Whispers that Real Estate in Canada might decline in price....

[TheDude79]

Shock! Horror! Blasphemy!

It seems like there are more and more articles coming out that are forecasting housing price declines in Canadian markets. Here's an entry from cbc.ca, extracted from BNN Article #1 (http://www.cbc.ca/money/moneytalks/2008/02/andrew_willis_pessimism_on_the.html)

Another CBC article, this time with real numbers. Article #2 (http://www.cbc.ca/consumer/story/2008/02/15/realestate.html)

January sales in 20 major markets were down 0.4 per cent from the previous month on a seasonally-adjusted basis and were down eight per cent, year over year.


I wonder how long the bankers, realtors, and most importantly prospective buyers will keep holding to the thought that somehow Canada is magically insulated from the woes going on in the UK and the US.....

[deep]

There is a small difference between "growth is slowing" and "decline in price".

From article #1: "Economists still expect Canadian house prices to rise..."

From #2 = "Real estate prices are still rising across Canada,"

It just shows that no one is really making any guarantees, one way or another. Anyone who claims to be certain is certainly wrong.

[TheDude79]

Well, the CREA mantra these days is "growth is slowing". My point is that some people now seem to be thinking that it's going to be worse than that, and even some numbers may be bearing out those thoughts. Only time will really tell.

[Thalo]

I find it funny how they keep insisting that "growth is slowing" as if growth in real estate values is always a given. I mean, they went up 50% a year a few years ago (in some places, at least), but now they're going to slow to only 10% a year. Give me a break! The rate of inflation is only around 2%, at such a pace only a small fraction of the population will be able to afford real estate in a couple decades.

And it's obvious that home prices are coming down and have come down already. Prices on MLS are unchanged from last year and in reality you can purchase a place today for significantly less than what they're listed at (as opposed to a year ago, when you had to high-bid to compete with other bidders).

[faken]

Give me a break! The rate of inflation is only around 2%, at such a pace only a small fraction of the population will be able to afford real estate in a couple decades.


+1. For recent graudates, it will be insane to buy a house.

[ali1800]

I find it funny how they keep insisting that "growth is slowing" as if growth in real estate values is always a given. I mean, they went up 50% a year a few years ago (in some places, at least), but now they're going to slow to only 10% a year. Give me a break! The rate of inflation is only around 2%, at such a pace only a small fraction of the population will be able to afford real estate in a couple decades.

And it's obvious that home prices are coming down and have come down already. Prices on MLS are unchanged from last year and in reality you can purchase a place today for significantly less than what they're listed at (as opposed to a year ago, when you had to high-bid to compete with other bidders).

I work for a developer so I don't have my ear on resale. For new sale homes/condos prices are steadily going up... most of this is due to land costs and the increase in labour costs from our trades.

BTW there was an article in the Wall street journal reprinted in the globe about how increases in home prices are FAR above historical rent increases. And according to the article which was generate by the Fed rather than just rents increasing (at the the rate of inflation), prices will drop in line with normal ratios. Can't find the article on line but it's from Jan 3, 2008 page B6 of the Report on Business Section.

I think the next 2 years condo prices are going to be hit hard. A lot of new units coming online, a lot of them investor units and a good supply of existing condos available.

my 2 cents

[Thalo]

+1. For recent graudates, it will be insane to buy a house.

That's the thing. If house prices stay the same or go up even just a little, who will buy them in the next few years, in the next decade? New entrants into the housing market (college graduates and immigrants) can't afford to break into the housing market at these prices.

It's the goddam baby-boomers deluding themselves into believing their house values (on their primary res and all their many rental properties that they snapped up before we even had a chance to put a bid in) will keep going up unabated. Well, when it comes time for Mr. and Mrs. Boomer to sell their 2 storey and downsize to a condo or move to the Okanagan or whatnot, who out there can afford to buy it off them for $1 million?

[gei]

I think the next 2 years condo prices are going to be hit hard. A lot of new units coming online, a lot of them investor units and a good supply of existing condos available.

my 2 cents

it's funny. people have been saying that same thing every year for the past 6 years.

[movieman]

it's funny. people have been saying that same thing every year for the past 6 years.

People were saying it in the UK for several years too; now they're seeing the prices of 'luxury apartments' finally start to collapse. I was amused yesterday to read an article where British 'property investors' were trying to sue a developer because the apartments they bought as 'investments' a couple of years ago are now worth less than they paid... probably much less, as no-one in their right mind would think of buying one today at any price.

[ricenice]

That's the thing. If house prices stay the same or go up even just a little, who will buy them in the next few years, in the next decade? New entrants into the housing market (college graduates and immigrants) can't afford to break into the housing market at these prices.

It's the goddam baby-boomers deluding themselves into believing their house values (on their primary res and all their many rental properties that they snapped up before we even had a chance to put a bid in) will keep going up unabated. Well, when it comes time for Mr. and Mrs. Boomer to sell their 2 storey and downsize to a condo or move to the Okanagan or whatnot, who out there can afford to buy it off them for $1 million?


When all the Baby Boomers retire and start expiring the market will correct itself as more suply becomes available.

