Garth Turner - Real Estate in Canada

[RichardGibbons]

Question for the locals - it seems prices of single family homes are too high in Vancouver, but what about the apartments? Are they pricey relative to income, rents, and historical prices?

 

The average apartment price (not my preferred statistic, but it's hard to find median price) is $562K.  The median household income is around $76K, so that makes a 7.4 times multiple.  I'd guess an average 2-bedroom apartment would rent for around $2000/mo.  So if you assume the average apartment is the average 2 bedroom (which I imagine it's not), you're getting a 4.3% unlevered return on a rental, before you factor in taxes, depreciation, and special assessments.

 

In 2002, that average apartment was sub $200K.  It first broke $400K in 2007, and a year ago was just under $500K.

[JBTC]

Question for the locals - it seems prices of single family homes are too high in Vancouver, but what about the apartments? Are they pricey relative to income, rents, and historical prices?

 

The average apartment price (not my preferred statistic, but it's hard to find median price) is $562K.  The median household income is around $76K, so that makes a 7.4 times multiple.  I'd guess an average 2-bedroom apartment would rent for around $2000/mo.  So if you assume the average apartment is the average 2 bedroom (which I imagine it's not), you're getting a 4.3% unlevered return on a rental, before you factor in taxes, depreciation, and special assessments.

 

In 2002, that average apartment was sub $200K.  It first broke $400K in 2007, and a year ago was just under $500K.

 

Thanks Richard.

 

Assuming the average price went from $200k to $562k in 14 years, the CAGR is 7.7%. This would seem a very good return for apartments, but is it outrageous? I don't know. So while future returns should be lower, it's not clear to me that apartment prices need to adjust a lot, unless there is a vast amount of supply coming up soon. (In Australia, there's a huge amount of apartments being built in key cities.)

 

Price/income of 7.4x also seems ok.

 

Gross rent yield of 4.3% looks ok. If there is a major city in the world where one can get a 4% net yield, I'd be interested in hearing about it.

 

So it seems while there is a bubble in single family homes, apartments are more affordable. If apartments account for a large portion of the housing stock, then risk to the overall economy may be limited.

 

Also, could it be possible that the sub-$200k price back in 2002 was too low? Is there a way to conclude one way or another?

 

[scorpioncapital]

In a world of permanent leverage, anything can be justified.

 

[alertmeipp]

leverage works both ways.

 

there is no such thing as permanent leverage....  there are almost risk free ones and u know what happen when those types of leverage work the other way.

[lessthaniv]

Lots can be gained from this thread when heading back to page 1 and re-reading it.

[KCLarkin]

http://business.financialpost.com/personal-finance/mortgages-real-estate/worry-about-supply-not-demand-in-canadas-overheated-property-market-says-former-boc-governor-david-dodge

 

Completions of new single-detached homes (in Toronto) fell 18 percent to 7,871 units in 2015, the lowest since 1978.

 

 

[rb]

Question for the locals - it seems prices of single family homes are too high in Vancouver, but what about the apartments? Are they pricey relative to income, rents, and historical prices?

 

The average apartment price (not my preferred statistic, but it's hard to find median price) is $562K.  The median household income is around $76K, so that makes a 7.4 times multiple.  I'd guess an average 2-bedroom apartment would rent for around $2000/mo.  So if you assume the average apartment is the average 2 bedroom (which I imagine it's not), you're getting a 4.3% unlevered return on a rental, before you factor in taxes, depreciation, and special assessments.

 

In 2002, that average apartment was sub $200K.  It first broke $400K in 2007, and a year ago was just under $500K.

 

Thanks Richard.

 

Assuming the average price went from $200k to $562k in 14 years, the CAGR is 7.7%. This would seem a very good return for apartments, but is it outrageous? I don't know. So while future returns should be lower, it's not clear to me that apartment prices need to adjust a lot, unless there is a vast amount of supply coming up soon. (In Australia, there's a huge amount of apartments being built in key cities.)

 

Price/income of 7.4x also seems ok.

 

Gross rent yield of 4.3% looks ok. If there is a major city in the world where one can get a 4% net yield, I'd be interested in hearing about it.

 

So it seems while there is a bubble in single family homes, apartments are more affordable. If apartments account for a large portion of the housing stock, then risk to the overall economy may be limited.

