Garth Turner - Real Estate in Canada

[cwericb]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

[SharperDingaan]

Agreed, separate the land from the serviced lot.

 

The scarce commodity is land within easy walking distance of a subway. It’s a local, finite resource; and with inflation and increasing demand from immigration – it can only continue to rise in value over time. The dwelling you put on it, is just a place to live.

 

Simple 2% inflation will double the cost of the land in roughly 36 years (72/2), and quintuple it in 72 years. 72 years of city growth (immigration) have also put what used to be farmland – firmly within the city boundary. At 3.25% average growth, that 75K house purchase in 1944 - is worth 750K today. No speculation involved, just mathematics.

 

Pokey, refurbished 72 year old house in a great location; or a way more functional house < 5 years old, 45 minutes away. It’s a life style decision.

 

SD

 

[Liberty]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

 

Talking about something for a long time doesn't mean you don't have a point, and being wrong about one aspect of something doesn't mean you're wrong about all of it, just like people who started warning about the dot com bubble in 1997 or 1998 weren't necessarily completely wrong. Timing's always hard, but we all have to do what we feel makes sense.

 

I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

[Studesy]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

 

Talking about something for a long time doesn't mean you don't have a point, and being wrong about one aspect of something doesn't mean you're wrong about all of it, just like people who started warning about the dot com bubble in 1997 or 1998 weren't necessarily completely wrong. Timing's always hard, but we all have to do what we feel makes sense.

 

I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

 

+1

Toronto Real Estate = A pitch I won't be swinging at.

[Studesy]

I wonder if any of the Toronto Real Estate bulls out there would put there money where their mouth is and sell/write cheap insurance contracts to those with equity in Toronto real estate.

I bet if they looked at things this way....ie. from a risk standpoint as an insurer would, things would start to look different.

The "Greater Fool Theory" seems to be a stronger force than risk aversion and rationality though.  What else is new...to each their own...lol.

[Jurgis]

I'm just happy that I live in a "global city" Boston and can buy an OK house in OK burbs for $400-500K or so.

 

Not sure what I would do if I was forced to live in the "global city" of Silly Valley or some other multi-million $ place. Of course, part of my choice was not to live in Silly Valley.

 

Price ranges differ for different people. For me, the RE is not worth it when you have to pay an amount of money that you could just retire on in cheaper but still OK location. Somewhere in the range of US$1M-2M and up.

 

Just for fun in OKish exurbs of "global city" of Chicago, you can buy places for $200K or so... Climate not much different from Toronto. ;)

[augustabound]

I'm just happy that I live in a "global city" Boston and can buy an OK house in OK burbs for $400-500K or so.

 

We're in an OK suburb (45 minutes) of Toronto and paid $350 4 years ago. Same model of home is currently selling for $500K.

 

Toronto's not a global city until they can get their pathetic transit issues fixed. We need the Ford brothers back in office to build subways to everywhere. :D

 

[scorpioncapital]

Apparently Toronto did have a bubble in the past - http://www.torontocondobubble.com/2013/02/toronto-housing-bubble-in-1980s.html

 

A few notes

 

- Rise of interest rates were one way it got pricked - hitting 12.7%.

- There is a difference between inflation-adjusted and nominal house prices.

 

"If you bought a condo in downtown Toronto in 1989 and you were to sold it today, you would likely still end up selling your house at a lose and that's not counting the closing costs of a sale. "

 

 

 

[KCLarkin]

Apparently Toronto did have a bubble in the past - http://www.torontocondobubble.com/2013/02/toronto-housing-bubble-in-1980s.html

 

A few notes

 

- Rise of interest rates were one way it got pricked - hitting 12.7%.

- There is a difference between inflation-adjusted and nominal house prices.

 

"If you bought a condo in downtown Toronto in 1989 and you were to sold it today, you would likely still end up selling your house at a lose and that's not counting the closing costs of a sale. "

 

The Toronto bubble did not self-implode. Rather a combination of astronomical mortgage rates, a massive increase in unemployment, and a major recession popped the bubble. Even then, house prices only dropped 28%.

 

And what happened to the lenders? Mortgage arrears in Ontario skyrocketed to 0.72%. Wells Fargo had 0.52% arrears in 2006? Canada's worst housing crash resulted in delinquencies only slightly higher than America's best bank in a boom year?

 

[JBTC]

I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

 

The RE logic of the rest of the world? What is it?

 

The more I look at real estate across the globe, the more I see the differences. I wish there were a universal ratio on housing valuation. There isn't.

 

Within Canada, the price difference between cities is huge and likely widening. Within a city, prices can change a lot between neighborhoods.

 

Not saying property prices cannot go out of whack and correct. It's a fact that property prices go down less often and less dramatically than stock markets.

 

I'd love it if someone can present a cogent case on why Canadian housing prices will fall significantly in the near-term. I am all ears.

 

[wisdom]

Let me try inverting? Vancouver and Toronto are cheap - what reasons could there be?

[beerbaron]

I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

 

The RE logic of the rest of the world? What is it?

 

The more I look at real estate across the globe, the more I see the differences. I wish there were a universal ratio on housing valuation. There isn't.