[DanielCarrera]

I find it funny how they keep insisting that "growth is slowing" as if growth in real estate values is always a given. I mean, they went up 50% a year a few years ago (in some places, at least), but now they're going to slow to only 10% a year. Give me a break! The rate of inflation is only around 2%, at such a pace only a small fraction of the population will be able to afford real estate in a couple decades.

Nit pick: The rate of wealth increase is a bit higher than the rate of inflation (but it is NOT 10%, so your point is valid). Btw, this means that as a society we are getting richer (measured by what people can buy) and you would expect as much. We have more average material wealth than 50 years ago. We don't feel any richer because we tend to measure wealth relative to our contemporaries. This is a long and round-about way to say that house prices can perfectly well increase faster than inflation in the long term. They just can't increase faster than after-tax wages in the long term.

[DanielCarrera]

People were saying it in the UK for several years too; now they're seeing the prices of 'luxury apartments' finally start to collapse. I was amused yesterday to read an article where British 'property investors' were trying to sue a developer because the apartments they bought as 'investments' a couple of years ago are now worth less than they paid... probably much less, as no-one in their right mind would think of buying one today at any price.

Oh oh oh. I'd love to read that article. Do you have a link please?

[TheDude79]

This is a long and round-about way to say that house prices can perfectly well increase faster than inflation in the long term. They just can't increase faster than after-tax wages in the long term.

I think this is the point of the affordability index numbers we see out there, as they related housing prices to wages in whatever market is being examined. In many western canadian markets, these numbers are at all time highs. There's lots of talk of "softening" out there LINK (http://www.rbc.com/economics/market/pdf/house.pdf)

Oh yeah, and for those of you who think prices never drop, check out the late 80s/early 90s.

[Thalo]

Wanna buy a condo in Miami? Find out what it was worth in 2006 and bid HALF of that. You'll probably get it.

[movieman]

Oh oh oh. I'd love to read that article. Do you have a link please?

I'll have to track down the web posting I read which had the link to it. I'll see if I can do that tonight.

[movieman]

Ah, here we are:

http://www.yorkshireeveningpost.co.uk/news/Tycoon-money-back-battle.3787337.jp

Actually they were houses rather than apartments, but they're still horribly overpriced for those areas; just less so than when these 'investors' bought them.

[movieman]

Oh, here's one on apartment price drops in the UK:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/21/cmbtl21.xml&DCMP=ILC-traffdrv07053100

"In Manchester, a repossessed flat bought for £178,000 in 2004, was recently offered at a London auction with a guide price of just £80,000. At a similar Manchester development, City South, one new flat was bought from the developer in 2001 for a just under £140,000 - it was sold a few months ago for just £87,970."

And they're probably still overpriced...

[pitz]

All those stupid buy-to-let'ers. :(

When will people ever learn, RE: negative cashflow.

I now read that there's approximately 20,000 layoffs coming in the London City banking industry. That'll definitely have an impact, for sure.

And no more crap loans from Northern Rock either.

[GimmeGear]

Wanna buy a condo in Miami? Find out what it was worth in 2006 and bid HALF of that. You'll probably get it.

http://condovultures.com/

[elty]

Problem with condo:

- There are too many of them.
- Mandatory condo fee.

[nobody1234]

Problem with condo:

- There are too many of them.
- Mandatory condo fee.

Is maintenance on a house not mandatory?

[brunes]

Is maintenance on a house not mandatory?

If you look at your average condo fee compared to maintenance expense on an average house you will find they are WAY out of wack.

IE, my friends a $150K condo has a $150 / month maintenance fee. That's $1800 / year. The idea that his building requires that much is ludicrous - which is why if you look at the books of most condo boards they always have huge surpluses that they spend on stupid things, and it is very hard to get your voice heard on these boards if all you are is an investor because they know you aren't staying in "their building" long term.

[pitz]

If you look at your average condo fee compared to maintenance expense on an average house you will find they are WAY out of wack.

I don't think you'll get away with maintaining a house for less than 1% of its value, on an annualized basis. Of course, a homeowner might be able to do much of the work himself and save some cash over hiring labour to do the maintenance, but then a benefit should be imputed to the homeowner in the calculation of maintenance costs.



IE, my friends a $150K condo has a $150 / month maintenance fee. That's $1800 / year. The idea that his building requires that much is ludicrous - which is why if you look at the books of most condo boards they always have huge surpluses that they spend on stupid things, and it is very hard to get your voice heard on these boards if all you are is an investor because they know you aren't staying in "their building" long term.

1%/year for maintenance isn't really that extraordinary, and is a rough figure used by many property managers for the costs of long-term maintenance. The amount of financial distress a condo corporation would experience if they hit everyone up for 10% of the value of the property to, for instance, replace the roof, would be considerable.

I do agree with your points on condo mismanagement however. And its kind of shocking that young buyers routinely (according to the "realtors" I've talked to) do not even perform a basic investigation into the finances of the condo before making a purchasing decision. I helped a friend of mine through some issues with her mortgage a few years ago when she was buying a condo -- and the "realtor" even resisted obtaining the books of the condo corporation, so that she could take them into consideration when making an offer. Claimed it was 'unnecessary', and that the 'books' aren't opened until you actually buy the condo. (completely untrue....but I digress.)

