Garth Turner - Real Estate in Canada

[alertmeipp]

just like many bubbles (I don't know if this one is but it sure looks like one) ... it will be hard to see how it stops until it does.

 

as this continue, pretty much all locals will need to move to condos, while foreign ppl (mainly from China) taking over all detached.

 

does this look like sustainable to you?

 

most other major cities in around the globe do have some rules in places to stop the inflow while Canada has done nothing so far. That makes the situation way worse as Canada is becoming the easiest place to move money into.

 

My guess is the problem is mostly in Vancouver and Toronto, not really Canada wide.

 

The global affluent go after these highly livable cities. You hear the same complaints when you talk to someone from London or Sydney.

 

I presume even before the immigrants arrived in scale a couple of decades ago, the same trend was taking place, albeit not as visible. People from other cities moved in, neighborhoods gradually gentrified, local low-income households moved out.

 

So this broad trend has been in place for many years and will surely continue. Only the characters have changed and the pace has accelerated.

 

I agree if Canada changes its immigration policy, it will likely slow the Vancouver market a bit. In addition, the government could force the foreigners to buy new apartments rather than existing properties, which is the rule in Australia.

 

Trend continues but does not mean it will not swing to extreme as the trend continues.

Historical low rate won't last long and math tells you, normalized rate will literally push many home owners into distressed area. Hard to see rate to go up any time soon tho... just an example

[mcliu]

With homes trading so far above replacement value, why aren't there people building homes like crazy in Toronto and Vancouver? The margins must be huge. And it's not like there's a shortage of land..

 

At least one of your assumptions is incorrect.

 

http://www.thestar.com/business/real_estate/2015/10/24/the-rise-of-willowdale-torontos-hottest-new-neighbourhood.html

 

"Land values alone have escalated so dramatically the last couple of years in this area just east of the North York Civic Centre that Jalali says banks are appraising most original homes at 97 per cent land value."

 

Is there some sort of land constraint or zoning regulation in the GTA area? When I look at Google Maps, there's so much land..  :o

 

The article you pointed out seems to be land that's pre-built. What about values for land for new construction?

 

It just seems like, out of all the countries in the world, Canada should be the last one having a shortage of land problem.

 

Also, is there a big pricing discrepancy between residential land and farmland? Is it hard to get farmland re-zoned to residential? Just trying to understand the market here.

 

At these million+ prices, it still seems very profitable to buy a couple of acres of land, convert it to residential, built a stack of homes.. Are there any publicly-traded Canadian home builders? Would be nice to look at the financials..

[wisdom]

There are restrictions on farmland being rezoned.

 

If I understand human nature -a point is reached where citizens exert pressure on their elected representativeso to release more land/tighten rules, etc. at some point in time. It actually seems to be playing out that way if you see what happened in recent elections and the pressure continues to build.

 

The problem  is that the prices are so inflated, that the floor is going to be a long way down once the music stops due to any reason.

[wisdom]

If a run up for 15 years proves there are fundamentals, then what happened to Calgary or any other city in Alberta after a 15 year run. Something to think about?

 

It is human to be irrational and longer than anyone can imagine.

[augustabound]

There are restrictions on farmland being rezoned.

 

If I understand human nature -a point is reached where citizens exert pressure on their elected representativeso to release more land/tighten rules, etc. at some point in time. It actually seems to be playing out that way if you see what happened in recent elections and the pressure continues to build.

 

The problem  is that the prices are so inflated, that the floor is going to be a long way down once the music stops due to any reason.

 

I can only speak to Newmarket (and Aurora I believe but not positive). About 10 years ago there was a halt to all new home construction. The town council(s) said there's no more land to be developed, ever.

 

Famous last words. A golf course was rezoned to residential, with lots of residential opposition. But not over green space issues, the local residents said their home values would plummet since they're not a golf course community anymore.

 

Farms in the same area, west of the mall for those familiar with Newmarket, were sold and are being developed. Prices start around $800k last I looked. For a 34' by '110' lot and about 2000 sq ft.

 

All on land deemed untouchable about 10 years ago by the town council.

[EliG]

Is there some sort of land constraint or zoning regulation in the GTA area?

