Garth Turner - Real Estate in Canada

[Liberty]

Horizon Kinetics commentary on Canadian REITs.  No real mention of the danger of housing prices falling--I presume that is an issue for REITs?  (I've always ignored them as they have seemed risky to me, but don't know much of the mechanics).

 

http://www.horizonkinetics.com/docs/December_Commentary_Canadian_REIT.pdf

 

I'm not expert on REITs, but when Garth Turner mentions them, he seems to think that they'll do ok because the renting market isn't nearly as bubbly as the buying one (and many REITs are heavy or exclusively in the commercial sector).

[Liberty]

Via many people on Twitter lately:

 

http://i.imgur.com/YBqsya1.jpg

[racemize]

Why does that chart say "Household debt in Asia" and then list a bunch of non Asian countries?  Does it mean something other than debt in those countries?

[Liberty]

Why does that chart say "Household debt in Asia" and then list a bunch of non Asian countries?  Does it mean something other than debt in those countries?

 

Not sure. It's from the Economist, so I'd guess it was in an article about that and they also included some other countries as comparison points.

[fareastwarriors]

http://www.bloomberg.com/news/2013-12-04/wealthy-global-buyers-favoring-montreal-spur-17-gains.html

 

Wealthy Global Buyers Favoring Montreal Spur 17% Gains

[Liberty]

http://www.bloomberg.com/news/2013-12-04/wealthy-global-buyers-favoring-montreal-spur-17-gains.html

 

Wealthy Global Buyers Favoring Montreal Spur 17% Gains

 

One thing I've found out the more I learned about Canadian RE is that there's little you can trust.

 

No third party, transparent body is keeping track of sales. You get stats from realtors, who mutilate the numbers so much you don't know what they mean anymore. They silently go back and revise past year numbers so the YoY comparisons look better, some houses listed in 2-3 systems get reported as 2-3 sales when they are sold, they throw out data arbitrarily, etc.

 

And then they play the media little a fiddle most of the time, with realtor press releases reprinted as news and even going as far as having realtors of asian origin pose as wealthy chinese buyers for TV crews in Vancouver (in a now infamous yellow helicopter ride), with bankers being cited as sources for most RE articles (as if big banks were unbiased parties in this).

 

It's all about sentiment. Everybody thinks prices are very high, and the only thing that can make them buy is if they're sure they'll keep going up and that waiting will price them out (fear) and cost them more. When sentiment turns, it'll get interesting, because it's not as if most people think that prices are reasonable and growth is just a nice bonus; they feel like they need it both to justify buying and to feel like it'll help them carry all that debt later later thanks to capital gains, and of course they don't want to miss out on all the profits everybody are making on their houses (greed).

 

So it's very possible that some area of Montreal is very hot. Things might even keep going across the country for years. But I'm certain it's not sustainable, and what can't keep going won't. In the meantime, I'm happy renting and I take what I read about RE with a big grain of salt.

[nkp007]

Well said Liberty. The entire industry is incentivized to keep the ball rolling.

 

All the bubble thumpers seem to be using reasonable rationale and logic.

 

It's scary that all sides agree that real estate is expensive and there will be some sort of correction. It's the extent that is being debated (soft landing vs crash).

[Liberty]

http://blogs.wsj.com/moneybeat/2013/12/11/a-worldwide-ranking-of-the-most-over-and-undervalued-housing/

 

http://online.wsj.com/media/1211PeteChart.png

[Liberty]

http://d3j5vwomefv46c.cloudfront.net/photos/large/827306195.png?1386939707

[Guest ajc]

http://twitpic.com/dok1jn/full

 

Should be fine. It'll be different this time. Just you wait...

[Liberty]

The Goldilocks argument. Where have we heard this one before?  :P

 

 

Not too hot, not too cold, but ‘just right’ – the Goldilocks scenario that appears to be playing out in the Canadian housing market.

 

Mark Chandler, head of fixed income and currency strategist at RBC Capital Markets, noted that the latest round of mortgage measures –  instituted in the summer of 2012 – looks like a success in terms of cooling demand.

