Baby, we got a bubble!?

[TheKingEast]

In most neighborhoods in central Toronto where there are a large number of seniors (of course, which neighborhood in central Toronto is not deemed upscale these days, right?), there are many more contractors milling about all over the neighborhood. You'll see everything from irrigation system experts to snow removal services to plumbers to electricians to miscellaneous contracted handymen to home security installers to lawn care contractors...I think that, as others have stated, when you factor in the costs of hiring these contractors, it's still fairly reasonable versus paying, say, $0.75/sq.ft. condo fees on a 1,200 sq.ft. condo. That's $900 per month or $10,800 a year! You definitely don't pay $10k a year on basic maintenance for your single family home.

You're also paying 20%+ less for the property as well. Smaller mortgage. I think you have to factor in everything. I'd personally buy a house over a condo but a house, especially the older ones downtown cost a crapload of money to just get your foot in the door, then money to update/upgrade and more to maintain.

So, here's an example. Pay $800K for an old house in a nice area. Spend $150K to renovate (roof, upgrading electrical, windows, floors, kitchen, bathrooms, etc). That's $1,000,000 then add general maintenance, taxes, heat, etc. It gets up there. There are condos out there with low maintenance fees. They're usually lofts.

 

[Migos]

So, is anyone still thinking of buying in 2015 with all this uncertainty and the faint (but getting louder and louder) ring of alarm bells?

Does anyone think there will be downward pressure on rents? I would imagine much of the newer stock will have to be increasingly competitive to attract good tenants (excessive supply, lower quality), but will established units hold their current rates or be pressured upwards? I would think demand for decent liveable units will likely grow.

Its all headwinds for real estate to me:
-interest rates can't get much lower
-consumers have maxed out their borrowing potential
-home ownership rate can't get much higher
-economy is sputtering and in my opinion on to brink of recession
-declining CAD is already hurting investors, further declines expected
-huge supply of condos coming online
-many unsophisticated investors purchased condos over the past several years with insufficient due diligence

Basically, Canadians have repeated the mistakes of Americans in 2008 by becoming way over leveraged and in the process creating a massive asset bubble that long ago disconnected from the fundamentals. It won't end well and the crash will be faster and longer-lasting than most expect. Canada is very vulnerable right now and there are several things that could spur a downward spiral and negative feedback loop.

 

[interested]

So, is anyone still thinking of buying in 2015 with all this uncertainty and the faint (but getting louder and louder) ring of alarm bells?

Does anyone think there will be downward pressure on rents? I would imagine much of the newer stock will have to be increasingly competitive to attract good tenants (excessive supply, lower quality), but will established units hold their current rates or be pressured upwards? I would think demand for decent liveable units will likely grow.

I believe there already is downward pressure on rents .... at least at the higher end. It is because there is a fair amount of product and not that many excess people willing to pay the rent.
So logic would dictate if we get a lot of product coming on the market at the mid range, perhaps it will start to outstrip demand and the rents will be pressured. However, I personally don't see large scale drops happening though the initial rents in some new condos that are not ready as far as amenities and with a lot of units to fill as it registers may hurt ... at least for the first year rent.

 

[interested]

Its all headwinds for real estate to me:
-interest rates can't get much lower
-consumers have maxed out their borrowing potential
-home ownership rate can't get much higher
-economy is sputtering and in my opinion on to brink of recession
-declining CAD is already hurting investors, further declines expected
-huge supply of condos coming online
-many unsophisticated investors purchased condos over the past several years with insufficient due diligence

Basically, Canadians have repeated the mistakes of Americans in 2008 by becoming way over leveraged and in the process creating a massive asset bubble that long ago disconnected from the fundamentals. It won't end well and the crash will be faster and longer-lasting than most expect. Canada is very vulnerable right now and there are several things that could spur a downward spiral and negative feedback loop.

