Canada Housing Sentiment

[Guest Broxburnboy]

If you think downtown Vancouver's prices are high, check out the state of the Manhattan market:

 

http://www.bloomberg.com/apps/news?pid=20601213&sid=aKJTtME9cUhY

 

 

[nodnub]

True,  but incomes in Vancouver are nowhere near what they were in Manhattan for the last few years.

[SharperDingaan]

 

Keep in mind that the US market went down in large part because securitizers couldn't continue to fund, & walked away. These low DP mortgages are being funded by the BOC through pass-through selling by the major banks.

 

There is relatively low risk, these are amortizing federally insured mortgages (systemic risk is contained - & lowered every time a monthly principal payment is received), & the properties are generally being bought at lower prices than would otherwise occurr were the market in a more 'normal' state. There is only 1 funder, they know exactly how much of this funding is out there, its maturity term, the geographic markets where the funding is, & the % of each market that the $ represent. Very different from the US.

 

SD

 

 

[Cardboard]

"Very different from the US."

 

I am sorry, but IMO it is not. The way it is happening is very different, but the belief that housing cannot go down is ingrained the same way that it was in the U.S. This inevitably leads to higher risk taking.

 

Prices in large metropolitan areas are way too high relative to income and the only way around it is to make loans more accessible to people who cannot possibly service them in the long run if anything negative occurs with these loans: higher interest rates, job loss, divorce, higher municipal taxes, higher cost of living, etc. Bring home prices high enough and these factors which should be calculated in loan loss provisions eventually make them totally inadequate.

 

Cardboard

[arbitragr]

By any chance, does anyone know what the general rental yields are in major Canadian cities or suburbs?

 

rough ball park ...

[bonechip1]

In my city, which is just outside of Edmonton, the gross rent multiplier is roughly about 16-17.  So, the annual gross rental income is around 6% of purchase price.  Net operating income would be less than 4% of purchase price, for a cap rate of about 25 - not particularly distressed conditions if you ask me. 

[SharperDingaan]

 

Cadboard: Agreed the 'it can never go down sentiment' is built in, but recognize that it's also a time horizon thing.

 

Long term, if the BOC maintains inflation at 2% for 25 yrs the house will sell for 64% ((1.02)^25)-1 more than it will today. Add in a 25yr mortgage amortization & the homeowner is understandably going to feel 'rich', because the house is really a long term savings plan paying you inflation + free accommodation 

 

Short term, its an investment that can go either up/down. Buying to fix up & flip to really no different to momentum investing - you just think you know better because you did the work & therefore have some degree of 'control'. Buying in tough times, or when rates are high, is no different to buying a bond & waiting for an upgrade.

 

Different geographic areas will have different preferances, & threfore orientation.

To a large degree Vancouverites are pricing in potential gains from renting out during the olympics, and/or selling to others who will use the property as 'cheap' accommodation - no different to Cape Town, RSA with the Soccer World Cup. But Vancouver also has a significant asian buying population which is much more risk tolerant, & access to HK $ which is even more risk tolerant - especially if there is a also a son/daughter on Cdn soil to manage the property. Someone in Halifax, Ottawa, or Edmonton might find that horrifying (less risk tolerant), but those are also long term property holders - so price swings are generally not going to be as extreme as there are fewer risk takers (who need to sell) in those markets.

 

On balance the 'it can never go down sentiment' does exist, but it would seem to be a lot better controlled. Real world diversification that actually works for a change!

 

SD

 

 

[arbitragr]

Is there a reason why the yields are so low in Vancouver/Canada in general?

If the downturn and unemployment is a concern then those low yields should be easing somewhat.

In some markets overseas there's justification for low yields due to high rates of household formation from population growth and immigration, whilst supply is low/shortage b/c of low land inventory or availability of brownfield land to develop on (e.g. Hong Kong, Sydney) ... hence yields are remaining perpetually low despite the economic downturn.

That is to say, whilst prices are high/inflated/bubble-like, they're not necessarily going to go down or crash like they are in the US.

 

The US markets are very unique in the sense that there is a huge inventory overhang as a result of the over building during the boom years, and also the unique securitization and lax lending standards by the banks that prevailed leading up to the crisis.

[ubuy2wron]

By any chance, does anyone know what the general rental yields are in major Canadian cities or suburbs?

