How does that headline catch you on an otherwise uneventful Friday morning?
Folks, I fashion myself a pretty honest guy, and I think I’m fair, and more impartial than most people in my business.
So let me be the first to call out one of the more outlandish prediction I’ve seen in years: Barry Fenton, President of Lanterra Developments, telling people that there’s going to be a 30-40% increase in average condo values over the next 3-4 years.
I know I’m a real estate salesperson, so this might seem contrarian, but I can’t possibly agree with Mr. Fenton’s prediction…
I know there’s a full minute of advertisements in the video, but it’s worth it – trust me!
Put it on mute, go warm up your coffee in the microwave, or just stare at the person across from you on the streetcar and see how many times he or she looks up at you in that one minute.
Any which way, you have to see this video.
I know I’m going to catch a lot of flak for this from my industry colleagues, who often wonder why I put anything negative out there, but COME ON!
How asinine is this prediction of 30-40% appreciation in condos in 3-4 years?
Let me be up front – I’m not a market bear. I do not think “the crash” is coming. In fact, I think over the next two years, we will see at least 2-3% annual growth in the real estate market, perhaps more.
But at the same time, I won’t blindly ignore all the bearish real estate articles, expert predictions, and negative sentiments out there.
I’ve said over and over again, “The media have accurately predicted eight of the last two recessions.”
And I have said on many occasions that “negativity sells,” and it’s part of the reason why despite our rapidly ascending market over the last two decades, much of the media coverage has been on predictions of doom-and-gloom, rather than a focus on appreciation, capital gains, and increased wealth.
So I do think that the negative media coverage of the real estate market has less to do with fundamentals, and more to do with what sells.
We don’t see nearly as much positive coverage as negative coverage, and for every market bull who gets their name in the paper (Benjamin Tal, anybody?), there are a dozen market bears predicting doom for the Toronto market.
But at the same time, I have to point out BS when I see it.
The last thing I want here is for the people reading this to think I’m bearish on the market, or predicting a correction, or even a dip in prices.
But I can’t watch this video without cringing.
I’m not cringing because of the actual prediction itself, which is pretty ridiculous. I mean, the last 20-years have been great and all, but this man is predicting up to 10% growth, each year, for the next four years – maybe more, if you care to finesse and cherry-pick his numbers.
But rather, I’m cringing because I just can’t stand to see somebody make a wild, outlandish statement that they know is exactly that, and smile while they do it.
This man is the President and CEO of a major condominium development company. And he is predicting 30-40% appreciation in condo prices over the next 3-4 years.
No kidding.
There’s nothing criminal about it. It’s not like the Banners Broker pyramid scheme.
But I don’t accept, for even a second, that this man actually believes what he’s saying.
By the same token, I didn’t think portfolio manager, Hilliard MacBeth, really believed what he was saying when he wrote a book about the 50% market correction that was about to happen in Canada.
And I most certainly did not believe that Nicole Foss actually thought the Toronto real estate market would drop 90% in value when she made this ludicrous prediction earlier this year.
People have agendas, no doubt about it.
And a cynic (there are many on this blog), will suggest that I have a vested interest in the Toronto real estate market continuing to climb, or at least people thinking it will.
I’ve said before that I will sell real estate whether the market is up, down, or sideways, and I think if, and when, the market corrects, my services, as a top, full-service agent, will be even more in demand.
So take it with a grain of salt when I say that my opinions are as truthful as you’ll find in this business, and while I don’t think the Toronto real estate market is going to drop 90% in value like Nicole Foss suggests, I also think for Barry Fenton, the President & CEO of Lanterra Developments, to suggest that the Toronto condo market is going to increase at double-digit rates for almost a half-decade, is as transparent as Garth Turner’s efforts to take people out of real estate and into his funds, or as pathetic as Hilliard MacBeth’s attempts to sell books.
Is there any sanity left out there?
Or are people just lined up to say stupid things?
Appraiser
at 7:12 am
There are two simple truths when in comes to the real estate market.
Fear sells and predictions are to be ignored.
Appraiser
at 7:18 am
Back to reality.
