Garth Turner - Real Estate in Canada

[wisdom]

2 possible outcomes going forward:

1) inflation - Canadian debt levels are the highest on record. 100% of GDP - what would the impact be.

2) deflation - asset prices and jobs decrease.

 

Out of the 3 possible outcomes that I think of you lose in 2 outcomes. The only outcome where you don't lose is if status quo is maintained and people continue to pay up $1 million for houses in suburbs an hour away from downtown in the belief that foreigners will come buy their houses for a higher price.

[JBTC]

What currency are they using for that study? With US dollars, the major cities of Canada are relatively cheaper.

 

These are just multiples to median income, so currency is not a factor.

 

Chicago is an interesting case. One obvious difference is that chicago population has actually shrunk over the past couple decades. The us median multiple is really helped by rust belt cities like Detroit.

 

http://www.demographia.com/dhi.pdf

 

This goes to show that income is really just one factor, and far away from being able to explain housing prices.

 

Much of the discussion has been focused on the demand side of the equation, especially related to immigration and population increase.

 

The Chicago example is interesting. While there's plenty of similarity between Toronto and Chicago in terms of climate and geography, the glaring difference is Toronto is adding people while Chicago is likely losing.

 

This is due to both the difference in immigration policy between the US and Canada and the difference in the relative competitive position of these two cities in each country. Toronto remains competitive in Canada, whereas Chicago faces numerous other cities that offer good job opportunities and lifestyle choices.

 

What has been mostly missing from this discussion so far is the supply. Is Canada building enough houses to the meet the rising demand? If not, then prices can surely rise.

 

This is just a question and I haven't looked up the answer. Anyone who has the answer please contribute.

 

[Liberty]

If this was a simple shift in the supply-demand equilibrium because of growing population, wouldn't rents be up with the prices of housing? As things are, as far as I know, the ratio of owning to renting is out of whack with historical normals and with the averages in other countries.

 

As for supply, I've seen the statistic a few times in recent years that Toronto had more condos under constructions than all of the other cities in North-America.

 

http://www.cbc.ca/news/business/130-highrise-building-projects-in-toronto-lead-north-america-1.2504776

 

Most people I know have these beliefs about canadian RE:

 

1) It can't go down.

 

2) It'll keep rising at rates similar to the past decade.

 

3) FOMO, buy now or be forever priced out.

 

4) HELOCs are free money.

[JBTC]

I guess another question is: at what prices would make you believe that a bubble has formed? Would it considered a bubble if median prices were $3 million, $5 million, $10 million or is there no limit?

 

Are there some similarities between what's happening in Toronto/Vancouver and Sydney/Auckland/Melbourne. (Would they be considered global cities too?) It seems like Australian prices were fuelled by a combination of foreign demand and lax lending. Thoughts?

http://www.bloomberg.com/news/articles/2016-02-22/one-sign-australia-s-housing-market-is-due-for-a-2008-moment

 

What about major cities like Chicago, Houston, why aren't they experiencing such elevated home prices.

 

Apparently, prices in Milton, Ontario(?) Increased by 42% yoy.. Is that even part of the GTA? http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/torontos-hot-housing-market-drives-big-bidding-wars-in-suburbs/article29053048/&ved=0ahUKEwihx4K8s7HLAhWHhywKHTKZA-oQqQIIGigAMAA&usg=AFQjCNHWv6ncMw0Mqn5oVkISEeBae2NXuQ&sig2=ajPFoh6gjTEmrtEBapiJpQ

 

There is a huge similarity between Canada, Australia, and New Zealand. They offer the most mature and systematic schemes for foreigners to move into their country.

 

They are English speaking, so attract people from every country (Unlike Spain is attractive only to South Americans).

 

All three countries offer both good job/business opportunities and social welfare.

 

And luckily for the immigrants all three countries have cities that are highly livable by global standards.

