Garth Turner - Real Estate in Canada

[Yours Truly]

Who needs the stock market when you can just flip single-detached homes in Toronto and Vancouver and declare it your principal residence (and incur no taxes on gains)? ... says a lot of non-financial folks

[Liberty]

https://twitter.com/benrabidoux/status/608612145991938048

[gary17]

http://www.cbc.ca/news/business/average-house-price-rose-8-in-may-to-over-450k-1.3113533

 

 

 

I recently had a chance to talk to a few agents with a lot of clients from China... yes, they are mostly buying in the high end Vancouver market... interesting the 5 major banks would lend these new immigrants money with no income in Canada, as long as they can show them proof there is income overseas.  min. downpayment is 35%. 

 

So with the ultra low interest rate here in Canada for the mortgage, and relatively higher savings interest rate in China; to many Chinese buyers, taking out a mortgage in Canada is like 'free money' to them...  the interest from the savings account in China basically pays for the mortgage interest + principal. 

 

I can see why money is flooding into Canada now...   

 

I suppose once the interest rate spread decreases - either due to increase in Canadian rates or lowering of Chinese rates - then the market could go back to normal levels.

 

Gary

 

 

 

 

[wisdom]

Gary, I have raised this a few times and I will repeat - you do not even confirm income overseas. All they need to do is have a reasonable explanation about their source of income. Why, because it is really not that difficult to provide fake documents and a Canadian employee would not know any better. In addition, a Canadian bank has no recourse on income or assets outside Canada.

 

Mainland Chinese have not experienced falling prices in RE so far, ever since they were allowed to own RE in China. They have only seen them go one way in China. To a lot of them this is a one way bet with no risk.

 

Look at the number of risks they are taking on -

1) foreign exchange - income in China and investment in China

2) interest rate

3) leverage

4) over valued asset

 

It is likely that when they move, a lot of these factors will move against them and the losses are going to be quick and big which could spread panic. I cannot imagine making a bet with this many variables that could potentially go against me. Either they are sure they will get out in time or they do not understand the risks they are taking on.

 

We will see - making money in Vancouver RE has been easy for 15 years now. The longest uptrend so far that I have been able to find - historically, it has been around 7 years in Vancouver. I guess, people can still find reasons why Vancouver RE will keep running up.

[gary17]

thank you Wisdom for your reply.  I too agree there's a lot of risk and frankly I don't really like RE going up , all tax free, leveraged, making it much , much harder now for individuals like myself making a modest salary taxed at high % and also trying to do a bit of investing on the side...  At this rate of RE price appreciation, I will likely live in a condo forever... lol

 

I'd be interested to know if any board members here work at one of the major banks in Canada and can share what kind of interest rates the new immigrants are getting with no income in Canada. 

 

Gary

[wisdom]

My understanding is they get posted rates. There is no adjustment for risk other than 35% down.

[tripleoptician]

Thanks wisdom for all your insights.

This knowledge does magnify the risk compared to my impression that Canadian financing would be hard to come by and therefore most purchases were primarily cash.

Interest rate spreads should imply a downturn or flattening of prices.

 

I still find it hard to evaluate on what will happen to rent vs own cost dynamics as our vacancy rates are so low. If buying for 10 years duration or greater, do you believe Vancouverites will be ahead based on overall principal payments vs savings from renting and investing the difference? I'm worried rent costs will increase once home ownership becomes less appealing....

[Liberty]

http://www.bcrea.bc.ca/docs/economics-publications-archive/2015-06-foreign-buyers-research-report.pdf

[SharperDingaan]

Yes there is risk, but it is minor.

 

China is communist state. Residents have only what the state allows them to have, and the state can take away the bank accounts, cars, and domestic real estate at any time. They CANNOT take away whatever residents have stashed overseas.

 

A resident can either repay their Canadian mortgage from a Chinese source, or repay from sale of Canadian real estate. If the Canadian property was bought at 3M with 1M down, & never traded, it need only sell for 67% of cost. But … if the resident had been successfully trading Canadian property, and had interim gains to offset against, they could afford to sell the Canadian property for a lot less.

 

It means that residents are best served if they trade within a collective bubble, start their trading as early as possible, and stay close to the herd. Exactly what we are seeing.

 

Yes the bubble WILL eventually burst, but who does it really affect - ordinary Vancouverites are not those buying the luxury condos.

 

It is about permanently getting funds out of China; and it is a lot safer, & more utilitarian, than simply depositing funds in an offshore account.

 

SD

[Liberty]

Yes the bubble WILL eventually burst, but who does it really affect - ordinary Vancouverites are not those buying the luxury condos.

 

The bubble is not only in luxury properties.

[wisdom]

There is also a reason why BC's per capita non-mortgage debt levels are 2x the Canadian average - around $39,000. Allows the locals to enjoy the ride.

[bizaro86]

My understanding is they get posted rates. There is no adjustment for risk other than 35% down.

 

Do you actually mean the posted rate? Because there is a pretty big difference between the posted rate and the actual market rate that Canadians who qualify for mortgages pay. (Generally speaking). That increase in interest rate would be effectively a risk adjustment.

[wisdom]

Sorry, that should have said the same rates as everyone else that qualifies using income and credit history.

