News   Mar 28, 2024
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Baby, we got a bubble!?


Look at past bubbles. Like the '89 bubble. After the initial crash, prices took 7 years to bottom out, and then 7 years to rebound to pre-crash levels, corrected for inflation.

The big issue in Toronto is that there are so many people with high LTI mortgages that these people are sensitive to increases of 100-200 basis points.

https://betterdwelling.com/city/tor...-shouldnt-and-half-are-at-risk-of-defaulting/

With the US Fed due to increase rates by at least 50 points this year, there's a real risk that as a lot of the mortgages get renewed in the coming years, we'll start seeing defaults rise. I keep telling family members to wait till 2019 to buy. Nobody wants to listen to me. Oh well.....

There's this idea that we aren't in a bubble because defaults are low. Yet the default rate is inversely correlated to price movement. As prices rise, defaults decline. And when prices drop, defaults climb (and often rapidly).

https://betterdwelling.com/mortgage-defaults-dont-indicate-real-estate-bubble-lack-defaults/

The tide will go out. Won't be this year. Will see who's not wearing trunks in a year or two.
 
Look at past bubbles. Like the '89 bubble. After the initial crash, prices took 7 years to bottom out, and then 7 years to rebound to pre-crash levels, corrected for inflation.

The big issue in Toronto is that there are so many people with high LTI mortgages that these people are sensitive to increases of 100-200 basis points.

https://betterdwelling.com/city/tor...-shouldnt-and-half-are-at-risk-of-defaulting/

With the US Fed due to increase rates by at least 50 points this year, there's a real risk that as a lot of the mortgages get renewed in the coming years, we'll start seeing defaults rise. I keep telling family members to wait till 2019 to buy. Nobody wants to listen to me. Oh well.....

There's this idea that we aren't in a bubble because defaults are low. Yet the default rate is inversely correlated to price movement. As prices rise, defaults decline. And when prices drop, defaults climb (and often rapidly).

https://betterdwelling.com/mortgage-defaults-dont-indicate-real-estate-bubble-lack-defaults/

The tide will go out. Won't be this year. Will see who's not wearing trunks in a year or two.

And there will be many people lining up to buy those properties. I truly feel that houses are recession proof due to the lack of them and the massive demand for them. I simply don't see it.

Also, the world is changing. Salaries and employment just arent't the same. People are trying to find ways to create income. They can no longer rely on their jobs. So what you're seeing is intense flipping in all kinds of different markets. From sneakers, to art, to homes, etc. It appears that everyone is trying to make money by flipping things. That also creates crazy demand. I just don't see things changing unless some huge unforseen events occur.

I don't deny that we're in a bubble. It seems to be a global thing.

One last thing too....with the States, people were allowed to walk away from their homes. You can't do that here. It's not the same....It's something different and our fate may be better or worse...I don't know. But things are different here.
 
And there will be many people lining up to buy those properties. I truly feel that houses are recession proof due to the lack of them and the massive demand for them. I simply don't see it.

Houses are only worth what people are willing to pay for them. And people can only pay for them what the bank will lend them. And what the bank lends is determined by their income and the interest rate. Incomes aren't going up substantially. But interest rates have started a slow climb in the US and ours will follow shortly. Let's see if people are willing to pay the same prices when they have to sign for 5% mortgages.

Will post this again:

https://betterdwelling.com/city/tor...-shouldnt-and-half-are-at-risk-of-defaulting/

If people are taking on 450% LTI mortgages, there's really no room for adjustment to significant interest rate changes. An increase of 200 basis points in interest means that their payments will go up by 9% of income. Rough numbers. The billion dollar quest is not how many people can afford an increase of 9% on their mortgage payment. It's how many can afford to pay 9% of their income on mortgage payments. By the way, the US Fed is forecast to increase interest rates by around 50 basis points this year. If the US economy holds, we'll start seeing a correction in 2019 as mortgages renew at higher rates and new originations face much higher rates.

Also, the world is changing. Salaries and employment just arent't the same. People are trying to find ways to create income. They can no longer rely on their jobs. So what you're seeing is intense flipping in all kinds of different markets. From sneakers, to art, to homes, etc. It appears that everyone is trying to make money by flipping things. That also creates crazy demand. I just don't see things changing unless some huge unforseen events occur.

