Garth Turner - Real Estate in Canada

[alertmeipp]

i would like in some area, it's more like up 15% to 20% YoY.

 

And no sign of slowing down.

[enoch01]

Several weeks ago I closed about half of my put position on The Royal Bank of Canada (took it down to 2% position of current portfolio), only because I couldn't roll it to 2017.  I'll ride the rest of the position into the ground.  If the rest of it does go to zero this adventure will have cost me about 3.5% of current port.  The funny thing is that all the ingredients are there for a bust, it just hasn't happened yet.

 

Canadian real estate - to the moon!

[enoch01]

Several weeks ago I closed about half of my put position on The Royal Bank of Canada (took it down to 2% position of current portfolio), only because I couldn't roll it to 2017.  I'll ride the rest of the position into the ground.  If the rest of it does go to zero this adventure will have cost me about 3.5% of current port.  The funny thing is that all the ingredients are there for a bust, it just hasn't happened yet.

 

Canadian real estate - to the moon!

 

No asset goes up at 6-10 times the rate of inflation.

 

Sure it can, just for some reasonable or unreasonable amount of time.

[alertmeipp]

Several weeks ago I closed about half of my put position on The Royal Bank of Canada (took it down to 2% position of current portfolio), only because I couldn't roll it to 2017.  I'll ride the rest of the position into the ground.  If the rest of it does go to zero this adventure will have cost me about 3.5% of current port.  The funny thing is that all the ingredients are there for a bust, it just hasn't happened yet.

 

Canadian real estate - to the moon!

 

No asset goes up at 6-10 times the rate of inflation.

 

Sure it can, just for some reasonable or unreasonable amount of time.

 

Many say it will go up forever, and soft landing just mean it go up slowly to let income catch up.

 

None of the people I talk to expect house to go down. You have to live in Vancouver and Toronto to believe the atmosphere here.

[Phoenix01]

A balloon is always at it's largest just before it pops.

 

It seems that the balloon will never pop while it is filling, and then all of a sudden, the inevitable happens.

 

It deflates at an incredibly scary rate compared to the amount of time it takes to fill it.

[wisdom]

It has been a one way bet in Vancouver for 15 years now. It is amazing how long things can run.

 

Markets can be irrational longer than....

[wisdom]

http://www.cbc.ca/news/business/real-estate-woes-the-secret-lives-of-house-poor-canadians-1.3086793

 

 

[tripleoptician]

I've lived in Vancouver for 5 years now and have been a firm believer in the unbalanced, frothiness of this market the entire time. All typical measures of inaffordability have been shown to be consistently off when comparing the local population's overall income, current debt levels and overall income growth in the recent past.

My wife and I are both doctors and could "afford" to buy, but I could never rationalize the purchase despite home ownership being aggressively pushed on us from all Vancouver locals and our parents who have obviously made money in real estate over this extended bull market, albeit in Winnipeg/Ottawa markets.

 

In the last few months however, I feel like I've been analyzing the local situation in Vancouver incorrectly.....

 

 

I agree with the majority of the bearish posters on this thread who point to the national indicators such as historic low interest rates coupled with historically high debt levels, combined with a prolonged period starting in late 1990's of purposeful manipulation by CMHC to increase home ownership via longer amoritization periods and lower minimum downpayment requirements. This national trend shows this cannot go on forever based on the macro/microeconomic trends that govern our national/provincial and municipal landscape for Canadians. Eventually either a recession, higher interest rates or lack of consumer/investor confidence in real estate being the golden ticket will lead to either prolonged stagnation or decline in prices in the majority of our National markets. Coming from Manitoba, this is the viewpoint I have held consistently for Winnipeg's market, and felt Vancouver's hot market was explained by its locals unbridled enthusiasm for all things real estate. It truly is more manic than any other area in the country, because everyone knows  multiple "average Joe's" who have made hundreds of thousands in this local market. It perfectly describes everything related to a speculative bubble.

