Thursday, April 07, 2005

Toronto Housing Market Cools

The clues mount in Canada that the bubble is coming down. The Toronto Sun link via a reader, "Sales may have dipped to 7,904 in March, down from an amazing 9,067 a year ago. Inventory reached its highest point this year, with 21,840 properties listed for sale on the TorontoMLS system. This figure is up 11 percent over the 19,749 listings available at the end of last March."

Commissions must be down too, but the local RE professionals are undaunted. "'I'm in it for the fun, excitement and potential of earning the big bucks,' said 24-year-old Emily McLean, who made the plunge into real estate three months ago."

The writer can remember down markets, but has a list of "ifs" for comfort. "Since 1996, when real estate nose-dived to the bottom of a deep deflationary cycle after the bubble burst in 1990, our housing market has been enjoying an explosive recovery. So as long as lending remains cheap, energy costs don't bankrupt consumers and first-time buyers don't blow it by going in over their head with 0% down, interest-only mortgages, this market still has legs."

25 Comments:

At 12:35 PM, Blogger Van Housing Blogger said...

Toronto P/E ratios are about 1/2 to 2/3 what they are in Vancouver, so Toronto isn't as over-priced as Vancouver.

 
At 12:55 PM, Blogger Ben Jones said...

VHB,
Thanks for that info. I didn't realize Vancouver was in that shape...Ben

 
At 1:00 PM, Blogger Ben Jones said...

VHB,
Wow, I should have known but haven't checked your site in a couple days. Those are some telling charts! Ben

 
At 1:14 PM, Anonymous marmico1 said...

I would be careful about using the data sets from the realtor boards and drawing any conclusions.

I am familiar with Toronto (and the editorial opinion of Linda Leatherdale) and the areas included in the TREB realtor data base have expanded significantly and continuously since the early '80s. In other words, home sales in the outlying suburban/bedroom community areas (now included in the data) are driving down the mean or median Toronto averages.

IMO, and as a homeowner in the greater Toronto area for 20+ years the average price in Toronto per se, is much higher than reported and contrary to Leatherdale's assertions, prices have recovered to the 1989 highs in real terms.

Vancouver has had higher prices than Toronto for about 25 years.

 
At 1:35 PM, Blogger Ben Jones said...

marmico,
Thanks for the insight...Ben

 
At 1:57 PM, Anonymous Anonymous said...

Calgary has the opposite happening with housing prices.

The monthly stats indicate an increasing average house price, but what it doesn't say is that the average house in Calgary is getting bigger and bigger and there is a lot of new development in the Calgary market. The price of those new houses is greater than the existing ones.

I think that same home price increases are much less robust than the average would indicate.

 
At 1:57 PM, Anonymous marmico1 said...

van housing blogger may want to analyze the RBC affordability index rather than P/E ratios.

http://www.rbc.com/economics/market/pdf/house.pdf

It seems to me that what matters to a homeowner is the monthly payments (affordability) as opposed to the capitalization rate (the inverse of the P/E ratio) of the home as an investment.

I'll post this to the van housing blog as well.

 
At 2:06 PM, Blogger Van Housing Blogger said...

This comment has been removed by a blog administrator.

 
At 2:07 PM, Blogger Van Housing Blogger said...

Hi Marmico1,

You're right - Vancouver prices have been higher for a long time. But what is really interesting is that rents in Toronto are *higher* than those in Vancouver. This is what drives the P/E ratios to be so different.

The only way to justify the big P/E's is if there will be big appreciation. Since the (mini)crash of 1989, those buyers in Vancouver have done well - there has been great appreciation. Good for them.

However, the real question facing us now is whether that appreciation will continue. That's the point: If there is not continued fast appreciation, then the 30+ P/E ratios will be really hard to justify. That is, stable or flat prices will *not* be enough - without the gains you're essentially paying for an asset yielding 2-3% annually in rent.

Maybe the appreciation can continue forever. That's the bet buyers are making.

 
At 2:14 PM, Blogger Van Housing Blogger said...

Hi Marmico1,

I see no reason to analyze the RBC index *instead* of the P/E ratio. They are measuring different things.

The RBC index measures how much of household income goes to home-owning costs. When I look at that index, it strikes me how *little* it has gone down, given the interest rate drops.

The RBC index says nothing about the value of housing as an investment - you may still be able to *afford* the big payment on your jumbo-mortgage - but you'd be pretty grumpy if the price of your house dropped below the mortgage value.

Thanks for pointing it out to me.

 
At 2:18 PM, Anonymous marmico1 said...

Calgary Anon:

Good point. Twenty years ago only the well-to-do had granite countertops, whirlpool tubs, slate floors, etc.. Those former types of luxurious finishings are now becoming quite common in middle class homes.

The average size of homes has increased decade over decade but it seems to me that the average lot size has decreased. So maybe those trends cancel each other out for purposes of the robustness of pricing.

It's a huge problem trying to analyze historical data as per my first post in this thread.

 
At 2:18 PM, Anonymous Anonymous said...

I think that the housing in Toronto and Vancouver is (way) over priced relative to rent.

I might be stupid, but I think that a house is worth about 10x its yearly rent.

I say this because in the long run the owner needs about 8% return on capital, 1% for taxes and 1%+ for upkeep.

Some people say they can accept a lower return than that, but they are relying on price appreciation of the house for returns and that clearly doesn't hold merrit in the long term (20 years).

Furthermore, getting a greater return by using a lot of leverage has worked the last 5 years but clearly won't work in the long term. Like with stocks, leverage is your friend in good times and your enemy in bad times.

