Garth Turner - Real Estate in Canada

[Spooky]

https://www.ubs.com/global/en/wealth-management/insights/2022/global-real-estate-bubble-index/_jcr_content/mainpar/toplevelgrid/col1/textimage.1255303826.file/dGV4dD0vY29udGVudC9kYW0vYXNzZXRzL3dtL2dsb2JhbC9pbnNpZ2h0cy9kb2MvdWJzLWdsb2JhbC1yZWFsLWVzdGF0ZS1idWJibGUtaW5kZXgtZW4ucGRm/ubs-global-real-estate-bubble-index-en.pdf

 

6 hours ago, UK said:

 

https://www.bloomberg.com/news/articles/2022-11-01/canada-plans-to-welcome-record-half-million-immigrants-in-2025

 

And also migration of capital from China etc in search of safety not returns?

 

This is an important part of the story I think - lots of international buyers parking their capital in Toronto housing looking to preserve it. There has also been a pretty big divergence between the prices of homes and rents since rents can generally only go up as much as local incomes can bear.

 

 

[SharperDingaan]

Recently had an approach to takeover an assignment on a large 12th floor Mississauga condo. Existing assignees are on the hook for material additional build costs (covid/inflation driven), and if it ever gets built - the building finishes will need to be 'upgraded' into a luxury 're-brand', with even more costs. Current assignees are at risk of losing their deposits, significant legal costs, and incremental cost assignment. Significant dollars and motivated sellers.

 

It didn't go well, as I offered them low cents on the dollar, and wished them luck if they didn't sell.

Didn't want to hear that I could simply wait for their development to bankrupt, and another developer to buy their land out of the bankruptcy, and build their condo in its place -  while earning a nice safe 5%+ in GICs while I'm waiting.

 

How insulting!!

A good clean out is coming, and it is long overdue.

 

SD 

 

 

 

Edited November 4, 2022 by SharperDingaan

[maplevalue]

A combination of low property taxes and high development charges has contributed to high housing prices in Canada, particularly GTA. There is some interesting legislation being tabled where Ontario is going to limit development charges by municipalities. In Markham, a Toronto suburb, there is talk of needing to increase property taxes 50%-80% to cover the hole that will be left from these development charges. Could potentially change the math around investment properties, and help with supply.

 

https://globalnews.ca/news/9292260/ontario-cities-protest-ford-government-housing-bill/

[Cigarbutt]

19 hours ago, maplevalue said:

A combination of low property taxes and high development charges has contributed to high housing prices in Canada, particularly GTA. There is some interesting legislation being tabled where Ontario is going to limit development charges by municipalities. In Markham, a Toronto suburb, there is talk of needing to increase property taxes 50%-80% to cover the hole that will be left from these development charges. Could potentially change the math around investment properties, and help with supply.

 

https://globalnews.ca/news/9292260/ontario-cities-protest-ford-government-housing-bill/

Ok but how does that change affordability (on a net basis) from the buyer's perspective?

[maplevalue]

58 minutes ago, Cigarbutt said:

Ok but how does that change affordability (on a net basis) from the buyer's perspective?

 

All else equal higher property taxes -> purchase price of investment property would have to be lower to generate same return.

[whatstheofficerproblem]

Higher than Japan at peak real estate bubble. What is the likelihood of a burst here?

Edited December 3, 2022 by whatstheofficerproblem

[Viking]

1 hour ago, whatstheofficerproblem said:

Higher than Japan at peak real estate bubble. What is the likelihood of a burst here?

@whatstheofficerproblem when you get your answer please let me know. I continue to think that interest rates are one of the keys. If the Bank of Canada keeps raising rates then i think more pain is ahead. The spring market (gets going in Feb) will be key - and it is not far away. 
 

If the economy also slows in 2023 that will probably be a hit to housing.
—————

Prices are coming down pretty hard in the areas that were most frothy. I looked at my old neighbourhood (Langley) and house prices look to be back (perhaps even lower) to where they were back in March of 2021. 

[lessthaniv]

2 hours ago, Viking said:

@whatstheofficerproblem when you get your answer please let me know. I continue to think that interest rates are one of the keys. If the Bank of Canada keeps raising rates then i think more pain is ahead. The spring market (gets going in Feb) will be key - and it is not far away. 
 

