Garth Turner - Real Estate in Canada

[alertmeipp]

very few asking, many bids, have none, get one, have one, get more. price spiking. buy now or pay more later, it will never come down, even if it does, it will be small correction, leverage up, ratios don't matter, it's the new era.

 

sounds familiar?

[scorpioncapital]

I really don't understand how crashes occur in general. I don't even understand how the 2008 RE crash happened. I mean with stocks or RE, my first assumption is that nobody is obligated to sell anything ever. You can get much poorer based on "paper losses" and you may be uncomfortable but if they are excess savings or a house you live in , it is just a personal upset. The real problem is if you can't pay the financing cost and RE is almost always leveraged. To not be able to pay such cost you must lose your job or the payment must go up alot.

[JBTC]

I really don't understand how crashes occur in general. I don't even understand how the 2008 RE crash happened. I mean with stocks or RE, my first assumption is that nobody is obligated to sell anything ever. You can get much poorer based on "paper losses" and you may be uncomfortable but if they are excess savings or a house you live in , it is just a personal upset. The real problem is if you can't pay the financing cost and RE is almost always leveraged. To not be able to pay such cost you must lose your job or the payment must go up alot.

 

It's generally caused by a number of factors happening at the same time.

 

In 2008, business cycle started to turn down and jobs were lost.

 

Mortgage rates started to go up after the teaser rate period.

 

As sentiment weakened, prices began to fall.

 

There were too many speculators heavily leveraged, and their game was up once prices fell.

 

People overstated their incomes. They were able to keep their homes initially only because prices were going up. Once that stopped, they had trouble making monthly payments.

 

In other words, if jobs are stable, rates are stable, not too many leveraged speculators, mortgages are properly underwritten, the owner occupiers should be able to withstand certain price falls.

 

Of course in 2008 the bad mortgages ultimately caused the entire financial system to break down, which in turn made the housing bust worse.

 

[scorpioncapital]

Yeah you really need a snowball event - and a major recession. Otherwise even a drop of 20 or 30% in house prices is not enough to really get the ball rolling downhill - although the media will probably be screaming at even a 10% drop.

[JBTC]

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.

 

If your personal circumstance allows that, I can see that makes sense.

 

But the majority of people in Vancouver don't have that choice. This is because there is a border between Vancouver and California.

 

Just two hours drive south of Vancouver, Seattle is cheaper in housing and almost everything else. It has more jobs and higher income. It has lower mortgage rates. But most Canadians cannot simply move there to live.

 

This is why comparing housing prices across countries has limited practical value most of the time.

 

And the Vancouver housing speculators know this too well.  ;)

 

[Viking]

I think a key cause of the real estate popping in the US was they ran out of fresh meat. By 2007 if you had a pulse you 'owned' a home. Income did not matter. Job did not matter. The market simply exhausted itself.

[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.

 

If your personal circumstance allows that, I can see that makes sense.

 

But the majority of people in Vancouver don't have that choice. This is because there is a border between Vancouver and California.

 

Just two hours drive south of Vancouver, Seattle is cheaper in housing and almost everything else. It has more jobs and higher income. It has lower mortgage rates. But most Canadians cannot simply move there to live.

 

This is why comparing housing prices across countries has limited practical value most of the time.

 

And the Vancouver housing speculators know this too well.  ;)

 

Good point, I think you've hit on an essential aspect of globalization and even perhaps part of the Canadian real estate market flare. While it's true most citizens cannot easily be resident in another country on account of being born in Canada, a quite large proportion of people have dual residence/citizenship this almost creates a 2-tier system because while non-residents can invest and buy property here and while immigration is not as difficult as in some other countries, non-residents have some key benefits, namely usually low to no tax back home as well as being able to avoid capital gains, gst, and other major taxes here. Not sure at what % of non-resident immigration this can really heat up the market. But the stats are old (from 2006) showing ~20% of Canadians are foreign born. However this is *not* an accurate reflection of citizenship/residence issues. Many countries allow even Canadian born with parents or grandparents from another country to re-establish citizenship there very easily and thus I would put the % of residents who can in fact play "residence arbitrage" at much higher than 20%. We'll see when the census comes out but I'd say it's 50% if not higher at this point. Of many countries out there including UK & USA, I think Canada is one of the few that has really gone with the large foreign population policy, after all it's a newer country and with a small base to start from.

