Garth Turner - Real Estate in Canada

[wisdom]

Traditionally, an immigrant used to take 3 to 5 years to establish themselves in a new country. And it was on average in year 10 that they would end up buying their first house when they had a down payment ready.

What the new immigrant program seems to have done is front loaded the whole process. Most immigrants now buy within the first year of landing in Canada.

I also feel there tends to be a high correlation between recessions and slow down in immigration in a democratic society. Canada could be on the verge of a slow down. Funnily enough the protest and talk about professional locals not being able to afford a house are starting at the same time as the slow down.

We shall see if it turns out differently this time.

[gary17]

A few may have a million dollar condo in Beijing.  For what it is worth Beijin cost of living was higher than Vancouver when I was there in March. 

The people playing in the 3m plus market in Vancouver are easily very high net worth individuals ... They can afford the mortgage If we count their global assets.   The avg home price in Vancouver is around one million because we have entry level places in the not so speculative markets of Burnaby , Richmond , Coquitlam , etc where "ordinary" folks live lol.

The only question I have is:
Can you confirm most of the deals are being done in cash. If you have lived in Canada for less than 5 years, you can qualify for a 65% mortgage with no income and no credit. I believe it is called the new immigrant program.

I have seen this with many $10 mil purchases in Vancouver. And I do not expect a person who has bought a house for $ 10 mil to say I have financed it.

I would look a bit deeper than just the anecdotes for evidence.

EDIT: Agree with most of the the stuff you are saying. But, here are my other thoughts:
1) Majority of individuals are doing this with $ 1 mil homes - 65% no questions financing. But, I have also seen that most struggle to get good employment once in Canada - for whatever reason. They are currently managing because the housing values have been increasing. What happens when those values aren't rising and they are still struggling for good jobs?

2) In most cases that I have come across this scenario - the money comes from sale of an apartment in a Chinese city ($1 mil range). Let's say I sell a condo for $ 1 mil CAD (after taxes) in Beijing. Move to Vancouver - put down 35% on a million dollar home and live off the $650,000. But, at some point I will need to get a good paying job when the $650,000 is gone. Today, on a $650,000 mortgage your monthly payments would be around $3,000.

I do believe this could continue until either of the 2 things happen:
1) something causes real estate price in Vancouver to fall scaring buyers away from this arrangement
2) anything that causes large real estate losses in China

[wisdom]

The average price for Vancouver is $1.3 mil not including any of the suburbs.

[gary17]

Then average down by the condos and east can maybe. I know condo prices have not moved.

[wisdom]

East Van is right. Condos are not included in Single detached prices.

What I am trying to point out is that is a small section of the population of immigrants not the majority. But, it gets all the headlines.

The investor class of immigrants is a very small number - you can look up the numbers and majority of them settle in Toronto.

[gary17]

Well I think like illiquid stocks. A few buys move the price.
We visited a friend yesterday who bought a new lot in west van wanting to rebuild .  He figures he gets $8m because the last two sales on the block were in that neighbourhood. 

I'm not sure what to do.

I think if I buy in the east van level but in say north Vancouver I could be okay over the long term. Or just get used to condo living.  Nothing wrong. Small environmental footprint lol.

[wisdom]

Gary not sure what the right thing to do is.

If this is a bubble, it is one of the longest in Canada. At some point most people will buy into it.

The other thing that scares me in the number of individuals relying on the real estate market for income. Majority of people I talk to - anyone from doctors, IT professionals to cab and truck drivers - everyone is building on the side. They seem to be doing exactly what your friend is doing. Buy houses for a $1 - 2 mil and build a new home and flip it.

I have 2 concerns -
1) What if majority of the sales in the last few months have been to developers rather than real demand?
2) What happens in 2 years time when all these houses are completed and put on the market and there are no buyers? (If immigration or China slows/Canada is in a recession or interest rates are higher)
3) Since so many individuals rely on this process for income - what happens to their mortgages and multiple properties when the cash flow (music) stops?

It truly scares me when I look at how far it has fed into the local economy because of how long this has gone on.

Could the shortage in lots being available be due to these builders buying at this time rather than real demand.

But, this may continue for a lot longer - who knows.

EDIT:
Because it is difficult to get good employment - most immigrants - Indians, Iranians and Chinese are very heavily reliant on this process for their incomes - building a home if you have capital (self employed), trades until you have capital (immigrants are cheaper) and work longer hours in general.

[SharperDingaan]

A few things you might want to keep in mind …

Big house, no cash. No one forced you to buy more shelter than you need. You did it in the hope of a near-term flip to some other sucker at a higher price, and ... there is no possibility that you may be that sucker.

Foreign investment. Canadian real estate is a very good deal versus global comparatives, and bought primarily to hedge against adverse change. Look forward 30 years - and to most folk, it is pretty hard to see why Vancouver would not trend towards what Hong Kong used to look like prior to the hand-over. Foreign buyers are simply being prudent, and astute.

Negative yield. In today’s world, a high net worth person, depositing CHF into a Swiss Bank for safekeeping - has to pay the bank around 0.25-0.50% to take the money. Or, they could simply buy an A list condo in Vancouver for cash - and pay a property manager to keep it rented, as an alternative store of value. Rent the condo for 3-4 months/year to cover taxes and condo fees, and flip it again for a gain as/when you need the money.

SD

[wisdom]

SD obviously that is happening.

But, if the CAD drops 20% it is not as safe. And this has nothing to do with a real estate market that has gone one way for 14 years now.

On top of that if bonds are in a bubble and interest rates reverse, the calculations on real estate might change as well.

[Hoodlum]

I can tell you that the CMHC is allowing purchasers to use overseas accounts as collateral for mortgages.  There is no method for the CMHC to ensure that these account don't have any other leans against them or if the cash would be accessible when required.  This is likely one of many holes in our existing system and when the market does turn we will start to see what was really happening.

In my area, new homes are going for 20% more than existing resales and many of these new homes won't get built until 2017.  Home owners are hoping that the market continues this upward trajectory between now and when the new house closes.  When the market does turn and house prices drop we will see a lot of home owners in trouble as they won't be able to take on the additional mortgage.  Foreign buyers may just get up and leave rather than deal with the huge losses.