Housing Bubble Harms

August 27th, 2021 by Potato

Adam Vaughan made himself the face of government callousness and inaction earlier this year[0]. It started with an appearance on TVO’s the Agenda, where when talking about what the government should do about housing, he said “We’re in a safe market for foreign investment but we’re not in a great market for Canadians looking for choices around housing.” Which wasn’t news to a lot of people, but it was news that the government knew and was choosing to do nothing rather than just being incompetent and unaware.

He then continued to say (and followed it up and in various Twitter battles) that the government would not do anything if it meant risking even a 10% decline in house prices — which in the context of the time (over 20%/yr increases, and not just in the big cities) would have been rolling prices back just a few months. But even that was too much for them.

In other words, he said the quiet part loud. And now we all know that they know, and that they don’t care.

He’s tried to make the case that housing prices falling is bad, as have others throughout this decade+ run-up in house prices. People don’t like seeing their biggest asset fall in value, and recent buyers could be underwater and financially stressed. If it gets rolling, it might lead to a recession.

And sure, it’s pretty obvious that if we have a housing crash, it would have many negative effects. The problem is, high prices also have negative effects, and there’s a chance prices will fall anyway in the future, and inaction just delays and exacerbates that.

Why Housing Bubbles are Bad

A housing crash and its associated harms is hard to miss, but the harms of a bubble are more subtle and insidious, but just as bad for society.

Bad? The wealth effect? Our cities becoming “world-class”? These are bad things? Well, those aren’t the only side effects of a housing bubble.

There are much more serious effects on people’s lives. There’s rising inequality, though that’s just part of it.

Housing is the biggest cost in most family’s budgets, and for young people that can be by a huge amount[1]. When housing gets more expensive, they feel the squeeze: literally, if they have to settle for being under-housed to make ends meet. That has real-world consequences.

I can write about the rent-vs-buy decision and raising a kid in a rental all I want, many people out there still want to put off starting families until they can buy sufficient housing for a family. The frenzied speculation makes rentals less secure even if rents themselves have lagged price appreciation. With higher prices (and rapidly rising prices), buying is harder — much harder — and young families have to settle for less space, and delay their purchases to save up. That means they put off having kids longer, and having fewer when they do. Toronto’s fertility rate dropped 16% in the last decade[2]. If anything else had caused our fertility rate to drop that much in just a decade (in the face of millennial demographics that we might have expected an increased fertility rate from) we would be rioting in the streets for the government to do something, holding up signs about the missing 10,000 babies. We’d be banning chemicals, exterminating mosquito vectors, or adding fertility treatments to OHIP coverage. But when it’s economic: crickets. Housing insecurity and microcondos are just the way of life here in a world-class city, and a few thousand unconceived babies are acceptable collateral damage for muh price growth.

Mike Moffat has also pointed out Toronto’s troublesome population movement patterns: the largest cohort of people leaving the city are newborns (followed by other young children and those in the parents of young children age bracket) — so even when a kid is born here, there’s a good chance its family promptly leaves.

Lower interest rates (that somehow keep going lower) have helped support housing prices: mortgage payments have not increased as much as prices. But they have gone up quite a bit, and even if more and more of that payment goes toward principal, the principal still has to be paid back. 10 years ago, a $775k average detached house required that, at some point, you paid back $775k. Spread evenly over 25 years, that’s $31k/yr. A big chunk of a couple’s after-tax income, but doable if you were pulling in $100-120k combined (and a monthly payment including interest of $3.1k). At $1.7M, that’s $68k/yr to pay it off in 25 years, which doesn’t leave much else for having kids or supporting the economy (and the monthly is up to $5.4k at lower interest rates).

This is a big black hole for the velocity of money: more and more of our salaries are going to paying for our houses. That’s money that isn’t circulating back through the economy, or investing in something productive. Wouldn’t we be better off with lower house prices, and more of our disposable income going to services, innovation, transitioning to a low-carbon economy, charities, etc., instead of having housing sucking up all the cash flow?

In conclusion, while a crash can be harmful, high (and rapidly rising) house prices also have harms. So far the government has made it clear which set of harms they see and care about.

