A House in Canada Now Costs Almost 2X A House in the US

[Viking]

High real estate prices in the US? Nope. At least not compared to Canada. As has been discussed extensively on this board, the real estate market in Canada has been a runaway train since 2000. A family member just sold a 1,400 sq foot house in a very small forestry community (with forestry shrinking) for C$500,000 (it was only a couple of years old). Community is remote and 8 hour drive from Vancouver. Nuts. The next 24 should be very interesting…

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Double trouble: A house in Canada now costs nearly twice what it does in the US

- https://nypost.com/2022/04/25/the-average-canadian-home-price-is-now-double-that-of-us/

American homebuyers can take small comfort: It’s far worse up north. 

 

The Canadian housing market is even more ludicrously expensive than the US’s, with the nation’s home prices recently reaching a new record high, which puts the average housing cost at almost double that of America’s. 

 

Since early 2020, Canadian home prices have surged 30%, an increase which is “nothing short of stunning,” economist Robert Hogue wrote for a recent Royal Bank of Canada report (via Fortune). 

 

As of February, the Canadian Real Estate Association reported that the average price of a Canadian home stood at 816,720 Canadian dollars, or $646,809 — over nine times the average household income. 

 

In contrast, the US has seen slightly lower price increases, with home prices rising 27% over the same period, Fortune previously reported. In America, the median home price last month stood at $375,000, an all-time high and a 15% rise from a year prior.

 

[thepupil]

For my house, I have 4 cases.

 

bear case: Lot value at 3 years ago land prices -33% from base

 

base case: slight haircut to today, 0.85-0.9x zestimate

 

bull case: zestimate

 

canada case: $2.5mm

[Spekulatius]

Will be an interesting time when Fomo disappears (as far as real estate is concerned)  in Canada, it’s not a question if, it’s a question when. Canada is different than the US that mortgage debt is recourse and interest rates only fixed for 5 years (similar to commercial mortgages in the US).

[SharperDingaan]

The financial structure of the Canadian market is materially different from the US, and not comparable. Mortgages are recourse, and anything over an 80% LTV is insured. A US resident accustomed to a 10% DP, would have to pay an additional 2.4% of the mortgage as insurance premium. A 800K house, 20% DP (typical), will have a 640K mortgage. After CHMC insurance, a 15-yr fixed rate mortgage will cost 7.275% (4.875+2.4), or $46,560/Yr (7.275% x 640K), or $3,866/mo.

https://www.cmhc-schl.gc.ca/en/professionals/industry-innovation-and-leadership/industry-expertise/resources-for-mortgage-professionals/mortgage-loan-insurance-and-premiums  https://smartasset.com/mortgage/td-bank-mortgage-rates

 

So what? The market goes down 30% the banks aren't going to sell. They are going to foreclose, toss you out, and CMHC is going to defease the mortgage until it resets. No cascade of distress selling, market prices staying high enough to stall further foreclosures, and stability. Market activity slows down, real estate and mortgage brokers starve (fewer transactions). As mortgages reset, CHMC simply refinances at roughly the 180 day BA rate; the BoC financing on behalf of CMHC.

 

New borrowers don't get a mortgage period, unless they can pass a financial stress test at 150bp above the expected cost. No pass, no play, no additional risk. The BoC isn't mommy/daddy; borrowers can whine/raise a fuss, etc. as much as they like - but it remains no play.

 

SD 

    

[Xerxes]

Historically in Canada it has been real estate, Big Banks and the oil & gas sector. 
 

that incremental dollar saved need to be soaked up somewhere. 

[Saluki]

So if a house costs 2x what it does in the US that must mean that salaries in Canada are 2x what they are in the US, right?  Makes perfect sense to me.  

 

My sister in law lives in the Phoenix bubble.  Housing prices jumped 32% there over the past year. An unlevered 32% return is what Buffett was getting in his salad days.  But when you throw a mortgage on that, the cash-on-cash return is ridiculous. And it had been going up a lot there even before last year. 

 

She doesn't want to sell but has been AirBNBing her place in Phoenix and renting vacation homes in Puerto Rico and Mexico and pocketing the difference. She can live on the arbitrage in rents and the appreciation is the icing on the money cake. 

