The Real Estate inflation bubble

Analyzed based on the data collected from the Toronto

Real Estate inflationary bubble that peaked in 1989
The Toronto bubble in 1990, a year after deflation began in April 89.

Toronto median home price

This is what I believed, back in 1990, the Toronto market should have done, if the
bubble had never existed

Toronto median home price

This is how I believed the market would deflate back to normal

Toronto median home price

This is what happened in reality, as I found out 16 years later

Toronto median home price

The US single family home bubble as seen in a 7 year context only.
It looks as just a minor deviation !

US median home price

The same bubble in a 40 year context
 The St Lucie county single home historical prices.
The data is shown month by month, dividing the total dollars of all transactions by their total square footage.
(St. Lucie Property Appraiser database)

St Lucie county average home price in $/SF

Inflation bubble
 A close-up of the same bubble
An offset of 9 months can be observed between the peaks of the investment and price bubbles.
The investment bubble peaked in July 2005 and the price bubble peaked in March 2006
Where I predicted the St. Lucie single family market would stop falling.

St Lucie county average home price in $/SF

 What will the market do after that?
The scenario shown below assumes 2 years of stock depletion with a price growth equal to about 2%/year,
followed by a 7% price growth driven by inflation due to scarcity and to bailout excess liquidity.

St Lucie county average home price in $/SF

 The construction cost behavior in the two Toronto Bubbles
Construction costs kept growing for 2 years after the bubble began deflating
Then costs kept growing but at a slower pace while construction was at a virtual standstill.
Costs rode the second bubble catching up with all ground lost since 1992

The first bubble starts inflating in 1985

 US historical construction costs in $/SF
The construction cost inflationary bubble created a structural problem that needs to be resolved for the
industry to recover a normal pace.

Construction cost inflation accompanied Real Estate inflation

 • What does the future hold for the construction
industry?

Construction prices must substantially lower its current level to about 66% of what they are now (which seems close to
impossible), or otherwise wait 5 to 6 years, until general inflation and housing demand catch up with them. The best case
scenario seems to be 4 to 5 years of extremely low levels of new construction, until the market begins to normalize.
I recently completed a pricing exercise for a low income home in the St. Lucie area, starting from raw land and using local
contractor prices. At the current local construction costs, I would have to sell it for about $160,000, while a similar house is
currently selling for about $95,000.
For the equation to be balanced again, the $95,000 home would have to increase its price at a 6% annual rate for 6 years while
construction costs would have to increase its current level at no more than 1% per year. After 6 years, I could compete with the
existing house again and construction in general would regain life.