Baby, we got a bubble!?

[CN Tower]

http://www.theglobeandmail.com/repo...eady-housing-years-ahead-cmhc/article2336199/

Good times are still ahead --CMHC.

Read all about it here.

Toronto Bubble Risk Topping New York in Condos- Bloomberg

Read all about it here:

http://www.bloomberg.com/news/2012-...ork-in-market-for-condominiums-mortgages.html

Hint: One of these sources guarantees $800B of Canadian residential mortgages while the other has no horse in the race

 

[KA1]

Toronto Bubble Risk Topping New York in Condos- Bloomberg

Read all about it here:

http://www.bloomberg.com/news/2012-...ork-in-market-for-condominiums-mortgages.html

Hint: One of these sources guarantees $800B of Canadian residential mortgages while the other has no horse in the race

CN Tower, if you were to read the article carefully, you will see that there are 2 good news buried in the Bloomberg story.

Sheryl King, economist with Bank of America Merrill Lynch has been quoted that prices are 10% higher than they should be -- not 15% or so according to the savy investor Interested or 25% according to Redfirm, Daveto and the likes.

Further, that Andfrew of Queen's University expects problems to crop up when current mortgages come up for renewal -- 3.5/4 years from now.

Why not enjoy the sunshine while it lasts?

 

[interested]

The part that caught my eye was the 24% reference in the bloomberg article as the %age of rentals. I wonder how they arrived at that figure. I am guessing it is based on MLS listings. We know however a fair number of landlords rent without using MLS, especially small rental units downtown I would think. Also, how does this jive with Jamie Johnson of RemaxCondosplus who stated that the majority of PRECON is virtually 100% investors since "end users" do not buy with a 3-5 time line.

As to the comment Ka1 of why not enjoy the sunshine for 3.5 to 4 more years; if one really assumes that the problem is there....
why would you be buying into this market now unless an assignment or resale and hoping that one times it correctly before the "adjustment" occurs. Of course, if rents are marginal at best at present, and one believes the end is 3.5 years hence, does one also believe that one can buy now and make a profit when one considers the LTT and the Real estate commissions etc. over a short time. Would not prudence dictate "no further purchases" at this time? Further, would it not dictate no justication for price increases as well going forward. Of course, this is not as relevant to those looking to buy long term to live in, I am referring to investment and investment condos downtown in particular.

 

[CN Tower]

Also, how does this jive with Jamie Johnson of RemaxCondosplus who stated that the majority of PRECON is virtually 100% investors since "end users" do not buy with a 3-5 time line.

Really, who concerns themselves with this guy or takes him seriously? He's like the guy who lined up all night for tickets to the U2 concert at the ACC, gets shut out, and is later seen and overheard at the local pub claiming that U2 is washed up! He doesn't know anything. He sells existing condos, not new ones.

I'm as neutral as they come guys. I call it like I see it. I'm just trying to position myself and clients for opportunities as they present themselves. In deference to KA1's point in defence of the market, I don't know how anyone at Merrill Lynch (which horse are they betting on btw, can't quite figure out their interest in our little town) can blithely overlook the fact that every single new condo buyer in Toronto puts down a decent sized non-refundable deposit, is likely pre-qualified for a mortgage for the balance and, the most important point, is 100% legally bound to close the deal!

These are real flesh and blood buyers people. Not stick men. They can't walk away from these deals absent some dramatic material change in the project. That greatly differentiates the Toronto pre-con market from just about anywhere I believe. It is a massive safety net in my opinion.

 

[ISYM]

Submitting 25% on the sale price would be required without a certificate in place. With a certificate the adjusted cost base is calculated on the sale excluding realtor and legal fees. This initial filing may be submitted by the seller's lawyer if they've provided such an undertaking to the buyer. A tax return is then prepared where the realtor and legal fees are included which generally results in a refund of the capital gains overpayment on said fees.

Referring to the sale of a property by a non-resident, the CRA would withhold 25% of the sale price (your lawyer is obliged to send them a cheque from sale proceeds). You would then provide documentary proof of purchase price, less expenses and calculate the capital gain tax owed (same tax rate as residents). The CRA would then send you the balance withheld.

Example:

-Original purchase price: $300k
-Sale price: $400k
-Total transaction expenses: $10k
-Top marginal tax rate: 40%
-Capital gain tax: 50% (50% of your gain is taxed)

So CRA initially withholds $100k ($400k X 25%)

Actual capital gain tax charged is $18k ($400k-$300k-$10k=$90k, $90k X 50%=$45k, $45k X 40%=$18k)

So the CRA would then refund $82k ($100k-$18k)

Hope this clarifies.