 

Yes. Greenbelt (Golden Horseshoe)

 

The Greenbelt is a permanently protected area of green space, farmland, forests, wetlands, and watersheds, located in Southern Ontario, Canada. It surrounds a significant portion of Canada's most populated and fastest-growing area—the Golden Horseshoe.

 

Created by legislation passed by the Government of Ontario in 2005, the Greenbelt is considered a major step in the prevention of urban development and sprawl on environmentally sensitive land in the province.

 

It's debatable how much impact the Greenbelt has on the house prices in GTA. For example:

 

Priced Out: Understanding the factors affecting home prices in the GTA

 

Page 18

 

Factor 4: Land availability and regulations

 

The availability of land, both in terms of its physical location and the regulations governing its use, can influence home prices. However, in the GTA this may only be an issue for specific, established neighbourhoods.

 

Key findings

 

• There is an adequate supply of land in the GTA for approved and future residential developments. Based on municipal projections, 81% of the land available for development will still be unused in 2031.

 

• Intensification policies will mean more housing units can be built per acre than previously. Using the same amount of land, it is possible to build 250,000 more high-density housing units in the GTA by 2031 than would have been possible with the lower-density development of past decades.

 

• Land availability is not an issue for the region, but it is relevant for established neighbourhoods that are favoured by homebuyers. These neighbourhoods, which tend to be near the urban centre, are experiencing high levels of demand combined with a lack of available land and therefore higher prices.

[SharperDingaan]

A few GTA comments.

 

There is no shortage of land.

 

There is significant mismatch between expectation and reality. That detached/semi-detached close to good schools, at a reasonable price, is available; but it is in the ‘burbs. The trade-off is commute time, and the cost is roughly an extra 75-125K (dependent on type of house) per 15 minutes of one-way commute. To live and work downtown is a lifestyle choice.

 

Global, not local. Vancouver and Toronto are global, and cosmopolitan cities.

In today’s negative global rate environment; cultures that prefer to save via land purchase - versus bank/broker deposit, are doubly incentivized. A high end purchase in a down town core is protected by both the lack of new land; and the market incentive to offer only high-end units on any land that might be reclaimed. Currently, you could buy a USD 7M apartment in New York; or one each in both Vancouver AND Toronto, PLUS have change to decorate with. Those times you stay in New York, use a hotel.

 

As/when CAD appreciates above USD 1 again, simply sell one of the Canadian apartments and buy something in New York at what are highly likely to be depressed prices. You are simply buying/selling real estate that you can actually use (stay in), instead of financial paper (bonds, stocks) that you cannot. Functional asset class diversification amongst the global 1%.

 

SD

 

[Uccmal]

A few GTA comments.

 

There is no shortage of land.

 

There is significant mismatch between expectation and reality. That detached/semi-detached close to good schools, at a reasonable price, is available; but it is in the ‘burbs. The trade-off is commute time, and the cost is roughly an extra 75-125K (dependent on type of house) per 15 minutes of one-way commute. To live and work downtown is a lifestyle choice.

 

Global, not local. Vancouver and Toronto are global, and cosmopolitan cities.

 

 

SD

 

The last line I have quoted here summarizes the situation nicely.  Toronto and Vancouver play by the rules of global, international cities. 

 

See the chart in this article from just over a year ago. 

 

http://business.financialpost.com/personal-finance/mortgages-real-estate/toronto-and-vancouver-home-prices-pass-rome-and-close-in-on-paris

 

Land availability does not seem to be a factor.  Proximity is the issue. 

 

This applies very neatly to Toronto.  The greatest price increases have been downtown, and near the subway lines.  I live very near Mississauga (~1 km), 15 minutes by bus from the subway, and the prices have not risen nearly as rapidly, as homes slightly east and walking distance from the subway.  There has also been huge developments of high rise condos along old, and new subway lines that may be skewing the prices upwards as well. 

 

Finally, Canada's immigration is somewhere over 200,000 people every year, of which over 40% wind up in the greater Toronto Area.  That is an addition of 1 million people, with their children every 10 years since 1991.  Of course, prices will go up.  No one really knows if they are in a bubble.  I honestly

thought they were in a bubble 12 years ago, when we bought our house.  I am happy my wife pushed to buy a house then, in retospect. 

