Garth Turner - Real Estate in Canada

[Peregrine]

Frank - Canada also has non-recourse mortgages.

 

Yes - in Alberta. The point I was making is that what happens in practice matters.

[wisdom]

What happened in Vancouver in 1981 or Toronto in 1990s?

 

Jingle mail? Is it that different or is human nature the same everywhere?

[Peregrine]

What happened in Vancouver in 1981 or Toronto in 1990s?

 

Jingle mail? Is it that different or is human nature the same everywhere?

 

I'm not sure we're debating about the same thing. I have no idea where home prices will go. I'm just saying that what happened in the US in the mid-2000s and what's happening here are two completely different things.

[Liberty]

I'm not saying that the same thing that happened in the US will happen in Canada. It's always different from one time and one place to the other. We'll see.

 

I'm saying that houses are not good buys at any price (do we have to explain this to value investors?), and that unsustainable situations end. When houses go up in price at double-digit rates for years and years and incomes go up (if at all) at low single digits, the difference is made up by debt, that makes the situation brittle. Many people can only justify buying houses because they use assumptions about them continuing to go up in value rapidly and periodically taking equity out. What if that stops? They used to call it taking a second mortgage and it was a big deal, now it's HELOCs and it's free money that many use for consumption because they have nothing left over after paying for their 800k mortgage and ratcheted up city taxes... and they're deadly afraid of interest rates going up 1 or 2 percent.

[scorpioncapital]

Governments around the world are covert and sneaky. Inflation is the preferred method to paper over so many social ills like your neighbour paying full taxes ethically while your other neighbour is offshore and pays nothing. Markets must go up to compensate for such social ills. Also, governments eventually bail out everything, via the banks and via the tax payer. So sure, maybe nothing bad happens and things march ever higher. But they are marching higher because the currency is being debased. Who suffers most from inflation? Those without any assets. But even those with assets must earn a real return or they are still getting poorer. All this plays out over a long time sometimes. Real estate will be the same. It's always a transfer of wealth from someone to someone else.

[rb]

Governments around the world are covert and sneaky. Inflation is the preferred method to paper over so many social ills like your neighbour paying full taxes ethically while your other neighbour is offshore and pays nothing. Markets must go up to compensate for such social ills. Also, governments eventually bail out everything, via the banks and via the tax payer. So sure, maybe nothing bad happens and things march ever higher. But they are marching higher because the currency is being debased. Who suffers most from inflation? Those without any assets. But even those with assets must earn a real return or they are still getting poorer. All this plays out over a long time sometimes. Real estate will be the same. It's always a transfer of wealth from someone to someone else.

That is wrong in almost every single way.

[KFRCanuk]

and they're deadly afraid of interest rates going up 1 or 2 percent.

 

Most have no clue what this means to them in any practical sense.

[Peregrine]

and they're deadly afraid of interest rates going up 1 or 2 percent.

 

Again, to correct another misconception: all insured mortgages now have to qualify at the 4.6% posted rate, which is over 2% higher than contracted rates. Uninsured mortgages also have to qualify at the high posted rate - except for 5 year and longer terms.

 

But yes, interest rates act like gravity on all kinds of assets - including real estate.

[Liberty]

and they're deadly afraid of interest rates going up 1 or 2 percent.

 

Again, to correct another misconception: all insured mortgages now have to qualify at the 4.6% posted rate, which is over 2% higher than contracted rates. Uninsured mortgages also have to qualify at the high posted rate - except for 5 year and longer terms.

 

But yes, interest rates act like gravity on all kinds of assets - including real estate.

 

This rule is recent, most didn't have to go through it, and qualifying at a time when they lend to everyone isn't the same as being disciplined enough with your finances to actually have the spare cash flow when the time comes... Many wouldn't qualify without the bank of mom and dad providing a down payment that they couldn't save organically.

 

Everyone wants to focus on debt service, but in the end, the absolute size of the debt always ends up mattering...

[wisdom]

If you want to understand the market - just look at the increase in HELOCs and private financing as they have been the largest source of down payments in Canada. In other words - 100% financed.

 

Notice the drop in houses valued over $800,000 the moment the feds tightened the borrowing rules in Vancouver. Now you need income to qualify not just equity or rental income. Tells you what is the maximum the market can bear if Canadians use income to qualify.

 

There is now fear in Vancouver but we are still in the denial phase. Let's see what happens in summer/fall when the market moves to the acceptance phase and those HELOCs financing all the mortgage payments and construction are maxed and those houses don't sell for $2 mil.

