Author Topic: Garth Turner - Real Estate in Canada  (Read 487198 times)

Studesy

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Re: Garth Turner - Real Estate in Canada
« Reply #30 on: February 29, 2012, 08:35:42 PM »
Great discussion everyone. As a Canadian, I also see the bubble we are currently experiencing.  Knowing with any reasonable level of certainty whether the bubble will burst or growth will remains flat the next 10 years would be way above my capabilities.  It is obvious however, that with the current market fundamentals and the previous 10 yr. track record, real estate as an investment at this point would not have an adequate MOS. On the other hand, I do think that this applies mostly to larger cities (as far as high prob. of significant capital losses anyway). 

As an example, I live about 1.5 hrs. west of Toronto, close to 401 in a small village between London and Woodstock. It's in a new subdivision of about 30 houses so far on a about 1/3 acre lot. The house is a 2-storey, about 2100 sq./ft, 2 car garage. We paid $275,000 in March of 2009 and the property taxes are about 2800/yr. You can buy the same house today for $295,000.  Noting the overvaluation in Canada's big cities, I have always thought to myself: what is my downside on this place?

Lets say the replacement value of just the building is $200,000.  This means I paid $75,000 for a 1/3 acre serviced lot.  Ok...off to Toronto.  I'm guessing the same house, on a much smaller lot would cost around $600,000 (someone correct me if they think this is way off..just a guess). So the replacement cost of the house is $200,000...same as my house. The land therefore cost $400,000.  Assuming we don't see significant deflation, that replacement cost isn't likely to change drastically. Therefore, it is land value decreases that we have to worry about the most I think. With a 20% decrease in residential land values nation wide, I would think I have a lot less to lose on both a absolute and relative (return) basis.  This is because the portion of the asset that is most likely to decrease in value is a lot smaller piece for me than the guy in Toronto. But its quite possibly less liquid.

I don't think a lot of Canadians realize this....they think real estate just goes up forever. Over the very long term, they are right...but I believe the long term averages are only slightly above the inflation rate. After 15 yrs of huge growth, the probability of losses has to be much higher than say after a 15 year period of 3% growth.  Real estate is so difficult to value. Theoretically, rental rates for any given property, should determine the value.  However, if the rates are not predictable with a high level of certainty...it makes it pretty tough.  I think the only true "investment" in real estate is 1) buying distressed ( i.e., paying significantly less that the replacement value of the building plus getting the land free) and waiting  2) buying a property for a "good" price that has some sort of a competitive advantage or moat ( ie due to prestige, geographic location..etc.) I also think it would be much easier from an investment standpoint to stick with #1.  Buffett is on #2 so is Brookfield





Liberty

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Re: Garth Turner - Real Estate in Canada
« Reply #31 on: February 29, 2012, 08:42:07 PM »
I haven't read Turner's blog.  Did see him speak many years ago.  He puts on a hell of a show and makes alot of money on the circuit.

I suggest you read at least this one, if only for the graphs that are based on data from other sources:

http://www.greaterfool.ca/2012/01/08/in-the-end/

It doesn't 'prove' anything - no one can predict the future - but those data points (and others elsewhere) are certainly cause for great concern, IMO.

Quote
Worth considering why he says what he says.

Absolutely true. Make sure to apply the same standards to all those economists working for banks, realtors, gov't officials, etc, though. For each Garth out there, there are thousands of people inflating the bubble. And that's not counting the millions of homeowners who just won't see any problems with real estate because they have huge sunken costs.
« Last Edit: February 29, 2012, 08:54:04 PM by Liberty »
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Studesy

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Re: Garth Turner - Real Estate in Canada
« Reply #32 on: February 29, 2012, 08:52:34 PM »
@Liberty   Couldn't agree more. Even without those charts...after the 15yr run we've had it's a no brainer that one would have to be very careful looking at real estate in Canada's big cities..as an "investment" anyways.  As far as the exact way things play out the next 6 months or 5 yrs its hard to say.  But I doubt will see the same growth the next 10.

Liberty

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Re: Garth Turner - Real Estate in Canada
« Reply #33 on: February 29, 2012, 08:58:11 PM »
But I doubt will see the same growth the next 10.

Unless wages more than double in a very short period of time and interest rates never go back up to historical averages, I just don't see how people who make 60K can afford these 800k+ bungalows and condos, or how the average house in Canada can cost twice the average house in the US... It just doesn't make any sense. Who knows how long it'll last, though.
« Last Edit: February 29, 2012, 09:25:19 PM by Liberty »
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Studesy

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Re: Garth Turner - Real Estate in Canada
« Reply #34 on: February 29, 2012, 09:07:24 PM »
I know its crazy.  I'm not one for shorts but it would be interesting to find a publicly traded land developer who is sitting on a lot of serviced residential land in Toronto or Vancouver. A company with a huge debt load and low margins when things were good.  The land isn't likely to be reverted to farm land if it has been serviced.

Studesy

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Re: Garth Turner - Real Estate in Canada
« Reply #35 on: February 29, 2012, 09:09:38 PM »
Timing is the hard part though. Better off finding assets on sale!

WideMoat

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Re: Garth Turner - Real Estate in Canada
« Reply #36 on: March 01, 2012, 05:58:22 AM »
I really have no idea where people are getting this speculative money from.  I am guessing it is financing through developers, and non-bank mortgage companies, and of course the CMHC. 

This is the crux and where we need an answer.  Unless developers and non-bank mortgage cos also hold the loans for investment, they are just a conduit. 

Is it really true that no lender will grant more than 80% LTV in Toronto and Vancouver?  In the US, during the bubble, there were mortgage brokers popping up everywhere, from strip malls to commercial towers.  They were all offering loose terms, and offloading the loans as quickly as they could churn them. 

