Baby, we got a bubble!?

[KA1]

The link you provided describes 3 properties, none of which have seen a price increase of 50-60% since March 2008. The TREB data of a 20% nominal increase since March 2008 refutes your presumption of a 50-60% increase. Do you agree?




You're refuting a straw man argument. My question was whether the cultural distribution of the agents you were told about were similar or different to that of Toronto's population. If I can paraphrase your answer, "you don't know", correct?




Intelligent and analytical? I'm blushing.




Weak hearted? Chickens? Compelling arguments.

Daveto, considering your background, I am dismayed that you have not read the link properly. You have missed the following points:

761 Bay Street: 43% increase in 28 months.

763 Bay Street: last month a 1bedroom unit was sold at $ 750 psf. (If I were to apply this psf to my size unit, then, price of my unit has gone up by 60% since March 2008.

You are correct about cultural distribution. All what I know that was described to me. That many agents/brokers of Chinese descent means only one thing to me. That overseas buyers are investing in Toronto R/E sight unseen. As long as this trend lasts, there will be no bubble burst.

Intelligent/analytical individuals have been making posts on this thread -- forecasting doom and gloom soon, whatever soon means. Interested had been quoting QE, bond yield curve and other 'buzz' words and had predicted -- forcefully -- 10% decline in prices by March/April 2011. That has yet to happen. Instead of admitting that he has been wrong -- totally wrong, in this situation -- he has laid the blame on government intervention to keep interest rates articially low.

You, and others as well, have maintained a 'bearish' outlook for a very long time. I have a feeling that by the time you come out of your cocoon and face the reality, you will find that a reasonable price unit can be found only in the next slum in the making -- that is, City Place. You can go to youtube and search for City Place videos.

By the way, if and when a bubble bursts, perhaps, someone on this thread could wake me up.

 

[interested]

Ka1;

I read the Remax report. The 43% increase was taken from the bottom of the market in Feb 2009 to now. The market dropped almost 15%. In fact; this is an unfair comparison. One also does not know from this if upgrading occurred.

The other example is more pertinent: 22% in 38 months or 7%/year

Also, one cannot necessarily extrapolate the cost increase on a 1 bedroom to a 2 bedroom since lower priced and sized units proportionately at least for a time were going up more than larger and also an example of 1 unit without knowing the details of it in particular is a dangerous extrapolation. Hence I would have to agree with Dave when he quotes out TREB data which is much more broadly based though personally I prefer the data which compares resales of the same unit.

And as to being totally wrong, I have admitted "mea culpa" many times and am willing to do it again. However, it does not change that we have unprecedented interference in the market place by governments. That QE 1, 2 and maybe 3 is distorting what is happening is simply to ignore what is clear. After all, the governments are using QE exactly to try and float asset values.

Quoting bond yields upon which the mortgage market is virtually totally based is not a "buzz word". It is an economic fact and a reflection of what dictates mortgage rates. If the world was better off (witness 3-4% declines this week alone in North American stock markets), bond holders would demand more money in the form of interest and the reality is markets cannot afford an increase in rates.

My point: I still believe in the fundamental logic of my thinking. I correctly predicted Florida's bust and sold in 2003 when my property had doubled in 2 years because it was illogical only to see it double again to 2006. Well, the same property just resold for the same amount in May 2011 that I sold it for in USD in 2003. Only difference; when I sold, the USD was worth 1.40 C$ so I sold still for almost 40% more in C$ 8 years later. Was I wrong in 2003; yes because it went for another 3 years up. Was it rationale? My view.....no. But as I have said, irrationality can continue for very long times.

It does not mean, my friend, Ka1, that I believe I am wrong. I believe strongly I will be proven correct "in the longer term". In the mean time, I will be wrong.......until ultimately I will be right. And even then I will have been wrong because I will have predicted the demise too early.

 

[Eug]

I read the Remax report. The 43% increase was taken from the bottom of the market in Feb 2009 to now. The market dropped almost 15%. In fact; this is an unfair comparison. One also does not know from this if upgrading occurred.