[JBTC]

A few GTA comments.

 

There is no shortage of land.

 

There is significant mismatch between expectation and reality. That detached/semi-detached close to good schools, at a reasonable price, is available; but it is in the ‘burbs. The trade-off is commute time, and the cost is roughly an extra 75-125K (dependent on type of house) per 15 minutes of one-way commute. To live and work downtown is a lifestyle choice.

 

Global, not local. Vancouver and Toronto are global, and cosmopolitan cities.

 

 

SD

 

The last line I have quoted here summarizes the situation nicely.  Toronto and Vancouver play by the rules of global, international cities. 

 

See the chart in this article from just over a year ago. 

 

http://business.financialpost.com/personal-finance/mortgages-real-estate/toronto-and-vancouver-home-prices-pass-rome-and-close-in-on-paris

 

Land availability does not seem to be a factor.  Proximity is the issue. 

 

This applies very neatly to Toronto.  The greatest price increases have been downtown, and near the subway lines.  I live very near Mississauga (~1 km), 15 minutes by bus from the subway, and the prices have not risen nearly as rapidly, as homes slightly east and walking distance from the subway.  There has also been huge developments of high rise condos along old, and new subway lines that may be skewing the prices upwards as well. 

 

Finally, Canada's immigration is somewhere over 200,000 people every year, of which over 40% wind up in the greater Toronto Area.  That is an addition of 1 million people, with their children every 10 years since 1991.  Of course, prices will go up.  No one really knows if they are in a bubble.  I honestly

thought they were in a bubble 12 years ago, when we bought our house.  I am happy my wife pushed to buy a house then, in retospect.

 

Bubble has become such an overused word. That's unfortunate, because it deterred a lot of people (without a wise wife) from buying.

 

If prices in Vancouver and Toronto are merely in line with Rome and Paris, to me they are still cheap.

 

[wisdom]

Vancouver home prices are high because it is a global ciy - any evidence to back it up or is it anecdotal. Is that why young families are buying $ 1 mil homes in the burbs.

 

Sounds awfully like peak oil unless there is evidence.

 

Most new immigrants that I have seen buy get 65% financing and are speculating using this leverage. People think that large amounts are tough to qualify for so the new immigrants must be paying cash. Not true - I would love to see numbers suggesting otherwise.

[alertmeipp]

there sure are LOTS of speculation... many houses being bought for 1m+ is being rented out for mere 2k per months.. that's gross rent.

 

the reason?

 

flip it next year for 20%+ profit.

 

Many (mostly condos) are just left vacant.

 

To say this surge in pricing is mainly because V & T are world class cities is a bit weak on reasoning.

 

[Uccmal]

Vancouver home prices are high because it is a global ciy - any evidence to back it up or is it anecdotal. Is that why young families are buying $ 1 mil homes in the burbs.

 

Sounds awfully like peak oil unless there is evidence.

 

Most new immigrants that I have seen buy get 65% financing and are speculating using this leverage. People think that large amounts are tough to qualify for so the new immigrants must be paying cash. Not true - I would love to see numbers suggesting otherwise.

 

Of course its anecdotal or subjective - So is this entire discussion.  One would have to start by describing what a global city is, and how prices are affected. 

 

Even the damn government cant figure it out and they theoretically have access to all the statistics. 

 

I know that in Toronto prices are higher closer to downtown, or near subway lines.  The price rise has not been porportionate across the entre region. 

[Uccmal]

there sure are LOTS of speculation... many houses being bought for 1m+ is being rented out for mere 2k per months.. that's gross rent.

 

the reason?

 

flip it next year for 20%+ profit.

 

Many (mostly condos) are just left vacant.

 

To say this surge in pricing is mainly because V & T are world class cities is a bit weak on reasoning.

 

Your statement is a bit weak on evidence. 

[SharperDingaan]

It was not suggested that V or T luxury housing is driving the price surge.

Most recognize that simply a few big sales will skew the average - upward.

The average will also skew -  upward; when the 1% market has disproportionate activity.

 

Nothing says that a parent cannot partner with their kids.

