What's Going on With Toronto's Real Estate Market?

John in Toronto Real Estate News

There were a couple of reports yesterday that are sure to make the average home buyers head spin.

While the Toronto Real Estate Board announced a startling 22% drop in sales in March, RBC Chief Economist Craig Wright tells us that Ontario is on the brink of a recession which will be short lived thanks to Ontario's healthy real estate market.

So what's really going on?  Is the market 'cooling down', heading for a US style collapse, or is our real estate market healthy?

One important point to be aware of is that the decline referred to in media reports has to do with sales volume, not average prices.  Average prices continue to be on the rise.

Having said that, 22% is still a big decline and we should be taking a closer look at what's happening.  It's easy for a lot of people to look at last month's decline and conclude that we are on track for a crash in Toronto's real estate market.  But the numbers only tell part of the story.  To really understand whether our market is healthy or on shaky ground we have to look beyond the numbers to understand what caused the decline in Toronto. 

When it comes to the Toronto market, is supply and demand leveling out after years of imbalance? Was this decline caused by a speculative bubble bursting?  Are homeowners following their US counterparts in defaulting on their mortgage payments, leading to an oversupply of properties as banks turn to Power of Sale to recover their loans?  Perhaps our market is experiencing the high levels of speculation, high interest rates and high inflation that led to Toronto's real estate crash twenty years ago. There are countless factors that can trigger a decline in real estate sales and identifying the right ones in play today is key, because they don't all lead us to the same place.

So how can sales be on the decline and our market still be healthy?  Again, the answer has to do with the reasons behind the decline.  Unlike the US market, Toronto's real estate market was not highly speculative during its rise (the one exception may be the new condo market). 

To date, Canada has not experienced the phenomena of millions of home owners defaulting on their mortgages. While some equate the introduction of new mortgage products such as extended amortization in Canada to trends in the US market which also saw the introduction of "no questions asked mortages", I feel there are very important differences - our banking industry being more conservative for one.

A couple of weeks ago I wrote an article titled Why is Toronto's Real Estate Market Cooling down where I talked about some of the factors that I believe are triggering the slowdown in Toronto's real estate market. 

Most people tend to see the real estate market as either on its way up or on its way down.  The reality is that there is something in between boom and bust markets.  Economics 101 tells us that boom and bust markets occur when supply and demand are out of whack.  When supply and demand eventually line up we reach a period where prices are neither on their way up or on their way down.  They just bounce around the same range for years.

Between 1992 and 1998 the average sale price for homes in Toronto hovered around $208K.   Prices would rise a bit in one year and then drop in the next but were never more than $10K (or 5%) from the $208K average for that period.  During that same period, roughly 47,000 homes would sell on average each year, but exact sales volumes per year were far more variable than prices. The number of homes sold would be up or down by up to 10,000 homes (or 21%) in any given year.

If a drop in sales results in a greater balance between supply and demand, then the decrease is not only expected but also a healthy change for our market.  Sales and prices may fall from their record heights, but I don't see anything in our market or economy that would suggest an upcoming crash.  If anything, our market is approaching a period where supply and demand appear to be lining up and leading us to a far more balanced market. 

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Comments

[John]

John,

First and foremost, there needs to be a couple fact based realizations on analyzing this real estate market.

1) Housing in Toronto and the rest of Canada has essentially followed the same path as the US, Europe, UK, and Australia in the sense that real estate prices have been rising to the tune of roughly 10% annually.

2) Average incomes in all these countries have essentially remained flat to negative.

3) Central banks around the world including Canada have running M3 money Supply (growth of new money and new debt)at an average rate of 15%, annually essentially debasing all global currencies, hence the price gold hitting US$1,000 per ounce. (Competitive devaluation, or technically "Beggar thy neighbour" policies.

4) Official inflation in Canada is running at 2%...hogwash. The most highly manipulated data set are the inflation numbers with the use of Geometric Weightings, Seasonal adjustments, Hedonics and all the crap baked into to the calculation make inflation look better than it really is. Inflation in Canada is running closer to 10% seemingly offset by a rising Canadian $$.

The insane growth of G7 M3 Money Supply has resulted in a significant rise of cheap money. The Credit Crises occuring now is basically deflating all leverage in the credit markets with the US leading the pack. The US Fed is pumping billions into the US Economy in a futile attempt to reflate. The result is a falling US$. In order for Canada and the rest of the world to compete on a trade basis, all foreign central banks are forced to lower their interest rates and simultaneously devalue their own currencies. Case in point CAN$ hits par with US$.

