[Bugs]

This is disappointing. I honestly thought that Flaherty and Harper would restrain these bandits ... the banks are doing something similar to what they did during the mortgage outrages in the US -- funding real estate projects by putting the risk on the backs of the taxpayers while keeping the profits for themselves.

[cosmostein]

I think one of the biggest differences of development contracts in Toronto is that people are actually buying into them in droves;

Standard practice is 5% at signing, 5% a few months later, and then the developer hands off the mortgages. A lot of these developments are far more self financed by actual future owners then many of their counterparts in the US.

In some of the larger cities in the US the developer would basically not sell a unit till they were ready for occupancy basically carrying the weight of the liability for the entire development as the sale price of a finished unit is normally much higher then that of a giant hole in the ground that will be ready in 18 months.

With the inability to get 30 - 50 year interest only mortgages in Canada as was the case prior to 2008 in the States, its a impossible in Canada to a condo or home mortgage from a bank without having *at least* 5% of the value of the unit cash in hand, coupled with the elimination of any mortgage longer then 25 years its a very different animal.

If we started seeing halted development programs in Toronto like we did in major US cities I would be much more concerned, the difference is where the last generations first home purchase was a brick and mortar home, this generation seems to be opting for cheaper condos.

When supply exceeds demand then we will get a better idea as to how many condos were too many but in the here and now there doesnt seem to be any issue.

[Bugs]

Sorry, but isn't $1.2 million a little steep for a 'modest bungalow' in downtown Toronto?

And 5% down ... well, that'd be about a $60,000 down payment. And that'd leave the taxpayer on the arm for ... hmmm ... over a $million.

Good country, this Canada ...

Come on, Cosmo ... this cheap money + government guarantees are fueling a real estate bubble for sure. A big one.

And who are these people 'flocking' to buy up these new 500 square foot condos for $400,000 and up? A high proportion of theme, believe me, are foreigners making highly leveraged 'investments'. To qualify for this credit, the buyer must pony up $20,000 at the start. and then another $20,000 down the road ... and then, when they move in, pay $900 a month, plus $400 a month condo fees ... for something like $1200 monthly.

Who can afford this?

More to the point ... what happens when interest rates are set by free markets once again? If they go to 6% -- entirely imaginable -- those monthly rates will double! If they go to 9%, they will triple.

Then we'll see what the consequences are.

[cosmostein]

Sure, if the average modest condo unit was 1.2m.

The average unit cost is not 1.2m, not by miles.
If there is four units over a million in a 34 floor condo that would be quite the feat.

The majority of the developments have the bulk of their units which are a bedroom and a den with an average cost in the 300 - 400 range.

Basically a 20k down-payment;

Who are these people who are flocking to live in closets?
Certainly not I,

However we are yet to see a single major development in the Toronto Core fail to sellout its base units before final building release, so clearly its someone and lots of them.

As for who can afford 1200 a month;

The average cost of a 1 bedroom apartment in Peel Region (for example) is $969 based on the 2011 numbers, and over 1400 in Toronto, so owning a condo (all be it small) for 1200 after condo fees and mortgage isn't exactly a huge stretch.

I do have some concerns pertaining the effects of "cheap money"
However there are a few stark difference between Toronto and the situation in say Miami?

In Toronto you toss your 5% down when the project is a hole;
You need to live in your unit for at least a year (IIRC) before you can sell but the average ROI on a unit purchased at the beginning phase of a development as opposed to its values when its actually livable and sell-able is just over 7% (based on 2011 numbers)

You also don't have the option to put nothing down; nor do you have the option to just pay the interest over a 40 year mortgage.

You toss down 5%, you pay your mortgage over no more then 25 years, and unlike a US style foreclosure the banks (and taxpayers) and not on the hook for the entire value of the property because you need to put capital down, and you need to pay principal payments from day one.

Yeah, the payment will go up but we arent exactly talking about the situation as we had with sumprime's where you went from paying 750 bucks a month in interest, and as your term expired and you needed to make principal payments it was over 4000.

Based on a 300k mortgage over the max 25 years
a 3% mortgage will yield a monthly payment of $1,419.74
a 6% mortgage will yield a monthly payment of $1,919.42
a 9% mortgage will yield a monthly payment of $2,483.94

It stinks that it will drive up the monthly, but the above numbers also assume you paid no principal on the mortgage you took out today that you will have to renew at 6 or 9 percent when and if they go up that high.

The cause for alarm will really depend on how quickly rates go up when they go up.
There will certainly be folks who cant afford it, but isn't that the risk you always run when interest rates have gone up historically as well?

I was hit with a few increases (as well as property tax increases) and while I didnt like it, I was able to weather it.

[Bugs]

I take it that you don't think there's a real estate bubble in Toronto and Vancouver, then?

I thought it was clear that the $1.2 million price tag was attached to a 'modest bungalow', not a premium penthouse condo.

If someone buys a condo in a 'high appreciation area' -- the record shows that such condos have been appreciating at about 10% a year. Many of the buyers are 'investors'. Say you bought one four years ago, for $300,000 before it was a hole in the ground, and four years later, you close. You have ponied up (perhaps) $30,000 to $40,000, but the unit has already appreciated by $90,000. You cannot (typically) get a positive cash flow for four or five years. As a result, many of these speculators 'flip' the property, pocketing not only the $90,000 to $120,000 appreciation, as well as their down payment(s). Not bad, on $30,000 over three to four years.

