Garth Turner - Real Estate in Canada

[Liberty]

An interesting take on how to separate bubbles from mere overvaluation (h/t @ac_eco):

 

http://www.mauldineconomics.com/the-10th-man/how-to-identify-bubbles#

 

The true part is that a lot of things are currently overvalued. I would say stocks are overvalued. Most people would agree. I would also say bonds are overvalued. Some people would agree. I would say corporate credit is overvalued, real estate in certain parts of the country is overvalued, and maybe a few other things.

 

But these are not bubbles.

 

So, what is the difference between something being overvalued and something being in a bubble?

 

Since you asked…

 

A bubble is a psychological phenomenon that occurs when an asset class becomes overvalued and is accompanied by an obsession or preoccupation with that asset class. For example, you probably heard that the Dow just hit 20,000. It is not a bubble. Nobody is obsessed or preoccupied with the stock market. You don’t have Coast Guard guys day-trading it like when I was still in the service in 1999. That was a bubble. In fact, nobody really gives a crap about today’s stock market. Usually they have CNBC on in the locker room at my gym. Nobody pays any attention to it.

 

By that standard, there are very few bubbles in the world right now. But there is a bull market in people running around calling everything a bubble. Please ignore those people. The only real, honest-to-goodness asset price bubbles out there are in residential real estate in Canada, Australia, and Sweden. They are going to end up in the landfill in New Mexico with all the Atari E.T. cartridges. [...]

 

That’s the thing about bubbles. Just when you think they are stupid, they can get a lot stupider. That’s been my experience with Canada, as house prices went from stupid in 2013 to very stupid in 2015 to OMG so stupid in 2017

[Guest 50centdollars]

http://themacrotourist.com/macro/the-worlds-worst-market-timer

[Spekulatius]

Until interest rates climb it will be status quo.

 

It's going to pop. the reason may not be known and it does not really matter. These bubbles are reflexve, due to positive feedback mechanisms. Prices rise, because prices rise and the inverse logic applies as well. Interest rate rises or government interventions may do it. Once prices stop to rise, the marginal buyers (Flippers etc.) will be gone, the natural buyers won't feel buying pressure any more and hold out, and prices start to fall. It will take a while to show up in numbers, but a change in buyers perception can change in a month or two all of a sudden. I have seen this happen several times in different markets. Real estate is one of these things that feels like a better buy to most people, when it's expensive and getting more expensive.

[Liberty]

[alertmeipp]

http://business.financialpost.com/personal-finance/mortgages-real-estate/ontario-slaps-15-tax-on-foreign-buyers-expands-rent-control-in-16-point-plan-to-cool-housing

 

The tax will have exemptions for skilled workers in the Ontario worker nominee program and refugees will be exempt. Anyone obtaining a permanent residency or Canadian citizenship within four years of purchasing their home would receive a full rebate of the NRST. Any international student enrolled full-time for at least two years would receive a full rebate. If you’ve worked in Ontario from the date of purchase of your home, you also get a full rebate.

 

The last one seems like a big loophole. Register an Ontario corp and hire yourself or/and spouse. Voila, you get a full rebate. What am I missing?

 

True, need to see the details.

 

But I think the rent control is going to remove quite a bit of demand.

 

[alpha]

New survey out from Bloomberg, looks like Canadians are still confident real estate will continue to rise:

 

https://www.bloomberg.com/news/articles/2017-04-24/canadian-housing-optimism-hits-record-amid-moves-to-cool-toronto

[Liberty]

https://www.bloomberg.com/news/articles/2017-04-24/home-capital-founder-soloway-to-step-down-after-osc-allegations

 

Soloway out at HCG. Still looking for a CEO and a CFO...

[Liberty]

http://www.680news.com/2017/04/24/buyers-remorse-millennial-homeowners-house-poor-want-sell/

 

"Buyer's remorse: Most millennial homeowners are house poor and want to sell"

[gurpaul88]

Glad to see sentiment is changing.

[Liberty]

Home Capital not having a good time:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/hcg-to-home-capital-group/msg296793/#msg296793

[bbarberayr]

Realtor.ca has a new (I think) feature which lets you show listings since a certain date. 

 

The thing I find very interesting is in bubble areas like Toronto or KW, half of the active listings on the market have come on in the last week.

 

In non-bubble areas like Montreal, 10% of the active listings have come on in the last week.

 

Seems like people are starting to panic-sell to try and get out while the market is hot.  If supply continues to come on-stream, this, on top of the end of financing companies like HCG, could be what pops the bubble.

[rb]

Realtor.ca has a new (I think) feature which lets you show listings since a certain date. 

 

The thing I find very interesting is in bubble areas like Toronto or KW, half of the active listings on the market have come on in the last week.

