Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Analysing Toronto’s Real Estate Market: How Can So Many Be So Wrong?

John Pasalis in Toronto Real Estate News

Rarely does a week go by when there isn’t a new economic forecast about the real estate market. For nearly a decade, the negative forecasts have been predicting a 25% decline in house prices while the positive ones have been predicting a “soft landing” for Toronto’s real estate market. Both predictions have yet to come true.

Readers often ask me how this is possible. How can so many economists be so wrong about the market for so many consecutive years?

While there are a number of reasons why economists are poor forecasters (Nobel-prize winning psychologist Daniel Kahneman's new book Thinking, Fast and Slow suggests that most experts, like most humans, are not as clear-thinking as they'd like to be due to the way the human mind operates), I’ll focus on some of the key problems that have been top of mind with me lately.

Firstly, the real estate market has historically been the realm of the macroeconomist. Macroeconomists will study aggregated indicators like GDP, unemployment, interest rates and household income to understand their impact on the real estate market. While these kind of macroeconomic indicators are of course important and do impact the real estate market, they are far too broad to really give us a strong understanding of what’s going on in the actual market.

Even when economists look beyond national and provincial data to focus on indicators for a particular city, this too can present considerable challenges. In many instances the data economists use, through no fault of their own, is either inaccurate or misleading.

The real estate market requires a stronger emphasis on microeconomic principals if one truly wants to understand where the market is heading.  Microeconomists study the individual decisions and behaviours of households and their impact on supply and demand. More importantly, they track the spread of such decisions and behaviours, identifying the trends that really shape the real estate market.

To illustrate my argument, I’ll look at two common macroeconomic variables that economists often use when studying the real estate market - average house prices and changes in rent - and why they are problematic.

Toronto Real Estate Roundup January 27th 2012

John Pasalis in Real Estate Roundup   

Real Estate Bubble Talk

It's great to see the mainstream media stick to what sells papers this week.

Canadian Business, Macleans and the Globe and Mail all jumped on the real estate bubble band wagon (again) this week.  Unfortunately I can't say that any of the articles were very insightful.  Most were filled with "what if" type analysis.  What if Europe collapses, what if China slows down, what if 50,000 households default on their mortgage at the same time if house prices drop by 25%. 

The one argument worth mentioning here is the increase we are seeing in household debt. There has been a lot of talk about the fact that debt-to-income ratios in Canada are at an all time high, above 150%.  But I often wonder wonder how economists adjust what a normal debt-to-income level should be as financial products change.  For example, from 2006 to 2011 the federal government increased the maximum amortizion for mortgages from 25 years to 40 years.  

To understand what this change meant, an average household that qualified for a $450K mortgage with a 25 year amortization would quality to borrow $550K with a 40 year mortgage.  That means most home owners could now qualify to take on 22% more debt than they could with a 25 year mortgage.  

Furthermore, Canadian Home Income Plan (CHIP) reverse mortgages have grown in popularity over the past ten years.  Reverse mortgages allow seniors to use the equity in their home as income during their retirement.  These financial products could very well explain why a recent CIBC report concluded that baby boomers are driving the increase in household debt we are seeing.  

Rising debt-to-income levels are a function of the financial vehicles the federal governemnt and banks make available to consumers.  As the CIBC report points out "there’s simply no magic number for the average debt-to-income ratio that automatically spells trouble".

