Garth Turner - Real Estate in Canada

[rukawa]

There is a simple way to determine whether supply is a problem...rental rates. In a situation with lots of speculation there should be high prices and low rental rates. From what I've heard Vancouver did have this situation at one point. But Toronto never did. Toronto has high real estate prices and high rental rates. There may be a case to be made though for houses in the suburbs like Mississauga where rental rates are very low and house prices very high.

[Rod]

There is a simple way to determine whether supply is a problem...rental rates. In a situation with lots of speculation there should be high prices and low rental rates. From what I've heard Vancouver did have this situation at one point. But Toronto never did. Toronto has high real estate prices and high rental rates. There may be a case to be made though for houses in the suburbs like Mississauga where rental rates are very low and house prices very high.

 

I guess the question is what does "restrained supply" actually mean? If there is a mad rush to buy homes as fast as possible and the owners of raw land are slow to sell then you will have restrained supply regardless of the regulatory environment. You could also ask what is the capacity of the homebuilding industry to build new homes in the Toronto market? There is always going to be some kind of bottleneck somewhere in the production process. There is a limit to how many homes can be built in one year given the amount of construction labour you can draw on and other constraints. My understanding is that there is close to a record number of homes being built in the GTA now.

 

 

 

 

[cwericb]

There is another factor that may have an effect on the housing prices in Canada's major cities.

 

At one time a lot of people were tied to living in the large congested metropolitan areas. But today that is no longer the case for many. Many jobs are portable today and a lot of people no longer have to suffer living in the dense, urban, crime infested cities and are free to relocate to more desirable areas of the country.

 

As they say, “water seeks its own level”. As more and more people realize that they don’t have to live in Vancouver, Toronto, Calgary, etc, it is pushing up prices in the more desirable areas of the country and this will not stop until prices tend to level off somewhat.

 

Here, we have a high level of immigration. When I moved to a new city here last year I asked my insurance agent if he was seeing a lot of immigrants moving. He said yes, they were seeing a lot of new comers. I asked where most were coming from, expecting China, Pakistan, Phillippines, etc. He said “Ontario”.

[Rod]

There is another factor that may have an effect on the housing prices in Canada's major cities.

 

At one time a lot of people were tied to living in the large congested metropolitan areas. But today that is no longer the case for many. Many jobs are portable today and a lot of people no longer have to suffer living in the dense, urban, crime infested cities and are free to relocate to more desirable areas of the country.

 

As they say, “water seeks its own level”. As more and more people realize that they don’t have to live in Vancouver, Toronto, Calgary, etc, it is pushing up prices in the more desirable areas of the country and this will not stop until prices tend to level off somewhat.

 

Here, we have a high level of immigration. When I moved to a new city here last year I asked my insurance agent if he was seeing a lot of immigrants moving. He said yes, they were seeing a lot of new comers. I asked where most were coming from, expecting China, Pakistan, Phillippines, etc. He said “Ontario”.

 

The idea that telecommuting thanks to the internet will cause large relocations out of cities has been around for many years. I wonder whether it's actually happening? It seems that many companies are actually moving jobs downtown. And young people increasingly want to live and work downtown as well. The urbanization trend seems only to be getting stronger. And the biggest cities seem to be the ones gaining the most new jobs.

[rukawa]

There is a simple way to determine whether supply is a problem...rental rates. In a situation with lots of speculation there should be high prices and low rental rates. From what I've heard Vancouver did have this situation at one point. But Toronto never did. Toronto has high real estate prices and high rental rates. There may be a case to be made though for houses in the suburbs like Mississauga where rental rates are very low and house prices very high.

 

I guess the question is what does "restrained supply" actually mean? If there is a mad rush to buy homes as fast as possible and the owners of raw land are slow to sell then you will have restrained supply regardless of the regulatory environment. You could also ask what is the capacity of the homebuilding industry to build new homes in the Toronto market? There is always going to be some kind of bottleneck somewhere in the production process. There is a limit to how many homes can be built in one year given the amount of construction labour you can draw on and other constraints. My understanding is that there is close to a record number of homes being built in the GTA now.

