Garth Turner - Real Estate in Canada

[KCLarkin]

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

 

No asset has an absolute value. All values are relative.

 

[wisdom]

http://www.bloomberg.com/news/articles/2015-02-13/5-reasons-sweden-s-red-hot-housing-market-won-t-crumble

 

Canada could be like Sweden - in answer to why housing prices could keep increasing.

[RichardGibbons]

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?

 

I fit in here.  A decade ago, I could have afforded to purchase a home with cash on the west side of Vancouver. However, I rented instead.  This allowed me to get aggressive in wealth building, both in investing and starting a business.  Now my net worth is roughly 4 times what it was then.  That said, I might have done better if I bought 8 houses with maximum leverage.  But I think that's irrational outcome-oriented thinking.  (i.e. the same seeing a 10 come up in roulette in Vegas, then saying that I would have been better off if I bet all my assets on 10.)

 

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. 

 

These are mostly the same thing.  In the first case, your ownership of businesses and their cash flow is the same, while the price people will pay you for them declined.  In the latter case, your ownership of the house and its implied rent is the same, but the price people will pay for it has declined.  I think the main difference is that the former is likely much more diversified and much more liquid, and therefore less risky.

 

You likely think there is something magical about owning a house and that it shouldn't be evaluated based on its cash flows because you live in Vancouver.  Lots of people think that here.

 

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.

 

It only makes sense to use this sort of reasoning if the cost of the debt is fixed over the lifetime of the debt.  Since, in Canada, almost all first mortgages are for a small fraction of the period of time that the debt is paid off, then this is bad analysis.  If you want to use this sort of reasoning (which I think is a bad idea, but I'm conservative when it comes to large  bets), then the most reasonable thing to do is to estimate the cost over the full life of the debt, then add a margin of safety.

 

The funny thing is that most of us would say that it would be a bad idea to use 5 year debt to finance a project that will take 30 years to pay off that returns an extra 2% a year above cost of capital. The risk of interest rates rising or the business environment worsening is just too high to make a it a sensible bet.  But call the project a "home" and suddenly people think it's a good idea....

[Range]

Thanks for that last post Richard.

 

I didn't feel like taking the time to address those points but I'm glad someone did.

[cwericb]

“I  fit in here. A decade ago, I could have afforded to purchase a home with cash on the west side of Vancouver. However, I rented instead.  This allowed me to get aggressive in wealth building, both in investing and starting a business.”

 

That is not the scenario I was comparing. Very few have the cash to buy a home in Vancouver. That is not the same as comparing a mortgaged home to renting. Yes, with cash you can compound it through investments. But the average person does not have that cash to invest, nor can he borrow it without collateral. He has to live somewhere and for most the choice is to either rent or buy. 

 

There also seems to be an assumption on this thread that all Canadians live in Vancouver, Calgary, Toronto or Montreal. Certainly prices in those cities are high. But the combined populations of those cities represents only one third of the Canadian population - two thirds of us live elsewhere where prices may not be as unreasonable.

 

The extreme, of course is Vancouver. And it seems that people here frequently tend to reference Vancouver in their examples. In comparison to the rest of the country Vancouver seems dysfunctional when it comes to housing prices. But those prices are driven by a lot of unique factors not shared by most of the rest of the country. Vancouver prices are double the average and perhaps three or four times the price of many other areas of the country so it is a rather unique example.

 

Now for those who believe that investments in the market and home ownership are essentially the same thing, try living in your investments. As I said previously, if home prices drop substantially, you still have a place to live. Perhaps the difference here is that I am talking about the average person, not wealthy, successful investors.

 

Personally, home ownership has worked out well for me over the years. But I have never looked at my house as an investment, it is my home.

 

[cwericb]

Not really a fair comparrison. What happens if your stock drops by 50% and you lose your job? What happens if your stock drops by 50% and you do not have the funds to buy more? What happens if your stock drops to zero or close to it by bad management?

