Garth Turner - Real Estate in Canada

[Peregrine]

There are a few key differences between what happened in the US and what's happening in Canada (but really just Toronto and Vancouver) right now.

 

The US housing bubble was driven by a general mass delusion regarding housing prices that drove mortgage underwriting standards to the ground. This in turn fed massive housing development that ultimately created a massive overhang in the housing supply that took years to work through.

 

What's driving housing prices in Canada (but really just in Toronto and Vancouver - the rapid price increases haven't been observed elsewhere) is primarily a function of record low interest rates and low housing supply. If anything, mortgage underwriting standards have never been tighter. Ask anyone in the real estate business in Canada these days - it has become far harder to secure a mortgage now than just 5 years before.

 

Now, I'm not saying that housing prices can't fall - but the general narrative comparing the two situations has plenty of fallacies.

[rb]

I'm sorry but I'm not buying the lack of supply story. I'm not very familiar with Vancouver but I am with Toronto. Firstly, why is it just now that supposedly supply has  become a problem? Why wasn't it a problem in the 90s? Vancouver was land constrained back then too. In the Toronto area there has been a ton of development. I don't have time right now to pull historical housing stats but they're a lot higher than the 90s. So why wasn't a supply shortage back then? If a lack of housing supply is what's driving up hose prices then why haven't rents matched home price increases?

 

In addition it wasn't just Toronto that prices have gone up a lot. The whole GTA moved in lockstep. Even moving out the the GTA you see the same thing. Over the past 12-14 years price performance in Hamilton has been almost identical to Toronto. Is Hamilton supply constrained? The is no data for cities that are further away but priced have gone up a lot there as well. In Brantford (110 Km away) semis now go for 300k. In St Catharines (120 KM away) single family detached is going for 500k.

 

Underwriting is theoretically supposed to be strong. But I have my doubts about that as well and there have been lots of documented cases of mortgage shenanigans . If that was true you'd expect mortgage approvals to go down as house prices move up a lot faster than incomes because less people would qualify. A personal anecdote: A couple of years ago my sister was making 45k pre tax and didn't have a long or even continuous employment history. Her bf (not married) was making another 40k pretax self employed (read no income verification). They were able to buy a 500k house with 2% down. The mortgage was underwritten by a major bank in branch not through some shady broker. That doesn't strike me as tight underwriting.

[Peregrine]

I'm sorry but I'm not buying the lack of supply story. I'm not very familiar with Vancouver but I am with Toronto. Firstly, why is it just now that supposedly supply has  become a problem? Why wasn't it a problem in the 90s? Vancouver was land constrained back then too. In the Toronto area there has been a ton of development. I don't have time right now to pull historical housing stats but they're a lot higher than the 90s. So why wasn't a supply shortage back then? If a lack of housing supply is what's driving up hose prices then why haven't rents matched home price increases?

 

In addition it wasn't just Toronto that prices have gone up a lot. The whole GTA moved in lockstep. Even moving out the the GTA you see the same thing. Over the past 12-14 years price performance in Hamilton has been almost identical to Toronto. Is Hamilton supply constrained? The is no data for cities that are further away but priced have gone up a lot there as well. In Brantford (110 Km away) semis now go for 300k. In St Catharines (120 KM away) single family detached is going for 500k.

 

Underwriting is theoretically supposed to be strong. But I have my doubts about that as well and there have been lots of documented cases of mortgage shenanigans . If that was true you'd expect mortgage approvals to go down as house prices move up a lot faster than incomes because less people would qualify. A personal anecdote: A couple of years ago my sister was making 45k pre tax and didn't have a long or even continuous employment history. Her bf (not married) was making another 40k pretax self employed (read no income verification). They were able to buy a 500k house with 2% down. The mortgage was underwritten by a major bank in branch not through some shady broker. That doesn't strike me as tight underwriting.

