The Friday Rant: Is Toronto Real Estate “Overpriced?”

Such a leading question!

First, we need to define “overpriced,” and in actual fact, we’d need to analyze multiple different definitions and interpretations – both literal and economic, of “overpriced”

If you want to compare Toronto to New York, then we’re not overpriced.  If you want to compare 2014 to 1970, then we certainly are overpriced.  It’s just a matter of perception, and of course, finding the right numbers and examples to back up your opinion…

OverPricedHouseCartoon

For whatever reason, I seem to get a lot of calls from Toronto newspaper columnists and journalists, and many of them for the last year have been asking the same basic question: “What is with the price of Toronto real estate?

I would think by now that they’re getting exceptionally bored of writing the same thing, over and over – that the market is hot, and house prices are high.

I’ve also chatted with folks from the Wall Street Journal, and another “chap” in London, as people around the world have taken notice of Toronto’s seemingly never-ending bull-run when it comes to real estate.

Folks have been writing about the impending demise of the Toronto real estate market since I got into the business in 2004, and it hasn’t happened……yet.

Some people who wrote about the impending demise have gone from bearish to bullish, and yet some continue to hammer away at economic indicators and statistics that could potentially point to a downtown.

But today, I don’t want to talk about predictions, or talk about where the market is going, whether up or down.

I want to talk about the words “overpriced,” and “overvalued,” and exactly whether or not those words can be attributed to the Toronto real estate market.

I was asked the other day about the Fitch Ratings Agency’s assertion that Canadian real estate was “overvalued by 20%.”

Personally, I don’t put any stake into that whatsoever.

What is overpriced?

And who is the Fitch Ratings Agency to suggest that Canadian real estate is overpriced by 20%?  What numbers do they have to back this up?  What do they have to suggest that they didn’t just pluck this number from thin air?

“We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases.”

Wow, that’s ground-breaking stuff, isn’t it?

Is that ALL they have to go on?  Or is the name “Fitch” enough to back up a hypothesis or prediction, whether it’s pulled out of thin air or not?

These assessments of the market being xx% overpriced are nothing new.

A quick search on Google, whether it’s you or I, will reveal all kinds of predictions from the past few years.

HERE is an article from February, 2013 suggesting that Canadian real estate is overpriced by 10-20%.  The average Toronto house price increased about 7-10% since then, so perhaps the market of informed buyers and sellers didn’t agree.

I’m not going to waste my time going through the Google archives, looking for more articles like this from 2012, 2011, 2010, and so on.

But I think it’s fair to say that for every year in the past decade, some ratings agency, Big-5 bank CEO, or notable economist has published a “report” (ooooooh…..a report!  Does it have fancy cover?) suggesting that the Canadian real estate market is overvalued by a certain percentage.  And yet, the market has continued to go up every year since then.

I’m sorry, but I don’t put a lot of stake into ratings agencies.

After all, the United States has an insurmountable debt over $17.6 Trillion – a hole they will most likely never climb out of as they near the end of their reign as a world superpower, and yet their greenback continues to soar, and ratings agencies have no problem giving them AAA.

In fact, our good friends Fitch Ratings Agency, who believe that Canada’s real estate market is overvalued by 20%, had no problem increasing U.S.A.’s credit rating from AA+ to AAA in March of 2014.

What a bunch of Fitches.

So no, I don’t really care what ratings agencies say about the Canadian real estate market.

I care about what’s going on, each and every day, in the market that I work in.

The story from my perspective over the last few years has been the same: not enough supply to satisfy the demand.

This is usually the part of the blog where I put up a very elementary graph of “Supply And Demand,” but I don’t want to water it down today.  Surely we can agree that when demand is greater than supply, we have a “shortage,” and that in a shortage, prices increase, no?

Can we also agree that if price is paid for a product, over and over and over, then that product is valued, by the market, at that price?

It’s semantics, really.  I’m not going to say the product is “worth” what the buyers will pay, since an argument can be constructed that what something is “worth” and what somebody will PAY are two different things.  Of course, the counter-argument is the old real estate adage, “A house is worth what somebody is willing to pay for it,” and I both agree and disagree with that, depending on where I’m standing.

I guess my real frustration stems from the fact that outsiders, ie. those who don’t live in this country, let alone work in the real estate market every day, are standing at the top of a mountain saying, “Canadian real estate is overpriced.”

And yes, I’m sure that an analyst in London, England can go through the financial statements of a company based in Silicon Valley, and decide whether the stock is a good buy.  But I think real estate is different.

To understand our city, you have to live here.

