Garth Turner - Real Estate in Canada

[VAL9000]

I don't see how that would change anything in a RE bubble bursting panic. Please elaborate.

My point about how quickly the prices rose in the 80's vs. today is that the more people who are "in it" means that the price is more real.  i.e. a meteoric rise is more readily followed by a spectacular crash, whereas a more steady rise gives the pricing more credibility.

 

I think the baby boomers reached house-buying age many years earlier than that, but they are now certain reaching retirement age, and they haven't saved anything, and most of their net worth is in a single asset, their houses. They're all going to want to cash out at the same time in the next few years, 9 million of them.

Some of the boomers reached home buying age that early, but the cohort spans 20 years.  Many, many more were in a position to buy homes in the late 80's than in the late 70's.  The boomers will not cash out at the same time over the next few years.  Many started retiring 5-10 years ago, and the latter half of the cohort can expect to prolong their retirement past today's national average of 63 years.

 

Boomers have saved quite a bit.  > 70% of them have pension plans, the median of which is about 240k.  Something like 55% of assets held are in financial instruments.  The home is a big chunk of the asset mix, but this is an historically faithful asset composition.

 

It looks like everything else we're debating is speculation.  I think your viewpoint has merit - namely that prices are high based on conventional (and warranted) measures and that boomers will need to liquidate their positions in the next 20 years.  This will put downward pressure on the market.  My own theory is that prices have been pushed into new territory because urbanization is a new and growing trend, and urban density justifiably moves prices above inflationary growth.  I continue to believe that real estate will defy traditional economics (for dozens of reasons), but that anyone buying today (or ever) should err on the side of caution and look for value where possible.

 

[Liberty]

My own theory is that prices have been pushed into new territory because urbanization is a new and growing trend, and urban density justifiably moves prices above inflationary growth.

 

Do you, or anyone else, have any examples of this taking place anywhere else over a short period (±1 decade)?

 

Not that I think Canada's urbanization pattern has changed that drastically over the past 10 years or that urbanization without increases in wages make debt any safer, but I'm still curious to hear more about this theory.

[SharperDingaan]

Real Estate was the traditional investment vehicle for the masses, before the advent of the mutual fund industry selling stocks/bonds as the replacement. If you didn't understand/trust the market you bought bricks/mortar, often in your own town, & because in the worst case - you/familiy could always live in it if you had to. Market reversals are driving mean reversion. Board interest in this string is anecdotal evidence.

 

Sons/daughters need family help to buy a McMansion. Mom/Dad become grandparents sooner, & get to see their grandkids more often, if they put up the funds. Mom/Dad also get to cash out of THEIR McMansion because there is now a buyer. No different to liquidating a position by creating liquidity & selling 5 units for every 4 bought.

 

     

[VAL9000]

Do you, or anyone else, have any examples of this taking place anywhere else over a short period (±1 decade)?

 

Not that I think Canada's urbanization pattern has changed that drastically over the past 10 years or that urbanization without increases in wages make debt any safer, but I'm still curious to hear more about this theory.

Not exactly.  There are a few markets you can look at to make comparisons.  Hong Kong's market is pretty pure in that 100% of the market is urban.  Density has come up 50% over 30 years and property prices have come up 10 fold.  Japan's density is up about 10% with more recent years seeing negative growth in density.  Over there the real estate market has been coming off highs for nearly two decades.  In these cases, if you consider Toronto's urban density has grown about 20% over the past 10 years or so, something between negative prices and ten fold growth seems "normal".

 

Another way of thinking about this is by relative property values based on density.  Vancouver costs more than Toronto, which costs more than London, On, which costs more than Woodstock, On.  Looking at this kind of evidence, it is reasonable to say that more densely populated areas are worth more.  A more rigorous approach would be...  The amount of land in the Toronto area is fixed, but 20% more people live there.  All else equal, the land is at least 20% more productive.  Although, due to network effects, my belief is that a 20% increase in density results in a greater than 20% increase in productivity. 

