Garth Turner - Real Estate in Canada

[Liberty]

achievement unlocked:

 

[rb]

But let's unpack that even more. To get the the great "pin down" number. One way to figure out the maximum paid is to see what's the maximum you can qualify for under CMHC rules. I believe that current rules do allow for reasonable expenses outside the home. Lets assume $3,600 in property tax, $1,200 insurance, and $500 for 1/2 heating costs.

 

You're right that the median family income in Toronto is 75K. But screw them if they're not smart to make real coin they should be homeless. Let's go with $120k annual income. 32% of that is $38.4K. Take out expenses and you're left with $33.1k for mortgage payments or $2,758 per month. At 5% down payment that's 516K max for the house. At 20% it is 613K.

 

So I would go with the max pin down number as 613K for say a 1,500 sqft place. I believe we blew through that number a while back.

 

I believe average house price in Toronto is around mid 700's. Average detached is above 1m.

 

Your analysis is interesting and much better than mine. How are people even getting CMHC insurance? I don't get it. CMHC require that you can spend no more than 32% of your gross income on Principal, Interest, property taxes and heating on housing.

https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_003.cfm

 

So with the median household making around 76k, you can only service your house with 76k*0.32/12 = 2k per month. Heating is 100 a month. Property tax is 300 a month. So you are left with 1600 to service the house. I've plugged that into the TD mortgage payment calculator and I get that the most you can afford is $400,000 of principal for the mortgage.

I don't know for sure what the house prices are. CREA is showing a composite average for Toronto of 876K. But you have a lot of 1 bed condos in there. Not exactly what i was calculating for. With condos we get into different discussion about maintenance fees and the like. Also if you have small semis going for 800k in the burbs I doubt you can get anything non-condo for under 1m in the city proper. It's even harder to know prices today because listing prices aren't prices anymore. Just some theoretical start point for an auction. -- See one example in Liberty's link in the post above.

[mcliu]

Same craziness in Australia: http://www.news.com.au/finance/real-estate/selling/derelict-surry-hills-terrace-on-the-market-for-185m/news-story/1e46bc02c9640e7a07d53289598ba863

[DTEJD1997]

HOLY SMOKES!

 

What is going on in Canada, eh?

 

What do people do in Toronto that enables them to buy $1mm shacks?

 

Hell, for a couple few million, they could buy most of the town I live in!  I'm not that far away from Canada either....Heck, I can sometimes see Canada when I go on a long walk or bike ride...

 

That is a bubble for sure...only question is how long it is going to take before it blows apart.

[Yours Truly]

Just noticing that it's ridiculously easy to get financing right now through alternative lenders/brokers/private financing route.  When in doubt, fake letterheads showing proof of employment can easily be obtained and there's no due dilligence being done to validate/verify these sources whatsoever.

[Spekulatius]

His claim was that this could not happen since the real estate market was in some sense efficient and prices could never go this high since people would not be able to afford it

 

The real estate market is no more logical or efficient that's the stock market or the market for Pokemon cards.  It will only be efficient if the market participants are rational.

the whole point of a bubble is that prices can far exceed what people can actually afford - for a while.

[bizaro86]

So this thread has been fun, and while I wish for selfish reasons the same pricing insanity would trickle down to Calgary where I own real estate, I have a question. Is there any reasonable way to make money off of knowing this is a bubble? The banks are tbtf, and I can't short the government or cmhc. Are people buying genworth puts?

 

PS. I have a number of Chinese immigrant friends who have received money from.  Both parent's house/apartment sales in china, and used the cash to buy real estate here. I have a coworker who owns 12 houses he bought from this source of funds. I'm mentioning this for two reasons. If it's true in Calgary it's probably true in Vancouver and Toronto. Secondly, my message to irrational real estate speculators is that Calgary is way undervalued!

[clutch]

Is there any reasonable way to make money off of knowing this is a bubble? The banks are tbtf, and I can't short the government or cmhc. Are people buying genworth puts?