Migos:
1) interest rates. I would have said the same thing last year too and it can't go too much lower. However, unless oil recovers quickly, look for another interest rate cut in March if not by May almost certainly BOC will drop another 1/4%.
2) Consumers are maxed out but have been for the past 1 and 1/2 years. It will take job losses and the ripple effect of oil dropping to cause a meltdown. It will happen I believe in Alberta. I am not sure it will come to Toronto as per previous posts.
3) I agree with 70% home ownership..this is very high. That said, North America likes its homes and since the immigration is to the cities...especially Toronto...this may maintain demand. I expect it will not outside of the big cities however.
4) The declining C$ does hurt present investors. However, it means we are on sale for those with currencies that are holding up. That would be the U.S. Remember that while the C$ is declining, it has actually stood up reasonably well when compared to the Euro, Yen, and other currencies in the basket of currencies. So yes, against the US we are not doing well with our loonie but if you are a European, Japanese, Chinese etc. our C$ currency has not declined vis a vis your currency though you would have done better to invest in the US for the capital appreciation.
5) Huge supply of condos coming on line....agree...especially the next 2-3 years. However, in 2013 late and through at least the early part of2014 I believe that less product was marketed and projects delayed so if we can get through the next 2-3 years, we may in fact be looking at a decrease in product coming on line in 2018-2019.
6) Agree fully with this statement.

This asset bubble will deflate due to a black swan event....terrorist attack....Grexit with unintended consequences (read Lehman collapse)...other unanticipated event.
My concern is that we see with the exception of the US, every central bank is again on a race to the bottom to devalue their currency. The US will not be raising this year or at most 1/4 of 1% and I doubt that. We will watch the purchasing numbers and non farm payrolls tomorrow but I suspect they will show that the massive appreciation of the USD has hurt hiring and will hurt companies bottom lines. The 10% increase in the currency is the equivalent of a 2% rate increase and I do not believe this was expected when Yellen said rates would go up in Summer "cautiously". With everyone around the US deflating their currency, the US can't afford a double whammy of going up in my view so by the law of "unintended consequences" I believe that interest rates in fact will remain lower for longer....at least to 2016 or even longer and we will not see much of a correction. Not because it should not correct but because central banks and governments are working so hard to prevent the natural market correction which needs to happen.

 

[TheKingEast]

Migos:
1) interest rates. I would have said the same thing last year too and it can't go too much lower. However, unless oil recovers quickly, look for another interest rate cut in March if not by May almost certainly BOC will drop another 1/4%.
2) Consumers are maxed out but have been for the past 1 and 1/2 years. It will take job losses and the ripple effect of oil dropping to cause a meltdown. It will happen I believe in Alberta. I am not sure it will come to Toronto as per previous posts.
3) I agree with 70% home ownership..this is very high. That said, North America likes its homes and since the immigration is to the cities...especially Toronto...this may maintain demand. I expect it will not outside of the big cities however.
4) The declining C$ does hurt present investors. However, it means we are on sale for those with currencies that are holding up. That would be the U.S. Remember that while the C$ is declining, it has actually stood up reasonably well when compared to the Euro, Yen, and other currencies in the basket of currencies. So yes, against the US we are not doing well with our loonie but if you are a European, Japanese, Chinese etc. our C$ currency has not declined vis a vis your currency though you would have done better to invest in the US for the capital appreciation.
5) Huge supply of condos coming on line....agree...especially the next 2-3 years. However, in 2013 late and through at least the early part of2014 I believe that less product was marketed and projects delayed so if we can get through the next 2-3 years, we may in fact be looking at a decrease in product coming on line in 2018-2019.
6) Agree fully with this statement.

This asset bubble will deflate due to a black swan event....terrorist attack....Grexit with unintended consequences (read Lehman collapse)...other unanticipated event.
My concern is that we see with the exception of the US, every central bank is again on a race to the bottom to devalue their currency. The US will not be raising this year or at most 1/4 of 1% and I doubt that. We will watch the purchasing numbers and non farm payrolls tomorrow but I suspect they will show that the massive appreciation of the USD has hurt hiring and will hurt companies bottom lines. The 10% increase in the currency is the equivalent of a 2% rate increase and I do not believe this was expected when Yellen said rates would go up in Summer "cautiously". With everyone around the US deflating their currency, the US can't afford a double whammy of going up in my view so by the law of "unintended consequences" I believe that interest rates in fact will remain lower for longer....at least to 2016 or even longer and we will not see much of a correction. Not because it should not correct but because central banks and governments are working so hard to prevent the natural market correction which needs to happen.