 

Also, could it be possible that the sub-$200k price back in 2002 was too low? Is there a way to conclude one way or another?

7.4 price to pretax income income is really high. I also believe the Richard's 4.3% gross yield does not include maintenance fees (HOA for our US friends). Not 100% sure how it works in Vancouver but in Toronto for a 2-bed condo you're looking at 800-900 per month in maintenance fees and the landlord pays the main fees. That really kills your rental yield.

 

In Toronto condo rental is cash flow negative. I know I'm not fair because I'm including the full mortgage payment, but still.

 

There are plenty of cities in the US where you can get a 4% net yield. Don't know if premier ones like LA and NY, but I don't think that Vancouver is in that league either.

[JBTC]

http://business.financialpost.com/personal-finance/mortgages-real-estate/worry-about-supply-not-demand-in-canadas-overheated-property-market-says-former-boc-governor-david-dodge

 

Completions of new single-detached homes (in Toronto) fell 18 percent to 7,871 units in 2015, the lowest since 1978.

 

This is critically important to prices, but rarely discussed on this board.

 

Builders respond to incentives. If there's no incentive to build, there are likely perverse government policies at work.

 

[JBTC]

 

7.4 price to pretax income income is really high. I also believe the Richard's 4.3% gross yield does not include maintenance fees (HOA for our US friends). Not 100% sure how it works in Vancouver but in Toronto for a 2-bed condo you're looking at 800-900 per month in maintenance fees and the landlord pays the main fees. That really kills your rental yield.

 

In Toronto condo rental is cash flow negative. I know I'm not fair because I'm including the full mortgage payment, but still.

 

There are plenty of cities in the US where you can get a 4% net yield. Don't know if premier ones like LA and NY, but I don't think that Vancouver is in that league either.

 

I just want to mention one point - in earlier years I made the mistake of using the US prices as a benchmark when comparing housing prices in different parts of the world. And I found housing bubbles in every country. It took a while for me to realize that the US prices are abnormal.

 

If Middle America is at one extreme and Hong Kong at another, the world seems to be moving more toward HK than to Middle-America.

 

[rb]

 

7.4 price to pretax income income is really high. I also believe the Richard's 4.3% gross yield does not include maintenance fees (HOA for our US friends). Not 100% sure how it works in Vancouver but in Toronto for a 2-bed condo you're looking at 800-900 per month in maintenance fees and the landlord pays the main fees. That really kills your rental yield.

 

In Toronto condo rental is cash flow negative. I know I'm not fair because I'm including the full mortgage payment, but still.

 

There are plenty of cities in the US where you can get a 4% net yield. Don't know if premier ones like LA and NY, but I don't think that Vancouver is in that league either.

 

I just want to mention one point - in earlier years I made the mistake of using the US prices as a benchmark when comparing housing prices in different parts of the world. And I found housing bubbles in every country. It took a while for me to realize that the US prices are abnormal.

 

If Middle America is at one extreme and Hong Kong at another, the world seems to be moving more toward HK than to Middle-America.

I'm not sure that's the right way to think about it. That's like saying something like... "well a lot of stock markets are trading at 60x PE so stocks must be worth 60x PE now".

 

I think that rental yields are a much better indication of prices. You can have longer lived dislocations in real estate price/value because home ownership is such an emotional thing. My home is my castle and all that... But if prices are high and rental yields are low the market eventually corrects. People figure out that it's better to have no castle pay low(er?) rent and have a good life as opposed to get the castle, slave over the payments, and have no life.

[SafetyinNumbers]

I've noticed anecdotally in Toronto, that condo cap rates (rental income less expenses / price of condo) are running around the 5 year mortgage rate and prime rate. I think it's important to look at the cap rate for an investment decision versus the cash flow as it seems people are willing to run negative cash flow because prices have continued to rise.

 

Recently rents are really on the rise to catch up to prices and I suppose we'll see if higher prices can be sustained by the market.

 

Full disclosure, I'm a renter who has been wrong on prices in Toronto for almost 10 years!

[JBTC]

My guess is that for most people, their most successful investment in life in terms of dollar amount could be their primary home. The reason could be that they buy one when they need it, and go on to live in it for decades. If they try to be clever on timing the market, then there could be lots of reason not to buy. Given home prices don't fall often, the wait can be long and the loss of the compounding effect can be huge. Thankfully most people don't put their life on hold just to wait for a good deal.

