Garth Turner - Real Estate in Canada

[Liberty]

I think that's likely correct. Canada benefited from the commodities boom while pretending that what made it get through the crisis was actually prudent citizens and institutions. It's quite clear that debt levels higher than the U.S. at its peak and houses that cost almost 2x what they cost in the US aren't exactly a prudent state to be in...

[wisdom]

It will get nasty if this impacts the housing industry in Canada (which I expect it to).

 

Housing and related industries are around 25% of GDP and investment in housing is over 7%. The commodity crash may lead to people losing houses when their debt levels are at their highest levels in history. At 70% home ownership it could get interesting as future demand is going to be limited when an average house costs 5.5 times the median household income. In some cities, it is at 10x.

 

Canada does not need sub-prime lending - there are enough investors who have pooled funds and lend money privately at 12-14% on 2nd/3rd mortgages. These funds are usually borrowed at 3.35% from FI's using individuals equity in their own residence. The boom has gone on for so long a lot of home owners have made this is a source of income for themselves. Most of these guys have no past experince of downturns and have no idea what they are getting into. On $500,000 HELOC at 10% spread they could be earning $50,000, and, as far as they understand with no risk.

[augustabound]

Canada benefited from the commodities boom while pretending that what made it get through the crisis was actually prudent citizens and institutions.

 

Don't forget our Conservative government. They've been given credit also, worthy or not.

[wisdom]

I am sure the increase in amortization to 40 years with 0% down helped along with other steps taken to help Canadians buy houses. That was the governments contribution.

[Liberty]

The chest-puffing and self-back-patting by Canada about all this reminds me of Europe right after the subprime crisis started in the US. I remember reading Economist articles quoting European politicians gloating and saying that American capitalism was dead, the European model had triumphed, and Americans should come over to Europe to see how it's done, etc.

 

How did that turn out?

[EliG]

Questions to Canadians:

 

Are any of you still buying USD at the current level?

 

I have about 15% of portfolio sitting in cash (CAD). CAD is trading below purchasing power parity (~82c). It's annoying to buy USD here. On the other hand, it may be not too late if the worst predictions about Canadian economy come true.

 

 

[wisdom]

Not buying anymore. Loaded up on USD over the last 10 years when the US was on sale.

 

I am building CAD cash as I believe Canada is about to go on sale.

 

PS. Should add, I am no expert.

[alertmeipp]

Anyone here live in Toronto/Vancouver/Calgary, with kids but do not own a house?

[gary17]

It's very normal to raise a family in a 1000sf box.... they've done it in HK, Tokyo, Seoul , Taipei, Shanghai.....  no reason why we can't in Toronto or Vancouver. 

 

I live in a condo in Vancouver - I can easily get a house about 1h commute away from work for about the same price.  I made the choice I don't want to do 1h x 2 each day for work.... :))

 

Gary

[alertmeipp]

Sorry, I mean renting a place rather than owning it.

 

The price is high, but hard not to buy one when you have kids... is it not?

 

 

 

[Liberty]

Sorry, I mean renting a place rather than owning it.

 

The price is high, but hard not to buy one when you have kids... is it not?

 

Why would it be "hard not to buy a place" when you have kids? In many countries, most people rent, and I think they still manage to reproduce.

[Range]

Sorry, I mean renting a place rather than owning it.

 

The price is high, but hard not to buy one when you have kids... is it not?

 

Sincerely not trying to be a jerk... but why would it be different if you have kids or not?

 

A simple lease vs. buy analysis or implied cap rate on purchase price is what I would look at.  I don't see how kids fit into either of those equations.

 

(I don't have kids so I could be completely naive here)

[alertmeipp]

It's just harder to move around when you have kids, neighborhood, school, etc...

 

 

[Potato]

Anyone here live in Toronto/Vancouver/Calgary, with kids but do not own a house?

