None of us have a crystal ball, but there are a lot of buyers out there that refuse to accept this simple fact.
They wish they had pulled the trigger when the market was down last year, and now they’re full of resentment.
But the resentment can be found anywhere you look…..like in the United Kingdom…
I remember my very first trip to the casino.
It was in Niagara Falls when I was about 22 years old on one of those cheesy Valentine’s Day trips with my girlfriend.
I sat down at the blackjack table for the first time in my life, and I still recall the feeling of the green felt beneath my fingertips as I placed a $5.00 chip in the betting square. The whole experience was surreal, but I wasn’t there for the experience – I was there to make money.
I decided that I was smarter than everybody else, and despite having no experience with this game, I was going to win enough money to pay for our trip.
Starting with $100, I was up to about $350 within an hour, but I refused to quit. I went down to about $200 at one point, but then gained enough to surpass the $300 mark once again. But as “luck” would have it, I eventually sank back down to my original $100, and then played until I lost all of that as well.
I’ve seen some serious paralells between my first blackjack experience and what many would-be property buyers in Toronto are going through right now.
The buyers don’t know when to give-up, and by give-up I mean “give-in.”
I’ve been dealing with a lot of buyers latley who have been holding out for as little as one year and as much as five years. These buyers have decided that the market is going to CRASH eventually, and refuse to buy until that happens.
We all know that the Toronto real estate market dropped anywhere from 8-15% during October 2008 to January 2009, but nobody really saw that coming….did they?
And even if they did see that coming, did anybody figure that the market would gain back ALL of that loss, and in some cases, more?
There is growing resentment among buyers who never pulled the trigger in late 2008 or early 2009, as the market has heated back up over the last eight months, and it shows no (real) signs of stopping.
But these buyers only resent the market, and not their own inability to take the plunge.
They say that “the market is crazy right now; just stupid,” when in fact maybe they should look back and say, “I was crazy not to buy in December of 2008 when condo prices were down 12%; just stupid.”
Buyers are more resentful now than I have ever seen.
One of my blog-readers forwarded me an article from a U.K. newspaper which states that mortgage approvals in the United Kingdom have reached a 19-month high. The article also goes on to mention that house prices are rebounding and the average asking price has risen 2.8% month-over-month.
What astounded me with this article was the incredible amount of negativity amongst the readers displayed in their comments below.
They are far more resentful than even the Toronto would be-buyers!
Here are a few of the comments that accompanied this article:
“The day of reckoning for the housing market is around the corner. The elections will sort things out, and the prices down.”
Based on what, I ask?
“20% off house prices by this time next year. Massive cuts and tax increases to come. We will see.
I’m not an expert in the history of economics and market cycles, but how often do we see a 20% drop in the housing market inside of one year in a G8 country? And how often does this happen right after the previous drop was 15%?
It is comments like this that bother me. I think people fail to realize how big a 20% drop really is. I think this is just wishful thinking from the resentful would-be buyers who are waiting and waiting…
“Prices are falling, don’t believe the Hype. We are all manipulated and our Obsession with house prices driven by Greed, B2L, those with a vested interest (MPs flipping 2nd homes springs to mind) Sellers get your property on the Market Fast. 2010 is going to be very interesting year.”
Isn’t this just negative hype? This is rhetoric based on nothing more than the opinion of a newspaper reader. This is hype at its most extreme.
“Another headline from Elizabeth Judge trying to get encourage the market.”
So now it’s a conspiracy involving the media? That’s funny, because the Toronto media is always anti-real-estate and all their coverage is negative and predicts the real estate Armageddon.
I only found one positive comment to the article:
“Yep, backs up what I been experiencing. Pretty sure we seen the bottom now. Big bonus season this year (up 50% on last) still such a lack of quality housing in London, I think we can expect to see prices steadily climb now.”
And naturally, all the subsequent posts were slandering this poor chap who was only speaking his mind.
But that last comment makes a very good point; one that we can learn from here in Toronto: “…still such a lack of quality housing in London…”
This is exactly what is happening right now in Toronto!
I keep telling all of my buyers the same thing: “There’s a lack of supply right now; there’s nothing out there worth seeing.”
Some of my clients have been emailing me saying something to the effect of, “Hey, remember me?” I tell them that I haven’t forgotten them, there is just nothing to show them!
It doesn’t matter what you’re looking for – house or condo, $300K or $900K, Riverdale or King West; there is a lack of product, and when something does come along, there are multiple offers because there are too many people interested in the property.
Once again, buyers become resentful, and they blame the market.
But the only person you can blame in the real estate market is yourself.
You feel prices “should” be down, but they aren’t. Well too goddam bad.
One of my very first blog posts in 2007 was about a “friend” of mine who was waiting for the market to crash. He told me that “It’s cycles, buddy, it happens all the time, always! It’s gonna happen again!” He surmised that all the $900,000 houses could be scooped up for $300,000….eventually.
