Garth Turner - Real Estate in Canada

[Peregrine]

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

 

This is just my opinion: housing prices crashing alone will have little if any effect on the global financial system. Off the top of my head:

 

1) The majority of mortgages in Canada are insured fully by the full faith of the Canadian government. There are three mortgage insurers in Canada: CMHC, Genworth and Canada Guaranty. CMHC is by far the largest and is a Crown Corporation, or a government owned company. Genworth and Canada Guaranty are privately owned, but in event of a default by either, the government will reimburse 90% of mortgage losses to lenders.

 

Both Genworth and Canada Guaranty underwrite at combined ratios of ~40-50% and have capital well in excess of regulatory minimums. Contrary to what many think, these mortgage insurers perennially operate at combined ratios unheard of in the insurance industry - they are tremendously profitable.

 

A smaller portion of insured loans are securitized in the two government programs NHA MBS and CMBs. Private securitization is non-existent in Canada, unlike the US circa 2003-2006. There are also no derivative products such as CDOs and CDOs-squared that further leverage bets on mortgages in Canada. The Big Banks here do not carry massive derivative books and there is none of the webs of counterparties and systemic risk that exist between banks here, much less with other banks worldwide.

 

2) The other portion of mortgages in Canada are uninsured balance sheet loans - that is, banks, specifically the Big 6 Banks, bear the risk. Now, that risk is mitigated by:

- Very low arrears rates, an attribute largely due to sound federal regulation of uninsured loans by OSFI and the concentrated nature of Canada's mortgage market

- Substantial LTV cushions, typically around 50-60%. And at origination, maximum 80% (or minimum 20% down)

- Full recourse in most provinces - you can't discharge a mortgage in bankruptcy

- Substantial equity capital (CET1, total capital, etc)

 

 

[Liberty]

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.

 

I'm sure it's because of the shorts that fraud and lax lending standards were uncovered, the second CEO in a short period was fired, insiders have been selling rapidly, and the company can't even earn decently in a huge real estate bubble in Canada.

 

Based on what I know about the company, I don't trust their financials, so looking at them to be reassured isn't an option.

 

But if you think they're so wrong, I expect you can make a lot of money with your variant perception by buying it hand over fist. Time will tell who's right. Meanwhile, the stock is at almost 5-year lows and falling fast...

 

Personally, I have no position as I don't short.

[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.

 

I'm sure it's because of the shorts that fraud and lax lending standards were uncovered, the second CEO in a short period was fired, insiders have been selling rapidly, and the company can't even earn decently in a huge real estate bubble in Canada.

 

Based on what I know about the company, I don't trust their financials, so looking at them to be reassured isn't an option.

 

But if you think they're so wrong, I expect you can make a lot of money with your variant perception by buying it hand over fist. Time will tell who's right. Meanwhile, the stock is at almost 5-year lows and falling fast...

 

Personally, I have no position as I don't short.

 

It seems to me that your perception and knowledge of the company has been framed by short-sellers, and I am not surprised that that has been the case. I don't care for changing your opinion but I do think that it'd be helpful to look at the actual facts than to repeat the distorted claims of others.

[Liberty]

It seems to me that your perception and knowledge of the company has been framed by short-sellers, and I am not surprised that that has been the case. I don't care for changing your opinion but I do think that it'd be helpful to look at the actual facts than to repeat the distorted claims of others.

 

Funny how shorts always have a higher burden of proof and draw more suspicion with regard to their motives than longs...

 

I'm just a casual observer of HCG because it's tied to the Canadian RE market, which interests me. For years I've read what the longs say about it, from Donville to the people on the FEB, so I'm familiar with the thesis. So far it's been wrong, but time will tell. I don't really want to dig deeper because, frankly, I don't care enough about it. If you do, and have conviction, as I said, feel free to invest in it and make a lot of money.

 

If Canadian RE corrects big time and defaults start to go up, it'll be interesting to see what happens when regulators start digging into all the paperwork and supposed due diligence that had to be done by lenders and find boatloads of irregularities... There's always the theory -- securitization reduced risk in the US, insured mortgages protect lenders in Canada -- and then the practice when shit hits the fan. Taxpayers won't be happy about bailing out lenders who gave huge million+ mortgages to regular folks so they could buy overpriced condos and shacks just because our system happened to have incentives that created huge moral hazard (lend to anyone who has a pulse and keep the upside, but the downside is supposedly capped because CHMC will take care of it...).

