Baby, we got a bubble!?

[Condo George]

down 1.2 %, up 2.9 %, down 8.2% forecast oh my the sky is falling, definitely bubble conditions in those numbers lol

 

[interested]

down 1.2 %, up 2.9 %, down 8.2% forecast oh my the sky is falling, definitely bubble conditions in those numbers lol

Actually George, I would not say the sky is falling. What is disturbing is the trend and the rapidity.
Crea was calling for a large increase, followed by a smaller increase, now followed by a decrease all within 6 months.

This is exactly what happened in the US where the Real estate association called for no decrease, followed by a slight decrease and then it was to be done with and in fact dropped another 30% in many markets after their first and second/third/subsequent calls.

I am not a doom and gloomer but I believe I also do not see the world through rose coloured glasses either.

I believe Crea will have to revise itself yet again downwards before the end of the year or early next year, there will be a very tepid if any pickup in Fall and the big problem is once bearish sentiment sets in, it is tough to turn.
Recall Real estate, esp. for those investors who were a significant portion of the market, will not be attractive when it is declining. Remove the investors or a significant portion and then ask yourself with all the sales to date, how much end user demand do you really feel is left?

Remember as well, these are predictions from CREA who would not want to err on the side of saying things are really bad. Look at the economists and those predicting 25% declines and they may well be overshooting. Likely, the result will be somewhere in the middle but ultimately at least a 10-15% volume and probable price decline I believe is in the cards

As I previously said, there certainly appears to be more downside risk then upside potential at this point in time.


To CDR, thank you for posting the article so it doesn't disappear.

What I think is striking is that it was just perhaps 2-3 months ago that Crea revised down and the amount of further reduction is really quite striking. If I understand the article correctly, the 3+% increase over last year in price means that prices will shortly be declining comparing the last year's months year on year.

As expected, now Crea will put out data comparing year to year averages since this paints the real estate in better light. While I believe average on the year is a fairer measure, now that things are looking worse like most lawyers, one chooses the arguments that put your client in the best light and try to ignore those facts that are not beneficial to your case.

Crea naturally has an obligation to represent its constituency and therefore it is understandable that they will try and maintain credibility with the public but will always be behind in the reporting of "bad news" since to do the opposite would be to argue against their own constiutency ( the realtors of Canada) and harming its base voters (constituency group).

 

[cdr108]

down 1.2 %, up 2.9 %, down 8.2% forecast oh my the sky is falling, definitely bubble conditions in those numbers lol

granted CREAs values are on a national basis over all types of properties from condos to freeholds (bungalows, 2/3s) ...

let's look locally at dt toronto condos:
would a 70% increase in 4 years be considered bubblish;
how about a 50% increase in 2 years ?

 

[simuls]

granted CREAs values are on a national basis over all types of properties from condos to freeholds (bungalows, 2/3s) ...

let's look locally at dt toronto condos:
would a 70% increase in 4 years be considered bubblish;
how about a 50% increase in 2 years ?

Both would be firmly in bubble territory. In fact 70% in 6 years would still be bubblish and 70% in 9 years frothy.

What will be important, and of course, CREA or TREB won't use these numbers, will be to compare housing prices when they peaked in April 2010.

Yesterday a realtor on that absolutely inane Hot Property Show even said that there's already been a 5% drop - in 3 months. Then he proceeded to harangue a caller who got a bad agent (who also happened to be a discount agent 2% vs. 2.5%) and he got very animated and said that that .5% means the discount broker didn't have the money to market the guys property. What a load of crap.

 

[interested]

What will be important, and of course, CREA or TREB won't use these numbers, will be to compare housing prices when they peaked in April 2010.

Yesterday a realtor on that absolutely inane Hot Property Show even said that there's already been a 5% drop - in 3 months. Then he proceeded to harangue a caller who got a bad agent (who also happened to be a discount agent 2% vs. 2.5%) and he got very animated and said that that .5% means the discount broker didn't have the money to market the guys property. What a load of crap.

Your first point speaks exactly to the issue I brought up simuls, that CREA will now start reporting averages on the year since this puts the data in the best possible light. 5% in 3 months means that it will be at least another 5-10% from peak by the end of the year. Prices started to climb significantly after reaching lows in the early part of 2009. Therefore, even if prices were to stay level which they won/t, they will be dropping because last year's comparison number will be increasing. this does not even allow for prices to decline today, just to stop rising.

