Do you Believe in the Insanity of the Toronto Real Estate Market?

A friend recently was looking at buying an old house in The Junction. She put in an offer very close to the asking price. Someone came in and out bid her by $80000. It's the new West Queen West they say.....or is it the new Dundas West which is the new West Queen West...

Stuff sells for %40 over the asking price too. Insane it is!

"no such organized animosity towards the state of the market exists in the T-dot that I'm aware of."

Well, then let me be the first to say I FRIGGING hate it. I'd love to be able to afford a house and not have to rent. It's looking less and less likely on my income, and I DON'T want to leave the city. It's really frustrating...

Echoing brokenengine's sentiments. The prices are absolutely ridiculous. I want to move out from the family home in the next few years and close to my parents, but it doesn't look likely. It doesn't help Leslieville has become an up and comer, so prices have shot up insanely.

Same boat here. I'm tired of renting but not quite ready to buy in the downtown core (I don't want to live in a crappy condo).

Speaking of Junction house prices the picture in this post is an abandoned house on Vine ave which has been that way since the 60's! It's full of racoons and animals. Best part of all is that its a semi detached house and the attached property has tenants. Lots of construction and change in the junction... good times indeed

Hey, cool!

I can attest to the market being hot, having sold our current house in the Junction and purchased another one in Parkdale over the past month... it's crazy out there. The big technique the agents are using now is to underlist the house and hold back offers, creating a kind of Circus Maximus for the bidders. One house in my neighbourhood was listed at 249K - it was underlisted by about 50k. It ended up selling for 366K after 25 different buyers came in and offered. It must have been chaos the night all the offers were offered.. Honoured and Offered, Offers, your Honor!.. etc.. etc..

The banks aren't making this any easier by taking 5K down payments and offering 45 year amortizations. That's just about the only way many young buyers could possibly afford a starter home these days. Even the Junction is hitting the 300k+ mark.

Makes me very glad I didn't sell my house before emigrating.

Once a neighborhood is called an up and coming it's already too late.

Sookie: Too right. Prices rocketed a few years before I started seeing all the publicity for the neighbourhood. It drives me crazy to know that twenty years ago, my parents paid only a fraction of current prices for their home, and no longer have a mortgage to keep up.

There's an interesting article in the Globe today about families choosing between the suburbs and the city due to high housing prices.

Kudos to all for some great comments.

Hamish, I know of the bidding war you speak of...a little birdie told me about it.

It's too bad some Real Estate Agents act so irresponsibly as to list a house that far below its actual market value. In this case, 25 offers meant 24 people went home disappointed and disillusioned to the entire home buying process. But alas, this is a whole other topic for another day.

Often people complain about the real estate prices, but sometimes it's because they're picky about neighbourhood.

If you expect to live south of Dupont and are complaining about the price -- you should try examining your own neighbourhood bigotry.

My wife and I bought a detached 3 bedroom home at Oakwood and Vaughan, 5 minutes walk from Eglinton West subway, and right next to the 24 hour Ossington bus. It sold for under list (this was two years ago when the market was even crazier) and cost the same as a 2 bedroom in Leslieville. When we looked, there was not a (livable) house under $300,000 in the entire west or east end. So we went north.

I'm pretty sure that even what we paid was not a reasonable price when compared to renting. I can see why people complain. But just a suggestion: my neighbourhood (and others) could do with a fresh injection of new young people. Why not check it out?

Who are all these rich people buying massively expensive condos and houses? And how can I become friends/mooches with these people?

Follow the 20 year rule: if your rent for 20 years is the cost of what you are buying, you'll break even. Otherwise you are better to f*** the market, rent and (have the consistent discipline to) invest.

Besides, you have to live now too. My father invested and paid his mortgage off by self-denial; he died two years before retirement.

Aidan: Does that rule cover the rising costs of rent over the years?

Gloria, that's a hell of a good question, but I suspect that both rent and property values rise in a relatively similar way, so that over time the difference is negated.

I might even suspect that property values are likely to rise more, for the following reasons: there is status in ownership which there isn't in rental (and this is a town where status matters), most households have more than one income unlike many rentals, the lower end of the income spectrum stops rentals from getting completely out of hand as does the perception that rental money is better spent on a mortgage (people forget all the other carrying costs of ownership - taxes, repairs, heating, renovations...) and I am sure there are more.

