TD Bank: “Home prices will be essentially flat for the next decade” [Therefore Vancouver Prices Will Crash]

td bank flat

“A TD Bank research report is warning that Canada’s real estate bonanza has come to an end and predicts home prices will be essentially flat for the next decade. The TD report forecasts average house prices will move lower over the next few years before modestly rebounding after 2015. But even with the rebound, TD predicts that home price increases will only rise about two per cent annually — essentially keeping pace with inflation.”
– from ‘The value of your house may remain flat for 10 years: TD Bank’, CTV News, 11 Mar 2013 [link defunct at time of press] [hat-tip E.G.]

“Just to be clear, most observers expect a soft landing, rather than a U.S.-style crash. But, according to TD, don’t bet on prices appreciating to any great extent.
“The housing market is prone to cyclical ups and downs, and Canada is expected to embark on a gradual, modest, downward adjustment over the next three years,” the TD economists said.
“A string of lacklustre performances will mean that the annual rate of return for real estate in nominal terms will be roughly 2 per cent over the next decade,” they said in their report.
“In other words, real estate gains are set to match the pace of inflation.”

– from ‘Home prices to gain ‘measly’ 2% a year over next decade: TD’, G&M, 11 Mar 2013

“The report does not predict a collapse in house prices as some analysts have suggested. In fact, it sees prices rebounding after a few years of a correction to as high as eight per cent.
However, the longer term trend is for home price gains to average about two per cent over the next 10 years — flat once inflation is taken into account, says TD chief economist Craig Alexander.
“I do not think we have a housing bubble in Canada,” said Alexander. “We have had abnormal strength in the market during a period of low interest rates and when rates go up over the next three years, you will get a cooling and weaker prices, but not a permanent shock and not a sharp correction.”

– from ‘Vancouver house prices to will outpace national average, TD report says’, Vancouver Sun, 11 Mar 2013

The vast majority of buyers of Vancouver RE, for many years, have been speculators in that they have been buying with the expectation that prices would continue to rise at an abnormally high pace (for instance, 7% per annum, or even more).
Once it becomes clear that prices will not continue to behave like this, the massive central engine for demand will disappear. Buyers will not overextend to a ridiculous degree to chase prices that aren’t going anywhere. The fear of being “priced out forever” will no longer propel their behaviour; the greed that previously encouraged buyers to “jump on the RE train” will disappear.
This is why a speculative mania never, ever, ends with a flat market.
Once the speculative component of prices evaporate, prices will fall to those supported by fundamentals, far below. In Vancouver’s case, these levels are 50% to 66% off peak.
– vreaa

46 responses to “TD Bank: “Home prices will be essentially flat for the next decade” [Therefore Vancouver Prices Will Crash]

  1. Real Estate Tsunami

    I hope our secretary reads this article.
    Only fools rush in!

  2. Does Alice understand the change in Harmonized Sales Tax this coming April 1st, will decrease the price of new condo’s? Does she anticipate, like I do, that this will be the catalyst to Gap Down the overall RE scene?

  3. Wait and see unless you are “horney first time buyer” and don’t give a ….. Only fools rush in.

  4. Cyril Tourneur

    I don’t think very many people understand this dynamic. So much speculation here has been based on nothing but the expectation of ever increasing prices. As you say VERAA, take that expectation away and price discovery resets to fundamentals, no other option.

  5. Real Estate Tsunami

    This report will be the straw that breaks the RE camel’s back.

    • “…..Canada is expected to embark on a gradual, modest, downward adjustment over the next three years,”

      If only that were the truth it might not hurt so much later.

  6. TD mentions price-income and price-rent once in its report

    Here is their basic thesis:
    “In the long-run, household-specific factors have a lesser impact on real estate price growth. Instead, macroeconomic factors carry the greater clout. The variables thought to contribute the most include: income and economic growth, and population and household formation”

    Not mentioned — and I am in agreement with its omission — is borrowing rates. But I don’t think demographics and population growth, or even economic growth (a large part dependent upon construction activity), have the magnitude of effect they claim. Whether someone is old or young the amount of housing they consume is about the same though the specifics change. Population growth, too, only panders to what’s affordable and price changes are more tightly linked to changes in population growth, not population growth per se. From what I’ve been able to ascertain I don’t expect demographics to have as much an effect as is touted; it seems so obvious to me it’s price-rent — the marginal investor — that dictates prices in the long run. TD is either deliberately avoiding the crux of the “fundamentals” driving the housing market or are unwilling to deal with price-rent in a more considered manner.

    I think the report’s concentration on population, demographics, and economic growth is flawed, and I expect bigger drops than what they’re predicting.

    As mentioned, Vancouver, even with TD’s prediction, is going to underperform, and all signs for 2013 are pointing to further deterioration in prices. Things may surprise (well surprise me anyways) to the upside as they did in 2009 but to date sales growth is meagre. That is bearish.