[Peregrine]

It seems to me that your perception and knowledge of the company has been framed by short-sellers, and I am not surprised that that has been the case. I don't care for changing your opinion but I do think that it'd be helpful to look at the actual facts than to repeat the distorted claims of others.

 

Funny how shorts always have a higher burden of proof and draw more suspicion with regard to their motives than longs...

 

 

Be wary of that premise. There is no reason to suggest that shorts in general do more work than longs, although in general they seem to broadcast themselves more audibly.

 

In my view, people are people. I've seen a lot of shorting based on driving fear in the markets and taking advantage of gullible investors by spreading misinformation. Often times, it can be a profitable strategy as fear tends to drive action fairly immediately. I know Cohodes's history - he has a history of doing this.

[Liberty]

It seems to me that your perception and knowledge of the company has been framed by short-sellers, and I am not surprised that that has been the case. I don't care for changing your opinion but I do think that it'd be helpful to look at the actual facts than to repeat the distorted claims of others.

 

Funny how shorts always have a higher burden of proof and draw more suspicion with regard to their motives than longs...

 

 

Be wary of that premise. There is no reason to suggest that shorts in general do more work than longs, although in general they seem to broadcast themselves more audibly.

 

That's what I'm saying, they're no better and no worse. There's a million articles by longs saying that everything is great and will go higher. But when a short says things are bad and going lower, well, that's judged differently!

 

Look, I've heard things from both sides and I happen to lean more toward the short side on HCG. It's an opinion. It's not high conviction and I don't short so I'm not putting much time behind it, but I also have opinions on lots of other companies, so it's not a big deal. It seems like a pretty crappy company with crappy management and crappy culture, they've been riding a wave for a while but now the cracks are starting to show. These are a dime a dozen, especially here in Canada.

 

In my view, people are people. I've seen a lot of shorting based on driving fear in the markets and taking advantage of gullible investors by spreading misinformation. Often times, it can be a profitable strategy as fear tends to drive action fairly immediately. I know Cohodes's history - he has a history of doing this.

 

Cohodes was pretty right on Concordia and Valeant, and HCG so far. For every Cohodes, there's a thousand longs who pump things the other way, so why is he singled out? That's what I meant by double standards. If I agreed with a long instead, nobody would tell me to "be careful listening to longs". Cohodes has been short HCG since 2014 iirc and seems to plan to ride it into the ground, similarly to CRX and VRX, he's not a trader going for a quick market manipulation. That's as admirable as a long-term investor, IMO. I'm not wired to do that kind of things, but I think the market needs more people like that to balance things out.

[Peregrine]

 

That's what I'm saying, they're no better and no worse. There's a million articles by longs saying that everything is great and will go higher. But when a short says things are bad and going lower, well, that's judged differently!

 

 

I have no problem with shorts talking their book as longs do that as well (although I don't like that practice). I do have a problem with spreading misinformation and deliberately misleading insinuation without any support.

 

 

Cohodes was pretty right on Concordia and Valeant, and HCG so far. For every Cohodes, there's a thousand longs who pump things the other way, so why is he singled out? That's what I meant by double standards. If I agreed with a long instead, nobody would tell me to "be careful listening to longs". Cohodes has been short HCG since 2014 iirc and seems to plan to ride it into the ground, similarly to CRX and VRX, he's not a trader going for a quick market manipulation. That's as admirable as a long-term investor, IMO. I'm not wired to do that kind of things, but I think the market needs more people like that to balance things out.

 

Cohodes, like many, is pretty good at publicizing his wins - but what about his losses? And you think he intends to do that just because he says so?

[Liberty]

 

That's what I'm saying, they're no better and no worse. There's a million articles by longs saying that everything is great and will go higher. But when a short says things are bad and going lower, well, that's judged differently!

 

 

I have no problem with shorts talking their book as longs do that as well (although I don't like that practice). I do have a problem with spreading misinformation and deliberately misleading insinuation without any support.

 

This is the double standard again. He's not a prosecutor, he's an investor. He doesn't have to prove everything he says anymore than a long has to prove what they're saying. They're sharing stuff, and you do your own thinking and diligence and decide if you agree or not. You happen not to agree because you trust the company's financials and have some views on the Canadian real estate market. I have different views.

