A reader challenged me last week, and today, I’m going to answer that challenge.
I received an email that read: “Must be getting hard to keep putting a positive spin on this market huh? Then again, you’d never post anything negative.”
I didn’t think that was fair, nor do I like when it’s insinuated that I cheerlead the market.
So today, I’m going to post the single most negative thing on the Toronto real estate market that I can possibly find. Sound fair?
I think there’s a difference between being bullish, and cheerleading.
I’ve seen real estate cheerleaders. Many of them, in fact.
I see them every single day.
I was in a house on the weekend that was overtop of the subway, and as train rolled by, and the house began to buzz, I turned to my clients and said, “This is an absolute deal-breaker.”
A couple minutes later, another agent walked into the master bedroom with her clients and told them, “It’s probably not as bad as you’d think, and it’s the sort of thing you’d get used to over time. Are you guys sound-sleepers?”
I started Toronto Realty Blog in 2007 with the idea of being different from the old-guard of real estate. I wanted to be honest and opinionated, but those two things, when combined, in this industry, equal controversy.
I suddenly had this label of being “controversial.”
Well, I suppose when the average age in the industry is 61-years-old, and everybody loves every house, and never says a bad word about it, then yes – being honest is controversial.
The industry has changed a lot in ten years, and I’ve found a lot of like-minded colleagues, as the old-guard in real estate has begun to break down.
I’ve always sought to provide insight and entertainment on TRB; a very tough combination, as we’re all entertained by different subject matter, and some of us are more or less insightful than others.
“Photos of the Week” is many people’s favourite feature, and others’ most hated.
Blogs that break down statistics bore the hell out of some people, while others get out their abacus and play along at home.
And I’d like to think that, while my outlook on Toronto real estate is bullish, people understand that I try to provide my opinion on the real estate market as I see it, while remaining open to contrarian viewpoints.
So I was a bit perturbed last week when I got that email suggesting that I’m cherry-picking topics, articles, or insight that spin the market in a positive way. And don’t get me wrong – I’ve developed a very thick skin over ten years of blogging, but I did pause for a moment and ask, “Is this person a troll, or is there some truth to what he’s saying?”
Right or wrong, I figured, what the heck. I’ll post the most negative story I can possibly find on real estate, and open the topic for discussion.
UBS is a global financial services company, operating out of Switzerland.
They are probably one of the best-known financial services companies in the world, and to many of you, they need no introduction.
Last month, they published a report called “UBS Global Real Estate Bubble Index,” and guess which city was ranked #1 on their list?
Download the entire 24-page report HERE.
I encourage you all to read the report, and draw your own conclusions.
But since many of you are simply scrolling or killing time on the TTC, let me give you the Coles Notes.
First, here is the Editorial that opens the report:
In Munich, Toronto, Amsterdam, Sydney and Hong Kong, prices rose more than 10% in the last year alone. Annual price-increase rates of 10% correspond to a doubling of house prices every seven years, which is not sustainable. Nevertheless, the fear of missing out on further appreciation predominates among home buyers. After all, the price increases appear rational, for three reasons.
First, financing conditions in many cities are now more attractive than ever before. Second, the global increase in wealthy households seemingly creates constant demand for the most attractive residential areas. Third, building activity cannot keep pace with this demand.
Expectations tend to be prone to exaggerations in boom phases. The optimistic projections of the trends outlined above create ever-greater price fantasies. However, should sentiment change or interest rates increase, a correction is practically inevitable. In the past, rising interest rates almost always triggered a crash in housing markets. In addition, the dependence of prices on international flows of capital represents an incalculable risk. Plus, once demand fell, even the low growth in supply would no longer provide an anchor.
Vastly overvalued housing markets, as measured by the UBS Global Real Estate Bubble Index, have historically been associated with a significantly heightened probability of correction and greater downside than housing markets whose prices developed more in line with the local economy. This year’s UBS Global Real Estate Bubble Index publication reveals the cities in which caution is required when buying a house and the places in which valuations still seem fair.
In this edition, Los Angeles and Toronto have been added to the selection of financial centers.
We hope you have an engaging read.
Fair points, to open up with.
I would agree that to see house prices double every seven years is not sustainable, for the most part. But can you paint every city in the world with the same brush? I don’t think so. There are, and always will be, exceptions to the rule.
