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Baby, we got a bubble!?

What fundamentals are you talking about?

Population growth is irrelevant unless you discuss it in the context of housing supply. Demand can't be examined in a vacuum.

If housing can collapse in markets like Miami and California (bigger economy than Canada!), you are kidding yourself if you think Vancouver or Toronto are immune.

And here is where population growth in the context of housing supply is relevant in Toronto and Vancouver:

Montr%C3%A9alRadius20km.PNG

TorontoRadius20km.PNG

VancouverRadius20km.PNG

Taken from here: http://urbankchoze.blogspot.nl/2015/04/why-is-montreal-so-much-more-affordable.html?m=1

There is much less room for sprawl in Toronto and Vancouver than there is in Montreal. Much less land within that desirable 20km area is available for development, constraining supply and raising prices. Introduce increased population growth and therefore increased demand and you get your high prices.

Miami and California are massively sprawled regions. There is no shortage of land supply there so when the bubble popped, so did the housing prices. I don't think Toronto or Vancouver are headed in the same direction as Miami/California, or even other Canadian cities feeling this bubble (like Calgary just experienced).
 
I'd be interested to see the Toronto 20km radius map with the greenbelt overlaid. I suspect urban sprawl would be even more constricted.
 
These are measures of affordability, not value. Value is determined by Supply and Demand. How do the above charts consider supply?

Price-to-rent is not a measure of affordability. It is a measure of the value of an income-producing asset. Think of it as the yield on a dividend stock. The more rent a property can generate, the more it is worth.

Supply/demand determines price in the short term. However, it doesn't mean that the price is "correct", otherwise there would be no such thing as a bubble. Bubbles are caused when the price determined by supply/demand is disconnected from the fundamentals. A stock may trade at 1000x earnings for awhile, but eventually it will track down to a more reasonable level, either because earnings increase or price decreases. The same has held true for real estate, generally. Either rents will need to increase, or prices will need to drop.
 
And here is where population growth in the context of housing supply is relevant in Toronto and Vancouver:

Montr%C3%A9alRadius20km.PNG

TorontoRadius20km.PNG

VancouverRadius20km.PNG

Taken from here: http://urbankchoze.blogspot.nl/2015/04/why-is-montreal-so-much-more-affordable.html?m=1

There is much less room for sprawl in Toronto and Vancouver than there is in Montreal. Much less land within that desirable 20km area is available for development, constraining supply and raising prices. Introduce increased population growth and therefore increased demand and you get your high prices.

Miami and California are massively sprawled regions. There is no shortage of land supply there so when the bubble popped, so did the housing prices. I don't think Toronto or Vancouver are headed in the same direction as Miami/California, or even other Canadian cities feeling this bubble (like Calgary just experienced).

This is silly. There is an almost unlimited amount of land to build higher density housing in Toronto. We are nowhere close to being "full". We only just started building high-rise in the past decade or so in any significant amounts. We can build condos for the next 100 years downtown easily.

Also, the population of the City of Toronto has hardly increased in the past decade. It's mostly been growth in the GTHA where there is still plenty of subdivisions being developed.
 
This is silly. There is an almost unlimited amount of land to build higher density housing in Toronto. We are nowhere close to being "full". We only just started building high-rise in the past decade or so in any significant amounts. We can build condos for the next 100 years downtown easily.
Ah you see, but this is where zoning comes in, preserving the build form of lower density neighbourhoods closer to the core. Zoning prevents the real estate market from correcting itself by protecting lower density neighbourhoods from redevelopment and from densification into midrises and 'missing middle' housing types, thus straining supply.

This carries over other consequences as Vancouver and Toronto attempt to cover their housing demand with high-rise condos in locations where zoning permits them, thus making those extremely valuable locations with a high-cost build form. This by proxy increases the value of low-rise detached and semi-detached residential built-form surrounding them.

Not to mention the aforementioned Green Belt. There is compounding legislative and geographical among other reasons for why prices for detached houses are the way they are in Vancouver and Toronto. Housing prices aren't super high for some unsubstantiated mania-driven speculation, but for real reasons that will persist even if the nation-wide property bubble pops.
 
Ah you see, but this is where zoning comes in, preserving the build form of lower density neighbourhoods closer to the core. Zoning prevents the real estate market from correcting itself by protecting lower density neighbourhoods from redevelopment and from densification into midrises and 'missing middle' housing types, thus straining supply.

This carries over other consequences as Vancouver and Toronto attempt to cover their housing demand with high-rise condos in locations where zoning permits them, thus making those extremely valuable locations with a high-cost build form. This by proxy increases the value of low-rise detached and semi-detached residential built-form surrounding them.

Not to mention the aforementioned Green Belt. There is compounding legislative and geographical among other reasons for why prices for detached houses are the way they are in Vancouver and Toronto. Housing prices aren't super high for some unsubstantiated mania-driven speculation, but for real reasons that will persist even if the nation-wide property bubble pops.

By your logic, housing prices in Toronto and Vancouver can never go down. That type of thinking is exactly why I think there is a bubble.
 
