I’m not in the habit of making predictions.
Far too often, predictions prove wrong, and it always seems like the prognosticator can fall back on, “It was just a prediction,” once events have transpired differently than what was prophesied.
But I would, however, like to discuss the real estate market moving forward into 2014, and take a look at how some other people, media outlets, and institutions think things are going to play out…
Do you follow baseball?
I do. And every December, there are a slew of free-agent signings in Major League Baseball, all of which are analyzed, scrutinized, and quite often, criticized.
General Managers are giving out $100 – $200 Million to sign players this time of year, and there is absolutely, positively, zero guarantee of a return on that investment.
Jacoby Ellsbury signed a 7-year, $153 Million deal, or $21.9M per year.
Shin-Soo Choo signed a 7-year, $140 Million deal, or $20M per year.
Curtis Granderson signed a 4-year, $60 Million deal – or $15M per year.
All three of these players are outfielders, and I have no idea how a General Manager is supposed to decide which player is going to achieve what, and how to evaluate that unknown variable.
I have come to believe that signing free agents in baseball amounts to little more than guesswork, which is to say that he who has the most educated guess, screws up the least.
I hate guesswork. And I hate predictions.
But predictions get people worked up, and they sell newspapers, as well as a slew of financial services!
Over the holidays, I saved a few articles of interest pertaining to the real estate market; some bullish, some bearish; some about Toronto, and some about the United States.
I’d like to share those predictions, and seek further opinion from my readers.
And if you think that you can’t join the conversation, just remember: everybody’s got an opinion…
Here are the links to the articles, and the excerpts I’ve chosen to share:
“Toronto House Prices To Double Over Next 25-Years, Study Predicts”
By: The Canadian Press
Financial Post
TORONTO — A new forecast suggests fears of a housing bubble and a price collapse are misplaced and predicts rising population and land supply restrictions will result in Toronto house prices doubling over the next 25 years.
The forecast by Central 1 Credit Union says higher mortgage rates in the next three years will restrain housing sales in Ontario as a whole, but not cause a market correction.
Ontario home prices will rise about 4% a year through 2016, down from a decade-long annual average of about 6%.
“From The Desk Of Brad J. Lamb – Toronto Real Estate Market 2014 & Beyond”
By: Brad Lamb
Brad J. Lamb Realty Inc., Brokerage
2010 condo sales of 20,491 units and 2011 sales of 28,190 units. These were incredible years for new construction condo sales and these sales caused a huge amount of negative ‘doomsdayer’ type press. I believe 2013, 2014, 2015, and 2016 will see just 12,000 new condo sales per year in the GTA. With 2012-2016 likely generating a total of just 60,000 new sales, it is likely that we will see a shortage of 15,000 units by 2018.
With rising construction costs, rising development levies (recently doubling, adding $10,000 in new costs to every new condo), rising land prices (as it disappears), and soon rising demand, and a lower supply, prices are going to start climbing again. I predict that typical $600PSF condo will rise to $800PSF within the decade. A 500SF one bedroom suite in the central core in a new building will sell for $400,000 by 2020.
“The Year Of The Boomerang Buyer”
By: Kimberly Miller
The Globe & Mail
South Florida housing experts are trumpeting changes that allow foreclosure sufferers to buy back into the American Dream sooner than they probably imagined, calling 2014 the year of the “boomerang buyer.”
Revisions made over the summer to Federal Housing Administration (FHA) guidelines and technical updates in November to Fannie Mae loan approval systems have opened the door for some former homeowners to buy again just one year after foreclosure.
Founders of the San Diego-based company AfterForeclosure.com said last week that millions of banned borrowers nationwide will be eligible for a mortgage next year, while Jupiter mortgage broker Skip McDonough said his firm is already doing deals with home buyers who were forced into default during the housing bust.
“The old-fashioned way of doing it was a seven-year waiting period,” said McDonough, president of Family Mortgage. “That’s changed, and people who don’t believe they can qualify are qualifying.”
McDonough and Jon Maddux, co-founder of AfterForeclosure.com, said the boomerang buyers are necessary to maintain a growing economy as other drivers fade.
So here we have three very different sources, but all of them seem to push the overall real estate agenda to some degree.
The first article suggests that Toronto real estate prices are going to DOUBLE in the next 25 years. I don’t in any way disagree.
But what does that mean for this year? The article says that 4% growth is expected in Ontario through 2016, but Toronto outpaces the average in Ontario, does it not? So are they expecting 7-8% in Toronto?
And are they expecting prices to drop, ever? If prices are to DOUBLE in 25-years, then when is the crash, correction, or “re-balancing” of the market?
The second article makes some pretty wild claims, and while I’m not looking to make any enemies in the Toronto real estate industry, the list not limited to Brad Lamb, I have to question the idea of an $800 per square foot average condo price for new construction. That’s a LOT of money, isn’t it?
Well, if we compared to, say, $1,000 in Vancouver, then it’s not.