As to the agent issue: marketing the property is important. However, this is a totally self serving comment and indicative of an entitlement problem which is ridiculous.

10 years ago when prices in Toronto were roughly 1/2, if a property sold for $200k it is now selling for say$400K for simplicity of numbers.
If they got even 2 1/2% say then, that was $5000. Now 2% of $400K is $8000. I am sure marketing costs have gone up, but are we to believe that what may have been $1000 of cost is now let's say $2000( and I doubt costs have doubled). Leaves $6000 instead of $4000 even in this example. I don't know about you, but I don't believe most people have seen 50% increases in takehome amounts.

I know I will hear objections to this from realtors. I didn't take higher numbers and as well, remember even if 2% represents 1 side, I would bet the buyers agent got the 2.5%, and I have allowed for marketing costs already, so the real take home should be based on 4 1/2% commission vs. 5%. What is the justification for the buyers agent to have doubled his takehome pay in 10 years. I have allowed the marketing costs totally to the listing agent(which is fair) but given that we have had years with multiple bids, bidding wars, I never heard a complaint that marketing costs were an issue.

Realtors then were quite content to take the 2% with minimal marketing necessary and sell by the sole virtue that almost everything sold by simply being listed. It is amazing to me that now when actually having to possibly work to get their commission which alot of people feel is vastly inflated, they wish to be paid for actually working and maybe make a reasonable wage for their work.

Please understand, I am not down on realtors. I use them and feel they provide a valuable role. That said, I believe they should make a reasonable hourly wage and I assure you, perhaps going forward, they will make a similar dollar amount in tough markets, but in good markets they simply benefited from a lack of need to do much (since almost everything sold itself) and in that market, I believe the commission structure lead to inflated wages.

I guess it just comes down to what is a reasonable amount of money for the act of selling/listing/marketing/staging a property? Clearly the competition bureau feels MLS is a monopoly leading to bloated commissions and I am sure with real competition, no longer will anyone automatically get 2% for listing a home though perhaps the very full service agent for staging and giving Cadillac service may.

 

[cdr108]

I guess it just comes down to what is a reasonable amount of money for the act of selling/listing/marketing/staging a property? Clearly the competition bureau feels MLS is a monopoly leading to bloated commissions and I am sure with real competition, no longer will anyone automatically get 2% for listing a home though perhaps the very full service agent for staging and giving Cadillac service may.

i have not known any realtor to include staging the property as part of their commissions.
that's typically an extra cost a seller would have to pay for.
if they did, then i could see the value of the 2.5% commission; but the most i've seen/heard is a recommendation of clearing clutter and maybe repaint to something neutral, etc.

 

[interested]

i have not known any realtor to include staging the property as part of their commissions.
that's typically an extra cost a seller would have to pay for.
if they did, then i could see the value of the 2.5% commission; but the most i've seen/heard is a recommendation of clearing clutter and maybe repaint to something neutral, etc.

yoiu are of course correct. they may suggest staging or the stager but you are expected to pick up the costs. they do help with suggestions on how to make the property more presentable. Of course this is not only in your but their interest as the more marketable, the better and faster the likelihood of a sale.

 

[KA1]

There have been lots of posts in this thread about where real estate prices are heading -- geneally, downwards--, how low they couldl go and when they might start going up. I would like to put some sense to all these posts and see if the discussions could forward in a different -- and my desired -- direction.

In March 2008, I bought a unit in AURA on 'Executive' (59th) floor to live. Unless there is a deep recession like the '30s, I fully intend to go ahead with closing the deal around the estimated completion date of late 2013. I need a place to live and I do not wish to become a refugee in my own town.

I am sure there are others too who need a place to live and will go ahead with closing the deals regardless of the market conditions.

Then, there are ' deep pocketed' investors who will ride out the slow down/recession/decrease in the prices. Over a period of time, say, 5 years or so, the prices will recover.

It is the 'flippers' who will feel the pain. They will try to 'assign' their purchases or, at worst, walk away from their purchases. This will mean quite a few units for sale that, otherwise, would have been available for rent.

Individuals with limited means will stay out of the market and keep renting for a while instead of buying a place. That means slow sales of units already built. Developers will delay bring in the market new project and discount unsold units.

