Scary Decline of Housing Affordability

Scary Decline of Housing Affordability

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Much has been said over the last 18 months about a Canadian housing bubble, a Canadian condo bubble, a Toronto housing bubble, and a Toronto condo bubble. It appears that this concern and media-fed belief has waned to a near whimper. As I have stated in past articles, interviews, and the “Myth of the Condo Bubble” booklet, this bubble was fictional, and bred from badly informed economists and media types. Unfortunately, this hysterical nonsense migrated to some consumers who took it as a fact, probably hopefully, thereby cancelling or delaying the purchase of a home or investment property, convinced that by waiting, huge savings would be had.

Unfortunately, this fear-mongering had the opposite effect as prices have kept rising, putting many “waiting consumers” into the pool of lifetime tenants. The market waved goodbye to the hopeful on its path to new highs. The obvious observation, as stated by me hundreds of times was, real estate prices don’t collapse in expanding economic times. They NEVER have. If you want to wait for a bargain, you will need to accurately time the potential next major economic meltdown or recession. I believe that it will come in the next 8-10 years. In the meantime, average prices will rise another 30-40 percent from where we are today. During that recession, as with most recessions, we will likely see a 10-15% drop in average prices. The point being that the next recession will not come close to wiping out the gains from 2013 onward.

We have heard a lot of talk about the latest worry, namely the year 2015. Some genius claimed that 50,000 condos will be delivered in 2015. This is just blatant fantasy. The average construction cycle for a 200-500 unit condo project is 3 years. The average design, sales, and financing cycle is 2-3 years. In all, a project takes 5-6 years to complete and 6-7 years to sell out. This is the current reality. Below is an actual, realistic estimate of condo completions, per year, from 2013, and also how many completed, unsold units there will likely be.

YEAR         –               COMPLETIONS            –         UNSOLD INVENTORY              –             PER MONTH

2013             –           12,000 units            –             1800 units                     –                          150 units

2014             –           18,000 units            –             2700 units                     –                          225 units

2015             –           18,000 units            –             2700 units                     –                          225 units

2016             –           13,000 units            –             1950 units                     –                          163 units

2017             –           13,000 units            –             1950 units                     –                          163 units

2018            –            13,000 units            –             1950 units                     –                          163 units

As you can see, the peak years will likely be 2014/2015, but by no means is this guaranteed as things can change quickly with scheduling this kind of real estate development. Even so, 18,000 units completed with 2700 unsold units is not a market killer. It represents an addition of only 225 unsold units per month to the GTA inventory. Looking out 4-5 years, we will have a shortage coming, due to the 2011-2015 development slowdown. Few projects were or will be, launched in that time. The MLS system easily absorbs 15,000 units a year, many of them are unsold from the development inventory.

One of the silliest claims that the Ministry of Finance, Bank of Canada, and other economists have been saying is that Canadians have too much debt. This is patently false. Unfortunately, these big thinkers have a hard time seeing the forest for the trees. They are so focused on their “data” that they have lost their ability to see through it. For instance, the problem metric that they all can’t get past is our debt level per income level which sits around 150-160% (it is falling). This means our personal debt is 1.6 x our income. That could be a problem if the debt is educational, credit cards, or automobile based. Guess what? It’s not. Equifax (a leading credit agency), has publicly stated that this “problem” defaults on credit card/auto debt are at an all-time low which means that the debt in question is at low-interest rates. Equifax also says that debt payments versus income are at an all-time low. So, what’s up? Well, if you have bought a $200,000 home with 5% down, you have a $190,000 mortgage. You qualify easily to buy that property with a $70,000 income. The thing is, your debt to income level is 271%! Ouch! According to our government, you are the problem! Are you really the problem? Your payments per month are $1350 including property taxes, condo fees, and principle and interest. Yet, if you did not choose to buy and rented instead, you would pay $1250-$1400 to rent the same property. It seems quite unfair to say that the guy who bought with a 271% ratio versus a guy who rents with a 0% ratio is worse off. At least the buyer is retiring debt and owns his home. Everyone needs a place to live. This is an arbitrary statistic that largely needs to be ignored unless there is clarity as to specifically what the debt in question is.

I’ve read plenty of comments on blogs and elsewhere that prices have to fall because they’re unaffordable. Case in point, the Globe and Mail just published an article on this very idea. Here is an eye opener. The fact that you can’t afford to buy a home is not a reason for prices to fall. Our economists and government are fooling themselves if they think that affordability is the most important measure. Vancouver, Hong Kong, London, New York, Paris, San Francisco, Boston, Tokyo, and dozens of other cities are totally and completely unaffordable and have been this way for 25 years. There are other economic and geopolitical issues that exert more influence on pricing than affordability. Toronto’s housing future is more condos and rental apartments. Just as it was for the other cities that reached unaffordability decades before Toronto. It is likely that many central Torontonians will never own a home.