Garth Turner - Real Estate in Canada

[wisdom]

Virtually all have mortgage's. It is a myth that foreigners are paying cash - only a very small minority are not borrowing.

 

Even in this write up on the $31 mil purchase there was a $9.9 mil mortgage. Why only $9.9 mil because the FI probably hit a cap. In most cases the financing is 65%.

[Guest 50centdollars]

http://www.theglobeandmail.com/opinion/when-realtors-have-their-way-a-crisis-follows/article30020302/

[gary17]

Recognizing foreign income - What is the FI's recourse? The purchaser wins big if there is appreciation and walks away if the market goes the other way.

 

A perfect set up if I were to attract speculation.

 

i believe for foreigners there is a limit -  i think the article suggests a very high down payment (21M down , $9.9M mortgage)  whereas a typical canadian / resident with Canadian income can get away with 10% down I believe.

 

SO the bank is willing to take that risk.

[scorpioncapital]

Of course, the least they can do for Canadians that pay high taxes is offer a lower down payment :) If offshore tax rates are 0%-15% vs 50%, it amounts to almost the same thing.

 

 

[gary17]

the crazy prices continue -  we saw this over the weekend

[nodnub]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

 

How do they get mortgages for these properties? Where's the income coming from? If there's a default, is there recourse?

 

Many dont need mortgage. Not sure how they move so much cash over given the Chinese regulation...

 

Circumventing the regulation limiting it to $50,000 annually has been covered in the media a bit already.  One way is paying a bunch of people a fee to use their $50,000 allocation.  I'm sure there are many other methods.

 

 

[nodnub]

Recognizing foreign income - What is the FI's recourse? The purchaser wins big if there is appreciation and walks away if the market goes the other way.

 

A perfect set up if I were to attract speculation.

 

i believe for foreigners there is a limit -  i think the article suggests a very high down payment (21M down , $9.9M mortgage)  whereas a typical canadian / resident with Canadian income can get away with 10% down I believe.

 

SO the bank is willing to take that risk.

 

I doubt that banks give a mortgage with only 10% down on these rare, properties that are in the top 1%. That would not be very prudent for the bank given the magnitude of historical price movements in the luxury and vacation property markets.

 

 

[wisdom]

In Canada, banks will lend to you with insurance with 5% down for the first $500k, and then 10% for the next $500k. At that point you need 20% down.

 

As a new immigrant you need 35% down with no Canadian source of income or assets other than the down payment in Canada.

[nodnub]

In Canada, banks will lend to you with insurance with 5% down for the first $500k, and then 10% for the next $500k. At that point you need 20% down.

 

As a new immigrant you need 35% down with no Canadian source of income or assets other than the down payment in Canada.

 

Do you think they are using the same rules on $30M properties like the house in the article a few posts back?

[wisdom]

I stated on the previous post - yes, but they would have a cap on the exposure they would have on an individual. The $9.9 mil mortgage should tell you what the cap might be.

 

There are a few banks that have been very aggressive in this market and others have followed suit recently.

 

http://www.cbc.ca/news/business/rbc-mortgage-limit-size-1.3299631

 

PS. the Canadian and Vancouver market are built for speculators. Downside is limited to your 35% deposit if your income and assets are not in Canada. Upside has been huge.

[gary17]

I stated on the previous post - yes, but they would have a cap on the exposure they would have on an individual. The $9.9 mil mortgage should tell you what the cap might be.

 

There are a few banks that have been very aggressive in this market and others have followed suit recently.

 

http://www.cbc.ca/news/business/rbc-mortgage-limit-size-1.3299631

 

PS. the Canadian and Vancouver market are built for speculators. Downside is limited to your 35% deposit if your income and assets are not in Canada. Upside has been huge.

 

the bank is not taking on much risk

 

$10m first mortgage on a property worth $30m

bank only needs to recover the $10m or 33% of purchase price.  can Vancouver real estate fall 66%?

 

 

[alertmeipp]

I stated on the previous post - yes, but they would have a cap on the exposure they would have on an individual. The $9.9 mil mortgage should tell you what the cap might be.

 

There are a few banks that have been very aggressive in this market and others have followed suit recently.

 

http://www.cbc.ca/news/business/rbc-mortgage-limit-size-1.3299631

 

PS. the Canadian and Vancouver market are built for speculators. Downside is limited to your 35% deposit if your income and assets are not in Canada. Upside has been huge.

 

the bank is not taking on much risk

 

$10m first mortgage on a property worth $30m

bank only needs to recover the $10m or 33% of purchase price.  can Vancouver real estate fall 66%?

 

Banks will be in big trouble IF the real estate bubble goes burst.. remember it won't be just from mortgage.

 

the RE bubble has fueled many other credit boom.

[mcliu]

I stated on the previous post - yes, but they would have a cap on the exposure they would have on an individual. The $9.9 mil mortgage should tell you what the cap might be.

 

There are a few banks that have been very aggressive in this market and others have followed suit recently.