At 9:30 am this morning our Finance Minister, Bill Morneau will be making an announcement. Reuters is reporting that new mortgage rules are likely on the way. Stay tuned.
http://www.reuters.com/article/canada-politics-finance-idUSL1N13Z2SR20151211#8SEGTUWJ1MlD6MOm.97
Boris
at 8:15 am
If there is one certainty, it’s that asset prices do not move in straight lines for indefinite periods of time. This country is going to hell in a handbasket, and we will be in recession by Q2 or Q3.
The Scandinavian experiment with NIRP resulted in HIGHER mortgage rates even with negative overnight deposit rates. We could easily see a scenario with modest mortgage rate increases (50-100 bps on 5 yr) while as a response to a faltering economy exacerbated by non business friendly policy we end up easing 50 bps to 0%.
There were two bank rate reset preferred issuances this week – well 3 if you include Laurentian. All 3 went very poorly, and this was at 450 bps spread to the 5 year, which is double what the banks could raise at 12 months ago via the rate reset pref market. This high cost of capital can only be offset by increased fees, mortgage rates and other ways of laying it on the consumer.
We now do have the confluence of an exacerbated commodity market meltdown, increased non business friendly politics across the country, debt markets hiccuping deeply (the US high yield market is melting down), higher bank cost of capital, lower real wages in Canada and policy designed to cool the housing market (maybe).
I’m not saying that this is what breaks the housing market (I just don’t know), but we have had a confluence of negative headwinds of this depth and severity in a long time in this country.
Appraiser
at 8:53 am
Speaking of predictions:
“We believe there’s a reasonable probability that two years from now we’ll be back at 2 percent inflation; the economy operating at full capacity,” ~ Stephen Poloz, Governor, Bank of Canada.
http://bloombergtv.ca/shows/the-daily-brief/the-daily-brief-clips/poloz-says-canada-quite-far-from-needing-extraordinary-stimulus/
Ed
at 9:10 am
But rather, I’m cringing because I just can’t stand to see somebody make a wild, outlandish statement that they know is exactly that, and smile while they do it.-David
That line you wrote soooo reminds of Wynne.
Boris
at 9:12 am
From Benjamin Tal this morning:
Assessing the Impact of Higher Minimum Mortgage Down Payments
by Benjamin Tal
According to sources, the Ministry of Finance is touching the untouchable. Minimum down payments on mortgages in Canada are expected to rise. The move is asymmetrical. It will impact only high-ratio mortgages (less than 20% down payment) and properties valued between $500K and $1 million. The minimum down payment will rise from 5% to 10%. The motivation to the policy is clear. The attempt is to slow down the only two markets that are really moving (Toronto and Vancouver). Those markets happen also to be the most expensive ones. So linking down payment to price should do the trick. While this would have some impact, a closer look suggests that the impact will be smaller than perceived.
To get a sense of how many properties will be impacted we have to look at the share of units that are valued between $500K and $1 million and have a high-ratio mortgage.
Chart one provides this info. For the country as a whole, the share of new sales of properties (over the past year) at this price range is around 17%. In Toronto, that ratio is over 40% and in Vancouver close to 33% (Chart 1).
Now to the other part of the equation—the high-ratio segment of the market. For the past year the share of high-ratio mortgages in total outstanding is estimated at 23% of originations. Accordingly, for the market as a whole the new measures will impact an estimated 3.9% of mortgage originations.
Now the share of high-ratio mortgages in the more expensive cities is actually lower than the national average due to the fact that they have a larger share of properties that are above $1 million and thus not qualified for high-ratio insurance.
Adding this to our calculations leads to Chart 2. In Toronto, the new measures are estimated to impact close to 5% of new sales while in Vancouver, the impact will be on only 2.5% of sales. Note that the largest impact (close to 10%) will be on Calgary (due to its relatively large share of high-ratio mortgages)—not exactly a city that needs additional cooling.
The new measures reflect some creativity in the thinking regarding Canadian housing. The asymmetrical approach to pricing makes sense and is much preferred to the indiscriminate weapon of higher interest rates. However, while it sounds dramatic, our analysis suggests that the overall impact will be felt only at the margin given the relatively small segment of the market that will be impacted—even in the target markets.
condodweller
at 11:03 am
I caught this on BNN this morning. IMHO this is spot on, and the new policy was very nicely thought out along the lines of my reasoning why minimum downpayments should go up. It will separate the strong qualifiers from the ones who barely qualify and probably should not be taking on a huge mortgage. The former will need a little longer to come up with the downpayment and the latter can still get a high ratio mortgage albeit on perhaps a condo rather than a house while still being able to take advantage of participating in the wealth building trough RE equity.
