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Baby, we got a bubble!?

there's also an accompanying article with the above ...

http://www.yourhome.ca/homes/realestate/article/853783--the-buyer-in-the-driver-s-seat#

The buyer: In the driver's seat
August 27, 2010
Tony Wong
BUSINESS REPORTER


Bianca and Mike Raso purchased a home in Vaughan, just north of the city of Toronto, about 12 years ago. Over the years they’ve steadily seen their net worth increase as the housing market sailed upward.

But after having two children, the couple found they had outgrown their 2,000-square-foot home. Last winter they started searching for a bigger house with a larger backyard.

“We started looking just when the market was really active, so I kind of freaked out a bit over the prices,†said Raso, who works in the payroll department for the city of Toronto.

The market continued a frenzied march over the winter and into the spring, where prices and sales started to accelerate.

Raso thought she would be priced out of the market.

“We weren’t looking for a mansion, just some more room for our children, but anything that seemed reasonable just seemed so far out of range,†said Raso.

But timing can be everything. After a heated first half of the year when sales in the Greater Toronto Area broke records, the second half is shaping up to be a bust.

Analysts say many sales were pulled forward in the first half of the year as buyers tried to avoid the HST and more onerous restrictions on mortgages.

Existing home sales are down by 29 per cent in the first two weeks of August compared with the same time last year, while new home sales are down 42 per cent in July.

“Ontario’s housing market continued to slow in July with activity now well below the long term historical trend,†said a report by economist David Hobden for Central 1 this week. “The main sales negative is higher mortgage rates and other less stimulative financing terms which will squeeze our the lowest equity buyers.â€

When Raso first entered the market last year, bidding wars were the norm for many properties. Not so in today’s market.

“You can really see there is a bit of a shift. Homes out there are sitting longer,†said Raso.

Realtor Steven Belitsky said buyers are also being much more picky, not just on price, but on conditions.

“They will ask for every little detail to be done after the home inspection report, it could be caulking a wall or replacing a showerhead, and the vendors are complying,†said Belitsky.

The TD Bank said this month that they expected to see a correction of about 10 per cent in average housing prices. Other analysts have said housing prices are as much as 25 per cent overvalued.

In the meantime, there seems to be a stand off between buyers and vendors. Vendors want yesterday’s prices. Buyers want to pay prices that reflect the new reality.

Transitional markets are tricky, say realtors, because not everyone is reading from the same page. Some vendors have already realized that they must lower pricing if their homes are going to move. Others are stubbornly holding on to what they feel their home is worth.

“Some people aren’t getting the message that prices are going lower,†says Raso. “But we can afford to wait.â€

The couple bid on a home in Vaughan last week. The vendor was asking $709,000, and they bid under $700,000. the vendor refused to come down in price. The home also needed another $100,000 in work.

“If they’re not willing to deal, then I’m not willing to look,†said John Lee, an optician who is looking for a home in Mississauga.

Lee said he called off his search for a home last year when prices started going up and he didn’t want to be involved in bidding wars.

“I think the sellers have had a pretty good run. It’s been frustrating for over the last few years, so I think it’s time for buyer’s to get some love.â€

It’s not hard to see why vendors are so spoiled. They’ve had a 14 year string of unbroken price increases since values started rising in 1996 when the average price of a home was $198,150. Today average prices are more than double that at $412,000 as many buyers have been priced out of the market.

“You’re still seeing some vendors out there holding on to what they think the value of their home is worth,†said Angie Foggia, a lawyer who is looking for an investment condominium property.

“But as a buyer my attitude has shifted toward expecting lower pricing, people are much more conservative with their money.â€

Foggia said she looked at one condominium in Yorkville last week listing for $499,000, but decided it was overpriced. She is also looking at pre-construction units, particularly in the trendy King West area.

Analysts have said the condo sector is the most vulnerable part of the housing market because of potential overbuilding. There are more than 35,000 new units under completion in the GTA, with the bulk of occupancies taking place this year and next, giving buyers far more choice.

But with time on her side, Foggia has decided to sit back and take her time as the market ratchets down before pulling the trigger.

In May, she managed to time the market perfectly by selling her two year old condo at Yonge and Eglinton during the peak of the market. At the time it fetched the highest selling price for that particular floor plan, selling in three days with multiple offers.

As a result, she is in the catbird seat: Sold high, and now buying low.

“I wasn’t intentionally trying to sell before the market went down, it just worked out that way for me,†said Foggia. “I’m fortunate that at this point it’s certainly a much better time to be a buyer.â€

---------

on a side note, i find the first part of the article quite disturbing.
a family of 4 lives in 2,000 SF and they find that too small !?!?!
 
