Author Topic: Garth Turner - Real Estate in Canada  (Read 501408 times)

rb

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Re: Garth Turner - Real Estate in Canada
« Reply #1800 on: November 24, 2018, 10:14:20 PM »
Cigarbutt, I'd say that generally we is us as a society. But more specifically the ones that we as the society put in charge to ensure our well being.

When you get into the weeds, things get more complicated and confusing. The regular person may thing that the Bank of Canada (due to its imposing name) should be on top of this. But BoC's job is mainly inflation. It's not to look after debt/asset bubbles, even though it takes an interest in such things.

Eventually the ones that took charge to reign in the madness was OSFI. Btw, I think that the new regulations that OSFI brought in are very much commonsense and the right way to go about it. But the average Joe has no idea what an OSFI is. To the average person OSFI is one of those agencies that you only learn exists when the aliens attack.

In regards to the comments about BoC raising rates back in 2011. I disagree. In 2011 it was clear that the economy needed low rates. It would have been stupid to raise them at that point. The hike rates argument back then was this: Let's have an economic crisis now so we don't potentially have an economic crisis in the future. That's madness. A better solution would have been this: keep rates low, implement the OSFI rules we put in place now along with a significantly bigger deficit. That would have been smart.

This brings us to the other point you've raised. The deficit. Yes we're running a deficit at the federal level. Yes, it'll be a round for a while. Given the situation that's ok. The reality is that Canada in a strong fiscal position. The debt to GDP ratio is around 30% (the US by comparison is over 100%). The deficit while not small, at 1.9% is fairly benign. Running deficits at this level will shrink debt to GDP. If you're attempting to delever households you don't do fiscal tightening. In fact, if households start to delever the right thing to do will be run up the deficit. No tax cuts either, full spending ahead.

In retrospect this is really a much better time to stop the debt party than back in 2011. The economy is somewhere in the neighborhood of full employment so there's forward momentum. More importantly the US economy is doing well. That means that we can partly export out way out of this mess. The ideal way this happens is that households start to delver, reducing household consumption. That gets offset by higher net exports and government consumption (read higher deficits). By the end we have a debt to gdp ratio in the 40-50% range and no economic crisis.

In practice that requires a pretty difficult balancing act. To implement you have to keep your eyes on the ball and spend huge amounts of political capital. I just pray that our leaders are up to the task. Especially when it comes to spending political capital and take the body blows that come with that.


Cigarbutt

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Re: Garth Turner - Real Estate in Canada
« Reply #1801 on: November 25, 2018, 05:56:16 AM »
^Thanks for the perspective and you wrap it up nicely.
Just in case for international readers, the public debt to GDP in Canada has an unusually high component of provincial debt which, in total, puts us in the OECD pack.

Sincerely, I hope you're right.
When thinking of the real estate picture in Canada, I don't use a Monte Carlo simulation (garbage-in-garbage-out, backward looking, underestimation of correlation between inputs etc) but use different scenarios.
I guess using scenarios is reasonable because our situation is somewhat bizarre especially when I read that Cardboard and yourself seem to be on the same side concerning the inappropriateness to raise rates at this point, which is really a head-scratcher.
In the event that the economy refuses to cooperate and/or austerity (oops! dirty word) becomes imposed, I want to make sure that I can contribute my fair share to our redistribution effort.

I'm also reading my fair share about Mr. Paul Volcker these days (his name is brought up not to argue about what he would do or suggest here but to underline the huge weight on public people's shoulders and their "political" capital). When he "caused" a recession, he was a hated figure and kept receiving car keys and others through the mail and it must have felt awful at the time. But he rose to the occasion and grew taller.

Viking

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Re: Garth Turner - Real Estate in Canada
« Reply #1802 on: November 25, 2018, 09:25:59 AM »
if rates are too low (especially when they are negative real rates) the result will be much more debt. The longer you wait to normalize rates the bugger the debt bubble gets. It then becomes impossible to raise rates to normal levels due to the impact it would have on all of the debt.

Canada is in a bit of a pickle. And add in the challenges currently facing Alberta and the oil patch and it certainly is hard to see how rates in Canada move much higher...

mcliu

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Re: Garth Turner - Real Estate in Canada
« Reply #1803 on: November 26, 2018, 04:47:31 AM »
The other problem is if rates in Canada are much lower than the US, there'll probably be significant capital outflows.


Viking

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Re: Garth Turner - Real Estate in Canada
« Reply #1805 on: December 04, 2018, 12:47:10 PM »
November real estate stats are out for greater Vancouver: https://www.rebgv.org/monthly-reports/november-2018

“The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 12,307, a 40.7 per cent increase compared to November 2017 (8,747) and a 5.2 per cent decrease compared to October 2018 (12,984).”

