Garth Turner - Real Estate in Canada

[bbarberayr]

WARREN BUFFETT: The foundation of every market bubble is a 'sound premise'

 

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

 

The reality is there are reasons for house prices in Vancouver and Toronto to have gone higher. 

 

In Vancouver, you've got a desirable moderate climate and limited land supply due to the mountains and ocean.  Plus it is geographically close to the far East which is looking for ways to get some of its money out.

 

Similarly in Toronto, you have Canada's economic engine and the designation of the Ontario Greenbelt around Toronto which really limits new development and causes a supply / demand change for Toronto homes.

 

But, as Buffett says, "And the price action becomes so important to people that it takes over the -– it takes over their minds…”  The real question is has price action overtaken fundamentals - I think so, but hard to know for sure and, even if it has, even harder to know when it stops.  But, if it has, there will be a lot of downside in both markets when this comes apart.

 

[wisdom]

The rate it is moving at - this cannot be sustained for long. Feels like it is near the end but I am guilty of having thought that before too. It is going to catch a lot of people swimming naked when the tide goes out.

[gary17]

The rate it is moving at - this cannot be sustained for long. Feels like it is near the end but I am guilty of having thought that before too. It is going to catch a lot of people swimming naked when the tide goes out.

 

So didn't HK have a real estate crash before?  Didn't Londo , Paris , New York , etc do too?

But why do they continue to be the most expensive places on the planet?   

 

So if Vancouver has a 20% correction - and then over the next 10 years go up another 50% - what's the risk here ?

[Liberty]

So if Vancouver has a 20% correction - and then over the next 10 years go up another 50% - what's the risk here ?

 

There was a RE crash in Toronto in the late 80s-early 90s. It took until about the mid 2000s for prices to reach their previous peak, and I'm not even sure if that was in real terms.

 

But if you believe that there's no risk and prices will always go up, I suppose the way to play that is to buy a bunch of properties using borrowed money. That's what everybody else is doing, and I'm sure they'll all turn out to be right.

 

BTW, I don't believe Vancouver is London, Paris, New York, etc.

[wisdom]

The only people buying are speculators, developers and people buying their 2nd, 3rd, 4th, 5th..20th rental property. A newcomer cannot enter the market. Everyone refinances and buys more properties and flips them which increases prices allowing them to again refinance and buy more properties.

 

An average person is buying condos or houses 1.5 hours away from the city - this is in a city of 2.5 mil or 1/4th of the cities Vancouver is being compared to.

 

Obviously none of this makes sense to me, but, it does to most others.

 

 

[gary17]

The only people buying are speculators, developers and people buying their 2nd, 3rd, 4th, 5th..20th rental property. A newcomer cannot enter the market. Everyone refinances and buys more properties and flips them which increases prices allowing them to again refinance and buy more properties.

 

An average person is buying condos or houses 1.5 hours away from the city - this is in a city of 2.5 mil or 1/4th of the cities Vancouver is being compared to.

 

Obviously none of this makes sense to me, but, it does to most others.

 

Liberty & Wisdom

are you guys from Vancouver?

I think most of these purchases are just ordinary people looking to grow the family - 

we have a few luxury real estates sold to Chinese newcomers - ($3 ~ 10M)

baby boomers are therefore cashing out to find a cheaper place - such as a large condo or a house outside of Metro Vancouver (~ 1.5M); keep the change for travelling / medical needs (~1M) and anything left goes towards helping the kids to buy their first house (~0.5 ~ 1M).

 

The kids who got help can buy a $1.5M ~ 2M house with parent's downpayment, savings, and a $800K mortgage?

 

 

 

 

 

[wisdom]

Gary - how large is your sample? Are you in the industry?

[gary17]

Gary - how large is your sample? Are you in the industry?

 

Sort of in the industry -

 

We are actively in the market looking and making low ball offers lol

[gary17]

Also - most of the prices appreciation that's gone up is since last summer (2015 April) - I believe since then there's max 30 year amortization; and 10% down payment for homes over $700K -    (i don't think there's any house under $700K in metro vancouver).

 

 

[bbarberayr]

Don't kid yourself, New York has had tough times in the past:

 

http://9640-presscdn-0-28.pagely.netdna-cdn.com/wp-content/uploads/2015/09/Manhattan-Real-Estate-Roaring-20s-and-Great-Depression.png

 

http://www.jparsons.net/housingbubble/new_york.html

 

I couldn't find a chart for the 1960's to early 1970's, but that was a tough time too when NYC almost went bankrupt.

[wisdom]

True, you would have to go into the Valley to find something decent around $700k. Most decent places as far as Langley will be in around a mil.

 

From what I know the market went absolutely nuts in the fall and is accelerating.

 

I am not saying families don't bid, just that you are competing with others who are not long term or end users.