The par CAN$ destroys manufacturing jobs in Canada as exports now become more expensive and less competitive. Ontario will take the largest hit of all the Provinces as most of the Canadian manufactoring sector is based here. Resulting in higher unemployement. 400,000 high paying manufacturing jobs have been lost in Ontario. Replaced by $5/hour jobs at Walmart.

Since the credit crisis began, the lowering of overnight lending rates by the BoC has resulted in little to no movement of posted mortage rates. Even the standard 1% discretionary discount off of posted rates has now disappeared in most Canadian banks.

1) Money is tightening
2) Manufacturing is disppearing
3) Inflation is running rampant (somewhat tempered by the high CAN$)

Real Estate prices climb not as a result of Supply and Demand in housing, but in fact a supply and demand for cheap credit ie: mortgages. As this disappears so will sales, and essentially result in falling home prices.
As for the Canadian banking industry being more conservative, that's a complete myth. Canadian banks are as aggressive if not more so than their US counterparts in both Investment Banking and Retail Banking. The Banks have been great at sowing a public image of conservatism, but the reality is much different. I can confirm this as I have been an Investement Banker with one of the big 5 for over 25 years. Just look at the exposure and writedowns that all the banks have taken recently. CIBC at $25 billion, BMO at $10 billion etc. In addition, if you look very closely at all the Can Banks Q1/08 quarterly reports, you will notice that they have all upped their loan loss provisions by 100%, clearly there is negative anticipation in the mortage markets. This increase is based on Canadian mortage portfolios. Anyway for those who choose to believe that the weather slowed down sales, I have got some great property for sale in Bulgaria, it's lakefront and cheap only $1M Euros.

As Ludwig Von Mises said:

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders".

Cheers

[Carl Minicucci]

Interesting comments although I do question some of the presented "fact based realizations".

Fact is, the historical average home price increases are no where close to 10% per annum over any extended timeline, especially when inflation adjusted.

Fact is, if one accepts the premise of inflation being a scathed and manipulated figure which more closely approximates 10%, housing prices have remained flat or even receded.

Fact is, in Canada, average incomes (Real Disposable) have increased about 2% per annum since about the mid 90's.

Fact is, money supply increases of 15% annually are absurd. No where close as far as US is concerned.

Fact is, we have about short of 1M manufacturing jobs in Ontario. While no one disputes the job losses in the manufacturing industries, to suggest 400K loss even in the last 10 years, is way off the mark. The number is closer to 175K.

Fact is, overnight rates do not have a direct correlation to medium/long term fixed mortgage rates. (Mortgage rates are more closely tied to bonds which remain impacted by subprime.) The end result are widening spreads.

I agree with the trends noted, but I think the numbers could benefit from a sharper pencil.

While the supply of credit is integral, there are other factors which are at play in the housing price algorithm. Certainly in the Canadian example, demographics and population growth (particularly immigration) are also important catalysts.

I'm not certain of the source of the information suggesting the added bank writedowns are in respect of devalued Canadian mortgage portfolios.

Finally, just wondering if the Bulgaria property available for the May 2-4 weekend?

[Phil Long]

According to a TD Bank study that was reported in The Financial Post on February 14, 2008:

Ontario has lost 180,000 manufacturing jobs over the past five years and TD is forecasting a further loss of 250,000 in the next five years.

[Pam]

Fact is. Fact is. Fact is...

Oh please, let me too have my two bits worth to add to the previous two comments!

Living here in Vancouver - where it is NOT the utopia everyone envisions. More people = more litter, less and less people speak english, more rude and careless behavious, and oh...

Real estate is a complete and utter joke. But surprise surprise...very few people can recall when home prices in West Vancouver dropped 60%!

I'm not saying that is going to happen here but if you could only see the vertical chart for prices here in the Lower Mainland - you'd almost get a case of seasick. We have become a condo city/ and first time buyers are being marketed to that "apartment living" is where it's at. Ya, if you like 1,000 different food smells in the spring and summer, or smell the trendy odour of chic and modern pot smoke...ya, living in upscale condo/townhouses is a real treat.

Even if you make $85,000 grand a year like us (which used to be a pretty good income) and are DEBT-free and still saving $800 per month...YOU STILL CAN'T afford to buy a house! And for those who say - just move - sure, we'll just pick up and leave our families!

For those of us with parents who were mortgage free from the git go, this is all very frustrating. We basically decided to forgo the entire notion of owning our own house and just focusing on our businesses.

We're so tired about people saying: the Olympics are coming THEREFORE prices will stay lofty! Unbelievable - FOR AN EVENT THAT WILL LAST FOR TWO OR SO WEEKS!

