Garth Turner - Real Estate in Canada

[no_free_lunch]

Perhaps the flip side to this is remote work. Why pay $1.4m in Van when you can get the same thing for $700k in Kelowna..  So construction will boom somewhere but not sure its van/Toronto.

[Cigarbutt]

Thank you Viking

Interesting perspective

....

Gary

From anecdotal to fundamental and back to sentimental

 

Anecdotal

Real estate market movements in my street reflect (somewhat muted though) general trends in Canada. Echoing Viking’s anecdotal stuff, our next-door neighbor moved about 300 feet to the other side of the street in order to buy the second most expensive house of the area. In Canada, refinancing is not so easy and the transaction helped in achieving a net positive development for paper worth (and short term liquidity). They have two very young children and, the other day, during typical neighbor chit-chat, the topic of funding higher education was touched upon but rapidly switched to the large spa that they plan to acquire next summer. Keeping the house is contingent on both keeping their jobs and they have a margin of safety based on the value of their two leased cars. (Note: they sold their house practically the same day it was listed with a very optimistic list price and with the winning price above and with the buy decision made essentially after a virtual visit; what’s not to like?)

 

Fundamental

An argument can be built that Canada real estate prices are absurd but obviously everything depends on the eye of the beholder. Historically, various factors are mentioned (vibrant work market, healthy influx of immigrants inhabited by a strong propensity for homeownership and various supply issues). Some also mention the central role of various public support tools and the incredibly low interest rate reign. Well, in 2020, job losses was the order of the day but various interventions to support incomes and deferral payment schemes were supplied. And immigration flux decreased by about 50% (due to various administrative delays in the supply chain) but the BoC (and a freshly minted QE program) came to the rescue. The 2021 central debt issue plan hasn’t been fully internalized yet but another 300B is the base case scenario if one reads between the lines but who cares (now)? The overriding factor is sentiment and how do you assess that, in terms of sustainability? From page 8 of the pdf document, over the course of human events in 2020: “Among non-homeowners, the expectation of buying in the next year has more than tripled, from 7% at the end of last year to 14% in the first wave of the survey, 16% in the second wave, 19% in the third wave and 23% in the fourth wave.” The dream lives on and more.

https://www.bankofcanada.ca/stats/cars/results/bd_auction_schedule.html

It looks like the GoC is aiming to lengthen duration. Who could blame them at this point?

https://mortgageproscan.ca/docs/default-source/consumer-reports/rapidly-evolving-expectations-in-the-housing-market---december-2020-en.pdf

 

Sentimental

Just a few weeks ago, I spotted a few properties (with the goal to move into one and own a few residential apartment properties) and actually completed due diligence (to the extent possible). The catch is that those properties are not on sale (yet). i bet they will.

 

[clutch]

It's really unbelievable. We have a number of events in the past few years that could have potentially ended this boom, and now the pandemic, but the housing market is still going strong.

 

As for the city of Toronto, condo rental prices are taking a significant hit. Yet, if you look at the resale prices, they don't seem to reflect the crash in the rental market.

 

Once the vaccines are widespread and borders open up, I suspect an influx of immigrants into GTA again. I predict a sharp bounce back in the condo/rental market then.

[gary17]

we are all assuming vaccine solves everything

i’m not convinced

a new variant may be an unexpected event

[alpha]

do people know why vancouver RE still going up with COVID

  foreigners are not coming!

 

Many people are moving from the East/Toronto. I just purchased a home near Vancouver over the internet and moved back from the USA. Most of the people I was in bidding wars with were not locals. Right now there is no vacancy on Van Island from all the snowbirds from other provinces who didn't want to risk leaving the country. There are also millions of people with Canadian citizenship living overseas who can shift their cash back into Canadian real estate during the border lock downs.

 

There is a housing shortage, it is extremely expensive and complicated because of bad regulation to build anything new here. Tenants living in home owners basement suites is a common theme. It seems like a significant number of single family homes have been subdivided into multi units. It's pretty sad... but reading the local newspapers the #1 issue on peoples minds is reducing carbon output etc... this combined with guaranteed low rates and record immigration levels over the next 2 years means I don't see things changing anytime soon...

 

[bizaro86]

The other thing that sets floor on price is cost of skilled construction labour which is about $400/sf

So valuation of new home = land plus cost of construction will set the market for existing homes too

 

I don't think that number is accurate, especially if you're only talking labour. Calgary land isn't nearly as valuable as in Vancouver (we aren't going to run out of prairie) but labour costs here are still higher. And you can buy a new house here for under $400/sq ft. Presumably the builders aren't selling for under cost, and land isn't free here.