I also saw a report recently that mentioned borderline buyers have increased from 3% to 11% which is also a warning sign.
Kyle
at 11:15 am
Actually i think what this is more likely to do, is separate those with wealthy and generous parents from those without.
condodweller
at 4:03 pm
I don’t get your point. People who have money, regardless of the source, can buy a home and those without, can’t. The intent of the rule changes is to stabilise the RE market through disqualifying home buyers who probably shouldn’t be buying one in the first please, or at least not with potentially unmanageable mortgages.
Kyle
at 9:58 am
You keep trying to suggest that the new rules will help reduce the risk to marginal borrowers, by filtering out people who “shouldn’t be buying”, or the non “strong qualifiers”, basically protecting them from themselves, etc. What i am saying (i also mentioned it in the previous post about 10% downs) is that the new rules DO NO SUCH THING. The new rules are equivalent to lowering the loan-to-value (LTV) ratio. If you understand how LTV works, you will realize that LTV’s purpose is only to protect the lender in case of default, it increases the amount of equity that they can recover. That’s all, it does nothing to improve the credit worthiness of the borrowers. The way to do that is to lower the maximum gross-debt-service (GDS) or raise the minimum credit scores.
Lowering the allowable LTV only filters out one thing – those who have less equity. So my point above is referring to something that is commonly occurring today, i’m saying that regardless of how good or bad someone’s credit is, those who can tap the bank of Mom and Dad will continue to be allowed, while those who don’t will be denied.
condodweller
at 2:59 pm
@Kyle, We are on the same page I’m just thinking one step ahead. You are only looking at the immediate impact. The rule changes are designed to protect CHMC as the critics say they are the ones first on the hook in case of default, not the bank. You are right, the immediate impact is that LTVs go down, but the effect of lower LTVs will be lower GDS ratios (after the purchase) which will protect a marginal borrower as their price cap has just been lowered resulting in lower mortgage payment and extra disposable income to help absorb future rate increases.
Here is an example:
Today I have a $50k downpayment to buy a 1 million house with 5% down, which at a 2.75% fixed mortgage rate will result in a $4,374.86 monthly payment. Next year if/when the rules go in effect I can only afford to buy a $750k house with my $50k downpayment resulting in a $3,223.59 monthly payment. Interest rates would have to double for my mortgage payment to reach what I would pay if I bought today. Factor in the lower land transfer tax and you are in a much safer situation. It absolutely improves my credit worthiness as my expenses will be around $1,5000 less each month.
Where our opinions differ I think is that you are assuming Mom and Dad will pay the difference in downpayment in which case it’s true, the new rules would not affect anything other than LTV. To that, I would say that people who use the bank of Mom and Dad don’t even matter here because they won’t be using a high ratio mortgage. My understanding is that for these people Mom and Dad are providing a significant portion of the purchase price, even paying for it outright.
Kyle
at 5:31 pm
I’m not just talking about immediate impacts, i’m talking about in general this rule does nothing at any point immediate or future to differentiate borrowers along the lines of creditworthiness, as you repeatedly suggest. Yes i fully realize there may be some people who will be prevented from borrowing more than they “should”. I get that. What i am saying is, that is purely by happenstance of this rule and not by design. Just as there will be as many creditworthy individuals who will be prevented from borrowing as much as than they could.
Kyle
at 5:55 pm
The example you provided, is pure happenstance. There are actually four possible scenarios, If as you say, “The intent of the rule changes is to stabilise the RE market through disqualifying home buyers who probably shouldn’t be buying one in the first please”, then notice how two of the scenarios would be negative unintended consequences vs your one intended consequence.
1. Borrower is buying more house than he can afford, but rules deny him because he lacks equity (your example)
2. Borrower is buying more house than he can afford, but gets a gift of a down payment, rules allow him because he has equity (my example of an unintended consequence)
3. Borrower is buying a house he can rightfully afford, but rules deny him because he lacks equity (another example of an unintended consequence)
4. Borrower is buying a house he can rightfully afford, rules allow him because he has equity ( i think we agree this is fine)
condodweller
at 8:35 pm
I think you are way overcomplicating this. You are creating four permutations by separating affordability into two categories. What really matters is how much mortgage a person can carry and their capacity to tolerate rate increases. Where they got their downpayment is totally irrelevant. The lenders don’t care whether you saved it up, your parents gave it to you, got a bonus at work, inherited it, or won it at the race track etc. etc.