 

rough ball park ...Cash on cash, net returns in Vancouver are very low think 3 percent, they are higher think mid to high single digit in the rest of the country with higher returns available in Winnipeg and markets which have had very little or modest appreciation. Investors in Canada take on a huge interest rate risk if using a mortgage in Canada as 5 year term mortgages are about the longest term you can lock in interest rates at reasonable rates for the residential market. The returns available in markets like Arizona(Phoenix are MUCH MUCH higher plus you can get a 30 year fixed rate mortgage. I can not understand how you can have homelessnes in the US when perfectly sound housing is available for a mortgage payment of 350 per month. You can make that much collecting bottles !!!!!

[StubbleJumper]

"Very different from the US."

 

I am sorry, but IMO it is not. The way it is happening is very different, but the belief that housing cannot go down is ingrained the same way that it was in the U.S. This inevitably leads to higher risk taking.

 

Prices in large metropolitan areas are way too high relative to income and the only way around it is to make loans more accessible to people who cannot possibly service them in the long run if anything negative occurs with these loans: higher interest rates, job loss, divorce, higher municipal taxes, higher cost of living, etc. Bring home prices high enough and these factors which should be calculated in loan loss provisions eventually make them totally inadequate.

 

Cardboard

 

 

Cardboard,

 

SD makes a very important point in post #27.  Under the National Housing Act, lenders require mortgage insurance (typically from CMHC) for mortgages where loan-to-value exceeds 80%.  So it's the federal government that is on the hook for the losses on high LTV mortgages.  The big banks are exposed to losses on LTV of 80% or less.  However, the bottom would really have to fall out of the housing market for this to become a big problem for them.  That group of homeowners will not become "upside down" until the market drops by more than 20%.  Meanwhile, as SD suggested, they are continuously making principal payments which further reduces their risk.  The real estate market needs to drop drastically before the banks really feel the pinch.

 

The banks have experienced an uptick in their provision for credit losses over the past year or so, and IMO this will probably accelerate over the next few quarters.  However, I would suggest that much of this will be their consumer credit card debt, car loans, unsecured consumer loans, and loans to businesses.  My view is that there is much hurt yet to come in Canada and we will really begin feeling this recession as 2009 progresses and unemployment increases significantly.

 

I was comfortable with the price of Canadian banks in February/March, but as others have noted the shares have really rallied a great deal over recent months.  Clearly, with their expected earnings over the next couple of years, the dividends are only sustainable if they can continue to pawn off preferred shares on yield-hungry Canadians....but so far people have been greedily sucking up every preferred offering.  At this point I'm not touching the banks unless they decline back to less than 10X normalized earnings....which is far lower than 2007 earnings.

 

SJ

[admiral]

Hi Richard,

 

Vancouver is an anomaly but in general I think that your sentiment is right - I expect my house to do a "roundtrip" from the price we paid 5 years ago + reno costs. But I like living here and have no interest in moving in the next 10 to 15 years. Mortgage rates are not an issue unless I want to sell.

 

We have a couple of small rental properties in Parksville - Price paid to annual gross revenue just over 10 - a lot better than Vancouver. I mention this because of comments made earlier about the possibility of rents going up in Vancouver - our experience is that the recession is pressuring rental rates. There may be more renters in the market but there are even more people who can afford less than they thought they could a year ago. We've maintained rates but gave incentives to sign one year leases - something we didn't have to do in the past. I also think that it will be increasingly difficult for Landlords to pass on municiopal tax and other rate increases.

 

No idea how far we have to fall yet & I suspect that rising mortgage rates will have the biggest effect - bigger than unemployment anyway. This site tracks affordability and its graphs suggest that Vancouver is always significantly more "unaffordable" than Toronto or Montreal but at current levels is still within its historical range http://vancouvercrash.com/

 

Regards

Philip

[RichardGibbons]

Hi Philip,

 

Yeah, for me, the main goal is to maximize happiness, not maximize money, so I can't argue with your decision to stay in your place.  It is a lovely house.

 

My parents live in Qualicum, near Parksville.  If Parksville's demographics are anything like Qualicum's I could see that the stock market drop and low interest rates could have more of an effect on rents there than other cities.  If a large chunk of that market is retirees whose primary source of incomes was investments, that could have a significant impact on rents.

 

I'd agree with you on the mortgage rates having a bigger impact than unemployment.  The interesting thing is that I've been looking at this stuff for a 3 or 4 years, and historically there was much higher correlation between unemployment and prices than there was between interest rates and prices.  But I think that may no longer be true, since housing is priced so highly that it's only feasible for a large segment of the population to buy when rates are extraordinarily low.  This time it's different.  ;)

 

(The other fun real estate-related stat I saw a couple years ago was that something close to 100% of Vancouver's employment gains during the last boom were jobs in real estate.)

 

Richard