Garth Turner - Real Estate in Canada

[Gregmal]

A post about the interest rate risk via Canada housing related finance got me thinking….why aren’t there US type 30 year mortgages in Canada? If rates rise and people cant afford refis what are the odds there would be a government push for them to solve the issue? I am not familiar with the market in Canada but how feasible is it to eventually see a similar government sponsored product like this?

[Minseok]

@Gregmal whats US type 30 year mortgage? I got myself a 1.28% variable 30 year mortgage on my property in canada (5 year term)

[Spekulatius]

1 hour ago, Gregmal said:

A post about the interest rate risk via Canada housing related finance got me thinking….why aren’t there US type 30 year mortgages in Canada? If rates rise and people cant afford refis what are the odds there would be a government push for them to solve the issue? I am not familiar with the market in Canada but how feasible is it to eventually see a similar government sponsored product like this?

The US is unique because Fannie/Freddie are government sponsored/owned and take the interest rate risk. No bank can take the interest rate risk of 30 year mortgages in bulk and that's why they don't exist elsewhere (Europe, Canada etc.).

[Gregmal]

What I mean is, what prevents Canada or other countries from replicating this? 
 

A lot gets made of rising rates but for everyone who already has a mortgage in the US, this is actually a positive thing if you’re 30 year fixed. But if you have to refi in 5 years or have an adjustable, maybe not so much. 
 

So while everyone worries about when the Canada bubble pops, I think it’s worth pondering what gets done in response to something like that. 30 year fixed mortgages solve a lot of the problems. 
 

Crisis or crashes aren’t really that scary if you can see how they get resolved. Governments consistently and especially recently, are more and more willing to provide soft landings. So I was just spitballing a bit what kind of options do they have if the “bubble” that’s been going for like 20 years all of a sudden bursts?

[maplevalue]

17 minutes ago, Gregmal said:

Crisis or crashes aren’t really that scary if you can see how they get resolved. Governments consistently and especially recently, are more and more willing to provide soft landings. So I was just spitballing a bit what kind of options do they have if the “bubble” that’s been going for like 20 years all of a sudden bursts?

 

CAD govt in particular can always lean on increasing immigration. Current target 400k/year; they could just do 500k and voters would probably not care (voters do not really care that they have ratcheted it up to 400k already). Many of these people move to the GTA. Same amount of land + more people = soft landing for real estate. 

[thepupil]

50 minutes ago, Gregmal said:

What I mean is, what prevents Canada or other countries from replicating this? 
 

A lot gets made of rising rates but for everyone who already has a mortgage in the US, this is actually a positive thing if you’re 30 year fixed. But if you have to refi in 5 years or have an adjustable, maybe not so much. 
 

So while everyone worries about when the Canada bubble pops, I think it’s worth pondering what gets done in response to something like that. 30 year fixed mortgages solve a lot of the problems. 
 

Crisis or crashes aren’t really that scary if you can see how they get resolved. Governments consistently and especially recently, are more and more willing to provide soft landings. So I was just spitballing a bit what kind of options do they have if the “bubble” that’s been going for like 20 years all of a sudden bursts?

 

Canada has a 10yr tsy that yields 1.81%. In theory, Canada could organize government/GSE wrapped MBS that would have similar characteristics to US FNMA FRE GNMA securities and could introduce its citizens to the wonders of the 30y fixed.

 

In practice, the US has a multidecadal head start in exporting this security and demand for the canuck version would be unclear since CAD is not the global reserve currency. Agencies are 2nd most liquid FI mkt in the world and a globally important asset class. 

 

this is one of the bennies of being the global hegemon..and our blessed fixed income market makers at the large IB's. America!!!

 

Quote

1. Benchmark implications
   Agency MBS is a $7.5 trillion asset class that accounts for nearly 28% of the Bloomberg Barclays US Aggregate Bond Index and more than 10% of the Bloomberg Barclays Global Aggregate Index (data as of May 31, 2021). That means the impact of tight spreads in the sector will be felt by multi-asset and core bond investors worldwide, and especially in the US, as portfolio managers adjust positioning.

 

Edited January 17, 2022 by thepupil

[RichardGibbons]

3 hours ago, Gregmal said:

A post about the interest rate risk via Canada housing related finance got me thinking….why aren’t there US type 30 year mortgages in Canada? 

 

My understanding is that Canada has regulations in place where people can get out of their mortgage without penalties after five years. So, the bank bears 100% of the risk after five years. As a result, any mortgage over five years has high interest rates, and I don't think you can find big-bank mortgages with terms over ten years.

It's also worth noting that Canada's banking system is an oligopoly, so there's less incentive for banks to compete with innovative longer-than-five-year mortgages.

[SharperDingaan]

It's just a different approach.

 

Borrowers can get a fixed rate mortgage amortizing over 25, or even 30 years. However the outstanding balance becomes due every 5 years, and would be refinanced at that time as either a floating rate or another fixed rate mortgage with a term of the borrowers choosing. Borrowers expect to have paid the mortgage off in full by retirement, following which they may remortgage up to 55% of the house value in retirement via a reverse mortgage (CHIP). Not a lot of risk.

