Baby, we got a bubble!?

[Johnzz]

I’m always amused by the mainstream media’s biased interpretation of data and the people here who quote them as authorities. I, for one, would discount the opinion of a two bit journalist.

Here's a slightly more balanced and level headed analysis which, admittedly, would not sell as many newspapers:

http://www.movesmartly.com/2010/08/is-the-sky-falling-on-torontos-real-estate-market.html#more

Is the Sky Falling on Toronto’s Real Estate Market?

John Pasalis in Toronto Real Estate News

The Toronto Real Estate Board (TREB) recorded 6,564 sales in July 2010, a 34% drop over the same month last year. This figure is understandably startling, but is it significant?

After reading the coverage of TREB’s press release by the Toronto Star, Globe and Mail and National Post, I'm not sure the mainstream media is digging behind the numbers.

As I’ve mentioned in previous blog posts, when looking at percentage change in sales, you need to add in the supply side of the story to really understand the state of Toronto’s housing market.

TREB reported 10,825 new listings in July 2010, the lowest number for a July since 2002. This decline in new listings is noteworthy for a couple of reasons.

Despite the increased demand we saw in Toronto’s housing market during the second half of 2009, the number of new listings coming on the market continued to fall until December of that year. We then saw a rapid increase in the number of new listings coming on the market peaking in April when we saw a 59% increase in new listings (compared to the same month in the previous year). When listings surged, we started seeing fewer multiple offers as buyers enjoyed more choice. In some cases, houses that would have received multiple offers just two months earlier received none.

In speaking to clients, it appears that some sellers are responding to this changing landscape by delaying or postponing the sale of their homes. In just a few months we have gone from a market with a 59% increase in new listings to a 11% decline in new listings.

This rapid decline in new listings is a good news story for Toronto’s real estate market.

The following chart compares the % change in sales with the % change in new listings, or put another way, it compares the % change in demand with the % change in supply of homes.

The chart below shows the % change in average prices during the same period.

For most of 2007, the demand for homes was up and the supply of homes each month was either flat or negative. This imbalance between supply and demand drove prices up in 2007.

In 2008, we saw sales drop, but new listings increase each month which resulted in a decline in prices beginning in September of that year.

By mid 2009, sales increased significantly, but the number of new listings continued to fall which contributed to the rapid price appreciation we saw during the second half of 2009.

In each of the periods above, demand and supply were moving in opposite directions which contributed to the relatively rapid price appreciation and depreciation we experienced.

Had the volume of new listings last month continued to rise as demand declined, I would be inclined to think that we are moving closer to a period of declining prices. But the fact that the declining demand for houses is being matched by a decline in supply suggests to me that we are moving to a more balanced market with moderate price appreciation.

John Pasalis is the Broker Owner of Realosophy Realty Inc in Toronto.

 

[Condo George]

^ Some one buy John a drink!
Now lets not trash it because John is a Broker, try and have an open mind

Seperate note........ Unemployment hits 8% again in July, Carney might be reducing if we get a negative GDP, you heard it here first

 

[daveto]

But the fact that the declining demand for houses is being matched by a decline in supply suggests to me that we are moving to a more balanced market with moderate price appreciation.

John Pasalis is the Broker Owner of Realosophy Realty Inc in Toronto.

Not true.

July 2010 sales declined by 34% compared to July 2009, whereas July 2010 new listings declined by 11% compared to July 2009.

 

[interested]

I agree the decline in listings is reassuring. The question still remains whether more listings will come on in spring or will there be more sales and a pickup.

I appreciate John's analysis but as dave in to points out, the reality is that listings declined less than sales declined. As well, this refers just to new listings and the other issue is "active listings" and as eluded to in the article, a number of owners have deferred putting their homes on the market.

The question remains how many of these put back their homes in the hope of getting in with the slight uptick when the seasonal Sept-Oct bump up occurs.

"In each of the periods above, demand and supply were moving in opposite directions which contributed to the relatively rapid price appreciation and depreciation we experienced."

"Had the volume of new listings last month continued to rise as demand declined, I would be inclined to think that we are moving closer to a period of declining prices. But the fact that the declining demand for houses is being matched by a decline in supply suggests to me that we are moving to a more balanced market with moderate price appreciation."