[Gregmal]

The thing most fail to understand with housing is that it is very, very hard to become a forced seller. I mean it all comes down to lending standards and sure some brokers are great at "making the equation work", but generally speaking, you have to be deemed a credible borrower or you dont get the loan to buy the house. And if the situation isnt right, or one people want to accept, people generally just dont sell. The only way a demand problem is solved, is through building more. Except the builders also "should" have financial incentives. And there is also limited space to build in MSAs where people want to be. You can keep going further out, and that works, but it doesnt make the better located properties any less desirable. 

[Viking]

My read is there has been a lot of speculating going on with the real estate market in Canada. The stats available for housing are pretty pathetic so it is kind of a big black box.

 

My guess is an investor buying today will rent and be cash flow negative. The investment thesis is built around continuing capital appreciation - ever higher prices. My guess is if we ever see a 10 or 20% decline in nominal prices that persists for +12 months then we might see some distress. Especially if we see higher interest rates. We know property taxes will be going up dramatically (likely at inflation). Here in Vancouver we have rent controls - the allowed increase for 2022 was 1.5%. Revenue not keeping up with expenses + falling asset price = trouble for speculators.

[ValueArb]

The higher prices for Canadian housing are easily explained by the higher quality outer wall construction required by the Canadian construction code in order to resist Moose attacks and the heavier insulation requirements to reduce the endemic freezing deaths in May.

Edited April 28, 2022 by ValueArb

[scorpioncapital]

what does it mean recourse when like 1/3+ of your population is from another country. If they don't pay they can not just skip town, but skip the entire country. I do not see this as prevention of a disaster.

As for incomes being higher than USA, with the tax burden generally being higher (i once calculated it as 2x higher) and cost of living higher and salaries lower I would say canadian incomes are half of US incomes despite houses being 2x more expensive, a 400% differential. This is the dynamic you see in third world countries, where the rich can do anything but the cost of living is too high for the locals relative to incomes.

[SharperDingaan]

An immigrant to Canada, is here primarily for their kids future; they've come from devastation, and the future Canadian 'life' their kids will grow up in is not going to be given up. Sure you can emigrate someplace else to evade your mortgage obligation; but the bank has both the equity cushion of your DP, and insurance against the mortgage. You will also have a difficult time moving your money out of Canada, with this kind of a default against your name. Very small minority.

 

Worst case, maybe the 800K house is 20% overvalued, and only worth 666K (800/1.2). But it's a hard asset, growing at the inflation rate (7% in Canada) - all else equal, one year out; that 666K value is 713K (666x1.07). Actual amount at risk?, maybe 87K (713-800), or 11% (87/800) of the asset value.

 

The thing is, that 800K house, 20% DP, also has a 640K mortgage. A hard liability devaluing at the 7% inflation rate - all else equal, one year out, that 640K liability is worth 595K (640x (1-0.07)). Inflation gain of 45K (595-640). 87K of asset loss, offset by 45K of inflation gain; net reduction in spending power of 42K, or 5% (42/800) of the asset. In real (after inflation) terms, a 5% change is squat.

 

SD

[thepupil]

On 4/27/2022 at 9:15 AM, SharperDingaan said:

The financial structure of the Canadian market is materially different from the US, and not comparable. Mortgages are recourse, and anything over an 80% LTV is insured. A US resident accustomed to a 10% DP, would have to pay an additional 2.4% of the mortgage as insurance premium. A 800K house, 20% DP (typical), will have a 640K mortgage. After CHMC insurance, a 15-yr fixed rate mortgage will cost 7.275% (4.875+2.4), or $46,560/Yr (7.275% x 640K), or $3,866/mo.

https://www.cmhc-schl.gc.ca/en/professionals/industry-innovation-and-leadership/industry-expertise/resources-for-mortgage-professionals/mortgage-loan-insurance-and-premiums  https://smartasset.com/mortgage/td-bank-mortgage-rates

 

So what? The market goes down 30% the banks aren't going to sell. They are going to foreclose, toss you out, and CMHC is going to defease the mortgage until it resets. No cascade of distress selling, market prices staying high enough to stall further foreclosures, and stability. Market activity slows down, real estate and mortgage brokers starve (fewer transactions). As mortgages reset, CHMC simply refinances at roughly the 180 day BA rate; the BoC financing on behalf of CMHC.