So... houses that rent for $1000/month are worth $120,000, $2,000 are worth $240,000, etc. Even bumping the ratio to 12X yearly rent makes there houses worth $144,000 and $288,000.

Maybe this is why I rent and have a large stock portfolio.

 
At 2:23 PM, Blogger Van Housing Blogger said...

Anonymous would love Vancouver where prices are over 30x rent! I'm a happy renter too.

 
At 2:41 PM, Anonymous Anonymous said...

30x ! I just don't get it.

Everyone is happy right now because RE is appreciating, but do they think that is going to happen forever ?

There have been busts in both Toronto and Vancouver in the last 20 years. Don't people have memories ? I just don't get it. I just don't get it.

 
At 2:45 PM, Anonymous Anonymous said...

We need to rename this blog "renters anonymous", not because there is anything wrong with renting, but because we get persecuted so much. I love being anonymous because I think I am the only person in my city that rents yet. Everyone thinks I'm nuts.

This blog is the only place where I can speak freely about RE, the way I see it. On the weekend I have to listen to our friends go on and on about how much their house is *going to* be worth and how we are missing the *opportunity of a lifetime*.

 
At 2:59 PM, Anonymous Anonymous said...


Good point. Twenty years ago only the well-to-do had granite countertops, whirlpool tubs, slate floors, etc.. Those former types of luxurious finishings are now becoming quite common in middle class homes.


I agree. It is not unusual to see walk in closets, soaker whirlpool tubs, double sink ensuites with granite, etc.

If you want to see the differences for yourself, go look at existing homes for sale. Look at a 1970s-80s house compared to a 2002 house. Wow, what a difference and not just in styling. The new houses are built 10x nicer.



The average size of homes has increased decade over decade but it seems to me that the average lot size has decreased. So maybe those trends cancel each other out for purposes of the robustness of pricing.


In 1980 my parents built a monster house, a 1300 ft^2 bungalo. Now it looks like a plain jane vanilla house. Modern houses are 1800 ft^2 and up. Lots of 2 stories are 2200 ft^2.


It's a huge problem trying to analyze historical data as per my first post in this thread.


Agreed. Real estate publications need to try to estimate same house price increases, not the average price paid.

 
At 3:00 PM, Anonymous Anonymous said...

Canada's economy stalls, except housing, of course:

http://www.canada.com/edmonton/edmontonjournal/news/business/story.html?id=8c434d62-06af-423e-9761-fe392d4f8241

 
At 3:16 PM, Blogger deb said...

My 2 cents...

Give me an old house any day. The houses around here that were built 40+ yrs ago are much better built. They may not have all the bells and whistles, but they are built to last. My mother-in-law lives in a 5 yr old tract house in Vegas and it already looks very tired. It feels like it is made out of cardboard.

We sold our home in the LA suburbs last July. Currently we are renting a house that would sell for about $1.25 mil for $2800/mo. That's about 37 times annual rent. We are getting a good deal for our area though.

 
At 3:19 PM, Anonymous Anonymous said...


Currently we are renting a house that would sell for about $1.25 mil for $2800/mo. That's about 37 times annual rent.


That is hilarious ! Do you ever talk with the landlord ? What does s/he say about renting out such an expensive house ? What the heck would his mortgage payment be ?

 
At 3:22 PM, Blogger deb said...

Our landlord is an older lady who has owned the house for about 30 years. She owns it free and clear.

 
At 3:26 PM, Blogger Ben Jones said...

(Real estate publications need to try to estimate same house price increases, not the average price paid)

I have posted on the problems with median, etc. But the house I rent was built in 1972 and my rent doesn't cover the property tax. It isn't lavish but I consider it more valuable than the chicken wire and stucco "mansions" they are building here in Arizona.

I asked a local home builder how much profit was in the current market and he said 25-30%. They can build these in less than a year.

Another matter is quality of the wood, labor, ect. Lumber isn't properly seasoned anymore. Carpentry has been ruined as a paying trade. Give me an older house.

 
At 3:32 PM, Blogger Ben Jones said...

(Canada's economy stalls, except housing, of course)

I see this story as more proof of irrational construction. Does it make sense to increase building with the economy stalling? Thank you for the link, I am reading it now..Ben

 
At 3:45 PM, Anonymous Anonymous said...


Our landlord is an older lady who has owned the house for about 30 years. She owns it free and clear.


Too bad she doesn't sell. She could lock in a huge profit. I feel sorry for people like her.


Does it make sense to increase building with the economy stalling?


It doesn't, yet every year the housebuilders crank out more homes than they did the year before. The population isn't increasing much in Canada. Who is buying all these homes ?

The home builders crank them out because the margins are so good. Until the price falls the home builders will keep building. It is almost guaranteed that sooner or later they will crash the market with over supply.

Repeat after me: in the long run the price of a house will follow inflation. In the long run the price of a house will follow inflation. In the...

 
At 4:15 PM, Anonymous Anonymous said...

I like the line "it still has legs".

I read this like "we can still probably find more suckers before the market crashes".

The article said that they went through a deflation of prices from 1990 to 1996. Why are people bound and determined to repeat that ?

 
At 5:07 PM, Blogger PunKtilious said...

(Renter's Anonymous)

Cheers Anonymous, looks like we are part of the minority. I too rent, out of choice. I refuse to be house rich and cash poor. I live in l.a. county and rent in a neighborhood where if I were to purchase could easily be paying double my rent. This wouldn't even include upkeep, etc...
I am banking the difference, I can only hope that inflation and or a dollar collapse will not bite me.

 

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