10 Reasons Why a Housing Crash is Very Unlikely in Toronto with Igor Dragovic

Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: It’s my pleasure to welcome to the show Igor Dragovic. Igor is an urbanist. He’s a land economist. He’s policy maker. He does a lot of things. He’s got a great personal blog about housing, real estate, housing markets. Igor recently a fantastic post which we’re going to be talking about in a minute, but Igor, thank you for being here. Welcome to the show.

Igor Dragovic: Thank you, Andrew. It’s good to be here.

Andrew la Fleur: Igor, just introduce yourself a little bit for the people who don’t know who you are or don’t follow you on twitter. We’ll certainly include link to your profiles and everything. Tell us a little bit about yourself, who you are, and why are you so passionate about real estate?

Igor Dragovic: Sure, essentially I work right now in the province of Ontario within the Ministry of Municipal Affairs and Housing. I work as a policy maker focusing mostly on polices that retain and then track jobs thought the region. It’s done through essentially land use planning and a mixture of economics. Essentially I decided to write this article because it’s something that’s a big passion of mine, an interest in real estate and housing and urban development. For instance, when I started working in the real estate field, I used to look around and I saw a lot of building activity across the region. I thought to myself, “Am I missing” … this doesn’t look to sustainable right. Looking at the infrastructure and [inaudible 00:00:55] all the buildings that are taking place, it just doesn’t look sustainable.

When I sat back, looked at the numbers examined all the information from various banks and things like that and looked at how our economy’s functioning, it turned out the market’s actually quite stable here. I wanted to write some articles about that to not have people think it’s not all doom and gloom when it comes to the market here. There’s also a positive side to it that the market’s actually doing quite well and a lot better than a lot of people say. I think that’s where the passion comes from.

Andrew la Fleur: That’s great. One of the reasons, Igor, I wanted to have you on the show as well for this interview was just you’re sort of outside the real estate industry in a sense. You’re at the government level. You’re not directly related. You don’t benefit or not benefit from the real estate industry itself. That’s obviously one of the things that the skeptics or the critics of the real estate markets will always say. Is oh well, whenever you hear good news about the housing market, it’s just coming from shills or whatever, inside the industry or just pumping the industry up. They’re just so biased. Look at real estate agents or myself, people like me get criticized for that.

I think it’s very interesting and definitely worthwhile for everyone listening to go to your blog to read your article and your other articles as well and understand your perspective on things and do their own evaluations. Let’s jump right in. It’s a great article, lots of great content. Again, I encourage everyone to go and read it. We’ll include a link to it in the show notes for this episode.

You basically go over, as far as I can tell, about seven or eight major points from your analysis why a housing crash is very unlikely to happen in Toronto and the greater Toronto area. I thought it would be great. Let’s just dive in. We’ll see how many we can get through in our time here today. Let’s start with the first point you bring up. Tell us about that. That is debt levels. A big concern we hear a lot about in the media. The debt levels are at all-time highs. Canadians have so much household debt and all these buzzwords we’re hearing. As it being a very bad thing or making allusions to the US crash and their debt levels and things of that nature. What’s your analysis in the household debt and how it relates to real estate?

Igor Dragovic: Essentially, one thing to understand about debt is that we often look at it, household debt as a disposable income. That is one measure. By that measure we’re at a 163.7% which is very high. It surpassed the level that the US has been since the 2008 crash and the recession that took place. There’s also another way of looking at it. It’s household debt to assets. When you look at that, we actually notice that Canadian households possess five dollars’ worth of assets for every one-dollar worth of debt, which is very positive.

Andrew la Fleur: You have any idea … I don’t know if you know the numbers of the US situation it’s often compared to for this one. What were the numbers like in their asset to debt ratio when they had their crash? Do you have any idea on that?

