Garth Turner - Real Estate in Canada

[wisdom]

http://globalnews.ca/news/2887766/data-is-the-metro-vancouver-real-estate-market-in-free-fall/

 

Not sure if it has begun, but, sure starting to feel like it has.

[Guest 50centdollars]

Tim McElvaine talks about Van & Tor housing markets at his annual meeting. He also discusses some of the stocks he is invested in.

 

http://www.valuefund.ca/uploads/5/9/3/6/59365351/2016-05_conference_transcript.pdf

[alertmeipp]

The town house in my neighbor went from 600k to 900k in 3 years.

And no sight of slowing down.

Richmond hill.

 

Ppl are making lots of money. And Ontario gov loves the taxes.

[tripleoptician]

I've lived in Vancouver for 5 years now and have been a firm believer in the unbalanced, frothiness of this market the entire time. All typical measures of inaffordability have been shown to be consistently off when comparing the local population's overall income, current debt levels and overall income growth in the recent past.

My wife and I are both doctors and could "afford" to buy, but I could never rationalize the purchase despite home ownership being aggressively pushed on us from all Vancouver locals and our parents who have obviously made money in real estate over this extended bull market, albeit in Winnipeg/Ottawa markets.

 

In the last few months however, I feel like I've been analyzing the local situation in Vancouver incorrectly.....

 

 

I agree with the majority of the bearish posters on this thread who point to the national indicators such as historic low interest rates coupled with historically high debt levels, combined with a prolonged period starting in late 1990's of purposeful manipulation by CMHC to increase home ownership via longer amoritization periods and lower minimum downpayment requirements. This national trend shows this cannot go on forever based on the macro/microeconomic trends that govern our national/provincial and municipal landscape for Canadians. Eventually either a recession, higher interest rates or lack of consumer/investor confidence in real estate being the golden ticket will lead to either prolonged stagnation or decline in prices in the majority of our National markets. Coming from Manitoba, this is the viewpoint I have held consistently for Winnipeg's market, and felt Vancouver's hot market was explained by its locals unbridled enthusiasm for all things real estate. It truly is more manic than any other area in the country, because everyone knows  multiple "average Joe's" who have made hundreds of thousands in this local market. It perfectly describes everything related to a speculative bubble.

 

The problem with Vancouver real estate is there is a significant non local market force in the foreign Chinese buyer. I don't believe the rest of the country is affected by this at any similar order of magnitude, although the Toronto market may be somewhat affected. Many posters have alluded to the Chinese foreign buyer influence, but I don't think we have delved deep enough into why this money flows to the Vancouver market, and what factors would potential reverse or diminish its flow. This is the part that has me questioning whether this long term rise will actually decline. I don't want to debate if foreign buyers are truly having an effect - anecdotal and objective evidence is continuing to mount; the only question may be is it the primary driver of recent increases or secondary/tertiary contributer. I've attended some forums with Dr Ley and personally feel the link is clear

http://www.theglobeandmail.com/life/home-and-garden/real-estate/some-wonder-if-its-time-vancouver-acts-to-slow-foreign-buyers/article24341903/

 

Now these are some commonly held beliefs as to what motivates the Chinese foreign buyer to buy million dollar homes with cash:

 

1. Taking capital out of China provides a possible call option/exit strategy if an individual's business gets nationalized.

 

2. Canada has less stringent immigration laws regarding obtaining permanent residency status relative to other Western countries including an "investor" class that eases the application process if the applicant is wealthy. This again gives an individual a call option on leaving China if political unrest or corruption/witchhunts occurs.

 

3. Access to Western educations for their children

 

4. Environmental concerns for China/Chinese desire for natural beauty of Vancouver

 

5. It has been very lucrative as an investment over the last several years

 

6. Canada appears to have the most lax laws on foreign property ownership compared to other Western countries.

 

7.It also appears we have lax laws on bringing large amounts of currency into our borders relative to other Western countries:

 

http://www.vancouversun.com/news/Vancouver+airport+tops+country+seizures+undeclared+cash/8043419/story.html

 

There are likely many other possible motivations and some of the above may be anecdotal or incorrect. I previously believed that regardless of the motivation, once the bubble "pops" in the rest of Canada which will eventually occur, the foreign buyer would immediately be dissuaded from continuing to purchase as price declines would scare them from placing capital into a possible losing investment. I now think this is probably wrong.

 

The above border cash seizures article references that the supposed amount of capital outflow allowable to a Chinese citizen is $50,000/ year CAD equivalent. To have overall Chinese outflows in the billions/year as referenced in the article, individuals are obviously deciding the risk of keeping their cash in China is riskier than being caught taking larger sums out of the country. The Chinese foreign buyers are not utilizing local mortgages to purchase Vancouver homes. Anecdotal evidence has shown the majority are cash purchases. As noted above, even when CBSA finds undisclosed large amounts of cash at the border, the person pays a fine but keeps all their cash without further investigation. A multi million dollar cash real estate purchase by a Canadian citizen would likely send CRA on an in depth audit, but there is no concern by Canadian authoritities when it is a foreign buyer.

