Garth Turner - Real Estate in Canada

[Liberty]

Looks like in the US, "debt service payments as a percentage of disposable personal income was 9.82% in Q3 2018 which was the lowest percentage since at least 1980."

 

 

 

Meanwhile in Canada, looks like we're at record highs, and that without a lot of the interest-only HELOCs and other similar instruments popular in the past decade, many wouldn't even have made it this far..

 

Via

[Spekulatius]

^the above takes for granted that house values will keep increasing faster than inflation.

 

A long term retrospective look indicates that this is not guaranteed.

https://www.livabl.com/2017/03/canadian-house-prices-since-1921.html

 

If interested, the full study referenced in the article is long but fascinating and includes a horrible chart, made in Japan.

 

I believe that LT home values will move with income/salaries in the given area, not so much inflation. People tend to spent as much on housing than they can afford.

[Liberty]

I believe that LT home values will move with income/salaries in the given area, not so much inflation. People tend to spent as much on housing than they can afford.

 

Yet that's not what has happened in the past 15-20 years. The difference between incomes and house prices has been bridged by increasing debt. So if we're to get back to the income/salaries trend, a significant correction (or long stagnation) would need to take place.

[gary17]

pretty hard to beat tax free leveraged return if you buy a home

 

Historically, on average, real estate appreciation has pretty much followed inflation with a little extra, no? And there are all kinds of maintenance costs that people often forget to factor in when they cite how much they've made. Most of the return seems to come from leverage, which is fine, but we shouldn't forget that carrying a lot of debt can be a problem (price can fall, hells angels can move next door, houses can have expensive problems, etc).

 

Tax free is nice, but a lot of people invest in tax-advantaged accounts too, and the friction to buying and selling tends to be relatively high, if you're not someone who knows real estate well and can bypass a lot of the fee-takers.

 

To me, buying a house has a lot of non-financial considerations too, so looking at IRRs vs renting is only part of the story. Some people want to be real estate investors and don't mind flipping houses and moving every few years. Personally, I have no interest in that.

 

So if inflation is roughly 2.5%. leveraged at 5x = 12.5%. and since it is tax free it means if you have investment income you need to be roughly returning 25%, unleveraged befote taxes...

 

i think for most average canadians owning a home , one home that is your principal residence is a fairly safe way to generate wealthy over the long term—

[clutch]

pretty hard to beat tax free leveraged return if you buy a home

 

Historically, on average, real estate appreciation has pretty much followed inflation with a little extra, no? And there are all kinds of maintenance costs that people often forget to factor in when they cite how much they've made. Most of the return seems to come from leverage, which is fine, but we shouldn't forget that carrying a lot of debt can be a problem (price can fall, hells angels can move next door, houses can have expensive problems, etc).

 

Tax free is nice, but a lot of people invest in tax-advantaged accounts too, and the friction to buying and selling tends to be relatively high, if you're not someone who knows real estate well and can bypass a lot of the fee-takers.

 

To me, buying a house has a lot of non-financial considerations too, so looking at IRRs vs renting is only part of the story. Some people want to be real estate investors and don't mind flipping houses and moving every few years. Personally, I have no interest in that.

 

So if inflation is roughly 2.5%. leveraged at 5x = 12.5%. and since it is tax free it means if you have investment income you need to be roughly returning 25%, unleveraged befote taxes...

 

i think for most average canadians owning a home , one home that is your principal residence is a fairly safe way to generate wealthy over the long term—

 

Also, buying a house with a mortgage is a form of forced saving, which undoubtedly helped many people who otherwise may have just spent all the money or blew them in some altcoin investment.  ;D

[wisowis]

pretty hard to beat tax free leveraged return if you buy a home

 

Historically, on average, real estate appreciation has pretty much followed inflation with a little extra, no? And there are all kinds of maintenance costs that people often forget to factor in when they cite how much they've made. Most of the return seems to come from leverage, which is fine, but we shouldn't forget that carrying a lot of debt can be a problem (price can fall, hells angels can move next door, houses can have expensive problems, etc).

 

Tax free is nice, but a lot of people invest in tax-advantaged accounts too, and the friction to buying and selling tends to be relatively high, if you're not someone who knows real estate well and can bypass a lot of the fee-takers.

 

To me, buying a house has a lot of non-financial considerations too, so looking at IRRs vs renting is only part of the story. Some people want to be real estate investors and don't mind flipping houses and moving every few years. Personally, I have no interest in that.