 

Restrained supply is fully explained in the following article:

https://business.financialpost.com/real-estate/regulatory-overkill-is-driving-biggest-canada-homebuilder-south

 

Why would a developer complain about regulations and threaten to move if his real problem is a lack of labour. Why would developers fund Ontario Proud:

https://www.cbc.ca/news/canada/toronto/ontario-proud-election-advertising-spending-1.4941210

 

I think its extremely odd that its easier to make money in Florida, North Carolina and Arizona when home prices are less than half what they are in the GTA. But its easy to explain if the problem is excessive red-tape. Developers are complaining because the regulatory burden is high. And if the burden is high than it is definitely supply-constraining.

 

[Rod]

I think the biggest problem with supply in Toronto are the restrictive zoning policies in the urban neighbourhoods. So much of the older parts of the city are zoned for single family homes, which is outdated given how much the city has grown. What's needed is low-rise apartment buildings and townhouses. It's been called the "missing middle". A lot of people are pushing for change so maybe something will happen.

 

[Mark Jr.]

The idea that telecommuting thanks to the internet will cause large relocations out of cities has been around for many years. I wonder whether it's actually happening? It seems that many companies are actually moving jobs downtown. And young people increasingly want to live and work downtown as well. The urbanization trend seems only to be getting stronger. And the biggest cities seem to be the ones gaining the most new jobs.

 

Anecdotally, we shut down our business office in June, we’re 21 years old and were in that office for about 14 years. Nobody was using the space, more and more of the staff have moved out of Toronto to places like Cambridge, Kitchener, even New Brunswick, Nova Scotia, etc.

 

We’re an internet company, and we do everything online. We were already doing everything virtually, phones, email, video conferencing, project tracking.

 

The savings were substantial and go directly to the bottom line. It was a no-brainer. It turns out we’re not alone and this is becoming more the norm within the industry.

 

I’d be wary of commercial real estate (office rentals), even the temp/space on-demand unicorns like WeWork are fighting an uphill battle I think.

 

In a few years we may buy our own building, but it’ll be a mixed use: office downstairs, with multi-tenant rentals on top. We’ll see.

 

 

 

[SharperDingaan]

The idea that telecommuting thanks to the internet will cause large relocations out of cities has been around for many years. I wonder whether it's actually happening? It seems that many companies are actually moving jobs downtown. And young people increasingly want to live and work downtown as well. The urbanization trend seems only to be getting stronger. And the biggest cities seem to be the ones gaining the most new jobs.

 

Anecdotally, we shut down our business office in June, we’re 21 years old and were in that office for about 14 years. Nobody was using the space, more and more of the staff have moved out of Toronto to places like Cambridge, Kitchener, even New Brunswick, Nova Scotia, etc.

 

We’re an internet company, and we do everything online. We were already doing everything virtually, phones, email, video conferencing, project tracking.

 

The savings were substantial and go directly to the bottom line. It was a no-brainer. It turns out we’re not alone and this is becoming more the norm within the industry.

 

I’d be wary of commercial real estate (office rentals), even the temp/space on-demand unicorns like WeWork are fighting an uphill battle I think.

 

In a few years we may buy our own building, but it’ll be a mixed use: office downstairs, with multi-tenant rentals on top. We’ll see.

 

I have had a similar experience with a GTA start-up ...

 

The traditional reason for partners buying the real-estate the office is in, is because it's the partners pension plan.

The business continues to pay rent every month, but after 20 years the partners real-estate is owned outright.

 

We also found that we were primarily an internet company that was essentially outsourcing everything.

Generally, partners/staff were having a face/face meeting once/week at best, the rest of the time it was mostly Skype/Phone. When we did the numbers; continuing with the combined cost of telecom+temp space-on-demand+lunches - came in at well under the costs of a permanent 'office'. Lower break-evens, and tax deductability, were also material 'additional' considerations.

