Baby, we got a bubble!?

[cdr108]

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 anything, the fact that he had to sell the house to split the assets means he doesn't have enough assets to purchase on his own, and he's probably accustomed to the size of his old place and finds it difficult to downsize to 1/2 - 2/3 the size, or can't find something in that range.

divorce can't be detrimental financially, as well as emotional, etc.

 

[AKS]

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.

The long term trend seems to indicate that as such. Even if it goes down in the short term. The historical long term seems to indicate housing prices go up. However, once prices rise too high and ownership becomes impossible, people accept that and rent. Only people with money can purchase and there will be less sales and purchases of houses unless factors change.

There was an interesting presentation at the Japan Foundation I attended earlier in the month which talked about Tokyo's situation. After the RE bubble burst, there were a lot of bad debts. People who purchased land at the height of the bubble couldn't pay back. People who were priced out during the bubble, moved into the suburbs either due to high rental or expensive cost of ownership. But since then, the government is allowing them to build more heights. However due to cost related issue with construction, they only build certain heights. There's several brackets. The shorter cheaper ones, the medium size medium cost ones and the luxury tall buildings. The taller built, the more cost due to engineering for fire and earthquake. Owners could build taller now and sell to offset their loses for buying at the top. So one building one story tall could now be sold at several stories tall. Let's say they bought it at the top for 1 million. If they could sell the units at market price now without losing money if they have several more units to sell. Since the bubble burst, prices became more affordable and people moved back into the city. This is an example of a possible outcome here.

Another example could be like HK where prices go up and down but historically trends up. The rich gets richer and the poor gets poorer. The rich will keep boosting up prices and the poor will rent.

 

[daveto]

The long term trend seems to indicate that as such. Even if it goes down in the short term. The historical long term seems to indicate housing prices go up. However, once prices rise too high and ownership becomes impossible, people accept that and rent. Only people with money can purchase and there will be less sales and purchases of houses unless factors change.

All the evidence of historical long term prices (50 years+) indicates that price increases are consistent with income increases.

There is no evidence of declining ownership rates during times of ongoing price increases. To the contrary, there is extensive evidence of the opposite, with increasing ownership rates during times of price increases. (ie Canada 2000-2011)

Finally, leaving aside the correlation to price changes, there is no evidence of declining home ownership rates over the long term.

 

[AKS]

From the wiki about HK.

http://en.wikipedia.org/wiki/Housing_in_Hong_Kong

From the Wiki, I get the impression most people rent.

Total Hong Kong population was 6.6 million

In 2009, 53.9% of the 2.3 million domestic households were owner-occupiers.[2]

It seems like only 1.24M out of 6.6 M people are home owner occupied. About 1M people rent market rate?

Public rental housing: 31.0%
Housing Authority subsidized sale flats: 17.1%
Housing Society subsidized sale flats: 0.7%
Private permanent housing: 49.3%
Temporary housing: 0.7%
Non-domestic housing: 1.2%

If you want to talk domestically. The long term chart for Canada using prices seem to go up. It overshoots and undershoots but on average trends up. I think we're probably at the overshooting stage, but things should cool in a few years hopefully if foreign investments stop coming in.

 

[js97]

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.

Dave, in your calculations, you forget to include Supply vs Demand.

Demand continues to oustrip supply as our population growth in urban centers continues to oustrip available units.
What does this mean?

A larger portion of what we consider 'middle class' will not be able to afford to buy homes. As the 'rich' get more rich, their numbers proportionately might get smaller (% to general population), but their nominal numbers continues to grow. How many billionaires existed 60 years ago compared to the numbers today (even adjusted for inflation)?

The middle class might be 'shrinking' proportionately to the population, but nominally, there are much more middle class families now than ever.


I used to think that prices are unsustainable compared to 'AVERAGE' wages... But if you take a look at affordability indexes in europe and some of the older cities in the world, most of their RE prices cannot be afforded by your average 'middle' class.

The previous generation sustained a family, home, and car with only one parent working... how many families can boast that these days?

It's not walll street or baystreet, simply dynamics of basic demand and supply... (keep in mind past generations didn't have granite counters and designer appliances, walk-in closets, bathrooms on every floor etc.