The millennial side hussle. Yes, I've heard of it. More evidence that this is all not sustainable. You have a whole whack of boomers who have saved nothing for retirement and are working longer to pay the bills, while you have a whole what of millennials who are having to do two low paying jobs instead of launching professional careers. And the Boomers are counting on millennials to buy their houses at these inflated prices? Ha ha ha.

One last thing too....with the States, people were allowed to walk away from their homes. You can't do that here. It's not the same....It's something different and our fate may be better or worse...I don't know.

Where do people get this stuff? Only 7 States are non-recourse in the US. The rest were all limited or full recourse, just like 8 of 10 Canadian provinces and still had significant crashes. When people can't pay, they'll default. Regardless of whether they can walk away consequence free or not.

But things are different here.

Just like they were different in Ireland, Spain, or Toronto in 1989.
 
But interest rates have started a slow climb in the US and ours will follow shortly.

I only wonder whether or not interest rates will be set higher based upon the central banking decisions of the USA, I question whether Canada will opt to continue making interest rate decisions in lockstep with the United States, perhaps the Bank of Canada may cut rates below zero.

I am in full agreement with everything else that you've said.

I believe incomes will fall over the long-run, as labour markets become more competitive, partly due to increasingly mobile-transnational labour supply. Moreover, labour markets may become even more so competitive as automation and AI displaces jobs and then those displaced make for competition across other industries.

And then another aspect to falling incomes may be a reduced demand for our exports (in aggregate), as nations are becoming more energy independent, Oil & Gas and it's derivatives make up a tremendous amount of what we export and I just don't see the world paying up so much more for our oil in the distant future.
(It should be considered that we may eventually come to a time where much of the world is water stressed, perhaps Canada's water will be among it's most valuable export in the future. Maybe the world will need our water, mineral and agriculture resources to a degree that makes up for reduced demand for our petrol.)

And our population is now stabilizing and changing in age distribution. No matter our resource endowment or technical capacity, on the whole we are becoming less and less productive as our society has fewer and fewer people of working age.

If real estate does continue to retain its nominal value over the decades upcoming, say fifty years out from now, In such a case I suspect that our currency will have been tremendously devalued against those developing nations where real inflation is still a possibility.

I believe that our demographics and economic happenstance evidences a deflationary trend to occur over the long-run.

I still see opportunity in real estate, but I think more transactionally across all time horizons.
 
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We're making an assumption that a crash might be quick to bounce. But with 25% of the Canadian population to be 65 years of age or older by the year 2035, we may be in for a very long, drawn out period of economic stagnation. Japan went through it after its boom in the 80's. They had an aging population that was a tax on the entire system, causing very little to no growth for a prolonged period of time. Japan is not the most immigration friendly nation and they were having fewer kids per couple. This lopsided demographic shift is still wreaking havoc on economic growth. It's what fuels their strengthening robotics industry, and caregiver robots are a goal that they are wishing to achieve as the demographic shift only gets worse.

On the flip side, we are a nation that welcomes immigration, and for good reason. We don't want to suffer the same fate as Japan. However, we are seeing an anti immigration sentiment start to brew in pockets of society. A voice that seemingly gets louder and louder as more time passes, and is only 'validated' by the Trump presidency. If the far right gains a foothold on our politics, and they tighten our borders, this will work against any potential recovery from a crash. We can't assume that things can/will be the same after a crash. And if a crash wipes out a significant portion of boomer wealth, we'll be in a worse position.
 
Wouldn't a housing crash be temporary? Within a few years, or perhaps a decade prices would certainly return to their upward trajectory? I suggest this because I sense a lot of fanciful hope that prices will return to and remain at more affordable levels. Judging by the last "crash" the market has 12 years or less before it returns to where it was.

last-real-estate-recesssion-GTA-Toronto.jpg
 
Wouldn't a housing crash be temporary? Within a few years, or perhaps a decade prices would certainly return to their upward trajectory? I suggest this because I sense a lot of fanciful hope that prices will return to and remain at more affordable levels. Judging by the last "crash" the market has 12 years or less before it returns to where it was.

last-real-estate-recesssion-GTA-Toronto.jpg

Adjust that chart for inflation, and its way longer.