[elty]

Condo fee is mandatory because.... well it is. The condo may provide service that I don't want, purchase unnecessary stuff (my friend's condo spent $1500 to buy a threadmill), and is upfront. When someone buy a house, they probably won't think "hey I am not paying the $400 a month maintenance for nothing, I am actually paying it to fix my roof 15 years from now".

[speedysa]

$150 /month for a condo fee is extremely low. If that is the case expect it to rise soon after development whereas the builder was subsidizing.

In most cases for a regular 3 bed condo in toronto you are looking $400-600, in some cases more for luxury apartments.

I have a detached house in W02, about 2000 sq feet. I did all the math and came around the area of $500 / month for all my necessary bills (Gas, Hydro, Water). 7 years ago did the roof for $2500, 3 years ago changed the furnace for $3000.

Keep in mind I also rent half of my basement for $700/month.

IMO, that is much better than any investment into a condo.

[elty]

Actually most (new) condo fee is around 38-40 cents per sq ft, excluding all utility. I have seen one that is 46 cents, and it is just a cheapo condo without swimming pool. For a 1000 sq ft unit it would be around $400 a month.

Condo/townhouse fee for a shared parking lot is around 12-20 cents/sq feet. Seriously, do you really need to pay $150 per month to maintain your garage?

My condo is charing around 24 cents, includes water and Rogers Personal TV. But my condo has no facility (basically elevator + parking lot). Security is handled by the building next to us.

[nobody1234]

Condo/townhouse fee for a shared parking lot is around 12-20 cents/sq feet. Seriously, do you really need to pay $150 per month to maintain your garage?


Depending on where you live you might be able rent that parking space out for $150 or more. I live in the city and don't drive, somebody who does is more then happy to pay $100/month for my parking spot and it's not even underground.

[grant]

IE, my friends a $150K condo has a $150 / month maintenance fee. That's $1800 / year. The idea that his building requires that much is ludicrous - which is why if you look at the books of most condo boards they always have huge surpluses that they spend on stupid things,
Maintenance fees also include insurance. And yes insurance on a condo will be more than a similarly priced house because the buiding value takes a larger % of the total value, i.e., requires more insurance! Also homeowners can skimp on insurance (except fire) whereas a condo must buy full replacement value policies + coverage for things like plumbing leaks & most natural disasters.

If you include full-on insurance for a house and maintenance (regular lawn car, snow removal for the driveway, etc.) then that $1800 suddenly seems less ludicrious.

I don't know how many condos you've owned, but none of my stratas have ever spent money on "stupid things"... all money has been carefully accounted for and every effort made to minimize fees.

[pitz]

I don't think any Canadian market got this bad:

http://www.socketsite.com/CS%20Historic%20Housing%20PE%20Ratios.gif

San Diego, lol! >40X earnings for assets that, at best, grow a little bit faster than inflation? That's pretty much the definition of insanity.

[grant]

What's that a ratio of? selling price vs. gross yearly rent? Or selling price vs. net rent (after expenses)

[pitz]

What's that a ratio of? selling price vs. gross yearly rent? Or selling price vs. net rent (after expenses)

I'm pretty sure net rent. Here's the link (http://www.socketsite.com/archives/2008/01/bay_area_rents_surge_but_housing_pe_ratios_remain_ out_o.html) I got the chart from.

[canabiz]

http://www.canada.com/ottawacitizen/news/homes/story.html?id=a6be793c-9887-4679-9262-6f18ac9056e6

All seems to be well in the capital of the Great White North.

[species5618w]

I don't think any Canadian market got this bad:

San Diego, lol! >40X earnings for assets that, at best, grow a little bit faster than inflation? That's pretty much the definition of insanity.

Houses are heavily leveraged, which makes it more attractive than stocks. That being said, unless SM is used, wouldn't the owner slowly lose his/her leveraged position?

[pitz]

Houses are heavily leveraged, which makes it more attractive than stocks. That being said, unless SM is used, wouldn't the owner slowly lose his/her leveraged position?

Yeah but leverage cuts both ways; borrowing to invest in something at a P/E of 40, with the sort of growth profile that houses usually exhibit is just a quick way to bankruptcy.

With stocks, or with housing.

[species5618w]

Yeah but leverage cuts both ways; borrowing to invest in something at a P/E of 40, with the sort of growth profile that houses usually exhibit is just a quick way to bankruptcy.

With stocks, or with housing.

Indeed, however, housing has the advantage there, being a much less volatile market. Usually house market crashes happen over several years, thus softing the blow. The problem is that it's easier with housing for people to forget the risk and over-extend themselves.

[elty]

I don't think any Canadian market got this bad:

http://www.socketsite.com/CS%20Historic%20Housing%20PE%20Ratios.gif

San Diego, lol! >40X earnings for assets that, at best, grow a little bit faster than inflation? That's pretty much the definition of insanity.

I think we are around 20-30? That's not too bad.