Igor Dragovic: Unfortunately I do not. Essentially what happened in the US was a lot their mortgages and a lot of the debt was in homeowners who held debt were in risk of defaulting which is not the case really here. Debt is linked to credit scores or mortgages purchasers as well as subprime lending. Credit scores and mortgage purchasers are doing quite well here. We’re getting a lot more mortgage purchasers with higher credit scores coming in. Not only that, the prime lending is very low here. We’re protected from those things.

The thing with debt also is that we may have a high percent of household debt to disposable income. When you look at other countries, especially some of the most livable countries in the world with include Denmark and the Netherlands and Norway and Switzerland, they have way higher household debt levels that us. Especially a country like Denmark which is almost at 300%.

Andrew la Fleur: Relative to other countries, Canada’s not that bad. Like you said, most importantly, if you’re looking a debt, you’ve got to look at the full picture of debt. You can’t look at debt without looking at assets. That’s a great stat there. On average Canadian households have five dollars of assets for every one dollar of debt.

Igor Dragovic: Exactly.

Andrew la Fleur: We always talk about there’s good debt and bad debt. Just because you have debt … If you have credit card debt, obviously that is a bad debt to have. If you have debt related to education or debt related to housing, especially housing that appreciating in value, that’s actually a very good thing to have. It can be a very good thing for creating wealth.

Igor Dragovic: It’s almost an investment with education as well as a debt.

Andrew la Fleur: Let’s talk about another point from your article. That’s over valuation. Again, something we hear about all the time in the media and from doom and gloomers in the real estate market. Canadian housing is overvalued by, pick a number it seems. Every six months there’s a new number that somebody’s declaring is the number whether it’s 20%, 30% or some crazy people think 50%. What did you find on that point of is Toronto real estate overvalued?

Igor Dragovic: What I think about that is essentially … I like the point you made that every day there’s something new coming out. Whether it’s 10%, 20, 30, or as much as 63% I think in Deutsche Bank called for. What’s interesting is when you look at all these organizations or banks that have called for this over valuation estimates, a lot of them are not Canadian. They’re major, like OECD or Deutsche Bank, or Fitch’s Ratings, things like that. These things look at things that I think they’ve got 30,000 sub level so they don’t look at the nuances within individual urban markets and things like that. You can’t really compare, I think. Was it Ben Meyers who said, “A condo in downtown Toronto is a single attached home in Regina, Saskatchewan,” thinks like that are important to consider.

In addition, it’s the fact that a lot of these over valuation claims are based off of using a method to determining something like home price income or a home price to rent ratio. There is some merit to it, but it is not a very effective measure. It doesn’t take into account, for instance dropping interest rates and all the carrying cost associated with it.

Andrew la Fleur: Absolutely.

Igor Dragovic: You start to notice that price of homes are actually quite in line with their historical averages. This is something that Eric Lascelles from RBC looked at in one of his reports. He estimated that it’s about … Homes could actually be undervalued by about 4% when it comes to when you look at variable mortgages.

Andrew la Fleur: That one drives me crazy personally when I see these overvalued. Why is it overvalued? Look at the price to rent ratio. Price to rent. Price to rent. Historically we have this and now we’re way out of line. Sure, historically we had 10% interest rates and now we have 2% interest rates. It’s such a huge piece of the equation that if you’re taking that out and not considering that, it just can create really wonky, off-kilter conclusions on what’s going on in the housing market.

Igor Dragovic: When you go and buy a house, say it’s a $500,000 home, you don’t give $500,000 right to bank. Here you go. I paid it off. You’ve got to put a down payment. Interest rates take into account, amortization period, all of those things impact what your monthly payment is or whether it’s a biweekly or whatever the payment you set out. I also think what is an important consideration here is that people say that homes are overvalued in Toronto and Vancouver. When you look at it on a global scale, and I think Ben Meyers wrote an article very recently about this if you look Toronto and Vancouver’s rankings on a global scale in terms of livability, quality of life, features, things like that, these cities are consistently ranked very high up there. There homes relative to cities like New York, London, Hong Kong, San Francisco are at a fraction of the price.

Andrew la Fleur: Yes.