Election Time

A federal election has been called, and more and more people are saying that housing is a big issue for them. Each party has come out with an ineffectual do-nothing housing plan, and not one has acknowledged the elephant in the room: that a solution must allow at least the risk that house prices will drop. The cure to affordability is not to create more loan programs and tax breaks to help people pay higher and higher prices for housing[3] — it’s to get prices lower.

The first step is admitting that there is a problem[4]. I’m a left-leaning voter — often ABC — and while there are a lot of issues I care about (science funding, the environment, electoral reform, etc.), man, at this point I would vote PC if they actually came out with a housing plan that was willing to actually address prices and affordability.

[0] And stealing that crown from DoFo in a pandemic was quite the achievement.

[1] Though for the wealthy who haven’t read my book, investment fees may edge out housing.

[2] And that’s before the effect of the pandemic and lockdowns, which looks to have created its own “baby bust”. Also, other cities did have birth rate declines over the last decade too, though they were lagging Toronto’s — Calgary and Halifax had held steady through to 2016 (which would be about 9 months after Alberta’s oil bust started) and then a step down; London had a small decline in 2016, which was then exacerbated in 2018, while Toronto just heads down and down the whole decade.

[3] which in a tight market just gives people more money to bid which drives prices up further — many of the proposed programs are counter-productive that way.

[4] Update: Rob Carrick had a similar take here (and he got around to hitting publish first while I was dicking around in MS Paint). “Only a major price reversal can restore mass affordability and the federal parties won’t touch policies that would make this happen.”

Rent vs Buy: So How’d That Work Out for You?

August 10th, 2021 by Potato

It was 10 years ago that I finished my PhD and started looking for a new place to live. I went deep, deep down the analysis rabbit hole, eventually emerging with my rent-vs-buy spreadsheet. At the time, we decided to rent: the housing market in Toronto was already at a price-to-rent ratio of over 300X, and using a bunch of very reasonable assumptions, renting looked like the much smarter move.

Well, now it’s 10 years later. How’d that all work out?

The housing market (esp. in Toronto) performed very well over the last decade. That was unexpected: the market was already expensive on a price:rent and price:income basis in 2011, and it just simply got more expensive — incomes have not surged ahead in the city, nor have rents. Yet prices have been on an absolute tear, roughly doubling in that decade.

Back then interest rates were at “emergency” lows, and nearly everyone was warning buyers that they would have to be prepared to renew at higher rates. Reality is stranger than we can imagine though, and instead we find ourselves a decade later with rates even lower. If you predicted that, congratulations, you already have your prize. If you used the best information available at the time and decided to rent instead, then you likely have a constant stream of people looking to dunk on you. “How’d that renting thing work out for you anyway?”

While housing is the national obsession, investments had a hell of a decade, too. Remember in the rent-vs-buy analysis we assumed a 7% rate of return for investments? Well in actuality an aggressive diversified portfolio got over 9% because the stock market also blew the lights out.

So how did those two choices shake out with all things considered then? The answer comes down to leverage: if you had a big pile of money and were looking to buy a place outright, you were better off investing it. A $775k (the price of an average detached house back then) investment in a TD e-series portfolio would grow to become $1.9M, while a house of the same value grew to $1.7M. Without leverage, renting and investing was a toss-up versus buying.

If you use the more realistic scenario of starting with a smaller amount to invest and using that as a downpayment (and getting a mortgage for the rest), then buying a house came out better — thanks, leverage!

To look back we can use the same rent-vs-buy calculator and just adjust a few numbers based on how things played out — higher realized returns for both investing and house price appreciation, lower mortgage rates, lower property taxes, as well as lower rent inflation [1].

Saving the extra cashflow from renting plus investing the downpayment would leave the renter with a portfolio of $820k (remember how expensive housing was compared to rents — it took a lot of cashflow to buy!). But that house appreciation (to $1.7M!) leaves the owner with even more equity. Once you sell both (hit the renter’s portfolio with some capital gains taxes, the owner with some sales commission), the owner is better off by $367k.

That’s… not a small difference.

Findependence Proximity

Here’s the strange thing: in reality I chose to rent, so I can see how much more houses in my neighbourhood are than my portfolio. Yet I don’t feel bad about missing the boat. Part of it is not wanting to engage in resulting. I knew what information I had at the time, I know that I put a tonne of effort into my decision-making and analysis, and made the best decision I could with it at the time. Some people were indeed calling for those high growth rates to continue, and we would do the math and laugh.