I had a family friend visit from Atlanta, and when we went down to get groceries at Metro on Front Street, he marvelled at how small it was, and asked, “Don’t you guys have a like a big Publix that you can drive to?”  Where he’s from, you can drive ten minutes and be well outside the city limits, and into areas where land is in abundance, and you can build ten mini-malls in a row, if you’d like, and a cost of next to nothing.

We just don’t have the land in Toronto to build the number of houses and condos needed to satisfy the demand.

It’s that simple to me.  It really is.

A CBC reporter asked me this week, “Is it sad that many Canadians are no longer able to afford ‘The Canadian Dream,’ and buy a house in Toronto?”

I replied as honestly as I could, and said, “No.”

That’s not “sad.”  It’s reality.

And this is the point that many outsiders don’t understand about the Toronto market, where houses are worth what they’re selling for, and as they continue to appreciate, and defy expectations from analysts and economists alike.

This isn’t 1950’s Kansas where pre-fab houses were rolling off assembly lines, and being smacked down all over the place so that John & Mary could raise Bobby & Susie, while John worked 9-5, Mary kept the house, and John worked for the same company for 30 years until he retired comfortably.

I told the CBC reporter rather bluntly, “If you’re a guy that works at Jack Astor’s, and your girlfriend works out of the apartment, designing jewelry and selling it over the internet, do you really have the “right” to the Canadian Dream?”

I don’t mean to be insensitive, or insulting, but that’s just the harsh reality of Toronto.

There’s no “right” to affordability.

It’s market dynamics.

Supply and demand.

Accurate pricing.

If you can’t afford to live in Toronto, you might not be able to live in Toronto!  Ajax, Pickering, Oshawa – have your pick.  You don’t see those folks who can’t afford a Brownstone in Manhattan shouting, “This is unfair,” and yet we see a lot of those sentiments here in Toronto.

The prices are what they are, because the market says so.

And if and when the market, which is made up of buyers and sellers, believes otherwise, then prices will drop accordingly.

So far this year, I’ve had three clients sell their Toronto condos, and move to Oakville where prices are lower.  If we start to see more and more of that, perhaps the market here in Toronto will change.  There are other options out there, and not everybody who currently lives in Toronto had to continue doing so.  But to suggest that the market is overpriced, merely out of frustration, is juvenile.

“The market in Toronto is just stupid.”  I hear that a lot, and it’s frustration talking; not economics.

“Houses are way too expensive in Toronto.”  To who?  You?  Well they’re nothing compared to houses in Istanbul, so maybe they’re not “expensive,” but rather they’re “unaffordable” to a certain part of the population.

One of the most commonly-used critiques of the Canadian housing market is that “Canadians take on too much debt,” and while I agree that consumer debt is ridiculous, I don’t think this has an absolute and direct impact on the Canadian housing market.

The current debt-to-income ratio in Canada is about 164%, and this is up significantly from, say, 1990, when debt-to-income was around 90%.  But the benchmark lending rate is at 1.0% today, whereas it was 15% in 1990!

Debt is cheap today, so people have more of it than they did when debt was expensive.  That makes a hell of a lot of sense to me.

Again, I certainly don’t agree with consumer debt – buying Gucci purses on VISA’s and carrying a balance, but I don’t think that the debt-to-income ratio of Canadians should show up as a statistic in every single prediction about the Canadian housing market.

I’m sure the bears will ask, “What do you think will happen to the real estate market when interest rates increase?”

It’s a valid question, no doubt.

But does anybody here think that real estate prices might just stop appreciating, rather than drop?  At least in Toronto, that is?

Our city is so dense, and so many people want to live here, that I just don’t see any shortage of real estate on the horizon.  I can’t see real estate being “overpriced” and “overvalued,” because there just isn’t enough of it to satisfy the demand.

If anything is “overvalued,” it’s the baseless opinions of ratings agencies, analysts, and economists who make statements with no backing, and merely rely on their namesake for support.

Albert Einstein is credited with having said that the definition of “insanity” is doing the same thing over and over, and expecting a different result.

Surely he’s a bit smarter than the folks who continue to say the Toronto market is “overpriced,” and then sit and watch as it appreciates again and again…

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  1. Steve says:

    Ok then the houses are not “overpriced ” the people are underpaid
    3.5 times your annual income should be the price of your home
    It’s closer to 8x in Toronto but I guess that’s not a problem if you make 250k a year to afford your 1 million dollar detached home

  2. Peter says:

    In my view, if someone is willing to pay the asking price of a given property, then it’s NOT overpriced.

    The people who whine about real estate being overpriced are often self-entitled fools who want everything for nothing.
    They don’t want to compromise. They don’t want to merely buy something within their budget. They want a prime building in a prime location that needs no work… at a suburban starter-home cost.