Price-to-rent is not a measure of affordability. It is a measure of the value of an income-producing asset. Think of it as the yield on a dividend stock. The more rent a property can generate, the more it is worth.

Supply/demand determines price in the short term. However, it doesn't mean that the price is "correct", otherwise there would be no such thing as a bubble. Bubbles are caused when the price determined by supply/demand is disconnected from the fundamentals. A stock may trade at 1000x earnings for awhile, but eventually it will track down to a more reasonable level, either because earnings increase or price decreases. The same has held true for real estate, generally. Either rents will need to increase, or prices will need to drop.

I don't think yield of a stock is comparable considering that toronto rental increase has a yearly cap. On average less than 2% per year over the past 10 years. When it use to be around 5% in the 80s and 90s. Some years have been less than 1%, which is ridiculous, from a landlord's perspective of course.
http://www.ontariotenants.ca/research/rent-increase.phtml

We are also aware that population (demand) will only increase in the coming years and new construction starts of low rise (supply) will only decrease due to land constraints. If you take out condos (Apts), there is a decrease year/year. Also the low rise construction starts are merely in the hundreds in comparison to the thousands for condos. Essentially, you're cost per sq ft of land in Toronto will only increase. How densely populated you can make the land is a different story...
http://www.cmhc.ca/en/corp/nero/nere/2015/2015-04-10-0816b.cfm

I do agree, your comments have some merit in the high rise market, but the low rise market appears to be a different beast.

Only time will tell weather this is a bubble...
 
By your logic, housing prices in Toronto and Vancouver can never go down. That type of thinking is exactly why I think there is a bubble.
By your logic, the housing prices in Manhattan, Paris and Tokyo are bubbles as well.

Now I don't think you are wrong when you say that the supply/demand here is disconnected from the fundamentals and that the price is not necessarily "correct" in the long run. However, the things that are creating these high prices are things such as legislation (zoning and greenbelt) and geography, neither of which are going away anytime soon, nor in some cases (like the Green Belt) should we want them too.

If we lived in libertarian paradise, maybe we can call this a bubble. When these prices are protected by zoning, is it really a bubble or is it the norm?
 
By your logic, the housing prices in Manhattan, Paris and Tokyo are bubbles as well.

Now I don't think you are wrong when you say that the supply/demand here is disconnected from the fundamentals and that the price is not necessarily "correct" in the long run. However, the things that are creating these high prices are things such as legislation (zoning and greenbelt) and geography, neither of which are going away anytime soon, nor in some cases (like the Green Belt) should we want them too.

If we lived in libertarian paradise, maybe we can call this a bubble. When these prices are protected by zoning, is it really a bubble or is it the norm?

You're conveniently ignoring low interest rates, which is the only reason people can afford these high prices. That is something that is most definitely going to change in the long run.

The demographics of the city are in a significant state of flux. I think it's very short sighted to extrapolate future demand from the last ten years. It is very possibly that the younger population will leave the core in the future.
 
I don't think yield of a stock is comparable considering that toronto rental increase has a yearly cap. On average less than 2% per year over the past 10 years. When it use to be around 5% in the 80s and 90s. Some years have been less than 1%, which is ridiculous, from a landlord's perspective of course.
http://www.ontariotenants.ca/research/rent-increase.phtml

Rent control in Ontario doesn't apply to buildings built after 1991. Landlords can increase rents as much as the market will allow.

We are also aware that population (demand) will only increase in the coming years and new construction starts of low rise (supply) will only decrease due to land constraints. If you take out condos (Apts), there is a decrease year/year. Also the low rise construction starts are merely in the hundreds in comparison to the thousands for condos. Essentially, you're cost per sq ft of land in Toronto will only increase. How densely populated you can make the land is a different story...
http://www.cmhc.ca/en/corp/nero/nere/2015/2015-04-10-0816b.cfm

I do agree, your comments have some merit in the high rise market, but the low rise market appears to be a different beast.

Only time will tell weather this is a bubble...

The mix of housing is irrelevant. If there isn't low-rise supply, people will buy high-rise.

If you have statistics that show that population growth and/or household formation is outstripping household starts, I would be very interested in seeing that data. Otherwise, you're just speculating.
 
One week it's a bubble ready to burst, the next week everything's status quo. Pick your side this week.

http://www.thestar.com/business/2015/06/25/condo-boom-has-helped-stabilize-housing-market-cibc.html

Condo boom has helped stabilize housing market: CIBC

Canadian real estate market is not at any risk of a U.S.-style housing meltdown, new report says.

By: Susan Pigg Business Reporter,Published on Thu Jun 25 2015

The booming condo market has so far been a stabilizing, rather than a destabilizing, force in Canada’s housing landscape – an affordable safety valve for first-time buyers, renters and newcomers.

But demand appears to be moderating and the number of new units could soon outstrip demand by some 2,000 units a year, which could depress both condo values and rents and create “a wave of sales in the resale market that will directly compete with the upcoming influx of new units,” says a CIBC World Markets report.

Overall, however, the Canadian real estate market is not at any risk of a U.S.-style housing meltdown, say economists Benjamin Tal and Andrew Grantham in a paper released Thursday titled “The Many Faces of the Canadian Housing Market.”