The truth is, that property prices keep rising mainly because people will pay them. There are many things that regulation could do to punish speculation, and make housing affordable to everyone, but... that only serves the interests of those who do not yet own. Don't mean to sound like a conspiracy theorist, however, those who do not own are young, underemployed, not middle class, or politically undesirable in some other way (mainly they do not get out the vote for mainline parties), so we don't matter!

I'm so not surprised something at Oakwood & Vaughn went for below listing. Thats a baaaaaaad hood.

Aidan - you don't sound like a conspiracy theorist. you sound like someone who utterly and spectacularly misunderstands how markets function.

A few brief rejoinders:

The "20 year rule", as you describe your invention, does not make any sense. If your rent over 20 years was equal to the price of your house now, the house would be a fantastic bargain, not even taking into account the time value of money or the appreciation in the value of the house over those 20 years (if you look at housing prices from 1987 to now, you are unlikely to find a better market rate of return for your money).

Renters pay insurance and property taxes (in the form of rent) and heating and electricity too. Including the cost of renovations is about as relevant as include the costs of, say, a bicycle.

The only real additional cost of owning a house is the carrying cost of the mortgage. The true value equation is whether, if you are paying 6% compounded on your mortgage over 25 years, whether (a) your house value will increase by a greater or lesser amount over this period; (b) whether you can get a better than 6% rate of return doing something else with the money that you invest in your mortgage.

Prices aren't rising because of "speculation" (sure, there is the odd person holding a number of properties on the basis they might appreciate in value quickly, but, unless you substantially upgrade the value of the asset, you are unlikely to get returns above your carrying cost of the asset), they are rising because of excess demand in desirable neighborhoods.

Capping prices (which I infer is what you mean by "regulation") would only compound the problem for the young, houseless people because no one would move. moreover, the value of a house is the only asset most average Canadians own over their lives and a huge lever of wealth creation, social mobility and retirement savings.

Yawn. Heard it before. You work in the financial services industry, right?

Relax,
For all those who are freaked out about Toronto's real estate prices, I send this message. Remain calm and be patient. There is one thing that people have to understand about real estate. It's a "market" just like any other market. All markets either go up or down, there is no such thing as a market the plateaus(or levels off). This is because all markets are controlled by the emotions of consumers. Emotions of comsumers are controlled by their situations and information that they are being fed. The fact is that 95% of the information Torontonians are getting about their real estate market is being provided by conflict of interest groups such as CMHC,Remax etc.... It is very easy for groups such as these to help create a false sense of buoyancey in the real estate market. Between all the hoopla about rising prices and "conveniently low interest rates" -but thats another story-Torontonians have overloaded themselves with heavy personal debt and over valued real estate.
I can't help but noticing that we are seeing less articles about "The hot Toronto Market", and more on "Personal debt overload". This is the begining of the end.
We all have seen what has happened south of the border. Contrary to what real estate experts say, It's just a matter of time before Canada sees an economic slowdown, caused by poor economic performances in the US and China. I happen to work in the construction industry and there IS a slowdown unfolding.
So here's my point. Once the media shifts their attention from "the hot market!" to a more doom and gloom position of the economy it's all over. The real estate professions will only be able to twist the sales figures for so long. The day it's reported that sales figures have fallen the bubble will burst.
So here is my prediction. This spring (2007)We will still see high prices, but a greater availability of resale homes. The fall will show that homes will still fetch good prices but will be on the market much longer. I believe that in the winter of 2007-2008 we will see our first real negative indicator that the market is going for a dump. Perhaps this correction will be sharp or more gradual depending on how the media treats it.
Just for everyones information, I put my money where my mouth is. In the spring of 2006 I sold my beautiful home in central Toronto for a SICK profit,and I am now renting.
I understand that it is very difficult for fist time buyers right now, but here's my advice. Wait until at least the spring of 2008 to see which way the market is going. You have nothing to lose but time!

Aidan: You are right. It was diffcult for me not to leave my number at the bottom so I could sell you a mortgage. I had only my self interest in mind in trying to demonstrate that your math doesn't work. You win and get to live in a apartment for the rest of your life.

More seriously, I am all for challenging orthodoxy, but your routine is equivalent to covering your ears so that pesky facts don't interfere with your oh-so-doctrinare world view. Now thats boring.

Readers: google "20 year rule mortgage". It doesn't exist.