Kids pay the mortgage, future grandkids inherit the parents share of the property.

With low rates, & a sizeable down payment, 1M is not that big a stretch.

Kids, & grandkids, benefit from property appreciation - tax free.

 

I don't ask the weatherman for his facts, I just opt to use his/her forecast.

If I don't believe it - I'm free to bring along a parka, swim trunks, or an umbrella.

 

It is the same mechanism in London, New York, Paris, Rome, etc.

We just aren't used to it - therefore it is controversial.

 

SD

 

 

 

 

 

 

 

 

 

 

[alertmeipp]

there sure are LOTS of speculation... many houses being bought for 1m+ is being rented out for mere 2k per months.. that's gross rent.

 

the reason?

 

flip it next year for 20%+ profit.

 

Many (mostly condos) are just left vacant.

 

To say this surge in pricing is mainly because V & T are world class cities is a bit weak on reasoning.

 

Your statement is a bit weak on evidence.

 

In Toronto... thats pretty well known

[JBTC]

If you haven't been in Canada, you may want to see data, although I think everyone in Canada knows.

 

There are half a million people of Hong Kong descent in Canada. They live overwhelmingly in V/T. This doesn't count the newer immigrants from China.

 

In terms of overall Chinese population, 531k live in Toronto (9.6% of total) and 411k in Vancouver (18% of total), which compares to 91k in Montreal (2.4% of total) and 20k in Winnipeg (2.9%).

 

I don't have the numbers, but assume before the immigration from Asia in the past couple of decades, the price gap between Vancouver and Montreal was less dramatic.

 

Of course there are many factors impacting prices. Even without the immigrants, I'd imagine Vancouver would over time become far away the priciest city in Canada. It's nice and laid back and warm. The point is the immigration/global affluent/etc likely only accentuated a trend already in place. 

 

Maybe the current price is high and you hope it falls. But never lose sight of the strong fundamentals in these cities.

 

[Uccmal]

If you haven't been in Canada, you may want to see data, although I think everyone in Canada knows.

 

There are half a million people of Hong Kong descent in Canada. They live overwhelmingly in V/T. This doesn't count the newer immigrants from China.

 

In terms of overall Chinese population, 531k live in Toronto (9.6% of total) and 411k in Vancouver (18% of total), which compares to 91k in Montreal (2.4% of total) and 20k in Winnipeg (2.9%).

 

I don't have the numbers, but assume before the immigration from Asia in the past couple of decades, the price gap between Vancouver and Montreal was less dramatic.

 

Of course there are many factors impacting prices. Even without the immigrants, I'd imagine Vancouver would over time become far away the priciest city in Canada. It's nice and laid back and warm. The point is the immigration/global affluent/etc likely only accentuated a trend already in place. 

 

Maybe the current price is high and you hope it falls. But never lose sight of the strong fundamentals in these cities.

 

I will pull some very anecdotal evidence from my personal experience.  There is a vibrant Tamil (Sri Lankan) community in Toronto.  I was at a wedding of two under 30s three years ago, via my Wife's work.  They bought a house at market prices then - both are young professionals from pretty poor families.  There were dozens of similar kids at the wedding.  I envision this going on in our sizable, Chinese, Indian, Persian, Serbian, Polish, Romanian, African etc. communities.  I have friends, and have worked with people from some of these communities.  The city is growing and there is pressure on housing as a result.

 

I cant answer whether that justifies Paris and Rome pricing but I am damn sure there is vastly more opportunity for intelligent and educated immigrants in Canada than nearly anywhere else in the world.  Just ask the moderator of our message board, his business partner, or Prem Watsa, or Frank Stronach.. we get the idea.

 

The flipping of real estate is a sidebar to the real effect, whatever the sensationalist headlines are. 

 

I would never argue that the price increases, year on year, are sustainable, either.  The increases may slow down, stop, or even reverse somewhat as time goes, since that is what markets do.  But the overall trend is in place.  Prices will not revert significantly.  Add to this that Canada and Ontario have been floating at the edge of recession for 7 years now during the most dramatic price rise. 

[SharperDingaan]

We have had very similar anecdotal experience (Mississauga), and for much of the GTA - it is largely the norm; not the exception.

