Garth Turner - Real Estate in Canada

[gary17]

don't forget we have parity or close to parity which is why we feel things are cheaper in the US!  Rewind a few years back when we were at $1USD: $1.25 CAD I think most thought then things were reasonable in Canada !  My personal view is our dollar should be valued at about $0.80 - $0.85 ---  Gary

[leftcoast]

Good article about foreign ownership of real estate in Canada, and Vancouver in particular. Interesting to see the comparison with Australia.

 

http://www.huffingtonpost.ca/2014/08/27/foreign-real-estate-ownership-canada_n_5718705.html

 

Vancouver’s rise to become the second most expensive housing market in the world — the average detached home is now worth $1 million — cannot be explained by local incomes, which are well below the average of major Canadian city centres.

 

The math simply doesn’t add up to explain what is happening in the market.

 

Just over half of Vancouverites believe there is too much foreign ownership of real estate in the city, according to a 2012 poll. But in a statistical vacuum, no one knows for sure.

 

Estimates for foreign-owned downtown condos in Vancouver and Toronto range from less than five per cent to a whopping 50 per cent.

 

There’s no question that home ownership in cities such as Sydney, Vancouver and London has become a trend among affluent Chinese, sparked partly by policies in China that make owning a second home an extremely costly endeavour and prevent them from transferring large sums of yuan out of the country directly.

 

...

 

Countries including the U.S., Denmark, France, Mexico, Japan, Turkey and Singapore have not only implemented methods to collect data on foreign investments but have also invoked tax policies to curtail the trend.

 

Eyeing the potential for an investment bubble in London driven by foreign investors, the U.K is implementing a capital gains tax for foreign investors selling homes beginning next year.

 

Hong Kong’s government has levied a 15 per cent tax for non-residents who buy property — in part to curb fears their market will be overrun by mainland Chinese speculation. Denmark forbids foreign buyers from purchasing waterfront property and the U.S. places heavy taxes on the sale of foreign-owned houses.

 

Meanwhile, Canada’s hands-off approach — whether out of politeness, lack of know-how or self-interest — puts it in the minority among industrialized countries by remaining in the data dark.

 

[SharperDingaan]

There is always a bad guy; in London it was the Arabs following the oil boom, then it was the Russians, now it is the Chinese. The reality is that many of these properties are actually rented out (to friends) at below market rates -  & it is often flight money, bribe money, or money laundered funds making the purchase. Players change, but the asset itself stays; realty fees & higher property taxes are just the cost of doing business.

 

Locals bitch because they couldn't match the bid, are not the friends getting below market rates, & cant make their case for deferred taxes because of difficulty paying bills (as those rich guys ARE paying, & ON TIME). The fact that locals benefit from the modernized services financed by those property taxes, & higher borrow capacity resulting from rising property values - is conveniently ignored.

 

You don't need people actually using the place - as Abu Dhabi, & much of Dubai proves. But you have the place, & debt free, because it is an emergency asset that you can use - should you have to flee home with nothing but the shirt on your back. Exiles are routinely created every day.

 

Taxing is also not the answer (UK). You simply flip the place into a locals name, retain a call option at the purchase price, & agree the annual fee on the option for the next 99 years.

 

SD

 

[wisdom]

Check out what happened to real estate in Dubai in 2008/20009. That is the problem with hot money.

[alertmeipp]

It's not hard to see various real estate bubbles and subsequent bursts afterward. They do happen and it will go to downside as irrationally as they do to the upside.

 

 

[SharperDingaan]

Re Abu Dhabi/Dubai. Much of the building was built on money laundered funds. $ in to create a bank -> new build real estate financed by that new bank -> new real estate built at higher prices to bubble it -> loan against the appreciation to repatriate the $ in. Bank is collapsed (crises), the kingdom takes over the shiny new buildings, & offers cheap rent in Grade A buildings to anyone who would like to start-up/open a business catering to the ME. Very smart.

 

The same process built Vegas, & Havana; just different players. The Paris of the ME was already taken (Beirut), so we got Disney Land instead - just keep in mind that Beirut, Abu Dhabi, & Dubai were all long established trading ports before the West found them; & hot money has been around for a very long time.

 

On any given day the status of Hong Kong could be revoked, making it just like the rest of China - & it would wipe out the wealth of anyone in Hong Kong that is not in gold. So to insure survival ... periodically sell down/borrow against HK assets, invest the cash in Vancouver RE .. & you will never be poor. Vancouver RE gets a steady ongoing inflow of new cash - but the value of the condo to a HK buyer is primarily safety, not shelter. If it goes down 35% next week, it is largely irrelevant.

