Garth Turner - Real Estate in Canada

[wisdom]

Both Canadian and Australian private debt is at 100% of GDP . Does that imply that Canadians are even more leveraged than the Aussies?

 

The Canadian government has been trying to target the housing market since 2008 when you could buy with 0 down and amortize a mortgage over 40 years.

[Pauly]

Anecdote from Vancouver, FWIW, shows some of the mindset going on and the way people get houses they can't really afford:

 

“There is mass hysteria here as people rush to buy now or be priced out forever. I thought things were crazy before, now they are just beyond absurd. It seems like people are doing whatever they can do buy now, including (probably) pledging their firstborn children. Some have this mentality that they must buy to ensure the future of their children, otherwise their kids will never be able to afford a place years down the road, since people seem to have forgotten that Vancouver isn’t the only city in Canada, or the world, that has houses.

 

“A friend of ours has been looking to buy for months, to no success. Outbid on many properties, until they finally found one that had no other offers. Bad location, they made an offer and it was accepted. Price is $800k for a 3 bed townhouse. The bank gave them the bad news: they didn’t qualify for the mortgage. No s**t sherlock, hard to justify a $750k mortgage when the family income is only $70k per year. Following some fancy footwork by the broker (something that seemed to involve kiting cheques between family members)-voila! The deal is done, townhouse is theirs. It seems outrageous to me but this seems like a fact of life these days that it’s an any-price type of game….doesn’t matter what the price is, the broker can help you get the place you want. If the bank doesn’t follow through, private lenders can step in too.

 

But these types of anecdotes have been going around for what...9 years or more? I can't speak to the rest of Canada, but Vancouver is in a perfect storm :

 

- beautiful city (say what you want about the rain, but the city and its surroundings have great 'curb appeal'

- only large Canadian city with a moderate climate (Canada is still a desirable country to live in for many around the world)

- proximity to HK/mainland China, and a large, established Asian community

- an army of well paid real estate types constantly playing hype man

- opaque market so people rely on realtors and hearsay for information

- over 1 1/2 decades of steady price increases that even the Great Financial Crisis could barely dent. And the cratering of share prices in 08/09 made real estate even more desirable in Canada since it appears rock solid compared to paper assets.

- rock bottom borrowing rates that have inflated every financial asset.

- my own anecdote from a friend in the industry: as the CAD declined, Vancouver house prices rose by an equal amount so that they were nominally the same in USD. Does that make sense for the average home buyer?

 

Reading a blog like Garth Turner's makes you want to short everything you can find in Vancouver real estate, but if you had somehow shorted back when this thread started you'd be insolvent by now. Too hard pile for me.

It's depressing, though, that skilled people (doctors, engineers etc.) are choosing to avoid the city yet we're up to our eyeballs in rich real estate types adding little (or negative) value.

 

 

[JBTC]

 

But these types of anecdotes have been going around for what...9 years or more? I can't speak to the rest of Canada, but Vancouver is in a perfect storm :

 

- beautiful city (say what you want about the rain, but the city and its surroundings have great 'curb appeal'

- only large Canadian city with a moderate climate (Canada is still a desirable country to live in for many around the world)

- proximity to HK/mainland China, and a large, established Asian community

- an army of well paid real estate types constantly playing hype man

- opaque market so people rely on realtors and hearsay for information

- over 1 1/2 decades of steady price increases that even the Great Financial Crisis could barely dent. And the cratering of share prices in 08/09 made real estate even more desirable in Canada since it appears rock solid compared to paper assets.

- rock bottom borrowing rates that have inflated every financial asset.

- my own anecdote from a friend in the industry: as the CAD declined, Vancouver house prices rose by an equal amount so that they were nominally the same in USD. Does that make sense for the average home buyer?

 

Reading a blog like Garth Turner's makes you want to short everything you can find in Vancouver real estate, but if you had somehow shorted back when this thread started you'd be insolvent by now. Too hard pile for me.

It's depressing, though, that skilled people (doctors, engineers etc.) are choosing to avoid the city yet we're up to our eyeballs in rich real estate types adding little (or negative) value.

 

There may be reasons to be short, but most of the above are really reasons to be long.

 

For now it's hard to see how the current trend reverses itself. My guess is a few years down the road the government may be forced to act. Their goal will be to slow the market, not make it fall.

 

Outside of government intervention, you will need a potential shock which is not forecastable.

