Garth Turner - Real Estate in Canada

[Liberty]

Some people say Canada has recourse mortgages but if many buyers are dual citizens, they can pack up and leave the banks holding the bag without much recourse. This is a dynamic that may not existed to such a degree in the States. I wonder how a bust would affect the dollar...

 

On top of that, US states that have recourse mortgages fared pretty badly in the housing bust. That's not a panacea.

[wisdom]

Alberta is non-recourse. And Liberty is correct in his statement on recourse mortgages.

 

What about Ireland? Too much debt sets up society for lots of volatility. This is not good where shelter is concerned in a society with homeownership at 70%.

[wisdom]

Spent time talking to developers/realtors and investors on the weekend. The euphoria is incredible in Vancouver and everyone is "king of the world" right now because they have made the smartest decision.

 

Feels very similar to my conversations with people during the tech bubble. That did not last too long once the delta got very high. Let us see how long Vancouver can maintain it.

[bbarberayr]

Miami market getting hit by a reduction in overseas buyers.  Different market and different buyers, but a lot of the same drivers. 

 

http://www.bloomberg.com/news/articles/2015-06-05/miami-s-hot-condo-market-cools-as-dollar-derails-buyers

 

“Everybody is looking at Miami and saying when is something bad going to happen?” Rosso said. “And I say this is a different market. You’re not going to have a bubble burst.”

 

> The above quote sure sounds like Vancouver

 

[JBTC]

 

The point is that although Manhattan land is very scarce the land component of the condo is small and you can build more condo's in NY over time.  So only 5-10% of the price people were paying in Manhattan might be land. 

 

 

Will you be able to provide some data to substantiate this?

 

[wisdom]

http://blogs.theprovince.com/2016/02/23/langley-property-listed-at-1-8m-just-a-month-after-selling-for-1-15m/

 

Another example of what I have been saying for the last month or so. This is fairly normal right now. Incredible to see!

 

[scorpioncapital]

http://blogs.theprovince.com/2016/02/23/langley-property-listed-at-1-8m-just-a-month-after-selling-for-1-15m/

 

Another example of what I have been saying for the last month or so. This is fairly normal right now. Incredible to see!

 

So if it rents for $24,000 per year, then at this listing price the yield (as an investment) is 1.3%. That's a little less than what you can get for cash sitting in the bank. Likewise, at the assessment price of 1.1 million, the yield is 2.1%. Also something you can probably get at the bank. I'm even wondering if the property assessment department is drinking something as well! For that money you can get something in the south of France or Spain and still have spending money left over.

[wisdom]

This is how the story goes -

Vancouver has mountains, water, clean air and good governance. So all the rich people want to move here. These prices are nothing for the world's rich. They have no where else to go but move here. And we in Vancouver don't have any more land.

 

BTW - that property is about an hours drive from downtown.

[JBTC]

 

For that money you can get something in the south of France or Spain and still have spending money left over.

 

A couple of days ago I was flipping through the FT property section when sitting in a plane. Yup, French and Spanish properties are dirt cheap.

 

If you can think of a way to arbitrage, we can get rich.

 

[Liberty]

http://blogs.theprovince.com/2016/02/23/langley-property-listed-at-1-8m-just-a-month-after-selling-for-1-15m/

 

Another example of what I have been saying for the last month or so. This is fairly normal right now. Incredible to see!

 

So if it rents for $24,000 per year, then at this listing price the yield (as an investment) is 1.3%. That's a little less than what you can get for cash sitting in the bank. Likewise, at the assessment price of 1.1 million, the yield is 2.1%. Also something you can probably get at the bank. I'm even wondering if the property assessment department is drinking something as well! For that money you can get something in the south of France or Spain and still have spending money left over.

 

It's even worse than that. You get $24,000/year, but that's a gross amount, it doesn't include all your costs for maintenance, municipal taxes, etc.

[scorpioncapital]

If the wealthy are using B.C. as a bank account then I have to ask, what's wrong with a regular bank account at the local bank? To put your money into an illiquid asset with a speculative element suggests it's more than just storing wealth. Perhaps there is a cultural component to it, money goes where it's welcome and B.C. has made it so welcome that it has even turned a blind eye to crime and taxation to encourage it.