 

http://www.cbc.ca/news/business/rbc-mortgage-limit-size-1.3299631

 

PS. the Canadian and Vancouver market are built for speculators. Downside is limited to your 35% deposit if your income and assets are not in Canada. Upside has been huge.

 

the bank is not taking on much risk

 

$10m first mortgage on a property worth $30m

bank only needs to recover the $10m or 33% of purchase price.  can Vancouver real estate fall 66%?

 

I guess, the other question is whether that property is really worth $30 million? Isn't the scare that that house was only worth $10 million in the first place, but the "greater fool" came along and paid $30 million for it? Meanwhile, the banks are using the $30 as the "value" to lend against instead of the $10 million that it should be valued at.

 

I mean, if someone else comes along and buys the same house tomorrow for $300 million and takes out a $100 million mortgage. Is the house really worth $300 million? And is the bank really only at a 33% LTV?

[scorpioncapital]

The bank is always at a higher risk when foreigners are involved. They can just take off. Losses are split 30-70.

 

 

[wisdom]

http://www.rosskay.com/vancouvers-ponzi-scheme.html

 

Found this interesting. Not sure how good these guys are.

[gr33ngi4nt]

http://www.rosskay.com/vancouvers-ponzi-scheme.html

 

Found this interesting. Not sure how good these guys are.

 

http://www.bnn.ca/Video/player.aspx?vid=871456

 

Interesting definition of Ponzi scheme. I'm not sure you can give much weight to what this guy is saying... nevertheless, doesn't take away anything from how crazy Vancouver RE has become.

 

 

[Guest 50centdollars]

Good article

 

http://www.macleans.ca/economy/economicanalysis/the-anatomy-of-a-housing-bubble/

[permabear]

Hey guys,

 

I have read hundreds (probably thousands) of articles (also books, slide decks, etc.) on Canadian real estate. I am convinced it is a short, don't know about timing.

 

Wondering if anyone knows of a single article, book, essay, slide deck, or anything that lays out the entire short thesis for Canadian real estate? Preferably not When the Bubble Bursts by Hilliard Macbeth as I have already read it.

 

Cheers

[Potato]

The entire thing? I mean, I suppose that depends on what you mean. Because I could summarize the short thesis in a statement: Canadian RE (esp. GTA & GVR) is over-valued and will at some point in the future correct. But to detail all the bits that go into that... can't say I've ever seen it. Some parts I've never even seen the bits discussed in the full light of day, just hinted at. We don't have good data on the scale of private lending, and how much of that may be creating feedback loops by being financed via prime HELOCs. Even after seeing Urbancorp's troubles, we have no idea what kind of shape the builders are in, just that condos keep going up. Even after HCG was forced to disclose their little problem, it's not clear how much fraud-for-shelter/speculation is happening there, let alone system-wide. For all the scare stories of HAM and money laundering and foreign buyers, it's not clear how much actual money is coming in, and how much the stories of money coming in are driving local speculation.

 

Also very hard to find pre-internet information on the last housing bust(s), like 1989 in Toronto. In the wake of that lots of TrustCos became distressed, and the entire TrustCo model became almost invisible. I was able to dig up some annual reports from National Trust showing the collapse in the mortgage portfolio, but not the ones that collapsed first. I used to make forts out of CDIC print-outs from that era as a kid, and unfortunately that's all been shredded and disposed of now. If you dig up newspaper clippings the yellow peril angle could be word-for-word from some of today's stories, just changing mainland China to Hong Kong.

 

Sources/writers that like to focus on the macro picture tend not to talk about anecdotes and the tails. The average household debt is skyrocketing, etc., etc., but what's scarier is that it really only takes single-digit percentages of people getting into trouble to spark a massive crash. If you were able to randomly sample the bottom 10% of owners in bubble cities and look at what they've borrowed, and what their budgets are like, and how leveraged they are to prices continuing to go up, even the bears might be scared. I've seen a few people (David Chilton in particular) suggest that approach to putting context and faces to the population-level data, but not many essays or articles that do (or when they do it tends to just be a small handful of cases instead of a few hundred, with the context of where on the bellcurve those people fall). We know affordability is "stretched" but just what kind of lengths are people actually going to to fulfill their house lust?

 

I, too, have ready probably thousands of articles, and also have no idea on timing. I figured Calgary would continue to accelerate to the downside after the oil plunge helped turn it around last year, but it looks to be levelling off now.

[permabear]

Thanks for the insightful comments, Potato. Would love to see some of the research you described! What is "HAM"?

 

I was hoping to have a doc or video or something to point to when my friends come to me and say they're buying their first home, an investment property, investing in syndicated mortgages.. etc. To most of them it is a simple decision in that it is that time in their life for them to enter the RE market, they want to diversify, they can afford the biweekly payment and of course, prices only go up and if they don't buy now they will be priced out forever and die lonely.

[Potato]

I've tried to tilt at that windmill a few times but there's just so much to possibly cover and you never know which piece is going to resonate with some people. Plus much of it is academic -- beyond "renting and investing the difference is really the better deal right now", there isn't much they can do. Besides, then I get into answering the next question of "what's investing?"