Prediction: The Canadian housing market will crash (Canadian Business)

Connect the housing bubble dots: There could be trouble on CMHC’s horizon (Globe and Mail)

What happens when Canada’s housing bubble pops? (Macleans)

Really, an increase in household debt isn’t all bad (Globe and Mail)

Punch Drunk (CIBC)

 

Other Real Estate News

Ritz-Carlton five-star condos proving a tough sell (Toronto Star)

Realtysellers gets green light for lawsuit (Globe and Mail)

Canadian home prices dip for first time since fall, 2010 (Globe and Mail)

Canadian home prices slide for first time in a year (Financial Post)

Canada House Prices: Vancouver Second Least-Affordable City, International Study Says (Huffington Post)

Rob Carrick's tips for investing in real estate (Globe and Mail)

For Chinese buyers, ‘hongza’ rings death knell for property prices (Toronto Star)

Think Toronto's real estate is expensive? You're right—and it might be the Greenbelt's fault (Open File)

New towers leave empty space in iconic buildings (Globe and Mail)

As Toronto condos shrink, space grows precious (Globe and Mail)

Toronto’s toughest real estate markets? Jane and Finch, and the Bridle Path (Toronto Star)

The new-home market is shifting into high gear (Toronto Star)

MLS regions: Hot or cold? (Toronto Star)

Real-estate board warns of appliance thefts (CBC)

$8.3M condo breaks real estate history in Calgary (National Post)

Real estate may do an encore (Financial Post)

Real estate: Investing in the U.S. (Globe and Mail)

Toronto’s tiny cube house gets six offers – and a buyer with two children (Toronto Star)

Dr. Doom reveals what lies ahead and where he’s stashing his money (Globe and Mail)

 

John Pasalis is the President and Broker-Owner of Realosophy Realty Inc. Brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way.

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2011 Year End Real Estate Statistics for Toronto

John Pasalis in Toronto Real Estate News

The final numbers for 2011 are in and the average price for a Toronto home officially increased by 8% to $465,412 over 2010.  Sales were up 4% to 91,756 and the number of new listings were down 4% to 148,014.

But we know the aggregate stats don't tell us too much about the market so I'll take closer look at the key figures that drove Toronto's real estate market in 2011.

Inventory

The big news in 2011 was the limited number of houses that came on the market for sale between April and June, traditionally the peak months for the market.  The following chart shows the monthly inventory (houses available for sale) for the past four years.  You'll see that inventory levels between March and June for 2011 were significantly lower than previous years.

 

The following chart does a slightly better job of showing just how much inventory levels declined compared to last year.  It shows the percentage change in inventory in 2011 when compared to the same month in the previous year. The number of homes available for sale was down 27% in May.

Toronto's Real Estate Market in 2011 - Year in Review

John Pasalis in Toronto Real Estate News

As we say goodbye to another year, it's always instructive to take note of the year that was. What did we hope for? Worry about? And how did things actually play out? Here's my review of the key stories behind Toronto's real estate market in 2011.

January 

To kick off 2011 Finance Minister Jim Flaherty decided to make some changes to Canada's mortgage rules including reducing the maximum amortization from 35 years to 30 years. I anticipated that a mini boom would follow as many buyers would rush to buy ahead of the March 18th deadline (indeed Toronto's sales-to-inventory ratio climbed from 36% in January to 56% in March).

In my January market update I looked at whether or not Toronto house prices were on the way up or down by comparing figures published by the Toronto Real Estate Board and by the National Bank Teranet House Price Index. TREB reported an increase in house prices while the House Price index showed a decline in prices.

New listings and sales were down 10% and 13% respectively in January 2011.

 

February 

Economic research firm Capital Economics published a report that suggested that house prices in Canada could easily fall by as much as 25% over the next several years(in actuality, house prices increased by roughly 5% nationally and 10% in Toronto in 2011 ).

But not all economists agreed. From Scotiabank economist Adrienne Warren, “We lack the triggers that prompted the U.S. market to crash, I think what you see is prices staying flat as incomes rise over the next few years.”

RBC Economics forecasted that home prices in Ontario will rise a modest .5% in both 2011 and 2012.

Although sales were down 14% in February, my market watch for the month showed that the market was actually heating up and moving further into seller's market territory.

