Toronto`s Real Estate Bubble

[Lucy]

No Worries Maxim.....



I am with you. Rickson professes to be an know it all internet keyboard warrior.



Supply and Demand is only relative to the market at a given time. This absolutely does not give any indications whether a commodity is overpriced or in a bubble.



over the long term, Real estate keeps up with the average income and the average income rates. We all know rates are well below average and prices are well above the average income.



There are plenty of statistics that and studies which indicate that much of Canada's real estate is experiencing a bubble and one big steaming pile of debt.





CANADIANS HAVE THE WORST DEBT TO INCOME RATIO OF 20 OECD COUNTRIES AND ONE OF THE MOST TAXED! (this is 11/2 years old, its even worse now)



http://www.policyalternatives.ca/publications/commentary/canadian-households-among-highest-debt-income-ratios-world

 

[Lucy]

Our Canadian Politicians are being recless and irresponsible by allowing this to get to this point and perhaps beyond to satisfy the banks greed to sustain their lending. To cool things off, Canadian banks need to take a breather from their profits and aggressive lending.







http://www.vancouversun.com/story_print.html?id=6290869&sponsor=





Other organizations, including the International Monetary Fund and the C.D. Howe Institute, are worried that the publicly owned CMHC has taken on too much mortgage liability, exposing Canadian taxpayers to undue risk. While there is a debate about whether Canada has a housing bubble, housing prices have increased 44 per cent since 2006. The CMHC`s total loan insurance portfolio is now $541 billion, up from $350 billion in 2007. The Howe institute has suggested encouraging private mortgage insurers to play a larger role.




The main question, generally unasked, is why a federal agency has to take the risk out of mortgage lending for Canada`s big banks. It`s particularly pertinent with banks lowering rates again this week as they fight for more lending businesses. Normal businesses take risks. Why not our banks?


Our financial leaders say they are against debt, but their policies encourage it, and the government makes a tidy profit off insuring it. As long as those policies persist, they should spare us the lectures

 

[RedlineBrett]

[quote user=Lucy]

The main question, generally unasked, is why a federal agency has to take the risk out of mortgage lending for Canada`s big banks. It`s particularly pertinent with banks lowering rates again this week as they fight for more lending businesses. Normal businesses take risks. Why not our banks?


Our financial leaders say t




I have a feeling it is because CMHC is making money hand over fist in spite of all the risk they are taking on. CMHC is actually pretty picky when it comes to accepting applicants. They are generally harder to please than the lenders. Because banks like having zero risk they are forcing all of their borrowers to go through insurance. Sometimes the borrowers have to pay the premiums, sometimes the banks choose to.



While I would like to see the government get out of the housing business I suspect that this has turned into a nice little profit center for them. With consumers getting low rates and the market getting some traction they likely aren't in much of a hurry to walk away from the revenue.

 

[Thomas Beyer]

[quote user=RedlineBrett]While I would like to see the government get out of the housing business I suspect that this has turned into a nice little profit center for them.


until it doesn't due to slight market correction and loan defaults.



The current CMHC policy of 5% down needs to be revised, and I have written a letter to Hon. Jim Flaherty (Minister of Finance) in that regard.



A better policy is 10% down, once, for your first home, then 20%.



Too many young people buy too big a house too early in their lives with too much debt. This new policy would still enable people to get into the housing market.



Banks, of course, have abused the CMHC policies in that they insure conventional loans, even 25% down loans with CMHC at their expense to lower their risk to zero, and thus are able to lever their cash more, and increase their profits. An unintended consequence.



So yes, the CHMC guidelines to a small degree artificially inflate the housing market, and a slight moderation in their policy would be a welcome moderation in this day-and-age of belt tightening.

 

[RedlineBrett]

[quote user=ThomasBeyer]Banks, of course, have abused the CMHC policies in that they insure conventional loans, even 25% down loans with CMHC at their expense to lower their risk to zero, and thus are able to lever their cash more, and increase their profits. An unintended consequence.