Either way, 12 years is a long time to 'break even' on the largest investment that most people make in their lifetimes. Especially when you factor in the opportunity cost on the investments you could've made.
 
Adjust that chart for inflation, and its way longer.

Either way, 12 years is a long time to 'break even' on the largest investment that most people make in their lifetimes. Especially when you factor in the opportunity cost on the investments you could've made.
True.

Though I've never considered my home to be an investment, certainly it's an asset. My wife and I bought our house in 1998 when we first got married, and will never sell it; so there's no ROI so to say, beyond being mortgage and rent free in our senior years. I suppose it's an investment to our kids, though again since they've got nothing invested there's no true ROI when they sell it after we croak.
 
True.

Though I've never considered my home to be an investment, certainly it's an asset. My wife and I bought our house in 1998 when we first got married, and will never sell it; so there's no ROI so to say, beyond being mortgage and rent free in our senior years. I suppose it's an investment to our kids, as they'll sell it when we croak.

In that case, it's investing in your low cost housing for retirement don't you think?

Many people view their housing as a very long term investment. It's an investment that you get utility out of, but it's what people use to justify buying more house than they need. I'd imagine a sizeable portion of homeowners in their working years imagine the time where they sell their primary residence and use the equity to downsize to a sleeper community for retirement years.

Well intentioned, non speculators looking for a family home factor in the 'investment' side of owning a home. It's the speculators that ran wild with the market that took it to a crazy level.

Renting tends to be less expensive than a mortgage payment in downtown. I've done the math on various different comparable units, and although it's a tiny cross section of housing, I found that rent is about 70% that of what a mortgage payment would be. Mortgage payments are justified if the value of the home climbs, otherwise, you're better off renting and putting the 30% into investments. If and when we have a housing price contraction, it's smarter to ride the downturn out by renting and saving the difference, eventually buying into housing when the timing is better. But of course many people will say "I want to own my home. I want to renovate my home. I want to be able to do what I want to my home.", but not ignoring the market and riding the trend intelligently can lead to a better home purchase down the road, allowing ownership of a property that one can be even more proud of.
 
In that case, it's investing in your low cost housing for retirement don't you think?

Many people view their housing as a very long term investment. It's an investment that you get utility out of, but it's what people use to justify buying more house than they need. I'd imagine a sizeable portion of homeowners in their working years imagine the time where they sell their primary residence and use the equity to downsize to a sleeper community for retirement years.

Well intentioned, non speculators looking for a family home factor in the 'investment' side of owning a home. It's the speculators that ran wild with the market that took it to a crazy level.

Renting tends to be less expensive than a mortgage payment in downtown. I've done the math on various different comparable units, and although it's a tiny cross section of housing, I found that rent is about 70% that of what a mortgage payment would be. Mortgage payments are justified if the value of the home climbs, otherwise, you're better off renting and putting the 30% into investments. If and when we have a housing price contraction, it's smarter to ride the downturn out by renting and saving the difference, eventually buying into housing when the timing is better. But of course many people will say "I want to own my home. I want to renovate my home. I want to be able to do what I want to my home.", but not ignoring the market and riding the trend intelligently can lead to a better home purchase down the road, allowing ownership of a property that one can be even more proud of.
In my case, I plan to move out in my retirement, yes. But even then, that's a very long time from now. Weathering 12 years of a real estate dip if it happens won't be an issue.

As for renting vs a mortgage, for a detached home renting would be cheaper because I would rent a smaller home with a smaller lot. Yes, I would get something that filled my "needs" better, but if really just was considering needs, we'd live in a 3-bedroom apartment. OTOH, if I wanted to rent something equivalent to what I have now it'd be very difficult to find. And if I found it, it would be expensive. IOW, the reason why for some renting is cheaper is sometimes because they rent smaller homes with less amenities and/or if they bought they'd only put the bare minimum down, get CMHC insurance, and buy with a 25-year amortization. Yeah, in that case, buying gets expensive, but fortunately for some people in the GTA, they don't have to do that. There are an awful lot of people who either have the money already or else lucked out into buying starter homes in the 1990s (like me). Selling those homes went a long way to helping them out later on when they upsized. In my case I bought a pre-construction townhouse condo downtown back in the late 90s, and moved in a couple of years later. When I sold in 2007, the place had increased in price by 80%. And if I had kept it until today and then sold, it would have almost doubled again, meaning today it would cost over 3X what I paid for it back in the 90s.

