Garth Turner - Real Estate in Canada

[Liberty]

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.

 

You don't agree that the US was in a housing bubble in 2007 and that Canada is now way way higher than that point? Other indicators are also pretty high, like the 165% debt-to-income level, rents-to-buying ratios, inflation has been low and house prices usually track inflation, etc.

[gary17]

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.

 

You don't agree that the US was in a housing bubble in 2007 and that Canada is now way way higher than that point? Other indicators are also pretty high, like the 165% debt-to-income level, rents-to-buying ratios, inflation has been low and house prices usually track inflation, etc.

 

Liberty

I agree that Canada's housing market - especially in Vancouver , where I am, has gone nuts and a correction is overdue.  However, I do not believe we have the same issue as that of the US bubble experience in 2007 /08 though --

 

[Liberty]

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.

 

You don't agree that the US was in a housing bubble in 2007 and that Canada is now way way higher than that point? Other indicators are also pretty high, like the 165% debt-to-income level, rents-to-buying ratios, inflation has been low and house prices usually track inflation, etc.

 

Liberty

I agree that Canada's housing market - especially in Vancouver , where I am, has gone nuts and a correction is overdue.  However, I do not believe we have the same issue as that of the US bubble experience in 2007 /08 though --

 

I guess it depends how you define "same", but in broad strokes, Canadians are paying more than they can afford for housing, and that will stop at some point. Sentiment will change. If you look at the charts I posted, there was a correction in the early 1990s and it took until the middle 2000s to get back to the previous high in real terms, but everybody in the country has already forgotten that these things can happen.

[rukawa]

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.

 

I think the opposite. The US is the least distorted housing market. Although I still regard the US market as hugely distorted.

 

To me, 30 year mortgages are a ridiculous concept. And 3% mortgage rates even more ridiculous. How many other consumption or even investment markets are there which involve so much OPM and with such generous terms.

 

I define a non-distorted housing market as the one that existed before the Great Depression where mortgage financing was minimal. To you I guess its the exact opposite...a non-distorted housing market is one that involves maximum mortgage financing.

[Liberty]

I think two big factors encourage canadians to put everything they have in real estate.

 

During the 2000s, they've been burned many times by the stock market.

 

GICs and savings accounts aren't attractive either because of the low interest rates.

 

On the other hand, houses have been going up fast as far as anyone can remember (which isn't very far), and it doesn't cost much to get into a very expensive house (a few years ago you could do 0% down and amortize over 40 years, now it's mostly 5% down and 25 years, but you also have tons of lease-to-own schemes and cashback mortgages which mean pretty much 0% down). And since people buy houses like they buy cars - they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

 

It's basically a momentum strategy. People are piling on the thing that has been going up and getting out of the things that have been going down. There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money". I also think that, perversely, what happened in the US reinforced the bubble here because when things didn't go down much, it cemented in most people's minds that Canada was immune. Americans, who had the bargains of a lifetime in RE recently, weren't buying because they had a very fresh memory of a painful event.

 

All of this probably helps explain why the saving rate is just 4% (US is 30% higher at 5.25%, iirc -- that's pretty damn low too, but 4% is really really low. A high-earning $100k/year household could maybe buy a Camry after saving for 5-6 years...).

 

All the reasons used now to explain why Canadian RE is different and solid sound to me like "halo effect" artefacts. Just like a company doing well is said to have good management, a good strategy, good products, etc, and as soon as it starts to go wrong then it has bad management, bad strategy, etc, I expect that when things go wrong suddenly Canada will become a country with crappy weather, where it gets dark at 4 PM for half of the year, a moribund economy, too much dependency on commodities, big structural issues at the provincial level, high taxes, crumbling infrastructure, etc.

[KCLarkin]

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.

 

I think the opposite. The US is the least distorted housing market. Although I still regard the US market as hugely distorted.

 

To me, 30 year mortgages are a ridiculous concept. And 3% mortgage rates even more ridiculous. How many other consumption or even investment markets are there which involve so much OPM and with such generous terms.

 

I define a non-distorted housing market as the one that existed before the Great Depression where mortgage financing was minimal. To you I guess its the exact opposite...a non-distorted housing market is one that involves maximum mortgage financing.

 

Bernake drops a bomb. It causes a Tsunami in Canadian housing prices. It doesn't cause a ripple in U.S. prices.

 

You're right that the Canadian market is more distorted. But it should be distorted.

[mcliu]

I attached the "Mortgaged to the Hilt" report that was mentioned in the Fairfax annual letter. Some of the findings are downright scary.

