Garth Turner - Real Estate in Canada

[Liberty]

http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/vancouver-real-estate-prices-continue-climb-projected-to-skyrocket/article23799929/

[alertmeipp]

Nuts.

 

But unless gov does something,  hard to see this stop.

[FiveSigma]

We went to Td to get a Heloc set up. 

 

Uccmal, how did you get TD to give you a HELOC up to 80% of total LTV with your first mortgage NOT being with TD (i.e., with First National)?

 

In my very recent experience, every big-5 Canadian bank refuses to go second on a property with first mortgage that is not with them, including TD (had a phone conversation with them).

 

The only firm that agreed to do it was Home Capital group, but they cap total LTV (first+HELOC) at 65% of appraised property value.

 

 

 

 

[Liberty]

Nuts.

 

But unless gov does something,  hard to see this stop.

 

What do you mean? You don't think that at a certain point incomes simply can't keep up, and interest rates will go up in the US, forcing the bank of Canada's hand (if they don't want the CAD to be even weaker -- Canada is still a net importer)? Or that some random shock to the economy (we already have mining in the dumps, and now oil) will be enough? Caring only about short-term monthly payments rather than the actual entire price of something is not sustainable.

 

The government is far from being the only entity that can do something. When they ease like they did recently, they are just kicking the can down the road and making it worse when we get there.

[Uccmal]

We went to Td to get a Heloc set up. 

 

Uccmal, how did you get TD to give you a HELOC up to 80% of total LTV with your first mortgage NOT being with TD (i.e., with First National)?

 

In my very recent experience, every big-5 Canadian bank refuses to go second on a property with first mortgage that is not with them, including TD (had a phone conversation with them).

 

The only firm that agreed to do it was Home Capital group, but they cap total LTV (first+HELOC) at 65% of appraised property value.

 

I dont know.  I had one before the remortgage that was discharged at that time.  I hold all of my brokerage accounts with TD, and Visa cards with TD.  Maybe they are worried about losing that business?  So, I have been a long time customer... 30 years total. 

 

Your comment plays to my thesis that the big Canadian banks aren't going to be left holding the ball in a housing slowdown though.  Its the smaller finance companies of which there are dozens out there.

[Yours Truly]

I for one welcome our new Mainland Chinese overlords

[bizaro86]

We went to Td to get a Heloc set up. 

 

Uccmal, how did you get TD to give you a HELOC up to 80% of total LTV with your first mortgage NOT being with TD (i.e., with First National)?

 

In my very recent experience, every big-5 Canadian bank refuses to go second on a property with first mortgage that is not with them, including TD (had a phone conversation with them).

 

The only firm that agreed to do it was Home Capital group, but they cap total LTV (first+HELOC) at 65% of appraised property value.

 

They'll do it if they think they have a chance at making you a relationship customer. My banker moved to RBC for awhile, and I took a new 1st mortgage on one rental and a second (behind a Scotiabank first) on a different rental. They had no problem doing it, and pushed hard to get the second as well, which I was planning to combine with the Scotia first mortgage.

[gurpaul88]

I for one welcome our new Mainland Chinese overlords

 

+1

[Guest 50centdollars]

http://www.macleans.ca/economy/realestateeconomy/when-the-housing-bubble-bursts-there-wont-be-a-soft-landing/

[Phoenix01]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

[gary17]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

 

I agreed - although I think real estate in Canada is probably not quite the same as the tech bubble where some assets were priced at avg of 165x p/e multiples - and the market participants bought using margin -

 

I believe the high end real estates in Canada are bought with cash... 

and many 'average' condos were bought with more stringent downpayment and insurance requirements. 

 

That's not to say a bubble is not here and won't burst... but I have a hard time seeing that's the same as the tech bubble. 

 

Gary

 

 

 

 

[wisdom]

I have a question -

Is there any data backing up the statement - "high end houses are being bought with cash."

 

Canadian banks have a new immigrant program - no income, no credit requirements as long as you have been in Canada less than 5 years and can put down 35%.

 

 

[gary17]

Hi Wisdom.. sorry I don't have any data.

But having lived in Vancouver for 20 years... and know the Asian community very well... and just from the deals I know - they are all bought with cash deals.  The town of Vancouver is just flooded with money from China.

 

when i went to UBC - wealthy students from Taiwan / HK drove BMW or Benz to school.... 

 

I now do quite a bit of work at ubc - and wealth students from China drive Ferrari and Rolls Royce to school....    In fact I recently saw a blog on my FB feed:  http://universityofbeautifulcars.tumblr.com/

 

I have no problem believing these students are here with their mom (dad still working in China) - and almost everything they own is bought with cash. 

