Garth Turner - Real Estate in Canada

[SharperDingaan]

Keep in mind that regulation is RE-active, not PRO-active.

FI's are expected to self-regulate within the rules of the sandox (set by the regulator), in return for hands-off regulation (letting the market solution prevail wherever possible). The regulator is just there to preserve the robustness of the system as a whole, and limit any aggregate net abuses. By and large it works well.

 

There will always be fraud, and money-laundering. All that regulation can do is try to make it more visible, more difficult to execute, and shut it down where practical. But as in the drug trade, it is unrealistic to believe that you will ever get 'ahead' of the dealers.

 

Not all provinces have the same view. BC is notoriously lax, and can do what it wants within its own borders - the Vancouver property market being an example. But if bad things happen there it will be BC and investors that take the brunt of the hit, not the Cdn banking system.

 

Not what folks want to hear, but this isn't the US banking system.

 

SD

 

 

 

 

 

[Viking]

It looks to me like the many significant changes that have been implemented in the mortgage market over the past 8 years have been needed. Too late? We will see. However, i do think today as far as mortgages rules go we are far from where the US housing market was in 2006 (in terms of regulation). Perhaps we can say the regulators have been caught napping a number of times; however, over time they have addressed a number of issues as they became more obvious.

 

I agree Sharper,  it is very difficult for regulators to be early. It would be like playing a game of whack a mole, not knowing with alot of guessing involved.

[clutch]

Mortgage fraud

Fake income statements pay stubs

Moving money around from relatives just before mortgage approval.

Fake employment letter

 

Were the norm

 

The motto was get in before it’s too late.

 

Now it’s too late.

 

What evidence do you have that these were the NORM, not a few instances?

[Cigarbutt]

It looks to me like the many significant changes that have been implemented in the mortgage market over the past 8 years have been needed. Too late? We will see. However, i do think today as far as mortgages rules go we are far from where the US housing market was in 2006 (in terms of regulation). Perhaps we can say the regulators have been caught napping a number of times; however, over time they have addressed a number of issues as they became more obvious.

 

I agree Sharper,  it is very difficult for regulators to be early. It would be like playing a game of whack a mole, not knowing with alot of guessing involved.

 

Opinions voiced about the relative "appropriateness" of regulators' actions may be correct.

 

Relative contrarian opinion here is that the potential for infrequent but significant shocks is underestimated (through insufficient reserves against surprises and through recency bias) but I may be wrong. But, if a significant shock were to occur, the "real estate eco-system" happens to be in a very vulnerable posture. So, a variance of opinions is possible and depends on the weighting one attributes to various scenarios and their potential severities.

 

Interestingly for context, in a typical fashion for the years preceding the GFC in the US, here's a link which shows how the "regulator" may have suffered from looking too heavily in the rear-view mirror.

Speech from Federal Reserve 2006:

https://www.federalreserve.gov/newsevents/speech/kohn20060518a.htm

 

So, this was an environment of tolerable gyrations within a Great Moderation frame of mind, despite real, growing and significant risks within household real estate (at least relatively apparent to modest contrarian observers). This was also an era where reliance on market discipline was to become challenged shortly after by issues where bank nationalizations were considered as potential remedial measures.

 

When dealing specifically with the prevention of crises:

 

"A third principle is that the actions taken to prevent a crisis should not raise the odds of creating more problems in the future. In particular, the problem of moral hazard is a significant concern. If market participants begin to rely too much on regulators and central bankers to manage possible future crises, they may act in a way that has the effect of raising the risk of a financial crisis. For example, they may fail to engage in adequate due diligence when extending credit to other market participants or to maintain adequate capital for the risks they undertake. And they might come to believe that the government possesses more tools and resources than are actually available to shield them from the consequences of poor risk management."

 

I would humbly submit that their assessment of moral hazard was VERY wrong. Collectively, their assessment was precise but quite inaccurate.

