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…
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.
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…