 

Yes, in Toronto with one kid; we rent a detached 3-bdrm near the north end of the subway system. Before that I rented a detached and then half of a duplex in London, ON. Finding a place with space is harder than finding a condo, but it's far from impossible. Took about two months of looking last time to find a place to settle in that was decently renovated and in a good neighbourhood, and there was at least one candidate coming up each week.

 

As for life with a kid while renting, it's not hard at all, in fact it's awesome. When there was a small leak in the roof I just called the landlord, and they took care of it -- I didn't have to spend precious time I could be napping calling and screening contractors or cracking the whip to get the job done. We were in the place in London (before getting pregnant) for 4 years, we've been here for over 3 and just signed another lease to secure another year. Even if at the end of that we move, it's hardly more moving around than typical owners these days.

 

And the price:rent here is just insane, and getting crazier every year. I don't know why anyone is buying at these prices (well, I do -- they don't even consider renting, as the question seems to imply here).

[wisdom]

Same here - Vancouver 2 kids and renting. Rent a house.

 

Have more cashflow than most I know who are house rich but cash poor. But, they would brag at every dinner how much money they had made and how much their house was worth. Not so much over the last couple of years as most of the prices have plateaued.

 

I can sense the psychology changing. It is still considered an Alberta issue at this point. Easier to bury my head in the sand than accept something terrible is about to transpire. To be seen how it plays out.

[gr33ngi4nt]

I came across these charts yesterday. I suspect the mix for Toronto (which doesn't break out multis vs. singles) is more heavily skewed to multis than in the Ontario chart. Pretty scary.

 

I just signed a lease for a 1br condo in Toronto. During the viewing and negotiating process you could really sense how desperate the agents/landlord are to get the units rented. Mind you, it is in the middle of winter, kids still in school, and multiple condos completed during the same month. 

[frommi]

Does it make sense to short canadian banks based on this insight?

[LongHaul]

Thanks for the replies of why Canadian homes didn't crash.

 

I am in the US and I think it may be easier to spot bubbles when you are outside of the country.  Less koolaid being offered daily!  I think homes in Canada are about 75% overvalued.  I got that from looking at the economist website and comparing the average long term real price and price to rent and both work out to ~75% overvalued.  The US wasn't that overvalued overall.  If I owned one of these overpriced homes I would immediately sell and rent.  That can be a very significant amount of money.

 

I agree that a bunch of other places are in bubbles too, China, Australia, etc.

 

[mcliu]

Just playing the devil's advocate here, even though P/Rent or P/Income ratios are higher than historical averages, mortgage rates and bond yields are also lower than historical averages.

 

Adjusting for that, maybe housing prices aren't as overvalued as it seems?

 

That obviously changes if mortgage/interest rates go back to or above historical averages.

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

[Liberty]

Just playing the devil's advocate here, even though P/Rent or P/Income ratios are higher than historical averages, mortgage rates and bond yields are also lower than historical averages.

 

Adjusting for that, maybe housing prices aren't as overvalued as it seems?

 

That obviously changes if mortgage/interest rates go back to or above historical averages.

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

 

Interest rates are similarly low in many other places, yet houses aren't as expensive as in Canada.

 

I think what will matter in the end is that house prices have completely disconnected from wages. People are barely able to afford housing even with the help of super low interest rates. Most people justify buying because they think prices will keep rising and 1) if they don't buy now, they'll never be able to and 2) over time they'll make money on their house.

 

As soon as sentiment changes and people realize that trees don't grow to the sky, I think things can start to happen fairly quickly.

[petec]

Just playing the devil's advocate here, even though P/Rent or P/Income ratios are higher than historical averages, mortgage rates and bond yields are also lower than historical averages.

 

Adjusting for that, maybe housing prices aren't as overvalued as it seems?

 

That obviously changes if mortgage/interest rates go back to or above historical averages.

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

 

Interest rates are similarly low in many other places, yet houses aren't as expensive as in Canada.

 

I think what will matter in the end is that house prices have completely disconnected from wages. People are barely able to afford housing even with the help of super low interest rates. Most people justify buying because they think prices will keep rising and 1) if they don't buy now, they'll never be able to and 2) over time they'll make money on their house.

