Baby, we got a bubble!?

[interested]

I agree with this.
Migos, would you buy for investment purposes today?
I think there may be select buys that make sense but overall at least in the new condo market, I don't believe there are many good investments.
It is the leverage that is juicing the perceived returns and even a slight increase in interest rates will negate that. As well, all other investments are enjoying inflated values
due to the low interest rate environment.
Can you make money with leverage now...absolutely...you just have to be smart enough to know when to get out... and that is the difficult part.
But I guess it is live by the sword/die by the sword.

 

[James]

With the inevitability of interest rates increasing, as early as end of the year in the U.S., it'll be interesting to see what transpires.

 

[interested]

With the inevitability of interest rates increasing, as early as end of the year in the U.S., it'll be interesting to see what transpires.

Yellen and Clan have already been back tracking a bit. Interest rates will rise but now it seems more slowly than first feared and at most to 0.5% this year and perhaps to 1.5 to 2.5% next year and up to 3.5% in 2017. While this is definitely a rise, I think with time and this type of raise, assuming Canada follows somewhat in kind though with a slight delay...that will not create the conditions to signficantly cause deterioration or much slowdown in the real estate market in my view. I am not saying I would buy investment real estate, and with the rise and I do not believe condo market rents can/will go up signifcantly ( people just can't afford it ), it may get tighter but not tight enough to cause a panic.

Incidentally, on a similar note, in the US the Chinese have now become the largest group of foreign investors, a position held by Canada until 2013. Also, they buy much higher value real estate.
The point I believe is not that the Chinese will not invest in Canada...they will continue for now....but the fact that they spent so much more in the US means the "hot money" will shift around and they may not be there to support the Canadian market to the degree, whatever that was since no one can agree about how much foreign investment there was in the condo market in TO and Vancouver, and certainly that will show up in new condo market sales since I believe locals are being more selective in investing at this time already. In other words, I think we will see curtailed demand for new sales going forward. Should prove "interesting".

 

[James]

Per the following Toronto Star article today, who exactly are these people that will be spending almost 50% of their household income on home ownership? I certainly don't know them.

http://www.thestar.com/business/201...ouver-became-more-unaffordable-this-year.html

Homes in Toronto, Vancouver became more unaffordable this year

Across Canada, it now takes 47.9% of household income to service the costs of owning a home at current market values.

By: The Canadian Press,Published on Mon Jun 22 2015

A report by RBC Economics says housing affordability continued to decline in Toronto and Vancouver, while conditions for homebuyers improved in Alberta during the first quarter of the year as lower oil prices caused the real estate market to soften.

RBC says mortgage rate cuts improved the affordability of homes in many Canadian housing markets where prices didn’t accelerate too rapidly.

That offset rapid price growth in Toronto and Vancouver, leaving national affordability levels relatively flat.

RBC says demand in softer markets such as Montreal and Ottawa began to pick up.

The RBC Housing Affordability study measures the proportion of household income that is needed to service the costs of owning a home at current market values.

On a national level, RBC says affordability edged 0.3 percentage points lower for condos to 27.1 per cent, while for detached homes it declined 0.2 percentage points to 47.9 per cent.

The bank predicts that rate hikes from the central bank, which is expected to raise its trend-setting overnight interest rate next year, are likely to erode affordability.

“Exceptionally low interest rates have been a key factor keeping housing affordability levels in a largely manageable state in recent years,” Craig Wright, RBC’s senior vice-president and chief economist, said in a statement.

“The knock-on effect of the anticipated rise in rates would be most visible in high-priced markets.”

 

[Migos]

Per the following Toronto Star article today, who exactly are these people that will be spending almost 50% of their household income on home ownership? I certainly don't know them.

http://www.thestar.com/business/201...ouver-became-more-unaffordable-this-year.html

My theory is that foreign money is buying a lot of the property in Vancouver and Toronto. It could be situations where the families live in Canada but the primary breadwinner is overseas. They don't declare their foreign income in Canada so it looks like they are much poorer than they are, especially relative to the multi-million dollar home they live in.

See this article: http://news.nationalpost.com/news/c...ensive-mansions-also-one-of-the-citys-poorest

How can it be that one of the most expensive neighbourhoods is overriden by poverty? The answer is it isn't...it's just that the residents aren't declaring their income.

