CalvinL
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Posts posted by CalvinL
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"there is no particular reason why housing has to be affordable for the average person"
I'd add that it's the average local person without foreign connection.
http://www.baskinwealth.com/a-contrarian-view-on-canadian-housing/
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from what I know.
- Financing, if needed, would have been done in China a few years ago, not here. It's harder today with all the capital control policies but not impossible.
- Most immigrants to Canada would be able to come up with 1M+ as a family. Selling any of their real estates in Beijing, shanghai, Guangzhou and of cos HK would generate that amount. (although most who had done that in the past few years would regret it now)
- Family buying: one child policy in the last few decade means a couple in their 30s today would have the financial backing of both their parents. Living with inlaw and parents is the expectation but that's also quickly changing.
of cos there are also mortgage packages designed for new comers in Canada from lenders like Genworth. Why would they do it - I have no idea. There is a rumour that's floating around - "in Canada you can get bankrupt and it does not affect your asset in China". I'll stop here lol....
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I live in Toronto, and this bubble is definitely insane, but I can't wrap my head around whether I can bet against it or not.
Because to me, the premise "this bubble must pop" is not good enough, obviously because of the timing aspect. In some sense, I need to identify potential catalysts for the bubble to pop, and be sure that the catalyst(s) would happen soon.
Here are some scenarios that I though about...
- Highly levered, speculative local investors default on mortgage payments or must sell the property for other reasons. This requires one of 1) interest rate rising fast, 2) cannot find tenants (or rental market tanks), or 3) the investors lose their sources of income / wealth. 1) is unlikely given that the government can control it to prevent popping the bubble, 2) is also unlikely looking at Toronto's rental market right now (no sign of population decline) and 3) likely means some sort of global financial melt down, which is hard to predict.
- Foreign investors suddenly need to sell, perhaps because they suddenly need the money, or they now have an incentive to sell (better investment opportunity elsewhere or maybe China says bring your money back now and you can legitimately keep it?) or they figure that the investments no longer meets their hurdle rates. I really don't know whether any one can predict timing of these events...
Anyone else can think of other catalysts and their estimated timing?
I agree with your logic - the timing and probability is uncertain and no one will know if this is a bubble that's gonna burst soon or a bull market run that's just beginning.
Other Catalysts:
- Capital control by the Chinese Government. (Usually ineffective as people will always find a way)
- Anti-immigration policy, Reduction of student permit/parents visa/work permit. by the Canadian Government - not likely given the current political environment
- New immigrants preferring other cities instead of Vancouver/Toronto - I dont see how that's probable
- Racism riots/Terrorist attack in Toronto/Vancouver - probability unknown, but that will be enough to scare off some immigrants who are here for their kids.
- increased capital gain tax of any kind on property. That will trigger short term selling - We will know today.
- Sudden jump in CAD - back to 1:1 USD?
- Government providing significantly more permits for condo development in the next few years
Valuation of housing is always relative. imagine a new Chinese immigrant from a major city come over and look at what $2MM can buy in Markham. And it comes with free English schools+free healthcare. Most would find it a steal. Our 35mm population just find it hard to understand what the 1.4B ppl are thinking.
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This is the typical belief system in Canada. You don't need cash flow because houses always rise. Why bother with cashflows? Borrow larger amounts and keep bidding asset prices higher so everyone can borrow even more.
It is a beautiful thing. If only the rest of the world could figure this out we would all have limitless funds.
The truth is you still need to "prove" cashflow. But that proof is where some brokers would bent the rules. I went to 2 different mortgage brokers and they both suggested me to "prove" cash flow by simply drafting a renting agreement with someone. There will be tax on those rental income, but the interest would be deductible. They really dont care if those rental incomes are legit. The message was "this is common sense and everyone does it. You are missing out if you don't" Their job is to present a case to the underwriters so that they don't have a reason to reject them.
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I actually went to the Toronto Real Estate Expo. It was a horrifying experience.
Biggest takeaways:
- everyone pitch is some form of 'get over your fear, don't analyze just buy' - I am not kidding that was pitched first 3 presentations.