 

So if inflation is roughly 2.5%. leveraged at 5x = 12.5%. and since it is tax free it means if you have investment income you need to be roughly returning 25%, unleveraged befote taxes...

 

i think for most average canadians owning a home , one home that is your principal residence is a fairly safe way to generate wealthy over the long term—

 

The leverage isn't free!

 

Would you leverage 5x at 3-4% mortgage rates to return 2.5%? And in Canada, you may have to renew at even higher rates after 5 years...

[clutch]

pretty hard to beat tax free leveraged return if you buy a home

 

Historically, on average, real estate appreciation has pretty much followed inflation with a little extra, no? And there are all kinds of maintenance costs that people often forget to factor in when they cite how much they've made. Most of the return seems to come from leverage, which is fine, but we shouldn't forget that carrying a lot of debt can be a problem (price can fall, hells angels can move next door, houses can have expensive problems, etc).

 

Tax free is nice, but a lot of people invest in tax-advantaged accounts too, and the friction to buying and selling tends to be relatively high, if you're not someone who knows real estate well and can bypass a lot of the fee-takers.

 

To me, buying a house has a lot of non-financial considerations too, so looking at IRRs vs renting is only part of the story. Some people want to be real estate investors and don't mind flipping houses and moving every few years. Personally, I have no interest in that.

 

So if inflation is roughly 2.5%. leveraged at 5x = 12.5%. and since it is tax free it means if you have investment income you need to be roughly returning 25%, unleveraged befote taxes...

 

i think for most average canadians owning a home , one home that is your principal residence is a fairly safe way to generate wealthy over the long term—

 

The leverage isn't free!

 

Would you leverage 5x at 3-4% mortgage rates to return 2.5%? And in Canada, you may have to renew at even higher rates after 5 years...

 

It's not just 2.5% return. The return should include the rent money that either you are saving yourself or getting from other people. Typically, that money cancels out the cost of borrowing + expenses.

[Cigarbutt]

I believe that LT home values will move with income/salaries in the given area, not so much inflation. People tend to spent as much on housing than they can afford.

Fair enough.

However, the house (building, not the land) is both a consumer durable (shelter service) and a depreciating asset.

We have lived in a house for 22 years in an area where the housing values have + or - followed income increases. The amount of money we "invested" over time to "maintain" it corresponds to the difference between today's value and the house value that would have been obtained from inflation alone.

I remember reading Jim Grants' work (around 2005-6) on the decoupling that was happening between housing values and GDP (an equivalent measure of income) and then, he looked unattuned, as he often does.

 

[clutch]

I believe that LT home values will move with income/salaries in the given area, not so much inflation. People tend to spent as much on housing than they can afford.

 

Yet that's not what has happened in the past 15-20 years. The difference between incomes and house prices has been bridged by increasing debt. So if we're to get back to the income/salaries trend, a significant correction (or long stagnation) would need to take place.

 

Low interest rate is a big factor here.

[Liberty]

So if inflation is roughly 2.5%. leveraged at 5x = 12.5%. and since it is tax free it means if you have investment income you need to be roughly returning 25%, unleveraged befote taxes...

 

i think for most average canadians owning a home , one home that is your principal residence is a fairly safe way to generate wealthy over the long term—

 

???

[alpha]

 

The housing market in Canada is becoming really bizarre, there is such a housing shortage now in West Vancouver they are renting out multi million dollar mansions to groups of students. My friends daughter just rented a 12 million dollar home on the west coast from a Chinese investor, when he told me about it I thought he was joking but apparently there is hundreds of these homes now listed on the market because of the new vacancy tax.

 

https://bc.ctvnews.ca/is-this-real-hundreds-of-vancouver-mansions-for-rent-for-cheap-1.4329826

[cwericb]

We too have a lot of Chinese immigrants who have bought high end homes in upscale subdivisions.

 

But here, many are spending large sums on renovating their basements into apartments. Not really legal of course.

 

I am in the opposite end of the country and the vacancy rate here is about zero. Combining that with the fact that we also have had the fastest population growth rate in the country for the past two years would suggest that the collapse of the housing market is not going to happen here any time soon.

 

[alpha]

 

Today the Federal Government announced it is going to loan up to 10% of the home value to first time buyers, and raise the cap on the amount a person can borrow from their RRSP to purchase a home. These policies seem insane with the current household debt levels, but it's an election year.

