Drive behing the Market? Status Fad?

[MAU]

Also many of you make incorrect calculations that you need 50k income to support a 180k mortgage.

I know people who make far less and somehow, god knows how, pay much larger mortgages.

This is the heart of the problem. Too many people think that these low interest rates are normal and the old 3x income rule is obsolete. They're getting by, for the moment, with with mortgages several times their income. When interest rates return to something closer to the long term average, then they will need 50k income to support a 180k mortgage. These low rates won't last more than a few years. These people that you know better start paying down their mortgage quickly.

 

[daveto]

How much of a correction are we talking here? The reality is the housing market is correcting itself from correcting too much from the mid 80s (?) . Someone posted a graph in one of these threads that showed a median and the huge drop in prices of homes made it so people never even broke even till about '99 or later.

According to the averages of housing increases over the last 50years we are pretty close target.

Original post by Eug...
http://www.urbantoronto.ca/showpost.php?p=276894&postcount=127

The driving force is that in reality realty prices were below market value. Now they may be a little about value but there certainly won't be a drastic drop in price. Plus many higher end homes have already dropped in price significantly. I don't think starter homes will drop at all.

The correction may have already happened if you average out the prices.

"the reality is..."? "Certainly"? And then you post a graph from TREB to prove your point?

TREB is not exactly an objective source about this whole thing, and I think we can all agree that nothing is certain here, and the reality of the situation is difficult to identify.

w.ll.am, ultimately I come back to the following two questions

1. What do you think is an appropriate multiple between rental prices and the cost of purchasing and owning the same property?

2. What do you think is an appropriate multiple between the cost of purchasing and one's family income?

If you do some googling on those topics, you'll learn some interesting things. For me, 18 months ago I was a hardcore Toronto RE bull. But then I began researching the answers to those two questions, and now I'm a hardcore Toronto RE bear.

The MSM and various sales outlets (TREB, etc), are not going to help you find the truth. Do your own research on the above two questions, and if you still are a Toronto RE bull then I would be very grateful if you would post your reasoning here so I can reassess my position.

 

[andrejeffry]

This is the heart of the problem. Too many people think that these low interest rates are normal and the old 3x income rule is obsolete. They're getting by, for the moment, with with mortgages several times their income. When interest rates return to something closer to the long term average, then they will need 50k income to support a 180k mortgage. These low rates won't last more than a few years. These people that you know better start paying down their mortgage quickly.

I think you guys are underestimating how many wealthy households in Toronto. According to the last report, the average net-worth of households in Toronto is ~530K, second only to Vancouver. That's average, not median. Meaning that there are a whole bunch of wealthy households number out there, enough to skew the number to be that high.

Toronto is the second capital centre in North America, after New York. that's a fact you just can't dismiss

 

[confused5o1]

Toronto is the second capital centre in North America, after New York. that's a fact you just can't dismiss

You mean third right behind New York and Chicago but ahead of Boston.

 

[andrejeffry]

You mean third right behind New York and Chicago but ahead of Boston.

really? I thought it was second.

So in comparison to other large capital centres in North America: New York, Chicago , Boston, Vancouver, San Fransisco, Toronto still has the lowest real estate price

 

[daveto]

I think you guys are underestimating how many wealthy households in Toronto. According to the last report, the average net-worth of households in Toronto is ~530K, second only to Vancouver. That's average, not median. Meaning that there are a whole bunch of wealthy households number out there, enough to skew the number to be that high.

Andre, which report? I'm curious how much of that $530k is predicated upon current RE valuations. Do they show a split by asset class? Also retirement locked in or non locked in makes a big difference.

Does the report identify the distribution of the the households? Since it is an average figure, there could theoretically be just one super high worth household. Did they provide median figures?

 

[cdr108]

really? I thought it was second.

So in comparison to other large capital centres in North America: New York, Chicago , Boston, Vancouver, San Fransisco, Toronto still has the lowest real estate price

hmmm ... let's see, the US has pre-dominately 35- and 40- year mortgages AND the interest is tax deductible, both which inflate prices.

Vancouver is an international 'port' city for many Asian/European/Middle Eastern clients.

I love Toronto, but really, we have to get off this high horse attitude that we are an international city. When our incomes and infra-structure approach cosmopolitan city levels, then we can talk.

