Pretty Flowers

I think it's highly unlikely that the Toronto property market will tank any time soon. Just looking at the fact that of the 250,000 immigrants coming to Canada each year, 75% move to the GTA, meaning an approximate requirement for 100,000 extra homes adds a significant factor to the demand side of the equation.

Prices in Toronto have typically been much lower per square foot than for other world commercial capitals, so the relative increase in Toronto house prices is merely reflecting its increasing importance.

Then if you look at the relative financial caution in banks lending compared to the UK and US, there are simply not the pieces in place that could lead to a price crash. If anything, I'd expect that prices *may* stablise, but I'm still expecting that prices in the downtown core, especially for houses, will continue to grow the way that they have done over the last 2/3 years. Even in the darkest days of 2008 and 2009 property prices in Toronto were still increasing...

JonboyE

I know nothing about Toronto, nothing about the real estate market in the rest of Canada, in fact I know very little about the real estate market in most of the Lower Mainland. I don't care. There is no Toronto real estate market, there is no rest of Canada real estate market, there is no Lower Mainland real estate market. All there is is a series of niche markets.

Supply and demand are the only two factors that effect real estate prices. Your hope of learning what has happened, what is happening now, and predicting what will likely happen in the future, is to focus on the niche markets that interest you and try to really understand the forces that are driving the supply / demand dynamic.

For example, it is a commonly held belief that interest rates are a primary driver of demand and that a rise in interest rates will halt the rise in house prices. In some sectors of the market it will. The required debt service ratios will reduce the amount of mortgage buyers can qualify for.

I also suspect that a sharp rise in interest rates may cause a fall in prices in some types of housing. Typically, family homes aimed at 30 somethings as these families are often highly leveraged and without the resources to fall back on to survive higher payments.

However, knowing about interest rates is not going to be of any help whatsoever if you are looking to buy in the Vancouver West Side. The issue here is supply. The buyers are people who are parking excess money. They don't need mortgages.

Alan2005

Note that Canadians have more personal debt than Americans or Brits.

JonboyE

You are right that Canada is not isolated from Western economic fundamentals but I don't see how you deduce from this that Canadian house prices will inevitably suffer the same decline as the US and UK did (not that I am accepting that the situation in the UK as analogous to the USA).

Alan2005

They are. But the function is more complex than you imply that we believe. You talk of supply/demand, but demand has to be backed up with ability to pay. The reason that interest rates vs prices doesn't correlate is because the central banks make adjustments way to late in the credit cycle and when they do make them they try to delay the pain rather than get over it quickly. Interest rates should have been increasing steadily from 2003 to control debt levels - but they weren't. And now there is too much debt to pay off everywhere - so much that default is inevitable somewhere in the system.

Btw, how expensive do you think real estate would be if the currency wasn't fiat? If banks could only lend from capital formation rather than basically printing it?

This is true. I don't blame them at all. Even if they lose 50% they'll probably think it's better than losing all of it - which is possible if you keep paper, especially within China.

canadian_critic

Not about the property bubble in Toronto no. But my advice sticks and I do know what I'm talking about. I've made a fortune out of property transactions in the past, a huge amount more than I ever earned in any slave wages job. People speculate over market crashes but they don't understand what really triggers these. Even experts cannot usually anticipate this. All one can do is look to statistics which point strongly toward a decline in property investments, either short term or long. Given high closing fees in Canada this is an excessively risky move even if things remain as is. Obviously if the market pops then this could spell disaster for anyone who'd just poured all their money into a property.

My advice was to bring out as little as possible, and try and fund life in Canada from earnings rather than bringing money out.

Alan2005

Nowhere is going to see significant declines. If I've learned one thing over the last 4 years - it's that the government (in whatever country) would rather devalue the currency than see bad lending or other financial decisions punished.

So inflation it is. Lots of inflation.

canadian_critic

This is true. House prices only matter if you think you might have to sell up within 5 years, or if your loan to value ratio is higher. Emigration however puts a different spin on it, as when I bought my home I had every intention to be there for at least 10 years, yet circumstances had me considering putting it up for sale a couple weeks after purchase.

If there's no factor that would force you to sell up and move back or anywhere else, then who cares about property values. Providing you buy and sell in similar markets it's all relative anyhow.

Project_Habbakuk

Well - what drove the last crash in the 1990s? Largely sentiment and over-leveraging - it was an irational boom with every speculator/flipper Tom Dick & Harry out to make a killing, which rapidly went into reverse when interest rates started going up and the speculator/flippers piled out. It will be interesting to see how it plays out this time.

I agree that there is significant increase in immigrant numbers going on in Toronto but they said that also in the early 1990s and it didn't make a blind iota of difference !

JonboyE

Sure, when I talk of demand I am assuming buyers ready, willing and able.

I've been expecting interest rates to rise for some years now. It has been costing me money as 2rds of my borrowings are fixed well above prime.

As you say in a later post, it looks like the BOC has decided on a nice bit of inflation as a way out of this.

Long-term real estate prices will grow roughly in line with the growth of the economy as a whole. If banks could only lend from capital/deposits we would have a very small economy - and cheap real estate.

JamesM

I'm not sure on your maths here. 75% of 250,000 is 187,500 immigrants. To expect 100,000 new homes to house them is rediculous. I just moved into a condo share for example. Plus the fact that alot of these people are couples and families. So realistically I do not think you would need to find even 40,000homes and that figure pales into significance when you look at the number of unfinished condo's in the GTA.

Then how many of these people can afford to buy anyway.

There was also an article in the Globe and Mail talking about a migration of jobs in Canada from the East to the West and provincial migration following a similar pattern.

I'm just not convinced that immigration has that bigger impact on property in Toronto.

I would say the low interest rates are the biggest factor and that governments would rather artificially inflate house prices at the expense of sorting out the real problem of debt and raising interest rates so that they can win their short term elections and make the middle class feel good about themselves.

Canada is the last Western country whose bubble is yet to burst. It may not necessarily be a dramatic price slide. It only takes inflation to run at 4% for 5 years and price growth to run at 2% and you have a significant price reduction in real terms.

Novocastrian

Indeed. Not even to the extent of knowing that there is no property bubble in Toronto in recent times.

Not that I care one way or another.

London Mike

The Chinese have done this for a while to boost their export sales (like the world needs any more Go-Gos). It's effective. This is why the US strategically tried to devalue its own currency to compete last year and ... lost $700bn in the process. Stupid Americans.