    That’s not reality.

    I recently had this discussion with someone who said she’ll “never be able to afford her own place”… and I did a quick search and found a couple of small stacked townhouses that were the same size as the place she was renting, with a monthly carrying cost (including utilities and taxes) that would be roughly the same or a bit less. And it was a decent area near the TTC and the lake. What made it cheap was the fact it was small and also close to the highway.

    People just like to complain.

  3. Peter says:

    the real problem is the lack of wage inflation . $imple a$ that when u really think about it

  4. Fiona says:

    I just don’t see how they can be this expensive when there are people living and working on less than 15$ an hour for careers. Someone has to restock your grocery shelves, and it’s overwhelming not a ‘teen’ job, but an adult job. I just don’t think they should be relegated to near poverty with no hope of owning a home*

    *without mortgage insurance. It is such a good idea to save the 20% deposit that it’s absurd how much you can save. That’s still 50-80,000 in the GTA usually, not achievable within 5-10 years.

  5. frank says:

    The price of your house is going down, get over it.

  6. megaman says:

    Yes the prices are inflated, seriously, a million dollar house in Mississauga, about 6 feet away from the next house, in a tiny 2500sqft of area. House is made of wood and sticks. some drywall and glue. its stupid. the area also is nothing special.

  7. DS says:

    David – just discovered this great blog, thanks for the posts!

    My thoughts:
    When investing in any asset, the value should be determined by its income-generating potential – i.e. how much cash flow can the asset generate over its life. That’s why it makes sense to look at things like price to net operating income (or, for a quick and dirty, price to rent) to find “under-valued” real estate markets. If you do this analysis in Toronto, I bet you would end up with breakeven NOI at best (i.e. 0% income yield). Alternatively, if I go to a market like Atlanta, I can probably make 5-10% on my money. This is why I see the Toronto market as expensive from a valuation standpoint.

    That said, price to rent doesn’t show the whole picture because buyers are motivated by much more than their annual yield — i.e. buying with emotion, or more importantly — speculating! If I buy a condo at a price that guarantees I will never generate any income (0% yield), and I rely completely on further appreciation in the condo market to make any money, that’s speculation. Speculators are betting that prices will continue to rise. Not to say you shouldn’t join in the fun, but I believe the market will always regulate itself and bring prices back down to economic reality — and when that happens, a lot of speculators will get burned. My plan is to rent until the valuation fundamentals come back into line — this could mean prices falling or rents rising.

  8. Waqas Ali says:

    yup………..it is

    http://www.waqashomes.com

    1. ScottyP says:

      Go away, Waqas.

  9. Name says:

    The U.S. has a future debt of unfunded liabilities that exceeds $200 Trillion Dollars. It is not sustainable. Where the U.S. goes … So does Canada. The worst is yet to come.

    1. Ferrari321 says:

      Yea the market is so hot no one needs any price cuts at all … SFH homes in Toronto are going to $2mm!!!!

      Wait a minute ….

      http://guava.ca/?cat=3

  10. Kyle says:

    As the last decade has proven, Price to Rent is not very useful at predicting where home prices are going. The concept behind it is utterly flawed, renting is NOT a substitute for owning. For them to be substitutes in an Economic sense, people would have to be indifferent between the choices. Which is no where close to the case. Many renters wish to be owners but can not afford to, the same can not be said of owners. Said it before and I’ll say it again, the vast majority of homes are sold to end users to live in. Expecting these people to switch from owning to renting as some sort arbitrage is almost as dumb as expecting women to get sex changes to save money on haircuts

    1. Joe Q. says:

      The “concept” behind price-to-rent doesn’t assume that renting is a substitute for owning. I don’t think anyone claims that people are “indifferent between the choices”, as you put it. Obviously most people will put a premium on owning. The question is how that premium plays out economically over time.

      This can be especially illuminating when it comes to condos (where the fraction sold to end-users is certainly not a “vast majority”). When you’ve got a stock of housing made up of similar or identical units, 1/4 to 1/2 of which are bought as investments and put on the rental market, and the ratio of price paid to rent collected keeps going up over time, you have to wonder what might lie ahead.

      I like your analogy though.

      1. Kyle says:

        Probably almost as illuminating as watching the price differential between bicycles and cars over time, but no more useful at predicting where prices of cars are heading

        1. Joe Q. says:

          You really think comparing condo sale price to condo rental yield (for similar or identical units) is like comparing cars to bicycles?

          1. Kyle says:

            Nope but I would say that car drivers are as likely to become bikers as owners are to become renters. In both cases the differential that bears like to use as their smoking gun have very little impact on people’s behaviour. And if behaviours don’t change then the differential is meaningless as a predictor.