 

Urbanization has come up 6% in the past 30 years, overall population density has come up 65%, and Canada's real estate market is mostly made up of 4-5 major urban centers.  This gives me some comfort in the idea that real estate in Canada should be rising at a rate greater than inflation, which at least puts a floor under real estate prices.

 

 

[VAL9000]

- Urbanization - US and Canada have similar urbanization rates, but Canada's is much more concentrated at the high end.  About 7.5% of the US population lives in cities with a population > 1mm.  In Canada, this number is 50%.  That's crazy.  As a comparison, for cities of populations > 100,000, you're looking at only 28% of the 300mm people that live in the US.  That means that 75% of Americans live in cities smaller than Waterloo.  So that's another major contributing factor for why real estate prices are so comparatively high.

 

This sounds crazy...  because it is.  My analysis here was flawed.  I compared apples (city populations in US) to oranges (metropolitan areas in Canada).  Overall urbanization is about the same between Canada and the US.

 

[VAL9000]

I am somewhat regretting wading into this discussion about house pricing because it's kind of pointless.  It's like trying to forecast the price of gold or any other non-producing asset.  The price of real estate depends too much on other factors - it can't be forecasted independently.

 

Real estate is a producing asset.  That's how you know that it's overvalued.  I think it has fewer influencing factors than most stocks.

 

I didn't say that real estate wasn't a producing asset, I said it was difficult to value like a non-producing asset.  The reason is that so much of real estate isn't about productivity.  The productive capacity of a granite counter top is about the same as a laminate one, but the price they command is different.  There are 1000's of examples like that, hence why I think it's hard to value.

 

One of the pricing tools for real estate that we've mentioned here is price relative to rents.  I came across this document from the CMHC:

http://www.cmhc-schl.gc.ca/odpub/esub/64691/64691_2011_A01.pdf?fr=1330958975066

 

It shows that the cost components of home ownership have all grown faster than rents, which only grew about 11% over 10 years.  Meanwhile, the vacancy rate (in Toronto, anyway) hasn't moved around much - between 2 and 3% for that decade.

 

Is there an argument that rents are too cheap?  Will they rise rapidly now that we're at a home ownership saturation point (from 62% to 70% - at the level where US real estate started to come down), while overall population is still growing?

 

Just a thought.

 

[ERICOPOLY]

I haven't seen data on this, but I think you'll probably find a correlation between rising total Canadian mortgage debt as a % of Canadian GDP and rising housing prices.  When mortgage debt is on the rise as a % of GDP, home prices rise faster than trend, and they rise slower than trend (or fall) when the ratio of mortgage debt to GDP retreats.

 

This is what Steve Keen does in Australia and it seems fairly convincing.  He's not just looking at population trends as a measure of demand, but rather looking more closely at the financial demand.

 

 

 

 

[RichardGibbons]

One of the pricing tools for real estate that we've mentioned here is price relative to rents.  I came across this document from the CMHC:

http://www.cmhc-schl.gc.ca/odpub/esub/64691/64691_2011_A01.pdf?fr=1330958975066

 

It shows that the cost components of home ownership have all grown faster than rents, which only grew about 11% over 10 years.  Meanwhile, the vacancy rate (in Toronto, anyway) hasn't moved around much - between 2 and 3% for that decade.

 

The data says "there is enough supply -- the vacancy rate hasn't moved and the rents aren't going up.  But the costs of home ownership have skyrocketed.  Thus, home ownership is in a bubble."  It seems odd to me that you want to interpret it as something else.

 

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.

[VAL9000]

The data says "there is enough supply -- the vacancy rate hasn't moved and the rents aren't going up.  But the costs of home ownership have skyrocketed.  Thus, home ownership is in a bubble."  It seems odd to me that you want to interpret it as something else.

Is it odd to invert the conclusion?  I'm exploring the idea that instead of homes being too pricey relative to rents, maybe rents are too cheap relative to homes.

 

My line of thinking was..  A greater portion of renters have been converted to home owners.  Vacancy rates have remained steady.  So I conclude that rental demand and rental supply are in balance.  If the growth in home ownership as a percentage stops and holds at 70%, then relatively more demand will be placed on the rental market, which should push up rents.

