Garth Turner - Real Estate in Canada

[scorpioncapital]

if you believe the panama papers, untaxed foreign wealth. When you have an extra 30% to play with and you can borrow 3:1, that's 100% higher prices you can afford to pay right there.

[wisdom]

http://business.financialpost.com/personal-finance/mortgages-real-estate/march-home-sales-smash-through-record-in-greater-vancouver-as-bubble-fears-grow

 

Housing sales hit record high in Greater Vancouver. Average detached house is now $1.78 mil. Median household income around $75,000.

 

Note: this is not just Vancouver but Greater Vancouver.

[JBTC]

Possibly one indication of the size of Chinese buying -

 

Chinese Developers Aim to Expand in Canada

 

http://www.wsj.com/articles/chinese-developers-aim-to-expand-in-canada-1459871887

 

[Liberty]

New CMHC report on foreign ownership. Low single digit percents in both vancouver and

GTA. And that includes americans and others.

 

http://www.cmhc.ca/en/corp/nero/nere/2016/2016-04-07-1100.cfm

[scorpioncapital]

They should look at the question of people with dual citizenship. I read an article that said that the numbers are low because of this , also there are other issues that cause foreign ownership not to be counted, such as buying in other people's names or corporations. Call me a cynic but this is pure propaganda to keep the number low to keep the housing market chugging along.

[wisdom]

At least in Vancouver, majority of the homes are being bought by locals. They refinance their existing houses and buy new places.

 

When you apply through a broker - one bank gets an application for an equity take out and the other bank gets an application for 80% financing request on the new purchase with 20% down. Though the 20% is also being borrowed (on the first property) on highly inflated property values. In a lot of cases 80% would be 100% of the value of the same property as recently as December 2015.

 

Neither FI knows of the other application. If they knew or cared to look, they would figure out that the new property is 100% financed (20% on existing and 80% on the purchase). Everyone is too busy feeling giddy.

 

Both, FI's end up under reporting risk as they are unaware (or look the other way) of the debt on the othe FI's book. The regulators are also ignoring this risk.

[gary17]

Wisdom

I think FI know-

they do a credit check as part of mortgage app and would see the existing line of credit. they also Usually ask how the deposit is funded.

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At least in Vancouver, majority of the homes are being bought by locals. They refinance their existing houses and buy new places.

 

When you apply through a broker - one bank gets an application for an equity take out and the other bank gets an application for 80% financing request on the new purchase with 20% down. Though the 20% is also being borrowed (on the first property) on highly inflated property values. In a lot of cases 80% would be 100% of the value of the same property as recently as December 2015.

 

Neither FI knows of the other application. If they knew or cared to look, they would figure out that the new property is 100% financed (20% on existing and 80% on the purchase). Everyone is too busy feeling giddy.

 

Both, FI's end up under reporting risk as they are unaware (or look the other way) of the debt on the othe FI's book. The regulators are also ignoring this risk.

[wisdom]

Gary there are ways around it if you know the Canadian banking system. Which the brokers and a lot of investors know.

 

When a broker sends an application, there is no contact with the client. Brokers who know the system often do not disclose the true reason.

 

Secondly, when 2 FI's are lending at the same time using the broker supplied credit bureau it is impossible for them to know there is a 2nd application in progress.

 

And remember Canadian banks do not report mortgages on credit bureaus and they have no way of knowing if you are a guarantor on any debt unless you  voluntarily disclose. Unfortunately, there are too many people who see nothing wrong with lying because they believe they are not hurting anyone.

 

So no, Canadian FI's do not know. And often people working within FI's who know the system are also helping customers exploit the loopholes so that they can meet their targets. It is pretty perverse.

 

So all this fraud is seen as victim less because you cannot lose on Vancouver real estate. The borrowers and the lenders believe this, thus, they continue to beat the system. I believe that should at some point increase instability in the system because of the sheer number of people doing this.

 

PS. I would add that it is obvious to most lenders why someone would be financing $200-300k on a house, but, they choose to look the other way. You have to remember that bank losses have been historically low for the last 16 years that real estate has been rising. Why? Because you can always refinance for more or sell your place if you start falling behind. Thus, it reinforces the belief that there is no reason to be conservative.

 

I would also argue that the sheer volumes this year have been so high that most lenders do not have the time to use common sense. They are just processing the documentation and providing financing. From what I understand some FI's were running more than a month behind on certain applications recently.

[Liberty]

A million dollars. Nice neighbourhood.

 

http://www.rew.ca/properties/R2043286/6604-knight-street-vancouver

[turar]

A million dollars. Nice neighbourhood.

 

http://www.rew.ca/properties/R2043286/6604-knight-street-vancouver

 

I wonder if it would have been more expensive with a house already removed.

[scorpioncapital]

Some of these photos look like parts of Eastern Europe or former soviet countries :) You can get a similar property for $30,000-50,000. You can buy 20+ houses for the price of 1!

[Jurgis]

Some of these photos look like parts of Eastern Europe or former soviet countries :) You can get a similar property for $30,000-50,000. You can buy 20+ houses for the price of 1!

 

There are places in US (and I bet in Canada) where you can get similar property for $30,000-50,000. Possibly even in nicer neighborhood.

[kab60]

A million dollars. Nice neighbourhood.

 

http://www.rew.ca/properties/R2043286/6604-knight-street-vancouver

Holy shit. I just tuned in and haven't followed, but how do I put on my first short ever? I live in Copenhagen and I'm pretty familiar with high real estate prices (and 2% 30 year mortgages), but that looks crazy.