And if we compared to, say, $3,000 in Manhattan, then it’s even more reasonable!
But the idea of a 500 square foot condo averaging $400,000 in downtown Toronto sickens me. That’s absolutely insane, and it’s unnecessary.
And if we truly are going to see the inventory that analysts are predicting (42,000+ condo completions in Toronto in 2014), then how can prices reach an average of $800/sqft?
The last article takes insanity to a whole new level!
My favorite line was, “The old-fashioned way of doing it was a seven-year waiting period.”
Let’s take that logic, and apply it to some other issues…
“You used to have to get approved for a line of credit, and that took time!”
“Once upon a time, criminal background checks were necessary in order to purchase a gun!”
“In olden days, you’d actually test the temperature of the bath water before putting your baby right into it!”
This article, which you should all read in FULL, is ridiculous.
This “mandatory” seven-year waiting period for borrowers who previously defaulted on their mortgages, is now being done away with by many lenders. Isn’t this just asking for trouble?
Did we not learn ANYTHING from the American housing crash a half-decade ago?
And this is happening in Florida, of course, where the market is incredibly depressed, and prospects are bleak.
Sooooo……..why not artificially increase the market? 🙂
The article says, “boomerang buyers are necessary to maintain a growing economy as other drivers fade.” This is basically conceding that the price appreciation isn’t happening on its own, so lending rules need to be relaxed so more people can buy, and more buyers can help increase prices!
What’s wrong with the world?
Overall, the feeling south of the border is that the real estate market is in for a very good 2014, but it’s hard to say whether that will have any affect on Canada.
Open the newspaper in Toronto, and you’ll see an equal mix of bullish and bearish predictions.
I’m not making any predictions for 2014, other than to say that people still have to live somewhere, and the real estate market in Toronto will thrive whether prices are up or down. Up 2%, down 2% – how much does it really affect your life?
Jason H
at 8:48 am
We can say one thing for sure that in the last couple months we’ve seen some hefty lay-off’s in manufacturing and mining. I would take a guess and say this trend will continue.
How this will affect the real estate market is yet to be seen but I think it will have an impact on housing.
Joe Q.
at 10:17 am
“Up 2%, down 2% – how much does it really affect your life?”
Not much for a typical homeowner — but for those whose only asset is RE and who are living on the financial edge, it can be significant.
David — How about some predictions not directly related to sales volume and average prices? For example — will the RE boards institute new rules to rein in some of the dubious practices that have long bothered you and others? Will FSBO grow, flatline or shrink in popularity? Will Jim Flaherty and / or the OFSI make further changes to mortgage lending regulations?
David Fleming
at 11:08 pm
@ Joe Q.
Trying to predict what the real estate boards will do is yet another impossible task.
Recently, TREB decided, on our behalves, that they would cut ties with Teranet and their Geowarehouse (Land Registry) product, and sign with MPAC instead. Why? Because it’s cheaper. The rub, of course, is that MPAC doesn’t provide 1/10th of the product that Teranet does, and it means that the experienced, knowledgeable, professionals like those at my brokerage will have to spend thousands of dollars out of pocket to bring BACK a service that TREB used to provide. TREB is flush with cash – I have no clue why they made this decision, but I assume it’s because the bottom 50% of Realtors and brokerages are hurting for money, and would rather save a few bucks than have an essential service. BTW – I can’t wait to see how many errors are made, and lawsuits are filed, once licensed Realtors no longer have Geowarehouse.
Sorry…..bit of a tangent there, but you hit a nerve with the RE boards…
As for FSBO’s, they might grow, but discount brokerages will start to go under. I say this not because I am a full-service agent, defending his turf, but because the business model just doesn’t work, and the products and services they provide only appeal to the poorest and most desperate.
As for Flaherty, he’ll make changes, but I don’t know what. He just loves to tinker, or at least talk about it.
Maybe this is the year that Genworth takes a much larger piece of the pie? If CMHC rules tighten, maybe other doors open?
@MortgageJake – care to weigh in?
Jake
at 8:26 am
Some changes already taking effect:
-if using a guarantor to support the deal they must not only appear on title now, but they must live in the property. Some lenders already taking this stand. Crazy rule, completely illogical, and will never happen.
-if you have a line of credit or worse, home equity line of credit, instead of interest-only payments being used as a liability, they now use THREE PERCENT OF THE LIMIT. Example a $100,000 HELOC will cost $3000 per month to maintain. That’s right, the same as $600,000 in mortgage. That’s insane.
-if you have a student loan or line of credit, before we could use the agreed upon payments per month on that loan. Now? No. Now the banks are amortizing it over 5/10/15 years depending on the loan amount, at a set prescribed rate of 5.34% (govt of can posted). So those payments are higher.