This is how I feel. The "correction" has been delayed and will keep being delayed for a while. Rates will not sky rocket or jump overnight. Simply will not happen. I still think prices will stabilize for some home types, while drop for others. If I owned a tiny shoe box in a not so prime area, I'd be worried. SFHs and larger 2 bed condos will continue to go up in value and run into multiple offer scenarios and it's all due to supply IMO.

 

[Migos]

This is how I feel. The "correction" has been delayed and will keep being delayed for a while. Rates will not sky rocket or jump overnight. Simply will not happen. I still think prices will stabilize for some home types, while drop for others. If I owned a tiny shoe box in a not so prime area, I'd be worried. SFHs and larger 2 bed condos will continue to go up in value and run into multiple offer scenarios and it's all due to supply IMO.

Is this anecdotal or do you have data?

 

[interested]

Is this anecdotal or do you have data?

I don't have evidence but I agree largely with theKingEast.
Even if the market as a whole falls, SFH's will maintain their value quite well. Just more demand.
I think some people would move back from the burbs if they could afford it. Others would move closer to the city within the city.
Condo dwellers who would want to trade up would possibly be able to do it.

As for condos, I agree that 2 bedrooms will become the defacto supply. I also think it will be larger 2 bedrooms in older better buildings because of the price differential to new and if faced with a family and the choice between a new glossy 700 sq.ft. or 1000 sq.ft. in an older better building I think the space/price will dictate the choice.

 

[Migos]

I don't have evidence but I agree largely with theKingEast.
Even if the market as a whole falls, SFH's will maintain their value quite well. Just more demand.
I think some people would move back from the burbs if they could afford it. Others would move closer to the city within the city.
Condo dwellers who would want to trade up would possibly be able to do it.

As for condos, I agree that 2 bedrooms will become the defacto supply. I also think it will be larger 2 bedrooms in older better buildings because of the price differential to new and if faced with a family and the choice between a new glossy 700 sq.ft. or 1000 sq.ft. in an older better building I think the space/price will dictate the choice.

Do a lot of families raise their kids in 2 bedroom condos? The idea of that seems a bit odd to me as there doesnt seem to many schools or room for kids to play downtown. I know a lot of low-income people raise their kids in apartments but I didn't know it was common for the middle class. I wasn't raised in a city so colour me ignorant on this.

 

[TheKingEast]

I don't have evidence but I agree largely with theKingEast.
Even if the market as a whole falls, SFH's will maintain their value quite well. Just more demand.
I think some people would move back from the burbs if they could afford it. Others would move closer to the city within the city.
Condo dwellers who would want to trade up would possibly be able to do it.

As for condos, I agree that 2 bedrooms will become the defacto supply. I also think it will be larger 2 bedrooms in older better buildings because of the price differential to new and if faced with a family and the choice between a new glossy 700 sq.ft. or 1000 sq.ft. in an older better building I think the space/price will dictate the choice.

Exactly how I feel.

 

[TheKingEast]

Do a lot of families raise their kids in 2 bedroom condos? The idea of that seems a bit odd to me as there doesnt seem to many schools or room for kids to play downtown. I know a lot of low-income people raise their kids in apartments but I didn't know it was common for the middle class. I wasn't raised in a city so colour me ignorant on this.

I was raised in a condo for half of my childhood. So were a lot of my friends. It's very possible and happens a lot. Condos aren't just for single people. You can raise a child in a condo. Not these new shoeboxes. But you can deff do it in the bigger, older ones with actual doors and not sliding plastic doors that don't close. Those livable, bigger condos to me will go up in value or at least retain their value. The smaller ones with sliding doors and internal bedrooms with no windows will have a tougher time.

 

[Migos]

I was raised in a condo for half of my childhood. So were a lot of my friends. It's very possible and happens a lot. Condos aren't just for single people. You can raise a child in a condo. Not these new shoeboxes. But you can deff do it in the bigger, older ones with actual doors and not sliding plastic doors that don't close. Those livable, bigger condos to me will go up in value or at least retain their value. The smaller ones with sliding doors and internal bedrooms with no windows will have a tougher time.