What would that ROI be? Do you know of any other Canadian investment vehicle that can match that?

But it all depends on a steady stream of young goofies buying those condos with cheap money.

And, if the market heads south, it can quickly turn against the investor because they have 10x leverage working against them, rather than for them.

Surely those are the conditions we are approaching. The market if flattening out, and thousands of new units are coming on stream. They may have pre-sold lots of them, but will those 'investors' be able to carry them in the future? Will those Asian students take the losses, beyond their 5% down payment, or will they walk away from it, leaving the taxpayers feeling as if someone had put a finger up their asses?

As I said, good country, this Canada.

How long can we expect the Toronto condo market to increase, given the glut of supply coming on the market, (incidentally ruining the waterfront), and deteriorating economic conditions? The article says there are more condos going up in Toronto than there are in New York city! In a city with little economic growth beyond the proliferation of public sector workers.

And, of course, the math in a Mississauga condo is quite different. Using the figures you offer us, you are positing a 5% down payment ... leverage of 20x ... on a condo valued at between $300,000 and $400,000. It all depends on real estate values going up by 5% or so a year, and money being at 3% ... otherwise, it ceases to be a good investment. But, in Mississauga, a lot of condos are owner-occupied. It's a home.

A lot of condos -- nobody seems to know the percentage, overall -- are in buildings where half or more of the occupants are tenants. (This is, in fact, one of the structural problems with condo governance. The owners don't live in the building, and are willing to let maintenance slip.)

It's easy to imagine the US Fed losing control of the interest rate, as has happened in Greece, Spain and Italy. Those countries now have to pay 6% to 7% interest on their bonds, and if the American market were to go to those levels -- entirely possible in the next few years -- mortgage rates could quickly rise to about 10% in Canada. That would mean the carrying costs would double and triple. (And rates could go even higher.)

How many of those downtown young couples could afford that without cutting seriously into their restaurant budgets? In the case you suggest, the bottom of the market case of $1200 a month would balloon to $3000 a month! Rather than renew under such terms, a lot of these young couples would sell ... and the market could easily drop by 10% and 20% a year for a few years. Virtually everybody will be 'under water' as they say in the USA.

And that is a quite likely outcome, particularly if these trends continue until something goes snap. It'll be like the real estate market in the early 1980ies ... a growing snowball of distress sales could easily knock a third off the price over two or three years. Maybe more.

That's the point -- it's when the market turns, or even levels off, that the bubble bursts.

[cosmostein]

Yes you were clear;
However the reality is the vast majority of folks buying homes in Toronto are not spending 1.2 million to do so, they are likely spending a third of that.

Do I think the real estate "bubble" will burst in Vancouver or Toronto;
No.

Because a bubble implies there is some insane inflated value that will crash down, while I agree the cost of a home in either market is high the "crash" normally associated with a bubble is not likely to occur in either city simply because in both cases the cities are growing at a rate which justifies the construction.

The fact that there are more Condos going up in Toronto then New York is an interesting fact, however the usual sign of supply exceeding demand is an abundance of unsold units which we simply are not seeing yet.

I agree that this rate of construction cannot go on forever, however as long as units are being solid I don't see it as cause for alarm.

I also disagree that the "flip" phenomenon is as common in Toronto or Vancouver as it was prior to the Sub Prime meltdown in the States.

In the US I could have bought a property with zero down, paid nothing by way of interest for the first 30 days, "renovated" and sold the unit before interest payment one.

That isn't a reality here;
You need the minimum 5%, there are also not many Banks in Canada that will giving you multiple 5% down mortgages as unlike the US you need 20% down to get an insured mortgage which is normally the norm for a second one if you still have a first.

While I understand your point about "tenant occupants"
I would also argue that the vast majority of Condos in Toronto are actually owner occupied (I believe the number was just north of 70% in 2010) which was not the case in Cities in the States that got pummeled where you said a number south of 40%

While I tend to agree a uptick in interest will create a market correction, I don't think you are going to see the situation we saw in Phoenix or Miami where properties were selling for 20% of their value a year later.

[Bugs]

Perhaps we should agree to disagee on this.

Even so, I should point out that the average cost of housing in Toronto has reached insane levels, in terms of average incomes.

What makes you think that 5% down is enough to prevent a bubble? The point is the money is artifically cheap, and that the miscues of the state have created a moral hazard. The banks can offer mortgages without worrying about the risk to their own profits. That's the key thing.

I asked you a question -- what Canadian investment vehicle do you know that can produce the returns that these condo flips has produced in the recent past? Where else can a couple, making $50,000 a year, can get 20 times leverage?

It's because the banks don't have to worry about the future consequences, they are literally selling mortgages ... and their brokers will do anything the can to qualify people for loans because they aren't really risking the bank's money.

Perhaps we can agree that the time for the government to act is NOW -- if it wasn't yesterday.

[cosmostein]

[Bugs]