Saturday, July 18, 2009

Has the Toronto Real Estate Market prices reached their Zenith? No way!

These are my 2 cents worth in response to Garth Turner's comments and predictions on our Canadian real estate bubble that is about to burst and that "This is because the housing market is at its zenith" as stated at his blog post here:

I don't agree that the housing market is at it's zenith. There is much room for the Mississauga Real Estate Market and the GTA real estate market to increase.

First things first.

Negative articles, press, blogs and news sells. Negative press has always sold newspapers and negative press is most sensational. You can read the negative press, but don't always follow the predictions, often they are wrong.

If you want to get noticed, write something very negative or go against the grain and many will notice. Other negative people will tell their negative stories, because negative people need validation of their negative experiences and observations, so they can say "I told you so" and sit on the sidelines and stay safe. (just read the majority of responses in this blog, it's the negative herd mentality).

I'm not saying negative people are wrong or that negative analysis is not necessary, but don't let it affect your psyche or your personality. Always be positive, even in negative situations and you will survive. Even some of the negative people who have written above are sometimes positive because they see opportunity in negative situations (what an upside world we live in)

If you say something positive or predict positive news about the future and it does not happen, people will point at you and put you down for being wrong. If negative press comes to be, the writer can say I told you so. If negative press does not occur, everyone forgets about the negative news and moves on, waiting for the next negative news.

Thus, negative news cannot lose.

I do not agree with Garths comments that he states our Canadian real estate bubble that is about to burst and that "This is because the housing market is at its zenith" We are no closer to the peak of real estate prices in the GTA or Canada than we were each spring and fall peak experienced during each year from 1995 to 2008

Some have commented about the 'emotional' aspects of the real estate market and the financial markets.

We all make decisions based upon emotion and then attempt to validate our 'emotional' decision with facts.

I would like to know where you think we currently are on the market emotions cycle as pictured here:

Do you think we are at the point of Hope, Relief or maybe even optimism? If you asked any realtor back in October 2008 up to about January 2009 they would have said that we were in the area of Despondency. Our GTA marketplace was so depressed, sales were down incredibly, agents were getting out the business by the truckload and the future looked grim. Our 'price' bottom was January 2009 and since then prices have only increased in the GTA. This gives many of us reason for hope and even optimism, some in the downtown areas of Toronto are feeling euphoric of late with multiple offers and 100%+ selling prices. Could this real estate bubble last much longer? Will this real estate mini bubble last much longer? Your guess is as good as mine.

I've been a residential real estate agent in Mississauga since 1987 and I've watched people suffer from real estate losses and even lose their homes in the period from March 14, 1989 to about 1994 when the market began to increase again. Our real estate market has enjoyed unprecedented growth from 1995 to September of 2008. 14 years, incredible. During this period I had clients who were buying a new home in say 2001, closing 15 months later and making $100,000 profit and did it again from '03 to '05 or '07 and made a ton of money in real estate. I warned them that our market had already peaked at whatever it was at the time, $250,000 GTA average price, $300,000 average price and then $380,000 average price in '07, how high could it go and when would it burst. Well, I was wrong that the prices had 'maxed out' every time the TREB (Toronto Real Estate Board) price hit a new maximum each spring and fall from 1995 to the spring of 2008.

I carry two articles in my portfolio, one written in 1987 which talks about Toronto average real estate prices predicted to rise to over $200,000 in 1988 and another article that appeared in the Toronto Sun written by the Business Editor, who was none other than Garth Turner, dated January 7, 1988 where I have highlighted one paragraph that sums up why real estate in the GTA was undervalued, Garth states "This is the result of simple market forces - of supply and demand. As long as people are willing to sacrifice other aspects of their lives to liver where the action is, then prices will rise" Reasons for the huge increase in real estate values in the 80's were that women came into the work force during this decade and investors fueled the market from the mid 80's until '89. It was just a simple case of what Garth states, supply and demand. Many blamed the reason for the 'bust' back in '89 due to double digit inflation, double digit unemployment and investor greed. It took about 5 years to recover from that bubble. I feel that supply and demand was the fundamental reason why real estate continued it's unprecedented growth from 1995 to 2008 The differences in this last cycle of increase was that we had relatively low interest rates (actually an all time low in 03 and 04), low inflation and low unemployment. Again, supply and demand reared it ugly head and prices kept increasing. Only when the "financial crisis" peaked in September of 2008 did our local GTA real estate market pause. And this pause was only for about 4 months. Since January of 2009 prices have increased again.