 

Both Vancouver and Toronto are surrounded by green belts. A large part of the surrounding greater metropolitan areas are undeveloped due to difficulties in obtaining permits and lack of zoning rights. In Toronto, for example, you'll notice this when you go north of the city. Some lots are crammed full of townhouses, yet on the adjacent street corner there is no development. The housing shortage bears out in the data, especially for single detached homes. Months of inventory are at record lows in Toronto.

 

As for the comparison with the 90s, I'm not sure that's relevant. This is a period of extremely low interest rates and both cities are also considerably larger than they were in the 90s. In the 90s, 5-year fixed rates were in the area of 8-15% versus barely 2% now. Also, Greater Vancouver has grown from 1.6 million to 2.5 million from 1990 to 2015, a 56% increase, while Greater Toronto has grown from 3.8 million to 6.1 million in that same time frame, or a 61% increase. Together, these two cities accounted for 40% of the entire growth of Canada's population from 1990-2016. Housing supply has increased, but not to the same degree as population growth.

 

Re: underwriting. Anecdotal evidence can be highly misleading. You're not privy to all the facts when you hear this stuff through the grapevine. The fact is that it's harder now to get mortgage insurance now than ever before. It is also harder to get an uninsured mortgage with any federally-regulated lender due to B-20 rules. Tightening regulation of course is pushing stuff into the more shadowy lending side, which is growing but still a very small part of the entire mortgage market.

[gary17]

i tend to agree with Frank

 

also people forget that when the rates are low, even people who don't need a mortgage would borrow because they'd rather use the cheap money from the bank and keep the cash at hand for other uses... take my inlaw's family for example - they have the ability to own the house they live in now without a mortgage, yet they still decide to take a line of credit out -

i know for a fact they have other sources of funds that can easily paid off the loan should the rates go up.

 

no problem with real estate in Canada -  only up from here

[Liberty]

House prices going up double digits for years while incomes go up low single digits, the difference being made up with debt, which is taken on at generational lows in interest rates, which have already begun to rise. Mortgage brokers, private mortgage lenders, and cash-back mortgages allowing almost anyone with a pulse to borrow leverage of 19-20x for years. While Americans have been delevering, Canadian have kept levering up. Yes, no problems. It's not like our economy is rather cyclical and undiversified in nature.

 

Toronto and Vancouver aren't the only places that have green belts and other restrictions to development, or that have immigration. And Toronto has had more cranes and high rise developments than anywhere else in North America (including NYC) for many years of the recent past, yet condo prices haven't exactly stopped going up.

 

I think a lot of the reasons used to rationalize this bubble will be looked back later on in a different light. Every time things get irrational, people have plausible-sounding reasons, but it's like the Halo Effect -- price movement drives the justifications, and not the other way around.

 

Animal spirits have a lot to do with it; Canadians think their RE is invulnerable because what happened to Americans didn't happen to them in 2008, and they think that a house is the only place to put their wealth because the dot-com and GFC events have made them mistrust other investments and because they can't get decent rates from GICs and safe bonds. Once something has been going up fast enough for long enough, FOMO kicks in and everybody's pretty much ready to pay anything to get in on the action. Besides, most people here seem to think that owning a house is a kind of human right, and you just pay whatever it costs. Your life isn't complete until you can watch HGTV from your own living room. What does it matter, interest rates will always be low and house prices always go up anyway, right?

 

I mean, even San Francisco, which has even more supply restrictions (legal and geographic), and happens to be home to a few trillion dollars in market cap and much nicer weather and culture, isn't as expensive as Vancouver.

[Peregrine]

House prices going up double digits for years while incomes go up low single digits, the difference being made up with debt, which is taken on at generational lows in interest rates, which have already begun to rise. Mortgage brokers, private mortgage lenders, and cash-back mortgages allowing almost anyone with a pulse to borrow leverage of 19-20x for years. While Americans have been delevering, Canadian have kept levering up. Yes, no problems. It's not like our economy is rather cyclical and undiversified in nature.

