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A Bubble Is Sustained By The Next Guy Being Willing To Pay More

A report from the Globe and Mail on Canada. “Trevor Nicolle didn’t line up outside in 2018. The Toronto-based real estate agent, who specializes in new-build condominiums, joined the queues outside sales centres in 2017, when lines stretched far down the street before the launch of a new project. But things changed last year, when more projects were launched and more options were available. Suddenly, clients had three or four projects to consider.”

“They could actually take a day to think about a purchase – without finding the price was $10,000 higher on the second day of sales. And agents such as Mr. Nicolle, who were ‘doing cartwheels’ in 2017 if they could secure any units for their clients in a new development, were gradually being allocated more and more units in new projects.”

“From a distance, Toronto’s preconstruction condominium market has looked like the last remaining bubble in the city’s overheated real estate market, with prices hitting a record high in 2018 and the average unit selling for more than $1,000 a square foot in central Toronto, according to Urbanation Inc.”

“One big reason has been growing cautiousness among investors – those buyers who intend to flip or rent out their units. They have been key to the new-build market, buying about half the units sold in the Toronto area in recent years – and creating the largest supply of rental units in the city.”

“Many are now watching Vancouver, where sales of preconstruction condo units fell 15 per cent in the first nine months of 2018 and average sale prices slid almost 15 per cent between the first and third quarters as investor activity cooled, according to data firm Altus Group.”

“Toronto may not follow the same pattern, and many builders say new-construction sales are simply stabilizing at a historically normal level after an unnatural frenzy in 2017. But some analysts fear a more significant hit could be coming as a flood of new supply comes on the market, potentially easing the city’s ultralow vacancy rate and limiting rent increases for investors.”

“‘I think those days of the modern gold rush in Toronto, where every developer was selling out within 30 days, are gone,’ said real estate agent Adam Brind in downtown Toronto. ‘I think everyone has to work a little harder now. You can’t just throw up a sign and say, ‘We’re launching this,’ and have a huge lineup.'”

“Toronto’s condominium market launched into overdrive in 2016 as the city’s housing sector soared into bubble territory. Many investors jumped into the prebuild sector in 2016 and 2017 as they watched others make huge profits on units purchased years before.”

“In 2018, however, even the condo sector began to feel the strain. As the year progressed, prices for new-build condominiums outpaced the gains for resale condos. Mizan Rahman owns a condo unit in central Toronto that he rents out. He also bought two preconstruction units over the past few years that he expects to be completed and delivered this year. But the Toronto real estate agent says he wouldn’t buy a new one now, especially downtown.”

“‘If someone wants to invest money in a new condominium, it’s not the right time to do it right now because prices are sky high,’ he said.”

“According to a 2018 study by CIBC World Markets, investors took possession of 48 per cent of completed condos in the GTA in 2017 – and at least 44 per cent of those investors were in a negative cash-flow position, in which the rent they charged tenants was not enough to cover their mortgage costs, maintenance fees and property taxes. More than 34 per cent of those had a shortfall of more than $1,000 a month, and a further 20 per cent were losing between $500 and $1,000 a month.”

“According to an IPSOS survey conducted in November, 62 per cent of people who own residential investment properties in the GTA said they were likely to list the properties for sale over the next year.”

“If new investors don’t see a potential for ample value growth – enough to justify carrying a rental property at a monthly cash loss – they could withdraw in larger numbers, pulling the biggest source of heat out of the Toronto market. And if investors who purchased condos start to list them for sale after taking delivery because the carrying costs are too onerous, the pain could also spill into the resale market as inventories climb.”

“‘A bubble is sustained by the next guy coming in and being willing to pay more,’ said Anthony Scilipoti, CEO of Toronto-based Veritas Investment Research Corp. ‘If the price doesn’t go up, the new guy says, ‘I’ll just watch and see.’ And the longer it doesn’t go up, the longer he just watches.'”

From Domain News on Australia. “Sydney property prices are in decline but, in some pockets of the city, there is a stark difference in how apartments and houses are faring. Prices for apartments and houses are falling Sydney-wide. But in more than two dozen suburbs across the city, property price movements are more out of sync, mostly due to median unit prices rising while house prices fall.”

“The biggest difference was in North Bondi, where the unit price climbed 12.1 per cent to $1,345,000, while the house price dropped 16.1 per cent to $2.56 million. Several high-end apartment sales on Ben Buckler, the headland north of Bondi Beach, were behind the increasing unit median, said Mary Anne Cronin of Phillips Pantzer Donnelley.

“‘Generally apartments are still seeing an adjustment down … because you haven’t got as many investors,’ Ms Cronin added.”

“In other suburbs, like Penshurst, Redfern and Castle Hill, apartment prices dropped but were less affected than houses. In Redfern, the unit price went down 2.6 per cent, while house prices fell 16.8 per cent.”