Couple the above with this recent article that suggests Chinese policy will ease limits on foreign capital flow along with a depreciating

CAD relative to the yuan, it appears capital outflows to Canada may see a sustained surge.

 

http://www.wsj.com/articles/china-to-ease-limits-on-overseas-investments-1432841526

 

So to summarize, I can see many natural incentives to encourage Chinese citizens to continue to have their capital flow to Western countries and will not be abated by:

1. tougher foreign ownership laws (see Australia and Hong Kong's real estate price growth despite making foreign real estate investment harder),

2. Chinese National policy (has currently been ignored and is set to ease further)

3. Increase in interest rates (purchases are largely cash)

4. Chinese recession - I think this would continue to see higher capital outflows as there is a higher chance of nationalization of private businesses in poor economic times rather than continual economic growth

 

So if there is potential tidal wave of external capital flow that doesn't necessary act based on fundamentals, does this not mean Vancouver prices potentially have a long term trend to rise even despite the astronomic growth thus far?

 

One year earlier, I was not contemplating the government intervention option. The BC government has been reaping so many benefits from foreign property purchases and rapid real estate turnover via land transfer and property tax increases in addition to economic benefits in construction and real estate related services. It seemed impossible to see why they would stop the benefits, but I suppose you can count on popular opinion only being valuable in an election year.

The 15% foreign property tax won't instantly deflate the bubble, but it will remove the "middle class" Chinese foreign buyer who is in the grey zone of affordability for multi-million dollar homes. Upper class Chinese buyers will likely not be dissuaded. Some price stagnation and small drop will likely initially be viewed as a buying opportunity by many local people. A more aggressive correction may give some pause.

 

I feel the additional BC government uncertainty (they have stated they may reserve the right to increase to 20% if conditions aren't improving) combined with any of the above natural economic forces now gives me increased faith that a long term secular Chinese money inflow will not be a secular trend.

If you remove the Chinese foreign buyer, instantaneously the local Lower Mainland economic machine has no ability to sustain price increases, let alone what will happen if the real estate industry and associated economic earnings stagnates.

[bargainman]

fwiw

 

http://www.zerohedge.com/news/2016-08-18/vancouver-housing-market-implodes-average-home-price-plunges-20-1-month-market-devas

 

[permabear]

Can someone please help me understand this?

 

CMHC has $523 billion insurance-in-force and $426 billion guarantees through its securitization programs ($208 billion NHA MBS + $218 billion CMB). If you are trying to get a measure of CMHC's exposure to housing, is it simply the sum of the two (insurance + securitization guarantees) or is there some overlap (double-counting) on the guarantees?

 

i.e. say a bank lends $500 million to various borrowers, and obtains CMHC insurance on every deal ($500m of insurance). Then they pool those mortgages, securitize and sell them to investors (through NHA MBS or CMB, does it matter which one?). Now CMHC has sold insurance to the bank (the beneficiaries of which should now be the investors) and has provided a guarantee to the investors that they will receive "timely payment of interest and principal". Do they now record $500m of "insurance-in-force" and another $500m of guarantees?

 

Thanks!

[VersaillesinNY]

The higher the level of ownership in a given country, the longer and bigger the credit cycles are.

 

http://www.bloomberg.com/news/articles/2016-09-01/if-it-s-stability-you-want-then-rent-don-t-buy

 

https://www.ecb.europa.eu/pub/economic-research/resbull/2016/html/rb160831.en.html

 

“A credit boom is a credit bust as surely as night follows day.

Jean-Marie Eveillard

[scorpioncapital]

I thought this was a joke. For every renter there must be an owner right?

[CalvinL]

https://www.youtube.com/watch?v=l8Vu7vRoVUU

 

I think this is the closest thing - the Canadian version of subprime mortgage.

[lessthaniv]

Interesting comments from G&M today on some potential upcoming regulatory changes.

 

The Globe and Mail reports in its Friday edition that proposed federal government measures to cool Canada's hottest local housing markets could make it harder for borrowers in some parts of the country to qualify for affordable loans. The Globe's Tamson McMahon writes that the Department of Finance confirmed it is studying the idea of implementing a deductible on government-backed mortgage insurance to force lenders to share the risks. At the same time, the Office of the Superintendent of Financial Institutions is expected to launch new rules at the start of next year that would require mortgage lenders and insurers to hold more capital against loans in local housing markets in which prices appear to be rising too quickly. The new rules, which are still under review, would likely affect mortgages to borrowers in Toronto, Vancouver, Victoria, Calgary and Edmonton, according to analyses of OSFI's proposal. Federal regulators "haven't really contemplated that that has a big regional impact, that that will mean that one borrower in one region of the country will be treated differently," said John Webster at Bank of Nova Scotia. "I don't think they've thought that all the way through."

[Graham Osborn]

One of many potential catalysts for popping the bubble is higher oil prices, or anything else that forces up the CAD/ USD.  With so many foreign buyers, the relative strength of the dollar pushes up demand.