 

Toronto and Vancouver aren't the only places that have green belts and other restrictions to development, or that have immigration. And Toronto has had more cranes and high rise developments than anywhere else in North America (including NYC) for many years of the recent past, yet condo prices haven't exactly stopped going up.

 

I think a lot of the reasons used to rationalize this bubble will be looked back later on in a different light. Every time things get irrational, people have plausible-sounding reasons, but it's like the Halo Effect -- price movement drives the justifications, and not the other way around. Animal spirits have a lot to do with it; Canadians think their RE is invulnerable because what happened to Americans didn't happen to them in 2008, and they think that a house is the only place to put their wealth because the dot-com and GFC events have made them mistrust other investments. Once something has been going up fast enough for long enough, FOMO kicks in and everybody's pretty much ready to pay anything to get in on the action. Besides, most people here seem to think that owning a house is a kind of human right, and you just pay whatever it costs. Your life isn't complete until you can watch HGTV from your own living room. What does it matter, interest rates will always be low and house prices always go up anyway, right?

 

I mean, even San Francisco, which has even more supply restrictions (legal and geographic), and happens to be home to a few trillion dollars in market cap and much nicer weather and culture, isn't as expensive as Vancouver.

 

I'm not arguing whether it is or isn't in a bubble, just that the US situation from 2003-2007 and the Canadian situation now are very different.

 

[KinAlberta]

I've noticed a noticeable amount (by definition) of insider selling among Canadian bank stocks recently. Not sure if I'm just sensitive to it or if it's a real change but someone may want to look at insider behaviour for hints as to the future.

[SafetyinNumbers]

Not sure how much you can read into that. Bank employees just had options vest following their year end on October 31 and were granted new options so it makes sense they would exercise and sell.

[rb]

Both Vancouver and Toronto are surrounded by green belts. A large part of the surrounding greater metropolitan areas are undeveloped due to difficulties in obtaining permits and lack of zoning rights. In Toronto, for example, you'll notice this when you go north of the city. Some lots are crammed full of townhouses, yet on the adjacent street corner there is no development. The housing shortage bears out in the data, especially for single detached homes. Months of inventory are at record lows in Toronto.

 

As for the comparison with the 90s, I'm not sure that's relevant. This is a period of extremely low interest rates and both cities are also considerably larger than they were in the 90s. In the 90s, 5-year fixed rates were in the area of 8-15% versus barely 2% now. Also, Greater Vancouver has grown from 1.6 million to 2.5 million from 1990 to 2015, a 56% increase, while Greater Toronto has grown from 3.8 million to 6.1 million in that same time frame, or a 61% increase. Together, these two cities accounted for 40% of the entire growth of Canada's population from 1990-2016. Housing supply has increased, but not to the same degree as population growth.

 

Re: underwriting. Anecdotal evidence can be highly misleading. You're not privy to all the facts when you hear this stuff through the grapevine. The fact is that it's harder now to get mortgage insurance now than ever before. It is also harder to get an uninsured mortgage with any federally-regulated lender due to B-20 rules. Tightening regulation of course is pushing stuff into the more shadowy lending side, which is growing but still a very small part of the entire mortgage market.

Firstly, anecdotes regarding mortgage underwriting are relevant because mortgage underwriting is centralized and automated at the big banks. If it works for one it works for all.

 

Secondly, it's easy to just repeat the words green belt and supply without actually backing them up. If the green belt is causing supply shortages and prices to go up then why have prices in Newmarket (outside the greenbelt) have kept pace with prices in Richmond Hill and Toronto (inside the belt). If what you say is true then prices increases should be bigger in Richmond Hill and lower in Newmarket. However that's not the case. In addition, how do you explain Hamilton? It doesn't have a green belt and price action in Hamilton has been highly correlated with Toronto. Plus Hamilton is far from a beacon of economic prosperity. I've attached price action for Toronto and Hamilton for the past 18 years.

