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Is There a Housing Bubble in Toronto?

From the anonymous writers of www.torontocondobubble.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:

Toronto Housing Bubble
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:

Toronto Housing Bubble
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.

Toronto Housing Bubble
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.

Toronto Housing Bubble
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.

Toronto Housing Bubble
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.

Toronto Housing Bubble
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…

Toronto Housing Bubble
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.

Toronto Condo Bubble
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?

Toronto Condo Bubble
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.

Toronto Condo Bubble
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.

Toronto Real Estate Bubble
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.

Toronto Real Estate Bubble
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.

Toronto Real Estate Bubble

Toronto Real Estate Bubble
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.

Toronto Real Estate Bubble
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.

Toronto Real Estate Bubble
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.

Toronto Real Estate Bubble
Comment: This is just too easy…

From BMO’s May 3rd 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 4th 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 30th 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.

Toronto Housing Bubble
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.

Toronto Housing Bubble
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.

Toronto Housing Bubble
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 Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.

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