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Canada's housing bubble: This time is not different (G&M)


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http://www.theglobeandmail.com/globe-investor/investment-ideas/george-athanassakos/canadas-housing-bubble-this-time-is-not-different/article2347630/singlepage/#articlecontent

 

House price increases have not been matched by underlying increases in fundamentals such as growth in disposable income, growth in GDP per capita, inflation, population growth, annual immigration growth or the rental indexes produced by CMHC. The ratio of house prices to rent (a ratio equivalent to price to earnings ratio used to identify valuation risks in stocks) is now higher in Canada than in any other developed country.

 

Moreover, average house prices are now 12 times personal disposable income, way above historical averages. This ratio reached 9.7 times in the last housing bubble in the late 1980s. As a result, household debt as a per cent of disposable income has risen to over 153 per cent in Canada, reaching record levels and coming close to the levels that the U.S. reached before the housing crash.

 

A few interesting comments on that article too.

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http://www.theglobeandmail.com/globe-investor/investment-ideas/george-athanassakos/canadas-housing-bubble-this-time-is-not-different/article2347630/singlepage/#articlecontent

 

House price increases have not been matched by underlying increases in fundamentals such as growth in disposable income, growth in GDP per capita, inflation, population growth, annual immigration growth or the rental indexes produced by CMHC. The ratio of house prices to rent (a ratio equivalent to price to earnings ratio used to identify valuation risks in stocks) is now higher in Canada than in any other developed country.

 

Moreover, average house prices are now 12 times personal disposable income, way above historical averages. This ratio reached 9.7 times in the last housing bubble in the late 1980s. As a result, household debt as a per cent of disposable income has risen to over 153 per cent in Canada, reaching record levels and coming close to the levels that the U.S. reached before the housing crash.

 

A few interesting comments on that article too.

 

Man, I have to admit Chinese has a habit buying real estate regardless of price. You may even call this an addiction. Still, one has to punt into perspective that this is really an arbitrage for 3rd world rich people like Chinese. Even at today' price, you can buy a far better quality home in Canada than in China. That being said, it is now the marginal purchasing power that is supporting the sky-high price.

 

This may go on for a while. Stay tuned.

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  • 3 years later...

I think that the worldwide commodity price decline could finally be a trigger to a credit/housing crisis in Canada. Canadians, have a look at this interview with Richard Koo:

http://www.macleans.ca/economy/economicanalysis/is-canada-at-risk-of-a-balance-sheet-recession/

 

Thanks, that was a good read.

 

Agreed, thanks for the article.

 

I've been waiting on the sidelines (renting) for years. I definitely think we're a bubble and I hope it pops soon. Any ideas on how you could make money on the short side? I looked into shorting the non-government mortgage insurers, but decided against it.

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I think that the worldwide commodity price decline could finally be a trigger to a credit/housing crisis in Canada. Canadians, have a look at this interview with Richard Koo:

http://www.macleans.ca/economy/economicanalysis/is-canada-at-risk-of-a-balance-sheet-recession/

 

Thanks, that was a good read.

 

 

 

Agreed, thanks for the article.

 

I've been waiting on the sidelines (renting) for years. I definitely think we're a bubble and I hope it pops soon. Any ideas on how you could make money on the short side? I looked into shorting the non-government mortgage insurers, but decided against it.

 

I've read that shorting the Canadian banks is the way to play it.

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http://business.financialpost.com/2015/03/24/now-and-then-do-canadian-homes-really-cost-that-much-more-than-30-years-ago/

 

More articles such as this are starting to appear in mainstream media which is what should happen before things turn according to Bob Shiller.

 

This article uses Toronto as an example. In 1989 it was considered a bubble in Toronto as housing took up 50% of the average income. In Vancouver, even at the lowest historical interest rates (assuming 25% down) an average mortgage still takes over 80% of average household income. How does one justify that?

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I think that the worldwide commodity price decline could finally be a trigger to a credit/housing crisis in Canada. Canadians, have a look at this interview with Richard Koo:

http://www.macleans.ca/economy/economicanalysis/is-canada-at-risk-of-a-balance-sheet-recession/

 

Thanks, that was a good read.

 

 

 

Agreed, thanks for the article.

 

I've been waiting on the sidelines (renting) for years. I definitely think we're a bubble and I hope it pops soon. Any ideas on how you could make money on the short side? I looked into shorting the non-government mortgage insurers, but decided against it.