 

Amongst our takeaways; was the realization that to rent space (DT Toronto/GTA hubs) efficiently - all the renters in that location, had to have a similar need (place to bring clients) - and be actually using the space for that purpose. As rent is a fixed cost, and 'usage' doesn't show up as a variance each month, there was no incentive to manage it. Make usage semi-variable, and the dynamics change quite a bit.

 

If you're a large company, a permanent office space is pretty much expected; but if you're a small/medium company, space-on-demand is becoming increasingly the norm. A 'common-use' lounge, a room of your own, and a 'conference' room bookable as needed. It's also the office set-up 'of choice' for a growing number of junior staff.

 

SD

 

 

 

 

 

 

 

[Cigarbutt]

Thesis: housing prices is Canada are influenced by many factors but the level of interest rates remains the most important factor.

This post: Supply factors are important and regional dynamics apply but the above thesis is maintained.

Potential outcome: The recent trend (last 20 years) is assumed to continue if interest rates stay low or go lower. IMO, the potential for non-linear changes are inadequately discounted.

If you have time to waste:

https://bankunderground.co.uk/2019/09/05/houses-are-assets-not-goods:-what-the-difference-between-bulbs-and-flowers-tells-us-about-the-housing-market/

https://bankunderground.co.uk/2019/09/06/houses-are-assets-not-goods-taking-the-theory-to-the-uk-data/

https://housingevidence.ac.uk/wp-content/uploads/2019/08/20190820b-CaCHE-Housing-Supply-FINAL.pdf

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/hot-charts-190913.pdf

 

Since the year 2000, when Nortel peaked, Canada's household debt to GDP and disposable income has been multiplied by 1.7, interest rates (10-yr government bonds) went from 5.9% to 1.5% now (1.1% a few weeks ago), 'investments' have been diverted to housing and household debt services burden is worsening and reaching a new high.

 

Nobody knows the future but I guess it may be worthwhile to look into potential side effects from non-linear developments.

[wisowis]

https://www.theglobeandmail.com/business/economy/article-how-canadas-suburban-dream-became-a-debt-filled-nightmare/

 

Opens with a bombshell example:

Navin Seepaul is a 29-year-old single dad who makes $30,000 a year as a barber. He owns a $1-million house in Brampton, a sprawling suburb northwest of Toronto. Each month, the payments on his roughly $700,000 mortgage are $4,300. On top of that, he has $24,000 in credit card debt.

To help pay the bills – even just the monthly interest charges are staggering – he rents out his basement to three or four students, and two truck drivers rent bedrooms on his second floor. At any given time, the young father has six vehicles parked on his property.

 

Credit cycle is turning:

Worried about household debt, the nation’s bank regulator is forcing the big banks to hold more capital to guard against potential loan losses. At the same time, the banks are becoming increasingly stringent about loans, making it harder for customers to refinance and consolidate their debts. Others are seeing interest rates on their lines of credit or credit cards increase with no explanation.

 

“I can’t go to my bank now and shift my Visa balance onto my line of credit,” says Scott Terrio, manager of consumer insolvency for Hoyes, Michalos Licensed Insolvency Trustees in Ontario. “That is a big deal. It doesn’t sound like much. But that’s what people were doing for the last five years.”

 

When people start running out of options, that’s when you’ve got trouble coming, according to Mr. Terrio, adding that insolvencies in Ontario are increasing at a pace not seen since 2009. “When those doors start to close," he says, “I think the next insolvency peak will blow 2009 away.”

[alpha]

Trudeau announced this week that the government would subsidize 800k house purchases if re-elected. What a mess.

[scorpioncapital]

"Navin Seepaul is a 29-year-old single dad who makes $30,000 a year as a barber. He owns a $1-million house in Brampton, a sprawling suburb northwest of Toronto. Each month, the payments on his roughly $700,000 mortgage are $4,300. On top of that, he has $24,000 in credit card debt.

To help pay the bills – even just the monthly interest charges are staggering – he rents out his basement to three or four students, and two truck drivers rent bedrooms on his second floor. At any given time, the young father has six vehicles parked on his property."