      2. Potato says:

        I will claim that people are approximately indifferent — not everyone, but your rational marginal buyer is. Some may prefer owning (and have a “pride of ownership” premium they’re willing to pay), some may prefer renting (recognizing that owning carries different kinds of risks and that renting can be convenient when you’re busy — I fall slightly into this latter camp, as I was so busy when the roof leaked last year I just didn’t have the bandwidth to call and coordinate roofers. One call to the landlord and it was done!). Many people will not even think to make the comparison in the first place. But even a preference to own is not infinite: before ending up with my current awesome landlords I leaned towards owning and was willing to pay up to $1000/yr more to own, but the actual ownership premium was looking to be 10X that much. Renting a condo or owning the same condo is about as perfect a substitution as you can get in economics, aside from buying or leasing a car I don’t know where you’d find one better.

        An important additional component is landlords who care about both ends: at wacky price-to-rent multiples landlords don’t make money on new purchases except by speculation.

        1. Kyle says:

          They are only apples to apples from a ‘utility’ point of view. But ignores all the other advantages of owning, like buying an asset at a locked in price, such that your payment is basically fixed for 25 years vs paying rent that rises with inflation for the rest of your life. Or not having to worry about not having a home when your landlord decides to cash out or move his kid in. Or not having to be interrogated, background checked and treated like a second class criminal everytime you move. Or the freedom to do what you want to your place and not having to ask permission to change the wall colour or move your girlfriend in, etc

          My point on substitutability is not to argue how similar they are. Each person will have a different idea of what an apple is vs what an orange is to them. My point is that most renters are in no position to own and most owners are disinterested in renting. So there isn’t much free flow from the ‘buy’ camp to the ‘rent’ camp or vice versa. And without free flow there isn’t really any market force to bring the price to rent ratio back to what bears perceive as the ‘correct’ historic level. Which renders the Price to Rent concept as nothing more than a line on a graph and a nice story to use as bear fodder.

          1. Frugal says:

            “payment is basically fixed for 25 years”

            Your condo fees rise with inflation and building age, just look at the condo fees for older building, utilities rise with inflation and you can’t lock in a mortgage rate for 25 years in Canada.

          2. Frugal says:

            And don’t forget property taxes. Did they ever go down?

          3. Kyle says:

            Haha, got to love it when someone is incapable of coming up with a counterpoint to a perfectly valid argument so instead they need to knit pick at the details to feel better. Thanks for coming out!

          4. Joe Q. says:

            I understand your point, Kyle, but I think there is more to it than you are acknowledging.

            While there are not many people transferring back and forth from the ‘buy’ camp to the ‘rent’ camp, there are many cases where units transfer between these camps. Think of a new condo project going on sale downtown: somewhat less than half the units get bought up by people who will then turn around and rent them out. Over time, some formerly leased units will be bought by end-users, and some formerly owner-occupied units will be leased out.

            In this case I think it is extremely instructive to look at the rental yields vs. sale prices for comparable units. Large changes in the sq-ft normalized price-to-rent ratio over time (as we saw around 2010-2012, I don’t know the recent statistics) become far more illuminating than the trivia you make it out to be.

          5. Kyle says:

            Yes and clearly it’s been working out very well for the bear case. As far as I’m concerned price to rent is nothing more than a mined data set to set for the bears to rally around and form a circle jerk. Kind of reminds me of how the picture of a guy in a gorilla costume is illuminating to all the big foot believers.

          6. ScottyP says:

            Kyle is so anti-bear (and understandably so), that if someone gave him a stuffed Winnie the Pooh for his birthday, he’d light it on fire.

          7. Kyle says:

            MUAHAHA!!!

  11. Jonathan says:

    One other thing: I have trouble with price to rent ratios because they really aren’t apples to apples comparisons. For example, there aren’t exactly a lot of renovated 3 bedroom, 2 bathroom houses in desirable neighbourhoods available for rent, and those that do exist tend to be quite expensive. You could rent a large apartment in an aging high rise for less, but the two are not at all equal.

    1. Joe Q. says:

      Price-to-rent is useful for looking at things like rental condos, where you often have nearly identical units in the same building (sometimes the same unit) offered for sale and for rent. Although there are some people that seem to think price-to-rent is meaningless even in this case.

    2. Potato says:

      They should be apples-to-apples comparisons. True, there aren’t a lot of renovated 3 bdrm/2 bath detached houses out there, but there are some, and on most of those the price-to-rent range is not that much different than the much easier condo comparison.

