Garth Turner - Real Estate in Canada

[scorpioncapital]

If they will bend the rules in real estate I think Canadians should demand a bending of the rules in other areas, like maybe interest expense deduction on non-dividend paying stocks, lower capital gains taxes, maybe even a principal position stock position exclusion? :)

[Hoodlum]

If they will bend the rules in real estate I think Canadians should demand a bending of the rules in other areas, like maybe interest expense deduction on non-dividend paying stocks, lower capital gains taxes, maybe even a principal position stock position exclusion? :)

 

Well they sort of have that with the TFSA but only if you don't have larger gains.  Otherwise the tax department will take you to court.  ::)

[Guest 50centdollars]

http://vancouversun.com/storyline/opinion-vancouver-housing-bubble-will-burst

[Aberhound]

The foreign property purchase tax in Vancouver diverts some purchases to commercial and most residential purchases are simply diverted to the Canadian permanent resident or citizen family member. It is unlikely to have much impact. The foreigner can own a property indirectly by holding the mortgage which could even be a sharia mortgage to share in the capital gain or can hold equity in a corporation if structured carefully.

 

Vancouver has hired an airspace expert from New York. If someone comes along wanting to buy your airspace to "preserve their view" say no. You can see massive increases in density along all major arteries in in whole neighbourhoods. Everyone notices a dramatic increase in vehicle traffic. A lot of the price increases come or will come from density increases. My home by the new walk/bike trail from the CP rail the City purchased is an example. You can see it will be towers in the near future. I have been considering organizing the neighbours to allow us to assemble the block instead of others. If anyone has a precedent or contracts for doing this please let me know. I have noticed that investors from China and elsewhere are patient investors and seem to be more willing to buy in anticipation of density increases.

 

The bigger impact is likely to come from the vacancy tax as many owners from China seem to prefer to leave their homes unoccupied. Whistler town centre has long had rules forcing property owners to rent out their units which has helped avoid the ghost town problem. Vancouver is developing a ghost town problem now which has decreased the rental stock. Previous city councils had increased the rental stock by allowing lane-way housing and making it easier to put in legal rental suites. I support the vacancy tax as it addresses a real and growing problem.

 

There are many investment opportunities. There are many three story walk ups built in the 1950s and 1960s which slowly decay because owners do not wish to pay capital gains tax so they do not sell and conversion to strata units is restricted. Few seem to be aware of the tax free roll-overs into limited partnerships and the willingness of the city to allow higher density and new strata units if you include sufficient rental stock in the new building. The votes required to rebuild existing strata and coops has been reduced so it is easier to vote to rebuild. Rental apartments are sold based on cash flow instead of the estimated future cash flows from new construction. Basically you are converting unused air space into valuable square feet.

[wisdom]

I did hear similar stuff on Monday - the day the tax was proposed. I hear more fear and panic as people in the industry are starting to process the possible outcomes as I believe everyone believes that it is a bubble. It is just that they will get out of it before everyone else.

 

Who knows how it pans out? just need enough people to panic and head for the exits at the same time.

[scorpioncapital]

So they'll sell and rent? or sell and migrate?

[beerbaron]

The cool aid is still on the table. You can put as many warnings signs around the bowl it won't change a thing until lots of people lost their shirts. This will be when all players rush for the exit and the market crashes.

 

BeerBaron

[scorpioncapital]

I guess bubble blowing is the only way that governments know how to help people recoup their losses from the previous disaster. Maybe at best they break even in the end, but you're a couple of decades older :)

[rb]

I'm sorry, but I didn't see much bubble blowing in Canada RE after 2008. They didn't really put on the breaks either but that's not really bubble blowing. We talk a lot in this thread about Chinese money which is part of the problem - from what I read here it's a bigger problem in Van than Toronto. But there's the biggest part of this problem. Regular Canadians that are rushing in but buy real estate with no regard for the price.

 

These are people that spend months researching the best deal on a $800 TV but make the biggest purchase of their life with no regard to price. Then there's the "real estate investors" who again pay whatever price and are convinced they're gonna make loads on that "fixer upper". These people are 100% convinced not only that real estate cannot go down, but it will continue growing at present rates. Some thing it'll grow even faster. These attitudes are blowing my mind since 2008 was quite recent, not some story that grandma tells.

