
Toronto Is in a Housing Bubble - kspaans
http://www.greaterfool.ca/2017/03/04/its-official-its-a-bubble/
======
kareemm
I live in Vancouver - which has become one of the most unaffordable cities in
the world[1] and am from Toronto.

Watching Toronto's market explode is like watching a horror movie that I saw
take place in Vancouver over the last two years. The politicians, press, and
real estate industry are spinning the same stories their counterparts in
Vancouver did without providing an even plausible explanation for the rocket
ship growth.

The key issue with Vancouver's market is that prices have become decoupled
from local incomes. The same thing is happening in Toronto.

In Vancouver, the main driver of decoupled home prices is foreign investment
dollars, mainly from China. I suspect the same is true in Toronto because
prices there started exploding after Vancouver instituted a 15% tax on foreign
buyers in August 2016.

If you're interested in understanding the key drivers of the Vancouver real
estate market, this paper by a SFU professor summarizes the data, provides a
sensible solution, and convincingly refutes the tropes that are often provided
as reasoning for the market's explosion:

[http://www.sfu.ca/content/dam/sfu/mpp/pdfs/Vancouver's%20Hou...](http://www.sfu.ca/content/dam/sfu/mpp/pdfs/Vancouver's%20Housing%20Affordability%20Crisis%20Report%202016%20Final%20Version.pdf)

1 - where unaffordable is defined as the ratio of median home price to median
income.

~~~
verelo
I don't know how to write this without sounding entitled, so here it goes
anyway: I own a house in Toronto (purchased May 2016), I do not believe it's
affordable for your average Canadian, but I do think it's still within reach
for skilled people who are willing to make sacrifices to make it possible.

Single data point as an example: Last month a friend, who between he and his
partner make approx. $200k (before tax) combined household income, bought a
semi-detached property on the east end (west of the DVP, south of Dundas).
"$200k you say, that is a lot!", right, it isn't insignificant, but it's also
just two skilled people who make $100k in a major city. There are a
significant volume of $100k jobs out there (so if they lose them, I suspect
they will find another fairly soon). It's just not as impossible to do as
people say, but most of us are not willing to pack a lunch every day, stop
drinking lattes make it possible.

When hunting for a house in Toronto there were 3 things that really bugged me
that would be great to have addressed before we freak out over the possibility
of foreign money:

1) "Second round of offers". It's a trick relators play. Basically they get
all the offers together and then come back and say "uh, they're all super
close, we're looking to get an outlier". Of course some people come back with
bigger offers...and the highest is accepted, or the highest offer from the
previous round is accepted.

2) Poorly done home-owner renovations. People doing shitty renovations and
then later selling the place (often these are flips). Uneducated buyers see
these 'improvements' as positive things when most of the work will be to be
re-done due to the job not being done properly. It just keeps Home Depot
humming and inflates the cost of the house by the cost of materials + repairs
down the road. It's compounded by the fact all offers [in practice] need to be
unconditional or they won't get considered. So no inspection, the buyer
doesn't get the chance to really find out until later. Sellers often include
inspections, but these are always terrible sources of info.

3) Illegal housing; So many listings say "Potential basement suite", and
people do the math expecting to get $800-1500 / month extra income from it.
They say "potential" in the listing because it's nearly impossible to create
an actual legal basement apartment in your house in Toronto [and they know
it], but people are willing to risk it or simply unaware of the exposure this
places on them. Legal basement apartments need fire rated rooms, to include a
parking spot (which is super hard to do in Toronto!), have a separate HVAC
system and much much more. 99% of basement apartments do not comply, but due
to either people not knowing, or not caring, they rent them out to increase
their housing budget. Banks are partly to blame here, they enable this by
increasing the lending amount accordingly based on an assumption that the
second unit will be rented 10/12 months per year.

I think the thing we're truly seeing here is what access to cheap capital
produces in established major (aka historically low risk) cities. Interest
rates are sub 3% with no signs of increasing, people make decent money and are
willing to sign up for 30 year commitments. There is risk, but when you look
at the key factors, it's pretty low give the likely outcome over that time
horizon. This isn't a small suburb hours away from a major city [i.e. Hamilton
Ontario - where prices are going up despite the fact lots of the residents
commute hours to Toronto every day] where one company going broke will send
everyone into the poor house, it's a major city with a very good history of
having available skilled work.

I'm personally more worried about robots taking skilled jobs than I am the
possible housing market crashing. Those things will probably be related
events, and housing will be one of the many industries not ready for that
shift.

Finally, having said all this, a well timed quote from a conversation i had on
Friday "If i lose half the value in my house, i won't be upset or
surprised...I went into it assuming things might not go my way". Not everyone
has that luxury or time horizon to not mind waiting around like I do, but I'd
encourage more people to not see a house as an investment but more as a cost
(as you would rent) and use that emotional response you get to help you
justify your next decision in the house buying process.

