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Vancouver's Real Estate Bubble Trouble


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http://www.businessweek.com/magazine/content/10_27/b4185064551500.htm?chan=rss_topStories_ssi_5

The Olympics are over, and the Village is for sale. The complex in Vancouver, British Columbia, that housed the athletes during the 2010 Winter Olympics has been converted into 1,100 luxury condos. About 450 have been pre-sold, and the sales of the remainder may well render a verdict on a mystery that looms over this city like Grouse Mountain: Did Canada prudently steer its way clear of the worst of the financial crisis only to be rewarded with a massive housing bubble of its own?

 

On a bright, warm Saturday in late June, couples and families wandered through the empty village, which has been renamed Millenium Water. It opened for public tours last month and draws about 100 people a day. Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report. (A Canadian dollar is currently worth about U.S. 96 cents.)

 

Millenium Water isn't in downtown Manhattan, of course. It's not even in downtown Vancouver, which is across an inlet known as False Creek. It isn't really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that's Vancouver for you.

This time, it's different 8)

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Here is a graph from statistic Canada showing all the mortgates that apppear on the financial institutions balance sheets. Judging by that measure it looks like the run-up from 1999 is about 5% per annum. I'm not sure this graph show all the securitized mortgages tough.

 

BeerBaron

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There is something wrong with the Canadian market. I know a lot of people who work in the construction industry (residential and commercial) and they tell me that things are slow this year. I also heard from one that renovation work was cut in half this year.

 

So if demand is slacking off on the construction side, why is it that prices keep on climbing like crazy? I would think that if prices kept on going up due to high demand that building permits would follow.

 

"The value of building permits for single-family dwellings decreased 6.0% in April to $2.6 billion, a result of declines in Quebec, Ontario and Newfoundland and Labrador. Following a strong gain in March, municipalities issued $1.3 billion in building permits for multi-family dwellings in April, down 11.7% from a month earlier. British Columbia was by far the province with the largest decrease in the

value of multi-family permits, followed by Ontario and Quebec. Municipalities approved the construction of 18,089 new dwellings in April, down 7.3% from March. The decrease was due to an 8.2% decline in the number of multi-family dwellings to 9,237 and a 6.4% decline in the number of single-family dwellings to 8,852."

 

Looks like a glut of supply to me with people still keeping the ask price really high. I see most of the signs of a bubble.

 

I am also quite fed up to see these articles saying that Canadian banks are so great. They operate within an oligopoly allowing them to charge more than they should and they never suffered from declining housing values. If the latter changes, they won't look as pretty. Their loss reserve ratios are very low.

 

If you have short ideas on the Canadian side I am all hears. Discretionary retailers, banks and these "specialized" mortgage lenders like Home Capital may be a good place to start hunting.

 

Cardboard

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Here is a graph from statistic Canada showing all the mortgates that apppear on the financial institutions balance sheets. Judging by that measure it looks like the run-up from 1999 is about 5% per annum. I'm not sure this graph show all the securitized mortgages tough.

 

BeerBaron

 

Yes, I have a feeling it's not included the CMHC data in it.

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There is something wrong with the Canadian market. I know a lot of people who work in the construction industry (residential and commercial) and they tell me that things are slow this year. I also heard from one that renovation work was cut in half this year.

 

So if demand is slacking off on the construction side, why is it that prices keep on climbing like crazy? I would think that if prices kept on going up due to high demand that building permits would follow.

 

"The value of building permits for single-family dwellings decreased 6.0% in April to $2.6 billion, a result of declines in Quebec, Ontario and Newfoundland and Labrador. Following a strong gain in March, municipalities issued $1.3 billion in building permits for multi-family dwellings in April, down 11.7% from a month earlier. British Columbia was by far the province with the largest decrease in the

value of multi-family permits, followed by Ontario and Quebec. Municipalities approved the construction of 18,089 new dwellings in April, down 7.3% from March. The decrease was due to an 8.2% decline in the number of multi-family dwellings to 9,237 and a 6.4% decline in the number of single-family dwellings to 8,852."