If the economy also slows in 2023 that will probably be a hit to housing.
—————

Prices are coming down pretty hard in the areas that were most frothy. I looked at my old neighbourhood (Langley) and house prices look to be back (perhaps even lower) to where they were back in March of 2021. 

we’re neighbors!

[SharperDingaan]

In our area, prices have settled down but the froth is now gone. You still have to pay up, but you aren't offering 20-30% over the ask anymore. Supply is also quietly rising as inflation has driven up condo fees, property taxes, etc. - and the next round of gentrification is taking over.....

 

It's also noticeable that a lot of those whose sold to rent a while, have discovered that renting is only 'predictable' as long as the place you are renting isn't sold out from under you. Forcibly have to move once and its shame on me, but if I have to move a second time - it's back to another house that I've just bought! McMansions essentially exchanging into upgraded smaller condos that are easier to clean.

 

Amusingly, a growing number of those condo's are also owned by groups of little old ladies whose spouse have croaked out. They all live together, keep each other company, travel when/where they like, hire a maid/chef to do the chores once/twice a week, and enjoy a combined free cash flow through the roof. Nothing wrong with grandma!

 

SD

 

 

[maplevalue]

The interesting thing about Canada is that essentially all mortgages are floating rate. There are two types of mortgages, variable rate where payments immediately adjust based on what banks' prime rates are, and fixed rate where a rate is locked in for (in most cases) 5 years. So even if Canadians have a 'fixed' mortgage, they are still exposed to higher rates since every 5 years they need to pay a new going rate. Many people have yet to feel the sting of higher rates, but with the passage of time, as more 5 year fixed mortgages get reset at higher rates, the 'pain' in the market should increase. All this is to say, is that if all the BoC did was to keep rates on hold for the foreseeable future, their policy should still lead to indigestion in Canadian housing.

 

This Twitter thread explains it well.

 

 

It's a similar dynamic to the federal debt in Canada where about 1/2 of debt matures in the next 5 years (https://www.bankofcanada.ca/stats/goc/results/en-goc_tbill_bond_os_2022_11_30.html).

 

Now there are a lot of factors related to what happens with housing, but I think it is safe to say Canada fairly vulnerable to an extended period of high rates.

[whatstheofficerproblem]

Nice, looks like somethings are inevitable! What might be the best way to bet against the housing market in Canada? 

Edited December 5, 2022 by whatstheofficerproblem

[SharperDingaan]

Canadian floating rate mortgages work a little differently. At the time the mortgage is issued, the borrowers ability to make payments is stress tested at the current rate (ie: 3%) plus 200bp (ie: 5% trigger rate). The monthly payment is then the mortgage balance x the trigger rate for the length of the mortgage. 

 

At current rate (3%) < trigger rate (5%) the monthly payment includes a modest debt repayment. At current rate > trigger rate (5%) the borrower must make a higher payment. Typically the payment remains the same, the monthly  difference added to the outstanding debt, and the term extended (25 to 30 year) if needs be. The reality is that while it is not impossible, it is pretty hard to default on a floating rate mortgage.

 

Media estimates (strongly manipulated) currently place > 50% of all Canadian outstanding floating rate mortgages at above their trigger rates.; selling both fear and armageddon as the monthly payment is no longer covering the interest cost. However, as/when the current rate falls below the trigger rate again, the mortgage will instantly return to performing status as debt repayments resume.

 

The BoC has been raising the market rate, and the floating rate mortgage rate to combat inflation. The pace of the increases has been widely telegraphed as about to slow, most would expect inflation to be at least 200-400bp lower 6-9 months out, and the more aggressive the decline - the more room the BoC will have to lower both the market, and floating rate mortgage rates. Raise hard, and raise fast; and most would expect the bulk of floating rate mortgages > trigger rate to be back to performing within 12 months. The only folks bitching are the media and Bay Street ..... everybody else is just thankful for a way out, and ability to keep their house.

 

Media is paid to sell a game set-up that punters are expected to lose at, and it is very good at it. So ... take a page from Nash (game theory), and change the game set-ups - thereafter let the best manipulator win, and no holds barred! However, you can ALSO exit the game whenever you wish, .... whereas the media - not so much 

 

Good luck!