There is a blast coming - and it ain't gonna be pretty...time will only tell if this poster is right. NO, of course it won't, we're Canada - we've the perfect economy, perfect lending practices, perfect banking system, etc. etc. etc. The idea that Canada never had risky mortgage lending is absurd. Ours just wasn't overly advertised.

Thanks for the vent.

[Pam]

Oh, and I don't need to have Economics 101 taught to me. I'm a trained economist. Have past realtors in the family, so am no stranger to the "Real Estate" mumbo jumbo. I just don't buy all the crud the main stream media feeds.

[Bob]

I just want to add a few questions to think about when considering the state of the Vancouver market:
How many people, as a percentage of the population, make $85,000 or more?
How much would you qualify to borrow for a mortgage with an $85k income?
Where can you buy a place with the answer to above question?
Where are most of the better paying jobs geographically?
What percenatge of the economy is involved in real estate and related professions (construction, realtors, brokers etc)?

[Pam]

Correction: I'm trained "as an" economist - that's my background.

To Bob - I'm not sure if you were asking me those questions directly or just putting some thoughts out there.

I don't know about the # of people/per pop'n percentage but I do know that we make ABOVE the average. The Northwest Territories, Yukon and Alberta all have the highest "median" incomes (2005): $84,000/$72,000/$71,000. B.C. is just under $59,000

We'd qualify for approximately a $300,000 mortgage based on a $72,000 income. Husband's small business puts us usually at $85,000 but we don't want to depend on that. The $300,000 mortgage doesn't include property tax or all the other important things!

In the Lower Mainland currently, there are probably 6 or 7 houses under $350,000 and they are all "charming" or "quaint" dumps! And about the some square footage we're living in right now.

As for the Fraser Valley - now we're getting into a 4 hour daily commute (can you say family stress?) there are a handful of houses in that price range but once again in the 1200 square foot/fixer upper range.

It's interesting, my Dad built his house without a mortgage on a $45,000 income and my Mom helped with a small business here and there (of the Tupperware variety). For many years you could still get a pretty decent house of maybe 1800 - 2200 square foot house with a nice lot and be pretty content.

The only people we know that have bought houses, and some pals making more than us, have had parents throw them a couple of hundred thousand dollars. We don't know how anybody else is doing it without going up to their noses in debt, and even then we don't know.

I would say the best paying jobs geographically are in the Lower Mainland. We looked outside the Lower Mainland but that too is complicated. Doctor shortages, poor water, and what they call a "sunshine" tax (meaning much lower pay). Even so the prices in other parts of B.C. have risen quite abit too. We know because we have family North.

As for how many people are involved in Real Estate, etc. I'd crack - everybody and their dog. Not to mention the Ozzie Jurocks of the world who recruit wealthy investors from abroad - who do not live in (in a permanent community sense) a permanent sense - to buy up $400, $500 and up, up, up condos...

I suppose the idea with the Olympics is that with the biggest game in town, people will want to move here or invest here...once again non-permanents. When Expo 86 was over, we had a tremendous influx of Hong Kong immigrants - some who stayed and others who bought up real estate just to park their money. Whatever keeps the real estate economy temporarily ticking.

Vancouver is currently undergoing a state of construction and condo development hell. I don't mean to sound so negative, but Vancouver is now just one big city of glass highrises. Not very attractive for a "world class city". It seems more a mentality of "how fast can we build em".
I suppose taste is in the eye of the beholder. Tacky.

[Pam]

With respect to non-permanent investors, I was thinking of how like what happened with some Hong Kong money who invested but didn't live here, I caught a news report about investors from Europe flocking to New York to snap up deals...once again...investors but no one planning to live and contribute to the local community. Although there are exceptions (for actual residents and contributors to the community), that also pretty much defines the Whistler Village real estate too.
That's your global village...

[Piero]

Come on John! Simplifying the complexity of the market to supply and demand does no one, except for real estate agents, any good. Where your interests lie are so blatantly obvious.

[Matt]

Good comments, I agree with the "doomsayers" here to some extent, but want to clarify a few things above. John and Pam, an Investment Banker and a "trained economist" or whatever, did a good job summarizing, but threw in some BS with their facts.

Firstly, Canadian banks HAVE NOT stopped offering 1% discretion off of mortgage rates. In fact, I'm selling at about 1.40% off posted right now, when I do sell fixed rates. So that is just plain wrong. If you are getting a mortgage, you should be getting 1.40% off the posted rate, plain and simple.