 

On this issue the US is very different. The US mostly takes in people with family ties. So while you can pretty much fill out a few forms (after meeting certain standards) and then wait for your turn to get into Canada, you can't do that to get into the US.

 

Now as I said repeatedly, many demand/supply factors influence housing prices. The US is a particularly curious case. Despite having one of the highest incomes in the world, the US homes to my knowledge are probably the cheapest on an absolutely basis when adjusted for quality and certainly the cheapest relative to income globally.

 

There is not enough space and time to get into why that is the case. But this means if Canada is merely more expensive than the US, Canada is not expensive at all. Every country is more expensive than the US. The Yanks are quite lucky.

 

[Uccmal]

I guess another question is: at what prices would make you believe that a bubble has formed? Would it considered a bubble if median prices were $3 million, $5 million, $10 million or is there no limit?

 

Are there some similarities between what's happening in Toronto/Vancouver and Sydney/Auckland/Melbourne. (Would they be considered global cities too?) It seems like Australian prices were fuelled by a combination of foreign demand and lax lending. Thoughts?

http://www.bloomberg.com/news/articles/2016-02-22/one-sign-australia-s-housing-market-is-due-for-a-2008-moment

 

What about major cities like Chicago, Houston, why aren't they experiencing such elevated home prices.

 

Apparently, prices in Milton, Ontario(?) Increased by 42% yoy.. Is that even part of the GTA? http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/torontos-hot-housing-market-drives-big-bidding-wars-in-suburbs/article29053048/&ved=0ahUKEwihx4K8s7HLAhWHhywKHTKZA-oQqQIIGigAMAA&usg=AFQjCNHWv6ncMw0Mqn5oVkISEeBae2NXuQ&sig2=ajPFoh6gjTEmrtEBapiJpQ

 

There is a huge similarity between Canada, Australia, and New Zealand. They offer the most mature and systematic schemes for foreigners to move into their country.

 

They are English speaking, so attract people from every country (Unlike Spain is attractive only to South Americans).

 

All three countries offer both good job/business opportunities and social welfare.

 

And luckily for the immigrants all three countries have cities that are highly livable by global standards.

 

On this issue the US is very different. The US mostly takes in people with family ties. So while you can pretty much fill out a few forms (after meeting certain standards) and then wait for your turn to get into Canada, you can't do that to get into the US.

 

Now as I said repeatedly, many demand/supply factors influence housing prices. The US is a particularly curious case. Despite having one of the highest incomes in the world, the US homes to my knowledge are probably the cheapest on an absolutely basis when adjusted for quality and certainly the cheapest relative to income globally.

 

There is not enough space and time to get into why that is the case. But this means if Canada is merely more expensive than the US, Canada is not expensive at all. Every country is more expensive than the US. The Yanks are quite lucky.

 

 

I think concentration plays a role as well.  For higher end employment in Canada you need to be in one of the big cities... Toronto, Van. Calgary, and Montreal perhaps.  The advent of telecommuting was supposed to work opposite and allow people to work from anywhere.  In reality work has become more concentrated in the biggest cities.  New Zealand has the one city, and Australia has Sydney, Melbourne, and  perhaps Perth. The Us has dozens of big cities, which may be dispersing the population a little better. 

 

Or Toronto is in a horrible bubble of epic proportions. 

[JBTC]

If this was a simple shift in the supply-demand equilibrium because of growing population, wouldn't rents be up with the prices of housing? As things are, as far as I know, the ratio of owning to renting is out of whack with historical normals and with the averages in other countries.

 

As for supply, I've seen the statistic a few times in recent years that Toronto had more condos under constructions than all of the other cities in North-America.

 

http://www.cbc.ca/news/business/130-highrise-building-projects-in-toronto-lead-north-america-1.2504776

 

Most people I know have these beliefs about canadian RE:

 

1) It can't go down.

 

2) It'll keep rising at rates similar to the past decade.

