Toronto's condo market booms

[EverythingZen]

Hello all,

Here are some of my thoughts for you, I hope you enjoy them:

The re-alignment of risk that is underway in the credit markets around the world must impact the Toronto housing market as well. It seems to me that credit will now become much, much, more difficult to obtain as the model for lending has broken.

It is difficult to imagine how we in Toronto are immune to the effects of this worldwide rebalancing of the credit markets. Banks will now be demanding higher risk premiums for loans and that will naturally translate to higher mortgage rates and more prudent lending. Only qualified borrowers will be able to obtain mortgages again. It is difficult to believe that the banks will continue to aggressively lend money to condo buyers who don't intend on residing in their units, ie speculative buyers. This speculative lending is perhaps the greatest reason for the current problems in the market and lenders will once gain become highly risk averse. This has to have a strongly negative impact on sales for housing in general and for condos particularly.

I appreciate hearing your thoughts on my post.

Peace & Kindness

 

[BobBob]

All of those things are good, no?

Speculative buying just makes things more expensive for everyone, the fewer flippers we have, the more stable the market will be.

Also, you say banks will only lend to qualified borrowers. Hasn't that always been the case, at least in Canada? In any case, that's certainly the way it should be!

Nothing bad about any of that...

 

[EverythingZen]

All of those things are good, no?

Speculative buying just makes things more expensive for everyone, the fewer flippers we have, the more stable the market will be.

Also, you say banks will only lend to qualified borrowers. Hasn't that always been the case, at least in Canada? In any case, that's certainly the way it should be!

Nothing bad about any of that...

I agree that a price correction is healthy overall as it will rebalance the housing market and flush out the negative impacts that the speculation is having on humanity. However, many people will experience significant distress as a result of the correction. Suffering is never a good thing but hopefully once things stabilize, probably in 2-3 years, society will be better off.

 

[AKS]

It's the speculators/investors who are buying the condos. Without them, the builders can't sell so they won't be able to build. Then all job related markets related to the real estate will get hurt in turn the economy will melt down. The Auto is already hurt, but at least our RE is still staying afloat. But those builders really are pricing their units way too high even if material, land, labour costs are expensive.

 

[Solaris]

It's the speculators/investors who are buying the condos. Without them, the builders can't sell so they won't be able to build. Then all job related markets related to the real estate will get hurt in turn the economy will melt down. The Auto is already hurt, but at least our RE is still staying afloat. But those builders really are pricing their units way too high even if material, land, labour costs are expensive.

I agree with only HALF of your statement ... more than 50% of condo purchasers are actually future owner-occupied units, and really is in the condo market because of the affordability factor ... this is what has been driving the condo market in the past couple years (renters buying their first home) ... sure enough investors played a significant role in condos, but I don't necessarily believe they are the 'drivers' of condo development

exception to the above would be high profile projects such as 1BE + ICE, which clearly has targetted and generated investor interest

 

[cuzzin_elias]

do what we do in Lebanon, LYNCH da speculators

 

[lordmandeep]

The things is in Toronto unlike many Condo markets, many people actually buy Condo's to live in them.


That is why our market will decline but not collapse.

 

[EverythingZen]

The things is in Toronto unlike many Condo markets, many people actually buy Condo's to live in them.

I have not seen actual data to substantiate this point. Instinctually I would agree that Toronto has a large pool of end user buyers looking for homes. However, the enormous volume of condo sales that we have seen in Toronto over the past several years, 2007 being a dramatic year for sales, points to significantly more speculative buying that the demographics would suggest.

I believe that the difference in Toronto vs. Calgary or Vancouver or perhaps toxic markets such as Miami, San Diego and Las Vegas, all of which also have significant population growth and legitimate local demand for new condo homes, is that prices have not escalated in Toronto to the point where the speculative buyers can't reasonably carry (but unlikely profit) from their speculative bets. So, whereas in Miami, where a 2005/6 spec buyer paid $500,000 for a unit that would likely rent for $1300 (if he could find a tenant), thus resulting in a huge monthly deficit to the speculative buyer, in Toronto you find a building such as one in Cityplace, flush with speculative buyers, where the buyer paid $279,000 for a unit that rents for $1300 per month and where the buyer might have also purchased the unit with more equity resulting in a lower mortgage interest payment.

Both markets are subject to investment purchases, however in Toronto you find investors that are less leveraged with lower acquisition costs and therefore less monthly cash drain. Also, in Toronto we probably have a larger pool of renters to draw on as so many of these units really turn into shadow rentals. Toronto investors are still losing money every month (unless big down payments artificially subsidize the monthly loss), and ultimately they will probably take losses from their speculative buys, however this behavior won't cripple them and the losses will be gradual as opposed to instant and dramatic as we've seen in the US with spec buyers unable to obtain the 105% financing required to purchase units that they initially committed to for nothing more than a $5000 deposit paid for on their credit card.

I believe that the acceleration of new prices in 2007 will possibly prove to be the unwinding of the market as rental rates cannot keep pace with the higher purchase prices and the speculative buyers begin to feel the pain of monthly deficits to a greater extent. Also, with significantly tighter requirements, it is also quite conceivable that lenders demand more equity for purchases or higher mortgage rates. I believe that with the events of the financial stress in the credit markets, risk premiums will return to the mortgage market once again as it had before the credit bubble began.

Thank you for taking the time to consider my thoughts.

Peace & Kindness

 

[TKTKTK]

Canada could face housing woes, Merrill warns

The Canadian Press
September 24, 2008 at 11:20 AM EDT

TORONTO — Canada could be headed for a housing mortgage meltdown similar to that being felt in the United States as statistics show many households in Canada are running far larger financial deficits than in the United States or Britain, says Merrill Lynch Canada.