 

Now people have been doing dumb things with money since the world was young and normally I wouldn't give a hoot about the people making these dumb decisions cause they bring it on themselves. But when real estate crashes happen, unlike crashes in other markets, they spill into the general economy in a major way and innocent, responsible people pay the price. So I say that it's warranted to bring all the king's horses and all the king's men to stop this madness and let's hope we're not too far along the wrong path and the situation is still salvageable.

[alertmeipp]

the sad/funny thing is even if it comes down 30%, it just back to 1? or 2 years ago price.

 

hardly any ppl get hurt.... only those that carry more then they can.

[gary17]

I think it is still early to tell whether the 15% tax will have much impact

 

It is interesting 10% of Metro Vancouver are foreign buyers --  18% specifically in Richmond and 15% in Burnaby...    It would be interesting to learn how many of these foreign buyers were already in the queue to get their Canadian Permanent Residence status and are simply buying to lock in RE price and not wanting to wait until they get PR.  So if there is a significant percentage of this group that's already planning to be PR; then all this would do is delay the purchase for a few months .... 

 

I think the so called 'developers' with not enough deep pocket would get hurt the most... Time will tell.

 

 

Gary

[wisdom]

To understand the Vancouver market, one has to realize that most properties have been bought by so called developers (5-20 properties) that have paid over $1.2 million hoping to demolish, re-develop and to sell to Chinese buyers at $2.5 mil.

 

If the Chiniese buyer disappears because of the tax the so called developer is scewed. Now these so called developers are in 1,000s in Vancouver because the bubble has been so good to them and it is 30% of local GDP. Look out below the day the music stops playing. Only a matter of time, no matter what stories someone can come up with about Chinese demand or not. In the end even the Chinese will buy high and sell low as do all other people.

[Guest 50centdollars]

I'm sorry, but I didn't see much bubble blowing in Canada RE after 2008. They didn't really put on the breaks either but that's not really bubble blowing. We talk a lot in this thread about Chinese money which is part of the problem - from what I read here it's a bigger problem in Van than Toronto. But there's the biggest part of this problem. Regular Canadians that are rushing in but buy real estate with no regard for the price.

 

These are people that spend months researching the best deal on a $800 TV but make the biggest purchase of their life with no regard to price. Then there's the "real estate investors" who again pay whatever price and are convinced they're gonna make loads on that "fixer upper". These people are 100% convinced not only that real estate cannot go down, but it will continue growing at present rates. Some thing it'll grow even faster. These attitudes are blowing my mind since 2008 was quite recent, not some story that grandma tells.

 

Now people have been doing dumb things with money since the world was young and normally I wouldn't give a hoot about the people making these dumb decisions cause they bring it on themselves. But when real estate crashes happen, unlike crashes in other markets, they spill into the general economy in a major way and innocent, responsible people pay the price. So I say that it's warranted to bring all the king's horses and all the king's men to stop this madness and let's hope we're not too far along the wrong path and the situation is still salvageable.

 

RB - But didn't all the king's horses and all the King's men get us into this mess in the first place?

 

The BOC cuts rates and what do you expect people do to? Poloz said back in mid 2015, I don't expect people to go buy 2nd or 3rd homes.....really? Why wouldn't they? You can borrow your down payment buy a new build and sell it off when its built (forward contract). Obviously there is risk in doing this but do you think the average person see's that risk?  Is it a surprise to anyone that people would be doing this? You can put up no money but make a lot. The BOC warns about the inflated housing market but watch in the fall they will cut rates again to stimulate exports that won't come.

 

CMHC insures subprime mortgages and this is why there are no penalties for mortgage brokers who inflate incomes. When HCG announced 1.5 billion in fraudulent mortgages, that was insured by CMHC and those brokers were not penalized. Do you think they will stop? Of course not, there are no penalties so why would they? Up until mid 2014, CMHC was insuring mortgages over $1 million. http://www.rebgv.org/cmhc-mortgage-insurance-ends-1-million-homes 

 

Since then Genworth has taken excess demand. From what I've read, Fannie Mae or Freddie Mac never even insured over $1 million. CMHC/Genworth even accept rental income to qualify borrowers lol. Music must keep playing. There are so many gimmicks to keep this thing going.

 

Check out the 1st attachment. CMHC doesn't even know how many mortgages there are in Canada.

