Baby, we got a bubble!?

[KA1]

This comment as well as the comment about the bears moving into a slum in two years is uncalled for and immature. Thanks for keeping the thread on track.

I did not think you were thin skinned.

My apologies.

 

[ILuvTO]

I did not think you were thin skinned.

My apologies.

It's you that is incredibly thin skinned. The mere thought of a correction in the market has you shaking in your boots and lashing out with comments like the above. You seem to resent anyone who even suggests the possibility of a correction.

Disingenuous apology not accepted.

 

[KA1]

It's you that is incredibly thin skinned. The mere thought of a correction in the market has you shaking in your boots and lashing out with comments like the above. You seem to resent anyone who even suggests the possibility of a correction.

Disingenuous apology not accepted.

Time to close this chapter, move forward and open a new chapter?

 

[interested]

Hey guys;

I have watched Ka1 post for a long time. He likes to stimulate the conversation by representing the opposite view of a number on this forum who are "bears" as described by himself and others others forum.

Rightly or wrongly, with the correct reasoning or not, or for whatever reason; we have to give credit where it is due. Ka1 so far has been correct. I do not share your view ILUVTO that he is shaking in his boots as suggested and he has not been malicious but rather I would say light hearted in pushing people to comment as opposed to some who have been shall we say "more extreme".

If I could suggest perhaps his offer to move forward and continue with a "new chapter" should be accepted graciously and in the spirit it is offered.

 

[KA1]

http://www.thestar.com/news/article/1089426--vertical-toronto-going-going-up?bn=1

Link to an an internet only article in The Star: Vertical Toronto: going up and up.

140 residential condo towers are under construction. 140+ condo towers in planning stage.

This on top of estimated 20% unsold inventory suggested by our 'able' friend CN Tower.

For once, I refuse to say anything as to which way the world is heading. Instead, I shall wait for others to comment.

 

[daveto]

RE price increases cannot exceed income increases indefinately. Since 1976:
-median Canadian income has decreased at annual rate of -.3% http://www5.statcan.gc.ca/cansim/a0...stByVal=1&paSer=&csid=1321886522897&lang=eng-
-average Canadian income has increased at an annual rate of +.3%http://www5.statcan.gc.ca/cansim/a0...&stByVal=1&paSer=&csid=1321886268491&lang=eng
-median Toronto income changes has been consistent with national figures, and average Toronto income changes have been at +0.6% annually

With the inflation assumption of 2%, any sustained RE price increase beyond the nominal annual increase in wages of 2.3% nationally (or 2.6% in Toronto?) will eventually see 100%+ of income spent on housing.

Furthermore, with a sustained RE price increase of 2.3% (or 2.6%), the net price increase is below zero (net of property tax and inflation)

Therefore, longterm, RE can only be a sustainable investment if the price is supported by the possible rental income.

One could argue that there is a paragigm shift afoot, and prices are moving to a new normal and hence we are seeing short term, unsustainable, price increases which exceed wage growth but which will soon end. However no-one in this thread has made that argument.

It seems to me the question is simple, do you accepts the mathematics that sustainable RE price increases cannot exceed wage growth, and do you accept that sustainable real estate prices must be supported by rental rates?

If the answer is yes, then when one analyses the numbers, the mathematics indicate an eventual decrease in Canadian (and Toronto) prices. The only question is when.

Finally, for those snide schaudenfreuders who are snickering about these absurd caricatures of the "doom and gloomers" who have sold their RE and now live in penury etc...grow up. Seriously.

 

[interested]

Daveto,
While I am in the camp clearly that feels that sustained price increases beyond rent and wage increases is not possible ad infinitum, I am not sure that this will result in a correction back to R/E price increases that only match wage + inflation increases.

I look to Europe(yes I appreciate they have problems) but would point out that in many countries since they have been around for much longer periods than North America, that real estate ownership rates are far lower than in North America. Many people grow up with the understanding they will never own property and in fact rent. For eg. in Switzerland I believe home ownership rates are below 50% and I believe closer to 30-40%. I would have to confirm the percentages but I believe the concept is correct. Yet wages are higher and rents in no way reflect the cost of housing. Now Switzerland has incredibly low interest rates and one could argue they have "all that money seeded away illegally helping float their economy" but I know someone who has an above average salary (in the neighbourhood of $120K/year who rents an apartment for about$1000/month the value of which would be $800000 to buy. I believe similar situations exist in other European countries.

My point is that in Europeans who have higher wages but much higher house prices still have relatively lower rental rates (barring central London/Paris and the like high end addresses) which do not long term justify the prices. I believe that as Canada and the US mature this idea that everyone is entitled to their own home may change; people accept renting; and the economics as they now are in TO reveal that renting is cheaper than owning. The owners will continue to own accepting a lower rate of return but the real estate will not be traded as a commodity to the degree it is being down so in Canada and the US; and in particular with reference to the foreign buying of downtown TO condos.

 

[Condo George]

China to our market, I cant believe some would make that comparison, just got back from out of town, cheers

 

[daveto]

I look to Europe(yes I appreciate they have problems) but would point out that in many countries since they have been around for much longer periods than North America, that real estate ownership rates are far lower than in North America. Many people grow up with the understanding they will never own property and in fact rent. For eg. in Switzerland I believe home ownership rates are below 50% and I believe closer to 30-40%. I would have to confirm the percentages but I believe the concept is correct. Yet wages are higher and rents in no way reflect the cost of housing. Now Switzerland has incredibly low interest rates and one could argue they have "all that money seeded away illegally helping float their economy" but I know someone who has an above average salary (in the neighbourhood of $120K/year who rents an apartment for about$1000/month the value of which would be $800000 to buy. I believe similar situations exist in other European countries.

