Last Monday’s blog post spurred thirty-something comments, mostly from four or five regular readers who subsequently debated the health of the real estate market, the future of real estate prices, and even which economists they trust – if that’s at all possible.
Today I wanted to talk about where prices could go, both the upside, and the downside, and how that would affect our economy in general, as well as the every-day, average Canadian…
I’m a bit behind on my newspaper reading lately.
You see, I typically read the Globe & Mail and the National Post on the stairmaster every day at the gym. I’m “that really weird guy” who makes a gigantic mess of newspapers in a 360-degree radius around the machine.
What can I say? I like to multi-task, and the stairmaster is really the only upright machine that lets you comfortably read a paper. Imagine trying to read on the treadmill? Or the eliptical? And before you say “reclining stationary bike,” I don’t consider that exercise, FYI.
A bit off topic, but I think this will make you L-O-L on a Monday morning. If you’re a gym regular, this is the funniest rundown of “Gym Stereotypes” I have ever seen:
Okay, yes, that was a tangent. But it’s worth sharing, AND it’s Monday, so enjoy.
My point to the stairmaster story is that I was sick last week, and wasn’t able to hit the gym, thus I saved eleven newspapers for reading on Saturday afternoon (correct – I am that cool…), and the most intriguing article I found in the whole lot, was something Rob Carrick wrote in last Thursday’s Globe Investor.
For those of you that don’t know Rob Carrick, I’d have to describe him as a “real estate bear.” Just like in last Monday’s blog post, where my readers commented on the bearish-ness of Garth Turner, compared to that of Ben Rabidoux (both economists, although the latter is exceptionally well-respected and trusted), Rob Carrick is a name that people could have thrown into the mix as well.
Carrick is a fantastic writer, and although his articles are bearish, they’re often quite hard to disagree with.
In last Thursday’s column, called “In 2024, All Homes Will Be ‘Dream Homes’“, he outlines how the market might look ten years from now.
Here are two important excerpts:
1) If house prices rise from current levels by an average annual rate of 2.5 per cent over the next 10 years, the average Canadian home will cost half a million dollars. By my rough estimate, that would be a realistic purchase only for families with pretax income of at least $125,000 or so. Just for context, the most recent Statistics Canada numbers put the median total family income at $72,240 in 2011.
2) To qualify for a mortgage, the total of your mortgage, property tax and heating costs must be no more than 32 per cent of your gross household income. If we estimate costs of $4,000 for property taxes and $1,800 for heating today and increase them by 2.5 per cent annually over the next 10 years, we can project that a household income of $124,775 would be needed to support the average-priced Canadian house. That’s up from $89,713 today. Might annual wage increases bridge us from today’s income levels to where we need to be a decade from now if we want to maintain affordability at current levels? To get from the most recent median total family income figure of $72,240 to $125,000 over 10 years, you’d need annual pay hikes of 5.6 per cent. Dream on.
You should read the article in full, as Carrick makes an interesting argument about affordability in Toronto, although he doesn’t really distinguish between houses versus condos, central Toronto versus GTA, etc.
The article finishes with an interesting take:
“Even if prices keep rising at half the average rate of the past 17 years, they’ll be utterly unaffordable for everyday people. We’re not far from that now.”
Well, I guess a real estate salesperson would say, “BUY NOW!” Or even “DON’T WAIT ‘TILL IT’S TOO LATE!”
But who among us believes that the real estate market will continue to rise by 2.5%, every year, for the next ten years? Raise your hands (or in this case – comment below), if you do.
What happened to the real estate bears? Where is the 50% crash?
To be honest, it’s been a while since I’ve heard anybody say “The crash is coming – prices are going to drop 30-40% in Toronto.” I think that maybe, possibly, just maaaaybe – those people have been silenced.
Is a “correction” coming? What about a modest 10% drop in the prices of Toronto housing? Does anybody think that’s coming? Again, if you do, raise your hand.
And what would happen to the average Toronto home-owner if a 10% drop hit our market? Well, I think it depends on what you own…
In Carrick’s article, he constantly calculated the down payment needed to purchase a home in various scenarios as the minimum five per cent.
So while the owner of a $1,500,000 house would see his or her home value drop to $1,350,000, that person, who has to put down 20% by law, would still have equity in the home.
It’s the buyers at the bottom of the market that would be affected the most. Think of the kid buying his first condo with 5% down, for $250,000. He puts $12,500 into the condo, and after the 10% drop, his unit is only worth $225,000. He pays $2,225 in land transfer tax, and his non-refundable CMHC fees are $6,531.