 

I've read that shorting the Canadian banks is the way to play it.

 

Are there listed Canadian home builders? It's not specifically a housing bet but I think that Canadian government bonds are a good one if Richard Koo's scenario plays out (and even if it doesn't), especially the long end of the yield curve, e.g. ZFL.

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I think that the worldwide commodity price decline could finally be a trigger to a credit/housing crisis in Canada. Canadians, have a look at this interview with Richard Koo:

http://www.macleans.ca/economy/economicanalysis/is-canada-at-risk-of-a-balance-sheet-recession/

 

Thanks, that was a good read.

 

 

 

Agreed, thanks for the article.

 

I've been waiting on the sidelines (renting) for years. I definitely think we're a bubble and I hope it pops soon. Any ideas on how you could make money on the short side? I looked into shorting the non-government mortgage insurers, but decided against it.

 

I've read that shorting the Canadian banks is the way to play it.

 

Are there listed Canadian home builders? It's not specifically a housing bet but I think that Canadian government bonds are a good one if Richard Koo's scenario plays out (and even if it doesn't), especially the long end of the yield curve, e.g. ZFL.

 

I used to own a land developer back after the crisis. Melcor Development. There are a few others as well, some horrible companies under the REIT umbrella.

 

BeerBaron

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Interest rates have a lot to do with it. Mind that they've been saying the same about London since 2007 and prices have kept going north. Foreign buyers dont seem to be too price sensitive.

 

Sure. But zero interest rates didn't stop US house prices from collapsing, right? I think the most important factor for Canada is commodity prices. Why was there no dip in 2008/2009? Canada didn't have a crisis because of China's massive investment spree. People don't get that China saved Canada and Australia in 2008/2009. Won't happen this time (because they can't). In my opinion people are massively underestimating how long and severe this commodity price slump could go. Canada, Australia etc. haven't seen something like this in decades. Everybody talks about mean reversion but do we really know where the mean is or will be 5 years from now?

 

My favorite short candidate so far: Home Capital Group.

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One of my friends just recently put his house on the market in Markham (suburb of Toronto). He priced it in line with the same model home that sold on the same street within the last 3-6 months (under $1m). On the day he listed, by the time he got home from work, the broker had arranged a bidding war with a dozen or more people. He told me a Chinese buyer offered ~10% over asking and had a certified cheque with her for a ~15% nonrefundable deposit! Low price sensitivity. Almost like they are doing this to move money out of China.

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One of my friends just recently put his house on the market in Markham (suburb of Toronto). He priced it in line with the same model home that sold on the same street within the last 3-6 months (under $1m). On the day he listed, by the time he got home from work, the broker had arranged a bidding war with a dozen or more people. He told me a Chinese buyer offered ~10% over asking and had a certified cheque with her for a ~15% nonrefundable deposit! Low price sensitivity. Almost like they are doing this to move money out of China.

 

Interesting – I've heard similar things about Australia. There are a lot of signs for capital flight from China. But are there enough foreign buyers to keep prices on a "permanently high plateau", even when those economies go downhill?

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It is difficult to time this market because the dramatic influence of Chinese purchasers on the margin. As the USD rises Chinese exporters report poor earnings like Yingli solar reported a miss today. What happens if the USD continues to increase? Eventually China will likely end the peg or devalue substantially. Martin Armstrong recently explained why it is inevitable when discussing the end of the Swiss peg. Due to the expectation of the end of the peg it must look attractive for wealthy Chinese to borrow on overvalued real estate in China and buy relatively much cheaper Canadian, US and Australian real estate. (I have never understood the Chinese practice of putting money into leaseholds as you are buying a wasting asset, not a store of value compounded by the common practice of leaving the leasehold empty without cashflow. Panic is the likely ending.) In Canada and Australia real estate prices are down substantially in Chinese currency compared to a year ago due to the fall in the Australian and Canadian currencies. Because the Canadian economy is so closely tied to the US when the Chinese peg is removed or the currency is devalued, the Canadian currency is likely to remain stronger than the Australian or the Chinese currency so long as there is a strong USD.

 

I expect that Canadian and especially Vancouver real estate won't correct much until after the Chinese currency is devalued or the peg is ended. Long term I expect weaker nation states and stronger city states so Vancouver is likely an excellent long term pick because it will be a successful city state. The Griffiths family from England have kept substantial holdings for over 100 years for good reason and the Li family have accumulated substantial holdings since the 1980s.

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