Garth Turner - Real Estate in Canada

[Liberty]

[rb]

Toronto up 33% in a year.

 

http://www.cbc.ca/news/canada/toronto/toronto-house-price-1.4056093

 

Some area up 50% 60% in a year.

 

Even if u make 20% down, that's like 3x your money in a year.

 

The realtors said that's all supply side problem... well, when everyone want to get in to flip, the demand side will be too huge.

 

This will end when ppl realize house price cannot go up forever... then we will see the real user demand... and I doubt that would be pretty.

33% YoY is means that the price appreciation is actually speeding up. This is utterly insane.

 

If/when prices stop climbing you won't have normal real demand. You'll have depressed demand because everyone bought houses at ridiculous prices and are now broke many others will be unemployed and won't be able to afford homes even at the new prices. Then you'll also have huge supply because all of the "investors" either can't make the payments anymore or all of a sudden they're not so thrilled anymore with the negative carry.

 

Here's an interview with the Toronto mayor on Bloomberg:

 

https://www.bloomberg.com/news/articles/2017-04-05/toronto-home-prices-jump-33-in-march-as-market-tightens

 

Let me paraphrase "My heart weeps for the people of my city that can't afford a house anymore (most of them). We are looking at many tools. But we have no data, we are totally clueless about what's going on. So we shouldn't rush to do anything, we should just sit around and wait." Sure, we should sit around and to nothing. It's not like we have a critical situation on our hands. I wonder, when this thing goes tits up and we have a full blown crisis whether the response will be the same: sit around and do nothing.

 

Compare this with the Oakville mayor's interview on CBC that was posted here yesterday. That guy surprisingly had data (shocker!), called bullshit and Real Estate industry and was calling for action.

[Yours Truly]

Who needs to work, the stock market, or business ventures when you can just sit on single detached homes in Toronto and Vancouver !!

[mcliu]

Not really going to help if the central bank keeps cutting rates..

[alertmeipp]

 

 

Can't believe ppl still saying supply is the main issue, it's demand from crazy speculation. I heard realtors are charging ppl tens of thousands to line up for new properties sale.

 

Ppl lined up and selling their assignment with 100ks of profit.

 

These arent normal demand.

 

 

[alertmeipp]

Not really going to help if the central bank keeps cutting rates..

 

who cares about the rate if they expect price will go up 10 20% in matter of months.

[alertmeipp]

Toronto up 33% in a year.

 

http://www.cbc.ca/news/canada/toronto/toronto-house-price-1.4056093

 

Some area up 50% 60% in a year.

 

Even if u make 20% down, that's like 3x your money in a year.

 

The realtors said that's all supply side problem... well, when everyone want to get in to flip, the demand side will be too huge.

 

This will end when ppl realize house price cannot go up forever... then we will see the real user demand... and I doubt that would be pretty.

33% YoY is means that the price appreciation is actually speeding up. This is utterly insane.

 

If/when prices stop climbing you won't have normal real demand. You'll have depressed demand because everyone bought houses at ridiculous prices and are now broke many others will be unemployed and won't be able to afford homes even at the new prices. Then you'll also have huge supply because all of the "investors" either can't make the payments anymore or all of a sudden they're not so thrilled anymore with the negative carry.

 

Here's an interview with the Toronto mayor on Bloomberg:

 

https://www.bloomberg.com/news/articles/2017-04-05/toronto-home-prices-jump-33-in-march-as-market-tightens

 

Let me paraphrase "My heart weeps for the people of my city that can't afford a house anymore (most of them). We are looking at many tools. But we have no data, we are totally clueless about what's going on. So we shouldn't rush to do anything, we should just sit around and wait." Sure, we should sit around and to nothing. It's not like we have a critical situation on our hands. I wonder, when this thing goes tits up and we have a full blown crisis whether the response will be the same: sit around and do nothing.

 

Compare this with the Oakville mayor's interview on CBC that was posted here yesterday. That guy surprisingly had data (shocker!), called bullshit and Real Estate industry and was calling for action.

 

Gov from all levels are saying to other level, "hey, u fix it, not my problem", "we need to fix it so we don't harm anyone", "let's collect data",... eventually, this will blow up badly.

 

 

[mcliu]

When rates are this low and going lower, borrowers can keep rolling their debts and add more debt. Until we see higher interest rates, the music will keep playing..

[rb]

When rates are this low and going lower, borrowers can keep rolling their debts and add more debt. Until we see higher interest rates, the music will keep playing..

Actually mortgage rates have gone up about 50 bps in the past year or so. But as another poster said, why does that matter when you can make 3,000 bps? Even if you can raise rates 500 bps why would it matter?

 

By the way, to stop things you don't have to hike rates like crazy to brick the whole economy. The government has tools at its disposal to go use more precision based tools to regulate the shit out of real estate and real estate lending without taking down other sectors. But that seems to be unconceivable. Why should real estate speculators suffer and not manufacturers as well?

