Baby, we got a bubble!?

[interested]

Good point.

I was hearing today from a friend that stocks are tanking now because of Portugal, last year it was Cyrus then Italy, Greece so on ... Why should an investors portfolio tank because of Portugal, no control I say......what happened to PE ratios etc for valuation!

I will respond quickly as this is off topic and the mods may get upset. I am by no means an expert.
First of all Tanking is a gross exaggeration (it was 4% in Portugal, Germany and France 1.5%, the TSX 0,5%...so hardly tanking).
Other issues: Europe growth is more sluggish. China....growth came in at 7+ percent when 10% was expected.
Some of the US Bank Governors expect possibly a rise in interest rates earlier next year than expected.
Takes the shine off.
Also, the increase in stocks the past year has not been so much a growth story of increased earnings as much as a story of increase P/E ratios. In other words, people willing to pay $15 for $1 of income/year last year are now willing to pay $18 for each $1 of income. We are above historic norms (just as real estate is). Hence why I posted before that I agreed with the article talking of multiple asset bubbles.

 

[Ex-Montreal Girl]

Just back to bubbles ... (although I do appreciate the digressions) ...

Assuming that most of the, for lack of a more current term, Yuppies now bidding up houses in Riverdale, Parkdale, Leslieville etc. can handle the mortgages and that interest rates stay low/flat, there is little probability IMO that they can keep up with maintenance, insurance, hydro and other utilities -- not to mention property taxes when evaluations catch up with market prices.

I'd be very surprised if wages are keeping up with 9% hydro rates rises, for example. So I wonder how many of these buyers are counting on these inevitable increases every year when thinking through their budgets and whether they can afford to buy that house for that much.

The other thing I have observed is how much these kids want what they see on the TV decorating shows: the granite counters, the stainless appliances, the hideous laminate floors and all the rest of the shiny stuff. They will go into an open house and oooh and ahhh over pot lights and rain shower fixtures in the bathroom but never notice the dampness on the foundation walls. So, when they are finally installed in their magic fairy Home and Garden TV kitchens and, all of a sudden, the roof starts leaking or the septic tank backs up or whatever, they will have to dip into their LOCs and their payments will increase.

I think that's the real bubble. I highly doubt that, as long as houses and neighbourhoods are well-maintained, values in good locations will decline over the long term, although there may be occasional hiccups like that in the early 90s.

 

[Eug]

I think a lot of people here underestimate people buying these homes. Most seem to be pretty comfortable. If anything, I'd guess it's the single income young condo buyers that are often more stretched than the dual income SFH buyers.

I also think a lot of people here are falling out of touch with modern tastes. Granite counters are becoming baseline. Even lowish end places come with granite. El-cheapo fixer-uppers come with melamine. I personally really dislike melamine counters myself. Heck I even put granite in my basement kitchen. The one thing people should realize though is that cheap granite is well, cheap. While it may not be awesome quality, it's still way more resistant to stuff like heat than melamine is, and it's not that expensive. Stainless appliances? A few hundred bux more.

As for laminate floors, they are actually quite good, if you select the right laminate. I personally prefer hardwood, but laminate actually is MORE resistant to scratches than most hardwood, and labour costs for installation sometimes are lower.

Dampness on foundation walls is something a lot of people, old or young, don't know to look for. That's the whole point of getting a seasoned and well-respected home inspector after all.

And who in Toronto has a septic tank? Not very many.

 

[interested]

Just back to bubbles ... (although I do appreciate the digressions) ...

Assuming that most of the, for lack of a more current term, Yuppies now bidding up houses in Riverdale, Parkdale, Leslieville etc. can handle the mortgages and that interest rates stay low/flat, there is little probability IMO that they can keep up with maintenance, insurance, hydro and other utilities -- not to mention property taxes when evaluations catch up with market prices.

I'd be very surprised if wages are keeping up with 9% hydro rates rises, for example. So I wonder how many of these buyers are counting on these inevitable increases every year when thinking through their budgets and whether they can afford to buy that house for that much.

The other thing I have observed is how much these kids want what they see on the TV decorating shows: the granite counters, the stainless appliances, the hideous laminate floors and all the rest of the shiny stuff. They will go into an open house and oooh and ahhh over pot lights and rain shower fixtures in the bathroom but never notice the dampness on the foundation walls. So, when they are finally installed in their magic fairy Home and Garden TV kitchens and, all of a sudden, the roof starts leaking or the septic tank backs up or whatever, they will have to dip into their LOCs and their payments will increase.

I think that's the real bubble. I highly doubt that, as long as houses and neighbourhoods are well-maintained, values in good locations will decline over the long term, although there may be occasional hiccups like that in the early 90s.