 

http://business.financialpost.com/2013/12/13/canadian-housing-market-not-too-hot-not-too-cold/

[Liberty]

http://www.economist.com/news/finance-and-economics/21592646-monetary-policy-may-call-end-house-price-party-castles-made-sand

[leftcoast]

Ben Rabidoux: Four changes CMHC needs to make to rein in its mortgage market influence

http://www.theglobeandmail.com/report-on-business/economy/housing/four-changes-cmhc-needs-to-make-to-rein-in-its-mortgage-market-influence/article16178271/

1) Increase income documentation requirements on insured mortgages

2) Reinstate the regional mortgage cap

3) Eliminate the second home program

4) Increase transparency and oversight

 

[leftcoast]

Canada Mortgage Trends:  Fighting Mortgage Fraud

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2013/09/fighting-mortgage-fraud.html

 

Mortgage fraud in Canada has increased by a staggering 50% in recent years, according to Equifax.

 

While accounting for only 13% of attempted frauds in 2011, mortgage fraud was responsible for two-thirds, or $400 million, of the estimated dollar amount of financial fraud in Canada. According to John Russo, Vice President of Equifax, that number jumped to $600 million in 2012.

[Guest 50centdollars]

http://www.financialsense.com/contributors/bca-research/outlook-canada-australia

[enoch01]

https://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=816871

 

Fitch affirms the large Canadian banks today.  There are several assumptions built into the rating that are arguable, such as:

 

"Fitch's ratings incorporate a base case housing scenario of a plateauing and orderly cooling of the housing market."

 

They also provide cover for changing their rating, such as:

 

"Should the CMHC alter its mortgage insurance programs or not fully make banks whole for potential loan losses on insured mortgages due to underwriting defects or other reasons, ratings could be downgraded."

 

"Banks with significant presence outside of Canada, including RY in the U.S. and global capital markets, BNS in Latin America and Asian Markets, and BMO and TD largely in the U.S retail market, could have their ratings impacted should there be weakness in any of these markets, should it adversely impact credit quality and earnings generation."

 

I own puts on the Royal Bank of Canada.  I am skeptical of its capital levels and it's earnings capabilities over the next few years.  There is most likely a housing bubble.  Debt to personal income is at historically high levels.  Royal Bank management strikes me as aloof, and too eager to expand in recent years.  Why people continue to purchase this bank at over 2 times Book Value confuses me, even granting that it is part of an oligopoly.

[alertmeipp]

when will this "bubble" actually burst?

 

How many years we have to wait? I am not shorting anything for this, I just want to buy a house cheap in Toronto. :)

[hardcorevalue]

Yes, I am the same. I want to buy a house but they are wayyyy too expensive and I can't get over the fact that after the 5 year fixed term you have no idea what your mortgage payment will be.

 

I'm 28 and a lot of my friends in Toronto have started buying real estate (particularly condos). I ask them what happens if interest rates double in 5 years and they have no answer what so ever. It's like they haven't even thought about it. Boggles my mind. I guess I'm stuck in the rental market for eternity! But I'm happy to save the difference and compound it at a good rate :)

[Otsog]

Not looking forward to refi in 2016.  We never had the interest only or teaser rate mortgages here, but since practically every mortgage in the country matures in 5 years or less the entire country is on medium term teaser rates. 

[alertmeipp]

I wouldn't say foolish.

I thought it was pricey few years, wish I have bought then. You never know. Can't look at a house a pure investment, especially nice location.

[original mungerville]

https://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=816871

 

Fitch affirms the large Canadian banks today.  There are several assumptions built into the rating that are arguable, such as:

 

"Fitch's ratings incorporate a base case housing scenario of a plateauing and orderly cooling of the housing market."

 

They also provide cover for changing their rating, such as:

 

"Should the CMHC alter its mortgage insurance programs or not fully make banks whole for potential loan losses on insured mortgages due to underwriting defects or other reasons, ratings could be downgraded."

 

"Banks with significant presence outside of Canada, including RY in the U.S. and global capital markets, BNS in Latin America and Asian Markets, and BMO and TD largely in the U.S retail market, could have their ratings impacted should there be weakness in any of these markets, should it adversely impact credit quality and earnings generation."

 

I own puts on the Royal Bank of Canada.  I am skeptical of its capital levels and it's earnings capabilities over the next few years.  There is most likely a housing bubble.  Debt to personal income is at historically high levels.  Royal Bank management strikes me as aloof, and too eager to expand in recent years.  Why people continue to purchase this bank at over 2 times Book Value confuses me, even granting that it is part of an oligopoly.

