The Housing Bubble

A report from Bloomberg on Canada. “Toronto’s housing market has seen a stunning slowdown in the past year. Now one brokerage has cataloged the damage for 988 homeowners who got caught in the eye of the hurricane. In the space of four months last year, the homeowners lost a collective $135 million as the median house price slid 18 per cent, a faster decline than any major market during the U.S. market crash, according to Realosophy Reality Inc.”

“The story goes like this: The median house price surged 30 per cent from January to peak at $765,000 in March, largely driven by investors who were pouring money into the market for quick returns, Realosophy said in a report. To tame the beast, the government instituted a series of regulations, including a foreign buyers tax, starting in April. Some 866 homeowners had clinched a sale but were not able to close, eventually selling to another buyer later in the year for $140,200 less on average.”

“Some buyers had to walk away as they weren’t able to sell their own homes or the banks appraised the house for less than what they agreed to. Another 122 sellers sold their houses for an average $107,325 lower than what they bought it for earlier. By the time the dust had settled in July, the median price had dropped to $626,000 from $765,000 in March.”

“‘The rapid rise in investor demand coupled with their rising negative cash flow suggests that a speculative mood hit Toronto, reflected in investors who appeared to believe they could make easy money by buying what they perceived to be a safe and secure asset, single family homes,’ Realosophy President John Pasalis said in the report. ‘When the market unwinded, the areas with the biggest decline had the highest percentage of investors.’”

From Macleans. “There are many culprits behind last year’s unsustainable rise in Toronto house prices, with experts blaming everything from foreign buyers to lack of supply. But a new report singles out another major factor: speculative investment. Toronto brokerage Realosophy Realty Inc. found 16.5 per cent of low-rise houses in the Greater Toronto Area were purchased by investors during the first quarter of 2017, the peak of the bubble.”

“In York Region, an area north of the city of Toronto, investors accounted for more than 20 per cent of sales. House prices in York surged the most during the run-up to the bubble, and have fallen the furthest in the aftermath. ‘This was largely a speculator driven bubble,’ says Realosophy president John Pasalis.”

“Pasalis noticed a shift in buyer behaviour in 2016, when nearly half of the visitors to his brokerage were interested in purchasing investment properties. With home prices rising fast, however, rental income typically wasn’t enough to cover mortgage payments and other expenses. Most interested buyers didn’t care about losing money each month, according to Pasalis, since they were betting that home prices would keep rising. ‘That’s just not normal,’ he says. ‘They’re just overly optimistic about how much money they’re going to make.’”

“During the period Realosophy analyzed, the average GTA investment property was short $1,650 each month. In Richmond Hill, a town north of the city, investors were out-of-pocket $2,488 monthly. A similar mentality is still at play in Toronto’s condo market. A recent report from CIBC and Urbanation found that 44 per cent of investors who took possession of newly constructed condos last year are losing money each month.”

“The Ontario government helped to burst the speculative mindset in the GTA in April 2017 when it implemented a 15 per cent foreign buyer tax. Median home prices fell 18 per cent over the next four months. Realosophy found 866 transactions failed to close during the first quarter of 2017. Those properties were eventually sold later in the year for $140,200 less on average than the price received earlier in the year. Another 122 properties were bought and sold in the same year for a loss. It’s unclear why these homes were re-listed so quickly. ‘The only thing I can think of is panic selling,’ Pasalis says.”

“A recent Superior Court of Ontario decision lays bare everything that can go wrong when buying at the top of the market. In March 2017, a couple listed their home in Stouffville, just north of Toronto, for $2 million. A bidding war ensued, and one pair of interested buyers boosted their initial offer by $200,000 to $2.25 million. The sellers accepted, but the deal quickly unravelled when the would-be buyers felt they had a mistake and overpaid. (The appraisal also came in short, and they couldn’t obtain the financing to close.)”

“The sellers re-listed the property, which sat on the market for months without receiving a single offer. The home eventually sold for $1.77-million in October. The sellers also filed a lawsuit against the pair who walked away from the deal earlier in the year. A judge ruled in favour of the sellers, and ordered the defendants to pay the difference between the closing price and their initial offer back in March. That amounts to $480,000, plus special damages. It’s a grim reminder that while the bubble may have burst, some households are still dealing with the consequences.”

From the Globe and Mail. “There is a more bearish way to examine the market, often with anecdotes shared on Toronto real estate Twitter accounts focused on examples of financially-crushing real estate losses. The twitter account ExtraGuac4Me, for example, run by investor and lawyer Joey Evans, is fond of tweeting the real estate equivalent of car crash scenes that show recent transactions that resulted in multi-hundred-thousand-dollar losses in a single year. ”

“He shared a recent example of a court case featuring a buyer who walked away from an April, 2017, agreement to purchase a house for $2.25-million. The home was resold for $1.78-million, and the original buyer was sued and ordered to pay the difference to the seller: $470,000. ‘I’m pointing out examples of what’s actually happening; these are real examples, these are real people, real families – huge amounts of money on the line,’ says Mr. Evans, who lived in the United States during the sub-prime mortgage crisis of the mid-2000s and finds eerie parallels between those days and now.”

“In his Realosophy blog, Mr. Pasalis recently shared some data that suggests those areas that saw the highest amount of investor-buying activity between 2012 and 2016 also saw the fastest price corrections in 2017-2018. In markets like Newmarket where more than 30 per cent of buyers were investors, house prices are now down 25 per cent from the same time last year, Richmond Hill’s declines were steeper at 27 per cent and Markham prices slid 22 per cent.”

“Mr. Pasalis’s take is that a declining market simply exposed some of the risk that was always there. ‘A lot of people were making bad decisions and they were able to get away with it for a long time.’”

From the Toronto Star. “The financial impact varied dramatically within the Toronto area, says Pasalis. Sellers who had to re-list took an average of 12 per cent less on the second sale of their homes. But in Newmarket, sellers took 21 per cent less — $238,866 less on average. Brampton prices depreciated by about 7 per cent or $54,502. In Toronto, the second sale was 13 per cent lower on average, about $162,000. Pasalis’s 988 total includes 122 homes that sold for less than the owner had paid within the previous year. Those cases averaged a $107,325 price drop.”

“Another 1,784 homes purchased in 2017 were re-listed and failed to sell again through the first quarter of 2018, says the study, A Sticky End: Lessons Learned from Toronto’s 2017 Real Estate Bubble. ‘We see all these people doing stupid things without really thinking. A lot of these are bad real estate decisions,’ he says. A market psychology gripped the region in 2016, says the report. ‘In a market where house prices are rising 20 per cent or more, investors believe that the $700,000 property they’re buying today is going to be worth at least $840,000 a year from now,’ writes Pasalis.”