~~~
nvk
I think you nailed it.

1\. On top of that, there is also the fact that 100K new ppl move into the GTA
every year. A good chunk of the wants to live in DT Toronto, further reducing
the small supply;

2\. Toronto produces 30% of Canada's economic output;

3\. By many metrics, Toronto is extremely underpriced for the job and quality
of life you get compared to other countries' largest cities;

4\. Toronto is the 3rd largest North American city;

5\. It's possible part of the prices are just tracking the USD as the CAD
dropped ;and

6\. The truth is, the majority of the Canadian population won't know/accept
that in this single city people make 5-10x the income they make, hence
"bubble" being thrown around as the obvious answer.

~~~
eigenvector
Toronto has been the economic and immigration centre of Canada for 20 years.
Why has there suddenly been an inflection point in the rate of price growth in
the last 2-3 years? [1] What about Toronto's economic fundamentals (i.e. the
capacity of Torontonians to pay for housing) has changed in that period?

Don't get me wrong, there are definitely organic factors that contribute to
the price growth in Toronto. But those cannot account for >15% year-over-year
growth.

[1] [http://www.torontohomes-for-
sale.com/4a_custpage_2578.html](http://www.torontohomes-for-
sale.com/4a_custpage_2578.html)

~~~
verelo
I think point 5 is likely important to recognize. The CAD to USD ratio has
dropped dramatically (Currently 1 USD = 1.33 CAD). If you picked the exchange
from 5 years ago you see it was 1 USD = 1 CAD, if you do 10 years it was 1 USD
= 1.07 CAD.

I'd argue that at least 20% of the price increase we're dealing with today is
related to inflation.

~~~
dpc59
Then how come there isn't a 20% increase in cities like Québec, Montréal,
Calgary or Winnipeg?

~~~
verelo
Have you visited those cities? I don't find it surprising at all.

Quebec / Montreal: historical politics pushed investment to toronto when
separation was on the table and pushed by certain political groups (again
bumping toronto prices and not helping those areas at all!)

Winnipeg / Calgary: isolation from other large cities, colder climate, less
immigration friendly.

~~~
joshlemer
>Winnipeg / Calgary: isolation from other large cities, colder climate, less
immigration friendly.

Isn't Manitoba one of the easiest provinces to immigrate to?

------
HorizonXP
I just bought a house in Toronto last June. In Etobicoke, quite literally on
the outskirts of what you can still call Toronto before entering the suburb of
Mississauga.

We got extremely lucky with our home purchase. We had an amazing agent that
we've known for years, and we had only started looking in February. By April,
we had our home purchased, with a June closing. We had one offer fall through,
which in hindsight, thank God that it did. This was our first home purchase
(and property).

We managed to snag our house for $5k under listing, after offering $10k under
listing. We managed to avoid a bidding war, as no other offers came in. When
we found this home, we moved quickly, making an offer that night, and giving
them 24 hours to respond (we extended it to 48 for goodwill). This was a home
that was renovated from top-to-bottom, and as an engineer, I'm happy to say
was done properly.

With that context, now you know why I say we got extremely lucky. We worked
hard to make our own luck, but I can't control the opportunities presented to
us.

Anyway, we've watched many of our new neighbours sell their homes for 6-7%
higher than what we paid. One of our neighbours has an open house going on
_right now_ and there are dozens of families coming in cars to check it out.
It's listed $20k higher than what we paid for our home, and it's likely to go
for $50k above that. We've seen the pictures, and it does not compare to the
quality of our home.

So yeah, we might be in a bubble, but people are trying to buy. Speculators
and investors may be the ones driving up the prices, but I think there really
is just that much demand. People want to live here, and they'll find a way to
pay for it.

Personally, I'm not too bothered by it since I didn't buy it as an investment.
Sure, I do care about my home value, I want to make some money when I sell in
10 years to move to another home. But that's my unfair advantage compared to
everyone else: I can live in my home as long as necessary to wait until the
market recovers if this bubble were to pop.

~~~
edblarney
"Speculators and investors may be the ones driving up the prices, but I think
there really is just that much demand. "

Only 5% of buyers need to be speculative. They drive the 'price anchoring' for
the rest - including the banks who 'deem the property to have x value'.

That's how bubbles work - a small number of 'price insensitive buyers' create
poorly anchored prices which drive everyone else into the mania.

Those 'buyers' are there only because the banks are happy to give them loans
using the asset as backing.