 

 

Cohodes was pretty right on Concordia and Valeant, and HCG so far. For every Cohodes, there's a thousand longs who pump things the other way, so why is he singled out? That's what I meant by double standards. If I agreed with a long instead, nobody would tell me to "be careful listening to longs". Cohodes has been short HCG since 2014 iirc and seems to plan to ride it into the ground, similarly to CRX and VRX, he's not a trader going for a quick market manipulation. That's as admirable as a long-term investor, IMO. I'm not wired to do that kind of things, but I think the market needs more people like that to balance things out.

 

Cohodes, like many, is pretty good at publicizing his wins - but what about his losses? And you think he intends to do that just because he says so?

 

He was on the other side of me on EBIX years ago, and he still talks about it as a loss ¯\_(ツ)_/¯  I don't have to agree with everything he says, he's not my god, I just think he's making good points about a few companies lately.

 

As far as doing what he says, who knows. Same question applies to any long who talks about what they're doing. How do I know you're not secretly short HCG and you're just saying all this to confuse me? How can you prove anything that anyone says? You make your own calls and develop judgement and try to be right more often than you're wrong, that's all that anyone of us strive for in this business.

 

I'm a lot more suspicious now of a long like Donville who has been praising some stocks on TV at the same time as he was selling his stake... And who often praised HCG without disclosing clearly that he had been on their investment committee in 2007 and had a paid relationship with the company. As far as a I know, Cohodes hasn't done anything like that, he's just a chicken farmer who likes to do multi-year shorts and get sued by CEOs who think all their problems come from short-sellers.

 

http://www.homecapital.com/press_releases/2007/Home%20Capital%20Group%20Appoints%20Jason%20Donville%20as%20Chief%20Investment%20Officer.pdf

 

Concordia was another Donville top pick at $43, iirc.

[benhacker]

Hey former HCG.T short here.  Still think it's a good short BTW (no position).

 

I personally think Cohodes is lame, and is just a mouthpiece for someone(s) else's research.  Listen to his interviews and all the BS he spews... and actually ask what he is saying exactly?  Yeah, HCG.T got caught a while back in some bad broker relationships, and then they hired / fired a CEO on short notice, and talked about it poorly to markets.  Oh yea, and RE is on fire, and HCG.T is struggling (probably shorting on that last point is all you need to know).

 

But you listen to him talk in interviews (I've only listened to 2 I think - so maybe I'm missing something) and he takes 15 minutes to say that, and then provides a bunch of stories about how he's out for the little guy, and how companies are after him all the time.

 

I think HCG.T is a good short, but Cohodes doesn't make the case well / succinctly.  The Twitter-verse is all beared up because HCG.T has been "overdue" for a while - and CAD RE is totally bonkers.  Shorts like to come in with vague sounding hype once the bell seems to be tolling.... and the timing is really ripe for HCG.T, and I would say 50/50 they don't make through to the other side.... *but* very little of what Cohodes says is needed to deduce that.

 

HCG.T is probably crappy, maybe even as crappy as Cohodes implies.  His reasoning / justification as I've heard it said though, doesn't explain why that is.  Borrow is >20% last I checked... which is too bad.

 

Cohodes and Left are a cut of the same cloth IMO.  They are willing (through either compensation, or intestinal fortitude) to be the delivers of very bad news (a not-popular skill in stock markets), so they get fed a lot of short ideas.  When *they* are right, I think the *they* is someone else behind the scenes.

 

I agree with Liberty also that Longs / Shorts should be held to the same standard.  And I also think that *as a long* you need to understand how exposed your longs are to short campaigns even if you think the company is good.

 

The truth always has two sides, and you should know both if you own anything.

 

HCG.T is really exposed to markets right now, and they are dangerously leveraged at-nowhere-close-to-start of CAD RE economic cycle.

 

Good luck to anyone long this or CAD financial assets.  CA doesn't need a US 2008 style blow up for investors to get hurt.

 

Ben

 

[Peregrine]

 

This is the double standard again. He's not a prosecutor, he's an investor. He doesn't have to prove everything he says anymore than a long has to prove what they're saying. They're sharing stuff, and you do your own thinking and diligence and decide if you agree or not. You happen not to agree because you trust the company's financials and have some views on the Canadian real estate market. I have different views.

