Tag Archives: bubbles
Clearing the fog on housing
John Greenwood – Financial Post
You don’t have to look far to find someone willing to share their opinion on where house prices are headed, but the thing is, everyone has a different point of view, with many insisting that prices are going for the moon while a comparably sized group warn darkly of impending collapse. But maybe the reason Canadians are muddled about real estate is because even the experts can’t agree.
Comment: Except those who predict collapse have no data. They just repeat their mantras about oversupply and corrections. Those of us who do not see collapse can point to changing trends driving people from the suburbs into the core, rising costs making condos one of the only options, the addition of 100,000 new people and up to 50,000 new households to the GTA every year – who all need somewhere to live, interest rates that have been in the 3–6% range for a solid decade now, 80% sales of new condo projects, and more… I have 10 iron clad reasons why there is no bubble and no risk of collapse.
It was only on Wednesday that one of the world’s premier bankers declared that real estate is a good place to invest. Speaking to a business group in Toronto, Goldman Sachs chief executive Lloyd Blankfein declared that in the current environment he would “go long” on property. Central banks are “putting a real penalty” on holding cash with all their money printing and that’s driving investment in real assets such as property, he explained. And while policy makers are loath to allow the formation of asset bubbles, they’re even more worried about deflation, which is the alternative, because it’s a lot more damaging and difficult to fight, he said. So go with the bubbles.
Chalk one up for the housing bulls.
Comment: Not sure I want an executive from Goldman Sachs agreeing with me…
But what about Bank of Canada Governor Mark Carney? Mr. Carney – one of the world’s most highly regarded central bankers and a Goldman alumnus to boot – has taken almost every possible opportunity to warn Canadians not to make big bets on housing, even chastising households for excessive mortgage borrowing. A rise in unemployment or interest rates is all it would take to bring the whole housing market down, with harsh repercussions for the broader economy, he has suggested.
Comment: Carney has talked more about debt in general than specific housing debt. But his points still ring true.
A point for the bears.
Then there are the banks. Experts say that one of the characteristics of the housing market is that it’s surprisingly difficult to predict, affected as it is by the whims of consumer sentiment and demand. “[Economists] do tend to look at common sets of facts when they look at real estate but in reality prices can deviate from averages for months, years and even decades,” said Finn Poschmann, vice president of research at the CD Howe Instititute.
Surprisingly, two of the country’s big banks recently came out with nearly identical forecasts for housing. TD Economics this week slightly tweaked its outlook and is now calling for a gentle 10% decline prices, down from a potential drop of 15%. The new forecast puts TD in line with Bank of Nova Scotia which is also calling for a drop of 10%.
Comment: Even given a few years, in Toronto a 10% drop would mean that prices would have to drop from a 6% rise to 0% in a year, then down 5% for the next two years. Around here, as soon as prices dropped, there would be 14-person bidding wars on every house driving the price back up again. And in reality, it is a meaningless drop. That means the average detached house in Toronto goes from $805,000 to $725,000 by the end of 2015. I cannot see that without a doubling of current mortgage rates – which is not going to happen.
The Royal Bank of Canada is also in the optimists’ camp. Earlier this year Mr. Carney expressed concerns about the red-hot Toronto condo market. It didn’t take long before RBC, the country’s biggest bank by assets, said that Toronto condos are not in a bubble. In a July 24 report, RBC’s senior economist Robert Hogue said demand is actually in line with supply. (One of the unique aspects of Toronto is that it has more condos either in the planning stages or under construction than any other city in North America.)
Comment: Of course there is the right amount for the demand, that is why 80% of the new ones are sold. Never mind the 10s of 1,000s of resale condos. And prices rising but 6% per year is not a bubble, is a gradual increase. Heck, it is not even 4% when you take inflation into account. Remember the 127% jump in 1989–1990? Now THAT was a bubble!
More points for the bulls? Or the bears? We’re actually not sure.
Given the zero interest rate environment and the grim outlook for stocks, it’s easy see why Canadians are eager to gain a better understanding of the housing market. Too bad they aren’t getting much help from the experts.