[wisdom]

A person who has lived in Canada can use a similar no income verification program if they are self employed. BC has the highest rate of self employment in Canada.

[Liberty]

A person who has lived in Canada can use a similar no income verification program if they are self employed. BC has the highest rate of self employment in Canada.

 

This post has some stuff about how some lenders like Vancity are offering all kinds of crazy products (ie. they give you half of your downpayment at 0.01% interest, etc):

 

http://www.greaterfool.ca/2015/06/14/the-money-changers/

 

Also: http://business.financialpost.com/personal-finance/mortgages-real-estate/a-third-of-canadians-would-struggle-if-mortgage-rate-grew-by-only-1-survey-finds

 

"A third of Canadians would struggle if mortgage rate grew by only 1%, survey finds"

[alertmeipp]

A person who has lived in Canada can use a similar no income verification program if they are self employed. BC has the highest rate of self employment in Canada.

 

This post has some stuff about how some lenders like Vancity are offering all kinds of crazy products (ie. they give you half of your downpayment at 0.01% interest, etc):

 

http://www.greaterfool.ca/2015/06/14/the-money-changers/

 

Also: http://business.financialpost.com/personal-finance/mortgages-real-estate/a-third-of-canadians-would-struggle-if-mortgage-rate-grew-by-only-1-survey-finds

 

"A third of Canadians would struggle if mortgage rate grew by only 1%, survey finds"

 

I am debating whether I should get in.. (Toronto) I guess not?!!?

 

[Liberty]

A person who has lived in Canada can use a similar no income verification program if they are self employed. BC has the highest rate of self employment in Canada.

 

This post has some stuff about how some lenders like Vancity are offering all kinds of crazy products (ie. they give you half of your downpayment at 0.01% interest, etc):

 

http://www.greaterfool.ca/2015/06/14/the-money-changers/

 

Also: http://business.financialpost.com/personal-finance/mortgages-real-estate/a-third-of-canadians-would-struggle-if-mortgage-rate-grew-by-only-1-survey-finds

 

"A third of Canadians would struggle if mortgage rate grew by only 1%, survey finds"

 

I am debating whether I should get in.. (Toronto) I guess not?!!?

 

It's your decision, it's your money, same as with stocks. But if you're asking me what I would do, especially in Toronto, I would rent (I'm currently renting, and I live somewhere a lot less expensive than Toronto). If you are really itching for a nice place, then rent a luxury condo or house, it'll still cost you a lot less than buying. Put aside the difference for a bigger downpayment down the road and wait for this real estate mania to be over. You never get a good deal when you are buying something that everybody else is buying, especially when they think it'll keep going up fast and can't fall.

[Guest 50centdollars]

http://www.vancouversun.com/business/real-estate/Flipping+Vancouver+homes+proves+profitable/11145524/story.html#ixzz3dRA3YYGc

[Otsog]

Having a bitch of a time selling my condo in Victoria, anyone want it?

 

Anyone know what cap rates usually are in multi-family residentials?

[gary17]

downtown vancouver, for a newer 550K condo , 2 bdrm + 2 bathroom + 1 parking  - rent should be $2000/month.

you then need to account for about $400/month of strata fee + insurance + property tax....      ($2000)

[Otsog]

Wow that is low.

 

I'm calculating roughly 3% in Victoria. I don't have any insurance though. Also had maintenance, vacancy and management fees.

 

 

[Guest 50centdollars]

http://news.nationalpost.com/full-comment/bruce-yaccato-youd-have-to-be-crazy-to-buy-real-estate

[alertmeipp]

I am renting in Toronto suburb, $2000 per month, it will cost me about $750,000 to buy the place.

Rent is pretty reasonable. But the catch is the same house can be have to 630k last year.

 

So, yes up close to 20% in a year!  :-\

[enoch01]

I am renting in Toronto suburb, $2000 per month, it will cost me about $750,000 to buy the place.

Rent is pretty reasonable. But the catch is the same house can be have to 630k last year.

 

So, yes up close to 20% in a year!  :-\

 

Good for you on relatively cheap rent though.  Prices sound like they are firmly in greater fool territory.

 

I'm astonished at how low some of these quoted rental yields are.  Your hypothetical landlord's situation were he to buy it today:

 

$2k * 12 / $750k = 3.2%.

 

By contrast, I own a rental at an 11% yield in the U.S.  Nothing special, I bet there's millions of them in the U.S. available at similar prices.

[alertmeipp]

I am renting in Toronto suburb, $2000 per month, it will cost me about $750,000 to buy the place.

Rent is pretty reasonable. But the catch is the same house can be have to 630k last year.

 

So, yes up close to 20% in a year!  :-\

 

Good for you on relatively cheap rent though.  Prices sound like they are firmly in greater fool territory.

 

I'm astonished at how low some of these quoted rental yields are.  Your hypothetical landlord's situation were he to buy it today:

 

$2k * 12 / $750k = 3.2%.

 

By contrast, I own a rental at an 11% yield in the U.S.  Nothing special, I bet there's millions of them in the U.S. available at similar prices.

 

 

Yes, and we have not talked about taxes on rental income, property taxes and maintenance expenses.

 

If one assumes house price will JUST appreciate the same pace as inflation, it makes no sense to buy now. But somehow in Canada, there is a thinking that detached houses will be in shortage, so buy now or never!