PROPOSED b21 RULES may include higher downpayment, elimination of 30 year amortization for high-ratio OR conventional business, potential requalification at renewal, and other ways that people like LONG TERM REALTOR think will not impact the market and things will be rosy and cheeky. Not to mention CMHC’s role is increasingly being questioned as to its long-term viability and necessity at the hands of taxpayers’ risk.
One final comment: Flaherty no longer really makes as much impact as OSFI which has taken over CMHC. Flaherty definitely has his input in the market but now it’s a two-headed monster.
Kyle
at 10:18 am
To house prices doubling in 25 years works out to be about 2.8% average growth per year, which actually isn’t very bullish at all, compared to recent growth. So i think it’s plausible for a rapidly growing city like TO, but with a 25 year horizon it will really come down to immigration, household formation and jobs.
Brad Lamb’s prediction of 33% increase by 2020 for new construction, means an average of 5% price growth per year. I think this is probably overly-optimistic. I could see this happening for SFH under very favourable conditions, but definitely not for new condos.
Long Time Realtor
at 12:10 pm
Just going over TREB MLS sales archives dating back to 1968. Average sale price increased every year for 21 years in a row from 1968 to 1989, when avg. price peaked at $273,698. Then the great crash ocurred, and avg. price did not exceed that peak again until it reached $275,231, in 2002!
Interestingly, the avg. price has increased every year since 1996, when it closed at $198,150. Today TREB reported the avg. sale price for 2013 was higher for the 17th consecutive year, when it closed at $520,398.
Jason
at 12:36 pm
Its obviously tough to make predictions about real estate since its highly dependent on interest rates and other macro economic events which you can’t predict.
One thing I’m fairly confident in saying is that 2014 will probably see a record number of completions in the new condo market, but it won’t be anywhere near 42,000. I think we may push the envelope and get 20,000 new completions or slightly more, but not over 40,000. It will be interesting to see if the market can absorb the new inventory and if investors can still break even if rents decline because of too much supply. Many condos purchased during the record year of 2011 will be completed this year or next year, so we’ll have to wait and see how it shakes out.
Rob Fjord
at 12:40 pm
-toronto prices double in 25 years –but what if inflation goes up 200% over that same time period!
We are in the midst of the great leveling, the middle class will be brought to their knees as their assets are manipulated downwards in value, their wealth confiscated by bail-ins, their jobs wiped out by recessions and trade agreements, their wages kept stagnant or decreasing by immigration, both legal and illegal and inflationary monetary policy.
the thing is, its all by design, the elites do this as a power/wealth grab, and it works continually, ongoing cycles, all markets manipulated, money spigots turned on… then turned off…ebb and flow…tide comes in…tide goes out. The masses may get richer over many generations, but eventually everything is taken by the elites, they think much longer term then the rabble, so some poor families can rise up and get very wealthy, over say 100 years, weathering numerous storms and cycles, but then the big one comes, a world war, a deep depression, the new rich is disposed of in an instant, generational wealth transferred to the elites. Ashes to ashes dust to dust, from poverty and servitude you came, and poverty and servitude you shall return! forget about thriving, focus on surviving- they got your number, toronto real estate…. and its almost up.
Long Time Realtor
at 7:15 pm
Dear Rob Fjord: I strongly suggest taking a deep breath and perhaps trying some herbal tea.
Jake
at 4:36 pm
Two things not mentioned in this article revolve around the #1 road block to a continuing healthy market: the mortgage landscape. Sure, Brad Lamb et. al. could pipe in and declare a bull market that will last another improbably 7 years, but if the mortgage space gets tighter, (not if, but, as it does), lending will dry up, and that will be the #1 reason why his prediction will probably not be accurate. Hell, no one can predict what policy makers are going to do but if the trend is your friend as they say in investing, the trend over the past 5 years has been to make things more and more difficult to get approved. Now, I see more changes coming (already have) and more in March (in the pipeline) that will potentially cripple the little nuances that brokers and banks used to get people approved – things that one could argue goes too far but really, we’ve enjoyed a 17 year ride so isn’t it time to perhaps pull back and take a breath?
I’m a 10-year established mortgage agent so perhaps I can take this sort of approach but many in my industry do not share the same view; nor in the Realtor community. Things do not ALWAYS have to go UP UP UP, it’s unsustainable. And if they do, great, we were all wrong. I’m not a bear or a bull in the market, I’m a pragmatic thinker and believer that what goes up must come down and vice versa.
What’s most interesting perhaps is that a down market is usually the best and ONLY time you can move UP the property ladder, too. Sell for less but buy for less. So it’s not all darts and daggers out there, things are good and we should be thankful to live in such a thriving market.
Jake
at 4:42 pm
that should’ve said ONE thing not TWO things, or two things out of one thing:
Mortgage rules and mortgage rates.
Sorry! Too quick to press send.
Long Time Realtor
at 7:07 pm
Mortgage rules have been tightened 4 times in the past 4 years. The real estate market appears to have adapted and thrived each and every time, notwithstanding the dire predictions of an all-out crash from the bears each and every time.
