Garth Turner - Real Estate in Canada

[SharperDingaan]

The price has risen because demand for Vancouver real estate has consistently exceeded the supply over the last 14 years. The Hong Kong handover ceremony was 1997, and it came with a number of transitional provisions expiring 2000. As those provisions expired, Hong Kong funds began to flow out, and were initially spread over a number over of markets. As the investment results developed, Vancouver (and Toronto) captured a growing market share of the rising flow, and local real estate prices have risen accordingly.

Yes there is price risk, but it is minor. The Hong Kong gate will not remain open forever, but when it closes; it will be sudden, absolute, and will stay closed for a very long time. If the price of the condo collapses 70% it really does not matter – what matters is that you got the funds out, it is in a safe place, and your family has options.

Price risk declines significantly, the more you can make on the Canadian property during interim flips. Concentrate the recycled and new inflow on select markets, and you can generate a reliable bubble of rising prices. Sell into the bubble for a gain, reinvest the proceeds in other Canadian real estate, and when the door closes – you will not be one of those down 70%.

Everything to this is exceptionally rational; it is just not what most Canadians are accustomed to. It is also not that unusual, re foreign investment in London (UK), New York, Paris, Milan, etc.

SD

[alertmeipp]

If u believe the rate will go up eventually back to 5% which makes the mortgage rate 6 or 7 percent , house price will come down.

Yes,  the cash buyers won't need to sell. But they won't be significant driver there. 

[wisdom]

SD you should check out how many locals own 10 to 40 properties and are leveraged all the way. I would recommend not falling prey to media stories that this is all Chinese money.

Maybe Vancouver is the next London, maybe not. The jury is still out.

[SharperDingaan]

I hear you, but I also know there are very different segments within every market. There will always be the foolish who will over-leverage and blow themselves up.

Most folks just do not get why anyone would knowingly buy a condo at an inflated price, when they know it could be worth cents on the dollar tomorrow - even when you are pretty sure that you may well be the bag-holder at the end. But talk to anyone who has had to flee a country with nothing, or been trapped in a country, and the answer becomes abundantly clear. Your life, a safe bolt-hole, and a marketable grubstake are the keys; you simply accept that you will be a distressed seller, and have no expectation of getting full value for the asset.

Example. Canadian kids have been so successfully vaccinated against measles and polio for successive generations, that most people now have never seen an all-out death from one of these diseases. They were called child killers for a reason, and hard deaths were routine. But because we have not seen it - we dismiss it. In grandpas time there was no vaccine ….

SD

[alertmeipp]

Toronto up like 15 percent year over year.
Sky is the limit.

 

[Yours Truly]

Who needs the stock market when you can just flip single-detached homes in Toronto and Vancouver and declare it your principal residence (and incur no taxes on gains)? ... says a lot of non-financial folks

[Liberty]

https://twitter.com/benrabidoux/status/608612145991938048

[gary17]

http://www.cbc.ca/news/business/average-house-price-rose-8-in-may-to-over-450k-1.3113533



I recently had a chance to talk to a few agents with a lot of clients from China... yes, they are mostly buying in the high end Vancouver market... interesting the 5 major banks would lend these new immigrants money with no income in Canada, as long as they can show them proof there is income overseas.   min. downpayment is 35%. 

So with the ultra low interest rate here in Canada for the mortgage, and relatively higher savings interest rate in China; to many Chinese buyers, taking out a mortgage in Canada is like 'free money' to them...   the interest from the savings account in China basically pays for the mortgage interest + principal. 

I can see why money is flooding into Canada now...   

I suppose once the interest rate spread decreases - either due to increase in Canadian rates or lowering of Chinese rates - then the market could go back to normal levels.

Gary

[wisdom]

Gary, I have raised this a few times and I will repeat - you do not even confirm income overseas. All they need to do is have a reasonable explanation about their source of income. Why, because it is really not that difficult to provide fake documents and a Canadian employee would not know any better. In addition, a Canadian bank has no recourse on income or assets outside Canada.

Mainland Chinese have not experienced falling prices in RE so far, ever since they were allowed to own RE in China. They have only seen them go one way in China. To a lot of them this is a one way bet with no risk.

Look at the number of risks they are taking on -
1) foreign exchange - income in China and investment in China
2) interest rate
3) leverage
4) over valued asset

It is likely that when they move, a lot of these factors will move against them and the losses are going to be quick and big which could spread panic. I cannot imagine making a bet with this many variables that could potentially go against me. Either they are sure they will get out in time or they do not understand the risks they are taking on.

We will see - making money in Vancouver RE has been easy for 15 years now. The longest uptrend so far that I have been able to find - historically, it has been around 7 years in Vancouver. I guess, people can still find reasons why Vancouver RE will keep running up.

[gary17]

thank you Wisdom for your reply.  I too agree there's a lot of risk and frankly I don't really like RE going up , all tax free, leveraged, making it much , much harder now for individuals like myself making a modest salary taxed at high % and also trying to do a bit of investing on the side...   At this rate of RE price appreciation, I will likely live in a condo forever... lol

I'd be interested to know if any board members here work at one of the major banks in Canada and can share what kind of interest rates the new immigrants are getting with no income in Canada. 

Gary