Baby, we got a bubble!?

[interested]

^^^
I do agree. I wonder if Toronto is different than the Ontario average. That might explain the discrepcy. Perhaps different people talking about 20% are talking about different sub-markets.

 

[Kenny]

^^^
I do agree. I wonder if Toronto is different than the Ontario average. That might explain the discrepcy. Perhaps different people talking about 20% are talking about different sub-markets.

Yep. London, Ottawa, Hamilton and Kitchener all have much lower p/i ratios than the national average, whereas Toronto is much higher than the national average (4.62 vs 4.13 in 2008).

 

[Eug]

^
I would like to know how they calculated these figures. 10% for Ontario??? Everybody else at 20%+??? Such difference doesn't make sense to me.

If you have seen the price increases in say Saskatchewan, they do in fact make sense. Remember, that box isn't talking about the actual price-income ratio, but the change in the price-income ratio, vs. the long-time trend.

Toronto has been traditionally high for the price to income ratio, but the increase in that ratio hasn't moved esp. fast in recent years when compared to other regions.

OTOH, while the actual price-income ratio been traditionally quite low in Saskatchewan, that ratio had been increasing by leaps and bounds in recent years. It's still higher in Toronto by a long shot, but it's a lot closer now in Regina than it was 10 years ago, because the rate of increase in Regina has been much higher.

Yep. London, Ottawa, Hamilton and Kitchener all have much lower p/i ratios than the national average, whereas Toronto is much higher than the national average (4.62 vs 4.13 in 2008).

Unless something drastically changes, that in itself doesn't really matter. Toronto has always cost more than Kitchener, and will continue to cost more (with a higher price-income ratio) for the foreseeable future.

However, what they want to know is how fast that is changing.

 

[BrianPersaud]

http://paper.li/BrianPersaud/real-estate-8

This is cool Brian. Great idea!

Also, does your show stream anywhere online? I don't have Rogers cable.

Thanks for the note,

You can stream the first 10 mins at www.rogerstv.com/itre

At some point the rest will come online

 

[redfirm]

Eug,
I am aware of what happened in Saskatoon (was there just recently) and I understand that their % is higher as their long term ratio is low relative to Toronto / Ontario. What I'm not so sure about is that Ontario is only 10%
above historical ratio. Do we have these ratios available? Somebody please? Is is possible that in the last 10 years we had prices in 905 area almost double and we are only 10% above historical? That means that income levels
followed r/e prices within 10%?! That's what I was referring to in my comment.

 

[interested]

It does seem a bit strange that it is only 10%.

^^^
However, remember that from 1989 to 1996 we had a price drop and then stagnation. Prices only started to increase again in 1996 and it took to about 2002 or 3 to get back to the 1989 peak. Granted the 1985 to 1989 rise was excessive similar to those seen in Florida and Arizona from 2000-2006 which bust but perhaps whenone looks at the big picture and draws a curve from 1985 to 2002 or 2003 things closely approached or ran slightly below historical norms.

I have no figures just conjecture but I wonder if that would explain at least part of why it is not as high as one would expect.

Also, small and mid size town/cities have not experienced much price increases. It is mainly Toronto in Ontario that has seen the biggest increases I would believe as I suggested in my previous post..

 

[Eug]

I don't have the historical price-income numbers. However, I do know (as interested said) that the 1990s prices in Toronto were well below the historical real estate price trend line. It didn't go above that trend line until the mid 2000s.

Assuming that income increases were more linear (without the huge dip in the 90s), then it would stand to reason that price income ratio followed a curve that was somewhat similar to the real estate price curve during that period.

It should be noted that home pricing in 2010 in Toronto is only about 30-35% higher than what they were in 2004, after accounting for inflation.

That comes out to about a 5% per year increase in prices after inflation, over six years. BTW, that puts prices at around 15% above the historical trend, which is part of the reason I think price drops would be around 15%, but that in some way is an optimistic view. Why? Because historically we know that when prices drop, they often drop past the trend, which brings up the possibility of a 25% drop. Still, given what I expect for the economy etc. going forward, I don't expect that 25% drop to happen.

 

[daveto]

For those looking at the graph that Eug posted....

These graphs are misleading, because the current peak skews the trendline higher. If you apply the same methodology after the prices have corrected lower, then suddenly the trendline will be lower.

A more accurate methodology is to derive the trendline using data which starts and stops at the same point in the cycle (ie either "peak to peak" or "trough to trough".

Similarly, many times various RE bodies quote the average price increase "over the last 25 years"etc. Once again these provide misleading results because they end at our current peak.

