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Canadian Housing Bubble


Matson125
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The supply situation in Toronto is at the tightest it has been in many years.  We'll have to wait to see if the January uptick in inventory is a new trend or not.

 

http://guava.ca/indicators.html

 

I don't believe this will go on much longer.  We are at historical highs as far as home ownership in Canada (~68%), which has provided much of the growth over the past 20 years.  Interest rates have nowhere to go but up, which will lower displosable income due to our high personal debt levels.  

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Here is a response from the Canadian Government (effective April 19th).

 

http://www.theglobeandmail.com/report-on-business/reckless-speculators-get-a-cold-shower/article1470418/

 

Ottawa's decision to increase the minimum down payment required to obtain Canada Mortgage and Housing Corp. insurance on investment homes to 20 per cent, from just 5 per cent, will have a sizable impact, said Craig Alexander, deputy chief economist of Toronto-Dominion Bank, because these properties account for up to 15 per cent of all new mortgages.

 

“Raising the requisite down payment could be a significant deterrent to making the investment,” he wrote in a report. “The actions announced by the government for non-owner-occupied dwellings significantly reduce the risk of speculation driving the market forward.”

 

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Canadian real estate certainly looked to be following the US trend lower 12 months ago. Primarily crazy low interest rates (I hear rates last year went as low as 2% for variable loans) seemed to stoke animal spirits and prices are again at record levels. Pretty much anyone can afford a $500,000 mortgage at 2% = $10,000 per year in interest! Does look like a bubble to me. But until interest rates go higher this thing could continue on its merry way.

 

My dilemma is I will be moving to Langley (Greater Vancouver) at the end of the school year. I can afford to buy (small mortgage) but I have been trained to NEVER buy assets at what appear to be peak valuations. I also want my family to settle and be happy. Money is the servant not the master. Nice problem to have!   

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hoodlum, thanks for posting that recent article.

 

I hope we will see a reduction in speculation and a more cautious approach from first time home buyers. I know quite a few young single people that are first time buyers in Vancouver right now - mostly looking at 1BR apts in the $300-$400K range.  I don't understand why anyone would buy a first property in this market unless it was necessary (I do consider it reasonable to own a house when you have a family and want stability).  I consider it an unforced error when someone who is young and single decides to buy a first home at an inflated price.  It is a little different if you are trading up from another property which has also seen some price appreciation.

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Ottawa's decision to increase the minimum down payment required to obtain Canada Mortgage and Housing Corp. insurance on investment homes to 20 per cent, from just 5 per cent  

 

“Raising the requisite down payment could be a significant deterrent to making the investment,” he wrote in a report. “The actions announced by the government for non-owner-occupied dwellings significantly reduce the risk of speculation driving the market forward.”

 

I read a little more and it sounds like this will only apply to non-owner occupied property. This will not address the large number of 5% down buyers that have been drinking the koolaid.

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The supply situation in Toronto is at the tightest it has been in many years.  We'll have to wait to see if the January uptick in inventory is a new trend or not.

 

http://guava.ca/indicators.html

 

I don't believe this will go on much longer.  We are at historical highs as far as home ownership in Canada (~68%), which has provided much of the growth over the past 20 years.  Interest rates have nowhere to go but up, which will lower displosable income due to our high personal debt levels.  

 

Hi Hoodlum,

 

What I mean by demand/supply is underlying demand using household formation and population figures, not the level of inventory. Such data might show a different picture.

 

 

 

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Hi Hoodlum,

 

What I mean by demand/supply is underlying demand using household formation and population figures, not the level of inventory. Such data might show a different picture.

 

arbitragr,

 

I have not seen any discussion on this specific to Canada, although we could use the changing demographics of Canada to come to some type of direction.  The general aging of our population will eventually have an impact.  The baby boom generation (ages 48-63) are no longer upgrading their homes, but instead will be looking at downsizing.  So I see an eventual surplus of larger homes for many years.  Some of these larger homes will be purchased by recent immigrant families as multi-generational homes.  In general you will see less demand for single unit houses due to fewer first time buyers and existing buyers downsizing.  The shift to multi-residential units will continue in large and median urban cities.