 

[safeashouses]

rbt, I think almost by definition virtually no one can predict the timing of a crash. I think a keen mind can identify what the major issues are, the cause and consequences. However, if prices hypothetically need to change up or down based on known forces it is hard to tell if this will happen rapidly in 6 months or over many many years.

Daveto, It is my general opinion that there is something seriously imbalanced in the local real estate market here and in the rest of Canada. History tends to repeat itself and Canada has always been a kind of meat and potatoes pragmatic marketplace. The one thing where I may drop my guard and ask the famous last words "is this time different" is with respect to how several markets like here in Toronto are maturing? Canada on a relative scale is becoming more and more economically and politically irrelevent with each passing day. However we occupy and will likely always occupy the top tier of standard of living in the world. My question is to what degree are we becoming a capital (money) dumping ground for foreign nationals and how is that impacting markets in Toronto and Vancouver etc. in the long-term? So what I mean is that even if the Canadian middle-class is going no where, even falling behind that doesn't mean that there isn't an exponential increase in foreign interests plunking money in the market.

Ricky appears to grasp the situation in Toronto better than anyone else here. We are in the grasp of foreign speculative forces that ignore fundamental metrics of value. This is a dangerous game to play. If I were an investor (hint I'm a huge investor but not in this pinball game market) I would want to understand fundamental values or just sit this one out until values return to normal.

For those of you unaware, a fair yield on rental income today is probably in the 6%-6.5% range (that's an actual yield after properly factoring in all operating expenses and reserves) with 10 year mortgage funds available in the 5.5-6.0% range. Those of you buying property for a 3% return and financing it with floating prime rate debt will be very disappointed in the performance of your investments looking ahead 1-2 years.

The agent's comments above make me laugh. Hey agent, price of an iPhone is $700 in Paris so I guess iPhones in Toronto at $299 are 60% underpriced too huh! Better buy your iPhone now before Toronto catches up to other world cities like Paris! Why don't you save your blatant marketing bs for the lesser minds in the MSM.

 

[MAU]

I think you guys are underestimating how many wealthy households in Toronto. According to the last report, the average net-worth of households in Toronto is ~530K, second only to Vancouver. That's average, not median. Meaning that there are a whole bunch of wealthy households number out there, enough to skew the number to be that high.

It's the median that counts. Average numbers are misleading. The wealthy live in a wealthy world, with wealthy finances and wealthy real estate markets. They may well be living within their means with mortgages less than 3x their income. I'm sure their net worth is astronomical too. Good for them. And yes, they do skew the statistics. A lot.

Us mere mortals live in the median world with median real estate markets. We compete for houses against other median people with median incomes and net worth.

 

[safeashouses]

It's the median that counts. Average numbers are misleading. The wealthy live in a wealthy world, with wealthy finances and wealthy real estate markets. They may well be living within their means with mortgages less than 3x their income. I'm sure their net worth is astronomical too. Good for them. And yes, they do skew the statistics. A lot.

Us mere mortals live in the median world with median real estate markets. We compete for houses against other median people with median incomes and net worth.

Actually MAU you touched on something quite interesting. You live in a world where most buyer's bid on property based on a conservative approach of 25% downpayment, 5 year fixed mortgages, etc. However, it's that one guy who had no business bidding on $400,000 condos last year who is now told by his bank that he can borrow money at 2% with a 35 yr amortization who pushes all you sensible buyers out of the market. He can only borrow money so cheap because CMHC is recklessly approving anyone on orders of the federal government. When that guy who can afford $8k in interest at 2% finds himself paying $16k at 4% interest, well look out. Not only because he will have trouble servicing his debt but the bar is now raised on all new buyers entering the market. I wouldn't want to be the guy in charge of CHMC in 18-24 months!

 

[andrejeffry]

Andre, which report? I'm curious how much of that $530k is predicated upon current RE valuations. Do they show a split by asset class? Also retirement locked in or non locked in makes a big difference.

Does the report identify the distribution of the the households? Since it is an average figure, there could theoretically be just one super high worth household. Did they provide median figures?

Here's article for it, no full report. Again, it's average, not median
http://www.thestar.com/opinion/editorials/article/705830

it could be one giant super high net worth and/or a whole bunch of families worth 3-5 millions.