 

So maybe the old saying "it's time in the market, not timing the market" does apply.

 

[permabear]

Garth Turner recently wrote: "over 50% of all GTA condos go to flippers and amateur landlords"

 

Does anyone have a source for this? Much appreciated

[Liberty]

Garth Turner recently wrote: "over 50% of all GTA condos go to flippers and amateur landlords"

 

Does anyone have a source for this? Much appreciated

 

I don't have that one, but Garth tends to write about these kinds of stats once in a bit more detail with a source link, and then in following mentions he doesn't always give the detail. So I'd check his recent stuff,  the source is probably somewhere in there.

[rb]

I don't have data to the opposite by that stat looks wrong. If so many condos went to speculators and investors everyone would know it. You wouldn't need to look for a source.

[TBW]

It was from a study by Urbanation. It is referenced in this cbc article http://www.cbc.ca/beta/news/canada/toronto/local-investors-outnumber-foreign-buyers-10-1-in-toronto-s-condo-market-1.3825498 but i dont have the source document.

 

I believe the conclusion. From being pitched condo presales as 'easy money' from my mechanic to a friend seeing census notices on all door handles a month late when condo shopping. I also know a couple of people that own 4+ condos. All anecdotal from my pov but their study confirms it.

[JBTC]

Perhaps the most renowned geographer in Canada, Ley has been cranking the foreign-money siren for years, most notably with his 2010 book “Millionaire Migrants”, in which he described a 94 per cent correlation between immigration and home prices in Vancouver over a 30-year period.

 

http://www.scmp.com/news/world/united-states-canada/article/2048798/vancouvers-mayor-never-dreamed-foreign-funded

 

[permabear]

It was from a study by Urbanation. It is referenced in this cbc article http://www.cbc.ca/beta/news/canada/toronto/local-investors-outnumber-foreign-buyers-10-1-in-toronto-s-condo-market-1.3825498 but i dont have the source document.

 

I believe the conclusion. From being pitched condo presales as 'easy money' from my mechanic to a friend seeing census notices on all door handles a month late when condo shopping. I also know a couple of people that own 4+ condos. All anecdotal from my pov but their study confirms it.

 

Thanks! It strikes me as high, but I can see it

[gokou3]

Calgary landlords facing ‘grim’ times as almost 40% of rental properties sit empty

http://business.financialpost.com/news/property-post/calgary-landlords-facing-grim-times-as-almost-40-of-rental-properties-sit-empty?__lsa=2aa2-54b2

 

"Close to 40 per cent of Calgary’s available rental listings are unoccupied..."

 

The headline is misleading, but still...

[rb]

For what it's worth

 

http://www.cbc.ca/news/business/cmhc-foreign-ownership-report-1.3874515

[Liberty]

For what it's worth

 

http://www.cbc.ca/news/business/cmhc-foreign-ownership-report-1.3874515

 

Thanks.

 

Canadian condo ownership by foreign residents is highest in Toronto, where 2.3 per cent of units are owned by foreign residents, according to the Canada Mortgage and Housing Corporation. Vancouver and Montreal have foreign condo ownership rates of 2.2 per cent and 1.1 per cent, respectively.

[gary17]

I wonder how is 'foreign' defined -

 

I would say if the money wasn't made in Canada; it's foreign... even if the homeowners are residents or citizens of Canada.

 

Gary

[rb]

I wonder how is 'foreign' defined -

 

I would say if the money wasn't made in Canada; it's foreign... even if the homeowners are residents or citizens of Canada.

 

Gary

It says in the article. It's foreign owned if the owners don't reside in Canada.

[LesPaul]

A bit of an aside... many banks cross-sell credit cards with their mortgages.

 

I find it humorous that today a homeowner will have to qualify at a rate of 4.64% to get that five years fixed rate of 2.64%. After crunching the numbers, the branch representative informs the customer they can afford not a cent more than $X under the new mortgage rules. Then upon signing the documentation in the branch, "Oh, you've also been pre-approved for a $5/10/15,000 credit card at 19.99%!"

 

I know they're different products with different rules but still, kind of worth a chuckle.

[alertmeipp]

GTA detached now up like 32% YoY..... no impact whatsoever from the mortgage rule changes yet..

 

Hot money from Van...blah blah...

 

Wayne's $2000 cash back to help first time buyer is a joke.