  12. Libertarian says:

    Be careful David about doing media interviews and saying that the dude who works at Jack Astor’s doesn’t have the “right” to live the Canadian Dream to buy a house in downtown Toronto. I agree with you 100% percent, but the Lefties in this town will come after you. The Lefties believe that everyone should be able to have whatever they want and that the government should pay for it. That explains why artists are getting subsidized housing in the new condos being built along Queens Quay. The artists want to live by the lake, so the Lefties got the government to make it be!! The Lefties say that a city needs artists, so they deserve housing. I always thought that poverty created the best art, so I’m not sure how living in some of the most expensive real estate will improve art in this city. It’s a shame how greedy, selfish, and materialistic the Lefties in government have made most citizens today. That dude at Jack Astor’s thinks that he can live a millionaire lifestyle based on the tips he earns at work (which he probably doesn’t report to CRA). It’ll only get worse if Chow wins in the fall. Keep telling the truth David!

    1. @ Libertarian

      Your comment is so true, and so real, that it made me grit my teeth until one almost broke…

      1. Jonathan says:

        David, you’re such a meanie! Don’t worry about it, “the rich” (in other words, somebody aside from me) will pay for all of this.

    2. Alex says:

      Sorry, you used the term “Lefties”, thus rendering anything else you said a nonsensical angry rant. It’s funny how some people feel the need to invent an army of enemies to make themselves feel smarter. It’s like talk radio, they always have two whackjobs on there so that the host can sound really smart and reasonable during a debate, thus making people like him more. Or sometimes they pick one whackjob, and one reasonable person, so that anyone listening assumes one side of the argument is obviously right. It’s annoying how easy to manipulate some people are.

      Mr. Libertarian, please go out in the city and talk to people. You may realize there is no such thing as a “Rightie” or a “Leftie”, just a lot of different people. A lot of them are frustrated and angry that they will never be able to afford to live in the city, or even close to it, but I haven’t met a single person that said “I deserve to live there”. The people you see in news articles and stories aren’t generally real, they’re an extreme shown to prove one side of an argument.

      1. Carl says:

        Exactly. Throwing around terms like “lefties” (do you include the Pope? If not, you need to read up on what he’s been sayin’ lately) makes you either Rob/Doug Ford or the Koch brothers. What a choice!

  13. Lester Maladjuster says:

    i) Interest rates have been kept artificially low for the last 5+ years. At some point, they will rise.
    Good luck carrying that $500k mortgage when it happens.
    ii) What would the marketplace be like if the Canadian government stopped (or just didn’t) backstop the banks on CMHC? Or that $90billion lift they all got back in 2009?
    iii) It’s going to be Biblical.

    1. Chroscklh says:

      i) Terminal level of interest rates remain lower going forward than in recent history because a) a small increase in rates have bigger effect on economy due to leverage b) investors have more confidence that central banks are better able to use monetary policy to moderate economy meaning less volatility so term premium to own bond decrease. BMO economist publish great report that says 2% increase in rates = big trouble if all at once but if over 2 yrs, incomes will rise to mostly offset, therefore house prices may moderate but no crash

    2. Carl says:

      Exactly what do you mean by “artificially low”? Perhaps a Nobel prizewinning economist can weigh in on this myth.

      http://krugman.blogs.nytimes.com/2014/10/03/wages-and-the-fed/

  14. Dave says:

    Overpriced…. Yes…

    Entry level condos carrying for $2200-$2400 monthly at the lowest rates in history. If you don’t think the market is overpriced you haven’t been through a real crash yet. Which is about 90% of the buyers these days. They have no idea what negative equity looks like. But they will, soon enough. Also look up B21 new rules to insured financing. That will be a real doozy.

    1. Carl says:

      What’s a “crash” to you, Dave, or a “doozy”?. The early 90’s meltdown? When housing prices cratered? By what? 40 percent? 50 percent? More? Well, perhaps somewhere, but not in Toronto. Average prices in the GTA fell by 27.6% from the 1989 high ($273,698) to the 1996 low ($198,150) a fairly modest average drop of about 4.45% per year. And let’s not forget that prices had run up an incredible 151% (from $109,094 in 1985 to $273,698 in 1989) in just the four years prior, a 25.8% annual average. And I’m sure you know that the highest one-year increase since then has been the 9.43% recorded in 2002 (i.e. one-third of the 1985-1989 average) and that GTA prices increased by 151% (where have I heard that number?) between the 1996 nadir ($198,150) and 2012 ($497,131) a span of sixteen years and an average of 5.92%. So I’m sorry, but until I start seeing double-digit (not to mention 25%) annual increases, I don’t see an across-the-board “crash” happening anytime soon.

  15. Harold Dick says:

    “Surely we can agree that when supply is greater than demand, we have a “shortage,” and that in a shortage, prices increase, no?”