-Brad Lamb (king of condo's) said infront of 15k people that it's good to have a good relationship with your lender because they 'will bend the rules for you'. If that doesn't work, find a third tier lender there are plenty of them.
-Every booth was pitching second lien mortgages as RRSP investments. Mostly in the 10% range. I talked to many of these sales people. There is no security on these loans. Typically it is offered on houses pre-renovation. Ie. buy house for 1mil putting down 20% (lie to bank to get that, don't mention you are flipping), get 500k second mortgage, then sell house for 2mil! I heard that pitch twice
There is a boom in second lien with new lending standards. The second lien lenders are only looking at asset values, don't care about your personal credit or cashflows to sustain property. This is going to be a huge problem when prices stop rising.
I wrote more here on my blog. https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to
I am email a bunch of these 'mortgage lenders' and 'investors' to learn more if anyone is interested I can pass on what I learn.
You do need cash flows to sustain the property, but it could be done with a note from a friend saying they pay you $2000 rent/month for a 100sqft den (exaggeration for fun). Just pay tax that that and now your property is cash flow positive. And now off to the next bidding war ;D
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I'd like to know which Canadian markets are at ~55 price to rent ratio (the bottom end of that bar). The propertis I own now are probably 150x price to rent ratio.
Actually 200x to 250x is the norm now if it's in reputable school zones.
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Why are detached homes in Vancouver selling for 15-20% lower prices than last June?
Did anything other than the ability to borrow because of the tighter mortgage rules change? Or is Vancouver suddenly not as good as Toronto? I thought the argument was that Vancouver was the best and all the rich people were moving here? Suddenly the rich people prefer Toronto?
Another thought exercise - last winter/spring - people were flipping homes for $100k more than their purchase within 24 hours. Why did people feel the need to pay $100k more for the same property by the end of the day? Did the lifestyle in Vancouver improve by 10% within 24 hours or was it their incomes that increase by 10%?
Its easier to find correlation rather than causation, but there is an interesting correlation here regardless. I find it hard to pinpoint the real reason. Most people say it's the foreigner tax, China capital control etc...
Average home price could be misleading. From anecdotes I've read online, prices for homes under $2-3MM didn't come down at all in Vancouver.
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The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.
The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.
Except for conjecture, do you have any real facts to back up these claims? I'm honestly curious.
Simply check out Ratehub or ratesupermarket, talk to any one of the mortgage brokers there and find out the world of possibilities ;)
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On a seperate note:
If we are calling things "overvalued" or "undervalued" purely based on historical prices, how's that different from stock price chartists and speculators? To me the intrinsic value of a property is all the future rental income minus all cost discounted to present value.
Have anyone crunch the numbers with a model (DCF etc) for their own situation in Canada? Rent vs Purchase, with different rate, rental prices, in dfferent location etc. What are your findings and what surprises you? if current pricing is "too high" or "too low", what would be the right pricing and what's the rationale?
It would be interesting to see the assumptions behind certain model that lead to your stand on housing market valuation.
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OK - i don't need to be a math wizard to know those who rented when my dad started out vs those who bought - the latter are doing better now -
OK just keep renting. we'll know who is right in 30 years....
Gary
Ahhh... the great theory of value investing: go out and buy assets that have had very large run up in prices.
Maybe you should compare your dad's situation to a guy who rented and put his down payment, and savings from repairs, forced principal payments, prop tax etc into BRK and see how that latter guy did vs ur dad. You don't need to be a math wizard for that either.
If we value a house like a business, how would that look like to you?
If people buy property with all cash and then try to rent it out, the rental return is at around 2-3%. Might as well just buy government bonds. The trick right now is to leverage up at low interest cost and magnify that return.
Relative to the current mortgage rate and assuming 2% increase in rent every year, the current prices seem to be in reasonable range - If downpayment is at 20%, deduct all fees/maint/interest/tax the rental income could come in at around 8-15% on the downpayment depending on the building.