[Liberty]

BC's saving rate is interesting:

 

British Columbia’s household saving rate (saving as a percent of household disposable income)fell back into negative territory in 2014 (-1.9%), after climbing to 0.4% in 2013. British Columbia’s saving rate has been negative in all but one year since 1996, making it the only province that has persistently had a negative saving rate during this period, although other provinces such as Nova Scotia (-4.0%), P.E.I. (-1.5%) and New Brunswick (-0.9%) have also seen negative saving rates during some of this period.

 

Between 1999 and 2010, BC's average saving rate has been -4.2%:

 

 

I suppose that they can keep putting everything on their HELOCs forever...

 

I'm sure incomes are really high to be able to afford these million-dollar bungalows. Let's see:

 

At $48,048, real per capita GDP in British Columbia remained below the national average ($49,171) [...] Real per capita household disposable income in the province was $28,809 in 2014, up from $28,797 in the previous year. This was the second-highest per capita income in the country, after Alberta ($36,714).

 

http://www.bcstats.gov.bc.ca/Publications/Infoline/15-11-10/Issue_15-74.aspx

[gary17]

 

At $48,048, real per capita GDP in British Columbia remained below the national average ($49,171) [...] Real per capita household disposable income in the province was $28,809 in 2014, up from $28,797 in the previous year. This was the second-highest per capita income in the country, after Alberta ($36,714).

 

http://www.bcstats.gov.bc.ca/Publications/Infoline/15-11-10/Issue_15-74.aspx

 

Most foreigners have no income in BC or Canada - yet they are minting well over $500K at 15% tax rate in Asia.

 

[Liberty]

Most foreigners have no income in BC or Canada - yet they are minting well over $500K at 15% tax rate in Asia.

 

Source?

[gary17]

Most foreigners have no income in BC or Canada - yet they are minting well over $500K at 15% tax rate in Asia.

 

Source?

 

don't need one - just look around in my own family, their friends, high school friends, university classmates and you can confirm what everybody knows here.

 

mom and dad are in a group of oversea chinese -  there are a few exceptions but most are extremely wealthy.  we are the poor ones...

 

i don't see asian taxi drivers , do you?

 

[gary17]

The Immigrant Investor Program (IIP) aims to have experienced business people contribute to Canada’s growth and long-term prosperity by investing in Canada’s economy. Investors must:

 

show that they have business experience

have a net worth of at least C$1,600,000 that was gained legally and

invest C$800,000.

Citizenship and Immigration Canada (CIC) will divide your investment between participating provinces and territories. They will use it for projects to develop their economies and create jobs for five years.

 

Your investment is guaranteed. CIC will return it, without interest, about five years and three months after payment.

 

If we approve your application, you must make your investment before we issue a permanent resident visa. You must usually do this within 30 days. The visa office will send you a letter that explains what to do. Learn more about making your investment.

 

 

 

 

How much money do you think a Chinese immigrant net worth is - buying a $3M house + $800K for the government ? 

They probably also know they won't be able to earn the same kind of living in Canada -  their lifestyle in Asia is probably costing the family $100K ~ $200K / year. 

 

Do the math - they have to have well over $500K earnings and a lot of money saved up before committing to moving to another country for the next 10 or 15 years or whatever for the length of the children's study.

[scorpioncapital]

I can buy a house in California with an even more moderate climate than Vancouver in a country with overall somewhat lower taxes and lower cost of fuel, food, etc..and finance it with a 30 year mortgage. I am not convinced Vancouver is so great as to justify such high prices based on geography alone.

[Liberty]

Most foreigners have no income in BC or Canada - yet they are minting well over $500K at 15% tax rate in Asia.

 

Source?

 

don't need one - just look around in my own family, their friends, high school friends, university classmates and you can confirm what everybody knows here.

 

mom and dad are in a group of oversea chinese -  there are a few exceptions but most are extremely wealthy.  we are the poor ones...

 

i don't see asian taxi drivers , do you?

 

Anecdotal. Okay.

[wisdom]

I agree - I would be looking at Florida, Hawaii, California rather than Vancouver. Only individuals in Vancouver believe that every rich person in the world wants to move here.

[JBTC]

The rate it is moving at - this cannot be sustained for long. Feels like it is near the end but I am guilty of having thought that before too. It is going to catch a lot of people swimming naked when the tide goes out.

 

So didn't HK have a real estate crash before?  Didn't Londo , Paris , New York , etc do too?

But why do they continue to be the most expensive places on the planet?   

 

 

+1

 

Speculation is real, but fundamentals are also real.

 

We'll all learn more and analyze better if we are open-minded about all the possibilities.

 

[JBTC]

So enough of the anecdotes. I was trying to look at population data, but Canadian census is done every five years and the last one was in 2011.

 

From 2006 to 2011, the metro population growth

 

Vancouver +9.3%

Toronto +9.0%

Montreal +5.2%

Calgary +11%

 

Looks like we don't any data for the last few years. Population growth is the first thing a property investor should look at. Every person moving into a city needs a roof.