The answer to this question about the 35000 units lies of course in how well capitalized the "investors are" and how many will not qualify, were flippers/speculators to begin with. If the latter group is a small number, and the others qualify for mortgages, interest rates stay low because of a bad economy, even if rents drop a bit people can carry. They make no money or little money or even possibly lose $100 to 200/month but for most reasonably capitalized investors, this would not represent a major problem and if one can't afford to lose $2000/year, one has to ask what one is doing making a $300000+investment if one is running that tight.

This is what I refer to as the "stupid money" in the market. Unfortunately for them, they lose money or the property but in the process create an uncertain market both for rent and resale going forward which does no one good.

It must be said that I have little sympathy for those who chose to speculate and buy multiple units being unable to carry them in the event of the slightest adversity. This was never investing. It was gambling and much like Vegas, eventually the "house" wins, rarely the gambler.
 
There is also an article talking about housing in the US and the thrust of it is that housing will no longer be viewed as an investment but as a place to live for a whole new generation. I am not saying that I totally agree with that but certainly the "commodity aspect" of investment real estate will descend until prices are more sustainable or make financial sense again. Along with the removal of housing from the commodity arena or at least of it as a decreased player in that arena, the increases in price we have seen the past few years due to it being a commodity which I believe are unsustainable should be wrung out and housing will resume its traditional role: a place to live rather than an investment on which to speculate.

A few comments here.

First of all, Interested, you have ignored another part of this article that states individuals have started renting places. Prices might not go up or, as you have been saying, reset to year 2008 prices. Nothing worse, unless someone has bought a unit in 2009 or 2010.

Despite all this talk of slow down/decrease in prices, Minto is still selling units at 775 King Street West. Bisha is going for $ 780 sq.ft. Units are still selling both in 775 King Street West and Bisha, but not at the frantic pace they used to sell. Unless you are a flipper or an investor who bought a unit with only 5% down with the intention to rent, there is nothing to worry except worry itself. It is the individuals who have bought 1 bedroom units around Rogers Centre and City Place need to worry.

I will wait for condo George to come back to town next week and give me some solace and rosy-coloured spiritually uplifting talk. Till such, I will wipe my tears. I have already bought an extra box of kleenexes to tie me over till next week.
 
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A few comments here.

First of all, Interested, you have ignored another part of this article that states individuals have started renting places. Prices might not go up or, as you have been saying, reset to year 2008 prices. Nothing worse, unless someone has bought a unit in 2009 or 2010.

Despite all this talk of slow down/decrease in prices, Minto is still selling units at 775 King Street West. Bisha is going for $ 780 sq.ft. Units are still selling both in 775 King Street West and Bisha, but not at the frantic pace they used to sell. Unless you are a flipper or an investor who bought a unit with only 5% down with the intention to rent, there is nothing to worry except worry itself. It is the individuals who have bought 1 bedroom units around Rogers Centre and City Place need to worry.

I will wait for condo George to come back to town next week and give me some solace and rosy-coloured spiritually uplifting talk. Till such, I will wipe my tears. I have already bought an extra box of kleenexes to tie me over till next week.

Why?
 

As 'Interested' has stated in his post above (# 1399), it is the speculators who are going to get hurt. My discussions with various individuals over the years has led me to the conclusions that enough speculators have bought units in these locations -- cheap, 1 bedroom units, affordable and easy to rent.

At one time, Tridel has marketed units to the invesators in one of its buildings in the area -- Mariner Terrace, to be specific. That individual lost a tennat last year who had lost his job -- and 4 months rent as well -- and is having difficulty finding a good tennant who will pay high enough rent to cover mortgage and secured line of credit used to make a hefty down payment and also will stay for more than 1 year.

Other investors in these locations, who are not adequately financed, will have problems staying 'afloat'.
 
Ka, there is one other concern and that is the domino effect.

Investors well capitalized will be OK. But say someone was an investor and put down 25%. A very sizeable down payment. Say the condo for argument sake was $300000. So he has $75000 equity. Let say the price drops by 15% back to 2008 levels. His equity is now $30,000 ($75000 - 45000 (15% of $300,000). Now finally let say he has to refinance in 2011. Suddenly with new rules of 20% minimum for investment the mortgage amount will be somewhat less than $225,000. However, 20% of this amount roughly will still be about $45000 (allowing a bit less for some principal repayment). However, his equity is $15000 short.

If he can come up with that, fine. But if not, he is now forced to sell. This in turn depresses prices further if alot of people are in a similar boat, prices fall further and take in the next person who had 30% down payment etc. etc.

In other words, it becomes a snowball that gains size and momentum as it trends downhill. This is my one real concern for the market.
 
A few comments here.

