Baby, we got a bubble!?

[cdr108]

I cringe every time I read someone use the term "it's different this time" in a sarcastic manner.

So much has changed in our economy, our demographics, our preferences, our policies, our province that the market today is very different than markets past. Toronto of 2012 is not Toronto of 1989.

Now, don't get me wrong - I'm not suggesting that these differences are going to power a never-ending, always increasing real estate market. The market will eventually fall.

But our province, our economy, our city have all changed drastically over the last twenty years. A lot is different. Assuming that these differences don't matter or don't change market response/cycles is just as loopy as assuming that prices are going to go up forever.

the same statements can be said of any developed city/country, yet that still didn't prevent those cities/countries from falling.
nothing has stayed static for the past 20+ years.

prices change, incomes change, types of jobs change, etc but the metrics have stayed on constant.

remember similar statements were made for dot com stocks and their lofty evaluations ... what happened there?

 

[jeff316]

But even in Toronto, the metrics used to determine if house prices are overvalued still apply today, and they are telling us that prices are not in line with rents and wages.

I agree that the traditional metrics lead to your conclusion but whether they still apply is more of an assumption, albeit fairly commonly held.

This isn't really a response to your response but my question is why are those metrics applied without question, amendment or re-calibration? Because that's the way it's always been...? That's how we've traditionally done it...? That sounds an awful lot like the bipolar brother of "It's different this time!" that gets (sometimes rightfully, sometimes wrongly) pilloried by many commenters. We're not talking about metrics that run back particularly far. Most start with datasets from the mid 50s and early 60s. Is price:rent from 1976 truly relevant in 2012? Is a price:income calculation that includes the post-WWI economic "miracle" apply without question today? Could this be one of those times that skews the ratios up a bit permanently? I don't know. Why are the metrics from a previous era considered an accurate assessment of affordability in this day and age? It's an honest question that I don't have an answer for.

 

[ILuvTO]

I agree that the traditional metrics lead to your conclusion but whether they still apply is more of an assumption. My question is why are those metrics applied without question, amendment or re-calibration?

Because that's the way it's always been...? That's how we've traditionally done it...? That sounds an awful lot like the bipolar brother of "It's different this time!" that gets (sometimes rightfully, sometimes wrongly) pilloried by many commenters. We're not talking about metrics that run back particularly far. Most start with datasets from the mid 50s and early 60s. Is price:income from 1976 truly relevant in 2012? Is a price:rent trend line that includes the post-WWI economic "miracle" apply without question today? Could this be one of those times that skews the ratios up a bit permanently? I don't know. Why are the price:income and price:rent ratios from a previous era an accurate assessment of affordability in this day and age when so much has changed since? It's an honest question that I don't have an answer for.

I'll take a stab at answering. I believe those metrics do still apply today because they illustrate affordability. The fact that more of peoples incomes are required to pay for their mortgages is not a positive or sustainable thing. Years ago one income could support a mortgage, now two are barely cutting it and this is even with record low interest rates.

 

[greenleaf]

I agree that the traditional metrics lead to your conclusion but whether they still apply is more of an assumption, albeit fairly commonly held.

This isn't really a response to your response but my question is why are those metrics applied without question, amendment or re-calibration? Because that's the way it's always been...? That's how we've traditionally done it...? That sounds an awful lot like the bipolar brother of "It's different this time!" that gets (sometimes rightfully, sometimes wrongly) pilloried by many commenters. We're not talking about metrics that run back particularly far. Most start with datasets from the mid 50s and early 60s. Is price:rent from 1976 truly relevant in 2012? Is a price:income calculation that includes the post-WWI economic "miracle" apply without question today? Could this be one of those times that skews the ratios up a bit permanently? I don't know. Why are the metrics from a previous era considered an accurate assessment of affordability in this day and age? It's an honest question that I don't have an answer for.

You should google the Herengracht index. There are plenty of articles on it that explain why the metrics are applied.