    • Ralph Cramdown

      I think household formation is as much a driven variable as it is a driver. When monthly costs are high and credit tight, kids live longer with their parents, roommates and couch surfing is more common, separated couples continue to live under the same roof and so forth.

    • I saw a Canadian population chart a number of years ago that Included the Immigration component, by age, and was Quite Shocked. It is NOT very well known just how many Complete Families of immigrants were brought into the country between 1989 and 1994, but it was Staggering.

      Just when the peak Boomers were in their Peak Family formation years, it was the policy of the Immigration department (policy is dictated to Canada from the UN) to FLOOD the country with Asians, grandparents and children in tow. Remember the Family Re-unification Years?

      The point is.. If you look at a Age Distribution graph, of Native Born Canadians, you might be duly impressed with the Peak re-production years of early 1960’s. But if you factor the Immigration and add the Children of immigrants, There Is A Second Peak, in 1990/1991.

      What does that mean for the First Time Buyer Co-hort? age 25-31. Easy. Just add 25 or 31 to 1990 to arrive at: 2015 to 2021

      • Real Estate Tsunami

        You are assuming that these children are still around.

      • these children are approx 23 years old now. I remember that I loved to travel when I was in my 20’s. But the day comes when you knock up your girlfriend and need to buy a loft. These kids will go where the economy is best suited to their needs (or vice/versa), not necessarily Vancouver.

    • EinsatzgruppenVancouver

      You’re right on the money where you mention borrowing rates.
      The price of real estate isn’t being set by what buyers think is an acceptable price. What happens is buyers, they go to a bank or a mortgage broker first, see how much they can borrow, and buy the most house that that will get them.

      The amount you can get from the bank is a function of your income and interest rates and credit history. In sense, people don’t buy purchase prices, they buy monthly payments of X.

      So if your bank figures you can be trusted with a $650K mortgage, what they really mean is you can be trusted to make ~3100/month in payments, because at today’s rate of 3% that’s how it works. Presumably, the exact same buyer who qualified for $650K @3% will only qualify for $525K @5% interest rates, right?

  7. Real Estate Tsunami

    This report will drive the final nail in the “buy now or be priced out forever” coffin.
    Also, by predicting a flat line for 10 years, it will force many boomers who intended on liquidating during the next 10 years to push this time line forward, resulting in a large increase in inventory in the next few years.
    The new motto will be ” sell now or be left holding the bag”.

    • +1 on that.

    • I don’t see how this forecast is going to deter people from buying into stagnating market. For an average Joe this translates into “buy now and you’ll have 10 years worth of equity before prices will start climbing again or pay somebody else’s mortgage for the next ten years and then be priced out forever”

      • Real Estate Tsunami

        The old and tired “paying someone elses mortgage” again.
        Please do the math for me.

      • CanAmerican

        Andy, For people currently stretching beyond any reasonable amount just to get into the game and catch some appreciation the jig is up. If they believe the “flat” market argument, then there’s no capital appreciation. One could argue, correctly that it’s cheaper to rent and that should be enough to halt the buying, but you are right some would still see it as forced savings. There will be a proportion of people however, who are so levered out that they have next to no money available after the mortgage, with some probably using credit to help subsidize. These people are doing this in large part on anticipation of capital appreciation. Take this away and they want no part of it. This will also cause some to want to exit the hard sacrifice of exorbitant real estate and sell. All-in-all, it’ll end.

        Remember, this just assumes flat. I continue to believe that long term fundamentals always apply, and prices will revert to a sustainable historical mean. This should be round abouts 3X average income. Maybe slightly more in highly desirable areas. Vancouver and suburbs are going to reach that point, it’s just a matter of when and how protracted the great reset will be.

      • CanAmerican

        I might add one more point. Once the assumption that home values can only rise is no longer accepted by those responsible for lending, which would include CMHC, then lending standards will become more stringent. Knowing that the bank or insurance company could reasonably take a loss will change the whole game. Being credit-worthy will mean something again.

        This will further tighten demand. As a corollary, we’re already seeing this. Note the endless stories of properties over $1mm with huge MOI and near zero demand in places like Richmond where I used to live for some time. It should seem laughable that someone would buy a home for that much money and not have at least 20% down. But in our reality it looks like the joke was likely on the public who financed the risk through CMHC. Now that this spigot has been curtailed, the lending ceases. Watch for more and continued emphasis on risk identification all round in the future. The heady days of fogging a mirror and getting a loan in Canada are coming closer to an end with each passing day.

      • Real Estate Tsunami

        Also please re-read Vreaa’s comment.

      • Andy said: “I don’t see how this forecast is going to deter people from buying into stagnating market.”