Pam, as someone who is "trained as an economist", I had hoped you would have been much more aware that you live in a bubble altogether. Seriously, that side of the mountains have never had a fucking clue of what is going on in the rest of the country and it is comforting to see that hasn't changed. If you can't find and hold a place with an $85k a year salary, then you shouldn't be crying about it. You are clearly horrible with money.

I hate to attack the parts of your comments which seemed thoughtless or just plain wrong, because overall I do agree with them. I think we will see pockets of declining prices that would be considered "severe" and an overall drop that would be considered average for recession we will experience shortly. Certainly not a 15% haircut that will be coast to coast in the States.

And also, the weather did slow things down. I have 2 dozen clients getting ready to sell and EVERY ONE has said "I can't wait for the snow to go so I can get the place ready to sell." Hate to come down on that fact John, but when we see the slowdown, it won't be 22% at a time. Sorry.

I'd like to see what you all think of the urban centers condo markets in specific. What will we be looking at over the next 5 years? Unfinished projects and shells of buildings littering our skylines, or something more moderate?

[Pam]

Matt...I always find that someone that defaults to rudeness and dropping the "F" bomb actually gives a writer "less" credibility. Kinda lazy don't ya think? It's harder to actually express yourself in a dignified fashion then hitting the crass default button...you don't know anything about me. And no my comments were not littered with B.S. My comments were based on M.L.S and Stats Canada numbers. As for your comment about this side of the mtn. range "you're the one" who doesn't have a clue. I actually DO know what goes on in the rest of the country because and read and listen to radio from ALL over the country because I love my ENTIRE country and have friends in numerous provinces. So don't act like such an ignorant bore. As for your attacking our being horrible with our money...you are dead wrong but I'm not going to display my finances for you to pick through. However if we're debt-free and squeak out upper double digits in the stock market - handled by us - and are continuing to save $800-$1000/mth I'd say we're doing pretty good. And most astute people know that over the long term - the stock market is the better investment.

And you needn't blather on about numbers off the posted rate because that's common knowledge. Being "trained as an economist" was not to toot my own horn but to indicate that I'm not living with my head under the sofa cushion. In fact, I'll hazard to guess that some of us bullpoopers knew that the sub-prime nonsense was heading down the toilet pipe because we listen to sources other than maintstream media - which usually reports on news from other news sources rather than breaking stories themselves.

Good for you and your clients ready to sell. I'll pay attention more to the Sam Zell's of this world for when to buy and sell. Buy being a mouth piece from the industry - you've probably never heard of him.

I don't mean to be rude but I'm rather taken aback at how rude and unproductive your attitude and comments are. Kinda rings of eastern jealousy...It's really sad because people like myself are always defending the eastern provinces - fishing, manufacturing, and the like - for how difficult things are. That said - the Toronto Maple Leafs, well - suck. Go Habs!

[Pam]

As for Vancouver - if that was your implication - being in a "bubble", that's pretty obvious. Does it mean the real estate market is going to burst in every geographical segment of the market with a slowdown or "crash" (as some might like to argue) - no. Everyone that knows anything about the real estate market knows that price corrections are usually locational. If you subtract all the "frothy" markets that have corrected in the States for example, other parts are holding up just fine...

[Bluefood]

Once again, self-dealing industry obfuscates the housing market facts
My contention is that within a few months, maybe a handful of weeks, Canadians will be caring far more about the value of their homes than they will about antics in the House of Commons, immigration legislation, boycotting the Olympics or the revenue-sucking GST cut.

Today families in this country have more than 80% of their entire net worth in one asset, their homes. This is even more undiversified than the Americans, where a real estate collapse has swept through the middle class like a fatal contagion, and brought the world’s greatest economy into recession. And do you hear about this in Parliament? I didn’t think so.

Meanwhile our compliant and institutional media, combined with self-dealing industry spokesguys are papering over the symptoms of a disease we’d best all talk about treating. A good example is this week’s assertion by Royal LePage, given prominence in unblinking publications such as the Globe and Mail, that the Canadian housing market is strong and vibrant, as witnessed by continual price increases.

“Canada’s housing market remains on solid footing. With the notable exception of a handful of small western cities, the country has returned to an environment characterized by moderate price increases,” says Phil Soper, LePage CEO, in a single-voice media article.

Sadly, this is not the case. Let me give you some reasons.

Let’s take the country’s most expensive real estate market, Vancouver, where the average house price has been sitting north of $700,00 now for more than a year. That means the average Vancouver family cannot afford the average home there. It also means that to buy a piece of property takes, on average, more than 70% of the entire income of a family – which is ludicrous and unsustainable.