I think these 2 quotes are interesting. I think the conclusion is however somewhat self serving. My conclusions from John's data would not be the same as his.

Even if declining demand was being matched by a corresponding decline in supply, then a more balanced market should lead to stable prices (or inflation based increases at best). I am not sure what moderate price appreciation is but suggests more than the current inflation rate. And as pointed out, new listings declined less than new sales and further, I am sure if one looked at the total listings, the numbers would be worse.

I appreciate the attempt to add objectivity to the discussion but I believe we need to look at total listings which far exceed sales and this number with slower declining new listings will only be getting worse going forward unless the new listings + current inventories decline faster than the sales declines going forward. Perhaps John or someone else could analyze these numbers since I believe we eluded to it above in previous posts and showed a worsening picture, not a move to a more balance market with moderate price appreciation.

One last issue, while percentage is interesting, it is absolute numbers that are important. We really need to be comparing total number of sales to total inventory (in absolute numbers) and that will give us an indication of real time to sell on average and should predict better in which direction the market is going.

 

[ponyboy]

It is hard to make sense of all of these very recent market metrics, but the longer term metrics seem to show we are close to peak limits (increasing debt ratios, historically low rates, worsening economy).

Interesting that with any other consumer product (e.g. cars, computers, etc), to assess value we would direct our analysis to the costs of the components, labour, distribution, markup, and competition among vendors, but with houses we throw most of that out the window, because of the (false) assumption that land is completely different as an enabler of housing, and the emotionally entangling of house and home in peoples minds. This demonstrates the market and political power of the housing industry, and strangle hold it has on so many. Basically, people are manipulated by much more sophisticated people that know exactly how to play on their desires, fears and insecurities. Most of housing is consumption rather than investment. Builders/developers have a lot more land available to them for highrises than often perceived, and they can fairly accurately chart out the relative costs of building much like a consumer electronics company. As consumers, we have very little information and it is no accident. For it being such an important industry, why are there so few publicly traded developers? Almost any other sector has a ton of publicly traded companies. The balance sheet of a publicly traded high-rise developer would give us much better metrics of how much speculation is in the market these days. It also doesn't help that the government essentially subsidies mortgages rates by coddling the lenders.

I believe that subjectivity and emotion clouds most views of real estate, even if we are trying to be "objective".

people who make their money off real estate valuations and transactions, whether directly or indirectly, cannot be trusted to do a fair analysis intended for public consumption because of the conflict of interest. Their livelihood is so dependent on the market that they will come up with many ways of spinning data or selectively reporting results.

Many/most homeowners and renters are also steered by their relative possibility of gaining or losing from market changes.

 

[interested]

Not true.

July 2010 sales declined by 34% compared to July 2009, whereas July 2010 new listings declined by 11% compared to July 2009.

Articles todayin both Globe and Mail and National Post and Toronto Star:

Talking about the new norm for real estate agents, mortgage brokers and consumers. That things are not going to be as they have in the past decade.

As well, economists divided on whether this will be a slight decrease or a downright crash of the Canadian market. Some realtors talking about a increases in line with inflation. The interesting thing is no one is talking about a moderate or significant increase.

I realize just as realtors want to talk up the market newspapers want to sell papers so they go for the extreme positions up or down. However, it is now clearly shifting with daily articles warning of at least some doom if not downright gloom.

http://www.theglobeandmail.com/repo...ky-days-in-the-housing-market/article1664986/

http://www.yourhome.ca/homes/reales...sting-home-market-shows-more-signs-of-cooling

http://www.nationalpost.com/After+l...umers+should+reality+check/3371497/story.html

 

[cdr108]

http://www.nationalpost.com/After+l...umers+should+reality+check/3371497/story.html

unfortunately, some views by the property owners are also blindly shared by many; and an interesting quote from a long-time realtor and Chief Executive of one of the main RE firms, which confirms what many here have stated regarding the historical appreciation of RE:

After one of the longest bull runs in Canada's housing history, everyone from real estate agents and mortgage brokers to consumers should get set for a reality check
Garry Marr, Financial Post;
With Files From Paul Vieira · Saturday, Aug. 7, 2010


Erica and Jeff Manger never thought the price of their house could drop.