 

https://nationalpost.com/news/canada/federal-budget-2019-offers-first-time-home-buyers-a-break-with-1-25-billion-in-mortgage-relief

[doc75]

 

Today the Federal Government announced it is going to loan up to 10% of the home value to first time buyers, and raise the cap on the amount a person can borrow from their RRSP to purchase a home. These policies seem insane with the current household debt levels, but it's an election year.

 

https://nationalpost.com/news/canada/federal-budget-2019-offers-first-time-home-buyers-a-break-with-1-25-billion-in-mortgage-relief

 

Complete insanity and totally irresponsible IMO.

[Cigarbutt]

^Lately, it has become clear that it will be very hard to take the monetary punchbowl away.

https://business.financialpost.com/news/economy/why-central-banks-like-canadas-are-finding-it-hard-to-navigate-home

 

The mortgage stress test that has been introduced by the OSFI regulator has hurt the market quite a lot, especially for first-time buyers (a stress test implies being stressed now in order to have less stress later) and today's fiscal announcement appears simply to be a temporary measure to appease the short-term political stress.

 

Hoping for sunny ways may not do the trick.

 

[scorpioncapital]

10k boost to 35k? It's peanuts. Even if prices where half. With tightened mortgage restrictions what is given with one hand is taken with the other. I see this is as a gimmick, a bit of a joke. 10k? It's like almost 1 year of interest on a 250k property. Maybe if you live in middle of nowhere or a shoe box. You can buy 6 apartments for this price in Eastern Europe. I think I rather take that even without the 10k inducement.

[Liberty]

 

Today the Federal Government announced it is going to loan up to 10% of the home value to first time buyers, and raise the cap on the amount a person can borrow from their RRSP to purchase a home. These policies seem insane with the current household debt levels, but it's an election year.

 

https://nationalpost.com/news/canada/federal-budget-2019-offers-first-time-home-buyers-a-break-with-1-25-billion-in-mortgage-relief

 

Complete insanity and totally irresponsible IMO.

 

Pretty bonkers. Clearly one of those desperate electoral moves.

[Viking]

This new program sounds complicated to me. They will have to create a whole new bureaucracy to manage the program. There must be a more cost effective way to achieve their objective.

 

“Under the $1.25-billion incentive program, prospective buyers who have the minimum down payment for a home can apply to finance between five and 10 per cent of their mortgage via a shared equity program administered by Canada Mortgage and Housing Corporation (CMHC). The 10 per cent cap applies to newly constructed homes.”

 

The real answer to deal with sky high housing prices (and affordability issues for young people) is to normalize interest rates. We have learned that free money creates asset bubbles. However, normalizing interest rates would be hard medicine and clearly the Liberals are not interested in going down that path. Hard to see how taking on more debt than one can afford will end well...

[doc75]

This new program sounds complicated to me. They will have to create a whole new bureaucracy to manage the program. There must be a more cost effective way to achieve their objective.

 

“Under the $1.25-billion incentive program, prospective buyers who have the minimum down payment for a home can apply to finance between five and 10 per cent of their mortgage via a shared equity program administered by Canada Mortgage and Housing Corporation (CMHC). The 10 per cent cap applies to newly constructed homes.”

 

The real answer to deal with sky high housing prices (and affordability issues for young people) is to normalize interest rates. We have learned that free money creates asset bubbles. However, normalizing interest rates would be hard medicine and clearly the Liberals are not interested in going down that path. Hard to see how taking on more debt than one can afford will end well...

 

Agreed it would be hard medicine but I don't think rates are a partisan issue... unless you're talking about regulations mandating floors for residential mortgage rates as opposed to BoC moves? 

 

[Rod]

 

Today the Federal Government announced it is going to loan up to 10% of the home value to first time buyers, and raise the cap on the amount a person can borrow from their RRSP to purchase a home. These policies seem insane with the current household debt levels, but it's an election year.

 

https://nationalpost.com/news/canada/federal-budget-2019-offers-first-time-home-buyers-a-break-with-1-25-billion-in-mortgage-relief

 

Complete insanity and totally irresponsible IMO.

 

Pretty bonkers. Clearly one of those desperate electoral moves.

 

I don't know. What's interesting about the loan is that there is a price to income cap of 4, which is less than what many first time buyers are paying now. One effect could be to convince first time buyers to buy cheaper houses to qualify for the loan. In effect, the are being incentivized to buy less house and take on less debt. It's a bit like your dad offering to contribute $1,000 to the cost of your first car, but only if you buy used.

[Cigarbutt]

^Agreed that the underlying issue is affordability.