 

Thirdly mortgage rates have helped but not as much as you thing. I see that today some banks have 3% promotional rates for 5 yr fixed. That seems a bit low. They were higher when I renewed my mortgage a couple of months ago. But let's go with 3%. When we bought the house I live in now (a semi in a Toronto suburb) in 2004. We paid 280K, put 20% down, took out a 5 year fixed mortgage @ 4.5% with a 25 year term. Our monthly payment was $1,245. Right now our house goes for about 650k. If one was to take out the 3% promotional rate and put 20% down, the monthly payment would be $2,458. So it's a massive increase in cost even with the lower rates.

[wisdom]

How do you account for fraud in Canada which allowed Canadians to have higher debt levels than Americans in 2008?

 

How do tighter standards stop fraud?

[KCLarkin]

Secondly, it's easy to just repeat the words green belt and supply without actually backing them up. If the green belt is causing supply shortages and prices to go up then why have prices in Newmarket (outside the greenbelt) have kept pace with prices in Richmond Hill and Toronto (inside the belt). If what you say is true then prices increases should be bigger in Richmond Hill and lower in Newmarket. However that's not the case. In addition, how do you explain Hamilton? It doesn't have a green belt and price action in Hamilton has been highly correlated with Toronto. Plus Hamilton is far from a beacon of economic prosperity. I've attached price action for Toronto and Hamilton for the past 18 years.

 

Both Newmarket and Hamilton seem to be inside the Greenbelt. But that doesn't really matter. If there is insufficient supply in Toronto, there will be spillover to Hamilton and Newmarket. If the Bud factory goes on strike, Coors will be in short supply too.

 

[rb]

Secondly, it's easy to just repeat the words green belt and supply without actually backing them up. If the green belt is causing supply shortages and prices to go up then why have prices in Newmarket (outside the greenbelt) have kept pace with prices in Richmond Hill and Toronto (inside the belt). If what you say is true then prices increases should be bigger in Richmond Hill and lower in Newmarket. However that's not the case. In addition, how do you explain Hamilton? It doesn't have a green belt and price action in Hamilton has been highly correlated with Toronto. Plus Hamilton is far from a beacon of economic prosperity. I've attached price action for Toronto and Hamilton for the past 18 years.

 

Both Newmarket and Hamilton seem to be inside the Greenbelt. But that doesn't really matter. If there is insufficient supply in Toronto, there will be spillover to Hamilton and Newmarket. If the Bud factory goes on strike, Coors will be in short supply too.

So in your view Toronto prices are going up because it is supplied constrained. Then prices in places that are not supply constrained should go up as well? That makes no sense.

 

You analogy is also bad. A strike is a temporary event. A better analogy would be that bud decides to stop selling beer in America. In that case what you'll have happen is coors will build more factories to supply bud's former customers. In the meantime some people will switch to wine and spirits. You won't see beer gain market share as the home ownership rate is going up in Toronto.

[KCLarkin]

A better analogy would be that bud decides to stop selling beer in America.

 

Yes, that is a better analogy. The issue is that Coors is unable to build factories to meet the demand. Local politicians have zoning regulations, it is difficult to get permits, land is scarce, whatever. Eventually, enough people will switch to wine (condos or apartments) to balance the market.

 

Now, it is perfectly reasonable to say that demand is inflated. But it must also be true that supply is constrained. Otherwise, new houses would be built to accommodate the speculative demand.

 

That is what happened in the worst cities in the U.S.. Excessive supply was built to meet excessive demand. Look at the price chart in Las Vegas. Prices spiked briefly. Then new supply was brought on line. And prices plunged.

 

Compare that to the price chart in Toronto. This time really is different. That doesn't mean Toronto won't crash. Just that the forces are very different than the ones in U.S. housing bubble.

[rb]

Right on cue. Now Tim Hudak is calling for the government to lend down payment money to people - i.e. no money down mortgages. Remember, this was the small government free markets guy.