 

Within Canada, the price difference between cities is huge and likely widening. Within a city, prices can change a lot between neighborhoods.

 

Not saying property prices cannot go out of whack and correct. It's a fact that property prices go down less often and less dramatically than stock markets.

 

I'd love it if someone can present a cogent case on why Canadian housing prices will fall significantly in the near-term. I am all ears.

 

Among reasons for corrections in any sectors but applies especially well for canadian real estate are:

Debt serviceability

Increase Competition (in case of real estate, other cities or rents)

Subpar return on capital

Interest rate increase

 

BeerBaron

 

 

[Liberty]

I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.

 

The RE logic of the rest of the world? What is it?

 

Over the long-term, housing tends to follow inflation and incomes. When it diverges from that for too long, it tends to come back to it.

 

Let's look at the alternative. Let's say what's going on right now in Canada is normal and will keep going on. So in 10-15 years, regular Canadians will have 1-2 million dollar houses while americans are in their 350k houses? First time buyers will get mortgages over half a million to get a crappy starter house, something that would cost more than $2k/month just to service the interests at a more normalized 5% (don't believe interest rates will normalize within 10-15 years?). How high will debt levels be by then? They're already at very elevated levels right now, above where Americans where in 2007...  The rate cut by the BoC stirred the pot, but that can't go on forever either.

 

I believe that when something can't go on, at a certain point it must stop. Who knows when... But I'd rather buy after that happens than before.

[JBTC]

Let me try inverting? Vancouver and Toronto are cheap - war reasons could there be?

 

I personally don't think they are cheap. But I appreciate the fact that they are perennially ranked among the most livable cities on the planet and  they attract people to move there.

 

And for the many thousands moving from HK, Beijing, and Shanghai to Canada every year, there can be no doubt the prices in V/T are very reasonable when compared to their home markets.

 

[wisdom]

Was the US attracting thousands of immigrants before 2008?

 

Is HK attracting thousands of immigrants? What about Singapore?

 

I believe Delhi attracts more people than Vancouver, yet the prices there are dropping? To the people moving to Delhi, it is a more attractive option than where they lived prior to moving there? According to the logic that thousands of people moving to a city for a better life - prices should keep going up. Why isn't it working in HK, Singapore or Delhi. Please don't tell me because everyone wants to move to TO or Vancouver. For most of the rich in the world a city like Vancouver doesn't even register.

 

It is great to sit in Canada and imagine that everyone in world wants to live in Canada. The reality is we only take in 250,000 people a year.

[wisdom]

Geneva, Bern, Zurich rank very high as livable cities. I don't see them rising 30% a year. I have been trying to understand for years how the mountains in Vancouver allow one to afford their mortgage as the median household here earns $72,000.

[JBTC]

Was the US attracting thousands of immigrants before 2008?

 

Is HK attracting thousands of immigrants? What about Singapore?

 

I believe Delhi attracts more people than Vancouver, yet the prices there are dropping? To the people moving to Delhi, it is a more attractive option than where they lived prior to moving there? According to the logic that thousands of people moving to a city for a better life - prices should keep going up. Why isn't it working in HK, Singapore or Delhi. Please don't tell me because everyone wants to move to TO or Vancouver. For most of the rich in the world a city like Vancouver doesn't even register.

 

It is great to sit in Canada and imagine that everyone in world wants to live in Canada. The reality is we only take in 250,000 people a year.

 

First, let me say rising population is a key factor to housing prices. This is so simple because this is demand.

 

Second, no one was saying rising population is the only factor. Trying to imply what others didn't say is not the way to discuss.

 

Third, let me leave out Delhi because I know nothing about it.

 

For the US housing bubble, I think the major cause was low rates and irresponsible lending. But the major bubble cities had huge internal migration - Las Vegas, Phoenix, and Miami. They helped the boom.

 

In HK and Singapore, both direct immigration and other foreign buying all contributed to the high property prices. As a result, in both markets the government has put in restrictive measures on non-resident buyers. Despite both markets have softened in recent months, those restrictions are still in place.

 

[JBTC]

Geneva, Bern, Zurich rank very high as livable cities. I don't see them rising 30% a year. I have been trying to understand for years how the mountains in Vancouver allow one to afford their mortgage as the median household here earns $72,000.

 

If you can

 

1) make English the first language of the Swiss people (perhaps harder than making Montreal adopt English) and

 

2) change the Swiss law on immigration (probably easier to simply invade the country)

 

then a 30% rise could be in the cards!  :)

 

[Viking]

I think it is pretty straight forward to identify a bubble. I think it is near impossible to predict when it will pop and what the cause of the 'pop' will be.

 

It looks to me like Vancouver is in a housing bubble. Living here, it is taking on the feel of a game of monopoly. Prices up 20% over the last year in some neighbourhoods? Prices up 50% in 5 years? My neighbours sound like they are intoxicated when they talk about real estate.

 

The one caveat I have is China. If demand from China continues at current levels (people wanting to get their money out) then the Vancouver market could stay elevated. It could even continue to go higher. Bizarre....

