Author Topic: Garth Turner - Real Estate in Canada  (Read 493379 times)

VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #50 on: March 03, 2012, 05:34:07 PM »
I don't see how that would change anything in a RE bubble bursting panic. Please elaborate.
My point about how quickly the prices rose in the 80's vs. today is that the more people who are "in it" means that the price is more real.  i.e. a meteoric rise is more readily followed by a spectacular crash, whereas a more steady rise gives the pricing more credibility.

I think the baby boomers reached house-buying age many years earlier than that, but they are now certain reaching retirement age, and they haven't saved anything, and most of their net worth is in a single asset, their houses. They're all going to want to cash out at the same time in the next few years, 9 million of them.
Some of the boomers reached home buying age that early, but the cohort spans 20 years.  Many, many more were in a position to buy homes in the late 80's than in the late 70's.  The boomers will not cash out at the same time over the next few years.  Many started retiring 5-10 years ago, and the latter half of the cohort can expect to prolong their retirement past today's national average of 63 years.

Boomers have saved quite a bit.  > 70% of them have pension plans, the median of which is about 240k.  Something like 55% of assets held are in financial instruments.  The home is a big chunk of the asset mix, but this is an historically faithful asset composition.

It looks like everything else we're debating is speculation.  I think your viewpoint has merit - namely that prices are high based on conventional (and warranted) measures and that boomers will need to liquidate their positions in the next 20 years.  This will put downward pressure on the market.  My own theory is that prices have been pushed into new territory because urbanization is a new and growing trend, and urban density justifiably moves prices above inflationary growth.  I continue to believe that real estate will defy traditional economics (for dozens of reasons), but that anyone buying today (or ever) should err on the side of caution and look for value where possible.


Liberty

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Re: Garth Turner - Real Estate in Canada
« Reply #51 on: March 04, 2012, 04:32:50 PM »
My own theory is that prices have been pushed into new territory because urbanization is a new and growing trend, and urban density justifiably moves prices above inflationary growth.

Do you, or anyone else, have any examples of this taking place anywhere else over a short period (1 decade)?

Not that I think Canada's urbanization pattern has changed that drastically over the past 10 years or that urbanization without increases in wages make debt any safer, but I'm still curious to hear more about this theory.
« Last Edit: March 04, 2012, 04:35:41 PM by Liberty »
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SharperDingaan

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Re: Garth Turner - Real Estate in Canada
« Reply #52 on: March 05, 2012, 05:12:34 AM »
Real Estate was the traditional investment vehicle for the masses, before the advent of the mutual fund industry selling stocks/bonds as the replacement. If you didn't understand/trust the market you bought bricks/mortar, often in your own town, & because in the worst case - you/familiy could always live in it if you had to. Market reversals are driving mean reversion. Board interest in this string is anecdotal evidence.

Sons/daughters need family help to buy a McMansion. Mom/Dad become grandparents sooner, & get to see their grandkids more often, if they put up the funds. Mom/Dad also get to cash out of THEIR McMansion because there is now a buyer. No different to liquidating a position by creating liquidity & selling 5 units for every 4 bought.

     

VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #53 on: March 05, 2012, 06:24:23 AM »
Do you, or anyone else, have any examples of this taking place anywhere else over a short period (1 decade)?

Not that I think Canada's urbanization pattern has changed that drastically over the past 10 years or that urbanization without increases in wages make debt any safer, but I'm still curious to hear more about this theory.
Not exactly.  There are a few markets you can look at to make comparisons.  Hong Kong's market is pretty pure in that 100% of the market is urban.  Density has come up 50% over 30 years and property prices have come up 10 fold.  Japan's density is up about 10% with more recent years seeing negative growth in density.  Over there the real estate market has been coming off highs for nearly two decades.  In these cases, if you consider Toronto's urban density has grown about 20% over the past 10 years or so, something between negative prices and ten fold growth seems "normal".

Another way of thinking about this is by relative property values based on density.  Vancouver costs more than Toronto, which costs more than London, On, which costs more than Woodstock, On.  Looking at this kind of evidence, it is reasonable to say that more densely populated areas are worth more.  A more rigorous approach would be...  The amount of land in the Toronto area is fixed, but 20% more people live there.  All else equal, the land is at least 20% more productive.  Although, due to network effects, my belief is that a 20% increase in density results in a greater than 20% increase in productivity. 

Urbanization has come up 6% in the past 30 years, overall population density has come up 65%, and Canada's real estate market is mostly made up of 4-5 major urban centers.  This gives me some comfort in the idea that real estate in Canada should be rising at a rate greater than inflation, which at least puts a floor under real estate prices.


VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #54 on: March 05, 2012, 06:35:16 AM »
- Urbanization - US and Canada have similar urbanization rates, but Canada's is much more concentrated at the high end.  About 7.5% of the US population lives in cities with a population > 1mm.  In Canada, this number is 50%.  That's crazy.  As a comparison, for cities of populations > 100,000, you're looking at only 28% of the 300mm people that live in the US.  That means that 75% of Americans live in cities smaller than Waterloo.  So that's another major contributing factor for why real estate prices are so comparatively high.

This sounds crazy...  because it is.  My analysis here was flawed.  I compared apples (city populations in US) to oranges (metropolitan areas in Canada).  Overall urbanization is about the same between Canada and the US.

VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #55 on: March 05, 2012, 07:03:12 AM »
I am somewhat regretting wading into this discussion about house pricing because it's kind of pointless.  It's like trying to forecast the price of gold or any other non-producing asset.  The price of real estate depends too much on other factors - it can't be forecasted independently.