 

3) FOMO, buy now or be forever priced out.

 

4) HELOCs are free money.

 

These beliefs are coincident indicators. It seems the market is strong for now.

 

There is probably stock broker research that analyzes the supply/demand picture. One of the key factors to future pricing in my view is if the current housing construction will continue to grow and at some point exceed demand (as the property developers too extrapolate the past trend).

 

A bad downturn would require a few things to take place, ideally simultaneously - weak economy and job losses, inflation failing to fall and hence limiting rate cuts, new supply coming on stream and exceeding demand, China going through a huge slowdown and wealth being destructed, Canada deciding to tighten immigration rules, banks tightening lending due to regulators' concerns, etc.

 

A proper bear case needs to examine all these factors and weigh the negatives and positives.

 

[JBTC]

Oh, there is no bear case yet on the immigration front -

 

Canada’s Liberal Party, headed by Prime Minister Justin Trudeau, promised to create a more welcoming immigration program and to “fix the problems” created by his predecessor, Stephen Harper. Last week, they made good on that promise, introducing amendments to Canada’s Citizenship Act.

 

“The main point I think is that I want to do more to help international students become permanent residents because Canada needs immigrants,” Canada’s immigration minister, John McCallum, said at a news conference today. “We are an aging society. We need more immigrants for sure. I think international students are arguably the most fertile ground, the best place to find new immigrants because they know about Canada.”

 

http://www.barrons.com/articles/canada-fast-tracks-asian-students-for-residency-1457491661?mod=BOL_hp_highlight_5

 

[wisdom]

http://www.financialpost.com/m/wp/news/blog.html?b=business.financialpost.com/personal-finance/mortgages-real-estate/more-than-one-in-10-vancouver-condos-sit-empty-in-city-desperate-for-affordable-housing&pubdata-ipsquote-timestamp=2016-03-09

 

Another study saying foreign ownership is not a factor

[wisdom]

http://www.theglobeandmail.com/report-on-business/top-business-stories/bc-ontario-2-frothy-housing-markets-3-stats/article29070884/

 

I wonder how much of it is because of speculating and builders building inventory financed by credit. Credit continues to grow faster than GDP even though private debt is now = 100% of GDP for the first time.

[JBTC]

http://www.financialpost.com/m/wp/news/blog.html?b=business.financialpost.com/personal-finance/mortgages-real-estate/more-than-one-in-10-vancouver-condos-sit-empty-in-city-desperate-for-affordable-housing&pubdata-ipsquote-timestamp=2016-03-09

 

Another study saying foreign ownership is not a factor

 

The article doesn't say that at all.

 

It says vacancy rates are low for detached homes, and are high for condos.

 

It seems the overall vacancy rates are relatively low in Canada. I recall seeing data suggesting 10% of all homes in Australia are vacant.

 

All else being equal, low vacancy rates indicate fewer speculative activity.

 

[mcliu]

http://www.theglobeandmail.com/report-on-business/top-business-stories/bc-ontario-2-frothy-housing-markets-3-stats/article29070884/

 

I wonder how much of it is because of speculating and builders building inventory financed by credit. Credit continues to grow faster than GDP even though private debt is now = 100% of GDP for the first time.

 

I wonder about that too. It just seems like the housing market is too big for foreign capital to have such a big impact. Too bad there's no data on this.

 

I was looking at this BBC article on Australian housing: "Last year Chinese buyers spent a record A$12bn on Australian property, boosting house prices at a time when locals were already feeling anxious about the rocketing cost of property."

 

http://www.bbc.com/news/world-australia-35601102

 

Not sure if that's accurate, but if it is, then it's tiny compared to Australia's outstanding housing-related debt of $1.5 trillion. The growth in housing credit (7.6%) last year or $108 billion is significantly higher than the $12 billion of Chinese buyers.