Igor Dragovic: Are they overvalued on a global scale? That’s one question we also have to consider I think.

Andrew la Fleur: Absolutely, overvalued compared to what? Great question. Let’s keep moving. Got to the next one. Your next point I actually think is great on over building especially related to the condo market. That’s probably the number one thing you hear people saying. We’re building too many condos. I can’t believe how many condos. Look at all the cranes everywhere. There’s a condo bubble because there’s so many condos. It must be true. What did you find on this question? Are we over building?

Igor Dragovic: I wrote an article I think in March of this year that looked at the demographic impacts on the housing markets. I looked at immigration levels across the whole country and determined what number that new migrants were coming to specifically the Toronto area and Ontario. What was our natural increase? Essentially determined that the greater Toronto area was growing by about 100,000 people a year. It’s forecast to grow by 100,000 people a year or more until 2041. This is set out in provincial policy. This is adopted by a municipal official. This is what we have to plan to.

What happens is when you have 100,000 people coming every year and you have since the ’90’s and you continue to have this growth, you got to build a certain amount of homes to accommodate those people. This was essentially something that Ben Meyers had also looked at previously. He noted that the ratio should be around four homes for every ten residents, give or take roughly. When you look at that, I examined CMAC numbers of completed an unabsorbed units and I notice that common market had never fairing better than today.  What’s happening is you’re getting over 90% every year completed homes that are absorbed which is a great statistic, I think.

Andrew la Fleur: he homes are being built pre-sold especially condos. Condo projects before even start construction have to be 70-75% pre-sold. By the time that condo building is finished, on average what is it? 95%, 96% sold out.

Igor Dragovic: You can’t get financing unless you’re going to finance the whole project privately yourself. You’re not going to get financing from a bank unless you pre-sold, like you said, 75% to 80% of your units, as simple as that.

Andrew la Fleur: There was this other issue this year around the CMHC. They came out with some headlines and that got a lot of press. We’ve covered it on this podcast and in articles and hopefully people will know what I’m talking about as we discuss this. We should talk about CMHC’s numbers this year. I know you looked at that as well. They came out this alarmist headline that we have all time high numbers of completed but unabsorbed condo units. There was another side to that story and you took a look at that.

Igor Dragovic: CMHC came out I think it was in May, 2015 and they reported a huge amount of increase of unsold condo units from about 1,000 in December to almost 3,000 in May. In a matter of four or five months, you had a jump in about 2,000 units. Essentially the next month CMHC report a drop all of a sudden of about 800 units to a number, give or take, to 1,900. If I can recall correctly. This volatility essentially encouraged urbanation.  CNBC and Ben Meyers of Fortress to look at this data and understand is this actually happening? Where’s the issue? Urban nation looked specifically at where CMHC reported this. This was in the region part then we know that, in fact, all the units there have been absorbed and they’re completed. Clearly there’s a mismatch.  CMHC came out reporting there was a paperwork problem. They admitted their initial findings were inaccurate.

Andrew la Fleur: This was already after all the headlines had gone out. The world was believing that this was true. Everyone catches the first headline, but nobody is going to pay attention to the retraction later.

Igor Dragovic: Exactly. What was good that Ben Meyers and Benjamin [Towell 00:00:55] also came out and said you have to understand the context when it comes to this and that. For instance when you look at housing starts in the region in 2012, this was a big year for housing starts. When you looked at housing starts of 2012, and given that a lot of these are condos, condos are going to take a few years to complete. 2015, was that year where we saw a lot of completions take place. Both Ben Meyers and Benjamin Towell noted that we’ve had about three times the number of completed units in the first half of ’15 than the level of completion in previous years. These unsold units only represented about 6.3% of the completed supply so over 90% of units were absorbed.

Andrew la Fleur: That’s a great reminder to all us to be critical of what we’re reading in the headlines and the papers in the news media because there’s always another side to the story. What about foreign buyers? Do you think foreign buyers are a threat to our market?