[SharperDingaan]

Mathematics.

 

The reality in all global cities is that the ‘average’ growth rate on the price of land within the down town of the city, greatly exceeds the ‘average’ wage increase of the local citizen. Compound the difference over an extended time frame, & down town land ownership becomes more and more out of reach of the local citizen. Local citizens live further out (where it is more affordable); & only tourists & the very rich live in the down town. Time & popularity determines affordability.

 

London, Paris, Rome, etc. have been around for hundreds of years; simple compounding has made their down town living unaffordable. The solution has been separation of land from dwelling, via a lease (UK); to live down town does not mean that you have to own the land – the norm is to rent. If you want to live in a very desirable place, rents are of course - high; no different to any other rental market in the world.

 

We just don’t want to hear it.

 

SD

 

[KCLarkin]

Was the US attracting thousands of immigrants before 2008?

 

Is HK attracting thousands of immigrants? What about Singapore?

 

I believe Delhi attracts more people than Vancouver, yet the prices there are dropping? To the people moving to Delhi, it is a more attractive option than where they lived prior to moving there? According to the logic that thousands of people moving to a city for a better life - prices should keep going up. Why isn't it working in HK, Singapore or Delhi. Please don't tell me because everyone wants to move to TO or Vancouver. For most of the rich in the world a city like Vancouver doesn't even register.

 

It is great to sit in Canada and imagine that everyone in world wants to live in Canada. The reality is we only take in 250,000 people a year.

 

"The most affordable major metropolitan markets in 2015 were in the United States, which had a moderately unaffordable rating of 3.7.followed by Japan, with a Median Multiple of 3.9. Major metropolitan markets were rated "seriously unaffordable," in Canada (4.2), Ireland (4.5), the United Kingdom (4.6) and Singapore (5.0). The major markets of Australia (6.4), New Zealand (9.7) and Hong Kong (19.0) were severely unaffordable."

 

Vancouver is a notable exception. But Toronto certainly seems reasonable, at least relative to other major global cities.

[scorpioncapital]

What currency are they using for that study? With US dollars, the major cities of Canada are relatively cheaper.

[mcliu]

I guess another question is: at what prices would make you believe that a bubble has formed? Would it considered a bubble if median prices were $3 million, $5 million, $10 million or is there no limit?

 

Are there some similarities between what's happening in Toronto/Vancouver and Sydney/Auckland/Melbourne. (Would they be considered global cities too?) It seems like Australian prices were fuelled by a combination of foreign demand and lax lending. Thoughts?

http://www.bloomberg.com/news/articles/2016-02-22/one-sign-australia-s-housing-market-is-due-for-a-2008-moment

 

What about major cities like Chicago, Houston, why aren't they experiencing such elevated home prices.

 

Apparently, prices in Milton, Ontario(?) Increased by 42% yoy.. Is that even part of the GTA? http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/torontos-hot-housing-market-drives-big-bidding-wars-in-suburbs/article29053048/&ved=0ahUKEwihx4K8s7HLAhWHhywKHTKZA-oQqQIIGigAMAA&usg=AFQjCNHWv6ncMw0Mqn5oVkISEeBae2NXuQ&sig2=ajPFoh6gjTEmrtEBapiJpQ

[Studesy]

1.  I'm not sure we can classify this so called "bubble" as a Canada wide issue.  Correct we if I'm wrong, but I believe it is mostly a Toronto, Montreal, Vancouver issue.

 

2.  Justifying why prices will go up or down in these markets over the next couple years is a waste of time.  The obvious thing is that real estate in these markets is not

    a value proposition.  From a "safety of principle" standpoint, I believe a real estate investor would be better protected looking in a more value oriented market (Windsor??...or out side the country).

 

3.  Assigning values to real estate in general is extremely difficult.  Since the "rents" (cash flows) that derive these values are essentially a commodity, how can one predict these with any certainty            going forward? Somewhat similar to why Buffett avoids commodity companies (with the exception of those with some sort of comp. advantage..ie low cost producer).  One could attempt to use such a "Buffet approach" identifying properties with some type of competitive advantage over the rest of the market, determine the future cash flows, and compute a value based on these factors (the max price one would be willing to pay in order to compound at a given rate over a period of time).

 

On the other hand, a Graham type approach to RE would be much simpler, principle protecting, and would provide a market beating return over a period of time.  Imagine if you could buy a basket of residential properties at 0.75x tangible book value.  In other words, tangible book = replacement cost or physical value of the home ("the bricks and mortar") +  $0 for the land + say $20,000 for the services to the property.  I suspect this would be an extremely safe long term investment (even if no cash flow was produced early on).  Also, I'm sure such deals exist....especially in 08/09 in certain US cities.

 

Thoughts?

[KCLarkin]

What currency are they using for that study? With US dollars, the major cities of Canada are relatively cheaper.

 

These are just multiples to median income, so currency is not a factor.

 

Chicago is an interesting case. One obvious difference is that chicago population has actually shrunk over the past couple decades. The us median multiple is really helped by rust belt cities like Detroit.

 

http://www.demographia.com/dhi.pdf