[Liberty]

Can't believe ppl still saying supply is the main issue, it's demand from crazy speculation. I heard realtors are charging ppl tens of thousands to line up for new properties sale.

 

Ppl lined up and selling their assignment with 100ks of profit.

 

These arent normal demand.

 

There's a recent Garth Turner piece where he talks about how home inspectors' business is down 30-50% because now people buy houses without inspectors, as sellers put conditions that there won't be an inspection and they even throw people out of open houses visits if they bring an inspector:

 

http://www.greaterfool.ca/2017/04/03/good-luck/

 

I'm sure thats' really healthy behavior...

[mcliu]

When rates are this low and going lower, borrowers can keep rolling their debts and add more debt. Until we see higher interest rates, the music will keep playing..

Actually mortgage rates have gone up about 50 bps in the past year or so. But as another poster said, why does that matter when you can make 3,000 bps? Even if you can raise rates 500 bps why would it matter?

 

By the way, to stop things you don't have to hike rates like crazy to brick the whole economy. The government has tools at its disposal to go use more precision based tools to regulate the shit out of real estate and real estate lending without taking down other sectors. But that seems to be unconceivable. Why should real estate speculators suffer and not manufacturers as well?

 

Yes, slightly, driven by higher bond yields, but I think BoC is looking to cut short-term rates than to raise them. http://ca.reuters.com/article/businessNews/idCAKBN16Z1SX-OCABS

 

I think it matters because higher rates makes it harder for people to borrow more and service the debt. Once cash flows get very negative, over-leveraged buyers are forced to sell, and all of a sudden, you'll have much more supply on the market. When net cash flows are positive, speculators have more flexibility to hold on to multiple units and wait for prices to rise. When everyone does this, supply shrinks and it becomes a self-fulfilling prophecy.

 

While, theoretically, there are more precise/targeted monetary or fiscal tools, it's hard to find examples of where that's been implemented successfully. Even in China, where the government has much greater control over markets than most Western developed countries, they're having massive problems regulating real estate prices.

 

Meanwhile, it's easy to find examples of the many cities and countries (that have had loose monetary policy / lending and extremely low real interest rates) that are having trouble dealing with escalating real estate prices, like Australia, Canada, Sweden, Norway, Hong Kong, China, etc. etc.

 

Even with the US housing bubble, it was only until interest rates rose significantly and risky mortgages started resetting at higher rates that large cracks in the market began appearing. Most central banks have learned from that episode and their take-away seems to be to preempt housing corrections by lowering rates ahead of time.

[alpha]

Chief economist of Gluskin Sheff did an interview today and is now comparing Canada's housing market to USA in 2008.

 

http://www.bnn.ca/toronto-housing-bubble-on-par-with-what-we-had-in-the-states-rosenberg-1.717144

 

Also head of RBC called for government intervention during their annual meeting today:

 

http://www.bnn.ca/rbc-ceo-sounds-the-alarm-on-housing-urges-governments-to-act-reasonably-quickly-1.716943

 

I don't understand why the major banks are still writing mortgages in these markets if the CEO's are making public statements about bubbles forming.

 

[wisdom]

Chuck Prince said it best - you have to dance while the music is playing.

[mcliu]

Chief economist of Gluskin Sheff did an interview today and is now comparing Canada's housing market to USA in 2008.

 

http://www.bnn.ca/toronto-housing-bubble-on-par-with-what-we-had-in-the-states-rosenberg-1.717144

 

Also head of RBC called for government intervention during their annual meeting today:

 

http://www.bnn.ca/rbc-ceo-sounds-the-alarm-on-housing-urges-governments-to-act-reasonably-quickly-1.716943

 

I don't understand why the major banks are still writing mortgages in these markets if the CEO's are making public statements about bubbles forming.

 

Citi's CEO said this back in 2007. “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

 

Probably applies here as well. The big banks have to answer to shareholders and keep pumping out profits.

 

What better way to do that than to write ever bigger and riskier mortgages? High LTVs are also preferable since borrowers can buy mortgage insurance. You'll likely get a lower mortgage rate for a high LTV insured loan than a low LTV uninsured loan.

 

RBC for example, almost half of their residential mortgage book is insured, so no credit risk + very little capital needed to support these loans = $$$.

[Guest Schwab711]

How does Canada get out of this?

 

Central Bank Leverage:

Bank of Canada: 214x

The Fed: 108x

ECB: 400x

 

I've never looked at these before. Wow...

 

http://www.bankofcanada.ca/wp-content/uploads/2017/03/statement-financial-position-280217.pdf

https://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201703.pdf

https://www.ecb.europa.eu/press/pr/wfs/2017/html/fs170405.en.html

[Liberty]

http://www.macleans.ca/economy/realestateeconomy/a-day-of-insanity-that-typifies-torontos-housing-market/

 

"A day of insanity that typifies Toronto’s housing market: When the real estate expo came to Toronto, attendees were fed a steady dose of hype and hoopla about how to get rich trading houses"

 

Read the whole thing. It's pure gold. So many parts I'd want to quote..