 

[mcliu]

So enough of the anecdotes. I was trying to look at population data, but Canadian census is done every five years and the last one was in 2011.

 

From 2006 to 2011, the metro population growth

 

Vancouver +9.3%

Toronto +9.0%

Montreal +5.2%

Calgary +11%

 

Looks like we don't any data for the last few years. Population growth is the first thing a property investor should look at. Every person moving into a city needs a roof.

 

Population growth alone can't explain the increase in prices because the number of houses is also increasing. Housing stock actually increased by 9.8% over the same period. Note that housing prices increased 39% from 2006 to 2011.

 

(It could be the case that there's a severe shortage of homes in 2006. Inventory was indeed at an all time low in 2006. However, inventory increased from 650 units in 2006 to 3,500 units in 2011. So in that period they've added more housing stock than the market absorbed. CMHC Data Portal)

 

"The 2011 Census shows the number of occupied dwellings to be

891,340. The 2011 Census figure of 891,340 occupied private

dwellings is an increase of 74,300 dwellings units over the 2006

Census. The region’s private housing stock grew by 9.8% since the

2006 Census, higher than the 8.4% (58,320 units) during the preceding

five years (2001‐2006)."

 

http://www.metrovancouver.org/services/regional-planning/PlanningPublications/MV_Housing_Data_Book.pdf#search="housing%20book"

The rate it is moving at - this cannot be sustained for long. Feels like it is near the end but I am guilty of having thought that before too. It is going to catch a lot of people swimming naked when the tide goes out.

 

So didn't HK have a real estate crash before?  Didn't Londo , Paris , New York , etc do too?

But why do they continue to be the most expensive places on the planet?   

 

 

+1

 

Speculation is real, but fundamentals are also real.

 

We'll all learn more and analyze better if we are open-minded about all the possibilities.

 

 

Which fundamentals metrics do you think are relevant?

 

Usually people look at Price-to-Income and Rental Yields.. I don't think I've see any P/CF based valuation metrics which shows Vancouver undervalued.

 

The only metrics that show Vancouver being under valued would be something like a comparable on a $/sq.ft. basis against New York/London/Shanghai/Hong Kong, etc..

[JBTC]

mcliu,

 

Thanks for the data.

 

By fundamentals, I don't mean just valuation.

 

It's both the demand factors (population growth, household formation, tendency to own vs. rent, income growth, wealth growth, interest rates, mortgage and tax policy, climate and livability, quality of schools, and more) and the supply factors (new construction volume, land availability, land release policy, competition between builders, zoning policy, etc).

 

Without going through all the key items, it would be difficult to make a conclusion.

 

I haven't had a chance to go through the data book you sent. Just on p22, it seems ownership housing starts didn't increase much at all during 2011-14.

 

That's crazy, isn't it? You have home prices going through the roof, but new construction didn't increase. Why? I know nothing about the specific circumstance here, but the general reasons are:

 

1) there is no more land.

2) there is land but the government refuses to release (citing greenbelts, protecting the environment, all sorts of things).

3) there is land but the developers are hoarding it.

4) some other reasons that don't offer developers incentives to build.

 

Hope your guys who live in Vancouver can provide some insights.

 

Also in 2011, 65% of the households in Vancouver were owners, and the rest were renters.

 

Thanks about it, the vast majority of the residents are beneficiaries of the boom and happy. These people are rich, more powerful, and have greater representation in politics. So chances are the government policy is skewed towards protecting these people's interests.

 

This in my humble opinion is partly why housing is generally a good investment most of the time in most places.

 

[mcliu]

This in my humble opinion is partly why housing is generally a good investment most of the time in most places.

 

That's fair and indeed in general it has been true but what about the times when it hasn't been true?

 

I mean, at what point does a good investment turn bad? For an extreme example, if prices hit $100 million for a house in Vancouver while population and incomes grow at 2%, does that signal a bubble or should we continue to justify prices?

 

$100 million is extreme but going down from there, there is still a point where you can safely declare that prices have far surpassed fundamentals. Maybe it's there already, maybe it'll take another 2x, 3x, 10x gain to convince people. (Although I guess, counterintuively, the higher prices go, the less people will be convinced that there is a bubble.) Based on the data that I've seen, the situation is pretty clear...

 

“You don’t have to know a man’s exact weight to know that he’s fat.” – Ben Graham

[gary17]

i know from this webiste we can look at statistics about inventory

 

http://www.rebgv.org/home-price-index

 

the 'active' listing is at all time low - very few "asking"; and many "bids"

 

if rich people don't spend money in vancouver real estate; what else should they do?  rich people like buying real estates together.  they also like 2nd citizenship (no diff than Conrad Black liked a British citizenship) -  for most in Asia  , Canada is the most easy to get; and close enough to the US but not in the US.