Just to comment on the record sales for the January 2007. It is my opinion that record was largely influence by the soft winter weather. When its nice out poeple go shopping.

I don't think I'd be rushing out to buy in 2007. Everyone of these bubbles has eventually burst. I wouldn't want to buy now at the top of the curve if that is what the market is approaching.

First of all, there has been newspaper articles since 2000 predicting a collapse of the "hot real estate market" and it hasn't happened.
That said, it will eventually turn as Mike noted above. When, NO ONE can say. Mike is right about markets being influenced by people, we see it all the time in stocks.
I do think that right now renting, provided you find reasonable rent, can be more profitable than buying.
By renting cheaply and investing wisely you can come out on top. Sure, your house may increase in value by $300,000 in 15 years but that is offset by property taxes, utilities and maintenance. Ever see a property tax bill for $6000, a heating bill for the year of $5500 and a maintenance cost finance payment (for a roof or something large) of $2000 a year on one property? I have. That is $13500 a year for 15 years. So your profit of $300000 just shrunk by $202500. $97,500 is left-less than if I had just saved most of that money under my matress.
X_in the_x probably doesn't work in the fiancial sector because it sounds like he doesn't understand how mortgages work. No one pays the same interest rate for 25 years. Mortgages have terms that expire and need to be renegotiated.
I also don't know what the heck is meant by saying including the costs of renovation is like including the cost of a bicycle. What? Some people pay more than the value of their house in renovations and quite frankly you don't get a reimbursement on renos on a 1-1 cost basis. Sometimes renos decrease the value of your home.

You do if you purchase a locked in mortgage. Even if you have a variable rate mortgage, the analysis still holds if you substitute the average interest rate over the 25 years.

The comparison should not include heat and property taxes. Renters pay these too although often indirectly.

Of course the market will correct at some point. You are unquestionably better if you buy at the bottom of the market. But that doesn't prove that you are better if you don't buy at the top. I maintain that if you buy a semi or detached house in an established or establishing neighborhood (or even a shitty one) you are bound to make money in the long term. Barring complete economic disaster, the asset class will recover from any recession.

My point in discussing renovations was that including reno costs in the cost/benefit analysis is about as relevant including the cost of a bicycle.

Dear Andrew,

In response to your comment, I did not suggest that there hasn't been the odd contraversial article on the bubble bursting, my point was that in the near future we will probably see the mass media's attention focused on the down turn in the real estate market.
I also want you to know that I support your position. Historically, private investing has largely out performed real estate investments. I believe the problem with renting and investing is having the discipline to SAVE and invest properly.
I respect your way of thinking, apparently we are surfing the same wave. I was wondering what you think of my prediction on the Toronto market.

To Mike,
I would say that from what I have seen in terms of number of articles reporting a bursting bubble have been more than what could be termed "the odd article". I have seen quite a few.
I agree we are thinking similarly and that the discipline to save is needed.
Re: your prediction of the Toronto market; I would say it sounds fair but then again the reverse could sound fair too. I shy away from predicting markets especially when it is as out of whack as this one. The interest rates have been kept low by the Central Bank and, as the census shows, we are a city on the grow. I do think there will be a correction (there needs to be) and that a lot of people will find, in the immediate future, that they have overpaid for their home. I have seen a lot of crazy bidding wars for unimpressive property. The way it has gone recently is you have frustrated buyers moving a price class down. So, if I was searching for a $500,000 house but couldn't find one I liked in the area I wanted, I start searching for a $400 or $300,000 house. How much more do you think I could overbid you if you were only qualified to buy a $300,000 house and I wanted it? Do you see where I am going? All of a sudden the house is worth however much more over it's real value I am prepared to outbid some other shmuck. Now all the houses similar to it on the street want the same amount and now the street has a new standard.
We have been fortunate not to have the whacky mortgage schemes they do in the US so we have avoided alot of insolvency of home owners but we are still dangerously overleveraged in this country. This can lead to inability to pay mortgages which leads to more inventory. When these "power of sale" homes and other homes hit the market after the correction you may see some people losing $80, 90, 100,000+. Happened in the late 80s & early 90s.
The truth is, your home is only worth what someone will pay for it. Frankly, most of the $700,000 homes only have a reproduction cost new of $90,000 or $100,000. Is the land worth $600,000? Especially when fee simple doesn't include mineral rights? Simple answer, no. It is crazy speculation.
So, in conclusion Mike, you made out like a bandit but are you smart to wait for prices to repurchase? No one can really say until they start coming down. Right now the renter's have the market in rentals so there is good opportunity to wait.
To x_in the_x,
Yes, you can use the average rate in a variable rate mrtgage to compare but you have to wait 25 years to find out what that is. There is no way to predict what the rates will be each time you renegotiate. I also have never heard of a locked in mortgage with a term of 25 years. That doesn't exist for residential.