[Viking]

In terms of demand for housing pre-covid Greater Vancouver was seeing population growth of something like 60,000 per year (immigration + people moving from other parts of Canada and the province). This number will be larger if Trudeau increases the number of immigrants coming to Canada the next few years.

 

There are also likely 30,000 - 40,000 international students (my guess) most of whom have left but will return.

 

Post covid, yes, there will be solid incremental demand for both rentals and purchases.

 

————————————

 

Yes, many people in Vancouver have rental units in their single family homes. This has been the case in Vancouver for decades (not a new development). On my street alone at least 10 houses that have basements rented out (separate entrance, kitchen, 1 or 2 bedrooms). These are called ‘mortgage helpers’.

 

It is interesting how the market continues to morph; people are very creative in adjusting to higher prices.

[clutch]

we are all assuming vaccine solves everything

i’m not convinced

a new variant may be an unexpected event

 

Ok but what kind of time frame are we talking about? Do you expect the COVID to persist forever?

 

I'm very confident that it will be completely resolved (become similar to the common flu) in 1-2 year, which is nothing in a typical RE investing time frame.

[cwericb]

For those wondering why housing prices keep rising, consider this:

World population

1900 = 1.6 Billion

1963 = 3.2 Billion - doubled in 63 years and (increased by 1.6 mil in 63 years)

2003 = 6.4 Billion - doubled in 40 years and (increased by 3.2 mil in 40 years)

2020 = 7.8 Billion - increased by 1.4 million in 17 years

People have to live somewhere.

 

"Billion with a b!  Aside from poor covid response, Canada has been desirable to live for sure."  Oops, millions corrected to billions.

[gary17]

Billion with a b!  Aside from poor covid response, Canada has been desirable to live for sure

[cameronfen]

For those wondering why housing prices keep rising, consider this:

World population

1900 = 1.6 million

1963 = 3.2 million - doubled in 63 years and (increased by 1.6 mil in 63 years)

2003 = 6.4 million - doubled in 40 years and (increased by 3.2 mil in 40 years)

2020 = 7.8 million - increased by 1.4 million in 17 years

People have to live somewhere.

 

Yea but theoretically you you can always build more vertical which we clearly aren't close to saturatating.  The question of why this doesn't result in a stable equilibrium where prices don't seem to ever go down, I don't know. 

[Viking]

i’m thinking of exiting the market and buy real estate in vancouver.  is that the same as selling tesla to buy air bnb ?? lol

 

That comment made my day :-) I am actually thinking of doing the opposite. Gotta love how smart people can look at the exact same situation and see two completely different solutions / ways forward.

 

No right or wrong. The key is fit. Finding a solution that works for you. Best of luck!

 

you are thinking of exiting real estate (in Vancouver?) and entering the stock market?

 

i’m definitely not smart financially.  thx to this board (all the contributors and educators and the administrator Sanjeev of course) — i have had some fun while keeping my capital and some :))

 

gary, I have learned over the years that I am smart as a stump when it comes to real estate. Dumb luck explains my current situation.

 

When I bought my current residence in Langley (2010) I paid about $600,000 and thought the market might be in a bubble. My mortgage was a little under $400,000 so my starting equity was $200,000. This spring my house might sell for $1,300,000 (perhaps more). My mortgage is under $330,000. With closing costs, costs to break my mortgage and moving costs if I sold this spring I think i might net about $900,000. I started with $200,000 so this would be a $700,000 tax free gain in 11 years (no taxes on principal residence in Canada).

 

Locking in $700,000 real estate gain (tax free) appeals to me. Adding $900,000 to our existing investment portfolio my wife and I will be set up very well financially. If I can earn 6-8% on the total portfolio (my long term average is a shade under 15%) we will be set financially.

 

Another smaller factor is our current house will need some improvements in the coming years. If we stay my guess is we will spend about $70,000 in improvements in the next 5 years (new windows, garage door and motor, plumbing upgrades, new powder room, new kids bathroom, new kitchen etc). We have a nice house... but it will need some work :-) 

 

The second part of the equation is lifestyle. Where we live today is a great area to bring up kids: quiet street, great schools (all walking distance), parks, bike trails, newer rec center, shopping close, great sports programs and sports facilities. Great suburban living (50 minutes from downtown Vancouver). Except our 3 kids will all likely be in same University (UBC, on the other side of town) in Sept. My wife and i will be entering the next phase of life (no kids at home; no kids sports activities to keep us busy in the evenings etc). We are thinking it might be great to live in the fun part of Vancouver (close to UBC) for the next couple of years: rent a house ($4,500/month, perhaps more). And be closer to the kids (at school) and spend the next couple of years exploring and getting know the fun parts of urban Vancouver (beautiful city).

