Garth Turner - Real Estate in Canada

[wisdom]

Before the Chinese, it was the Olympics. The PR machinery keeps providing a story the locals need to hold onto to keep this going and they lap it up.

[Liberty]

For those who follow him, here's Francois Rochon of Giverny Capital, in the 2015 letter:

 

Housing prices in Canada have also continued to increase in 2015, primarily in British Columbia and Ontario. The average home price in Vancouver now exceeds one million dollars. In Toronto, the average price is $631,000. A significant drop in Canadian real estate prices could have major consequences on various segments of the Canadian economy. We consequently try to stay clear of any businesses that could be affected.

 

http://www.givernycapital.com/en/doc/206/Giverny_Capital_-_Annual_Letter_2015_web_.pdf

 

For those who don't know Rochon, the letter contains the performance of his fund. Beat his index by 6.1%/year since 1993, 15.2% CAGR over that period.

[KCLarkin]

This is an interesting graph:

http://www.statcan.gc.ca/pub/16-201-x/2016000/c-g/c-g02-4-eng.htm

 

If I am interpreting correctly:

- in the 10 years from 1991 to 2001, Toronto's "footprint" grew 369 square kilometres

- in the 10 years from 2001 to 2011, Toronto's "footprint" grew 102 square kilometres

 

- in the 10 years from 1991 to 2001, Vancouver's "footprint" grew 159 square kilometres

- in the 10 years from 2001 to 2011, Vancouver's "footprint" grew 35 square kilometres

 

There is a severe deceleration in urban "sprawl"

[Liberty]

This is an interesting graph:

http://www.statcan.gc.ca/pub/16-201-x/2016000/c-g/c-g02-4-eng.htm

 

If I am interpreting correctly:

- in the 10 years from 1991 to 2001, Toronto's "footprint" grew 369 square kilometres

- in the 10 years from 2001 to 2011, Toronto's "footprint" grew 102 square kilometres

 

- in the 10 years from 1991 to 2001, Vancouver's "footprint" grew 159 square kilometres

- in the 10 years from 2001 to 2011, Vancouver's "footprint" grew 35 square kilometres

 

There is a severe deceleration in urban "sprawl"

 

Do you have the population figures for the same periods? I'd be interested to compare.

 

For Toronto, it would also be interesting to look at the larger GTA's area, since at some point toronto proper just runs into the suburbs and these are the ones that grow.

[KCLarkin]

Looks like Toronto CMA includes suburbs and is roughly same as GTA. Barrie, Oshawa, and Hamilton are outside the CMA. Population grew 9.2% from 2006 to 2011.

[mcliu]

This is an interesting graph:

http://www.statcan.gc.ca/pub/16-201-x/2016000/c-g/c-g02-4-eng.htm

 

If I am interpreting correctly:

- in the 10 years from 1991 to 2001, Toronto's "footprint" grew 369 square kilometres

- in the 10 years from 2001 to 2011, Toronto's "footprint" grew 102 square kilometres

 

- in the 10 years from 1991 to 2001, Vancouver's "footprint" grew 159 square kilometres

- in the 10 years from 2001 to 2011, Vancouver's "footprint" grew 35 square kilometres

 

There is a severe deceleration in urban "sprawl"

 

Do you have the population figures for the same periods? I'd be interested to compare.

 

For Toronto, it would also be interesting to look at the larger GTA's area, since at some point toronto proper just runs into the suburbs and these are the ones that grow.

 

Interesting question. I went ahead and ran the numbers.

 

Pop growth 1991 to 2001:

Vancouver: 24% (+384,375ppl) ~2,400/sq.km.

GTA: 19% (+884,673ppl) ~2,400/sq.km.

 

Pop growth 2001 to 2011:

Vancouver: 16.4% (+323,363ppl) ~9,200/sq.km.

Toronto: 18% (+1,002,046ppl) ~9,800/sq.km.

 

https://www1.toronto.ca/city_of_toronto/social_development_finance__administration/files/pdf/2011-census-backgrounder.pdf

https://en.wikipedia.org/wiki/Demographics_of_Vancouver

 

Maybe another interesting study would be to do this exercise for all the cities, and then also compare the housing prices vs. density across these periods.

 

[wisdom]

Vegas and phoenix had been some of the fastest growing cities prior to 2008. Don't think it did them any good.

[KCLarkin]

Vegas and phoenix had been some of the fastest growing cities prior to 2008. Don't think it did them any good.

 

http://www.fastcoexist.com/1679594/watch-las-vegass-growing-sprawl-from-space

 

http://urbantoronto.ca/news/2013/05/examining-urban-sprawl-through-satellite-timelapse-imagery

 

 

 

[Liberty]

http://www.greaterfool.ca/2016/03/24/seriously-7/

[Viking]

Agreed that well researched stats are in short supply. I also agree that crazy low interest rates are the fundamental factor driving the market higher (although I am not sure that explains the 30% increase in prices we are seeing year over year as I think interest rates have been roughly flat over this period).

