Garth Turner - Real Estate in Canada

[scorpioncapital]

I think they could have gotten the same effects simply by enforcing the tax laws which are loosely enforced with lots of grey areas about residency, etc.. This would have the added benefit of favouring tax paying homeowners over tax avoiding homeowners and stashing wealth in houses.

 

[rb]

I don't think the foreigners are bothered by taxes or forms to fill out. I wonder what would happen NOT if foreign rules come into place like they did, but something as simple as JUST enforcing the tax law and all the grey areas, which seems so lax probably just tightening that up would have had the same effect without having to put any new rules in place. This would transfer the benefit to those who actually pay their taxes versus those who have money and feel they are above the law.

This is already happening. New task force last year to do exactly what you're saying.

[Hawks]

Agree with Cardboard here. No one knows exactly when it will pop, but it will. An uptick in mortgage rates might do it or some other event we haven't anticipated yet.

[TBW]

I think this just bursts on its own weight, no catalyst needed.  These things are clearly psychological and its just a matter of when the psychology changes.  The conversation I have on the subject has now changed to 'yeah its a bubble, but when is it going to change' from 'houses only go up' so I think psychology has tilted and its now only a matter of time.  My bet would be this is the year Toronto pops.

 

The scenario RB laid out is simply unsustainable.  Looking up income stats on Statcan, only 5% of individuals make more than 150k per year in Canada.  So for what sounds like an average house in the Toronto suburbs you need at least one of the two individuals to be in that top 5%.  It just doesn't make sense.

 

I know that HELOC from parents and second lien financing has to be a large part of the financing for such houses.  What is interesting to me is that both loan types are callable at any time.  From what I understand second lien's are from more 3rd tier lenders and therefore no reputational risk so I think people are underpricing the repossession risk when the mkt turns.  Does anyone know who the big players are in the 2nd and 3rd lien mortgages? 

 

I really think you see house price declines north of 40% in Canada, over 50% in Toronto and Van.

[alertmeipp]

With a semi selling close to 1m I think there are two types of buyers.

 

Foreigner and ppl that already owned a house.... And they use home equity to finance.

 

The second type is going to cause house price to fall off the cliff when things reverse.

[Guest 50centdollars]

Anyone have an opinion on the CAD when this busts? I'm guessing it would drop as the BOC would have to print money to flood the market. Would it be prudent to hold cash balances in USD over CAD?

[rb]

Anyone have an opinion on the CAD when this busts? I'm guessing it would drop as the BOC would have to print money to flood the market. Would it be prudent to hold cash balances in USD over CAD?

It's tricky because CAD can be a crazy currency. I've had a large short CAD bet for about 4 years because in anticipation of this. It worked out well.

 

Basically if this thing bursts BoC will probably have to step in with some serious easing. It'll hit the real economy as well pushing down on GDP. Both of these should in theory be bad for CAD. On the other hand CAD has been week for a few years now. Also Canada is an advanced economy not a banana republic -its currency has value. In addition if oil prices shoot up for some reason you could see CAD appreciate even with RE burst - nightmare scenario for GDP and BoC. I'm actually looking to cover some of my short CAD/USD in the high .60s low .70s.

 

In short I think that there is limited to no upside for CAD and some downside (maybe 10%-15%) but not as much as it once was. If you're heavy long CAD I'd diversify some from it. However at this level (0.74 USD) I'm not sure there's a very good case to be made for a crazy CAD short.

[turar]

This was entertaining: https://www.thebeaverton.com/2017/03/lotto-649-commercial-features-dream-owning-1-bedroom-condo-toronto/

[scorpioncapital]

Today, many 'advanced economies' are behaving like banana republics and many banana republics are acting like advanced economies. Don't know what will happen to the dollar, but no doubt bailouts are highly inflationary unless somehow everyone gets taxed more. At 50% marginal rates, I can't see this happening. And while canada does have soft capital controls (e.g. departure tax) I'm sure money will find creative ways to leave if it isn't treated right.

[rb]

Today, many 'advanced economies' are behaving like banana republics and many banana republics are acting like advanced economies. Don't know what will happen to the dollar, but no doubt bailouts are highly inflationary unless somehow everyone gets taxed more. At 50% marginal rates, I can't see this happening. And while canada does have soft capital controls (e.g. departure tax) I'm sure money will find creative ways to leave if it isn't treated right.

Yes because the US had a real problem with inflation post 2008. ::)

[Guest 50centdollars]

Anyone have an opinion on the CAD when this busts? I'm guessing it would drop as the BOC would have to print money to flood the market. Would it be prudent to hold cash balances in USD over CAD?

It's tricky because CAD can be a crazy currency. I've had a large short CAD bet for about 4 years because in anticipation of this. It worked out well.