 

ex. Household Debt to Disposable Income has risen from 200% in 1999 to over 350% in 2012 for Ontario. The percentage of households with Debt-to-Income >500% has risen from ~2.5% to ~12.5% in Ontario and ~7.5% to >20% in BC over the same period.

 

Interestingly, while total debt has gone up significantly, RBC's affordability report suggests that ownership costs have not risen as a result of lower interest payments.

 

I wonder how much further this can continue, I mean at some point, you have to wonder whether households can afford to repay the principal amounts.

 

On the bright side, if housing does ever wobble and consumers face a balance sheet recession, BoC can always keep cutting rates now that there's no zero bound.  ;D 0% mortgages anyone?

 

Also, does anyone here actually invest in Vancouver/Toronto residential real estate and have some data on unlevered/levered rental yields?

february_2015_rbc_housing_affordability_report.pdf

Mortgaged_to_the_Hilt.pdf

[wisdom]

Recently I have seen commercial real estate in Vancouver with unlevered yields of sub 3%.

 

Residential is lower - around 2 to low 2's.

[wisdom]

But on residential properties prices in Vancouver are increasing at $100k a month. So it is the best investment in town. Every showing has tons of people and usually around 10 offers. In areas where property prices used to be over a million you need to bid at least $200k to $500k over asking to have a chance.

 

In the suburbs where younger families are moving, you can get away with just $60,000 to $100,000 over asking.

 

Everyone is getting rich and it is wonderful.

[wisdom]

http://www.theprovince.com/business/Former+wholesaler+lifts+dark+side+Vancouver+real+estate+market/11771306/story.html

 

This is fairly common practice in Vancouver at this time.

[mcliu]

Recently I have seen commercial real estate in Vancouver with unlevered yields of sub 3%.

 

Residential is lower - around 2 to low 2's.

 

Thanks wisdom. Would the yield be before or after CAM/opex, taxes, maintenance capex?

[wisdom]

Sorry, I had an error - 3% vacancy. 5% expenses. After taxes and strata.

[wachtwoord]

they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

 

There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money".

 

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually.

 

No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will).

[Liberty]

they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

 

There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money".

 

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually.

 

No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will).

 

Another thing that most people don't realize: If you have a huge mortgage, you are renting, even if you don't realize it. Rather than renting a  house or an apartment, you are renting a big pile of money from the bank, which you then turned around and bought house with.

 

If the cost of paying interests on that pile of money plus maintenance and taxes (all the thing you don't pay as a renter) are higher than the rent on the equivalent property, why buy it? By saving the difference (and more) I can build equity faster, with less hassle, and if I wait for a less overheated market to buy, I can save on that side too (and all the saved interest over time).

[gary17]

they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

 

There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money".

 

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually.

 

No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will).

 

Another thing that most people don't realize: If you have a huge mortgage, you are renting, even if you don't realize it. Rather than renting a  house or an apartment, you are renting a big pile of money from the bank, which you then turned around and bought house with.

 

If the cost of paying interests on that pile of money plus maintenance and taxes (all the thing you don't pay as a renter) are higher than the rent on the equivalent property, why buy it? By saving the difference (and more) I can build equity faster, with less hassle, and if I wait for a less overheated market to buy, I can save on that side too (and all the saved interest over time).

 

Except renting has no upside; owning does !    That's what the RE-owners will tell you LOL.

 

 

[Liberty]

Except renting has no upside; owning does !    That's what the RE-owners will tell you LOL.

 

Indeed. What they forget is that with upside potential comes downside potential (and since a lot of people are super-levered in their houses, a drop of 5-10% can wipe out many people's equity, and more than that can drag them underwater).

 

And if I build up equity outside of the place where I live, I can invest it, and there is upside (and downside) there too. It's not like the only alternative to putting money in a house is putting it under a mattress.

[wachtwoord]

they look at the monthly payment and if they can afford it things are fine - the absolute amount of debt is rarely considered (how many hours, after tax, must the average wage slave work to pay down an average mortage + interests over 25 years at the average interest rate over those 25 years?).

 

There's a lot of social pressure to buy, and renting is basically seen as a failure and "wasting money".

 

Both of these are true where I live as well. I hear both arguments a lot. Here houses are primarily overvalued due to taxation rules by the government (you can subtract mortgage payment from income taxes) but that will change eventually.

 

No way I'll buy a house for these ridiculous prices. I'll start to slowly consider it after the prices drop by at least 50% from here (which I doubt they will).