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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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Why you shouldn’t become a condo speculator
David Kaufman – Financial Post
If you’re considering purchasing a condo for a reasonable price, with a mortgage that you can afford both now and when interest rates rise by a few points, a plan to live in it for at least a few years and are happy with appreciation that more or less matches inflation, you’re nicely set up to own property.
If, however, you’re among the thousands of Canadian purchasers considering buying a condo at a greatly inflated price, with the maximum amount of leverage you can muster, barely enough income to cover your mortgage payments and a “plan” to rent it out for a while and then resell it for an easy gain when prices skyrocket, you’re a speculator.
Comment: Who says prices are inflated? Toronto real estate prices are based on some 100,000 sales every year. Which means a buyer and a seller – plus their agents. That means there are at least 400,000 people (never mind friends and relatives and their opinions) determining property prices. With around half being condos, and only resale condos, that means 200,000+ people set the prices of condos. Add in another 30,000 new condos – and their buyers, some agents and the builders – and you have a good 250,000-300,000 opinions on the price of Toronto condos. That is called Market Value my friends, and it is exactly the right price. Overpriced products do not sell, simple as that. Thus, Toronto condos are priced exactly right for this market, at this time. Talk of “greatly inflated prices” is as useless and baseless as “corrections” and “bubbles”.
You don’t have a plan, you have a dream. And that dream can easily turn into a nightmare before you can do anything about it.
Comment: But he is right, buying and investment condo with 5% you can barely afford is a Bad Idea. Unless you have 20-25% to put down and are willing to lose a couple hundred bucks a month, stay out of it.
There is a long list of reasons why you shouldn’t enter the condo speculation game. Here are just a few:
1. You can’t diversify your asset
Even if condo prices rise, there’s no guarantee that your specific condo will go up in value. Unless William and Kate move in next door, there is very little that can make your condo appreciate faster than the rest of the city’s inventory. Conversely, any number of events can make your condo appreciate slower than others in the area.
Comment: Areas appreciate, some more than others. But it is rare for one building to not rise with the tide. Buy in a good area and you are safe. Look for future value. The east end, for instance. With the West Don Lands and Pan Am Games, that area will be built up in record time. New parks/infrastructre/homes/stores/offices always bring up values. And along Eglinton, where the subway is going. People like transit and a new subway line will increase value. Look at Sheppard Ave for example.
2. Prices do not always go up
Pick up the phone and call anyone who lives in Arizona, California, Nevada or Florida and ask them if real estate prices can go up forever. While you have them on the phone, ask them how much fun it is to be an active real estate speculator when the music stops.
Comment: Around here they do. This is not Arizona, California, Nevada or Florida. This is Toronto. And we have only had 4 down years since 1966. That means prices rose in 43 of the past 47 years. So yeah, prices do always go up in Toronto. Never mind inflation… there is a reason movies don’t cost a nickel anymore.
3. Leverage: Your best friend, your worst enemy
Without leverage, speculating on condos wouldn’t be much fun, since you probably couldn’t even afford to buy one. With leverage, a gain of, say, 10% on the value of the asset will result in a 50% return on equity if you are able to finance 80% of the purchase with a low-cost mortgage. Of course, a 10% decline in value will result in a 50% loss of equity. A 20% decline — really just a correction to where prices were two years ago — would be a total wipe out. Anything beyond that and you would be underwater and sending cheques to the bank long after your condo is owned by someone else.
Comment: Prices have not risen 20% in the past two years! To suggest that is devious at best. And people buy condos to rent out, not to flip. The value year to year is not as important. Buy with 20% down and hold it for 10 years. You pay a bit towards it while having the bills paid by the tenant. Even – though the chance is SO SMALL as to be imossible – if prices are flat after those 10 years, you have paid off most of the mortgage. Thus, the $300,000 condo you bought with $60,000 down is now an asset with $180,000 in liquid value. So you tripled your money in 10 years with 20% down and no price appreciation. Even with slow price growth, less than inflation, you could see your condo rise by $100,000. So now you have made $280,000. Not bad, for two rather conservative scenarios.
4. Lack of institutional buy-in
When was the last time that you heard of a condo speculation fund? Never. Why? Because professional investors don’t make unreasonable assumptions about the performance of their assets, and they consider rainy day scenarios when making their investment decisions. Condo speculating is akin to booking tickets on an airline that pilots refuse to fly on because of safety concerns. You probably — and probably is the key word — won’t crash, but why take the risk.