 

Another perspective...The guy is cutting hair leisurely while some very poor renters are paying off his mortgage. At the end he will have a very pricey asset free and clear and he'll probably be in the top 20% richest people in the world. And the renters are probably getting pretty cheap rent for renting a room in canada. win-win?

 

 

 

 

 

 

[clutch]

"Navin Seepaul is a 29-year-old single dad who makes $30,000 a year as a barber. He owns a $1-million house in Brampton, a sprawling suburb northwest of Toronto. Each month, the payments on his roughly $700,000 mortgage are $4,300. On top of that, he has $24,000 in credit card debt.

To help pay the bills – even just the monthly interest charges are staggering – he rents out his basement to three or four students, and two truck drivers rent bedrooms on his second floor. At any given time, the young father has six vehicles parked on his property."

 

Another perspective...The guy is cutting hair leisurely while some very poor renters are paying off his mortgage. At the end he will have a very pricey asset free and clear and he'll probably be in the top 20% richest people in the world. And the renters are probably getting pretty cheap rent for renting a room in canada. win-win?

 

In fact, this kind of rental income won't often be reported and therefore don't show up in the debt-income ratios... Also consider that many house owners in Toronto/Vancouver can have foreign income sources that also don't get reflected in the ratio.

[Peregrine]

https://www.theglobeandmail.com/business/economy/article-how-canadas-suburban-dream-became-a-debt-filled-nightmare/

 

Opens with a bombshell example:

Navin Seepaul is a 29-year-old single dad who makes $30,000 a year as a barber. He owns a $1-million house in Brampton, a sprawling suburb northwest of Toronto. Each month, the payments on his roughly $700,000 mortgage are $4,300. On top of that, he has $24,000 in credit card debt.

To help pay the bills – even just the monthly interest charges are staggering – he rents out his basement to three or four students, and two truck drivers rent bedrooms on his second floor. At any given time, the young father has six vehicles parked on his property.

 

What are the circumstances behind this example? Because no bank or federally regulated financial institution, not to mention credit union, will underwrite a $700k mortgage for a guy making $30k as a barber regardless if he's using it largely as a rental. And if $4,300 is his payment and assuming a 35-year amortization, his interest rate is 6.7% which is private lender territory.

[spartan]

For anyone who hasn’t been reading Garth’s blog recently, he has been warning Canadians of an increase in the capital gains inclusion (50% to 75%). Seems like a very real threat to me.

[Viking]

Where is Garth Turner? I think his prediction of a real estate meltdown in Canada just might come true in the next year or two. Canada is facing a potential three headed horseman: coronavirus, oil meltdown and housing bubble popping. Our housing bubble today is more bubbly than the US in 2007; the main difference being it is much harder in Canada to walk away from a mortgage.

 

Government spending the past few years has been increasing rapidly (resulting in growing deficits) and taxes have been increasing. Regulation has been increasing. Traditional sectors of growth (resources) is no longer a priority for government; quite the opposite in fact (most parts of Canada hate resources as they polute the earth, are evil and are the work of the devil). Canada’s level of competitiveness might be at an all time low versus the US.

 

Any ideas of a way to hedge the potential for a housing crash in Canada? (Selling my house is not an option :-) No credit default swaps to purchase. Short Canadian Banks? They are so protected by the government this might not pay out as expected. Is there a way to short property developers?

 

One strategy i am using is to be quite cautious with my financial portfolio (mostly cash). A second is to hold US$: 65% of my financial portfolio is in US$. My guess is if Canada has a real estate crisis the Canadian $ will go much lower (and $0.71 is already low).

 

Once Safer Than Gold, Canadian Real Estate Braces for Reckoning

- https://www.bloomberg.com/news/articles/2020-04-15/once-safer-than-gold-canadian-real-estate-meets-its-match

 

Canadian housing once seemed so infallible that the head of the world’s biggest asset manager in 2015 described Vancouver condos as a better store of wealth than gold. The coronavirus is putting that theory to the test.