The Alberta couple bought a condominium in the Rockies resort town of Canmore three years ago and when they decided to move in 2008 to Sylvan Lake in Alberta, where they could afford a detached home, they kept the condo as an investment.

"It never occurred to us that we wouldn't be able to sell for what we paid," says Ms. Manger. "People were making $100,000 [on paper] a year on their condos."

Now they'd be lucky to get the $315,000 they paid for their condo, even though it may have fetched $345,000 in 2008 when they were thinking about selling it to help pay for their new home. Instead, they're getting $1,100 a month in rent for an investment that costs them $1,800 a month to carry and isn't going up in value.

It gets worse. They have to sell the house in Sylvan Lake because Jeff, who is a helicopter pilot, is looking for a better location for work. They paid $375,000 for the house and fixed it up. Not even counting Jeff's labour, the couple spent another $30,000 on supplies.

"We tried to sell it and put it up for $409,000. We lowered it to $385,000 when we hired a realtor, but that didn't work," says Ms. Manger.

"We lowered it again and now we are down to $374,900," she says about the home that has now been on the market for two months. "We've lost all of our down payment, which was almost $30,000."

Their tale is one not often heard over the past decade, the longest bull run in Canadian housing history. People have been competing wildly for homes and double-digit annual price increases have been the norm. The market corrected slightly in 2008, but the correction was short-lived. Average prices in Canada dropped 10.2% in the first quarter of 2009 from the previous year, but rebounded dramatically. By the fourth quarter of last year, prices had jumped 19.1% from a year earlier.

But the market appears to be slowing again. Last quarter, prices were up just 5.2% from a year ago and July sales dropped as much as 40% from last year in some major markets. Even if there is no U.S.-style collapse, everybody from the consumer to the mortgage broker to the real agent may have to accept a new real estate reality: For the first time in a decade, housing might become boring, with flat sales and price increases just ahead of inflation.

"I was totally unprepared for this. People warned [us] ... but real estate has been considered such a safe investment," says Ms. Manger.

John Andrew, director of the executive seminars on corporate and investment real estate at Queen's University in Kingston, understands why people have been accustomed to a booming market. "It is all they've ever known," he says. "There are a lot of people who, for their whole adult life, there has been the perception that residential real estate does nothing but go up."

Don Lawby, chief executive of Century 21 Canada, who has been in the business since 1974, says no other time beats this past decade for housing. "We've had up and down, but this has been very good."

But like many, he's forecasting a more balanced market and that means people's mind-sets will have to change. They might have to wait a little longer for a sale, or price their homes a little lower.

"In the 1990s, it wasn't abnormal to see a home sit on the market 30, 45, 60 days," says Mr. Lawby. "People have more of an opportunity to look now. Houses that are priced right will get an offer and won't sit. But if you have 25 homes sitting on the market at $400,000, people will look around because they know they are not all going to sell overnight."

Sellers may have to get used to the fact price increases will go back to the historical norm -- a few steps ahead of inflation. "You'll get cost of living and a bit," says Mr. Lawby.

What to expect next from the housing market has become a major guessing game among economists, consumers and those in the real estate community. There is little doubt that the spring market this year got an extra push from the one-time impact of tighter mortgage rules and the new harmonized sales tax in British Columbia and Ontario, which pushed people into buying.

"What is going to be the new norm is the $64,000 question and it's still a very real debate," says Douglas Porter, deputy chief economist with the Bank of Montreal. "Did the market wildly overshoot or was it really just responding to the steep decline in interest rates?"

Mr. Porter doesn't see housing continuing at the same pace. "It's tough to see big further gains on top of what we've already gone through," he says. "I do think people have to get used to a more subdued reality. There is a feast-or-famine reality to the Canadian housing market and it's been mostly feast for the last 10 years."

Traditionally, the real estate industry sold the safety and stability of housing compared with investing in the stock market. But over the past decade, the story has been capital appreciation. Statistics from the Canadian Real Estate Association (CREA) say the average house price has climbed 110% over the past 10 years. During the same period, the S&P/TSX composite index had a total return of about 40%.

