Garth Turner - Real Estate in Canada

[clutch]

This is bubble popping -- Canadian style.

 

Sorry that it's not as exciting!  ;D

[TBW]

@rb

Totally agree. Credit will be restricted and that should be that in terms of the bubble. Also agree that rate hike, hcg deal, and osfi tightening were probably all coordinated. I found it weird that there was very little mention of housing in the boc releases today.

 

But I still think osfi should be telling ppl who the bad actors are. Lets not forget that we subsidize their funding. Where would alt lenders fund without gics? Would be 100s of bps higher.

[rb]

@rb

Totally agree. Credit will be restricted and that should be that in terms of the bubble. Also agree that rate hike, hcg deal, and osfi tightening were probably all coordinated. I found it weird that there was very little mention of housing in the boc releases today.

 

But I still think osfi should be telling ppl who the bad actors are. Lets not forget that we subsidize their funding. Where would alt lenders fund without gics? Would be 100s of bps higher.

TBW, that's part of the Canadian style, they'll sort it out behind closed doors, not on the front pages of newspapers. But to answer your question, they were all bad actors. Some more than others. But all the FIs wrote shit mortgages, and all of the "massaged" an application every now and then. Again, some more than others. OSFI just kinda/sorta turned a blind eye until they didn't.

 

At the big guys it was kinda wink, wink, nudge, nudge, it's ok to massage an application every now and then to get it trough. Now they'll get a memo from the top brass saying that massaging an application is a capital offense. The subprime (alternative) guys are probably just totally screwed cause those are just massage parlours.

[TBW]

You are right. It does appear to be Canadian way.

 

My question is WHY is this the Canadian way?

 

I am Canadian and just dont at all understand the compulsion to bury issus and hide problems. Other questions I have: Is this cyclical behaviour one sees at the end of a long asset bubble? Or is this a cultural thing I just wasnt aware of?

[rb]

You are right. It does appear to be Canadian way.

 

My question is WHY is this the Canadian way?

 

I am Canadian and just dont at all understand the compulsion to bury issus and hide problems. Other questions I have: Is this cyclical behaviour one sees at the end of a long asset bubble? Or is this a cultural thing I just wasnt aware of?

I think it's a bit of both.

 

I think there's a cyclical part to it. Part of it is the end of a long bubble, sort of you had your fun with it but you took it way too far and now we're gonna step in before you break any more things. The other cyclical thing is that the regulator probably wanted to step in for a while but they weren't sure if the economy could take it. You don't want to pop a housing bubble on top of an oil crash. But now maybe they feel that the economy is in better shape and they went for it.

 

But a big part is the cultural thing that you just weren't aware of.

 

Why is it this way? Tradition has a lot to do with it. It's always been thus and it's worked pretty well in the past. The government/regulators are very powerful (when I was at RBC in London we were kinda worried about the FSA but terrified of OSFI) and they care about the stability of the system. From a stability perspective it's easier and more elegant to do it this way as opposed to naming names and triggering bank runs. Yes, you and I can't make the profits on our shorts that we want. Then there's gonna be dumb investors that put money into these guys and are gonna loose a lot. But our gov't can be pretty ruthless that way in the name of stability of the system.

 

HCG is a case study. They were made an example of. The regulators (mainly OSFI) were probably all over these guys for a while (Canadian style) to clean up their act. But most likely due to hubris and/or stupidity they didn't listen or cooperate. So they had a regulator, in this case the OSC, drop a bomb on them. Now if this was in the US and the SEC issued the letter you would had maybe a 5% stock drop and nobody would have cared much. But over here on that action you're done, cause it's not just an OSC letter.

 

Yea, it's murky, and you, I or the next guy may not like it. But it's just the way things work here.

[TBW]

Thanks.  That is very helpful.  I think that was probably a realistic description.

 

I think by operating this way they are creating a massive amount of moral hazard which can make things much worse in a crisis.

 

We shall see, I could be wrong.

[Liberty]

I thought this was an interesting read. Can anyone confirm the author's claims?

