Author Topic: Garth Turner - Real Estate in Canada  (Read 443422 times)

Viking

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Re: Garth Turner - Real Estate in Canada
« Reply #1760 on: September 24, 2018, 10:58:44 PM »
Cigar, if Canada has a housing slowdown or worse the country will be in deep trouble. Real estate has been the road to riches for many. Calculated Risk says to watch inventory closely. When inventory in the US started increasing dramatically (in 2006 I think) he called the top in prices. I am watching inventory in my area and while it has been increasing and is elevated it doesn’t look concerning yet. However, if inventory continues to increase substantially over the next year then perhaps we will see prices start to crack. If the the Bank of Canada continues to raise rates this will also be a risk given how much debt many families have. Interesting times :-)


SharperDingaan

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Re: Garth Turner - Real Estate in Canada
« Reply #1761 on: September 26, 2018, 03:49:28 PM »
Keep in mind that Canadian RE shares little simlarity with the US. Loan structure, recourse/non-recourse, regulatory oversight, and a host of other things are completely different. Hence, you're trying to compare apples to oranges. Yes they are both fruits, but that's about it.

SD

50centdollars

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Re: Garth Turner - Real Estate in Canada
« Reply #1762 on: September 26, 2018, 05:18:15 PM »
Keep in mind that Canadian RE shares little simlarity with the US. Loan structure, recourse/non-recourse, regulatory oversight, and a host of other things are completely different. Hence, you're trying to compare apples to oranges. Yes they are both fruits, but that's about it.

SD

SD - can you elaborate when you say sound regulatory oversight? As someone who works in the compliance world, I think the regulatory oversight in Canada is a joke.

What makes you say that the regulators do a good job in Canada?
50centdollars

obtuse_investor

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Re: Garth Turner - Real Estate in Canada
« Reply #1763 on: September 26, 2018, 07:10:09 PM »
Cigar, if Canada has a housing slowdown or worse the country will be in deep trouble. Real estate has been the road to riches for many. Calculated Risk says to watch inventory closely. When inventory in the US started increasing dramatically (in 2006 I think) he called the top in prices. I am watching inventory in my area and while it has been increasing and is elevated it doesn’t look concerning yet. However, if inventory continues to increase substantially over the next year then perhaps we will see prices start to crack. If the the Bank of Canada continues to raise rates this will also be a risk given how much debt many families have. Interesting times :-)

Interesting...

Viking: how do you get inventory numbers for various locations? Is this available to the public?   
Value Investor who manages his personal portfolio with a 25-45 year time horizon | @obtuse_investor

Cigarbutt

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Re: Garth Turner - Real Estate in Canada
« Reply #1764 on: September 26, 2018, 08:52:43 PM »
CREA has national statistics on residential market balance with inventory in months and it is possible to look at regional inventory numbers.
http://creastats.crea.ca/natl/
http://creastats.crea.ca/treb/


Looking for disconfirming evidence but would tend to say that the Canadian mortgage regulatory framework is more "sound" although Timothy Geithner and Ben Bernanke used to give reassurance that was growing alongside implicit and explicit government involvement. And things turned out more complicated than forecasted.

-underwriting standards appear to rely on stronger documentation and clearer rules for down-payments and affordability
-mortgage interest is not deductible and lenders have legal authority to go after borrowers
-the mortgage product is less "exotic", no teasers and the principal is scheduled to go down
-the mortgages are less intermediated

In contrast to the US where the government encouraged home ownership and the subprime wave, I find that, in Canada, the government has "only" allowed an environment where households became "comfortable" with debt and became used to rising house prices much faster than fundamentals. However assumptions relied, at least in part, on mortgage interest rates remaining low and the regulators now appear to be behind the ball.

So, the mortgage markets are different animals when one compares the US and Canada. In 2006-7, an argument can be made that the subprime sector imploded, spread to the rest of the mortgage sector and then the economy went south. For the above reasons, IMO the Canadian real estate market is unlikely to turn badly on its own but different measures show a relatively high degree of vulnerability if the economy experiences a cyclical downturn (for whatever reason). Asset busts are much more painful and longer than the typical cyclical economic busts.
https://www.bankofcanada.ca/wp-content/uploads/2015/12/fsr-december2015-cateau.pdf
see pages 55 and 56 of the document, including Box 1.
But nobody really knows until we find out. Sometimes objects in mirrors are closer than they appear.

