Real Estate

GTA housing pricing argument in 20 years

  • Last Updated:
  • Oct 5th, 2020 10:39 am
Deal Addict
Jul 3, 2002
1298 posts
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Hp4041 wrote: The only but very big issue I have with this comparsion is that you are comparing equity risk with real estate risk. They are not the same and are not supposed to have the same return. Stocks are supposed to far outperform and they do over longer periods.
I know
They both are great and have their place
Member
Feb 7, 2018
286 posts
358 upvotes
As Mazerbeaner eloquently described. The issue is in 20 years 3.5M might be the equivalent of 1.4M today with around a 2% compounded return.

The biggest issue we’ll have after all this COVID spending is inflation. If everybody gets used to a UBI of 24k/year, employers will have to pay more to attract labour which leads to more buying power in the short term and higher inflation in the medium/long term. More $$ chasing less assets, however the Bank of Canada will maintain that inflation is on target because their methodology will swap higher living standards for poorer standards. Ie cost of beef rising 20%, let’s use beans in the calculation to make it seem like low inflation. Condos gaining in price, let’s swap out 500 sf 1bed units for 350 sf bachelor units and call it even to make the inflation numbers come out around 2%.

Summary : devalued currency + poorer living standards across the board means the 1.4M home will be worth probably 3.5M loonies in 2040.
Jr. Member
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Jun 3, 2019
173 posts
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GTA
1LoveToronto wrote: I have no view on future growth, whether it can match historical or dip as low as inflation, but I do believe there is much more room on the upside.

Barring a global catastrophe (COVID hasn't been at catastrophe levels yet since it's shown so far that home-buyers have been disproportionally UNaffected compared to non-home buyers), it is more likely that the middle class disappears and life just becomes more difficult for the average person. Home ownership just won't be the "entitlement" many people feel that they have; that instead of 5x-10x gross salary, it'll 15x and multi-generational. This isn't a new concept in some parts of the world already.
I do believe 1LoveToronto is correct in where we are heading. In places like Hong Kong you have entire family of 4-5 people (parents and adult children) paying the mortgage on a 400+ sq/ft condo because it cost over $1 million CAD. They have nothing but skyscrapers and if you owned a home with land you are in the upper elite. I'm not saying the Toronto market is similar to HK, just where we are headed in terms of pricing, affordability and density.
Realtor® & Mortgage Agent
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Dec 13, 2016
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It's easy to post op's nonsense now that global pandemic is ongoing.

The price of housing in Toronto or any decent city in the world has absolutely nothing to do with the salary of some computer engineer and everything to do with globalization.
Sr. Member
Sep 18, 2008
689 posts
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Woodbridge
Hp4041 wrote: yes, because everyone can get hired at facebook and google for their first job.
who said everyone should OWN a home?
Jr. Member
May 10, 2020
178 posts
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erexa wrote: who said everyone should OWN a home?
What does that have to do with "loser computer engineers making 75K". Complete tangent/deflection ?
Sr. Member
Jun 26, 2019
645 posts
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Hp4041 wrote: What does that have to do with "loser computer engineers making 75K". Complete tangent/deflection ?
The whole computer engineer making $75k out of school should basically have no relevance to this discussion.

So a 22 or 23 year old graduation from one of the better programs into a high demand field makes $75k out of school, so what? If this person is in a relationship with someone who say makes $50k, they already have a household income at $125k at age 22. Not only this, based on their careers, their incomes will probably increase sustainably well before they are age 30. If this is our "average person" we are using for an argument. Then for sure, prices are going to the moon because people like this can easily afford to support most of these home prices.

Additionally with how low interest rates have dipped and the stimulus that is most likely coming will probably fuel prices hire so long as most of the population or homebuyers maintain their jobs/salary.
Jr. Member
May 10, 2020
178 posts
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SubjectivelyObjective wrote: The whole computer engineer making $75k out of school should basically have no relevance to this discussion.

So a 22 or 23 year old graduation from one of the better programs into a high demand field makes $75k out of school, so what? If this person is in a relationship with someone who say makes $50k, they already have a household income at $125k at age 22. Not only this, based on their careers, their incomes will probably increase sustainably well before they are age 30. If this is our "average person" we are using for an argument. Then for sure, prices are going to the moon because people like this can easily afford to support most of these home prices.