More to come

(I love when they post partial stories)

 

[Roy G Biv]

Canada could face housing woes, Merrill warns

The Canadian Press
September 24, 2008 at 11:20 AM EDT

TORONTO — Canada could be headed for a housing mortgage meltdown similar to that being felt in the United States as statistics show many households in Canada are running far larger financial deficits than in the United States or Britain, says Merrill Lynch Canada.

Interesting. Let's hope not.

Here's a personal anecdote on how the sub-price meltdown in the US can effect Canadian business. We export and install goods into Florida. Business is non-existant, but now we're finding out that money-in-the-bank isn't money until it's actually in the bank.

Yesterday we received a fax from a Florida court which let us know that we are a creditor for a developer that just filed Chapter 11. Many of the condo buyers defaulted on their mortagages, and the developer ran out of money, and now we're out 15K in revenue... for a small business, a couple more of these kinds of instances could sink us.

 

[lowesthangingfruit]

Hello all,

Here are some of my thoughts for you, I hope you enjoy them:

The re-alignment of risk that is underway in the credit markets around the world must impact the Toronto housing market as well. It seems to me that credit will now become much, much, more difficult to obtain as the model for lending has broken.

It is difficult to imagine how we in Toronto are immune to the effects of this worldwide rebalancing of the credit markets. Banks will now be demanding higher risk premiums for loans and that will naturally translate to higher mortgage rates and more prudent lending. Only qualified borrowers will be able to obtain mortgages again. It is difficult to believe that the banks will continue to aggressively lend money to condo buyers who don't intend on residing in their units, ie speculative buyers. This speculative lending is perhaps the greatest reason for the current problems in the market and lenders will once gain become highly risk averse. This has to have a strongly negative impact on sales for housing in general and for condos particularly.

I appreciate hearing your thoughts on my post.

Peace & Kindness

Agree with Zen. If someone can explain to me how a global credit crunch NOT effect Toronto, I would love to hear from you. Was there an anti-credit crisis force field put up around Toronto recently that I haven't heard about ??

I am more of a believer in "first one in, first one out" thesis. Translation: I would sooner look at Florida and California real estate (you gotta admit it's kinda tempting...) then Toronto/Vancouver real estate.

 

[cdr108]

Agree with Zen. If someone can explain to me how a global credit crunch NOT effect Toronto, I would love to hear from you. Was there an anti-credit crisis force field put up around Toronto recently that I haven't heard about ??

I am more of a believer in "first one in, first one out" thesis. Translation: I would sooner look at Florida and California real estate (you gotta admit it's kinda tempting...) then Toronto/Vancouver real estate.

Well, haven't you heard - we're different here in Toronto and Canada
We have the anti-credit force field and Klingon/Romulan cloaking device.

The reality is, were it not for the Fed rate cuts by the US Federal Reserve after 9/11 to the historic and artificially low rate of 1% up to 2004, the US would already be experiencing a recession bringing along Canada with it.
We were 'lucky' since the US spent their way out of it, so Canada never saw a downturn but look at what is happening to them now.

With the proposed $700 billion bailout of Wall Street, that may slow down the inevitable US recession. And who knows, we may get off relatively unscathed.

Ironically, with the global credit crisis and how it may affect some construction projects in TO, it could turn out to be beneficial.

On one side, you have the possibility of slowing or cancelling projects in the works. This would lessen or eliminate more condo units/products from flooding the market so not to adversely flood the supply side while we are already experiencing a decreased demand.

On the other side, with credit markets tightening, no more loans of 5x salaries to people; hence less buyers.

I'd be interested to hear your views, and please include some quantitative and intelligent thoughts; and none of that 'made me chuckles' crap without anything to substantiate your statements besides 'just because' we live in Toronto.

 

[ducati0000]

I havent seen one project cancel due to slow sales.Show me one project that been put on hold because of the US slowdown.Our markets will not show the huge growth compare to the last 5 years but our country is not like the US,we have have fuel,food and fertilizer which the US does not have.Our markets are more tighter in its lending practice than the US.Of course there will be pockets of decline but the amount of decline is normal compare to the huge returns the last few years of those areas.Its back to balance market in Canada and the mess that USA cause will eventually be corrected.The USA government has the power to over haul its economy,it will take time and a lots of money,but as we seen before they always come out stronger and not always smarter.

 

[Alvar]

The old view that when the U.S. sneezes, Canada catches a cold still holds true, to a degree. The only problem is that, this time, the U.S. has the flu. Fortunately, Canada has universal health-care, and should be reasonably well protected. This health-care is a tighter monetary policy, a higher per person savings rate, and a superior banking system. Nonethless, our largest trading partner will not be buying as much from us, so our economy is going to suffer. This will affect the real estate market. Again, in some areas, real estate prices got waaay out of whack. Those corrections will be more pronounced. Good luck.

 

[Alvar]

I havent seen one project cancel due to slow sales.Show me one project that been put on hold because of the US slowdown.Our markets will not show the huge growth compare to the last 5 years but our country is not like the US,we have have fuel,food and fertilizer which the US does not have.Our markets are more tighter in its lending practice than the US.Of course there will be pockets of decline but the amount of decline is normal compare to the huge returns the last few years of those areas.Its back to balance market in Canada and the mess that USA cause will eventually be corrected.The USA government has the power to over haul its economy,it will take time and a lots of money,but as we seen before they always come out stronger and not always smarter.

The U.S. has fuel, food, and fertilizer....!