My example is not at al happenstance. If you have x amount of downpayment which is less than 20% of the value of the home, you are limited to a lower purchase price, if the price is over $500k.
Even if your parents are giving you the downpayment, the premise still holds. The more I think about it, the more I see what an elegant solution this is because it limits the mortgage you take on without tinkering with GDS limits which may, as you suggest, lock out someone from home ownership.
Kyle
at 11:29 am
It’s not over complicated at all. It’s actually quite simple. If the intent was to weed out marginal borrowers (which it isn’t) they would have screened for credit worthiness not how much someone can put down. It is clear the intent of the new rule is to reduce systemic risk from the lenders and insurers, it has nothing to do with protecting marginal borrowers.
What you keep suggesting (incorrectly) is akin to a bar who only serves people taller than 5’6″ to ensure minors don’t drink. Sure you can point to many short minors who have been denied, and say, “see i told you it works”, but that’s only if you are able to completely ignore all the tall minors inside the bar doing shots and all the short people who have reached the age of majority who can’t get in.
condodweller
at 1:11 am
The rules are designed to stop people from taking on too much credit which in turn can trigger market instability when the you know what hits the fan. Guess who is going to be the trigger…..the marginal borrowers who can’t withstand future interest rate increases or a job loss when they are all going to be forced to sell.
Your example has nothing to do with mine. The rule changes are not retroactive therefore it doesn’t matter who is “already in the bar”, under age or not.
It’s not my life’s ambition to make you see my point or agree with it so I’m going to leave it at that.
Appraiser
at 5:27 pm
You are kidding right? This has nothing to do with your “lines of reasoning.”
There is no “flying colours” level of qualification in mortgage underwriting. You either qualify or you don’t under the prevailing guidelines.
P.S. When you site an article or report, please provide a quote and / or a link, instead of an unverifiable anecdote.
Fro Jo
at 10:02 am
I haven’t watched the video. But the prediction of 30-40% growth in the next four years seems correct from the POV of a foreign buyer, somebody who works in US$.
1. Buy C$-denominated assets now.
2. Wait for oil and commodity prices to rise.
3. Watch the C$ rise in near lockstep.
4. ????
5. Profit.
Sorry for the ancient meme. I think it works.
FJ
Joe Q.
at 10:30 am
Do you think that’s really what he had in mind (someone buying in USD) when he made the prediction?
crazyegg
at 11:05 am
Hi FJ,
That is a great point.
A 10% increase x 4 years does seem on the high side but only in isolation.
With the C$ now at the lowest in over 10 years coupled with foreseeable / sustained low resource pricing plus the rising US$ against all currencies (including the Euro), this prediction could come to reality (or pretty close to it).
In addition, China now is showing cracks in its economy. Chinese money will now be looking for safer havens offshore.
Regards,
ed…
Noel
at 10:37 am
‘Economists have predicted 19 of the last 4 recessions’
condodweller
at 10:55 am
I agree 30-40% is extremely optimistic to be kind. However, I would not be surprised by strengthening of the downtown condo market as houses prices, in conjunction with tightening lending policies, increase to the point where it is out of reach for the majority of buyers. As land prices are going up along with government development fees, those who are priced out of the house market will fall back to the condo market thereby supporting its growth. I think a solid 5-8% price growth per year for the next few years is not unrealistic.
Why do you call Benny Tal a bull? I only started following him recently and most of his commentary seems pretty reasonable, and would think many might call him a bear.
Appraiser
at 2:20 pm
So here’s the bottom line on the new insured mortgage rules. Because the 10% minimum down payment only applies to the portion of the sale price over $500,000, it will soon (Feb. 15, 2016) require $25,000 more up-front cash to buy a home that sells for $999,999.
Hardly earth-shattering, but combined with the four previous rule changes over the past several years, I would conclude that Canada is being prudent with regards to mortgage lending.
http://www.fin.gc.ca/n15/15-088-eng.asp
Joel
at 3:22 pm
This, combined with the past four rule changes you had mentioned are what sets us apart from the US 2008 housing market. The Canadian government is putting in gradual steps to fight against a crash.
