Is Toronto in a Housing Bubble?

Andrew: Bubble, bubble, toil, and trouble. Are we in a housing bubble? What does it mean for condo investors? Find out on today’s episode.

Speaker 2: Welcome to the True Condos Podcast with Andrew La Fleur, the planks to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew: Hi. Welcome back to the show. Thank you for listening and thank you for your great feedback that I’ve been receiving on the show the past few weeks, especially a lot of great comments and a lot of people enjoying the episodes that I’ve been putting out lately. Thank you very much.

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Okay, let’s jump into the show here for today. I want to talk about this housing bubble talk that’s been in the media quite a bit in the past week. The reason is the chief economist of BMO whose name is Doug Porter. Doug Porter came out last week and he publicly said that we are in a housing bubble. His words were, “Let’s drop the pretense, the Toronto housing market and the many cities surrounding it are in a housing bubble.” Places in Greater Toronto Area are now up a fiery, 22.6% from a year ago, the fastest increase since the late 80s.

Basically, yeah he’s come out and he said the big B word, the big B word that always generates headlines when that word is uttered by anyone of any significance. Media jumps all over that and prints that like there’s no tomorrow. They love it when people use that word, because it’s something that will really get clicks, and views, and eyeballs, and people by papers if anyone still does that. That is what we’ve been seeing and hearing about.

Now, the question is and what a few of you listening have been asking me is what I think about this. Are we in a housing bubble? What’s going on in the housing market? There’s no question that the market is as hot now as it is ever been. In the last 15 to 20 years, we’ve had some high highs certainly and it’s been a very long upward trend for 15 or 20 years in the Toronto market. Right now, it’s fairly safe to say that this is the hottest. It’s probably ever been, prices are clearly escalating very quickly, 20 to 30% price increases as being observed all over the GTA. Even in the condo market as we talked about the condo market, which typically lags behind the low rise housing market, is also experiencing 15, 20, 25%, in some cases price increases over the same time a year ago.

Yeah, the market is absolutely on fire right now. The question is, is this a bubble? Here’s my commentary on that, I think first of all that bubble is a stupid word. It’s a dumb term. It’s something that generates a heated reaction and emotional response in many cases from people on one side of the fence or the other in terms of the housing bears or the housing bulls. I think it’s a stupid term. The reason is that you really only know if something was a bubble after in hindsight, if the bubble has actually popped. That’s the definition of a bubble as far as I know is something that goes up really big and then it disintegrates into nothing overnight.

Obviously, that is not the case. We are not dealing with a disintegrating housing market. The housing market is growing, is booming. To say that it’s a bubble, I think is just not a useful term for the discussion on what’s happening in the market. It just condures up all sorts of other ideas in people and everyone has different concept to what that means, and what it is. It’s just very alarmists word that to me is just not a very useful thing to talk about. No one knows if we’re in above or not until the bubble is already burst, which was in the case in the late 80s, which was in the case in 2006, 2007, 2008 in the US.

Right now, we have no basis to call anything a bubble. All we know is we are in a boom. We are in a boom, we’re not in a bubble. The market is booming and everything is booming right now. It’s boom time. That’s for general comment. The other comment is just it’s interesting that when somebody an economist, or a banker, or somebody says that the market is good and we are not in a bubble, no one believes them. They don’t get many headlines. Nobody really cares when somebody comes out and says the market is negative in some way it is a bubble.

Whoa, suddenly everyone turns their head and says, “Whoa,” then, “His comments are so valid and we must believe him now.” Just interesting that that is just the psychology of the media and the news cycle in the media world that we all live in. Further to this, so what? What really is the implications of all this? What I want to say is that the market, what we’re experiencing right now, this is not normal. Speaking to you, the condo investor, if you’re out there listening, if you have invested in condos or other properties, or you’re thinking about becoming an investor, you just need to understand a few things.

Number one, the market that we’re in right now is not normal. Don’t get used to this. People are buying condos right now and on the one hand it’s great. You buy a condo today and tomorrow the price has gone up by $30,000 or you just sold a condo today for $30,000 more than the guy who sold his last week. One the one hand, it’s great and it’s exciting, and it’s a good time if you’re in the market. It’s very frustrating and you’re pulling your hair out if you’re not in the market trying to get in. Don’t get used to this. This is not a normal market that we’re in right now. This is not how the real estate market normally behaves.

It is a very exceptional time that we’re in. This time will not last. At some point, I believe in the near future, the market will change and the market will not always be going up at this pace that it’s on. What should you do as an investor? It seems trite, but basically my advice remains the same. You need to stick to the fundamentals as an investor in this market or any market. You want to be buying properties that are under market value. When you’re buying pre-construction, you want to buy something that’s cheaper than resale. You want to buy properties that are cashflow positive, that are going to give you positive cashflow with a traditional 20% down payment and getting the current market rental rate on the property.

I’ve been calling for condo prices to rise this year as I’ve probably come out and said, “Condo prices to rise this year 20%.” I should clarify. I’m not saying that I think it’s a good thing that condo prices are rising 20%. I actually think it’s an unhealthy thing for the market to be behaving as it is right now. This is a very short-term situation, I believe that will change at some point soon. Nobody knows when, but we’re not going to be having this conversation two years from now and thinking, “Wow, condo prices and housing prices have gone up another 50, 60% in the next two years.” I don’t foresee that happening. It’s not a sustainable path for the market to go on.

Anybody who’s in the market or interested in being in the market shouldn’t want that to happen either, because that prices are rising too quickly for too long. Obviously that is increasing the likelihood of some kind of a more serious type of correction as opposed to a natural ebbs and flows of the market that it goes up and it goes down. It’s hotter and it’s cooler, but general trend is always moving upwards, assuming there’s no major economic catastrophes or recessions.

Yeah, like I said, condo price are going to rise probably about 20% this year. I still hold to that. Condo prices right now as I said are actually rising probably more than 20% a year, probably closer to 25% in most areas that we’re concerned about as investors and most buildings that we’re concerned about. I’m actually calling for the market to slowdown somewhat at some point, maybe instead of 25% as of now, at some point maybe later in the year they will come back down to a 10 or 15% range. The overall rate for the year might end up being somewhere around that 20% mark.

Yeah, those are some of my thoughts on this housing bubble situation. Again, I don’t think it’s a great word. I think there’s better discussions to have about the housing market. I do think that the current boom and the pace of the market that we’re in right now is not something we should be in favor of per se as investors even though it’s great in the short-term for us if we’re in the market. It’s not something that’s sustainable in the long-term and it’s not something that we should get used to. It does tend to have the effect of causing, especially inexperienced investors and buyers in the market to really make bad decisions, some of that irrational exuberance, if you will.

People really overpaying for stuff that they shouldn’t be. It can eventually have negative side effects for the whole market as a whole. I do believe at some point this year, the market will cool down in some way. I’m not saying at all that I believe that prices will fall, I just believe that again, anytime we’re in this uncharted territory of 20% price appreciation, this is never been seen before that this will not remain for a long period of time.

Okay, there you have it. Those are some of my thoughts on the housing bubble. I’d love to hear yours, so feel free to email me anytime, andrew@truecondos.com. Give me a call, send me a text, 416-371-2333. Let’s all enjoy the ride as it’s never boring when you’re investing in the Toronto real estate market. That’s for sure. Will talk to you soon.

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