“You can’t be serious. At that rate, in a decade an already-expensive bog-standard 3-bedroom detached house would be $1.7M! Who would possibly be able to buy that!” Well, here we are, the Darkest Timeline.

With the incredible stock market returns, the renters now have enough to be able to buy in cash — mortgage-free — the house they were previously renting… if it had only appreciated in-line with inflation. But it didn’t, and instead they’re priced out forever (…ever-ever-ever…).

Yet in a way, they’re better off.

I tend to try to put big numbers into context by thinking about FIRE — how much closer to retirement would $367k [2] put me? On the surface, that much money should be a very meaningful difference in outcomes — years knocked off the time in the science mines. But it’s all locked up in real estate equity in the counterfactual. That’s the funny thing: though they can’t buy a house, that stock market performance means that the renter’s investment portfolio is now roughly large enough to pay their rent indefinitely. A few more years of saving and investing to cover their other needs and they’re on track to retire in their 50’s.

The owner still has 15 years of mortgage payments to make, and then still has to save up enough to be able to pay the other costs of the property (tax, insurance, maintenance) and then find a way to pay for food and all the other necessities of life. Their net wealth is significantly higher, and yet their life goals are much further away.

Unless, of course, they’re willing to sell and realize those gains. But at what point do you do that? If you looked at the market in 2011 and decided to buy anyway, when do you switch tracks and get out? What do you do with all that housing wealth if you don’t sell?

The market has seriously warped the notion of wealth. Ten years ago I was aiming for an early retirement (not extreme FIRE, something like early-to-mid 50’s). Round numbers, $1.5M invested would have been in the ballpark for me to comfortably quit my job and either fully retire or go freelance part-time. Yet these days, that doesn’t even buy a house here.

Resulting and the Next Timestep of the Simulation

Was it a “bad decision” to rent 10 years ago? I don’t think so — based on the information available at the time, it was the right move under most expected future scenarios. The future as it turned out happened to be the darkest timeline: rather than correcting the 300X price:rent, it simply went to an even crazier 470X through massive appreciation. If in 2011 you told me the high rate of growth would continue for another decade, I’d say that seemed laughable, and do the math for you — wouldn’t the average house becoming $1.7M in 2021 seem like a ridiculous outcome? …yet here we are. So no, I don’t think it was a bad decision, just a bad outcome.

Likewise, continuing to rent from here: there is nothing in the short-term data that suggests this market is about to crash. The bulls are firmly in control and the government has explicitly said it’s not going to do anything that might bring prices down. But it doesn’t have to crash for renting to come out ahead — it just has to stop growing at such a ridiculous rate. The price:rent is even more insane, so even with lowered expectations about future stock returns, renting looks like it should come out ahead if the housing market also settles down to inflation-plus-a-bit returns. And maybe in 10 years we’ll laugh at how people thought a two-and-a-half decade bull market would continue into a third and fourth decade, and that an average house would somehow be trading at $4M by 2031. Or maybe we’ll see that become the price and the class divide will be complete.

Now, if you gave me a time machine and said what would be the best move to make in 2011, then sure, buying might be the way to go… but that would be a terrible waste of a time machine. As Ben Felix said it would be even better to use that time machine to go back and rent and then invest the difference + downpayment into Bitcoin.

1. There’s a big suburbia/downtown split here — AirBNB really threw a wrench in the rental market. If your condo approximately resembled a hotel room, the rent went up by more than the 2% assumed inflation, then crashed in 2020, while rents out here in commuterville have gone up less than 2%/yr yet held up through the pandemic.
2. Or whatever scaled but not so very different amount for my actual situation vs. the average house retrospective/counterfactual numbers here.

The K-Shaped Recovery (or the Perfect Storm that Missed)

January 27th, 2021 by Potato

In the clouds of the pandemic, a perfect storm was brewing for Toronto real estate. The units stolen from the residential market by AirBNB were coming back online, at the same time that immigration was suspended and a massive wave of unemployment and economic uncertainty swamped the economy, oh and the city was warning that the lost TTC revenue and extra costs might lead to a huge property tax hike (spoiler: they got a bailout and chose to cut services rather than increase taxes if it gets worse). In a sane world those should have been a handful of pins popping an already frothy real estate market, with an epic, sharp crash to bring us back to sensible price:rent and price:income levels — or at the very least an Alberta-style soft landing that takes the froth out.