For some reason many bulls won’t except this and think/hope that the market is going to fall apart, despite the actions that are being taken to prevent that.
Joel
at 3:25 pm
Does this mean that Lanterra is selling pre-builds at 40% above market value, so that they accurately reflect the rates they are expecting in 2020?
What a terrible prediction. I know many here laugh at the ridiculous predictions from the bears, but this is equally as bad. When you start making ridiculous claims you are no better than Garth Turner… Or Donald Trump
Kyle
at 3:40 pm
I agree with him that inventories are actually pretty low and new supply will be lower than it has been in the last couple of years. Despite all the cries of over-building i think the reality is new units are just barely keeping pace with the growth in new households. Also I could see 2 and 3 bedroom condos start commanding higher prices, as they are rarer and will be more in demand as low rise prices become out of reach. Overall however I can’t see his prediction coming true, i think it would take something pretty extraordinary for condos to go up 30 – 40% in the next 3-4 years.
Appraiser
at 4:09 pm
Here’s one observation that I hear nobody talking about and it has to do with what is happening to the real estate market in Calgary.
If Calgary teaches us one thing, it is that economist Will Dunning is right. Employment is the biggest factor affecting the housing market. It’s not interest rates or foreign investors or fears about poor mortgage underwriting that kills real estate – it’s jobs (more precisely the lack of jobs)!
P.S. This is for all the bears that think the real estate market in Toronto or Vancouver will one day simply collapse under its own weight.
Not. Gonna. Happen.
Calgary proves that a catalyst is required.
Kyle
at 4:42 pm
Bingo! This chart kind of says it all.
http://www.theglobeandmail.com/report-on-business/top-business-stories/why-analysts-see-no-quick-end-to-the-toronto-vancouver-housing-booms/article27661566/
Appraiser
at 8:06 am
For the best article regarding the new mortgage rule changes, may I recommend:
http://www.canadianmortgagetrends.com/
Ed
at 12:02 pm
For David- Will it ever come to pass that sellers will be offering to cover closing costs so that the buyers will be eligible to qualify for CHMC insurance.
Lets pretend we have a buyer who has amassed $50,000 to cover down payment and land transfer tax (LTT). And for arguments sake let us assume LTT is $12,000.
Pre Feb 15- Buyer has $38,000 for a down payment and is CHMC eligible on a house up to $760,000.
Post Feb 15- Buyer has $38,000 for a down payment and is CHMC eligible on a house up to only $630,000.
So can not the buyer approach the seller and offer an additional $12,000 above and beyond the sale price on the condition the seller will reimburse the buyer $12,000 at time of closing.
For instance buyer offers $750,000 for house selling for $738,000.
In this scenario the buyer will have earmarked $50,000 for a down payment knowing the seller will in effect be covering the $12,000 LTT and will still be CHMC eligible up to $750,000.
Have you ever seen this David?
rob fjord
at 10:56 am
i predict 30-40% DECLINE in the next 4 years. The US FOMC meeting this week is perhaps the most important since the Volker meetings of 35 years, janet yellen may raise rates this wednesday and begin the reversal in money velocity, which will unleash inflation…which is usually good for housing, but real estate has had its day, rising in the deflationary low interest rate environment, now with rising rates those days will end and there will be a shift to other asset classes. Canada will follow the US in raising rates slowly, and our commodities and our currency are set to turn the tide (although oil may still take a few years to join the party) I was wrong about the september FOMC meeting, but it looks like all systems go now for the december rate raise. Its a good time to sell real estate and buy mining company stock which should greatly outperform their underlying commodities such as copper and gold.
Mr.Audi
at 12:14 am
Well,one thing is for sure,for the foreign buyers e.g. Chinese,the real estate prices are on sale,aat least 25% compared to couple of years ago,based purely on the exchange rate of the looney.
AT555
at 2:27 pm
So Barry’s prediction is about to be true huh!! Who thought..
BillyO
at 8:14 am
Hey David, hopefully you see this message – perhaps this blog post is worth revisiting. Looks like Barry was right!
Irfan
at 12:58 pm
Lol
Tudval
at 10:52 am
I see this all the time: so much outrage from people who are so wrong. I mean, this guy was a lone voice predicting a price increase is a sea of bears, why even bother, who’d listen to him?