 

The problem with Vancouver real estate is there is a significant non local market force in the foreign Chinese buyer. I don't believe the rest of the country is affected by this at any similar order of magnitude, although the Toronto market may be somewhat affected. Many posters have alluded to the Chinese foreign buyer influence, but I don't think we have delved deep enough into why this money flows to the Vancouver market, and what factors would potential reverse or diminish its flow. This is the part that has me questioning whether this long term rise will actually decline. I don't want to debate if foreign buyers are truly having an effect - anecdotal and objective evidence is continuing to mount; the only question may be is it the primary driver of recent increases or secondary/tertiary contributer. I've attended some forums with Dr Ley and personally feel the link is clear

http://www.theglobeandmail.com/life/home-and-garden/real-estate/some-wonder-if-its-time-vancouver-acts-to-slow-foreign-buyers/article24341903/

 

Now these are some commonly held beliefs as to what motivates the Chinese foreign buyer to buy million dollar homes with cash:

 

1. Taking capital out of China provides a possible call option/exit strategy if an individual's business gets nationalized.

 

2. Canada has less stringent immigration laws regarding obtaining permanent residency status relative to other Western countries including an "investor" class that eases the application process if the applicant is wealthy. This again gives an individual a call option on leaving China if political unrest or corruption/witchhunts occurs.

 

3. Access to Western educations for their children

 

4. Environmental concerns for China/Chinese desire for natural beauty of Vancouver

 

5. It has been very lucrative as an investment over the last several years

 

6. Canada appears to have the most lax laws on foreign property ownership compared to other Western countries.

 

7.It also appears we have lax laws on bringing large amounts of currency into our borders relative to other Western countries:

 

http://www.vancouversun.com/news/Vancouver+airport+tops+country+seizures+undeclared+cash/8043419/story.html

 

There are likely many other possible motivations and some of the above may be anecdotal or incorrect. I previously believed that regardless of the motivation, once the bubble "pops" in the rest of Canada which will eventually occur, the foreign buyer would immediately be dissuaded from continuing to purchase as price declines would scare them from placing capital into a possible losing investment. I now think this is probably wrong.

 

The above border cash seizures article references that the supposed amount of capital outflow allowable to a Chinese citizen is $50,000/ year CAD equivalent. To have overall Chinese outflows in the billions/year as referenced in the article, individuals are obviously deciding the risk of keeping their cash in China is riskier than being caught taking larger sums out of the country. The Chinese foreign buyers are not utilizing local mortgages to purchase Vancouver homes. Anecdotal evidence has shown the majority are cash purchases. As noted above, even when CBSA finds undisclosed large amounts of cash at the border, the person pays a fine but keeps all their cash without further investigation. A multi million dollar cash real estate purchase by a Canadian citizen would likely send CRA on an in depth audit, but there is no concern by Canadian authoritities when it is a foreign buyer.

Couple the above with this recent article that suggests Chinese policy will ease limits on foreign capital flow along with a depreciating

CAD relative to the yuan, it appears capital outflows to Canada may see a sustained surge.

 

http://www.wsj.com/articles/china-to-ease-limits-on-overseas-investments-1432841526

 

So to summarize, I can see many natural incentives to encourage Chinese citizens to continue to have their capital flow to Western countries and will not be abated by:

1. tougher foreign ownership laws (see Australia and Hong Kong's real estate price growth despite making foreign real estate investment harder),

2. Chinese National policy (has currently been ignored and is set to ease further)

3. Increase in interest rates (purchases are largely cash)

4. Chinese recession - I think this would continue to see higher capital outflows as there is a higher chance of nationalization of private businesses in poor economic times rather than continual economic growth

 

So if there is potential tidal wave of external capital flow that doesn't necessary act based on fundamentals, does this not mean Vancouver prices potentially have a long term trend to rise even despite the astronomic growth thus far?

 

 

 

 

 

[gary17]

hi tripleoptician

very interesting analysis...  I share the same view, except you put it down in words better than I could have described it.