My point is that in Europeans who have higher wages but much higher house prices still have relatively lower rental rates (barring central London/Paris and the like high end addresses) which do not long term justify the prices. I believe that as Canada and the US mature this idea that everyone is entitled to their own home may change; people accept renting; and the economics as they now are in TO reveal that renting is cheaper than owning. The owners will continue to own accepting a lower rate of return but the real estate will not be traded as a commodity to the degree it is being down so in Canada and the US; and in particular with reference to the foreign buying of downtown TO condos.

As far as rental gross cap rates of 1.5% (ie $1k a month on a $800k property from the anecdotal example you quoted), it would appear that is an aberration. The following link quotes gross cap rates as being "quite low" at 4-5%.

http://www.globalpropertyguide.com/Europe/Switzerland/Price-History
"Rental yields Switzerland’s major cities are quite low, at 3.5% to 5.3%. Apartments in Geneva, home to various international organizations such as the ILO, WHO, WTO, and the Red Cross, have gross yields of 3.5% - 4.6%. In Zurich, Switzerland’s biggest city and the financial capital, apartments have gross yields of 3.7% – 5.3%."

A quick google shows that Switzerland's nominal RE price increase was 1.5% yearly from 1985-2004. I see elsewhere that the increases since 2004-2009 have been in the 4-5% range. In total, the increase from 1985 to today is therefore at below inflation since 1985, and signficantly below wage increase over that time.
http://www.bis.org/publ/wgpapers/cgfs26brown.pdf

"House prices have increased by a mere 1.5% per year over the past 20 years, so that real house prices have actually fallen over this period. Following a real estate boom at the end of the 1980s, house prices in Switzerland fell sharply during the 1990s and have only recovered moderately since 2000"

 

[interested]

Thank you Dave for the information.

My main point was that rents do not justify the cost of property. the paper shows that ownership is 35%. I don't know if there is a link to house prices and rents and cap rates but my suspicion (at least from the information that I was told..granted not statistical but anectdotal) is that Europeans as a rule do not place house ownership in the same category as Canadians/Americans.
They are prepared to rent. Also, since house prices have been escalating for 500 and not 100 years, they are much more expensive compared to the rent they get and the relative higher salaries that the Swiss receive.

 

[cdr108]

Thank you Dave for the information.

My main point was that rents do not justify the cost of property. the paper shows that ownership is 35%. I don't know if there is a link to house prices and rents and cap rates but my suspicion (at least from the information that I was told..granted not statistical but anectdotal) is that Europeans as a rule do not place house ownership in the same category as Canadians/Americans.
They are prepared to rent. Also, since house prices have been escalating for 500 and not 100 years, they are much more expensive compared to the rent they get and the relative higher salaries that the Swiss receive.

don't many of those european countries/cities have stricter rules about density and lack of land to build compared to Canada/Toronto/US?

 

[daveto]

Thank you Dave for the information.

My main point was that rents do not justify the cost of property. the paper shows that ownership is 35%. I don't know if there is a link to house prices and rents and cap rates but my suspicion (at least from the information that I was told..granted not statistical but anectdotal) is that Europeans as a rule do not place house ownership in the same category as Canadians/Americans.
They are prepared to rent. Also, since house prices have been escalating for 500 and not 100 years, they are much more expensive compared to the rent they get and the relative higher salaries that the Swiss receive.

Interested, I took the cap rates from the bottom of the page on the global property link which I posted.

Also, do you have any data source to support your contention that house prices are much more expensive in Europe (relative to income), than in North America? The following link shows a Chart 1 from the IMF which shows that housing prices in Amsterdam have increased at an average of +0.2% above inflation over the past 350 years (ie doubled). This rate of increase is consistent which the increase in wages for Canada over the past 30 years, and I would suggest it is probably consistent with inflation adjusted wage increases in Amsterdam over that time.
http://www.finfacts.ie/irishfinancenews/article_1019261.shtml

Also from the same link, Chart 5 from the OECD provides relevant data on the ratio of prices to housing for some 18 western countries.

 

[interested]

Daveto.
I was not basing it on source data but rather on conversations I have had with Europeans who live in Europe and have told me prices relative to rents. My main data source was talking about Zurich Switzerland which is why I eluded to Switzerland.

I have not done a formal analysis so I acknowledge that I am putting forward only opinions which may not be as accurate as source data.

 

[AKS]

I've heard prices in Paris has also increased. My uncle sold his home after the divorce to divide the assets and used the money to rent. After many years of renting, he can't afford to buy back a place to live anymore because prices have gone up. He will end up renting for the rest of his life.

 

[daveto]

I've heard prices in Paris has also increased. My uncle sold his home after the divorce to divide the assets and used the money to rent. After many years of renting, he can't afford to buy back a place to live anymore because prices have gone up. He will end up renting for the rest of his life.

If you've heard it, it must be true. Yes, your uncle will be renting the rest of his life, because everyone knows that RE prices only go up.