What does this mean for real estate? Hard to say, but at some point I think we will reach a tipping point as a society and start cracking down on this sort of thing. There are already some rumblings starting, particularly in Vancouver, where the problem is most visible.

 

[Eug]

Owning a primary residence is very different from owning investment properties. I am not arguing for or against owning vs. renting, I'm arguing that buying investment properties in this climate is foolish.

I was talking about this topic a couple of years ago with a person from a family with a lot of real estate holdings. Her job was to scout out new investment properties for purchase with groups of investors. She said the actual sale price isn't the big concern. It's the sale price vs rent collected. If there is a sufficient rate of return, with evidence the rate of return will be relatively consistent (eg. good condition building with proper maintenance, good quality tenants with stable occupancy), it's fine with them since they buy and then hold for 20 years or whatever. What they want is the ability to have income from the property over that period of time. They are NOT speculators who flip the building 2 years down the line.

However, the difference here is that they buy entire apartment buildings, not individual condos. Furthermore, they are ponying up their cash up front for these investments. It's a way to park their existing money but get more than money market rates of return. They mostly are not leveraged.

I have been reading this type of 'sage' advice on this thread since 2008.

Impressive, considering the thread started in 2009.

 

[WislaHD]

http://www.bnn.ca/News/2015/6/18/Re...g-ambition-to-transform-downtown-Toronto.aspx

Very good read on Allied Properties and the Toronto market.

I get the feeling that this thread is primarily for residential real estate. Do we have a thread on this forum more specific to office real estate? They are different markets after all.

 

[ponyboy]

She said the actual sale price isn't the big concern. It's the sale price vs rent collected

I received some hostility on another real estate forum when I said that many seasoned income-oriented investors want about 1% of sale price in gross rents per month. How many properties on MLS today provide this level of income vs price?

 

[James]

^ In Toronto, that's virtually impossible. Not even a multi-room multiplex can even get close to that kind of cash flow.

 

[Migos]

U.S. short sellers betting on Canadian housing crash: ‘An accident waiting to happen’
http://news.nationalpost.com/news/c...n-housing-crash-an-accident-waiting-to-happen

Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 are now betting real estate values in Vancouver and other Canadian cities will crash, financial insiders say.

The hedge fund investors, known as short sellers, are betting against what they believe is a housing bubble in Vancouver, Toronto, Calgary and other Canadian cities. They believe Canadians hold too much mortgage debt, and that Canadian banks, mortgage insurers and “subprime” private lenders will lose money on unpaid loans when property prices fall.

“The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” said Marc Cohodes, once called Wall Street’s highest-profile short-seller by The New York Times. “A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.”

He says Vancouver real estate has reached peak insanity, and any number of factors could trigger a collapse.

But one Canadian housing analyst who advises U.S. clients, including Cohodes, said major investors are currently “building positions” against Canadian housing targets. They are forecasting a raise in historically low U.S. interest rates this fall will spill financial stress into Canada.

“All of the big global macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years,” said the Canadian analyst, who asked not to be named because of client confidentiality. “I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.”

 

[WislaHD]

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. This is before considering these two cities are poised to grow into globally exceptional cities and receive great population growth. It is not as if the housing prices are unjustified like they were in the American housing bubble or in other famous bubbles (Railway Mania, Tulip Mania, South Sea and Mississippi Bubble). A house in Vancouver or Toronto's core are really that valuable given their contexts.

Hell even the Japanese Asset Bubble inflated to the extent it did for reasons separate from the very valuable and limited land in Japan. Unsurprisingly, real estate in Japan is still very valuable post-crash.

 

[James]

^ 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.

 

[Migos]

In what world do the fundamentals in Toronto and Vancouver support the real estate pricing?

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.

 

[nrb]

The Toronto market is reliant on the FIRE sector. If that sector experiences a downturn, it will have the same effect on the market as falling oil prices have had in Calgary.

The fundamental problems of the housing market have already been beaten to death in this thread. They certainly don't cease to exist once you enter a certain cities boundaries.

 

[RButler]

In what world do the fundamentals in Toronto and Vancouver support the real estate pricing?

These are measures of affordability, not value. Value is determined by Supply and Demand. How do the above charts consider supply?