Garth Turner - Real Estate in Canada

[alpha]

http://www.cbc.ca/news/business/osfi-mortgage-rules-1.4358048

 

Mortgage rules tightening further - would be interesting to see how this impacts an already slowing market.

 

According to BNN guests/analysts I have listened to today the new rules will have some bite.

 

Kind of hard to believe a family with 100k income is currently able to purchase a 726k home.... whatever happened to the 3x income rule!

 

http://www.bnn.ca/polopoly_fs/1.887271!/fileimage/httpImage/image.JPG_gen/derivatives/default/new-stress-test-rules.JPG

 

http://www.bnn.ca/osfi-sets-new-rules-for-mortgage-lending-1.887025

 

[doc75]

http://www.cbc.ca/news/business/osfi-mortgage-rules-1.4358048

 

Mortgage rules tightening further - would be interesting to see how this impacts an already slowing market.

 

According to BNN guests/analysts I have listened to today the new rules will have some bite.

 

Kind of hard to believe a family with 100k income is currently able to purchase a 726k home.... whatever happened to the 3x income rule!

 

http://www.bnn.ca/polopoly_fs/1.887271!/fileimage/httpImage/image.JPG_gen/derivatives/default/new-stress-test-rules.JPG

 

http://www.bnn.ca/osfi-sets-new-rules-for-mortgage-lending-1.887025

 

Maybe I'm misinterpreting, but how many first time buyers with $100k in family income are sitting on enough cash to make a $140k down payment (20% of 726k)?

 

Is this computation by Ratehub actually indicative of what's happening, or a fringe/theoretical example?

 

[rb]

It's a theoretical. Someone just punched some numbers in a calculator. They also assume a rate of 2.83 for 25 years which is bonkers.

 

Of course there aren't 1st time buyers sitting on 140k for down payment.

[Yours Truly]

Always thought the rule was 3x gross income... in that example, it looks to be close to 6x gross income?

[alpha]

 

Maybe I'm misinterpreting, but how many first time buyers with $100k in family income are sitting on enough cash to make a $140k down payment (20% of 726k)?

 

Is this computation by Ratehub actually indicative of what's happening, or a fringe/theoretical example?

 

I have noticed many first time buyers in the GTA seem to get help with the down payment  from their parents/relatives who are in turn depending on the equity in their own house for retirement.

 

A recent CIBC poll seems to back this observation up:

 

And most parents are quite generous. The average intra-family donation is $24,000, but those with incomes above $100,000 generally give over $40,000. As many as 25 per cent of those surveyed reported gifts of over $50,000.

 

https://globalnews.ca/news/3628596/canada-boomers-millennials-financial-help-gifts/

 

[Liberty]

I have noticed many first time buyers in the GTA seem to get help with the down payment  from their parents/relatives who are in turn depending on the equity in their own house for retirement.

 

Yeah, and that help for the downpayment seems to often come out of a HELOC, just to make sure that everybody is leveraged to local real estate to the max.

[Aberhound]

I have noticed many first time buyers in the GTA seem to get help with the down payment  from their parents/relatives who are in turn depending on the equity in their own house for retirement.

 

Yeah, and that help for the downpayment seems to often come out of a HELOC, just to make sure that everybody is leveraged to local real estate to the max.

 

Or perhaps the parents are adopting the Chinese practice of making sure their children have homes so can attract a desirable mate and produce grandchildren. If so prices have a long way to go before they match the levels in China.

[Liberty]

I have noticed many first time buyers in the GTA seem to get help with the down payment  from their parents/relatives who are in turn depending on the equity in their own house for retirement.

 

Yeah, and that help for the downpayment seems to often come out of a HELOC, just to make sure that everybody is leveraged to local real estate to the max.

 

Or perhaps the parents are adopting the Chinese practice of making sure their children have homes so can attract a desirable mate and produce grandchildren. If so prices have a long way to go before they match the levels in China.

 

The motivations are varied, I'm sure, but the financial logic remains. Borrowing to borrow on elevated asset, and putting your whole net worth into one asset, at historically low interest rates at a time when regulators are tightening the screws isn't exactly a low risk approach.

