Real Estate

Did we just hit the peak of the Toronto RE bubble?

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  • Aug 17th, 2017 5:32 pm
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Member
Jan 19, 2015
366 posts
417 upvotes
Scarborough, ON
Prelude

Canada was the economic underdog in the 1990s and early 2000s in the developed Western world. Japan was the new economic superstar throughout most of 1980s and 1990s. In the summer of 1995, Japanese economic prowess reached a new high. With the flying Japanese yen, Japan’s GDP was almost as large as that of the United States. The United States, on the other hand, staged a spectacular comeback in the 1990s with the advent of the technology era. Companies like Microsoft, Intel and Cisco Systems ushered in a new age of American economic dominance, helping the US in reclaiming economic leadership from Japan. Britain, France, Germany and Italy were moving ever closer to a more unified European Union and the Euro was being planned as the sole competitor to the US dollar.

Canada was left out in the cold. Sure, Canada is rich in natural resources and is a major exporter of oil and gas. But in the 1990s, economic growth was dominated by technology advances in computer and the Internet. Such growth did not require significant increase in consumption of resources. In the summer of 1998, the price of crude oil dropped to a multi-decade low of US$10 per barrel. Russia, a major oil exporter, was in a full-blown financial crisis. Canada’s key source of competitiveness turned to the constant devaluation of its currency. Canadian dollar sank to $1.58 per US dollar at the end of 1998 and reached an all-time low of $1.62 per US dollar in January 2002. Many people in Canada believed that the only way Canada could retain jobs was to constantly devalue the Canadian dollar.

But Canada’s luck would soon improve in the new millennium. Canada would once again become the economic darling of the world.

On September 11, 2001, terrorists brought down the World Trade Centers in New York City in the worst attack on the US mainland. President George W. Bush declared the War on Terrors. On March 20th, 2003, US troops invaded Saddam Hussein’s Iraq. US victory was swift and decisive and 20 million Iraqis were liberated from the rule of one of the most brutal dictators in the 20th century. However, US invasion of Iraq also broke the original equilibrium in Iraq and the Middle East and opened a Pandora’s box. The invasion unleashed a series of uncertainties suppressed under the Saddam regime and the Middle East was in even greater turmoil. Oil price reacted violently to the fear of disruption of oil supply in the region. Crude oil traded at US$20 per barrel in early 2002 and rose to US$36.76 on Feb. 28th, 2003, right before the War broke out. By October 2004, oil reached US$55 per barrel after the US troops were engaged in bloody street fighting with Saddam loyalist insurgents.

On the other side of the globe in that March of 2003, a seemingly unrelated event was playing out in Beijing, China. The Communist Party of China held its annual People’s Congress meeting in the month and selected Hu Jintao as the nation’s President and Wen Jiabao as the premier of the government. Hu and Wen were mandated with a ten-year tenure and China would enter into an extended period of unprecedented economic growth with strong emphasis on increasing consumption of resources. China’s crude oil consumption would double from 4.95 million barrels a day in 2002 to 10 million barrels a day in 2012. China’s insatiable appetite for oil and other resources would prove to be a major boon for Canada.

Starting in 2003, a national euphoria was descending upon Canada. Canadian dollar was rising fast against the US dollar and reached $1.20 per US dollar in late 2004. Oil price kept going higher, reaching US$70 per barrel in 2006. Jobs were plentiful in Canada and the long-held Canadian inferiority complex against its American cousins was quickly dissipating. On September 28, 2007, Canadian dollar closed above par for the first time in 30 years against the US dollar. On November 7, 2007, Canadian dollar hit $0.9071 per US dollar during trading, a modern-day high. The strength of Canadian dollar became a new source of pride for Canadians. Canada was now billed by many as the “new energy superpower”.