This Post Has 32 Comments
  1. These two articles were published close enough together to provide a real lesson about bubbles and relative speculation.

    ‘The biggest difference was in North Bondi, where the unit price climbed 12.1 per cent to $1,345,000, while the house price dropped 16.1 per cent to $2.56 million. Several high-end apartment sales on Ben Buckler, the headland north of Bondi Beach, were behind the increasing unit median…’Generally apartments are still seeing an adjustment down … because you haven’t got as many investors’

    They are all speculators. Some more than others. SFR in London, Vancouver, Toronto sank like a turd in a well first. Then the condos followed. So who was the bigger gambler looking to bail? A $600k airbox that hadn’t been build, or a $2 million shack the guy never went to?

  2. ‘I think those days of the modern gold rush in Toronto, where every developer was selling out within 30 days, are gone,’ said real estate agent Adam Brind in downtown Toronto. ‘I think everyone has to work a little harder now. You can’t just throw up a sign and say, ‘We’re launching this,’ and have a huge lineup.’

    I would say there should never, ever, be a gold rush real or imagined on unbuilt airboxes or shacks. Anywhere. Jeebus do you idiots look like fools now. Work a little harder my butt. You’ll be bankrupt in a year.

    1. From the article: “Hughes died in 2000 before realizing his dream home, and it sold to its current owner, a company linked to Victor Franco Noval, son of philanthropist Victorino Noval, for $23.75 million, according to property records.”

      Listing a $24 million property for $650 million? That’s like listing a $300K house for $12 million and reducing to $8 million. That’s not a “discount.” That’s going from really ridiculous to less ridiculous, but still so ridiculous that it doesn’t matter anyway.

  3. Here’s that chart again that compares the number of realtors in existence to the number of homes for sale …

    https://goo.gl/images/bt56VN

    I can understand why the number of homes-for-sale moves up and down over time but less clear to me is why the number of realtors moves up and down so much. It would seem to me that once a realtor becomes a realtor he/she remains a realtor. But, guess not. Perhaps starvation has something to do with it.

    Whatever.

    1. Ramen shortages, squirrels becoming extinct, overwhelming amount of 911 calls for outbreak fires from trash can ceremonies, unwelcome trespassers found in attics, closets, even walls at for sale empty houses. All a result of the growth of realtors. Dark times ahead!

    2. It would seem to me that once a realtor becomes a realtor he/she remains a realtor.

      I haven’t had my license for a year yet so I don’t know. But I mentioned a while ago that ten years ago the number of agent licenses went way down while the number of broker licenses stayed pretty constant. I assume that at some point here I’ll get hit up for some kind of renewal fee and if I don’t pay it I’ll no longer be a licensed agent. At my classes a while back there were some people taking them who had been licensed agents before but had let it lapse for too long and had to take the test again. They were used as FUD examples to try to convince everyone that they should pay their renewal fees every time they were due no matter what.

  4. An interesting chart …

    During the year 2011 there were 2594 realtors in Louisville, KY. Check out the number of these realtors who earned the really big bucks and then compare this number to how many didn’t earn diddily squat.

    https://goo.gl/images/i6RiJU

  5. “According to a 2018 study by CIBC World Markets, investors took possession of 48 per cent of completed condos in the GTA in 2017 – and at least 44 per cent of those investors were in a negative cash-flow position, in which the rent they charged tenants was not enough to cover their mortgage costs, maintenance fees and property taxes. More than 34 per cent of those had a shortfall of more than $1,000 a month, and a further 20 per cent were losing between $500 and $1,000 a month.”

    There are so many economic agents around the world who are investing at a loss. I believe this is one of the primary hallmarks of Ponzi finance — accepting a loss today on the expectation that price appreciation will somehow make the investment pencil out later.

    Another example that comes to mind are the people who are loaning out their money to governments at negative yields. How is a negative return supposed to pencil out to a gain? It will only work out for them if the currencies in which the bonds they buy are denominated go up in value relative to other currencies, or if the yields later are even more negative than when they buy. I long for the good old days when people kept their money in safe, low-yielding savings vehicles with a positive return, unless something with more risk and reward was available and they could afford to speculate. These negative yielding investments seem very confusing.

    1. “It will only work out for them if the currencies in which the bonds they buy are denominated go up in value relative to other currencies, or if the yields later are even more negative than when they buy.”

      I forgot to mention another scenario: If stocks, real estate, or other assets to which these investors normally allocate their HODLings fall in value relative to the negative yielding bonds, then HODLing the bonds creates an arbitrage opportunity.

    2. Bank deposits are only insured up to a certain limit. Institutions with massive liquidity may be willing to assume short-term negative yield to reduce risk.

    3. Apparently it is entirely possible to do far worse than slightly negative yields on high quality government bonds.

      You can feel free to check my math, but I believe that a loss of $56.4 billion comes out to a per capita loss of $10,642 for each of Norway’s 5.3 million people. And a lot more in krone!