[lessthaniv]

- Metro Vancouver is expected to grow by 250k people over the next 5 yrs.

- there is over 60k student visas here

- there is over 300k multiple entry visas (10 yr)

- Vancouver has a brutal building permit process and slow processing time

- the average duration for one high rise (300 units) from conception to occupancy is about 6 years if everything goes well.

 

The result is incredibly tight supply and constant demand.

 

 

 

[rb]

Supposedly Vancouver Real Estate is the only good who's demand is not affected by its price.

[Liberty]

- Metro Vancouver is expected to grow by 250k people over the next 5 yrs.

- there is over 60k student visas here

- there is over 300k multiple entry visas (10 yr)

- Vancouver has a brutal building permit process and slow processing time

- the average duration for one high rise (300 units) from conception to occupancy is about 6 years if everything goes well.

 

The result is incredibly tight supply and constant demand.

 

When prices go up, people can find lots of reasons why it's going up.

 

When it goes down, people will find lots of reasons why it goes down.

 

It's the Halo Effect, but for cities.

 

To me, it's not worth paying millions for a bungalow from the 1970s and expect it to keep compounding faster than Berkshire (which has cashflows and reinvestment opportunities, unlike a house), but what do I know...

[wisdom]

But this is Vancouver we are talking about. It is so special that the natural beauty and warmer winters make your mortgage payments. One does not require income/cashflow. All one needs to do is borrow more and you make money. Others will never understand.

 

And yes, we are running out of land up here in Canada - population 36 mil and the 2nd largest country. No other city/country has such density.

[scorpioncapital]

Real estate in North America is highly subsidized. As are banks in Canada. I sometimes wonder if people are racing into a sinking ship instead of abandoning it.

 

 

[bizaro86]

No other city/country has such density.

 

I suspect that it is true that no other country has density like Canada, except maybe Greenland (is that a full country?)

[John Hjorth]

No other city/country has such density.

 

I suspect that it is true that no other country has density like Canada, except maybe Greenland (is that a full country?)

 

lol, bizaro, it's a part of tiny Denmark, but with its own separate government. The Southern part of Denmark sends about DKK 4 B up there  every year to keep the approx. 55 thousand citizen out of the Stoneage. Greenland is actually also on the US State Budget - the Defense Budget. US Air Force running Thule Air Base, pumping out a lot of USD, creating demand and economic activity.

 

Now back to topic.

[Viking]

I have given up trying to understand what is going on with Vancouver (and Toronto) real estate. It looks and feels like a bubble to me. But I said the same thing 7 years ago. First time home buyers have some really difficult decisions to make. The money from Asia (mostly China) continues to pour in. Interest rates are still very low. The economy in BC continues to perform well, lead by the housing market.

 

In a few more years, once my kids are out of the house, I would be happy to sell and rent. I would love to get my hands on my equity and invest it in stocks for the long run.

[scorpioncapital]

What about the theory that debt/credit is a life-long proposition. I.e. if you can pay some monthly mortgage - FOR LIFE - and never pay off the property, does it matter if you die, you got the use of the house for the entire time. But if everyone goes in with wild abandon when rates are 3%, if they go to 6% or higher maybe you actually will get kicked out of the house before you pass on...unless of course you get a bailout. Which is a distinct possibility. In which case maybe you can continue to stay on as a perpetual debtee. Is this the golden age of almost free lunches?

[Liberty]

What about the theory that debt/credit is a life-long proposition. I.e. if you can pay some monthly mortgage - FOR LIFE - and never pay off the property, does it matter if you die, you got the use of the house for the entire time. But if everyone goes in with wild abandon when rates are 3%, if they go to 6% or higher maybe you actually will get kicked out of the house before you pass on...unless of course you get a bailout. Which is a distinct possibility. In which case maybe you can continue to stay on as a perpetual debtee. Is this the golden age of almost free lunches?

 

I'd rather look at the base rate of what has happened historically rather than make theoretical scenarios about "what if everybody just decides not to sell and never pay off their houses".