So he’s what you call “under-water” on this condo, since his mortgage of $237,500 is more than the $225,00 value of the property, and his sunk costs are over $8,000.
That is who I think gets hurt in a market correction, but it also needs to be noted that a buyer of any property in Toronto should acknowledge when purchasing that IF he or she needs to change course and sell inside of 1-2 years, they’re going to lose money.
With land transfer tax, legal fees, Realtor fees, CMHC fees, and mortgage interest – you can’t turn around eleven months after buying a property an decide to sell, without taking a loss. We all know this, right?
So suffice it to say, the young “kid” buying a $250,000 condo with 5% down has to plan for volatility in the market, and keep enough of a cushion to ride out 4-5 years in that unit, in order to avoid that market correction, IF, and when it happens.
I’m not sure of Rob Carrick believes the market is going up 2.5% per year, every year, for the next ten years, or if that was just an example. But I also don’t know if the Toronto market is going to dip 10%, or go up 10%, or remain flat.
I do know that the one word I never see in market projections is “inflation,” and it bothers me.
Any worthwhile investor knows the term “risk-free rate,” and that investor also knows that stuffing your money in your mattress doesn’t save you from a loss – it loses you money, in the way of the cost of inflation.
So when we talk about a return on investment in finance, we look at the risk-free rate as essentially the minimum return possible (some might subtract the risk-free rate from the actual return on investment, to calculate the real return), and we look at inflation as the monster that eats away at our un-invested capital.
Why then don’t we look at inflation in every real estate projection, whether negative or positive?
Here is the rate of inflation in Canada, over the last ten years (from www.inflation.eu):
2012 – 0.83%
2011 – 2.30%
2010 – 2.35%
2009 – 1.32%
2008 – 1.16%
2007 – 2.38%
2006 – 1.67%
2005 – 2.09%
2004 – 2.13%
2003 – 2.08%
In SIX of the past ten years, inflation has topped 2%.
So if the real estate market increased 2.5%, every year, for the next ten years, what would be the REAL return?
How would YOU calculate it?
How should we adjust for inflation?
If inflation in 2014 is 2%, and the housing market goes up 2%, then we really didn’t make any REAL money on our houses, did we?
However, unless our salaries went up 2%, then indeed – we are playing from behind.
I don’t know what’s going to happen to the housing market over the next ten years; I seem to be one of the only people in the real estate market to freely admit this in print, and the economists who have predicted a decline in Toronto real estate seem to be “doubling-down” as prices continue to increase.
But I don’t think that housing will become “unaffordable” in the future. The market is too efficient for that.
Isn’t it?
Long Time Realtor
at 7:32 am
I found Carrick’s article simplistic and pedestrian. Analyzing average incomes and average prices, then projecting from there is well, weak.
Housing affordability is much better measured by the various affordabilty indexes that already exist. TREB has a very good one that is included in their monthly stats, as does StatsCan and RBC.
Carrick is an amateur.
Joe Q.
at 9:52 am
So far as I can tell, TREB’s house price index is just a measure of average prices as well, normalized to a reference period. At least that’s what their website seems to indicate:
http://homepriceindex.ca/hpi_home_en.html
RBC’s affordability index is based on the carrying cost of a mortgage (plus property taxes and utilities) at prevailing mortgage rates, based on a 25% down-payment and 25-year amortization. I’m not sure this is a good way to project housing affordability into the future, especially for first-time buyers who are in general putting far less than 25% down and are thus much more sensitive to changes in interest rates. Not to mention the uncertainty surrounding utilities and taxes.
http://www.rbc.com/newsroom/pdf/HA-0827-2013.pdf (check a few pages in for their methodology)
StatsCan doesn’t seem to have an index, at least that I could find. They do publish figures on the percentage of the population spending more than 30% on housing costs but these appear to be “snapshots” rather than an index.
Carrick doesn’t have a crystal ball but I find his calculations useful as a back-of-the-envelope sanity check on claims made about the housing market. The point he makes about housing demand seems to me to be spot-on — demand depends both on “willingness to pay” and “ability to pay”, and if the latter is not there, no amount of the former will be able sustain the market.
Long Time Realtor
at 11:02 am
@ Joe Q: The TREB index is similar to the RBC index but assumes a 20% down payment and StatsCan income data. RBC also uses the posted 5-year mortgage rate, which helps to mitigate some of your concerns. It may surprise you but affordability indexes are NOT geared stictly to first-time buyers.
