Last weekend a semi in Toronto’s east end was mobbed by crazed yuppies, in part because of the ‘aggressive’ pricing. (Remember what I told you a few days ago about how agents start bidding wars?) The list price was $549,000.
Chris and Monica were one of the thirtysomething couples who went to have a look. “It seemed exorbitant to me for a house like that,” Chris said later in disgust. Others didn’t think so. There were 25 offers, and the saggy half-house sold for $717,336. Says Chris: “I have no idea where the money of fund all of these crazy mortgage payments is coming from. Is everyone a bloody millionaire?”
Hardly. They just borrow like it. Especially in that segment of the urban real estate market which is coming unglued from the others.
Chris and Monica make $125,000 between them, have good jobs, savings, clean credit, no debt and hate their apartment. “Needless to say we are frustrated. We would ideally like a house but wouldn’t mind a nice condo if that is all we could get. However, the condo market seems like a disaster waiting to happen and they’re not cheap either. We just don’t want to stay in the apartment we’re in and don’t want to keep renting. What the hell are we supposed to do?”
Adds Chris: “Everyone I talk to keeps saying that sales are going to remain strong and prices are going to continue to rise. Nobody’s income seems to be going up like that so I don’t know how this can happen. Your perspective would be greatly appreciated.”
Sure. First, let’s all understand the market is not hot, booming or advancing. Year/year sales in Toronto, for example are lower (not higher), and off 17% from the spring of 2012. The number of single-family resale homes trading in 416 has been declining for four years. One reason is price – those unafraid of debt or risk have pushed average SFH values to Vancouveresque levels of stupidity
Higher prices in the teeth of falling demand is not a good harbinger of what’s to come. How can people go to university for seven years and not figure that out?
Moreover, as I’ve told you, this is a market which is stratifying bigtime. Over-$1.5 million properties (there are now 1,400 of them in the GTA) are languishing, even in some of the best hoods. Life was never the same for seven-figure listings after F disqualified them from CHMC mortgage insurance.
At the other end of the market, it’s obvious the condo market is set to suicide. Even the Bay Street boys can smell that. TD Bank this week issued a report which should scare the crap out of everyone who bought a concrete box with little or nothing down in the last few years. Condo prices are headed 8% lower over the next two dozen months, it says. That means anyone who ponied up a 5% down payment and then sells and pays commission (after already paying double what a renter would for the same unit) should never have listened to their mom. It’s a personal financial wipeout. (And 8% is a wildly optimistic number. Thrice it.)
There are so many reasons condos are cooked. Tiny new ones can’t compete with bigger, old ones. There’s a scant secondary market for 500-foot claustro cubbyholes. Rents are too low to attract new investors or keep existing ones. And supply (70,000 units coming this year and next) is overwhelming demand. In short, there’s only one direction in which these prices will travel.
Now, back to that segmentation of housing. The bank economists sure see it:
“Toronto’s skyline of cranes is now about to transform into a skyline of condo buildings. The number of new units scheduled to be completed in the GTA over the next two years is striking at a time when new condo sales are dwindling. Meanwhile, the market for single-detached homes remains drum tight, keeping average resale home price growth in the GTA near 9 per cent year-over-year in February, further igniting fears of a bubble. One market is facing too much supply, while another appears to be heating up.”
So, Chris and Monica, what to do? First, if you hate your apartment, move. Rent a house, or a townhouse or a larger unit. Quench your house-horny juices for a year or two until the inevitable interest rate or market jolt restores some sanity. Your friends are wrong – the market is thin and unbalanced. It will correct. Besides, how would you feel after paying three-quarters of a million dollars for half a house, unrenovated, in the wrong part of the city? Would that bring happiness?
The deals right now are for those with two million to spend. The deals to come will be when condos hit the wall. The steaming middle is a debt trap.
Now, a quick word about poor Vancouver, where seasoned Westside real estate guy Sam Wyatt sold his own house and rents, “because it’s cheaper.” I asked Sam a month ago for reaction when the feds punted the investor immigrant program, and he’s now had time to reflect. Thought you would find this report of his interesting:
“The question people are asking is: will this affect real estate prices in Vancouver? The simple answer is yes. If nothing else, foreign nationals who have purchased homes in anticipation of their applications being processed may rethink their plans and sell their property. In addition, new prospective foreign buyers will be scared off by the lack of an easy avenue to immigrate by. Sales of new condominiums at UBC (a hot bed of Chinese foreign buyers) have already fallen off.”
But Sam agrees with this blog’s thesis that while wealthy immigrants have certainly goosed the top end of the market, people in Vancouver can’t blame them for pushing the average SFH to the $1.3 million mark.
“If you bore into individual sales you find that the highest priced real estate went way up while the lowest priced real estate barely moved. The addition of all that foreign capital in the high end of the market didn’t have much of an effect on the bottom of the price ladder. The removal of that inflow of money will likely have a disproportionate effect on higher priced detached homes than on lower cost condos.”
Connect the dots between what Chris and Monica see in Toronto and what Sam knows in Van, and the real story emerges. People are nuts.