wisdom

How do you explain bankers teaching people how to beat the system to get a few more mortgages so that they can keep meeting their goals. Is that what banks are supposed to do? As I have said in the other thread, do some scuttle butt and you will understand why Canadian banks have done so well - potentially at short term cost to Canadians. It will be interesting as all of this plays out over the next few years. Will Canadian banks do well in the long run. Absolutely! Have they messed up over the last few years. Absolutely - by enabling widespread fraud due to the culture created. Not very different from the American banks.

http://www.cbc.ca/beta/news/business/banks-upselling-go-public-1.4023575 Another source of outperformance. Due to this culture, banks have helped commit fraud by getting around rules. It will be interesting when the tide goes out. People who understood the process, banks and brokers, have helped Canadians pile on record debt. Bankers, regulators, borrowers and government have looked the other way.

http://www.cbc.ca/beta/news/canada/british-columbia/td-bank-employees-admit-to-breaking-law-1.4016569 Secret to Canadians ability to carry more debt is this superior banking system. Now imagine the above has been happening across all Canadian banks because bank employees wanted to save their jobs over the last decade. You should have multiple wells Fargo and wide spread fraud. The tide is starting to go out and the music is about to stop playing.

Vancouver used to be 4 x median household income when this run began in 2000. Today a detached house is at 14x or so. Check out page 12 on this report -22% of households at 500% mortgages. The numbers are from 2012 for BC before the recent run up. The numbers for Vancouver have to be higher. I would guess 25-30% of households in Vancouver would be in that category today. https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_441_0.pdf Page 3 on this report is good too. A median household needed around 60% of their income when this started. Today they need 140% to carry a mortgage in Vancouver on a detached house. Any type of dwelling on average requires 92%. http://www.rbc.com/newsroom/reports/rbc-housing-affordability.html

I don't recall the US market being this hot even in 2006. I wonder how ugly the other side of this bubble will be. US prices rose for 11 years in their bubble. Canada has been going up for 16 years. I believe, Brazil and Indian real estate went through something similar in the last few years. Both have been terrible over the last few years.

All bubbles go on till credit is available. The Feds have come down on credit and the banks are also pulling back. As long as they don't change their mind, this is done and dusted. Now the government and banks are preparing to deal with the consequences. It is obvious why the government wants the banks to share in losses and the banks want to avoid it at any cost. Even the so called rich Chinese buying in Vancouver were borrowing 65% of the value. Limited properties went for all cash.

That is not true. In March 2016 when the house prices were increasing by $100k no one knew of the foreigners tax. The market was already slowing down before the government acted. Detached houses are not the same as homes (which includes condos and townhomes). Detached home sales are down over 70% in Vancouver. Calvin - all detached home prices are down - anything over $800k isn't an easy sell right now. This is based on what is happening on the ground in reality and not the real estate boards statements. Frank is your research based on quoting the real estate board figures? I would recommend at least using google.

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%?

Frank - agreed that I have no facts. Since Vancouver homes were at $1.8 mil on average last year, we should be close to $3.6 mil by 2020 in a city where the median household income according to statscan is $72,000. I would conjecture that is because it is only the rich that live in Vancouver. They don't need income. I look forward to learning more on how that works. Meanwhile detached home sales in Vancouver are down by 70% or so.

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. I would again state that human nature is the same everywhere. There is no system that can stop you from gaming it. A real estate market that has only gone up for 17 years now leads to a lot of complacency amongst borrowers, lenders and regulators. The scariest argument I hear is that Americans did a lot of stupid things but our banks are better thus, our prices can keep rising forever as long as we can keep borrowing. Bankers and borrowers live in the same society and are influenced by the same things. In addition, bankers are driven by incentives and are usually in the real estate market themselves. They do not consider or in reality, do not even want to consider the risks - as Munger would say - I don't want to think about death either. Bankers are sales people driven by incentives. Let me know if you uncover a banker who is incented to consider risk.

All I will say is -in theory what you have said is perfect. This is not what has happened in reality in canada. Would recommend some scuttlebutt. Reality is worse than what happened in the US IMHO. Americans at least knew they were doing NINJA mortgages. In Canada, we have lied to ourselves and done the same. If I am right, that is more scary. I would not be surprised if stories like wells Fargo emerge from Canada over the next few years. I am actually sure they will.