 

i am a taiwanese immigrant and traveled to japan, taiwan, china recently and know of a few wealthy folks who are in the $3M+ markets in West Vancouver.    in Asia, the primary residence is taxed for capital gain -  so in addition to the new wave of immigrants driving up the prices, there are also folks who have moved to Vancouver for 5 ~ 10 years now participating in the market, building spec houses .  So a typical lot in west vancouver is around $2M ~ $3M ; they spend another $2M to build a 6000sf luxury house and flip to a new Chinese immigrant for $7 or $8M , all tax free.  Imagine making $2 - $3M over 2 years tax free -- I am a youngish professional too and could 'afford' an entry-level house, but been watching on the sideline , not knowing when this will end. what i can afford in the $1M neighbourhood are all crappy tare-down houses...  meanwhile I live in a 800sf condo lol

 

in my recent visit to Beijing, i can really appreciate the state of the pollution...  and i was told over there people do not own their houses; they lease from the government.  the communist party owns everything in China. 

 

re wiring cash overseas - there are ways for people to get money out. and people are doing this.  even more rapidly these days because the Canadian market is 20% off thanks to the oil plunge. 

 

i'd add a few more points: vancouver is truly unique (in comparison to other major NA / European cities):

a) it has an establish asian community - 3rd largest in north america ?

b) you can get very decent Chinese food in Vancouver

c) you are 10 hours direct flight from home (vs 15+ going to Toronto / New York)

d) you are in the warmest city in Canada (avg 10 snow days a year with a dry ,  summer)

e) you are protected by the US but not part of US (this means stability)

f) on a relative basis, real estate is still much cheaper than Singapore, Hong Kong, Taipei, Tokyo, Seoul

 

unlike equities where we like to find ideas before others flock to ; real estate is built on existing infrastructure , community and environment. the  major cities of the world will continue to attract buyers

 

Gary

 

 

 

 

 

[wisdom]

The only question I have is:

Can you confirm most of the deals are being done in cash. If you have lived in Canada for less than 5 years, you can qualify for a 65% mortgage with no income and no credit. I believe it is called the new immigrant program.

 

I have seen this with many $10 mil purchases in Vancouver. And I do not expect a person who has bought a house for $ 10 mil to say I have financed it.

 

I would look a bit deeper than just the anecdotes for evidence.

 

EDIT: Agree with most of the the stuff you are saying. But, here are my other thoughts:

1) Majority of individuals are doing this with $ 1 mil homes - 65% no questions financing. But, I have also seen that most struggle to get good employment once in Canada - for whatever reason. They are currently managing because the housing values have been increasing. What happens when those values aren't rising and they are still struggling for good jobs?

 

2) In most cases that I have come across this scenario - the money comes from sale of an apartment in a Chinese city ($1 mil range). Let's say I sell a condo for $ 1 mil CAD (after taxes) in Beijing. Move to Vancouver - put down 35% on a million dollar home and live off the $650,000. But, at some point I will need to get a good paying job when the $650,000 is gone. Today, on a $650,000 mortgage your monthly payments would be around $3,000.

 

I do believe this could continue until either of the 2 things happen:

1) something causes real estate price in Vancouver to fall scaring buyers away from this arrangement

2) anything that causes large real estate losses in China

[wisdom]

Traditionally, an immigrant used to take 3 to 5 years to establish themselves in a new country. And it was on average in year 10 that they would end up buying their first house when they had a down payment ready.

 

What the new immigrant program seems to have done is front loaded the whole process. Most immigrants now buy within the first year of landing in Canada.

 

I also feel there tends to be a high correlation between recessions and slow down in immigration in a democratic society. Canada could be on the verge of a slow down. Funnily enough the protest and talk about professional locals not being able to afford a house are starting at the same time as the slow down.

 

We shall see if it turns out differently this time.

[gary17]

A few may have a million dollar condo in Beijing.  For what it is worth Beijin cost of living was higher than Vancouver when I was there in March. 

 

The people playing in the 3m plus market in Vancouver are easily very high net worth individuals ... They can afford the mortgage If we count their global assets.  The avg home price in Vancouver is around one million because we have entry level places in the not so speculative markets of Burnaby , Richmond , Coquitlam , etc where "ordinary" folks live lol.