 

It seems there is no obvious way, and also timing this seems impossible. But I'm hoping to load up on the bank stocks if they tank when the bubble bursts.

[EliG]

Commercial Real Estate Underwriter in Toronto -->

 

https://twitter.com/canafin/status/845812638928003072

 

20 unit townhouse, 100% pre-sold before construction started, 95% Chinese buyers, $700+ per square foot, took just 1h to sell.

 

His closing tweet:

 

"people say this isn't sustainable but it has been going for quite a while now and there are no signs of slowing"

 

He may very well be right, as long as wealthy Chinese keep bidding. They don't need a mortgage, so all mortgage calculations upthread are irrelevant.

 

[rb]

So this thread has been fun, and while I wish for selfish reasons the same pricing insanity would trickle down to Calgary where I own real estate, I have a question. Is there any reasonable way to make money off of knowing this is a bubble? The banks are tbtf, and I can't short the government or cmhc. Are people buying genworth puts?

 

PS. I have a number of Chinese immigrant friends who have received money from.  Both parent's house/apartment sales in china, and used the cash to buy real estate here. I have a coworker who owns 12 houses he bought from this source of funds. I'm mentioning this for two reasons. If it's true in Calgary it's probably true in Vancouver and Toronto. Secondly, my message to irrational real estate speculators is that Calgary is way undervalued!

Well there is no CDS although that doesn't matter much cause it's not like we would have access to CDS. On top of that the option market is nowhere as deep or liquid as it is in the states.

 

One could just straight up short MIC and HCG. But like the subprime cos in the states the carry is pretty big. Though despite the carry you were rewarded if you shorted the US subprimes.

 

Another way would be a long short on the canadian banks. I think that the banks will be ok in the end. But they will take body blows. Some more than others. My favorite would be long TD short CM or some fancy option strategy around that. The reward won't be as large as betting on a MIC collapse but the carry isn't bad.

 

If anyone has other ideas, please share.

[mcliu]

Maybe short the C$ or Genworth?

 

It's a tough trade all around, like rb said, big carrying costs. Plus, the trend may last a lot longer than anyone expects as EliG says. Until you see a collapse in the Chinese housing bubble or a real tightening/reversal of capital flows, the inflow of hot foreign capital will keep driving prices higher.

 

The problem is the large spread between real estate prices in China and the rest of the world. When someone can sell a tiny apartment in Shanghai/Beijing/Shenzhen/Hong Kong and buy a house in Australia/Canada/US, the trade will continue until the spread closes. Especially when prices are being set by the marginal buyer/seller. It's hard to see when this will happen, particularly as deposit rates in China are set below market rates, forcing people to buy real assets.

 

It also doesn't help when the central banks in Australia/China/Canada keep extending credit into an overheating market..

 

I guess this is what happens when you allow non-market entities to hold dominant market share in global markets.  ::)

[alpha]

Home Capital fires the CEO:

 

http://www.theglobeandmail.com/report-on-business/home-capital-terminates-chief-executive-martin-reid/article34440301/

[rb]

Home Capital fires the CEO:

 

http://www.theglobeandmail.com/report-on-business/home-capital-terminates-chief-executive-martin-reid/article34440301/

After a full 10 months in the job!

[Liberty]

[TBW]

People seemed to like my last post, so will put this one here too.  https://onbeyondinvesting.com/blogs/blog/canadian-lenders-are-safe-arent-they

[Guest 50centdollars]

http://www.cbc.ca/player/play/911085635889?utm_content=buffer4e719&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

Oakville Mayor discusses house prices. I thought it was interesting.

[rb]

http://www.cbc.ca/player/play/911085635889?utm_content=buffer4e719&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

Oakville Mayor discusses house prices. I thought it was interesting.

Interesting interview. Thanks for sharing.

 

Refreshing to see someone rightly calling bullshit on the real estate industry party line of it's lack of supply/give us the greenbelt.