 

As for foreign buyers, sure its pushing prices up for everyone but its not the main problem. Canadians are the main problem and the debt to income stats show this. Will the tax do anything? Not sure but I doubt it. The government has been playing games for decades trying to get people to buy homes. Look at 2nd attachment. Government insurance + guarantees have a 0.983 correlation to house prices. RB as you have mentioned before, 90% of Genworth is backed by the government.  Canada has 76% of our GDP riding on the housing market. Foreign money is peanuts compared to this. We have a debt/credit bubble and this is fueling prices and banks make these loans because they get cheap insurance from Genworth and CMHC. You think if the banks had skin in the game they would make these subprime loans? Allow people to borrow money for their down payment? That is pure subprime.

 

The BOC, CMHC and the government have been trying to get Canadians for decades to buy homes and now these people will somehow change their ways and make it harder? How we fix this I don't know but the BOC will keep devaluing the currency for now. Prices can't fall here or we are screwed. I was at a party last night in Vaughan and everyone was talking about how they're all millionaires now because of there homes. As people were talking, I started to think about Peter lynch's cocktail theory on when the markets were ready to fall or rise.

 

As someone mentioned already its too late now, the horses have left the barn.

[Guest 50centdollars]

Take a look at this court case. Family defaults on mortgage and guess who buys the property and flips it.....CMHC

 

http://www.canlii.org/en/bc/bcca/doc/2012/2012bcca419/2012bcca419.html?searchUrlHash=AAAAAQAJIDEwLTUxMTkgAAAAAAE&resultIndex=1

[scorpioncapital]

- Seems to be a renters's paradise. Cap rates appear to be 1-2%?

- But what of primary residence, like a work of art? Cap rate = debt servicing cost + maintenance. Sensitivity of rates to servicing costs based on avg incomes and % of total income. Anyone do the research on what 25 basis pt translates into as increase in % of disposable income?

- Divergence of interest rate between Canada and other nations. Say US at 3% and Canada at 0%. Then not only could the bubble pop but there will be a double whammy of losses. The dollar will fall severely (maybe 2 for 1 even) and there will be an outflow of capital to higher rates elsewhere - a rush to the exit, crunching debt holders more so than paper loss on equity.

- Stocks seem positively bargains compared to P/E 50-100 CA real estate. PE 50-100 implies growth rate of say 30-50% per year? Even if rates go to 5%, an "expensive" yield of 5% on a stock is still break-even but deeply underwater buying a house at 1-2% leveraged 5x-10x.

- Only way this goes on is low rates forever but have to think global capital flows too.

- CA real estate cannot deduct mortgage interest (not applicable to non-taxpaying non-residents) and there is no 30 year fixed rate loans - an additional burden on buyers, foreign or domestic.

- Those who think money laundering and store of value in real estate is the cause of this should consider the illiquidity of the investment and the absolute fact that it is not a cash-equivalent. Most likely buyers want to live here in addition to other considerations. But they will not like losing the use of their equity for decades...

[alertmeipp]

the tax by itself is not significant. but the fact that a provincial government is starting to act against a house market is big.

 

today maybe 15% taxes.. if that does not work, expect other measures.

 

 

[scorpioncapital]

What is the relationship between real estate purchase price and interest rates? I am having a debate with someone and I said that if rates are 20%, RE prices must be very low but they think inflation makes them very high. So this got me confused. Is inflation when rates are zero (like now) or when rates are 20%? There is also the matter of all cash buyer vs leveraged but most people use debt to buy property - or anything else that's very expensive.

 

 

[beerbaron]

As a rule of thumb all assets are inversely correlated with risk free rates. If interest rates went up to 20% in the course of 5 years, real estate prices would collapse. Maybe partially offset by higher inflation expectations but not that much. The math is quite simple, if one has a mortgage of 300 000$ the current interest payment would be about 9 000$/ Y (3%). It's quite manageable for a household making about 60 000$ net (15% of net income). Go forward 5 years later and that interest payment is now 60 000$. To be able to service that kind of interest you need at minimum 120 000$ net income.

 

So in short your household salary would have to compound at 14% for 5 years and even then you are barely afloat with 50% of your money going to service your mortgage (opposed to 15% 5 years earlier). What do you think would happen to the supply in such scenario? There would be a flood of foreclosures. No speculator looking to fight inflation would touch this with a 10 foot pole. You can buy TIPS instead and you would sleep much better.

