- the source for market opinions


April 10, 2018 | No Pity

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.

Rudy’s a crusty business guy who has spent four decades buying and selling properties in the hinterland just north of The Big Smoke. Made a pot of money speculating on houses, apartment buildings and commercial properties. With the cunning of a country fox, he bailed on the last one about a year ago – when everyone swore gains were endless.

“Prices,” he told me Tuesday, “are down by thirty percent. And I don’t mean on just distressed stuff. Everything. A hard thirty. At least.”

To be clear, this is not the boonies. Not any more. Areas like Newmarket. Richmond Hill, Vaughan or Stouffville are now prime commutershed regions, serviced by wide highways and politicians with rapid transit expansion plans in their eyes. A year ago some of the biggest price gains in a bubbly time were happening up where the deer and groundhogs used to call home. Speculation was rampant. What this blog chronicled on Sunday – the Saga of Derek – was not isolated.

By the way, this is a cautionary tale. Events in the GTA burbs will be repeated in many places where real estate became an investment asset, snapped up by speculators rather than end users. Recall that several days ago we told half of all the condos bought in the region last year were snorfled by speckers – and at least 40% are being rented out for negative cash flow. So imagine what’s likely to happen next there, or in the Lower Mainland, or Whitby, or Hamilton.

Wizened Toronto broker John Pasalis had an interesting report on the rise and fall of the spec-heavy burbs this week. “One of the key signs of a housing bubble is when more and more people start to buy real estate strictly as an investment rather than as a place to live,” he reminds. “As a home buyer you want to be more cautious about buying in a neighbourhood that has a high number of investors. Looking at the areas that have had the steepest decline in prices during the first quarter of 2018 versus the first quarter of 2017, it’s no surprise that the areas that were once dominated by investors are showing the steepest price declines.”

So here is what the sales looked like in the upper GTA swath as the bubble built and as the speculators moved in, bigtime:

In those areas where the speculators moved in…

Source: Realosophy

Now we’re on the other side of the curve. The bubble’s burst. New investors are few and far between. Many of those speculators who moved in are now hurting, trying to move out. The hoods with the biggest price gains in 2016 and 2017 and seeing the largest price plops in 2018, with asking prices off 25-30%, and sale prices dipping even further. Places where most people bought to live, instead of tomake money (like Brampton) have suffered less of a shock. And recall that Toronto as a whole has seen valuations erode by 14%.

…house prices are now collapsing the most.

The lesson here is simple. When prices go up a lot, they usually come down a lot. Also if a property increases in value by 50%, from $800 to $1.2 million, a 33% drop in price will bring it down to $792,000. It seems a lot of people sitting on the real estate sidelines these days have failed to understand the math involved. Further decreases are also reasonable if you follow the eight-point seller-evisceration strategy laid out on this pathetic blog a few days ago.

Meanwhile, all is not happy in condo land, either. This week more than a thousand buyers in three honking big towers slated for one of the areas mentioned above – Vaughan – were punted. Liberty Development said its Cosmos condos will be the 11th area development murdered by market conditions in the last year, after the company failed to get the financing it wanted. Buyers are now swarming the media with stories of how unfair it is when you buy something that has not even been built after signing a contract that’s completely one-sided, without any legal counsel. Who knew anything could go wrong?

As stated often, all real estate is local. Houses in demand areas still sell briskly for big bucks. The kids are still devouring every new condo development that comes along with a  bicycle locker and has a hip name. But detacheds have stumbled badly in most markets. Overall, sales have dropped by a third. The national numbers to be released by CREA Friday morning won’t be pretty. And in some places, the gutters run red with the guts of gamblers. Mr. Market has no pity

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

April 10th, 2018

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published.

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.