It is possible to envisage the possibility of "deep trouble" but the banks should make it through considering that public entities would rapidly rescue and back-stop with the undesirable potential side effect of preventing the deleveraging from bearing its fruit. 
« Last Edit: September 26, 2018, 08:55:35 PM by Cigarbutt »

Viking

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Re: Garth Turner - Real Estate in Canada
« Reply #1765 on: September 26, 2018, 11:54:07 PM »
Obtuse, here is what i use to see what is going in my part of Vancouver (called the Fraser Valley).

http://www.fvreb.bc.ca/stats/

I continue to believe that we have a housing bubble in Vancouver and Toronto. I have been wrong for many years and may continue to be wrong :-) The US had a housing bubble and it popped; this does not mean what happens in Canada is the same (why we have a bubble and what may eventually pop it). One key to me is interest rates. If mortgage rates in Canada continue their march higher higher interest costs will eventually start to bite.

Viking

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Re: Garth Turner - Real Estate in Canada
« Reply #1766 on: September 28, 2018, 10:01:16 AM »
Quote from RBC report on the Canadian housing market; released today. The Bank of Canada continues to increase interest rates. I think we are getting close to an inflextion point. Either economic growth slows, which would then reduce the need for more interest rate increases. Or, as mortgage rates continue higher, house prices start to come down.

“To carry a home bought in the second quarter of 2018 would have taken up 53.9% of a typical household’s income. This is up sharply from 43.2% three years ago Blame interest rates for the rise in ownership costs in the past year… Unaffordability is off the charts in Vancouver, Toronto and now Victoria. Interest rates have a big impact in these high-priced markets… It’ll probably get worse. We expect further interest rate hikes in the period ahead. This is poised to drive ownership costs even higher across Canada. Household income increases will soften the blow for buyers.”

SharperDingaan

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Re: Garth Turner - Real Estate in Canada
« Reply #1767 on: September 28, 2018, 12:57:42 PM »
Keep in mind that Canadian RE shares little simlarity with the US. Loan structure, recourse/non-recourse, regulatory oversight, and a host of other things are completely different. Hence, you're trying to compare apples to oranges. Yes they are both fruits, but that's about it.

SD

SD - can you elaborate when you say sound regulatory oversight? As someone who works in the compliance world, I think the regulatory oversight in Canada is a joke.

What makes you say that the regulators do a good job in Canada?

In Canada. The vast majority of mortgages are issued by federal FI's regulated by OSFI, working closely with the BOC and provincial regulators. Financial stability is maintained by OSFI /BoC stress testing FI capital against various scenarios, and changing the rules as required (new mortgagers passing a 200 bp stess test before the morgage is issued). You do as you're told, when you're told, as your federal FI operates at the 'pleasure of her majesty'. A Provincial FI is subject only to the rules of the Province, usually a lot less strict. But if the Provincial FI is selling mortgages to others outside of the Province, there will be an OSFI 'overlay'.   

So long as a Province 'X' FI meets local requirements it can originate a mortgage in Province 'X'. It can re-sell it to anyone it wants, but a Federal FI will have limits on how much of these Province 'X' mortgages it can hold (originate or purchase). Hence you can originate as much dog-sh1te as you want, but you need an other than federal regulated FI to buy the bulk of those mortgages. So you securitize what you couldn't sell, and it becomes the mortgage investors problem - not that of the Canadian financial system.

The US doesn't have anywhere near this crisp a level of seperation. So when there's abuse - it's easier to achieve system wide 'contagion' and force a financial system 'bail-out'. We burn the investors, and originating Province instead. A scottish thing.

SD

« Last Edit: September 28, 2018, 12:59:52 PM by SharperDingaan »

alertmeipp

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Re: Garth Turner - Real Estate in Canada
« Reply #1768 on: September 28, 2018, 06:59:16 PM »
There are billions of shadow banks and p2p mortgage up there.
Median income of 60 70k, average house price near 1m.
50 percent of condo buyers are investors not end users. Half of those are in negative cash flow position.

It’s going to be very ugly.

Btw, BC is cracking down millions of illegal money that are tunnelling throughout real estate as well.


