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Baby, we got a bubble!?

bodybag said:
Another way to look at this is that if China economy goes bust, those who have money in China will certainly move their money overseas to safer investment. I actually see that as a good thing for toronto real estate market.

http://www.home2price.com
Click to expand...

I think that is a wishful outcome.
The Toronto Precon market is being supported to a great degree by investors/speculators. We could dispute what percentage it is and no one knows for sure. However, end users apparently are in the minority in Precon. Let's assume for a moment that is correct.

Prices to a degree are being supported by overseas investors. If things get bad, these investors are worse off. I believe if you have less money, you reign in your spending, keep your principal residence, get rid of 2nd and 3rd properties, and stop buying "investment real estate".

I think a China economy going bust will bode badly not just for real estate but the stock market, interest rates for savers, and many other investments.
 
radioheadmike said:
Fair enough. So why doesn't the government "regulate" the amount of units that can be build within a specific period.

This could prevent the developers from hurting themselves from overshooting the market due to greed, it could prevent home owners from losing equity, and prevent the tax payers from having to bail out the developers, the investors, and the unfortunate home owners.
Click to expand...

It's a free market, why should the government regulate it?

What the government should not be doing, however, is providing CMHC loans willy-nilly. I wish they had maintained a cap on CMHC loans. They could have regionalized the cap. But removing the cap has lead to massive run-ups in CMHC liabilities. It's undoubtedly enabled all the housing asset price inflation that's happened.

I am a bit nervous at the moment. I might have to rent or sell my condo in a few months and the regulatory landscape is rather scary. OSFI is about to regulate the heck out of CMHC. And CMHC is running out of room on its insurance-in-force cap. There's already rumours of applicants getting rejected for CMHC-insured mortgages. And while that might lead to more business for Genworth and Canada Guaranty, they too have a parliamentary mandated cap. If prices keep rising, the entire mortgage insurance industry will hit their cap by the end of this year to mid-next year.
 
From the National Post:

http://urbantoronto.ca/forum/showthread.php/10523-Baby-we-got-a-bubble!?p=640927#post640927

Drop in Toronto condo sales shows market balancing out, industry group says

Garry Marr May 23, 2012 – 10:03 PM ET | Last Updated: May 24, 2012 10:28 AM ET
Tobin Grimshaw for the National Post

Tobin Grimshaw for the National Post

Builders say home sales are in line with more typical periods during this boom and comparisons against 2011 are against a record-breaking year

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Toronto builders call it stability but their latest statistics show condominium sales are down 20.2% this year and now prices are falling.

The Building Industry and Land Development Association says there were 7,047 high-rises purchased over the first four months of the year, down from 8,833 for the same period a year earlier. The average high-rise apartment sold for $431,800 in April, off 3.5% from a year earlier.

The builders say home sales are in line with more typical periods during this boom and comparisons against 2011 are against a record-breaking year.

‘You have to remember 2011 really was a banner year’

“We try to use a five-year average,” says Bryan Tuckey, chief executive of BILD, in talking about comparisons. “It’s very positive in that it’s balancing the market. You look at trends and forecasts and actual sales, it’s very seldom a straight line but these [results] are balanced to the way things have been going the past four or five years.”

The exceptions have been 2008 and 2009, years affected by the recession, and the record-breaking pace of 2011, he says. “You have to remember 2011 really was a banner year,” says Mr. Tuckey, adding he doesn’t see downward price pressure because of the demand created from people moving to Toronto.
Related

OECD urges Canada to hike rates this fall to cool housing market

Toronto condo market ripe for a correction?

Is there ever a bad time to invest in real estate?

The drop in sales didn’t come as a huge surprise to CIBC deputy economist Benjamin Tal, who says a 20% drop in sales and 10% decline in prices is what he’s been expecting — something he says will be good for the condo market. “It’s exactly what we expected.”

