Baby, we got a bubble!?

[interested]

It is really interesting to read opinions on this thread regarding a bubble issue. My coworker just bought house (1 week ago) in King City ( Younge/King st.) for 450K, he bought it from those who got this very same house in May for 385K (he borrowed somehow 5% for downpayment somewhere). He is a self employed and told me for the fun of it he went to his bank (RBC I believe) and asked them if he can get around 400K, in shortl they said no way, only if he has 10/15% down and show sufficient last 2 years income(which he didn't have). To make story short, he went back to his RE agent who hooked him up with mortgage broker who did the trick. He got 425K. It is stories like this ( i know a few more as I work on construction sites and meet a lot of folks) that make me firmly believe we are in a bubble. Salaries are stagnant for the past 10 years at least, while RE skyrocketing. CMHC insures right and left at taxpayer expence (when time comes to pay), if CMHC sole reason is to help homeowners to have affordable housing, why they insure 2nd, 3rd, ... houses ? How does that help to keep housing affordable? I don't even raise moral issues with our polititians buying votes through CMHC (feel homerich policy).

Shtopor, your co worker's scenario is concerning. I hope there is not much of a correction. In the paper this Friday, they talked about the 6 big banks making a recommendation to increase down payments to 10% and shorten amortization to 30 years. There is no doubt that a potential bubble exists if the above example was a significant part of themarket. That said, remember in Canada unlike the US, mortgages(at least in some states) are not non recourse mortgages. In other words, you just can give up the keys when prices drop. If your co worker has to walk, he will likely have to declare bankrupcy. He will lose the $25,000 and likely would continue to pay even if it dropped $50,000 and was $25000 under water(as long as the mortgage company would allow him). Problem will be when he has to renegotiate and also should his income drop. there is always a mortgage broker willing to find someone who for a higher rate of return will loan money. That secondary lender will take over the property if your co worker defaults and unless your co worker represents a significant proportion of the market, the overall market should survive, even if unfortunately your co worker loses his house.

 

[Eug]

^^^ I'm confused. Are the lenders saying the house is only worth $400000 to $425000? If so, then maybe he's overpaid by 6%-13%.

Or are you just saying the first bank wants only to give him a mortgage of $400000 on a house that's truly worth $450000? If the latter, I see that as reasonable. Then, what you're saying doesn't surprise me much. Different lenders have different criteria, and that's always been true.

That in itself doesn't suggest a bubble. It just illustrates differences between lenders. However, certain lenders might be a bit more lenient in one aspect, but more restrictive in others.

 

[interested]

^^^ I'm confused. Are the lenders saying the house is only worth $400000 to $425000? If so, then maybe he's overpaid by 6%-13%.

Or are you just saying the first bank wants only to give him a mortgage of $400000 on a house that's truly worth $450000? If the latter, I see that as reasonable. Then, what you're saying doesn't surprise me much. Different lenders have different criteria, and that's always been true.

That in itself doesn't suggest a bubble. It just illustrates differences between lenders. However, certain lenders might be a bit more lenient in one aspect, but more restrictive in others.

Eug, I hope your are right in that the house is appraised at $450 and not $400 to $425. If the house is appraised at $400 to $425K, the buyer is already under water and that is what happened in the US with Zero down. There would have to be either an unethical mortgage broker or an inflated evaluation to justify giving $425K if the evaluation is $400 or $425K. furthermore, CMHC cannot insure that mortgage I would believe since the governemnt changed the rules to have 5% down which means it could not insure a $425K valued property since the $25K of buyers equity would already be gone and technically this would be a 0% downpayment. It could only insure it if it was in fact $450K or thereabouts. Even worse, perhaps the co worker got in this case a loan at very high rates which he almost certainly is at risk of defaulting on with any adverse event occuring. It will be interesting to hear Shtopor's response.

 

[simuls]

As well HST coming in July of this year should dampen house sales, at least new product over $400K.

I've heard this over and over, but the HST has been in effect and applied for new construction since June 18, 2009 for any construction finishing after July 1, 2010. Since almost no construction - especially in condos close that fast, the effects of the HST already exist and are - as most taxes like the city of Toronto land transfer tax, etc., shrugged off by consumers.

 

[interested]

I've heard this over and over, but the HST has been in effect and applied for new construction since June 18, 2009 for any construction finishing after July 1, 2010. Since almost no construction - especially in condos close that fast, the effects of the HST already exist and are - as most taxes like the city of Toronto land transfer tax, etc., shrugged off by consumers.