 

We have a new development, close to us, where every new build was a large detached (2300+sq. feet) + yard, starting at 700K. Most were built for around 850K after upgrades, all are < 5 yrs old, & its roughly a 40 minute one-way commute to down town Toronto via Go Train. These developments are fairly common, and widely available across the 'burbs.

 

We know many of the folks who moved in.

It is almost always the grand parents living on the ground floor, parents on the upper floor, & kids in the (very nice) walk-in basement. Typically as the kids move away, the family helps with the buying of an apartment fairly close. There are many sources of income (kids, mom/dad, grand parents), multiple and sizeable equity stakes, & relatively little at risk. For the most part, this is a very common practice in the Middle East, Near East, and Far East; and it works very well - at a variety of levels.

 

This would be very difficult to do if you were not living in a very cosmopolitan city, hence V & T are dominant beneficiaries. It is also why it is so alien to the average US based investor - it is just not the common US practice.

 

If you published this, it would not sell papers - or attract advertising $.

So instead .... one publishes the sensational stuff instead, with an aim to herding panicked buyers, & feeding the news cycle.

It works very well.

 

SD

 

 

 

[cwericb]

Never really been a fan of Mr. Turner’s, but let’s go back to the start of this thread.

 

Mr. Turner confidently stated... 

 

“The risk of a long and slow real estate decline has never been more acute. The certainty of a long and slow ascent in interest rates never more assured.

 

Smart people will follow the advice set out here often. Sell assets at the top. With real estate, that’s probably now.”

 

That was over FOUR years ago. I wonder what Mr. Turner might say today should he meet one of those “smart people” in a dark alley?

 

Four years later it makes for interesting reading  http://www.greaterfool.ca/

 

eb

[KCLarkin]

"We are classically at the end of a bull market,” Mr. Turner says." - National Post May 2008

 

He might be right in the end. But he was at least 8 years early.

[Uccmal]

Never really been a fan of Mr. Turner’s, but let’s go back to the start of this thread.

 

Mr. Turner confidently stated... 

 

“The risk of a long and slow real estate decline has never been more acute. The certainty of a long and slow ascent in interest rates never more assured.

 

Smart people will follow the advice set out here often. Sell assets at the top. With real estate, that’s probably now.”

 

That was over FOUR years ago. I wonder what Mr. Turner might say today should he meet one of those “smart people” in a dark alley?

 

Four years later it makes for interesting reading  http://www.greaterfool.ca/

 

eb

 

I guess he would say we are in a bubble and prices will go down soon.  Turner is generally a decent guy but he makes most of his living as a financial shill, hence the sensationalism. 

[Liberty]

Never really been a fan of Mr. Turner’s, but let’s go back to the start of this thread.

 

Mr. Turner confidently stated... 

 

“The risk of a long and slow real estate decline has never been more acute. The certainty of a long and slow ascent in interest rates never more assured.

 

Smart people will follow the advice set out here often. Sell assets at the top. With real estate, that’s probably now.”

 

That was over FOUR years ago. I wonder what Mr. Turner might say today should he meet one of those “smart people” in a dark alley?

 

Four years later it makes for interesting reading  http://www.greaterfool.ca/

 

eb

 

I don't think he foresaw interest rates stay near zero for this long, as most didn't.

 

That doesn't mean that his argument about canadian RE being disconnected from fundamentals isn't right, just that he got the timing wrong (that's always the hardest thing to get -- ask Burry). In fact, the longer this goes on, the worse it's probably going to be in the end.

 

I'm happy to keep renting, in the meantime. I don't know about elsewhere in the country, but in my area, I've definitely felt a plateauing and softening in the past year. I know people who've tried selling a house for months and given up, there's a million condos for sale in a 10 km radius, we've tracked many houses that have been for sale for a very long time and aren't moving. I don't know what will make sentiment change further, maybe interest rates at some point, maybe prolonged low oil prices, maybe just RE-fatigue or something else. But I know that when house prices disconnect from incomes for this long, the difference is debt, and that can't pile on forever. Same for something that everyone knows can't fall -- it has to fall. Stability creates instability because it drives people to go too far and do things they shouldn't do.