The new year of 2006 quickly came. The stars of How I Met Your Mother were sharing their New Year Eve limo ride through New York City in their first season and one of them, Cobie Smulders, is actually a Canadian. Canada was on the doorsteps of an unprecedented housing bubble with the GTA at the centre of it.
Member
Jan 19, 2015
366 posts
417 upvotes
Scarborough, ON
Summary

1. Hatching
2. Beginning
3. Exuberance
4. Crisis
5. Resurrection
6. Respite
7. Game on
8. Intervention
9. Shale Oil
10. Collapse
11. Rescue
12. Bubble
13. Crash
Jr. Member
Dec 12, 2016
138 posts
109 upvotes
Greater Canada
Dedicated to the prophets of RFD who predicted this glorious collapse.
Advocate For The Removal Of Dihydrogen Monoxide (DHMO) From Canada's Water Supply
Member
Jan 19, 2015
366 posts
417 upvotes
Scarborough, ON
Luckyinfil wrote:
Aug 12th, 2017 9:36 pm
Informative high quality thread. Very insightful
Thanks for the compliment. I will post these sections one by one. Still doing the editing. Summer is slow time for me. so got some extra time.
Member
Jan 19, 2015
366 posts
417 upvotes
Scarborough, ON
1 Hatching
With a size of 7,124 square kilometres, GTA occupies less than 0.1% in area in Canada. However, its population is about 18% of Canada’s total and it is home to some of the nation’s biggest corporations and is of vital economic, social and political importance to the whole nation. According to CREA (Canadian Real Estate Association), in June 2017, the national average housing price excluding the GTA and GVA (Greater Vancouver Area) was $394,660. In the GTA, the June 2017 housing average price was $793,915 or about twice the national level. Therefore, even though GTA only has 18% of the nation’s population, its residential property value could be twice that, or 36% of the nation’s total. GTA housing market is an epitome of Canada’s housing market.

Throughout this modest document, I will be using the average housing price as the yardstick in observing price movement in housing. GTA average housing price in June, for instance, would be the summation in price of all the housing units sold in the month of June in the GTA divided by the total number of units sold. Granted, average price is not the most accurate measure of housing price in a region, but it is a very reliable one and is subject to least human manipulation. In some way, it works like the stock market index in measure of stock market price. For instance, if the S & P 500 index drops 20%, it does not mean the value of your stock portfolio also drops 20%, but there is good reason to believe that your stock portfolio might have performed more or less along the line with the index. Similarly, if the housing average price drops 20%, it does not mean the value of your house or any house drops 20%, but there is good reason to believe that their values have performed more or less in line with the average price. The GTA housing data this document uses are all from the website of Toronto Real Estate Board (TREB) regular news releases. The author would like to express gratitude to TREB for making these numbers available for readers.

After the September 11 terror attack and the ensuing recession, the US Federal Reserve lowered interest rate (Fed fund rate) to an all-time low of 1%. The rate stayed at 1% until June 2004. The US residential property market, which had not seen a price down year in more than 20 years, got a strong boost from this ultra-low rate. In 2003, housing prices were rising strongly all over the country especially in California, Florida and Nevada. US housing market had developed into a full bubble by then. With a hot housing market to the south of the border and renewed confidence in Canadian economy, Canada housing market started to move up in 2003 led by the GTA.

Bank of Canada followed the US Fed in 2001 and lowered rate to 2% in 2002, but quickly raised it to 3% in 2003 and then lowered it again to 2% in 2004. Canada’s housing market started its modest upward movement in 2003 and 2004 but mostly stayed stable mainly due to much higher interest rates in Canada. In 2005, the GTA housing average price was $335,907. With Canada fast becoming the economic star in mid 2000s, foreign investors swarmed into Canada. Investment in residential properties was heating up throughout 2005.