 

Interesting to note that the US Congress legislated their own version of a First-Time Homebuyer Credit in 2008 with the intent of stabilizing a falling market and in order to stem the waves of foreclosures. It's always hard to evaluate one policy action among others but it appears that the application of the bill was fraught with IRS-related administrative difficulties and fraud and, apart from possible limited postponement, did not really influence the built-in trajectory of prices. That was in 2008 and the GSE thread is still a very active one.

 

The new rules where the CMHC invests alongside the new owner is a reminder of how dominant the real estate has become in Canada and the government will only become more involved with support (and moral hazard) in the event of significant declines in home values.

 

 

Also, there ave been unusual demand factors (well described by some posters in this thread) but encouraging young households to put a significant part of their registered savings in a home "investment" when the affordability is so low is IMO borderline irresponsibility.

[no_free_lunch]

Well said cigarbutt, agree completely viking. 

 

This is what happens when you build plans with committees.  Everyone has to have their inputs and you end up with something complicated but where everyone has 'contributed'.

 

In addition to the complexity, extra government, potential for fraud, it is discriminatory. One first time home buyer opted to buy a condo and is living there now.  They plan to upgrade when they have get married/have kids.  Another just wants the house right away and is saving for it.  The first is out of look under this program because they are not a first time buyer.  I really have to insist that these government programs be equitable.  If they are going to do it (and they shouldn't) but then everyone should have access to it.

 

 

[Liberty]

I don't know. What's interesting about the loan is that there is a price to income cap of 4, which is less than what many first time buyers are paying now. One effect could be to convince first time buyers to buy cheaper houses to qualify for the loan. In effect, the are being incentivized to buy less house and take on less debt. It's a bit like your dad offering to contribute $1,000 to the cost of your first car, but only if you buy used.

 

I doubt that this is the impact that it'll have on the system. Those who were going to buy houses that don't qualify will still buy them, I doubt this is a big enough factor to make people pick a whole different house. As for those that buy houses that qualify, at the margin they'll be more inclined to buy and/or pay more.

 

It's basically just adding liquidity and loosening credit in an already very very hot market. I don't see how it can cool things down.

[SharperDingaan]

 

Today the Federal Government announced it is going to loan up to 10% of the home value to first time buyers, and raise the cap on the amount a person can borrow from their RRSP to purchase a home. These policies seem insane with the current household debt levels, but it's an election year.

 

https://nationalpost.com/news/canada/federal-budget-2019-offers-first-time-home-buyers-a-break-with-1-25-billion-in-mortgage-relief

 

Complete insanity and totally irresponsible IMO.

 

Pretty bonkers. Clearly one of those desperate electoral moves.

 

I don't know. What's interesting about the loan is that there is a price to income cap of 4, which is less than what many first time buyers are paying now. One effect could be to convince first time buyers to buy cheaper houses to qualify for the loan. In effect, the are being incentivized to buy less house and take on less debt. It's a bit like your dad offering to contribute $1,000 to the cost of your first car, but only if you buy used.

 

This is a lot more accurate than you might initially think.

 

Ken & Barbie, 1st time buyers, are not in a position to whine ....

With their combined 120K/yr gross income (high for 80%+ of everyone in Canada) they have the following ...

 

118K (25%) of a 480K house, at 0% financing

- 70K (35K each x 2) of interest free financing from their RRSP

- 48K (10% partiicipation loan) of interest free financing from CMHC

 

127K (26%) of savings to buy that 480K house, on which no tax was paid on the investment income earned

- Cummulative to date 63.5K/person TFSA limit  (63.5k x 2 = 127K)

 

They have one of the larger combined gross incomes in Canada, they were able to accumlate a 26% downpayment without having to pay tax on the investment income,  1/3 (118K) of their 362K total mortgage is interest free, and they have the ability to stop repaying their 70K RRSP mortgage at any time, without triggering a default. And all courtesy of the government of the land. Pretty generous?

 

I don't like the house 480K could buy, and I don't like paying tax on my RRSP non-payment, is a life-style choice. You want more, you pay for it; if you haven't got the money - get a 2nd job, get a renter, or get another co-owner. Millions of other people accross Canada routinely do this, there is no reason you cannot; you just don't want to.

 

You're not special.

 

SD

 

 

 

 

[Liberty]

Did you just count their entire combined gross income as available to spend on a house (somehow being "0% financing")?  ???

 

I won't get into the assumptions for how many "1st time buyers" have full TFSAs and 35k per person in their RRSPs..