So what's my point? Garth preaches doom and gloom for our future real estate market. I certainly hope he is wrong. I've read through all the comments on this post and while most bring up very important and factual points, these don't address the old adage of supply and demand. If there is demand and the demand continues, prices will stay about where they are or increase. If the US and the global economy improve over the next year, then we are in for another round of positive real estate markets in Canada. As long as people around the globe see Canada as 'the land of the free' they will continue to migrate here and as long as our Canadian economy does not run out of control, demand will exceed supply.

If you bought a home back in 1989 at the very peak of the TREB market and held that same home for the past 20 years you would still have 5 years left on your mortgage that was originally about $180,000 (assuming you put 10% down payment) and you would still owe about $50,000 on this mortgage assuming 8% average interest rate since 1989. You would now have a property worth about $400,000 and equity of about $350,000 If you are thinking of buying a home today, don't buy anything that takes up more than 35% of your gross income, make your amortization 20 years if you can handle the payment, or 25 years at the most. If you rented for $1375 (the mortgage payment for the preceding analysis) you would be paying about $2000 per month or more for the same house and you would have ZERO to show for it. Also, don't go for the 30 or 35 year mortgage. Go as short as you can to pay off that mortgage as quick as you can while the rates are low. I do believe what Garth predicts that rates will rise again to double digits by the year 2020, but if you pay down as much of your mortgage as you can in the next 10 years, you will be ok by the time the interest rates hit double digit again. My point is that if you sit on the sideline and hope for real estate values to drop 10 to 50% over the next year or two, you'll be out of luck (again) here in Canada. Our economy is not the same as the US anymore, our banking system is not the same and our mentality is not the same, certainly not similar to what SF Banker writes about.

So, what's my second point? Read the negative press, articles, blogs and such, but DON'T be negative and follow their advice in the long run. Buy real estate for the long run, buy real estate that is within your family budget and pay it off as quick as you can. So when the next 'drop' in the market occurs and the nay sayers say they are right, then you can buy another property at a good price! :-))

Just my 2 cents worth.

I wish you all the best!

Toronto Real Estate Board (TREB) Average Prices and Graph

For more information please contact A. Mark Argentino

A. Mark Argentino, Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc., Brokerage
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS. 905-828-3434
FAX. 905-828-2829


  1. "Always be positive, even in negative situations and you will survive."

    First of all, not true. I am sure if I was surrounded by hungry cougars (the large cats, not the 45 year old single women) and had meat strapped to me, being positive wouldn't help me all that much.

    Smartass comments aside, in real estate, 1 person being positive will not save the market. If everyone thinks prices will rise, then they will rise. Just me thinking prices will rise and everyone else thinking they will fall will probably result in lower prices.

    I agree negative press sells. After all, it is far more interesting than "everything is rosy". People also want to know what could go wrong so they can try to protect themselves from it.

    However I think that Garth is completely justified in his negative ideas about real estate right now. Negativity is not always correct, but it is probably better to at least consider the possibility of things getting worse, rather than assuming everything will be golden (staying positive).

    I consider myself a realist, positive sometimes, negative others. In this case, I strongly agree with the negative side. Perhaps this is because I want prices to fall as I own no real estate and hope to buy in a few years. At current prices (in Vancouver, where I live) I cannot afford any half decent place, even with an above average income and a large down payment. I can also rent the place I live now for less than half of the monthly cost of owning it.

    Considering these things, I can not really see the upside to buying. I believe it is a matter of time before others feel the same. Probably after interest rates rise to somewhat normal historic levels.

  2. you are right! it is time to buy a house!

  3. Hey Mark,

    You sound like an honest guy.

    I just want to point out that interest rates have dropped for almost 30 years now. Real incomes have stagnated. GDP growth has been dismal despite the massive growth in credit. Housing has only risen because of reduced interest rates and a massive increase in borrowing. The gains for the past decade haven't been real.

    Canadian banks are only ok because housing didn't collapse. Keep in mind american banks were raking in record profits as housing turned ugly. The banks don't cause housing to turn ugly. They merely compound the problem, once the problem has started.

    Prices here are over double the price of an american average home. Our average incomes are about 10% less. Taxes are higher here. Prices of goods and services are much less competitive (PPP isn't so great here). Your right things are different here. We are actually worse then them. Even with a massive trade surplus thanks not to hard work, but to a run up in commodities, we are still running up the massive growth in debt. If we were dealt america's card, we'd be much worse off.

    I don't share your enthusiasm. Our government debt is the same per capita as America- about 80% of GDP at the end of this year. American states don't borrow money. Quebec and Ontario owe 300 billion alone.