One factor that could also be impacting the market is the increase in interest rates earlier this year. Rates have crept back up after dropping to a record low of 2.99% on a five-year, fixed closed-rate mortgage. Royal Bank of Canada lowered the posted rate on its five-year fixed closed mortgage by 10 basis points Wednesday to 5.34%.

Not everybody is convinced the condo market is sinking. Urbanation Inc., which also tracks condominium sales, says the first quarter was the highest quarter on record. Urbanation’s stats are not out for April.

“It looks like what happened after the first quarter is that a few sites might not have done as well after their opening,” says Ben Myers, executive vice-president of Urbanation. “Our numbers don’t reflect that and it is the first time we have seen that in a long time.”

Like BILD, Mr. Myers wonders whether expectations are a little high because of 2011. “The new standard is lot different than the past standard. In 2007-2008, if somebody sold 30% of their units in the first three months after launch they would be happy. Now it’s more like 50% to 60%,” he says.

His own data indicates that GTA condo prices are relatively flat with the average sale price in the resale condo market $396 a square foot in the first quarter, down from $400 a year earlier. It was the first time since the recession in 2009 that the market had recorded a quarter over quarter decline.

George Carras, president of RealNet Canada Inc., which compiles the data for BILD, says price comparisons are difficult because condo units have shrunk.

“What has driven the price decline is size,” says Mr. Carras. “We’ve lost about 130 square feet in the index size of a condo. You are seeing prices go down. The reason is you are getting less space for less money.”

Mortgage Broker Vince Gaetano, of Monster Mortgage, wonders whether all the negativity about the condo sector has fuelled the decline. “The negative press doesn’t help,” says Mr. Gaetano, adding tougher mortgage regulations, especially a crackdown on rules for self-employed individuals, may be impacting sales.

A couple of thoughts:

This article echos the posts previously that suggested that a few of the recent launches have been badly received. Are we at the "too much product point?" Also, are we possibly approaching the point that investors have finally realized what many of us have been saying for a while, fundamentals make no sense. Are the speculators realizing that they won't be able to flip out for immediate gain prior to closing based on $650-800/sq.ft.

Mr. Carras' comment does not make sense to me. The price/sq.ft. is down from $400 to $396. So this is a drop in /footage cost. If anything, a smaller unit is more expensive to build as building a bedroom less costs much less than a kitchen or a bathroom. So the costs to build a 3 bedroom would be cheaper than a 1 bedroom. In absolute dollars, smaller units will cost less but to try and suggests prices are down due to smaller size appears to me to be an attempt to spin the "bad numbers".
I readily acknowledge Mr. Carras may have been quoted out of context.


As to Mr. Gaetano's comments, this is the same thing I heard from all the realtors and mortgage brokers in Florida early on before the meltdown in 2006 onwards. The press was causing the decline. The reality is no one was saying the press was bad when prices were on the rise. The knife has to cut both ways. That said, certainly the constant negativity is going to have an effect but it is more the reality of the world economy and the price point especially related to PRECON which is causing the problem here in my view.
 
Also from the Star:

http://www.thestar.com/business/art...ld-withstand-40-per-cent-drop-in-house-prices

Canadians households could withstand 40 per cent drop in house prices
Published On Thu May 24 2012

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Article

Dana Flavelle Business Reporter

Canadian households could withstand as much as a 40 per cent drop in house prices without defaulting on their loans, a report by the debt-rating agency DBRS says.

The agency isn’t saying Canadian house prices are at risk of falling that far, DBRS senior vice-president Kevin Chiang said in an interview.

The figure is the result of conducting “a stress test. A ‘what if?’ The worst case scenario,” Chiang explained. “We’re not saying it will drop 40 per cent.”

Rather, it’s another way of looking at a topic of growing concern among policy makers -- how well debt-laden Canadian households will manage if record low interest rates start to rise or record high house prices started to fall.

Most studies look at debt-to-income ratios. However, this one studied Canadian households’ net worth.

Since the average Canadian household has a net worth of $400,000 and home equity accounts for just $150,000 of that, house prices could fall by up to 40 per cent and households would still be solvent – assuming no other assets declined, Chiang said.