 

Basically if this thing bursts BoC will probably have to step in with some serious easing. It'll hit the real economy as well pushing down on GDP. Both of these should in theory be bad for CAD. On the other hand CAD has been week for a few years now. Also Canada is an advanced economy not a banana republic -its currency has value. In addition if oil prices shoot up for some reason you could see CAD appreciate even with RE burst - nightmare scenario for GDP and BoC. I'm actually looking to cover some of my short CAD/USD in the high .60s low .70s.

 

In short I think that there is limited to no upside for CAD and some downside (maybe 10%-15%) but not as much as it once was. If you're heavy long CAD I'd diversify some from it. However at this level (0.74 USD) I'm not sure there's a very good case to be made for a crazy CAD short.

 

Thanks rb!

[bizaro86]

I'd like to know which Canadian markets are at ~55 price to rent ratio (the bottom end of that bar). The propertis I own now are probably 150x price to rent ratio.

 

Actually 200x to 250x is the norm now if it's in reputable school zones.

 

Sorry, I was misinterpreting the graph.

 

I think price to rent varies by local market, Calgary is a bit under 200 I'd day.

 

That being said, I really do have a pretty nice 2 bedroom apartment condo in a good inner city Calgary neighbourhood (across the street from a good elementry,  1 block from the Peace bridge). I would sell it at the price (say 155x my 1300/mth rent) so I think my valuation is relevant for at least part of the market.

 

Toronto and Vancouver are different, but that's not news.

[Guest notorious546]

I'd like to know which Canadian markets are at ~55 price to rent ratio (the bottom end of that bar). The propertis I own now are probably 150x price to rent ratio.

 

Actually 200x to 250x is the norm now if it's in reputable school zones.

 

Sorry, I was misinterpreting the graph.

 

I think price to rent varies by local market, Calgary is a bit under 200 I'd day.

 

That being said, I really do have a pretty nice 2 bedroom apartment condo in a good inner city Calgary neighbourhood (across the street from a good elementry,  1 block from the Peace bridge). I would sell it at the price (say 155x my 1300/mth rent) so I think my valuation is relevant for at least part of the market.

 

Toronto and Vancouver are different, but that's not news.

 

I'm from calgary too. Do you live in Kensington? (I do) or i guess it could be called Sunnyside/Hillhurst

[bizaro86]

I live further NW in Calgary, the condo I am thinking of selling (in Sunnyside) is a rental.

[wisdom]

http://www.cbc.ca/beta/news/canada/british-columbia/td-bank-employees-admit-to-breaking-law-1.4016569

 

Secret to Canadians ability to carry more debt is this superior banking system. Now imagine the above has been happening across all Canadian banks because bank employees wanted to save their jobs over the last decade. You should have multiple wells Fargo and wide spread fraud. The tide is starting to go out and the music is about to stop playing.

[physdude]

While I think it a very low probability event, it looks to me like there is a real possibility of a lot of problems for the Canadian economy arising simultaneously in the near future: namely the popping of the real estate bubble, oil continuing lower for longer and the implementation of a BAT south of the border. The outcome if all three hit at the same time is unlikely to be very pleasant. (I am personally long a bunch of Canadian dollars because the currency seems undervalued from a long term perspective but will probably get some cheap OOM puts to hedge the position until the danger passes.)

[Guest 50centdollars]

http://www.cbc.ca/beta/news/canada/british-columbia/td-bank-employees-admit-to-breaking-law-1.4016569

 

Secret to Canadians ability to carry more debt is this superior banking system. Now imagine the above has been happening across all Canadian banks because bank employees wanted to save their jobs over the last decade. You should have multiple wells Fargo and wide spread fraud. The tide is starting to go out and the music is about to stop playing.

 

This is happening at all the banks not just TD.

[Liberty]

http://www.antimoneylaunderinglaw.com/2017/03/us-rates-canada-once-again-as-a-major-money-laundering-country-in-annual-report.html

[rb]

Hey look, it turns out it may not be lack of supply after all but elevated demand from foreign buyers/money launderers, speculators, and future demand brought forward by scared youth. Basically your run of the mill bubble with some Asian spices. 

 

http://www.theglobeandmail.com/real-estate/toronto/demand-fuels-toronto-house-prices-not-lack-of-supply-study-finds/article34279980/

[Liberty]

Via @ac_eco:

 

http://www.ryerson.ca/content/dam/citybuilding/pdfs/2017/CBI%20POLICY%20PAPER-In%20High%20Demand-March20171.pdf

[scorpioncapital]

Maybe there won't be a crash, instead the CAD$ goes from say 1:1 when all the homeowners bought their property to say 3:1. So they lose 2/3rds of their money but will still have their house. Not sure how inflation would affect financing though. If they step out of the country they will be shocked where their wealth went. But in this scenario, house prices can just remain flat or even increase. Most home purchases are ring-fenced into the CAD dollar I imagine? Any thoughts on this theory?

