The sky is NOT falling
I am known to vehemently disagree with Garth Turner, on pretty much everything he says. I would love to get into what I really think, but a libel suit would do me no good. So let me take some of what he said on Howestreet.com (http://www.howestreet.com/articles/index.php?article_id=11099) recently and comment on it.
“Toronto, Vancouver (especially) and a few other major markets are in the midst of an unsustainable real estate bubble bred by a number of factors…”
Bubble? How is the current market a bubble? We have prices rising 10% in 12 months, less tha 1% a month. Wow, that sure is an incredibly fast rise, isn’t it?
Just look at the numbers. Between 1984 and 1989, Toronto house prices increased 167% according to the Toronto Real Estate Board stats. Average annual appreciation was 22% during that period. Everyone agrees that that was a bubble, massive price increases over a short period of time.
Even if we go back 11 years, we still see only a 6% average annual increase recently. From 1996 to 2007 house prices increased 90% – a very far cry from the 167% in 5 years we saw a few decades ago. So how can now be a bubble, when we do not have numbers anywhere close to what we saw during an actual bubble back in the 1980s?
It sure is easy to yell about something when you do not have to produce any stats or numbers or data to back it up. And it is amazing how those hollow arguments fall in the face of facts that do not support them.
But it GT’s support, Vancouver (and Calgary) are definitely in and out of bubble territory all the time. But Toronto is simply not in the same league.
The final nails in GT’s bubble coffin come from the banks themselves (http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=M1ARTM0012334):
CIBC World Markets chief economist Jeffrey Rubin, the man who called the real estate bubble in 1989, says there’s no parallel today. Only a significant interest rate hike could trigger a collapse in the housing market, and that’s “not very likely,” he says. A slowdown in job growth could cool the housing market slightly, but it wouldn’t burst a bubble, he adds.
Carlos Leitao, a Royal Bank of Canada senior economist agrees. Some segments, such as the Toronto condo market, may be “on the bubbly side,” he says, but overall “we don’t think it is a bubble by any means. Keep in mind, we’re coming from a deep, deep hole.”
“…chief among them cheap money and investor stupidity.”
Just to be clear on this, he is saying that all of you who have bought a house or condo are stupid. Last gasp of the desparate, or those with no clear argument, is to result to insults. So mature.
“Our household and mortgage debt levels are racing higher, with no real gains in income.”
There are innumerable articles about how affordibility is improving, with the Royal Bank saying it is gotten better for 15 months now (http://www.jeffreyteam.com/blog/toronto-real-estate-market/housing-affordability-hits-levels-not-seen-in-5-years/). This would seem to disprove the higher-debt-and-lower-income statement above.
Statistics Canada’s latest release (June 2009 – http://www.statcan.gc.ca/daily-quotidien/090603/dq090603a-eng.htm) shows that median family income (adjusted for inflation and other factors) increased 3.7% from 2006 to 2007 (the latest year for data). Median income for singles increased 3.9%. Since 2002, the average annual growth of the median after-tax income for families was 1.8% and 1.4% for singles. So, Garth, you are just wrong.
And if mortgage rates are so low, which is the only reason people are buying, how can their mortgage debt be so high? Ah, right, it is the total amount they mortgage, not their monthly payments. The simple fact remains that $300,000 at 14% is $3,437 per month, while $570,000 at today’s best rate of 3.84% is only $2,878 per month. So while housing prices may be higher, it costs $559 less per month (in today’s dollars at that, never mind inflation) to own a similar home today as it did 10–20 years ago. And incomes are rising by around 3% a year. I guess we must all have 23 credit cards each to get our household debt high enough to get the sky falling as much as GT says it is.
Again, do not trust the man shouting from on top of the box. Do some digging, find the real numbers. Analyze the data and find the truth for yourself. That is why I am including links to all of the stats I am using, so you can double check them for yourself. Don’t just take my word for it…
“Interest rates will be heading higher, and unemployment is still growing.”
Will they? I have heard that for quite some time now. Mortgage rates were about 2% higher than they are now for a while last year. Previous to that, we have to go back to around 2000 to find rates similar to that. We have not had rates consistently at 7% or more since around 1996 (http://www.mississauga4sale.com/rates.jpg). And brokers and banks typically give 1–2% off the posted rates. The lowest rate offered right now, that I know of, is 3.74% with current bank rates around 5.49% for a 5-year term. So we have seen around a 1.5% fluctuation over the past 13 years. So the trends over the past decade and more will just fly right out the window and rates will hit 1,000% just because someone say so? Of course… Rates were 1–1.5% higher in 2007, when we last set some real estate records – yet people were still buying and selling houses. As they did last year. As they did this year. As they did in 1980 when rates were almost 19%.
I have said it before and I will say it again – the whole interest rate argument is total bunk.