 

As soon as sentiment changes and people realize that trees don't grow to the sky, I think things can start to happen fairly quickly.

 

+1 and I fear the UK is in the same position.  Although, I do think that a decade or so of ultralow rates is a possibility, as per the previous post.

[Liberty]

+1 and I fear the UK is in the same position.  Although, I do think that a decade or so of ultralow rates is a possibility, as per the previous post.

 

That's possible, but I don't think interest rates have to rise for sentiment to change (at least in Canada, I'm less familiar with other markets).

 

The current oil crash could be the final nail in the coffin. Mining (esp. junior) has been depressed for a few years, and now this. That's a big chunk of the Canadian economy, and especially, a very visible chunk. Bad news are hard to ignore when you have no margin of safety (record debt levels, etc).

[LongHaul]

Just playing the devil's advocate here, even though P/Rent or P/Income ratios are higher than historical averages, mortgage rates and bond yields are also lower than historical averages.

 

Adjusting for that, maybe housing prices aren't as overvalued as it seems?

 

That obviously changes if mortgage/interest rates go back to or above historical averages.

 

However, what about the off chance that we have another decade or two of low/declining/negative interest rates?  ::)

 

 

Both are fair points.  I have no idea when interest rates will rise.  We are in some weird times with interest rates though.

~140 year lows on the 10 year US treasury yield.  140 years!  http://www.multpl.com/interest-rate/

Negative interest rates in Germany too.  Which is just insane to me.

For interest rates to stay low you would have to believe investors would accept 0 or negative real interest rates for an extended period which I think is unlikely.  But who knows - I am no expert and if you had told me German interest rates would be negative I would not have guessed that.  BTW - German residential real estate seems roughly fairly valued.  Japan is probably also.

 

I think there is a benefit for the levered buyer on a present value basis. But the risk seems to be on the downside at these prices.

 

A lot of people attribute the current central bank actions of lowering rates to causing bubbles, etc.  It may be partially the reason - hard to say how much though.  In the late 1920's, ~2000, and 2006 interest rates were higher and there were bubbles in addition to many other times.  No real estate bubbles in Germany and Japan housing that I know of now.  So it seems to me that the overriding point is human nature which which gets caught up in bubbles like teenager drinking beer.

[petec]

+1 and I fear the UK is in the same position.  Although, I do think that a decade or so of ultralow rates is a possibility, as per the previous post.

 

That's possible, but I don't think interest rates have to rise for sentiment to change (at least in Canada, I'm less familiar with other markets).

 

The current oil crash could be the final nail in the coffin. Mining (esp. junior) has been depressed for a few years, and now this. That's a big chunk of the Canadian economy, and especially, a very visible chunk. Bad news are hard to ignore when you have no margin of safety (record debt levels, etc).

 

I don't think interest rates have to be the trigger either.  But (speaking for the UK, and specifically London) I think the psychology of ownership is so strong that it will take time, or a real crisis, to change it.  It's just been so long since anyone really got hurt owning property here that people don't consider the downside.  I'm not even sure most have any way to visualise the downside and the leverage.  And they don't have to because so far every dip has been temporary since the 1970s.  Housing is a) basically the only investment option most laypeople have, b) a surefire winner in the popular psychology, and c) an essential that seems only to get more expensive.  You can understand why the mindset exists and I do think it will take time, or a crisis, to turn.

[petec]

 

A lot of people attribute the current central bank actions of lowering rates to causing bubbles, etc.  It may be partially the reason - hard to say how much though.  In the late 1920's, ~2000, and 2006 interest rates were higher and there were bubbles in addition to many other times.  No real estate bubbles in Germany and Japan housing that I know of now.  So it seems to me that the overriding point is human nature which which gets caught up in bubbles like teenager drinking beer.

 

Surely it's the direction of rates that matters, not the level?  My underdstanding is that pretty much every bubble has been preceded by easing monetary policy.  But clearly the teenager/beer psychology is also key - the two interact with each other.