall. Remem­ber: sales fall first, prices fall sec­ond. Addi­tion­ally, judg­ing from the US, prices can be in flux (side­ways) for more than a year before they start falling dramatically.

Com­ment: National stats are moot, we are talk­ing about Toronto. And the US means even less to us.

For the past year condo prices had been side­ways or, in other words, the appre­ci­a­tion has slowed to a halt. Expect con­dos to be hit the worst and to be the first ones to fall in price.

Com­ment: That chart is for sales VOLUME, not PRICES. And wow, look at that, it fol­lows the same sea­sonal pat­terns as vol­ume and price do EVERY YEAR. Slow in the start of the year, peak­ing in spring, slow through sum­mer, peak­ing in fall and slow­ing to end the year. Hap­pens every year, big whoop de doo.

Com­ment: This chart just shows that there has been a lot of volatil­ity over the 12 months from March 2012 to March 2013. So what? April just posted a 5.6% price increase for con­dos in the 416 over April 2012. In March it was a 2% rise. So the net net is that condo prices are ris­ing. How does that prove the bub­ble again?

Below is map that shows how much hous­ing prices went up from 1996 to 2012. Keep in mind that these stats were adjusted for infla­tion so the num­bers are lower than you might expect. Notice the areas that have expe­ri­enced the biggest price growth. Those areas tend to be the wealth­i­est and most glam­ourous – such as The Beaches, Yorkville, and For­est Hill.

Com­ment: Oh. My. God. The best neigh­bour­hoods saw the largest price growth? You the mean the places want to live the most are worth the most? This cer­tainly is news! Again, so what? How does this prove a bub­ble? All it does is show where the nicer neigh­bour­hoods are.

What Now?

So the Toronto hous­ing mar­ket is over­val­ued by 20% to 30% depend­ing on the area, but what does this mean for the indi­vid­ual per­son – for you?

Com­ment: No, only you say that. Fair from prov­ing it in this arti­cle, I have rebutted your every attempt.

- If you plan to invest in real estate, right now is the worst pos­si­ble time to do it.

Com­ment: Well heck, it would have been nice to have bought 10 years ago. Same as 10 years from now we will all wish we had bought today. And those who wait… they will see, higher prices and higher mort­gage rates – guaranteed.

- If you own an invest­ment prop­erty and your strat­egy was based on 6% annual appre­ci­a­tion, then you bet­ter grab a cal­cu­la­tor and con­sider sell­ing as soon as possible.

Com­ment: Do NOT do that! I know some­one who sold out 2 years ago, think­ing the mar­ket had peaked. Read too much crap like this from peo­ple with no clue what they are talk­ing about. His prop­erty has since risen more than 10%, he lost about $50,000. Plus the past 2 years in rent pay­ments. By my math, his sell­ing then cost him about $100,000. Do not lis­ten to alarmist crap like this, it can cost you a lot of money.

- If you are a first time home buyer with a 5% down pay­ment, just rent!

Com­ment: Maybe, maybe not. But if buy­ing puts you in a tight finan­cial spot, don’t do it. Many peo­ple buy with 5% down and are totally fine.

- In any case, you bet­ter do some math with var­i­ous sce­nar­ios before jump­ing into the market.

Com­ment: Yes, I can agree with that. The first and only solid advice of this whole LONG piece.

Finally, if you are cur­rently house horny and in need of ther­apy, I highly sug­gest you read Garth Turner’s Blog. If you are a sta­tis­tics geek and you want to dis­cover all the tiny bits of infor­ma­tion about Toronto’s hous­ing mar­ket, read Bed Rabidoux’s blog. And, of course, don’t for­get to come back to the Toronto Condo Bub­ble for the lat­est news on the Toronto hous­ing bubble.

Com­ment: Do not read GT’s crap, he has been wrong for a decade or more now. And he is some­one who buys and sells houses every year. Yes, Mr. Turner is a flip­per. He makes money bet­ting on house prices ris­ing! Yet he preaches this doom and gloom sce­nario. Not some­one I would trust… Had you lis­tened to him 10 years ago and not bought that house in Lea­side (as a reader of this blog told me) they would not have a house worth over $1 mil­lion now. They did NOT lis­ten and they are MUCH bet­ter off today. And BR… well, he is of the same ilk.

Heck, all I can say is that if you have read this far, then you can make your own deci­sions. Believe who you want, the orig­i­nal writer or all of the cor­rect data. I think you know which one of us right.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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