This is, needless to say, the highest home price in history, suggesting we are at the top of a cycle. After all, US home values collapsed because of asset inflation (and not subprime mortgages), and the inability of new buyers to get in, even with a lowering of the financial bar.

But here’s the rub. LePage tells people we are into a “more agreeable” era for homebuying, where we are really in red needle territory.

Fact: Sales of resale properties in Greater Vancouver tumbled by 6.4%, year-over-year, in February, and were down 9% from the same month two years earlier.

Fact: Vancouver real estate sales crashed 16% in March from the same month in 2007.

Fact: Homeowners are rushing to get their properties on the market while there is still time. Listings in Vancouver last month increased by 4%, to 5,674 properties, while inventories of unsold homes in the Fraser Valley hit a 10-year high, with active listings up close to 30%.

Fact: In Calgary, listings have been soaring for the same reason – the writing is on the wall and current home values are unsustainable after a decade of excessive gains. The city has become a buyer’s market.

Fact: The average home price in Edmonton has actually started to fall, with single family homes off 5% and condos down 7% from a year ago.

Fact: In Metro Toronto, resales tumbled by 11% in the latest reporting period. Realtors blamed snow.

Fact: Across Canada, house sales have been collapsing at an annualized rate of 70% since 2008 began.

Today Canadians have more invested in real estate that anything else. RRSP contributions have not increased. Family incomes have stagnated. Most Canadians do not have company pensions. Energy costs have increased dramatically. Utility bills, insurance charges and property taxes are all higher, driving up the carrying costs of residential real estate, which itself is more expensive by 70% than it was after Nine Eleven. Worse, we have hundreds of thousands of recent buyers with giant mortgages, virtually no equity, and the distinct possibility of soon having home loans worth more than their homes.

Is this a recipe for financial disaster? Well, it was in the United States, and the blowback from the real estate excess would have come sooner, and less painfully, if they had not relaxed mortgage lending practices, to keep the party going.

But in Canada, we’re smarter, right? That’s why we have prudently allowed 40-year mortgages with lower monthly payments and ballooning debt. It’s why we routinely sell young couples houses with virtually no money down. It’s why our cautious banks approve loans based on postal codes, not appraisals. It’s the reason we let Royal LePage’s CEO got unchallenged when he repeats the industry mantra: “Buy.”

And it’s why this is all unsaid, on Parliament Hill.

[Pam]

"Let’s take...Vancouver, where the average house price has been sitting north of $700,00 now for more than a year..the average Vancouver family cannot afford the average home there. It...takes, on average, more than 70% of the entire income of a family – which is ludicrous and unsustainable.

This is, needless to say, the highest home price in history, suggesting we are at the top of a cycle."

Thanks for articulating the FACTS so well Bluefood. The numbers shout the truth.

[Urmi Desai]

Thanks to all who have contributed to a lively debate. I would, however, like to remind everyone to keep things civil. We work to maintain this blog so that like-minded people (in so much that we are interested in real estate and related issues) can enjoy sharing views. Thank you for respecting that spirit.

Urmi
Editor, Move Smartly

[Serge]

Hello Friends,

I live in Toronto, and i will start by telling you all a joke!
My best friend got a line of credit for 100,000 dollars from a Toronto bank based on home equity, and all he had to say is that he had completely renovated the house....although he hasn't even painted it!!
So all it takes is the following:
- A greedy Financial Sales Rep, a greedy bank whose underwritters are taught to close their eyes, and then you have the recipe for a poor hollywood society that buys material that they will throw out before they even pay for it.

I am not an expert, but i will tell you that just like a storm, you can feel the clouds coming in...
These Western societies will eventually be worse than communism. Sometimes i take public transit, and i wonder why are people so miserable, and i realize that we are trapped with GREED!!
I still enjoy a little beer, a little laugh, a nice chat with my beautifull woman, a game of sports with my friends and everything else is just advertising that contributes to make the wealthy sad rich man a little richer, so he can be buried in a gold coffen, and wait his turn to be judged...Long live this beautifull contry and all the people who trully appreciate it.
I have been everywhere in this country and i can not pick a favorite spot...Damn what a great piece of God given land!!!

Be Well..
Sergio

[Toronto real estate agents]

As a Toronto real estate agent I would say that we should be careful about what the media says and investigate always the sources of information befor taking it too serious. The recession is a common phenomenon now in most of the countries including the US but it`s another story. In Canada the situation is not desperate but we should focus on the mortgage schemes as the figures show a rise in foreclosures.