The other example is more pertinent: 22% in 38 months or 7%/year

Agreed. Any comparison should be from before the blip, to see the true trend curve.

It does not mean, my friend, Ka1, that I believe I am wrong. I believe strongly I will be proven correct "in the longer term". In the mean time, I will be wrong.......until ultimately I will be right. And even then I will have been wrong because I will have predicted the demise too early.

Well, at what point does one become a broken record? I could say the market will go into overdrive upwards in the future... And I might be right a decade from now.

 

[interested]

True. My point is simply that I am basing my conclusions on a hypothesis supported by facts and logic as opposed to it will just go up because people will just pay ever increasing prices for no reason. I can at least attempt to draw logical conclusions. Of course, as I have pointed out, external factors not accounted for or anticipated will alter results. Still does not mean it is unreasonable to at least attempt to apply logic to the market.

 

[KA1]

True. My point is simply that I am basing my conclusions on a hypothesis supported by facts and logic ....

I think I missed something important here.


can you, please, re-state the facts and logic supporting your conclusions?

 

[interested]

they have been mentioned before:
Historic prices to earned income at 6x vs. 3.5 x.
Interest rates at record lows due to bad economy.
Price increases outpacing historical norms.
Wages barely increasing in 10 years.
Reliance on "foreign investors" to make a local market.
Flooding of the world with QE to avoid a depression of all asset classes.
Problems in Europe, US, and possibly China; but Canadian real estate is a bastion to itself
and is unaffected by this.
Predictions now that Carney will lower rates further because of generalized slower growth.
But somehow against this background; prices will just continue to rise.

My hypothesis is that the money which eventually will have to be delevered and removed from the system
will result in all asset classes coming down. Japan's real estate is around 25% of where it was before. So it can happen

 

[cdr108]

they have been mentioned before:
Historic prices to earned income at 6x vs. 3.5 x.
Interest rates at record lows due to bad economy.
Price increases outpacing historical norms.
Wages barely increasing in 10 years.
Reliance on "foreign investors" to make a local market.
Flooding of the world with QE to avoid a depression of all asset classes.
Problems in Europe, US, and possibly China; but Canadian real estate is a bastion to itself
and is unaffected by this.
Predictions now that Carney will lower rates further because of generalized slower growth.
But somehow against this background; prices will just continue to rise.

My hypothesis is that the money which eventually will have to be delevered and removed from the system
will result in all asset classes coming down. Japan's real estate is around 25% of where it was before. So it can happen

oh it will happen.

when the RBC survey indicates 57 per cent said they expect to carry mortgage debt after the age of 55, with nearly one-third expecting to carry debt after age 65; and another 1/3 of Canadians who are 55 or older have at least 16 years left on their mortgage term, that means people are over-stretched with debt.

imagine the repurcussions when interests rates eventually rise.

every 100 bp rise in rates will equal to 10% increase in mortgage payment !

IMO, TO r/e is 35% overvalued now.

 

[ponyboy]

I'm not putting my life on hold by renting. Housing is an illiquid asset, more consumption than investment, so as long as there is reasonable security of tenure and availability of desirable rentals, then an analysis of monthly costs of owning vs. renting is all that is needed to decide what to do. Even with low rates, the differences are stark. We've been renting a spacious 2/2 loft condo downtown at about 40% of the monthly ownership costs assuming an interest-only mortgage. Although single family home rentals are harder to find, and that is a problem if you feel you must live in that kind of property, there are a number of spacious and well-appointed condos downtown for rent. The story about renter bidding wars is mostly BS. I think the key is striking an option for a multi-year tenancy with the owner so you have security of tenure should they decide to sell. We signed a one year lease with an option for a two-year renewal. Although the fundamentals clearly suggest a major multiyear correction is ahead of us, I've stopped worrying about the pace because governments are doing everything they can to prop it up. Who knows how long it will take...probably one day after many bears throw in the towel. I would go so far to say I feel morally repulsed by the idea of buying into the current real estate boom/bubble because it rewards behavior, individuals and industries that I consider harmful to the longterm well-being of our society. Any society that puts so many resources into housing is not putting that into productive assets and entrepreneurship. It is a huge misallocation of resources. Young people are shackling themselves to a particular location and long mortgages when they need to be more flexible, and they are rewarding older generations for the economy they have inherited by buying their properties and supporting their retirement portfolio. The culture of ownership based on constant growth of housing and the housing industry is bankrupt and destructive; access and flexibility are keys going forward.