 

http://www.macleans.ca/opinion/why-a-low-delinquency-rate-isnt-the-good-news-real-estate-story-you-think/

[Potato]

Which claims would you like to confirm? That people will go to great lengths and be in poor overall financial shape but still make the mortgage payment?

 

Perhaps the CMHC report he references at the beginning is a good place to start:

 

"The average credit scores of mortgage holders improved in the fourth quarter, in addition to a decrease in their likelihood of bankruptcy. In contrast, consumers without a mortgage continued to follow a declining trend in their average credit scores beginning in 2015, as well as an increasing likelihood of bankruptcy."

https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?cat=201&itm=1&lang=en&sid=TZDSf8odDoxFnGkBUWuOyQz0BLwXU49KK6oCznBMdTzWm9rMKxL3KTQ70mJNBqRW&fr=1500398459821

 

This could be because homeowners with a mortgage became better credit risks, or because the hot markets gave more people with houses the option to sell the house and avoid bankruptcy (or to go refinance or get a 2nd mortgage, etc.).

 

The delinquency rate was 0.3%, or 20,058 mortgages in '16Q4 of 5.85M mortgages. There were 31,067 bankruptcies and insolvencies that quarter, so lots of people who went bankrupt without even becoming delinquent on their mortgage, though that doesn't directly back up what he's saying as we're missing how many of those bankruptcies were by people without a mortgage, and how many delinquencies were "cured" before sliding to a bankruptcy or proposal, and how many people had to seek the help of a credit specialist (or family member or in some other way came close to the edge) but ended up being able to pull out of their credit spiral without a bankruptcy or proposal.

 

I'm out of hard proof, but if I squint and take a guess at the numbers, I think it holds up that there are a fair number of people who hit the wall before falling very far behind on their mortgage, and that there are more Canadian consumers in trouble (or one relatively minor surprise expense away from trouble) than the very low number of mortgage delinquencies implies. Not sure if my opinion and interpolations are helpful for you, though.

 

 

[SharperDingaan]

You are right. It does appear to be Canadian way.

 

My question is WHY is this the Canadian way?

 

I am Canadian and just dont at all understand the compulsion to bury issus and hide problems. Other questions I have: Is this cyclical behaviour one sees at the end of a long asset bubble? Or is this a cultural thing I just wasnt aware of?

I think it's a bit of both.

 

I think there's a cyclical part to it. Part of it is the end of a long bubble, sort of you had your fun with it but you took it way too far and now we're gonna step in before you break any more things. The other cyclical thing is that the regulator probably wanted to step in for a while but they weren't sure if the economy could take it. You don't want to pop a housing bubble on top of an oil crash. But now maybe they feel that the economy is in better shape and they went for it.

 

But a big part is the cultural thing that you just weren't aware of.

 

Why is it this way? Tradition has a lot to do with it. It's always been thus and it's worked pretty well in the past. The government/regulators are very powerful (when I was at RBC in London we were kinda worried about the FSA but terrified of OSFI) and they care about the stability of the system. From a stability perspective it's easier and more elegant to do it this way as opposed to naming names and triggering bank runs. Yes, you and I can't make the profits on our shorts that we want. Then there's gonna be dumb investors that put money into these guys and are gonna loose a lot. But our gov't can be pretty ruthless that way in the name of stability of the system.

 

HCG is a case study. They were made an example of. The regulators (mainly OSFI) were probably all over these guys for a while (Canadian style) to clean up their act. But most likely due to hubris and/or stupidity they didn't listen or cooperate. So they had a regulator, in this case the OSC, drop a bomb on them. Now if this was in the US and the SEC issued the letter you would had maybe a 5% stock drop and nobody would have cared much. But over here on that action you're done, cause it's not just an OSC letter.

 

Yea, it's murky, and you, I or the next guy may not like it. But it's just the way things work here.

 

Each Big-5 has its own unique 'Charter' and operates at 'the pleasure of her majesty' - a historic quirk that literally goes back to Canada's founding years; OSFI is essentially her majesty's representative. Add in that early Canadian bankers were primarily Scots, that grew up in the 'clan' system; & you get today's banking system. Canada's modern day version of banking is very effective, and retains the 'help yourself' underlying nature of the clan system - ensuring that it is generally market responsive.