Oh yes, I almost forgot. Stats Can just announced on October 10th that the unemployment rate dropped 3.5% in September. Sorry again GT, wrong once more. Unemployment is not still growing, and mortgage rates have dropped over the past few months. Check the stats before getting on your soapbox.
“There is no logical reason for average house prices to grow by double-digit increases during a recession. Except buyer delusion and herd instinct.”
Except we are not in a recession. GDP has shown growth, the Bank of Canada says it is over. Consumer confidence is up, the TSX is up, house prices are up, unemployment is down. Does any of that indicate recession? Give it up, it has been over for months now. And the double-digit increase was only September 2009 over September 2008. And could it be partly because the poop hit the fan last September, pushing prices down? And lack of inventory last month created an abnormal number of bidding wars, arbitrarily pushing prices up? So an abnormal down month compared to an abnormally high month means that the world is about to end? Come on, put the stats in perspective.
Again, did you notice how he insulted everyone who bought a housing recently? Nice…
“I’m on record as saying average prices nationally will correct by 15 per cent, and by at least 20 per cent in Toronto. This will lower the average price by about $80,000, and make recent ‘winners’ of bidding wars into significant losers.”
I can’t say it better than one of my commenters. Read the post and the full comment here – http://www.jeffreyteam.com/blog/toronto-real-estate-market/2009-toronto-real-estate-trends/
“I use to read Garth Turner in the real estate news paper when i was young and foolish. I have a semi. 3 bed room in Leaside that has gone up 120% in eight years. Garth told people in 2004 to sell their homes and put the money into the stock market. Good idea Garth.”
I do like how GT does not give any time frame on this 20% correction. Could be tomorrow, could be by 2020. Maybe the end of the world in 2012 will have something to do with it. Prices are going to drop $80,000 in Toronto? By what mechanism? During our little recession recently, we saw prices maybe drop 5–10% for a month or two, then come right back up. Heck, even if prices were down 10% at one point, now they have come back, stronger than ever, with new record prices set. How many years did it take to recover from the 1989–1990 bubble? Prices dropped until 1996 after that fiasco. And that was with mortgage rates in the 11–14% range. After a 167% increase in 5 years, which all pretty much evaporated in a year.
He can go on record predicting as much doom and gloom as he wants. I am on record saying it ain’t gonna happen. Let’s check in once a year for the next 5 years or so, see who is right.
“Let’s all remember we are in a country with $56 billion in debt (federal only) this year, which will goose the bond market and raise mortgage costs — perhaps dramatically.”
But we did not have the same deficit over the past few years, each of which you have preached the same message. So why does it matter this year? Perhaps it won’t matter, perhaps it will. Glad you were so firm on that.
“Also assured are higher taxes (on incomes) as well as the HST next year.”
Why are higher taxes assured? Do you have information that the rest of us do not? Will they be more than the tax cuts we have seen over the past few years (I am no Harper fan, do not get me wrong)? You cannot say things like without something to back it up. Tax cuts in the 2007 budget, again in 2009. I think we can afford a small increase, if it actually happens.
The HST will suck, no argument from me there. I do not think it will end the world, but people sure will hate it. I had concerns about the Toronto Land Transfer Tax, but I am on record saying that people will hate it, but they will get used to it and it will simply just become part of the process. Pretty much exactly what happened. Likely it will be the same with the HST. Everyone spit foam over the GST, but it is just a fact of life now.
“Add it all up and you have less disposable income, more expensive debt, less credit and inevitably lower real estate values. After cresting about now, you should expect a slow melt lasting several years.”
So incomes that increase each year, mortgage payments that are lower than 10–15 years ago and years of tax cuts mean lower disposable income? Do my informal test and see what you find. Park in front of Best Buy for a while and count the number of big screen TVs you see coming out of there. I would say there is an awful lot of disposal income out there right now.
Debt is less expensive, as I proved with the mortgage comparison. Credit is actually on the rise, I do not care what people say. Read the stats and reports, people are not having problems getting credit. The 8,196 people who bought houses in the GTA in September did not all pay cash.
There is nothing to cause real estate prices to drop. Listings are down 42% year over year, building up a backlog of purchasers. It is going to take a year of normal inventory levels to satisfy the current demand. And then it will just level off. Inflation, at a minimum, will keep prices rising, even if it is only slowly. My prediction is an increase of around 2–5% per year for the foreseeable future. Once we get past the chaose of 2007, 2008 and 2009 we should start to see things settle down and get back into the normal patterns we saw in the late 1990s and early 2000s. No booms, no busts.
So, there you have it, a complete and total repudiation of GT’s latest rant. The sky is not falling, the world is not ending. If things were so bad, wouldn’t he be in a cave somewhere, storing canned goods and bullets?
Get a grip, there was a shakedown and correction. It was bad in some places, do not get me wrong. But it was not that bad here, and it is over. Things are improving and we are all going to be okay. We have learned some lessons and will hopefully behave better and do things a little more cautiously in the future. Which means we might just ends up better in the long run.
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