Real Estate

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

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  • Feb 23rd, 2019 10:16 pm
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Deal Fanatic
Feb 1, 2006
9491 posts
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Muskoka
mazerbeaner wrote:
Nov 23rd, 2018 11:18 am
This is 100% grade A, BS. Show me 1 source that states Toronto housing has been anywhere near inflation for the last 100 years.
'So, what's the result of over 100 years of ups and downs in the housing market? The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation'

'Interestingly, you could make the case that, after adjusting for inflation, the long-term trend for housing prices has been essentially flat.'

http://observationsandnotes.blogspot.co ... -1900.html

Is the GTA somehow 'different this time' than the U.S. housing market?
Deal Addict
Jan 26, 2016
1018 posts
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Toronto, ON
rkanwar109 wrote:
Nov 23rd, 2018 8:05 am
This is exactly what will happen. House prices have historically tracked inflation, so either prices have to drop rapidly (and potentially undershoot) due to a recession, or in the best case, stay stagnant till the fundamentals and/or trend line catches up.


Either way it’s not different here, different this time, and it’s not a new paradigm.
So a house bought in Willowdale area in 1950s, after inflation, would be worth $4M in 2018?

That's such a ridiculous statement... Clearly it is dependent on many other things than just inflation, such as region economy, safety, quality of life, etc. A house in Detroit has kept up with inflation? No, it's much more negative. A house in Hong Kong has kept up with inflation? No, try 100x fold.
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Feb 22, 2011
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Bullseye wrote:
Nov 23rd, 2018 12:49 pm
'So, what's the result of over 100 years of ups and downs in the housing market? The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation'

'Interestingly, you could make the case that, after adjusting for inflation, the long-term trend for housing prices has been essentially flat.'

http://observationsandnotes.blogspot.co ... -1900.html

Is the GTA somehow 'different this time' than the U.S. housing market?
You can't say different this time when talking about a different market... why are you using total US figures and not Toronto? You think every city in the world will match the US average? What an absurd comment.
Banned
Nov 18, 2014
824 posts
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Toronto, ON
WinterSleep wrote:
Nov 23rd, 2018 12:55 pm
So a house bought in Willowdale area in 1950s, after inflation, would be worth $4M in 2018?

That's such a ridiculous statement... Clearly it is dependent on many other things than just inflation, such as region economy, safety, quality of life, etc. A house in Detroit has kept up with inflation? No, it's much more negative. A house in Hong Kong has kept up with inflation? No, try 100x fold.
Post the numbers for willow dale I’m not familiar with that area
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Nov 18, 2014
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Toronto, ON
Bullseye wrote:
Nov 23rd, 2018 12:49 pm
'So, what's the result of over 100 years of ups and downs in the housing market? The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation'

'Interestingly, you could make the case that, after adjusting for inflation, the long-term trend for housing prices has been essentially flat.'

http://observationsandnotes.blogspot.co ... -1900.html

Is the GTA somehow 'different this time' than the U.S. housing market?
Permabull argument:

-it’s different here this time
-it’s the governments fault
-to da moon!
-prices are up since 2017
-it’s always a good time to buy
Banned
Nov 18, 2014
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Bullseye wrote:
Nov 23rd, 2018 12:42 pm
'Oxford Economics reached these findings by comparing housing markets across Organisation for Economic Co-operation and Development (OECD) countries from 1970 to 2013 with real price growth in the following five years.

What they found was this: In all countries, median house prices are tracking 15% above the historical long-term average. For those markets in the upper end of valuations, like Canada’s, median prices are 40% and 70% above that average.'

https://www.lowestrates.ca/news/canadia ... orld-25273

Here it is graph form from another source;

Image



'When the prices rise faster than the trend suggests, the market eventually slows down. Whether the prices become stable, following the trend line, or actually drop, seems to depend on the speed with which the price increases happen. The steeper the angle of the curve representing house prices, the more likely is a price 'correction'.'
Perhaps people can spend over 100% of their income on housing!