I have been a realtor for 28 years. One thing I’ve learned in nearly 3 decades in the ‘biz is that major corrections are directly correlated to recessions. So unless you think a few more mortgage tweaks are going to trigger a recession, please spare me the drama.
Jake
at 7:55 pm
LTR, you forget that the current real estate market employs approximately 1/4 of Canadians. So what do you think will happen when mortgage rates rise, and less people buy? That’s right – potentially leading to a recession, no? So while you’re right on the effect of a recession, you are wrong on the potential this time around of the cause of it.
Good for you for lasting 28 years in this business, so surely you must know that home financing is crucial to keep it going, and when capital tighens up, things change rapidly.
Long Time Realtor
at 8:31 pm
The prime rate has been at 3% or less for 5 years, yet inflation is hovering dangerously below the BOC target rate of 2%. The economy is well below capacity despite all of this stimulus, so much so that the BOC has actually relinquished it’s tightening bias and you’re warning of a substantial interest rate hike? Capital drying up?Really?
Someone’s been reading too much Ben Rabidoux and Garth Turner.
Jake
at 9:07 pm
Unlike yourself, I choose to read all sides. Garth Turner is an absolute nut but it’s still fun to read. Let me guess, you only read the “Prices Will Rise” articles and scoff at any mere mention of an impending mess?
Cuz, as we all know, prices ALWAYS go up, right?
By capital drying up my message was: if it’s getting that much harder and harder to get a mortgage, coupled with the inevitable mortgage rate hikes, you can bet that the market HAS TO slow down. Do I want it to? Hell no! I’m in the mortgage SALES business. Do I think it can and probably will with the recent changes coming? HELL YES.
Jason
at 8:41 pm
I tend to agree with LTR, interest rates are not just low, they were and continue to be ridiculous low. Interest rates risingto 5 to 6% is still extremely lowand I don’t think an increase to these levels will affect the housing market. A sharp spike in interest rates will have a short term effect unless the spike is to much higher levels.
As for which is likely to come first, a recession or a housing correction and causality, I believe that a recession will obviously cause a housing correction and that a housing correction is unlikely to occur before a recession. New condo development has slowed from its 2011 levels and while the new rules have slowed the market for short periods of time as buyers adjust, the effect has not been permanent. This is an issue that we can debateat length. For the most part, real estate is a great long term investment if decisions are made rationally. If people try to become a millionaire through flipping real estate, they’ll inevitably get burned eventually, but its a great way to build long term net worth for yourself and you family.
Joe Q.
at 10:08 am
Garth Turner is a broken record (maybe more like a broken clock?) but I wonder what the problem is with Ben Rabidoux. Do you read his work or just reflexively oppose him because he is bearish on RE?
Jason
at 10:14 am
Ben Rabidoux has been bearish on real estate in Toronto since 2011. Eventually, he’ll be right, but he’s been doom and gloom for the past 2 to 3 years and only small hiccups have occurred. He’s actually more bearish on Montreal’s condo market then Toronto’s right now. There’s no use arguing who’s right and who’s wrong. As an investor, I read most of the articles on the condo market in Toronto and Montreal and realize that neither the bulls nor bears are going to be right and that the actual outcome will be somewhere in the middle. My best indicator of real estate’s future is looking at rents that I’m getting and how quickly they’re increasing and looking at comps in the buildings where I own property.
Joe Q.
at 3:08 pm
Not really about “who’s right” and “who’s wrong” or “who’s a bear” and “who’s a bull”, or how long they’ve held their positions, but rather whether their arguments make sense and are backed up with data.
As far as I know, Rabidoux is not into predictions, but he points out when he thinks something is “off”. He also tends to look more at macro trends and government policy — especially the CMHC (like him, I wonder why we need a Crown corporation to insure vacation property mortgages, second-home mortgages, and loans for condo developers) In that context, the “he’s been a bear since 2011 and the market hasn’t crashed” factor doesn’t dissuade me from listening to him.
Kyle
at 5:20 pm
JoeQ i have to disagree, I DO think it is about “who’s wrong” and “who’s right”. And any opinon from anyone with that abysmal a track record should really be questioned HARD. I don’t read Rabidoux, but being consistently wrong for that long a time period begs the question, should he not be challenging his own assumptions, expectations and misinterpretation of data. I’m not saying every opinion he has is worthless, but to me it is completely illogical to conclude that reality is out of whack, and that it simply hasn’t caught up to his expectations.
Not saying every opinion he has is wrong, but having an abysmal track-record is definitely reason to dismiss someone.
Joe Q.
at 10:06 am
How many major corrections have there been in the GTA RE market in the last 28 years? (I’m talking about corrections that take a couple of years to recover from).
Jake
at 10:20 am
the last time it happened it took twelve YEARS to get back to normal: 1989 to 2011
http://4.bp.blogspot.com/-mX98J5WEXOo/UdbkXthFpEI/AAAAAAAAVWg/Nn5_l0RrS0s/s1600/Annual+Average+Toronto+MLS+Sale+Price+History.jpg
so that’s one hell of a correction, lasting 1/3rd of your 28 year timeframe.