 

 

[LongHaul]

Edit:  ignore the below analysis as it is incorrect.  There is a big difference between buildable square foot and price per square foot of raw land.

 

Here is an article about Manhattan Land.  One price listed is $1,200 a foot but then the chart shows $579 per foot.  I am not sure of difference.  $1000 per SFT is $44m per acre.  Depends on how many units you can put on there.  If there are 500 units then it works out to $100k of land per unit.  At $1.9m per unit would be 5.3% of the total price.  Construction costs are super expensive in Manhattan.  I originally thought the high apartment prices were from high land values but it seems like it is more construction costs.

 

Land

http://therealdeal.com/issues_articles/486631/

 

 

Apartment prices

http://www.bloomberg.com/news/articles/2015-07-01/manhattan-apartment-prices-reach-record-amid-bidding-wars

[wisdom]

One word - leverage. You only need to put down 35% to get financing. If the property is up 10% in a month = 28% return in a month.

 

There is a new to Canada program which allows any resident of Canada (work permit or permanent resident) to get 65% financing without credit history or in many cases local income.

 

Buy a $3 mil property with $1 mil down and sell it in a year at $4 mil or having doubled your equity.

[mcliu]

If the wealthy are using B.C. as a bank account then I have to ask, what's wrong with a regular bank account at the local bank? To put your money into an illiquid asset with a speculative element suggests it's more than just storing wealth. Perhaps there is a cultural component to it, money goes where it's welcome and B.C. has made it so welcome that it has even turned a blind eye to crime and taxation to encourage it.

 

Cash flows don't matter when you're getting double-digit tax-free capital gains each year..

 

I can just imagine the realtor pitch: "Why settle for 1% taxed income in your savings account, when you can get 10% annual unlevered gains in Vancouver real estate tax-free? Sure win! Prices have only gone up for the past 3 decades!"

[scorpioncapital]

Which is more likely? Rents double to catch up with prices or prices halve to meet rents? The way prices are rising suggests hyper-inflation in Canada but this is hard to justify given a potential recession and not much wage increases.

 

 

[Jurgis]

 

For that money you can get something in the south of France or Spain and still have spending money left over.

 

A couple of days ago I was flipping through the FT property section when sitting in a plane. Yup, French and Spanish properties are dirt cheap.

 

If you can think of a way to arbitrage, we can get rich.

 

1. Flip that 1.8M mobile home

2. Buy French/Spanish properties with the money

3. ...

4. Profit!!!

 

Repeat as needed.

 

8)

[JBTC]

Here is an article about Manhattan Land.  One price listed is $1,200 a foot but then the chart shows $579 per foot.  I am not sure of difference.  $1000 per SFT is $44m per acre.  Depends on how many units you can put on there.  If there are 500 units then it works out to $100k of land per unit.  At $1.9m per unit would be 5.3% of the total price.  Construction costs are super expensive in Manhattan.  I originally thought the high apartment prices were from high land values but it seems like it is more construction costs.

 

Land

http://therealdeal.com/issues_articles/486631/

 

 

Apartment prices

http://www.bloomberg.com/news/articles/2015-07-01/manhattan-apartment-prices-reach-record-amid-bidding-wars

 

LongHaul,

 

Your math is so wrong that I want to correct it.

 

I invest in property a little but have no direct development experience, so if I am way off in my post I will apologize and correct myself.

 

I gather you are not in the property business, and you don't know New York well.

 

The $1,200 land price cited in the article is per buildable square foot. It's the unit land price based on the total floor area of the building, not the unit price based on the size of the plot.

 

Put in another way, the Soho parking lot sold for $50mn does not have 0.84 acre - it's likely a fraction of that size.

 

In fact, if you did read the article you provided, the facts are crystal clear.

 

"If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that’s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin."

 

In this example, the land cost is 48% of the final selling price.

 

Let me know if you disagree.

 

[JBTC]

 

For that money you can get something in the south of France or Spain and still have spending money left over.

 

A couple of days ago I was flipping through the FT property section when sitting in a plane. Yup, French and Spanish properties are dirt cheap.

 

If you can think of a way to arbitrage, we can get rich.

