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Baby, we got a bubble!?

Happy Anniversary and a Happy New Year! ..especially to you Simuls, who started this thread way back in.. January 2008 (has it really been 3 YEARS?!) , definately my second favorite entertaining poster here for predicting the almost at hand financial realestate armeggedon.


"Baby, we got a bubble!?
I've been gung ho on the housing and especially the condo market in Toronto for about the last 6 years, but in the past few months I've seen some alarming trends that seriously suggest a massive bubble is being created that'll explode as soon as interest rates increase and/or the supply of condos goes through the roof in the next 17 months. The article below deals with some of the problem, but the 8% increase in home debt during a recession is also worrisome. What's your take?"

Congrats!


You, UrbanDreamer, (my favorite) and a few other regulars who have taken the time to put down their 'End is Near' sandwich boards and post their expert opinions here have certainly given the rest of us a lot of chuckles.
Who knows 2011 could be the big disater year eh wot!? .. Hope springs eternal.
 
I've done some analysis on the relationship between DOM (Days on Market) and Price Changes.

The following graph shows the 12month rolling averages for % DOM changes, and the % Price changes (adjusted for inflation at 2%). Using the 12 month rolling average avoids the effect of seasonal fluctuations.

Observations
And remember that these figures are 12 month rolling averages.

1.In 2005/6, DOM was stable (at 36 days)
2.For 12 months from Jan 2007, DOM dropped 12%, and prices increased 10%. This coincided with the new mortgage rules.
3.For 18 months from Jan 2008, DOM increased 25%, and prices dropped 12%. This coincided with the financial crisis.
4.For 18 months from July 2009, DOM decreased 40% and prices increased 20%. This coincided with the decreasing mortgage rates.
5. DOM are now 20% lower than the historical average at 29 vs 36.

Conclusions

1. It is self evident that there is a high negative correlation between DOM and prices.
2. It is equally self evident that prices can increase or decrease while DOM stable.
3. Unless the current DOM is the new normal, then prices will decrease 10% as DOM reverts to the historical average
4. If DOM increases beyond the historical average then prices will decrease beyond 10%.

Graphs
Here is the total change graph
DOM vs Price Total Change Rolling 12month Avg.JPG


Here is the YOY change graph
DOM vs Price YOY  Change Rolling 12month Avg.JPG


Here is the DOM vs Price graph
DOM vs Price 12month Rolling Avg.JPG



DOM derives from the interaction between supply and demand. I think that historically there is a reason why DOM was consistently in the mid-30s. I think this derives from the practical reality of the process of listing, showing, negotiating and selling a home. I think it is self evident that DOM cannot decrease indefinately. So the question is whether we are into a new normal, or a temporary shifting of demand forwards due to the 2006 mortgage changes and the 2009/10 mortgage rate decreases.
 

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  • DOM vs Price 12month Rolling Avg.JPG
    DOM vs Price 12month Rolling Avg.JPG
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  • DOM vs Price Total Change Rolling 12month Avg.JPG
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  • DOM vs Price YOY  Change Rolling 12month Avg.JPG
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Well, DOM analysis is similar to looking at auto sales--the longer a car sits on dealer's lot or at the factory lot, the greater chance incentives will be used to sell the vehicle. So it's common sense really...

As for 2011 Granny, the year of the rabbit is nigh, and you know what that means to Asian investors, right?
 
^^^
Enlighten please about the "year of the rabbit". I am guessing it would mean a swift brisk positive market.
 
Happy Anniversary and a Happy New Year! ..especially to you Simuls, who started this thread way back in.. January 2008 (has it really been 3 YEARS?!) , definately my second favorite entertaining poster here for predicting the almost at hand financial realestate armeggedon.


"Baby, we got a bubble!?
I've been gung ho on the housing and especially the condo market in Toronto for about the last 6 years, but in the past few months I've seen some alarming trends that seriously suggest a massive bubble is being created that'll explode as soon as interest rates increase and/or the supply of condos goes through the roof in the next 17 months. The article below deals with some of the problem, but the 8% increase in home debt during a recession is also worrisome. What's your take?"

Congrats!


You, UrbanDreamer, (my favorite) and a few other regulars who have taken the time to put down their 'End is Near' sandwich boards and post their expert opinions here have certainly given the rest of us a lot of chuckles.
Who knows 2011 could be the big disater year eh wot!? .. Hope springs eternal.