    Home prices have doubled in Canada since 2001. Mortgage debt has doubled since 2002. Inflation only represents a quarter of this. Mortgage debt per capita is the same as the US. Once the US writes off $2 trillion of mortgages, they will actually owe less.

    35 year ams ensure that higher interest rates will catch up to most first time buyers. It's hard to pay down your mortgage at any rate fast enough to protect yourself from the coming storm. Assuming variable rates at 2.5% today, if mortgage rates rise to 8%, mortgage payments will double.

    8% mortgage rates are quite reasonable to expect given that banks would charge a serious premium over prime to compensate them for the risk. The US will soon raise rates to attract people into buying their massive amount of debt. Fortunately for them, their housing is nearing a bottom around $150,000. Their economy can afford higher rates more easily than our own.

    Insurance through CHMC is the exact same thing as securitization in the states. The only difference is the demand for securitization dropped when US housing dropped. Unfortunately for taxpayers in Canada we have no say. Each worker in Canada, 17 million of us, is on the hook for $42,000 in high risk mortgages through CHMC alone. The future is bleak for this country if housing makes a downturn. But propping up the housing market in a recession actually adds to the risk of a housing meltdown. Young individuals are flocking in at rates that are not sustainable.

  4. When a P.Eng. is selling real estate rather than using his education to do something productive, something is really wrong. THAT fact alone says more about the irrationality of the market (and our economy, in a broader sense) than any analysis presented here. What a misallocation of a valuable resource!

  5. Hello Anonymous, Yes, you are not the first to comment on a P.Eng. selling real estate, but engineering taught me how to think and problem solve and my mother taught me how to sell, so I had to enter real estate to satisfy both, a marriage made in heaven that has lasted 21 years.

    Real estate is so much more fulfilling and I can help people solve their housing problems, it's a very satisfying and challenging career!

    All the Best!

  6. David,

    Yes, I agree that Garth's logical analysis and conclusions can be supported, but so can the alternative and opposite conclusions.

    Only time will tell, but if you have 10% or more for a downpayment, buying real estate and holding over time is still one of the most sound long term investments and clearly one of the best methods of long term savings and retirement planning available.

    All the Best!

  7. Hi Jonathan,

    Yes, if current mortgage interest rates double, then so will payments (actually slightly more than double), and I believe this day will come, but probably not again for at least 4 to 5 years and by then prices will have escalated again, inflation will have increased, salaries will be higher and the economy will be able to absorb this doubling of rates. Othewise, the Bank of Canada will hold rates lower to keep inflation low and not ruin our economy, I hope!

    All the Best!

  8. Mark,

    You agree interest rates will rise. Lets do some quick math;

    Avg price now $400k - lets assume everyone has a 10% downpayment. (like you did in your 1989 scenario)

    At a 4% interest rate, amort. 25 years, spending no more than 35% of income on mortgage (not housing, just mortgage) - Household income required is about $5400/mth or $65k/yr.

    5% interest rate, amort. 25 years, 35% on mortgage - household income required is $6000/mth or $72k/yr

    This is pretty close to todays scenario. Some may even get a lower rate. Let jump ahead and look at 2-3 years in the future when rates double. Or you take the current 18yr open rate. 8.95%

    8.95% interest rate, amort. 25 years, 35% on mortgage - household income required is $8480/mth or $102k/yr.

    Granted in 3 years you'll only owe $330k of the original $360, but that only knocks off about $5k per year required.

    The average household income in the GTA is about $80k, the median income is significantly lower than that at around $52k.

    40% of homeowners (as of 2005) already spend more than 30% of their gross income on housing.

    I'm happy to see that you are confident salaries will increase so much over the next few years. I hope you are planning to raise you assistants salaries by this much as well.

  9. Hi Chris,

    Nice analysis, I am very confident if not 99% sure that interest rates will not be 8.95% in 2-3 years, or even 4-5 years from now. As you have pointed out, it would put far too much strain on the economy and affordability, as you have pointed out.

    With this said, affordability has never been a mandate of the Bank of Canada and interest rates. People panicked and cried almost exactly as they are now when prices escalated in the late 80's and again in the early 2000's but nevertheless, prices escalated at very high annual rates.

    I'm not confident that salaries will rise similar to interest rates and those with salaries that don't keep up will be left in the dust. This is why they should buy now and get into the market while rates are low :-)

    We are surely in for some troubled times, but I don't see the market crashing or dropping any more than it did from Sept 2008 to February of 2009 Our market dropped over 12% during that period in the GTA, but the real estate community seemed to take it all in stride. Somewhat bizarre IMHO

    At any rate, thanks for your comments and analysis.

    All the best,