But we don’t live in a sane world, and instead we have a K-shaped recovery. Except unlike the K-shaped recovery people talk about for people and the jobs market, where one group is having a really bad year with no light at the end of the tunnel yet (e.g., anyone whose livelihood revolves around music festivals, conventions, or personal services), while another has virtually uninterrupted income and lower expenses (e.g., many people who work primarily on a computer and who only had to go into the office in the first place because of a lack of imagination and will from their corporate overlords), in the real estate market it can be the same property with two divergent outcomes.

The rental market has taken a big hit in the downtown core, especially the microcondo segment that was most ghost hotel-y and the least fun to quarantine yourself in. Yet prices to buy those units have barely budged. In the burbs, rents are flat-ish, while prices have exploded higher.

And hold on to your butts, because the early indicators are making it look like the first half of 2021 is going to be an absolute ripper. Whether its low rates, or spending so much time at home that makes people want a house, or the freedom to look a little further afield if daily commutes may be off the table for a while, demand is surging, while the deferral cliff (that was one of the elements of the perfect storm that missed) turned out to not be such a big deal.

Now, if you’re just looking for a long-term place to live, then this likely doesn’t concern you — one more blip up on the chart of craziness, while renting continues to be a predictable expense. But if you’re in the FOMO game, or are looking to take a big risk on flipping a place this year, this is a big deal. It’s also so confusing and so hard to see coming, especially if the pandemic has left your own financials in shambles.

Where are people getting the money? How do they even have the energy to go rage-buying houses when things are so terrible?

Well, the upper leg of the “K” is doing just fine, if not even better than before, and they’re the only ones who buy houses anyway. So of course the market would be ripping, why didn’t I see it before?

Buuuuuut, immigration is still down. Tourisim is still down. Employment is still down. The perfect storm may have passed us by for now, with the upper leg of the K doing fine and dandy and as focused on real estate as ever, yet the storm clouds still look to be brewing out there, and are even weighing on the rental sector. If rents are down, why isn’t it affecting the purchase prices of the same units? Will this so-called fundamental stuff eventually matter?

Though rents are a big factor in the value of housing, a part of that to consider is the gearing involved: as rents race ahead, the added rent is essentially pure profit for the landlord (the beauty of a fixed-cost business), allowing a disproportionate increase in the price of the unit. As rents fall, the same should hold true in reverse: the price should fall by more than the decline in rents. However, investors can also speculate on future rents, while the rental market is basically a spot price. So if you believe that all the factors currently holding rent down are temporary, it may be rational to not cut your price by much, or even to down a big ol cup of FOMO FlavorAid. Conversely, if all the demand factors are down for the foreseeable future, and rent inflation may be muted for a long time, then prices should drop a lot — first to catch up with the lowered rent, and then to reverse the expectation for rapidly rising rent that had already been baked into prices.

As always, I look around and renting looks to be the smart move. The price:rent is IMHO more likely to be fixed in the long term by prices coming down than rents going up. But the market can stay irrational for a long, long time, and based on how the spring is setting up, a while longer still.

There’s a parallel in the Gamestop (GME) mania: with a long-term view, you may see a mostly bricks-and-mortar retailer with limited profit potential, worth nowhere near the current price. But short-term supply-demand imbalances (a mania combined with short covering, and options fuckery*) can drive the price up far beyond that, and it’s impossible to know the precise moment it will turn.

* – I believe the technical term is gamma squeeze but I don’t want to have to try to explain it.

Whether to Lease Your Condo in a Pandemic

November 21st, 2020 by Potato

Rents are dropping in Toronto, particularly for downtown condos (the market that had been driven up the most by the AirBnB crime syndicate phenomenon in the first place).

That raises an important question: what should owners of a vacant condo do? Advice is all over the map, from those who say to sell it while valuations are still high1, to those who say to rent it out tout suite to avoid cash burn, to those who say to do the opposite and hold off because rents will go back up one day but renting at a low price now will lock you in to covid rents until the tenant leaves.