 

Gary

 

 

 

 

[Phoenix01]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

 

I agreed - although I think real estate in Canada is probably not quite the same as the tech bubble where some assets were priced at avg of 165x p/e multiples - and the market participants bought using margin -

 

I believe the high end real estates in Canada are bought with cash... 

and many 'average' condos were bought with more stringent downpayment and insurance requirements. 

 

That's not to say a bubble is not here and won't burst... but I have a hard time seeing that's the same as the tech bubble. 

 

Gary

 

During the tech wreck, even the Queen of England was trading stocks.  Everyone was doing it, except for a few notables WB, Prem, etc..

 

We are seeing global inflation of all assets simultaneously.  There is a possibility that all assets will reverse simultaneously and very quickly.  Long tail events occur when people are not expecting them.  BLACK SWAN!!

 

Today everyone is convinced that a 50% drop in Canadian RE is not possible.  Is a 50% drop reasonable in light of the global asset inflation over the past 7 years?  What if everything drops at the same time?  Will global funds pour into Canada for refuge?  Who knows???

 

BLACK SWANS are possible and very few are prepared to deal with such an outcome.  Personally it looks like pick up quarters in front of a steam roller.  Not worth the risk.

 

 

[merkhet]

I suppose the lack of credit purchases might make a difference on the margin, but does it really matter if most of the purchases are all cash or not? After all, the marginal buyer sets the prices. The margin only matters for the knock-on effects.

[gary17]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

 

I agreed - although I think real estate in Canada is probably not quite the same as the tech bubble where some assets were priced at avg of 165x p/e multiples - and the market participants bought using margin -

 

I believe the high end real estates in Canada are bought with cash... 

and many 'average' condos were bought with more stringent downpayment and insurance requirements. 

 

That's not to say a bubble is not here and won't burst... but I have a hard time seeing that's the same as the tech bubble. 

 

Gary

 

During the tech wreck, even the Queen of England was trading stocks.  Everyone was doing it, except for a few notables WB, Prem, etc..

 

We are seeing global inflation of all assets simultaneously.  There is a possibility that all assets will reverse simultaneously and very quickly.  Long tail events occur when people are not expecting them.  BLACK SWAN!!

 

Today everyone is convinced that a 50% drop in Canadian RE is not possible.  Is a 50% drop reasonable in light of the global asset inflation over the past 7 years?  What if everything drops at the same time?  Will global funds pour into Canada for refuge?  Who knows???

 

BLACK SWANS are possible and very few are prepared to deal with such an outcome.  Personally it looks like pick up quarters in front of a steam roller.  Not worth the risk.

 

 

 

So what if your horizon is very long - say 20 years ?

 

We had the worst real estate correction in the US in 2008/09...    Are the quality homes in NEW YOrk / Seattle,  San Fran back to the peak in 2007 ? 

 

I think there is a risk - but so as everthing else in the world...  We gotta look forward and stay positive.    Being risk adversed can include having mechanism in place to address the risk....  Gary

[Phoenix01]

 

 

So what if your horizon is very long - say 20 years ?

 

We had the worst real estate correction in the US in 2008/09...    Are the quality homes in NEW YOrk / Seattle,  San Fran back to the peak in 2007 ? 

 

I think there is a risk - but so as everthing else in the world...  We gotta look forward and stay positive.    Being risk adversed can include having mechanism in place to address the risk....  Gary

 

Very good point.  One needs to be protected as they move forward.  Many are getting complacent and will not be protected.  That is what will trigger a correction.  The Canadian RE will simply be swallowed up by other global events, no matter what arguments are put forward.

[alertmeipp]

I think  the main reason ppl are buying house is there is a general belief  that house price will continue to go up if u don't act now.

 

It's like a chicken and egg thing.

 

 

[Liberty]

I think  the main reason ppl are buying house is there is a general belief  that house price will continue to go up if u don't act now.

 

It's like a chicken and egg thing.

 

The greater fool theory. That's basically all bubbles.

 

The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. Or one may rationally have the expectation that the item can be resold to a "greater fool" later.

 

http://en.wikipedia.org/wiki/Greater_fool_theory

[Phoenix01]

I think  the main reason ppl are buying house is there is a general belief  that house price will continue to go up if u don't act now.

 

It's like a chicken and egg thing.

 

Fear of missing out is the fuel that drives bubbles.

[hardcorevalue]

All I can say is I have seen this in countless friends (late 20s early 30s age group) in Toronto. Yes, the most common belief is if you don't buy now you will never be able to afford a house in the city. There is zero belief (and I say this not over exaggerating) that house prices can go down. They are a 'one way' asset to most Torontonians. Any time you mention the US, Ireland, or other markets where housing broke, they say Canada isn't like that or the government would never let that happen. This spring is likely to see material price appreciation in Toronto, the interest rate cuts (although small) make it seem to the public that rising prices are even more permanent now.