“Average Canadian households are solvent and can withstand a housing price decline of 40 per cent,” according to the report called House Rich, Cash Poor: An Update on Residential Mortgages and Household Borrowing in Canada. “However, increasing household leverage and stretched housing affordability is a concern.”

Despite the recent recession, Canada’s housing and residential mortgage markets have continued to grow since 1990, the report also says.

By the end of 2011, the average home price had appreciated 141 per cent but aggregate national mortgage debt had grown by a much-higher 374 per cent to $1.1 trillion.

Mortgage debt rose faster than house prices because more houses were built during that two-decade period, Chiang explained.

Total household debt, including home equity lines of credit, had grown by 381 per cent to $1.6 trillion.

The faster debt accumulation relative to GDP or average household income drove up both home prices and household debt in Canada.

Between 1990 and 2011, the average home price in Canada increased from 3.4 times the average gross family income to 4.9 times.

Similarly, household debt-to-personal disposal income increased by 73 per cent to 153 per cent, the study found.

The result is reduced housing affordability with pressure on day-to-day cash flow for average Canadian households, leaving them little room to deal with unexpected expenses and more vulnerable to liquidity and cash flow shock.

“However, from the perspective of lenders or investors in securitization, potential losses on defaulted mortgages would be mitigated by household net worth, which includes the equity embedded in the underlying properties, and therefore any rating impact would be subdued,” said Kevin Chiang, senior vice president at DBRS.

The study examines the various sources of mortgage funding in the market, including covered bonds and sovereign-sponsored programs such as NHA-MBS and the Canada Mortgage Bond program, as well as the significant roles played by chartered banks and mortgage insurers.

Another key point of the study centers on the myriad ways used in Canada to assess household financial health and leverage and its implications.

“We would emphasize that affordability measurements based on average numbers are not representative and do not recognize regional or market-specific preferences, differences or property types,” Chiang said.

“Having said that, the real estate market for most Canadian cities appears balanced based on sales activities and housing inventory supply but moderately overvalued in terms of price-to-income and affordability.

“Barring a nationwide economic downturn, the impact of an interest rate increase or any price correction on mortgage defaults should be localized, with more elevated risk in certain markets and segments.”

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I would like to see how they tested this. I could see the economy tanking if we approach anything near these type of losses. People would invest less in the stock market as they would be pulling out money to meet commitments. This would further drive down their net worth. Job losses and then house losses next would be a logical conclusion in my view.

I think this just sounds far too optimistic. Just my gut reaction.
 
interested said:
From the National Post:

His own data indicates that GTA condo prices are relatively flat with the average sale price in the resale condo market $396 a square foot in the first quarter, down from $400 a year earlier. It was the first time since the recession in 2009 that the market had recorded a quarter over quarter decline.

George Carras, president of RealNet Canada Inc., which compiles the data for BILD, says price comparisons are difficult because condo units have shrunk.

“What has driven the price decline is size,” says Mr. Carras. “We’ve lost about 130 square feet in the index size of a condo. You are seeing prices go down. The reason is you are getting less space for less money.”
Click to expand...


A couple of thoughts:

This article echos the posts previously that suggested that a few of the recent launches have been badly received. Are we at the "too much product point?" Also, are we possibly approaching the point that investors have finally realized what many of us have been saying for a while, fundamentals make no sense. Are the speculators realizing that they won't be able to flip out for immediate gain prior to closing based on $650-800/sq.ft.

Mr. Carras' comment does not make sense to me. The price/sq.ft. is down from $400 to $396. So this is a drop in /footage cost. If anything, a smaller unit is more expensive to build as building a bedroom less costs much less than a kitchen or a bathroom. So the costs to build a 3 bedroom would be cheaper than a 1 bedroom. In absolute dollars, smaller units will cost less but to try and suggests prices are down due to smaller size appears to me to be an attempt to spin the "bad numbers".
I readily acknowledge Mr. Carras may have been quoted out of context.


