Garth Turner - Real Estate in Canada

[Yours Truly]

In other news, "Canadian home prices climb another 1% in biggest February increase on record as Toronto stays strong."

 

"Prices across Canada were up 13.4 per cent compared to a year ago, the biggest 12-month increase since November 2006. Toronto led the pack with a record 23.0 per cent surge."

[Guest 50centdollars]

http://www.bnn.ca/toronto-housing-will-come-down-with-a-bang-stephen-jarislowsky-1.696204.

 

Good interview with Stephen Jarislowsky. He talks about housing right at the end but the rest of the interview was interesting. I agree with most of his points.

[scorpioncapital]

http://www.bnn.ca/toronto-housing-will-come-down-with-a-bang-stephen-jarislowsky-1.696204.

 

Good interview with Stephen Jarislowsky. He talks about housing right at the end but the rest of the interview was interesting. I agree with most of his points.

 

He talks about increasing capital gains taxes but has anyone heard about this? They are already quite high at a marginal rate of 23 to 25% (after the 50% deduction), roughly in line with most high-tax nations (arguably higher). Any higher would be , as he says, tempting a mass exodus since several countries don't even have a capital gains tax or lots of exemptions. Perhaps they will increase TFSA contribution?

[Guest 50centdollars]

http://www.bnn.ca/toronto-housing-will-come-down-with-a-bang-stephen-jarislowsky-1.696204.

 

Good interview with Stephen Jarislowsky. He talks about housing right at the end but the rest of the interview was interesting. I agree with most of his points.

 

He talks about increasing capital gains taxes but has anyone heard about this? They are already quite high at a marginal rate of 23 to 25% (after the 50% deduction), roughly in line with most high-tax nations (arguably higher). Any higher would be , as he says, tempting a mass exodus since several countries don't even have a capital gains tax or lots of exemptions. Perhaps they will increase TFSA contribution?

 

There is speculation that the tax will be increased in the new budget, which I think will be announced on March 22.

[rb]

I'm guessing there won't be a TFSA contribution increase since they just lowered it.

 

23-25% marginal tax on cap gains would imply you're pretty much in the top few % of income. For most people it's lower. I also don't think there will be a mass exodus if cap gains taxes were to be increased. In Canada you pay an exit tax when you leave. Effectively you realize all your gains at once. That can be a costly proposition under a progressive tax system.

[scorpioncapital]

Exactly, the fee hits on departure so I suspect if there is an exodus it will be at some tipping point pretty soon. Don't think people like the idea of being forced to stay in a country because very few other countries have departure tax starting at a measly $100k (or at all).

Better to take the hit once then forever, IMHO.

[Liberty]

Marc Cohodes interview on Vancouver and HCG:

 

[EliG]

23-25% marginal tax on cap gains would imply you're pretty much in the top few % of income. For most people it's lower.

 

It's lower now with 50% inclusion rate.

 

http://taxtips.ca/taxrates/on.htm

 

With 75% inclusion: 23% marginal CG tax if you make between 74K and 84K.

 

With 66% inclusion: 22.5% marginal CG tax if you make between 84K and 87K.

 

Not exactly the stuff of riches.

[Liberty]

https://medium.com/@mrtsta/walking-on-thin-ice-time-for-torontos-real-estate-bubble-to-pop-62f7456821b8#.8epwriz42

 

http://www.cbc.ca/news/business/toronto-housing-bmo-td-1.4028032

[Liberty]

This feels toppy:

 

http://m.sfgate.com/entertainment/article/Was-last-weekend-s-Real-Estate-Wealth-Expo-the-2538443.php#photo-2669675

[rb]

So that makes it 4 out of 5 banks that have called this a bubble. CIBC of course still believes it's a great time to buy a home.

[TBW]

I actually went to the Toronto Real Estate Expo.  It was a horrifying experience. 

 

Biggest takeaways: 

- everyone pitch is some form of 'get over your fear, don't analyze just buy' - I am not kidding that was pitched first 3 presentations.

-Brad Lamb (king of condo's) said infront of 15k people that it's good to have a good relationship with your lender because they 'will bend the rules for you'.  If that doesn't work, find a third tier lender there are plenty of them.