 

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.

Yep, and that makes perfect sense to me.  Trust me, I am working my ass off trying to refute the theory that homes are overvalued and I'm not really getting anywhere ;)

 

Actually, I think it's time for me to throw in the towel on this side of the debate.  I've run out of ideas to justify Canadian home prices at their current levels, and the ones that I've come up with aren't robust enough to flog.  The evidence of bad things on the horizon is just too prevalent, and try as I might, I can't imagine a scenario where it ends well with this amount of leverage involved.

 

Thanks for the debate (Liberty especially.  I owe him for always being a good sport.) - I think you are right and that I am/was wrong.

 

[Liberty]

Thanks for the debate (Liberty especially.  I owe him for always being a good sport.) - I think you are right and that I am/was wrong.

 

Well, thanks for being a good devil's advocate. I can't take credit for most of what I've said in this thread, as I've found these ideas elsewhere.

 

A few weeks ago I, like most average canadians, believed that "it's different here" because "our banks are so strong and so careful about lending" and so on... But when you dig a bit, you realize it's all BS, and giving people a false sense of security, which is dangerous in itself. We have our own version of sub-prime lending here, with banks insuring so many loans with CMHC (which are then packaged and sold afaik...) that they don't give a crap about due diligence because they're not on the hook. People have pigged out on debt and leverage and that's rarely good.

 

In fact, the more I think about it, the more I believe that one of the most important psychological factors in how long this bubble has been going on is that we mostly avoided the US crisis. This tells people: "See, we're fine here, this can't happen here, or it would have already when things looked worse a few years ago".

 

After all, look at any bubble you want, and without a widespread psychological failing, they wouldn't inflate. Peple would look at the fundamentals and go "hmm, no, this isn't a good value". But in bubbles, they ignore fundamentals and think that "this time it's different" and all wish they had bought sooner so they could have benefited from the price inflation, so the next best thing is to buy now (before being "forever priced out!").

[Liberty]

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.

 

http://www.greaterfool.ca/wp-content/uploads/2012/01/Prices-incomes.jpg

 

I think this graph shows it nicely. Housing tends to follow inflation -- people earn more, they spend more on housing, prices rise.. but now people aren't earning much more but prices are way higher, so the difference has to be made up by debt.

 

Also, note that the graph ends in Q1 2011, so the difference is probably even wider now.

[ERICOPOLY]

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.

 

http://www.greaterfool.ca/wp-content/uploads/2012/01/Prices-incomes.jpg

 

I think this graph shows it nicely. Housing tends to follow inflation -- people earn more, they spend more on housing, prices rise.. but now people aren't earning much more but prices are way higher, so the difference has to be made up by debt.

 

Also, note that the graph ends in Q1 2011, so the difference is probably even wider now.

 

Prices might be higher because of increasing mortgage debt (not the other way around):

 

Here is a nice presentation on the topic:

http://www.debtdeflation.com/blogs/2011/03/20/mortgage-finance-association-of-australia-talk/

 

It's for Australia, but perhaps also would apply to Canada.

 

[gokou3]

Prices might be higher because of increasing mortgage debt (not the other way around):

 

This is part of the bigger picture, which is "Prices went up because of availability of bigger mortgage".  Once again, government policies were made counterproductive to their goal, namely affordable housing.  All that 0% downpayment / 40-year amortization / stated-income loans, in addition to a generally declining interest rate environment over the last decade, enable people to borrow a lot more than they otherwise can.  Alas, this didn't allow them to buy bigger houses (or go from no ownership to having ownership) because prices quickly adjust upwards.

 

This also explained why house prices shoot up way higher than rent.  Typically, mortgage payments and rents are x% of a family's income.  The latter didn't get the "help" mentioned above.

