OECD Says Toronto Condos are RISKY

According to OECD, Canada is in a category of three countries where real estate is overvalued yet prices are still rising. Additionally, Canada, Norway and New Zealand are most vulnerable to real estate correction. Especially if interest rates rise! 

Do Low Interest Rates Cause Housing Bubbles?

You can't really run a controlled experiment to see whether low interest rates cause asset bubbles to develop or not. Consequently, you can't really ever say that one causes the other. That didn't stop countless academics from trying to figure out the relationship between low interest rates and asset bubbles though. So what is the relationship?

Toronto Unemployment from 1987-2013

According to the Toronto Star, apparently there are not enough willing Canadians to fill all the positions in the fast food industry. Yes, businesses say that there is a shortage of fast food servers in Canada!

Most of you have already heard the story that there is a labor shortage in certain industries as there is a skill mismatch between what Canadian employers want and what Canadian workers can provide. Consequently, Canadian employers look outside of Canada for future employees.

In the meantime, the Canadian unemployment rate remains at 7.2% as of April, 2013. The current unemployment rate in the City of Toronto is 9.1% as of March 2013, while the unemployment rate in the "905" area is 7.7%.

What is the most surprising is that the there were less employed residents in the City of Toronto in 2012 than in 1987, 1988 and 1989.

Toronto's New Condo Market Continues to Cool Down

New condo sales in the City of Toronto have crashed by -42% since last April. At the same time, the number of condo apartment units under construction in the GTA went up by 17% from a year earlier to 51,448. Housing starts were down by -81% in April 2013 compared to a year earlier, while apartment completions were up by staggering 419%. There were 3589 apartment units completed in the GTA last April, the third highest number in over 30 years. Source: Statscan.

Jokingly, Flaherty says that there is no housing bubble in Canada. Well, if you assume that the bubble has already burst then maybe he is right. All that remains now is for prices to fall and unemployment to rise. By the way, if I told you that there are less employed residents in the City of Toronto than two decades ago, would you believe me? Please post your answer in the comments section. Otherwise continue reading for many stats and graphs...

Toronto Condo Bubble in Perspective

At one point in time, Las Vegas was thought to be a jewel of the desert and a place of renaissance as it was in the process of becoming Manhattanized. As we now know, it was all a hoax. Las Vegas isn't Manhattan and neither is Toronto. 

Over 66% of the new condo units to be completed in 2014 are going to be one bedroom or smaller. The average condo apartment size of the 2014 cohort is a staggering 695 square feet. What a wonderful space to raise a family. Squeeze in a dog and your picture perfect life is complete. 

Housing Debt Makes Life Worth Living

Could you imagine if there was no such thing as debt, period?

What a horrible world it would be!

Imagine paying cash for that new iPhone. Or vacationing in the backyard instead of Bora Bora. Awful, right? Worse yet… could you imagine having to save $60K for that new Lexus parked in the driveway? And you can forget about buying a house before you’re 40!

Having no credit cards, loans or borrowing options would make for a life absent of all vibrant colour. Everything would be a dull, shit brown – and everyone would be unhappy. How could you possibly be anything but miserable if you’re so poor?

Debt provides you with wealth, don’t you realize? Debt lets you leverage previous purchases to make more purchases. Because you can never have enough stuff. Especially if your neighbors have the same amount of stuff. Everyone is richer and happier that way.

So what’s the easiest way to endless wealth?

Buying a home.

Seriously, can you name a better way to wealth than housing debt? A down payment later and not only do you have leverage, you’re sitting on the best investment you could ever make. Ever!

Will Full Recourse Loans Save Canada?

It is often pointed out that in Canada mortgages are full recourse - meaning that if your home value goes under water,  you will still be on the hook for your housing debt no matter what. You can't just walk away from your mortgage. Some suggest that full recourse mortgages lead to more responsible lending, absence of strategic defaults and lower delinquencies. But will full recourse mortgages prevent the Canadian housing bubble from bursting?

Guest Post: Florida after the Bust

The real estate bubble – or housing bubble – is a type of economic bubble that occurs every so often in local and even global real estate markets. The bubbles are caused by rapid increases in the value of housing until they get to unsustainable levels, and that’s when the values begin to decline.

Believe it or not, bubbles in the housing market are even more critical and closely watched than bubbles in the stock market because real estate markets have much longer boom and bust periods. There is also much controversy over whether or not these bubbles can be identified and prevented. Many say that they cannot and should not be prevented – they should only be monitored and cleaned up after a burst. Much debate takes place over this issue and is constantly pushed back and forth to both sides.

So what causes a bubble in the US housing markets? Observers and analysts blamed the 2001-2006 housing bubble and its 2007-2010 collapse on everyone and everything from mortgage underwriters, investment banks, rating agencies and investors to low mortgage interest rates, and relaxed standards for mortgage loans. Some even believe that mortgage standards became too lax because of moral hazard, which occurs when a party takes high risks because the costs won’t be felt by those taking the risks. The topic is always up for debate.

Toronto Condo Sales Down 15.7% Mid May

TREB just released its mid-May 2013 stats. As usual, there is about a 2% difference between reported sales volume and what actually happened. Why is that the case? Read this article.

In sum, the total sales volume in the GTA is down 13% while the average price went up by 5.4%. If you think that the above data suggests the absence of a housing bubble, please consider that during 1989 bubble prices only started falling 10 months after the sales began to decline. More on this here.

