Baby, we got a bubble!?

[interested]

Guys, discussions have been sidetracked, first by recharts and then by others towards the statistics and away from this thread, that is "Bubble".

Not too long ago, 'bears', ably led by one Interested and fully supported by Daveto, were predicting R/E market bursting and going to the level of 2008 and staying put there.

It has not happened as yet and based upon your reading of the 'Tea leaves" -- that is, statistics --, does any one from the 'Bear' camp still believe that the prices will go down to the level of 2008. If so, then, when we expect that to happen?

I think daveto answered this question very eloquently. I 100% agree with his response. The reality is the unprecendented quantitative easing and flooding of the world with cheap capital has grossly distorted everything including real estate. It is a huge intergenerational wealth transfer from savers to borrowers. If interest rates do finally go up, the shift will go back in favour of the savers. Those borrowers who venture in now into investment real estate may well require more capital and if there is a jolt to the system and sudden spike in interest rates....hold onto your seats because the ride will get very bumpy for those leveraged.

In response to "blahblahblah and chwong" I would ask you to consider that a lot of people in 1990-1994 could not hold on and suffered severe setbacks. While it is true that perhaps your 1989 peak purchase is up 300%, this is not the average for most. Also, how much improvements, capital costs have been spent over 30 years. I am not disputing the premise but just suggesting a fair comparison would have to look at these factors. Also, to daveto's point: TSX in 1989 was 3378. Today 11968. (350% higher). Invested in bonds over 30 years, probably close to the same increase. Of course I appreciate you would have to lower by the amount paid in rent.

My view is that given that the biggest single factor resulting in the price of houses increasing over the past 30 years has been the constant decline in bond rates and therefore mortgages, increasing affordability. I fail to understand why people do not feel that rising rates and hence mortgages, decreasing affordability will not result in price decreases. I do however agree that as a person who invests in some real estate (to a small degree) that it is the rent and the source of revenue which I like.

I personally view real estate revenue as a source as I view dividends, bond interest, and yes even GIC's and cash. I am a believer that I am not smart enough to know what will happen.....learned by having made lots of mistakes over the years. So I spread my eggs and hope that at least one area of my investments will sustain as others fail.

Finally, thank you Ka1 for pointing out yet again my wrong prediction on real estate but I could not have fathomed the massive QE response. I would ask you another question...where do you think real estate would be today if the world were not awash in liquidity looking for a place to settle. Just look today at what happened as the markets digested that Bernanke may in the next few months possibly withdraw some of the stimulus....note they are still talking about buying 65 billion USD/month instead of 85 billion and the mass panic. If people have less money to invest (stocks/bonds etc. worth less) do not house prices eventually have to follow?

 

[KA1]

. Finally, thank you Ka1 for pointing out yet again my wrong prediction on real estate but I could not have fathomed the massive QE response.

You have been very gracious in admitting that you have been wrong in the past.

Having said that, would you care/dare to give us your thoughts, never mind they might turn out to be wrong again, about the real estate landscape that you see between now and, say, year 2020?

 

[interested]

^^^

Haha. And make a bigger fool of myself? LOL
Sure I will give it a try but I think daveto and I are on the same page. However, my feeling is that it will not go as far back and retrace 25-35% but I do believe that 2008 lows are very plausible.(i.e. 15-20%) but not necessarily what I think will happen.
Daveto uses empirical data and past history to arrive at his figures and it is hard for me to dispute. I just do not think they will go down that much.
Clearly my timing has been horribly wrong so far and will be again mainly because I have no idea what market distorting events will occur.

I see a continued stability and no upward growth and possibly a slow drop as QE is withdrawn. If they get it wrong, withdraw too much quickly or some other shock happens, then the drop could be precipitous and more closely resemble daveto's suggestions of the possible 25-35%. In fact, it could even overshoot these targets as pendulums tend to overswing in both directions. If they do not get it horribly wrong, I think probably we will see 5-15% retrenchment over the next 2-7 years.