To your first point about the costs, I agree that with increasing costs more and more money will go to lodging. However, we see that in all major cities around the world. There will be people who want to live in the more desirable locations and so long as there is someone to replace the person who can no longer afford it, I think the property values may hold. Also, there is more and more of a schism between the upper quintile and the rest of the "middle class". I think the really good neighbourhoods have those upper quintile whose salaries are increasing at more than 2% inflation / year or alternatively they have enough additional room to handle a higher running cost.

To the second point, to refer to the early 90's as an occasional hiccup is not really fair. Prices dropped by 30% and in some cases (especially condos by as much as 50%). I would suggest the result of that compared with the increased availability of cash for people to buy (we have 70% home ownership at an all time high made possible by low interest rates,30 and 40 year mortgages and 5-10% down over the past few years)....all things that did not exist in 1990 means we are less well equipped to handle a hiccup. Also, that hiccup lasted a decade.... a long time frame. Prices dropped from 1989 to 1992, hovered from 1992 to 1996 and only by 2001 or thereabouts recovered to where they had been in 1989. Of course, we must recall that in Toronto house prices doubled and even tripled in some areas from 1985 to 1989....Now that is a true bubble and much larger increases than we have seen of late.

 

[interested]

I think a lot of people here underestimate people buying these homes. Most seem to be pretty comfortable. If anything, I'd guess it's the single income young condo buyers that are often more stretched than the dual income SFH buyers.

I also think a lot of people here are falling out of touch with modern tastes. Granite counters are becoming baseline. Even lowish end places come with granite. El-cheapo fixer-uppers come with melamine. I personally really dislike melamine counters myself. Heck I even put granite in my basement kitchen. The one thing people should realize though is that cheap granite is well, cheap. While it may not be awesome quality, it's still way more resistant to stuff like heat than melamine is, and it's not that expensive. Stainless appliances? A few hundred bux more.

As for laminate floors, they are actually quite good, if you select the right laminate. I personally prefer hardwood, but laminate actually is MORE resistant to scratches than most hardwood, and labour costs for installation sometimes are lower.

Dampness on foundation walls is something a lot of people, old or young, don't know to look for. That's the whole point of getting a seasoned and well-respected home inspector after all.

And who in Toronto has a septic tank? Not very many.

To your and Ex Montrealer Girls comment Eug:
I think the greatest disservice to a whole generation of younger people is the HGTV channel. The expectation is that granite, SS appliances, marble bathrooms, good neighbourhood, right by the subway, and 4 bathrooms for 4 bedrooms are a must.
The reality is that a significant amount of this is being done with borrowed money.

I was speaking to a banker who deals with wealthy individuals. The comment made was that there are people in their 60's living in $2-3 million dollar homes with $1-2million of mortgages driving $100K vehicles (leased of course). Our parents generation in their 60's would not do this unless they have money tied up in businesses or otherwise how does this make any sense. As a society we differ from our parents but if the Boomers are doing this, why are we surprised the young people extend themselves as well.

 

[TheKingEast]

For a $800K house, I can't blame people for wanting the latest and greatest finishes. Sadly, there are a lot of properties out there with the shiny, new finishes, but not much else. Builders and flippers have learned to glue some ceasarstone and stainless steel to a giant turd and people will buy it.

 

[Ex-Montreal Girl]

For a $800K house, I can't blame people for wanting the latest and greatest finishes. Sadly, there are a lot of properties out there with the shiny, new finishes, but not much else. Builders and flippers have learned to glue some ceasarstone and stainless steel to a giant turd and people will buy it.

Exactly.

When we sold our Riverdale semi, we had a very large inspection binder by the city's top firm on the dining room table. According to my agent, only a dozen or so people of the 200 that came through on the weekend open houses flipped through it. By Monday night, the house was sold north of asking. Not one bidder asked for an inspection.

These kids are out of their minds.

And yes Eug, they "seem" to be very well off but, between maintenance costs and daycare, a good many are on the edge.

As for the hiccup, I guess I am referring to Riverdale, a market I know very well. We bought one house for $160K in 1985, sold it in 1992 for $325 (which was not as high as it could have been had we sold a year earlier), left town for a while, came back and bought in 1993 for $215 (from a couple who had payed $289 in 1989) and sold for $750-plus in 2012.

If I could graph it, I am sure I could show that the longterm trend was up.

 

[Ex-Montreal Girl]

I think a lot of people here underestimate people buying these homes. Most seem to be pretty comfortable. If anything, I'd guess it's the single income young condo buyers that are often more stretched than the dual income SFH buyers.

I also think a lot of people here are falling out of touch with modern tastes. Granite counters are becoming baseline. Even lowish end places come with granite. El-cheapo fixer-uppers come with melamine. I personally really dislike melamine counters myself. Heck I even put granite in my basement kitchen. The one thing people should realize though is that cheap granite is well, cheap. While it may not be awesome quality, it's still way more resistant to stuff like heat than melamine is, and it's not that expensive. Stainless appliances? A few hundred bux more.