 

https://www.bloomberg.com/news/articles/2016-12-21/lend-millennials-cash-for-houses-ontario-realtor-chief-says

[scorpioncapital]

What can one expect from Socialist Canada? The crtc is about to rule that Internet is an 'essential service'. Like oxygen and water I suppose. As a consequence, the government is redistributing $500 million of taxpayer's hard earned money to provide Internet to the few rural customers that probably are rural because they don't want blazing Internet that much anyway :) This is part of the infrastructure spending... they have to come up with projects to use all this money they collected or will collect in taxes. Big brother knows best.

 

[Yours Truly]

Who needs the stock market when we can just invest in Toronto real estate!

[rb]

What can one expect from Socialist Canada? The crtc is about to rule that Internet is an 'essential service'. Like oxygen and water I suppose. As a consequence, the government is redistributing $500 million of taxpayer's hard earned money to provide Internet to the few rural customers that probably are rural because they don't want blazing Internet that much anyway :) This is part of the infrastructure spending... they have to come up with projects to use all this money they collected or will collect in taxes. Big brother knows best.

Sure, go ahead and take a shit on Canada. Everything's perfect in your non-socialist country right? Land of milk and honey. Everyone is happy and no one is wanting. You sure never had a real estate bubble with your non-socialist efficient markets and all right? Did you have anything useful to contribute to the discussion or did Socialist Canada just blue screened you and you did a memory dump?

[Peregrine]

Both Vancouver and Toronto are surrounded by green belts. A large part of the surrounding greater metropolitan areas are undeveloped due to difficulties in obtaining permits and lack of zoning rights. In Toronto, for example, you'll notice this when you go north of the city. Some lots are crammed full of townhouses, yet on the adjacent street corner there is no development. The housing shortage bears out in the data, especially for single detached homes. Months of inventory are at record lows in Toronto.

 

As for the comparison with the 90s, I'm not sure that's relevant. This is a period of extremely low interest rates and both cities are also considerably larger than they were in the 90s. In the 90s, 5-year fixed rates were in the area of 8-15% versus barely 2% now. Also, Greater Vancouver has grown from 1.6 million to 2.5 million from 1990 to 2015, a 56% increase, while Greater Toronto has grown from 3.8 million to 6.1 million in that same time frame, or a 61% increase. Together, these two cities accounted for 40% of the entire growth of Canada's population from 1990-2016. Housing supply has increased, but not to the same degree as population growth.

 

Re: underwriting. Anecdotal evidence can be highly misleading. You're not privy to all the facts when you hear this stuff through the grapevine. The fact is that it's harder now to get mortgage insurance now than ever before. It is also harder to get an uninsured mortgage with any federally-regulated lender due to B-20 rules. Tightening regulation of course is pushing stuff into the more shadowy lending side, which is growing but still a very small part of the entire mortgage market.

Firstly, anecdotes regarding mortgage underwriting are relevant because mortgage underwriting is centralized and automated at the big banks. If it works for one it works for all.

 

Secondly, it's easy to just repeat the words green belt and supply without actually backing them up. If the green belt is causing supply shortages and prices to go up then why have prices in Newmarket (outside the greenbelt) have kept pace with prices in Richmond Hill and Toronto (inside the belt). If what you say is true then prices increases should be bigger in Richmond Hill and lower in Newmarket. However that's not the case. In addition, how do you explain Hamilton? It doesn't have a green belt and price action in Hamilton has been highly correlated with Toronto. Plus Hamilton is far from a beacon of economic prosperity. I've attached price action for Toronto and Hamilton for the past 18 years.

 

Thirdly mortgage rates have helped but not as much as you thing. I see that today some banks have 3% promotional rates for 5 yr fixed. That seems a bit low. They were higher when I renewed my mortgage a couple of months ago. But let's go with 3%. When we bought the house I live in now (a semi in a Toronto suburb) in 2004. We paid 280K, put 20% down, took out a 5 year fixed mortgage @ 4.5% with a 25 year term. Our monthly payment was $1,245. Right now our house goes for about 650k. If one was to take out the 3% promotional rate and put 20% down, the monthly payment would be $2,458. So it's a massive increase in cost even with the lower rates.