Try the Bank of Canada housing affordability index, it assumes a 5% DP.
Joe Q.
at 11:48 am
Can you please point me to the TREB index (a website explaining it)? All I found was the link I mentioned (MLS Index) which has the TREB logo on the bottom. It seems to be merely a normalized average.
My comment about first-time buyers is based on the fact that Carrick writes from the perspective of a first-time buyer making a small down-payment.
Long Time Realtor
at 1:01 pm
I see that you have confused the HPI with the TREB affordability index. The TREB affordability graph and methodology are available through TREB’s Marketwatch report. Members only, sorry. Did you bother to check out the BoC site?
Joe Q.
at 10:03 am
A thousand pardons — you’ll have to excuse my naivete in thinking that this highly touted index could be found via a web search, and in confusing these two obviously very different indices.
I found one page about the BoC index methodology — http://credit.bankofcanada.ca/financialconditions/hai and one giving the actual index — http://credit.bankofcanada.ca/financialconditions … You are correct that the methodology assumes a 5% down-payment. The methodology also calculates house prices by equally weighting new homes and resale. The data appears to be aggregated nationally (not by region). If you know where I can find the BoC index reflecting Toronto or the GTA only, please let me know.
Kyle
at 9:58 am
Agreed Carrick is another horrible analyst who parrots the bears’ talking points. I can’t read any of his stuff without my BS radar going through the roof. Ever since he started advocating how renting is a much better financial option and tried to support it with classic garbage analysis, unrealistic assumptions and selective data, in my opinion he’s in the same class as the other bear ideologues, who let’s face it aren’t actually any good at analysis and would be obscure nobodies if it weren’t for the notoriety and loyal following that comes with being a RE bear.
His main argument that housing will become (or is already) unaffordable is based on some entitled assumption that owning a single family house “should be” affordable to every Average Joe in Canada. In many areas that may hold, but anyone who has been to any other large city knows this assumption is beyond unrealistic for a major metropolis.A good analyst would look at the conditions in the different markets. A lazy analyst or one that simply wants the data that supports his view will lump it all together and not differentiate. House prices in Canada are dominated by sales in large cities, and a few really large sales will have a material impact on the reported numbers, these are crucial considerations in terms of forecasting accuracy, but like pretty much every other bear, his analysis just disregards these factors.
AndrewB
at 10:41 am
I remember reading some article a little while ago about an economics professor who challenged his students every semester to provide numbers to support that owning financially makes sense in the long term. Wish I could find that article again. His challenge as he noted, was that by owning, one should expect significant costs to maintain a house which many people don’t do, and then there’s the issue of price ceilings. From what I do remember, he did note that if one were to rent and use the pocket difference in investing, you’ll always come out ahead with more money renting.
However, that simple analysis doesn’t take into account intangibles that are far more valuable than dollars earned. Pride of ownership, setting your own rules, a method of forced savings, etc. While I prefer home ownership myself, I think both sides have their pros and cons if discipline and knowledge is set in place.
Kyle
at 11:16 am
I recall reading that article too. And thinking that prof has the exact WRONG approach, and that is why he is coming to the exact WRONG conclusion. Not sure if it was the author or the prof, but the article made the prof sound like every year he was setting out to prove that he is once again right and that renting is better, rather than trying to disprove his hypothesis, which would be the basic premise of solid analysis and Scientific research.
Short term i agree renting can be better. Longer term, using any realistic assumption for changes in house prices, rents, maintenance costs, interest rates and investment returns, housing has almost always won. Think about it from an NPV standpoint, owning leaves you with a large tax free appreciating asset (i.e a large POSTIVE NPV). Renting always leaves you with a large NEGATIVE NPV. The offset is the Investment return on the cash flow difference between buying/maintaining and renting. But buying locks your price in (i.e. your mortgage payment stays pretty steady for the 25 years), while rent keeps rising with inflation. Under most realistic scenarios, the cost of renting ends up exceeding the locked in cost of buying/maintaining at some point (it only makes sense that it does, Land lords are not in the business of charity), so rather than investing the difference the renter has to drawdown from Investments (which are taxable), just to keep a roof over his head. So at this point he is now paying more than the homeowner (who’s mortgage costs are locked) AND he is burning through his savings. After 25 years the house is owned free and clear, with just the cost of maintenance left and will continue to appreciate tax free, while the renter will need to keep paying rent (increasing with inflation) FOREVER, and will likely have drawn down any remaining Investments to zero.