50centdollars

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Re: Garth Turner - Real Estate in Canada
« Reply #1769 on: September 29, 2018, 05:38:51 AM »
Keep in mind that Canadian RE shares little simlarity with the US. Loan structure, recourse/non-recourse, regulatory oversight, and a host of other things are completely different. Hence, you're trying to compare apples to oranges. Yes they are both fruits, but that's about it.

SD

SD - can you elaborate when you say sound regulatory oversight? As someone who works in the compliance world, I think the regulatory oversight in Canada is a joke.

What makes you say that the regulators do a good job in Canada?

In Canada. The vast majority of mortgages are issued by federal FI's regulated by OSFI, working closely with the BOC and provincial regulators. Financial stability is maintained by OSFI /BoC stress testing FI capital against various scenarios, and changing the rules as required (new mortgagers passing a 200 bp stess test before the morgage is issued). You do as you're told, when you're told, as your federal FI operates at the 'pleasure of her majesty'. A Provincial FI is subject only to the rules of the Province, usually a lot less strict. But if the Provincial FI is selling mortgages to others outside of the Province, there will be an OSFI 'overlay'.   

So long as a Province 'X' FI meets local requirements it can originate a mortgage in Province 'X'. It can re-sell it to anyone it wants, but a Federal FI will have limits on how much of these Province 'X' mortgages it can hold (originate or purchase). Hence you can originate as much dog-sh1te as you want, but you need an other than federal regulated FI to buy the bulk of those mortgages. So you securitize what you couldn't sell, and it becomes the mortgage investors problem - not that of the Canadian financial system.

The US doesn't have anywhere near this crisp a level of seperation. So when there's abuse - it's easier to achieve system wide 'contagion' and force a financial system 'bail-out'. We burn the investors, and originating Province instead. A scottish thing.

SD

Have you asked yourself why the stress test was brought in? I'll tell you. It's because they found out that mortgage fraud is a serious problem in Canada. There is a reason why CMHC is asking the CRA for people's incomes now. https://business.financialpost.com/real-estate/mortgages/exclusive-canada-housing-agency-pushes-for-better-income-checks-to-catch-fraud. It's because its very easy in Canada to lie about your income and most mortgages brokers out there get paid on volume so they don't care whether you can really afford the house or not. Many people were doing this.

The OSC and OSFI were tipped off by whistleblowers about the mortgage fraud going on at Home Capital a year and a half before shit hit the fan. They sat on the information and did absolutely nothing. They only acted on it when the information was leaked to the Globe and Mail and it was published in an article. Is that good oversight to you? Now, even today, most people think Home Capital was a short and distort lol and the reason they do is because OSFI doesn't give the information to the market. The only way you would know this is if you knew an OSC/OSFI employee or someone who left Home Capital, which is how I know. The CMHC knew Home Capital was a problem. They knew there was a lot of fraudulent mortgages pumped into CMHC but even they did nothing. They kept approving them. Not sure how that is good oversight?

Things don't get done on the frontpage of the newspaper in Canada and you will never hear when there is a issue in the financial world unless it is leaked. The reason for this is because OSFI believes that our financial system is small and because it is small, our system can collapse a lot easier. If one bank goes down in Canada, were fucked. If one bank in California goes down, doesn't mean the US banking system goes down. Now, you can argue whether this is the right way to do it or not but I believe all information should be given to the market so people can make informed decisions. People were going long home capital thinking it's short and distort and I don't blame them because how would they know? It wasn't short and distort, there was serious fraud going on there.

Home Capital is just one example where mortgage fraud is a problem. There are others but the market doesn't know about them yet. You will find out when this cycle ends.

The other major problem in Canada is money laundering. The money laundering departments of all FI's in Canada are dog shit. I'm not sure why they even have these departments because the employees in them don't do anything. And I'm talking about the big banks, not casinos in BC. The regulators know about this but don't do anything lol. Even the compliance departments at most banks are a mess. They're mostly country clubs.

The stress test was way too late. That should have been brought in years ago but I'm glad they did it and I hope they get even more strict. They waited way too long. Regulators in Canada have to be tougher. They have to show their teeth. Sadly, most of the time, they don't really do anything.


« Last Edit: September 29, 2018, 06:29:43 AM by 50centdollars »
50centdollars