 

 

It's not a double standard. Everyone is entitled to their own opinion and freedom of speech allows them to voice it. I do have a problem with deliberately obfuscating facts, such as parroting out the line that $2 billion of mortgages are fraudulent, when in fact that wasn't the case.

[Liberty]

Yeah, Cohodes' interviews are pretty meh on the details, but that's TV for you. Good interviews are rare, and it's quite obvious that he doesn't want to go into any specifics for legal reasons (he's been sued multiple times already). Every time he's pushed to go there, he goes back to more general things.

 

Wherever he gets his info, I think lately he's been good at pointing out rotten apples, and that's a valuable skill to have. Once he points them out, you can have a look and see what you think. It's not about blindly trusting his work, just like you shouldn't do that on the long side, even if you have fave longs that generate good ideas for you.

 

Most of the people I follow are longs, so I like to get a dose of something different in my diet.

[gokou3]

BMO Bundles Uninsured Mortgages in a Canadian Bond First

https://www.bloomberg.com/news/articles/2017-04-17/bank-of-montreal-to-offer-mbs-as-canada-shrinks-mortgage-support

 

"The bond is backed by C$1.96 billion of prime residential mortgages, more than half of which are in Ontario and Quebec, according to a Moody’s pre-sale report. Around 95 percent of the securities in the transaction will be rated Aaa. The lowest rated portion will be B2, and there is a non-rated portion as well, the bond grader said."

 

So... another similarity to the US housing bubble now?  These are not subprime loans, but they are playing the same game of slicing and dicing just like the US did circa 2003-2006.  What's next, CDO and CDO^2?

[Peregrine]

 

Most of the people I follow are longs, so I like to get a dose of something different in my diet.

 

That's entirely fair.

[Peregrine]

BMO Bundles Uninsured Mortgages in a Canadian Bond First

https://www.bloomberg.com/news/articles/2017-04-17/bank-of-montreal-to-offer-mbs-as-canada-shrinks-mortgage-support

 

"The bond is backed by C$1.96 billion of prime residential mortgages, more than half of which are in Ontario and Quebec, according to a Moody’s pre-sale report. Around 95 percent of the securities in the transaction will be rated Aaa. The lowest rated portion will be B2, and there is a non-rated portion as well, the bond grader said."

 

So... another similarity to the US housing bubble now?  These are not subprime loans, but they are playing the same game of slicing and dicing just like the US did circa 2003-2006.  What's next, CDO and CDO^2?

 

I'm not surprised that this happened. New mortgage insurance rules last fall substantially reduced portfolio insurance on low-LTV mortgages. Banks, due to capital constraints, don't have the capacity to hold all of that on their balance sheet so private securitization is creeping back a bit on that excess.

 

I do not expect this to be a huge development as there isn't much investor appetite for these kind of products and there isn't much of these 'excess' mortgages to go around. But this further shows the unintended consequences that follow from government action.

[Liberty]

btw, for a longer-form interview with Cohodes, check out episode 7 here:

 

https://www.grantspub.com/podcasts.cfm

 

Not saying it'll change anyone's mind, but this is better than a BNN segment...

[benhacker]

btw, for a longer-form interview with Cohodes, check out episode 7 here:

 

https://www.grantspub.com/podcasts.cfm

 

Not saying it'll change anyone's mind, but this is better than a BNN segment...

 

A good link to share.  This was one of the two I was referencing above BTW...

 

I agree that using these kinds of short guys as a sort of screening tool is helpful... screen for both longs and shorts!

 

Thanks Liberty and Frank for the discussion.

[clutch]

I actually hear more people talking about how this market is a bubble than people downplaying it - including the majority of the media, people around me, or even real estate agents. Sure, the direct participants of the real estate market may be still crazy, but it seems like everyone watching it has identified that it is a massive bubble.

 

So this makes me wonder if there would be any obvious shorting opportunity at all...

[Matson125]

I live in the GTA and work in downtown Toronto,  and the other day I was riding on Go Train (for folks who aren't familiar it transports people from the suburbs into the downtown core) to work and the person sitting beside me was chatting on their phone, and was gleaming with joy that he bought a house for 1.1 million with no conditions as he stated "In this market you can't put any conditions on offers".  He then mentioned to his friend that he needed to "hit it out of the park" when he puts his house up for sale to be able to make it work.  He then mentioned that once he gets possession he will redo the kitchen as the real estate agent said it would add $75k  in value.