Comment: Huh? There are REITs, Real Estate Investment Trusts. They don’t necessarily specify, but I am sure some of them invest in condos. And offices. And other properties. Are there no Circus Speculation Funds? No? Well does that mean circuses are a bad idea? It is a strange and not useful line of thinking.
There is nothing wrong with buying condos. I’ve lived in condos for more than 20 years. I’ve even made some money on the way out on a couple of occasions. But I would never buy a condo as a speculative investment. It’s gambling, pure and simple. And the odds are not always in your favour.
Comment: Buying to rent out is never a bad idea, as long as you have a decent down payment and you do your homework. Buying to flip, true speculation, is totally fraught with danger. This article seems to be missing the point and directing all the cautions and warnings to the wrong type of condo investor. Flipping anything is hard to do well and can be very dangerous. Buying an investment property is much easier and just takes some patience, brains and money.
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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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Condos at a “boiling point” as supply to eclipse demand?
Michael Babad – Globe and Mail
There was much talk this week about condos and bubbles, notably in Toronto, but elsewhere as well.
As The Globe and Mail’s Bertrand Marotte, Jacqueline Nelson and Richard Blackwell reported, the construction industry continued to make gains in April as housing starts climbed to an annual pace of 244,900. Driving the increase, Canada Mortgage and Housing Corp. reported, was construction of multiple units, such as condominiums.
In Quebec and Ontario, starts surged 56.5% and 12.2%, respectively, largely because of those multiple units.
Looking at those numbers, economist Robert Kavcic declared that condo construction has now reached the “boiling point,” and that the housing market threatens to overheat in some segments and some regions.
“The bubble-mongering that has been going on seemed overplayed for some time, given that housing starts were running only slightly above household formation (about 180,000), on average, for the past three years,” Mr. Kavcic said.
“But that is no longer true with starts now moving well above underlying demand, and accelerating in recent months,” he warned in a report about the CMHC numbers.
Comment: But that is only in certain areas. In Toronto, we are seeing around 50,000 households forming every year – with 28,000 condos being completed. There is still a huge gap between new housing being created and demand. That is why we have so many condos going up, the demand is there.
“It’s important to note that the heated building activity is very much contained to the multi-unit segment in a handful of cities. While single-unit starts edged up just 0.6% in April, multis surged 27.4% to the second highest level since 1978 – the trend away from building detached homes in favour of condos continues unabated, particularly in Toronto, Vancouver and Montreal.”
Comment: Comparing condo building today to 1978 is just dumb. Everything has changed. People want to live downtown, they want to be near work and play. People are less interested in sprawl and living in the suburbs. People are buying when they are single, not when they have kids and need a yard. I bet detached home construction in 1978 was far higher than today – does that mean the single home market is collapsing? No, it just further supports the fact that housing trends have changed dramatically in the past 34 years.
David Rosenberg, the chief economist at Gluskin Sheff + Associates, agreed that construction is “far outpacing” natural demographic demand.
“No doubt the Canadian economic backdrop is solid overall and mortgage rates are at low levels,” he said. “But at some point, the Bank of Canada will no longer be playing the role as the boy who called wolf, and mortgage guidelines are already being tightened up.”
Comment: Huh? What the heck does that have to do with new condos?
Some economists do see just softer times ahead for the overall market, however.
“Given that April’s surge was driven largely by the multi-unit segment, we suspect that this level of home starts is not sustainable,” said Dina Cover of Toronto-Dominion Bank.
Comment: Why is it not sustainable? People buy them and live in them, they can afford them, they want them. We have had close to the same levels on home starts for 7 or 8 years now. It is not new, it has been sustained for quite some time now.
“Moreover, unseasonably warm weather in many parts of the country surely brought some new home starts forward. As such, we expect to see some give-back in the coming months.”
Comment: Like when Feb numbers where down and everyone panicked? Construction is different this year because of the weird weather. That is a strange variable that is not easily accounted for.
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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.
—————————————————————————————————–
Incoming search terms
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