 

Further, if your house drops and you lose your job, you still have to live somewhere. That is the difference. You are still going to have to pay either rent or mortgage payments. And, one other thing. Even in bankruptcies, few people lose their homes today.

[alertmeipp]

yes, I didn't buy a house and get crashed by using into oily stocks.

[rb]

Forget the yield. Where do I get something for 198k in Vancouver. Or maybe that's the price of the bus?

[Jurgis]

Forget the yield. Where do I get something for 198k in Vancouver. Or maybe that's the price of the bus?

 

You got it! You buy a bus for $198K and it provides 12% yield when you use it to show RE to Chinese RE tourists.  8)

[plato1976]

Did we take the depreciation into consideration?

 

Forget the yield. Where do I get something for 198k in Vancouver. Or maybe that's the price of the bus?

 

You got it! You buy a bus for $198K and it provides 12% yield when you use it to show RE to Chinese RE tourists.  8)

[rb]

Nope, that's tax gravy  :)

[gokou3]

Forget the yield. Where do I get something for 198k in Vancouver. Or maybe that's the price of the bus?

This ad is for a development in a bad area of Surrey, a suburb of Vancouver.  The developer is Concord Pacific which is famous for making cookie cutter condos.  The price is probably for a 300-400SF studio unit.  As for 12% yield, the investor will consider himself lucky if he can gross half of that figure.

[augustabound]

This ad is for a development in a bad area of Surrey, a suburb of Vancouver.  The developer is Concord Pacific which is famous for making cookie cutter condos.

 

I think they're at 19 and counting for condos surrounding the Skydome and CN Tower here.

There was an article I read that asked, "Is Concord Cityplace a ghetto in the making?"

The main point seemed to be the "investors" buying and renting them out.

 

Even some city councillors are/were raising concerns about it. How long is it sustainable etc.

[Liberty]

“With the loonie falling about 10% against the U.S. dollar in the last six months,” said the Financial Post yesterday, “foreigners who have their money parked in greenbacks or in currencies pegged to the American dollar are likely to ramp up their interest in the Canadian marketplace, say industry experts.”

 

See what I mean? It’s a relentless and consistent message, yet one which is supported by no authoritative data. And any empirical attempt to counter it – as CMHC did recently with a survey showing only 2% of condos in 416 or 604 are foreign-owned – is instantly attacked.

 

So, what are we to think? If a massive doubling of mortgage debt on the part of Canadian citizens is not enough to make it clear who the buyers are, what is?

 

Well, here’s a glimpse.

 

The Victoria Real Estate Board tracks exactly who buys real estate in that market, BC’s second-largest. Yeah, I know. Victoria is not Vancouver, 115 watery km away. Maybe there are twice as many foreign buyers in Van. Maybe it’s five times. But at least this is a good starting point in understanding who is buying houses in one of the priciest cities in the country, and a provincial capital. The numbers below were just released privately to members of the Victoria Real Estate Board:

 

http://i.imgur.com/Qcdz5a4.png

 

By the way, of the 1.64% of Victoria buyers who were foreigners, 50% were from the US.

 

Of course, such stats won’t change the minds of those who hate without thinking, or blame others for their shortcomings. That’s the nature of prejudice. We all have some.

 

But it’s a fair assumption all real estate board have similar numbers. Guess why they’re not published?

 

http://www.greaterfool.ca/wp-content/uploads/2015/02/VIC-BUYERS-CHART.png?8f4c78

[alertmeipp]

so how many of you do not own a house and are renting in the Toronto and Vancouver area?

 

The house market is just red hot in these two places (other cities like Calgary, Montreal, Ottawa have been slowing down already). In Toronto, almost nobody thinks this rise is going to stop anytime soon. House are selling with multiple competing offers even in the suburb area, 15% over asking is becoming a norm.

 

Is it a good time to keep renting? Or just jump in the band wagon as the foreigner money and cheap rate will be around for quite a while?