-Every booth was pitching second lien mortgages as RRSP investments.  Mostly in the 10% range.  I talked to many of these sales people.  There is no security on these loans.  Typically it is offered on houses pre-renovation.  Ie. buy house for 1mil putting down 20% (lie to bank to get that, don't mention you are flipping), get 500k second mortgage, then sell house for 2mil!  I heard that pitch twice

 

There is a boom in second lien with new lending standards.  The second lien lenders are only looking at asset values, don't care about your personal credit or cashflows to sustain property.  This is going to be a huge problem when prices stop rising.

 

I wrote more here on my blog.  https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to

 

I am email a bunch of these 'mortgage lenders' and 'investors' to learn more if anyone is interested I can pass on what I learn.

 

 

[Guest 50centdollars]

This is getting comical.

 

My aunt and uncle who live in Woodbridge have been borderline bankrupt for years just refinanced their house with none other than Home Capital Group. Home Cap gave them a $700K mortgage and they are in their 70's! My uncle is retired and my aunt works as the deli manager at Metro. How on earth can they ever pay this back? There only hope is to sell before the market goes down. If they don't they're bankrupt. But how can a lender give someone in their seventies $700K? And this is to people who have been on the verge of bankruptcy for years. They have only kept their house because they have borrowed over $150K from family members. This makes no sense to me.

[CalvinL]

I actually went to the Toronto Real Estate Expo.  It was a horrifying experience. 

 

Biggest takeaways: 

- everyone pitch is some form of 'get over your fear, don't analyze just buy' - I am not kidding that was pitched first 3 presentations.

-Brad Lamb (king of condo's) said infront of 15k people that it's good to have a good relationship with your lender because they 'will bend the rules for you'.  If that doesn't work, find a third tier lender there are plenty of them.

-Every booth was pitching second lien mortgages as RRSP investments.  Mostly in the 10% range.  I talked to many of these sales people.  There is no security on these loans.  Typically it is offered on houses pre-renovation.  Ie. buy house for 1mil putting down 20% (lie to bank to get that, don't mention you are flipping), get 500k second mortgage, then sell house for 2mil!  I heard that pitch twice

 

There is a boom in second lien with new lending standards.  The second lien lenders are only looking at asset values, don't care about your personal credit or cashflows to sustain property.  This is going to be a huge problem when prices stop rising.

 

I wrote more here on my blog.  https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to

 

I am email a bunch of these 'mortgage lenders' and 'investors' to learn more if anyone is interested I can pass on what I learn.

 

You do need cash flows to sustain the property, but it could be done with a note from a friend saying they pay you $2000 rent/month for a 100sqft den (exaggeration for fun). Just pay tax that that and now your property is cash flow positive. And now off to the next bidding war  ;D

[TBW]

50cent - that is crazy.  One of many reasons HCG stock is going a lot lower (my guess 0ish)

 

CalvinL - does that happen a lot?  That also seems crazy.

 

Speaking of crazy, when I was writing my blog post I was at a coffee shop.  Woman sitting next to me was talking on the phone to mortgage provider to buy a condo.  It was her second rental condo.  She only buys condo's that breakeven from a cashflow basis (meaning mortgage and condo fees, excludes maintenance, vacancy risk etc.).  Since she can't find any in Toronto she is buying in Collingwood (2.5hrs north of Toronto).  She plans on buying a second one there in the next month, to give her a total of 3.  Given how expensive real estate is in Toronto she thinks there will be a flood of money going to other towns and wants to buy the cashflow breakeven places now before everyone else.  I was shocked.  She wasn't dumb, she analyzed the numbers and relative value thinks breakeven is cheaper than all her friends buying condo's in Toronto that cost them money every month (she knows one guy that has 5).

 

It just seems that people in this city think you invest savings in real estate and consider no other option (stocks, businesses etc.).  So in her mind since she is renting a condo to live in that likely costs the owner money but she can buy ones that don't, long term she is much better off.  My question was why don't the negative carry owners sell?  She had no idea but thought they should...

[rb]

My question was why don't the negative carry owners sell?  She had no idea but thought they should...

Hahaha!! You know why they don't sell. They think this is going much higher (because real estate never goes down) and they will be mega gazzillionaires. The money they loose on the negative carry is insignificant in their mind compared to the future gains. Just a minor penalty of doing business.

 

If I had investment real estate in this market. I would thank my lucky gods, sell and never look back. Of course if one were a rational investor, one would have sold a good while back.