Is that too wishy washy or hedging my bets too much?

Where do you and others stand as of today? Others willing to guess....because that is all we are doing.

 

[blahblahblah]

I think the increase in real estate over the last 30 years is a result of more than low interest rates. Strong immigration and job growth and a desire to be in a city have helped. And Places to Grow has been huge. The greenbelt means houses(as distinguished from more dense housing) will become more and more rare.

I looked at the return over 24 years based on your TSX and house returns(well mine over that period, which I think IS indicative of the Toronto market) and they were both around 5% yearly. Now the TSX would have had maybe 1.5% dividends and real estate would have maintenance costs. On the other hand, most would have been in usurious mutual funds so they would have had a 3% return instead. AND, real estate is leveraged in most cases. I recognize one can leverage the market as well but I don't consider that prudent.

Me, I don't think well located fee simple real estate in Toronto is in a bubble. Looking around I don't see a tonne of good houses on the market. And those that are go fast. Incomes are strong, the desire for a house in the city is strong. And all those 30 year old condo owners about to have kids would love to have a house and back yard(I generalize here). And even if interest rates go up 2-3%, I think the double income families can still afford a house at these prices.

As for condos, I am not as close to them but I do know vacancy rates are low, rents are high, and that should put a floor under them. Where that floor is is not for me to opine about. Maybe 10% lower?

As for whether it is good time to buy, I think sure, yes. As long as you have a long view.

I think daveto answered this question very eloquently. I 100% agree with his response. The reality is the unprecendented quantitative easing and flooding of the world with cheap capital has grossly distorted everything including real estate. It is a huge intergenerational wealth transfer from savers to borrowers. If interest rates do finally go up, the shift will go back in favour of the savers. Those borrowers who venture in now into investment real estate may well require more capital and if there is a jolt to the system and sudden spike in interest rates....hold onto your seats because the ride will get very bumpy for those leveraged.

In response to "blahblahblah and chwong" I would ask you to consider that a lot of people in 1990-1994 could not hold on and suffered severe setbacks. While it is true that perhaps your 1989 peak purchase is up 300%, this is not the average for most. Also, how much improvements, capital costs have been spent over 30 years. I am not disputing the premise but just suggesting a fair comparison would have to look at these factors. Also, to daveto's point: TSX in 1989 was 3378. Today 11968. (350% higher). Invested in bonds over 30 years, probably close to the same increase. Of course I appreciate you would have to lower by the amount paid in rent.

My view is that given that the biggest single factor resulting in the price of houses increasing over the past 30 years has been the constant decline in bond rates and therefore mortgages, increasing affordability. I fail to understand why people do not feel that rising rates and hence mortgages, decreasing affordability will not result in price decreases. I do however agree that as a person who invests in some real estate (to a small degree) that it is the rent and the source of revenue which I like.

I personally view real estate revenue as a source as I view dividends, bond interest, and yes even GIC's and cash. I am a believer that I am not smart enough to know what will happen.....learned by having made lots of mistakes over the years. So I spread my eggs and hope that at least one area of my investments will sustain as others fail.

Finally, thank you Ka1 for pointing out yet again my wrong prediction on real estate but I could not have fathomed the massive QE response. I would ask you another question...where do you think real estate would be today if the world were not awash in liquidity looking for a place to settle. Just look today at what happened as the markets digested that Bernanke may in the next few months possibly withdraw some of the stimulus....note they are still talking about buying 65 billion USD/month instead of 85 billion and the mass panic. If people have less money to invest (stocks/bonds etc. worth less) do not house prices eventually have to follow?

 

[interested]

blahblahblah,
I agree there are other factors contributing to housing besides interest rate. However, one cannot deny that a leveraged asset, especially in a rising rate environment, will likely result in falling or at least falt house values which will be very difficult for people to absorb. Those with 20% equity who have a 10% decline in pricing have lost 1/2 their equity. Mortgage stays the same (other than what has been paid down. I do appreciate when you say 300% increase in price you are talking about the price increase based on 100% equity. Obviously you made even more in percentage terms as the mortgage became a relatively smaller amount and if your house was at 50% equity for the time, you made 600% on your payment if the house trebled in price.