    Nope. Logic fail!

    1. @ Harold Dick

      As per my comment above, I mixed these up.

      I hope that one error in a 1,800 word blog post doesn’t take away ALL credibility…

      1. ScottyP says:

        The funny thing is, I didn’t even catch the inadvertent demand-supply switcheroo (Or Freudian slip. Or whatever you call it). Because I read it as David meant it.

        So, sorry for the snarkiness Harold. But I’m not *that* sorry, as I’m pretty sure you (and A. Grant above) knew exactly what David meant to say as well.

  16. Joe Q. says:

    (1) I agree with that the term “over-valued” is too fuzzy to serve as the basis of a serious discussion (unless it is defined more narrowly).

    (2) Here is a link to a brief interview with someone from Fitch, in which the rationale behind that company’s statement about the Canadian real-estate market is (partially) explained. Key quote: “The 20 per cent is derived from our sustainable home price model for the Canadian market, where we compare changes in home prices historically to changes in five major macroeconomic indicators that we consider to drive the housing market, which are income, employment, interest rates, housing supply and population growth.”

    http://www.theglobeandmail.com/report-on-business/economy/housing/why-fitch-is-sticking-to-its-20-canadian-home-price-overvaluation/article19644963/

    (3) With regard to David’s comments about Fitch’s rating of the US sovereign debt, my understanding is that the ratings do not reflect the size of the debt but rather the risk of default. The change in rating in this case would mean that Fitch believes the USA has become less likely to default on its sovereign debt.

    (4) I respectfully disagree with David’s comment that the average debt-to-income ratio is overused in discussions of the Canadian housing market. Debt is what enables the housing market, so figures like these (and others, like mortgage sizes relative to incomes, etc.) are key to understanding (or trying to understand) what is happening out there right now and what might happen if or when interest rates rise.

    (5) With regard to Kyle’s comments that flippers and developers “add supply” — I can see the point he is trying to make, but (aside from the case where a flipper or developer creates a home where one did not exist before) I find it hard to see the activities of flippers as constituting an increase in supply. They are competing with people who want to buy houses to live in, and a home that is uninhabitable during a reno operation certainly isn’t adding to supply. I do wonder what flipping in general is doing to the notion of first-time homeowners starting out with fixer-uppers and slowly renewing them over time as their resources allow.

    1. Kyle says:

      In the case of SFH houses, where the total number is basically static, the only way supply can increase is for the turnover to increase, flipping does that. Your point that they are also increasing demand is only sort of valid. Flippers are looking for houses where there isn’t much demand (i.e. The C- houses and below) so they’re not really competing with most end users and in turn they then supplying something that is in demand (i.e. a completed A- house or higher). In any case their net effect is at worse neutral, but more likely positive to the supply side of the equation. What they aren’t is negative, as bears like to portray. I think flippers get a bad wrap from the bears. Much like Realtors, Banks and 5% downers, they too have become an undeserved lightning rod for all that ails real estate bears.

      1. Kyle says:

        By the way I’m not referring to you or Paully. I’m talking about the vitriol commonly thrown around on other real estate blogs and articles

        1. Joe Q. says:

          Kyle, I have to agree with Potato on this one. I find it a difficult logical stretch to argue that flippers increase supply unless you are “integrating” supply over a very long time period by arguing that (for example) a house that is purchased by a flipper will end up being on the market twice in two or three years. This isn’t really an increase in supply on the time-scale of the annual real-estate cycle.

      2. Potato says:

        I have to disagree: flippers add to demand just as much as they add supply, and they take houses out of the pool of living quarters (the other meaning of supply vs listings) during the renos. They only add supply where they subdivide units, and that happens with a lag so an increase in flipping/subdividing activity has a short-term negative effect on supply. That can lead to a positive feedback cycle: flippers move into a market, decreasing supply, which drives prices up in the short term. That price increase attracts more flippers, which further squeezes supply. Same with big redevelopments: a condo project can wipe out something like 100 houses. Eventually it will provide a multiple of that in (smaller) units, but for the ~5 years of construction supply just gets tighter.

        1. Kyle says:

          Nah I do ‘to buy that, most of the houses flipped are dilapidated and require an overhaul, whether they’re bought by a flipper or an end user, they’re still going to sit unoccupied while being renovated. Difference is a flipper will put that house back on the market at some point whereas an end user will likely stay in it basically till they downsize, meaning one less house to eventually re-enter the supply for a very long time.

          1. ScottyP says:

            Many of the houses that are flipped throughout the tonier areas of Toronto are bungalows razed and rebuilt into larger homes. Far from being “dilapidated”, they’re simply smaller homes being remade into bigger homes.