Not so long ago when prices were increasing all the time, real estate bulls had the logic that the best predictor of the near future is the present, so better buy now before it gets even more expensive. Well, that argument can work in reverse too: better take the rent you can get now before rents drop even more — or to bleed money with a vacancy if they don’t go back up. On the other hand, Toronto real estate has always been a story of hope and bullishness over all comers, and unrelenting bullishness and irresponsible leverage has won every time so far, so why not one more victory for that unstoppable pair?

How do you even approach such an important decision with such uncertainty and completely opposing advice? Congratulations to the regular readers who said spreadsheets. Save us math, you’re our only hope!

First off, consider the two choices for renting the place out: early, or late. That will help frame the third choice of selling the place (or possibly buying more while prices are “low” because you can make multiple millions but only go bankrupt once so the risk-reward is clear).

Renting now is more-or-less certain what you’re going to get. The main uncertainty is how long your new tenant will stay in place (which is only a concern if rents to go back up substantially faster than rent control guideline increases). But you can pull a number out of a hat and likely not be too far off. These are downtown condos we’re talking about, even at a discount to market rent it’s quite unlikely a tenant will stay for more than 5 years (or that your intended holding period is that long).

So you’ll have just 3 factors for how much money you’ll make: R, the current market rent; E, your expenses2, and Tr, the amount of time the renter stays, which is unknown but we’ll pin at 60 months.

So renting right away will give you: (R – E)*Tr.

So far so good. Now if you decide to wait, you’ll still have expenses, E, to pay to carry the place. You may have additional expenses that the tenant would normally pay for, such as utilities, but we’ll assume E stays the same for now. So you’ll be losing E for a period of time, let’s say Tv, the length of time until there’s a vaccine or widespread normalcy or what have you, and you get your once and future rent again. Let’s call that A. You’ll then get that for the remainder of Tr after Tv has passed.

Waiting then will give you: (A – E)*( Tr – Tv) – E*Tv

There’s a lot more uncertainty here: how high will A get, and how fast? All the way back to pre-covid highs by the spring? Maaaybe, but IMHO that’s unlikely because that was in part driven up by AirBnB, and pandemic aside, the city has finally moved to restrict AirBnB rentals. But maybe you laugh at my foolish hope in the rule of law and say that it will never be enforced, so that’s fine. Maybe you should consider the scenario where A isn’t all that much higher than today’s rent, R. And you also don’t know what Tv is going to be. It could be a few months, as some on the real estate blogs are saying, it could be a few years to get back up to pre-covid rents.

One approach to make the decision is to compare something mostly known today to an expected value of a bunch of possible outcomes. But before we do that, you have to stop and examine the risks. You could be “totally sure” of an outcome, but if being wrong would ruin you then you maybe shouldn’t take the risk anyway.

So some real estate investors are deep-pocketed with massive unrealized capital gains, so a year or three of vacancy doesn’t really phase them. Their advice to wait may mean little to the start-up specuvestor who expected the condo they stretched to buy to make money, not demand it while they are also financially strained from the pandemic. If 3, 6, or 12 months of that negative E term starts to look like bankruptcy, then you may need cashflow now even if it caps future potential gains (or you may want to look at selling while the selling is still pretty decent).

If you’re able to survive different outcomes, then you can do some math on expected value. How likely is the scenario where rent goes all the way back up in 3 months? How about the one where it takes a year? How about the one where you wait 18 months and settle for rent that’s the same or even lower than today? An expected value is just a weighted average of each of the outcomes, where the weighting is your guess on the probability.

You can plug all those in to a spreadsheet, and give yourself some information to work from.

Here’s an example of how that might work:

Pre-covid rent: $2250. Expenses: $1600/mo. Current rent: $1860.

Renting now would earn $15,600 over 5 years (at which point we assume the tenant with the cheap rent leaves and it’s ceteris paribus).