[gary17]

the best way to invest in Canadian real estate, however, is to be a resident for income purposes.  this is because the principal residence is completely tax free. 

 

so what I've often seen is the husband is a non resident - working somewhere in Asia - and the house is in the child or wife 's name - who are residents - and enjoy tax free gains

[scorpioncapital]

the best way to invest in Canadian real estate, however, is to be a resident for income purposes.  this is because the principal residence is completely tax free. 

 

so what I've often seen is the husband is a non resident - working somewhere in Asia - and the house is in the child or wife 's name - who are residents - and enjoy tax free gains

 

I'm not so sure this structure of claiming non-residence while your immediate family is here wil or can work for long,

 

"The most important thing to consider when determining your residency status in Canada for income tax purposes is whether or not you maintain, or you establish, residential ties with Canada.

 

Significant residential ties to Canada include:

 

a home in Canada;

a spouse or common-law partner in Canada; and

dependants in Canada;"

 

This is from the CRA website. Anyway I'm sure this and using shell corporations to buy/sell real estate to avoid taxes is a minor factor but one thing struck me as the world globalizes and people come and go EVERY country is having real problems integrating their benefits, social systems among people with various nebulous types of status. I hope this gets sorted out to make it easier, especially as cross-country mobility and trade expands.

 

[wisdom]

One should look at the snowbird phenomenon or how many Canadians bought properties in phoenix, Florida, palm Springs to understand how easy it is for Canadians to move between Canada and US.

 

It is leverage that kills and Vancouver cannot be any different. The longer this continues the more leverage is used and more unstable the system.

 

I do not believe any other factors matter in the long run as all markets eventually turn.

[CalvinL]

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.

 

I agree except the lower taxes part and that may be true from your perspective. Now imagine a family born and raised in China whose first language is Mandarin?

 

Equal opportunity for ethnic Chinese is important. Racism issue, cultural acceptance, community where you can feel you belong...it's there in a smaller scale in California but it's also differences in the details.

 

Services in Chinese similar to what they could get in China is important. The moment you walk off the airport - Chinese Signs, Mandarin broadcast, Chinese restaurants, beauty salon - Not exactly as good but close enough. And then you have a few neighbours who speaks Mandarin as well. Pack Chinese food for lunch to school and it's just a common sight. These are part of the ecosystem that created a "monte carlo" for Chinese rich people. it's similar to how Japanese were buying up Hawaii back in the 1970s-1980s.

 

That being said, this bubble could pop someday. Vancouver could have some sort of uncontrolled racial riots, tax targeting immigrants/high price property ownership, or a tighter immigration policy for the rich. China could try to limit capital flight, or their economy could collapse, or China could become such a great place that people decided to move to China....

 

Most RE market price is a function of rate and income. Debt % and housing price to GDP could tell if it's overheated or not.  Vancouver just isn't another regular market.

[mcliu]

Except, it's not just Chinese people buying up the million-plus dollar SFD homes/condos in Vancouver/Toronto/Adelaide/Melbourne. The global housing market is too big.

 

Ex. The Chinese buying those homes are probably worth at least 100 million RMB or C$20 million. There's less 100,000 people in that bracket in China.

 

There are 10 million people in China that has a net worth of 10MM RMD or more. That's roughly 1/3 the population of Canada. And this number should be used as a base estimate as there are countless black book and under-the-radar captial. Based on a survey I've read a few years ago, around 60% have plans to immigrate, and almost all considered sending their kids to college overseas. 

 

There are only around 1 million US$ millionaires in China. That's only 3% of Canada's population. You can't just make up these numbers..

 

http://www.hurun.net/EN/ArticleShow.aspx?nid=4558

 

Hurun 2014: "The country has 1,090,000 millionaires and 67,000 super-rich, an increase of 3.8% and 3.7% respectively from last year."

"millionaires (defined as individuals with personal wealth of CNY 10 million, equivalent to US$1.6 million and GBP 1 million)"

"super-rich (defined as individuals with personal wealth of CNY 100 million, equivalent to US$16 million and GBP 10 million)"

 

 

The US by far has the most millionaires. Canada has around the same number of dollar millionaires as China. The myth that there are millions of extremely wealthy Chinese investors looking to buy global real estate is just not accurate..

