Baby, we got a bubble!?

[cdr108]

Kenny,
Other than those with no skin in the game who are hoping for a "crash" to get in, the majority of the population and certainly the 70% owners do not want any price decrease, let alone a soft landing. The one thing everyone would fear would be a "hard landing"; and by this I mean a precipitous, major drop of the order of 20% or more over say a year.

as much as i believe prices are over-inflated, i don't believe a 20+% correction in 1 year is likely, unless financial markets completely crash/freeze again.

but i do think 25% within next 5 years is in order.

 

[Kenny]

New marketwatch for February is out:
http://torontorealestateboard.com/consumer_info/market_news/index.htm

 

[interested]

cdr,
I assume you are allowing for the 5:1 ratio of income to cost of homes to approach back to historical 3.5:1 numbers.

Personally in keeping with "Wizard's first law" proving I am an idiot, I am still hopeful that the correction will not be as extreme as 25%( because I want to believe this lie). I think if there is a drop, it will occur more in the neighbourhood of over 3 years and then prices will hover for another 3-5 years before they start to rise again. At least, that was the experience in Toronto from 1989-1992 and then to 1996.

I believe history that history may follow the same time frame more or less again but will be less drastic than at that time since price escalation has not been so severe. What does worry me, and in particular with the condo market and the core downtown Toronto market, is that I can virtually predict with certainty that developers will continue to overbuild despite some articles to the contrary. That is because that is what developers do. They build to sell. They are all in competition and they either build or cease to do anything (i.e. don't grow their business). Since they are independent, each does what is in his immediate best interest. That would be to build and then undercut on price so long as they can make a profit. At some point, there will be an oversupply with a corresponding drop. I say this because in this particular market (condos) the lag time means that by the time it is clear overbuilding has now occured, there is still a 2-3 year delay to the projects finishing which means the ongoing supply continues when the demand has fallen off in the previous couple of years.

 

[cdr108]

cdr,
I assume you are allowing for the 5:1 ratio of income to cost of homes to approach back to historical 3.5:1 numbers.

Personally in keeping with "Wizard's first law" proving I am an idiot, I am still hopeful that the correction will not be as extreme as 25%( because I want to believe this lie). I think if there is a drop, it will occur more in the neighbourhood of over 3 years and then prices will hover for another 3-5 years before they start to rise again. At least, that was the experience in Toronto from 1989-1992 and then to 1996.

I believe history that history may follow the same time frame more or less again but will be less drastic than at that time since price escalation has not been so severe. What does worry me, and in particular with the condo market and the core downtown Toronto market, is that I can virtually predict with certainty that developers will continue to overbuild despite some articles to the contrary. That is because that is what developers do. They build to sell. They are all in competition and they either build or cease to do anything (i.e. don't grow their business). Since they are independent, each does what is in his immediate best interest. That would be to build and then undercut on price so long as they can make a profit. At some point, there will be an oversupply with a corresponding drop. I say this because in this particular market (condos) the lag time means that by the time it is clear overbuilding has now occured, there is still a 2-3 year delay to the projects finishing which means the ongoing supply continues when the demand has fallen off in the previous couple of years.

you are correct on both accounts.

let me add further that other measures beside the 5:1 income-to-property value ratio substantiate the premise that R/E, especially condos, is over-inflated:

* above-average historical price appreciation for the past 15 years (ie. 150+% vs 86% norm),

* below-average historical interests rates (ie. BofC bank rate and 10-yr bond rates) by ~ 400 basis points,

* substantial proportion of new mortgages within the past 5 years were longer than the traditional 25 years (ie. mostly 30, 35 and 40-year amortizations),

* stagnant wages for the past decade,

* stagnant rents for the past decade and rent control

 

[interested]

Agree with you totally cdr.
Still, I hope when you said I was right on both accounts you were referring to income to property ratio and builders continuing to build. I hope it wasn't agreeing with me being an idiot (which I am) for following Wizard's law. LOL.

 

[cdr108]

Agree with you totally cdr.
Still, I hope when you said I was right on both accounts you were referring to income to property ratio and builders continuing to build. I hope it wasn't agreeing with me being an idiot (which I am) for following Wizard's law. LOL.

lol @ interested.
i don't know you well enough to call you an idiot
... besides, i don't know what Wizard's law is.

 

[interested]

lol @ interested.
i don't know you well enough to call you an idiot :_P
... besides, i don't know what Wizard's law is.

Wizards First law: someone quoted it to me on this site but I can't find it. Not sure if maybe it was deleted? or maybe on another thread.

So quick google search and here we go:

Wizard's First Rule:
"People are stupid; given proper motivation, almost anyone will believe almost anything. Because people are stupid, they will believe a lie because they want to believe it?s true, or because they?re afraid it might be true. Peoples? heads are full of knowledge, facts and beliefs, and most of it is false, yet they think it all true. People are stupid; they can only rarely tell the difference between a lie and the truth, and yet they are confident they can, and so are all the easier to fool."
(Chapter 36, Page #397 US Hard Cover)

 

[Kenny]

Wizards First law: someone quoted it to me on this site but I can't find it. Not sure if maybe it was deleted? or maybe on another thread.