 

A great many in SD houses simply knock them down in 30-40 years, and replace with a monster home in the now fully serviced  lot in a desirable location . Keeps new supply off the market, raises prices, and raises the value of the property by 3-5x in most cases. More if the monster home is multi generational. Smart.

 

There are fixed rate 'locked in' 25-30 year mortgages, but they are rarities, not portable, and almost exclusively public housing. You buy your unit when built, then stay in it 'forever', sell before the mortgage is due and you lose it. Cursed by the real estate community as it crimps movement up the property ladder. Few transactions, equal less economic activity.

 

SD

[Gregmal]

Yea those were thoughts I had too. Admittedly knowing very little about the specifics of the Canadian RE financing system, but damn….must be good being a mortgage broker. Basically an annuity stream with all those refis.

[Spekulatius]

11 minutes ago, Gregmal said:

Yea those were thoughts I had too. Admittedly knowing very little about the specifics of the Canadian RE financing system, but damn….must be good being a mortgage broker. Basically an annuity stream with all those refis.

Until the buck stops. Canada is far more vulnerable to a RE crash than the US right now imo, for two reasons;

1) lower cap rates / higher prices

2) Absence of LT fixed mortgage.

If interest rates were higher after 5 years, many Canadian that are starting out owning houses now would have no choice but default, because they can't afford the higher payment any more. You can run the math using incomes but many canadians buying houses now need to spent 40-50% of their income on housing.

 

That is why the Canadian government will do anything to keep the interest rates low. This probably means that the CAD will probably crash at some point relative to the USD.

 

Relying on immigration is iffy because at some point, Canada may become unattractive to immigrants because the cost to own are too high. Well, maybe there are always enough rich Chinese that can pay cash, but I am not sure these are the immigrants that Canada wants.

Edited January 17, 2022 by Spekulatius

[Gregmal]

Yea IDK. Ive long been fascinated by the Canadian market, but with US RE where it is, I dont have to worry about it cuz the value proposition is obvious and its not one that compels me to be buying in Canada. I would eventually like something off the grid in the New Foundland/Labrador area though. Probably a summer retirement home or something. But those remote bubblefuck places aint exactly expensive now anyway IMO. Its probably more expensive over a 10 years stretch doing the commutes for a seasonal home out there than actually owning it. 

 

Like WTF, $300k? Actually its hockey dollars not even USD. 

 

https://www.zillow.com/homedetails/14-14A-Pidgeons-Rd-Marystown-NL-A0E-2H0/2067469241_zpid/?

[Spekulatius]

@Gregmal You can get similar houses in "bumblefuck" Maine:

https://www.realtor.com/realestateandhomes-detail/266-Rim-Rd_East-Machias_ME_04630_M44034-37661

[Morgan]

1 hour ago, Gregmal said:

Yea IDK. Ive long been fascinated by the Canadian market, but with US RE where it is, I dont have to worry about it cuz the value proposition is obvious and its not one that compels me to be buying in Canada. I would eventually like something off the grid in the New Foundland/Labrador area though. Probably a summer retirement home or something. But those remote bubblefuck places aint exactly expensive now anyway IMO. Its probably more expensive over a 10 years stretch doing the commutes for a seasonal home out there than actually owning it. 

 

Like WTF, $300k? Actually its hockey dollars not even USD. 

 

https://www.zillow.com/homedetails/14-14A-Pidgeons-Rd-Marystown-NL-A0E-2H0/2067469241_zpid/?

 

That place is cool looking. Very beautiful area too. The roads are supposed to be excellent for motorcycle rides. But you're totally right, that is a long way away! 

[scorpioncapital]

"Same amount of land + more people = soft landing for real estate. "

 

How does immigration create more wealth per capita to increase the ability to service higher debts?

Wouldn't it even be deflationary for wages?

 

 

[fareastwarriors]

9 hours ago, Spekulatius said:

@Gregmal You can get similar houses in "bumblefuck" Maine:

https://www.realtor.com/realestateandhomes-detail/266-Rim-Rd_East-Machias_ME_04630_M44034-37661

 

Man I really need to get out of my bubble and enjoy this big country. I just bought a $700k 2bed/1bath 900 sq ft place and I felt like I got a great deal! F'ing Cali.

 

[SharperDingaan]

"If interest rates were higher after 5 years, many Canadian that are starting out owning houses now would have no choice but default, because they can't afford the higher payment any more. You can run the math using incomes but many canadians buying houses now need to spent 40-50% of their income on housing."

 

Not true. 5 yrs out the mortgage will be lower by the amount or principal repaid, and the property value higher by the cumulative inflation over the 5 years - all of which is additional equity. No different to gentrification, individuals who cant afford it are forced to sell, and the property goes to stronger hands. Furthermore, all banks have an incentive not to flood the supply, keep prices high, and use the equity build to either de-risk or make an incremental loan. 

 

SD

[maplevalue]

11 hours ago, scorpioncapital said:

"Same amount of land + more people = soft landing for real estate. "

 

How does immigration create more wealth per capita to increase the ability to service higher debts?