Toronto mortgage broker Sandra Epstein has been in the industry since 2003, and sees a much tougher market ahead. "I'm not seeing as many purchasers as I was, and there are fewer deals around," she says. "The competition on the mortgage side has intensified."

During this last cycle the ranks of brokers and agents swelled enormously. There are about 18,000 to 20,000 mortgage brokers in Canada, including agents called sub-brokers in British Columbia and associates in Alberta, says Jim Murphy, chief executive of Canadian Association of Accredited Mortgage Professionals. Although it is hard to compare the numbers with a decade ago, since many provinces did not have the licensing requirements, Mr. Murphy estimates the ranks have more than doubled in 10 years.

The number of real estate agents has also climbed -- CREA says there are now 100,000 realtors in Canada compared with 63,950 a decade ago. But the sector is starting to feel the pinch.

In July, employment fell by 30,000 in finance, insurance, real estate and leasing -- back to July 2009 level. Avery Shenfeld, chief economist at CIBC World Markets, says the drop could be linked to the slowing in the real estate market.

"I would not want to be a broker starting out in the market today," says Ms. Epstein. "When I started in 2003, you had to hustle to get deals. Going forward, you have to be an established broker with a data base. It's going to be more challenging for all of us."

 

[interested]

cdr: Even Lawby is still too optimistic: "you will get cost of living and a bit". This after 10 years of excessive growth. Cannot acknowledge that a loss can/will occur. Remember, for him to say a loss would probably result in a "loss" of his job. At least we have to congratulate him for not saying "rahrah keep buying as the sky is the limit".

I thought it was very interesting that you saw a home sell less than 2007 purchase price in the high end market. I don't know the circumstance but this finally mean we won't read in the sold section of every paper houses going for "over ask" half the time. Preselected skewed market data by those who have vested interests and happily published by the papers who then take their advertising dollars. Even the papers can't deny what is happening.

I think the ral interesting question is investor psychology. I think it will stop almost dead in its tracks and I forsee, especially in the new condo market, a significant ($100/sq. ft) decline in the next year in the downtown core. With resale at $369/sq. ft. and new well into the $500's or $600's, with no reasonable expectation of growth (or even allowing 2%/year of inflation), this gap has got to narrow.

I realize everyone wants new and pays a premium for it, but add HST now and one must believe prices will drop or builders will have to swallow the difference.

" Sellers may have to get used to the fact price increases will go back to the historical norm -- a few steps ahead of inflation. "You'll get cost of living and a bit," says Mr. Lawby.

How about inflation for the past 10 years was 2-3% so allowing 20-30% from 2000 prices + a few steps ahead of inflation (say another 20%), we now give back a good part of the increase or stay at the same levels for 10 years to allow a catchup. I am not saying this will happen as drastic and as long as 10 years but why are the figures only applied to increases and not looked at as possible for decreases. Answer: not the message the real estate industry will want to put out there.

 

[cdr108]

interested, i agree his forecast of inflation may be optimistic ... it's just refreshing to hear from a Chief Executive from a RE firm that the historical norm - a few steps ahead of inflation. "You'll get cost of living and a bit," says Mr. Lawby.

many have only experienced RE appreciation as that is all they've seen in the past 10-15 years as stated by John Andrew, director of the executive seminars on corporate and investment real estate at Queen's University in Kingston, understands why people have been accustomed to a booming market. "It is all they've ever known," he says. "There are a lot of people who, for their whole adult life, there has been the perception that residential real estate does nothing but go up."

during the past decade i have heard from many who leveraged their purchases and bought many units based on the paper appreciation of other properties, boasting how they've made millions. i just hope they don't get caught being underwater with negative cashflow.


what i find intriguing about this whole discussion is that anyone who calls/sees declining sales/values is labeled a 'doom and gloomer', as i find a 25-30% decline over 5 years a correction.
while when RE values were climbing 10% annually was called 'normal' by many ...