Joe Q.
at 2:59 pm
That’s partly my point. Making sweeping conclusions about what causes a housing bust based on a 28-year time-frame in Toronto RE does not seem reasonable, because you have an “n” of 1. Housing “corrections” play out slowly, as you correctly note (1989-2001 or 2002 depending on how you count it).
Joe Q.
at 10:13 am
I personally think it is too early to judge the effects of recent mortgage lending rule changes and I actually wonder whether we have enough information to do so properly (e.g. information on leverage, investor vs. owner condo purchases, condo vacancy, etc.).
Alina
at 11:25 pm
The Toronto real estate market will continue to grow with the inflation rate of 2.2% seen over the past 10 years. I arrived in Toronto in 2000 after having lived in three different countries. I am an architect by profession but became a realtor in 2001. In 2002, I purchased my first house in central Toronto for the price of a 2 br apartment, which means that the prices were very low at the time. I know Toronto is not Paris, New York or Tel Aviv but given the high real estate prices in those cities, and given the immigration rate to Toronto and the fact that banks here are relatively strict with mortages I think Toronto real estate market will be stabil.
Rob Fjord
at 1:20 pm
Predictions based on time are doomed to fail….thats why garth turner looks bad, even though he is right on the fundamentals…which say toronto real estate is over valued, that doesnt mean they crash tomorrow or cant get even more over valued. Are you a market timer or a value based speculator? successful market timers are rare, choose value!
Kyle
at 5:29 pm
First let me preface this by saying i am not a bull, i just like to call it when i see it
Garth Turner doesn’t look bad because of timing, he looks bad because he has a perfect record of incompetence and his entire viewpoint is founded on deeply flawed assumptions with obvious huge gaping holes, ill- formed expectations and complete and utter misinterpretation (and in many cases misrepresentation) of data. Not sure which fundamentals you are referring to, because he moves on to a new theory for why housing is over-valued every month, when it becomes obvious that his last theory is garbage and he runs out of selective data to mine and spin. Let’s review on some of his many failed reasons for why housing will crash: Interest rates are rising, too much inflation, too little inflation, deflation, $200 oil is coming, boomers all decide after years of owning that this is the year to be a renter, the Real Estate conspiracy will run out of gas, zombies prefer the taste of owners to renters, blah, blah blah. It’s all garbage and that’s the real reason why he looks bad. He is suppose to be an “expert”, you would think someone who is an “expert” and spends all day researching and hypothesis testing would get it right most of the time, but a monkey, a blind man throwing darts or a coin tossed in the air all would wipe the floor with this so-called “expert”.
If you had a cough that wouldn’t go away and your doctor kept telling you “it’ll go away in a week, just take this cough syrup and come see me next week if you’re still coughing”. Would you keep going back week after week after week…four 6 straight years? Of course not, any rational, truth-seeking person with half a brain cell would say maybe his diagnosis is wrong. Maybe this so-called “expert” is incompetent and maybe i should consider a second opinion.
Yet here we have Garth Turner, your so-called “expert”, who has been dead wrong day-in day-out, year-after-year for 6 STRAIGHT YEARS!!!!!!! That is an extraordinary track record of incompetence. Infact statistically speaking the probability of being wrong every single day for 2,110 straight days is virtually zero, but yet he has manage to do it and continues to do it. It is like he is a savant of incompetence. i think his blog title is uncharacteristically humble, and suggest he change it, since he has more than earned the title “The Undisputed Greatest Fool There Ever Was”.
David Fleming
at 11:16 pm
@ Kyle
Very well said!
Victor
at 8:22 pm
I tripped across this blog today and found some of the posts to be very articulate and appreciated David’s tenacity for speaking the facts. I also watched the video bio in the about section and was left with a good impression.
I’m a renter but hope to buy in the future, and was thinking that David could be someone worth contacting down the road.
That is until I read the above post attacking Garth Turner.
Dear Mr. Fleming, there are many educated, financially literate Canadians that follow Mr. Turner’s blog for investment, tax and economic advice (including real estate).
It does not suit your otherwise respectable image to throw mud. My first impression of you went from an A+ to a C by reading your one petty comment above.
I realize this is a post from an anonymous person on a blog, but hope you appreciate that I’m being candid as to my reaction.
Alina
at 9:12 am
I am reading this blog for about a month and I enjoyed reading David past articles about real estate. As per the comments in between the articles I think people have the right to share their opinions and this is how we can also have a bit of fun. You don’t have to be harsh on David just because you don’t share his oppinion.