You don't need to be bothered by it as long as you are willing to sit on it
for 10+ years and can afford to make the payments.

------
martinald
Is there any city that is actually managing to provide enough housing
inventory these days? SF, London, NY, Vancouver, Toronto etc - all seem to
have low inventories.

Is it simply that there is a multiyear lag before inventory starts coming on
stream, or is there some fundamental reason why these larger cities can't
provide enough housing?

~~~
patrickaljord
Zoning laws and building heights restrictions and other regulations are to
blame. Basically, it's hard to provide enough inventory when doing so in a way
that would help (build more buildings and higher ones that can receive more
people) is illegal. Why do such regulations exist? Several reasons:

* nepotism, current owners want to keep the inventory low so the price of their property and demand remain high

* nepotism, because owners are afraid tall building will make their city less appealing and lower the price of their property.

* silly zoning laws, because many believe central planning is actually a good thing despite the ridiculous amount of evidence that it doesn't work.

* simple inertia, bad laws and regulations are created all the time but almost never repealed.

I'm probably missing a few other reasons I'm sure others will point them out.

Also something worth saying, owners love to say that adding taller buildings
and more buildings and people would kill the spirit of the city. But
preventing new buildings has a effect of super high prices that makes it
impossible to live in the city, in the end only billionaires can buy homes as
investment and don't even live there while the few other building are rented
to a few lucky high salary people which creates tension with the rest of the
population. So you get a city full of empty houses, super rich people, high
salary folks and regular people who are getting kicked out. Real people start
living outside the city and its spirit is gone anyway.

~~~
ggcdn
Some zoning rules could be beneficial. For instance, if cities started
mandating 15% of new apartments had to be rentals, or 40% have to be 3
bedrooms, etc. Right now, much of the new housing stock coming online isn't
really useful for anyone but single wealthy individuals or speculative
investors. And so, without zoning restrictions, we are ending up with cities
full of $400,000 empty 1-bedroom condos.

~~~
aianus
> if cities started mandating 15% of new apartments had to be rentals

Why is it so desirable for your landlord to be a business instead of a private
individual who bought a condo? What problem does this solve?

> 40% have to be 3 bedrooms

What is this supposed to do? Yuppy roommates are still going to outbid
working-class mom and dad every time. See San Francisco.

~~~
ggcdn
>What problem does this solve?

It prevents them from being bought by speculative investors and taken off the
market. An alternative solution to the same problem is an empty-home tax,
which is being rolled out in Vancouver.

> What is this supposed to do?

Its pretty obvious isn't it? It increases the supply of viable housing options
for families.

I'm not trying to say this is the silver bullet - Its just some ideas.

My honest opinion is that Canadian housing should only be able to be owned by
Canadian citizens, but that ship sailed long ago.

------
MattyMc
I own a semi-attached house in Toronto that I purchased last May with my
fiancee. I have a few critiques of this article related to the context it
places Toronto's housing market, and some of the souped-up language used.

Why compare the Toronto housing bubble with that in Japan or the US? You don't
have to look further than Toronto for a direct comparison; [housing prices in
Toronto decreased by 40%]([http://www.torontocondobubble.com/2013/02/toronto-
housing-bu...](http://www.torontocondobubble.com/2013/02/toronto-housing-
bubble-in-1980s.html)) between 1989 and 1997.

Second, a bully offer is not an "aggressively high" offer by definition. A
bully offer is simply an offer that is submitted before an agreed upon offer
date. He offers no evidence to his argument that houses are going for
6-figures above the asking price.

Last, ideally these statistics would have been given in context. Don't pull
two historical housing bubbles and then compare their growth to Toronto's.
Rather, pull all fast growth housing markets and compare their behaviour to
Toronto's. In other words, how often is this growth _not_ a bubble?