 

Also, when you look at USA-based and European surveys and ivory-tower assessments done around 2005, 2006 and even 2007 versus the potential trouble brewing in US real estate and potential spillovers, the wording is almost exactly copy and paste compared to what is presently reported by the Bank of Canada (2018):

 

"More broadly, participants in the Bank of Canada’s Financial System Survey were asked about their confidence in the Canadian financial system if a large shock were to materialize. Most survey participants remain confident in the current resilience of the financial system."

 

Enough doom and gloom for this topic.

 

BTW, whack-a-mole is one of my family's favorite game when we see one. In a terribly competitive environment, I usually get the second score and my son typically gets first prize. What's your recipe? You have to get your rhythm and anticipate the moves, he says. Easier said than done.

[alpha]

 

Latest Vancouver RE data shows sales dropping with inventory building, and BOC expected to accelerate rate hikes into 2019.

 

 

https://business.financialpost.com/real-estate/real-estate-board-reports-metro-vancouver-home-sales-down-sharply

[sundin]

"Housing market not headed for a major correction: Moody's Analytics"

 

https://business.financialpost.com/personal-finance/mortgages-real-estate/housing-market-not-headed-for-a-major-correction-moodys-analytics-says

[Viking]

The report says “Moody’s Analytics predicts interest rates will rise through 2020, which could push mortgage rates back up to around 6 per cent from the current five-year rate of around 4.4 per cent. But the absence of “significant” house price declines should reduce the risk of mortgage debt “deteriorating” over the period, the report concludes.”

 

Actual 5 year fixed mortgage rates in Canada currently are 3.25-3.5%. If they rise 1.5% to 5% over the next 18 months (and remain at that level for any length of time) my crystal ball says we will likely see significant price declines. Too many people at the margin are carrying far too much debt and when it has to be refinanced at rates 50% higher they will be toast. Once the turn in prices happens, it could get ugly if it spreads into the broader economy.

[Guest 50centdollars]

https://business.financialpost.com/personal-finance/mortgages-real-estate/osfi-to-take-new-measures-to-address-equity-based-mortgage-loans

 

"A federal regulator says it will have to take further action to address mortgage approvals by Canadian banks that still depend too much on the amount of equity in a home, and not enough on whether loans can actually be paid back."

 

Like I said, mortgage fraud has been legal in Canada for a long time. OSFi has know about this for years.

 

Jerome Powell just 2 weeks ago:

 

"Really, what hurts is if consumers are borrowing heavily and doing so ... against an asset that can fall in value," he said. "That's a really serious matter, when you have a housing bubble and highly leveraged consumers and housing values fall.

 

"We know that's a really bad situation."

 

https://www.cbc.ca/news/business/fed-interest-rates-1.4839094

 

[alpha]

 

Condo rental rates in Toronto are up 7.6%

 

Nationally housing starts declined in September, but gained in Toronto

 

For several years in a row Toronto holds the record for most tower cranes erected in North America.

 

I would like to find an unbiased forecast for upcoming new build completion over the next few years. It seems like right now supply cannot keep up with demand.

 

 

https://www.bnnbloomberg.ca/toronto-condo-rents-jump-7-6-to-2-385-per-month-in-third-quarter-1.1150775

 

https://economics.td.com/ca-housing-starts

[obtuse_investor]

Very timely update on the Canadian housing landscape from Ben Rabidoux. Podcast: http://www.stitcher.com/s?eid=56553986

[Cigarbutt]

The following is:

-anecdotal

-regional in nature

and worries about vulnerability have been voiced for many years. Still.

 

https://www.msn.com/en-ca/video/news/is-toronto-the-new-manhattan/vi-BBOc41p?ocid=spartanntp

checked for reference:

https://www.kijiji.ca/v-1-bedroom-apartments-condos/city-of-toronto/1-bedroom-we-pay-your-utilities-lawrence-ave-e/1376748826?enableSearchNavigationFlag=true

 

Anecdotally, just renewed the lease on an apartment used by two of my children in Montreal (typical student sector). The rent was increased by 1,5% and when compared to what I was paying for a similar arrangement in the 80's, rent rise has slightly decoupled from inflation but not that much. I inquired to the owner if the building was for sale. I end up with the conclusion that the price asked is quite high but can be rationalized to some degree with long term optimism and if you believe that interest rates will stay low for a very long time.