 

[urbandreamer]

KA1
You are correct about cultural distribution. All what I know that was described to me. That many agents/brokers of Chinese descent means only one thing to me. That overseas buyers are investing in Toronto R/E sight unseen. As long as this trend lasts, there will be no bubble burst.

I hate to burst your bubble, but isn't that a classic sign of a bubble--when foreign investors buy sight unseen?

 

[interested]

UD, I think you make a fair point.

Unless it is "different this time" and Toronto has permanently become a new "final destination for capital", then I fear this is a risky assumption to base continued price increases.

 

[CN Tower]

On The Popping of China's Real-Esate Bubble

There was just too much money in the economy and so people then poured money into apartments. And China has gone on a tear building ghost cities and all the rest of it.*And now the progression that you talked about -- skyrocketing prices and then stable prices, selling volume, and then property price declines -- is what we are seeing in China.
*
In October, last month, prices in places like Shanghai declined 30%, as we saw developers start to offer these enormous discounts. And by the way, these discounts were so big that people who bought at earlier stages in these same developments, where these discounts were being offered have now taken to the streets complaining if you are giving 30% discounts to these other guys, then give it to me as well. And so we have not got a little bit of social unrest because of falling property prices.
*
In Wenzhou, which is in prosperous Zhejiang Province, which was perhaps the most prosperous province up to about a year ago, developers are, one developer is now offering BMWs to the first 150 buyers of apartments. And this is just a sign that property prices have not only softened, but they are starting to fall quickly.
*
You know, every market has to go to equilibrium. There are too many apartments in China and not enough buyers and occupiers. And it was going to go to equilibrium in some fashion. What is really surprising observers is that the rapidity at which we see this move to equilibrium. Last year there were, in about I guess it was April or May, the state grid in China reported there were 64.5 million apartments that showed no electricity usage for six consecutive months. That is enough housing for 200 million people, but yet Beijing was decreeing the building of 30 to 50 million more apartment units....
*
But at the end of the day, there has got to be a correction. And what goes up fast comes down fast. And what we are seeing is the down phase. The only issue is whether Beijing can stop the down phase by administrative measures. But so far the Chinese leaders, Premier Wen Jiabao, last Sunday said "nope, we are going to stay with these tightening measures." And that has really created great pessimism in the Chinese property market...
*
And so really what we have is a government now that is really trying to bring the property market down. And of course it wants to do so gradually, you know, orderly. But as you say, it is a bubble, there is a pin and the problem is that Chinese leaders cannot manage the process of bringing the property market down to equilibrium....
*
When China's elite analysts start talking about prices being 50% of where they are this year that means that they are probably privately thinking that no, prices will not halve: they might go down even further than that. And that is really a problem because that mentality, once it gets embedded in people's minds in China really means that, Chinese leaders then have very few tools in which to prop up the property market. * *



I draw a parallel to Shanghai and the over abundance of new projects south of Bloor that are springing up like weeds, well ahead of the real demand for $650 PSF space.

 

[Eug]

China's residential real estate market is quite bizarre, at least to us. The are entire neighbourhoods that are completely empty that people bought as investments. However they're not even occupied by renters, because a "used" unit is perceived as less valuable.

 

[interested]

China's residential real estate market is quite bizarre, at least to us. The are entire neighbourhoods that are completely empty that people bought as investments. However they're not even occupied by renters, because a "used" unit is perceived as less valuable.