This is a big reason why I think CMHC is actually quite profitable.
Sure they will have a small rate of default on the highly levered loans,
but when banks are paying for insurance at 25% down there is lots of
equity and hence the average LTV for a CMHC insured property is probably
a lot lower than 5%. Those deals with more equity make up for the ones
with less equity and greater defaults. CMHC also charges
banks/consumers 2.75 % of loan balance to insure those highly levered
deals... so they are getting paid quite a bit to take on that risk.



Raising the minimum down payment from 5% to 10% would be bad for two reasons:



1. The real estate market would slow due to a reduction in entry level transactions. First time buyers buy the cheap stuff which then ripples transactions upward through trade up business. Taking that business out would be like trying to climb a ladder without the first few rungs.



2. You'd make things hard on the lower price point renters and you'd see more of them out onto the street. Less first time buyers means more renters and hence upward pressure on rent rates.



I don't think the government wants either of those things... so 5% down will be here to stay for a while!

 

[Rickson9]

Good discussion re: CMHC. Enjoying the read. Thanks!

 

[Thomas Beyer]

[quote user=RedlineBrett]I don't think the government wants either of those things... so 5% down will be here to stay for a while!
You're probably right, as we don't have a fiscally responsive government anymore even in the conservatives (as we see in Alberta or the recent federal budget) nor Liberals (like under Paul Martin).



Vote buying at its finest, at the expense of common sense.



Even with a decent economy and ultra-ultra-low interest rates they are unable to balance the budget in ON, BC, AB or on the federal level !! Wait for a slight interst rate uptick and a slight weakening economy and it can get dark very fast !



[quote user=RedlineBrett]Sure they will have a small rate of default on the highly levered loans,
but when banks are paying for insurance at 25% down there is lots of
equity and hence the average LTV for a CMHC insured property is probably
a lot lower than 5%.
I bet FannieMae and FreddieMac in the US thought the same .. where's the risk. Hey, let's keep lending.





BOOM.



Not very likely in Canada, but certainly possible !

 

[Lucy]

Our economy is one steaming pile of debt. I already posted the links to the evidence. Please don't think there isn't a snowball of corruption and greed happening at CMHC, BANKS and GOVERNMENT levels.

 

[Rickson9]

Anything more 'precise'? And by 'precise' I mean a date that we can all mark down in our calendars? Anything?

 

[Hutchym]

Just some Thoughts,











If your looking to stay in the market for several years to come, wouldn't it be best to scrutinize your property to be sure that it will cash flow enough during a 20% correction? If the property still flows then a bubble is not so scary. If it is not going to be safe enough then maybe one should consider selling before the masses.







Also, if an investor is looking to cash in on properties within the short term then maybe it would be best to leave some profit on the table. I think I read that in one of Mr. Don Campbells books. You could then search out another area in another season of the real estate cycle.







Mike

 

[Rickson9]

"No Bust In Canada"



http://seekingalpha.com/article/459941-canada-vs-australia-no-bust-in-canada-but-a-recession-is-probable



It appears to be the most thorough analysis in this thread so far.



[quote user=Rickson9]Anything more 'precise'? And by 'precise' I mean
a date that we can all mark down in our calendars? Anything?




I guess the answer is "no"?

 

[MaximeValmont]

Nobody talked about a "bust" in this thread, except you.



The conclusion of that article is this :



" It's likely that Canada may experience a recession this or next year,
especially if the US growth rate stalls. However, an outright Ireland or
Iceland-style bust is not likely here."



Nobody talked about a big recession like this. In fact I wrote in this thread why it won't happen. Just take what happened in the US for exemple. What is going on in Canada is really different.










Valmont.

 

[MaximeValmont]

http://business.financialpost.com/2012/04/04/flaherty-calls-on-banks-to-fix-mortgage-market/

 

[MaximeValmont]

I truely believe that 90% of journalist have no idea what they are talking about 100% of the time...But this is actually a good article that attacks the source of the problem : stupid government. http://opinion.financialpost.com/2012/04/13/to-tame-torontos-housing-bubble-ban-foreign-buying/



Everybody thinks we live in a free-market economy, but we are not, at all. Lots of people think that what happenned in the US in 2007 is the result of a free-market economy. The reality is that it's the result of stupid government intervention. The US is the largest economy in the world by far, and it got there many years ago when there was no stupid government intervention. Times have changed though. The US are not what they used to be. Government intervention = problems in 99% of the time. Almost all politicians come from a background of Law and political science. Then one day they become in charge of Billions of $ and millions-Billions of people. These people have not earned that money. In fact most of the time they never earned any significant amoung of money in their life. That's the problem ; People with no actual knowledge going in politics. The fact that someone knows the civil code or can write a paper on the political system of France in 1850's doesn't mean he can be in charge of a country, at all.