 

1. Flip that 1.8M mobile home

2. Buy French/Spanish properties with the money

3. ...

4. Profit!!!

 

Repeat as needed.

 

8)

 

3. Ship the Spanish house and the land underneath to Vancouver.  :D

 

Look, I don't want to defend the current housing prices. They look high, and I am not buying at the current level.

 

But I do think many bears clearly missed a few secular drivers of Canadian housing in the past decade. This thread is four years old. I am not saying some of you need to change your view - your view on today's price could well be correct.

 

What I found slightly lacking is very few of the bears have come out and reflect on where they got wrong. Such reflections are critical for us to improve our ability to forecast.

 

It's wrong to ignore the significant speculative activities in the market. It's also wrong to completely dismiss the fundamental factors that have allowed and encouraged the speculative activities.

 

Housing is both an investment and a consumption good. Many of you have focused entirely on the investment side of the equation. But people also buy to live in it. When a house is bought mostly as consumption, the cap rates and all sorts of ratios matter less.

 

[Jurgis]

Housing is both an investment and a consumption good. Many of you have focused entirely on the investment side of the equation. But people also buy to live in it. When a house is bought mostly as consumption, the cap rates and all sorts of ratios matter less.

 

I don't have a bear in this fight. Not even a polar one.

 

As I said before in this thread, when I buy a house for consumption, I refuse to spend 1.X M because I might just as well use that money to retire.

 

But I'm fine if people want to waste that money on houses in Silly Valley, NYC, Vancouver or North Pole. The views are great I hear. And the prices can never go south.

[JBTC]

Housing is both an investment and a consumption good. Many of you have focused entirely on the investment side of the equation. But people also buy to live in it. When a house is bought mostly as consumption, the cap rates and all sorts of ratios matter less.

 

I don't have a bear in this fight. Not even a polar one.

 

As I said before in this thread, when I buy a house for consumption, I refuse to spend 1.X M because I might just as well use that money to retire.

 

But I'm fine if people want to waste that money on houses in Silly Valley, NYC, Vancouver or North Pole. The views are great I hear. And the prices can never go south.

 

I knew that. I'd be more careful about venting to a bear.  ;)

 

From you I can count on getting a few jokes, and I like the North Pole bit.

 

[LongHaul]

Here is an article about Manhattan Land.  One price listed is $1,200 a foot but then the chart shows $579 per foot.  I am not sure of difference.  $1000 per SFT is $44m per acre.  Depends on how many units you can put on there.  If there are 500 units then it works out to $100k of land per unit.  At $1.9m per unit would be 5.3% of the total price.  Construction costs are super expensive in Manhattan.  I originally thought the high apartment prices were from high land values but it seems like it is more construction costs.

 

Land

http://therealdeal.com/issues_articles/486631/

 

 

Apartment prices

http://www.bloomberg.com/news/articles/2015-07-01/manhattan-apartment-prices-reach-record-amid-bidding-wars

 

LongHaul,

 

Your math is so wrong that I want to correct it.

 

I invest in property a little but have no direct development experience, so if I am way off in my post I will apologize and correct myself.

 

I gather you are not in the property business, and you don't know New York well.

 

The $1,200 land price cited in the article is per buildable square foot. It's the unit land price based on the total floor area of the building, not the unit price based on the size of the plot.

 

Put in another way, the Soho parking lot sold for $50mn does not have 0.84 acre - it's likely a fraction of that size.

 

In fact, if you did read the article you provided, the facts are crystal clear.

 

"If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that’s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin."

 

In this example, the land cost is 48% of the final selling price.

 

Let me know if you disagree.

 

JBTC - Excellent correction.  You are totally right and I was wrong.  Nice catch.  Good to learn from someone who knows real estate. 

 

The chart I saw must of been price per buildable square foot in Manhattan and not price per sft of land.

So for 2014 I see the average as price per buildable SFT as $579 and new condo prices at ~$1851 or 31% of the price of a new unit as land.

 

Very interesting.  It seems like the constraint may also be how much SFT one can put up on the raw land.

If it was much larger across the board then the land/unit price should be less, but of course it is very constrained in Manhattan.