If inventory continues to grow at such a rapid pace (40%) it will get interesting to see what happens to prices... It certainly is not a pretty picture and the macro backdrop (rising interest rates, tighter lending standards, higher taxes, higher hurdles for foreign buyers, clamping down on Air BNB rentals etc) Will not help.

Liberty

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Cigarbutt

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Re: Garth Turner - Real Estate in Canada
« Reply #1807 on: December 12, 2018, 01:36:09 PM »
^If I may add, CalculatedRISK (which was very relevant pre-GFC in the US), put a relevant piece this AM where he questions Mr. Schiller's assumptions concerning the level of the real estate index in the US now.

I would say that statistical analysis or theoretical models are optional when looking at the diverging paths depicted above.

https://www.calculatedriskblog.com/2018/12/a-comment-on-professor-shillers-housing.html

How far can this go?
It looks like Australia is starting to provide an answer.

Cigarbutt

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Re: Garth Turner - Real Estate in Canada
« Reply #1808 on: December 16, 2018, 06:16:19 AM »
Reason for this post: I’ve held a basket of Canadian banks in the late 90’s, did quite well (eg a quite rapid double with CIBC) but eventually put that result in the failure file (file #2 of 4: good result and bad process) because it was basically luck. I want to invest in Canadian Banks again but need to understand better what will happen to Canadian real estate.

Viking has elegantly suggested the possibility that we may somehow muddle through and that’s a reasonable alternative.

This post was triggered by a phone call and a one-page note.

I understand that a significant fraction of Canadians are hurt by rising rates and profiles obviously vary. A member of the extended family circle recently called me to ask advice about a topic unrelated to money or investment. Going to general talk (during which she offered unsolicited financial advice), it became quite clear that she had become financially stretched in the context of a recent purchase of a new (and quite expensive) car and as a recent owner of a nice condo. At the conclusion of the conversation, I made a mental note to prepare an answer that would not appear condescending in order to politely deflect an eventual invitation to participate in an Occupy-Wall-Street type of event in the future.

The one-page note (see below) shows how 1-the % of mortgage debt servicing to disposable income has remained quite stable although there are small peaks that help to define the concept of margin of safety and how 2-the composition of the mortgage payment has changed over time (principal and interest strip). However what the author considers to be a source of “strength” and financial flexibility may correspond, at least to me, to a terrible misconception if the value of the underlying asset bought and financed is overvalued. In some scenarios, the price obtained upon selling may be a relevant input and a source of significant hardship as the value of liabilities is much stickier than the value of assets. At least, that’s one of the lessons learned from the American Experience in 2007-9.

Putting the anecdotal and the statistical together

An amazing phenomenon that has occurred (in North America at least) is that consumers have responded to improved energy efficiency in cars and relatively cheap gasoline prices (despite environmental and high gas prices headlines) by buying heavier and more expensive cars. Can somebody explain that conundrum other than saying that “rational” people respond to prices? The same way, people have responded to ultra-low interest rates by buying larger and more expensive (and progressively overvalued IMHO) homes and this new era even prompted some (?5% of households) to buy a home when it would have been financially safer to rent one.

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/hot-charts-181214.pdf

What’s the point and why it may be relevant now?

People refer to the “hawkish tone” displayed by the Bank of Canada and describe the recent rise in rates as a “shock”. A link is provided below for historical perspective. If what has happened to the recent mortgage rate trajectory is found to be traumatic, the historical perspective helps to define the extent of the household leverage situation and the precarity of the residual margin of safety for many. The expression that comes to mind for the residual margin of safety is “peau de chagrin” which cannot be translated directly but which means that, at times, all you may be left with is sorrow.

https://www.ratehub.ca/5-year-fixed-mortgage-rate-history

This post is getting way too long but I looked also at the exposure to fixed and variable rates and the nature of Canadian debt, especially the mortgage debt that has a significant fixed component, which is felt to offer protection in a muddling through scenario but which may also happen to be a curse in disguise.

Disclosure: no long position in Canadian banks, yet.

bizaro86

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Re: Garth Turner - Real Estate in Canada
« Reply #1809 on: December 16, 2018, 06:47:32 AM »
This is certainly anecdotal, but banks have started to get conventionally financed properties back in Alberta. (Source: conversations with AB real estate lawyers with foreclosure practices). This is bad for them for two reasons: no mortgage insurance means they are on the hook for the full loss, and in AB conventional mortgages aren't recourse to other assets.

Interestingly, one lawyer I chatted with recently mentioned that BNS has been taking deed backs in lieu of foreclosure (basically short sales) in cases where the borrower comes to them and demonstrates they can't pay. While the other lenders proceed to foreclosure, which dings the credit report of the borrower but costs more and takes longer. Pros and cons to both methods from a lender point of view, but I thought the distinction was interesting. BNS has historically been the most aggressive with mortgages for rental properties in AB, which may be a factor as they likely have lots of conventional exposure to folks without an emotional connection to their property.