 

[recharts]

I think the increase in real estate over the last 30 years is a result of more than low interest rates. Strong immigration and job growth and a desire to be in a city have helped. And Places to Grow has been huge. The greenbelt means houses(as distinguished from more dense housing) will become more and more rare.

I looked at the return over 24 years based on your TSX and house returns(well mine over that period, which I think IS indicative of the Toronto market) and they were both around 5% yearly. Now the TSX would have had maybe 1.5% dividends and real estate would have maintenance costs. On the other hand, most would have been in usurious mutual funds so they would have had a 3% return instead. AND, real estate is leveraged in most cases. I recognize one can leverage the market as well but I don't consider that prudent.

Me, I don't think well located fee simple real estate in Toronto is in a bubble. Looking around I don't see a tonne of good houses on the market. And those that are go fast. Incomes are strong, the desire for a house in the city is strong. And all those 30 year old condo owners about to have kids would love to have a house and back yard(I generalize here). And even if interest rates go up 2-3%, I think the double income families can still afford a house at these prices.

As for condos, I am not as close to them but I do know vacancy rates are low, rents are high, and that should put a floor under them. Where that floor is is not for me to opine about. Maybe 10% lower?

As for whether it is good time to buy, I think sure, yes. As long as you have a long view.

I love this sort of speculation without any support
If you don't see good houses maybe you should look more carefully


You have around 18% of the properties for sale over 1 mil sitting there for months
Most of them are in North York
Most of them good properties and they do not sell.

Do you care to explain why? Your theory above doesn't say anything about money and afordability.


Check this picture and this article


For sales numbers

http://recharts.blogspot.ca/2013/06/may-31-my-final-estimates.html

 

[daveto]

I looked at the return over 24 years based on your TSX and house returns(well mine over that period, which I think IS indicative of the Toronto market) and they were both around 5% yearly. Now the TSX would have had maybe 1.5% dividends and real estate would have maintenance costs. On the other hand, most would have been in usurious mutual funds so they would have had a 3% return instead. AND, real estate is leveraged in most cases. I recognize one can leverage the market as well but I don't consider that prudent.

There are a number of inconsistencies in your comparison of the returns of housing vs the TSX.

1. Using the time frame of 1998-2012, Toronto RE is up 3.4% annually according to TREB. The S&P/TSX including dividends is up 5.5% annually.
2. However your analysis uses a 5% RE annual return (above the market average) and compares to the S&P/TSX average return.
3. You then apply a heavy mutual fund fee to the TSX returns (to compensate others for managing your investment) yet make no similar charge for your RE investments (which you manage yourself, without applying a charge for your labour)
4. You then credit your RE investments a benefit from leveraging, but don't apply a similar benefit to the TSX returns.

While it may indeed be correct that a savvy investor would outperform the RE market avg returns, the same holds true for a savvy investor in the TSX.

If you rework the numbers on a consistent basis, allowing for the appropriate taxes, mortgage rates, and equivalent assumptions on leveraging/management fees etc, then the results will be somewhat different (approx equal). Note also that the period of 1998-2012 has seen Toronto RE outperform its long term average whereas the TSX has underperformed its long term average and so the time frame is biased.

 

[blahblahblah]

Your tone doesn't make me feel like spending the effort on you, so I won't. Notice my tone was always respectful and in an "in my opinion" manner.

My initial post in the conversation was basically, don't over analyze. Risk takers analyze and then take a risk. And are sometimes rewarded. Over analyzers end up doing nothing. (well criticising those who don't agree with them but that counts for little).

I love this sort of speculation without any support
If you don't see good houses maybe you should look more carefully


You have around 18% of the properties for sale over 1 mil sitting there for months
Most of them are in North York
Most of them good properties and they do not sell.