 

I view land as just another input into the construction of new units.  You have some land to put up a building and earn a return.  If the return is low the land is over priced.  If the price of apartments goes way up the land prices will go up at a much faster rate.

 

The land/apartment unit price ration should be dependent on the price of the apartment.  The higher the price of the apartment the higher the land price embedded in the apartment (All else equal - construction costs, site, etc.)

 

I personally think NY is in a bubble with low cap rates so the land is inflated in price.    Perhaps a more normalized ratio is 15% or so. 

 

Thanks again for the correction. 

 

[JBTC]

Here is an article about Manhattan Land.  One price listed is $1,200 a foot but then the chart shows $579 per foot.  I am not sure of difference.  $1000 per SFT is $44m per acre.  Depends on how many units you can put on there.  If there are 500 units then it works out to $100k of land per unit.  At $1.9m per unit would be 5.3% of the total price.  Construction costs are super expensive in Manhattan.  I originally thought the high apartment prices were from high land values but it seems like it is more construction costs.

 

Land

http://therealdeal.com/issues_articles/486631/

 

 

Apartment prices

http://www.bloomberg.com/news/articles/2015-07-01/manhattan-apartment-prices-reach-record-amid-bidding-wars

 

LongHaul,

 

Your math is so wrong that I want to correct it.

 

I invest in property a little but have no direct development experience, so if I am way off in my post I will apologize and correct myself.

 

I gather you are not in the property business, and you don't know New York well.

 

The $1,200 land price cited in the article is per buildable square foot. It's the unit land price based on the total floor area of the building, not the unit price based on the size of the plot.

 

Put in another way, the Soho parking lot sold for $50mn does not have 0.84 acre - it's likely a fraction of that size.

 

In fact, if you did read the article you provided, the facts are crystal clear.

 

"If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that’s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin."

 

In this example, the land cost is 48% of the final selling price.

 

Let me know if you disagree.

 

JBTC - Excellent correction.  You are totally right and I was wrong.  Nice catch.  Good to learn from someone who knows real estate. 

 

The chart I saw must of been price per buildable square foot in Manhattan and not price per sft of land.

So for 2014 I see the average as price per buildable SFT as $579 and new condo prices at ~$1851 or 31% of the price of a new unit as land.

 

Very interesting.  It seems like the constraint may also be how much SFT one can put up on the raw land.

If it was much larger across the board then the land/unit price should be less, but of course it is very constrained in Manhattan.

 

I view land as just another input into the construction of new units.  You have some land to put up a building and earn a return.  If the return is low the land is over priced.  If the price of apartments goes way up the land prices will go up at a much faster rate.

 

The land/apartment unit price ration should be dependent on the price of the apartment.  The higher the price of the apartment the higher the land price embedded in the apartment (All else equal - construction costs, site, etc.)

 

I personally think NY is in a bubble with low cap rates so the land is inflated in price.    Perhaps a more normalized ratio is 15% or so. 

 

Thanks again for the correction.

 

You are the most welcome. We are all here to learn and I have learned a lot from everyone.

 

If you believe the statement that what matters in real estate is location, location, location, then it follows land price is an important component of real estate price. There cannot be any other way.

 

I haven't studied the ratios of land price to property price. They seem to vary by country and market. My guess is they may also vary over time. But I have no data.

 

Relative to land which is nonmovable and nontradable (real estate in French is immobilier), construction materials are movable and tradable although can be heavy. So relative to each other, I would expect land prices to vary more greatly than construction material prices. Construction labor is generally mobile but nontradable (mostly), and the price difference can be huge between countries but may be small within a country.

 

[JBTC]

Hot in the city

 

Valuations in globalised cities are rising much faster than in their hinterlands

 

http://www.economist.com/news/finance-and-economics/21695912-valuations-globalised-cities-are-rising-much-faster-their

 

[permabear]

Long Canadian housing report published by Fortress RDI. http://fortressrealdevelopments.com/news/the-market-manuscript-spring-2016/

 

Where to start...

[KCLarkin]

I was in Mexico last week. I overheard two people discussing the Vancouver real estate market. I officially agree that Vancouver Real Estate market is a bubble.

 

I'm still not sure that Toronto is in a bubble.