2011 Real Estate Roundtable Update

Our real estate experts revisit their bold spring predictions and look to the future

POST: Sherry, in March, you said, “Toronto house prices will be up, but only by two per cent to three per cent, compared to 4.6 per cent last year” and “I don’t believe Toronto real estate is at bubble levels.” But according to recent TREB sales figures, July 2011 sales are up close to 10 per cent from July 2010 (but also down from the previous month). Do you still contend that the Toronto real estate market is at a safe level?

Sherry Cooper: I think there might be some froth in Toronto real estate, but interest rates have fallen to extraordinarily low levels, which keeps activity buoyant. Toronto house prices look likely to increase about eight per cent this year, assuming they remain at roughly current levels. Prices rose faster than I anticipated because interest rates were lower than I had expected. Over the longer term, prices could decline five per cent over the next couple of years, but that isn’t a meaningful correction. Strong demand from new immigrants should cushion any downturn.

Garth Turner: More evidence that being an economist is the best damn job. You get paid big bucks for blaming external factors and creating conditional sentences devoid of conclusions. Of course the T.O. market advanced strongly because (at least I am consistent) we are in bubble territory. Yes, rates are low, but it is only cheap money (that is, debt) that has fuelled higher house prices since wages have gained no ground. Inevitably, prices will correct, leaving a mountain of debt and less equity to cover it. Danger.

But that will not happen. The decline will be far more significant, and a bank economist should play her role in spelling the potential out to folks who are overleveraged.

Elise Kalles: It appears Canadians are undeterred by the recent turmoil in global stock markets, as they are attracted to real estate because of very low mortgage interest rates. When the stock market turns volatile, real estate becomes an attractive investment because of its security. CREA [Canadian Real Estate Association] revised its forecast for national home sales, citing stronger-than-expected sales and higher prices in the second quarter. Benjamin Tal, chief CIBC economist, states that the European debt crisis and the United States credit downgrade are actually helping boost activity in Canada’s real estate market. Global uncertainty is postponing an increase in interest rates in Canada.

POST: Harry, last spring, in addition to being Garth Turner’s lone companion on his ark, you said of the Toronto condo market: “With apologies to President’s Choice, the term that comes to mind is ‘memories of ’89’ when condos eased into becoming a financial commodity rather than accommodation.” But the condo market is still growing, sales are at a healthy level. What now?

Harry Stinson: I stand by the original statement. More condos are being sold to investors than to owner/occupants and this will continue to be the case. However I did not mean by this that the market will inevitably soon collapse solely because it is investor driven. The difference between the market in ’89 and now is that in ’89 a large proportion of the “investors” simply intended on flipping the property … without even closing … whereas the investors in 2011 generally expect to close or, at the very least, are capable of doing so.

In the late ’80s, I recall trying to diplomatically interview new clients to determine the true extent of their resources. Without wishing to sound elitist, there were too many people speculating in real estate who were way over their heads in terms of money and expertise.

Brad Lamb: When Harry and I were selling condos back in 1988, condos were a dirty word. People didn’t want to buy them. They thought they were some new contraption, and if people bought them, they did so because they had to. There was no alternative. Today, people are buying condos as their first choice. The thing with pricing is there’s no doubt that the pricing model in Toronto is getting harder to understand.

POST: Garth, in March, you said, “By mid-2012, the prime rate will be north of four per cent, having increased from 2011 by a third.” But, it looks as though that prediction might not come to fruition. Would you still argue against buying a home in this market with a five per cent downpayment?

Garth Turner: With a U.S. recession more likely and the wheels coming off investor confidence in the summer, the American central bank announced a rate freeze for two years. This was horrible news. But, true to form, manipulative people in the Canadian real estate biz told consumers it meant Canadian mortgages would stay cheap for the long term. Their intended victims were first-time homebuyers who probably think the fed is a competitor to the Brick.
“Real estate is not a ‘fad,’ nor is it homogenous. There are opportunities and there are white elephants.”

Of course, rates in Canada will rise sooner than in the U.S. for a simple reason: their problem is too little consumer borrowing, and ours is WAY too much. Families here are more indebted than those to the south, and mortgage debt has exploded. Higher house prices are a result of more debt, not more income. The Bank of Canada knows this and will act. Count on it.

Harry Stinson: At the risk of sounding like an economist — on the one hand, I agree with Garth about the futility of interest-rate tinkering, on the other hand, I do not feel that the sky is falling. Senior government bankers have become modern-day equivalents of the Wizard of Oz, bellowing pronouncements melodramatically into their megaphones, unaware that the curtains have been drawn back and the world in general is not really taking them so seriously anymore.

Barry Cohen: Just yet another failed prediction from the financial core. I’m so tired of hearing what is forecasted for real estate values by that industry. When was the last time you heard the real estate industry forecast a stock market meltdown? We are a simple group. We don’t have a hidden agenda. We just sell homes. Investors and immigrants, worldwide, are re- evaluating where to invest their money or reside, and Canadian real estate is at the top of the list, with the obvious choice being the major cities, such as Toronto.

POST: Mike, last spring, you said, “Trying to time a market is next to impossible. Therefore, if my son or daughter had a solid down payment and low mortgage costs (locked in over a minimum of five years), I’d be comfortable telling them to buy now.” Do you still stand by this statement?

Mike Eppel: Affordability, as always, is a key factor in a purchase decision. I believe we’re likely heading to a more favourable purchasing environment for real estate than we were previously. The recent data indicates there are slightly lower prices to be had and, hopefully, improved supply coming on the market this fall. Coupled with the uncertainty in the U.S. and Europe, this will maintain a very attractive interest rate environment well into 2012. If the global economy does slow, ours will likely follow to some extent.

Elli Davis: The summer has been very active with very little pause (it’s still a seller’s market in houses, and a more balanced seller/buyer market in condos). If the supply increases, definitely be patient — but we’re not seeing that with houses yet.

Harry Stinson: Real estate is not a “fad,” nor is it homogenous. In any market or any cycle of the market, there are opportunities and there are white elephants. My advice would be: Always keep your eyes open.

Posted in Post City Magazines


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