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Another Sign of a Housing Bubble?

Posted by: Peter Coy on October 17, 2005

Housing optimists like to talk about “unmet needs.” As in: The housing boom will never end because there’s a huge “unmet need” for more and bigger houses. You can find this viewpoint well expressed in the New York Times Magazine’s cover story yesterday on Toll Brothers, the luxury home builder.

On one level, the unmet-need argument is indisputable. We’d all like bigger and better houses, wouldn’t we?

On the other hand, housing is just one need among many that are competing for funds. Just for example, there are my own unmet needs for a 200-foot yacht, not to mention replacement liner bags for our 12-year-old vacuum cleaner.

In the last few years, housing has been elbowing aside other priorities. America has been satisfying the need for housing by diverting more and more scarce resources toward it. You can see that phenomenon in the chart below, which shows residential investment—i.e., the construction and remodeling of housing—as a share of GDP.


Has housing reached a permanently high plateau at around 6% of GDP? Or will its share of the economy soon fall back toward historic norms? Nobody knows for sure. But here’s a parting thought: Imports have been soaring as a share of GDP—up 5 percentage points since 1990. To put it differently, we’re living large in bigger and better houses by borrowing from abroad. I’m not sure how sustainable that is.

Reader Comments

Matt Metzgar

October 18, 2005 3:24 PM

Why even take something a home builder says seriously? Of course they're going to say there's still demand for housing - they are publicly traded corporations with stockholders. They'll stick to their story until the housing bubble pops. Meanwhile, if you dig deeper, you will see lots of insider trading currently happening with employees of these home builder companies selling their stocks.


October 19, 2005 6:29 AM

Over here in the UK we are constantly told that there are not enough houses because there is not enough land, and that this housing shortage is the reason for the property boom here.

These people forget that Canada, the USA and Australia have similar housing booms. Is Australia really running out of land too? It has only a third of the population of the UK, and many times the amount of land.

And if there is this housing shortage where are all the refugees living in tents and football stadiums in London? Funny thing is, I don't see them.

What we are seeing is the results of easy (borrowed) money, and a (so-far) self fulfiling prophecy that real estate prices only ever go up.


October 19, 2005 10:37 AM

I agree with Matt, above. I also read the NY Times piece on Toll Brothers - it failed to mention that Bob Toll has sold nearly half a billion (yes, that's billion, with a "b") dollars of his own Toll Bros. stock in the past year. Actions speak louder than words....


October 20, 2005 3:34 PM

I don't know if the market will continue to boom or bust-no one sure know the answer. And I also can't compared the Stock Market with the housing Market neither, because they are not the same.
For stock market, people don't have to invest, if they don't feel safe. Where as housing market, everyone wants to own their own home. Everyone wants a safe place to live and call it a home. And most people want to be a home owner.
However, as the fundamental of econimic, i don't believe the price of the housing market will increase double digit in the next years or so, because the interest rate is rising. The Fed sure is trying to do something about the real estate market, because they know that it's getting out of control.
Right now, people can afford to buy more houses, because of low interest rate and their equity in their house. Even with low interest rate, people still apply for ARM loan instead of fix loan. That shows that they can't really afforded a home and think that the price of the house sure will increase and never go down, and believe when they sell, they'll make profit.
I'm living in the bay area, the average price of a single family home is around $700k+, interest rate about 5.5%-6% (most people get ARM loan). They pay mortgage average of $2600-$3500/month, depending on property tax. Now, what happened if the interest rate is 7%-8% or 9%. People can't afford to buy a $700k homes with a 7%-8% interest rate. And salary hasn't increase much in the past years. What happen if people have to sell their house because job lost or because of their ARM loan have expire, they have to sell their houses at lower price, otherwise, they won't get buyer. When they sell lower price, they still owe money to the bank. And with the new bankruptcy law, it's difficult to run away from debt.
When people assume that the city will always have plenty of jobs and companies are always hiring. Do we ever ask ourselves, what happened if the government have strict regulations on tax, safety issue, etc. Company can't make much profit, than they will move to cheaper location, so they could make profit for share holder. If company don't make profit for investor, investor will pull their stock out.
In conclusion, I believe the housing market will go down to balance out with the inflation and the income; if the fed decided to increase interest rate and set more regulation on tax. If the Fed invole in the housing market and make it less attractive for investor, than the housing market will slow down, and not as crazy as now.