It had been five years since he first told me that, and the house he was renting for $2,500 per month had doubled in value.
That was two years ago. He is now in his seventh year of renting that house, which he probably could have bought by now.
There are scores of buyers who watched the market drop last winter, and assumed it would drop further. They could have bought in at a 15% discount, but they decided to wait until that number reached 20%. They saw a very healthy Spring market, and said, “Whatever…just a blip in the radar – an upturn in a down market.” Then we saw a frenetic summer followed by an incredible Fall market.
Those buyers are so resentful that they didn’t buy last year that they’re shooting themselves in the foot by refusing to buy now.
It doesn’t matter who they are – post-university kids living at home, life-long renters, young couples looking to move up, 40-somethings who want to buy their “dream home” – there is a slew of buyers who regret not buying when prices were down, but now insist on going down with the ship.
I understand the adage, “Buy low, sell high.”
But you can’t be successful 101% of the time.
I also understand the adage, “You gotta live somewhere,” and maybe a few buyers out there forget that while a property is an investment, it’s also a place to live and to love.
So maybe you only make $22,000 instead of $29,000. Are you going to let that get in the way of you and you first condo? Your dream home? Your child’s place to grow up?
In my opinion: house prices aren’t going down any time soon. There may be a leveling-off in early 2010, but I’ll be shocked when this “crash” happens.
Buyers have a choice: continue being resentful, or find a place to live…
dave
at 9:48 am
Housing affordability derives from several factors including purchase price and mortgage costs.
The following report from RBC shows that notwithstanding some blips, Canada’s housing affordability as a % of income is fairly consistent within a 10% band (Ie 35-45% for std 2 floor, etc)
http://www.rbc.com/economics/market/pdf/house.pdf
Mortgage rates are not only at their lowest in history, but they have also been trending downwards since the mid-90s, concurrent with house price increases. It is an easy to forecast that if mortgage rates cease to trend downwards, prices are unlikely to continue to increase, and indeed that prices will need to drop to preserve affordabililty if mortgage rates increase.
I predicted a 10-20% drop by the end of 2009 on your blog in August of 2008, and indeed you dedicated an article in response to my post advising that it wasn’t possible for the housing market to crash 20% in the same way that the stock market does. Two months later, prices dropped 15%.
At the same time, I freely admit I didn’t see the Q2/Q3 2009 rebound, however I simply view that as a short term reflexive rebound of stage 8 as per the attached link
http://www.ibtimes.com/articles/2009…-investing.htm.
In conclusion, there will always be short term blips but I think the future direction of housing prices remains clearly downwards. My 2 cents, but I’m happy to be on the sidelines and renting at price significantly below the ownership costs for the same property and deploying my capital elsewhere
I love the blog btw.
fidel
at 10:59 am
Well… we’re still seeing rising unemployment, which is the foundation of the housing market. It will be a while before people start running out of EI and have to sell their property in distress.
The interest rates are also fueling the market, but they can’t stay low forever and when they start to rise again, it will force prices down.
I don’t know that a crash is coming, but the fundamentals aren’t there for further growth. I can see stagnation as the best scenario. Too many people benefited from flipping property after owning 6 months for double digit profits… that is simply not sustainable
Meh
at 12:06 pm
I’m frankly disappointed by this post. I would expect you to at least list reasons as to why house prices will go up, other than ‘thats just what house prices do’.
– Is there an influx of money into the city?
No
– Is there a housing shortage?
Not to be confused with a shortage of houses for sale. While housing is a necessity, owning the house isn’t. There is loads of rentals, so the housing supply can clearly sustain the population of the city.
– Are people getting paid more money, are there more jobs?
No
Everyone, TREB included, cites the mortgage rates as the reason for the current market. What happens when you take away the only thing that people can say is keeping the market strong?
Maybe something else will swoop in and keep the strength going, but unless you can name what that thing is (just as mortgage rates swooped in and saved the market when it was dropping in early 2009), you have no basis for your claim.
Lemon
at 12:37 pm
the toronto media has never been pro real estate. everywhere you look the media is predicting the next market crash or slandering real estate agents. people believe what they read so surely this has to weigh on the minds of buyers and sellers alike.
LC
at 12:59 pm
There is a cycle in real estate, yes, but it’s always on an upward trend. Think back to what your parents paid for their home in the GTA 10-30 years ago and look at how much it’s worth now.
And lets say the market does drop by 20% or more – it will most likely be because interest rates will have risen to levels that will cost you more than what would be paying now anyway. We are nowhere near seeing those rates anytime soon.