 

[andrejeffry]

hmmm ... let's see, the US has pre-dominately 35- and 40- year mortgages AND the interest is tax deductible, both which inflate prices.

Vancouver is an international 'port' city for many Asian/European/Middle Eastern clients.

I love Toronto, but really, we have to get off this high horse attitude that we are an international city. When our incomes and infra-structure approach cosmopolitan city levels, then we can talk.

Maybe it's time for us to stop feeling like a citizen of a second class city. The last time I checked 5 of the biggest banks in North America are HQ in Toronto. Yeah we can say them as the biggest now, since they're the only few escaped barely unscathed from the crisis

 

[lordmandeep]

So many contradictions in this debate.

One group is arguing all is well, this is just Toronto growing. Others say this is just a huge bubble and dark days are ahead.


All I am saying, has a real estate market crashed while an economy was improving???

I think what you will see in Toronto is the market will go crazy while rates stay low. The Bank of Canada has said if the real estate market does not "calm down" by the start of 2010, they may have to increase interest rates. The 2nd rates start to increase the market will go back down however I doubt we will see a crash.

I assume the increases will be slow, as the Bank of Canada is a very very conservative group and do not want to jump the gun.

Even as the interest rates increase, and this is an assumption....
As the economy improves, I would imagine people will have "space" or extra money to afford the higher rates on their mortgages.

That is why I think any thought of the market collapsing is absurd.

 

[jacek.mazurek]

So many contradictions in this debate.

One group is arguing all is well, this is just Toronto growing. Others say this is just a huge bubble and dark days are ahead.


All I am saying, has a real estate market crashed while an economy was improving???

I think what you will see in Toronto is the market will go crazy while rates stay low. The Bank of Canada has said if the real estate market does not "calm down" by the start of 2010, they may have to increase interest rates. The 2nd rates start to increase the market will go back down however I doubt we will see a crash.

I assume the increases will be slow, as the Bank of Canada is a very very conservative group and do not want to jump the gun.

Even as the interest rates increase, and this is an assumption....
As the economy improves, I would imagine people will have "space" or extra money to afford the higher rates on their mortgages.

That is why I think any thought of the market collapsing is absurd.

Has the Bank of Canada not said that as long as inflation stays reasonable, they will not touch rates until the middle of 2010? Even then, I really don't see them rocketing up.
Any thoughts?

Jack

 

[Eug]

I don't see why some need to have an extreme view on this stuff. Some ramblings from me, in no particular order.

I personally think Toronto is indeed the most metropolitan city in Canada, and yes I've lived in Vancouver, Toronto, and Montreal (among other places). For this reason, Toronto continues to attract a large immigrant population and there is continued growth because of that. Toronto is also the financial hub of Canada, which is not an insignificant consideration.

That said, it may be foolish to just assume all the increases in home valuations are 100% justified. There is evidence that Toronto home prices are somewhat overvalued, and when things are overvalued, there is a distinct possibility that there will be a pullback to more reasonable valuation... and then some, meaning an overshoot to the negative is also quite possible. Also, if a pullback to the expected mean is to happen, there are different ways that can happen. It can happen suddenly, with a huge overshoot, or it can be more gradual with no overshoot, or it could just mean a flat market for a number of years leading to a real pullback after inflation is considered.

As for owning a home being a "status fad" in Toronto, I'm not sure where that comes from. If anything I think people on average have become more astute over the years about the benefits of owning and the benefits of renting, even if many people still don't quite understand it. If the "status fad" of owning did exist, if anything that fad is probably waning IMHO. In fact, I'd say that sentiment is less prevalent in large cities like Toronto as compared to small cities. I grew up in a small city, and there, ownership was expected for anyone in a stable job and established. This is definitely not the case in Toronto. I have some quite well-to-do acquaintances who rent, and nobody gives a damn either way. I personally prefer to own, but that's a personal decision, and not a judgement on someone else's choice to rent.

I also don't understand why any numbers from TREB are immediately brushed off as meaningless lies by some. The numbers are the numbers. If someone thinks TREB is lying and is publishing falsified numbers, then it's up to that someone to prove it. Yes there are other ways of measuring home prices such as Teranet's method, but it's just another different method. Now you're free to ignore TREB's spin on those numbers, but that's a different matter.