 

http://www.cnbc.com/2015/10/13/countries-with-the-most-millionaires.html

[CalvinL]

o my thank you for the correction mcliu. I read it from Hurun as well but got the figure wrong by 10 fold.  :o

 

I agree with you that it's not just the Chinese, it's more likely that the global 1% are moving and investing into these cities.

[wisdom]

I would again propose that it is mainly equity being withdrawn from the increase in real estate prices being leveraged once gain to buy more property. I would also say that for most the amount of debt is increasing at a faster rate than their networth.

 

It could be that this is just my observation. Not sure why everyone is ignoring this.

[JBTC]

One should look at the snowbird phenomenon or how many Canadians bought properties in phoenix, Florida, palm Springs to understand how easy it is for Canadians to move between Canada and US.

 

It is leverage that kills and Vancouver cannot be any different. The longer this continues the more leverage is used and more unstable the system.

 

I do not believe any other factors matter in the long run as all markets eventually turn.

 

The snowbirds are mostly older people who spend 6 months of the year in the US. Because they need to go back to Canada after the winter, they must maintain a home in Canada too. If they were allowed to stay for 12 months, I suspect some of them might sell their homes in Canada which would increase housing supply.

 

For most people who still work, moving to the US is not easy. Of course the highly skilled Canadians can find work in the US easily (say Justin Bieber).

 

The border between the US and Canada is real. This is different from other rich neighboring countries.

 

In Western Europe, there is complete freedom for people to move and settle across countries. London has higher prices than Paris, partly because numerous Frenchmen now work and live in London, not vice versa.

 

In Australia and New Zealand, citizens of the two countries can live and work anywhere completely freely. The immigration flow is mostly from New Zealand to Australia because of better weather and higher pay. This forces the New Zealand government to adopt a very generous policy to attract Asian immigrants.

 

I agree that the quantities of leverage and speculative buyers are important to future outlook. Which is why we want to quantify both as much as we can, not merely pointing out they exist.

 

I posted the link below before. It shows Canadian household debt to assets is 17% and owner's equity in housing is 73%. These are benign numbers.

 

Are there other data that look more worrying? Are there certain market segments that are more vulnerable?

 

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

 

[merkhet]

Interesting numbers, JBTC. Too bad they didn't segment it out in terms of metro. Would be interesting to see if owner's equity is significantly lower in Vancouver & Toronto.

[mcliu]

I posted the link below before. It shows Canadian household debt to assets is 17% and owner's equity in housing is 73%. These are benign numbers.

 

Is it that benign though? The same metric for the US was around 17% in 2006/2007.

The ratio subsequently spiked in 2008 and 2009 as asset prices came tumbling down..

 

http://3.bp.blogspot.com/-geOLT7b-_7w/VQiPDlkVIAI/AAAAAAAAS78/Wii0qaRArl0/s1600/Household%2Bleverage.jpg

 

Are there other data that look more worrying? Are there certain market segments that are more vulnerable?

 

Look at the charts and reports that I've attached in this post:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/garth-turner-greaterfool/msg258546/#msg258546

 

1) Over 20% of BC households had a household debt to income ratio of over 500% in 2012. Imagine what it is today given that the Household Debt to Income metric has climbed ~20% since 2012 for the country overall.

2) RBC's affordability report shows that ownership costs for a SFD home in Vancouver is over 100% of median household income.

 

How is that not worrying?  :o

[wisdom]

Debt to disposable income was 90% in Canada until 2000. Now the same figure stands at 165%. My understanding has always been that cash flow services debt and not assets.

 

Private debt to GDP has also touched 100%. A figure never seen in Canada before in its modern history.

 

As liberty has pointed out BC has had a negative savings rate for 20 years now bar for one year. How long can this be sustained . Are these signs of people leveraging or a sign of an extremely rich society.

 

Total vehicle financing in Canada was $15B in 2008. Today that figure is over $65B. I am sure someone will come up with the argument that the cars are worth more because they are new. Thus, the assets have gone up in value ( newer cars).

 

I would argue that our GDP has not gone up by 4x, thus, this increase is unsustainable.

[merkhet]

Out of curiosity, how are people playing this? Short Canadian banks? Canadian development companies?

[alertmeipp]

say u make 100k in Canada, u take home about 5k per months, with 200k down, and 3% mortgage (historical low)...

 

the max u can afford is like a 500k house.

 

http://www.canadamortgage.com/calculators/affordability.cgi

 

Average Vancouver income is 75k.