 

I find the situation in Toronto puzzling and the short video underlines some concerns about fundamentals. It's always hard to gauge "sentiment" but I wonder if the tone used and complacency shown by the two entertainers may not represent an underlying current (with timmies in our coffees and with sunshine on our faces). It seems to me that market participants assume that prices can move away from fundamentals forever. Who are the buyers? With stocks at least, one could always hope to sell rapidly to the next buyer if things get tight. I'm afraid some Toronto real estate owners may not have this luxury when prices eventually come back to earth (net worth=market value of assets-debt).

 

Like Ben Rabidoux says, there are "strange risk dynamics".

[shalab]

https://www.bloomberg.com/news/features/2018-10-20/vancouver-is-drowning-in-chinese-money?srnd=premium

 

[shalab]

These articles explain the booming house prices in Vancouver and other parts of Canada.

 

https://www.theglobeandmail.com/real-estate/china-canada-foreign-buyers/article33485996/

 

What's the purpose of this topic, shalab?

[scorpioncapital]

"Citizenship can be gained after as little as three years of residence, and taxation on income earned abroad is spottily enforced"

 

What the hell does this mean? That's blatantly illegal.

 

[Cigarbutt]

Interesting data form the latest (October) survey by the CMHC.

 

-in the main, sentiment remains positive.

 

-85% of first-time buyers spent the most they could afford on their home.

 

-About 40% of buyers do not have a monthly buffer in their budget. Of those that do at least 50% (64% for first-time buyers and 50% for repeat buyers) buffered $300 or less per month.

 

Of note, the average annual Canadian household budget for lottery tickets is also about $300 but the average masks the skew as the lower income earners (who typically rent) spend more than the average on lottery tickets implying that higher earners have better capital allocation skills.

 

https://www.collaborativefund.com/blog/no-one-is-crazy/

[alpha]

Canadian government is increasing the national immigration rate even more, to almost 1% of the population by 2021.

 

The housing situation in Toronto is already ridiculous with very low vacancy rates and the government has increased the cost of new housing development with the ever growing list of regulations and approval processes.

 

 

https://www.cbc.ca/news/politics/canada-immigration-increase-350000-1.4886546

[rb]

The target for immigration in Canada has long been 1% of population. Some years it's a bit more, some years a bit less. But this is nothing new.

[Viking]

With the current rate at 1.75% and a neutral rate of between 2.5 and 3.5% it looks like the BOC may increase rates 3 times in 2019 starting in January. Given the amount of debt held in Canada one has to wonder when higher rates will start to slow economic activity, particularly in the housing market. It looks like higher rates hit the economy with a multi-year lag as it takes years for mortgage rates to reset at the higher rates (given most mortgages are 5 year fixed). Perhaps we are another 12-18 months from more fully understanding the impact of higher rates on the economy here in Canada (not just slower housing sales but also reduced consumer and business spending as more money is shifted to servicing debts).

 

Bank of Canada will keep raising interest rates, Stephen Poloz says

- https://business.financialpost.com/news/economy/bank-of-canada-will-keep-raising-interest-rates-stephen-poloz-says

 

Rate hikes to cost Canadian households $2,500 each year — but it isn't uncharted territory

https://business.financialpost.com/news/economy/rate-hikes-to-cost-canadian-households-2500-each-year-but-it-isnt-unchartered-territory-report#comments-area

[Liberty]

HELOC changes:

 

https://www.ratespy.com/got-a-heloc-your-mortgage-options-are-about-to-shrink-11067208

[rb]

Seems like reasonable policy and good risk management of the financial system. But it's gonna hit some people.... hard! These are those people who were taking unreasonable risks.