Joe Q.
at 11:50 am
The number of people who advocate life-long renting would seem to me to be vanishingly small.
Paully
at 12:12 pm
Without having all the cash for the purchase, everyone is a renter. You can rent the house, or you can rent the money (mortgage) to buy the house. Until it is paid in full, you are still renting someone else’s property (capital). More people would be well served to recognize this fact.
Kyle
at 1:44 pm
All this “renting money from the bank” stuff is just absurd. The interest charged on a mortgage actually behaves nothing like rent. One declines over time to zero, while the other rises with inflation until you die.
AndrewB
at 7:56 am
I think maybe he means that a large percentage of the population actually never pays off their mortgage, so they in essence have been renting, albeit from the bank.
Joe Q.
at 12:12 pm
But wasn’t it the case that for much of the post-war period, pretty much everywhere in Canada including the big cities, owning a single-family house was affordable for an “average” family of modest means? Certainly that was the case in my extended family in Toronto and Montreal going back to the 1950s and 1960s, and I’m sure the same holds for others. I believe that this is the perspective of many (especially those who grew up in those decades) likely including people like Rob Carrick, who then look around and wonder what happened (and have house price / income stats to back them up). In that sense it probably isn’t fair to call it an “entitled assumption”.
Kyle
at 12:25 pm
Things constantly change over time. In my opinion refusal to accept realities and obstinately insisting on something counter, just because that’s how it might have been once upon a time, is by definition entitlement. But semantics aside, whether i call it “entitled” or some other euphamism, it is an incorrect assumption nonetheless.
jeff316
at 9:20 am
“Entitled” is a bit mean but I’d agree that “naive” might be more fair. Applying 1950s or 60s expectations to the economy of the 2010s is just nonsensical.
This is the perspective that fails to account for massive, wide-scale changes to the economy. High priced oil, free trade, rise of Asian economies, NAFTA, the tech economy, the decline of manufacturing, the consolidation of the economy into a few major urban centres…all of these are things that have changed the economy since that time.
I’m not much of a real estate bull but what I’ve never seen reflected in analyses of the housing situation here in Canada (and particularly in Ontario) is anything that accounts for these changes. Why comparing a historical price-to-rent or price-to-income ratio be relevant today given how much has changed?
(As an aside, what’s interesting is that many, if not most of the people who bought easily affordable houses in Montréal, Toronto and the likes in the 1950s and 60s wouldn’t have been able to buy those houses 50 years earlier. People somehow only tend to be naive when the graph ticks down.)
Joe Q.
at 10:41 am
Sure, there have been a lot of changes, and all of those you cite are noteworthy. At the end of the day, though, people can’t afford a house unless they can make the mortgage payments, so all of those large-scale changes have to be viewed through that prism. I just had a look at MPAC and StatsCan data for Ontario over the period 2007-2011 and saw that average house prices province-wide increased about 17% during this period, while median income and the shape of the income distribution was basically static (same fraction of the population in each income bracket). So how exactly do these macro-trends affect the housing market, when they don’t seem to be affecting incomes?
My gut instinct is to strongly question arguments based on rejecting historical trends “given how much has changed” because our cognitive biases are so much more easily swayed by recent events than by past ones. What seems really significant to us at this moment may not be very significant in the grand scheme of things. Especially in financial matters, “this time it’s different” can become a real trap.
Anyway, we can all agree to disagree. I’m not “cheerleading” a housing crash nor am I huddled away waiting for one to happen (I own a home, but am not otherwise involved in the RE industry [except for comments on this blog — LOL] and have no interest in investing further in RE). I am just concerned about the social and economic health of our city / province / country and trying to explain what I see based on the best available data.
jeff316
at 11:36 am
You’re not going to see major macroeconomic changes reflected in a four-year snapshot.
Where you will see it is in longer-term data, which tells us that since 1976 the income of the top 20 percent of earners in Canada has nearly doubled while incomes of the middle 60 and the bottom 20 have increased by a third or less. (Since 1993 middle or low income have seen their proportion of national earnings actually drop). That the rural population of Ontario has dropped 25 percent. Housing starts have dropped by half over that time. That the region within Canada the lowest rental market starts is the GTA and Hamilton.