Image
Deal Fanatic
Feb 22, 2011
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rkanwar109 wrote:
Nov 23rd, 2018 1:21 pm
Perhaps people can spend over 100% of their income on housing!
Many reasons it's possible. Wealth divide is growing, rich are getting richer. Lower income people renting. Lower home ownership rates. Smaller housing, less houses more condos etc etc etc.
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Apr 4, 2001
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mazerbeaner wrote:
Nov 20th, 2018 11:48 am
This is why I just laugh when someone tries to tell me renting is better than owning. They say they save a few hundred a month they can invest. Ignoring the fact that within a few years you will probably pay more in rent than owning there is also the issue of equity. By owning I gain $2000 a month in mortgage paydown, that adds up real fast and can be used if needed. Oh and the amount going to principal increases every single month. It just gives you so many more options and access to cheap credit.
The "renting is better than owning" argument is normally used to counter someone who tries to BS about real estate being a great financial investment. It's a counter-argument that demonstrates how much money you sink into the overall house (taxes, maintenance, opportunity cost) that most people don't factor in, how illiquid real estate is, and how expensive it is to sell compared to many other investments.

It's not meant to convince someone who wants to own for personal, non-investment reasons that they shouldn't buy a house. People usually buy houses for personal, non-investment reasons.

People should STFU about their house being a great investment because:

  • That's often not the reason you bought it and you only talk about it as an investment when it happens to have been a great investment.
  • Your gains and losses are generally the same as everyone else's who has real estate in your area.
  • Most people want to buy a house. Your main contribution was that you existed before someone else did. That's nothing to be proud of or take credit for.

Also, there are certain types of people that should not buy real estate because it is not a good investment in some cases:

  • Unstable employment, particularly in a remote area
  • Do not expect to stay in one place for long to offset the high costs of moving
  • If you are one of those people that has a history of relocating to a different region regularly
Member
Sep 13, 2007
359 posts
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Toronto
If I understand correctly, RE was a great investment especially from 2011-2017 but as of right now, should be treated as a place to live but that ppl should buy wisely.
Deal Fanatic
Feb 22, 2011
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mbg wrote:
Nov 23rd, 2018 1:33 pm
The "renting is better than owning" argument is normally used to counter someone who tries to BS about real estate being a great financial investment. It's a counter-argument that demonstrates how much money you sink into the overall house (taxes, maintenance, opportunity cost) that most people don't factor in, how illiquid real estate is, and how expensive it is to sell compared to many other investments.

It's not meant to convince someone who wants to own for personal, non-investment reasons that they shouldn't buy a house. People usually buy houses for personal, non-investment reasons.

People should STFU about their house being a great investment because:

  • That's often not the reason you bought it and you only talk about it as an investment when it happens to have been a great investment.
  • Your gains and losses are generally the same as everyone else's who has real estate in your area.
  • Most people want to buy a house. Your main contribution was that you existed before someone else did. That's nothing to be proud of or take credit for.

Also, there are certain types of people that should not buy real estate because it is not a good investment in some cases:

  • Unstable employment, particularly in a remote area
  • Do not expect to stay in one place for long to offset the high costs of moving
  • If you are one of those people that has a history of relocating to a different region regularly
I do agree with your points but it is very out of context on this forum where in fact many people advocate for renting over home owning specifically for investment reasons.

It is also readily apparent that people do not really understand the implications of ownership. If you think about the concept of a mortgage and a mortgage payment it is quite different than renting where you retain 0. With a mortgage payment on a 20% down 3% interest and 25 year amort you retain half the payment as equity.The amount you retain continues to increase monthly until the final payment which is 100% retained. The the other half is essentially financing the loan which gains long term appreciation on the full price of the asset. So when you compare the true cost of say a $500k house for owning it is really property tax and utilities for a few hundred vs a couple thousand for renting.
Banned
Nov 18, 2014
824 posts
769 upvotes
Toronto, ON
mbg wrote:
Nov 23rd, 2018 1:33 pm
The "renting is better than owning" argument is normally used to counter someone who tries to BS about real estate being a great financial investment. It's a counter-argument that demonstrates how much money you sink into the overall house (taxes, maintenance, opportunity cost) that most people don't factor in, how illiquid real estate is, and how expensive it is to sell compared to many other investments.