 

edit: BTW, to make things clear, the part in bold in the cwericb quote above is written in a way that makes it appear like it's from four years ago, but it's from today's post:

 

http://www.greaterfool.ca/2016/03/06/suck-it-up-3/

 

He might have said similar things four years ago, though.

[wisdom]

At least people have stopped including Calgary in the grouping of global cities.

 

 

[Studesy]

We have had very similar anecdotal experience (Mississauga), and for much of the GTA - it is largely the norm; not the exception.

 

We have a new development, close to us, where every new build was a large detached (2300+sq. feet) + yard, starting at 700K. Most were built for around 850K after upgrades, all are < 5 yrs old, & its roughly a 40 minute one-way commute to down town Toronto via Go Train. These developments are fairly common, and widely available across the 'burbs.

 

We know many of the folks who moved in.

It is almost always the grand parents living on the ground floor, parents on the upper floor, & kids in the (very nice) walk-in basement. Typically as the kids move away, the family helps with the buying of an apartment fairly close. There are many sources of income (kids, mom/dad, grand parents), multiple and sizeable equity stakes, & relatively little at risk. For the most part, this is a very common practice in the Middle East, Near East, and Far East; and it works very well - at a variety of levels.

 

This would be very difficult to do if you were not living in a very cosmopolitan city, hence V & T are dominant beneficiaries. It is also why it is so alien to the average US based investor - it is just not the common US practice.

 

If you published this, it would not sell papers - or attract advertising $.

So instead .... one publishes the sensational stuff instead, with an aim to herding panicked buyers, & feeding the news cycle.

It works very well.

 

SD

 

By no means am I smart enough nor interested in attempting to predict the path of Canadian real estate over the next several years.  As value investors though, it is quite obvious that Greater Toronto Area real estate is far from what would be considered a "value" proposition. 

 

Sd...your example of the Mississauga development with 2300sq. ft. houses in the $700 - 850k range provide a great comparison to the properties in my neighborhood (roughly 110km west of Mississauga).

 

My property is about 10km west of Woodstock and about 10km South of the 401 in a small village consisting of roughly 100 homes.  In 2009 I purchased a new 2100sq. ft brick house, 2 car garage, w/deck, and concrete driveway for $270k.  Many of the standard features in this home are what would be considered "upgrades" in big city subdivisions.  The house sits on about a 1/4 acre lot.

The lot component of the purchase was roughly $50k.  This implies a retail price on the house itself of $220K.  Compared against your Mississauga example (and assuming a similar retail house price....say $250K....this implies a $600K pricetag  for the tiny lot.  This is crazy!! To top that off...I have talked to several people who are still investing in TO real estate trying to cash in on quick gains.  They really believe this is a safe proposition! 

 

I am by no means predicting a GTA real estate crash...but under a scenario where they did I assume the decline would mostly be in the price of the physical land.  I mean the same house would still cost roughly $250k to purchase.  In other words, if land prices Ontario wide declined by 50% (not likely...but just as an illustration)....the Toronto property owner would take a $300K haircut.  My property....1 hour to the west would take a $25k haircut ($50k - 50%). Enough said!

 

How things actually play out in the short run and long run are beyond me but the warning signs are pretty obvious as far as I'm concerned.

 

[bizaro86]

At least people have stopped including Calgary in the grouping of global cities.

 

I love Calgary, live here, and own investment RE here. (Sold >50% of it in 2014, so that worked out)

 

Anyone who tells you 1MM people on the prairies is a global city is either 1) an idiot or 2) trying to sell you overpriced real estate there. (Or possibly both).

 

Calgary is wonderful. Great access to mountains, rivers, outdoorsy stuff. Good parks, restaurants (best Vietnamese food outside Vietnam, IMO), healthcare and schools. But it's not going to attract the super-rich looking for a place to personally live. The arts and culture and selection of high end dining are insufficient for that, and the climate hurts us. (Although this winter has been great).

 

Rents here are declining (I took a call from a tenant today who wanted a reduction, which I granted), and I expect them to continue to do so. Interestingly, my highest priced rental unit is rented to two students from China who took high school here and are now taking post secondary.