Rob Fjord
at 12:51 pm
fundamentals–price to earnings ratio- the price of the house vs. the market value rental income minus expenses (taxes/maintenance/etc..) out of whack in toronto for many years, thats over valued! the biggest counter argument is that housing is “affordable” which just means to me that someone can qualify for financing, and meet the monthly mortgage payment. Sure many people can “afford” a house today, but its a long term commitment…can they afford it tomorrow?- next year…when circumstance changes? The average canadian can afford the billionaire lifestyle for a few days or even weeks, do you suggest they make an investment in that experience?
Value trumps “affordability” and garth turner is dead right, day in, day out, when he says toronto real estate is over valued.
Kyle
at 4:13 pm
Not sure what you would consider to be “in whack”. Toronto is the fourth largest city in North America by population, above Chicago and below NY and LA. Compare price vs rent in the other large North American cities and you’ll see that Toronto cap rates are not out of whack at all.
New York Residential cap rates are around 4.4%
Los angeles Residential cap rates are between 3.75% – 4.25%
Toronto Residential cap rates are between 3.75% – 5.5%
Chicago Residential cap rate is 4.8%
I’m not a bull, but there’s far more justification for the rising prices than affordability: rising population, increasing number of households (particularly wealthy households), increasing preference to live downtown and lack of buildable land. In fact it’s actuallythe bears that lack any justification. They rely on the rent vs prices (which if you look at the data does not support their argument) and price vs avg income which is a stupid metric for a large city, since the average person can’t afford to own a home in the vast majority of large cities.
If you want to continue beliving Garth is right because you prefer his conclusion, that’s up to you, but frankly i think it is better to consume data and form your own opinions, rather than consume opinions (particularly when they come from that sad circlejerk blog of his) and ignore the data.
Rob Fjord
at 12:22 pm
a 4% cap rate is a P.E. of 25 –thats out of whack! and yes i would even suggest its too steep for LA or NYC which are world cities unlike toronto.
Rising population does not guarantee rising real estate prices, I believe florida real estate did nothing for something like 30 years despite huge in migration.
There is tons of buildable land downtown, if you go vertical!- have you ever walked the danforth– marvel at all the 2-3 story buildings lining this major artery, km after km, despite the 60 plus year presence of a subway. I would counter your “wealthy households” with, -record personal debt-
last time i checked median household income was $75K , avg. cost of house for 2013 is 523K. So toronto housing is selling at 7x household income- thats expensive, and its not a useless metric regardless of whether you think the avg person cannot afford a house in big cities. 2 people with a household income of $75K can afford a $360K condo in toronto, thats 4.8 times household earnings- that too is expensive. Just because people can pay, and have been willing to pay these multiples for whatever length of time, does not mean it will continue indefinitely. The US treasury bond is in a 40 year bull market, is that justified? I would say no, but the market is what it is- i dont buy US bonds now, nor last decade, nor the decade before that- poor value, and yet it has risen, who is wrong, me or the market? I say the market is wrong, notice i didnt say the market pricing is wrong, it is neither right or wrong, it is just over valued by the market participants, and it will correct—when?- i dont know, but it will.
garth turner is not my hero, he doesnt understand gold, and i dont like when he makes timing predictions, i simply state that he is correct in saying real estate is over valued. full stop.
Kyle
at 1:13 pm
Look, if you want to call it “over valued” cause that’s how you feel about it, that’s up to you. I’m not going to debate semantics or your gut feel of value. Toronto is about $500-600 CAD/sq ft. Take a look at other cities for some idea of what increasing population does to real estate prices over time:
http://ca.finance.yahoo.com/photos/most-desirable-cities-of-the-super-rich-slideshow/#crsl=%252Fphotos%252Fmost-desirable-cities-of-the-super-rich-slideshow%252Fmonaco-photo-1055424362.html
I guess you just think these other cities have been “over valued” for hundreds of years. Like i said if that’s what you want to call it, go ahead. All of the metrics you provide above are grounded only in your own personal belief system rather than any real life linkage that would indicate causality or any theory that couldn’t be torn into confetti.
“4.8 times household earnings- that too is expensive.”…based on your personal belief system
” The US treasury bond is in a 40 year bull market, is that justified? I would say no, but the market is what it is”…based onyour personal belief system
” i simply state that he is correct in saying real estate is over valued”…based on your personal belief system
Rob Fjord
at 2:47 pm
well of course its all -PERSONAL BELIEF- the point is, do we have historic examples to show that these metrics are useful indicators? yes we do. and yes an item can stay over valued for 100 years or more, US dollar is a good example. beach front land in africa is under valued for the last hundred years. People reassess risk all the time, they may scratch their wooden heads and say hmmmm, maybe instead of putting $ into a toronto house trading at 30 times earnings, i should put it into a hated gold stock, producing in mexico and trading below cash in bank!–with new streams of ore coming online in the next 3 years, and all-in cash costs a full 40% below the present cost of spot gold, which by the way at US$1250/oz is about near the cost of production for the industry, thus putting a limit on the downside of long term price depression.
so go rush out to sell your toronto house, and buy quality gold stocks, its a no brainer, the metrics say so— ahh, but its just my personal belief system right, so throw the metrics away and follow YOUR gut feelings…induced and inflamed by the herd mentality, There is nothing objective , no absolutes, all is relative, might as well just throw darts to make our decisions.