 

Looks like a glut of supply to me with people still keeping the ask price really high. I see most of the signs of a bubble.

 

I am also quite fed up to see these articles saying that Canadian banks are so great. They operate within an oligopoly allowing them to charge more than they should and they never suffered from declining housing values. If the latter changes, they won't look as pretty. Their loss reserve ratios are very low.

 

If you have short ideas on the Canadian side I am all hears. Discretionary retailers, banks and these "specialized" mortgage lenders like Home Capital may be a good place to start hunting.

 

Cardboard

You might want to look at Genworth a private mkt. mortgage insurer. I would be interested in your opinion on this as a short idea.
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Vancouver home sales drop sharply

http://www.theglobeandmail.com/report-on-business/economy/vancouver-home-sales-drop-sharply/article1629806/

 

"Vancouver's housing market  slowed considerably in June, with 30 per cent fewer sales than a year ago."

 

Although I have to admit, the actual article is less dire than the panic stricken link to it from Clusterstock suggested.

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Well, the article is also inaccurate.  When they say, "Still, the 2,972 sales made it the second-busiest June on record for the West Coast city", they didn't verify their facts.  This is actually the second-fewest sales in Vancouver out of the last 8 years.  The only lower recent year was 2008, after Bear Stearns, but before Lehman.

 

Richard

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Is anyone familiar with a company called TimberWest?

I own it and am thinking about adding here. If you look at it from the standpoint of the trees or the land it looks cheap it will not however be generating a lot of sales from either for the next 18 months.
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Ubuy2wron,

 

I have taken a look at Genworth MI Canada as a short idea and still considering.

 

What is interesting is that they have insured 30% of mortgages in Canada with the rest mostly done by CHMC. That is a 30% share of all Canadian subprime if you will and we know that they are competing with a government backed entity to get these premiums. We also know that they are a spinoff and still 57.5% owned by Genworth Financial which has had issues of its own. It is hard for me to imagine that a slowdown in Canadian residential real estate won't reduce mortgage appetite (underwriting activities) and that it won't cause some of the worst mortgages to turn bad.

 

One thing I am unclear about is how long they could massage earnings by releasing their reserves: turning unearned premiums into earned premiums. They say that they have actually increased these releases in recent months because they have not encountered much adverse insured mortgages in their portfolio. People still catch on at some point, but it could take time especially when a company keeps paying a fat dividend.

 

An other issue as a short is that Genworth was debt free. This meant that without a levered structure that you would need a big slow down in their underwriting activities or a big hole in their reserves to make it go down massively. When I looked, it was also trading around book value.

 

I think the good news is that they were looking at a plan to return something like $350 million to shareholders. Well, they just did!

 

http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aMIC-1740679&symbol=MIC&region=C

 

This Dutch auction will probably be financed with their first debt or a $275 million debenture issued in late June. So, it will do two things: leverage the company a bit and increase the share price to make it trade at least above book. Good news if you are looking to initiate a short sale. It is also interesting since they had 2 other choices to return money quickly to shareholders: special dividend or accelerated share buy-back. For Genworth Financial, the option selected is the most advantageous since it will likely be more tax effective, same quantity of cash returning to them and they get to participate at a nice price vs the IPO at $18 and change.

 

Looking at PMI in the U.S., they did not have a lot of leverage either, but the reserves were so out of whack that the stock completely collapsed since 2006. On the surface, there are some similarities, but it is tough to analyze since they are black boxes. Also, even if the Canadian housing market does not go down a lot, it is hard for me to see it getting much better. There is not much growth available to them, there are new tougher mortgage rules in place and considering that investors were not willing to pay much more than book for this company tells me that the upside is quite limited. Either they are afraid too or they see no growth.

 

Cardboard

 

 

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Ubuy2wron,

 

I have taken a look at Genworth MI Canada as a short idea and still considering.