Do you care to explain why? Your theory above doesn't say anything about money and afordability.


Check this picture and this article


For sales numbers

http://recharts.blogspot.ca/2013/06/may-31-my-final-estimates.html

 

[blahblahblah]

Dave:
All good points-thanks for thinking it through. I guess we can say stocks have outperformed real estate 2-4% over the last 20 odd years. There are some tax advantages to real estate perhaps along the way(claiming a loss here and there). And forced savings. It is easier to sell a stock and get $10,000 for that vacation but you can't do that with real estate(ignoring mortgaging). They are both good asset class performers and both belong in a diversified portfolio.

There are a number of inconsistencies in your comparison of the returns of housing vs the TSX.

1. Using the time frame of 1998-2012, Toronto RE is up 3.4% annually according to TREB. The S&P/TSX including dividends is up 5.5% annually.
2. However your analysis uses a 5% RE annual return (above the market average) and compares to the S&P/TSX average return.
3. You then apply a heavy mutual fund fee to the TSX returns (to compensate others for managing your investment) yet make no similar charge for your RE investments (which you manage yourself, without applying a charge for your labour)
4. You then credit your RE investments a benefit from leveraging, but don't apply a similar benefit to the TSX returns.

While it may indeed be correct that a savvy investor would outperform the RE market avg returns, the same holds true for a savvy investor in the TSX.

If you rework the numbers on a consistent basis, allowing for the appropriate taxes, mortgage rates, and equivalent assumptions on leveraging/management fees etc, then the results will be somewhat different (approx equal). Note also that the period of 1998-2012 has seen Toronto RE outperform its long term average whereas the TSX has underperformed its long term average and so the time frame is biased.

 

[KA1]

( From The Globe and Mail) Why developer Peter Freed is still bullish on Toronto
TARA PERKINS

The Globe and Mail

Published Saturday, Jun. 22 2013, 6:00 AM EDT

The central bank warned this month that Toronto’s condo market, coupled with sky-high consumer debt levels, is the biggest domestic threat to Canada’s economy and financial health.

Ottawa’s top policy-makers, including Finance Minister Jim Flaherty, have been sounding alarm bells since at least early last year over fears that developers are building too many condos, creating the possibility of a crash in the market.

So, it goes without saying that if Mr. Flaherty and the central bank had their way, Toronto’s condo developers would have begun putting on the brakes some time ago. While there has been signs of a slowdown in condo development, the latest data indicate that new cranes will continue to dot the skyline.

Peter Freed, a developer whose firm, Freed Developments, is credited with revitalizing the King Street West neighbourhood, is one of those who is still pouring money into new projects. His buildings include the swanky Thompson Hotel, the new Thompson Residences and Fashion House.

The Globe recently sat down with Mr. Freed in the Thompson Diner to talk about why he plans to keep putting up new towers.

What are you seeing in the market right now?
Over the last quarter, we’ve been very, very busy. Sales for everyone cooled off mid-2012, and started off slow this year, but about a month ago I realized that we were on pace for the best quarter revenue-wise in our corporate history; we’re on target to exceed $100-million in sales, which I’ve never done before.

So sales are bouncing back?
We have to work for the sales – it’s competitive – but we’re still getting good prices. I still think if you look at the prices for condominiums in Toronto, you can buy beautiful units in great neighbourhoods for $550 to $700 a square foot. In how many cities in the world like Toronto can you do that? With cheap money, those types of prices, and strong employment in Toronto, what do people want before they can say, ‘Hey, things are pretty good’?

So is the market rebounding?
The years in the recent past were exceptional and shouldn’t be considered normal. I think [developers’] expectations get warped. You get this sense of entitlement that, when you launch a project, you should sell 70 per cent of it in the first 90 days. If you can do that sometimes, celebrate, be grateful, but don’t expect it.