[wisdom]

The new way around foreign tax in Vancouver is using private equity or hedge funds.

 

Locals (amateurs) are setting up companies with 75% voting shares owned by locals or alternatively partnerships. Foreign investors set up holdco's in other provinces which in turn own the local companies or are limited partners.

 

Any local who is able to raise funds overseas is getting into this game. The locals do provide personal guarantees. Either they will be wiped out when this ends or they will have built up enough assets overseas to walk away.

 

Locals take a salary plus 20% of all income - which essentially is 2 +20%. Doesn't get any easier - use investors funds, leverage it up at the banks and collect fees and you are rich. If it goes bad, the banks are left holding the bag.

 

Any property that is cash flow positive is being targeted driving everything to zero or negative. At that stage, they  increase the equity portion to make the numbers work to allow them to still use leverage. It is beautiful to watch.

[rb]

The new way around foreign tax in Vancouver is using private equity or hedge funds.

 

Locals are setting up companies with 75% voting shares owned by locals or alternatively partnerships. Foreign investors set up holdco's in other provinces which in turn own the local companies or are limited partners.

 

Locals take a salary plus 20% of all income - which essentially is 2 +20%. Doesn't get any easier - use investors funds, leverage it up at the banks and collect fees and you are rich. If it goes bad, the bank and investors are left holding the bag.

Something tells me that the structure is a bit more complicated/sophisticated than that otherwise the feds would tax the shit out of the holdcos.

[wisdom]

The feds will run into this next year. At this time the objective is to avoid the foreign tax. They will run into CRA when they file taxes for 2017 in early 2018.

 

A lot of them are amateurs and in some cases the funds are being invested in the locals names.

 

It has gotten to a level where individuals doing this are not sophisticated or have a good grasp of things. They are just seeing the fees they can earn.

 

The rich foreigner walking in and picking up several properties could be someone pooling funds overseas and bringing them over and leveraging the real estate to earn returns. Capital gains have been a bonus.

[scorpioncapital]

Who says they are filing with CRA?

CRA does not enforce any of these offshore structures. Instead, if you overstate your public bus pass credit or claim a moving expense that's not to their liking, you will get a red flag.

Meanwhile how many billions are flowing through offshore or undeclared tax havens with Canadians in the middle?

Just look at the dollar as a sign of the strength or weakness of the economy. I'd say it's getting weaker.

 

 

 

[rb]

The feds will run into this next year. At this time the objective is to avoid the foreign tax. They will run into CRA when they file taxes for 2017 in early 2018.

 

A lot of them are amateurs and in some cases the funds are being invested in the locals names.

 

It has gotten to a level where individuals doing this are not sophisticated or have a good grasp of things. They are just seeing the fees they can earn.

 

The rich foreigner walking in and picking up several properties could be someone pooling funds overseas and bringing them over and leveraging the real estate to earn returns. Capital gains have been a bonus.

So basically poor tax planning? Trying to avoid buyers tax by paying fees and running into a tax chainsaw?

[wisdom]

http://vancouversun.com/news/local-news/house-buyer-beware-landmark-b-c-court-ruling-will-shake-real-estate-industry

 

Based on this ruling, CRA is going after the buyers here if the seller did not pay taxes in Canada. Not sure what impact this precedent will have. It is very interesting!

 

This purchaser got hit with a $600,000 bill.

[TonyG]

TBW, 200k ppl read that blog post? woah. nice. keep it up

[alertmeipp]

Toronto up 33% in a year.

 

http://www.cbc.ca/news/canada/toronto/toronto-house-price-1.4056093

 

Some area up 50% 60% in a year.

 

Even if u make 20% down, that's like 3x your money in a year.

 

The realtors said that's all supply side problem... well, when everyone want to get in to flip, the demand side will be too huge.

 

This will end when ppl realize house price cannot go up forever... then we will see the real user demand... and I doubt that would be pretty.