 

[redfirm]

CN Tower, if you were to read the article carefully, you will see that there are 2 good news buried in the Bloomberg story.

Sheryl King, economist with Bank of America Merrill Lynch has been quoted that prices are 10% higher than they should be -- not 15% or so according to the savy investor Interested or 25% according to Redfirm, Daveto and the likes.

Further, that Andfrew of Queen's University expects problems to crop up when current mortgages come up for renewal -- 3.5/4 years from now.

Why not enjoy the sunshine while it lasts?

Don't forget the overshoot! That 10% easily becomes twice as much .... r/e market is not precise and doesn't reflect reality. It goes higher than it should, and it falls lower than it should. Most of these # crunching exercises do not include the intangible "panic factor"..... CN is correct in saying that Toronto's got this unique "safety net" compared to US and some other countries, but I think that ever since that brief crash in 2009 this safety net was working overtime.

 

[daveto]

A Deutsche Bank study ranks Canada's house prices as the 2nd most overvalued in a list of 20 countries, and due for a 35% correction(ie 54%/154%=35%)For me, I'd say 20-30% is more what I would expect, but 35% is not impossible.

It's an interesting read to see how the different countries rank.
http://www.businessinsider.com/the-...2#canadas-home-prices-are-overvalued-by-54-19

The study uses the classic measurements of price to income and price to rents

 

[interested]

^^^
I wonder how many of our so called foreign investors read this report and others like it and if it will have any effect on them.

Just makes me think if I were an international investor I might start thinking of allocating funds to other locations. If the foreign effect is say 25% of the market (just a figure out of thin air), even if 25% head it; that would be a 6.25% decrease in demand, presumably in Toronto mostly from the downtown TO condo market demand numbers. Don't know if that would have a significant effect or not.

 

[MadMax]

Has anyone ever mentioned or argued that our re market may have been under valued for so many years? Probably since the crash of the late 80's. Did other countries worldwide experience the same crash that we did? Maybe we've just been playing catch-up for all these years? I'm just a laymen and putting it out there, but everyone seems to mention over valued...well if something can be overvalued then it can go the other way as well. No?

 

[macookie]

Has anyone ever mentioned or argued that our re market may have been under valued for so many years? Probably since the crash of the late 80's. Did other countries worldwide experience the same crash that we did? Maybe we've just been playing catch-up for all these years? I'm just a laymen and putting it out there, but everyone seems to mention over valued...well if something can be overvalued then it can go the other way as well. No?

Of course Toronto could be totally undervalued... and as such it will continue to increase exponentially until the system crashes or the bubble gets so SUPERSIZED... like the Tulip bubble, the South-Sea bubble, the America home dream bubble.

Toronto is a magnet for excess cash. I thought we were smarter than Americans, but we really we just slower learners... and maybe we are. Maybe this bubble will result in Torontonian's will demand higher wages to afford those massive mortgage payments. And hopefully those demands for higher wages won't mean that our lower cost competing neighbours, and those developing countries with cheap labour won't under cut us... and take those banking jobs... those "professional" jobs that could be outsourced... but hey... it's all good now... what's the worst thing that could happen... Prices might fall... and that would like more disaposal income in all our pockets.

 

[interested]

Has anyone ever mentioned or argued that our re market may have been under valued for so many years? Probably since the crash of the late 80's. Did other countries worldwide experience the same crash that we did? Maybe we've just been playing catch-up for all these years? I'm just a laymen and putting it out there, but everyone seems to mention over valued...well if something can be overvalued then it can go the other way as well. No?

Madmax, I do not know the answer to the question you pose. There is no doubt that Toronto did play some catchup. Afterall, it took from 1989 to about 2003 to hit 1989 levels again. However, 1985 to 1989 saw Toronto prices increase more than they have in the past 10 years. So I would argue that 1989 was an even bigger bubble and hence the 30-40% declines by 1993. Prior to 1985, TO real estate may have been somewhat undervalued (would have to research that more to decide) but the almost tripling over 4 years more than offset that.

Those of us who are concerned with overvaluation are using metrics such as average yearly earnings/cost of housing and others to conclude there is an overvaluation. Also, these studies you read about are comparing real estate around the world using the same metrics. Unless you believe that the Toronto condo market in particular but the Canadian market as a whole is going to behave differently and in isolation of world events, it does not stand to reason that prices continue their present trend.