 

:o

[JBTC]

There's some good data in the earlier posts. I'll make a few observations.

 

1) Rising debt is not unique to Canada, although Canada has indeed behaved worse than most. See the article below. Of the G7, only Germany and Japan delevered during 2000-14.

 

http://business.financialpost.com/investing/outlook-2016/canadians-household-debt-highest-in-g7-with-crunch-on-brink-of-historic-levels-pbo-warns

 

2) Debt has increased as interest rates have fallen. So debt servicing capacity didn't increase nearly as much. RBC's affordability report is useful in this regard (thanks to mcliu).

 

3) As of 2014, Canada's household debt to disposable income was 166%, just behind Sweden, Australia, Ireland, Norway, Netherlands, and Denmark. Denmark was the global champion at 305%. See data below. The debt ratios vary greatly by country. This to me reinforces the notion that there is hardly any ironclad law in economics.

 

https://data.oecd.org/hha/household-debt.htm

 

4) In terms of debt level, Vancouver seems the canary in a coal mine for Canada. Globally, perhaps Australia is the one to watch. The two countries are highly similar - key immigration destinations and commodity-driven, and Australia has higher housing prices and debt.

 

5) For Vancouver, the RBC report suggests that condo affordability has in fact improved. So it's really the single detached that has gone crazy. This is important - so a large portion of the market is mostly ok, and only the high-end is the most problematic.

 

6) The question becomes - how worrying is the high-end market in Vancouver? What's the consequence if this part of the market falls?

 

I assume these houses are most likely bought by high-income people, but there is no data. If the poor people fake their incomes and get into these houses, then risk is high. If, as gary suggested, it's the rich Asians who buy them to store their wealth, then risk is low.

 

Then there are other factors to consider - will the rest of the Canadian economy decline, and drag down housing? Could rates go up? If not, then debt servicing may be ok for now. Any other potential shocks?

 

I'll stop. Let's dig some more.

 

[wisdom]

From what I see - as I don't have the data to back this up.

 

I do not believe the major buyers are rich Asians, even though they get all the media attention. They are on the margins.

 

The biggest player from what I see -  a lot of people have become builders over the last decade or so. Depending on how big these guys are - each individual needs to buy at least 1 property each year if not 2. The slightly larger players are south Asians and iranians. The so called builders often own 10-20 properties. All these properties are financed and at different stages - i.e. some have just been bought as inventory for the  following year projects (20% or so), others have had plans submitted to the city another 20% as these will soon be demolished and construction will begin, another group of properties that are mid-way to being completed, and the last group that is completed and on the market.

 

Participants from Asia do not even come close to their numbers in the market nor do they hold the same number of properties. Construction has become a very large part of the local economy.

 

I will add there was a perception here and in the market that Asian buyers were paying cash and I have pointed out several times before that they are also using leverage.

[gary17]

Asians use leverage because the bank deposit rates in China / Taiwan / Hong Kong are higher than the mortgage rates in Canada

 

HSBC would lend you X based on deposits in GIC in their Asian branches.  and they just pay the mortgage - but the funds are secured.  Further , this practice also demands higher down payment - I believe 30% or more -

 

my concern with this is if the Chinese economy has a hard landing , our banks will be repossessing some of these Properties.  will they be worth what they are now ?

[wisdom]

So we can't compare real estate prices across different countries, but it is OK to compare their debt levels?

 

I would prefer to compare with historical numbers - Canadian median houses have over the long run been $10k cheaper than the US. Today we are on average $200k higher.

 

Our median house used to be 2.5x income, today it is  lose to 6x.

 

Median house to median household income used to be under 5x in Vancouver and now it is over 12x.

 

Debt to gdp for Canada was 60%, today 100% and increasing faster than GDP.

 

Every single number you compare with historical stats, it is way off. It is always possible that Canada has solved a problem the Americans and Europeans were not able to = more leverage leads to ever inceasing prosperity or we have reached a higher plateau.

 

I remain a skeptic.

[wisdom]

Gary - China has been trying to shut down outflows for a while. Initially it was $50k per person. Then Macau got shut down - was a major source. Then HK bank route got shut down.

 

People were playing with the $50k limit. So now there is a new $200k total limit. So now fake exports are the main source of funds leaving China.

 

What are the chances that authorities in China actually succeed. If that was the sole reason for Vancouver real estate market going up, I would be even more concerned.