 

Totally counter to the American approach, hence the dissonance.

Can't game principles, can't fragment authority over multiple regulators, can't bully because they're smaller than you, can't steal their best people - because you're just too small. They don't do democracy either, and you will do as you're told - when you're told. It's not a discussion.

 

While stability is prized, complacency isn't; so new innovations are permitted to root, & demonstrate the business case.

They enjoy time-limited 'protection' until they abuse the privilege.

 

No different to the drug, oil, or arms trades - just a lot better run.

Typical Scots.

 

SD

 

 

 

   

 

 

         

[Liberty]

Turns out last month was basically an unmitigated disaster. The median detached selling price in the GTA plunged 10.6%, for a one-month loss of $115,000. Ouch.

 

The median (not average) sale price in July was $960,000, compared with $1.275 million in April. That makes the 90-day decline a stunning 24.7%. By way of comparison it took a couple of years for real estate to lose 31% of its value during the last real estate crash in the early 1990s (and then 14 years to recover). Another month of this ugliness, and we will have a record on our hands – the quickest unwinding of a housing market in Canadian history. Maybe human history.

 

[...]

 

In Richmond Hill median selling prices declined by a hundred grand in July, and are off 23.2% from the spring peak. In poor Vaughan houses that fetched $915,000 in March are now going for $750,000. In Newmarket sellers are now getting 20.7% less with the median price dropping from $1.125 million to $850,000. And even in tony Oakville, 16-Mile Creek is tinged crimson with a 21% drop as days-on-market have tripled, with a $300,000 reduction in median detached values.

 

http://www.greaterfool.ca/2017/08/01/almost-there-3/

[Liberty]

http://business.financialpost.com/real-estate/toronto-home-prices-in-record-monthly-drop-as-sales-plunge-1/wcm/1b276698-c8b0-4cb9-a5a6-522557f062fe

[wisdom]

http://www.cbc.ca/news/canada/british-columbia/buyer-who-walked-away-from-real-estate-deal-ordered-to-pay-360k-1.4232844

 

buyer-who-walked-away-from-real-estate-deal-ordered-to-pay-360k

Interesting precedent.

 

[rb]

http://www.cbc.ca/news/canada/british-columbia/buyer-who-walked-away-from-real-estate-deal-ordered-to-pay-360k-1.4232844

 

buyer-who-walked-away-from-real-estate-deal-ordered-to-pay-360k

Interesting precedent.

Why is it interesting?

[rb]

6% month over month drop in the benchmark. 19% off from April. Pretty brutal.

[obtuse_investor]

I find it amusing that the headline stories lately are about just three data points. Current month, last month and last year. And all of them stress how the year over year number is largely positive.

 

It's sad that this light weight data passes along as a major news story in popular media.

 

Hardly any of the stories mention that any recent buyers that had less than 10% of down payment are now officially under water. They can't sell and move without taking a large blow to their personal net worth.

 

This is going to be brutal and I think it has just begun.

 

 

[rb]

I find it amusing that the headline stories lately are about just three data points. Current month, last month and last year. And all of them stress how the year over year number is largely positive.

 

It's sad that this light weight data passes along as a major news story in popular media.

 

Hardly any of the stories mention that any recent buyers that had less than 10% of down payment are now officially under water. They can't sell and move without taking a large blow to their personal net worth.

 

This is going to be brutal and I think it has just begun.

Well yea the reporting is pretty shit because any information that comes in is from the real estate boards which hoard data like crazy. See the lawsuits between the government and real estate board about making data public. The boards are fighting tooth and nail to prevent it. Also media organizations have become conditioned to copy and paste RE board press releases because for such a long time there was only one direction -up. So happy days. Who cares about details.

 

If the lump goes on (I think it will) and shit gets real - foreclosures, tears, etc - I think coverage will change dramatically. As in the big short - right now it's just a gully.