 

Builders bought houses for $1.1-1.2 mil early last year. Those houses would have been torn down and new houses costing $600k odd will be built and completed later this year. To  make a profit these builders need to sell these houses at $2 mil plus. That market is dead. Not sure how they carry these mortgages for much longer as they need those houses to sell to pay for the other 5-10 homes that they are building.

 

As Chuck Prince would say the music is about to stop playing.

[Peregrine]

and they're deadly afraid of interest rates going up 1 or 2 percent.

 

Again, to correct another misconception: all insured mortgages now have to qualify at the 4.6% posted rate, which is over 2% higher than contracted rates. Uninsured mortgages also have to qualify at the high posted rate - except for 5 year and longer terms.

 

But yes, interest rates act like gravity on all kinds of assets - including real estate.

 

This rule is recent, most didn't have to go through it, and qualifying at a time when they lend to everyone isn't the same as being disciplined enough with your finances to actually have the spare cash flow when the time comes... Many wouldn't qualify without the bank of mom and dad providing a down payment that they couldn't save organically.

 

Everyone wants to focus on debt service, but in the end, the absolute size of the debt always ends up mattering...

 

Again, not exactly true. All variable rate mortgages and fixed rate mortgages under 5-year terms had to qualify at the higher posted rate prior to the new mortgage insurance rules last fall. The new rules made it so that ALL insured mortgages have to qualify at the higher posted rate now.

 

Obviously debt service matters. The situation makes it particularly hard on the new home buyer who is challenged more than ever due to high prices and tightened rules. They aren't the ones driving the sales activity though.

[wisdom]

All I will say is -in theory what you have said is perfect. This is not what has happened in reality in canada. Would recommend some scuttlebutt.

 

Reality is worse than what happened in the US IMHO. Americans at least knew they were doing NINJA mortgages. In Canada, we have lied to ourselves and done the same. If I am right, that is more scary.

 

I would not be surprised if stories like wells Fargo emerge from Canada over the next few years. I am actually sure they will.

[scorpioncapital]

I was reading that there's huge domestic bank loans to foreigners who have bought real estate (like 500 billion). Isn't it considerably more risky to lend money to foreigners who can just take off or go somewhere else with a second passport and you're stuck unable to collect with the domestic taxpayers footing the bill? Not sure what happened in the States but I imagine the domestic/foreign ownership and defaults were skewed toward domestic?

 

https://www.bloomberg.com/news/articles/2017-02-27/foreigners-housing-bets-start-with-banks-canada-economy-watch

 

"The nation’s lenders have more than doubled their external debt since the end of the recession -- an amount in excess of C$500 billion ($382 billion), according to international investment position data released by Statistics Canada.

 

That’s brought total external debt financing of Canadian banks to about C$850 billion through last September, and it’s easy to conclude that at least some of the new foreign debt has helped drive mortgage lending. In some cases, the linkage with residential mortgages is direct."

 

[wisdom]

The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.

 

The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.

 

I would again state that human nature is the same everywhere. There is no system that can stop you from gaming it. A real estate market that has only gone up for 17 years now leads to a lot of complacency amongst borrowers, lenders and regulators.

 

The scariest argument I hear is that Americans did a lot of stupid things but our banks are better thus, our prices can keep rising forever as long as we can keep borrowing. Bankers and borrowers live in the same society and are influenced by the same things. In addition, bankers are driven by incentives and are usually in the real estate market themselves. They do not consider or in reality, do not even want to consider the risks - as Munger would say - I don't want to think about death either. Bankers are sales people driven by incentives. Let me know if you uncover a banker who is incented to consider risk.

[Yours Truly]

Don't forget that beautiful rule where gains on principal residence is tax exempt allowing children, cousins, grannys, the kaboodle (funded by family members) to have homes in their names for easy flipping

[Peregrine]

The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.

 

The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.

 

 

Except for conjecture, do you have any real facts to back up these claims? I'm honestly curious.

[rb]

The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.

 

The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.

 

 

Except for conjecture, do you have any real facts to back up these claims? I'm honestly curious.

The countless articles that have been written about all this stuff that's going on and how it's done is not enough? What exactly are you looking for? Being a member of CoBF doesn't give you subpoena power.

 

Frank, are you a realtor?

[wisdom]

Frank - agreed that I have no facts.

 

Since Vancouver homes were at $1.8 mil on average last year, we should be close to $3.6 mil by 2020 in a city where the median household income according to statscan is $72,000. I would conjecture that is because it is only the rich that live in Vancouver. They don't need income.

 

I look forward to learning more on how that works.