 

It could never happen here is fallacy - ask anyone from Beirut.

 

SD

 

 

 

[Kiltacular]

Allowing these huge bubbles in residential real estate is insane.  It destroys the middle class; they get extraordinarily angry; the search for a scapegoat.  The young people who feel it is a bubble have to argue with wife, friends, family and look like idiots if they don't go along.  It is nothing like the stock market. 

 

If Canada is allowing HELOC's and all the attendant things that went on in the U.S., the pain will be massive.

 

The whole U.S. stock crash was caused by the housing mess.  (Whereas, the huge correction in the early 2000's was caused by a massive bubble in stocks in 1997-1999.)  The real estate mess in the U.S. practically cratered the world.

 

Sell Canadian banks?  Or, does the gov't underwrite?

[SharperDingaan]

Most argue that RE bubbles are actually a plus. New houses get built, old areas get repurposed, infrastructure gets upgraded (water, sewage, transit, etc.), higher paying jobs from related construction, additional RE commissions, etc. But like anything, abuse it - & you will get burnt.

 

Canada has long had HELOCs & some of the US instruments. Unlike the US, the market levers are much more tightly controlled - & OSFI/BOC/CMHC routinely tighten to cool down markets. Folks will be angry no matter what; whether a bubble was allowed - or they were prevented from borrowing under tighter rules.

 

House ownership is not an entitlement, & neither is a short commute to work.

CMHC outlived its main purpose of enabling returning servicemen (WWII) to buy a house (stability) & start families, many years ago.

 

SD

[Liberty]

Some people will argue the same thing about the internet bubble (think of all the extra fiber that was laid out, etc).

 

Doesn't mean a lot of people won't get creamed. RE bubbles are a plus for those who rent and wait on the sidelines or those who luck out and sell at the top and don't just turn around to buy a similarly expensive house. Not for everybody else.

 

http://i.imgur.com/bTw60eA.png

[Liberty]

I found this article interesting:

 

I think European households are wealthier than the U.S

 

Average US household net worth: $381,000

Average Canadian household net worth: $400,000. ( or ~$650K in Vancouver )

 

 

Despite long work hours, tremendous opportunity, and inventing so much of what we use every day (iPhone, Android Phone, iPad, Chromebook, Intel processor, Nike shoes, Google, Yahoo, YouTube, AirBnB, Pandora, etc) Americans are not the wealthiest ones in North America. Canadians are King and Queen thanks to their extraordinarily strong housing market and Social system of governance. With stronger governance comes better managed financial institutions. A wider taxation net also helps ensure that a country is more united.

 

 

 

http://www.financialsamurai.com/the-average-canadian-household-net-worth-is-huge/

 

That's counting the value of their houses, though. Look at their liquid assets and incomes and the picture will be different, I'll bet.

 

I'm sure american investors all seemed a lot richer too at the top of the dot-com bubble, but it wasn't real value.

 

I think it's crazy and circular to use house prices to justify high house prices ("see, people have a high net worth, they can afford these expensive houses. Oh, what's their net worth mostly composed of? Houses, of course....").

[enoch01]

Allowing these huge bubbles in residential real estate is insane.  It destroys the middle class; they get extraordinarily angry; the search for a scapegoat.  The young people who feel it is a bubble have to argue with wife, friends, family and look like idiots if they don't go along.  It is nothing like the stock market. 

 

If Canada is allowing HELOC's and all the attendant things that went on in the U.S., the pain will be massive.

 

The whole U.S. stock crash was caused by the housing mess.  (Whereas, the huge correction in the early 2000's was caused by a massive bubble in stocks in 1997-1999.)  The real estate mess in the U.S. practically cratered the world.

 

Sell Canadian banks?  Or, does the gov't underwrite?

 

I've sold the banks.  I've been early.

 

What's interesting is that CMHC insurance in force had been holding steady, and actually has been shrinking a little recently.  CMHC historically has been about a 10% ROE business (your banks thank you).  So someone has been willing to take in less premium to insure riskier than normal mortgages these days.  More evidence of irrational behavior.