 

You actually haven't refuted a single thing that I wrote.

 

1) Anecdotal evidence can be highly misleading. Do you know all the details of even your sister's mortgage? Besides, even in the homogenous financial system in Canada, taking a single mortgage to represent the entire mortgage market is rife with statistical error. Anyway, the facts remain clear: mortgage underwriting standards for both insured and uninsured have never been tighter.

 

2) I don't know what you're getting at here. I'm not just repeating green belt. Supply constraints are backed by hard data - take a look at months of supply data for single detached homes in the Greater Toronto area over the last few years - they are at historic lows.

 

3) It is clear that low mortgage rates have had an enormous effect on housing prices. People always talk about the debt-income ratio, but the total debt service ratio is in line with its historic range.

[rb]

maybe you could share with us some of this data.

[Liberty]

http://www.statcan.gc.ca/pub/13-605-x/2015006/article/c-g/c-g04-eng.gif

 

Pretty sure it kept going up since 2014...

[Liberty]

https://www.thestar.com/business/2016/12/21/toronto-eclipses-vancouver-as-countrys-least-affordable-housing-market.html

 

[Peregrine]

maybe you could share with us some of this data.

 

I'm too lazy to look up all sources but I'll try to direct in the following:

 

1) Mortgage underwriting tightening:

 

Mortgage insurance rules changes: you can find this on CMHC or Genworth.

 

Tightening uninsured mortgage underwriting: refer to B-20 (and soon B-21) guidelines from OSFI. Plus historic low NPLs, loss ratios and origination LTVs in Canadian residential uninsured mortgages in all federally regulated banks.

 

2) Housing supply shortage:

 

Just found this: http://www.bnn.ca/newly-constructed-homes-near-new-lows-in-gta-1.636982

 

3) Debt service ratio:

 

I stand corrected by Liberty on the total DSR, which is currently a bit higher than its 25-year average. Interestingly enough, the DSR on mortgages are right at its historic averages so the increase in total DSR is due to the rise in DSR of non-mortgage loans - likely due to more auto loans and substitution of credit cards for cash based payments.

 

RBC report on Stats Canada DSR ratios: http://www.rbc.com/economics/economic-reports/pdf/other-reports/currentanalysis.pdf

 

[mcliu]

maybe you could share with us some of this data.

 

3) Debt service ratio:

 

I stand corrected by Liberty on the total DSR, which is currently a bit higher than its 25-year average. Interestingly enough, the DSR on mortgages are right at its historic averages so the increase in total DSR is due to the rise in DSR of non-mortgage loans - likely due to more auto loans and substitution of credit cards for cash based payments.

 

RBC report on Stats Canada DSR ratios: http://www.rbc.com/economics/economic-reports/pdf/other-reports/currentanalysis.pdf

 

The DSR is probably significantly higher for Toronto and Vancouver than for Canada as a whole.

 

This RBC Housing Affordability report shows Ownership Costs as a % of Total Income on a city-by-city basis. http://www.rbc.com/newsroom/_assets-custom/pdf/20161221-ha.pdf

 

It shows Canada at 45%. Toronto over 60%. Vancouver over 90%.

[rb]

ok, is anyone aware aware of any pro real estate trades aside from mortgage insurers and banks?

[wisdom]

http://business.financialpost.com/personal-finance/mortgages-real-estate/how-lenders-are-sidestepping-canadas-mortgage-rules-with-bundles-of-debt

 

The regulators and media seem to be noticing it since this is now 12.5% of the market. I don't believe sub prime in US ever got that big.

 

This is in addition to home owners whose houses are assessed at $1.6 mil being considered financially strapped. Thus, the government is giving them a break of $570 on average. That should make those $1.6 mil homes more affordable.