Baby, we got a bubble!?

[ElDee]

I was just pondering about the bubble and trying to understand what it means in the specific context of different types of real estate or buyer classes.

When we talk about the real estate bubbles, crashes and unaffordability, are we as Canadians and Torontonians talking about a broad bubble or potential crash across all price brackets of the real estate market and across all types of buyers?

Let's take a place like Forest Hill for example. Who wouldn't want to own a home there? Do people talk about prices in forest hill being bubbly in nature? Would a broad real estate crash or some sort of government intervention somehow create an environment where the middle class would be able to afford property there?

Or are properties in these types of areas and this class of buyer mostly irrelevant in discussions about bubbles and unaffordability?

For another example in my thought experiment, I recently dropped into the Aquabella show room just to take a peek. As much as I'm personally priced out of the terrace and water facing units, I played along with the sales folks just to see what sort of offerings were available and for how much.

With starting prices starting at 1.7M and up for decently sized 2bd units, I asked myself - what's the general profile of the people who buy these units, if a profile could be applied? Do these buyers worry about bubbles and crashes? is it all relative?

Does a crash or adjustment put these beautiful family sized units within reach of the middle class family? Should it?

How about another angle:

If we imagine a sharp adjustment happening in the market and focus on East York where prices have been steadily creeping up. Would this adjustment suddenly allow many young middle income families to then move in and live the life of their dreams? Or would there still be enough competition in the market to keep prices high and keep the majority of the population from the idyllic Canadian real estate dream?

Does a market adjustment affect an area's "desirability" at all? My opinion is no. And how about those aquabella buyers (for example)? Would they not see a great opportunity to come in with their already existing buying power and apply upward pressure on prices in the downward adjusted East York and this nullifying any potential affordability that an adjustment would allow to the "average buyer"?

Lastly, what is this "average buyer" that is spoken of in the media? Have we ever properly defined this?

Hmm.

 

[Memph]

The average buyer would be a household earning about $50-150k. Obviously certain neighbourhoods, homes, buildings, etc will always be geared towards the upper end of the market. Which parts of the market would be most affected by a crash depends on the cause of the crash.

Is it a broader crash in the global financial industry where governments are no longer willing to bail them out? In that case, I'd expect the high end of the market to be most affected, as well as the urban core as that's the part of the GTA most tied to the financial industry. Places like SE Oakville would be affected too though. That won't make Forest Hill and Lawrence Park as affordable as Erin Mills, but maybe instead of being 3-5x more expensive it will be 2x more expensive. I'd still expect Forest Hill would still be home to whatever's left of the upper class after the financial crash.

If the trigger of the crash is something else like shifts in immigration, foreign buyers, changes in trade... maybe other markets would be more impacted. Every part of the market would get cheaper, but for some parts of the market the drop will be bigger than others. And the entirety of the potential home buyers would be affected, though some more than others. If you're middle class and your finances have taken a hit, you won't move to the expensive area just because it's not as expensive as it used to be, you'll stay where you are or move to another middle class area that is also now less expensive.

 

[michaelnurse]

I don't know if we have a bubble or not, but we did an analysis that shows that you're much more likely to pay above asking for a home today than you were even as recently as 2014. Part of this is driven by the real estate marketing tactic of using artificially low prices to build interest in a property. Part of it is driven by the imbalance of supply and demand in the Toronto market.

Anyway, here's the analysis for anyone interested in taking a look:

http://www.wishpad.ca/?page=featured&title=list-prices-market-reality

 

[blixtex]

It's mainly a function of credit availability. With credit going down i.e. stress test, risk sharing, rates going up, it can definitely limit the rate of increase or slow transactions down (but those that sold, could be the higher priced homes artificially skewing what houses across the board will now go for). I've seen it in some areas where bungalows in the 650k-700k range were being snapped up, but now sitting around. Some even lowering their listing price then they would have 2 months ago.

But since employment in Toronto and GTA is good and stable, it won't prick the 'bubble' anytime soon, despite the credit trends.

 

[algotr8der]

It is a bubble and it will burst like every bubble in history.

Why is it a bubble? Every asset is valued by discounted cash flows of the income the asset can generate. No exceptions. No emotional nonsense arguments about well a house is a home that one will live in for 30+ years and blah blah. Same arguments have been made in every housing boom across the globe in all of history. Prices are a reflection of historically cheap credit.

Every credit cycle in mans history has resulted in inflated asset values. Credit cycles are just that - cycles. Late in every cycle, people are extended - debt to incomes are high or at record levels (which they currently are), lending standards are subpar and there is likely a good amount of irrational behavior.

None of this is news. Can prices go higher? Sure, all assets can remain over-valued for extended periods of time. Eventually, they revert back to the mean and when they do that they typically overshoot.

Just look how quickly interest rates moved in the past 2 weeks. When rates move they move fast. Trillions in bond fund values have been decimated as a result.

And no "we aren't special" that its going to be very different this time.

 

[ILuvTO]

It is a bubble and it will burst like every bubble in history.

Why is it a bubble? Every asset is valued by discounted cash flows of the income the asset can generate. No exceptions. No emotional nonsense arguments about well a house is a home that one will live in for 30+ years and blah blah. Same arguments have been made in every housing boom across the globe in all of history. Prices are a reflection of historically cheap credit.