 

[Aberhound]

High Vancouver RE prices creates a problem for those holding. I realize concentration of assets in High priced RE is unsafe. But I can see the massive influx of wealthy immigrants from everywhere. I wonder why they come because engineers and doctors etc. have a difficult time getting qualified here and business people have a difficult time adapting to our oligopolistic markets. But then I meet their young sons and daughters in their early 20s and I see the reason for the sacrifice. Who wouldn't want to move their children to a tolerant society with massive stores of societal trust, the type of trust that takes decades of safety and stability to develop? Further, I see technology making it easier to run international businesses from Vancouver. Then I wonder why prices aren't double or triple in a globalized world. What is the price of feeling safe? And what if winters in Toronto keep getting colder?The proportion of immigrants choosing Vancouver might increase. So I pay down debt to make it safe for me to hold RE through any conceivable correction. Hence the imbalance of assets.

 

Suppose one of you seeking to build an asset management business could help people like me. Could you find a pension fund that seeks to diversify their risk like a bank or pension fund in Japan and show them that they would benefit from writing no recourse first mortgages in Vancouver at say 60% LTV if the monies are used to fund portfolios of diversified assets upon which the bank can hold a charge as well ie the recourse is on both the RE and the portfolio. Problem solved especially for me if there is a clause allowing mortgage payments to come from portfolio appreciation during downturns when my income drops. Pension gets extra yield on no recourse loan, risk is reduced for both sides by diversification, you can rapidly get millions in portfolios and I can hold a lot more BAC and US long term treasuries. Buffett suggests no leverage which is what I have mostly followed. But is leverage better in some circumstances if it allows you to diversify? I think the answer is yes if the cost of borrowing is below the 6% expected returns + a margin of safety. This may be possible with the current low mortgage interest rates.

[shalab]

The median stats per household is even worse in the U.S compared to Canada. U.K and Canada are also roughly on par...

 

http://www.freedomthirtyfiveblog.com/resources/median-and-average-net-worth

 

Median Net Worth

 

Per Person in Canada $81,610 2012 middleclasspoliticaleconomist.com/2013/06/us-median-wealth-only-28th-in-world.html

 

Per Household in Canada $243,800 2012 http://cponline.thecanadianpress.com/graphics/2014/static/cp-median-family-net-worth.jpg

 

Per Person in the US ($USD) $38,786 2012 http://www.middleclasspoliticaleconomist.com/2013/06/us-median-wealth-only-28th-in-world.html

 

Per Household in the US ($USD) $77,300 2010 http://www.federalreserve.gov/Pubs/Bulletin/2012/articles/scf/scf.htm

[A_Hamilton]

Allowing these huge bubbles in residential real estate is insane.  It destroys the middle class; they get extraordinarily angry; the search for a scapegoat.  The young people who feel it is a bubble have to argue with wife, friends, family and look like idiots if they don't go along.  It is nothing like the stock market. 

 

If Canada is allowing HELOC's and all the attendant things that went on in the U.S., the pain will be massive.

 

The whole U.S. stock crash was caused by the housing mess.  (Whereas, the huge correction in the early 2000's was caused by a massive bubble in stocks in 1997-1999.)  The real estate mess in the U.S. practically cratered the world.

 

Sell Canadian banks?  Or, does the gov't underwrite?

 

I've sold the banks.  I've been early.

 

What's interesting is that CMHC insurance in force had been holding steady, and actually has been shrinking a little recently.  CMHC historically has been about a 10% ROE business (your banks thank you).  So someone has been willing to take in less premium to insure riskier than normal mortgages these days.  More evidence of irrational behavior.

 

The government effectively underwrites. Look at Tangible Common Equity / Assets and then Tangible Common Equity / Risk Weighted Assets in the Canadian banks and compare to JPM, BAC, etc.

 

Canadian banks have some of the thinnest direct capital levels of any financials on the planet. The question is if/when the Canadian economy faces a recession, will the banks be bailed out of mortgages at par by the government or will they have to raise capital. If a large hit to real estate happens nationally I think the public outcry would be that shareholders are no longer entitled to 20-30% ROE's on obscene amounts of leverage on tangible common.

 

I'm short the Canadian dollar...looked at the banks several times and the fact is if no recession/decline in housing happens in Canada you can get hurt very quickly.

 

As an aside FFH has hedged all of its Canadian exposure back to USD.

[Liberty]

Every time there's a bubble, people have a thousand reasons why it'll keep going.

 

All the attention gets focused on these reasons and people lose perspective. A few thousand wealthy foreigners obscure the fact that tens of millions of canadians are the ones primarily owning, buying and selling these houses, and their incomes haven't kept up, their debts are ballooning, and a huge part of the economy is RE, compounding risk.