 

What is interesting is that they have insured 30% of mortgages in Canada with the rest mostly done by CHMC. That is a 30% share of all Canadian subprime if you will and we know that they are competing with a government backed entity to get these premiums. We also know that they are a spinoff and still 57.5% owned by Genworth Financial which has had issues of its own. It is hard for me to imagine that a slowdown in Canadian residential real estate won't reduce mortgage appetite (underwriting activities) and that it won't cause some of the worst mortgages to turn bad.

 

One thing I am unclear about is how long they could massage earnings by releasing their reserves: turning unearned premiums into earned premiums. They say that they have actually increased these releases in recent months because they have not encountered much adverse insured mortgages in their portfolio. People still catch on at some point, but it could take time especially when a company keeps paying a fat dividend.

 

An other issue as a short is that Genworth was debt free. This meant that without a levered structure that you would need a big slow down in their underwriting activities or a big hole in their reserves to make it go down massively. When I looked, it was also trading around book value.

 

I think the good news is that they were looking at a plan to return something like $350 million to shareholders. Well, they just did!

 

http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aMIC-1740679&symbol=MIC&region=C

 

This Dutch auction will probably be financed with their first debt or a $275 million debenture issued in late June. So, it will do two things: leverage the company a bit and increase the share price to make it trade at least above book. Good news if you are looking to initiate a short sale. It is also interesting since they had 2 other choices to return money quickly to shareholders: special dividend or accelerated share buy-back. For Genworth Financial, the option selected is the most advantageous since it will likely be more tax effective, same quantity of cash returning to them and they get to participate at a nice price vs the IPO at $18 and change.

 

Looking at PMI in the U.S., they did not have a lot of leverage either, but the reserves were so out of whack that the stock completely collapsed since 2006. On the surface, there are some similarities, but it is tough to analyze since they are black boxes. Also, even if the Canadian housing market does not go down a lot, it is hard for me to see it getting much better. There is not much growth available to them, there are new tougher mortgage rules in place and considering that investors were not willing to pay much more than book for this company tells me that the upside is quite limited. Either they are afraid too or they see no growth.

 

Cardboard

 

Cardboard thank you for your post! I am of the opinion that Vancouver and Calgary are clearly in bubble territory. I wonder what Genworth will look like with a 26% decline in res re prices and a ten fold increase in the default rates which I believe is in the cards if my bubble prediction is in fact correct

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Ubuy2wron,

 

I don't know the short interest on this one, but my broker is unable to locate any available share for lending at the moment. Have you been able to find some?

 

Another short idea that I am looking at in Canada are some of the retail REIT's. High leverage, distributing more than generated funds, running out of opportunities to expand in Canada, occupancy as good as it gets, constantly dropping the cap rate that they are accepting on new deals and relying on a very accommodative debt market. RioCan fits the mold. Let me know what you think.

 

I have been contemplating this Canadian decline in real estate for a few years now. This reminds me so much of no nothing investors coming to me in 1999 and early 2000 telling me that this and that IPO was great, that Nortel was awesome and that I was stupid not to be able to make money. I hear the same today when I question people about the value of a home, condo or cottage that they just bought. Leaving emotions aside, I still think that they are wrong.

 

This time around, I would like to turn knowledge into a worthwhile return. To do a Kyle Bass type of move. 

 

Cardboard

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"Better to bet on those with weaker regulation."

 

Which ones do you have in mind?

 

Another thing that I am considering are credit default swaps on Canada bonds. CDS on the Canadian banks could be just as good. We are being told recently that Canada can do no wrong and that our budget/debt looks great relative to others. What happens if China really slows down and that commodity prices plunge? It is not like our workers productivity gap has really shrunk in recent years. And if we have a major decline in housing and that CHMC is stuck holding all this bad debt, isn't the same as taking over Fannie and Freddie and doing quantitative easing at the same time?

 

IMO, we are doing well because of commodities, housing and low cost of debt which is equivalent to the U.S. doing well during the Clinton years because the stock market and economy was booming along with low interest rates leading to a windfall of tax revenues and low cost to service the debt.

 

I admit it is a very contrarian idea. However, this insurance is probably at the lowest cost possible at the moment.

 

Cardboard

 

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