Kyle
at 3:37 pm
Unike your argument, my arguments are easily correlated, corroborated and calibrated with reality. It isn’t a coincidence that the metrics you cling to so dearly are worthless in all those cities in the slide show i attached, and just as worthless in the next 500 most expensive cities after that. You can continue to call all those cities “over-valued” if you want (i think most rationale people would maybe question whether the metric was bunk). But make no mistake, that “over valued” definition only correlates, corroboarates and calibrates with the reality that exists in your head (which apparently can diverge from the reality that’s observable in the real world for over 100 years). And thus it is nothing more than a personal belief system and as i mentioned earlier far less competent than darts.
Rob Fjord
at 4:41 pm
-ok i get it now, historic metrics do not correlate to anything today , toronto real estate trading at historic PE ratios has nothing to do with any measure of value, no correlation whatsoever, we live in a new world, a new reality, not only is the past not prologue, it is entirely useless.
-record personal debt levels do not corroborate my silly theory that home prices are too high. over extended home buyers dont exist, after all, banks wouldnt lend to them- especially when those bank mortgages are insured by the government who will have the taxpayers left holding the bag if things implode.
yes, value is in the eye of the beholder, just ask the highly intelligent dutch people who purchased a single tulip for 14 times the yearly wage of a skilled craftsman in the 17th century. over-valued, pffft! stupid nay sayers who said a single tulip should never sell for no more then half a days wage, what idiots! based on what!! they cannot correlate, corroborate and calibrate with reality.
my metrics are not worthless, they are simply measuring sticks, what is worthless is the human who analyzes the measured results foolishly and comes to silly conclusions (PE ratio above 12 equals good value)
Rome endured for centuries,a roman emperor said as long as we have this (swords) we will always have money- rome never lost its swords, but it did run out of money, and lost its empire, but yeah it took awhile. I would have been criticized for saying it was unsustainable, and rome was over valued, but i would be right…just as i am now, and you sir dont know what you’re talking about.
Kyle
at 6:02 pm
Meet confetti…
“historic metrics do not correlate to anything today , toronto real estate trading at historic PE ratios has nothing to do with any measure of value” – Correct, if the underlying distribution and population is drastically changing over time (hmmm, like when the income distribution in our city goes from a bell shape to something a kin to a flat line), then the past does not predict the future, no matter how much you want it to. It’s called heteroskedasticity.
“record personal debt levels do not corroborate my silly theory that home prices are too high” Correct, mortgages in arrears is currently at .31% that means only 31 in 10000 people are more than 90 days behind in their mortgage payment. This has actually been improving since 2010 even as longer fixed rates have been rising, but i like how you stressed record levels for greater effect.
“my metrics are not worthless, they are simply measuring sticks, what is worthless is the human who analyzes the measured results foolishly and comes to silly conclusions (PE ratio above 12 equals good value)” Bingo!!!! By universally applying the same measuring stick to all scenarios and all situations, with a complete disregard for key factors and differences and changes over time is silly.
Just as an aside, if you were to measure whether fertility rates were increasing or decreasing, would you count every man(?), woman and child(?) in the population? So, not sure why you would count every person’s income to determine house prices? Do you think that might impact the accruacy of your metric…Nah of course not, who cares if the entire left tail of the distribution has no hope or intention of ever buying a house, let’s throw them into the metric for shits and giggles.
“I would have been criticized for saying it was unsustainable, and rome was over valued, but i would be right” If i said that the Leafs would win the cup every single year because they are due, and then one year it finally actually happens, would that make me an incredible Analyst?
Problem isn’t that i don’t know what i’m talking about, the problem is you just don’t get or refuse to even consider what i am talking about, because you simply don’t like the conclusion.
Rob Fjord
at 11:57 am
why should the virtue of a sound PE ratio valuation be made null by a growing population or the rich being the driving force for high prices in an asset class? real estate is not the only investment vehicle out there, we do have other places to put our capitol. the cure for high prices is high prices…it will drive smart money out of the sector to seek better value (lower PE ratios) dumb money will follow later. PE ratios will fall as the past has shown them to, then a new bubble can begin again. Im not saying PE ratios are the be all and end all for measuring value, but you are entirely incorrect in saying that population fluctuations or any change in distribution from bell to flat, whether income or any other input, negate the usefulness of a PE valuation.
-the historic average PE of the DOW is 15.5. Variables like america being the worlds greatest power and having the worlds reserve currency, etc… make it a bit over valued , just as we would expect a huge surge in population growth to temporarily push real estate PE’s over the top in a city- but everything eventually reverts to the mean, things get either too pricey or too cheap. And time does not negate my argument, my argument is over value, not whether an asset can stay above sane PE levels for whatever period of time….it can, im just saying dont buy it- there is better value if you would just look elsewhere.
