Garth Turner - Real Estate in Canada

[gary17]

don't forget we have parity or close to parity which is why we feel things are cheaper in the US!   Rewind a few years back when we were at $1USD: $1.25 CAD I think most thought then things were reasonable in Canada !   My personal view is our dollar should be valued at about $0.80 - $0.85 ---  Gary

[leftcoast]

Good article about foreign ownership of real estate in Canada, and Vancouver in particular. Interesting to see the comparison with Australia.

http://www.huffingtonpost.ca/2014/08/27/foreign-real-estate-ownership-canada_n_5718705.html

Vancouver’s rise to become the second most expensive housing market in the world — the average detached home is now worth $1 million — cannot be explained by local incomes, which are well below the average of major Canadian city centres.

The math simply doesn’t add up to explain what is happening in the market.

Just over half of Vancouverites believe there is too much foreign ownership of real estate in the city, according to a 2012 poll. But in a statistical vacuum, no one knows for sure.

Estimates for foreign-owned downtown condos in Vancouver and Toronto range from less than five per cent to a whopping 50 per cent.

There’s no question that home ownership in cities such as Sydney, Vancouver and London has become a trend among affluent Chinese, sparked partly by policies in China that make owning a second home an extremely costly endeavour and prevent them from transferring large sums of yuan out of the country directly.


...

Countries including the U.S., Denmark, France, Mexico, Japan, Turkey and Singapore have not only implemented methods to collect data on foreign investments but have also invoked tax policies to curtail the trend.

Eyeing the potential for an investment bubble in London driven by foreign investors, the U.K is implementing a capital gains tax for foreign investors selling homes beginning next year.

Hong Kong’s government has levied a 15 per cent tax for non-residents who buy property — in part to curb fears their market will be overrun by mainland Chinese speculation. Denmark forbids foreign buyers from purchasing waterfront property and the U.S. places heavy taxes on the sale of foreign-owned houses.

Meanwhile, Canada’s hands-off approach — whether out of politeness, lack of know-how or self-interest — puts it in the minority among industrialized countries by remaining in the data dark.

[SharperDingaan]

There is always a bad guy; in London it was the Arabs following the oil boom, then it was the Russians, now it is the Chinese. The reality is that many of these properties are actually rented out (to friends) at below market rates -  & it is often flight money, bribe money, or money laundered funds making the purchase. Players change, but the asset itself stays; realty fees & higher property taxes are just the cost of doing business.

Locals bitch because they couldn't match the bid, are not the friends getting below market rates, & cant make their case for deferred taxes because of difficulty paying bills (as those rich guys ARE paying, & ON TIME). The fact that locals benefit from the modernized services financed by those property taxes, & higher borrow capacity resulting from rising property values - is conveniently ignored.

You don't need people actually using the place - as Abu Dhabi, & much of Dubai proves. But you have the place, & debt free, because it is an emergency asset that you can use - should you have to flee home with nothing but the shirt on your back. Exiles are routinely created every day.

Taxing is also not the answer (UK). You simply flip the place into a locals name, retain a call option at the purchase price, & agree the annual fee on the option for the next 99 years.

SD

[wisdom]

Check out what happened to real estate in Dubai in 2008/20009. That is the problem with hot money.

[alertmeipp]

It's not hard to see various real estate bubbles and subsequent bursts afterward. They do happen and it will go to downside as irrationally as they do to the upside.

[SharperDingaan]

Re Abu Dhabi/Dubai. Much of the building was built on money laundered funds. $ in to create a bank -> new build real estate financed by that new bank -> new real estate built at higher prices to bubble it -> loan against the appreciation to repatriate the $ in. Bank is collapsed (crises), the kingdom takes over the shiny new buildings, & offers cheap rent in Grade A buildings to anyone who would like to start-up/open a business catering to the ME. Very smart.

The same process built Vegas, & Havana; just different players. The Paris of the ME was already taken (Beirut), so we got Disney Land instead - just keep in mind that Beirut, Abu Dhabi, & Dubai were all long established trading ports before the West found them; & hot money has been around for a very long time.

On any given day the status of Hong Kong could be revoked, making it just like the rest of China - & it would wipe out the wealth of anyone in Hong Kong that is not in gold. So to insure survival ... periodically sell down/borrow against HK assets, invest the cash in Vancouver RE .. & you will never be poor. Vancouver RE gets a steady ongoing inflow of new cash - but the value of the condo to a HK buyer is primarily safety, not shelter. If it goes down 35% next week, it is largely irrelevant.

It could never happen here is fallacy - ask anyone from Beirut.

SD


 

[Kiltacular]

Allowing these huge bubbles in residential real estate is insane.  It destroys the middle class; they get extraordinarily angry; the search for a scapegoat.  The young people who feel it is a bubble have to argue with wife, friends, family and look like idiots if they don't go along.  It is nothing like the stock market. 

If Canada is allowing HELOC's and all the attendant things that went on in the U.S., the pain will be massive.

The whole U.S. stock crash was caused by the housing mess.  (Whereas, the huge correction in the early 2000's was caused by a massive bubble in stocks in 1997-1999.)  The real estate mess in the U.S. practically cratered the world.

Sell Canadian banks?  Or, does the gov't underwrite?

[SharperDingaan]

Most argue that RE bubbles are actually a plus. New houses get built, old areas get repurposed, infrastructure gets upgraded (water, sewage, transit, etc.), higher paying jobs from related construction, additional RE commissions, etc. But like anything, abuse it - & you will get burnt.

Canada has long had HELOCs & some of the US instruments. Unlike the US, the market levers are much more tightly controlled - & OSFI/BOC/CMHC routinely tighten to cool down markets. Folks will be angry no matter what; whether a bubble was allowed - or they were prevented from borrowing under tighter rules.

House ownership is not an entitlement, & neither is a short commute to work.
CMHC outlived its main purpose of enabling returning servicemen (WWII) to buy a house (stability) & start families, many years ago.

SD

[Liberty]

Some people will argue the same thing about the internet bubble (think of all the extra fiber that was laid out, etc).

Doesn't mean a lot of people won't get creamed. RE bubbles are a plus for those who rent and wait on the sidelines or those who luck out and sell at the top and don't just turn around to buy a similarly expensive house. Not for everybody else.

[Liberty]

I found this article interesting:

I think European households are wealthier than the U.S

Average US household net worth: $381,000
Average Canadian household net worth: $400,000. ( or ~$650K in Vancouver )


Despite long work hours, tremendous opportunity, and inventing so much of what we use every day (iPhone, Android Phone, iPad, Chromebook, Intel processor, Nike shoes, Google, Yahoo, YouTube, AirBnB, Pandora, etc) Americans are not the wealthiest ones in North America. Canadians are King and Queen thanks to their extraordinarily strong housing market and Social system of governance. With stronger governance comes better managed financial institutions. A wider taxation net also helps ensure that a country is more united.



http://www.financialsamurai.com/the-average-canadian-household-net-worth-is-huge/

That's counting the value of their houses, though. Look at their liquid assets and incomes and the picture will be different, I'll bet.

I'm sure american investors all seemed a lot richer too at the top of the dot-com bubble, but it wasn't real value.

I think it's crazy and circular to use house prices to justify high house prices ("see, people have a high net worth, they can afford these expensive houses. Oh, what's their net worth mostly composed of? Houses, of course....").