Since when does a critical look at the absurd economics of $600psf condos that rent for under $18psf net equate to the End is Near? Are you at all familiar with the concept of risk premium? Don't be so smug. (except wrt Urban Dreamer)
 
Happy Anniversary and a Happy New Year! ..especially to you Simuls, who started this thread way back in.. January 2008 (has it really been 3 YEARS?!) , definately my second favorite entertaining poster here for predicting the almost at hand financial realestate armeggedon.

The thread began in November 2009, and not January 2008.
 
Happy Anniversary and a Happy New Year! ..especially to you Simuls, who started this thread way back in.. January 2008 (has it really been 3 YEARS?!) , definately my second favorite entertaining poster here for predicting the almost at hand financial realestate armeggedon.

The thread began in November 2009, and not January 2008.


perhaps granny forgot to take her daily apple or meds, ... added almost 2 years there.

it doesn't seem anyone in this thread is touting financial armageddan (except for Paperchopper).

25% price declines is not the end of the world; however, it does dramatically affect the financial well being of many hard working men/women who saved to put substantial down payments on the largest purchase in one's life.


so i guess you are right, we should not be concerned with the following:

condos selling for $600+ PSF that rent for under $18 PSF net;
whose size and real value is limited by the 6 walls around you with no ability to extend;
whose land value is limited to the proportionate share ratio of the unit, which is typically 1/100th land value;
in a city and country that has about the same land area as our neighbour to the south but with only 1/10th of the people;
whose citizens on average earn less but pay more for housing;
where 70+% of the population is already property owners;
where Canadians' debt-to-income ratio at record high (~150%);
when affordability is premised on historic low interest rates at historic high prices ...



NOTHING TO LOOK AT HERE FOLKS ...

MOVE ALONG PEOPLE.
THE PRESENTATION CENTRE WILL BE OPEN IN 30 MINUTES.
BE READY TO BUY BECAUSE THE UNITS WILL BE GONE QUICKLY.
HAVE YOUR CHEQUES READY AND SIGN ON THE DOTTED LINE.
DON'T WORRY ABOUT HAVING YOUR LAWYER LOOKING AT IT ... TRUST US.
 
Last edited:
perhaps granny forgot to take her daily apple or meds, ... added almost 2 years there.

it doesn't seem anyone in this thread is touting financial armageddan (except for Paperchopper).

25% price declines is not the end of the world; however, it does dramatically affect the financial well being of many hard working men/women who saved to put substantial down payments on the largest purchase in one's life.


so i guess you are right, we should not be concerned with the following:

condos selling for $600+ PSF that rent for under $18 PSF net;
whose size and real value is limited by the 6 walls around you with no ability to extend;
whose land value is limited to the proportionate share ratio of the unit, which is typically 1/100th land value;
in a city and country that has about the same land area as our neighbour to the south but with only 1/10th of the people;
whose citizens on average earn less but pay more for housing;
where 70+% of the population is already property owners;
where Canadians' debt-to-income ratio at record high (~150%);
when affordability is premised on historic low interest rates at historic high prices ...



NOTHING TO LOOK AT HERE FOLKS ...

MOVE ALONG PEOPLE.
THE PRESENTATION CENTRE WILL BE OPEN IN 30 MINUTES.
BE READY TO BUY BECAUSE THE UNITS WILL BE GONE QUICKLY.
HAVE YOUR CHEQUES READY AND SIGN ON THE DOTTED LINE.
DON'T WORRY ABOUT HAVING YOUR LAWYER LOOKING AT IT ... TRUST US.

Multi-level marketing scheme. Look it up Granny.
 
I've done some analysis on the relationship between DOM (Days on Market) and Price Changes.

The following graph shows the 12month rolling averages for % DOM changes, and the % Price changes (adjusted for inflation at 2%). Using the 12 month rolling average avoids the effect of seasonal fluctuations.

Observations
And remember that these figures are 12 month rolling averages.

1.In 2005/6, DOM was stable (at 36 days)
2.For 12 months from Jan 2007, DOM dropped 12%, and prices increased 10%. This coincided with the new mortgage rules.
3.For 18 months from Jan 2008, DOM increased 25%, and prices dropped 12%. This coincided with the financial crisis.
4.For 18 months from July 2009, DOM decreased 40% and prices increased 20%. This coincided with the decreasing mortgage rates.
5. DOM are now 20% lower than the historical average at 29 vs 36.

Conclusions

1. It is self evident that there is a high negative correlation between DOM and prices.
2. It is equally self evident that prices can increase or decrease while DOM stable.
3. Unless the current DOM is the new normal, then prices will decrease 10% as DOM reverts to the historical average
4. If DOM increases beyond the historical average then prices will decrease beyond 10%.