 

SD

Edited December 5, 2022 by SharperDingaan

[maplevalue]

3 hours ago, SharperDingaan said:

Media estimates (strongly manipulated) currently place > 50% of all Canadian outstanding floating rate mortgages at above their trigger rates.; selling both fear and armageddon as the monthly payment is no longer covering the interest cost. However, as/when the current rate falls below the trigger rate again, the mortgage will instantly return to performing status as debt repayments resume.

 

Everything is fine as long as rates go back down! If we are in a 'new normal' (or more accurately, back to a level of rates that prevailed before the GFC) things could become very interesting.

Edited December 5, 2022 by maplevalue

[SharperDingaan]

1 hour ago, maplevalue said:

 

Everything is fine as long as rates go back down! If we are in a 'new normal' (or more accurately, back to a level of rates that prevailed before the GFC) things could become very interesting.

 

I have great confidence in the abilities of both the boc and mathematics. All else equal if inflation goes down 300bp so do interest rates!

 

SD

 

Edited December 5, 2022 by SharperDingaan

[scorpioncapital]

if rates go down or stop rising will that weaken the CAD? After all the Yen did weaken massively this year..but it stayed elevated for like 30 years before that. 

[Spooky]

1 hour ago, scorpioncapital said:

if rates go down or stop rising will that weaken the CAD? After all the Yen did weaken massively this year..but it stayed elevated for like 30 years before that. 

 

It would be relative depending on what other central banks are doing. If BoC stops raising or starts slashing rates while the Fed is still raising then CAD will suffer.

[SharperDingaan]

1 hour ago, scorpioncapital said:

if rates go down or stop rising will that weaken the CAD? After all the Yen did weaken massively this year..but it stayed elevated for like 30 years before that. 

 

Does it really matter?

 

Assume a 100K investment (CDIC insured at Canada's credit rating).

Yesterday I could buy a 5yr Canada for 3.00%, a 5yr GIC for 5.00%, and current Canadian inflation was 6.9%. If I buy the Canada, I am assuming a negative real return of 3.9% (3.0-6.9). Whereas if I buy the GIC, I am assuming a negative real return of 1.9% (5.0-6.9).

 

Put another way, the real world (main street), expects inflation to fall 200bp (-1.9-3.9 real) in the near term, and another 190bp (-1.9 real) over the longer term; or Canadian inflation falling to 4.9% in the next few months, and 3.0% over the next year. In relative terms, if that is better than the US/EU; CAD strengthens.

 

Quite a bit different to what the media/Bay street would like you to believe 

 

SD

 

 

[maplevalue]

6 hours ago, scorpioncapital said:

if rates go down or stop rising will that weaken the CAD? After all the Yen did weaken massively this year..but it stayed elevated for like 30 years before that. 

 

In a scenario where rates go up, and CAD economy is very sensitive (bc of structure of mortgage debt) and starts to weaken, and the US economy keeps chugging along then you would probably get CAD weakness as the BoC pauses and the Fed keeps going.

[scorpioncapital]

5 hours ago, SharperDingaan said:

 

Does it really matter?

 

Assume a 100K investment (CDIC insured at Canada's credit rating).

Yesterday I could buy a 5yr Canada for 3.00%, a 5yr GIC for 5.00%, and current Canadian inflation was 6.9%. If I buy the Canada, I am assuming a negative real return of 3.9% (3.0-6.9). Whereas if I buy the GIC, I am assuming a negative real return of 1.9% (5.0-6.9).

 

Put another way, the real world (main street), expects inflation to fall 200bp (-1.9-3.9 real) in the near term, and another 190bp (-1.9 real) over the longer term; or Canadian inflation falling to 4.9% in the next few months, and 3.0% over the next year. In relative terms, if that is better than the US/EU; CAD strengthens.

 

Quite a bit different to what the media/Bay street would like you to believe 

 

SD

 

 

 

This does not make sense to me. In 1980, the 30 year rate was 20%. Was the bond market right in assuming 20% rate for 30 years? No it was wrong. It was in fact 0% 30 years later. Therefore I do not think this fashionable idea that bond market predicts things has any validity.