Toronto Real Estate Roundup December 16th 2011

John Pasalis in Real Estate Roundup   

 

Record high household debt in Canada triggers alarm (Globe and Mail)

Debt-Payments-to-Income. A Trend to Watch (Canadian Mortgage Trends)

Canadian home sales edge higher in November (CREA)

Toronto real estate market favours sellers (CTV)

Q&A: Is Toronto in a real estate bubble? (National Post)

Toronto house prices hit new record (Toronto Star)

The Case of the Condom-inium (Toronto Standard)

Mortgage rules should be stricter: TD chief (Globe and Mail)

Housing industry shy on new rules (National Post)

Agent sues for $3,340 after home deal goes sour (Toronto Star)

Flatiron building sold for $15.3M (National Post)

Saadi Gaddafi’s $1.6M Toronto condo: dictator’s son owns penthouse near waterfront (National Post)

Saadi Gadhafi’s million-dollar (but unused) Toronto penthouse (Yahoo)

Real estate: What you got in Toronto for $500,000 in 2011 (Globe and Mail)

Real estate: What you can got in Toronto for $1 million in 2011 (Globe and Mail)

Rob Ford pledges to reduce land-transfer tax by the end of next year (National Post)

Chinese property: a lofty ceiling (Financial Tiles)

Toronto Real Estate Roundup December 9th 2011

John Pasalis in Real Estate Roundup   

 

Will the red-hot Canadian housing bubble burst? (Global News)

Bank of Canada warns condo boom could be ending (Globe and Mail)

Canada's housing starts slow in November (Globe and Mail)

Canadian home prices, sales better than expected in 2011 (Toronto Star)

Canada October New House Price Index Report (Bloomberg)

Condo Madness?! (Huffington Post)

See which Toronto neighbourhood is the toniest in Canada (Toronto Star)

Canada's Richest Neighbourhoods (Canadian Business)

CIBC: real estate to dip 10%-15% in medium-term (Canadian Real Estate Magazine)

Canadian real estate “defies logic” in 2011 with growth (Canadian Real Estate Magazine)

Toronto housing market still on fire (Financial Post)

Toronto Real Estate Sales up 11% in November

John Pasalis in Toronto Real Estate News

Below is the Toronto Real Estate Board's press release with November's sales statistics:

Greater Toronto REALTORS® reported 7,092 residential transactions through the TorontoMLS® system in November – up 11 per cent in comparison to November 2010. At the same time, the number of new listings was up by 14 per cent in comparison to last year.

“We have seen strong annual sales growth through the 2011 fall market. The increase in transactions has been broad-based, with strong growth across low-rise and high-rise home types throughout the Greater Toronto Area,” said Toronto Real Estate Board (TREB) President Richard Silver. “The market has also become better supplied, with annual new listings growth outstripping that of sales. As this trend continues into 2012, we will see more balanced market conditions.”

The average price for November transactions was $480,421, representing an increase of almost 10 per cent in comparison to $437,494 in November 2010.

“Despite strong price growth this year, the housing market remains affordable in the GTA,” said Jason Mercer, TREB’s Senior Manager of Market Analysis. “The correct method of assessing affordability is to consider the share of the average household’s income that is dedicated to mortgage principal and interest, property taxes and utilities. Currently, this share remains in line with generally accepted lending guidelines. Given this positive affordability picture, average price growth is forecast to continue in 2012, albeit at a more moderate pace.”

John Pasalis is the Broker Owner of Realosophy Realty Inc in Toronto. Realosophy focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions. Email John

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Toronto Real Estate Roundup December 2nd 2011

John Pasalis in Real Estate Roundup   

 

Warning Signs in the Ultra-Luxury Market (True Condos)

Vertical Toronto: Going, going up (Toronto Star)

Alarm bells sound over our house prices (Toronto Star)

Is home ownership really a smart investment? (Toronto Star)

Luxury Living: Cool with condo (National Post)

75-storey condo in downtown Toronto proposed (City News)

House prices flatten in September (Canadian Real Estate Magazine)