 

Chinese princelings aren't the ones buying dilapidated 1960s bungalows for a million bucks...

[enoch01]

Allowing these huge bubbles in residential real estate is insane.  It destroys the middle class; they get extraordinarily angry; the search for a scapegoat.  The young people who feel it is a bubble have to argue with wife, friends, family and look like idiots if they don't go along.  It is nothing like the stock market. 

 

If Canada is allowing HELOC's and all the attendant things that went on in the U.S., the pain will be massive.

 

The whole U.S. stock crash was caused by the housing mess.  (Whereas, the huge correction in the early 2000's was caused by a massive bubble in stocks in 1997-1999.)  The real estate mess in the U.S. practically cratered the world.

 

Sell Canadian banks?  Or, does the gov't underwrite?

 

I've sold the banks.  I've been early.

 

What's interesting is that CMHC insurance in force had been holding steady, and actually has been shrinking a little recently.  CMHC historically has been about a 10% ROE business (your banks thank you).  So someone has been willing to take in less premium to insure riskier than normal mortgages these days.  More evidence of irrational behavior.

 

The government effectively underwrites. Look at Tangible Common Equity / Assets and then Tangible Common Equity / Risk Weighted Assets in the Canadian banks and compare to JPM, BAC, etc.

 

Canadian banks have some of the thinnest direct capital levels of any financials on the planet. The question is if/when the Canadian economy faces a recession, will the banks be bailed out of mortgages at par by the government or will they have to raise capital. If a large hit to real estate happens nationally I think the public outcry would be that shareholders are no longer entitled to 20-30% ROE's on obscene amounts of leverage on tangible common.

 

 

BINGO.

 

The Canadian government has been gifting to the banks to such a degree that it is almost comical.

[SharperDingaan]

Keep in mind ...

 

Minimum DP's have been increased, & maximum LTV's increased via legislation. With all borrowers now either meeting these thresholds, or having their bank repossess & force a sale - weaker hands have been forced out & bigger cushions against loss put in place; for everybody. Sure, if you're the one repossessed you aren't happy - too bad.

 

If you don't have the DP or income required, you cant afford it - get over it.

Find a cheaper house, earn more income, or get someone else to front more DP for you - you are not entitled. Unlike the US, you are also being deliberately shut out, for the protection of everybody.

 

Lot less risk ....

 

SD

 

[nodnub]

Vancouver real estate has grown at 12% CAGR from 2000 onwards - that is almost 500% gain from the levels in 2000.

 

Amazing indeed!

Hi Shalab,

 

Are these numbers sourced from somewhere in this thread?  When I look at Vancouver price charts and crunch the numbers I don't see gains that high.

 

 

[Liberty]

From tom's other thread, I thought this also belonged here:

 

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

[gary17]

I really think US is well positioned for a decade or more of growth.  As the planet population doubles.... I think Canada and US are the two developed countries with the infrastructure and capacity for growth.  I'm very bullish about the US!

[Guest 50centdollars]

http://www.vancouversun.com/opinion/editorials/Barbara+Yaffe+Absentee+homebuyers+targeted+mayoral/10206155/story.html

 

Looks like they have an issue in Vancouver with vacant homes. Mayoral candidates are suggesting to tax people who buy homes and don't live in them.

 

"As much as 25 per cent of condos around Coal Harbour are believed to be unoccupied."

 

 

 

 

[mcliu]

Why aren't they building more units to absorb all this demand? It's not like there's a shortage of land in Canada and prices are clearly way above replacement value..

[Guest 50centdollars]

Why aren't they building more units to absorb all this demand? It's not like there's a shortage of land in Canada and prices are clearly way above replacement value..

 

They're are plenty of homes, people are just speculating...buying 2nd and 3rd properties

[Liberty]

Why aren't they building more units to absorb all this demand? It's not like there's a shortage of land in Canada and prices are clearly way above replacement value..

 

They're are plenty of homes, people are just speculating...buying 2nd and 3rd properties

 

Yes, there's more condos being built in toronto than in the rest of north-america combined IIRC. Prices aren't high because of a lack of supply, it's a sentiment thing.

[wisdom]

http://www.bloomberg.com/news/2014-09-17/hong-kong-developers-raise-cash-to-buy-land-real-estate.html

 

Billionaires in HK have cut debt and are ready with cash to pick up cheaper RE.

 

This is the only city more expensive than Vancouver.