How about inflation for the past 10 years was 2-3% so allowing 20-30% from 2000 prices + a few steps ahead of inflation (say another 20%), we now give back a good part of the increase or stay at the same levels for 10 years to allow a catchup. I am not saying this will happen as drastic and as long as 10 years but why are the figures only applied to increases and not looked at as possible for decreases. Answer: not the message the real estate industry will want to put out there.

i have an old price list from Radio City when they first came onto the market in 2000.
i use it as reference b/c it's a modern design by aA in the d/t core built by Context.
the pre-construction price was ~$250 PSF not including parking or locker.
so if prices increased at inflation+ over 10 years, that should put it @ $375 PSF.
on MLS they are currently asking ~$500 PSF.

 

[simuls]

I really like John Pasalis and welcome his comments and I would agree entirely that the drop in listings is a good thing. However, and this is the first time I've seen this from him, his conclusion is dubious at best. This focus on new listings is a bit of a red herring and what really matters, as Interested points out is total listings and the sales to list ratio. In a matter of 4 months it has gone from 1:1.4 or a very definite sellers market, to 1:3.3 or a more balanced market. However, with total inventory still growing at a much faster pace than sales, I expect this to drop to 1:4 and possibly worse. Even if the market rebounds this fall, which I doubt, there will be a lot of inventory to deal with.

To some extent however, my concern is not with the RE market in general, as I have stated before. My primary concern is with the condo market in downtown Toronto and I think that it will substantially underperform the rest of the RE market - especially houses in the Toronto core. Sure, some people won't put their condos on the market, but again, that wasn't one of my primary reasons for calling for this drop. My primary reason was the huge amount of inventory that is coming on the market, regardless of whether we want it to or not. A conservative estimate pegs 2007 condo sales at 50% investor owned. With the 20% minimum, stagnant rents, etc., many of these will simply be dumped because even with a declining market, there is still a lot of money to be made on these investments considering their purchase price was probably 30% less than today's asking price. Maybe they won't make $120 000 and will have to settle for $80 000 - but that's still a big incentive to sell - especially if they're smart and want to be flush in cash to take advantage of the deals that will eventually come down the pipe. Plus, as I've stated before there are lots of people like me (and my girlfriend) who will, in fact vacate 2 condos to move into one. That'll increase the rent supply and further depress prices.

I don't know if you George, or anybody else has access to these numbers, but it would be very interesting to see inventory and sales numbers that are dwelling and geographic specific (I know TREB has the sales info, so I assume it would also have the listing numbers). I wonder what has happened to condo inventory vs. overall housing inventory and condo resales vs. overall resales. That would give us a much clearer picture as well.

One final thought. With so many people trying to avoid a realtor's fee, and although it's still a relatively small portion of the market, there are lots of listing that TREB doesn't even count - especially in condos. Take a look at craigslist and Kijiji and you'll see what I mean.

 

[interested]

CDR,
I guess I am old and I remember back to 1989 when you could not give away a home/condo. It got worse 1990 to 1992-1993. Then it more or less stabilized at those low levels and stuck until 1996 when it started back up. Took to about 2002 to recover back to 1989 price.

I bought my first home in 1982 (interest rates where just coming down from 20%). I paid in 1982 essentially what the person paid in 1977. I paid about 15% more but the person had bought appliances, finished the basement and left the basement furniture + the drapes etc. (The house was new when he bought and he did the landscaping. ) The point is: No price appreciation at all even given much higher inflation over those 5 years.

This is why I am so fascinated by all those who think it must go up (even by the cost of inflation+ some small amount). I know from experience this is simply not the case. Perhaps over decades yes, but 5-10 year periods not necessarily.

Simuls: regarding downtown: The millionaires you speak of if they are very levered (sitting on say 10 properties with 10% down and have been using the money to buy more may well be in trouble. ) the smart ones will sell some, increase their equity. In the past, the drop in price and the inability to sell leads people who don't want to be landlords into being landlords as they must make the mortgage payment. they in turn as weaker individuals lower rents which impacts everyone. This is what happened from 1989 to 1994.

those who have bought in the past 1 year at very high prices hoping for escalation will have the worst problem as not only will there be alot of competition for sale but also for rent and their costs will be higher than those who bought 2-3 years ago with home they will be competing.