Mortgages in arrears!! -dude you are talking about today, im talking about tomorrow, the over extended debtor does not go bankrupt the first day he access all his credit, it takes time. gretzky said… i go to where the puck is going to be, not where it is. High debt /low default is NOW, high debt/high personal bankruptcy rates is where the puck is going to be.
By universally applying a universally held and historic measuring stick is not silly, and I do not “completely disregard key factors” – like in my DOW example, i point out why the market has given the DOW a higher PE ratio- no disregard on my part- but you disregard the power of the PE while bowing down to new revelations, and new eras, and “this time its different” dogma.
no it isnt different, a billion more people is not different, 20 billion more people do not negate value, yes they may justify a higher than normal PE for a certain amount of time, but the marketplace will correct that…in time.
I dont say the leafs will eventually win the cup, i only gauge their present value, and try to predict their future value. that is what a proper analyst does.
I get what you’re saying- my measuring sticks of value suck, the variables negate them. i get it, but you’re wrong, and your attempts to cut them into confetti have failed.
it seems you suggest a good measuring stick for real estate is population growth and income distribution. i wish i had the time to research, to show statistics from the past, showing that population growth does not necessarily mean price growth, nor does any combo of income distribution portend prices one way or the other.
Everything reverts to the mean!! chant that mantra
Kyle
at 4:27 pm
Now it’s clear that you are the one who doesn’t know what he is talking about. 2 things that are obvious, you don’t own a home and you’ve never taken a stats course.
1. PE ratios apply to stocks, which last time i check do not provide anyone with shelter. Stocks respond to PE ratios, because their only purpose is to be an investment, and their only value is if the underlying company generates earnings for it’s owners. The vast majority of residential housing in Toronto and Canada is bought by end users….to live in…with huge transactional costs. Your expectation that they will switch from owning to renting based on some value metric and other possible better returning asset calsses, is only slightly more realistic than people getting sex changes to save money on haircuts.
2. The whole entire validaity of statistic modelling is based on the assumption that the sample is representative of the population and that the underlying distribution stays constant. Your metric is batting 0 on both counts. If these assumptions are violated, then the results CAN NOT be trusted. To dumb it down for you, It would be like taking your bathroom scale to the moon and then believing you now weigh 0 pounds.
Rob Fjord
at 12:49 pm
im too value conscious to own a home, i will rent for 100 years if the PE ratios dont come lower. No stats course– of course not, there is no value in going to university either, i read online, or books for free at the library.
1-PE ratios apply to anything and everything, they are not exclusive to stocks. It is irrelevant if a house is shelter or an investment, or both. I measure value, and a rental provides shelter just as well as an owned house. I have no expectations whether people will switch from being owners to renters, if they are smart they will recognize current PE ratios favour renting.
2- PE is not a statistic, its a measuring mechanism, perhaps you are referring to avg household income to price….which i concede is not the best valuation tool for real estate for the reasons you mention……and yet it too will revert to the mean—in time- thats the key, over time. but yes, not the best way to value the real estate market.
PE is the best way to value the market.
fundamentals driving the market , such as interest rates, supply/demand, income, land restrictions, etc, etc… are certainly not constants, and thus cannot provide indicators of future value. What an individual believes is a proper PE for an asset is also forever in flux, but we have long term norms of what is considered good PE value, and any psychotic breaks from the norm either above or below will correct, and they should be bought and sold accordingly.
Jake
at 2:29 pm
P/E may be YOUR best way of measuring an investment but then you take the fun away from it. If owning a home was solely how you make it – completely lacking of any emotion and long-term enjoyment – then no one in their right minds would pay the money currently being asked for properties. But thankfully the majority of people aren’t just devoid of any soul and rather number crunching robots and choose to buy homes to raise families in, have friends over, enjoy growing with, become friends w/ neighbours, renovate and design, etc etc. That’s what makes things fun and is the wild card in all this.
Furthermore in my experience not a single person has ever measured a home’s value/worth at a P/E level. Not one. What can I say, you’re a leader
ScottyP
at 1:53 am
My RE prediction for 2014: Prices will go up, or they will go down.
Beat THAT, Garth!
Daniel Mac
at 10:09 am
I know it is short term, but I really thought the ice-storm, holidays, and general horrible weather, would slow down activity in late December, and the pent up demand would start 2014 off with a fast start. Seems like that didn’t happen, according to this:
TORONTO, January 17, 2014 — Greater Toronto Area REALTORS® reported 1,287 transactions through the TorontoMLS system during the first two weeks of 2014. This result was down by approximately eight per cent compared to 1,396 sales reported during the same period in 2013.
Daniel MacQuarrie
http://www.tophousesforsaleintoronto.com
Alina
at 9:26 am
David, I just want to let you know that in my area Don Mills & Lawrence homes started to sell this year with 100k more than last year, and this is just January!