Note that if you draw a straight line through the three "troughs" in the graph (1964, 1985, 1996), it produces a next trough at approximately $350k (approx 25% below current prices)

ps. I'm not blaming Eug for the graph, it came from a realtor. I'm just pointing out that the graph presents a mathematically inaccurate trendline.

 

[jeff316]

I'm just pointing out that the graph presents a mathematically inaccurate trendline.

Mathematically it is correct - we can't really expect them to make a trend-line taking into account something that hasn't happened yet. The graph just needs a big huge honking caveat at the bottom for the purposes of more accurate interpretation which you ahve pointed out.

 

[interested]

Thanks Dave for that insight. It is a very useful and valid point.

Thanks Eug for your comments and pointing out the trend. And Jeff, you are right as well.

I think the take home message is to look at the data in various contexts. Just as one could draw a "trough line" from the lows, one could draw a peak line from the highs and speculate that we should be at a peak now or possibly depending on how one incorporates the 1989 number, we could have more room to balloon before correcting to a trough or back more towards the blue trend line shown.

The difference in interpretation will likely colour how one views the market going forward. Dave would use this data to justify a 25% correction (to trough). A realtor with a positive outlook or spin would say it has room to grow. Most might look at the trend line and say over time, it will go back to the mean. I do believe that Dave's comments though of going trough to trough, and peak to peak do suggest a range which one should look at and perhaps use as technical analysts do with stocks to put a max/min prediction for prices.

 

[Eug]

Yep. If it's inaccurate, it's probably not that accurate. IOW, I think it's fairly representative of the overall trend, but as jeff said, It just cannot reliably predict the future.

Good point about the trough being roughly at the -25% mark. However, I've actually agreed in my previous post. Given that pullbacks can heavily overshoot the trend line, I said a 25% drop is indeed quite possible. OTOH, I don't really see a reason for that happening. If anything, as we go into 2012 and beyond, the economy should begin to improve. Interest rates will increase, but I would be shocked to see double digit interest rates like we had in the 80s. And I'd be surprised too to see 5-year discounted rate of 8% in the next couple of years.

Who knows past 2015, but I won't prognosticate about that.

 

[cdr108]

Interest rates will increase, but I would be shocked to see double digit interest rates like we had in the 80s. And I'd be surprised too to see 5-year discounted rate of 8% in the next couple of years.

Who knows past 2015, but I won't prognosticate about that.

i hear that alot, yet i don't know why people think we need to see double-digit interest rates before anything bad could happen ?!?

interest rates have been at historical 'emergency' lows in the past several years, during which time many new large mortgages with low DP and longer amortizations than 25 years were taken out.

for every 100 basis point (ie. 1.00% rate) rise in rates will result in 8-10% higher mortgage payments ! ! !
a full 1.00% rate increase for 2011 isn't impossible, let alone in 3-5 years when many mortgages come due for renewal.
the principal will be barely affected at that time since the majority of the mortgage payment was towards interest.

we are currently ~400 basis points below the historical long-term average of 8%.
so that 4.00% increase would result in 32% increase in monthly mortgage !

if the economy does get better as many predict, why wouldn't there be a corresponding rise in rates since the 'emergency' would be over and to temper inflation from cheap money QE1 and QE2 ?

 

[interested]

cdr: what you say makes sense. But if we carrythis one step further. Interest rates go up 4% presumably because of inflation but also because the economy is doing better. One would imagine one would have to have this if not, demand for money would decrease with less investment being made and interest rates would drop again. So assuming things are better, would that not lead to more jobs and increased wages. As well, if things are going well, why would house prices drop to any significant degree. OTOH, those at the margin will be in alot of trouble, and of course, if this results in price drops, more new people come in at the margin, like in the US and even those who are OK today may not be tomorrow and so on....

My point is if the economy does better and interest rates increase, that is not a reason for house prices to drop and I think one needs both increased interest rates and a shock for prices to adjust downwards. Interest rates alone will not do it unless there are enough people with 35-40 yr morgages mainly with 5%-10% equity who are at the margin and they are in sufficient number to send the boulder down hill. That is the big question which we are all postulating about. How many are at the margin and where exactly is the margin.

 

[cityboy]

great post Cdr and agree 100%

 

[Kenny]

It should be noted that home pricing in 2010 in Toronto is only about 30-35% higher than what they were in 2004, after accounting for inflation.

If you account for inflation, median incomes increased around 5% during the same period. The only reason people were able to buy homes despite the 30% bump over what they could afford before is that the BoC prime rate dropped from 4.75% in 2007 to 0.50% in 2009. A veritable 80% discount on your variable rate mortgage. We're still only at 1.00%, still a massive discount from that 4.75%.

Incomes are not rising. Housing prices continue to rise. Interest rates will rise. Something's gotta break, and I don't think we're getting any big raises from our bosses any time soon.