Rent later might have four equally weighted scenarios, say you wait a year for things to settle out and see where rent is at, and maybe it’s fully recovered, maybe partly recovered, or maybe you decide to wait a bit longer if things are on the upswing but still a bit below the peak, or maybe you get lucky and rent goes through a huge whip-saw and gets back to where it was in just 6 months.
1: Rent for $2250 after 1 year, vacant until then = -$19,200 + $31,200 = $12,000
2: Rent for $2000 after 1 year, vacant until then = -$19,200 + $19,200 = 0
3: Rent for $2250 after 18 months, vacant until then = -$28,800 + $27,300 = -$1,500
4: Rent for $2250 after 6 months, vacant until then = -$9,600 + $35,100 = $25,500
Average/expected value: $9,000

So here’s a spreadsheet, play with your own numbers and assumptions… but three of the scenarios above lost out to renting right away, even at a 17% discount. You have to have either very low expenses or very high hopes for a speedy rental recovery to make the case for waiting for the market to recover. Or fear a rent-controlled tenant will stay substantially longer than 5 years.

Psst!

Hmm?

Psst, Potato!

Oh hey, it’s Italics Man, paying a visit from Nelson’s blog.

Yeah hey, expenses don’t matter.

And indeed, if you’re paying the same expenses whether you rent the place out or not, then you can drop that term in all the math: the only thing that changes between the scenarios is the revenue (though if your expenses change, such as having to pay utilities that a tenant would otherwise pay during a vacancy, that’s a different story). So we could simplify it down even further: look at the difference in rents and how long it takes to go from one level to the other. Taking $400/mo less means you lose ~2 months of rent every year. So if you figure a tenant might stay for 5 years at the lower rent if you rent right now, then your breakeven point would be to wait for 10 months for a full recovery. If that sounds unlikely, then you may as well rent now. Given that renting now means you don’t have to endure 10 months of highly negative cashflow, I’m inclined to think that renting now really should be the preference given these numbers, but I also think getting all the way back up to pre-pandemic rents in a matter of single-digit months is quite unlikely.

However, including a version with the expenses may be important when framing the decision. After all, in the case where you wait a very long time (#3 above), you not only made less money, you had a loss on the condo. Even in the other cases, waiting starts with a loss, which you need to be prepared for and see when making that choice — do you have that first $20k on hand to survive to the high-rent near future you predict? People are sometimes much more motivated to avoid losses than increase gains. When all the numbers are positive, the decision looks very different.

More importantly, remember that there was a third choice: selling and bailing. Here’s where it makes all the difference to look at the amounts with expenses versus just the difference in revenues. If your expenses are high enough, then either the choice of lower current rents or waiting for higher rents may have you staring at a big loss and an even bigger cashflow hole. That may mean selling into a slightly weaker-than-last-year market may be the way to go for you, to take your lumps now rather than bleed cash over the next year or two.

And of course, all of these numbers have more uncertainty than I’ve indicated. For the most part, I think I’m being generous to the owner considering delaying — I didn’t include any scenarios where they wait only to find rent has gone down further. It depends on your view of the market, but I have a hard time believing that after the year that 2020 has been that rents will be sharply recovering for downtown condos any day now.

On the flip side, some people are worried about rent control and a tenant paying less than market rent for even more than my arbitrary 5 years. If you think you may get stuck for a decade or more you can try to convince yourself that it’s worth it to hold a vacant unit for an extended period of time. If you’re worried about being stuck with a below-future-market tenant for 12 years then you might be able to talk yourself into two whole years of vacancy (depending on the difference in rents, etc.). Of course, by that same logic you should have never rented over the past few years anyway, when downtown rent inflation was out of control — getting 10% less than you could get next year was a bad move if you were worried about the tenant sticking around for infinity years with rent control. As the magnitude of the gap between current and future rents widens then you may have an argument for tenants having more of an incentive to stick around – being just 10% below market may not have been enough to get them to forestall their life plan of moving from your 1 bdrm to a 3 bdrm in the burbs, but maybe a 17% would get them to hang around just to spite you? Still, I think there’s an underlying current of fear around rent control that leads people to make these suggestions to keep a place empty rather than make some money and house someone at the same time, rather than a serious economic analysis.

Anyway, feel free to check your own assumptions and situation, but I suspect that the best strategy is going to be to accept that the market sucks right now and rent anyway rather than prolonging a vacancy on hope, or to sell if your view on the long-term market has been changed.