 

Enoch01,

 

In which areas do you find Royal too eager to expand. Anything specific? or is that just in general?

[enoch01]

https://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=816871

 

Fitch affirms the large Canadian banks today.  There are several assumptions built into the rating that are arguable, such as:

 

"Fitch's ratings incorporate a base case housing scenario of a plateauing and orderly cooling of the housing market."

 

They also provide cover for changing their rating, such as:

 

"Should the CMHC alter its mortgage insurance programs or not fully make banks whole for potential loan losses on insured mortgages due to underwriting defects or other reasons, ratings could be downgraded."

 

"Banks with significant presence outside of Canada, including RY in the U.S. and global capital markets, BNS in Latin America and Asian Markets, and BMO and TD largely in the U.S retail market, could have their ratings impacted should there be weakness in any of these markets, should it adversely impact credit quality and earnings generation."

 

I own puts on the Royal Bank of Canada.  I am skeptical of its capital levels and it's earnings capabilities over the next few years.  There is most likely a housing bubble.  Debt to personal income is at historically high levels.  Royal Bank management strikes me as aloof, and too eager to expand in recent years.  Why people continue to purchase this bank at over 2 times Book Value confuses me, even granting that it is part of an oligopoly.

 

Enoch01,

 

In which areas do you find Royal too eager to expand. Anything specific? or is that just in general?

 

Mainly mortgage origination - cash back, high LTV, etc.  I suspect also that they've grown too big, too fast in capital markets.  Just a hunch though.  From the 2012 AR:

 

"Capital Markets has significantly advanced its global position to be a top 10 investment bank and is gaining market share in traditional investment banking businesses faster than any bank in the world."

 

When I see leveraged institution say stuff like this, it makes my ears perk up.

[original mungerville]

Thanks Enoch01. That is quite the quote you pulled out there from their public report!

[wisdom]

http://www.theglobeandmail.com/report-on-business/top-business-stories/pimco-sees-30-slump-in-canadas-housing-market-in-time-cuts-holdings/article17194498/

 

PIMCO on canadian housing

 

http://inagist.com/all/438794496860360704/

 

Ray Dalio on the Canada

 

 

[Liberty]

I just read When Irish Eyes are Crying by Michael Lewis about the RE bubble in Ireland, and many things were definitely familiar. I don't think Canada's bubble is on that scale, but many of the attitudes are recognizable. Good read for those who still haven't read it (it was published in 2011):

 

http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103.print

 

Here's some highlights I kept (the part about Lehman's global testicles is just funny):

 

Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists, and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’ ”

 

The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that, if his former students were cast on Irish TV as financial experts, something was amiss. “I just started Googling things,” he says.

Googling things, Kelly learned that more than a fifth of the Irish workforce was employed building houses. The Irish construction industry had swollen to become nearly a quarter of the country’s G.D.P.—compared with less than 10 percent in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had almost 15 times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in 25 years, three times as rich as the United States. (“A price/earning ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled, and the economy had been consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”

 

[...] The comparisons that sprung to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s and Finland in the 1980s, but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they subsequently fall.” [...]

 

“What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man,” says McCarthy. “And then they saw him and said, Who the fuck was that??? Is that the fucking guy who is in charge of the money??? That’s when everyone panicked.” [...]

 

Bertie Ahern, the prime minister from June 1997 until May 2008 and Political Perp No. 1. Ahern is known both for a native shrewdness and for saying lots of spectacularly dumb-sounding things that are fun to quote. Tony Blair had credited him with a kind of genius in how he brokered the Northern Ireland peace negotiations; on the other hand, seeking to explain the financial crisis, he actually said, “Lehman’s was a world investment bank. They had testicles everywhere.” [...]

 

The top executives of the three big banks all operated in a similar spirit: they bought shares in their own companies right up to the moment of collapse, and continued to pay dividends, as if they had capital to burn. Virtually all of the big Irish property developers who behaved recklessly signed personal guarantees for their loans. [...]

 

Ireland’s 87 percent rate of home-ownership is among the highest in the world. There’s no such thing as a non-recourse home mortgage in Ireland [and it didn't stop the bubble or crash]. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it.