 

In non-bubble areas like Montreal, 10% of the active listings have come on in the last week.

 

Seems like people are starting to panic-sell to try and get out while the market is hot.  If supply continues to come on-stream, this, on top of the end of financing companies like HCG, could be what pops the bubble.

You can't read too much into that for several reasons.

 

1. This is kind-of the real estate season so you get a lot of listings around this time of year.

2. If you have a hot market where homes sell really quick you would have a lot of very young listings.

[no_free_lunch]

A twitter user I follow (fcfyield) mentioned that you could short these Canadian residential bonds.  Could anyone confirm that it is possible?  I assume this isn't feasible for a regular joe investor but perhaps some could make money here.

 

Bank of Montreal is bundling uninsured residential mortgages into bonds in what could be the start of a new debt market for Canadian banks as the government scales back its support for home loans.

 

The Toronto-based lender is planning to sell debt backed by nearly C$2 billion ($1.5 billion) of prime uninsured mortgages through a trust. That’s a novel development in a country where big banks have historically packaged government-insured mortgages into bonds. Much of the securities will be purchased and retained by the bank, according to Moody’s Investors Service.

 

https://www.bloomberg.com/news/articles/2017-04-17/bank-of-montreal-to-offer-mbs-as-canada-shrinks-mortgage-support

[Liberty]

http://www.cbc.ca/beta/news/entertainment/los-angeles-celeb-homes-compare-toronto-1.4082052

[Liberty]

$1.1m in toronto:

 

 

 

 

[Liberty]

 

[alpha]

After the recent implementation of foreign buyer tax, and all the headline news about housing shortages in the GTA, the City of Toronto is now a platinum sponsor for an upcoming foreign real estate investor expo.

 

http://marketplacetoronto.com/Sponsors.html

 

 

[Liberty]

Moody's downgrading six canadian banks:

 

https://www.bloomberg.com/news/articles/2017-05-10/six-canadian-banks-cut-by-moody-s-over-consumers-debt-burden

 

Six of Canada’s largest banks had credit ratings downgraded by Moody’s Investors Service on concern that over-indebted consumers and high housing prices have left lenders vulnerable to potential losses on assets.

 

Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada had their long-term debt and deposit ratings lowered one level,

 

 

[rukawa]

My interpretation of those graphs is that the US has the ability to increase its interest rates and that we will try to keep our interest rates low since the government will try to avoid putting more pressure on hugely indebted canadians. The result is that the US/CA exchange rate should continue to get worse....I wouldn't be surprised if we eventually reach 50 cents on the dollar or even less...lets say 30 cents on the dollar.

 

That should make Canadian housing even cheaper which will raise foreign demand even more.

 

The real interesting question will be...at what point does the Canadian government cave and raise interest rates. Because I don't think the divergence between Canadian and US rates can last long.

[longlake95]

not sure about 30 cents, but I could see us test the 2001-2002 lows of 63 cents or so. But I generally agree. I'm 75% USD stocks and cash, as a hedge against a housing downturn here in Canada.

[no_free_lunch]

The real interesting question will be...at what point does the Canadian government cave and raise interest rates. Because I don't think the divergence between Canadian and US rates can last long.

 

That is the question isn't it.  What is scary is how few Canadians realize that this is even a possibility.  I keep hearing that rates can't go up because we are too leveraged.  It might have to happen though, like it or not. 

 

One additional concern, the biggest concern to me, is what do our neighbors think of the dollar value and what kind of leverage do they have.  Is dropping the dollar down to 60 or 50 cents even an option?

[rb]

There's slim to no chance of rate hikes in Canada. Why would BoC raise rates if we don't have inflation and the economy isn't overheating. Because the cool kids are doing it isn't a good enough reason in central banking. The BoC will not brick the economy just to keep up with the Americans.

 

The level of debt will basically ensure that the economy keeps sputtering and not have a strong takeoff. Even if through some miracle (low CAD?) the economy starts taking off and we get some inflation a small rate hike will be enough to cool the economy back down because so much of the debt is variable rate.

[Liberty]

Average Canadian house worth $559,317 last month, up 10% in past year

 

http://www.cbc.ca/news/business/crea-house-prices-1.4115208

[rb]

Toronto up 5% MoM

[alpha]

Toronto real estate developers are advertising in Hong Kong offering to pay the foreign buyers tax on condo purchases and find a tenant for the unit for the first year.

 

http://www.bnn.ca/hong-kong-ad-offers-to-cover-foreign-buyers-tax-for-toronto-condo-investors-1.753423

 

Also I was reading an article on Bloomberg that mentioned the Chinese government is considering a 10% tax on second property purchases to try and cool the domestic market. If implemented it means Chinese investors following all the rules would only really be paying an additional 5% to get into Canadas best RE markets (Vancouver and Toronto).