Igor Dragovic: I wouldn’t say they’re a threat to the market. I think that they could turn into an issue. I don’t see it as being something overly significant. CMHC recently came out with their report on foreign ownership of condos in Canadian housing markets. Although they noted that there was a huge growth in foreign purchases between 2014 and 2015, the rate of foreign ownership is actually quite low in Toronto. It’s at about 3.2%. The highest rate in downtown at around 5.8%. When I looked at those numbers, the first thing that came me was, “Wow, that’s surprisingly low.” Personally I thought that it would be a little bit higher, maybe in the teens, foreign purchases.

Before you delve into understanding the numbers and whether it’s good or bad, there’s a few things that have to be considered. One is CMHC only looked at condos. Didn’t look at single attached semis, row houses, town homes, things like that and that could change the number up or down. Most like down, but I don’t want to make an assumption here. Not only that, but what is a foreign owner or a foreign resident? What is that? CMHC gave definition within their report, but it’s hard to classify a foreign owner in a city like Toronto especially because half the people in the city aren’t born in Canada. What happens is money could be coming from overseas, but it could be to a family that are Canadian citizens here.

For instance what happened with my family, my father about 10-15 years ago, he worked for a number of years in Europe. While me, my mother and my sister we lived here in Canada, he provided some money for a down payment on a home that we had bought. That money wasn’t made in Canada. That’s foreign money. Does that classify as a foreign purchase?

Andrew la Fleur: Right.

Igor Dragovic: It’s a really murky field I believe when it comes to this. I don’t think it’s a huge issue. I think it’s a huge issue when you start seeing a lot of foreign buying and non-occupancy of these units. I think in London, England they’re having some problems where they call these … There’s these transparent towers that they call them because they can see through them. All day every day because nobody lives there, they’re all stuff but nobody’s in there. I think that’s when an issue an arise ultimately.

Andrew la Fleur: London great example. Certainly we are not there, not even close to that. It could come to that at some point, but it’s certainly not the case at all today. You also looked at the price of oil and how that might affect the Toronto real estate market. I don’t it’s something that we talk about enough and its potential impact on Toronto real estate. What’s your take on the price of oil and how that could affect us?

Igor Dragovic: When oil fell, I think we all know that Alberta was going to be hit pretty hard. They faced some issues. A lot of companies there have been facing issues and employment’s declined. The unemployment’s a little bit higher now. They’re the ones along with maybe Saskatchewan and Newfoundland which have oil producing economies would be most impacted by this. Unfortunately, for their case, is that we actually get the benefit possibly from these oil prices. What we’re seeing is uptake in export activity and uptake in manufacturing. The lower Canadian dollar is making homes potentially even more appealing to foreign buyers, things like that. There’s some benefits that can be derived from these lower oil prices. It’s likely going to benefit the Toronto region and Ontario because we have a pretty large manufacturing sector here. A lot of our experts go to the states. There could be benefits seen from those lower oil prices.

I think CMHC recently released one of their stress tests where they looked at the impact of low oil prices remaining at about $35 a barrel on the Canadian economy and they said that if they retain the $35 a barrel for about five, six years, what’s going to happen is that housing could drop as much as 25%, 26% or so the value of homes. There’s that, but again there’s the issue of oil staying at $35 a barrel for six years.

Andrew la Fleur: Right like you said low oil is great for exporters and manufacturers which is exactly what the golden horseshoe, Southern Ontario is exactly the base of our economy. You’re also going to get a lot of internal immigration from Alberta. People leaving Alberta and coming back to Toronto.

Igor Dragovic: Exactly, for a whole, people have been leaving Ontario. Our rates.

Andrew la Fleur: For a long time.

Igor Dragovic: Migrants out … A lot of people were leaving to go to Alberta for instance. Now that situation is going to start flipping around and we’re going to see more people coming back here which is only good for us.