 

Actually, this is more what I am thinking; I just broached the idea with my wife and she needs some time to wrap her head around it :-) We have talked about it for the past 6 months or so but I decided it was time to kick it up a notch when I saw what recent sales were going for in my area. We are in no hurry. Historically we have moved every 5 years or so; 11 years in one place is a record for us. The goal is two fold: 1.) improve our lifestyle 2.) lock in / perhaps improve our financial situation

 

No firm decision :-) When we have made moves like this in the past, it normally takes us about 12-18 months for the decision to come into focus. Every move we have made has been a great decision (looked at with hindsight). If we stay I will be happy.

[deadspace]

i’m thinking of exiting the market and buy real estate in vancouver.  is that the same as selling tesla to buy air bnb ?? lol

 

That comment made my day :-) I am actually thinking of doing the opposite. Gotta love how smart people can look at the exact same situation and see two completely different solutions / ways forward.

 

No right or wrong. The key is fit. Finding a solution that works for you. Best of luck!

 

you are thinking of exiting real estate (in Vancouver?) and entering the stock market?

 

i’m definitely not smart financially.  thx to this board (all the contributors and educators and the administrator Sanjeev of course) — i have had some fun while keeping my capital and some :))

 

gary, I have learned over the years that I am smart as a stump when it comes to real estate. Dumb luck explains my current situation.

 

When I bought my current residence in Langley (2010) I paid about $600,000 and thought the market might be in a bubble. My mortgage was a little under $400,000 so my starting equity was $200,000. This spring my house might sell for $1,300,000 (perhaps more). My mortgage is under $330,000. With closing costs, costs to break my mortgage and moving costs if I sold this spring I think i might net about $900,000. I started with $200,000 so this would be a $700,000 tax free gain in 11 years (no taxes on principal residence in Canada).

 

Locking in $700,000 real estate gain (tax free) appeals to me. Adding $900,000 to our existing investment portfolio my wife and I will be set up very well financially. If I can earn 6-8% on the total portfolio (my long term average is a shade under 15%) we will be set financially.

 

Another smaller factor is our current house will need some improvements in the coming years. If we stay my guess is we will spend about $70,000 in improvements in the next 5 years (new windows, garage door and motor, plumbing upgrades, new powder room, new kids bathroom, new kitchen etc). We have a nice house... but it will need some work :-) 

 

The second part of the equation is lifestyle. Where we live today is a great area to bring up kids: quiet street, great schools (all walking distance), parks, bike trails, newer rec center, shopping close, great sports programs and sports facilities. Great suburban living (50 minutes from downtown Vancouver). Except our 3 kids will all likely be in same University (UBC, on the other side of town) in Sept. My wife and i will be entering the next phase of life (no kids at home; no kids sports activities to keep us busy in the evenings etc). We are thinking it might be great to live in the fun part of Vancouver (close to UBC) for the next couple of years: rent a house ($4,500/month, perhaps more). And be closer to the kids (at school) and spend the next couple of years exploring and getting know the fun parts of urban Vancouver (beautiful city).

 

Actually, this is more what I am thinking; I just broached the idea with my wife and she needs some time to wrap her head around it :-) We have talked about it for the past 6 months or so but I decided it was time to kick it up a notch when I saw what recent sales were going for in my area. We are in no hurry. Historically we have moved every 5 years or so; 11 years in one place is a record for us. The goal is two fold: 1.) improve our lifestyle 2.) lock in / perhaps improve our financial situation

 

No firm decision :-) When we have made moves like this in the past, it normally takes us about 12-18 months for the decision to come into focus. Every move we have made has been a great decision (looked at with hindsight). If we stay I will be happy.

 

Are you considering the possibility that capital gains on the house may be taxed with the next budget?

That’s putting some hurry into these decisions for people

Somehow “the government has your back” will need to soon give way to the reality of tax increases

[gary17]

if government tax you on cap gain for principal residence...  how will that work practically

cuz improvements etc will be tax-deductible...  are they going to demand receipts from Rona & home depot going back many years ?????

[gary17]

i’m thinking of exiting the market and buy real estate in vancouver.  is that the same as selling tesla to buy air bnb ?? lol

 

That comment made my day :-) I am actually thinking of doing the opposite. Gotta love how smart people can look at the exact same situation and see two completely different solutions / ways forward.