Of cos, big assumptions: is the current rental price sustainable? what would be the mortgage rate/cost of capital in 5 years after the fixed term? Recent price run up right have deteriorate that return rate further and added risk to the investment, but a big run-up doesn't always mean an asset is already at overvalued category.
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Real estate is a leveraged asset in most cases. Since 1981, the cost of borrowing money in Canada has fallen from the peak. Over the same period of time, many households moved from one income earner in the household to two. So, for 37 years the cost of borrowing money has been falling while household income was increasing. It's not surprising then that leveraged assets like real estate were driven up. Especially in a city like Vancouver where land supply is tight. Mountains in the North, water to the West, a border to the South with protected farmland to the East against the backdrop of more mountains. The building in Vancouver these days is up. Vertically. Assessed values are dominated by land values.
Looking forward, a change in interest rates increasing the cost of borrowing would likely create a shakeout for the overleveraged, but longer term the land will remain a valuable asset.
Don't forget structurally weaker demand and more supply coming in the future as the baby boomers start to die off. Basically all the tail winds that real estate had over the past 30 years are basically turning into headwinds over the next 30.
It's true that the demand from baby boomers are dying out but I believe all projections point to an increase in population due to immigration, planning around 150k-300k per year. New immigrants likely won't find relatives, friends nor jobs beyond all the major cities.
Housing prices is a function of income and leverage applied. I can see how prices would come down if 1. unemployment rates go up 2. interest rates go up. both are actual factors that will make mortgage payment affordable and lower the demand for rental units.
1. is dependent on the economy, and no one has the crystal ball.
2. is something that would likely be artificially kept low. The government both left and right have every incentive to keep the housing market up. I find it hard to imagine a scenario where the government keeps rate high as housing prices come down.
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Sum-of-part analysis shows it's worth less than what it's selling for.
http://time.com/money/4608082/mcdonalds-lawsuit-value-meals/
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Chances are he will have a group of advisors holding his hands over issue he has no knowledge of, like foreign trade policies and military. The real concern I have about him is his moral ineptitude and the social progression over the past 8 years he could undo within his term.
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This has been happening for decade. The incentive systems is all wrong in Canada. Some RE agent argues that they are bound by ethic code bla bla bla, but the incentive to block out other deals and favour double ended deals is huge.
Always get the selling agent to represent you. The double ended commission ensures that they will go out of their way to seal the deal with you, or at least you wont place the highest bid and then find out that you miss out by $500. Some could easily block out other deals with "accidentally missed" calls and faxes from other bidders. What's worse I've heard is that selling agents are partnering with wealthy relatives to place fake low ball bids. All sorts of market manipulation and real ugly stuff is happening daily.
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https://www.youtube.com/watch?v=l8Vu7vRoVUU
I think this is the closest thing - the Canadian version of subprime mortgage.
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biggest mistakes I made are blindly following super investors into various situations. It is obvious that even the best and brightest sometimes make mistakes that's so obvious.
I made the same mistake as well - following a few famous value investors into XCO and torstar without fully understanding the risk behind it all. I also observed a herd like tendency within the value investing community.
I used to jump on 13F, especially when I saw other value investors buying into the companies I am familiar with. That's a terrible bias as I later learned.
Lesson - do my own homework, think hard, and listen to myself.
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o my thank you for the correction mcliu. I read it from Hurun as well but got the figure wrong by 10 fold. :o
I agree with you that it's not just the Chinese, it's more likely that the global 1% are moving and investing into these cities.
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Does anyone understand AVM's investment philosophy? I examined the historical trades in dataroma and found most of his positions as high P/E businesses. CHEF, TRIP, CMPR etc.
I haven't seen any value investors buying such high P/E stocks.
Can anyone help me understand his approach?