 

[cdr108]

...
The previous generation sustained a family, home, and car with only one parent working... how many families can boast that these days?

It's not walll street or baystreet, simply dynamics of basic demand and supply... (keep in mind past generations didn't have granite counters and designer appliances, walk-in closets, bathrooms on every floor etc.

true there have been 'upgrades' to the standard dwelling; however, the costs of some of these things have gone down substantially. ie. granite counters can be had for as little as $50 psf from several big box retailers now vs. $100+ psf many years ago; s/s appliances are cheaper now than a decade ago unless you're talking about stuff like Miele, Bosch, etc and they too have lower prices.

IMO, the real reason for higher prices are low interest rates, gov't backed mortgages and the ability to take off mortgages from banks books so they don't shoulder as much risk (securitization).

 

[daveto]

Dave, in your calculations, you forget to include Supply vs Demand.

Demand continues to oustrip supply as our population growth in urban centers continues to oustrip available units.
What does this mean?

A larger portion of what we consider 'middle class' will not be able to afford to buy homes. As the 'rich' get more rich, their numbers proportionately might get smaller (% to general population), but their nominal numbers continues to grow. How many billionaires existed 60 years ago compared to the numbers today (even adjusted for inflation)?

The middle class might be 'shrinking' proportionately to the population, but nominally, there are much more middle class families now than ever.
.

First, in Toronto, the housing supply has been growing faster than the population over the past 10 years.

Second, are you saying the middle class will not, in the future, be able to afford to buy homes, or currently? Currently that is clearly not the case since home ownership rates in Canada are at an historic high. If you are talking about the future, well, who will buy the homes? Surely not a 1% hyperwealthy group who for some strange reason covet poor performing illiquid investments.

...if you take a look at affordability indexes in europe and some of the older cities in the world, most of their RE prices cannot be afforded by your average 'middle' class

Would you have a link to any of these indexes?thx

 

[daveto]

From the wiki about HK.

http://en.wikipedia.org/wiki/Housing_in_Hong_Kong

From the Wiki, I get the impression most people rent.

Total Hong Kong population was 6.6 million



It seems like only 1.24M out of 6.6 M people are home owner occupied. About 1M people rent market rate?

Public rental housing: 31.0%
Housing Authority subsidized sale flats: 17.1%
Housing Society subsidized sale flats: 0.7%
Private permanent housing: 49.3%
Temporary housing: 0.7%
Non-domestic housing: 1.2%

If you want to talk domestically. The long term chart for Canada using prices seem to go up. It overshoots and undershoots but on average trends up. I think we're probably at the overshooting stage, but things should cool in a few years hopefully if foreign investments stop coming in.

AKS, thanks for taking the time to source your comments. I appreciate it.

For the HK, I think you have misread the data. It is saying there are 2.3m households (containing 6.6m people), of which 53.9% are owner occupied. Not that 53.9% of 2.3m individuals out of 6.6m are home owners. But regardless, whether 53.9% or 19%, in neither case does this identify that home ownership rates have decreased in inverse realationship to prices.

For the Toronto graph, the issue is not whether prices "go up", but whether they "go up more than incomes". In the case of the graph sourced, if you were to compare the trough-to-trough (or peak to peak) increases, then I think they certainly do exceed income growth. ie 1980-1996 (25% increase), 1974-2010 (70% increase). The Stats Can data shows increases of much less. But there are other factors in those time frames, specifically decreasing interest rates and loosened mortgage rules via the CMHC. Stats Can doesn't have data on the income changes prior to 1976, and I'm not familiar with the data for the house prices or any other factors for that period.

 

[AKS]

Not sure when was the last update.

House Price to Income Ratio

http://www.globalpropertyguide.com/Asia/Hong-Kong/price-gdp-per-cap
http://www.globalpropertyguide.com/North-America/Canada/price-gdp-per-cap

USA 27.89x
Canada 12.08x

India 845.45x
Cambodia 411.31x
China 133.72x
Philippines 106.75x
Thailand 62.48x
Hong Kong 56.18x
Indonesia 51.34x
Singapore 32.98x
Taiwan 32.94x
Japan 30.27x
Malaysia 17.94x

 

[CN Tower]

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

Hi George,

Welcome back.