 

No right or wrong. The key is fit. Finding a solution that works for you. Best of luck!

 

you are thinking of exiting real estate (in Vancouver?) and entering the stock market?

 

i’m definitely not smart financially.  thx to this board (all the contributors and educators and the administrator Sanjeev of course) — i have had some fun while keeping my capital and some :))

 

gary, I have learned over the years that I am smart as a stump when it comes to real estate. Dumb luck explains my current situation.

 

When I bought my current residence in Langley (2010) I paid about $600,000 and thought the market might be in a bubble. My mortgage was a little under $400,000 so my starting equity was $200,000. This spring my house might sell for $1,300,000 (perhaps more). My mortgage is under $330,000. With closing costs, costs to break my mortgage and moving costs if I sold this spring I think i might net about $900,000. I started with $200,000 so this would be a $700,000 tax free gain in 11 years (no taxes on principal residence in Canada).

 

Locking in $700,000 real estate gain (tax free) appeals to me. Adding $900,000 to our existing investment portfolio my wife and I will be set up very well financially. If I can earn 6-8% on the total portfolio (my long term average is a shade under 15%) we will be set financially.

 

Another smaller factor is our current house will need some improvements in the coming years. If we stay my guess is we will spend about $70,000 in improvements in the next 5 years (new windows, garage door and motor, plumbing upgrades, new powder room, new kids bathroom, new kitchen etc). We have a nice house... but it will need some work :-) 

 

The second part of the equation is lifestyle. Where we live today is a great area to bring up kids: quiet street, great schools (all walking distance), parks, bike trails, newer rec center, shopping close, great sports programs and sports facilities. Great suburban living (50 minutes from downtown Vancouver). Except our 3 kids will all likely be in same University (UBC, on the other side of town) in Sept. My wife and i will be entering the next phase of life (no kids at home; no kids sports activities to keep us busy in the evenings etc). We are thinking it might be great to live in the fun part of Vancouver (close to UBC) for the next couple of years: rent a house ($4,500/month, perhaps more). And be closer to the kids (at school) and spend the next couple of years exploring and getting know the fun parts of urban Vancouver (beautiful city).

 

Actually, this is more what I am thinking; I just broached the idea with my wife and she needs some time to wrap her head around it :-) We have talked about it for the past 6 months or so but I decided it was time to kick it up a notch when I saw what recent sales were going for in my area. We are in no hurry. Historically we have moved every 5 years or so; 11 years in one place is a record for us. The goal is two fold: 1.) improve our lifestyle 2.) lock in / perhaps improve our financial situation

 

No firm decision :-) When we have made moves like this in the past, it normally takes us about 12-18 months for the decision to come into focus. Every move we have made has been a great decision (looked at with hindsight). If we stay I will be happy.

 

thanks!!!!    i am in vancouver too so know the area well.  i went to ubc too :)  nice school!!!!   

 

Gary

[cwericb]

if government tax you on cap gain for principal residence...  how will that work practically

cuz improvements etc will be tax-deductible...  are they going to demand receipts from Rona & home depot going back many years ?????

 

I would think if they did something like that they would almost have some sort of value placed on every house as of today and then tax future increase from that point.

 

If I remember correctly in 1994 I believe they did something like that when they dropped the $100,000 deductible on capital gains 

 

Isn't it more likely CRA would simply increase the taxable portion of capital gains from 50% to perhaps 75% or something like that?

 

Something to think about though as I am sitting here waiting for email confirmation on the sale of two small properties and a change in the capital gains rate is something to be considered.

[no_free_lunch]

Dead space, where did you hear about this primary residence cap gain rumor?  That would be a HUGE change.  I just don't see it but with the feds I guess anything is possible.

 

On top of being complicated it will work to further decrease labor mobility.  I am not that old yet but most of my peers sit on 200, 300k equity with much from appreciation. Imagine getting taxed on that if you want to take a new job.

[Viking]

With a minority government the Liberals will not be taxing capital gains on principal residence sale. If it happens it will be VERY unpopular. So if it happens it will be years down the road when the government is broke and is desperate. Canada, at the Federal level, is not in terrible shape (yet) from a total debt outstanding perspective. Now if we get a few more $350-$400 billion fiscal deficits per year moving forward this will change.

[cwericb]

"With a minority government the Liberals will not be taxing capital gains on principal residence sale."

 

Not only would it be extremely unpopular, it would be very difficult to implement. However, if the Feds have to start giving out more billions they could reduce the capital gains from the 50% level fairly easily to help replenish the coffers and it wouldn't be that unpopular with some segments of the population. Hopefully that will not be necessary.