Real estate is a producing asset.  That's how you know that it's overvalued.  I think it has fewer influencing factors than most stocks.

I didn't say that real estate wasn't a producing asset, I said it was difficult to value like a non-producing asset.  The reason is that so much of real estate isn't about productivity.  The productive capacity of a granite counter top is about the same as a laminate one, but the price they command is different.  There are 1000's of examples like that, hence why I think it's hard to value.

One of the pricing tools for real estate that we've mentioned here is price relative to rents.  I came across this document from the CMHC:
http://www.cmhc-schl.gc.ca/odpub/esub/64691/64691_2011_A01.pdf?fr=1330958975066

It shows that the cost components of home ownership have all grown faster than rents, which only grew about 11% over 10 years.  Meanwhile, the vacancy rate (in Toronto, anyway) hasn't moved around much - between 2 and 3% for that decade.

Is there an argument that rents are too cheap?  Will they rise rapidly now that we're at a home ownership saturation point (from 62% to 70% - at the level where US real estate started to come down), while overall population is still growing?

Just a thought.

ERICOPOLY

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Re: Garth Turner - Real Estate in Canada
« Reply #56 on: March 05, 2012, 07:43:40 AM »
I haven't seen data on this, but I think you'll probably find a correlation between rising total Canadian mortgage debt as a % of Canadian GDP and rising housing prices.  When mortgage debt is on the rise as a % of GDP, home prices rise faster than trend, and they rise slower than trend (or fall) when the ratio of mortgage debt to GDP retreats.

This is what Steve Keen does in Australia and it seems fairly convincing.  He's not just looking at population trends as a measure of demand, but rather looking more closely at the financial demand.



« Last Edit: March 05, 2012, 07:45:36 AM by ERICOPOLY »

RichardGibbons

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Re: Garth Turner - Real Estate in Canada
« Reply #57 on: March 05, 2012, 08:59:30 PM »
One of the pricing tools for real estate that we've mentioned here is price relative to rents.  I came across this document from the CMHC:
http://www.cmhc-schl.gc.ca/odpub/esub/64691/64691_2011_A01.pdf?fr=1330958975066

It shows that the cost components of home ownership have all grown faster than rents, which only grew about 11% over 10 years.  Meanwhile, the vacancy rate (in Toronto, anyway) hasn't moved around much - between 2 and 3% for that decade.

The data says "there is enough supply -- the vacancy rate hasn't moved and the rents aren't going up.   But the costs of home ownership have skyrocketed.  Thus, home ownership is in a bubble."   It seems odd to me that you want to interpret it as something else.

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.

VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #58 on: March 06, 2012, 07:23:36 AM »
The data says "there is enough supply -- the vacancy rate hasn't moved and the rents aren't going up.   But the costs of home ownership have skyrocketed.  Thus, home ownership is in a bubble."   It seems odd to me that you want to interpret it as something else.
Is it odd to invert the conclusion?  I'm exploring the idea that instead of homes being too pricey relative to rents, maybe rents are too cheap relative to homes.

My line of thinking was..  A greater portion of renters have been converted to home owners.  Vacancy rates have remained steady.  So I conclude that rental demand and rental supply are in balance.  If the growth in home ownership as a percentage stops and holds at 70%, then relatively more demand will be placed on the rental market, which should push up rents.

It's largely explained by Ericopoly's point, that there's been a massive increases in borrowing.  When rates are low, People are willing to borrow huge amounts of money to buy houses, but, for some reason seem to be reluctant to borrow money to pay their rent.
Yep, and that makes perfect sense to me.  Trust me, I am working my ass off trying to refute the theory that homes are overvalued and I'm not really getting anywhere ;)

Actually, I think it's time for me to throw in the towel on this side of the debate.  I've run out of ideas to justify Canadian home prices at their current levels, and the ones that I've come up with aren't robust enough to flog.  The evidence of bad things on the horizon is just too prevalent, and try as I might, I can't imagine a scenario where it ends well with this amount of leverage involved.

Thanks for the debate (Liberty especially.  I owe him for always being a good sport.) - I think you are right and that I am/was wrong.

Liberty

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Re: Garth Turner - Real Estate in Canada
« Reply #59 on: March 06, 2012, 07:49:53 AM »
Thanks for the debate (Liberty especially.  I owe him for always being a good sport.) - I think you are right and that I am/was wrong.

Well, thanks for being a good devil's advocate. I can't take credit for most of what I've said in this thread, as I've found these ideas elsewhere.

A few weeks ago I, like most average canadians, believed that "it's different here" because "our banks are so strong and so careful about lending" and so on... But when you dig a bit, you realize it's all BS, and giving people a false sense of security, which is dangerous in itself. We have our own version of sub-prime lending here, with banks insuring so many loans with CMHC (which are then packaged and sold afaik...) that they don't give a crap about due diligence because they're not on the hook. People have pigged out on debt and leverage and that's rarely good.

In fact, the more I think about it, the more I believe that one of the most important psychological factors in how long this bubble has been going on is that we mostly avoided the US crisis. This tells people: "See, we're fine here, this can't happen here, or it would have already when things looked worse a few years ago".

After all, look at any bubble you want, and without a widespread psychological failing, they wouldn't inflate. Peple would look at the fundamentals and go "hmm, no, this isn't a good value". But in bubbles, they ignore fundamentals and think that "this time it's different" and all wish they had bought sooner so they could have benefited from the price inflation, so the next best thing is to buy now (before being "forever priced out!").
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