 

HAM is "Hot Asian Money", one purported cause of high prices. It's a controversial one because it's pretty clear that there is some of that action happening, but it's not clear if it's enough to be material, or just enough to inspire stories that drive local speculators -- and even if it is material, what it means for the local market (are prices forever divorced from local incomes because of money flowing in from afar, or is a bubble especially precarious because that money flow could be pointed elsewhere at a whim?)

[tallpop]

About 2.5 years ago, our family returned to Toronto from overseas.We wanted to live close to my wife's work and near good schools for the kids.  We settled on Yonge and Eglinton.

 

We looked at mansions for 2.5 million minimum, and decided we could not afford that.

We looked at houses that were very small (or teardown) for 1.5 million.

The rental market was crappy with people asking way too much for their crapholes.

And condos were just too small- putting 4 people in 1100 sq feet was not reasonable.

 

We ended up buying a triplex near Davisville and Oriole Pkwy for about 1.2 million.  We moved from Toronto but kept the place because we liked it.  We are told it is now worth 1.6 million (listing price- probably would sell for more), after we fixed it up (200k).  3 x 3- bedroom apt (one is a basement one) and are renting it out.

 

It pays for itself.  I just worry that we have this huge fixed asset that will be taxed to death to pay for new social programs.  My wife won't let me sell it given the problems we had getting a decent place.  Personally, I would sell it tomorrow smelling the bubble. And hopefully someday we will move back to the area.  But until then, we just watch the bubble grow.

 

Real estate is hard.  Yes, it is a home but it is an investment too.  That was the only way we could afford a living space in a decent area in Toronto. 

 

Will things sink 20%?  No problem.  40%?  I can handle that.  It is when it sinks 60% that I will get really piXXed off.

[rb]

Thanks for the insightful comments, Potato. Would love to see some of the research you described! What is "HAM"?

 

I was hoping to have a doc or video or something to point to when my friends come to me and say they're buying their first home, an investment property, investing in syndicated mortgages.. etc. To most of them it is a simple decision in that it is that time in their life for them to enter the RE market, they want to diversify, they can afford the biweekly payment and of course, prices only go up and if they don't buy now they will be priced out forever and die lonely.

You can put together a deck or dock for your friends showing the full RE Cycle peak to peak not just the past few years. Last peak was in 1989. If you graph stock market returns on that it is a real sobering sight. Also this way you can show them what kinda happened the last time when "prices only go up and if they don't buy now they will be priced out forever and die lonely".

 

You can also map affordability levels (hint: Toronto is at 1989 levels and Van is past those). You can also do cash flow models for different scenarios. You can also go through different "what if" scenarios. What if real estate keeps going up at x% per year? How will the market look 10-15 years from now? Does that world seem reasonable or even possible?

 

I've done the above for certain clients who were thinking about allocating money to RE and it scared the shit out of them. I can't share the deck here for a number of reasons. But having done the analysis I can say that one you start to work the models it's really eye opening. People talk a lot of crap about RE, when I take some statements they make and I build a model based on those assumption they look at the result and go "that's not possible!"

[wisdom]

http://www.news1130.com/2016/05/31/bank-mortgage-metro-vancouver-scotiabank/

 

Scotia has been backing off on Vancouver and Toronto markets.

[permabear]

Thanks for the insightful comments, Potato. Would love to see some of the research you described! What is "HAM"?

 

I was hoping to have a doc or video or something to point to when my friends come to me and say they're buying their first home, an investment property, investing in syndicated mortgages.. etc. To most of them it is a simple decision in that it is that time in their life for them to enter the RE market, they want to diversify, they can afford the biweekly payment and of course, prices only go up and if they don't buy now they will be priced out forever and die lonely.

You can put together a deck or dock for your friends showing the full RE Cycle peak to peak not just the past few years. Last peak was in 1989. If you graph stock market returns on that it is a real sobering sight. Also this way you can show them what kinda happened the last time when "prices only go up and if they don't buy now they will be priced out forever and die lonely".

 

You can also map affordability levels (hint: Toronto is at 1989 levels and Van is past those). You can also do cash flow models for different scenarios. You can also go through different "what if" scenarios. What if real estate keeps going up at x% per year? How will the market look 10-15 years from now? Does that world seem reasonable or even possible?

 

I've done the above for certain clients who were thinking about allocating money to RE and it scared the shit out of them. I can't share the deck here for a number of reasons. But having done the analysis I can say that one you start to work the models it's really eye opening. People talk a lot of crap about RE, when I take some statements they make and I build a model based on those assumption they look at the result and go "that's not possible!"

 

Great ideas. I like your what-if scenario, it would really help to show how ridiculous pricing and affordability has been, esp. the recent growth rates. Ideally I would like to make 2 docs, 1 for non-finance people like my friends and 2 for finance professionals with more detail, data, analysis, etc. What do you use as your primary source for this kind of research: CMHC, Statscan, CREA, Teranet, Bloomberg...?