 

New borrowers don't get a mortgage period, unless they can pass a financial stress test at 150bp above the expected cost. No pass, no play, no additional risk. The BoC isn't mommy/daddy; borrowers can whine/raise a fuss, etc. as much as they like - but it remains no play.

 

SD 

    

 

As are 38 states in the United States...IIRC we've discussed this before. The US is mostly recourse. 

 

 

Quote

There are currently 12 non-recourse states: Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington. In non-recourse states, the lender may foreclose, but as mentioned, they must accept whatever they receive from the foreclosure sale, which usually spells out a loss.

The other remaining states are called recourse states and allow some form of recourse, although the particular details and requirements for the deficiency judgments will be different in each state. Many recourse states still place limitations on how a lender can collect a deficiency judgment and how much the lender can collect from such a judgment.

 

https://www.legalmatch.com/law-library/article/what-is-a-recourse-state.html

[valueinvestor]

There's really no way of knowing because the data regarding housing is biased and lacks transparency - even the home bidding process is opaque, as @Viking alluded. There's also a real sense of FOMO and that's due to a myriad of reasons. 

 

However the possibility of decline is real and can happen. When COVID hit, prices were down 10% off the bat. If the government didn't step in with mortgage deferrals - we would've seen a real decline. 2018 (Just four years ago) - we had months where one was down 15%. If you were a first-time home buyer, that means you had negative equity or possibly 2x your downpayment. Thankfully, there's no technical defaults or breach of covenant with most of those mortgages when your equity goes down - it needs to be replenished. 

 

Secondly, a third of homes (again this could be wrong) is owned by investors paying cap rates that are totally reliant on capital appreciation. Consequently, if rents go lower their ability to service the debt will degrade. Historically, rents has not kept pace with capital appreciation - hence many people are reliant on refinancing and purchasing additional real estate to increase their paper returns. To give people a picture, my friend was able to rent an apartment that's only 5% higher than 2010 rent prices in Midtown Toronto.

 

As @SharperDingaan mentioned the banks will definitely not sell and CHMC insures all the homes, unfortunately that depends on speculator relying on bankruptcy versus selling. We should also consider that real estate prices are comped to last sold. A property on the block sold for higher? Great that raises the property value of that block, if not the entire neighbourhood. I assume the reverse is true. So it really takes one distressed seller on a block to trigger a cataclysmic decline. Especially with how the news in Canada reports on real estate, as often as the weather - it can scare speculators.  

 

It doesn't help that I don't have great faith in the underwriting of some of these mortgages. 

 

Again that's my simplistic analysis of the whole situation, but it doesn't mean that the entirety of Canada is overvalued. Kawartha lakes, cottage country has limited supply and even limited views - hence it's become an airbnb situation where one can get cap rates of 5-10%, even in today's real estate market. 

 

As @SharperDingaan mention there's a benefit borrowing in an inflationary environment, as it cuts both way in terms of increasing the value of the asset while decreasing the hard liability. 

 

P.S. It's also interesting to see that housing has become political in Canada. I really do not believe that the Government is going to artificially lower prices, as there's a lot of red tape and vested interested to keep it high. However, it is something to watch out for. 

 

On the other hand, there's a real path that Canada could be the next Hong Kong. 

[ICUMD]

21 hours ago, Viking said:

My read is there has been a lot of speculating going on with the real estate market in Canada. The stats available for housing are pretty pathetic so it is kind of a big black box.

 

My guess is an investor buying today will rent and be cash flow negative. The investment thesis is built around continuing capital appreciation - ever higher prices. My guess is if we ever see a 10 or 20% decline in nominal prices that persists for +12 months then we might see some distress. Especially if we see higher interest rates. We know property taxes will be going up dramatically (likely at inflation). Here in Vancouver we have rent controls - the allowed increase for 2022 was 1.5%. Revenue not keeping up with expenses + falling asset price = trouble for speculators.

