“What’s it going to take to make this market turn the other way?” I was asked last week by a reporter from the Wall Street Journal.
There are several ways to answer that question.
Cynically, figuratively, literally; with empirical evidence and economic data, or with anecdotal evidence from working in the market each and every day.
This post is sure to stir the conversation. So: what’s it going to take?
I’ve gone from bullish, to bearish, and back again, a few times over the last three years.
I went to business school, and did a minor in economics, so while I don’t profess to be a genius, I do have a general, basic knowledge of economics, as much of a nerd as I am, I read books on economics and market cycles in my spare time (and even on my Honeymoon…).
One of the things I’ve learned, that I just can’t seem to get over, is that “most” real estate market cycles generally average eight years, and in Toronto, we’re going on two decades now.
I got into the business in late 2003, and was actively selling by 2004.
I’ve told this story before, so if you’ve heard it, feel free to skim. But when I got my real estate license, an older friend of mine told me, “This is an AWFUL time to be getting into the business! The market is going to absolutely crash, dude! It’s just basic economics! This cycle is pooched! It’s been eight years, and prices are gonna drop 40%!”
That was in 2004, and since then, prices in Toronto have more than doubled.
You wouldn’t believe the comments I had to deal with back then. A family friend told us, “You should sell your house today, and then in three years, buy it back for half the price.” We kept the family home, and it added about 70% in value before we sold it. I don’t know what it would be worth now, since a developer tore it down and built two homes in its place, but I’m sure there would be even more money on the table, and no, it never dropped half its value so we could buy it back…
“Buy it back for half price,” I was told. That was just insane!
Or was that a reasonable statement, at the time?
I wrote in last Monday’s blog that, “I no longer hear the people shouting that a 30-40% market drop is coming.” They were in abundance all through the 2000’s, but in the last couple years, they seem to have disappeared.
One of my regular blog readers, “Potato,” commented:
“I apologize for my negligence, David.
Prices are going to drop ~30% in Toronto. It will not be fast, but the magnitude will make up for the multi-year wait and grind. Even afterwards, identifying the “trigger” will be fuzzy, and more about storytelling than anything else.”
So there are still people predicting a massive drop in prices, but let’s say a 2004 home that was worth $500,000 is now worth $1,000,000. If a 30% drop in home prices in Toronto did come true, that house would be worth $700,000, which would still represent a $200,000 increase (40%) over that 2004 price. So for all the doomsdayers in the early 2000’s, they’d still be catastrophically wrong, and would have lost out on a tax-free capital gain that can’t be made anywhere else on planet earth.
But let’s not look back anymore. Let’s look forward, and ask again:
What is it going to take for prices in Toronto to drop?
And don’t just give me, “They have to drop – they just have to.”
I’ve heard that way too many times before.
Give me an identifiable reason, backed up with evidence (whether it’s hard data or not), why prices in Toronto are going to drop.
Or, give me a reason not as to why, but how.
I think we would all agree that if interest rates increased, affordability would be lower, and fewer people would choose to buy move-up houses. Fewer first-time buyers would be purchasing homes, and might choose to rent instead, and the number of people looking to buy would be lower overall, thus putting downward pressure on prices.
But what if interest rates didn’t increase, or they did so very, very gradually, over a long span of time? What could make the market drop then?
I spoke to a writer from the Wall Street Journal last week at some length, and neither of us could really find a reason as to how the market could drop, other than, “It simply has to.” I told him that from what I can see out there in the market for single-family homes, I just don’t see it happening.
I’ve made this point before, over and over, but I’m going to make it again.
In Toronto, we never, ever, ever see this:
Imagine what the market is like in an area where one out of every two homes on the street is for sale. Whether this is Florida, Arizona, or another, we haven’t seen anything like this in Toronto in decades (if ever…), and I don’t expect to see this any time soon.
All week, I continued to email my active buyer-clients and say something to the extent of: “Hey guys, another week, and nothing to show for it! Listings are very slow to materialize so far in January, and we’re just not seeing any inventory! Maybe next week? Fingers crossed!”
I’m so tired of sending those emails. I feel redundant, and repetitive.
But the truth is, in most popular neighbourhoods, with single-family homes, we’re not seeing any inventory! Forget about the photo above where a dozen homes are for sale on the same street. Give me ONE great listing to sell!
And what happens when we do get that one great listing? Well, I’d say that 1,000 people view the listing online, 100 of them view the property at the open house or via appointment with their Realtor, 40 of them consider the property aggressively, 20 of them contemplate making an offer, and then 10 of them proceed with an offer on the scheduled day.
This is clearly a function of supply and demand, or rather, the lack of supply, and the incredible demand.
As I told the reporter from the Wall Street Journal last week, “Until this changes, and until we see multiple ‘FOR SALE’ signs on the lawns on the same street, this isn’t going to change.”
Let’s take a look at inventory levels of detached, single-family homes through the last few years, courtesy of my colleague, Ben Rabidoux:
Inventory levels in 2013 were among the lowest in the past seven years, and at some points, trailed the high by 40-50%.
Another comment on my blog post last week read:
“Corrections tend to affect all properties . Don’t believe for a second that the Beaches or the ridiculously inflated semi detached houses in Leslieville won’t be affected. Have you ever seen a stock market correction? Real estate is not much different in its reaction. Corrections usually effect the market as a whole.”
What is “ridiculously inflated” in this market? If $800K for that semi-detached in Leslieville is insane, then what about the $960,000 it’ll cost if and when the market goes up 20%? Or what about when the house was $600,000 a few years back, before the price increased $200K?
If something was “ridiculously inflated” in 2008 when people were calling for a 50% drop, then can that description be taken back, now that the market has increased by 40%?
I’m asking these questions, and making these statements, not as a salesperson trying to push the real estate agenda, but rather as an interested party, trying to make sense of this market.
How can you argue with the graph above?
With so little on the market, HOW can prices for single family homes change?
“What goes up, must come down.” We’ve heard that line before, and it almost always holds true.
I’m not going to pretend like I truly believe that the housing market in Toronto (and let’s be specific here – we are talking about single family homes, and not condos) will continue to add 8-10% per year, every year, forever. But I do think that this is going to continue through 2014, and into 2015, and I wonder when, why, and how it will stop.
I was a bull, then a bear, now I’m a bull again.
And just like every active buyer in today’s Toronto market, I just wish what is, was not…