Additionally with how low interest rates have dipped and the stimulus that is most likely coming will probably fuel prices hire so long as most of the population or homebuyers maintain their jobs/salary.
Everyone on here has a family income of 300K+ it seems. And owns 4 Precon condos or 3 rental properties. What averages?
Newbie
Jul 29, 2007
18 posts
6 upvotes
Toronto
Most of the people go with 10% (40k)-20%(80k). down ... now what's the gain?
FARMERBLANCHE wrote: That's a great example
$400000 invested in 1995 would equate to roughly $4.5 mil at the end of last year in the s&p 500. Now for sh!ts&giggles let's assume that fees are offset by RE carrying costs and you would have more $$ now if you invested but no place to live for the last 25 years. Grinning Face
Used the same CAGR calculator
http://www.moneychimp.com/features/market_cagr.htm
Ps I know that's not how real estate works
Member
Mar 26, 2015
200 posts
71 upvotes
Richmond, BC
I think a few different views.

First is the home itself, we need to compare to the actual growth of the population and the actual availability of land/housing.

in 20 years the population has increased by 25%

Land? perhap it's been spread into other areas.

it's only a matter of time before detached homes go from 1m to 3m to getting redeveloped into condos

only if population goes up, if it goes down, then there won't be a need for all that extra space for housing.

then above that there's standard inflation.
Jr. Member
May 10, 2020
178 posts
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lovevasi wrote: Most of the people go with 10% (40k)-20%(80k). down ... now what's the gain?
dramatically more of course. but the comparsion is incorrect to begin with. How many people would take 5x-10x leverage and invest in stock markets. The reason RE has been great is because leverage has been cheap and there are no margin calls.
Deal Addict
Mar 3, 2018
1760 posts
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GTA
FARMERBLANCHE wrote: That's a great example
$400000 invested in 1995 would equate to roughly $4.5 mil at the end of last year in the s&p 500. Now for sh!ts&giggles let's assume that fees are offset by RE carrying costs and you would have more $$ now if you invested but no place to live for the last 25 years. Grinning Face
Used the same CAGR calculator
http://www.moneychimp.com/features/market_cagr.htm
Ps I know that's not how real estate works
Except you have taxes to consider with s&p 500 investments making it less then $4.5M. If stocks and a tax free principal residence appreciate at the same level the house wins every time. And you have a place to live saving rent payments.
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Jul 3, 2002
1298 posts
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DaveTheDude wrote: Except you have taxes to consider with s&p 500 investments making it less then $4.5M. If stocks and a tax free principal residence appreciate at the same level the house wins every time. And you have a place to live saving rent payments.
Of course they do
I was illustrating a specific purchase someone shared
Again I'm not saying RE is a bad investment, I'm starting it's not necessarily better than other investments
If you rented instead and walked away with let say $2.5 after taxes you would still be up $1.1m. How much would you have spent in 25 years on rent? I know what I spent in the late 90's and early 00's and $2000 a month would have got me an amazing place.
Sr. Member
Sep 18, 2008
689 posts
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Woodbridge
Hp4041 wrote: What does that have to do with "loser computer engineers making 75K". Complete tangent/deflection ?
One can be a loser engineer, make 75K, rent a room in a basement and superstar engineers who make 200K+ should own homes to rent their basements to looser engineers.
Jr. Member
May 10, 2020
178 posts
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erexa wrote: One can be a loser engineer, make 75K, rent a room in a basement and superstar engineers who make 200K+ should own homes to rent their basements to looser engineers.
wow...what can I say....yes because in a healthy society, winner takes all and a modestly well performing guy should be relegated to a life of misery...and lets not even get into how people like teachers, accountants etc dont even come close to 75K for many years to start

but anyhow...i am happy the world doesnt work as per the warped ideas you seem to have,
Sr. Member
Sep 18, 2008
689 posts
124 upvotes
Woodbridge
Hp4041 wrote: wow...what can I say....yes because in a healthy society, winner takes all and a modestly well performing guy should be relegated to a life of misery...and lets not even get into how people like teachers, accountants etc dont even come close to 75K for many years to start