First of all, Interested, you have ignored another part of this article that states individuals have started renting places. Prices might not go up or, as you have been saying, reset to year 2008 prices. Nothing worse, unless someone has bought a unit in 2009 or 2010.

.

I hope so. Some have mentioned that rental rates will go up as alot of would be buyers sit on the sidelines and don't buy or wait for more of a bottom. Maybe that will occur.

Again, it depends on the relative ratio of weakly capitalized investors/speculators/ etc: the ones I call landlords by "default". They do not want to be landlords, or are carrying a relatively large mortgage and to stay afloat, will rent at reduced rates just to get their unit rented over the one next door also for rent at market. Pretty soon, the depressed rent becomes the new "market rent".
 
I hope so. Some have mentioned that rental rates will go up as alot of would be buyers sit on the sidelines and don't buy or wait for more of a bottom. Maybe that will occur.

Again, it depends on the relative ratio of weakly capitalized investors/speculators/ etc: the ones I call landlords by "default". They do not want to be landlords, or are carrying a relatively large mortgage and to stay afloat, will rent at reduced rates just to get their unit rented over the one next door also for rent at market. Pretty soon, the depressed rent becomes the new "market rent".


i believe rents will stay relatively flat, unless it's a very desirable not readily available premium unit.
with so many units coming online in the 2nd half 2010 and 2011, i think there'll be more supply than demand.
 
i believe rents will stay relatively flat, unless it's a very desirable not readily available premium unit.
with so many units coming online in the 2nd half 2010 and 2011, i think there'll be more supply than demand.

Certainly despite escalating prices, rents have not reflected this on the way up.
I would tend to agree CDR that rents will stay flat or decline by $100 to $150 maximum on a $1500 1 bedroom.
 
What? No posts in 3 days??

So here's a link to a study showing a 36% increase in the size of the average mortgage over the past 4 years
http://www.canadianmortgagetrends.c...8/average-mortgage-grows-36-in-48-months.html

Speaking of mortgages...
http://4.bp.blogspot.com/_0YOsyi5Wb...jViFX6Y/s1600-h/Canada+Mortgage+Credit+Q3.Bmp

This link shows the changes in the source of mortgage credit, 2007-2009. Note that 90% of the $170B increase came from NHA MBS (ie. the CMHC). The CMHC then securitizes those mortgages as MBS (mortgage backed securities) and sells them at a few basis points above the rates for federal debt. (the theory being that since the CMHC is a crown corporation, it is almost as secure as the gov't itself).

A large portion of these MBS have been sold to foreign investors. The currency marketplace is the same as any other marketplace, and the value of the last transaction is seen indicating the true value of all similar assets. However, of course, if the laws of supply and demand change then the price of the last transaction will change.

So what am I saying?

Well, as the CMHC prints off a substantial increase new debt and sells it to primarily foreign investors, this creates demand for the canadian dollar (when the foreign investors convert foreign currencies, so they can hold the $C denominated MBS). This places upward pressure on the $C due to higher demand.

But as the period of increase ends, and new origination MBS even decreases, then one of the supports for the increased $C is removed. New mortgage origination substantially decreased after the 2nd qtr. If sales continue to stay low, then the absence of new MBS issued will result in downward movement for the $C.

Anybody wanna buy a short?
 
I did want to make a post. However, I could not find the thread. I guess I was not using the right words in the 'search' box.

Last night, I visited the sales office of Minto's new project at 775 King W. They are selling at $ 550 sq.ft. I thought the price is reasonable and was debating to buy a unit. It won't be ready till end 2012 anyway. I am not sure right now.

Today's Report on Business of The Globe and Mail is full of not very encouraging news. Mr. Rosenberg is alluding to depression. Then, there is a reference to a think tank report that came out yesterday. This report talks about decrease in real estate prices of 9%, 21% AND 20% in difference scenarios. Drop in prices over next 2 years and years of stagnation.

If I was young, I would taken a few drinks and gone to sleep.

Good news is that my condo has been fully paid up for quite a number of years. As such, decline in price -- even 20% -- would not affect me personally. However, my dream of dying a millionaire is now just that -- a dream, unless, of course, the Good Lord is generous enough to grant me a few more years.

Hopefully, there will be some cheerful news from somewhere, soon.
 
Today's Report on Business of The Globe and Mail is full of not very encouraging news. Mr. Rosenberg is alluding to depression. Then, there is a reference to a think tank report that came out yesterday. This report talks about decrease in real estate prices of 9%, 21% AND 20% in difference scenarios. Drop in prices over next 2 years and years of stagnation.

