Author Topic: Garth Turner - Real Estate in Canada  (Read 488394 times)

JBTC

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Re: Garth Turner - Real Estate in Canada
« Reply #770 on: March 20, 2016, 07:18:43 AM »
There's some good data in the earlier posts. I'll make a few observations.

1) Rising debt is not unique to Canada, although Canada has indeed behaved worse than most. See the article below. Of the G7, only Germany and Japan delevered during 2000-14.

http://business.financialpost.com/investing/outlook-2016/canadians-household-debt-highest-in-g7-with-crunch-on-brink-of-historic-levels-pbo-warns

2) Debt has increased as interest rates have fallen. So debt servicing capacity didn't increase nearly as much. RBC's affordability report is useful in this regard (thanks to mcliu).

3) As of 2014, Canada's household debt to disposable income was 166%, just behind Sweden, Australia, Ireland, Norway, Netherlands, and Denmark. Denmark was the global champion at 305%. See data below. The debt ratios vary greatly by country. This to me reinforces the notion that there is hardly any ironclad law in economics.

https://data.oecd.org/hha/household-debt.htm

4) In terms of debt level, Vancouver seems the canary in a coal mine for Canada. Globally, perhaps Australia is the one to watch. The two countries are highly similar - key immigration destinations and commodity-driven, and Australia has higher housing prices and debt.

5) For Vancouver, the RBC report suggests that condo affordability has in fact improved. So it's really the single detached that has gone crazy. This is important - so a large portion of the market is mostly ok, and only the high-end is the most problematic.

6) The question becomes - how worrying is the high-end market in Vancouver? What's the consequence if this part of the market falls?

I assume these houses are most likely bought by high-income people, but there is no data. If the poor people fake their incomes and get into these houses, then risk is high. If, as gary suggested, it's the rich Asians who buy them to store their wealth, then risk is low.

Then there are other factors to consider - will the rest of the Canadian economy decline, and drag down housing? Could rates go up? If not, then debt servicing may be ok for now. Any other potential shocks?

I'll stop. Let's dig some more.


wisdom

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Re: Garth Turner - Real Estate in Canada
« Reply #771 on: March 20, 2016, 08:07:12 AM »
From what I see - as I don't have the data to back this up.

I do not believe the major buyers are rich Asians, even though they get all the media attention. They are on the margins.

The biggest player from what I see -  a lot of people have become builders over the last decade or so. Depending on how big these guys are - each individual needs to buy at least 1 property each year if not 2. The slightly larger players are south Asians and iranians. The so called builders often own 10-20 properties. All these properties are financed and at different stages - i.e. some have just been bought as inventory for the  following year projects (20% or so), others have had plans submitted to the city another 20% as these will soon be demolished and construction will begin, another group of properties that are mid-way to being completed, and the last group that is completed and on the market.

Participants from Asia do not even come close to their numbers in the market nor do they hold the same number of properties. Construction has become a very large part of the local economy.

I will add there was a perception here and in the market that Asian buyers were paying cash and I have pointed out several times before that they are also using leverage.
« Last Edit: March 20, 2016, 05:06:35 PM by wisdom »

gary17

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Re: Garth Turner - Real Estate in Canada
« Reply #772 on: March 20, 2016, 08:16:27 AM »
Asians use leverage because the bank deposit rates in China / Taiwan / Hong Kong are higher than the mortgage rates in Canada

HSBC would lend you X based on deposits in GIC in their Asian branches.   and they just pay the mortgage - but the funds are secured.   Further , this practice also demands higher down payment - I believe 30% or more -

my concern with this is if the Chinese economy has a hard landing , our banks will be repossessing some of these Properties.  will they be worth what they are now ?

wisdom

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Re: Garth Turner - Real Estate in Canada
« Reply #773 on: March 20, 2016, 08:20:01 AM »
So we can't compare real estate prices across different countries, but it is OK to compare their debt levels?

I would prefer to compare with historical numbers - Canadian median houses have over the long run been $10k cheaper than the US. Today we are on average $200k higher.

Our median house used to be 2.5x income, today it is  lose to 6x.

Median house to median household income used to be under 5x in Vancouver and now it is over 12x.

Debt to gdp for Canada was 60%, today 100% and increasing faster than GDP.

Every single number you compare with historical stats, it is way off. It is always possible that Canada has solved a problem the Americans and Europeans were not able to = more leverage leads to ever inceasing prosperity or we have reached a higher plateau.

I remain a skeptic.
« Last Edit: March 20, 2016, 05:07:07 PM by wisdom »

wisdom

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Re: Garth Turner - Real Estate in Canada
« Reply #774 on: March 20, 2016, 08:26:45 AM »
Gary - China has been trying to shut down outflows for a while. Initially it was $50k per person. Then Macau got shut down - was a major source. Then HK bank route got shut down.

People were playing with the $50k limit. So now there is a new $200k total limit. So now fake exports are the main source of funds leaving China.