 

[Liberty]

The argument that this has been going on for a long time always reminds me of the turkey story. The longer an untenable situation has been going on, the closer we are to thanksgiving.

 

Vancouver's nice and everything, but there's a difference between some wealthy foreigners coming in and nabbing some luxurious properties and increasing prices in some neighbourhoods and the whole city going nuts with real-estate fever and starting bidding wars over decades-old unrenovated crack shacks going for $1-2 million..

 

http://www.crackshackormansion.com/

[original mungerville]

What's weird is I remember sharing a crack shack / mansion link on Vancouver real-estate back before the financial crisis - probably 2006/07 timeframe. Been going on for 10 years now - maybe the bidding wars were not as crazy.

[Liberty]

What's weird is I remember sharing a crack shack / mansion link on Vancouver real-estate back before the financial crisis - probably 2006/07 timeframe. Been going on for 10 years now - maybe the bidding wars were not as crazy.

 

Yeah, that site is probably pretty old, I doubt it has been updated. I bet these crack shacks are selling for much more now.

[scorpioncapital]

It's not the crack shack it's the land. Price of a house relative to the land is kinda peanuts which is why they say real estate is about location, location, location. Of course if the location is out in the country then cost of the house as a % is going to be much higher.

 

[Liberty]

It's not the crack shack it's the land. Price of a house relative to the land is kinda peanuts which is why they say real estate is about location, location, location. Of course if the location is out in the country then cost of the house as a % is going to be much higher.

 

I still wouldn't pay 1-2 million for a tiny parcel of land surrounded by other crack shacks, only to then have to pay a ton more to build a new house (because new-building construction has to be overpriced there too, right?).

[permabear]

I do some real estate development work in central Florida. The rule of thumb for homebuilders there is that lot prices (pad-ready, incl. roads, sewer, utilities, water, etc.) should cost approx. 20% of the final selling price of the home (i.e. builder's land cost / builder's selling price = 20%). Haven't done any similar work in Canada, but with old dumpy lots fetching $1.0-1.5m and being resold for $2.5-3.0m after demolition and construction, it is clear that the lot cost is significantly higher in Canada (anywhere from 33-60% based on my figures). Very little room for error. If home prices drop these builders will be stuck with very expensive lots that they can't turn for a profit.

[Liberty]

For the price of one crack shack in vancouver, I can retire elsewhere on the income generated by that money. I know which one I'd pick.

[Jurgis]

For the price of one crack shack in vancouver, I can retire elsewhere on the income generated by that money. I know which one I'd pick.

 

Bingo. That's why I don't live in Silly Valley.

[bbarberayr]

Vancouver house prices will correct.  Because they've been going up for 15 years, people assume that they will forever.  Price has taken over from fundamentals and people are just thinking price.  Every situation where people assumed something would go up forever has ended up being a big problem (US housing crisis for example).

 

Here is historical Vancouver house prices - https://vreaa.files.wordpress.com/2010/09/vreta-chart-0-lines.jpg

 

See the 20%+ drop from 1994 to 1998 and the 1994 prices was not surpassed for almost 10 years.

 

It can and will happen

 

 

 

 

 

 

 

[scorpioncapital]

Another possible scenario is flat (high) prices for a very long time. So say today's high prices with no increases for the next 10 to 15 years. Of course such precision is unlikely given human nature but it is a possibility if there is significant government intervention.

[Liberty]

Another possible scenario is flat (high) prices for a very long time. So say today's high prices with no increases for the next 10 to 15 years. Of course such precision is unlikely given human nature but it is a possibility if there is significant government intervention.

 

People's ability to carry their massive debt with their negative saving rates is predicated on constantly rising prices. Flat won't do it, IMO. And this isn't taking into account that at some point interest rates will rise in the US and Canada will face a dilemma; either follow and kill housing, or don't follow and further kill the dollar.

[gary17]

NB estimates 1/3 of Vancouver homes bought by Chinese

 

http://www.bloomberg.com/news/articles/2016-03-23/chinese-buy-one-third-of-vancouver-homes-national-bank-estimate

[JBTC]

NB estimates 1/3 of Vancouver homes bought by Chinese

 

http://www.bloomberg.com/news/articles/2016-03-23/chinese-buy-one-third-of-vancouver-homes-national-bank-estimate

 

Interesting. I assume this doesn't include the buying of Chinese Canadians (20% of the local population) who likely punch above their weight in property purchases.

