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Baby, we got a bubble!?

safeashouses

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It’s something you buy and hold for 30 years whilst inflation slowly works its magic reducing the “real†value of your debt.

Patience is a virtue, and a valuable investment strategy! :)
^spoken like someone who has taken a few $1000 'how to make money in real estate' seminars...

That theory worked well as the prime lending rate fell from 18% to 2%. Now what will drive leveraged assets like property higher? Negative interest rates?

Incomes are stagnant and rents have not kept up with inflation this decade. Unemployment is rising and the Province of Ontario has an enormous deficit. How can real estate prices possibly increase from here? The forces that propelled prices higher are no longer available.

Now what?
 
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daveto

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That's a peach.

People have been calling for the “great Toronto condo collapse” for almost 10 years now. They have missed the entire demographic shift to city centre living, decreased family size, continued immigration growth, a preference to beat the worsening daily commute, improved city centre amenities and civic attitude, etc…

Yes, there has been a rapid increase in condo supply over the years. But this has been more then matched by fundamental condo demand.

When demand exceeds supply, prices rise.

Unless we get a fundamental shift in consumer demand for a different type of housing, its unlikely supply will exceed demand in Toronto.
Johnzz, you previously stated that your RE investments were not dependent upon any speculative gains in property values. But then subsequently admitted that your profits had indeed derived almost exclusively from price increases over the past 10 odd years.

What appreciation (annual?) are you expecting? And what overall depreciation would reduce your equity to zero? I'm not trying to fearmonger here. I'm genuinely curious and seeking to understand the thought process of someone in a different investment mindset from myself.

For me, I find it very difficult to envision how TO prices can't drop by 20%+ over the next 5 years (and possibly more like 3 years), regardless of gov't interventions/BOC/etc. But maybe I'm wrong.
 

Monaco

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You can't paint all condos with the same brush.

What about location, location, location (and other factors) - these might make a difference. I'm not saying condos in prime locations won't be affected or will even behave much differently than average, but there are material differences between condos that should be considered.
 

jacek.mazurek

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Johnzz, you previously stated that your RE investments were not dependent upon any speculative gains in property values. But then subsequently admitted that your profits had indeed derived almost exclusively from price increases over the past 10 odd years.

What appreciation (annual?) are you expecting? And what overall depreciation would reduce your equity to zero? I'm not trying to fearmonger here. I'm genuinely curious and seeking to understand the thought process of someone in a different investment mindset from myself.

For me, I find it very difficult to envision how TO prices can't drop by 20%+ over the next 5 years (and possibly more like 3 years), regardless of gov't interventions/BOC/etc. But maybe I'm wrong.
Can I ask you what else your crystal ball tells you about the economy and where we are headed in the next 3-5 years?
The fact of the matter is that you sound like the same person who told me the 765 sq.ft I signed for in 2005 @ $220k was overpriced and that prices will correct and I'll get it cheaper. People are no longer waiting for the market to come to them but getting in now, with whatever means they have.
I agree prices are nuts, however, to predict what will be in 3-5 years is nuts, as in today's economy you can't predict accurately what will be tomorrow.
I am willing to bet that nobody here was able to predict the frenzy in today's market late 2008 or early 2009, which was only 8 months ago, so please don't come out and tell me you know prices will be down 20% within 5 years. Even if you are right, how much will they increase between now and then?
Any guesses?
I'm not saying your wrong, however, I'm not saying your right. We're all aware that the market is very often driven by emotion and not always logic.
My 2 cents.

Jack
 

daveto

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Can I ask you what else your crystal ball tells you about the economy and where we are headed in the next 3-5 years?
The fact of the matter is that you sound like the same person who told me the 765 sq.ft I signed for in 2005 @ $220k was overpriced and that prices will correct and I'll get it cheaper. People are no longer waiting for the market to come to them but getting in now, with whatever means they have.
I agree prices are nuts, however, to predict what will be in 3-5 years is nuts, as in today's economy you can't predict accurately what will be tomorrow.
I am willing to bet that nobody here was able to predict the frenzy in today's market late 2008 or early 2009, which was only 8 months ago, so please don't come out and tell me you know prices will be down 20% within 5 years. Even if you are right, how much will they increase between now and then?
Any guesses?
I'm not saying your wrong, however, I'm not saying your right. We're all aware that the market is very often driven by emotion and not always logic.
My 2 cents.

Jack
Jack,

Evolution (or God?) has given us brains. I don't think that using them should be described as looking into a crystal ball.

While I may sound like that person from 2005, I am not that person. I joined this board last year.

I didn't say that I "know" anything (that is your word). I said "it is difficult for me to envision how TO prices can't drop by 20% over the next 5 years...regardless of gov't interventions/boc...".

With respect to predicting our present market, back in Dec 08? No, I had no idea what steps the gov'ts of the world would undertake. Had I (or anyone else) known all of that, well then maybe it would have been easier to use our brains (aka "crystal balls") to predict.

But the throttle on the gov't engines are allready out just about all the way. And so using my brain (aka "crystal ball") I think we'll be seeing less structural gov't intervention going forward.