All of these scenarios paint a picture of too much inventory of unsold units. Prices will go down to low levels -- 2009, 2008, 2007 or whatever. That could be an opportunity for investors with deep pockets -- and not 'flippers'-- to come back to the market and cherry pick bargains.

What that time frame will be -- 6 months, 1 year, 2 years or even longer?

'Interested' has stated in one his posts that real estate has had a good run for the last 10 years. It seems that it might not be a bad idea for the 'investors' to pick up their marbles and go somehwere else for a few years. Go where? Interest rates are very low -- lower than the 'real' inflation. That means the investment, in real terms, will depreciate.

Wouldn't it be a good idea for the deep pocketed investors to stick around the real estate and jump back into the market a bit later -- whatever later might be?

Any thoughts?

 

[cityboy]

i have not known any realtor to include staging the property as part of their commissions.
that's typically an extra cost a seller would have to pay for.
if they did, then i could see the value of the 2.5% commission; but the most i've seen/heard is a recommendation of clearing clutter and maybe repaint to something neutral, etc.

I think many realtors earn their commissions. They pay office rent, assistants and all other business expenses out of there pockets. Many agent friends work till 11pm weeknights and always on Saturdays and most Sundays. Remember, no commissions are earned until the deal closes. I agree multiple bids have made there jobs easier the past few years, however the environment is seldom that way.

 

[interested]

There have been lots of posts in this thread about where real estate prices are heading -- geneally, downwards--, how low they couldl go and when they might start going up. I would like to put some sense to all these posts and see if the discussions could forward in a different -- and my desired -- direction.

In March 2008, I bought a unit in AURA on 'Executive' (59th) floor to live. Unless there is a deep recession like the '30s, I fully intend to go ahead with closing the deal around the estimated completion date of late 2013. I need a place to live and I do not wish to become a refugee in my own town.

I am sure there are others too who need a place to live and will go ahead with closing the deals regardless of the market conditions.

Then, there are ' deep pocketed' investors who will ride out the slow down/recession/decrease in the prices. Over a period of time, say, 5 years or so, the prices will recover.

It is the 'flippers' who will feel the pain. They will try to 'assign' their purchases or, at worst, walk away from their purchases. This will mean quite a few units for sale that, otherwise, would have been available for rent.

Individuals with limited means will stay out of the market and keep renting for a while instead of buying a place. That means slow sales of units already built. Developers will delay bring in the market new project and discount unsold units.

All of these scenarios paint a picture of too much inventory of unsold units. Prices will go down to low levels -- 2009, 2008, 2007 or whatever. That could be an opportunity for investors with deep pockets -- and not 'flippers'-- to come back to the market and cherry pick bargains.

What that time frame will be -- 6 months, 1 year, 2 years or even longer?

'Interested' has stated in one his posts that real estate has had a good run for the last 10 years. It seems that it might not be a bad idea for the 'investors' to pick up their marbles and go somehwere else for a few years. Go where? Interest rates are very low -- lower than the 'real' inflation. That means the investment, in real terms, will depreciate.

Wouldn't it be a good idea for the deep pocketed investors to stick around the real estate and jump back into the market a bit later -- whatever later might be?

Any thoughts?

In response Ka1,
I believe the proper business principle would be to judge the investment today, and if it makes no sense, a pure business decision would be to let the investment go in favour of a better investment.
Emotions come into this decision. Uncertainty enters as who knows exactly what will happen. Finally, a very important issue is tax implications, not so much about people who bought to flip and have not taken possession, but people who have held non primary residence real estate for a while and have capital gains and recaptured depreciation, which may make the decision to sell less desirable.

Returning to new product where the tax should not be a major problem:
If the property is part of a portfolio, the investor if not forced to sell would likely not sell.

As I have posted previously, for those invesotr/speculators who may be marginally capitalized, they may well have no choice. The issue is how many of these are there as a percentage of the investor group and how quickly do they head for the exits. If it is on masse, then the situation will be dire. If alot hold on, then there will be an adjustment, perhaps a slight decrease, a long pause, and resumption of the upward trend.

Working strongly in favour of being able to hold on is that interest rates are still historically very low, very disimilar to 1989-1994 in Canada when 13% or so was a mortgage. You can still get a 5 year 4% mortgage according to the paper even from BMO(unless that was a print error but even if 5% the amount of negative cash flow should be relatively small if the place can be rented and rents do not decrease too much.