 

[rb]

I don't think anybody is going to take out HCG. I'd say that foreigner are probably gonna sit this one out and it's too small for Canadian FIs to matter. Since 4 of the 5 banks called the real estate situation a bubble I doubt they'd spring for a sub prime lender. But who knows Lauratian has done dumb things before.

[TBW]

50 - that is super interesting.  I think EQB is also a 0.  I am short those plus MIC (0 as well).

 

I agree with RB, likely no one takes them out and if they do it won't be the premium to book they are trading at.  Perhaps a big lender gets volu-told to buy them after the bubble has burst but that will still be much lower than here.

 

I bought 1 share in each EQB and HCG so I can attend the annual meetings this year.  That will be very interesting.

[mcliu]

So that makes it 4 out of 5 banks that have called this a bubble. CIBC of course still believes it's a great time to buy a home.

 

On the other hand, wouldn't it be truly a top when 5 out of 5 banks rate real estate a buy? That's when you really know everyone's bought the story and there are no skeptics..  ::)

[rb]

So that makes it 4 out of 5 banks that have called this a bubble. CIBC of course still believes it's a great time to buy a home.

 

On the other hand, wouldn't it be truly a top when 5 out of 5 banks rate real estate a buy? That's when you really know everyone's bought the story and there are no skeptics..  ::)

Nah man.... they wouldn't be CIBC if they got one of these things right.

[wisdom]

What you guys are describing has been the norm in Vancouver. The fact it has arrived in Toronto could mean that this is the end game.

[rb]

What you guys are describing has been the norm in Vancouver.the fact it has arrived in Toronto could man that this is the end game.

Ha! CMHC also rates Saskatoon and Regina as ridiculously overpriced. When it happens to Red Deer we'll know that we're truly fucked.

 

Actually if there are any members from Saskatoon or Regina I'd be really curious to hear what are the reasons realtors are giving there why prices are ok and it's a good time to buy. Shortage of land? Immigrants?

[Liberty]

I actually went to the Toronto Real Estate Expo.  It was a horrifying experience. 

 

Biggest takeaways: 

- everyone pitch is some form of 'get over your fear, don't analyze just buy' - I am not kidding that was pitched first 3 presentations.

-Brad Lamb (king of condo's) said infront of 15k people that it's good to have a good relationship with your lender because they 'will bend the rules for you'.  If that doesn't work, find a third tier lender there are plenty of them.

-Every booth was pitching second lien mortgages as RRSP investments.  Mostly in the 10% range.  I talked to many of these sales people.  There is no security on these loans.  Typically it is offered on houses pre-renovation.  Ie. buy house for 1mil putting down 20% (lie to bank to get that, don't mention you are flipping), get 500k second mortgage, then sell house for 2mil!  I heard that pitch twice

 

There is a boom in second lien with new lending standards.  The second lien lenders are only looking at asset values, don't care about your personal credit or cashflows to sustain property.  This is going to be a huge problem when prices stop rising.

 

I wrote more here on my blog.  https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to

 

I am email a bunch of these 'mortgage lenders' and 'investors' to learn more if anyone is interested I can pass on what I learn.

 

Thanks for taking one for the team, this is great entertainment. Like a scene straight out of The Big Short.

[Guest 50centdollars]

I don't think anybody is going to take out HCG. I'd say that foreigner are probably gonna sit this one out and it's too small for Canadian FIs to matter. Since 4 of the 5 banks called the real estate situation a bubble I doubt they'd spring for a sub prime lender. But who knows Lauratian has done dumb things before.

 

There is no way a bank takes them out. Why would they do it when they have a risk free model with the government? I was thinking more along the lines of EQB taking them out or doing some sort of merger since EQB is in the same situation as HCG.

[Peregrine]

I don't think anybody is going to take out HCG. I'd say that foreigner are probably gonna sit this one out and it's too small for Canadian FIs to matter. Since 4 of the 5 banks called the real estate situation a bubble I doubt they'd spring for a sub prime lender. But who knows Lauratian has done dumb things before.

 

There is no way a bank takes them out. Why would they do it when they have a risk free model with the government? I was thinking more along the lines of EQB taking them out or doing some sort of merger since EQB is in the same situation as HCG.

 

For the record, HCG and EQB are leaders in the alt-A regulated market. There's not many players, and it's a highly niche-type market. Take a look at their non-performing numbers over time - it doesn't jive with the fraud thesis.