Or, if you prefer the narrative version, NY Times article: http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?pagewanted=all

"where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long-term investments, this longest of long-term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."

(to be fair, no one really thinks about their real estate value over a half a century or more, but still...)

 

[KA1]

Why are the metrics from a previous era considered an accurate assessment of affordability in this day and age? It's an honest question that I don't have an answer for.

http://www.theglobeandmail.com/news...g-over-ontarios-economic-woes/article2343676/

Link to an article by Mr. John Ibbitson in today's The Globe and Mail. There are 2 Ontarios -- one is Toronto and the other is the rest of the province. Perhaps, that is why the metrics from a previous era do not work in GTA.

 

[cdr108]

http://www.theglobeandmail.com/news...g-over-ontarios-economic-woes/article2343676/

Link to an article by Mr. John Ibbitson in today's The Globe and Mail. There are 2 Ontarios -- one is Toronto and the other is the rest of the province. Perhaps, that is why the metrics from a previous era do not work in GTA.

sorry, i read the article and nothing there even talks about the metrics or why it should not apply.

only that Toronto's economy is based on a combination of financial services, education, biosciences, cultural industries, tourism and that living in the GTA, it can feel as though things are still going reasonably well vs. the other parts of Ontario.

 

[KA1]

sorry, i read the article and nothing there even talks about the metrics or why it should not apply.

only that Toronto's economy is based on a combination of financial services, education, biosciences, cultural industries, tourism and that living in the GTA, it can feel as though things are still going reasonably well vs. the other parts of Ontario.

Cdr 108,

you are quite correct that the article does not refer at all to the metrics.

By drawing attention to this article, I was trying to reiterate my 'pet' opinion that TO economy is different than the rest of the economy and that the prices may drop a bit but there will be no 'crash' or bubble bust.

Sorry for causing the confusion.

 

[macookie]

Cdr 108,

you are quite correct that the article does not refer at all to the metrics.

By drawing attention to this article, I was trying to reiterate my 'pet' opinion that TO economy is different than the rest of the economy and that the prices may drop a bit but there will be no 'crash' or bubble bust.

Sorry for causing the confusion.

Yes, we know that Toronto Housing Prices will continue to rise year after year because the "Housing Real Estate Talking Heads and Pets" believe this time is so different and that warning signs of an overheated saturated market do not apply to a Toronto because it is well diversified in middle of a Ohio like manufacturing state. Nothing but good times and sunshine for the Golden Goose Provincial Capital in the Center of the Universe.

3 years... lower prices that's my bet.

 

[KA1]

Yes, we know that Toronto Housing Prices will continue to rise year after year because the "Housing Real Estate Talking Heads and Pets" believe this time is so different and that warning signs of an overheated saturated market do not apply to a Toronto because it is well diversified in middle of a Ohio like manufacturing state. Nothing but good times and sunshine for the Golden Goose Provincial Capital in the Center of the Universe.

3 years... lower prices that's my bet.

To 'irritate' you a bit more, I have pasted a link to a news item in Monday's The Star stating that during the next 20 odd years, baby boomers will be inheriring $ 1 Trillion (there is no typo here) that will affect real estate prices and stock market.

Guess, which way R/E prices will go then?

http://www.moneyville.ca/article/1133853--baby-boomers-set-to-inherit-1-trillion?bn=1

 

[drewp]

I am kind of curious who owns and who rents. I wonder if peoples opinion are based on their current living arrangements.

 

[macookie]

To 'irritate' you a bit more, I have pasted a link to a news item in Monday's The Star stating that during the next 20 odd years, baby boomers will be inheriring $ 1 Trillion (there is no typo here) that will affect real estate prices and stock market.

Guess, which way R/E prices will go then?

http://www.moneyville.ca/article/1133853--baby-boomers-set-to-inherit-1-trillion?bn=1

When I look into my crystal ball I see austerity for Ontario. I see a looming deficit that makes us all a little Greece-like. I see job cuts, I see higher taxes, I see user fees, I see teachers, teacher aids & education workers getting layoff notices. I see Doctors earning less... because expenses increase yet they get cap'd at 2012 rates for the next 10 years. I see less nurses. I see less provincial workers... I see cap'd wages for the next 10 years.