I think one has to distinguish between investors and end users looking for a long term investment vs. an end user who needs a place in the near future. I was referring to those people who are buying to move in the next few months, not those who buy condos on paper right now intending to move in 3 years(the time it will take for completion.

 

[interested]

I've heard this over and over, but the HST has been in effect and applied for new construction since June 18, 2009 for any construction finishing after July 1, 2010. Since almost no construction - especially in condos close that fast, the effects of the HST already exist and are - as most taxes like the city of Toronto land transfer tax, etc., shrugged off by consumers.

One further point, I know in a fair number of cases, the developers are "eating part if not all of the PST component". this will not continue indefinately and I think one is seeing price resistance already to a degree, as evidenced by the lack of a 6-8% increase in prices at present on new development. I believe the developers are acutely price concious at this time as evidenced by the mix of units coming to market appealing to the lower end of the price range (either by price/sq. ft or by smaller units).

 

[cdr108]

With respect to the discussion about the accuracy of the data in the graphs at the Economist...

Page 4 of this CREA report shows prices increased from approx $125k to $325k, 1988 to 2009 (not adjusted for inflation). That is a 160% increase.
http://www.crea.ca/public/news_stats/pdfs/sept09rpt_e.pdf


The Bank of Canada inflation calculator, shows a 60% cumulative inflation 1988-2009.
http://www.bankofcanada.ca/en/rates/inflation_calc.html

Thus, CREA's inflation adjusted price increase 1988-2009 is (260%/160% minus 100%)=63% increase.

This contrasts with the Economists graph which shows a virtually zero increase in the avg price for this period.

daveto, could you please clairify your explanation to me?

from the values posted, here is my understanding:
* CREA report shows prices increased from approx $125k to $325k (1988 to 2009 not adjusted for inflation), so that's a 160% increase;
* Bank of Canada shows a 60% cumulative inflation 1988-2009;

so wouldn't the inflation adjusted increase be 100% = 160% - 60% ?

 

[jade_lee]

"Flaherty and the CMHC can't publicly admit that there is a housing bubble in Canada because if they do, it will likely spark off a financial panic.

But the bubble itself was caused by the Tories who, following the banks in the US, dramatically and drastically loosened the CMHC's down payment and amortization regulations. When the credit crunch hit in 2008, Flaherty quietly tightened these regulations but in a very small way - hardly reversing the loosening of regulations.

In effect, Flaherty has "subprimed" the CMHC. There are at least a few financial analysts who have been quoted calling the CMHC the largest subprime lender in the world. And because the CMHC is a crown corporation, if Canada's housing bubble bursts, then the public is on the hook. It's no different than the United States except we've cut out the middle-man: the private banks.

This is the unwritten story of why Canada has weathered the crisis: keeping asset investments inflated.

The other largely ignored and unwritten story is the bailout of Canadian banks early last year to the tune of at least $80 billion via none other than the CMHC.

It's a fiction that Canadian banks have been prudent and wise. They did need a bail out because they did invest in subprime and asset-backed commercial paper.

And now the Tories are presiding over an "instant" $50+ billion debt and we all know that social spending cuts and wage repression are around the corner (you wonder why there are so many public sector strikes lately? It's preparing for a larger attack on wages and benefits to reduce costs).

We could avoid all this if we taxed the banks and major corporations - who are all, largely, still making enormous profits while receiving bailouts and ongoing subsidies at the same time. THAT is the bottom line and why Canada is in deep trouble in the long run."

2006 Flaherty changed the lending rules 0% and 40 years then quietly in 2008 changed to 5% and 35 years (he should have Left (of center) things as they were but these republicans could not help themselves enough it appears)

 

[azureray]

When looking at the Toronto Housing market, we can't just use historical trend to make any speculations. Toronto is changing rapidly, so the market today is drastically different from 10 or 20 years ago...that's why we are seeing a less predictable cyclic housing price trend than any other city in the world. Since the last housing bubble bust in 1989, we enjoyed a two decades straight housing appreciation. That's because we had no shortage of housing demands by population booming and in-floods of new immigrants. Also, a lot of the population move to Toronto from domestic Canada, such as BC, for Toronto's relatively affordable housing and better prosperity.

With the century opportunity of US depression and China / India and developing country's rising, we as Canadians, especially Torontonians are enjoying the in-floods of both US investments and Asia investments. Just look at the long lines of those condo vip sales events, you can see a huge majority of ethnic minorities, such as Chinese / Indians...how do they finance their properties? A lot of these home buyers finance their purchases using foreign money other than borrowing from Canadian banks. So we are actually attracting foreign investments to fuel the growth of Canadian housing market.