Now that’s not to say that it is different this time. I’m not sure it is. (And to some extent, since I’m in a similar boat to yours re: housing, I’m not sure I really care.) I’m not sure that data proves it, although I think it tells some of the story.
But what I don’t understand, and this isn’t a comment to you, is this reliance on metrics that incorporate the greatest 20-30 year run of prosperity, economic growth and income equality this country has ever seen alongside the discounting the influence of economic trends that have been documented by that same dataset – not to mention the lack of critical thinking behind assertions that an average rental-to-price metric would be the same in post-WWII industrial Ontario vs. post-2008 post-industrial Ontario. (Sorry – rant over.)
CT
at 2:02 pm
I respectuflly disagree about Carrick.
He is writing these columns for the general public, not for advanced investors, or people who think “economics” is a hobby and a fun read.
His column was concise, made a good argument, and used real life examples. This is what readers are looking for, and believe it or not, this was probably more advanced than 95% of articles on similar subjects in the major four papers.
Carrick isn’t an amateur. He’s a great writer, who can write to an audience. Don’t blame HIM for the audience he’s tasked with targetting.
Joe Q.
at 4:25 pm
This is an important point. Carrick is a personal finance columnist for a well-regarded newspaper, and has been for some time, so he must be doing something right. I personally don’t find his analysis any more puerile than what is frequently offered from the bulls’ camp.
AndrewB
at 8:21 am
I don’t personally think there’s going to be a crash, but price correcting seems a fair guess. At the current trends, I find it difficult to imagine the average couple will be able to afford a decent home. Hell, I’d imagine is pretty darn impossible to live in the gta by home ownership with a household income of 70k unless you bought your home years ago. Granted, not everyone needs a SFH and can more than survive in other property types like a town, condo town, etc.
While average incomes seem simplistic, it still remains a pretty important indicator I believe. With salaries not meeting yearly inflation and rising debt, home ownership is probably so far off for most and getting that SFH will be even more impossible, unless one wants to live 2 hour commutes to and from work, thereby saving on a home but increasing all other living expenses. City homes will always be expensive, that’s a given considering their location. However, the rest of the gta is becoming just as expensive to live in.
Paully
at 8:44 am
Where things are headed tomorrow, I don’t think anyone can say for sure, but in the longer-run, you have to agree that prices and rents have diverged greatly.
There is a very nice, renovated bungalow near me in Willowdale that sold this summer for $830,000. After the deal closed, the new owners listed the home for lease at $2695 per month. It sat there, unloved and unleased for over three months, and then it finally leased out in December for only $2500.
Take a look at the simple math. $830,000 over 25 years at 3% gives you a mortgage payment of over $3900. Taxes are probably between $300 and $400 per month, so $4200 per month plus whatever it costs to maintain the property. Unlike a lot of the older places around here, it looks really well kept, so that may not be a huge number in the short-term. I did not add land-transfer and legal to the total, just the original sale price, yet the rent is still more than $1700 per month less than the cost (real and/or opportunity-cost) of owning it. Heck, the entire first-year rent barely covers the ridiculous $25,400 land-transfer tax on the sale!
Sure, the buyer would have a down payment that would reduce the monthly, but they would have to forgo any potential income that they could have earned on the money. Using the full sale price for a mortgage calculation accounts for that neatly.
The historical metric that I have seen and heard says that a house should sell for about fifteen times the annual rent. Annual rent on this house is $30,000 x 15 = $450,000 but the house sold for $830,000. That puts the price over rent ratio at just shy of twenty-five for this particular house.
Say what you will about where the market is headed, sale prices have diverged greatly from market rents. Something has to change. Rents up or prices down, or both.
Long Time Realtor
at 9:24 am
@Paully: There were 87,000 real estate transactions on TREB last year. You appear to have have drawn a generalized conclusion on the state of the real estate market in the GTA after examining exactly one of those transactions.
Paully
at 12:06 pm
So this one transaction is simply an aberration in your great expert opinion? All other houses in Toronto are selling for much less than fifteen times the annual rent indicating that this is a strong buyers market with no downside risk?
Have another glass of Kool-aid.
Joe Q.
at 12:23 pm
You can go on MLS and search for places for rent and for sale — look to see where they coincide, then compare asking price to asking rent for the same property. (Those who are savvy may have an easier way of harvesting this data.) This is easier with condos. I just had a quick look around “Downtown West” (Little Italy, Niagara / Queen etc.) and found four such cases. Ratio of asking price to 12 x asking rent was 20-30 for these cases.