It's not meant to convince someone who wants to own for personal, non-investment reasons that they shouldn't buy a house. People usually buy houses for personal, non-investment reasons.

People should STFU about their house being a great investment because:

  • That's often not the reason you bought it and you only talk about it as an investment when it happens to have been a great investment.
  • Your gains and losses are generally the same as everyone else's who has real estate in your area.
  • Most people want to buy a house. Your main contribution was that you existed before someone else did. That's nothing to be proud of or take credit for.

Also, there are certain types of people that should not buy real estate because it is not a good investment in some cases:

  • Unstable employment, particularly in a remote area
  • Do not expect to stay in one place for long to offset the high costs of moving
  • If you are one of those people that has a history of relocating to a different region regularly
Exactly this. I find it mind boggling that permabull have no concept of opportunity cost.

As an example @JayLove06 believes that paying 4K a mo th rent on a 4 mill property is asinine.

If he had any understanding of the concept of opportunity cost, he’d understand that 4 mill can generate 90k a year risk free (3% ya treasuries) or 150k a year in dividends (5% large safe financial institutions).

It’s essentially like having three 4 million dollar houses to live in by utilizing your capital properly.
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Apr 4, 2001
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mazerbeaner wrote:
Nov 23rd, 2018 2:03 pm
It is also readily apparent that people do not really understand the implications of ownership. If you think about the concept of a mortgage and a mortgage payment it is quite different than renting where you retain 0. With a mortgage payment on a 20% down 3% interest and 25 year amort you retain half the payment as equity.The amount you retain continues to increase monthly until the final payment which is 100% retained. The the other half is essentially financing the loan which gains long term appreciation on the full price of the asset. So when you compare the true cost of say a $500k house for owning it is really property tax and utilities for a few hundred vs a couple thousand for renting.
Agree - it's hard to come up with blanket statements about this kind of thing. That's why the rent vs. own topic exists - you can't say that renting vs owning is better or worse unless you look at the specifics of the situation.

Also, this topic really gained steam when people started putting 5% down and taking 40-year amortizations when those were allowed. This led to very little of the payment going toward equity alongside people with very poor financial judgement saying things like "Methinks I'm going to invest me in a house" on these terms. You can't even say you own the house with a straight face on those terms.

Things that often get missed in investment calculations:

  • Opportunity cost of the downpayment (i.e. if you can get 7% return on a 20% downpayment for a $500K house, that is almost $600 a month hard cash before compounding vs. theoretical gains you only realize when/if you sell)
  • Selling costs (including things like bridge loans, storage, staging, agent fees, lawyers, movers, etc.)
  • Property taxes and condo fees
  • Maintenance expenses
  • All of the things you put into a house that you would not put into a rental property (even if they are for your own enjoyment - it is still an expense you would not make as a renter).

The trick is - would someone who rented rather than owned put aside their savings as an investment? If not, then owning is forcing you to save and it's a net benefit investment-wise.

Again, though, there are plenty of circumstances where owning makes sense. If you're a homebody with a stable job that loves to stay in one place for a long time and you won't be overstretched to buy a house and make the payments, it may well make a lot of sense.

It's just not an investment in any reliable sense because you don't get anything out of it until you sell, and as some people are now realizing, you can't necessarily downsize to free up funds if the bottom of the market is hot while the middle and top are cooling off.
Deal Fanatic
Feb 22, 2011
5390 posts
5029 upvotes
Toronto
mbg wrote:
Nov 23rd, 2018 3:12 pm
Agree - it's hard to come up with blanket statements about this kind of thing. That's why the rent vs. own topic exists - you can't say that renting vs owning is better or worse unless you look at the specifics of the situation.

Also, this topic really gained steam when people started putting 5% down and taking 40-year amortizations when those were allowed. This led to very little of the payment going toward equity alongside people with very poor financial judgement saying things like "Methinks I'm going to invest me in a house" on these terms. You can't even say you own the house with a straight face on those terms.