            Would it not be fair to argue that, due to such rebuilds, the supply of larger, “A-list” homes (of which there is a huge demand) subsequently increases, whereas the supply of smaller, more modest homes decreases? The nature of the supply merely shifts, especially when the vast majority of buyers of said rebuilds are end-users.

            Where I imagine things getting somewhat skewed would be when the flippers start buying property that’s recently been flipped. I for one would like to know what percentage of newly-renovated homes are soon flipped again.

          2. Joe Q. says:

            ScottyP — this is part of the point I was attempting to make. Flipping activity (in part) takes entry-level or “fixer-upper” homes off the market and replaces them with “up-market” product at a higher price point. In that sense there is the potential for competition between flippers (with access to extra $$$) and DIYers (with access to their own skill / initiative / time) for fixer-upper homes.

            As for re-flipping, I know of one former rooming house in central Toronto with an interesting history. A Woodbridge-based Realtor couple bought it and turned into a decent SFH, initially for their own use. After getting cold feet about moving from Woodbridge, they attempted to flip the home, but could not recover their investment, so they rented it out for a few years before putting it on the market again. This time it sold, but the new buyer ripped everything out and turned it back either into three units or into a rooming-house again (the exact fate is not clear).

  17. Potato says:

    So what is valuation? There are many ways to value property, and to compare across cities.

    So yes, Toronto is an expensive place to live. It is on any measure more expensive than London (ON), but does that justify any price for houses? Rent is more expensive, by about 40-50%, but houses are 100% more expensive to buy. So London, ON price:rent ~180X, vs ~225-275X in Toronto. I just spot-checked a few listings in New York: rents are ~50% more; prices not even 20% higher, for a price:rent of ~190X (Trulia has the city at 180X). So that suggests that Toronto prices are ~20-30% overvalued.

    And again, no one credible was calling for a crash in 2004 on any kind of valuation metric or analysis-based reasoning. 2008, yes, and that is itself a long time to wait and look wrong, but not 2004.

    1. ScottyP says:

      6 years, 10 years… as you said, both are heck of a long time to be (consistently) wrong.

  18. FroJo says:

    Do you remember that Robert Duvall speech in Apocalypse Now?
    “Kilgore: I love the smell of napalm in the morning. You know, one time we had a hill bombed, for 12 hours. When it was all over, I walked up. We didn’t find one of ’em, not one stinkin’ … body. The smell, you know that gasoline smell, the whole hill. Smelled like… victory. Someday this war’s gonna end.”

    He also said “Charlie don’t surf!”, which is in essence what your’re saying. In the meantime ride the wave, help some folks, take your cut; but avoid complacency. Amateur Economics are as meaningless as the ratings.

  19. jeff316 says:

    “There are other options out there, and not everybody who currently lives in Toronto had to continue doing so.”

    I think this is a valid point. There are other options – in the inner burbs, the outer burbs, further afield in the 905, even in Toronto proper, but. Part of the problem is that most of the people in the upper-middle price bracket are all looking for the same thing with the same features (3 bed, 2 bath, at least 17×100, backyard, parking, subway walkability, not-too-rough-but-rough-enough-to-be-a-deal, liveable, minimal sketchiness) in the same place.

  20. Paully says:

    You have mentioned the supply problem numerous times recently. I wonder how much impact that speculators/developers are having on the currently available supply? Here in Willowdale, pretty much every block has a house that is in some stage of redevelopment. Some are vacant, some are a hole in the ground, some are finished, but there are a lot of lots that could be housing a family or two that are not. There are lots of blocks with more than one rebuild in process too. How many multiple offer situations might not have occurred if all of those houses were still part of the available inventory?

    I stopped to talk to a builder recently who bought a place on a 60′ lot. He said it took him two full years to get through all of the municipal bureaucracy to get approvals to sever and build two new homes on 30′ lots. Ultimately, he is increasing the housing supply by one, but that is a long time for that lot to be unavailable. The houses are still not finished either.

    Once the new houses are finished, most of the developers also “move-in” for a year, so that they can skirt around the HST and capital gains taxes on something that was never really intended to be a principal residence for the developer. On the upside, that ultimately keeps the costs down for the builder and maybe even for the future buyer, but it screws over the taxpayer in general.

    One other thing that is often missed, is when a developer buys a tear-down for example for $900k, and then sinks $500k into rebuilding and then resells for $1.8M, it skews the average sale price data. At first glance, the house doubled from $900K to $1.8M. But the house did not double in value in a year. It actually went from $1.4M invested to $1.8M. Still a tidy gain, but not anywhere near double.