The comparison is drawn between a market where sales were extremely vibrant for new condos, prices were rising, the bulk of the buyers were Chinese and there was a sense that prices could never fall or if they did the slowdown would be moderate and gradual.

Do you not see how one could mistake that market for Toronto or Vancouver today?

 

[js97]

First, in Toronto, the housing supply has been growing faster than the population over the past 10 years.

That's a pretty bold statement. I would challange the validity of that.
There hasn't been vast undeveloped fields in TO that all of a sudden have been turned into subdivisions. Most of the new housing have come in the form of Condos...

've lived here in the last 25+ years... I usually run into people that have moved here in the last 5 years from other parts of Ontario, and Canada. You should also consider all the 60's-80's babies that have grown up and now require housing.

Second, are you saying the middle class will not, in the future, be able to afford to buy homes, or currently? Currently that is clearly not the case since home ownership rates in Canada are at an historic high. If you are talking about the future, well, who will buy the homes? Surely not a 1% hyperwealthy group who for some strange reason covet poor performing illiquid investments.

At this rate, I think the middle class are going to have a very difficult time affording homes.

What do you consider middle class in Toronto ? I would say at a min, 80k to 140k in houshold income. Without a significant amount of savings, those in that group would have a hard time affording a home (not condo).


I don't agree that prices have escalated to rediculous amounts compared to our history, but you also can't be looking at the numbers the same way you have. A family of 4 in the 80's now requires at least double, sometimes triple the amount of housing as it did previously (as children move out and live on their own), and we haven't even accounted for immigration, from other Canadian suburbs, cities and international immigrants

 

[daveto]

Not sure when was the last update.

House Price to Income Ratio

http://www.globalpropertyguide.com/Asia/Hong-Kong/price-gdp-per-cap
http://www.globalpropertyguide.com/North-America/Canada/price-gdp-per-cap

USA 27.89x
Canada 12.08x

India 845.45x
Cambodia 411.31x
China 133.72x
Philippines 106.75x
Thailand 62.48x
Hong Kong 56.18x
Indonesia 51.34x
Singapore 32.98x
Taiwan 32.94x
Japan 30.27x
Malaysia 17.94x

This data is not "house price to gdp" as you title it. Rather, it is clearly stated as

"The house price to income ratio is the ratio of the cost of a typical upscale housing unit of 100 square metres, compared to the countrys GDP per capita."

 

[daveto]

There hasn't been vast undeveloped fields in TO that all of a sudden have been turned into subdivisions. Most of the new housing have come in the form of Condos...

In the 416 yes, but in the GTA, Brampton, Milton, etc?

That's a pretty bold statement. I would challange the validity of that.

My claim that housing has increased faster than population in Toronto is supported by the following.

The following Stats Can link quotes national population increase at 1.1% annually as at 2010(ie 11 per 1,000).
http://www.statcan.gc.ca/pub/91-209-x/91-209-x2011001-eng.htm

This Stats Can link quotes Toronto's population increase 2007 to 2010 as 5.6% for 4 years, or 1.38% annually.
http://www40.statcan.ca/l01/cst01/demo05a-eng.htm

This link states that as of 2006, 11.4% of Toronto's housing stock had been built between 2006-2010, or 1.8% annually.

I realize that I'm comparing the annual increases in population from 2007-2010, and housing stock from 2000-2006. But that's the only data I could find on Stats Can. I'm sure there is population data from 2000-2006, and housing data 2007-2010, but I couldn't find it. However I did find data on the 2001 census for Ontario at 11.285m vs 12.03m in 2006 (a 1.28% annual increase)

In summary, I think the following supports my statement that housing growth has exceeded population growth in Toronto over the past 10 years.
1.8% annual growth in Toronto housing 2000-2006
1.28% annual growth in Ontario population 2001-2006
1.38% annual growth in Toronto population 2007-2010.

You should also consider all the 60's-80's babies that have grown up and now require housing.

At this rate, I think the middle class are going to have a very difficult time affording homes.

What do you consider middle class in Toronto ? I would say at a min, 80k to 140k in houshold income. Without a significant amount of savings, those in that group would have a hard time affording a home (not condo).