As to Mr. Gaetano's comments, this is the same thing I heard from all the realtors and mortgage brokers in Florida early on before the meltdown in 2006 onwards. The press was causing the decline. The reality is no one was saying the press was bad when prices were on the rise. The knife has to cut both ways. That said, certainly the constant negativity is going to have an effect but it is more the reality of the world economy and the price point especially related to PRECON which is causing the problem here in my view.
Click to expand...


* pre-con pricing of $650-800 psf is the developers being greedy and taking all the 'anticipated' price appreciation for themselves and leaving all the risk with the buyers with little / no reward when one considers resale pricing around $500-550 psf in the majority of the dt core, excluding Yonge/Bloor/Yorkville

* Mr. Carras' comment makes some sense if we only compare "the average high-rise apartment sold for $431,800 in April, off 3.5% from a year earlier." due to the changes in unit sizes from the past decade, etc.
However, his comment makes no sense when talking about a change in the price/sq.ft. when the unit of measurement is already quantified.

* Vince Gaetano's comment is self serving ... less buyers means less commission from brokering mortgages.

As you said interested, the cheer leaders are out in force pumping things up more and more when prices rise; but when the exuberance goes too far and prices need to come back down, they cry foul.
 
This guy sounds like he wants the market to drop. Comparing a special 2.99% 5 year rate to a posted rate of 5.34% is crazy. 5 year closed rate mortgages can be still had in the low 3s.
 
^^^
I don't think Gaetano would like prices to drop much though perhaps it would draw more people in and hence more mortgages. However if the psychology goes really negative, then people don't buy as they expect it to be cheaper next year etc.
 
MLS Home Price Index: Home price trends continue to diverge in April

• The Aggregate Composite MLS® Home Price Index in April 2012 was up 5.2% year-over-year.
• Toronto again posted the largest year-over-year increase (7.9%), with more modest gains
in Calgary (4.0%), Vancouver (3.7%), the Fraser Valley (2.7%), and Montreal (2.3%).
• Year-over-year price gains accelerated in April in Toronto and Calgary but slowed in
Vancouver and the Fraser Valley and were little changed in Montreal.
• Single family home prices again posted the biggest gains (6.4%), with apartment unit
and townhome sales making more modest headway (3.6% and 2.7% respectively).

Among the different housing types tracked by the index, single family homes again posted the biggest year-over-year gains in April (6.4%), led by two-storey single family homes (6.9%). The MLS® HPI for one-storey single family homes rose 5.6 per cent from April 2011, while townhouses and apartments saw gains of 3.6 per cent and 2.7 per cent, respectively.
 
^^^
I realize this is not the precon market but clearly investors/speculators in downtown TO must realize that if resale is going up only 2.7%/year a $550 condo today in 3 years will be only $595, $612 in year 4 and year 5 from now $628 and not the $650-800 being asked. Further, these condos usually include the parking which PRECON is doing less and less making the $650/sq.ft. closer to $700/sq.ft.

My believe is we will see at least 50% of the projects trying to launch now fail or be remarketed/redesigned.

Those buying now are clearly "late to the party".
 
^^^
I am waiting for CityPlaceGuy saying it is the right time to buy next.
Maybe Ka1 will come back to the forum and let us know if he thinks everything is still OK.
cdr...we are on the same page.
 
I think the problem is that developers are selling future anticipated prices today. I highly doubt construction material cost went up that much to justify $600-700/sf on non-luxury condos in downtown. Steel prices were high several years ago when China had a huge demand, but I think that has quickly fallen with slow down in China. The developers here are trying to cut out the middle-man and investors and pocket all the money from the end-users. They have to leave some meat on the bone for other people to make some money.
 
^^^
Except that a 40% drop would mean the economy tanked and a lot of people might not have that job left with which to save/buy.
Also, psychologically people would save and that would further spiral down the economy because they would be scared trying to catch a falling knife. Just as it is impossible to know exactly where the top is (until after the fact) so is it difficult to know where the bottom is.
 
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