Sorry, that was me. I deleted because I did not want to imply that anybody here was stupid.

 

[interested]

Sorry, that was me. I deleted because I did not want to imply that anybody here was stupid.

thanks Kenny,
I thought I was having one of those senior moments again.
As you can see, some of us can laugh at ourselves.
Nice to see civility.
I for one, did not interpret the post as anything malicious.

One thing about the post aside is it does address a serious issue. People do tend to see what they want and interpret events to arrive at a foregone or acceptable conclusion and often disregard plain and obvious facts. In fact, that is the reason that bubbles can and do develop and will do so in the future.

 

[redfirm]

QUOTE : "People do tend to see what they want and interpret events to arrive at a foregone or acceptable conclusion and often disregard plain and obvious facts. In fact, that is the reason that bubbles can and do develop and will do so in the future. "

Interested,
that's exactly it, you said it beatifully. In my case, I wish stability and no bubbles ... but I'm afraid that ain't happening in this case.

I agree with everything said in the last 5-6 posts with one major difference: timing. You guys are saying 3-5 years .... I think we are looking into 18-24 months for significant slide to start. When all is said and done -total damage around 25%.

 

[KA1]

QUOTE : "People do tend to see what they want and interpret events to arrive at a foregone or acceptable conclusion and often disregard plain and obvious facts. "

Interested,
that's exactly it, you said it beatifully.

Could it be that all of you doom and gloom sayers also see what you want to see and predict a bubble burst? What if you all are wrong and there is no bust?

 

[interested]

I know Ka1 you like to stir the pot.

I am not a doom or gloom sayer. Simply hopefully a realist.

I believe fundamentals are important and at some point (I can't say when) they will come back into play. If one chooses to ignore all fundamentals, then everything will just keep increasing at say 6%/year forever with no corrections. Oh, and rents will stay the same as they have for the past 10 years. And incomes will hardly rise, and people will just spend more and more of their income until housing represents 100% of disposable.

I think you get my point. At some point, there has to be a realignment. I believe it will be coming but governments so far have tried their best to meddle to prevent it. Even the government is now taking steps (30 year mortgages, larger downpayments for investors etc.) because they realize this is not sustainable. Ask yourself, this is not a politically popular move and yet they are doing it... shoud tell us that there are very real risks.

But in conclusion, we could be wrong and there is no bust.

that would really be nice. A new "norm".... everything only goes up from this point in history onwards.

I am sure Ka1 you appreciate my humour.

 

[redfirm]

Hi KA1,
why didn't you include the next sentence from my post?

>>> In my case, I wish stability and no bubbles ...

Trust me. I am a property owner. Solid, minimal leverage ... I don't want it, no benefit there for me. But this cannot continue and I say we're beyond a point where Carney or anybody can ensure "soft landing". Too many factors indicate (at least to me, and I see many others) that changes have to come.

Let me ask you something: would you actually buy a condo / house with 25% down (as an investor) today in GTA? In other words, would you be afraid that there's a good chance of losing your downpayment / equity? If you answer yes - there's your answer for my position .... otherwise, we cannot reconcile our views and we will have to wait and see what happens next.

 

[InsideTorontoRealEstate]

Top 5 projects selling projects

5. Garden Villas 3(Stacked) by Great Gulf Homes (Eglinton and Winston Churchill - Mississauga)

Total: 94 Units
Sales: 23 (including those in the 10 day rescission period by the end of Dec '10)

4. DNA3 - Tower A & B by Canderel Stoneridge (King St W and Dufferin)

Total: 536 Units
Sales: 24 (including those in the 10 day rescission period by the end of Dec '10)
Average Price $560 psf



3. Stonebrook II by United Lands (Lake Shore and Southdown - Mississauga)

Total: 225 Units
Sales: 25 (including those in the 10 day rescission period by the end of Dec '10)
Average Price $369 psf




2. Limelight - North Tower by Daniels (Mississauga City Centre)

Total: 353 Units
Sales: 31 (including those in the 10 day rescission period by the end of Dec '10)
Average Price $454 psf


1. Treviso Condos by Lanterra (Lawrence Ave W and Dufferin - North York)

Total: 411 Units
Sales: 41 (including those in the 10 day rescission period by the end of Dec '10)
Average Price $471 psf


Average Price $239 psf

Read thoughts and observations here

 

[cdr108]

Top 5 projects selling projects

4. DNA3 - Tower A & B by Canderel Stoneridge (King St W and Dufferin)

Total: 536 Units
Sales: 24 (including those in the 10 day rescission period by the end of Dec '10)
Average Price $560 psf

when did DNA3 go on sale? less than 5% sold as of Dec '10 doesn't sound promising.
do you know as of end of February 2011, how many are sold?