 

Another thing that most people don't realize: If you have a huge mortgage, you are renting, even if you don't realize it. Rather than renting a  house or an apartment, you are renting a big pile of money from the bank, which you then turned around and bought house with.

 

If the cost of paying interests on that pile of money plus maintenance and taxes (all the thing you don't pay as a renter) are higher than the rent on the equivalent property, why buy it? By saving the difference (and more) I can build equity faster, with less hassle, and if I wait for a less overheated market to buy, I can save on that side too (and all the saved interest over time).

 

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

 

1) Much much less flexible (if you want to move you need to find a seller)

2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence

3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

[lessthaniv]

http://www.bnn.ca/News/2015/10/6/Canadas-real-estate-market-wont-crash-says-Riocans-CEO.aspx

 

 

[Liberty]

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

 

1) Much much less flexible (if you want to move you need to find a seller)

2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence

3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

 

Where are you? Are you comparing buying & renting an equivalent house?

 

But you are right, there are definitely other considerations (pros and cons) to renting and buying that can pull things in one direction or the other.

[Liberty]

For those not familiar, this is what many people do to get around the 5% downpayment rule. On TD's website:

 

[wachtwoord]

My monthly expenses will actually be lower if I buy instead of rent. However, you are:

 

1) Much much less flexible (if you want to move you need to find a seller)

2) Have well over 100% invested in real estate. I would never use that much leverage in any other type of investment and now I'm buying something which is unlikely to be undervalued and in a market (RE) outside of my circle of competence

3) If the government changes how it subsidizes houses this will increase your monthly expenses AND lower the value of the house considerably.

 

Where are you? Are you comparing buying & renting an equivalent house?

 

But you are right, there are definitely other considerations (pros and cons) to renting and buying that can pull things in one direction or the other.

 

Netherlands.

[Guest 50centdollars]

http://finance.yahoo.com/news/warren-buffett-explains-why-market-bubbles-occur-190745165.html

[Liberty]

http://finance.yahoo.com/news/warren-buffett-explains-why-market-bubbles-occur-190745165.html

 

Good stuff, thanks.

 

“It’s a totally sound premise that houses will become worth more over time because the dollar becomes worth less,” he said. “It isn’t because — you know, construction costs go up.  So it isn’t because houses are so wonderful, it’s because the dollar becomes worth less, and that a house that was bought 40 years ago is worth more today than it was then. And since 66 or 67 percent of the people want to own their own home and because you can borrow money on it and you’re dreaming of buying a home, if you really believe that houses are going to go up in value, you buy one as soon as you can.  And that’s a very sound premise.”

 

That's how it starts.

 

"Soon the price action — or at some point the price action takes over, and you want to buy three houses and five houses and you want to buy it with nothing down and you want to agree to payments that you can’t make and all of that sort of thing, because it doesn’t make any difference:  It’s going to be worth more next year," Buffett said.

 

And it's not just the homebuyers.

 

"[The] lender feels the same way," he said. "It really doesn’t make a difference if it’s a liar’s loan or you know what I mean?  [unintelligible] something because even if they have to take it over, it’s going to be worth more next year.  And once that gathers momentum and it gets reinforced by price action and the original premise is forgotten, which it was in 1929.”

 

"...the price action becomes so important to people that it takes over the -– it takes over their minds, and because housing was the largest single asset, around $22 trillion or something like that, not above household wealth of $50 trillion or $60 trillion or something like that in the United States.  Such a huge asset.  So understandable to the public -– they might not understand stocks, they might not understand tulip bulbs, but they understood houses and they wanted to buy one anyway and the financing, and you could leverage up to the sky, it created a bubble like we’ve never seen."

[scorpioncapital]

I cannot justify residential real estate as having higher avg annual gains over many years than most quality stocks/companies. Either the world is upside down due to something (low interest rates?) or BC is so exceptionally desirable that like a high PE stock it will grow into the valuations. But I'm not sure how regions and countries can be measured for value. Some criteria might be climate, space, social system, taxes, etc..

[gary17]

So how do we explain the phenomenon that many listings in Vancouver are now getting multiple offers - so for each one accepted offer there are 4 or 5 or even more groups that have not found a "home".  I made an offer for a duplex a few weeks ago - I went $100k over asking but was the bottom 3 of 12 offers - the accepted offer was $221k over asking.  I am and many of those making The offer are not developers speculating.  we are simply trying to find a place to live !

 

I wonder if there is data from census or whatever that would allow us to look at the demand side of the market more scientifically.