I see stuff like this--http://www.notapennydown.com/--and it all starts to look very familiar.

Most specifically, what do we know about places like Verico?

On their quite amateur website, they list the following as "preferred lenders":   

AGF Trust   
Bridgewater Bank
    Capital Direct
    Cove Mortgage
    First National Financial LLP
    Firstline Mortgages
    HomeTrust Company
    Industrial Alliance Pacific
    ING Direct
    Laurentian Bank
    MCAP
    Merix Financial
    National Bank
    Optimum Mortgage
    Resmor Trust
    Scotia Mortgage Authority
    Street Capital
    TD Canada Trust
    VERICO Mortgage
    XCEED Mortgage Corporation
 

SharperDingaan

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Re: Garth Turner - Real Estate in Canada
« Reply #37 on: March 01, 2012, 06:34:07 AM »
Change the game.

ie: Buy a house/condo in city X, sell a long lease (25-40yr) on the land inclusive of property tax. Lessee lives in the shelter (house) on top of the land, pays the utilities, & maintains the property if desired. Lessor hands over the shelter keys, pays the annual property tax, walks away, & re-leases or levels/re-develops the property at the end of the lease.

The lease is a bond, valuing at the PV of the remaining CF. Maximum value is at initiation & in a low risk environment. Lease value declines every year & terminates at zero. Shelter cost between yr X & Y is the difference in lease value, identical to depreciation in a vehicle purchase. Shorter the lease, the lower the price, & the less/no need for mortgage financing.

Kiltacular

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Re: Garth Turner - Real Estate in Canada
« Reply #38 on: March 01, 2012, 08:23:42 AM »
Quote
This is exactly right.  Mortgages are non-recourse in the US, which is why "it's different" in Canada.  You have to declare personal bankruptcy to get out of your poorly devised home ownership plan.  The result is that downward price trends are throttled because home owners can't just walk away like they did in the US.  I think RE prices will be forever buoyed by two things that people are loathe to do: one declaring bankruptcy and two selling at a loss.

I'm not sure you all fully appreciate what happened in the U.S. 

First, not all U.S. states have the protection you describe above.  While California does, some other large states -- I believe Florida -- for example do not.  I'm not going to go check but others here can.  Ultimately, it hasn't mattered which type of state you live in.  The biggest risk-takers have suffered the least relative the those that didn't take the risks.

Second, even in a state with such protection -- California as an example (which I'm familiar with and which is huge...12% of the U.S. population -- the protection DISAPPEARS once you refinance the loan.  And, of course, in order to "get cash out" you have to refinance the loan.  Naturally, this stipulation was to discourage people from doing excatly what they did do -- take out all their new "equity" and spend it.  Since most of the people that got in the largest amount of trouble had given up their non-recourse status, they should have suffered.  Yet, the banks -- by and large -- haven't gone after people.  Moreover, of course, most people didn't (don't) have any signifcant recoverable assets.  This rule -- where it applied -- had little practical effect on preventing the bubble.

Third, an additional discouragement was that if a homeowner engaged in a short-sale -- where the effect was that the lender "forgave" a large amount of the loan balance -- the dollar amount difference between the loan balance at the time of the short sale and the ultimate amount the bank accepted from the borrower was treated as income by the taxing authorities.  This law was summarily changed after the fact to protect those that had made idiotic decisions.  There were / are a lot of voters in this group, ya know.

Considering all three of these factors have gone out the window, the people taking the largest risks have suffered the least relative to their folly.

Moreover, those of us who warned about what was happening, while it was happening, and pointed out these negative aspects while the bubble grew ever larger, now see that as long as enough voters suffer together, the rules will be changed after the fact.  We're the chumps.

To now add insult to injury, those of us who stewarded our capital and, say, put it into the equity of a bank rather than into a home, have to listen as the banks are blamed for loaning money to these fools: "They should have known better", and then, when the fools (voters) can't pay (even though many of them took out all their gains -- my original point), the banks are blamed for not "properly foreclosing" (aka: robosigning).  As if poor foreclosure practices were the cause of these people not paying their contractual obligations in the first place.

Like I said: Comical.

But, and I mean this not in jest, I have no idea if this is likely what is going on in Canada.

VAL9000

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Re: Garth Turner - Real Estate in Canada
« Reply #39 on: March 01, 2012, 08:35:28 AM »
You don't need ppl to throw away their houses to get prices coming down quickly. When there is no bid, a few sell will do the wonder.
As I said, people are unwilling to sell at a loss, generally speaking.  The situation you're suggesting requires some kind of forced sale.  The vast, vast majority of people who have mortgages in Canada today are able to make payments with their current income streams.  The forced selling scenario is one of unemployment.  Which means we're not forecasting an independent real estate bust, we're forecasting a sustained rise in unemployment.  Which we just went through.  House prices weakened for a year and then shot back up again.  Granted, it was a pretty mild spike - from 6% to 8.5%.  The unemployment spikes from the 80's and 90's were much more severe and resulted in much more drastic drops in real estate prices.

how the average house in Canada can cost twice the average house in the US
I think these are two major contributors to that conundrum:
 - CAD/USD exchange - typically the Canadian dollar trades at a > 20% discount to the US dollar, but more recently the Canadian dollar has been trading at par.  If the dollar corrects itself (i.e. a US recovery is in full swing), then the price gap between Canadian and US real estate will narrow.  If it doesn't then maybe real estate values will do the correcting.
 - 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.

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.  It is fun to get a better understanding of the real estate picture, though.  My fundamental belief is that homes are not normal assets.  They are romantic, reusable, and they have significant utility for the buyer.  I would never view a home as anything other than an expense and I encourage everyone I know to consider homes this way.