As for laminate floors, they are actually quite good, if you select the right laminate. I personally prefer hardwood, but laminate actually is MORE resistant to scratches than most hardwood, and labour costs for installation sometimes are lower.

Dampness on foundation walls is something a lot of people, old or young, don't know to look for. That's the whole point of getting a seasoned and well-respected home inspector after all.

And who in Toronto has a septic tank? Not very many.

You're missing the larger point. They can't see beyond the shiny stuff. They think "move-in condition" and miss the shoddy wiring.

It's not about the relative merits of laminate floors. Laminate floors are trendy. They'd probably command a higher bid than a gorgeous oak floor.

 

[interested]

Exactly.




As for the hiccup, I guess I am referring to Riverdale, a market I know very well. We bought one house for $160K in 1985, sold it in 1992 for $325 (which was not as high as it could have been had we sold a year earlier), left town for a while, came back and bought in 1993 for $215 (from a couple who had payed $289 in 1989) and sold for $750-plus in 2012.

If I could graph it, I am sure I could show that the longterm trend was up.

I agree the long term trend was up. Also, Toronto benefitted tremendously in the 70's and 80's from the Montreal mass exodus as your name suggests you are acutely aware of.
$289 to $215 is a lot of equity to lose (26%). Back then, I would bet you bought with more than 20% which was a minimum. There are a lot who today buy with a lot less.

I would also suggest the fact that the last 30 years have seen outsized growth would suggest that we should expect less than normal growth going forward....especially that interest rates cannot go down any further unless we go negative interest (witness the ECB) and hence the continuing decrease in interest rates that has allowed for outsized gains in R/E appreciation should by all logic work in reverse as interest rates rise (assuming again they do at some point).

 

[detroitbootybass]

Yes, OREA commissioned the survey but it was done independently by the leading market research company in the country. So any insinuation of "fudging" is misguided.

Hiring a client (Ispos Reid) to do work for you (Ontario Real Estate Association) isn't a situation that one can claim independence from the paying entity. In any other aspect of life, that would be considered a notable 'conflict of interest'.

 

[Wooba]

Yes, OREA commissioned the survey but it was done independently by the leading market research company in the country. So any insinuation of "fudging" is misguided.

While I'm not saying that it's fudged, but I dare say that the OREA tells the researchers what to say. There's a great sequence in a British show from the early 80s called Yes Minister where one of the main characters demonstrates how easy it is to manipulate survey results.

[Sir Humphrey demonstrates how public surveys can reach opposite conclusions]
Sir Humphrey Appleby: Mr. Woolley, are you worried about the rise in crime among teenagers?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Do you think there is lack of discipline and vigorous training in our Comprehensive Schools?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Do you think young people welcome some structure and leadership in their lives?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Do they respond to a challenge?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Might you be in favour of reintroducing National Service?
Bernard Woolley: Er, I might be.
Sir Humphrey Appleby: Yes or no?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Of course, after all you've said you can't say no to that. On the other hand, the surveys can reach opposite conclusions.
[survey two]
Sir Humphrey Appleby: Mr. Woolley, are you worried about the danger of war?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Are you unhappy about the growth of armaments?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Do you think there's a danger in giving young people guns and teaching them how to kill?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Do you think it's wrong to force people to take arms against their will?
Bernard Woolley: Yes.
Sir Humphrey Appleby: Would you oppose the reintroduction of conscription?
Bernard Woolley: Yes.
[does a double-take]
Sir Humphrey Appleby: There you are, Bernard. The perfectly balanced sample.

 

[TO_Guy]

You're missing the larger point. They can't see beyond the shiny stuff. They think "move-in condition" and miss the shoddy wiring.

It's not about the relative merits of laminate floors. Laminate floors are trendy. They'd probably command a higher bid than a gorgeous oak floor.

I beg to differ. I think younger buyers are in many ways more informed than the generations before them. They know how to tap into the wealth of information that is the internet, in addition to the knowledge and advice of their real estate agent/family/etc. Case in point, I am in my late 20's and when I bought my first house last year, I knew every property that was available in my target neighbourhoods and what they sold for in the past. I knew to research comparatives and estimate a market value for the properties I bid on. I knew to research the merits of hardwood, laminate and engineered hardwood. Through watching renovation shows on HGTV, I knew how to spot the different types of electrical wiring (i.e. knob & tube, aluminum, copper) and the hazards to be weary of in older houses (i.e. asbestos in insulation, mold, leaky basements). I knew the importance of a home inspection - since it was (and still is) a seller's market and a conditional offer was highly unlikely to be accepted, I had a home inspection done on every house I planned to bid on, before the offer date. There are many more examples and I can guarantee you that I am not the exception.