[Peregrine]

 

While, theoretically, there are more precise/targeted monetary or fiscal tools, it's hard to find examples of where that's been implemented successfully. Even in China, where the government has much greater control over markets than most Western developed countries, they're having massive problems regulating real estate prices.

 

Meanwhile, it's easy to find examples of the many cities and countries (that have had loose monetary policy / lending and extremely low real interest rates) that are having trouble dealing with escalating real estate prices, like Australia, Canada, Sweden, Norway, Hong Kong, China, etc. etc.

 

 

This is an underrated point that doesn't get much play. So-called "global" cities everywhere are dealing with real estate price inflation with the local media decrying about housing bubbles. This is the case in New York, San Fran, Hong Kong, Singapore, Shanghai, London, Sydney, etc. On measures of absolute values, Toronto is considered cheap compared to others from the point of view of this foreign/global buyer. People want to move to these cities but in doing so, the demand is driving up cost of living substantially. It's an interesting dynamic.

[SafetyinNumbers]

The cost of living is being driven up but apparently not enough to raise rates.

[rb]

The cost of living is being driven up but apparently not enough to raise rates.

That is correct.

[TBW]

Imo boc is in a tough spot. The time to raise rates was 2yrs ago, instead they cut. Now I dont think they can raise because when this all blows they will likely have to go to the 0 bound.

 

I would be happy if they did raise, just seems like they can't.

[Liberty]

HCG, First National Financial, and Equitable going down the crapper... Canary in coal mine?

[Peregrine]

HCG, First National Financial, and Equitable going down the crapper... Canary in coal mine?

 

Liberty, it's probably not a good idea to get your information from twitter short-sellers - they're not exactly a very fair source. It's also probably not a great idea to base your view on a company by how its stock is doing on any single day.

 

First National is the largest monoline lender in Canada by far and handle substantial underwriting and origination for the Big Banks - in fact, they are so good at underwriting, originating and servicing that their arrears rates are even lower than that of the Big Banks and that the Big Banks even outsource those functions to First National.

 

Home and Equitable are the two largest federally-regulated lenders after the Big Banks and occupy dominant positions in a niche-type market. Check out their NPLs and loss rate history if you're worried about their underwriting.

 

It's no wonder that short-sellers love these stocks - the float's small, they're not liquid and they're all pretty easy to manipulate given the narrative and fear over anything related to Canadian real estate.

[treasurehunt]

 

First National is the largest monoline lender in Canada by far and handle substantial underwriting and origination for the Big Banks - in fact, they are so good at underwriting, originating and servicing that their arrears rates are even lower than that of the Big Banks and that the Big Banks even outsource those functions to First National.

 

Home and Equitable are the two largest federally-regulated lenders after the Big Banks and occupy dominant positions in a niche-type market. Check out their NPLs and loss rate history if you're worried about their underwriting.

 

I think NPLs and loss rate history during a period of consistently rising home prices have limited value in predicting what might happen if home prices dip significantly. Pre-crisis in the US, Golden West Financial had incredibly low charge-offs for fifteen years or more. For eight consecutive years from 1998 to 2005, they had 0% charge-offs! Wachovia acquired Golden West in 2006. Fast forward two years and Wachovia, which was one of the biggest banks in the US at the time, was destroyed by the losses in Golden West's option arm portfolio.

 

I am not saying the Canadian lenders are like Golden West. But historical loss rates might be very bad predictors of future losses.

[Peregrine]

 

First National is the largest monoline lender in Canada by far and handle substantial underwriting and origination for the Big Banks - in fact, they are so good at underwriting, originating and servicing that their arrears rates are even lower than that of the Big Banks and that the Big Banks even outsource those functions to First National.

 

Home and Equitable are the two largest federally-regulated lenders after the Big Banks and occupy dominant positions in a niche-type market. Check out their NPLs and loss rate history if you're worried about their underwriting.

 

I think NPLs and loss rate history during a period of consistently rising home prices have limited value in predicting what might happen if home prices dip significantly. Pre-crisis in the US, Golden West Financial had incredibly low charge-offs for fifteen years or more. For eight consecutive years from 1998 to 2005, they had 0% charge-offs! Wachovia acquired Golden West in 2006. Fast forward two years and Wachovia, which was one of the biggest banks in the US at the time, was destroyed by the losses in Golden West's option arm portfolio.

 

I am not saying the Canadian lenders are like Golden West. But historical loss rates might be very bad predictors of future losses.

 

You're right. Loss rates are not the best indicator of quality underwriting in a generally rising home price environment.

 

But arrears rates and NPLs definitely are. If these banks are underwriting so liberally to the degree that their borrowers can't pay, then early arrears rates and ultimately non performing loans will show that in due time.

[Gardener]

Anybody have an opinion on the consequences for the global financial system if this bubble deflates? From what I seem to read following a quick search on google, the impact does not seem to be that large from a global viewpoint... Is this true or are they just downplaying the consequences of a correction?

 

Apologies in advance if I missed something in the thread, or if the question has already been answered before...

 

G