If you want to understand the market - just look at the increase in HELOCs and private financing as they have been the largest source of down payments in Canada. In other words - 100% financed. Notice the drop in houses valued over $800,000 the moment the feds tightened the borrowing rules in Vancouver. Now you need income to qualify not just equity or rental income. Tells you what is the maximum the market can bear if Canadians use income to qualify. There is now fear in Vancouver but we are still in the denial phase. Let's see what happens in summer/fall when the market moves to the acceptance phase and those HELOCs financing all the mortgage payments and construction are maxed and those houses don't sell for $2 mil. Builders bought houses for $1.1-1.2 mil early last year. Those houses would have been torn down and new houses costing $600k odd will be built and completed later this year. To make a profit these builders need to sell these houses at $2 mil plus. That market is dead. Not sure how they carry these mortgages for much longer as they need those houses to sell to pay for the other 5-10 homes that they are building. As Chuck Prince would say the music is about to stop playing.

What happened in Vancouver in 1981 or Toronto in 1990s? Jingle mail? Is it that different or is human nature the same everywhere?

Frank - Canada also has non-recourse mortgages.

Too many people confuse Canadian housing pricing with what happened in the US. That is comparing apples to oranges. Canadian mortgages are not non-recourse mortgages like the US. You can’t just give the bank your keys and walk away. There are also stringent requirements to obtain mortgages in Canada unlike the lunacy we saw south of the border. These statements are not accurate. I would recommend reading up on this. As you said - Canada has different rules in provinces just as the US does. They are not the same everywhere. EDIT: It does help rationalize why we cannot repeat what the Americans did. So this is understandable. Did Fairfax and Burry take those CDS positions in the US in 2003 and it took till 2008 to play out?

Banks may have a higher ability to absorb losses, but, the rest of it is the same or worse. Can you explain to me mathematically how does this work: Americans were too leveraged and had sub-prime thus they ended up with 69% home ownership and $1.5 in debt for every $1 of disposable income. Yet, the risk averse Canadians have 70% home ownership and $1.67 in debt for every $1 of disposable income. How does a $1 in income earned in CAD allow one to be prudent and risk averse yet carry more debt? And the 70% home ownership is not including all those rich foreigners buying up Canadian real estate with all cash. PS. I would argue that the risk in Canada is concentrated in 2 spots with an economy that is not as diversified as the US.

What about other tail winds such as: 1) tighter lending rules - money is getting harder to get. 2) you actually need income now to buy in Vancouver - you did not until recently - asset value or rental income was all that was needed. 3) As a new Canadian you could put down 35% and you needed no Canadian income or credit to borrow 65%. eg. you needed only $500k as an immigrant to buy a $1.5 mil home without income. Not any longer. 4) higher income taxes, property taxes and capital gains on the way. How much does this decrease the NPV? 5) businesses are struggling in Vancouver because of high overheads - real estate prices. 6) Younger families and people moving out thus the city is being hollowed out - schools closing in Vancouver. How long is this sustainable? 7) Government finally starting to crack down on principal residence fraud used to avoid taxes - many builders in Vancouver reported houses that they sold as principal residences and instances of couples reporting 2 separate principal residences to avoid capital gains. Add up all these steps and try adjusting the values for all these factors. We haven't even looked at psychology or that 30% of Vancouver's GDP is real estate or that 25-30% of the households with mortgages in Vancouver have mortgages over 450% of household income or at some point interest rates could rise. But, none of these matter because Canada is nearly out of land, Vancouver is special and all the rich are moving here. Apparently, the same arguments are being made in GTA from what I hear.

http://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-023929504.html

They continue their global push, collecting more float. https://www.interest.co.nz/insurance/85927/tower-shareholders-warned-troubled-insurer-about-make-announcement-nzx-places

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http://www.cknw.com/2017/01/29/267389/ The average sale price is 28% lower now. Though people are still holding on at this time and still in denial. Things should get interesting this fall if the market doesn't bounce back. Acceptance may set in

https://www.bloomberg.com/news/articles/2017-01-24/omers-said-to-commit-1-billion-to-back-fairfax-s-allied-buy

They added to ICICI Lombard at a value of $2.5B 15 months ago. They are cashing out between $3.2-$4 Billion 15 months later and buying an insurer that they will control in Europe and potentially starting another insurer in India focusing in an area they already operate in - Thomas Cook. I understand P&C isn't as good a business in India. They may have realized this and decided to specialize in India. Is that bad capital allocation?

http://finance.yahoo.com/news/fairfax-may-sell-25-percent-indias-icici-lombard-114458793--sector.html

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