When my dad bought his last house, on the other hand, he relied solely on his experience and the knowledge and advice of his real estate agent (no, he is not computer illiterate) and I am almost certain he is not the exception either.

 

[TO_Guy]

While I'm not saying that it's fudged, but I dare say that the OREA tells the researchers what to say.

Yes, the questionnaire has to be approved by the client, if that's what you mean but the numbers don't lie. I know this from first-hand experience

 

[Eug]

You're missing the larger point. They can't see beyond the shiny stuff. They think "move-in condition" and miss the shoddy wiring.

You often can't see shoddy wiring unless you rip the walls apart. Same goes for plumbing, unless you hire a plumber to snake the drains before you make an offer. It doesn't matter if you're a 60 year-old buyer or a 30 year-old buyer.

Same goes for quality of a floor slab below basement flooring. Or efficacy of HVAC ducting if you buy in spring when it's 18 degrees outside.

It's not about the relative merits of laminate floors. Laminate floors are trendy. They'd probably command a higher bid than a gorgeous oak floor.

I think you're making wild guesses that are simply wrong. It might make sense for laminate floors to be preferred over oak in crappy condition, and there are certainly a lot of homes around with crappy wood floors. However, wood floors are extremely popular, if in good condition. And of course, laminate is preferred over el-cheapo broadloom.

It's not that laminate floors are trendy. It's that good quality laminate floors are robust floors that don't cost an arm and a leg.

P.S. There's likely a much, much higher chance that a century home with old oak floors will have shoddy wiring than a brand new build in suburbia with cheap laminate.

 

[Condo George]

GTA luxury home sales up 34 per cent in 2014: Sotheby’s

Brutal winter has helped buoy demand for low-maintenance, high-end condos

Sotheby's International says sales of high-end properties across the GTA, such as this $4.675 million, four-bedroom contemporary home on Wychwood Park, are up 34 per cent in the first half of 2014.

By: Susan Pigg Business Reporter, Published on Tue Jul 08 2014
GTA high-end real estate market is roaring along, with sales of properties over $1 million up 34 per cent in the first half of 2014 over a year earlier, matching gains in the country’s priciest market, Vancouver, according to a new report by Sotheby’s International.

The biggest jump, surprisingly enough, was in the sale of $1 million-plus condos which skyrocketed by 53 per cent to the end of June over the same period of 2013 — gains beyond those seen in Vancouver, Calgary or Montreal, notes the Top-Tier Real Estate Report released Tuesday.

“Despite fears of oversupply, demand for luxury condominiums remained high,†says the twice yearly state of the high-end market report by the high-end real estate company.

Sotheby’s realtor Paul Maranger said he’s seen a surge just since this year’s brutal winter in baby boomers looking for spacious but low-maintenance luxury condos, ideally with two parking spots, which can be tougher to find.

Many of these buyers already have second homes in sun destinations or cottage country that are great draws for family get-togethers, but are looking to simplify their lives and cash out on their pricey homes.

Even the GTA’s highest priced condo apartment and townhouses, those over $4 million, saw sales double, the report notes.

“Given strong economic fundamentals, increased consumer confidence and mortgage lending rates that remain at historical lows, all markets are expected to gain momentum in the latter part of 2014,†says Sotheby’s.

“International demand is also expected to remain strong across Canada’s major metropolitan markets, with the removal of Canada’s Immigrant Investor Program having had no impact on the luxury real estate market year-to-date.â€

More than one third of all high-end condos in the GTA actually sold for over list price in multiple bids, although not quite the bidding-war fever pitch that has driven the City of Toronto’s particularly tight house market to stratospheric levels, pushing even basic detached homes to an average sale price approaching $1 million.

A total of almost 4,000 houses, condos, detached and semi-detached homes sold for over $1 million across the GTA in the first half of 2014, up 34 per cent year over year, says Sotheby’s.

While they are also up 34 per cent in Vancouver, that compares to just a 17 per cent uptick in high-end sales in Calgary and 11 per cent in Montreal, according to the report.

That city was the only major urban centre in the country to actually see a significant downturn in high-end real estate sales through 2013, although sales picked up significantly in the wake of the defeat of the Parti Quebecois government April 7.

Since then, four $4 million-plus homes have sold in Montreal “signaling renewed confidence in this high-end luxury segment,†although luxury condo sales are still down four per cent in the first half of 2014 compared to 2013.

But, $1 million also isn’t what it used to be: Some of those gains, in Toronto and Calgary in particular, can be attributed to fierce demand in the face of ongoing shortages of listings which has driven competition — and prices — for detached and semi-detached houses to stratospheric levels.

In fact, the GTA ranked tops for the first half of 2014 for the number of $1 million to $2 million properties that sold for over asking price — some 37 per cent, followed by Vancouver at 30 per cent, Calgary at 9 per cent and Montreal at 7 per cent.