Aguduser
at 1:16 pm
Hi David,
1. Your blackjack experience reminds me very much of The Second Major Axiom “ON GREED” in The Zurich Axioms by Max Gunther (1985):
Even the example given in the book is similar to your experience:
http://www.neif.org/Zurich_axioms.pdf
I think this is a good book for beginner investor; it is good for me!
2. The part that you wrote about the lack of supply in the market right now is informative and insightful. That’s a very important piece of information, IMO!
3. I share the same thinking that there may be a dip in price in Summer 2010 when interest rates start to go up, and HST goes in action, (and other factors come in as well…) but that dip will be light, and there won’t be a crash as many of your resentful customers are desperately expecting.
4. With all that said, there are certainly people who overpay in this market due to the emotions in bidding wars. And overpaying is still overpaying no matter if the market is going to crash or not. Those people will regret when their head is cool off.
You really have to keep your emotions in control when dealing with a red hot market.
Aguduser
at 1:27 pm
A side note: when you’re not in a resentful state of mind yourself (when losing in certain deals), you sound wise. 🙂
Meh
at 4:59 pm
LC – The bigger the interest rate, the bigger a dent a good sized downpayment does. I’d much rather pay high interest with lower principal, especially since any lump sum payment also makes a bigger dent in such a mortgage. Also lower principal makes you less vulnerable to a interest rate spike.
For people with only 5% down, buying today may make sense. But if prices drop by 20%, then in 5 years they may have negative equity and be unable to refinance, which is exactly what happened in the states. People will say ‘no, its because of all the subprime borrowers’, but the fact is all those borrowers would have been fine if they could have refinanced, but they couldn’t due to their dropping house prices.
Dropping house prices caused the subprime crisis, not the other way around. The subprime crisis is what caused the massive 50% collapse, but 20% was going to happen no matter what.
WEB
at 7:10 pm
I work for a legendary investor in Toronto. He is one of the wealthiest people in Canada and would be regarded as one of the best investors of his generation. He made his money primarily in publicly traded securities but also to a lesser degree in commercial real estate.
Anyhow, this person has been bearish on Toronto real estate for at least a decade. In a nutshell, he’s been dead wrong. The point I make here is that predicting the direction of a local real estate market is very difficult. (By the way, this fellow predicted the meltdown in the U.S. and was able to make over $2 billion – yes billion – profiting from it.)
All the signs of a peak are abundant in Toronto- the ratio of home prices to average incomes are 5X vs. the historical average of 3X, most people think it is easy to make money in real estate and are using lots of leverage, the CMHC is guaranteeing massive amounts of mortgages and is growing dangerously fast, interest rates have been kept dangerously low, etc, etc, etc. But who the heck knows what will happen. On the other hand, Toronto is a great city (and getting better all the time) and is growing rapidly. It is also landlocked by Lake Ontario and by the Oak Ridges Moraine to the north (not to mention by increasing traffic.) But what will happen? Who knows!
Furthermore, I met with one of the wealthiest and smartest real estate developers about 6-7 years ago. This developer has put up dozens of condo towers in Toronto over the past decade. Anyhow, he told me 6-7 years ago that the condo market was about to collapse. I recently met with him again and he admitted to me that he was very wrong.
Myself, I bought my dream house earlier this year because my house is more than just an investment. I also bought something I could reasonably afford (I did not borrow any money) and feel good about it. If house prices drop by 50% over the next five years, I will survive. And I’ll be in a much better relative position than most. But more importantly, living in this house will significantly enhance my quality of living. By the way- if everyone tells you that there is absolutely no way that real estate prices could fall by 50% in Toronto in the next five years, you should get nervous!
When I read blogs criticizing people for having feelings of resentment for not buying when the market dipped earlier this year (as in this blog) I WONDER IF THE PEOPLE WHO BOUGHT IN AT THE BOTTOM WILL BE THE ONES THAT WILL ULTIMATELY HAVE FEELINGS OF RESENTMENT! No criticism to you Dave, I think your blogs are the best reading around when it comes to the Toronto real estate market.
Potato
at 7:41 pm
Well, you do need a place to live, and that’s what rentals are for.
Right now the market is so crazy it’s cheaper to rent, which makes no sense (why should a landlord rent at a loss?). I can’t see that imbalance lasting for too long (though in RE terms, that could mean another several years before a correction).
So, I rent, and I agree with some of the above commenters: the market has gone up a lot in the last decade or so, and the biggest drivers appear to be increasing leverage (downpayments of as little as 5% with 35-year amortizations) and decreasing interest rates. Both factors have pretty much bottomed out now, so I have a hard time imaging further increases.
I think a very valuable question to ask is “what if I’m wrong?”. If I bought and wanted to move again in 5 years, and was wrong about the potential for a correction, I could be in a bad situation: even a modest correction of 15% (which as we’ve seen, can come out of nowhere in a short period of time) can be very significant when the equity is only that much — I’d be wiped out if I had to sell.