BTW, as of about 3 years from now, my home will be paid off. Going forward after that I will be paying for general maintenance and utilities only. Actually, I will renovate the kitchen, but it's not as if it's a required expense. It's a desired expense as we spend a lot of time in the kitchen so we're willing to put some money into it. But excluding that, I'm estimating my costs for living in the home as of 2020 will be roughly 20% of what a rental would cost, and I plan on living there for another 20 years. Try finding a rental place for 20% of normal market rates. ;)

Also, as mentioned before, in my area, foreign speculators are pretty much a non-issue on the residential side. There are basically no foreign bidders in detached home sales in the area. I won't deny it's an issue in some areas (eg. Willowdale), but location is an important factor. I suspect that is why there is so much disagreement amongst real estate agents about the impact of foreign speculators, because each region is different. Ironically, on the commercial side, some of the malls are foreign owned. They bought up uber cheap strip malls back like 30 years ago and put very little money into them. They keep them presentable enough to lease out and then just sat on them. They get lease income to cover their expenses and then some, but also waited for rezoning from commercial to mixed-use residential/retail before selling. And now they are selling to condo developers for huge profits. Those are the foreign speculators in my area, but they have nothing to do with the traditional residential market.

P.S. Had I known what I know now about the real estate market, I would have tried very hard to buy more than I needed back in the 90s. Back then I bought a 2 bedroom 1000+ square foot brick townhouse condo with attached shared 2-car garage. I paid $212000. There were 1400+ 3-bedroom townhouse condos for sale at the same time with 2 attached parking spots going for a little under $400000 IIRC. $400000 was within reach then but it would have been more difficult so I bought what I needed at the time, but quickly grew out of it. Now a family of 4, we wouldn't be happy at all in that 2-bedroom townhouse, but could have have made a go of it in a 3-bedroom townhouse. But we decided we wanted a detached home in a quiet area instead (although we moved out before we even had the kids).

I agree though that if I were just starting out now and was short on cash, I'd strongly lean toward renting. Indeed. I rented for several years in Toronto, although that was because I wasn't sure I'd be staying here long term. At the time I had calculated that with my finances, I'd have to stay a minimum of 5 years to just break even on buying. If I stayed less than 5 years, I'd lose money due to various expenses, and of course it'd be a big hassle to sell. However, if I knew my move to Toronto was permanent, I might have considered buying in the early 90s instead of the late 90s.

tl;dr:

Renting isn't necessarily cheaper than buying, even in Toronto. Renting can be cheaper if people renting gravitate to smaller homes with less amenities, and if they are comparing to the scenario where they have to put the minimum downpayment, get CMHC insurance, and amortize over 25 years. However, there are many buyers who aren't in that scenario, and buying for them would be much cheaper. Furthermore, the comparison between renting and buying is not the same for small condos vs. larger detached homes.
 
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Houses are only worth what people are willing to pay for them. And people can only pay for them what the bank will lend them. And what the bank lends is determined by their income and the interest rate. Incomes aren't going up substantially. But interest rates have started a slow climb in the US and ours will follow shortly. Let's see if people are willing to pay the same prices when they have to sign for 5% mortgages.

Will post this again:

https://betterdwelling.com/city/tor...-shouldnt-and-half-are-at-risk-of-defaulting/

If people are taking on 450% LTI mortgages, there's really no room for adjustment to significant interest rate changes. An increase of 200 basis points in interest means that their payments will go up by 9% of income. Rough numbers. The billion dollar quest is not how many people can afford an increase of 9% on their mortgage payment. It's how many can afford to pay 9% of their income on mortgage payments. By the way, the US Fed is forecast to increase interest rates by around 50 basis points this year. If the US economy holds, we'll start seeing a correction in 2019 as mortgages renew at higher rates and new originations face much higher rates.