Unfortunately, with the marginal players, they will discount rents to make ends meet and thereby lower the average rental market in the process.
This too happened in 1989-1994.

Working against these investors are the new mortgage rules for downpayments and meeting the 5 year rate.
Those who bought who could only afford to close with 5-10% downpayments and based on variable mortgage rates under 3% will have to sell.

But these individuals were never investors but rather speculators and likely will get burnt.Regarding inventory, I believe there will be an excess coming forth. Everything points to this. I also believe that the spillover effects will take 2-3 years from peak inventory to mop up. I expect the peak of inventory to hit in about 2013 so I believe we are looking at 2015-2016 before prices recoup to their present peak.
Again I am talking about downtown condos. My rationale is the lead time between sales and completion and we are looking at about 3 years so even if some projects do not go forth as I expect, there will continue to be alot of product hitting the market until 2013-2014 even if the developers stop building or shelve some of the projects not started.
Of course outside issues like a repeat of credit seizing may influence things further but that would be a very bad thing for markets and indiciate further problems in the market place and mean that the poplulation also will be hesitant to buy thereby prolonging the effects(though stopping more projects more people will be unable to close properties as in some markets overheated in the US where 80% of the sales are cash sales for eg. Miami).
In summary, i think we are looking at about a 5 year period of lower prices until things recover back to their peak.
Of course, what do I know??

 

[aguduser]

Bearish or bullish? Which direction to go?

The ideas expressed article below, which I found online at http://www.btimes.co.za/98/0913/btmoney/money06.htm , are wise, IMHO! Even though it's talking about the stock market, it actually sums up the argument that we have about the real estate market here.

Fear and greed are an investor's greatest enemies

OVER the next few months we are bound to hear of many people who not only knew the market was going to crash, but who liquidated all of their shares - and are now sitting pretty. Some market commentators, investment newsletters and publications will also claim to have got it right. Very few will admit they were wrong.
Some interesting studies have been done in the US relating to the average return achieved by average investors over extended periods. Both the Morningstar and Dalbar Inc studies show that where the market achieved an average return of 12% a year, the average investor achieved a loss of 2% a year over the same period. In other words, you are not alone if you are making poor returns on your investments - most people are going backwards!

Why should this be the case?

Is it simply because the average investor experiences the two "investment emotions" almost all the time? Fear and greed lurk in the background of their decisions. Then along comes a well-meaning "Pied Piper" in the form of an investment newsletter, a newspaper reporter, or a radio journalist with a specific theory of what the market is about to do and the investor, "warped by lurking fear and greed", makes a radical decision.

From the information on capital flows it is clear that the average investor buys high and sells low. This can only be explained by greed (when everyone else seems to be making money) and fear (when there is "blood on the streets").

Often the market commentators have some form of system. It could be based on price:earnings ratios, historic price movements or a form of over- or under-value. They may be very persuasive, but the question is whether they really believe their own system.

I say this for one simple reason: if you had a system you were adamant would be able to predict stock market movements without any doubt, what would you do? Surely you would borrow to your maximum, invest every cent in the stock market and tell no one. After all, markets are made by people having different opinions. If you told everyone of your foolproof system, everyone would be following it and there would be no market. So you would certainly implement your system, make a fortune and sit back.

The crime situation in SA stimulates (admittedly in a different way) a similar emotion to what most people feel with regard to the stock market - fear! Imagine if you came up with a foolproof method of preventing crime, and there was no doubt about it -you and your family could avoid being subjected to crime in any way.

If you went out and shouted your system from the rooftops, surely criminals would find a way around it. So a better approach would be to act in a totally selfish manner and keep it to yourself. So it is with market commentators who say they have a system.

Even the most successful investors in the world, people like Warren Buffett, readily acknowledge that there is no fancy system. The top investment managers all over the world acknowledge it. They cannot (and in fact do not know anyone who can) time the markets.

So what do you do?

As in the case of crime in SA, all one can do is think about the options, develop a plan and implement it. Relating to crime, that may mean putting up a big wall, adding an electric fence and having 24-hour security.

If you then had a burglary, that would not mean your plan was wrong. All it would mean was that you needed to re-assess the problem and possibly make some minor adjustments.