 

I am renting and feel pretty confused.

[enoch01]

so how many of you do not own a house and are renting in the Toronto and Vancouver area?

 

The house market is just red hot in these two places (other cities like Calgary, Montreal, Ottawa have been slowing down already). In Toronto, almost nobody thinks this rise is going to stop anytime soon. House are selling with multiple competing offers even in the suburb area, 15% over asking is becoming a norm.

 

Is it a good time to keep renting? Or just jump in the band wagon as the foreigner money and cheap rate will be around for quite a while?

 

I am renting and feel pretty confused.

 

It is always darkest before dawn.

[alertmeipp]

>>It is always darkest before dawn.

 

 

I just don't know what will slow it down unless tmw China said no more capital flight. But chance of it is zero.

[cwericb]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago. 

[alertmeipp]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago.

 

Yes. It probably will take a 30 percent plus correction just to bring the price back to 3 yrs ago in some area.

 

We have quite a bit of institutions saying it is overpriced by 20 30 percents since few years ago. 

 

Mind blowing thing

 

 

[Liberty]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago.

 

Timing is hard, for sure, but value remains value. I'm sure people thought tech stocks were overvalued in 1997... Didn't make them fairly valued in 1999 because there hadn't been a crash yet.

[alertmeipp]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago.

 

Timing is hard, for sure, but value remains value. I'm sure people thought tech stocks were overvalued in 1997... Didn't make them fairly valued in 1999 because there hadn't been a crash yet.

 

The problem is I think for the foreigners, houses are cheap here.

 

A million for them is cheap to have an address in Canada.

 

Places like Scarborough, a smallish house asks for 500k can be sold for 700k.

 

And the same house maybe worth mid 40 couple years ago.

 

Not sustainable if all buyers are local and need employment income to sustain mortgage.

 

But we are talking about ppl who does not mortgage 

[Liberty]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago.

 

Timing is hard, for sure, but value remains value. I'm sure people thought tech stocks were overvalued in 1997... Didn't make them fairly valued in 1999 because there hadn't been a crash yet.

 

The problem is I think for the foreigners, houses are cheap here.

 

A million for them is cheap to have an address in Canada.

 

Places like Scarborough, a smallish house asks for 500k can be sold for 700k.

 

And the same house maybe worth mid 40 couple years ago.

 

Not sustainable if all buyers are local and need employment income to sustain mortgage.

 

But we are talking about ppl who does not mortgage

 

Where is "here"? Just Vancouver or all of Canada?

 

If houses are cheap here, just imagine how much cheaper they are in the US (about half price) and in other places around the world (Europe) that haven't had this massive, way above inflation, decade long run of debt binging. A few years ago the government allowed 40-year amortizations and 0 percent down, do you think that has had an impact on psychology and that maybe there's a lot of inertia there? Once things go up fast enough for long enough, people become convinced that it'll always be that way (especially if other asset classes get killed in the meantime and people lose confidence in them). I think we're still moving from past decisions, but now with mining in the hole, oil crashed, the canadian dollar clobbered, the US getting better, debt piling up and incomes getting farther and farther away from home prices, something has got to give. Otherwise what, households making 60k will be buying 2 million dollar bungalows in a few years?  Look at any world comparison, and we're one of the most expensive places in the world compared to rents or incomes or replacement costs (behind Hong Kong..) yet Canada's weather sucks and our economy is not doing well... Vancouver and Toronto aren't Paris or New York, that's for damn sure.

 

Also, blaming it all on foreigners will be shown to be a mistake in due time, I think. Most of what I see is that they are only a small part of the market. There was a survey in victoria where it was less than 1% of the market. But of course, realtors love to keep the illusion going (buy now or never! these rich foreigners will outbid you if you don't give your maximum!), so data is hard to come by for most places. In fact, even numbers on housing coming from realtors are really suspect and the media basically reprints their press releases; there's a total lack of transparency in our market.