October 22, 2005 10:36 AM


Do you have any facts to support your first few paragraphs? You state that everyone wants to own a home (or do they just want a place to live and are willing to rent) and they can use the equity in their home to help pay for a larger house (what about first time home buyers who have no equity?). I believe your assumptions about the housing market may be limited to a small scope of the market and not really valid for the housing market in general.

Housing Bubble

May 7, 2007 3:09 PM

I'm in Toronto, Canada and here everybody denies the existence of a housing bubble. Just 2 days ago a senior economist at CIBC said "Prices will not fall":

I'm sure the same was said at the top of the previous housing boom, just before the fall. I've noticed that the Canadian economy is like a delayed version of the US one. Whatever happens in US, it arrives here 6 months later, so don't be surprised if the house prices start to fall in Toronto and other Canadian cities...

Claudisu Emperor

May 30, 2007 7:21 PM

Of course, all these immigrants can afford 500 000 dollar home, right?

There has never been so high rental vacancy rate in Toronto and so cheap rents. Now the rents are lower then 10 years ago. So if you are investing in rental property I have a bad news for you...There are many rental property owners that are selling now... Including whole rental buildings refurbished as condos...

And all this overbuilding. So many new condos everywere, so many new houses (just look north of Major Mac)

So many 'executive' towhhomes and houses without any land and in bad locations with just 20k spent in 'luxory' upgrades.

The employment rent is deceiving, many people make just enough to pay the rent, they could never afford a home.

The affordability index is the key indicator to look at. 2 years ago it was 4.4 for Toronto (severely unaffordable), now is climbing over 5.

This index shows how many years of before tax income is needed for a household with an avarage income for a city in order to afford avarage home.

Don't compare Toronto with Vancouver, there are not hundred thousands immigrants from Hong Kong here..

What amazes me are all these people that buy new 'luxory' homes in crappy locations without any land. In 20 years you money will be gone.

And these high maintenance fees on new condos...
It is really amazing how the people are ripped off of their money with these property taxes and high maintenance condo fees...

What do you expect from a city where people live in basements...named apartements.

Go to USA or anywhere in Europe and find a place where people pay astronomical rents to live under ground and I will legaly change my name to an_idiot.

Or and of course, there is no enough land in Canada right? Just 10 milion square kilometers...

And with this nice climat...
And with this strong Canadian Dollar.

Toronto more expensive then San Diego? Excuse me...

A home that cosst 500 000 USD in San Diego would cost over 700 000 Canadian (soon to be over the USD) in Toronto.

To pay taht much for the luxury of freesing cold in the winter and awfull humid summer...

A yes, with very low avarage income (way bellow San Diego for example).

If you are investing in Real Estate in Toronto you need profesisonal help...
From a psyhiatrist...

And all thes 'huge' condo bedrooms (2x2 meters.)...

And all these builders makind 100 percent profit on their homes and condos...

And all these agents ripping you off of your money...
No wander nobody wants to see a housing bubble in Toronto.

But don't worry, tomorrow the prices will pass Paris and New York.


September 22, 2007 2:34 PM

I have elected the rental route. I am renting a 2 story house in the Danforth area in Toronto for $1500 a month which includes utilities. I am 32 years old and have diligently amassed over $340,000 in investments with my wife over the passed 10 years.

My wife and I are Greek and our whole family is pressuring us to buy a house.
They just don't understand, much like 99% of Torontonians.

The interest I make off of my conservative investments (<7% returns) covers my yearly rent. Both my wife and I work which means, after taxes, all our money is disposable. We make decent incomes and are by no means rich. What you do with your money is more important than how much you make.

I travel twice a year (once to Europe and I take a yearly cruise). I own a 2007 Infiniti G35 and my wife a Lexus RX330 (both paid in full).

Do not be fooled, there is a renters market in Toronto but everyone is caught in the realtor marketing frenzy.

The true cost of a house can only be determined when a mortgage is finally paid off.

list price+
realtor commission+
lawyers fees+
yearly property taxes+
interest paid over amortization period

Some people want to pay interest their whole life. I on the other hand want to enjoy life and not make banks any richer.

When the time is right, I will buy a house in full without the burden of a mortgage. Now, is not the right time.

My two cents.