I'm 32 years old and consider myself very fortunate to be able to own in
Toronto. This will allow my family to live in the city I love. Many of my
friends are facing the choice where if they wait and growth continues they'll
may be priced out permanently, but if they buy into the market they may be
sitting on a bubble. There was tons of bubble talk when we bought, but we were
more worried about being priced out.

~~~
lhorie
> He offers no evidence to his argument that houses are going for 6-figures
> above the asking price.

This definitely is happening, but it's cherry-picked data. I live in what's
considered a desirable area for chinese people (warden and steeles), and the
latest sales around my area have mostly been for 6 figures over asking, with
some being as high as 200k over asking. But around Unionville (a posh
neighbourhood a few mins north), sales have actually been under asking
(although, to be fair, the asking prices there are typically >1.5M)

Email me if you want a data source.

------
nibstwo
Yes, Toronto is probably in a house bubble. Is it in a housing bubble, though?
If doing more with less is the goal here (as opposed to less inflation on
houses in Toronto) why are people missing the relative affordability of condos
and apartments? A large flat structure with lots of mostly unused land (by
percent utilization) is horribly inefficient.

A condo costs less to live closer to the interesting things like work and
culture and the higher density means the bottleneck resource (land) is
utilized much more efficiently. I know there are cultural reasons not to, but
to me living in houses is not something we would necessarily ever choose if we
started today with a blank slate.

I think a world more along the lines of 80-90% green space with a sprinkling
of 100+ storey condos in variable sizes and trim levels would be more livable.
I struggle to see why one would want a backyard let alone feel entitled to
one.

I think the relative price of land to median income will increase as
population does (pretty easy to assert) and that we should instead just build
very high density buildings surrounded by green space instead of engaging in
zero sum competition for an unused backyard.

We talk so much about AI making web services better as a form of progress but
how much of the middle class budget goes to web services? Sure it could make
life better in the future but housing density could make life significantly
better now.

------
paulpauper
sigh..take bubble predictions with salt (people are really bad at predicting
this stuff) [http://greyenlightenment.com/crying-wolf-holding-the-
pundits...](http://greyenlightenment.com/crying-wolf-holding-the-pundits-and-
media-accountable-for-being-wrong-about-snapchat-and-web-2-0/)

You also have to take into account for the fact the Canadian dollar has fallen
25% to the Greenback since 2013

~~~
iaw
I've downvoted your comment because the article is referring to a very
specific localized housing bubble in Toronto due (potentially) to the behavior
of foreign investors.

This is not an article about startup or the US stock-market bubble.

Addressing your actual comment by paraphrasing Burton Malkiel: "The market can
invest irrationally for a surprisingly long period of time."

~~~
arjie
Everyone always uses that quotation to make unfalsifiable claims. Either the
prediction is true or the market is irrational.

------
20160226
Someone would be dismissed if they said Manhattan, London, Paris, and Rome are
in a bubble. It's just accepted that only the rich can buy there.

Toronto's housing situation is called a "bubble" because it's transitioning to
a similar, global city status, and a lot of people are having a hard time
facing that owning a house there is not meant for them.

I live in High Park. In a one bedroom apartment. I see for sale signs
everywhere plastered with 'sold above asking!' labels.

The cold reality in Toronto is that it's just supply and demand. There are a
handful of houses, and a handful of people with the resources to buy them and
live in this beautiful place.

For the rest, take the GO train.

~~~
eigenvector
The difference between Toronto and the oft-cited "global cities" of New York,
London, Paris, etc. is that all of those cities have a proportionate number of
extremely high-earning or high-wealth individuals to support their
astronomical housing costs. Manhattan is expensive, but if you work for
Goldman or Google you can still afford it. And you can see that this is true
because New York, London and Paris all easily support a huge number of
businesses catering to the everyday needs of high-wealth individuals. High-end
restaurants, luxury car dealerships, tailors - whatever luxury stuff you can
imagine, you will easily find it in London or New York.

That is not the case in Toronto. The issue is not that prices are going up,
but that they are going up exponentially in a way that doesn't relate at all
to the growth of the local economy. Toronto is a city where an expensive
restaurant is one that charges more than $40 for an entree. You will not find
$100 cocktails or $500 tasting menus a la Hong Kong or New York in Toronto,
because there would be nobody to buy them. You can still get a haircut for
under $20 and see people in $300 off-the-rack suits in the Financial District,
because the people there earn $70,000 or $80,000 not $800,000 or $8,000,000 as
in NYC/London.

Supply and demand are both issues, there is a lot of the latter and too little
of the former. But to say that Toronto has transformed into one of the richest
cities on Earth simply isn't true in any regard except its housing market. And
that is precisely the problem - it has the housing market of London with the
salaries of Cleveland.

~~~
carterehsmith
>> in the Financial District, because the people there earn $70,000 or $80,000
not $800,000 or $8,000,000 as in NYC/London.

Uh, that is way, way off. A person making 70-80K/year in Toronto Financial
district is like... junior analyst, junior software developer or so. That
person is not going to make 10X or 100X as much in NYC or London.

~~~
eigenvector
My point is that the 10x and 100x jobs simply don't exist in any significant
quantity in Toronto, and that's why it's not reasonable to say Toronto's
housing market should mirror Manhattan's.

~~~
carterehsmith
Sure.

But then, Google "Most expensive homes in NYC" (result: $72M-$120M) vs ""Most
expensive homes in Toronto" (result $14.8M-$27.5M)

I guess it is clear that most expensive homes in Toronto are not even close to
most expensive homes in NYC.