 

BeerBaron

[petec]

http://www.bloomberg.com/features/2016-vancouver-real-estate-market/

[scorpioncapital]

As a rule of thumb all assets are inversely correlated with risk free rates. If interest rates went up to 20% in the course of 5 years, real estate prices would collapse. Maybe partially offset by higher inflation expectations but not that much. The math is quite simple, if one has a mortgage of 300 000$ the current interest payment would be about 9 000$/ Y (3%). It's quite manageable for a household making about 60 000$ net (15% of net income). Go forward 5 years later and that interest payment is now 60 000$. To be able to service that kind of interest you need at minimum 120 000$ net income.

 

So in short your household salary would have to compound at 14% for 5 years and even then you are barely afloat with 50% of your money going to service your mortgage (opposed to 15% 5 years earlier). What do you think would happen to the supply in such scenario? There would be a flood of foreclosures. No speculator looking to fight inflation would touch this with a 10 foot pole. You can buy TIPS instead and you would sleep much better.

 

BeerBaron

 

If inflation is 20% and paper money will halve in value in 3.4 years, why wouldn't your house stay the same or even double in price? If it collapsed it would be a real bargain. To sell a house at 1/2 price when paper money is dropping like a stone will definitely be painful for some who are forced to default, but there may be a cushion there. Even in the States defaults were high but I think it didn't even reach 20%.

 

[beerbaron]

As a rule of thumb all assets are inversely correlated with risk free rates. If interest rates went up to 20% in the course of 5 years, real estate prices would collapse. Maybe partially offset by higher inflation expectations but not that much. The math is quite simple, if one has a mortgage of 300 000$ the current interest payment would be about 9 000$/ Y (3%). It's quite manageable for a household making about 60 000$ net (15% of net income). Go forward 5 years later and that interest payment is now 60 000$. To be able to service that kind of interest you need at minimum 120 000$ net income.

 

So in short your household salary would have to compound at 14% for 5 years and even then you are barely afloat with 50% of your money going to service your mortgage (opposed to 15% 5 years earlier). What do you think would happen to the supply in such scenario? There would be a flood of foreclosures. No speculator looking to fight inflation would touch this with a 10 foot pole. You can buy TIPS instead and you would sleep much better.

 

BeerBaron

 

If inflation is 20% and paper money will halve in value in 3.4 years, why wouldn't your house stay the same or even double in price? If it collapsed it would be a real bargain. To sell a house at 1/2 price when paper money is dropping like a stone will definitely be painful for some who are forced to default, but there may be a cushion there. Even in the States defaults were high but I think it didn't even reach 20%.

 

Supply will outpace demand by a wide margin. The bargain might be there but there will be lots of other assets that would look much better. TIPS, land, gold, commodities, etc... This is where the money will flow, it's a lot easier to maintain, does not cost a lot to own and is a good hedge against inflation. A building on the opposite requires maintenance and taxes. If you live in it you are not getting such a great deal because you could get good returns on the assets mentioned above. It you rented it, your returns would be abysmal because you would likely not be able to compound the rent at the same rate as inflation. Especially in Canada. Long term you might make your money back when inflation reverse it's course but just like today's never ending 1% inflation we could have a never ending 20% inflation.

 

You might want to read Buffet's essay titled How inflation swindles equity investor, it has good nuggets of information in there.

 

BeerBaron

 

BeerBaron

[scorpioncapital]

Thanks, I agree with you and that article. I like this article by James Altucher who says do not buy a house, it's a waste of money (but he's a bit of a radical): http://www.jamesaltucher.com/2015/10/own-house/

 

[gary17]

so nobody likes tax free gain? better to pay rent and not into equity ?

 

I know tax free principal residence doesn't exist in US... it's the gift from government Canada

[thepupil]

so nobody likes tax free gain? better to pay rent and not into equity ?

 

I know tax free principal residence doesn't exist in US... it's the gift from government Canada

 

are you referring to property taxes or something besides cap gains? Because the U.S. does exempt up to $500K of capital gains ($250K per individual) for a primary residence https://www.irs.gov/taxtopics/tc701.html

 

[gary17]

so nobody likes tax free gain? better to pay rent and not into equity ?

 

I know tax free principal residence doesn't exist in US... it's the gift from government Canada

 

are you referring to property taxes or something besides cap gains? Because the U.S. does exempt up to $500K of capital gains ($250K per individual) for a primary residence https://www.irs.gov/taxtopics/tc701.html

 

capital gain

 

if u buy something and sold when you retirement - basically a very nice gain with no tax.  no limit.