 

So I think you supply/demand picture could vary depending on location and type of housing.

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Keep in mind that non-owner-occupied is typically a condominium bought off plan with maybe a 30-40K DP (7-10%). The non-owner-occupied bought early (to get the project off the ground), & probably received free upgrades, GST rebates, 1st time buyer (one per kid) credits, & 2 rounds of inflation increases during the 2+ years that it took to get built. There is a strong incentive to buy the biggest/glitziest condo possible, retain it for 6 months following possession, & then sell it off for a tax free gain.

 

At 5% DP the non-owner-occupied didn’t need to put up any additional cash on possession as the initial deposit covered it. Now that non-owner-occupied suddenly needs to come up with a lot of new cash, & the bigger/glitzier the condo the more that’s needed. Either the non-owner-occupied almost immediately prices down & dumps (increasing inventory & deflating the bubble), or puts up more capital/condo (reducing the overall risk in the market).

 

Notable is that the 5% DP still applies to 1st time buyers, but is subject to the tighter means test; so for now - our flipper has a market for their more basic condos at lower prices, but not their glitzier varieties. Once the turn-over has occurred, most expect that minimum 5% DP to change to a 10% DP & a maximum 30 yr amortization; another round of market risk reduction.

 

Very elegant.

 

Of course if you’re one of non-owner-occupied with a big & glitzy condo you might have a different opinion. As might the army of ‘designer’ folk whose job it is to make your place look glitzy.

 

SD   

 

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It's better for the speculator to fail on their own dime than on CMHC's (read taxpayer's) dime.  Market stability through curbs is nothing new and a sign of an effective regulator.  Sure it dampens some market volume, but it avoids crashing a market that can have significant impacts in the wider economy (viz. US 2006-08, Toronto 1998-92, etc).  From the government's perspective, sales taxes (consumption taxes) still arrive at a regular rate from new housing starts at the expense of some capital gains which could be offset by capital losses in a speculative crash.

 

-O

 

Keep in mind that non-owner-occupied is typically a condominium bought off plan with maybe a 30-40K DP (7-10%). The non-owner-occupied bought early (to get the project off the ground), & probably received free upgrades, GST rebates, 1st time buyer (one per kid) credits, & 2 rounds of inflation increases during the 2+ years that it took to get built. There is a strong incentive to buy the biggest/glitziest condo possible, retain it for 6 months following possession, & then sell it off for a tax free gain.

 

At 5% DP the non-owner-occupied didn’t need to put up any additional cash on possession as the initial deposit covered it. Now that non-owner-occupied suddenly needs to come up with a lot of new cash, & the bigger/glitzier the condo the more that’s needed. Either the non-owner-occupied almost immediately prices down & dumps (increasing inventory & deflating the bubble), or puts up more capital/condo (reducing the overall risk in the market).

 

Notable is that the 5% DP still applies to 1st time buyers, but is subject to the tighter means test; so for now - our flipper has a market for their more basic condos at lower prices, but not their glitzier varieties. Once the turn-over has occurred, most expect that minimum 5% DP to change to a 10% DP & a maximum 30 yr amortization; another round of market risk reduction.

 

Very elegant.

 

Of course if you’re one of non-owner-occupied with a big & glitzy condo you might have a different opinion. As might the army of ‘designer’ folk whose job it is to make your place look glitzy.

 

SD   

 

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A few more months of frenzy before things turn.

 

http://www.theglobeandmail.com/report-on-business/why-economists-expect-a-hot-spring-real-estate-market/article1470915/

 

"The effect of the tightened mortgage rules will be to spur avoidance activity before the new rules become truly effective in July after the pipeline commitments on preapprovals burn off," Scotia Capital economists Derek Holt and Karen Cordes said in a research note today. "That avoidance behaviour will also apply to the HST that dings new homes in Ontario and B.C. after Canada Day. Thus, look for a very strong spring market that transfers sales from [the second half of] 2010 and beyond into [the first half] of 2010 and drives house prices even further into record territory."

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Why do you guy see a popping of the bubble?