 

 

[rb]

Maybe there won't be a crash, instead the CAD$ goes from say 1:1 when all the homeowners bought their property to say 3:1. So they lose 2/3rds of their money but will still have their house. Not sure how inflation would affect financing though. If they step out of the country they will be shocked where their wealth went. But in this scenario, house prices can just remain flat or even increase. Most home purchases are ring-fenced into the CAD dollar I imagine? Any thoughts on this theory?

No way the CAD can fall that much. Canada actually has a real and productive economy should. Should CAD fall even a relatively small part of what you're calling far our exports would shoot through the roof which will stabilize CAD.

 

In addition declines in CAD do not alleviate the housing costs for Canadians and make Canadian real estate cheaper for foreign investors in their currency. So I don't really see how a CAD decline fixes a bubble. Unless you're talking about foreign investors getting scared shitless by currency mark to market.

[mcliu]

Maybe there won't be a crash, instead the CAD$ goes from say 1:1 when all the homeowners bought their property to say 3:1. So they lose 2/3rds of their money but will still have their house. Not sure how inflation would affect financing though. If they step out of the country they will be shocked where their wealth went. But in this scenario, house prices can just remain flat or even increase. Most home purchases are ring-fenced into the CAD dollar I imagine? Any thoughts on this theory?

No way the CAD can fall that much. Canada actually has a real and productive economy should. Should CAD fall even a relatively small part of what you're calling far our exports would shoot through the roof which will stabilize CAD.

 

In addition declines in CAD do not alleviate the housing costs for Canadians and make Canadian real estate cheaper for foreign investors in their currency. So I don't really see how a CAD decline fixes a bubble. Unless you're talking about foreign investors getting scared shitless by currency mark to market.

 

Decline in the currency will probably be a result of monetary and fiscal easing to reduce the impact of a housing crash. (Like QE123.) The CMHC will need a bailout in a severe scenario. Housing gets propped up with ever lower interest rates. The government would probably want the effects to disperse through the currency rather than the real economy. Financially prudent Canadians take the hit in their C$ savings. (See Euro and GBP.)

[rb]

Maybe there won't be a crash, instead the CAD$ goes from say 1:1 when all the homeowners bought their property to say 3:1. So they lose 2/3rds of their money but will still have their house. Not sure how inflation would affect financing though. If they step out of the country they will be shocked where their wealth went. But in this scenario, house prices can just remain flat or even increase. Most home purchases are ring-fenced into the CAD dollar I imagine? Any thoughts on this theory?

No way the CAD can fall that much. Canada actually has a real and productive economy should. Should CAD fall even a relatively small part of what you're calling far our exports would shoot through the roof which will stabilize CAD.

 

In addition declines in CAD do not alleviate the housing costs for Canadians and make Canadian real estate cheaper for foreign investors in their currency. So I don't really see how a CAD decline fixes a bubble. Unless you're talking about foreign investors getting scared shitless by currency mark to market.

 

Decline in the currency will probably be a result of monetary and fiscal easing to reduce the impact of a housing crash. (Like QE123.) The CMHC will need a bailout in a severe scenario. Housing gets propped up with ever lower interest rates. The government would probably want the effects to disperse through the currency rather than the real economy. Financially prudent Canadians take the hit in their C$ savings. (See Euro and GBP.)

Don't get me wrong. If/when this thing pops there will be a decline in CAD. Mainly from what you say - QE etc. But it'll be in the 10-20% range not anything close to the 70% that scorpion was envisioning.

 

If it goes full meltdown there will probably be somewhere around $100-$120B in credit losses the be shared between the banks, private mortgage insures, and CMHC. The banks are decently capitalized and CMHC actually has a fair amount of reserves. Undoubtedly a bailout or two will be required somewhere - you don't know who's swimming naked until the tide goes bout. But it won't be anything that the government can't handle.

 

The main downside will be that there will be a really shit economic situation for long while. A lot of people will suffer that conducted their affairs in a proper manner, did nothing wrong, and did not engage in any real estate speculation crap.

[Yours Truly]

I personally know quite a lot of individuals partaking in the speculative/investment venture of owning multiple properties despite making nominal income.  They are getting the financing through alternative lenders and advise that forging documents to get the necessary down payment is a piece of cake right now.  I'm speaking about my experiences in the Greater Toronto Area as it likely will not reflect on the rest of the country (maybe Vancouver).

 

It will be interesting how this unfolds in the next couple of years.