Larry Roy

March 10, 2008 5:50 PM

I totally agree with "My two cents". Owning an overpriced property brings with it a lot of sacrifices. Is it worth it ?......not a chance !There are so many more meaningful, significant values ; e.g., being debt free , travelling,being relieved of the constant worry of rising interest rates or losing one's job.
Larry, Toronto.

Marcus Aurelius

June 18, 2008 3:26 PM

I find Toronto a facinating example of delusional thinking. First, all real estate markets are 'local', and generalizations don't work in predicting which area, or market segment, will be crushed the worst in 2009 (and many will be crushed to some degree). So let me comment on one 'segment' - the seven figure in-fill/new construction market in central Toronto.

1. Beware agents that tell you they 'know Toronto' - but have been living in the city (or country) for less than 10 years. They know squat, much less whether an area formerly known for trailerfolk, road hockey or murder rates is a 'prestige area'. They take the usual pathological lying of RE agents to a "whole 'nother level".

2. These agents, including some of the 'established'(?) ones - are 'speaking' largely to folks with qustionable funds (Russian minigarchs, South Korean army lieutenants, Persian emigres who'd rather be in the US, but for the 'climate' there), etc. - not to the mainstream buyer. Those fine foreign folks will be able to overpay by 25-30%, because it would cost them more to get their money out of their countries by laundering it the old-fashioned way. Go thank the federal government and its insane policies, including dual citizenship, for that one. Good news: when they sell a year or so later, they can afford to sell for less than they paid (check the Q2/08 sales figures - a predictor of pricing movements to come). Canadians can't (and shouldn't) play in that game. The real estate industry is an 'enabler' for these 'clients' -and they aren't you, the sane buyer. These buyers have a different 'business case' for paying $1.5M for a crapcan worth under $1M, and in some areas, they are helping the broker and lender 'enablers' make an artificial market. And we know what happens after that, sooner or later.

2. Watch how these agents and builders work a street in a 'newly developing prestige area'. They collude to 'turn a street/area over' after lots are bought at a lower price. It's rumoured that agents 'make the market' by trading early starts at inflated prices amongst themselves, on paper (then cash-in later, with the builders, as the street/area turns over). Look at C4, and now C7 - and ask yourself "Who are the self-congratulating brokers 'working' these areas, who are 'proud' to be so closely associated with builders?" Then run in the other direction. In securities law, people are supposed to go to jail for market-making. But these 'real estate boiler rooms' in Toronto have, so far, been left alone to shear the sheep. Don't be one of them.

3. Finally, builders used to work on 10-15% profit. Yes,servicing, municipal fees and material costs have risen since those days, but margins over cost are simply a reflection of unchecked greed that can only persist if an entire framework - the banks, the middlemen agents, a deluded and naive group of coddled 'buyers' - remains supportive. But would you be surprised to hear that builders are pricing at 50-75% profit on these infill houses - or more? Here's how 'your' list price is determined: a builder figures out his crushing margin, then refuses (except by 1% or less increments) to back off that list price, despite brutal turnover in these areas. Look at the windows - do they seem relatively 'small'? Are the finishes relatively unimpressive, even though you've worked out the price to $300/sq/ft? Stucco is also King, for these fly-by-nighters. And here's a scoop - No Tarion? It costs a few thousand dollars, relatively, to warrant a million-dollar+ property - so ask the vendor why he didn't do that, but don't bump into the non-union moonlighters finishing his project or trip over that 'borrowed' worksite material waiting to be put into YOUR new home. If his project took longer than 6 months from foundation to finishing, good luck. Fun and games drives margin, but none of this is hard to spot.

4. NEVER participate in an auction. Ever. When an agent says "we won't be taking offers for X days", walk away fast (after spitting on his/her shoes, of course).

This is all coming to an end, as everyone knows. The "Canada is Different" macro-view expounded by staff economists (they're the ones in the big hat, fur coats and bling) is becoming a more difficult sell, even to the real estate sales industry (the ones in the 9-inch white pumps and fishnets, on the streets).

Look at the lack of new listings in that segment, as the vendors back off inventory. Now if only those crazy yuppies can figure out that a 25-foot frontage stucco-job near beautiful, prestige Bathurst, Finch, Steeles or Laird is really not going to impress the Partners at work when they hear what these self-involved dorks paid, then we'd all be set. Most local buyers in this segment were raised as 'special children' with no boundaries or humility - so their basic Real Estate 101 stupidity makes them dangerous 'competitors' for those 'bargains' in these areas.

Marcus Aurelius

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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