 

 

 

 

The only question I have is:

Can you confirm most of the deals are being done in cash. If you have lived in Canada for less than 5 years, you can qualify for a 65% mortgage with no income and no credit. I believe it is called the new immigrant program.

 

I have seen this with many $10 mil purchases in Vancouver. And I do not expect a person who has bought a house for $ 10 mil to say I have financed it.

 

I would look a bit deeper than just the anecdotes for evidence.

 

EDIT: Agree with most of the the stuff you are saying. But, here are my other thoughts:

1) Majority of individuals are doing this with $ 1 mil homes - 65% no questions financing. But, I have also seen that most struggle to get good employment once in Canada - for whatever reason. They are currently managing because the housing values have been increasing. What happens when those values aren't rising and they are still struggling for good jobs?

 

2) In most cases that I have come across this scenario - the money comes from sale of an apartment in a Chinese city ($1 mil range). Let's say I sell a condo for $ 1 mil CAD (after taxes) in Beijing. Move to Vancouver - put down 35% on a million dollar home and live off the $650,000. But, at some point I will need to get a good paying job when the $650,000 is gone. Today, on a $650,000 mortgage your monthly payments would be around $3,000.

 

I do believe this could continue until either of the 2 things happen:

1) something causes real estate price in Vancouver to fall scaring buyers away from this arrangement

2) anything that causes large real estate losses in China

[wisdom]

The average price for Vancouver is $1.3 mil not including any of the suburbs.

[gary17]

Then average down by the condos and east can maybe. I know condo prices have not moved.

 

[wisdom]

East Van is right. Condos are not included in Single detached prices.

 

What I am trying to point out is that is a small section of the population of immigrants not the majority. But, it gets all the headlines.

 

The investor class of immigrants is a very small number - you can look up the numbers and majority of them settle in Toronto.

[gary17]

Well I think like illiquid stocks. A few buys move the price.

We visited a friend yesterday who bought a new lot in west van wanting to rebuild .  He figures he gets $8m because the last two sales on the block were in that neighbourhood. 

 

I'm not sure what to do.

 

I think if I buy in the east van level but in say north Vancouver I could be okay over the long term. Or just get used to condo living.  Nothing wrong. Small environmental footprint lol.

[wisdom]

Gary not sure what the right thing to do is.

 

If this is a bubble, it is one of the longest in Canada. At some point most people will buy into it.

 

The other thing that scares me in the number of individuals relying on the real estate market for income. Majority of people I talk to - anyone from doctors, IT professionals to cab and truck drivers - everyone is building on the side. They seem to be doing exactly what your friend is doing. Buy houses for a $1 - 2 mil and build a new home and flip it.

 

I have 2 concerns -

1) What if majority of the sales in the last few months have been to developers rather than real demand?

2) What happens in 2 years time when all these houses are completed and put on the market and there are no buyers? (If immigration or China slows/Canada is in a recession or interest rates are higher)

3) Since so many individuals rely on this process for income - what happens to their mortgages and multiple properties when the cash flow (music) stops?

 

It truly scares me when I look at how far it has fed into the local economy because of how long this has gone on.

 

Could the shortage in lots being available be due to these builders buying at this time rather than real demand.

 

But, this may continue for a lot longer - who knows.

 

EDIT:

Because it is difficult to get good employment - most immigrants - Indians, Iranians and Chinese are very heavily reliant on this process for their incomes - building a home if you have capital (self employed), trades until you have capital (immigrants are cheaper) and work longer hours in general.

 

 

 

 

[SharperDingaan]

A few things you might want to keep in mind …

 

Big house, no cash. No one forced you to buy more shelter than you need. You did it in the hope of a near-term flip to some other sucker at a higher price, and ... there is no possibility that you may be that sucker.

 

Foreign investment. Canadian real estate is a very good deal versus global comparatives, and bought primarily to hedge against adverse change. Look forward 30 years - and to most folk, it is pretty hard to see why Vancouver would not trend towards what Hong Kong used to look like prior to the hand-over. Foreign buyers are simply being prudent, and astute.