However, the US Federal Reserve raised key fed fund rate to 1.25% in July 2004. The Fed continued raising rates quickly to combat rising inflation and high oil price until the fed fund rate reached 5.25% in July 2006. In 2 years’ time, the Fed had raised rates by four percentage points and this directly contributed to the collapse of US housing market two years later. Bank of Canada followed the Fed’s move and raised rate to 4.25% in mid 2006 from 2% in late 2004. These interest rate raises put a damper on GTA housing market in 2006.
Member
Jan 19, 2015
366 posts
417 upvotes
Scarborough, ON
I strongly disagree with the decision of merging my thread with another thread. I am writing about the history of the GTA housing bubble, which is a completely different topic as the back-and-forth bickering of this "bubble thread". Please reconsider.
[OP]
Deal Addict
Dec 5, 2009
4349 posts
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airfarceone wrote:
Aug 13th, 2017 8:15 am
I strongly disagree with the decision of merging my thread with another thread. I am writing about the history of the GTA housing bubble, which is a completely different topic as the back-and-forth bickering of this "bubble thread". Please reconsider.
Because your version of history won't cause any back and forth bickering about "the bubble".
Sr. Member
Feb 22, 2011
954 posts
927 upvotes
Toronto
Here's an interesting video I think that highlights how houses can be so much more expensive than the average income earner. The bottom half of Canadians own less than 6% of the wealth. There is an obscene economic divide in Canada. Top 10% of people own 60% of financial assets.

Deal Addict
Feb 9, 2009
3967 posts
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rjg4235 wrote:
Aug 13th, 2017 1:16 pm
Here's an interesting video I think that highlights how houses can be so much more expensive than the average income earner. The bottom half of Canadians own less than 6% of the wealth. There is an obscene economic divide in Canada. Top 10% of people own 60% of financial assets.

It's like this all over the world.

Until that changes nothing else will. Socialism cant only go so far to ensure everyone's quality of life will be strong -- but in this world there are people who are far more motivated to do well than others... should those who work super hard have to, in some ways, split their wealth with lazy, unmotivated people? No... in the long-term with inflation the divide will look greater and greater.. the have's will have more than ever and have not's less than ever.
Deal Addict
Nov 27, 2006
2072 posts
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Toronto
Sanyo wrote:
Aug 13th, 2017 3:34 pm
It's like this all over the world.

Until that changes nothing else will. Socialism cant only go so far to ensure everyone's quality of life will be strong -- but in this world there are people who are far more motivated to do well than others... should those who work super hard have to, in some ways, split their wealth with lazy, unmotivated people? No... in the long-term with inflation the divide will look greater and greater.. the have's will have more than ever and have not's less than ever.
maybe... or maybe we become the singularity by then.
Sr. Member
Jul 14, 2002
882 posts
236 upvotes
Sanyo wrote:
Aug 13th, 2017 3:34 pm
It's like this all over the world.

Until that changes nothing else will. Socialism cant only go so far to ensure everyone's quality of life will be strong -- but in this world there are people who are far more motivated to do well than others... should those who work super hard have to, in some ways, split their wealth with lazy, unmotivated people? No... in the long-term with inflation the divide will look greater and greater.. the have's will have more than ever and have not's less than ever.
Want to create a market mover, 86 families in Canada have the wealth of the bottom 11 million people in canada.
And how do we get there? Look at what is happening to Sears Canada. 43 executives getting a bonus of 7.6 million, while pensions are not paid out for 2,900 workers.
That's what you get for working hard for your whole life and being loyal to a company.
Deal Addict
Feb 9, 2009
3967 posts
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dantey wrote:
Aug 13th, 2017 5:24 pm
Want to create a market mover, 86 families in Canada have the wealth of the bottom 11 million people in canada.
And how do we get there? Look at what is happening to Sears Canada. 43 executives getting a bonus of 7.6 million, while pensions are not paid out for 2,900 workers.
That's what you get for working hard for your whole life and being loyal to a company.
This is an extreme case but yes I agree with you it is not right... but I was talking in general.

The Weston family for example unless one of them screws it up will always be super wealthy... there is nothing much else to do...

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