If I’m a renter for the next 5 years, and I’m wrong and housing does double again, then what? I could be “priced out”… except that it’s already cheaper to rent, so unless rents also double, I’ll be in pretty much the same situation I’m in now. I’ll have missed out on the gain, but that’s nowhere near as catastrophic as being wiped out by a correction.
So to me, it’s just good risk management to sit the market out and rent my place to live, even if I’m wrong about a coming downturn and have to do so indefinitely.
Geoff
at 9:31 am
@ Potato – you make a compelling argument, but renting is not alwasy perfect. It’s really nice to own your home; I’m not going to get into the ‘pride of ownership’ argument but just as not all landlords are evil, not all houses are money pits and some are just nice to call yours and if you want to change something, change it. It’s nice.
I also think that the your landlord is not losing money on your rent, because he probably didn’t buy at the peak but years ago. If he was losing money on the rent, he’d sell the house now as it is most likely worth more now than before (at least breakeven) unless he just bought the house a month ago.
Louisa Martin
at 9:48 am
Markets can go crazy that’s for sure. I saw firsthand in London, UK, from 1995 > 2007, properties in central London at least quadrupled in price (some areas particularly prized by the wealthy Russians for whom the ultimate status symbol was a 4000 sq ft London “pied a terre”, quintupled and more). During the crash, prices were 30% lower than peak on average, though if you had been lucky enough to find a distressed seller (usually a sacked banker) right at the lows, you might have got 50% off. And 9 months later, prices have almost recovered back to the previous highs. Go figure!
Jess
at 10:18 am
I’ve heard several economists suggest that the current market is not only driven by pent-up demand, but is also borrowing demand from the future. That is, people who otherwise would have waited are buying now so that they can lock in the current rates before they go up. It suggests that there may be a buyers’ market coming up in the next year. Maybe not a crash, but perhaps the higher rates next year won’t be as expensive as “winning” a bidding war this year.
Jason
at 4:18 pm
Can we agree that recoveries seem to be happening faster than they used to? Both the UK example and what happened in the last 14 months in Toronto prove that recoveries aren’t taking 6-7 years anymore. Sure, the drops happen quickly, but they always have. It seems to me that if you buy in a downturn, you can feel a bit better knowing that your outlook for growth has become short term.
matt
at 7:08 pm
If we are really seeing a sustained global recovery, lending rates will eventually go up – along with commodities (which means a higher cost of living). I don’t see how real estate prices will continue their climb when lending rates are double or triple what they are today. On the bright side, if we are to have stagflation, at least rates won’t climb for a while.
And no I’m not a renter.
dave
at 12:03 am
Jason,
Do you understand how the GDP figures are calculated?
In particular that Gov`t spending, even with borrowed money, is added in to GDP figures.
Further, with RE at 15-20% of our GDP, the big spike in RE in Q2 and Q3 (10% increase in sales volumes and 10% increase in prices ballpark figures), adds 3% to our GDP figures.
And despite this we still only managed an annualized increase of 0.4% in Q3.
The `recovery’ is solely from borrowed money. The extent of gov`t borrowed money is globally unprecedented. 1930 saw a GDP contraction of 8%. 2009 is seeing a western world GDP contraction of 10%, offset by massive Gov`t spending (with borrowed money) of 7%, thus resulting in a average GDP contraction of 3%.
The only difference between 1930 and 2009 is government deficits.
I`m not saying that this a depression, nor a repeat of the 1930s.
I’m just saying that until we`re standing on our own two feet without unsustainable global gov’t deficits, I will have a hard time agreeing that this is a recovery.
Hong Kong Resident
at 8:47 am
I would like to take this opportunity to sincerely tell you; “I think you’re an idiot”. Please take your head out of the cave and use some common sense. The single reason why housing prices have rebounded are because of low interest rates, period. Once the almost free interest ride is over, forced upwards by investors looking for a better bond rate return, your sorry profession should shed about 20% jobs, although, as you know we can do without you.
Thank you for your time and consideration.
Geoff
at 10:42 pm
Hong Kong Resident – stay in hong kong and keep your comments there. You try living on commission and see what it’s like. At least this guy is trying to run a service, and you make it sound like he’s a drug dealer.
And no, I’m not a realtor but good god man, your comment makes you sound like such an angry basement dweller I can’t let it go.
I think, like most events, there are many reasons for why something has happened, not just low interest rates. In 2006/2007 there weren’t such low interest rates, and prices were climbing to new heights then. Even in November 2008 interest rates were low and prices fell (a bit) so that doesn’t fit nicely into your well thought-out hypothesis. Go lurk on greaterfool with your friends.
I’d thank you for your time and consideration, but I know you have lots of time and no consideration to give.
henrylow
at 6:19 am
There’s a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.
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