My 1.6 cents
(reduced from 2cents by 20% over the next 5 years)
 

jacek.mazurek

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Jack,

Evolution (or God?) has given us brains. I don't think that using them should be described as looking into a crystal ball.

While I may sound like that person from 2005, I am not that person. I joined this board last year.

I didn't say that I "know" anything (that is your word). I said "it is difficult for me to envision how TO prices can't drop by 20% over the next 5 years...regardless of gov't interventions/boc...".

With respect to predicting our present market, back in Dec 08? No, I had no idea what steps the gov'ts of the world would undertake. Had I (or anyone else) known all of that, well then maybe it would have been easier to use our brains (aka "crystal balls") to predict.

But the throttle on the gov't engines are allready out just about all the way. And so using my brain (aka "crystal ball") I think we'll be seeing less structural gov't intervention going forward.

My 1.6 cents
(reduced from 2cents by 20% over the next 5 years)
See, you may use your brain and logic, however, many don't. The market is often driven far more by emotion than logic. You can see crazy bidding wars, driving up house prices $50-$100k above the ask. The ask was probably right at fair market value but because a few people wanted it, seller got far more than they expected.
I can see what your saying and would not be surprised to see a 20% decrease in the next 5 years, however, I could also see prices stabilizing and not moving up or down.
Please do keep in mind less people are having children, less want to commute, and with fuel prices on the rise, TO will be the residence of choice. People will overpay for what they want or will at least pay a premium.
TO prices are still relatively inexpensive to what other major cities in N. America charge per sq.ft in their downtown cores.
Do you get where I'm coming from? With no family or cars, people have more disposable income and will throw a higher percentage of their money at the place they want.

Jack
 

lead82

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An alternative scenario that can occur is that prices stagnate or continue to go up, and real estate becomes unaffordable to first time buyers.

Since many people buying today have large debt-loads and low interest, when rates invariably go up, all those people would not want to sell and loose a tonne of money. So will have to of course, but others will rent their units/homes out to cover their costs. The rental market demand in Toronto is growing with new migrants and immigrants every year.

The only people being able to buy property will be those flush with cash or who can save up with big down payments. The others will have to rent. This will be similar to what exists in many European countrires, where the vast majority of urban dwellers rent their property, while the lucky ones that are able to afford it buy their homes.

This may be the reason why people are rushing in to buy property in today's market. As Toronto becomes more of a global city player, prices will continue to increase as the city grows and land becomes more obsolete and expensive. A 300K condo today may sell for 1M in 20-30 years from now. Who knows? Maybe it will, or maybe it wont. Only time will tell.
 

daveto

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Sure, I see where you are coming from. I agree that people behave irrationally. And further, I think that the biggest failure of the "science" of economics has been its reliance upon rational motives within the marketplace.

However at the same time, I look at those various factors as "soft" factors and ones that are often used in RE marketing campaigns. I think the first fallback position is to talk about the soft factors, or about location/location/location, etc. And indeed, there will be differences in the marketplace. But ultimately, the first consideration that anyone faces when buying RE is not where they want to live, or how they want to live. Rather it is how much can they afford to spend. And the issue is not just that rates are low, but that they have been incrementally lower during the periods of the greatest RE appreciation.

Again, maybe I'm wrong. But I'm putting my money where my mouth is. And I come on here and toss out my opinions in order to see if they can hold water.

For those interested, I direct them towards the following analysis.
http://americacanada.blogspot.com/2009/10/when-home-prices-rise.html
 

Johnzz

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^That theory worked well as the prime lending rate fell from 18% to 2%.
No, this theory works within a framework of guaranteed inflation (via the Bank of Canada inflation target). Your fiat currency is not backed by anything other then the promise it will depreciate roughly 2% per year.

My earlier point was that the condo market is not currently oversupplied. Do you disagree?
 

TrickyRicky

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One thing I wanted to point out is that people always want to use short 6-month trends to validate or refute ideas about what direction the market is taking. The problem with this is that 6-months is essentially insignificant. both the price drop last winter and the run-up in prices this summer are essentially insignificant events relative to the broader over-arching forces shaping the market.

A second point is that the direction of the market neither validates nor should condemn the actions an individual takes either personally or financially. Too many people draw a line of best-fit argument to validate their own actions instead of looking at the facts. Some people will benefit and some people will loose regardless of the direction of the market. However, you can bet that the majority of people benefiting or loosing from market direction will do so circumstantially, not through careful and accurate analysis of the situation.
 

simuls

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My earlier point was that the condo market is not currently oversupplied. Do you disagree?
Currently, it is not. But by the end of 2010, it will certainly be way oversupplied. There have only been 3000 condo completions in the last 19 months in the Toronto Core, but over the next 17 months there will be 15 000! That is a 1000% increase....and it could get worse. If 30% of those condos are investor owned (a very conservative estimate) that's a lot of rental units, plus, many people moving into these condos are already renting condos - sometimes a couple - each renting a separate condo and then moving in together into another, thus opening up 2 condo's for the one built form.