Obviously asking prices are not the same as sale or lease prices and there are other caveats, but this was instructive.
Pete
at 9:14 am
I think a price correction could be on its way. My guess is the average homebuyer is not studying economic forecasts before buying, they’re going off of the general mood of the country/province/city. With employment numbers worsening, the economy stagnating, and the dollar falling, I think I sense of usease and caution will start to set in. Sellers may start listing in higher numbers to cash in, but buyers may hesitate to take the plunge, leading to lower sales rates and eventually lower prices.
Melanie
at 10:29 am
What about detached homes? In established neighborhoods like the beaches? Everything I’ve read has stated that such a correction would not apply so much to these types of properties.
Mike James
at 1:44 pm
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.
As well, I wouldn’t trust any data that Treb or Crea puts out regarding affordability. They like to massage their numbers to make the market look better than it is.
Potato
at 8:06 pm
Further, the ultimate correction depends on the gap between fundamentals and price. Because people believe certain areas to be immune, they are more willing to bid the prices up and increase the gap to fundamentals, and so the correction comes despite (indeed, even because of) the supposed immunity.
Joe Q.
at 10:45 am
Detached homes will always be more resilient price-wise but they too could be affected in a correction. The closest historical precedent we have in the GTA is the housing correction of 1989-1994, in which the average GTA house price declined by about 25%. Condos “led the way” (40% price decline in this category) but SFHs were still affected.
I do not know what the rate of recovery in pricing looked like in the two separate categories. Overall there were several years of stagnation followed by a slow price increase (2001 average price was similar to the 1990 average price — if memory serves) then things began to take off around 2002-2004.
Joel
at 11:34 am
From what I have seen there are multiple markets in the Toronto marketplace and each will be effected, or not differently. I would think that condos are the most at risk of a softening due to supply and demand. Whenever there is more demand, Toronto developers are building more supply. Sometimes, even when I am not certain if there is a demand, but this will be seen over the next 5 years. Single family homes in Toronto do not have the same risk as there is a finite number of single family homes in desirable locations. Near downtown, subway lines and highways are areas where there is a much greater demand than supply. Go to an openhouse in a high demand area next weekend and you will see the 100 couples/ people going through each open house eager to purchase.These properties have less risk of a pricing correction, or decline as there is such high demand. The main risk for these houses would be that they do not outpace inflation. one thing I see when at open houses is that often young couples are accompanied by a parent. I know that David has written about this before and it seems to be a trend that is not going away.
As Kyle had mentioned above owning a home in Toronto is not for everyone and I think that it is foolish to think so. This reminds me of the article from a month or so ago about the Toronto housing board purchasing luxury condos.
Floom
at 12:47 pm
Great article David. I agree that Carrick’s analysis is often frustratingly simplistic (to appeal to the widest audience) but I believe that history does show that mean reversion tends to occur -when house price affordability ratios get out of whack…I tend to agree with other comments about which properties in Toronto will be most sensitive (condos) and which will hold their value (well-located, single-family)…I have to think that if and when a correction occurs, it will be when lenders increase rates by 100-150 basis points i.e. likely not before 2015-2016 at the earliest. I don’t forsee massive selling, foreclosures etc, but you may hear the odd “that house sold for $675k last week, last year an identical house on that street sold for $725k” – so for the seller at $675k, did he “lose money” or did he not sell at the peak?
Alex
at 2:40 pm
I think Carrick didn’t take into account that Toronto is growing, but the desirable places to live aren’t. I doubt that anywhere downtown will be affordable for the average person a decade from now. Not unless Toronto starts going really downhill, or the traffic situation improves incredibly. Plus our population is growing as well so there will be more and more competition for good housing in the future and the income bracket that simply can’t afford to own is going to grow. If people want to go back to the 1950’s and the housing and traffic situation then, then they’ll need a pretty severe plague, war, or deportation policy.
Sort of unrelated, but as a soon-to-be first time buyer is a 5% down-payment realistic? I already have a little over 5% for the kind of condo I intend to buy, and it would probably take me till the end of the year to save the other 5% to have a 10% down-payment. I thought the minimum safe down-payment was 10%, but if I can safely afford a 2-3% raise in interest rates now then would it make sense to buy now with a lower down-payment? I’d much rather be paying myself the mortgage then continue paying rent. If condo prices are expected to rise 2-5% anyway by the end of the year too then it seems like it wouldn’t make a huge difference financially to have that extra 5% off the mortgage initially.