but anyhow...i am happy the world doesnt work as per the warped ideas you seem to have,
it actually does. If you haven't noticed world has gotten much tougher and factually careless towards losers.
Any Syrian will tell you that ...
Member
Jul 18, 2020
300 posts
462 upvotes
I don't understand what with the stock vs re argument. Put it this way, you need to be able to own both in order to be doing ok. If you are 40 right now you should have around 1.5 - 2M equity spread between RE and Stocks in order to consider yourself to be a slightly above the average middle class person in the GTA.
Sr. Member
Jun 26, 2019
645 posts
494 upvotes
FARMERBLANCHE wrote: Of course they do
I was illustrating a specific purchase someone shared
Again I'm not saying RE is a bad investment, I'm starting it's not necessarily better than other investments
If you rented instead and walked away with let say $2.5 after taxes you would still be up $1.1m. How much would you have spent in 25 years on rent? I know what I spent in the late 90's and early 00's and $2000 a month would have got me an amazing place.
Every great economist will tell you that from an investment point of view under "normal" conditions, stocks will beat real estate the vast majority of the time. At the same point in time, all these people own their own homes. There is a lot of value added in terms of stability and other intangibles you get from home ownership. And yes, we can all acknowledge you can safely leverage yourself a fair bit more with real estate compared to stocks.

In the end, the argument is mostly a theoretical one and both sides like to cherry pick data a fair bit. Most people with the means will end up owning a house of their own. So for the most part I usually look at this argument as if you already own a house, and have some stocks/liquid assets on the side, what is better, to buy an income producing property or to invest more in stocks. Generally speaking what that boils down too, especially in the GTA/GVA, is that your cash flow on most of the properties is going to suck, unless you plow in a bunch of money on the downpayment, which lowers your leveraging. So you're basically reliant on cap gains to make your investment worthwhile, which again, will be taxed at the same rate as your stocks.

So to echo what @FARMERBLANCHE was saying, you can make money in both, and one isnt necessarily superior to the other. Also, some people may be better suited to invest in stocks and others may be better suited in invest in real estate.
Deal Addict
Jan 14, 2009
1920 posts
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Vancouver, BC
5% per year nominal gain is not that much for Toronto. Where are the global middle upper class suppose to live? Vancouver and Toronto is actually cheap if you want to own a nice home and drive a BMW and we already have lots of Chinese language amenities.
Sr. Member
Jun 19, 2017
565 posts
840 upvotes
Most people grossly overestimate future returns on real estate, especially if we make the mistake of projecting the performance of the last 40 years into the future.

Most people argue that RE prices have risen due to immigration, manhatenization, etc. That is true except the vastly overwhelming reason for price outperformance has been rates falling from almost 20% in the early 80s to basically zero now.

So we can maybe eek a few more one time gains from interest rates going negative, but where to after that, most likely they go up from there. If you adjust for changes in mortgage rates, you'll find that RE pretty much compounds near the rate of inflation.

I saw a post comparing the compounding of the SNP to compounding of Real estate...I think that's a bad comparison, SNP 500 companies haven't compounded faster than inflation by raising their prices 10% annually, they can achieve those returns by only increasing sales by the rate of inflation say 2%, and the excess is returned by high returns on equity or capital, that is why it can achieve high yields sustainably. Housing prices have increased 10% annually for some time while salaries are up 2%, that is not sustainable, we'll be hitting that wall soon.

Will housing be higher in 20 years? Yeah, probably, but real returns won't be great, I don't think it will keep up with inflation, best case is we get a housing crash in real terms but not in nominal terms. Housing is sensitive to unemployment, so I'm afraid that money printing alone won't help housing unless they find a way to stop the job losses from happening.

If we can maintain population growth, one RE strategy that might work is to buy property which becomes more high end over time. For example, 40 years ago, a 3bed 1500sqft detached could have been the average property. Now the blended average property might be the equivalent of a 2 bed condo, and the 3bed house has moved up the luxury scale and is priced well above average. So looking forward, anything freehold may have a chance to do the same in the next 40 years. On the contrary, a 450sqft condo, will probably not be more luxurious in 40 years, so probably buyer beware.

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