Who is buying right now?
I think the condo market, primarily, is the new rental supply in the city. The vacancy rate is below 1 per cent, the supply is getting absorbed. There are users buying in specific projects as well, but they’re certainly being overshadowed by the investor and the rental market supply.

What are you seeing in terms of prices?
Pricing is flat. Last year it stepped back a little bit, 10 per cent or a little bit more or less depending on the project, but I think it will stay flat for a little while and I think in a year or so we’ll start to see it increase a bit.

Are you putting your money where your mouth is in terms of future development?
Certainly. We’re working on acquiring land in a few great neighbourhoods right now. But we pick our spots carefully. We’re making a big bet on Yonge and Eglinton – we have 1,700 units in our pipeline there – and we have another two or three objectives that we’re working on. King West, we’re almost finished.

The fears around Toronto’s market aren’t convincing you to expand to other cities?
We have one project in Muskoka, but no. When I’m older, I’m certainly open to expanding. I like to drive to work and then go home at the end of the day, and I don’t like flying around too much for work.



This interview has been edited and condensed.

 

[blahblahblah]

I saw that as well. Can't be anyone closer to the market than Freed. And looking for sites. He is not sitting around making charts. He is out making money.

 

[pignchick]

I saw that as well. Can't be anyone closer to the market than Freed. And looking for sites. He is not sitting around making charts. He is out making money.

sure, hubris will eventually get him and the rest of these developers.

I would be interested to know exactly how all of these condo constructions projects are financed. There is not a lot of disclosure.

 

[interested]

sure, hubris will eventually get him and the rest of these developers.

I would be interested to know exactly how all of these condo constructions projects are financed. There is not a lot of disclosure.

Let's assume Freed is telling the truth. IF so, it just shows that after a relative lull of 6-9 months, there was one good quarter. This is not necessarily a trend. Also, he may have had a couple of launches, perhaps delaying a previously ready one and that may account for the sales.

That said, I would want to know that all or at least the majority developers experienced a good quarter before I would conclude that this is a trend.

Yes, developers are human and some will get caught in the end. But the "strong" will survive and the "weak" disappear. This is what would have happened to the housing market probably if there was not so much government intervention distorting the facts.

Developers finance in different ways. Some have private equity backers, some have "investors" who put up money for early stages, and of course some are wealthy and put up their own capital to start until they get bank financing in place. Most developers are private and hence you will not get disclosure.

 

[recharts]

I saw that as well. Can't be anyone closer to the market than Freed. And looking for sites. He is not sitting around making charts. He is out making money.

this makes me not bother with you either anymore from now on. Yet another RE pumper. Ans excuse my tone.
re mu tone:It doesn't cease to amaze me how deeply is this rooted in the canadian thinking: if you express it politely you can say any sort of insult or you can do anything. While in other countries you get punched for logical insults here the aggressed has to say "Thank you". And we are proud of our politeness and naive to believe that it is a Canadian brand.

you react and respond to an article that favors your opinion and choose not to respond to a a post that challenges your opinions with numbers. You are deranged by the tone bun not by the numbers
Next you say the stock are liquid and you can not sell a house to get 10000 to go in vacation. You need a vacation, next question is $10000: What is HELOC ?

Anyway....

 

[recharts]

Let's assume Freed is telling the truth. IF so, it just shows that after a relative lull of 6-9 months, there was one good quarter. This is not necessarily a trend. Also, he may have had a couple of launches, perhaps delaying a previously ready one and that may account for the sales.

That said, I would want to know that all or at least the majority developers experienced a good quarter before I would conclude that this is a trend.

Yes, developers are human and some will get caught in the end. But the "strong" will survive and the "weak" disappear. This is what would have happened to the housing market probably if there was not so much government intervention distorting the facts.

Developers finance in different ways. Some have private equity backers, some have "investors" who put up money for early stages, and of course some are wealthy and put up their own capital to start until they get bank financing in place. Most developers are private and hence you will not get disclosure.

He was cought with the pants off by this depressed sales and he is pumping it up.
What do you expect him to say ? He is a developer!