[obtuse_investor]

Well yea the reporting is pretty shit because any information that comes in is from the real estate boards which hoard data like crazy. See the lawsuits between the government and real estate board about making data public. The boards are fighting tooth and nail to prevent it. Also media organizations have become conditioned to copy and paste RE board press releases because for such a long time there was only one direction -up. So happy days. Who cares about details.

 

If the lump goes on (I think it will) and shit gets real - foreclosures, tears, etc - I think coverage will change dramatically. As in the big short - right now it's just a gully.

 

I think you're right. If this continues (if history is any guide, there is a long way to go) the public is going to start looking for someone to blame. The articles are already coming out about the "greedy realtors" and alleged fraud they conducted. When that happens, I hope government will be able to grow a backbone and push back to make the real estate market more transparent.

 

There will be other people sought out to blame for this. We have already seen "foreigners" being named as one of the parties. Another would be the banks-- I am sure banks are already working on their defence. Another party to blame would be the government policies themselves, especially the CMHC; where the taxpayer directly insures the mortgage lenders. That time will likely come in the next couple years.

 

Sadly, everyone who has participated in this mania had a role to play. But human beings being who they are, would rather look for a scape goat than take a cold hard look at their own actions.

 

[rb]

Well yea the reporting is pretty shit because any information that comes in is from the real estate boards which hoard data like crazy. See the lawsuits between the government and real estate board about making data public. The boards are fighting tooth and nail to prevent it. Also media organizations have become conditioned to copy and paste RE board press releases because for such a long time there was only one direction -up. So happy days. Who cares about details.

 

If the lump goes on (I think it will) and shit gets real - foreclosures, tears, etc - I think coverage will change dramatically. As in the big short - right now it's just a gully.

 

I think you're right. If this continues (if history is any guide, there is a long way to go) the public is going to start looking for someone to blame. The articles are already coming out about the "greedy realtors" and alleged fraud they conducted. When that happens, I hope government will be able to grow a backbone and push back to make the real estate market more transparent.

 

There will be other people sought out to blame for this. We have already seen "foreigners" being named as one of the parties. Another would be the banks-- I am sure banks are already working on their defence. Another party to blame would be the government policies themselves, especially the CMHC; where the taxpayer directly insures the mortgage lenders. That time will likely come in the next couple years.

 

Sadly, everyone who has participated in this mania had a role to play. But human beings being who they are, would rather look for a scape goat than take a cold hard look at their own actions.

Oh course in the future months and years you'll have whole bunches of smug "investors?"/homeowners who were swaggering around like masters of the universe turn up and yell at the sky "GOD?! Why me?" Yes.. they'll blame everyone but themselves.

 

Just like other great bubble, there will a lot of blame to go around as everyone was feeding at the trough. Banks.... sure probably they deserve some. When the lawsuits start coming in we'll see how solid those mortgage applications really were.

 

The government? Sure some there too for continuously increasing CMHC limits. But that's on the political side. CMHC itself actually looks very well reserved. It may come out the other side looking like despite it all it behaved the way an insurance company should. But if the government would have stepped in to do stuff you can imagine the screams: REGULATION! FREEDOM! blah, blah, blah

 

Realtors? Hell yea... they're greedy and they're majour sleazeballs. But everyone knows that realtors are sleazeballs. They went along with it because they could taste the mirage.

 

Yes they will be hard breaking stories. Nobody feels good when the young family with 2 kids looses their home. But yea most of these people brought it on themselves. But what really gets me amped up that a lot of innocent people are gonna pay for this. The factory worker, living responsibly, no HELOC and saving 15% of his salary is gonna loose his job because of this. That is infuriating.

[SharperDingaan]

I find it amusing that the headline stories lately are about just three data points. Current month, last month and last year. And all of them stress how the year over year number is largely positive.

 

It's sad that this light weight data passes along as a major news story in popular media.

 

Hardly any of the stories mention that any recent buyers that had less than 10% of down payment are now officially under water. They can't sell and move without taking a large blow to their personal net worth.

 

This is going to be brutal and I think it has just begun.