[maplevalue]

5 hours ago, SharperDingaan said:

 

Does it really matter?

 

Assume a 100K investment (CDIC insured at Canada's credit rating).

Yesterday I could buy a 5yr Canada for 3.00%, a 5yr GIC for 5.00%, and current Canadian inflation was 6.9%. If I buy the Canada, I am assuming a negative real return of 3.9% (3.0-6.9). Whereas if I buy the GIC, I am assuming a negative real return of 1.9% (5.0-6.9).

 

Put another way, the real world (main street), expects inflation to fall 200bp (-1.9-3.9 real) in the near term, and another 190bp (-1.9 real) over the longer term; or Canadian inflation falling to 4.9% in the next few months, and 3.0% over the next year. In relative terms, if that is better than the US/EU; CAD strengthens.

 

Quite a bit different to what the media/Bay street would like you to believe 

 

SD

 

The issuers of 5yr GICs are pricing them as a spread to 5yr Canada yields. They have nothing to do with inflation expectations.

[SharperDingaan]

20 hours ago, maplevalue said:

 

The issuers of 5yr GICs are pricing them as a spread to 5yr Canada yields. They have nothing to do with inflation expectations.

 

I hear you, but the comment was based on buyer expectations - NOT the issuers.

 

The buyer has a negative real rate of return, on the same credit risk, whether they buy the CDIC insured GIC or the Canada. But if they buy the GIC they only lose 1.9% (real return), vs 6.9% (inflation) if they do nothing.

 

Had the GIC buyer bought the Canada and held to maturity the buyer would lose 3.9% (real return). Identical credit risk, identical zero risk to capital (Canada held to maturity), yet the GIC has a 200bp improvement in real return? The GIC buyer via an actual transaction, is demonstrating an inflation expectation 200bp lower than the market. Inflation at 4.9% within 1 year (our time estimate).

 

We also know that negative real returns are NOT the norm. Hence, if that GIC buyer determined -1.9% real rate were to simply return to a neutral zero, inflation would have to be 3.0% within 1 year (our time estimate).

 

Were the BoC were to achieve its 2% target, the real rate would have to rise to 1% - or about the long-term average. WEB would call this ‘inversion’, and if the market is in ‘balance’ – it should tie up with CB pronouncements.

 

NOT the media line, hence it appears to be ‘shocking’  …..

 

SD

Edited December 7, 2022 by SharperDingaan

[whatstheofficerproblem]

https://www-bbc-com.cdn.ampproject.org/c/s/www.bbc.com/news/world-us-canada-64082923.amp

 

Foreigners now banned from buying homes in Canada!

[Gregmal]

Lol what idiots 

[cwericb]

There will be so many loopholes and exemptions that it is questionable as to how much impact it will have.

 

"There are also exceptions for residential properties in less-populated areas. Recreational properties — such as cottages, cabins and other vacation homes — are exempt." 

 

But it is rather unsettling to see so many nice home sitting vacant for years on end as people from other countries buy up our real estate and forcing prices up to the point where more and more local people are forced out of the housing market.

[Jaygo]

Never underestimate the incompetence of the liberal government. There are so many levers that could be pulled to help lower the costs of housing. They choose the one that says hey guys we’re world class, give us respect eh. Oh yeah but we’re also fucking idiots. 
 

Perhaps increase construction through reduced red tape, getting town folk building departments to fast track projects, build up our near north communities like Sudbury and Huntsville. Reduce the minimum lot size, dwelling size and allow densification.

Most importantly temper immigration during this short window in time to allow our echo boomers to buy property and form families of native Canadians. Trust me we will need immigration in 10 years when our demographics really hurt, but  right now you have a bulge of echo boomers and slightly younger all battling over shit hole housing over asking. 
 

How the people who regulate these things can’t see the demographic pinch brought on by aging in place elderly coinciding with echo boomers forming families. 
 

guess what, in a decade the elderly will be dead and dying and the echos will have procreated and bought housing with gut wrenching mortgages. Can’t we bring the 750k new Canadians then. 
 

But no,  we will not allow supply to increase at the natural pace of capitalism. We will kill demand and at the same time make us look like we are backwoods yokels. This Won’t do shit to affordability anyway, Crippling interest rates that are too high for our economics will work though.