 

[wachtwoord]

NB estimates 1/3 of Vancouver homes bought by Chinese

 

http://www.bloomberg.com/news/articles/2016-03-23/chinese-buy-one-third-of-vancouver-homes-national-bank-estimate

 

Annexation by real estate! ;)

[wisdom]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

[Liberty]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

I doubt this "back of the envelope" is anything by myth.

 

Victoria's real-estate board tracks these things, unlike vancouver, and in 2013 only 1.64% of buyers were foreign (most from the USA). Now that's not vancouver, but pretty unlikely that Vancouver next door is orders of magnitude different.

 

http://origin.library.constantcontact.com/download/get/file/1116729122123-37/Buyers+Origins+20130101+to+20131231.pdf

[mcliu]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

It's not. It's a very small sample of the high end market.

 

"Routledge compiled the data by extrapolating from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors."

[gary17]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

I doubt this "back of the envelope" is anything by myth.

 

Victoria's real-estate board tracks these things, unlike vancouver, and in 2013 only 1.64% of buyers were foreign (most from the USA). Now that's not vancouver, but pretty unlikely that Vancouver next door is orders of magnitude different.

 

http://origin.library.constantcontact.com/download/get/file/1116729122123-37/Buyers+Origins+20130101+to+20131231.pdf

 

Victoria is a 2h ferry ride away.  that's very different.

[Liberty]

Victoria is a 2h ferry ride away.  that's very different.

 

I didn't say it was the same.

 

Still hasn't stopped prices from rising almost 10% YoY despite 1.6% foreign buyers, most of them from US.

[Liberty]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

It's not. It's a very small sample of the high end market.

 

"Routledge compiled the data by extrapolating from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors."

 

Wow, 77 high-end buyers turns into media articles about the Chinese taking over all of Vancouver. There's a constant flow of these. Once the idea has taken root, confirmation bias does the rest. Every time someone who looks asian is seen, it only confirms what people think (even if they're Canadian).

 

Reminds me of the fake asian buyers from news stories not that long ago. Realtors rented a yellow helicopter and had Canadians of asian heritage (one who works as a condo promoters, iirc) pose as rich chinese buyers for TV cameras..

 

http://www.greaterfool.ca/2015/05/12/the-frauds/

http://www.greaterfool.ca/2013/02/14/the-myth-of-ham/

 

[gary17]

I would be surprised if those numbers were even close to reality.

 

In the meantime, it looks like the rich foreigners now want to live in townhomes in the suburbs. Those are now up 60% in the last 2 years in Vancouver. Could hit a million at this rate by the end of 2016.

 

It's not. It's a very small sample of the high end market.

 

"Routledge compiled the data by extrapolating from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors."

 

Wow, 77 high-end buyers turns into media articles about the Chinese taking over all of Vancouver. There's a constant flow of these. Once the idea has taken root, confirmation bias does the rest. Every time someone who looks asian is seen, it only confirms what people think (even if they're Canadian).

 

Reminds me of the fake asian buyers from news stories not that long ago. Realtors rented a yellow helicopter and had Canadians of asian heritage (one who works as a condo promoters, iirc) pose as rich chinese buyers for TV cameras..

 

http://www.greaterfool.ca/2015/05/12/the-frauds/

http://www.greaterfool.ca/2013/02/14/the-myth-of-ham/

 

Liberty - I take it you are not from Vancouver....

 

If you go to the only two high schools in West Vancouver;

pretty much all the high schools in Vancouver West side

and the two universities - SFU & UBC  and the local colleges.... 

 

Then you might find the 33% is not unrealistic. 

 

Let's hope the federal government find a way to measure this more reliably.  But you don't need hard scientific data to know it is the Chinese that's driving up real estate in Vancouver -

 

Gary

 

 

 

 

 

 

[Liberty]

I'm not saying it's not a factor, I'm saying it's the common excuse for everything. As Buffett said, every bubble is initially based on something real, but every time there are rationalizations that people use to go from that real thing into la-la land (how many comparisons of Vancouver have I seen with New York, Paris and London in the past few years?).

 

Question anything about Vancouver, and it's the Chinese.

 

I happen to think that the realtors and the media echo chamber have really overblown the Chinese situation because it benefits them tremendously. They've taken something real, and turned it into something else.

 

I think the vast, vast majority of houses in Vancouver are probably being bought by people who aren't from wealthy foreign money, but they're still paying princeling prices, and that will end badly.