        This forecast isn’t going to deter people from buying; falling prices will do that.
        Yes, counterintuitive, we know: falling prices should increase demand etc. But that is only the case when reasonably priced goods become a little cheaper — after a spec mania, price drops beget price drops.

      • Yup. When an asset is rising everyone wants to get on the gravy train and ride it up. Remember Bre-Ex? And when it falls out of favour the whole damn herd sells into a falling market in a rush to get out.

  8. Why is anything written by a bank on the topic of real estate even worth discussing in the first place? Even if its authors wrote in good faith and are intellectually honest (something I increasingly doubt for anyone in the FIRE industries given the shenanigans of the past 5-10 years), their incentives are such that they aren’t likely to reveal anything damaging to the bank’s mortgage business. At best, anything they say is likely to be neutral in this regard.

    It doesn’t seem all that different to me than taking the opinion of a precious metals fund dealer on the future prospects of the gold market, for example. The response is always going to be in the range [neutral, infinitely positive).

    • Canadian real estate has been downgraded from a buy to a hold. In financial industryese, that’s telling investors to sell.

  9. So TD is predicting that Flaherty’s perfect scenario will come true…

    (that housing prices will stay flat, the economy stays-the-course, mortgage debt gets paid off, high home prices don’t become a threat, and, eventually, housing becomes affordable with 10 years of economic and income growth)

  10. [NoteToEd: I may well be just another cynical, “SuperAnnuated Buffoon” … but I couldn’t help but wonder whether TD CanadaTrust’s revised trading hours had something to do with expanding their MarketShare in a ContractingUniverse {sorry, make that “Flat”Universe}. Well… never mind all that, ‘cuz just between the two of us, this past weekend’s preoccupations, although eminently entertaining, were – admittedly – debilitating. I am still recovering – “Oh, the shame!”.. One other thing, too – although I may never forgive BaronBlack of CrossHarbour for introducing “SuperannuatedBuffoonery” to the popular idiom… and nothwithstanding his multiform literary conceits, I will at least give him his due as regards this… “I don’t go around trying to stir up foreign wars.” – BaronBlack. A lofty declaration, indeed. Although personally, I rather more admire those who toil behind the scenes to prevent them from happening at all… TeeHee!]

    • From what I’ve heard from those in banking, there is some desperation over how fast mortgage lending has dried up.

      • You mean new mortgage loan applications I am guessing, Angleterre. Keep an eye on the kind of bank advertising over the coming year and the great incentives that get offered.

        With home buying declining we can expect the usual. Banks can only cannibalize each others business now if they want to bring in good results for shareholders.

        This is usually good news for consumers as all kinds of gifts and incentives get dished out trying to convince you to switch banks. Of course…..they only want the best customers from the competition so it can be a double edged sword as they will also be discouraging renewals for other folks.

    • Ralph Cramdown

      Hey, it’s not just TD. When I was in West Van last fall, the Royal Bank branches sported signs proclaiming “Now Open Mondays!” Frankly, I’m surprised the District allows such schenanigans — players looking for that kind of action ought to know where to find it: On the other side of the bridge, or perhaps in North Van (we don’t know for certain, we haven’t made inquiries, but it sounds like just the type of thing THEY’D go in for.)

  11. Stiffening her resolve whilst simultaneously struggling to loosen the bonds that held her captive, HostageComment vehemently declared, “You’d have to be a Buffoon… NO! A positively extraordinary buffoon, to think that I could ever love one such as you… you vile despicable worm, RoboRedaktor”…

  12. Quite the rosy picture the Vancouver Sun paints from that headline. As usual, nothing to see here…

    but… “TD expects prices to fall in the next two or three years.” TD should really stop here and elaborate, but as per industry standard they instead come out with all sorts of ways and figures to disguise the bad news.

    TD covers this 2 – 3 year notice of declining prices by making a nice little promise that they see prices once again resuming their increase afterwards to match inflation after 10 years. That is quite a crystal ball, how convenient….

  13. silly beatles people …

    • “Curses! Bested again!”

      [NoteToEd: The EmmyWinning episodic that didn’t have a RunningJoke hasn’t been invented yet. PS – Not many people know that Brig. Gen. James M. Stewart (USAF Ret.) was fluently bilingual]

  14. “You’re an insatiable dog, RoboRedaktor – but I adore you so!”, Hostage comment exclaimed whilst inadvertently allowing the merest soupçon of décolletage to frivolously entice the LewdCharlatan to further excesses….

  15. one more justification of why you need to buy rather than rent – when mass transit comes, you will be homeless if you don’t buy!

    Though I don’t know why the rent is so expensive in Coquitlam, it really shouldn’t be that expensive like Burnaby or Vancouver.

    Also, I think over medium/long term, we shouldn’t have a housing shortage since those old 4 level apartment buildings being demolished are being replaced by like 20+ stories with 4 or 5 times more units. Unless there are tons of new people magically appearing, those extra units either have to reduce rent to get renters or sit empty.