[Guest 50centdollars]

The subject of this thread was Garth Turner’s prediction of the imminent collapse of a real estate bubble in Canada.

 

But this thread and his comments originated over three years ago.

 

Timing is hard, for sure, but value remains value. I'm sure people thought tech stocks were overvalued in 1997... Didn't make them fairly valued in 1999 because there hadn't been a crash yet.

 

The problem is I think for the foreigners, houses are cheap here.

 

A million for them is cheap to have an address in Canada.

 

Places like Scarborough, a smallish house asks for 500k can be sold for 700k.

 

And the same house maybe worth mid 40 couple years ago.

 

Not sustainable if all buyers are local and need employment income to sustain mortgage.

 

But we are talking about ppl who does not mortgage

 

Where is "here"? Just Vancouver or all of Canada?

 

If houses are cheap here, just imagine how much cheaper they are in the US (about half price) and in other places around the world (Europe) that haven't had this massive, way above inflation, decade long run of debt binging. A few years ago the government allowed 40-year amortizations and 0 percent down, do you think that has had an impact on psychology and that maybe there's a lot of inertia there? Once things go up fast enough for long enough, people become convinced that it'll always be that way (especially if other asset classes get killed in the meantime and people lose confidence in them). I think we're still moving from past decisions, but now with mining in the hole, oil crashed, the canadian dollar clobbered, the US getting better, debt piling up and incomes getting farther and farther away from home prices, something has got to give. Otherwise what, households making 60k will be buying 2 million dollar bungalows in a few years?  Look at any world comparison, and we're one of the most expensive places in the world compared to rents or incomes or replacement costs (behind Hong Kong..) yet Canada's weather sucks and our economy is not doing well... Vancouver and Toronto aren't Paris or New York, that's for damn sure.

 

Also, blaming it all on foreigners will be shown to be a mistake in due time, I think. Most of what I see is that they are only a small part of the market. There was a survey in victoria where it was less than 1% of the market. But of course, realtors love to keep the illusion going (buy now or never! these rich foreigners will outbid you if you don't give your maximum!), so data is hard to come by for most places. In fact, even numbers on housing coming from realtors are really suspect and the media basically reprints their press releases; there's a total lack of transparency in our market.

 

I went to a open house/bidding war on Saturday for shits and giggles. Did not see one Asian person there.

[benhacker]

I went to a open house/bidding war on Saturday for shits and giggles. Did not see one Asian person there.

 

We are now in the stage of action in CA real estate where there will be one last round of suckers to come in and go down with the ship.  The data does not support external (non CA) money being a significant driver of this boom, it is a red herring to shove away the fact that this boom is Canadian in nature (which in my experience Canadian's find just as uncomfortable as folks in the US did in 2006).

 

I would also argue (as was done above) that the relative valuation of US major markets are cheaper and/or more attractive relatively to CA, and big money Asians wouldn't on average have a problem switching.

 

Whether Canada's market is a bubble or not is beside the point.  It is clearly very very pricey.  I think it best to avoid as a buyer right now if possible.  All else is speculation.  An entire housing ecosystem has developed around ever rising prices... change will be uncomfortable for many even if it's not a disaster.

 

Ironically, I predict that when housing prices up North start printing negative YoY prices, this thread will dry up and no one will care. :)  Always seems to be that way (see China)... we'd rather try to predict the turn than profit from the result.

[wisdom]

Rules that I use:

 

Anything not sustainable in the long run has to end.

Low interest rates, high debt, rising unemployment, rising housing prices is not a combination that is sustainable.

 

You do not have to play if something does not add up.

No one is forcing my hand to invest in real estate. Maybe I need to develop a hobby outside investing or real estate and wait for the opportunity that I have prepared for.

 

Do not create false expectations that the market will correct in a given amount of time.

You will know when the time is right. It will be obvious went it happens. Life is a marathon.