 

http://www.rba.gov.au/statistics/tables/xls/d02hist.xls?v=2016-03-09-11-13-12

[JBTC]

http://www.theglobeandmail.com/report-on-business/top-business-stories/bc-ontario-2-frothy-housing-markets-3-stats/article29070884/

 

I wonder how much of it is because of speculating and builders building inventory financed by credit. Credit continues to grow faster than GDP even though private debt is now = 100% of GDP for the first time.

 

I wonder about that too. It just seems like the housing market is too big for foreign capital to have such a big impact. Too bad there's no data on this.

 

I was looking at this BBC article on Australian housing: "Last year Chinese buyers spent a record A$12bn on Australian property, boosting house prices at a time when locals were already feeling anxious about the rocketing cost of property."

 

http://www.bbc.com/news/world-australia-35601102

 

Not sure if that's accurate, but if it is, then it's tiny compared to Australia's outstanding housing-related debt of $1.5 trillion. The growth in housing credit (7.6%) last year or $108 billion is significantly higher than the $12 billion of Chinese buyers.

 

http://www.rba.gov.au/statistics/tables/xls/d02hist.xls?v=2016-03-09-11-13-12

 

mcliu,

 

I think two factors may help you understand the numbers cited better.

 

1) The Chinese buyers mentioned here could be foreigners buying only. Once you become a citizen/resident, you are likely counted as domestic buyers.

 

2) Roughly half of the Chinese population in Australia live in Sydney. So their buying is very concentrated and has a large impact to the local market. Sydney prices are far away the most expensive in Australia and serve as the most important guidepost for the overall Australian market.

 

[Liberty]

I thought it was interesting that the average new detached home in the US is about 400 square-feet larger than the average new detached house in Canada. Another thing to keep in mind when comparing prices.

 

http://www.demographia.com/db-intlhouse.htm

[wisdom]

I bet US house prices aren't rising by $100k each month unlike Vancouver either. In some cases, this is happening in a day.

 

I love it when people say this is expected.

[Liberty]

Prem Watsa in the recent Fairfax letter:

 

As we have said a few times before, the collapsing commodity prices will not spare Canada. Canadian housing prices, particularly in Toronto and Vancouver, have gone up significantly, driven by lax policies at CMHC (Canada’s equivalent to Fannie Mae and Freddie Mac). Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks. Sounds familiar? This is exactly what happened in the United States before the financial crisis in 2008/2009. If history is any guide, this will reverse and we continue to be shocked at the massive debt levels incurred by young people (below 45 years old), with no financial buffer against hard times as the C.D. Howe report, Mortgaged to the Hilt, shows.

[alertmeipp]

I bet US house prices aren't rising by $100k each month unlike Vancouver either. In some cases, this is happening in a day.

 

I love it when people say this is expected.

 

not only expected, but expected for the foreseeable feature.

[Liberty]

Thought this was interesting. According to the Canadian Real Estate Association (not exactly a transparent organization, but still), the average house in Canada was $470k as of January 2016.

 

http://www.crea.ca/housing-market-stats/national-average-price-map/

 

Van and Toronto are really driving it, though:

 

http://www.cbc.ca/news/business/housing-crea-january-1.3449838

 

According to Statscan, the median household income in 2013 was $76k (or about $38k per person if you assume two earners).

 

Median house price in the US seems to be around $185-215k depending on the source.

[JBTC]

Thought this was interesting. According to the Canadian Real Estate Association (not exactly a transparent organization, but still), the average house in Canada was $470k as of January 2016.

 

http://www.crea.ca/housing-market-stats/national-average-price-map/

 

Van and Toronto are really driving it, though:

 

http://www.cbc.ca/news/business/housing-crea-january-1.3449838

 

According to Statscan, the median household income in 2013 was $76k (or about $38k per person if you assume two earners).

 

Median house price in the US seems to be around $185-215k depending on the source.

 

So A does not equal B. I don't see anything interesting so far.