The millennial side hussle. Yes, I've heard of it. More evidence that this is all not sustainable. You have a whole whack of boomers who have saved nothing for retirement and are working longer to pay the bills, while you have a whole what of millennials who are having to do two low paying jobs instead of launching professional careers. And the Boomers are counting on millennials to buy their houses at these inflated prices? Ha ha ha.



Where do people get this stuff? Only 7 States are non-recourse in the US. The rest were all limited or full recourse, just like 8 of 10 Canadian provinces and still had significant crashes. When people can't pay, they'll default. Regardless of whether they can walk away consequence free or not.



Just like they were different in Ireland, Spain, or Toronto in 1989.


I still think nothing will really happen unless rates go up by quite a bit or some unforseen event. I still think the intense demand will not be stopped without creating better housing options and that goes for rentals and resale. And building a bunch of shoeboxes in the sky is not the answer. Slight change in the rates won't do anything. Some people may be hurt, but I think there's more than enough demand out there for it to be a problem.

Do I think homes going up 30% every year is sustainable? No, I don't, but demand keeps getting fueled by lack of housing. We stopped building rentals for such a long time. Condos filled that void. A lot of this demand was fuelled by the lack of foresight from the city to the government. I compare it to the graffiti art market which has taken off in the last few years and how did it take off? Artists putting out very, very limited runs of their artwork which just spurned demand. See the same thing with high end snearkers, limited runs create outrageous demand. Lets take Jordans, for instance. They would release and people would pay 2,3,4x the value on the secondary market. Nike decided to start releasing Jordans much more often in much larger runs and guess what? It killed the secondary market.

Yes, houses and sneakers are different but the fundementals are the same. Limit something and watch how desperate people become and there's a lot of greed there too. Builders, the city, the province, all supremely greedy.

As long as we have this ridiculous transit problem, lack of suitable housing for families and rents remain close to a mortgage payment, I don't see a crash coming anytime soon.

As far as millenials having to work multiple jobs and boomers not being able to retire. That is a little sensationalized don't you think? While you may be right in some cases, there are still many millenials earning good income and boomers retiring early.

BTW, Toronto in 1989, much different than now. If rates quadruple overnight, then maybe I an agree with you.

Not saying you're wrong. I just see things a little differently.
 
When people start comparing houses to collectible running shoes, it's probably time to get out of the market.

I wonder how much of the housing crunch is pressured by middle-aged and older people having less stable lives than in the past. I think of my sister. She's in her late-40s, separated in the last couple years from her husband. She has kept the house they lived in for 20 years, living there with their youngest child who is in high school. He has purchased another house for himself. There'd also be a bedroom there for the daughter. (None of this is in Toronto, but I'm sure the same dynamic happens there, only with larger dollar figures.) Her husband has a girlfriend, who also has a home of her own. My sister is now hanging with another fellow, a widower in his early 50s, with a large rural property. He had a couple daughters in their 20s living there with him (along with a two or three of their kids and a son-in-law), but now that he's trying to rebuild his life, he's encouraged them to move on to places of their own. So four middle-aged adults (and a couple teenagers), four family size homes. And for as long as the housing investment mania persists, they're probably all happy to have their individual nests. Maybe it's all balanced by the young adults still living with (one of) the parents.

 
When people start comparing houses to collectible running shoes, it's probably time to get out of the market.

I wonder how much of the housing crunch is pressured by middle-aged and older people having less stable lives than in the past. I think of my sister. She's in her late-40s, separated in the last couple years from her husband. She has kept the house they lived in for 20 years, living there with their youngest child who is in high school. He has purchased another house for himself. There'd also be a bedroom there for the daughter. (None of this is in Toronto, but I'm sure the same dynamic happens there, only with larger dollar figures.) Her husband has a girlfriend, who also has a home of her own. My sister is now hanging with another fellow, a widower in his early 50s, with a large rural property. He had a couple daughters in their 20s living there with him (along with a two or three of their kids and a son-in-law), but now that he's trying to rebuild his life, he's encouraged them to move on to places of their own. So four middle-aged adults (and a couple teenagers), four family size homes. And for as long as the housing investment mania persists, they're probably all happy to have their individual nests. Maybe it's all balanced by the young adults still living with (one of) the parents.
I don't see this relationships scenario as being much different than the situation in the 90s.

We're not talking about 1950s.
 

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