 

[no_free_lunch]

Viking and cwericb, what you say makes a lot of sense. There is substantial profit to be made there given equity and RE prices. I hate it but it is logical. The liberals are clear, based on actions, that they will push to the left for new votes and I don't see a capital gain bump impacting that segment in any negative way. Meanwhile they keep most of their base. I think they lose centrics with a home cap gain tax.

 

Can they bump the cap gains tax so it impacts us in '21?

[StubbleJumper]

if government tax you on cap gain for principal residence...  how will that work practically

cuz improvements etc will be tax-deductible...  are they going to demand receipts from Rona & home depot going back many years ?????

 

I would think if they did something like that they would almost have some sort of value placed on every house as of today and then tax future increase from that point.

 

If I remember correctly in 1994 I believe they did something like that when they dropped the $100,000 deductible on capital gains 

 

Isn't it more likely CRA would simply increase the taxable portion of capital gains from 50% to perhaps 75% or something like that?

 

Something to think about though as I am sitting here waiting for email confirmation on the sale of two small properties and a change in the capital gains rate is something to be considered.

 

 

You are actually thinking of Valuation Day, which was December 31, 1971.  Before that day, there was no capital gains on cottages or secondary residences.  If you owned a second property prior to that day, you began to accrue taxable capital gains starting with the Valuation Day value.  In practice, over the past 50 years, few people seem to have been paying capital gains tax on the sale of their cottage and the CRA has mostly been unaware when somebody disposed of their secondary residence.  Over the past year or two, we have been obliged to report the sale of all real estate and then to take an exemption if it was a primary residence that was sold, so it appears as if the CRA is trying a bit harder to collect capital gains tax on real estate.

 

If the government decided that it wanted to impose some sort of capital gains on the principal residence, there's no reason why the CRA couldn't just implement Valuation Day II on December 31, 2021.

 

 

SJ

[gary17]

that’ll be interesting to have a tax

so if i need to move - i will need to come up with more money to re-enter the market... hmmm

 

 

i think the RE price appreciation may also be due to the same phenomenon we are seeing in car sales— people not able to spend money travelling or on entertainment so instead using that fund towards buying a new home in an ultra low rate environment. 

[clutch]

i think the RE price appreciation may also be due to the same phenomenon we are seeing in car sales— people not able to spend money travelling or on entertainment so instead using that fund towards buying a new home in an ultra low rate environment.

 

Really? One year saving of travel and entertainment can change one's budget on a new home? That's hard to believe.

[Gregmal]

i think the RE price appreciation may also be due to the same phenomenon we are seeing in car sales— people not able to spend money travelling or on entertainment so instead using that fund towards buying a new home in an ultra low rate environment.

 

Really? One year saving of travel and entertainment can change one's budget on a new home? That's hard to believe.

 

Not at all. In the US the poor man(or hand to mouth fella) needs 3% plus closing costs to get into a home. If you save $20k by not dining out and vacationing, thats a down payment for some, or another half mil+ of home they can buy.

 

I also think there should be entry taxes for states/jurisdictions. Its a big problem here in the US where you have people living in, and supporting the policies and fiscal irresponsibility of one state, and then not liking the bed they've made for themselves, and then collectively moving to, and starting to ruin new states by moving there and bringing their same philosophical issues and problems.

[deadspace]

"With a minority government the Liberals will not be taxing capital gains on principal residence sale."

 

Not only would it be extremely unpopular, it would be very difficult to implement. However, if the Feds have to start giving out more billions they could reduce the capital gains from the 50% level fairly easily to help replenish the coffers and it wouldn't be that unpopular with some segments of the population. Hopefully that will not be necessary.

 

Taxing capital gains with higher inclusion would barley move the needle

It would also punish the 99% not the 1% who would simply hold their shares and choose not to pay.

The 99% who need the capital gains to finance regular purchases would be most hurt by this. 

 

With regard to the taxation of primary residence it has been bantered around and it makes sense because let’s face it.  That’s where the money is. 

Look you have a PM that has never kept a budget and is a trust fund kid.  He has no sense of the arc of history.  Pandemics can last years.    It’s almost a guarantee the government will print more money in 2021 than 2020.  And guess what.  Sh*t happens that we cannot anticipate that’s why wise people save when times are good like 2015 to 2019 rather than run deficits that will “balance themselves “

If you don’t develop palpitations everytime he emerges from his bunker to unleash money from every orfice then you are not understanding the consequences.  When he says the government has your back he means you and me are gonna pay for it