Agree with this.  Real-estate ownership is unique in that it's a business in a sense. 

 

There are carrying costs and revenues.  Even a primary residence helps generate money close to your place of employment.  Having a mortgage means the bank owns your capital, which the owner has the optionality of buying back overtime, but also carries the bulk of the risk.

 

Sound like a bad business?  I think it is. 

Its no different than buying a piece of gold or a rolex watch waiting for it to appreciate or 'inflate'.

 

Low interest rate environments are favorable for all asset classes, but watch out when the rates rise a credit tightens.  

 

 

[Spekulatius]

@SharperDingaan One thing I am certain of: If enough people default on something, recourse loans become non-recourse. It's just populism. I think Canadian mortgages will be an interesting new way to see this play out.

[Xerxes]

Gregmal’ best friend has spoken 

[Gregmal]

LOL Tilson. I recall reading something from him in 2015 about how the only 2 stocks you needed to own for life were Berkshire Hathaway and Howard Hughes. 50% is a far better batting average than he usually puts up. Completely ignoring the stupidity of the premise that the average person should only own 2 stocks, regardless of what they are. Now, after calling Howard Hughes 1 of only 2 stocks one needs to own for life, he's predicting the end of real estate. Whatever that means. Seems par for the course. 

[Guest]

8 minutes ago, Gregmal said:

LOL Tilson. I recall reading something from him in 2015 about how the only 2 stocks you needed to own for life were Berkshire Hathaway and Howard Hughes. 50% is a far better batting average than he usually puts up. Completely ignoring the stupidity of the premise that the average person should only own 2 stocks, regardless of what they are. Now, after calling Howard Hughes 1 of only 2 stocks one needs to own for life, he's predicting the end of real estate. Whatever that means. Seems par for the course. 

 

 

look at this unknown guy questioning a freakin' legend. Get a life! 

[longlake95]

I see the "Prophet" has moved on from SAAS -----> to TAAS (whatever that is? lol) --------> now to crashing real estate....next.... GOLD $5000/oz

[Gregmal]

I would almost guarantee you I’ve made more money in the stock market than Whitney Tilson. Despite all the advantages he was given. 

[Guest]

2 minutes ago, Gregmal said:

I would almost guarantee you I’ve made more money in the stock market than Whitney Tilson. Despite all the advantages he was given. 

 

 

Dude, he went to Harvard. He's obviously a better investor. He is a freakin' legend. Arguably the best investor alive today. He ran a hedge fund too. It was so good, he closed it. He didn't want to make Simmons or Tepper look bad. 

[Guest]

Greg, I'm sure you realize but I'm just messing around. I don't disagree with anything you said.

[Gregmal]

Duh LOL. Tilson is establishment Wall Street. A clown who was given everything, took his fees, sold his "wisdom", and now parades around like he's hot shit because he has money. 

[SharperDingaan]

Purely a speculation, but most would argue that part of the BOC interest rate raise is to intentionally drop housing prices in Toronto and Vancouver. Bust some of the speculation and immediately force some of those speculative houses back onto the market, to raise supply, and drop house prices further. A controlled fall vs panic selling.

 

Longer term it is going to require large quantities of fiscal investment in lower end housing, in a similar solution to the post WWII baby boom. Build in quantity, force the lower end price of a house down, and fill them with annual mass immigration in the 400-600K/yr range. Let the population numbers drive the economics/politics, and get out of the way. Change.

 

SD

[no_free_lunch]

I don't know what will happen with housing. Hopefully prices can pull back 20-30% so we don't crush the new generation.

 

We know that people, most people, willl pay the mortgage first.  People will cut elsewhere if they can.  So with rates going up consumer spending will get hit.  Then factor that I see a lot of people buying their toys with mortgage refinancing and it gets even worse.  Bigger mortgage payment and stalled or shrinking home equity hits the consumer spend twice.  Let's not even talk about energy prices.  I don't see how we get through this without a recession. 

Edited April 28, 2022 by no_free_lunch