Graphs
Here is the total change graph
View attachment 6235

Here is the YOY change graph
View attachment 6236

Here is the DOM vs Price graph
View attachment 6234


DOM derives from the interaction between supply and demand. I think that historically there is a reason why DOM was consistently in the mid-30s. I think this derives from the practical reality of the process of listing, showing, negotiating and selling a home. I think it is self evident that DOM cannot decrease indefinately. So the question is whether we are into a new normal, or a temporary shifting of demand forwards due to the 2006 mortgage changes and the 2009/10 mortgage rate decreases.

Dave a really interesting analysis.
I always get scared when we talk about a "new normal" or "its different this time". Invariably, things progress back to the mean.
I think your conclusion is correct that the demand has been pulled forward.

However, interestly, where I live, there is virtually nothing for sale. I am in an established subdivision that is about 25 years old and I think there are about 5 houses total in a 2 square mile radius (where I would hazard there are probably 1500 homes(and probably in fact more like 3000).
I wonder if the spring will see alot of listings. As well, this local rental market has 2 upper scale homes for rent and typically
there are 8-10 at any one time. I realize it is early January and people will only start to think about putting their properties on the market but it is odd to me and I don't recall seeing this little product.
 
I appreciate the back handed kudos Granny:) and as has been correctly pointed out, I did start this discussion (and the 17 month timeline) in November of 2009, so that should bring us nicely to May of 2011 and it will be very interesting indeed to see how the market has turned out. While I haven't had the time to do my usual dissection of December's TREB figures, I think it is very important to note that they stopped comparing month over month (and year over year) and decided to make it a Yearly report because that had more positive news. This is not done just because it is the end of the year - they could easily create an addendum report. It is done because the December numbers are not good - especially in the C01 condo section that I'm most interested in. I've been monitoring a few condo's that have been on sale in extremely attractive buildings and one in particular has been sitting on MLS for more than 3 months now with two price reductions and still no takers. On an up note, the mental divide (and price divide) between King West and Liberty Village has now completely disappeared and LV units are now comparably priced to anything on KW west of Spadina and this makes me happy!
 
^^^
Makes me happy too Simuls. I bought in King West Life a couple of years ago to be ready in 2 years. While I expect a decline, it is presently I am told worth about 25% more so I could swallow this kind of decline. I intend to have personal use (family member) or alternatively rent it out.
Price appreciation in Liberty Village suits me fine.

I agree with your dissection of the ploys being used by TREB and other boards. Both you and I predicted they would stop referring to the year on year monthly comparisons and talk in terms of yearly growth since this is the most positive spin that can be put on it. Should continue to be interesting as prices increased continuously in the early part of 2010 so the year to year monthly comparisons likely will get worse.

Anyhow, I have readjusted my thinking and now believe it will be at least the latter part of 2011 or 2012 before we see any significant price drop. I suspect the fall market may remain relatively intact though I do not believe the 3-5% increases both Royal Lepage and Remax are calling for. Eventually (unfortunately) we will be proven correct I believe with the price adjustment call. It is just that the market can act irrationally if that is what we believe for protracted times.
 
^^^
Looking at the data CN Tower, there was a big increase in Feb and the next few months in 2010. Therefore by February for sure, unless our pattern replicates this Spring last years rather massive run up which seems unlikely, median prices year on year will be negative.

I still think we are going to get through the first 1/2 of the year with stable prices, but I expect by summer or late 2011 there will be the more significant price declines. I think most investors in real estate are not worried that the increase be less than inflation. Investors if they make any return on renting view the price appreciation as just more bonus.

I saw in the Royal Lepage report that while they are predicting 3-5% increases, Toronto is expected to have a meagre 1-2%. Don't remember the exact amount but definately less than 2%, 1 point something per cent. It is kind of intriguing to follow the curves on guava and with the exception of 2008 which was obviously an "interesting year", the curves seem to be remarkably similar except for a slight shift in valuation year on year.

One last point, I read that the market is divided in 2: End users who are not buying pre construction and investors (some local) but the majority from abroad who are coming and paying with "cash" and not mortgaging and are looking to park their money in a stable place. If the Canadian dollar holds value or appreciates, from a foreign perspective, that can offset the lack of keeping up with inflation. However, if the Canadian dollar where to start to lose ground, one would have to think that those same foreign investors will look to withdraw their money, which would certainly affect preconstruction. The effect would carry over presumably to resale property but would be less marked and the gap of $50-$100 historically the last few years of precon over resale should narrow further I would think.
 

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