AndrewB
at 5:22 pm
In 10 years though, the desirable neighbourhoods could change and there can be additions of new desirable neighbourhoods not in the city itself. 10years can do a lot, especially if transit expands more.
jeff316
at 9:25 am
This is what I’ve always found funny about the rise of Rob Ford. His kibosh on wide-scale meaningful transit expansion to the boons of Toronto has essentially most benefited the downtown urban property owners that didn’t elect him. It’s kind of funny.
Joe Q.
at 4:28 pm
Eglinton Ave from about Oakwood on west — not the greatest neighbourhood right now — will be fascinating to see what happens here once the underground LRT opens.
Potato
at 8:11 pm
“I’d much rather be paying myself the mortgage then continue paying rent”
Please, do the math. Historical heuristics like the above are failing in this environment. I have a spreadsheet that can help you with the comparison.
The other big factor to consider is the risk you may need to move in the short term. Without 10+% equity, even without a market correction you could be trapped. If you buy with a spouse and get divorced, it could be tricky to separate if you can’t sell the marital home; if you buy as a single and then find your partner and want to move up to a bigger place, you may become an accidental landlord while you live at his/her place.
David Fleming
at 8:22 pm
@ Potato…
Hold the phone…
You have a BLOG?
Since when?!?!?! You never told me?
Did we just become best friends? Wanna go to the garage and do karate?
Potato
at 6:40 am
Seriously? Your old blogging software had a field for website, it was there all along (check out any one of my comments on older posts).
And why is karate done in the garage? Are you going street fighter bonus round on your neighbours’ cars?
David Fleming
at 12:54 pm
@ Potato
It’s a line from “Step Brothers.” Will Ferrell says to John C. Reilly, “Did we just become best friends? Do you wanna go do karate in my garage?”
Although I LOVE the Street Fighter reference. I forgot about the car; I could only recall the bricks – which Ken’s up/down kick was good for. I preferred E-Honda for the car, with his wavy-hand-thingee.
I think I’m going to hook up my SNES tonight. Yes, I have a SNES. I have an NES too, complete with Game Genie. Excite Bike, anyone?
ScottyP
at 1:32 am
“Step Brothers”?
Holy Potato!
Potato
at 8:17 pm
“it’s been a while since I’ve heard anybody say “The crash is coming – prices are going to drop 30-40% in Toronto.””
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.
Kyle
at 9:56 am
@ Melanie
I would agree with what you read. Detached houses in established neighbourhoods, are like the gold standard of housing. Demand is always highest for them, and they aren’t building any more of them in the city.
Bears will have their own opinions (or dreams) that these will become affordable to the average, but the reality is they are and have been a luxury good for a very long time, that is why these naive/entitled predictions for this house type based on what the average person’s income is are destined to be wrong.
As for what will likely happen in the event of a correction. I suspect what you’ll see is the end of bidding wars, multiple offers will still happen on A+ houses and average days on market may increase, but i don’t think there will be a significant impact on prices. In fact what you could actually see are prices rising, this tends to happen in the blue chip neighbourhoods, when gloomy news stories, turn off sellers.
Rob Fjord
at 1:24 pm
I dont think we get just a 10% drop and then muddle on, i think its followed the next year by another 15% drop and then another one and another, and then its not just price drops that are demoralizing, but time…the ongoing drop with no significant relief rallies, month after month, really drain people, and they throw in the towel, give up, walk away from their mortgage. But right now i see the bears throwing in the towel , just like at the end of 2013 they gave up and bought the DOW, just in time for a 2014 correction. we should monitor page views for garth’s blog, when they plummet, that should mark a top in tor real estate.
What few people in the public fail to take into account are unknowns, hell even the known dangers are discounted. There are all manner of black swan events that can pop up, here is but one of many examples….
the japanese have stated recently a desire to nationalize 280 disputed islands.
Now the chinese navy has drawn up a detailed plan to seize the philippines pag-asa island this year.
Rob Fjord
at 1:44 pm
on inflation.– there is a guy in the states who calculates CPI using the old metrics
(shadowstats–website), and it shows inflation to be much higher than the official massaged government numbers, same holds for canada, hedonic adjustments are overdone and important items left out entirely.
money velocity is finally picking up in the states, will in canada too, this is inflationary and eventually interest rates will rise, i believe the US FED, when they say low rates near zero into 2015….. just like at the beginning of 2013 they said QE taper to start in late 2013, they kept to that schedule, so i figure US and CDN rates to begin rising sometime in 2015….the real estate slump may precede or lag those increases, but its a fair assumption that the beginning of the end will coincide within that time frame.- not a prediction…an analysis.