I don't agree that prices have escalated to rediculous amounts compared to our history, but you also can't be looking at the numbers the same way you have. A family of 4 in the 80's now requires at least double, sometimes triple the amount of housing as it did previously (as children move out and live on their own), and we haven't even accounted for immigration, from other Canadian suburbs, cities and international immigrants

1. The demographics actually work the other way, due to the baby boom bulge. The children of that demographic (ie born 60s-80s) are a much smaller cohort.
2. I agree, "at this rate" the middle class will have a hard time affording homes. Whether as renters or owners. Hence I conclude that prices (as determined by the market of what the user will pay) will moderate.
3. Sorry, but I don't understand why a family of 4 now requires 2-3 times as much space at 30 years ago?? That seems pretty unlikely. I understand that more 20-somethings are living at home longer, but they already had space at home, and wouldn't their choice to live at home longer reduce the demand for housing and thereby reduce prices?

 

[js97]

In the 416 yes, but in the GTA, Brampton, Milton, etc?



My claim that housing has increased faster than population in Toronto is supported by the following.

The following Stats Can link quotes national population increase at 1.1% annually as at 2010(ie 11 per 1,000).
http://www.statcan.gc.ca/pub/91-209-x/91-209-x2011001-eng.htm

This Stats Can link quotes Toronto's population increase 2007 to 2010 as 5.6% for 4 years, or 1.38% annually.
http://www40.statcan.ca/l01/cst01/demo05a-eng.htm

This link states that as of 2006, 11.4% of Toronto's housing stock had been built between 2006-2010, or 1.8% annually.

I realize that I'm comparing the annual increases in population from 2007-2010, and housing stock from 2000-2006. But that's the only data I could find on Stats Can. I'm sure there is population data from 2000-2006, and housing data 2007-2010, but I couldn't find it. However I did find data on the 2001 census for Ontario at 11.285m vs 12.03m in 2006 (a 1.28% annual increase)

In summary, I think the following supports my statement that housing growth has exceeded population growth in Toronto over the past 10 years.
1.8% annual growth in Toronto housing 2000-2006
1.28% annual growth in Ontario population 2001-2006
1.38% annual growth in Toronto population 2007-2010.

That's an incorrect comparison for this purposes. Rate of growth doesn't measure up to nominal growth? 1.38% percent increase to 2.5M in population is very different than 1.8% of say, 500k or even 1 million units? You probably have to look at the nomimal numbers instead

What about the extremely low vacancy rate in Toronto, indication of low supply for sure.

I initially thought there was a buble, but dual income yuppies that continue to flow into Toronto tell me otherwise. Short of an economic collapse of the Tech and Finance sectors (which are booming based on the amount of calls from head hunters, and HR collegues in the industry) I can't see a housing collapse happening in Toronto or the GTA.
Rural canada might be a different story.

If theoretically all credit was frozen tomorrow and no one could afford to buy a home, this would drive rental prices through the roof considering their current lack of supply. Housing stock would again be an attractive asset for those with capital.


Short of a mass exodus from T.O., economic catstrastrophe, or rapid interest rate increase, I can't see a downside right now... a plateau for sure, but a 'correction' is unlikely...

Bidding wars are still common in some of the hot spots in TO.

 

[Eug]

My real estate agent is telling me bidding wars are on the decline (although they are still common).

Part of it is due to a bit more balance in the market, but she claims part of it is also due to changing buyers' attitudes these days about bidding wars. Scenario:

Seller lists quite low, and sets a specific bid date to generate a bidding war.
Buyers overbid, with several above the list price, but none reaching the seller's true desired price.
Seller refuses to sell.
Seller relists at a higher price, with no forced bidding war.
Prospective buyers laugh saying the house didn't sell at a lower list price, so why should they be interested at a higher price, and the house sits on the market forever. The longer something sits, the more stale it gets.

Actually, I think this really comes down to unrealistic sellers' expectations. That happened on my street years ago, at the height bidding war era. The guy got a good offer quite close to list price, but slightly less, in the first week. The seller refused to sell, and the thing sat on the market for a year. He finally sold at a steep discount, something like 7% lower than the offer a year earlier.