 

New households are created, people get divorced, have to move for work, the kids move out and the house is suddenly too big, need money for retirement, etc. There's always going to be a bunch of churn in the housing sector, and price discovery is going to happen at that margin. If suddenly buyers have to get approved for a mortgage at 5-6% and they're not seeing prices rise constantly (stopping the FOMO, and reducing the hope that even if you're up to your eyeballs, you can always just take more equity out of the house via HELOC to pay for consumption), the psychology is not going to stay the same.

[rb]

What about the theory that debt/credit is a life-long proposition. I.e. if you can pay some monthly mortgage - FOR LIFE - and never pay off the property, does it matter if you die, you got the use of the house for the entire time. But if everyone goes in with wild abandon when rates are 3%, if they go to 6% or higher maybe you actually will get kicked out of the house before you pass on...unless of course you get a bailout. Which is a distinct possibility. In which case maybe you can continue to stay on as a perpetual debtee. Is this the golden age of almost free lunches?

You hear this type of argument frequently around cycle tops. What if this happens, what if that happens, what if this time is different. When it comes to real estate a lot of them have to do with with financial engineering. Yours does as well. Basically it means extend the term of the loan - 100 year mortgage - or interest only mortgage.

 

On paper it looks like it's technically possible. But in reality it always ends in tears. One of the reasons is that everything has to go smoothly and perfectly for it to work. But reality is neither smooth nor perfect. There are life events, credit cycles, and economic cycles. These ruin everything and you get tears. The bailout thing is actually not such a distinct possibility. There have been many house bubbles, but I am not aware of a single one where the gov't went in and bailed out the over indebted home owners.

 

One counter argument to the whole thing I can make is that if houses are so valuable why can't a landlord collect reasonable rent to make a reasonable rate of return? On a $1M house that should be at least $5,000 per month. But where I live you can rent $1 M for $2,200 and $1.7M for about $3,200 per month. Let's take your example and assume I can get a 100 year interest only mortgage @2.9% - the current best 5 year rate available from a shitty lender. Since I'm doing interest only, i'm effectively a renter but the bank is my landlord.

 

As a renter my monthly outlay is $3,200. As an owner my interest is $4,100 + $800 property tax + $200 insurance + $500 maintenance& repairs for a total monthly outlay of $5,600 dollars. As a rational economic actor why would one choose to buy instead of rent? This whole thing happened because you have irrational economic actors making irrational economic decisions.

[Liberty]

As a rational economic actor why would one choose to buy instead of rent?

 

The ONLY reason people are willing to pay current prices is the orthodoxy that prices can't go down and can't stop going up. This leads to the widespread fear of being priced out because prices will keep going up, and the belief that even if they overpay, rising prices will bail them out because they'll just take the equity out of the house as they go (making them more vulnerable to any shock to the system since they're more levered) or flip it at a profit later when they realize that whatever they bought isn't what they want anymore.

 

Doesn't seem wise to me.

[tripleoptician]

My recent home purchase at the top of the Vancouver real estate cycle - please criticize freely!

 

I have full conviction that the real estate cycle is at a top, specifically in Vancouver where I live. I have chosen to rent for the last 7 years despite easily affording to buy because of this conviction.

Our family just made the decision to buy at what is likely the top of the cycle - I will provide my rationale and please criticize freely so I can stay intellectually honest.

 

We have below market rent currently -$3000/mth for a house that would rent for around $4000/mth right now. Our landlord has told us they plan to sell which means we will be moving regardless with 2 kids and a newborn in the coming months.

 

New rent will be $4000/mth minimum for the size of place we need/want. Vacancy rates hover around 1% here. It is common to hear of renters suddenly getting notice to vacate for renovictions or owners suddenly selling a property given the gains owners are sitting on.

 

My purchase with a decent downpayment will leave my monthly payments as follows:

Mortgage $4500

Insurance $200

Property tax $500

Maintenance $500

Total $6700/mth

Approximately $2200/mth will go to principal payment or forced "savings" into the primary residence

So $4500/mth cost and $2200/mth forced savings vs $4300/mth rent for the new place.

 

Obviously interest rates will go higher and in 5 years the monthly cost will rise, but I expect rents will rise here as well given the historic low vacancy rates.