    • Real Estate Tsunami

      Because Coquitlam means Stinky Fish.
      That’s why.

    • CanIWaltzintheWalkIn?

      Long time lurker here … posting for the first time.

      The Burquitlam area mentioned in the article is a bit of a niche rental market that will be difficult to replace with new 20+ story towers. Like Edmonds in Burnaby there is a high concentration of refugee/immigrant families requiring cheap multiple bedroom rentals & access to transit. Most of these older 4 level buildings were designed with families in mind (2+ bedrooms, playground courtyards) … a rarity in today’s market. The nearby houses don’t contain nearly as many suites as in Burnaby/Van, but this is rapidly changing as the smaller ’60s houses are renovated/torn down & replaced with monster homes (keep in mind that there isn’t much older pre-60’s housing). This area of the TriCities also acts as SFU’s dorm … especially for older students with families. Neither of these groups will be purchasing the new granite-encrusted apartments & they probably won’t be able/willing to rent them either.

      As for “why the rent is so expensive in Coquitlam?” … lots of factors in addition to those above (high family immigration rate, lack of basement suites, prox. to SFU). TriCities & New West are the last spots to squeeze into before you are faced with bridge crossings. Coquitlam also attracts a huge number of middleclass family immigrants into established community networks (particularly from Korea, Iran, Eastern Europe) that can’t afford to/prefer not to buy Vancouver real estate (not-so-hot-Asianish-money?) or are just comfortable with renting because they’ve done that all their lives. The newish areas in Port Moody/Coquitlam also attract young ex-Vancouverites who like their granite & stainless steel lifestyles but can’t afford to rent or buy the same in Yaletown.

      The rental market in the TriCities is fine for those simply looking for a 1 bedroom apartment without many nearby amenities … frustrating & expensive for those needing family space, transit proximity, etc.

      • Real Estate Tsunami

        Thanks, Waltz.
        This is a great analysis.
        Looks like you really know your stuff.

  16. For an excellent example of a recent momentum play gone wrong, take a look at AAPL.

    Every analyst under the sun, and every fund manager found the stock cheap at $700. Institutional ownership hit the high 60’s and no one was left to buy. AAPL is now 40% cheaper with the same fundamentals, now it truly is a fantastic buy. A great company, with more cash than most countries, the most obsessed consumer base, and a huge potential for growth.

    And yet, now all the same people are absolutely disgusted with the stock. You can find opinion pieces that would make it seem like Apple is on the brink of bankruptcy, only because its stock has fallen.

    Its funny how market psychology works.

    • Real Estate Tsunami

      From tulip bulbs to Google.
      Nothing ever changes.

    • counterpoint – aapl got there on serial design innovations … are they still that without jobs? … if not the competition will eventually eat their margins
      re: bubbles – very profitable bait and switch for a small minority … sort of makes sense that loose cb money keeps blowing them … so, what is the biggest bubble right now?

      • Japanese government bonds?

      • Dubai’Luxe’Rezs… ???

        “In the wake of the Arab Spring, Dubai has been seen as a relative safe haven” – Knight Frank Prime Global Cities Index

        [AlArabiya!] – Dubai luxury property prices rocket by 20 percent

        …”The Middle East region saw the best overall improvement in prime property prices in a ranking by real estate firm Knight Frank. The Dubai market led the way regionally, with an increase of 20 per cent in villa prices between December 2011 and December 2012. That was second only to Jakarta, where prime property prices rose by 38.1 percent over the same period, according to the Knight Frank Prime Global Cities Index.

        The average price of luxury homes in 26 of the world’s key cities rose by 1.7 percent in the final quarter of 2012 and by 3.6 percent year-on-year, the study found. An inflow of investment from high-net-worth individuals (HNWIs) was cited as one factor behind the growth in Dubai property prices. “Cities such as Dubai, Miami, Nairobi and London are increasingly considered investment hubs for HNWIs in their wider regions.”….

        [NoteToEd: FunnyOldWorld, the more boisterous the crowds in MENA’s multiple ‘TahrirSquares’ get and the faster ISAF implements Afghan reductions in force/demobilization… the more expensive those silly PalmIslandProperties become… Speaking of which, it’s still very much a toss up as to which will prove more transient – regional HNWI FlightCapital or the Artificial Archipelago itself;
        NoteToJR: Speaking of DeMobilization, you may {if you ain’t already seen it} enjoy Brig. Gen. Stewart’s BeatlesRiposte, appearing above.]

      • 🙂 i like this one best … … won’t be overnight but eventually everything fed’s done since about 5%-6% will start backfiring bigtime and then some … pffft! … im thinking he was definitely for elvis …

      • Robert Dudek

        The Federal Reserve balance sheet.

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