Also, rents are currently 35% below where they should be to generate a decent (8%) return from an investment perspective. This leads me to believe that prices are overinflated.

I've put my money where my mouth is and sold my condo in May in order to lock in the equity. It's true that if I'd waited until now, I probably could have made another $10 000, but I was looking at a time horizon of needing the cash for another condo that will be completed by Nov 2010. At this point I expect there to be a correction in full swing. Especially amongst smaller units.

A couple other things to think about, and I apologize if anyone has read another post of mine that mentioned this. Until about 3 years ago, when you purchased a condo, you paid the market price for that unit as if you were buying it right then. You buy in August of 2006, you pay August 2006 market price - even if it won't be ready until 2011. You, not the builder, take the RE risk and hope that when it's finished you see an appreciation. The possibility for an upside is definitely there. Now, when you buy pre-construction, you are being asked to pay not what the unit is worth now, but a theoretical price that it will be worth when completed. The builders have removed any incentive for RE risk and taken all the presumptive appreciation for themselves. Costs for building are lower now than they were in 2006, but developers are charging 2x the price for the same stuff. New condo sales are still down 40% and while we hear of a recent surge, the fact is, very few properties have been launched over the past 12 months so the surge is happening in a much smaller market which might make it sound bigger.

I've totally flipped sides and while for the past 6 years I was big big big on condos and argued as much using the whole demographic change, the shift from actually wanting house to desiring a condo, immigation, etc. I think these new realities are not enough to counter the low interest rates/skyrocketing availability/high debt load problem, and we're in for a rude awakening that's going to start in about April.
 

kEiThZ

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You can't get 40 year mortgages any more. I don't even think you can get 35 year mortgages anymore.

And the conditions are pretty stringent for a 30 year mortgage. I am fairly sure that the few risky candidates who slipped through during the mortgage insurers war will work their way through the system without too much damage.

People forget that a big part of the market crash in the states was fraud (taking multiple mortgages to invest in various properties), a more severe recession, and higher personal debt loans which were often accompanied by higher interest rates (since unsecured LOCs are rare in the US). In general, Canadians banks have much stricter controls for fraud prevention, and regulate personal debt/credit more strictly and often provide the credit they do at lower interest rates. All that enhances stability here.

Toronto is not the next Miami. We might see some stagnation in prices if the recession plays out longer. Maybe even a slight decline (few percentage points). But we aren't going to see average condo/home prices drop to 120/220 like some have suggested here.
 

jacek.mazurek

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Currently, it is not. But by the end of 2010, it will certainly be way oversupplied. There have only been 3000 condo completions in the last 19 months in the Toronto Core, but over the next 17 months there will be 15 000! That is a 1000% increase....and it could get worse. If 30% of those condos are investor owned (a very conservative estimate) that's a lot of rental units, plus, many people moving into these condos are already renting condos - sometimes a couple - each renting a separate condo and then moving in together into another, thus opening up 2 condo's for the one built form.

Also, rents are currently 35% below where they should be to generate a decent (8%) return from an investment perspective. This leads me to believe that prices are overinflated.

I've put my money where my mouth is and sold my condo in May in order to lock in the equity. It's true that if I'd waited until now, I probably could have made another $10 000, but I was looking at a time horizon of needing the cash for another condo that will be completed by Nov 2010. At this point I expect there to be a correction in full swing. Especially amongst smaller units.

A couple other things to think about, and I apologize if anyone has read another post of mine that mentioned this. Until about 3 years ago, when you purchased a condo, you paid the market price for that unit as if you were buying it right then. You buy in August of 2006, you pay August 2006 market price - even if it won't be ready until 2011. You, not the builder, take the RE risk and hope that when it's finished you see an appreciation. The possibility for an upside is definitely there. Now, when you buy pre-construction, you are being asked to pay not what the unit is worth now, but a theoretical price that it will be worth when completed. The builders have removed any incentive for RE risk and taken all the presumptive appreciation for themselves. Costs for building are lower now than they were in 2006, but developers are charging 2x the price for the same stuff. New condo sales are still down 40% and while we hear of a recent surge, the fact is, very few properties have been launched over the past 12 months so the surge is happening in a much smaller market which might make it sound bigger.

I've totally flipped sides and while for the past 6 years I was big big big on condos and argued as much using the whole demographic change, the shift from actually wanting house to desiring a condo, immigation, etc. I think these new realities are not enough to counter the low interest rates/skyrocketing availability/high debt load problem, and we're in for a rude awakening that's going to start in about April.
Hi,

Sorry, why do you say April?
I believe a little later, as the threat of HST and promised increase in interest rates later in the year will keep people buying now to save later, or so they believe.
Maybe it is wishful thinking as I will be selling mine in the spring and hope the market holds until then.

Jack
 

kEiThZ

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Another factor that's often forgotten is the impact of the Greenbelt. The GTA is running out of land slowly but surely. That policy has more than likely contributed to propping up the price of real estate in general and condos in particular.
 

MadMax

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If I only had a dollar for every time I've heard how "were in for a rude awakening" in the last 5 years. I could have bought my condo with cash.....straight up!
 
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