What are the chances that authorities in China actually succeed. If that was the sole reason for Vancouver real estate market going up, I would be even more concerned.

mcliu

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Re: Garth Turner - Real Estate in Canada
« Reply #775 on: March 20, 2016, 10:11:49 AM »
Out of curiosity, how are people playing this? Short Canadian banks? Canadian development companies?

I struggled with that, unfortunately, there's no good instrument to short housing. It's hard to figure out the magnitude/timing and carrying costs for the trade is high. Nothing with attractive risk/reward trades like CDS.
Some possibilities but nothing really worthwhile:
1) Short mortgage insurance (Genworth MI), but carrying cost is high.
2) Short mortgage investment company. Only good candidate is ERM (Eclipse MIC, second tranche of first mortgage + uninsured mortgages), but liquidity is low, sub $30 million market cap, and also high carrying cost.
3) Short banks, but banks carry low LTV or insured mortgages.

Maybe the only option is to long government bonds, since a housing crisis will likely lead to big rate cuts. However, the bubble is centered around 2 cities, and US rates are rising.

If you live in these cities, maybe you can sell your house, or rent. Become a builder, but there's liquidity risks there if you don't complete in time.

Would love to hear if you guys have any ideas.

The biggest player from what I see -  a lot of people have become builders over the last decade or so. Depending on how big these guys are - each individual needs to buy at least 1 property each year if not 2. The slightly larger players are south Asians and iranians. The so called builders often own 10-20 properties. All these properties are financed and at different stages - i.e. some have just been bought as inventory for the  following year projects (20% or so), others have had plans submitted to the city another 20% as these will soon be demolished and construction will begin, another group of properties that are mid-way to being completed, and the last group that is completed and on the market.

Do you know what kind of financing they're getting and from where?

Gary - China has been trying to shut down outflows for a while. Initially it was $50k per person. Then Macau got shut down - was a major source. Then HK bank route got shut down.

People were playing with the $50k limit. So now there is a new $200k total limit. So now fake exports are the main source of funds leaving China.

What are the chances that authorities in China actually succeed. If that was the sole reason for Vancouver real estate market going up, I would be even more concerned.

Also, there's the fact that the amount of mortgage/consumer debt that's been added in the past 7 years in Canada/Australia is much larger than the possible capital outflow that China can inject into the foreign real estate..

wisdom

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Re: Garth Turner - Real Estate in Canada
« Reply #776 on: March 20, 2016, 10:55:19 AM »
Mcliu - there are many sources of financing - all the way from traditional bank spec financing (Prime + 2.25%) to private financing (14%).

For smaller players most of the financing is done on HELOC's on their residence at prime + 0.5% plus a 50% land loan on the new property.

Larger players go to banks and are paying around prime + 2% plus fees of 1-1.5%.

A lot of pools have come up where  investors pool their funds and lend at 12-14%. They net around 7% after costs. Often the 20% down payment required by the regulators is in fact borrowed from these sources as well which I believe leads to under reporting of the real issue. Individuals are also active in this market. Everytime you hear an ad from a fund or broker that you will be approved as long as you have equity in real estate, this is the source. My understanding is no regulator has any idea about the size of this market.

The thing that scares me about these pools is that the money invested in them also includes individuals borrowing on their residences at 3% or so and earning a 4% net spread. This is a source of income for these individuals. If the market ever shuts down, not only  will these individuals lose their incomes and capital, but will owe the amount borrowed against their equity in their residence.

For private builders who are not sophisticated or are in a rush, this private financing is often a source of funds. These are usually few in number but the highest risk players. So far the ever increasing prices keep bailing them out.

One has to remember this works till the music is playing. The only source of payment on these projects is from the sale of property. If the music stops, the builders will not have the cash flow to even debt service as I believe most properties would not be cash flow positive today if people accounted for maintenance. Several of the properties are at different stages of development and there are no cashflows from them. That is when this market should get interesting.

 The music has not stopped for 16 years now - the longest cycle so far.

The belief is absolute that we live in the only special place in the world and we are headed to having an average house valued at $2 mil now on median household incomes of $75, 000.
« Last Edit: March 20, 2016, 11:07:32 AM by wisdom »

Liberty

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Re: Garth Turner - Real Estate in Canada
« Reply #777 on: March 20, 2016, 11:45:03 AM »
Out of curiosity, how are people playing this? Short Canadian banks? Canadian development companies?

I'm renting.
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gary17

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Re: Garth Turner - Real Estate in Canada
« Reply #778 on: March 20, 2016, 12:09:22 PM »
Out of curiosity, how are people playing this? Short Canadian banks? Canadian development companies?

I'm renting.

Would you ever buy? 
Under what condition in this country would you enter the RE market?

RichardGibbons

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Re: Garth Turner - Real Estate in Canada
« Reply #779 on: March 20, 2016, 12:34:33 PM »
Would you ever buy? 
Under what condition in this country would you enter the RE market?

For me, living in Vancouver, I'd buy a detached home when the cost to buy that detached home is negligible relative to my net worth.  So, I'd treat it like buying a luxury car--a depreciating asset I'd buy for fun, but expect to lose significant amounts of money on.

(Alternatively, I'd buy it when the math made sense, but that looks unlikely from here.)