[rukawa]

Whenever I read Americans complaining about debt or house prices I just find it funny. I know financially responsible Canadians, :o with double the debt of these people and a lower household income:

https://www.wealthsimple.com/en-us/magazine/money-diary-couple-debt-us

 

I said financially responsible and I mean it. I don't even know what these words mean anymore in the GTA or if its possible for them to have a meaning. These days 1m in debt is considered pretty much normal.

[rb]

Yea, it's ridiculous and a problem that we've let things get this far in Canada. Thankfully, the powers that be finally decided to put a stop to it. Better late than never.

 

But the people in that article, the problem is not their debt. Their problem is that they're stupid. They make 160k a year and think that their 360k house is their problem? Ridiculous.

 

It's not that they have made a mistake once when they were naive and didn't know better. They're in debt up to their eyeballs and they have 3 kids in private school, 2 pets, and they must have sushi and whatever other ridiculous fancy food. Stupidity! If I go ahead and write those 2 a cheque that clears all of their debt, I GUARANTEE you that in 2 years those 2 are in the same situation they're in now.

[merkhet]

Yea, it's ridiculous and a problem that we've let things get this far in Canada. Thankfully, the powers that be finally decided to put a stop to it. Better late than never.

 

But the people in that article, the problem is not their debt. Their problem is that they're stupid. They make 160k a year and think that their 360k house is their problem? Ridiculous.

 

It's not that they have made a mistake once when they were naive and didn't know better. They're in debt up to their eyeballs and they have 3 kids in private school, 2 pets, and they must have sushi and whatever other ridiculous fancy food. Stupidity! If I go ahead and write those 2 a cheque that clears all of their debt, I GUARANTEE you that in 2 years those 2 are in the same situation they're in now.

 

Someone already DID! The article indicates their parents paid off their credit card debt a few years ago, and, yet, here they are again... ridiculous!

[scorpioncapital]

160k a year? you're already talking about the 1%. Canada is not a wealthy place, not more than other spots anyway.

 

 

[Cigarbutt]

Yea, it's ridiculous and a problem that we've let things get this far in Canada. Thankfully, the powers that be finally decided to put a stop to it. Better late than never.

 

But the people in that article, the problem is not their debt. Their problem is that they're stupid. They make 160k a year and think that their 360k house is their problem? Ridiculous.

 

It's not that they have made a mistake once when they were naive and didn't know better. They're in debt up to their eyeballs and they have 3 kids in private school, 2 pets, and they must have sushi and whatever other ridiculous fancy food. Stupidity! If I go ahead and write those 2 a cheque that clears all of their debt, I GUARANTEE you that in 2 years those 2 are in the same situation they're in now.

Who is we?

Isn't that the crux of the issue, the crass conformance?

 

-Optional part:

 

http://www.rbcgam.com/investment-insights/research-publications/_assets-custom/pdf/rbcgam-economic-compass-canadas-debt-threat-201107.pdf

 

-This is a report from 2011 which I had kept to see if/when the real estate in Canada would reach two standard deviation levels.

-The report contains comments about the role of the powers that be, in terms of the challenges related to prevention and the risks related to cheerleading and the conforming marginal buyers lining up as long as the music plays.

-Especially fascinating are exhibit 10 and exhibit 14. See the two following links for more contemporary updates.

-The question is not if but when and, at times, there are unusual "market forces" at work.

-An argument could be made that the author was wrong on many levels but he had that to say, in 2011:

 

"There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the Bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later."

 

http://creastats.crea.ca/natl/index.html

See MLS composite benchmark price

https://tradingeconomics.com/canada/bank-lending-rate

See 10 year or max option

 

And as the housing tide has lifted us to unusual heights, we just learned this week that the federal government has no plan to balance the fiscal budget for the foreseeable future. On this last point, I agree formidably that the budget will not balance for a VERY long time even if we wanted to.

 

Famous last words.