“Unlike the situation stateside, there isn’t anywhere near the same degree of overbuilding in Canada relative to household formation. In fact, the ratio of housing starts to household formation is not far from its long-run average,” the paper notes.

Even where there has been some overbuilding – Ontario, Alberta and British Columbia – it’s been marginal and largely offset in their largest cities by immigration. Not only has immigration accounted for about three-quarters of Canada’s population growth recently, the report says, but more than half those newcomers, a higher proportion than in the past, have been in the prime home-buying years of 25 to 45.

While “the day of reckoning” will come for Canada’s housing market when interest rates start to rise, in fact it may not be as painful as widely assumed: Some 30 to 40 per cent of Canadian homeowners appear to have taken warnings around record-high household debt to heart and are now accelerating their mortgage payments to the tune of an estimated $11 billion more in principal than officially estimated, says CIBC.

It makes no sense to look at the Canadian housing market as a whole, given regional and local differences that are skewing the overall picture, such as weakening prices in Calgary in the face of slumping oil at the same time Vancouver and Toronto are on fire, the report notes.

“In fact, the annual rates of house price growth in Vancouver and Toronto have, if anything, accelerated since the start of the year.”

But there’s a lot going on in the market, still, to keep housing bears wringing their hands, it says. Among them are worrisome trends – such as the growth in alternative, higher-interest lending as more conventional financial institutions have tightened up mortgage qualifying rules under the direction of Ottawa in an attempt to cool the market, especially in Vancouver and Toronto.

“...The market as we see it increased transfer of risk from large financial institutions to alternative lenders. This is not a zero sum game – as the risk profile in the industry as a whole is on the rise.”

The good news is that alternative lending remains “an extremely small portion of total mortgage activity in Canada – probably smaller than perceived by many,” notes the report.

“That is not to suggest that the system is risk free. Increased regulations on major financial institutions (that make it harder for some buyers to qualify for mortgages) combined with even lower mortgage rates may work to widen those shadowy margins.”

The condo market will, as always, be the most interesting to watch in the coming years, notes the report, as investors and developers increasingly look to build rental apartments at the same time condos now under construction come on the market.

While the Canada Mortgage and Housing Corporation has estimated that just under 20 per cent of Toronto and Vancouver’s condos are owned by investors – fewer of them off-shore investors than many assume, says CIBC – the World Markets report estimates that some 70 per cent of preconstruction condos are now being bought up by investors.

“Capital appreciation and rent income are currently the main motivation for investment activity. And that’s where the vulnerability is. We estimate that roughly half of the stock of rental units in the cities belong to this category.

If interest rates rise, at the same time rents soften in the face of further increases in the supply of condos on the market, “we might see a wave of sales in the resale market” which could flood the market and push down condo prices.

More than a crash, or significant defaulting on mortgages as happened in the U.S., CIBC anticipates that any downturn in the housing market would “act as a major drag on overall economic activity” by dampening consumer confidence and boosting unemployment in construction and real-estate related businesses.
 
By your logic, housing prices in Toronto and Vancouver can never go down. That type of thinking is exactly why I think there is a bubble.

The economist Lord Adair Turner has a provocative take on central London / Manhatten, etc. real estate: that, in fact, those markets are different from RE in general as the properties are being bought by the 0.1% as stores of value, rather than places to live, and there is really no other 'investment' like it. Not certain whether I agree, but I see his position. So, the question becomes, does high end central Toronto / Vancouver RE deserve the same designation, and if so, will that keep all condos/houses in Toronto from falling in lockstep with rates rising? It might work for the $5M+ Forest Hill homes and Shangri-La penthouses, but I don't think it'll help the $400k condo from dropping to $300k.

Housing booms don't deflate on their own, though. They need to be popped by higher interest rates, and it doesn't look like that'll happen this year (again). Eric Lascelles (RBC Chief Economist) is even starting to inch towards a rate cut in Canada this year. So... keep on, keeping on.
 
I believe the Canadian housing market could realistically crash but does anyone actually expect housing prices and the condo boom in Toronto and Vancouver to crash? Slow in growth maybe, and eventually picking up again in a few years is more realistic.

There are geographical, legislative, demographic and trans-national investment factors that are present to explain the markets in Toronto and Vancouver. ...A house in Vancouver or Toronto's core are really that valuable given their contexts.

^ Agreed. Bubbles that occur where there is little to no fundamental economic support are the ones to watch out for. I believe the Toronto market may experience a pullback but not a catastrophic bust. I "worry" more for the Vancouver real estate market because I don't see a solid economic foundation that can support that market should a correction take place.

Ah, yes. It's "different here", or, "it's different this time". :)

Every bubble in history has had the same arguments made. It's only in hindsight that everyone says we should have seen it coming.
 
Ah, yes. It's "different here", or, "it's different this time". :)

Every bubble in history has had the same arguments made. It's only in hindsight that everyone says we should have seen it coming.

Not that I agree or disagree but it has been "different here" and "different this time" for a while.
 

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