Andrew la Fleur: What about affordability? The people worry are concerned as prices continue to go up, up, up. How can people continue to afford houses? Won’t there just be a breaking point where … Or shouldn’t we already be at that breaking point? Some people would say that people just can’t afford houses anymore. Therefore, let’s stop buying them. Therefore, the housing market will crash.

Igor Dragovic: I don’t think just because people stop buying homes the housing market’s going to crash. You can fill that void with a rental market for instance or a variety of different ways. I think that affordability is one of those issues that if we left it unregulated, it could really cause significant problems down the line. This wouldn’t really only impact the housing market. This will legitimately have big impact on the broader economy I feel. It’s a more of a deeper underlying issue of inequality. The divergence of job creation, the divergence of income in the classes, things like that and sheltering or I guess shutting out certain people that cannot afford to live in a city. It’s kind of indirect discrimination if you may. Where I can afford to buy a place here, but you can’t. Well that’s too bad.

There’s tha,t and I get a little worried sometimes that we’re creating as Richard [Florida 00:00:55] and David [Olchanty 00:00:55] do a lot of studies on these kinds of factors, growing in equality and whatnot. They notice that cities can become these sheltered enclaves for the super-rich. For instance what we see in San Francisco. I read a really interesting article recently which looked at it wasn’t the tech workers that were actually driving up the prices of homes in San Francisco, it was these leftist nimbyists who didn’t want their neighborhood to change and didn’t want to see density. Limited how much you can build there and put a strainer on finance supply on the amount of developable land.

Andrew la Fleur: That’s something that we don’t talk about at all is the supply side of the equation. We have that issue growing as well in Ontario with the greenbelt and our growth policy. We just don’t have … Developers would love to add more density. The market clearly would take it, but the, like you said, the sort of nimby voice is still very loud in that respect.

Igor Dragovic: Exactly, I do understand where they’re coming from. It’s just preservationist notion of theirs. That makes sense. At the same time, you can’t … The best cities, they survive off these kind of synergistic relationships created in these mixed environments. Those are the cities that will be champions of the future, I feel, the taller and inclusive cities.  Affordability another important thing to remember about is there’s really no clear definition of what affordability is, or what affordable housing is. You have the Planning Act and the Provincial Policy Statement in Ontario have these definitions about it. The issue is that what is unaffordable and what is affordable. I think Ben Meyers and have both written about this where just because a home is not affordable in a neighborhood that you want to be in, doesn’t mean that homes are unaffordable across the board.

Andrew la Fleur: Right.

Igor Dragovic: Maybe you want to live in downtown Toronto. Yes of course, personally I would love to live in Rollsdale or Yorksville or Keywest, somewhere like that. Can I afford it? Probably not. Can I afford a single attached home? Likely not as well.

Andrew la Fleur: Right.

Igor Dragovic: What’s the next best thing? You move up, move in or you move out. I think George Karris always says from Real Life. It’s one of those things, you’re going to have to make compromises. That’s what life’s about.

Andrew la Fleur: Yeah, absolutely. I think it kind of goes to our Canadianess and our history I guess as a country and as a region in the country. We’re just so used to cheap housing. I think the main story of the last half of the 20th century, the suburban sprawl story, housing was in real terms it was flat. It just kept building out and out and out. The price of your house stayed the same or went down as you moved further away. People were okay with that because you could still move around freely. The traffic was still flowing and transit was relatively keeping up with the growth. It’s a different world now It’s a different city today.

When you start adding 100,000 people per year, a million people in a decade, that’s a very different city over only ten years then it was ten years before. The equation and everything is changing. That would be an interesting trend I think to certainly watch and see how Toronto develops, particularly the downtown core of Toronto. Is it the Manhattanization effect? Is that happening? Is that a good thing? Is that a bad thing? Are we an enclave of the super-rich? Overall is that good for everyone? Is that a bad thing? It will be interesting to see how this plays out.

Maybe it’s a good time for me to ask you as an urbanist and thinking about that issue. How do you see Toronto developing long term? Let’s say 20 years from now, what kind of a city do you think Toronto will become? Or should try to become, especially as it pertains to the global perspective?