 

Negative yield. In today’s world, a high net worth person, depositing CHF into a Swiss Bank for safekeeping - has to pay the bank around 0.25-0.50% to take the money. Or, they could simply buy an A list condo in Vancouver for cash - and pay a property manager to keep it rented, as an alternative store of value. Rent the condo for 3-4 months/year to cover taxes and condo fees, and flip it again for a gain as/when you need the money.

 

SD

 

[wisdom]

SD obviously that is happening.

 

But, if the CAD drops 20% it is not as safe. And this has nothing to do with a real estate market that has gone one way for 14 years now.

 

On top of that if bonds are in a bubble and interest rates reverse, the calculations on real estate might change as well.

 

 

[Hoodlum]

I can tell you that the CMHC is allowing purchasers to use overseas accounts as collateral for mortgages.  There is no method for the CMHC to ensure that these account don't have any other leans against them or if the cash would be accessible when required.  This is likely one of many holes in our existing system and when the market does turn we will start to see what was really happening.

 

In my area, new homes are going for 20% more than existing resales and many of these new homes won't get built until 2017.  Home owners are hoping that the market continues this upward trajectory between now and when the new house closes.  When the market does turn and house prices drop we will see a lot of home owners in trouble as they won't be able to take on the additional mortgage.  Foreign buyers may just get up and leave rather than deal with the huge losses.

[SharperDingaan]

The price has risen because demand for Vancouver real estate has consistently exceeded the supply over the last 14 years. The Hong Kong handover ceremony was 1997, and it came with a number of transitional provisions expiring 2000. As those provisions expired, Hong Kong funds began to flow out, and were initially spread over a number over of markets. As the investment results developed, Vancouver (and Toronto) captured a growing market share of the rising flow, and local real estate prices have risen accordingly.

 

Yes there is price risk, but it is minor. The Hong Kong gate will not remain open forever, but when it closes; it will be sudden, absolute, and will stay closed for a very long time. If the price of the condo collapses 70% it really does not matter – what matters is that you got the funds out, it is in a safe place, and your family has options.

 

Price risk declines significantly, the more you can make on the Canadian property during interim flips. Concentrate the recycled and new inflow on select markets, and you can generate a reliable bubble of rising prices. Sell into the bubble for a gain, reinvest the proceeds in other Canadian real estate, and when the door closes – you will not be one of those down 70%.

 

Everything to this is exceptionally rational; it is just not what most Canadians are accustomed to. It is also not that unusual, re foreign investment in London (UK), New York, Paris, Milan, etc.

 

SD

 

 

[alertmeipp]

If u believe the rate will go up eventually back to 5% which makes the mortgage rate 6 or 7 percent , house price will come down.

 

Yes,  the cash buyers won't need to sell. But they won't be significant driver there. 

[wisdom]

SD you should check out how many locals own 10 to 40 properties and are leveraged all the way. I would recommend not falling prey to media stories that this is all Chinese money.

 

Maybe Vancouver is the next London, maybe not. The jury is still out.

[SharperDingaan]

I hear you, but I also know there are very different segments within every market. There will always be the foolish who will over-leverage and blow themselves up.

 

Most folks just do not get why anyone would knowingly buy a condo at an inflated price, when they know it could be worth cents on the dollar tomorrow - even when you are pretty sure that you may well be the bag-holder at the end. But talk to anyone who has had to flee a country with nothing, or been trapped in a country, and the answer becomes abundantly clear. Your life, a safe bolt-hole, and a marketable grubstake are the keys; you simply accept that you will be a distressed seller, and have no expectation of getting full value for the asset.

 

Example. Canadian kids have been so successfully vaccinated against measles and polio for successive generations, that most people now have never seen an all-out death from one of these diseases. They were called child killers for a reason, and hard deaths were routine. But because we have not seen it - we dismiss it. In grandpas time there was no vaccine ….

 

SD

 

[alertmeipp]

Toronto up like 15 percent year over year.

Sky is the limit.