 

While lockdowns, job losses and uncertainty are roiling property markets from the U.K. to Australia to Hong Kong, Canada’s situation is more precarious than most. As its oil sector shriveled in recent years, Canada’s economy became ever more driven by real estate, an industry now in a state of paralysis. Nearly one in three workers have applied for income support.

 

What’s more, its households are among the world’s most indebted, poorly placed to weather the storm.

 

...The country may not have much of a choice but to prop up housing. Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.

 

...Recessions tend to be deeper and last longer when households are mired in debt -- an alarming prospect for a nation that may already be experiencing its sharpest contraction on record. Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.

 

“You have all of these flammable items that just need a spark, some external shock,” says Anthony Scilipoti, president of Toronto-based Veritas Investment Research Corp. “And this virus is a worst-case scenario none of us would have predicted.”

 

[opihiman2]

I'm not sure if this has been posted on here before, but I just found out that strata fees / costs in Canada against large building apartment / condos, especially in BC, is getting a HUGE increase these next year or so.  I'm reading anywhere from 50% to 300+% increases.  So, my MIL in Kelowna lives in a large multi-building complex in a 55+ community.  They were just notified their strata is going to double soon from $360 to over $600 a MONTH!  They are so fuming mad, and everyone is mad as hell in her condo complex.  They want to immediately sell.

 

It's happening all over B.C.  I think large high rise condos in Vancouver and Victoria are going to take a big hit in prices from this.

[RichardGibbons]

Yeah, I think the increase is a result of insurance rates skyrocketing.

[Viking]

I'm not sure if this has been posted on here before, but I just found out that strata fees / costs in Canada against large building apartment / condos, especially in BC, is getting a HUGE increase these next year or so.  I'm reading anywhere from 50% to 300+% increases.  So, my MIL in Kelowna lives in a large multi-building complex in a 55+ community.  They were just notified their strata is going to double soon from $360 to over $600 a MONTH!  They are so fuming mad, and everyone is mad as hell in her condo complex.  They want to immediately sell.

 

It's happening all over B.C.  I think large high rise condos in Vancouver and Victoria are going to take a big hit in prices from this.

 

Yes, the increases in insurance rates and deductables are are crazy. The increases are large enough they will certainly affect resale values at some point down the road.

 

How do strata corporations and owners manage the dramatic increase in Insurance Rates?

- https://www.choa.bc.ca/wp-content/uploads/300-869-05122019-How-do-Strata-Corporations-and-Owners-Manage-the-Dramatic-Increase-in-Insurance-Rates.pdf

 

Over the past few months across BC, there has been an industry struggle to renew strata corporation insurance polices. With renewals, the cost of the insurance has increased anywhere from 50‐300% and the deductibles to cover claims have also increased substantially, from manageable rates of $25,000 per claim to as high as $250,000 and $500,000. While not all regions of the province have been affected in the same manner, there have been targeted building types or large strata communities across BC that have seen the dramatic increase.

[RichardGibbons]

Over the past few months across BC, there has been an industry struggle to renew strata corporation insurance polices. With renewals, the cost of the insurance has increased anywhere from 50‐300% and the deductibles to cover claims have also increased substantially, from manageable rates of $25,000 per claim to as high as $250,000 and $500,000. While not all regions of the province have been affected in the same manner, there have been targeted building types or large strata communities across BC that have seen the dramatic increase.

 

Have either of you heard a plausible explanations for the increase in insurance rates? That sort of jump seems very strange to me. Like, were these things priced to make a huge loss five years ago, or are the new high prices just to make a massive profit?

 

I would've guessed that the insurance markets are close enough to efficient that a 100-300% increase in premiums without an extreme event would never happen. But I'm clearly wrong, so what's the deal here?

[Viking]

Over the past few months across BC, there has been an industry struggle to renew strata corporation insurance polices. With renewals, the cost of the insurance has increased anywhere from 50‐300% and the deductibles to cover claims have also increased substantially, from manageable rates of $25,000 per claim to as high as $250,000 and $500,000. While not all regions of the province have been affected in the same manner, there have been targeted building types or large strata communities across BC that have seen the dramatic increase.