CMPR or the old VPRT - was a fair price to pay for a growing, industry roll-up strategy. It is the amazon of printshop that no one talks about. Roll-up - I mean businesses begin transferred from traditional brick and mortar high cost print shop to online print shop. Lowest price, lowest cost producer advantage, reputation (repeat customers) advantage, marketing $ scale (google adsense) advantage, Robert Keane who can clearly articulate and execute this strategy. Its IT system is the real secret sauce that no one can just come in and kill their business. Given the total print market is shrinking, no one is going to come in and compete so they are likely going to dominate a slowly shinking pie. And it was traded lower when it experimented higher prices and that writedown that hurt earnings back in 2012. Needless to say, he became my hero since.
Chef is a specialty food supplier that has the widest catalog of specialty food in the US, sourcing mostly from small European suppliers. no one comes even close. There's a new foodie trend going on and consumers start to demand 200 different variety of cheese from restaurants beyond what sysco could provide. They are the only one in US that could deliver that, so price isn't the biggest problem. once restaurants start ordering from them it's easier just to stick to them for everything. so there's customer captivity and suppliers captivity. They manage their inventory well and even if things get worse, Sysco seems like a logical buyer.
none of these 2 stocks are exactly cheap now...but AVM got in at much lower prices. His strategy seems to be focusing on small/mid size growing businesses with competitive advantages at a fair value. I really wish to talk to him one day.
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I can buy a house in California with an even more moderate climate than Vancouver in a country with overall somewhat lower taxes and lower cost of fuel, food, etc..and finance it with a 30 year mortgage. I am not convinced Vancouver is so great as to justify such high prices based on geography alone.
I agree except the lower taxes part and that may be true from your perspective. Now imagine a family born and raised in China whose first language is Mandarin?
Equal opportunity for ethnic Chinese is important. Racism issue, cultural acceptance, community where you can feel you belong...it's there in a smaller scale in California but it's also differences in the details.
Services in Chinese similar to what they could get in China is important. The moment you walk off the airport - Chinese Signs, Mandarin broadcast, Chinese restaurants, beauty salon - Not exactly as good but close enough. And then you have a few neighbours who speaks Mandarin as well. Pack Chinese food for lunch to school and it's just a common sight. These are part of the ecosystem that created a "monte carlo" for Chinese rich people. it's similar to how Japanese were buying up Hawaii back in the 1970s-1980s.
That being said, this bubble could pop someday. Vancouver could have some sort of uncontrolled racial riots, tax targeting immigrants/high price property ownership, or a tighter immigration policy for the rich. China could try to limit capital flight, or their economy could collapse, or China could become such a great place that people decided to move to China....
Most RE market price is a function of rate and income. Debt % and housing price to GDP could tell if it's overheated or not. Vancouver just isn't another regular market.
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When PDF is not available, printing from htm seem like the only option but the pages never line up to letter/A4 sizes. Any tips to get htm files printed properly?
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I just logged on and just magically...it's back! I can see up to issue 10 (10/23/2015), 257 companies now. I wonder if someone from Value Line is on this forum and saw this post.
Thank you for your help AccentricInv :D
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You're referring to the ratings and reports for issue 10 (10/23/2015)? After clicking ratings & reports, I'm able to see the list of 257 companies, and can download each pdf individually. Is this what you're asking?
Yes that's precisely what I'm looking for. where do you find the ratings & reports link? I can't find it there...
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More info: I usually just go to "Find Ideas" tab and go to the "Investment Survey Plus" link under "Products" on the left panel.
I still prefer to print them all out and flip through one by one...maybe circle or highlight or draw on it if it helps me think. Old habit die hard....
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I have been trying to access the weekly issue page with a list of PDFs since Sunday(which i just download and print) but when I try to get to the page, it automatically redirect me to the "Browse Research" page. I want to see the entire updated list from last Friday, not just searching for individual ones...
Anyone has the same issue?
Chou Semi-Annual - Avoiding Value Trap
in General Discussion
Posted
I always wonder how he got to the level of fame that he has today. I have to say he is a respectable guy in terms of integrity. He even returns management fee at one point due to under performance.
He is a nice guy...but that itself doesn't guarantee investment success. He under-performed the market and made several big mistakes along the way.
he came to our class once and talked about value investing. That was a good lecture and I think he understands value investing...but like a great UFC trainer, they don't always win in UFC ring.