 

Not really.

 

Recent marginal buyers would have to have had a > 20% down payment, and ability to absorb a 200bp increase in interest rate on their HELOC. As today's buyer has to meet the same criteria - all sales (albeit at much lower prices) are into relatively strong hands. Systemic stability.

 

If the buyer bought the place to live in, nothing has changed - as there is no intent to sell.

Sure the buyer might be pissed, but that's it. Systemic stability.

 

If the buyer bought the place to flip, they knew the risks. Millions of people make stupid decisions every day - welcome to life.

The bank just forecloses, and simply rents out the property until the market turns around. Systemic stability.

Same as the buyer was doing. 

 

The pigs get slaughtered, valuation returns to more normal levels, and the sector becomes a lot healthier.

No real risk to system stability, while the market does its thing.

The way it's supposed to work.

 

SD

 

 

[gary17]

Agreed

 

by the way vancouver prices are still going up. 

 

 

[rb]

Agreed

 

by the way vancouver prices are still going up.

Maybe... but I'm hoping someone from our glorious west coast can explain to me how someone can qualify for a 1.5 million mortgage at 5% once B20 takes effect without being a serious 1%er

[Kapitalust]

Agreed

 

by the way vancouver prices are still going up.

Maybe... but I'm hoping someone from our glorious west coast can explain to me how someone can qualify for a 1.5 million mortgage at 5% once B20 takes effect without being a serious 1%er

 

Not us and we are in the lower end of the upper middle class in terms of income.

 

I would never liquidate the majority of our stock, bond, REIT, and cash assets to sink into a house, only to end up with a house and no other asset.

[Sharad]

Agreed

 

by the way vancouver prices are still going up.

 

You sure about that?

 

https://www.zolo.ca/vancouver-real-estate/trends

 

Looks like Vancouver is falling off a cliff...

 

One other thing for all to note. In Canada (excl. Alberta) mortgages are recourse loans, meaning you can't foreclose...you either pay your dues or you claim bankruptcy.

 

The Greater Toronto Area's drop isn't pretty either:

 

https://www.zolo.ca/toronto-real-estate/trends

 

Unless someone can provide me with evidence that the latest sales reports according to zolo.ca are completely wrong, it really feels like the media is holding back the dramatic drop that has occurred since the first rate hike. 

[Sharad]

My guess is real estate prices go sideways for the next 10 or 15 years. With inflation running at 2 or 3 percent per year, real prices will correct over time to a more reasonable level.

 

I often hear this (in fact, it seems to be as far as anyone from banks or the government is willing to go in newspapers). Can you elaborate on what makes you think this "sideways" scenario is more likely than a bust?

 

My understanding is that markets generally tend to overshoot both ways and rarely find some stable middle path, especially when there's leverage/government intervention/irrational beliefs among market participants/hot money pouring in/people think something is safer than it truly is/etc (I know this describes almost everything everywhere, but that's my point -- this isn't different). With everybody in debt to their ears, interest rates at historic lows and random economic shocks bound to hit the Canadian economy at some point or other, I kind of have trouble seeing how this would just result in prices stabilizing rather than in a panic-bust like we've seen in so many other places in the past.

 

I used to kind of accept the "generally accepted wisdom" that seems to be repeated everywhere on how Canada doesn't have the subprime/bad lending standards that the US had, which is why we'll be ok. But after reading this, I'm not so sure:

 

http://www.greaterfool.ca/2012/02/20/canadian-subprime/

 

I too have heard this "sideways" argument. Unless someone can show me a country where real estate prices suddenly went sideways after a massive fuel-debt boom, I'm very sceptical (skeptical?) that it can happen.

[vikx01]

The bank just forecloses, and simply rents out the property until the market turns around. Systemic stability.

 

 

Not sure if this was meant tongue-in-cheek. If not, really?! Do banks own real estate and rent out the property?

Aren't REO properties gotten rid of asap?

Are banks in Canada interested in carrying on holding foreclosed properties and renting them out? Hardly seems plausible, but then again, what do I know?