 

Have either of you heard a plausible explanations for the increase in insurance rates? That sort of jump seems very strange to me. Like, were these things priced to make a huge loss five years ago, or are the new high prices just to make a massive profit?

 

I would've guessed that the insurance markets are close enough to efficient that a 100-300% increase in premiums without an extreme event would never happen. But I'm clearly wrong, so what's the deal here?

 

From the article:

 

What is the cause of the dramatic increases? In addition to worldwide catastrophes, we live in a high‐ risk earthquake zone, and with several major building claims in the province, there are a reduced number of insurance companies who are covering strata insurance in BC. The hardest hit regions are the high‐density metro areas, but resort properties and communities with large developments of more than 250 units are also feeling the crunch as they have the highest compound risks when there is a claim. In addition, with a limited number of insurers, increase in claims, higher property and construction values and a high demand for insurance, a supply/demand imbalance has been created where the insurers have imposed much higher costs and deductibles to manage risks.

[Cigarbutt]

The condo insurance rate issue is discussed here:

https://www.insurancebusinessmag.com/ca/news/breaking-news/experts-react-to-skyrocketing-condo-insurance-rates-208826.aspx

 

So, basically three (four?) conceptual reasons that happen to move in the same direction:

-reasons specific for the condo market in Western Canada (rising 'actuarial' costs, past, present and future)

-hardening market at large

-social inflation development (business interruption with threat of retroactive coverage change)

-? changing perception about the price of risk ?

 

Price adjustments came come slowly or suddenly and deviations from 'true' value can occur, sometimes wildly so. And it can work both ways.

[bizaro86]

I can't speak to BC, but I own a number of condos in Alberta next door, and insurance rates here are up dramatically as well. The lowest building was a 30% increase in insurance.

 

Here, a hardening market has come from firms leaving what has been a poor market for profitability for years, and the remaining options becoming much more aggressive on price.

 

The market has been poor because claims keep rising. This is mostly claims for water damage, which go up every year. Buildings are getting older and tenants are harder on pipes than owners (put oil down the sink, stuff you shouldnt flush down the toilet).

 

The damage from individual claims is also much higher. I spoke to the restoration guy (older) when one of my condos was damaged. He said 10 years ago most units had carpet. They would pull up the carpet, install dehumidifiers and fans to dry everything out, and re-stretch the carpet. Now many/most units have laminate floors, which are destroyed by water. So they pull out the floor, and need to pay for install of a new floor. The restoration companies have also realized they have an agency problem by the tail. They recommend how many dehumidifiers and fans are needed, and then rent them. The rentals are very expensive. Adjusters are too busy, so value a restoration firm that just deals with stuff more than one that minimizes costs.

[matts]

Bizaro,

 

What's your view of the alberta rental market? I used to own mainstreet equity which is an amazing company, but i sold once oil collapsed. Stock has been cut in half. They just reported 94% of rents were paid for April but also said they would be delaying their next quarterly filing as allowed by the new regulatory guidance. 

[bizaro86]

I have a considerably smaller sample size, but I got 100% of my rents for April. And one tenant who hasn't paid on time for a year paid on the 1st.

 

For tenants who have lost their jobs, the CERB is $2000/month for 4 months. For a family with 2 adults, that's $4k/month. Someone working full time 40 hours/wk at minimum wage ($15/hr) only has a gross of $2500/month. So between taxes and payroll deductions and missing a shift many/most renters are as good or better off financially than they were. Even tenants in higher end professions seem to be mostly working from home, getting full pay, and saving money on commuting, lunches out, etc.

 

The piper will have to be paid for this eventually, but for now it seems OK. I think next spring when folks realize they need to pay income tax on their CERB could be tough, as one example. (No tax was withheld)

 

The market for property sales has slowed considerably, and both pricing and transaction volumes are way down.

 

I'm not sure about the leasing market, I haven't had a vacancy since this started. I suspect it's quite bad.