To Mike,
I would say that from what I have seen in terms of number of articles reporting a bursting bubble have been more than what could be termed "the odd article". I have seen quite a few.
I agree we are thinking similarly and that the discipline to save is needed.
Re: your prediction of the Toronto market; I would say it sounds fair but then again the reverse could sound fair too. I shy away from predicting markets especially when it is as out of whack as this one. The interest rates have been kept low by the Central Bank and, as the census shows, we are a city on the grow. I do think there will be a correction (there needs to be) and that a lot of people will find, in the immediate future, that they have overpaid for their home. I have seen a lot of crazy bidding wars for unimpressive property. The way it has gone recently is you have frustrated buyers moving a price class down. So, if I was searching for a $500,000 house but couldn't find one I liked in the area I wanted, I start searching for a $400 or $300,000 house. How much more do you think I could overbid you if you were only qualified to buy a $300,000 house and I wanted it? Do you see where I am going? All of a sudden the house is worth however much more over it's real value I am prepared to outbid some other shmuck. Now all the houses similar to it on the street want the same amount and now the street has a new standard.
We have been fortunate not to have the whacky mortgage schemes they do in the US so we have avoided alot of insolvency of home owners but we are still dangerously overleveraged in this country. This can lead to inability to pay mortgages which leads to more inventory. When these "power of sale" homes and other homes hit the market after the correction you may see some people losing $80, 90, 100,000+. Happened in the late 80s & early 90s.
The truth is, your home is only worth what someone will pay for it. Frankly, most of the $700,000 homes only have a reproduction cost new of $90,000 or $100,000. Is the land worth $600,000? Especially when fee simple doesn't include mineral rights? Simple answer, no. It is crazy speculation.
So, in conclusion Mike, you made out like a bandit but are you smart to wait for prices to repurchase? No one can really say until they start coming down. Right now the renter's have the market in rentals so there is good opportunity to wait.
To x_in the_x,
Yes, you can use the average rate in a variable rate mrtgage to compare but you have to wait 25 years to find out what that is. There is no way to predict what the rates will be each time you renegotiate. I also have never heard of a locked in mortgage with a term of 25 years. That doesn't exist for residential.
Also, heat and property taxes should definitely be included. Renters pay this but it is a prorated share while an individual owner must bear this himself.
Yes, an asset class MAY recover to the level at which you paid or more however this neglects to include the timing in which one must sell. People change houses an average of every 5 years and recessions can last twice this and recovery can be incrementally slow. This should show how buying at the top can leave you worse off. Would a stock broker suggest in general to buy at the top of a stocks price graph or wait until prices fall?
Your renovation point still makes no sense to me. Try rewording your sentence as it is not clear.

Just wanted to note that the commenter Andrew, me, is not the same Andrew, the article author.
Seemed prudent ot point that out.
Also my above comment posted twice but the first instance is incomplete so please ignore.

Thanks for clearing that up Andrew! Great comments, btw.

A locked in mortgage for 25 yers is not far - fetched in my mind. There is a trend toever increasing years in mortgages..40, 50 and even longer in some countries. When there was expectation of rising short term interest rates back in 2006, this kind of pacified long term mortgages and bonds because this kind of protected the helath of these long term instruments against inflation..so mortgage companies in the USA quit penalizing purchasers who selected locked in rates of 5 years or 10 years, and offered the same rate on such mortgages. Why not 25 years? Also, lots of mortgages (especially seconds) are Balloons...often set at 10, 15 or even 25 years. Got to repay the whole amoount and try and get a new mortgage. A Balloon is kind of like a rate lock too.

Having a rental property seems more appealing to me.

If you take a loan for a rental property you can create tax deductibles of 100% towards all interest you paid towards your loan. You can also claim losses incurred during the year.

300,000.00 at 5% interest 15,000.00 claimed