Igor Dragovic: I think that Toronto is on a very good trajectory, I find. For instance, when we got back say to the ’90’s when there was a pretty pronounced recession here specifically in the city and in Ontario. That adversely affected the city. Economically the city was not doing well We were losing jobs for about six or seven years straight. Then in about ’96, things started to pick up again. What was interesting was, throughout the time, in the ’90’s people continued coming. You still have growth rates of 90,000 to 100,000 people a year regardless of economic growth and regardless of the recession.

Andrew la Fleur: Interesting.

Igor Dragovic: What you’re seeing is this, you see a lot of pent up demand left over from the ’90’s. Since ’96, our economy has picked up and our job growth has been very consistent. I think we can be doing a lot better in that respect, but it is something that is very stable. We haven’t been that badly impacted by the most recent recession of 2008-9 and a dot com bubble. If you look at the city’s employment numbers, something very positive I find. It shows our stability and our strength. That’s one aspect that Toronto really needs to harness. The other one is our diversity and tolerance. Our city is diversity or strength. This is, I think, something very unique that personally I believe Toronto in the whole world does the best job of integrating new comers in the city.

Andrew la Fleur: Right.

Igor Dragovic: I think that we could do a better job of integrating new comers into work. When it comes to social integration, I think we do a fantastic job. That speaks to how many people are born here. Half the people in Toronto aren’t white. That’s a point of pride for me, something like that. This is a diverse city. You can meet anybody from anywhere. I think that’s something that we have to continue to support and encourage. Qualities of tolerance and inclusiveness are only going to become more important. We’re already seeing how important it is, especially with the situation in Syria for instance.

Andrew la Fleur: Yeah.

Igor Dragovic: I think in the future those are some things that we’re going to have to focus on, that kind of tolerance and inclusiveness. Continue on with our stability and continue to market the city as the place where there’s endless array of opportunities and work on improving our economy so that we’re not only stable, but that we’re actually stellar. We’re performing stellar economically, something like that. This city will not become New York or Chicago or whatever. I think it’s perfectly nice to have comparisons like that, but I think we should strive to become our own … Go down our own path and not focus on New York. We can take the best of New York, the best of Chicago, San Francisco, whoever, but create our own image and unique genuine identity.

Andrew la Fleur: That’s great vision. I like that. My brain’s just firing away. A lot of things you brought up, we could talk a lot longer. I do want to respect your time and the time of the listeners here as we are getting to the end. Igor, is there any other questions that I didn’t ask you about this article in particular or the real estate market or about Toronto that you wish that I had of asked you? What would it be?

Igor Dragovic: I think you covered a lot of great topics. I think one thing that’s also very important to consider is probably the infrastructure. That we’re lagging in infrastructure potentially and that’s there actually unprecedented interest investment taking place now. It’s almost a double edged sword I think. If we don’t invest and we don’t invest in the right infrastructure in this region, this could be very bad. They could actually drive business out and people out of here. If we do, which I think we are, it could actually boost our growth and our economy. Once you start to see all these, for instance, [inaudible 00:00:55] come to fruition like the young extension into New York region and the [inaudible 00:00:55] Ontario and so forth.

Andrew la Fleur: That’s great, a very important piece of the puzzle as well which we didn’t even touch on today. That will leave us something to talk about in the next episode. Igor, I want to thank you again very much for your time. If people want to get ahold of you online or otherwise, what’s the best way for people to find you.

Igor Dragovic: You can go on twitter. I’m under Igor Dragovic or Idragovic26 is my user name. I also have a personal blog at Idragovic.wordpress.com. You can access that also via twitter. On my website there’s a lot of other ways you can contact me.

Andrew la Fleur: Great, we’ll definitely include a link as I mentioned to all those things on the show and for this episode. Igor, thank you very much for being on the show and I appreciate your time today.

Igor Dragovic: Thank you so much Andrew. It was a pleasure, absolutely.

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