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Garth Turner - Real Estate in Canada


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That's the whole point though. Even though debt-to-income has risen by 70%. The cost of carrying that debt has dropped by more than 50%. So on a net basis, the carrying cost of your debt may have actually declined over the past 2 decades.

 

From an affordability perspective, it's actually cheaper to buy a $600K today than to buy a $350K house in 2005, even though the price has nearly doubled. So you end up with a mortgage twice as big, but the cost of that servicing that mortgage is actually lower..

 

Obviously, if you believe that rates will go back to the levels in the early 80s, then the debt service is unlikely to be sustainable. However, you can't rule out the possibility that rates will continue to go lower.. I mean it's been going lower for the past 4 decades..

 

P.S. I actually think housing prices are ridiculous in the GTA area, but I just wanted to make sure we're covering all the possibilities.

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Don't NY or San Francisco have land restrictions? If yes, why is that any different in Canada - why does it result in higher prices in Canada. NY median houses are cheaper than Toronto. Does that imply Toronto is more desirable and people will leave NY to move to Toronto.

 

If I wanted to sell my detached house in Toronto (great neighborhood) and move to Manhattan, could I buy a similar house for the same price?

 

Nope, I just looked on Trulia. If I want a townhouse in a nice neighborhood in Manhattan, I will need to sell 10 of my houses. There is a small vacant lot in East Harlem that is only 50% more than my house in Toronto, though.

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I beleive the median house price in metro San Fran and greater Vancouver is around the same.

 

The median household income in SF is just below $100k whereas in Vancouver it is $69,000. I believe SF might have more billionaires and millionaires than Vancouver. Does that explain the high debt levels individuals have?

 

SF and Vancouver have land restrictions. Both have low rates.

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The square foot prices mean nothing unless we have other details - such as local incomes, population, population density, etc.

 

Tokyo prices are similar to Vancouver - Tokyo has as many people as all of Canada. It doesnt tell me anything useful.

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An average house in NY metro is in the $300-400k range.

 

Don't want to hijack this thread, but the median household income for NYC is ~$55K..

 

No one seems to address the fact that the numbers show that the cost to service debt has gotten significantly cheaper today in Canada than it was 10 years ago. And it's continuing to get cheaper to service debt.

 

I think most media outlets quote that debt-to-income has gone up significantly over the past decade, but they fail to mention that the cost of that debt is actually lower today..

 

I mean a high debt-to-income ratio really becomes a problem if 1) cost of debt goes up 2) income goes down.

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The rates could stay low for the next 40 years, but, if they do normalize - this may apply.

 

http://www.rbc.com/newsroom/_assets-custom/pdf/20141126-HA.pdf

 

EDIT: It is an individuals choice whether to put their capital at risk based on the data available. Some may see this data as proving that prices will increase and others may come to a different conclusion.

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The rates could stay low for the next 40 years, but, if they do normalize - this may apply.

 

Yes, real estate prices are elevated and are sensitive to rising rates or economic shock. But almost all asset prices are elevated and sensitive to rising rates. This doesn't mean there is a bubble -- it just means that low interest rates are creating dangerous distortions in the financial system.

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I run through this thought process and this is where i get stuck -

 

In a an environment where interest rates stay flat or decline will -

1) incomes increase to sustain future price appreciation.

2) will we go to 200% private debt to GDP for the next double on houses.

3) will foreigners buy enough houses in Canada to lead to another double.

4) where is the future demand going to come from at 2x the house prices.

 

If interest rates normalize -

1) will incomes increase enough to lead to the next doubling of housing prices as debt payments increase.

2) will this attract new buyers.

 

I cant think of others - but it would be great if you could point out scenarios which would allow for further price increases for this to be a good investment.

 

EDIT: Where and what is my margin of safety here.

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Widsom,

 

I'll just add that house prices have done inflation or inflation+1% over time depending on the research/studies that you read.

 

So let's call that 4% just for fun.  That means that a house will take 17-18 years to double in value.

 

Does that mean that the average homeowner over the past century has made a poor decision if it took on average 17 years for his house to double in value?

 

(I'm also bearish on Canadian housing, I just don't understand what you're trying to prove)

 

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Consider this

 

1. For those who have been renting over the past few years rather than owning - as of today, how has that worked out for you financially?

 

2. Do not apply principals of investing to home ownership.

 

If the value of your shares drop by 50% tomorrow, half of your money is gone. Gone, disappeared, poof.

 

If the price of your home drops by 50% tomorrow, you still have a place to live, its value to you is the same as it was yesterday. The drop in price is only a number. 

 

...

 

Is housing really more expensive than it was in the past?

 

Years ago I paid a mortgage as high as 17.5% - and others paid higher. At that time you could pay your mortgage every month for five years and at the end of that period you had only reduced your total amount owing by a few hundred dollars. Nearly all of your payments went to pay interest.  And that was with 20 year amortization rates. Today the reverse is true, most of your payments are going against the debt itself.

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Range I probably did not word it right.:

I was trying to invert. Assuming prices double in 15 odd years - what could the reasons be.

 

cwericb - just because something was right or worked for 30 years does not imply it will automatically work for the next 10 years.

 

Again - all of us our looking at the same data and interpreting it differently - we do not need to convince anyone.

 

It is just that I see odds not favoring owning. I could be wrong. Only time will tell and hopefully I will be wiser either way.

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1. For those who have been renting over the past few years rather than owning - as of today, how has that worked out for you financially?

[...]

If the price of your home drops by 50% tomorrow, you still have a place to live, its value to you is the same as it was yesterday. The drop in price is only a number. 

 

On the first point I just did a retrospective a few weeks ago on the blog -- if you had a detached house in the GTA you did a fair bit better than rent & invest the difference, even if you now had to move and pay transaction costs etc. For any other kind of housing (condo, townhouse, semi), even though it's been a pretty good couple of years with no crash, the cashflow difference in renting and phenomenal stock market returns have made renting & investing better. I believe there will be a crash, but even if there isn't, renting looks to be the better bet assuming more normal appreciation (inflation-ish) and investment returns (5-7%-ish).

 

For many people, there are real risks to home ownership in a crash that make it harder to just ride out than riding out a stock market crash, because it's purchased using leverage and you can go underwater. The very serious risk is that while underwater your job moves, but you're trapped in the house. The less serious, more theoretical risk (it's been too long since there's been a housing crash to see how the banks will react) is that if you're underwater you may not be able to shop for your mortgage renewal and will have to take the posted rate, which could crimp a family's budget if they were already close to the edge of affordability at whatever special discount they were able to get in boom times.

 

The first risk can be particularly harsh in single-industry towns (I think about Ft. McMurray in particular). To me housing over-valuation looks like a nasty positive-feedback cycle: economy gets bad, prices go down, people get trapped in place, economy takes longer to improve, prices go down more...

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What a debate!

 

I think at the end of the day one has to come up with an absolute value for an asset.

If homes in Canada are trading at an unlevered P/E of 35x and are worth 20x then they are massively overvalued, (I made the P/E's up).  Eventually the price will reflect the value but people can be nuts for a long time.

 

All the other arguments about land scarcity, govt, safer lending, etc are just noise as illustrated by history over the last 200+ yrs.

But wait - THIS TIME IS DIFFERENT!!!! 

 

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