    1. Domenica says:

      Very good points!

    2. Kyle says:

      “How many multiple offer situations might not have occurred if all of those houses were still part of the available inventory?”

      The flippers and developers are actually adding supply, not reducing it. Each house that gets flipped turns over twice, giving the market two cracks it. It was part of the supply when it was first sold (and bought by the flipper) and becomes supply again when it is re-sold by the flipper. If flippers and developers did not exist the supply would decrease. Also they are the only ones creating new SFH infill housing (albeit not very much).

      1. Mike says:

        That’s incorrect. Having the same house sell twice does not increase the supply – there are still the same number of houses in the market place each time (unless both sales of the house happen concurrently, and two buyers can live in it simultaneously, which of course is impossible/doesn’t make sense). What it actually does is increase the number of transactions in the market place over a given period of time. This actually increases the total sunk transactional costs in the market place, which ultimately makes housing more expensive (unless developers are kind and absorb this cost as an act of charity.. heh..heeheheh..hehe… not really).

    3. Appraiser says:

      Hey Paully, get real. Please spare us the pointless anecdotes.

      Clearly, you have absolutely no concept of the difference between a developer, a builder and a general contractor.

      Let me guess, you rent right?

      1. Paully says:

        What is truly pointless is hurling worthless insults at other commenters with whom you do not agree. Ad Hominem attacks do nothing to advance the discussion. One of the things that I really enjoy about this blog is the intelligent and in almost all cases, polite discussion. For example, look at the comment above yours. Kyle disagrees with me and presents a reasonable, cogent argument for his view-point. He does not feel the need to toss invective around, since he has real ideas and can use words to explain them to others.

        The last time I went trolling, I caught a nice salmon. You should try it some time.

        1. Appraiser says:

          SO I’ll take that as a no; meaning you have absolutely no concept of the difference between a developer, a builder and a general contractor.

          And a yes; meaning you clearly rent.

          And finally; your inane and usupportable anecdotes remain so.

          1. ScottyP says:

            Hey look, Appraiser’s back after a semi-long hiatus!

            Welcome back, Appraiser. Nice to see you haven’t changed in the slightest.

          2. Chroscklh says:

            Appraiser is spend too much time on blog – not enough time appraising. Business is slow for you, no? Maybe is explain bitterness – transaction happen all around, he no participate. Paully makes interesting perspective, Kyle has good counterpoint. Appraiser is like gnat on circus bear.

  21. Kyle says:

    As i recall, Fitch and the other rating agencies were handing out AAA ratings to re-packaged sub-prime garbage, so that a lot of institutions who are only allowed to invest in “Investment Grade” instruments could get bamboozled into buying them. There is also a lot of evidence that they provided favourable ratings in order to “win” more business from the Investment Banks that structured this garbage. To me their credibility is right up there with Frank Abagnale’s. So why are they now rating residential housing? It’s not even a real investable “asset class”. Maybe i’m cynical, but i think it smacks of really desperate times for them.

    Anyhow the term “Over-valued” is fuzzy and intangible. I refer to it as nothing more than a belief system, which may or (more likely) may not have any connection to the real world. In my experience it is often used by people and firms who are supposed to provide guidance or an opinion directionally on something but are too gutless (or sick of being wrong) to make a call, so instead of saying the market will fall and be wrong – yet again, they hedge their bets, using this fuzzy construct. Now if markets rise they can say i’m not wrong it’s just further over-valued, but if markets fall you can bet your a$$ they’ll say they were right.

    1. Kyle says:

      Also wanted to say, that there is no such thing as a Canadian real estate market. Treating Canada as a single real estate market is as stupid as trying to come up with a single Canadian Weather forecast.

      1. Chroscklh says:

        this is point well-made

        1. Ferrari321 says:

          That’s what greenspan said too … look how that turned out

  22. Marina says:

    I’d love to see a re-visit of your old blog entry on supply vs. quality supply. I think many outsiders look at numbers and don’t get the reality behind them.
    In good neighborhoods, there are way too many buyers, and way too few quality houses. So if a house comes up for sale that is in a sh*t area, crappy, and overpriced, it might as well not be on the market.
    I bet that would change a lot of analysts valuations because there is a lot if crap out there.

  23. A Grant says:

    “Surely we can agree that when supply is greater than demand, we have a “shortage,” and that in a shortage, prices increase, no?” I disagree. And don’t call me Shirley (I think you mean “when demand is greater than supply.”)

    1. ScottyP says:

      No, I think he means what he said.

      1. @ A Grant & ScottyP

        Sorry guys – I was writing this at 1am on Thursday. I was tired. I defintiely mixed those up, but I think everybody knew what I meant.

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