How will the Toronto housing market move forward...real estates are commodities, and it follows a basic rule of supply and demand. We know we have a lot of supplies...the question is do we have enough demand to sustain it? My opinion is, we do.

Toronto has no sign of stopping its economic advancement. And it has got everything a city needs to become a world class top city. When that day comes, all those old graphs of historical housing price trends won't apply any more. Since Toronto today is not the same Toronto 20 years ago. And Toronto in 2020 will be drastically different from Toronto today.

We simply can no longer look at Toronto's housing market as we did in the past...it's now part of the global housing market, and we have to look at it from a global perspective. In that sense, the housing price iin Toronto is still LOW.

I have been looking for the latest immigration and population trend of Toronto, but had no luck. Anyone can supply some statistics or better, some graphs?

 

[azureray]

This comparison gives you an idea of how much potential Canadian housing market still has:

Square Metre Prices - Canada Compared to Continent


USA $16,216
Canada $3,985


Canada: Square metre prices, premier city centre, US$.

Average per square metre (sq. m.) prices in US$/€ of 120-sq. m. apartments located in the centre of the most important city of each country, either the:

* Administrative capital; and/or
* Financial capital; and/or
* The centre of the rental market


Ref: http://www.globalpropertyguide.com/North-America/Canada/square-meter-prices

 

[Eug]

One problem with an "investor heavy" market is the investors are often the first to pull out in the event of a pullback.

I'm not suggesting that the Toronto market is really investor heavy compared to say the Miami market of several years ago, but suggesting that there are a lot of foreign investors in the market isn't really a great way to way to win a There-is-no-bubble argument.

 

[azureray]

One problem with an "investor heavy" market is the investors are often the first to pull out in the event of a pullback.

I'm not suggesting that the Toronto market is really investor heavy compared to say the Miami market of several years ago, but suggesting that there are a lot of foreign investors in the market isn't really a great way to way to win a There-is-no-bubble argument.

Indeed...but I think how Toronto / Canada differs from say Miami or Thailand, is that these immigrants actually live in Toronto / Canada...and they intend to settle their family here. Toronto is the future city that does not only make investment sense, but also is very habitable.

I would not classify these new immigrants as "ivestors". Indeed any property purchase is an investment...but their intend is more than a "flip".

 

[interested]

W


Toronto has no sign of stopping its economic advancement. And it has got everything a city needs to become a world class top city. When that day comes, all those old graphs of historical housing price trends won't apply any more. Since Toronto today is not the same Toronto 20 years ago. And Toronto in 2020 will be drastically different from Toronto today.

We simply can no longer look at Toronto's housing market as we did in the past...it's now part of the global housing market, and we have to look at it from a global perspective. In that sense, the housing price iin Toronto is still LOW.

I have been looking for the latest immigration and population trend of Toronto, but had no luck. Anyone can supply some statistics or better, some graphs?

I only have 1 concern with the whole argument of "its different this time". While it may be so, generally trends tend to trend back to a certain norm. The issue is exactly as Eug suggested. I hope you are correct and that money is here to stay but investors will only leave their money here as long as it makes investment sense. Perhaps we are going to become that great global city and justify New York prices. I frankly doubt it. That said, it does not mean that the arguments presented do not have merit. The other question is how much more of this demographic is there to come. The one thing I have learned is just when you think you see a trend, it tends to reverse or something totally unexpected from left field as it were happens to alter everything you were predicting might happen.

 

[Eug]

I would not classify these new immigrants as "ivestors". Indeed any property purchase is an investment...but their intend is more than a "flip".

Except that a lot of foreign investors in downtown Toronto condos don't actually live there. Cityplace should almost be called Cityrental, if some (probably exaggerations) are to be believed.

To be fair, I am NOT a doom-and-gloomer like some at UT may be. However, I think it's a bit risky to assume everything is all hunky dory in the Toronto market. To put it another way, given the history of the Toronto market and previous trend lines, given the state of the economy, and given coming interest rate increases, I think the best approach to the market in the near future would be that of caution.

 

[azureray]

Here is some data of housing prices in China:
http://www.globalpropertyguide.com/Asia/China/Rental-Yields

In Shanghai, avarage price per sq metre: US$2,489 (for a 50 sq m apt, or 538 sq. ft )
In Beijing, avarage price per sq metre: US$2,681 (for a 50 sq m apt, or 538 sq. ft )