The market is in the same position right now - all you can do is diversify your assets among asset classes, countries and currencies in accordance with your own lifestyle objectives.

Over the past 20 years the average investor could have made 12% a year by accepting market returns. Instead they tried to beat the market and ended up with an annual loss of 2%.

It is always difficult to stick to a plan when the going gets tough, but there is no alternative to the two most important principles in investment - diversity and long term.

(Reposted from http://www.btimes.co.za/98/0913/btmoney/money06.htm All credits go toward the author of the article.)

 

[Shtopor]

aguduser, let me remind you about CMHC Canadian Mortgage and Housing Corporation, it insures mortgages for those who doesn't have a skin (5% downpayment) in their house purchase. Basically, banks land you money and CMHC says we will pay banks in full if those whom they lend to walk away. Once things get sour, CMHC will run out of money in no time
and taxpayer will have to pay for all this orgy. Now imagine how much fear would you have in bying stocks with 0% down and risking nothing.

 

[interested]

aguduser, let me remind you about CMHC Canadian Mortgage and Housing Corporation, it insures mortgages for those who doesn't have a skin (5% downpayment) in their house purchase. Basically, banks land you money and CMHC says we will pay banks in full if those whom they lend to walk away. Once things get sour, CMHC will run out of money in no time
and taxpayer will have to pay for all this orgy. Now imagine how much fear would you have in bying stocks with 0% down and risking nothing.

I ask this as a question. Is not CMHC effectively a branch of government. And if so, will not the government support CMHC(via the taxpayers) and prop up housing prices by not releasing alot on the market for sale at discounted prices since they would be cutting their own noses to spite their face?
I think this may just prolong the eventual pain.
One other point, I don't think investors will be happy even losing their 5% deposit and one would have to assume alot of speculators who would be the majority of investors if this scenario is to unfold in this fashion. I do realize a 10% drop will create alot of losses if everyone walks but I just don't believe it will happen over 5% negative equity in a low interest environment unless the person has no additional financing behind them.
Perhaps somewhat naive on my part.
However, at 15% and beyond, I believe people will walk on mass.

 

[daveto]

I ask this as a question. Is not CMHC effectively a branch of government. And if so, will not the government support CMHC(via the taxpayers) and prop up housing prices by not releasing alot on the market for sale at discounted prices since they would be cutting their own noses to spite their face?

My understanding is that the CMHC insures the mortgage. The bank is the beneficiary. If an owner defaults on the mortgage payments, then the CMHC funds those payments to the bank.

Note that most of the CMHC insured mortages have been sold as NHA MBA (mortgage bundled securities). These are sold at a very slight premium to regular Gov't of Canada securities. The CMHC is a government agency, and thus in the slight chance that the Gov't of Canada under pressure wrt making payments, it would presumably delay/default first on the arms legth agencies before it did so on its own securities.

Here is an answer to various faqs
http://www.cmhc-schl.gc.ca/en/corp/faq/faq_001.cfm

So in answer to your original question, the bank will do what they want with the property (presumably with some unofficial non- binding input from the CMHC).

I think the equally big issue, is what will happen to consumer spending and habits if they see themselves slowly slipping under water on their RE. They will find themselves unable to afford to sell, which would decimate the home sales and derivative industries (RE agents, brokers, home renovations, furniture, etc). They will also presumably go into financial lockdown mode to try to weather the storm, and cut back on discretionary spending.

Remember that RE is approx 20% of our GDP. Sort of ironic that borrowing money and buying something counts as "gross domestic product". If you look at Stats Canada GDP numbers for Q4/2009 and Q1/2010, our GDP "recovery" came entirely from the rebound in the housing market. (ie. Think about 20% of our GDP, up by 20% in prices/sales over 1 year prior. That raises GDP by 4% overall). Unless the recent downturn in RE sales activity changes direction, we can safely anticipate negative Canadian GDP changes Q3 2010-Q1 2011.

 

[KA1]

I ask this as a question. Is not CMHC effectively a branch of government. And if so, will not the government support CMHC(via the taxpayers) and prop up housing prices by not releasing alot on the market for sale at discounted prices since they would be cutting their own noses to spite their face?

CMHC is not in the business of being a landlord. They wouln't give two hoots as to what happens to the prices as long as real estate is off their hands. After all, it is not their money.