~~~
orbitur
I think the median would be more relevant, since it seems that's what is
shifting upward in Toronto.

~~~
carterehsmith
OK, can you provide a comparison of median prices growth Toronto vs NYC?

But make sure you also index that with median salary growth TO vs NYC. And
also, you need to take into account CAD vs USD over the time period.

So... not easy.

------
increment_i
The rocket ship rise of real estate in the GTA and indeed the entire Golden
Horseshoe has certainly been bizarre to witness. I live in Hamilton and
commute into the GTA for work. We bought our modest 3 bedroom townhome here in
2015. About four months ago our neighbour (who had a basically identical home)
sold their unit for 100k higher than we paid. This week, a comparable home was
listed for about 180k higher than we paid. So, in under 2 years, the current
market value of our house would have seem to appreciated by almost 200k. This
is a solid hour commute (by car) from the Toronto core.

So yeah, I'm not too sure whether to be extremely happy or extremely worried..

~~~
titanomachy
It's difficult for me to judge the significance of that because you report the
$ increase instead of %, without a base value.

~~~
ska
This article: [http://www.cbc.ca/news/canada/toronto/toronto-real-estate-
fe...](http://www.cbc.ca/news/canada/toronto/toronto-real-estate-
february-1.4008215)

Claims a 35.4% year over year increase. So that's a hot market.

------
theluketaylor
The toronto bubble has begun spilling outwards to much of southern ontario as
toronto homeowners cash out and move to the smaller cities. Here in Kitchener-
Waterloo about 1.5 hrs from toronto house prices leapt 20-30% in the last
year, primarily though all cash deals far above asking or assessed value.
People flush with toronto cash are over the moon about spending so little on a
house (even though it's still an insane figure divorced from reality). And
they don't care what shape it's in since they since have more than enough cash
leftover to gut the house and redo it.

Foreign money being injected into the process isn't helping, but I think the
real problem in Toronto is unbelievably low interest rates and easy access to
mortgages. Families are being approved for loans of such absurd proportions
that everyone who has entered the real estate market in the last 10 years is
house poor. Even small interest rate increases will make payments unaffordable
and the whole teetering mess will come down.

Governments have exactly zero incentive to do anything about it, since greater
property values means more revenue without the mess of a tax increase. The
Ontario land transfer tax isn't high enough to stop anyone from speculating,
but it's plenty to cash in on the situation.

~~~
ska

        but I think the real problem in Toronto is unbelievably low interest rates and easy access to mortgages. 
    

This really is key. There was no 2008 housing collapse in Canada, but the
larger economics pushed interest rates down hard towards zero.

Think of it as housing prices rising to capture most of the cheap money
available on loan. If we see a significant and quick increase in prime rates
it could see a real bloodbath develop.

------
geodel
Seems like a bubble when Asians are buying Canadian properties instead of just
buying petroleum or cars etc.

------
HugoDaniel
So is Lisbon

------
roschdal
> With stocks hitting new all-time highs almost every day, global bond yields
> at or near zero, and Canadian home prices at nose-bleed levels, it seems
> like everything these days is in a bubble.

A photo-sharing app with a market capitalization of 34.69 billion. Yes, it's a
bubble.

~~~
iaw
I've downvoted your comment because the article is referring to a very
specific localized housing bubble in Toronto due (potentially) to the behavior
of foreign investors.

This is _not_ an article about startup or the US stock-market bubble.

~~~
mistermann
The fact that there are bubbles in numerous places isn't irrelevant though.

~~~
confiscate
Actually it is irrelevant. I can find bubbles in Africa and 10 other countries
across the world. Screaming "bubbles" in 100 random places, doesn't mean your
current place is a bubble. Unless you can justify how those other bubbles are
related to the housing situation in the original article, we can't assume they
are relevant simply because "there are a lot of bubbles elsewhere".

The 2 issues might be relevant to each other, they might not. But you can't
assume there is a relationship between the 2 issues.

~~~
mistermann
10+ years of excessive quantitative easing and negative interest rates by
multiple governments around the world might have _a little_ to do with it.

Do you think $1 trillion++ of new debt per year affects nothing?

~~~
confiscate
Hey man, nothing personal. Not saying there aren't negative things going on in
the world. Heck, it's probably true what you said, the 2 might be related
somehow. But without pointing out why, I can't just assume the 2 are related,
right?

~~~
mistermann
Your first sentence wasn't speculative, hence my reply. :)

~~~
confiscate
My bad

------
fiatjaf
Of course it is. The central bank has inflated.