 

Meanwhile detached home sales in Vancouver are down by 70% or so.

[Liberty]

Canada business investment:

 

Canada residential investment as % of GDP:

 

 

 

price-to-rent ratio: https://twitter.com/alex_macdonald/status/836975600535490560

 

https://twitter.com/alex_macdonald/status/836975071323389953

 

"Fun fact: Toronto's 99,000+ unoccupied homes is half the number in *all* of England."

 

http://buff.ly/2m91Gdh

 

The number of homes in the GTA that aren’t being occupied is growing almost as fast as the price of shelter. The latest numbers show that 99,236 homes are not regularly occupied, as identified by the owner of the residence. This represents 4.5% of all homes in the city, and a 10.5% change over the past 5 years. The general population grew by 4.5% during the same period, which means this trend appears to be accelerating.

....

I know what you’re thinking, foreign buyers! Well, foreign buyers aren’t usually census respondents so these are most likely domestic residents.

[Peregrine]

The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.

 

The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.

 

 

Except for conjecture, do you have any real facts to back up these claims? I'm honestly curious.

The countless articles that have been written about all this stuff that's going on and how it's done is not enough? What exactly are you looking for? Being a member of CoBF doesn't give you subpoena power.

 

Frank, are you a realtor?

 

Lol, I have no professional connection with the real estate industry. This being a discussion forum, I am open to learning new things. I prefer views to be backed by hard facts and data and not conjecture and anecdotal evidence.

 

Don't mistake me asking for facts as me being biased in favor of Canadian real estate.

 

PS: I don't even own any real estate as I do believe that prices right now make it a poor long-term investment currently.

[CalvinL]

The Canadian system is so easy to game that it's not even funny. Too many loopholes in an environment where the lenders and borrowers have had only incentives to lie and cheat the system. You just need to talk to a broker or a lender and they will teach you how to play the game so that they can make their commissions or targets.

 

The amount of gaming the system that has gone on for over 10 years should be exposed once the tide goes out. It will surprise Canadians and regulators who have held the false belief that our system is better than Americans and thus we can carry more debt.

 

 

Except for conjecture, do you have any real facts to back up these claims? I'm honestly curious.

 

Simply check out Ratehub or ratesupermarket, talk to any one of the mortgage brokers there and find out the world of possibilities  ;)

 

[Yours Truly]

Anyone got any stats as to the CAGR returns for average detached home in Toronto vs. the TSX60/S&P500 indexes?

[rb]

When you have 4 out of 5 Canadian banks (BANKS!) calling the real estate market nuts you know that you have a problem.

 

The 5th one is of course a perennial candidate for the short in a long/short position.

[gary17]

Anyone got any stats as to the CAGR returns for average detached home in Toronto vs. the TSX60/S&P500 indexes?

 

it's not that much better 

 

here's home index  for Vancouver

 

https://shawglobalnews.files.wordpress.com/2016/02/capture10.png?w=720&h=480&crop=1

 

 

the diff is it's a leveraged purchase and the low interest rate and no capital gain tax really helped creating wealth the last few years 

the only other true tax free investments are 1 Tax free saving account which is roughly $ 70K now for ppl  (sotpped keeping track)  , and about $850K lifetime cap gain exemption for small business owners

 

so tax free is important because if you make say $ 800K tax free that's the equivalent of $ 1.6M of earned income for ppl making the highest tax bracket and say that's $ 200K salary - roughly 8 years worth of 'work' saved up.

 

 

[gary17]

i have a "high" income myself but believe me it wasn't easy to get a mortgage.  even though i got the asset too , they won't let me bridge a loan for 1 month while i complete a new purchase and waiting to get money for the older place we sold - 

 

i know many high net worth people - some immigrants, some small business owners that made it here in BC - can't get mortgage.  all they could get is a line of credit that is roughly 25% of their real estate asset.  i think unless you've personally applied for a mortgage and know of the real story behind things, it's just anecdotal evidence from stuff you read online or in the news.

 

Anyway, we don't need to waste our times here debating this;  it just basically comes down to a life style choice.  If you rent, nothing wrong with that - my brother does not -  I just told him then be prepared to buy if the market does really correct one day; don't try to time the market, just pay fair price when you can afford it.  but be prepared to sell your other investments, raise fund, and hopefully at a time when interest rates are reasonable & the stock market or whateverelse you are invested in can be sold at reasonable price...        i think in the end it's a wash...    good luck to you all.

 

real estate is a very local thing; you can't be deciding about what the asset is worth by just thinking about it while reading stuff online... u gotta be here and live here to know it.  my 2 cents.