Every credit cycle in mans history has resulted in inflated asset values. Credit cycles are just that - cycles. Late in every cycle, people are extended - debt to incomes are high or at record levels (which they currently are), lending standards are subpar and there is likely a good amount of irrational behavior.

None of this is news. Can prices go higher? Sure, all assets can remain over-valued for extended periods of time. Eventually, they revert back to the mean and when they do that they typically overshoot.

Just look how quickly interest rates moved in the past 2 weeks. When rates move they move fast. Trillions in bond fund values have been decimated as a result.

And no "we aren't special" that its going to be very different this time.

I don't disagree with you. Something has to give eventually. With that said, we have been saying this for years now. Excluding the blip in '08, prices have essentially been on the upswing since 2001. This RE bull market is unprecedented in its length. And it seems as though there is no end in sight. Immigration remains strong as does demand from foreign buyers who view Toronto property as a bargain compared to other major cities.

 

[James]

As usual, here are some select key TREB stats for November 2016. From one end of the spectrum (detached single family) to the other (condo units):

http://www.trebhome.com/market_news/market_watch/

Detached Houses
City of Toronto - average $1,345,962 / median $1,020,000
Toronto West - average $1,004,225 / median $874,000
Toronto Central - average $2,145,505 / median $1,836,000
Toronto East - average $886,680 / median $812,250

Condominium Apartments
City of Toronto - average $471,256 / median $408,000
Toronto West - average $370,448 / median $336,900
Toronto Central - average $526,116 / median $445,000
Toronto East - average $331,900 / median $295,050

 

[shal1n]

Well, the top is in. Its timbeerrrrrr from here.

US long rates are surging causing yuan rates to surge (given peg). Cost of loans getting more and more expensive for the Chinese.

China will devalue given the upward currency pressure from US dollar peg.

Timberrrrrrrr

 

[Migos]

Hilarious: http://www.cbc.ca/news/canada/british-columbia/interest-free-home-loans-bc-1.3897832

The level of governmental influence that the real estate industry has in B.C. is sickening. Houses are unaffordable so the answer is to have taxpayers lend overleveraged home buyers even more?

Meanwhile: http://www.cbc.ca/news/business/bank-of-canada-financial-system-review-poloz-housing-1.3897875

Nearly a third of recent Canadian homebuyers with so-called high-ratio mortgages wouldn't qualify for their loans under new rules recently implemented by the federal government.

Canada's economy is currently circling the drain, waiting for the shock to set off the chain of dominos...

 

[shal1n]

Well it goes back to what algotr8der said in a previous post. The government has a vested interest in keeping a housing bubble going.

Higher prices = higher property taxes, land transfer taxes etc

The Real Estate Agent community also has a vested interest in an inflated housing market so they are lobbying hard at every level of government for favorable policies.

Its a no brainer. Unfortunately, the average person gets screwed while the musical chairs game goes on. The smart thing to do is rent when asset prices are inflated (rents/incomes is a good measure). Then buy once the market mean reverts as it will and has in every instance.

 

[ponyboy]

The smart thing to do is rent when asset prices are inflated (rents/incomes is a good measure). Then buy once the market mean reverts as it will and has in every instance.

I agree, but rent/income and price/income ratios have been out of whack for a long time now by historical standards. So much depends on cheap money that I see no will to raise rates. Fortunately, the bond market doesn't care about these political priorities, and will bring higher rates to start the correction.

The mainstream media's coverage of housing is predictably disappointing. I find this blog quite good, and this recent entry about Vancouver revealing (the comments are also very good) --

http://wolfstreet.com/2016/12/02/vancouver-house-price-bubble-collapses-sales-crash-for-sale-signs/

 

[rbt]

Higher prices = higher property taxes

What makes you think that? It's not at all how it works in Ontario.

The city starts with a budget number and divides that by real-estate values. Property value determines what %age of the total budget you pay relative to your neighbour or the guy across town but it doesn't change what the municipalities actually receive for revenue.

 

[shal1n]

well - all my friends who own houses in Toronto have been reassessed at substantially higher valuations this past year. I'm not sure how frequently they do these re-assessments but in any case my friends were shocked at the sticker price on the higher property tax.

I'm confused then. Then what is the point of doing a re-assessment if property tax is not determined by valuations?

 

[slicecom]

I'm confused then. Then what is the point of doing a re-assessment if property tax is not determined by valuations?

Property tax is determined by the mill rate that city council decides. Property assessments determine your "share" of the tax burden. So if your house doubled in value, but everyone else's tripled, your taxes would go way down, as long as the mill rate wasn't significantly higher. Historically the mill rate decreases every year because values increase.

Well, the top is in. Its timbeerrrrrr from here.

US long rates are surging causing yuan rates to surge (given peg). Cost of loans getting more and more expensive for the Chinese.

China will devalue given the upward currency pressure from US dollar peg.

Timberrrrrrrr

Reminds me of this post from almost 7 years ago... http://urbantoronto.ca/forum/threads/baby-we-got-a-bubble.10523/page-43#post-387472

 

[shal1n]

As the age old age adage says, all assets can stay over valued longer than anyone can stay solvent.

In the case of housing markets its even worse because government policies can distort valuations for years. The government considers housing a major engine of the economy and you have the housing ecosystem lobbying hard for favourable policies. The greater the distortions the more painful its going to be. People have very short financial memory. Nothing new here. Same occurs cycle after cycle in all of mans history.