As a rule, trends tend towards the mean over the longer term.

Please note this does not prove or mean an imminent correction. It just means it is prudent to perhaps expect it.

The answer to your worldwide experience the recession in 1990 occurred in a number of locations due to excess in the 1980's.

One could extrapolate and suggest the TO real estate market and others around the world especially due to Quantitative easing and flooding of money, concern about the economy and very low interest rates, have cumulatively resulted in excess capital looking for places to be invested and in so doing are bubbling many asset classes. At some point these excesses (deleveraging) will have to occur and when it does, one would assume all asset classes (except perhaps gold and a few other exceptions) will devalue. Along with that, R/E; since it is highly leveraged for most investors, one would assume would be hard hit.

 

[cdr108]

Has anyone ever mentioned or argued that our re market may have been under valued for so many years? Probably since the crash of the late 80's. Did other countries worldwide experience the same crash that we did? Maybe we've just been playing catch-up for all these years? I'm just a laymen and putting it out there, but everyone seems to mention over valued...well if something can be overvalued then it can go the other way as well. No?

the classic measurements of affordability are price to income and price to rents.
by those standards, TO r/e prices are over-valued.

obviously someone working at McD shouldn't be buying in Yorkville proper, but we're not talking about that.

there are sources where one can pull stats on the average/median individual/family income in each neighbourhood/district, and in general, throughout the GTA, r/e prices are 5-6x income.

IMO, a working professional (early-mid 30s) with 10 years of experience should be able to purchase a modestly sized 1b+d, say 650 sq ft at 3.5x income of $65K = $227.5K

at current resale prices of $550 psf for a dt condo (excluding Yorkville), that 650 sq ft unit = $357.5K

$357.5K/$227.5K = 1.57, so my evaluation is TO r/e prices are ~ 57% over-valued

 

[interested]

cdr:

I agree with your approach but not with the metrics. I think when one is talking about the downtown core; given the savings in transport costs and the premium that one should expect to pay for the added amenities, the 3.5x income rule would underestimate the value. I think that just as the 3.5x is a generally accepted historical average, it is just that, an average.

I believe you and I would agree that maybe a less desirable neighbourhood, perhaps not a new modern condo but slightly dated equivalent should command less than the core and relatively new "with all the bells and whistles".

In view of that, I think we could ascribe 4x or even possibly 4.5x. I have some difficulty with the close to 6x metric.


One further thought. The problem is not so much a working professional with 10 years experience. It seems to me that there are a fair amount of young people with 3-5 years experience who wish to purchase the properties you described (in their late 20's) rather than mid 30's and having had more time to acummulate more of a down payment.

 

[TheSpeculator]

It all depends on the variables you choose.
I could select the average professional in Toronto being someone who makes $75K (which I realize is well above national average but its Toronto and wages are generally higher).
Given the smaller sized units these days 600 sq feet seems large for many these days, rather than choosing 650 sq ft.
There are pre-con units going for $458 psf today on Bathurst (don’t want to name names, but this was just emailed to me hours ago).
I know there are psf going for $600-800+ in the core, but we are all not entitled to live in the core of the world’s greatest city (up for debate)

Given those numbers
600sq ft x 458psf = $275K
75K salary * 3.5 (also up for debate) = 263K

With these number they are 5% overvalued which is marginal and can be absorbed in coming years.

 

[interested]

cdr: one more thought. Working the other way around: 650 sq.ft. given todays construction costs will not allow further construction. If I assume an average of $250/sq.ft. for all the costs to build the average condo in the core exclusive of land costs which will likely add at least conservatively another $50/sq.ft. (though likely to change if demand would ebb significantly); we are talking about $300/sq.ft. or $195K. No builder is going to start a 3-5 year project with the ability to make 13% over that time frame given the risks.

So unless there is a great excess of product available on the market which would drive prices below replacement costs; prices would have to be increased to allow a reasonable rate of return (assuming my assumptions of costs are in the ball park). So I am guessing a builder would want at least 10%/year x say 4 years or 40% above all costs to compensate for the work and the risk involved and probably much more. Just being conservative; based on 40% of $300 cost base means $420/sq.ft. bringing your 650 sq.ft condo to $273,000. Based on your $65K income; that would be a price/income ratio of 4.2x.

Of course, I could be off in these estimates but I think they are reasonable as to costs. Not sure builders would take the risk for 10%/year on an ongoing basis. They might for the shorter term however.