 

Key reasons we decided to buy despite expecting near term valuations to decline and likely price stagnation afterward:

 

1. We dont want to have to move house every few years when owners decide to sell. This has happened to many of our friends. Full houses to yourself are quite hard to find here and we prefer not to share 2 levels of a house.

 

2. Proposed Corporate tax changes are going to make us push out more income personally moving forward and reduce savings benefit in a corporation.

 

3. The total home purchase price equates to about 55% of current net worth in investable assets and we had minimal debt (investment related)

 

4. We improve the quality of home we are in and ensure we can stay in a good school district for the long term.

 

5. We still have substantial cash flow leftover to invest from huge income earning jobs.

 

6. We got a relative "deal" because the owner was murdered and the wife has left to the Grand Caymans eith the house sitting on the market for almost 4 months. Got it $200K less than asking. Prices in a bit of downside.

 

Downsides

 

1. We likely lose market value and may take 10+ yrs to return to purchase price value.

 

2. We move from financially independent with the ability to retire today with 25x yearly expenditures in net worth currently. We still planned to work anyway because we love our jobs. We wont need to increase our hours or reduce quality of life secondary to the purchase.

 

3. Hassle of home ownership - im not a handyman and it has been quige pleasant doing no maintenance cor the last 7 years!

 

 

 

 

 

 

[gary17]

I think part of the expensive real estate is the cost of construction for new homes due to shortage of skilled labour — a new wood frame house will simply be $250/sf for entry level ... a new 2000 sf house means $500K is in the house.

land is about 1M ? 1.5m for entry level

this tends to put a floor on the price for existing homes too

 

If we have a correction - hard to see cost of construction come down.  Land may come down but i think a correction will have limited downside — not USA styled meltdown. 

I was just in NYC - Manhattan is just expensive but outside of that island lots of land. 

it’s just a real estate phenomenon. we got lots of land in canada. but people want to live in major centres ... it’s just part of life

[rb]

I think part of the expensive real estate is the cost of construction for new homes due to shortage of skilled labour — a new wood frame house will simply be $250/sf for entry level ... a new 2000 sf house means $500K is in the house.

land is about 1M ? 1.5m for entry level

this tends to put a floor on the price for existing homes too

 

If we have a correction - hard to see cost of construction come down.  Land may come down but i think a correction will have limited downside — not USA styled meltdown. 

I was just in NYC - Manhattan is just expensive but outside of that island lots of land. 

it’s just a real estate phenomenon. we got lots of land in canada. but people want to live in major centres ... it’s just part of life

Actually construction costs for new regular homes are about $100-$150 per foot. Also if trades people were in short supply in BC you would expect them to earn high wages. So are the hoards of carpenters and drywallers making $50 an hour? Actually no. The wages in Vancouver for a carpenter is about $26 per hour and for a drywaller about $25. That pretty much in line with the national average. The highest wages for tradespeople are actually in Ottawa where homes are a fraction of the price in Vancouver.

 

Vancouver seems to be this magical place where how much money people make ($80k median per family) is irrelevant. It doesn't matter how much you make, you too can have a $1.5 million home. All you have to do is believe.

[rb]

Tripleoptician,

 

Based on the numbers you've listed I assume you have something like a $1M mortgage @2.6%. Assuming you've but 20% down that would make the house 1.25M your price of 1.5M market.

 

There's not much to criticize about your decision. It looks like you've looked at the situation carefully, understand all the details and risks and you're ok with it. Based on the numbers it looks like it could have gone either way. That $4,000 rent is pretty high. You don't get rents that high in Toronto.

 

Enjoy the place. :)

[tripleoptician]

Tripleoptician,

 

Based on the numbers you've listed I assume you have something like a $1M mortgage @2.6%. Assuming you've but 20% down that would make the house 1.25M your price of 1.5M market.

 

There's not much to criticize about your decision. It looks like you've looked at the situation carefully, understand all the details and risks and you're ok with it. Based on the numbers it looks like it could have gone either way. That $4,000 rent is pretty high. You don't get rents that high in Toronto.

 

Enjoy the place. :)

 

Wow good math.

$1.1 mortgage at 2.59% fixed. $500K downs

 

Thanks for your thoughts