In any event, here’s the lead graphic from the report, which shows Toronto at the top:
And frankly, I’m surprised that this is the first time I’m seeing it.
Consider that when the Toronto real estate market is booming, the evening news is chalk full of human interest stories, with reporters attending open houses, trying to get would-be buyers to say something on camera about how they’re scared to be priced out of the market.
So now that the sentiments in the media have turned, I’m shocked that we haven’t heard more about this UBS report.
There’s a lot of fine print at the bottom of the report, which might explain why they chose these cities, and omitted hundreds of others that you might expect to see.
I find it interesting that only one city on the list is “under-valued,” according to the report, which of course leads me to believe that the findings of the report, as is so often the case, are theoretical, and don’t or won’t play out in practice.
Another feature in the report was a look at the number of years a person must work in order to be be able to afford a 650 square foot condo or apartment.
You would think that perhaps there’s a correlation between the “over-valued/bubble” findings and the following. But note that here, Toronto is 13th out of 20:
I’m not sure we know how to interpret this graph, since, again, it’s theoretical. It’s merely a snapshot, and doesn’t account for inflation, appreciation/depreciation, changes in the interest rate, etc. It basically could be called “average price of a 650 sqft condo divided by average salary of average ‘skilled service worker.'”
Another feature of the report was a ratio of price-to-rent, which they call “the number of years a flat of the same size needs to be rented to pay for the flat.”
I’m thinking perhaps “price-to-rent” seems more appropriate?
It almost feels as if they titles were something you’d see in Toronto Life to catch eyes.
Have a look:
Here, Toronto is 14th out of the 20 cities.
Even though Toronto was ranked #1 on the bubble list, the UBS report didn’t spend much time analyzing the city.
London, Hong Kong, Zurich, Singapore, and New York each got their own feature page.
Toronto was included on a page called “select cities.”
So what conclusions did I personally draw from this 24-page report?
I guess the first thing I would ask is: How many cities did they analyze?
Did they choose these 20 cities, then analyze them?
Or did they rank 300 cities, and then choose 20 that had appeal?
Either way, I feel like to only feature 20 cities doesn’t give the findings enough context, especially when only one of the cities is “under-valued.”
The second thing I would ask is simply: what was the criteria for overvaluation/undervaluation?
It doesn’t really specify, although perhaps that’s like giving away the “secret sauce” recipe at Kentucky Fried Chicken…
It seems to me that appreciation is most of, or all of, the evaluation criteria. And while I understand the “what goes up, must come down” theory, I don’t think it’s any way to draw a conclusion about where a given market is headed, especially Toronto.
My theory about Toronto has always been a very simple one, and it’s something that this UBS report, and every other like it for the last decade, has ignored: Toronto was drastically undervalued for so long, that only after an unparalleled period of appreciation, have current values caught up.
I can’t say it any simpler than that.
Toronto doesn’t have the history of some of these European cities listed in the UBS report.
Toronto, relatively speaking, is the new kid on the block. In fact, it was only this year that UBS added Toronto to their annual “Bubble Index.”
Call me a homer, or call me biased, but I think Toronto is a different animal.
Toronto isn’t the tulip-bulb version of a city, where a run-up in buying activity – a mania, leads to overvaluation.
There’s no more room to build houses in Toronto, and we’re now starting to run out of room to build condos. The same can’t be said for most cities that have seen real estate speculation bubbles burst.
What makes real estate unique in terms of the relationship between supply and demand, as with any market of buyers and sellers, is that you can break the supply down even further. There’s the actual supply, ie. the number of homes available for sale, and then there’s the actual quantity of the product, ie. how many houses and condos are in existence.
On a go-forward basis, the number of housing completions in the central core is likely to diminish as we’ve run out of room to build.
And yet when I read reports as I have for the last decade on the impending market correction in Toronto, all we seem to look at is the past appreciation.
The fact that 19/20 cities in the UBS report had “positive” bubble scores, once again demonstrates that what exists in theory, or on paper, doesn’t always play out in practice. That’s been the story of the Toronto real estate market as it has continued to defy all the doubters, and I’ll be curious to see where Toronto ranks in the UBS report in 2018, that is, if they choose to include it in their 20 cities…