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January 5, 2017 | Dirty Little Secret

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

While desperate people living in $3 million Vancouver houses rioted for free salt this week (seriously, look at this), the country’s last remaining bubblicious real estate market was feeling smug. Toronto realtors are crowing about a boffo year in which the locals sold each other properties fetching $83 billion. A record, of course.

The average place now nets $729,000, up 17% over last year. The average detached in the inner Kingdom of 416 (as opposed to 905, where all the farmers and hairdressers live) ended the year ahead more than 20%, at $1.3 million. It took (on average) just 20 days to sell a house in the GTA, down by about a third from 2015. And across the region, properties sold for about 102% of what the vendors were asking. In other words, bidding wars, multiple offers, bully bids, speeding Audis and sharp elbows dominated the market.

But why?

After all, despite being full of crazies who would kill or maim for a bucket of free sodium, Vancouver has better weather, better scenery and politicians who routinely pimp real estate – even offering anyone living in a shack (under $1.2 million) free property taxes. So howcum in frosty Toronto, where people have to buy their own Sifto, face the prospect of toll roads, deal with murderous traffic, put up with condo construction on every corner, and routinely suffer visits by Drake and Adele, is the market still steamy?

How has this become the last, biggest mother of a bubble in the nation? A 20% year/year price increase when inflation’s barely over 1% with negative wage growth, is Kevin O’Leary nuts. Out there.

Well, Hanny may be on to something. He’s a certified financial analyst by trade, obviously with too much time on his hands and a blog reader (figures). “I’ve been a fan of your commentary for quite some time. I follow/analyze the Toronto real-estate market quite closely, and I have produced the following chart.”

It’s a good one. The blue line is total annual sales of houses through MLS in the Toronto region. Yes, a little growth over the past four years. Nothing weird. The red line, however, represents the number of homes available on the market. The plunge is dramatic. Historic.

Missing from the chart is average price. But you know what that would look like –  imagine the mirror opposite of the red line. As active listings have collapsed, selling prices have exploded.

“My question for you,” says Hanny, “is this: while everyone talks about a supply constraint, why does the discussion always focus on greenbelt development? Why don’t we talk about the fact that the number of people selling existing homes is RIDICULOUSLY low relative to the past and why this may be?”

It’s an insightful query. Toronto real estate continues to be hot because demand (although not historically high) is overwhelming supply (which is historically low). The result can be seen in DOM – down at the end of the year to a skinny 16 days. In fact any property that’s been listed three weeks is now widely considered to be massively overpriced, a genuine woofer, a former grow-op or murder location. Anything else will be gobbled in days, because for every decent listing there are half a dozen ravenous buyers.

In a region of more than 6,000,000, it’s a very odd thing only 4,746 properties were available for sale last month (down from 9,137 a year earlier). This represents only a few weeks’ worth of inventory, even at this disgusting time of year. No wonder prices have been spiking wildly, given there’s no shortage of house-horny greater fools willing to spend whatever it takes.

But why?

Does it not make sense that as property values smoke higher more and more people would want to cash out, collecting their windfall capital gains? Why do fewer homeowners sell when they could make the most profit? How does that make sense?

The reason – and a hallmark of a sick, unbalanced market – is that most people can no longer afford to move. Or believe that to be the case. If you sell a so-so house for $1.5 million, you have to buy another (unless you read this blog, have an epiphany and rent) for an equal amount. But the math doesn’t work. Commission (5%) leaves the seller with just $1.425 million, and when she buys there’s the double land transfer tax and other costs to consider. A new $1.5 million house actually costs $1.56 million. So even before the truck’s rented and the beer bought, the move’s cost $135,000.

It happened again last month. New listings fell another 11.6%, helping explain why thousands of people who own houses would rather renovate than move. After all, $135,000 can buy a pretty nice new kitchen, and you don’t need to change your driver’s license.

This is the dirty little secret of a market in trouble. The higher prices go, the fewer listings that materialize, leading to a demand-supply squeeze that creates higher prices – and fewer listings. Mix in some mortgage restrictions,  swelling interest rates and  public delusion, and it’s all a recipe for, well, you guessed it….

Salt disease.

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January 5th, 2017

Posted In: The Greater Fool

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