[SharperDingaan]

You might want to recognize:

 

Looser & cheaper mortgages. HELOC financing permits interest only monthly payment. The extended period of historic low rates allows a given $ of monthly payment to support a lot more mortgage. CMHC removed the default risk on the big mortgages with minimal DP, making questionable credit extension safe for the lender. Availability of longer than 'normal' financing terms. Net impact is more $ to spend on the same supply of housing. Therefore price must increase - Economics 101

Help with DP. Every $ of help mom/dad extend son/daughter is another $ to spend on the same supply of housing. Also a multiplyer as without the DP help, son/daughter may not have been able to enter the housing market period. Again, more $ at the lower end of the market. Price can only increase.

 

Global investment. Vast majority of Canada lives in the major cities, & many of them are attractive investment homes to foreign investors. Family going to school (Vancouver, Toronto), NA alternative (Montreal, Quebec City, Victoria), just like the place. Again, more $ at the higher end of the market. Price can only increase.

 

Exclude all Canada's major urban centers from the stats, & prices have moved by roughly the inflation + regional growth rate. About what you would expect.

[Liberty]

Help with DP. Every $ of help mom/dad extend son/daughter is another $ to spend on the same supply of housing. Also a multiplyer as without the DP help, son/daughter may not have been able to enter the housing market period. Again, more $ at the lower end of the market. Price can only increase.

 

A lot of people seem to have been buying without any actual downpayment, afaik. "cash back" mortgages have been giving back up to 5%, some of them even 7-8% (for a 102-103% mortgage). That's pretty reckless. And all the risk ends up with CMHC. *sigh*

[Liberty]

One more graph:

 

http://www.greaterfool.ca/wp-content/uploads/2012/03/chart.jpg

[leftcoast]

Canada's banking regulator, OSFI, proposed a new set of mortgage underwriting guidelines for Canadian banks yesterday. If these go into effect, they will tighten lending for many Canadian borrowers. For example, the new guidelines would disallow the use of "cash back" mortgages to get around minimum down payment rules. They would force lenders to use the 5-year posted rate to qualify borrowers for any uninsured mortgage, regardless of type or term. And they really clamp down on the use of HELOCs, by reducing the maximum LTV ratio for HELOCs and disallowing interest-only payments.

 

Seems like the federal gov't is serious about reducing the flow of cheap debt in the housing market, even if the Bank of Canada has its hands tied with interest rates. It will be interesting to see what kind of debate this sparks, since it could be a catalyst that finally pops the bubble in Vancouver. The gov't is also walking a fine line... they want to curb excessive borrowing, but they also don't want their policies blamed for an inevitable housing correction/collapse that will hurt a lot of voters.

[Liberty]

It also looks probable that in the next federal budget the 30-year amortization period will be killed, leaving 25 years the longest.

[Liberty]

http://www.greaterfool.ca/2012/03/22/moral-hazard/

 

The second part of this post is pretty scary  :-\

[Liberty]

http://business.financialpost.com/2012/04/26/osfi-to-supervise-cmhc/

[nkp007]

So assuming there's nothing worthwhile to short right now, when this bubble pops where should we be looking for values?

 

Brookfield Real Estate Services?

[nkp007]

Is the crash starting?

 

http://blogs.wsj.com/canadarealtime/2013/02/08/canadas-onslaught-of-data-mostly-points-one-direction-down/

[Liberty]

Is the crash starting?

 

http://blogs.wsj.com/canadarealtime/2013/02/08/canadas-onslaught-of-data-mostly-points-one-direction-down/

 

There's been many signs for many months now. I think we're slowly reaching a point when things will start to accelerate because the mainstream sentiment will start to change. But we'll see.

[Liberty]

http://www.bloomberg.com/news/2013-02-27/canada-losing-debt-halo-as-bull-market-housing-peaks-with-carney.html

[Liberty]

Looks like the public discourse keeps changing slowly..

 

http://business.financialpost.com/2013/03/11/house-prices-to-remain-flat-for-10-years-td/?__lsa=dfb8-4756

 

For a while it was "prices will keep going up, it's different here", then "growth in prices will slow down", and now this. A few more months and they'll talk about prices going down...