[wisdom]

http://www.theglobeandmail.com/news/investigations/inside-a-fast-growing-bc-firm-that-has-home-sellers-crying-foul/article29578417/

 

Tip of the iceberg? We will only know who has been swimming naked once the tide goes out.

 

Is this the beginning?

 

So may be it was all about manipulation rather than foreign money and no more land in Canada!

[dcollon]

This article in the NYT this morning was interesting.

Chinese_Scions’_Song__My_Daddy’s_Rich_and_My_Lamborghini’s_Good-Looking_-_The_New_York_Times.pdf

[merkhet]

This article in the NYT this morning was interesting.

 

Ugh. Just... ugh.

[Aberhound]

A million dollars. Nice neighbourhood.

 

http://www.rew.ca/properties/R2043286/6604-knight-street-vancouver

 

All the major arteries in Vancouver were up zoned a few years ago to allow condos so the price of such homes is determined by land value and the ability to assemble the lots on the target block. The city gets lots of tax revenues from capital charges on lots so they have a strong incentive to up zone. The higher tax revenues helps fund the rapid transit which the federal government has boosted funding from 1/3rd to 1/2 which is allowing a lot more density creating a virtuous circle. Now if we stopped protectionism and allowed the Chinese or other electric busses which cost less than a quarter lifetime cost the density could move out further. I wonder if TPP will force this change? We could also build three or four times as much infrastructure for the same cost if there was fair international tenders and if we went back to low interest central bank funding like we used to from the 1930s until 1971.

[wisdom]

Higher density has been part of Vancouver's urban plan for decades now. This is another reason why they do not have a freeway anywhere close to downtown unlike other cities. They wanted to go in a different direction than the rest of North American cities.

 

High density, more reliance on public transit and closer to nature.

[wisdom]

http://www.theglobeandmail.com/real-estate/vancouver/brokers-concerned-about-real-estate-offers-made-with-no-conditions/article29603246/

 

All purchases over the last few months have no subjects. Even realtors are concerned.

 

A new trend that is mushrooming in parts of Vancouver -

List your house and accept an offer with $50-100k deposit. Don't allow the banks appraiser access to the house until closing. Thus, the buyer is unable to complete and the person who listed their place gets to keep the deposit. Never been easier to make $50-100k in a month.

[lessthaniv]

A million dollars. Nice neighbourhood.

 

http://www.rew.ca/properties/R2043286/6604-knight-street-vancouver

Holy shit. I just tuned in and haven't followed, but how do I put on my first short ever? I live in Copenhagen and I'm pretty familiar with high real estate prices (and 2% 30 year mortgages), but that looks crazy.

 

Are either of you familiar with Night street? Just curious if your opinion is based on observation of the Vancouver market from within or from the outside?

[mcliu]

I've been collecting some data on Toronto and Vancouver housing.

 

May be interesting: http://www.liucapital.com/p/canadian-housing.html

 

It's surprisingly hard to get historical real estate data. Do you guys have any good sources?

[wisdom]

That is great Mcliu. It isn't easy to find good data.

 

The fact that caught my eye was that 30% of Vancouver's GDP is housing sales. I knew it was very high, but did not realize it was that high. Scary!

 

Especially with the amount of HELOC's and mortgage debt connected to housing.

[Guest 50centdollars]

That is great Mcliu. It isn't easy to find good data.

 

The fact that caught my eye was that 30% of Vancouver's GDP is housing sales. I knew it was very high, but did not realize it was that high. Scary!

 

Especially with the amount of HELOC's and mortgage debt connected to housing.

 

Wisdom - How familiar are you with the private mortgage market in Canada?

 

I spoke to a mortgage broker recently about HELOCs and he told me that the banks are willing to lend you 75% of the value of your home. People are then lending this amount out in the private mortgage market and making the difference in the spread. For example, your house is worth $1m (paid off), you borrow $750K @ 3% from the bank and lend in the private mortgage market at 12%. If this is true, then the banks are indirectly lending to the subprime market.

 

Have you seen/heard this as well?

 

Thanks, 50cent

[wisdom]

50 cent - What you describe is big business in Vancouver. A lot of individuals are either doing this on their own (lending HELOC's out for income) or pooling their funds for the same purpose. In the last 15 years the only time this has not worked out was in 2008 where individuals lost money.

 

HELOC at 3.2%

Lend at 12-14%

approximate costs are 1% (lawyers, registration, etc)

You net around 7-8%.

 

Several brokers run their own pool of funds as well. They try banks for financing and if they can't get you approved for traditional financing they use these pools for financing. Depending on the deal and the pool you can borrow for anywhere from 9% to 14%.

 

New regulations limit HELOC's to 65% of a homes value now. It used to be 80% until the change, approximately 4 years ago.

 

One other interesting number - with the recent increase in housing values in the first 3 months of the year - 65% of a houses value today is over 80% just 4 months back.

 

This is what Watsa's referred to in the Mortgaged to the Hilt report. Historically, 3% of Canadian households have mortgage debt of 500% of income. In British Columbia (Vancouver is the largest city in the province), over 20% of the households were in this category in 2012. My bet would be that the number in Vancouver today would be between 25-30% in Vancouver. In other words, every 3rd or 4th household is financially stressed because of their mortgage in the city. I have not read of any other city that has come close to these numbers.

[wisdom]

The market frenzy seems to have slowed down a bit - at least based on what I see and talking to a few others involved in the market. Last 3-4 weeks, things seem to be slowing down (not so say that they are still not crazy, just not as crazy as they were).

 

This maybe wishful thinking but the first 3 months of the year were the most similar to the December 1999, Jan and Feb 2000 relating to tech stocks, in my memory - it felt exactly the same.

 

If it was, we just experienced the peak.