Things that often get missed in investment calculations:

  • Opportunity cost of the downpayment (i.e. if you can get 7% return on a 20% downpayment for a $500K house, that is almost $600 a month hard cash before compounding vs. theoretical gains you only realize when/if you sell)
  • Selling costs (including things like bridge loans, storage, staging, agent fees, lawyers, movers, etc.)
  • Property taxes and condo fees
  • Maintenance expenses
  • All of the things you put into a house that you would not put into a rental property (even if they are for your own enjoyment - it is still an expense you would not make as a renter).

The trick is - would someone who rented rather than owned put aside their savings as an investment? If not, then owning is forcing you to save and it's a net benefit investment-wise.

Again, though, there are plenty of circumstances where owning makes sense. If you're a homebody with a stable job that loves to stay in one place for a long time and you won't be overstretched to buy a house and make the payments, it may well make a lot of sense.

It's just not an investment in any reliable sense because you don't get anything out of it until you sell, and as some people are now realizing, you can't necessarily downsize to free up funds if the bottom of the market is hot while the middle and top are cooling off.
While all of that is true there are some very big caveats.

You say it's not an investment because you can't always downsize. Well you can still pull out equity or even, god forbid, rent.

You say you can invest the difference but in many cases within a few years rental rates greatly outpace the cost of ownership.

Because of the large transactional costs and fixed nature of housing yes short term it is always better to rent. Subsequently it will almost always be better to own long term. Even people who bought at the worst possible time in Toronto history in the 90s still came out way ahead today.

I also always find it a bit funny when people want to factor in opportunity costs when talking about housing but when they talk about their other gains like in stocks they never factor in opportunity cost. If you rented and bought stocks for 10 years what was your opportunity cost if you had used it as a down payment and bought a condo in Toronto?

When I talk in the investing subforum and say my index fund that was $50k got a 10% annualized return over the last 5 years but actually I lost money because of the opportunity cost if I had bought a condo and it appreciated $200k?
Deal Guru
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Apr 4, 2001
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mazerbeaner wrote:
Nov 23rd, 2018 3:46 pm
While all of that is true there are some very big caveats.

You say it's not an investment because you can't always downsize. Well you can still pull out equity or even, god forbid, rent.

You say you can invest the difference but in many cases within a few years rental rates greatly outpace the cost of ownership.

Because of the large transactional costs and fixed nature of housing yes short term it is always better to rent. Subsequently it will almost always be better to own long term. Even people who bought at the worst possible time in Toronto history in the 90s still came out way ahead today.

I also always find it a bit funny when people want to factor in opportunity costs when talking about housing but when they talk about their other gains like in stocks they never factor in opportunity cost. If you rented and bought stocks for 10 years what was your opportunity cost if you had used it as a down payment and bought a condo in Toronto?

When I talk in the investing subforum and say my index fund that was $50k got a 10% annualized return over the last 5 years but actually I lost money because of the opportunity cost if I had bought a condo and it appreciated $200k?
Sure - it sounds like this would work for some people in the right circumstances.

We're never going to come to an agreement on blanket statements on whether or not renting is better than owning or vice-versa. My evidence is that this thread is now more than 10,000 posts long.
Deal Addict
Dec 27, 2006
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https://www.economist.com/finance-and-e ... ned-supply

There is more to high house prices than constrained supply
Low interest rates and innovations in the mortgage market may also be to blame


TO GET HOUSE prices down, increase supply. The logic seems unarguable. Britain’s house prices have inflated hugely in recent decades: by 161% in real terms since 1996. Barriers to construction, such as the green belt—zones of protected countryside around cities—are clear to see. If politicians were to remove them, overcome nimbyism and build more houses, more people could afford to buy. That would arrest a decline in home ownership that has been particularly sharp among young people. In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do.

So goes the conventional wisdom. But even as policymakers have at last begun to embrace building, a new school of thought has gained prominence. Its advocates, the most vocal of whom is Ian Mulheirn of Oxford Economics, a consultancy, say high prices have little to do with supply shortages. They put the blame somewhere else: global financial markets.