Anyway, here is another good article http://www.businessinsider.com/richard-koos-key-ideas-2012-4?op=1





Valmont.

 

[kreezo]

I have to admit that I didn't read all 74 posts but these are my two cents. For my full time day job I work on behalf of a pension fund investor that holds $13 billion of A-AAA quality real estate in Canada. The objectives and source of cash are slightly different than a typical condo builder or real individual real estate investor. As a pension fund, we buy everything in CASH. We build everything with CASH. Sitting on an extra $3 billion to invest, a $400 million construction is very do-able. The caveat for us, is 1) safety and 2) return. As a pension fund, in 30 years time when everyone retires we are expected to deliver a return with pretty good certainty.



Without going into too much detail on why the returns on development are good for a pension fund (i.e.comparing cap rates to what you can buy today vs your development yield) - lets address the safety.



Pension plans don't want to lose money and thus don't speculate like a condo developer. A condo can start building or going forward with the construction process (planning/financing/designing/selling) technically at 0% sold. For a pension fund, we can't go to the Board for approval until we have 40-50% of the space leased up (e.g. a head tenant). Once the head tenant is secured, the risks of completion gets signfiicantly reduced.



From 1980s-2000 there were maybe 1-2 office buildings that were completed in the Toronto core - including Brookfield Place and 2 Queen. In the last 2-3 years there were 4 buildings that were completed - 25 York, RBC Center, Maple Leaf Square and 18 York. There are 2 other projects confirmed for construtcion and to be completed in 2014 and 2015 with a potential for 4-5 others in the pipeline.



What does this all mean? Jobs are coming back to downtown toronto due to 1) consolidation of office space from 905s (oil prices up, demographic trends, lifestyle) 2) organic growth of Canadian companies needing more ppl and office space 3) foreign companies increasing presence in Canadian market and requiring more office space.



With jobs being the most important economic fundamental on the goldmine scorecard, I see new office development as a very strong indicator of how pension funds (very safe/conservative investors) are being bullish of the Toronto job/business market.



If jobs are here, people are here, rental units will be in demand and housing prices will get 'supported' (not inflated, supported).



A bubble suggests that there are no economic fundamentals to support artifically inflated high prices. A balloon suggests that prices are over the affordability ratios (i.e. price too high or income too low) but there ARE economic fundamentals that support the price.



I think Toronto is the latter. We're a balloon and not a bubble.

 

[MaximeValmont]

Don't forget that Pension funds invest for the realllly long term and they have lots of liquidity and they often pay cash, Thus they often get really good discount. If I get a really really good price I would buy a building in an overvaluated market anytime.

 

[yys2000]

There are lots of international students to buy condos and houses in Toronto with no mortgage. I can see this is big demand but nobody can tell the extract numbers.

 

[Thomas Beyer]

[quote user=yys2000]There are lots of international students to buy condos and houses in Toronto with no mortgage.
Not THAT many .. maybe a few dozen among a few thousand condos for sale.



Likely, prices will come down in many areas such as downtown condos and suburban houses or cities with weakening economics, but may rise along the new LRT lines and for single family houses in the greenbelt, as they are not making any more of them.



More on likely FALLing prices in Ontario here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-23645-Why_Ontario_real_estate_prices_will_FALL_to_2014_except_in_some_very_select_pockets.html



Thus, chose your location and property very very carefully in GTA. Single family houses (with legal or illegal suites inside them) probably make the most sense within the green belt, especially in high demand areas like Roncesvalles or Beaches, or within walking distance to new LRT lines.

 

[MaximeValmont]

http://business.financialpost.com/2012/04/17/why-torontos-overheated-housing-market-is-unsustainable/

 

[MaximeValmont]

Rickson9,



Still want to argue with me about this topic??







Valmont