 

I was ready for Ashton Kusher to jump out and scream "You got Punked!" but there was no camera crew, there was just a guy who got up and disembarked from the train like that was normal.

 

This is one of many stores that just seem all too common now a days in GTA real estate.

[mcliu]

The fact that so many people are calling a bubble makes it suspicious. Sometimes it feels like it's only a true bubble when no one sees a bubble and excess becomes normal. So this could be just the early innings and true euphoria hasn't come yet.

[Liberty]

https://beta.theglobeandmail.com/news/national/ontario-considers-housing-tax-for-non-resident-speculators/article34731629/?ref=http://www.theglobeandmail.com&cmpid=rss1&click=sf_globe&service=mobile

[Liberty]

The fact that so many people are calling a bubble makes it suspicious. Sometimes it feels like it's only a true bubble when no one sees a bubble and excess becomes normal. So this could be just the early innings and true euphoria hasn't come yet.

 

Lots of people called a bubble for the dot com, but even more people kept buying stocks. Same thing is happening now with real estate, but it's just in the recent past that there's been more agreement about the bubble...

[Peregrine]

As mentioned before, "global" cities everywhere are facing rapidly rising real estate prices. I don't think that price inflation is unique to Toronto and Vancouver alone, although recent price increases have been particularly sharp.

 

As the following NYT article indicates, supply has simply not been able to keep up with demand in places like LA, San Fran and even Boston:

 

https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in-the-american-mind.html

[Uccmal]

I live in the GTA and work in downtown Toronto,  and the other day I was riding on Go Train (for folks who aren't familiar it transports people from the suburbs into the downtown core) to work and the person sitting beside me was chatting on their phone, and was gleaming with joy that he bought a house for 1.1 million with no conditions as he stated "In this market you can't put any conditions on offers".  He then mentioned to his friend that he needed to "hit it out of the park" when he puts his house up for sale to be able to make it work.  He then mentioned that once he gets possession he will redo the kitchen as the real estate agent said it would add $75k  in value.

 

I was ready for Ashton Kusher to jump out and scream "You got Punked!" but there was no camera crew, there was just a guy who got up and disembarked from the train like that was normal.

 

This is one of many stores that just seem all too common now a days in GTA real estate.

 

A house 3 doors down from mine just sold for 1.15 M.  I was shocked.  The asking was 998 k.  Its a 3 bedroom bungalow and hadn't been updated in a couple of decades.  I'd sell our house but move where?

My wife wouldn't allow us to rent... soooo. 

 

Comparatively my place at these prices would sell for 1.4 to 1.5 M. 

 

There are a few curious things going on in Toronto.

 

One is that the supply of detached homes for sale is low.  People aren't selling.  Why? 

 

A friend of mine who does a bit of conservative investing theorizes that in the GTA there is no more room for new detached homes.  He is probably right since there is simply not any space to build.  There has to be an upper limit to prices. 

 

Another friend just sold a house in Pickering (East side of the GTA) for 800 k.  He paid 330 k for it about 4 years ago, and spent 100 k upgrading it - doing the work himself. 

 

I dont know what this all means.  Even a 30 or 40% correction only takes us back to 3 years ago.  This thread was active then. 

 

All I know is that when I do net worth calculations I discount the house by about 40% and remove the transaction fees.  Safer to know where we stand in tue event of a correction. 

[clutch]

I'd sell our house but move where?

My wife wouldn't allow us to rent... soooo. 

 

Get HELOC, invest, and profit!  ;D

[mcliu]

As mentioned before, "global" cities everywhere are facing rapidly rising real estate prices. I don't think that price inflation is unique to Toronto and Vancouver alone, although recent price increases have been particularly sharp.

 

As the following NYT article indicates, supply has simply not been able to keep up with demand in places like LA, San Fran and even Boston:

 

https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in-the-american-mind.html

 

The other question is, how do you distinguish real demand, as in families living in houses, from speculative demand, buying to flip?

 

One is that the supply of detached homes for sale is low.  People aren't selling.  Why? 

 

Supply elasticity is probably low given high transaction costs, long time to build, difficulty finding a new place, etc. etc.