Below is a table with the mid month summaries for the Toronto housing market.

Did Rents REALLY Go Up 10% Over The Past Two Years?

Urbanation recently reported that rents went up by 10% over the past two years. I don't know their methodology, but I suggest that everyone should start questioning their statistics since they cannot even get the basics right!

For example, Urbanation reported: "A total of 3,919 condominium apartments were leased in Q1-2013 on the crea system, up by 31% from a year ago." 

I call bulsh*t on that!

Housing Bubble Is Now Official!

There you have it! Flaherty just officially admitted to the existence of a bubble by suggesting that there were indications of the beginning of a bubble. If you still don't get it, then this quote by Pacifica Partners will clarify the above statement: "...any stronger statement as to the existence of a bubble would be unlikely since it is common practice for policy makers to attempt to "talk down" fears." 

Still not convinced? Please consider when Bernanke famously said in 2005 that there is no housing bubble in the USA as housing reflects strong economic fundamentals.

By the way, Pacifica Partners believes that the real estate in Toronto is overvalued by 33%, in Vancouver by 36% and in Montreal by 37% as compared to rents. If you are still not convinced that Canada has a housing bubble please review my following articles:

Is there a housing bubble in Toronto?

Is there a housing bubble in Canada?

Is there a bubble or not? What do people think?

Canadian Housing Bubble - Charts, Facts, Opinions

The thing to realize is that Canada does in fact have a housing bubble. Sometime ago I compared what the absence of a housing bubble looks like to the Canadian housing market and the verdict was clear. It's a bubble! It is worth noting that not all parts of the country have overvalued  real estate. However, many major Canadian cities, such as Toronto and Vancouver, possess large bubbles. In today's post I will provide a brief summary of key charts, facts and opinions.

Equity Isn't Fool-Proof Protection for the Canadian Banks & CMHC

The future looks gloomy for Canada's real estate market and for its banks. If the interest rates return to their 30 year average of 9%, a financial Armageddon would level out the housing market, CMHC and major Canadian banks. At the moment, a 0.25% hike in interest rates seems highly unlikely, so the chances of  a return to the long term average is unimaginable. Nevertheless all it takes is a spike in inflation to prompt the central bank to raise its benchmark rate. No matter how small the risk of inflation is, it is still like passing a double yellow line into oncoming traffic in front of blind curve.

Some say that Canadian banks are the best in the world and that they are invulnerable to the mess that hit the US financial system.  Yet not everyone agrees. Some analysts have come to the conclusion that equity built into residential loans is not enough to fully protect Canadian financial institutions.

Toronto Condo Investors Under Water

The Toronto condo bubble is as real as an investor running a negative monthly cash flow on his new 1-bedroom downtown apartment. Scotiabank estimates that between 45%-60% of all new condo sales in Toronto went to investors/speculators over the past few years. Immediately a question pops up in my head: if condo living is the way of the future, then why is it that the majority of people who buy condos never actually live in them?

According to the bank, the average down payment is typically between 5%-15% with leveraged equity being the main source for the down payment. No wonder household debt has reached 165% of income as hairdressers started pulling money out of their homes to subsidize hippie renters downtown. Buy it, rent it, flip it. Oh, and don't forget to throw a couple of hundred bucks each month into your new condo as a part of your carrying cost.

The graph below assumes a 20% down payment so the reality is much worse.

Canadian Housing Bubble Exceeds the US Bubble

We were  warned before but we chose not to listen. After all, we have winter for six months a year making our homes more expensive to build and maintain. That totally justifies nearly double the cost of real estate compared to our neighbours down south.  In fact, this is something to be proud of!

It's incredible what Canadians will let themselves believe.

I have compared the Canadian real estate market to the real estate market in Germany before and the verdict was clear. Canada has a housing bubble.

Today, let's take a look at home prices in the true north and home prices of our neighbours below for comparison. I have used two different data sources, one from the OECD, and one from the Dallas Federal Reserve Bank. Both data sets paint the same picture: the Canadian housing bubble exceeds the US real estate bubble in terms of price appreciation.

The graphs below require no further comments.

Local Bubbles in Toronto's Housing Market

The more prices grow, the more they will eventually fall. The more the prices fall, the more the damage done to the economy and to the lives of the average people. Even the central bankers sometimes admit the undeniable truth: rising home prices are a clear threat.

It is both frightening and sad that the majority of Canadians were brainwashed to believe that rising real estate prices was a good thing. The good times during the onset of the housing bubble are both addicting and euphoric. It's too bad that the party can't continue forever.

Toronto Housing Market in April 2013

Sometimes even high level officials admit the truth about rising real estate prices. Today TREB released their monthly report and it is no good! Prices keep going up and thus further raising the threat level.

While TREB is reporting that April sales have declined by only -2.1% in the GTA, the actual number is closer to -5.2%. TREB says that condo sales in Toronto declined by -1.3% while in reality the actual decline is closer to -3.6%. Keep in mind that this April had an extra one business day, as good Friday was in March!

You see, TREB has revised the sales for April 2012 from 10350 to 10021. There were 329 less sales in  April 2012 than originally reported. At the same time TREB reported that sales went up by 18% in April 2012, but according to the official numbers sales went up only by 14%. The same thing will happen to this month's data a year from now! To read an explanation of why Toronto sales are lower than what is being reported click here.

Toronto Housing Market Summary for April 2013