 

Where is the analysis? Can you arbitrage?

 

Economists call housing nontradable goods for a reason.

 

[JBTC]

Prem Watsa in the recent Fairfax letter:

 

As we have said a few times before, the collapsing commodity prices will not spare Canada. Canadian housing prices, particularly in Toronto and Vancouver, have gone up significantly, driven by lax policies at CMHC (Canada’s equivalent to Fannie Mae and Freddie Mac). Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks. Sounds familiar? This is exactly what happened in the United States before the financial crisis in 2008/2009. If history is any guide, this will reverse and we continue to be shocked at the massive debt levels incurred by young people (below 45 years old), with no financial buffer against hard times as the C.D. Howe report, Mortgaged to the Hilt, shows.

 

Just some blogger's data. Overall debt doesn't appear to be high. But there may be an issue with debt distribution as Watsa seems to suggest.

 

"Table 3 sets out some basic parameters by which to judge the vulnerability of the housing market from the perspective of household wealth. In the past 12 months, households' net worth to disposable income has increased by more than 2%. At the same time, debt-to-assets remain constant at a very low level of 17%. And, most importantly, owner's equity in their homes remains constant at 73%, indicating that homeowners have amassed a considerable amount of equity. Hence, there is an adequate buffer within the household sector, providing stability in the housing market."

 

http://soberlook.com/2016/03/canadas-changing-financial-landscape_13.html

 

[bizaro86]

If net worth to income is up, and debt to assets is constant, its necessary that debt to income is up as well. Debt servicing to income might not be since interest rates are down, but that makes any shock from rising rates worse.

[Liberty]

Thought this was interesting. According to the Canadian Real Estate Association (not exactly a transparent organization, but still), the average house in Canada was $470k as of January 2016.

 

http://www.crea.ca/housing-market-stats/national-average-price-map/

 

Van and Toronto are really driving it, though:

 

http://www.cbc.ca/news/business/housing-crea-january-1.3449838

 

According to Statscan, the median household income in 2013 was $76k (or about $38k per person if you assume two earners).

 

Median house price in the US seems to be around $185-215k depending on the source.

 

So A does not equal B. I don't see anything interesting so far.

 

Where is the analysis? Can you arbitrage?

 

Economists call housing nontradable goods for a reason.

 

Just like I wouldn't pay $60k for a Toyota Corolla, I won't pay the multiples of replacement cost, rents, income, inflation, etc, that houses are going for in my area right now, so I'm happily renting until things are more rational. Also, I can judge sentiment by talking to people and reading, and it is not a healthy market to be a buyer in right now. There's bubble "can't lose/FOMO" mentality, though that's starting to soften around here (apparently not in GTA and Van, though).

 

http://i.imgur.com/D21t9IJ.png

 

http://i.imgur.com/K8ELThh.png

 

http://i.imgur.com/i7WKdkR.png

 

http://i.imgur.com/qVwu5Vy.png

[KCLarkin]

Comparing Canada to Britain, Sweden, Australia using that Economist data gives a very different picture.

 

[Liberty]

Comparing Canada to Britain, Sweden, Australia using that Economist data gives a very different picture.

 

Not being the worst in the world is hardly a great consolation. I probably wouldn't buy RE in these markets either unless renting is even more overpriced (which it isn't where I am).

 

Canada and the US are neighbours with very interlinked economies and have traditionally more or less tracked each other.

[wachtwoord]

Thanks a lot for the economist relative housing prices link. Very informative!

[KCLarkin]

Canada and the US are neighbours with very interlinked economies and have traditionally more or less tracked each other.

 

I'd argue that your endpoint for the U.S. is skewing the data. The housing market in the U.S. is not functioning properly. So you can say that Canada is overvalued, relative to the U.S. But it might be more accurate to say the U.S. is undervalued, relative to Canada. Both are probably true but using the U.S. as your measuring stick exaggerates the overvaluation.