New investors face tighter credit score demands (Canadian Real Estate Magazine)

Joint venture on Toronto condo cuts a new path for development (Globe and Mail)

Toronto Mayor Rob Ford to seek 2.5-per-cent property-tax hike (Globe and Mail)

TTC may not run the Eglinton Crosstown LRT (Toronto Star)

Canadians rein in debts amid uncertainty (Globe and Mail)

We Live Here: 157 Coxwell Avenue (Torontoist)

New Loblaws unveiled at Maple Leaf Gardens (BlogTO)

 

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A Closer Look at Canada's Real Estate Market

John Pasalis in Toronto Real Estate News

Teranet and National Bank publish a monthly House Price Index that tracks changes in house values in a number of Canadian cities.  They recently added 5 cities (Victoria, Winnipeg, Edmonton, Hamilton and Quebec City) to their monthly House Price Index report bringing the total number of cities tracked to eleven.

Using a simple average to measure the change in real estate values can present a number of problems.  Averages can be heavily skewed by changes in the housing stock and by a small number of super luxury property sales.  

The House Price Index uses something called the repeat sales methodology to calculate changes in house values.  This approach requires a property to have been sold at least twice in order for it to be used in their calculations.  They take the current sale price of a particular house and compare it to the previous sale price to measure the increase or decrease in value over that period.  This approach offers a more realistic look into changes in real estate values. 

Instead of reporting on prices for a particular city, National Bank and Teranet have converted house prices into a standard index.  To do this they first assign a base period, in this case June 2005, for which the index for all regions is set to 100.  The index then captures just the appreciation or depreciation in house values for a particular market. 

Let’s take a closer look at the House Price Index data for al 11 cities tracked by the index. I’ll discuss each city in order of their appreciation as measured by the index.

Winnipeg is Hot!

Winnipeg house prices have appreciated at a faster and more consistent rate than any of the other Canadian cities tracked.  House values in Winnipeg have increased 78% since June 2005 (the base year of the house price index), roughly 12% per year.  Even a global economic and credit crisis in 2008 wasn’t enough to slow down Winnipeg’s real estate market.  During that time house values declined by just 3% before resuming their upward trend again.

Toronto Real Estate Roundup November 25th 2011

John Pasalis in Real Estate Roundup   

Toronto Condo Bubble: The Industry Weighs In

There has been a lot of talk about a bubble in Toronto's pre-construction condo market lately. 

Today we have the pleasure of reviewing several articles from people actively involved in the condo market who are challenging the idea that Toronto's condo market is looking like a bubble. Some of the arguments are more weighty than others, but all are worth a read.  

I'll take a look at some of these arguments next week and will see how they stack up against my own thoughts on the market.

 

Are new condos overvalued compared to resale units? (Toronto Star)

Why we're not in a condo bubble (New Condo Guide)

A condo bubble in Toronto? Forget about it, says Urbanation's Ben Myers (BuzzBuzzHome)

Are there too many condos in Toronto? (BuzzBuzzHome)

 

More Condo News

Time to Give Resale Another Look? (True Condos)

Cap Rates and Condos (True Condos)

Top 10 Tallest Condos in Toronto (Talk Condo)

City plays Donald Trump—Doug Ford gets excited, Adam Vaughan is not enthused (Toronto Life)

City to partner with Tridel in 75-storey waterfront condo (Globe an Mail)

 

Are Canadian House Prices Overvalued?

Will the hammer drop on house prices? (Globe an Mail)

House of horrors, part 2 (Economist)

Top 10 property safe havens abroad (The Telegraphy)

Housing affordability improves slightly (680 News)

Where Housing Affordability Stands in Canada (RBC)

 

Editor's appeal: In today's world, you’re nobody till facebook likes you. So if you enjoy reading the Move Smartly blog, please scroll to the right column of this blog and click on the facebook "like" button just under the the subscribers box. And thanks for the love!