Where did you goto school? I can't recall seeing schools downtown. Where did you go to play outside? One of those parks overrun with drunks and vagrants? Did you ride your bike with friends on Queen St.? Did your parents let you go out at dark? As somebody who grew up in the burbs it's hard to imagine.

As somebody who spends quite a bit of time downtown, I just don't see it as an ideal place to raise a kid. I also hardly ever see kids downtown which leads me to believe it isn't very common.

 

[PinkLucy]

Yeah, no one has ever successfully raised a child downtown.

There are kids in the condo I live in and all around. They go to school, some in walking distance, some take the bus, some ride. They play in parks with other kids. There aren't usually drunks and vagrants in our parks, unless there's an event going on and people from the burbs come and get wasted and hang out.

 

[KA1]

Do a lot of families raise their kids in 2 bedroom condos? The idea of that seems a bit odd to me as there doesnt seem to many schools or room for kids to play downtown. I know a lot of low-income people raise their kids in apartments but I didn't know it was common for the middle class. I wasn't raised in a city so colour me ignorant on this.

In the past, there have been links on this thread to articles in Toronto Life:

(1) about a couple with one child living and running their business from a 2 bedroom apartment in downtown area -- not core downtown though; bigger room was given to the child, living area was used as an office -- with computer, printer and what have you and reference to other couples also raising a child/ running business in apartments.

(2) In Liberty Village area, parents of young children getting together regularly in the party room of an apartment building; management of the building was persuaded to give party room without any charge.

Considering the current environment -- hellish of a daily commute, very high cost of SGH/TH in Toronto area -- this trend is going to become 'normal' if it is not already.

 

[NorthYorkEd]

Do a lot of families raise their kids in 2 bedroom condos? The idea of that seems a bit odd to me as there doesnt seem to many schools or room for kids to play downtown. I know a lot of low-income people raise their kids in apartments but I didn't know it was common for the middle class. I wasn't raised in a city so colour me ignorant on this.

I think you will see more and more people moving in this direction. The burbs were a great model for stable jobs, stable families, and the boomer-era drive to get as much as you can and go as big as you can.

Lifestyles and cultural attitudes are changing. Jobs, careers, and even families are much more transient than they were just a decade ago. The goals of the younger generations are different; they are more interested in being efficient with their time and space (less conspicuous consumption and excess) and close to the areas they work and play. Same with many boomers on the later end who are fatigued with all the maintenance headaches and costs of their large suburban homes and now just want to travel and be more social. Freedom and mobility will be more in demand than big lawns, massive resource-wasting properties, and endless commutes just to get "somewhere".

I agree with others that larger, more established condo units will be the new SFH, and this current stock of low-quality greed-driven shoe-boxes will turn out to be anchors around "investor" necks.

 

[Eug]

Yeah, no one has ever successfully raised a child downtown.

There are kids in the condo I live in and all around. They go to school, some in walking distance, some take the bus, some ride. They play in parks with other kids. There aren't usually drunks and vagrants in our parks, unless there's an event going on and people from the burbs come and get wasted and hang out.

Of course lots of people have successfully raised children downtown. But I can tell you it definitely isn't very popular for middle class and upper class. In my townhouse complex, basically everyone who had a kid moved out within a few years, even those with 2-bedroom units and a private patio.

This is certainly changing, as it's becoming easier to raise children downtown, but I'd say the preference for the majority is still not to do this. Furthermore, from my anecdotal-only observations, many do this not necessarily because they want to, but because they're forced to. If they cannot afford to move elsewhere, they make do, but if they could afford to move to a semi or detached within a reasonable commute, they would.

Yes, there are lots of people with children who prefer downtown even for child-rearing, but that "lots" still represents the minority.

---

BTW, my townhouse complex downtown did have some 3-bedroom units with 2-car private and attached parking, but most of them were occupied by empty nesters: Retirees who were downsizing, but to a downtown lifestyle. The young couples couldn't afford those, and those who could would just buy a house in Riverdale or somewhere like that instead.