Here's the article (but from the Star):

Housing prices due to fall, says think-tank

August 31, 2010
Tony Wong
Business Reporter

Canada’s major metropolitan housing markets are looking awfully bubbly and are due to burst, says a report released Tuesday. The report, entitled Canada’s Housing Bubble: An Accident Waiting to Happen, by the Canadian Centre for Policy Alternatives, looks at prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa. It concludes that housing price appreciation is frothy in comparison to historic values. “I think at best you will see stagnation in housing prices or some kind of correction, and at worst you will see the bubble bursting,” said David Macdonald, an economist and research associate at the centre.

Housing bubbles emerge when prices increase more rapidly than inflation, household incomes and economic growth. That has been the case for Canada over the last run-up in prices, according to the report. Macdonald said this bubble is different than others, because for the first time it is spreading beyond Toronto and Vancouver. “Canada is experiencing for the first time in 30 years a synchronized housing bubble across the six largest residential markets,” he said.

Major banks have reached conclusions similar to those of the left-of-centre think tank. The Toronto Dominion Bank has estimated that average prices are 10 to 15 per cent too high, while the CIBC has said prices are 14 per cent overvalued.

Canada has only had three bubbles. Toronto experienced a large bubble in 1989, while Vancouver had two burst in 1981 and 1994.

Macdonald said a full-blown crash can still be avoided if mortgage rates do not ratchet up quickly and if government puts more stringent requirements on lending. He said legislation could be introduced to return mortgage lending to 2006 criteria, where purchasers had to put 10 per cent down for a 25-year amortization. Although the federal government already put tighter restrictions in place earlier this year, buyers still have the option of putting 5 per cent down and can take a 35-year amortization on homes. “Consumers should also play a part by not buying more house than they can afford,” says Macdonald.

The report says the last bubbles were triggered by interest rates moving up by just one per cent above the two-year rolling average. “It doesn’t take much for consumers to take pause, especially those who are used to seeing such low rates,” said Macdonald. “You also have a lot of consumers, particularly outside Toronto and Vancouver, who have no memory of what a bubble is like or the aftermath.” Low mortgage rates, access to easy credit and net immigration have also contributed to price pressures, said Macdonald.
Between 1980 to 2000, the historical price range for housing stood at between $50,000 and $80,000 in inflation-adjusted 1980 dollars. But within a brief five-year period from 2001 to 2006, major housing markets shot to well above that $80,000 average, according to the report. “The comfort level isn’t there as affordability erodes,” said Macdonald.

Housing prices have stayed in a narrow range of 3 to 4 times income in the 20 years before 2000. The problem is, says Macdonald, is that housing prices adjusted for income today are anywhere from 4.7 to 11.3 times annual income in the six major areas. Not everyone agrees with the findings of the report. Toronto economist Will Dunning says that the market cycle is in a cyclical downturn – not a bubble. “It is quite possible that the next phase of the cycle will be a partial reversal of the price gains of maybe 5 to 10 per cent, but this is not a post bubble collapse,” says Dunning. “It is the operation of a functioning market in which the vast majority of buyers are making decisions based on their real needs, not the mindset normally associated with bubbles.”

Despite their differences, all analysts seem to agree that prices could fall.

Macdonald gives three scenarios in which prices might drop. The first is similar to what happened in Vancouver in 1994, a market correction through price deflation. In that scenario, Toronto prices would decline by 9 per cent from an average of $420,000 to $382,000. In the second scenario, the bubble would burst more slowly, similar to the 1989 Toronto bubble. In that case, prices would decline by 21 per cent from $420,000 to $330,000 over a five-year period. In the worst scenario, a bubble would form similar to the United States and prices would fall rapidly. In that case Toronto prices would drop 20 per cent over three years to $335,000. The price drop would be slightly less than in scenario two, but happen more rapidly. “Bringing house prices down just enough to moderate expectations but not so much as to cause a panic is a delicate balance,” says the report.“Government policy makers, the Bank of Canada, as well as rate setters at the big banks need to work together to steer the Canadian market to a soft landing. The alternative is not acceptable.”
------------------

Personally, I think we're beginning to see the first or second scenario unfolding. The third is extremely unlikely.
 
i would like to see where they are getting these 9-15% figures from because if i use various measures based on historical appreciation trends, price-to-income, etc ... i come up with 25-30%.

in reality, i believe the 'average price' is actually higher on a PSF basis than stated 'average' because it does not take into consideration the down-sizing of condo units over the past 15 years along with the greater proportion of sales vs. the trend of larger and larger single family homes in the past 50 years and their decreasing market share.
 
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i would like to see where they are getting these 9-15% figures from because if i use various measures based on historical appreciation trends, price-to-income, etc ... i come up with 25-30%.
.

I agree with you.

But 9-15% is more likely, and will happen much sooner, than 40-46%. So they ere on the side of caution, and get their pat on the back for a good forecast.

I work in financial forecasting, and I do the same.
 

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