      I recall they also took it in the shorts when subprime mortgages collapsed.

      Stock Market Turmoil Pushes Norway’s Oil Fund to Loss
      By The Associated Press
      Feb. 27, 2019

      COPENHAGEN, Denmark — Volatility in stock markets last year pushed Norway’s sovereign wealth fund, the world’s largest of its kind, to report a loss of 485 billion kroner ($56.4 billion) for 2018.

      Fund manager Norges Bank Investment Management says the fund’s worst-performing investments in 2018 were in the German pharmaceuticals maker Bayer AG, Facebook Inc. and brewer Anheuser-Busch InBev. The fund’s return was a negative 6.1 percent.

      Chairman and Norwegian Central Bank Governor Oeystein Olsen says the results were “weak” and blamed fragile stock markets in the first and fourth quarters of 2018.

      Norway first deposited oil and gas profits into the fund in 1996. The fund invests oil and gas proceeds mainly into stocks but also bonds and property worldwide to secure wealth for the Nordic nation’s 5.3 million people.

  6. “According to an IPSOS survey conducted in November, 62 per cent of people who own residential investment properties in the GTA said they were likely to list the properties for sale over the next year.”

    Sounds like an inventory glut and a massive collapse in prices are likely to occur. It should be spectacular to watch from a safe distance!

    1. it is actually that folks are losing $s every single month – which only works emotionally as an investor if you think the unit will appreciate. I think below is actually low – that most of the condo units in the downtown core sold in the last 5 years would be cash flow negative (even after a 20% downpayment – which most are not using).

      Investors have been willing to pay more for condos because they could rent them out for ever-higher amounts to cover their costs. But while the average rent for condominium apartments has climbed 19 per cent over the past two years, Urbanation says, prebuild sale prices are up 56 per cent over the same period.
      According to a 2018 study by CIBC World Markets economist Benjamin Tal and Mr. Hildebrand, investors took possession of 48 per cent of completed condos in the GTA in 2017 – and at least 44 per cent of those investors were in a negative cash-flow position, in which the rent they charged tenants was not enough to cover their mortgage costs, maintenance fees and property taxes. More than 34 per cent of those had a shortfall of more than $1,000 a month, and a further 20 per cent were losing between $500 and $1,000 a month.

      1. Wow, that’s a pretty high-stakes game of musical chairs. I know you have to “spend money to make money,” but in this competitive environment, likely to stampede at any moment…. Seriously, it’s safer to invest in bitcoin.

        But I feel sorry for the renters. LLs are going to jack the rent to make up for the losses in appreciation.

        1. They cant. I get the MLS listing for Condo rentals between $3K and $4K – there are a lot of them. Raising monthly rental seems like a lost cause

    1. I don’t get Dubai: I mean…it’s nice, and it’s culturally interesting, but what’s the draw? The mall? Legoland? Date farms?

      We have those things here, and for the rich crowd the Mediterranean is surrounded by friendlier places.

      As far as I can tell, Dubai is simply a comfortable rest stop for business travelers on the way to India.

      1. In Malaysia I got the vibe that there was a decent tourist market for nice places that cater to Muslims. My high roller top floor room with its own pool had dual king size beds, for example.

  7. Australian media will look over the crater in the 2 biggest cities and point out some town you never heard of as being red hot! Here’s one, formerly hot:

    ‘New auction clearance data shows how much heat has come out of the Geelong property market since last year. The clearance rate from the weekend was 50 per cent from 32 recorded results, compared to 93 per cent from 43 results at the same time in 2018, according to CoreLogic.’

    ‘Data shows there are less properties going to auction now however the number of properties overall on the market has increased. CoreLogic Australian head of real estate Geoff White said last year clearance rates in Geelong were “extraordinary”.

    “Geelong for the most part of last year was considered to be a fantastic alternative to buying in Melbourne as there was value for money there.”

    ‘He said they regard Geelong as a regional area but it was more or less a subregion of Melbourne. “There is still plenty of property, it will be a buyers’ market for most of this year.”

    https://www.news.com.au/finance/real-estate/melbourne-vic/new-data-shows-how-far-geelongs-clearance-rate-has-dropped/news-story/d42fc185a94665b6d2de36322d8e32ae

    1. I get that Australia is much further along in there bubble than we are but It seems like we hear about RE auctions much more in AUS than in the US and from the articles posted they all seem to be owner-seller auctions not state or bank owned, which is mainly what I’ve seen in the US. Is auctioning a primary practice for selling RE in Australia?

      1. It was for over 20 years. Now it isn’t working as well. That was one of the things that stunned them in the past year: when auction were held and no one bid. It was like a national funeral.

  8. “‘If someone wants to invest money in a new condominium, it’s not the right time to do it right now because prices are sky high,’ he said.”

    Ha ; where was this guy last year?

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