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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 How​estreet​.com (http://​www​.how​estreet​.com/​a​r​t​i​c​l​e​s​/​i​n​d​e​x​.​p​h​p​?​a​r​t​i​c​l​e​_​i​d​=​1​1​099) 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​.thecana​di​a​nen​cy​clo​pe​dia​.com/​i​n​d​e​x​.​c​f​m​?​P​g​N​m​=​T​C​E​&​a​m​p​;​P​a​r​a​m​s​=​M​1​A​R​T​M​0​0​1​2​334):

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​.jef​freyteam​.com/​b​l​o​g​/​t​o​r​o​n​t​o​-​r​e​a​l​-​e​s​t​a​t​e​-​m​a​r​k​e​t​/​h​o​u​s​i​n​g​-​a​f​f​o​r​d​a​b​i​l​i​t​y​-​h​i​t​s​-​l​e​v​e​l​s​-​n​o​t​-​s​e​e​n​-​i​n​-​5​-​y​e​a​rs/). This would seem to dis­prove the higher-debt-and-lower-income state­ment above.

Sta­tis­tics Canada’s lat­est release (June 2009 – http://​www​.stat​can​.gc​.ca/​d​a​i​l​y​-​q​u​o​t​i​d​i​e​n​/​0​9​0​6​0​3​/​d​q​0​9​0​6​0​3​a​-​e​n​g​.​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​.mis​sis​sauga4sale​.com/​r​a​t​e​s​.​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​.jef​freyteam​.com/​b​l​o​g​/​t​o​r​o​n​t​o​-​r​e​a​l​-​e​s​t​a​t​e​-​m​a​r​k​e​t​/​2​0​0​9​-​t​o​r​o​n​t​o​-​r​e​a​l​-​e​s​t​a​t​e​-​t​r​e​n​ds/

“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.


Con­tact Lau­rin Jef­frey for more infor­ma­tion  -  416−388−1960


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