But Eug, that does not detract from CN Tower's points in particular that BMW's are being offered to entice buyers and 30% decline in prices in Shanghai.
Sure an investor may be willing to leave a property empty as long as prices are rising, but one has to seriously ask will that mentality continue in a declining market when value is lower, costs to run continue and there is no revenue. Logical investing would say that this is not a sustainable combination.

 

[Eug]

But Eug, that does not detract from CN Tower's points in particular that BMW's are being offered to entice buyers and 30% decline in prices in Shanghai.
Sure an investor may be willing to leave a property empty as long as prices are rising, but one has to seriously ask will that mentality continue in a declining market when value is lower, costs to run continue and there is no revenue. Logical investing would say that this is not a sustainable combination.

The point is that while there are significant risks in the Canadian market, a pullback in Shanghai means little as an example for the Canadian market. In fact one may even argue it would have the opposite effect. Foreign investors are looking at the Canadian market as a safe haven now. The difference though is that these units are actually occupied by renters, yet still maintain value with a few repairs, paint, and cleaning. This is actually a bonus for them. Now these foreign investors get income generation from these investments on an ongoing basis instead of just having to hope for price appreciation by the time they want to sell. While I don't completely buy into it myself, I don't think it's wrong for someone to think it can help give this market legs for several more years esp. when it's a low interest environment for Canadian buyers too.

I think a couple of the fundamental problems with doom and gloom types in the real estate market is that they assume they understand the psyche of foreign investors, and they think they can predict timing. We more moderate types are also guilty of this to an extent, but have come to realize that simplistic predictions are often almost equivalent to random guesses. I'm glad I didn't cash out of the stock market when I was considering doing so, because I would have missed out on 10-20% of gains, for example. Yes, the stock market then peaked more and then came back down again, but that's still way higher than where I was predicting the market to settle.

I almost find it amusing that the most vocal of these RE doomsayers actually put their monies where their mouths were and cashed out of the real estate market half a decade ago, including with their primary places of residence. I betcha most of them are regretting their decisions now.

And finally, if someone is considering buying a place to live in and plan on living there for a significant amount of time, then I think it's a reasonable consideration despite all the negative predictions.

 

[ILuvTO]

The point is that while there are significant risks in the Canadian market, a pullback in Shanghai means little as an example for the Canadian market. In fact one may even argue it would have the opposite effect. Foreign investors are looking at the Canadian market as a safe haven now. The difference though is that these units are actually occupied by renters, yet still maintain value with a few repairs, paint, and cleaning. This is actually a bonus for them. Now these foreign investors get income generation from these investments on an ongoing basis instead of just having to hope for price appreciation by the time they want to sell. While I don't completely buy into it myself, I don't think it's wrong for someone to think it can help give this market legs for several more years esp. when it's a low interest environment for Canadian buyers too.

I think a couple of the fundamental problems with doom and gloom types in the real estate market is that they assume they understand the psyche of foreign investors, and they think they can predict timing. We more moderate types are also guilty of this to an extent, but have come to realize that simplistic predictions are often almost equivalent to random guesses. I'm glad I didn't cash out of the stock market when I was considering doing so, because I would have missed out on 10-20% of gains, for example. Yes, the stock market then peaked more and then came back down again, but that's still way higher than where I was predicting the market to settle.

I almost find it amusing that the most vocal of these RE doomsayers actually put their monies where their mouths were and cashed out of the real estate market half a decade ago, including with their primary places of residence. I betcha most of them are regretting their decisions now.

And finally, if someone is considering buying a place to live in and plan on living there for a significant amount of time, then I think it's a reasonable consideration despite all the negative predictions.

I see what you are saying, Eug. However, one could also argue that a bubble bursting in China will cause investors over there (who are forced/decide to sell) to lose a lot of money. This will in turn hamper their ability to invest abroad. One could also argue that if people begin having financial difficulties the first thing they would sell are their foreign assets. Kind of like selling the cottage in Muskoka first instead of the primary residence (not the best analogy).