 

Judging from the way Flaherty is handling the matter it looks more like a soft landing. Over here in Montreal, the prices certainly went up faster then the income for the last 12 years but I would not say it's a bubble.

 

Vancouver is more worrysome, I have some indirect exposure to the real estate market in the west and I'm very nervous with it. What should I check very carefully to monitor the situation in the west?

 

BeerBaron

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I also suspect much of the renovation activity from the last year was on borrowed money to take advantage of tax credits.

 

http://www.theglobeandmail.com/globe-investor/personal-finance/home-reno-activity-to-slow/article1471082/

 

Ottawa’s home reno program, which allowed taxpayers to get up to $1,350 in tax relief for projects worth between $1,000 and $10,000, was introduced as a limited-time measure in the 2009 federal budget. It was available for a year and expired last month.

 

Toronto-Dominion Bank economist Diana Petramala calculated that the program bolstered renovation activity by between $4- and 4.3-billion and provided a 0.3-per-cent lift to Canada’s real gross domestic product.

 

“We believe that the stimulus measure likely borrowed $3-billion of demand from the future – as those with future plans for renovations undertook the spending in 2009, rather than waiting until later years,” she said in a report.

 

Because the economic benefits of home reno projects often lag over time, especially those last-minute ones started by people scrambling to take advanatge of the credit before it expired, activity will likely drive a 1-per-cent annual gain in renovation investment this year. However, Ms. Petramala expects “the pace of growth will diminish over the course of the year and into 2011 as payback from the tax credit occurs.”

 

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Here are some more comments on where the housing market stands on a historical basis.

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/canada-not-immune-to-downward-pressure-on-housing-prices/article1472226/

 

While there may be a healthy debate as to whether there is a bubble or not in the Canadian housing market, suffice it to say that residential mortgage balances relative to disposable income just hit 92 per cent, which is exactly where this ratio was in the U.S. in 2005 when the mania was about to morph into a full-fledged bubble. It was barely a year later that the process of mean reversion began its course.

 

The Vanier Group just conducted a study showing that the price of an average home is now five times the size of average household after-tax income, which is 35-per-cent higher than the long-term norm.

 

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Any ideas on how to short this housing bubble?  I don't see anything besides taking a short positions in the banks.

 

Cheers

 

Michael

 

Genworth is a private mortgage insurer in Canada it trades as a separate co. in Canada. I have done very little due dilligence on this however they are guaranteeing a huge amt of mortgages. Anyone with an opinion pro or con on this fire away.

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  • 3 years later...

Another fund manager taking a short view of Canadian RE:

 

http://www.marketfolly.com/2013/05/steve-eismans-sohn-conference.html

 

Short Plays on Canadian Housing

 

He says that if a housing slowdown comes in Canada, the Canadian banks will really get hit.  "Misaligned incentives and poorly understood housing finance market."

 

Canada has their own Fannie Mae- called CHMC, which stepped in during 2008-2010 to do almost ALL the loans. Now CHMC is not doing loans, so banks must do it. Says these banks are all over-priced and "over-earning" because the boom from issuing insured loans is over.

 

Canadian banks: Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto Dominion Bank (TD).

 

Short Idea: Home Capital Group (HCG.CA). Listed only in Canada. Largest non-prime mortgage originator in Canada. Carries $8.8B on their balance sheet. Has less than $1B equity, yet 100% of the credit risk on those loans. Trades at twice tangible book, expensive.

 

Read more: http://www.marketfolly.com/2013/05/steve-eismans-sohn-conference.html#ixzz2SozBACfX

 

More info on Steve Eisman: http://en.wikipedia.org/wiki/Steve_Eisman

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Re GNW. Be sure you know which risks you want, & have a plan for if they split the business. Today it is 2/3 mortgage insurance, 1/3 extended health insurance (by Q1 P&L); & they are reducing their mortgage LOB. If you want mortgage insurance exposure this may not be the place.

 

We hold a concentrated position in MTG, bought around Xmas. While MTG has more risk, the risk is rolling off a lot quicker than most give it credit for.   

 

 

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