Wouldn't it even be deflationary for wages?

 

Never said immigration would create more per capita wealth or would inflate wages.

 

What immigration does do is make more people compete for the same amount of land, bidding the price up. In places like the GTA there are a host of restrictions on building new houses, so the only way to build is up, which makes existing houses (i.e. ones with a backyard) more expensive.

[MikeL]

So.... I wonder what will cause GTA house price to go down?

If houses are bought by rich immigrants, what about affordability to working class?

[SharperDingaan]

45 minutes ago, MikeL said:

So.... I wonder what will cause GTA house price to go down?

If houses are bought by rich immigrants, what about affordability to working class?

 

It just becomes the same as any other major international city. GTA prices simply move with the total net money flow (excess demand). While net inflow grows faster than demand, prices continue rising. As net flow includes inflation, prices continue to rise for some time, 

 

If the working class want to live in the city they rent, if they want to own - they buy a place outside the city and commute. Either take the commuter train to work or WFH, whichever is best for your situation. Montreal and Toronto have net migration at present. 

 

SD

[Spekulatius]

13 hours ago, scorpioncapital said:

"Same amount of land + more people = soft landing for real estate. "

 

How does immigration create more wealth per capita to increase the ability to service higher debts?

Wouldn't it even be deflationary for wages?

 

 

That's not how it works. The land constraint areas have a biggest booms and busts. CA is the primary example.

if you have a steady supply of housing coming on the market, it dampens the boom and hence the bust isn't as pronounced either. Example is New England (suburban) and Texas. In NE, the Yankee thriftiness may be a factor too.

[scorpioncapital]

but how can immigration boost house prices when poor people from abroad with no money come to canada? where do they get the money to buy these expense houses? I can't imagine all immigrants are rich. If they're rich why would they come to work in canada?

[Gregmal]

5 minutes ago, scorpioncapital said:

but how can immigration boost house prices when poor people from abroad with no money come to canada? where do they get the money to buy these expense houses? I can't imagine all immigrants are rich. If they're rich why would they come to work in canada?

Canada lectures us from a paper pulpit. The US is largely an importer of low quality immigrants. Canada? Not so much. If anything, I’d like the US to be more like Canada. 

[Viking]

3 hours ago, scorpioncapital said:

but how can immigration boost house prices when poor people from abroad with no money come to canada? where do they get the money to buy these expense houses? I can't imagine all immigrants are rich. If they're rich why would they come to work in canada?

obviously not representative. In my old house my ‘new’ neighbour was super nice family from South Korea. Wife was a tv/movie celebrity back home.  After they bought the house they completely renovated it (before moving in) right down to heated floors in garage. Completely re-landscaped. Probably spend $150,000 on renovations. This is not an exceptional example of the type of immigrant coming to Canada. Lots of new $ coming in. With lots spent on goods and services providing a boost to economic activity.

—————

As an aside, my favourite memory with the new family (they had 2 young kids) was showing them how to build a large igloo in the snow shortly after they moved in. I explained to the family that ideal igloo snow building conditions only happened once every 5 or so years in Vancouver (enough snow and sticky so it can be rolled and used to build a structure). And we had perfect conditions that day. Man were they ever surprised and happy with the final product (they clearly had no previous snow building experience). Took us about 4 hours. Snapped a ton of pictures and played in it every day. Great introduction to Canada. And, of course, the igloo was gone a week later (melted). 

Edited January 19, 2022 by Viking

[SharperDingaan]

For many people, Canada is the 'safe' place.

 

You may be rich in your home country, but if it could all be taken way from you in the night, you aren't secure. You solve the problem by buying something in a Canada and paying in full; if you have to run you have a place to go, and can immediately mortgage the property for money. If you subsequently need to change passports, or educate your kids, Canada is a very safe and neutral place to be.

 

Most migrant labour will get a much better deal in Canada, than elsewhere. It'll still be a hard and shit life, but you'll often be allowed to achieve citizenship, and there will be less systematic discrimination that there might be elsewhere. There are not that many Canadians, society is a lot less 'rigid' as a result, and if you at least try to integrate - a lot more open. Even in Quebec! The first house they own my be a shite box, but it is theirs, and the family will work very hard across the generations to upgrade it.

 

It's just a different approach.

 

SD

 

 

 

[maplevalue]

https://www.cicnews.com/2022/02/canada-immigration-levels-plan-2022-2024-0221165.html#gs.p4r2bw

 

The Canadian government has just announced its Immigration Levels Plan 2022-2024.

 

Canada is increasing its immigration targets yet again. It will look to welcome almost 432,000 new immigrants this year instead of its initial plan to welcome 411,000 newcomers. The announcement came today at approximately 3:35 PM Eastern Standard Time.

 

Over the coming three years, Canada will target the following number of new immigrant landings:

• 2022: 431,645 permanent residents
• 2023: 447,055 permanent residents
• 2024: 451,000 permanent residents

 

 

 

Also a reminder that over the past 12 months the MLS Housing Price index is up 26.6% (https://www.crea.ca/housing-market-stats/mls-home-price-index/hpi-tool/).