 

[Condo George]

http://www.torontosun.com/newhomesandcondos/2010/08/06/14946611.html

Cheers

 

[Shtopor]

RE is tanking(in all major canadian cities, even those which didn't implement HST,like Calgary), it is like stock trading in SLOOOOOW mow, prices will fall once number of shares(houses) for sale is more then buyers , writing was on the wall, for those who had enough time and brains to pick up the pieces, hell,you didn't even need brains to see that, it was staring right in your face from USA since 2006-7. In Canada the snowball is on the top of the hill and it is slowly moving downwards,
give it time and it will pick up speed and size on its way down. Prices will overshoot averages (adjusted for inflation) on the way down. Interested, I admire how delicate you are in explaining to deaf (RE inestors, yes, lol, they still consider it good investment - land (TRUE) and depreciating house(FALSE)) why and how it is that chances of RE going down are just too many to ignore. Fact is, those who own RE will be looking at past years and waiting for prices to rebound, month by month passing and going deeper and deeper into red, they are typicall bagholders. I am not delicate, Condo George, take a pan and write in your note book - "If I don't sell now I will be a bagholder" . In trading it is called stoplosses, trader MUST !!! sell stock after it reached certain point on its way down. That point must be set at a time of stock purchase.Investor in RE ( at least if he considers himself as such), MUST sell his assets once it has droped to certain point.Unfortunately today's 'RE investors" ( you've seen a lot of them on TV on' property virgins' and other house porn,don't have a plan B, which is what to do when/if RE tanks. Good luck to all, fall will be telling.

 

[Condo George]

Heard the bagholder line before an opinion given to me while having coffee by a very weathly friend in Yorkville in Dec 2008, in the depths of the global credit crisis, chatter like we are next .....sell now or lose it all etc etc etc, oh my I admit it scared me a bit to watch world real estate markets tank, but I knew we would come out of it and Canada wont follow the U.S. lead. If we go down, so be it, I wont be selling anything I am guessing it will be short lived, our fundamentals are strong. I am not a market timer as the stock players say, in for the long term

 

[interested]

http://www.torontosun.com/newhomesandcondos/2010/08/06/14946611.html

Cheers

the opposite view but being put forth by real estate agents/brokers and developers who have a vested interest to paint in the best light.
I simply do not believe these conclusions.
My sources tell me that new developments are almost dead with very little activity. I think the quote is annualizing since the beginning of the year and this is simply not the case in the past 2 months, yhough it was until May/June, despite what broker realtor developer BJL is quoted as saying.
I have met BJL and he is a very knowledgeable realtor but has been positive and views that Toronto will only continue to get better and more expensive. I simply do not believe that that is the case and that while a good investment, there are times such as present where it will not be for at least a few years.

"a very weathly friend in Yorkville in Dec 2008, in the depths of the global credit crisis, chatter like we are next .....sell now or lose it all etc etc etc". George, just because your wealthy friend applied logic to the situation and concluded the risk was very great, and this did not pan out in 2008-2009, does not mean he was wrong.
I can tell you that I owned a condo in Florida which we bought in1974. By 1981, price was 250% higher. Then prices went down. Took to 2000 before prices finally exceeded 1981 price though it fluctuated anywhere from the 1981 price to 20% less over those 20 years. In 2001 price increased. I sold in 2003 because I thought it made no sense because the price doubled in 2 years (now 5x the original price of 1974). From 2003 to 2006 it more than doubled from 2003 price. I was sitting there saying "I blew it". Today in 2010 it worth less than I sold it for in 2003. I do not point this out to say how smart I am. Quite the contrary. I am just saying just because irrationality took over in 2003 did not mean it made sense as it kept going up to 2006 beyond any fundamentals. Ultimately, rationality, events etc. caught up with the market and reality set back in.
I would argue that your wealthy friend in Yorkville was right, that in fact there is no good reason for the full and total recovery we had and as I have said before, we will at the very minimum retest the bottom of 2009 (or 10-15% declines). To quote Mr. Greenspan. "I believe the recovery was irrational exuberance". This all said, I do not believe that you will lose it all and I have learned that I am simply not smart enough to time the market. So most "rational investors" decide on an asset mix, do not go to town totally in one asset class, and allow for a reasonable amount of loss in their planning. Not necessarily exactly the idea of "stop loss" as pointed out by shtopor but similar.