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Most studies of Britain’s housing market link a 1% increase in the number of houses to a fall of around 2% in prices. If that is accurate, supply constraints cannot explain a boom as big as Britain’s. Applying these numbers, Mr Mulheirn calculates that had Britain built 300,000 houses per year since 1996, rather than around 200,000, adding 9% to Britain’s housing stock, prices would still have risen by about 134% in real terms in 1996-2017.

The true explanation, the argument goes, is found by viewing a house as a financial asset. It produces implicit income: the saving on rent achieved by owning the property rather than renting it (or equivalent digs) from a landlord. Like all streams of income, this can be valued using an interest rate. And just like the dividends offered by stocks, or the coupons offered by bonds, monthly savings on rent, capitalised as house prices, have soared in value as global real interest rates have tumbled (see chart).

Another version of the same argument says that house prices should be bid up until the cost of home ownership—which includes mortgage interest, as well as the lost opportunity to invest in something else—is about equal to rent. Over two decades the real cost of capital has roughly halved, says Mr Mulheirn. So you would expect prices to have roughly doubled.

To bid prices up to the point where rental yields are comparable to bond yields, households need sufficient access to mortgage credit. That might not have been available, were it not for the “financialisation” of housing—the liberalisation of mortgage lending, sometimes funded by foreign capital, in the 1980s and 1990s. One such reform was the advent of buy-to-let mortgages in 1996, which made it easy for individual investors to speculate on property by becoming landlords. Foreign investors may also have contributed to the frenzy.

If financial conditions can move house prices so much, how to tell if there is a housing shortage? One way is to look at rents, which measure only the supply and demand for a place to live, without any financial component. They paint a startlingly different picture. Since 2005 English rents have fallen in real terms. Even in pricey London, they are up by less than 4%.

Some caveats are necessary. Falling real interest rates are a global phenomenon. Yet housing trends and rental yields vary widely, even within countries. In posh bits of north London they are below 3%; in, say, parts of Liverpool they can exceed 10%. Many globally successful cities have seen rents rise hugely. In San Francisco, for example, where planning regulation is forbidding, rents are 31% higher in real terms than in 2005. Such places would benefit greatly from more supply, with knock-on effects on national economies. High house prices in London may reflect an expectation that building constraints will bite harder in future as the city continues to thrive, causing rents to accelerate.

The historical link between interest rates and house prices is weak. That is because predictions of future capital gains tend to be what inflate and shrink property-market bubbles. America, Ireland and Spain experienced huge property-price booms in the mid-2000s, even as interest rates rose. Decades of low rates have not restored Japanese house prices to the high they reached amid the speculative fervour of the late 1980s and early 1990s.

That is to build on Mr Mulheirn’s logic, however, not to demolish it. In fact, you might argue that the risk of speculative overheating is another reason not to focus on supply. Those countries that built freely during the 2000s had bigger crashes after the financial crisis, leaving behind ghost towns of vacant homes in places like Nevada and many parts of Spain.

You can’t handle the roof

Suppose financialisation and low interest rates are to blame for high prices. What, then, should policymakers do? Countries with greater restrictions on mortgage lending, such as Germany, have seen house prices grow much less over the long term than Britain has. But they also have lower rates of home ownership. That would not appeal to politicians in Britain, where “getting on the property ladder” is seen as crucial to financial security. Buy-to-let investors can be discouraged—indeed, Britain has hit them with much higher taxes in the past couple of years. But that will have only so much impact, since professional firms with large portfolios and access to capital markets can replace individuals. Increases in government subsidies for homebuyers will only inflate prices further.

A sensible approach would be to build more where rents are rising, make life easier for tenants—and abandon the notion that buying a home is a rite of passage. Attitudes could shift naturally if housing were to underperform for a while. Indeed, an implication of the financialisation thesis is that rising interest rates could put the decades-long housing boom into reverse.

Sure enough, housing markets in rich countries have begun to look wobbly as global interest rates have crept up. In London, where the prospect of Brexit is also hitting demand, real house prices have fallen by over 2% during the past year. Perhaps young people trying to scrape together towering deposits to buy their first home should hope that the supply sceptics are right. If so, the problem of high house prices might disappear on its own.

This article appeared in the Finance and economics section of the print edition under the headline "Home economics"

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