I see smaller pensions... I see smaller increases in pension benefits... I see clawbacks on CPP, and OAS. I see TSFA being cut, I see RRSP being taxed a higher rate... generally I see that governments are going to demand more cash in various ways I haven't even thought of... but they will provide less.

I see the Dalton Government increasing Estate Taxes and Probate Fees as one measure to help reduce the Provincial deficit.

Finally, I see Canadian's moving to Alberta, Saskatchewan, Manitoba... and overseas for a better live...

And guess, which way R/E prices will go then????????

 

[rbt]

3 years... lower prices that's my bet.

Just out of curiousity, what was your bet in 2007?

Also, lower prices than what? A lower price in 2015 than 2014 still means you should buy today (2 years appreciation). Back to 2006 price levels? How about 2001 price levels?

How many years will prices fall over? Will it take a decade to hit bottom or can I jump out of the market in Sprint 2015 and back in Fall 2016 with a bunch of cash in my pocket and the same house.

 

[rbt]

To 'irritate' you a bit more, I have pasted a link to a news item in Monday's The Star stating that during the next 20 odd years, baby boomers will be inheriring $ 1 Trillion (there is no typo here) that will affect real estate prices and stock market.

Guess, which way R/E prices will go then?

Down because boomers are selling a few million units to cash in on their inheritance?

 

[macookie]

Just out of curiousity, what was your bet in 2007?

Also, lower prices than what? A lower price in 2015 than 2014 still means you should buy today (2 years appreciation). Back to 2006 price levels? How about 2001 price levels?

How many years will prices fall over? Will it take a decade to hit bottom or can I jump out of the market in Sprint 2015 and back in Fall 2016 with a bunch of cash in my pocket and the same house.

My bet in 2007 was lower, and I was correct it was lower in Windsor, Ontario. Had, I waited another year or two to sell my home and move, it would have cost me another 20K to 30K.

 

[jeff316]

I'll take a stab at answering. I believe those metrics do still apply today because they illustrate affordability. The fact that more of peoples incomes are required to pay for their mortgages is not a positive or sustainable thing. Years ago one income could support a mortgage, now two are barely cutting it and this is even with record low interest rates.

You're probably right, I don't think it is positive, it's likely that it's not sustainable. But those are value judgments. I'm trying to take one step back. Why would what was considered affordable in a one income age be automatically considered affordable today? Maybe housing is going to get permanently (or long-termly, or medium-termly) less affordable due to a mix of economic, political, societal etc. factors, and subsequently only becomes sustainable or available for wealthier segments of the population?

Would we judge public health based on indicators that were based on trends that did not reflect the demographics (age, ethnicity, race, etc.) of our modern Canadian population?

Would we would try to assess how long the Red Wings will keep winning at home through metrics that are heavily weighted by data from the Original Six years?

Would I not recalibrate price:rent ratios to reflect changes to rental stock, consumer behaviour, consumer spending, income equality, gov't incetives re: housing development vs rental development, etc. etc. etc.?

I'm kinda ranting...well, more than kinda, I know, I'm sorry...I just find this stuff interesting because at my work we're often called on to assess the 'evidence' put forward by corporations, NGOs, once in a while gov'ts, that are used to justify actions and policies proposed or adopted. The first things we do is look for the metrics used to support the evidence (and those that are absent, sometimes conspicuously.) The second thing we do is try to assess the metrics to see how relevant the underlying assumptions and results and accepted conclusions of those metrics are to today. I haven't seen that happen for housing yet, and haven't seen a good answer for why not. When I see someone like Athanassakos state something along the lines of "I can't see why it would be any different" I know that I can think of a whole host of factors that might make things different (on both sides of the debate), and I know that type of thinking wouldn't last two weeks in our enviro.