[alertmeipp]

You don't need to wait for spring summer time.

 

House prices already up at least 15 20 percent in some suburb areas yoy. Scarborough

 

Inside Toronto, even way over built condos have caused bidding war.

 

The new finance minister  and bank governer so far is saying  soft landing.  Ie. Wait and pray.

 

 

 

 

[Uccmal]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

 

I agreed - although I think real estate in Canada is probably not quite the same as the tech bubble where some assets were priced at avg of 165x p/e multiples - and the market participants bought using margin -

 

I believe the high end real estates in Canada are bought with cash... 

and many 'average' condos were bought with more stringent downpayment and insurance requirements. 

 

That's not to say a bubble is not here and won't burst... but I have a hard time seeing that's the same as the tech bubble. 

 

Gary

 

During the tech wreck, even the Queen of England was trading stocks.  Everyone was doing it, except for a few notables WB, Prem, etc..

 

We are seeing global inflation of all assets simultaneously.  There is a possibility that all assets will reverse simultaneously and very quickly.  Long tail events occur when people are not expecting them.  BLACK SWAN!!

 

Today everyone is convinced that a 50% drop in Canadian RE is not possible.  Is a 50% drop reasonable in light of the global asset inflation over the past 7 years?  What if everything drops at the same time?  Will global funds pour into Canada for refuge?  Who knows???

 

BLACK SWANS are possible and very few are prepared to deal with such an outcome.  Personally it looks like pick up quarters in front of a steam roller.  Not worth the risk.

 

 

 

Okay, we had a generational macro event in 2008/09.  As a result the financial system is in better shape than it has been in decades. 

 

What asset prices are inflated, exactly?  You keep saying this but provide no evidence.  Commodities are generally depressed.  Europe Inc is generally depressed.  Japan Inc. is depressed.  By far the most important asset of all is running at 40% of its peak.

 

I agree with you that CDn. real estate is frothy.  However, as I have asserted above it is a subsector of the economy restricted to mortgage lenders.  Will something take it down eventually.  Of course, but 50%.  When did this last happen?

[Uccmal]

There seems to be a general sense that nothing huge can occur in the housing market.  This itself is a risk.

 

In a severe global downturn, risk aversion will take over and funds will run from risky assets.  The proverbial tide will go out and so many things will get clobbered simultaneously (junk bonds, EM bonds, stocks and currencies).  It has taken years to inflate global assets and it will take much less time for all of them to come back down to earth.

 

It is getting harder to sit back and watch everyone else making money in this environment, and that is exactly why those that can resist being drawn into the markets, will be well positioned when the inevitable will eventually occur.  Remember how Buffet was ridiculed because he would not board the tech wreck of the 90s?

 

I agreed - although I think real estate in Canada is probably not quite the same as the tech bubble where some assets were priced at avg of 165x p/e multiples - and the market participants bought using margin -

 

I believe the high end real estates in Canada are bought with cash... 

and many 'average' condos were bought with more stringent downpayment and insurance requirements. 

 

That's not to say a bubble is not here and won't burst... but I have a hard time seeing that's the same as the tech bubble. 

 

Gary

 

During the tech wreck, even the Queen of England was trading stocks.  Everyone was doing it, except for a few notables WB, Prem, etc..

 

We are seeing global inflation of all assets simultaneously.  There is a possibility that all assets will reverse simultaneously and very quickly.  Long tail events occur when people are not expecting them.  BLACK SWAN!!

 

Today everyone is convinced that a 50% drop in Canadian RE is not possible.  Is a 50% drop reasonable in light of the global asset inflation over the past 7 years?  What if everything drops at the same time?  Will global funds pour into Canada for refuge?  Who knows???

 

BLACK SWANS are possible and very few are prepared to deal with such an outcome.  Personally it looks like pick up quarters in front of a steam roller.  Not worth the risk.

 

 

 

Okay, we had a generational macro event in 2008/09.  As a result the financial system is in better shape than it has been in decades. 

 

What asset prices are inflated, exactly?  You keep saying this but provide no evidence.  Commodities are generally depressed.  Europe Inc is generally depressed.  Japan Inc. is depressed.  By far the most important asset of all is running at 40% of its peak.

 

I agree with you that CDn. real estate is frothy.  However, as I have asserted above it is a subsector of the economy restricted to mortgage lenders.  Will something take it down eventually.  Of course, but 50%.  When did this last happen?

 

1989. House prices dropped 50% in TOR

 

You are correct.  It was, however, not universally that dramatic across Canada. 

[Uccmal]

No it was VAN and TOR were they dropped

 

What data are you using.  I found one data set that suggested a roughly 30% drop for Canada.