[Guest 50centdollars]

http://www.theglobeandmail.com/real-estate/vancouver/out-of-the-shadows/article31802994/

 

This is so corrupt it's not even funny. I've been a sucker for years for declaring my full income.

[scorpioncapital]

Technically it's declarable but foreign taxed and undeclared should be roughly equal to declared and foreign tax credit.  The question is what is the tax system like in China? Lower/higher/non-existent/taxed at source? If lower, they are definitely getting a benefit. Marginal rate in Canada is what 45 to 50%?

 

[Hoodlum]

I suspect we are only scratching the surface with these issues.  According to an article from yesterday students would only need 35% down in order to apply for a mortgage with no income.

 

http://www.theglobeandmail.com/news/british-columbia/incomeless-students-spent-57-million-on-vancouver-homes-in-past-two-years/article31892652/

 

"Nine students with no apparent source of income bought $57-million worth of single-family homes in Vancouver’s tony Point Grey neighbourhood over the past two years"

 

 

[Liberty]

http://www.theglobeandmail.com/news/politics/ottawa-making-housing-fix-a-top-priority-minister-says/article31924658/

[Guest 50centdollars]

http://www.theprovince.com/business/mortgages/couple+claim+they+were+told+fake+assets+richmond+home/12196782/story.html

[Yours Truly]

It's getting so bad that even house boats have doubled in price..  :'(

 

http://www.bnn.ca/toronto-s-housing-prices-are-so-hot-even-the-cost-of-house-boats-has-doubled-1.568242

 

Thank goodness we are located in the hottest area east of BC (Richmond Hill) as there is a huge influx of mainland Chinese of recent times.

[Liberty]

http://business.financialpost.com/personal-finance/debt/canadians-are-just-200-away-from-being-overwhelmed-by-debt-new-survey-finds

 

More than half of Canadians are now within $200 of being unable to handle their monthly costs, a new debt survey shows.

 

In yet another indication of the mounting debt many Canadians are taking on, MNP Debt, part of the personal insolvency business of Calgary-based MNP LLP, said 56 per cent of those polled — up from 48 per cent surveyed six months ago — are close to facing negative cash flow should they take on up to another $200 in monthly debt.

 

The online survey of of 1,502 Canadians conducted between Sept. 6 and Sept. 12 also found 31 per cent are already not paying their bills on time, making them technically insolvent, MNP says.

[permabear]

Any readers of this thread have a reliable source on % of GDP attributed to housing? Cheers

[rb]

Not 100% sure what you mean by housing, but the whole Real Estate sector is just over 10% of GDP.

[TBW]

I believe this is the end.  The restriction on credit available is enough to topple this mkt imo.

 

The best short I think is MIC.  Too much exposure, no provisions and with their aggressive revenue model (recognize all insurance earnings in first 5yrs), on an earnings basis this will look very expensive if revs down 30 to 50%. 

 

http://investor.genworthmicanada.ca/English/media/news-releases/news-release-details/2016/Genworth-MI-Canada-Inc-Comments-on-Recently-Announced-Mortgage-Insurance-Changes/default.aspx

[rb]

I agree that MIC is probably the best candidate for a short. It has to be a creative trade though not just a straight short. MIC's yield makes a short an expensive proposition. Reminds me of countrywide. They also had a large div to prevent shorting.

[TBW]

On a yield basis the cheapest to short is EQB (borrow is very cheap).  I am short that too.

 

I hear you on MIC, however with increased capital requirements don't be surprised if the div gets cut.  If it doesn't get cut for that reason you may only have to pay for a year or more until the losses force them to cut to 0. 

 

If you are institutional shorting the corp bonds is the cheapest way to play this (if you know a platform that retail can do that please let me know).  Otherwise I just short the stock, puts are too short dated for my liking.

[rb]

I was thinking more along the lines of long TD and short MIC. What do you think? It may not be as profitable but it's a lot more conservative.

 

Also I don't have such confidence that the divvy will get cut so soon. I think they cut the div before they fail. I also don't have confidence that the MIC management is very honest so I'm a bit weary of that.

 

Do you know what the borrow is for MIC? What are you paying for EQB?

[Guest 50centdollars]

I believe this is the end.  The restriction on credit available is enough to topple this mkt imo.

 

The best short I think is MIC.  Too much exposure, no provisions and with their aggressive revenue model (recognize all insurance earnings in first 5yrs), on an earnings basis this will look very expensive if revs down 30 to 50%. 

 

http://investor.genworthmicanada.ca/English/media/news-releases/news-release-details/2016/Genworth-MI-Canada-Inc-Comments-on-Recently-Announced-Mortgage-Insurance-Changes/default.aspx

 

What's stopping people from borrowing the down payment from the private market to avoid needing an insured mortgage? I'm thinking these new rules will cause the private market to boom. Unless the government is planning on dealing with them by the November deadline.  I thought the BOC was worried about alternative lenders but I think these new rules keeps the party going for them.