1. While the downtown condo market has cooled a bit from the peak, valuations are still historically high, and astronomically high on a cap rate basis thanks to lower rent, as rents have dropped more than prices.

2. We’re not going to worry about inflation or time value of money to keep things simple, but yes, the costs would be expected to increase over time, with an additional big bolus of uncertainty from what property taxes will do after the sledgehammer that covid was to the city’s finances.

Naked Offers, Jumping off Cliffs, and Life’s Surprises

April 30th, 2018 by Potato

I’ve long lamented the use of so-called “clean” offers common in GTA bidding wars, where people bid massive amounts on a property with no conditions to protect themselves. It felt like the boy who cried wolf — for so long I’ve been warning people not to do that because in in the unlikely event something goes wrong, it can blow up very badly — damages in the hundreds of thousands can break a regular family’s finances. Yet for so long the market just kept going up and lending just kept staying loose and people ignored that advice.

Of course, at the end of the story there really is a wolf. And as the white-hot spring 2017 market cooled a bit, we got a few deals that couldn’t close and some court cases making the news. There’s a Reddit thread with hundreds of comments on this story, and at a quick glance most of them seem to be about the fact that there was no financing condition.

“But all the other offers are without conditions.”

Look, this is as close as you can possibly come to that cliche mom advice: if everyone else jumped off a cliff, would you do it too? If you actually need financing to close the deal, then you need a financing clause. If a rich person who doesn’t need financing or a foolish moister with a realtor whispering in their ear is bidding against you with a naked offer, then accept defeat (and subsequent teasing about being a forever-renter basement-dweller) gracefully, rather than jumping off the cliff with the rest of the lemmings.

I can understand that realtors are in a conflicted position, and are more interested in closing a deal than protecting their clients, so they collectively pushed the herd to this madness of unprotected naked offers becoming the standard, something you “had” to do when making an offer. But hopefully people will heed the warning of the judge in this case and stop that nonsense (though a cooling market may stop it naturally as bidding wars die down and people go back to negotiations with one prospect at a time). A part of me hopes the would-be buyers sue their realtor for pushing them to put in a naked offer when the deal was truly contingent on financing, but I suspect in reality it’s more likely the realtor will sue them for the commission lost when the deal fell apart, adding insult to injury.

And as long as I’m ranting and reminding people that there is risk in real estate: financing of a preconstruction is not guaranteed. If you’re not rich enough to have a substantial cushion to close even if the market value at completion is a fair bit below the price you contracted for (which you still have to pay), you’re not rich enough to play in pre-con.

I haven’t really blogged much about the real estate market: the core rent-vs-buy lesson hasn’t changed, and there isn’t much that happens in real-time to talk about. The 30% year-over-year gains of Spring 2017 have cooled, which not many were surprised at, and it will take years to see how it plays out from here. However, while I know that life is hard (very, very hard) to predict and forecast, there are a number of things that have surprised me:

    1. How fast the turn was, especially in parts of the 905. The market was totally coked-up-banana-pants-insane last spring. Then it wasn’t, and prices started to drop. The Stouffville case at the top of the post is an extreme example, but 10-20% decline in under a year is unheard of. For years when people tried to brush off the US housing bubble experience, one of my main points was that the subprime crisis was mostly an accelerant — even without subprime, we were still vulnerable to a crash, but that it would just happen slower. Instead, Markham is on track to out-crash Pheonix, Miami, and Vegas. Surprise! (Though this one comes with a bit of an asterisk as there was a government intervention in the form of the foreign buyer’s tax).

    2. That condos are holding up while detached prices tank. This one can likely be blamed partly on AirBnB, partly on people buying what they can afford after being priced out of detached houses in the frenzy. But that’s a complete surprise from what many who joked about Toronto’s official bird would have expected to see when the market started to turn.

    3. How many AirBnB units there are. I mean, Toronto wasn’t exactly lacking in hotel space for tourists from what I know. And the model of renting out a condo as a luxury hotel was, by all reports I’ve seen, a rather famous flop at the buildings designed for it (esp. Trump). Yet there are thousands of units in the city, despite being of questionable legality even before additional rules came out.

I’m sure there will be lots more surprises in the years to come.