Jason H
at 3:52 pm
Although I think pricing will still rise at this point and sales will not be where they once were (I think what was it 2 years ago it was at its height?) because at SOME point the credit will stop. Not simply because interest rates will eventually raise but the reality is the average person WILL be tapped out of credit. We’re not the government and at some point it will stop and slow.
Reminds me of something I saw today. A gentleman gets out of a BMW today to go into the grocery store and surprisingly I’m behind him the whole way. He goes to pay for $30 dollars of groceries and goes through not 1… not 2… no, not even 3… but 4 cards until one finally goes through. Anecdotal yes.. but I think it’s not far from reality with the 1.64 spent for every dollar earned today.
Proof’s in the pudding and I think time will tell.
ScottyP
at 1:39 am
“Proof’s in the pudding” + “time will tell” = Two aphorisms in one closing sentence to Jason H’s post!
(Just joshin’ ya Jason H, just joshin’ ya.)
Nick
at 3:46 pm
Hi David,
This is my first time posting. I am an occasional reader of your blog, I must first say that I appreciate your attempt to be objective when appraising the future of real estate and in more general terms.
As someone considering buying property for the first time It seems a bit daunting to navigate through all the data and differing sentiments. I find it difficult to gage what is sustainable in the long run. I think there are solid arguments for both sides, but in the mid-long term, the bearish arguments seem more logical(not in a cataclysmic way mind you). I read Ben, Rob and Garth with some regularity and they all serve a purpose in providing useful insight, in their own way, on the state of the industry just as you do. I think the crux of it is just based on individual affordability. If you want to buy, are in a position to do so, and its important to you to own than all the macroeconomic stuff is irrelevant.
As for future prices, i dont think we will really be able to understand the potential height of the “market” until it has been tested by rising interest rates. Until then… who the hell knows?
NK
rlst8isgreat
at 8:36 am
Kyle….you had me at NPV….you are spot on and I wish I could bring you to listing presentatons:)
cheers!
Kyle
at 8:50 am
Thanks! Truth is i am not a bull either, at least not in the near term. I just haven’t seen any merit or validity to the bear arguments. Their argument seems to always boil down to some easily debunked metric, which once debunked turns into the argument “Well i don’t care about your data, evidence or the obvious flaws you’ve pointed out, I’m right and reality is out of whack, you’ll see….one day!”
jeff316
at 10:25 am
^ This.
I’m not great at predictions, but I think real estate prices will come down too…maybe due to a couple of years of price drops, but mainly a number of years of below inflation stagnancy. But all signs point to them not returning to the levels that some attribute as normal.
My point isn’t that what we have right now is the new normal. For the sake or argument, if the 40 year average houseprice-to-income ratio in Ontario is 3.5 times income, and today it’s averaging 8, I’m not suggesting it won’t drop. Eight isn’t the new normal.
But what we might see five, ten, fifteen years down the road is that this stretch of price growth is the catalyst for bringing that average houseprice-to-income ratio up to 4 or 4.5. And maybe even a bit higher in the GTA.
People wave around “it’s different this time” in a dismissive manner, ignore structural changes to the economy, to consumer trends, to housing availability, etc., and then proceed to point to things like mortgage rules and rock-bottom interest rates as two of the primary causes of the run in prices. Are those mortgage rules the same as they were during the last period of price-growth? No. Were interest rates this low back then? No. So, yes, in effect it is different this time. It always always is.
Brian Ripley
at 12:51 pm
Demographia has released their Q3 2013 Affordability Review. I rebuilt my Canadian Cities table here: http://www.chpc.biz/demographia.html
Toronto has become more unaffordable and now ranks 3rd in Canada. (last year 5th).
Earnings in Ontario look to be stalled: http://www.chpc.biz/earnings-employment.html
“As a city develops, nothing is more important than maintaining mobility and housing affordability.” Alain Bertaud
The last time I was in Toronto a couple of years ago it took a very long time to get from downtown to the airport. The traffic was intense. Same thing is happening in Vancouver, there are a lot of single passenger cars. It strikes me that we have a lot of work to do (opportunity) in providing better affordable housing and better mass transit.