 

On my street in Langley (30 minutes outside of Vancouver) 5 houses have sold in the last 24 months; 4 buyers were new to Canada from China. My neighbour who listed his house earlier this year had 40 people come through in 24 hours and told me 'the vast majority' were Chinese buyers. It may be that my neighbourhood is being targeted (as it has a reputation for having very good schools). Bottom line, I do think Chinese buyers are goosing prices in certain neighbourhoods in Greater Vancouver. Unfortunately, it is all happening 5 years too early for me (if my kids were out of the house I would be happy to sell, pocket the gains and rent or downsize (to a townhouse).

[wisdom]

Vegas and phoenix had been some of the fastest growing cities prior to 2008. Don't think it did them any good.

 

http://www.fastcoexist.com/1679594/watch-las-vegass-growing-sprawl-from-space

 

http://urbantoronto.ca/news/2013/05/examining-urban-sprawl-through-satellite-timelapse-imagery

 

The prices in Vegas took off from 2000 to 2008 I believe. Not sure how big the change was in that period in vegas.

[JBTC]

Vegas and phoenix had been some of the fastest growing cities prior to 2008. Don't think it did them any good.

 

http://www.fastcoexist.com/1679594/watch-las-vegass-growing-sprawl-from-space

 

http://urbantoronto.ca/news/2013/05/examining-urban-sprawl-through-satellite-timelapse-imagery

 

The prices in Vegas took off from 2000 to 2008 I believe. Not sure how big the change was in that period in vegas.

 

From the HHC 2015 investor letter -

 

The Las Vegas Valley has experienced more than 50% population growth since 2000, adding approximately 700,000 new residents. The area is projected by Experian to grow another 12% over the next five years or almost three times as fast as the overall U.S. population.

 

[LongHaul]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

 

I had to comment on this - in every bubble because the timing is unknown those who warn of the bust look stupid because the timing is unknowable.  Speculators get more and more confident as the price signal confirms their hypothesis.  In reality the price has absolutely nothing to do with value.  Many thought Buffett was on old fool in the 1999/2000 internet bubble because he avoided tech.  If you are going nuts because it has been 15 yrs - hang in there. Ireland was the same until it blew to smitherines.  And the crash will likely be much more rapid and harsh. 

 

I am still doing research but Canada seems like a classic real estate bubble with low cap rates in many places.

 

Key question- what are the rough owner cap rates of your city?  I define owner cap rate as rent minus all expenses a tenant would not pay (real estate tax, insurance, etc excluding broker commission to rent the place out) in the numerator and in the denominator the unlevered home price.  I am trying to get a sense of the unlevered return an owner is making by buying a home excluding appreciation depreciation.

 

San Diego was ~2% at the peak in 2006 for an average apartment.  Totally insane. 

Now we have centuries low interest rates and people think that is normal. 

 

 

[mcliu]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

 

I had to comment on this - in every bubble because the timing is unknown those who warn of the bust look stupid because the timing is unknowable.  Speculators get more and more confident as the price signal confirms their hypothesis.  In reality the price has absolutely nothing to do with value.  Many thought Buffett was on old fool in the 1999/2000 internet bubble because he avoided tech.  If you are going nuts because it has been 15 yrs - hang in there. Ireland was the same until it blew to smitherines.  And the crash will likely be much more rapid and harsh. 

 

I am still doing research but Canada seems like a classic real estate bubble with low cap rates in many places.

 

Key question- what are the rough owner cap rates of your city?  I define owner cap rate as rent minus all expenses a tenant would not pay (real estate tax, insurance, etc excluding broker commission to rent the place out) in the numerator and in the denominator the unlevered home price.  I am trying to get a sense of the unlevered return an owner is making by buying a home excluding appreciation depreciation.

 

San Diego was ~2% at the peak in 2006 for an average apartment.  Totally insane. 

Now we have centuries low interest rates and people think that is normal.

 

I asked the same thing a few pages back.

 

wisdom said it's 2% to 3% in Vancouver.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/garth-turner-greaterfool/msg258551/#msg258551

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/garth-turner-greaterfool/msg258558/#msg258558

[JBTC]

Liberty, talk about coincidence. I clicked on your original link posted on page one of this thread back in 2012 and it took me to what is apparently today’s rant on the same subject.

 

I guess if you keep re-hashing the same column year after year it might come true. But after four years of crying wolf Turner might have a bit of a credibility issue.

 

I had to comment on this - in every bubble because the timing is unknown those who warn of the bust look stupid because the timing is unknowable.  Speculators get more and more confident as the price signal confirms their hypothesis.  In reality the price has absolutely nothing to do with value.  Many thought Buffett was on old fool in the 1999/2000 internet bubble because he avoided tech.  If you are going nuts because it has been 15 yrs - hang in there. Ireland was the same until it blew to smitherines.  And the crash will likely be much more rapid and harsh. 

 

I am still doing research but Canada seems like a classic real estate bubble with low cap rates in many places.

 

Key question- what are the rough owner cap rates of your city?  I define owner cap rate as rent minus all expenses a tenant would not pay (real estate tax, insurance, etc excluding broker commission to rent the place out) in the numerator and in the denominator the unlevered home price.  I am trying to get a sense of the unlevered return an owner is making by buying a home excluding appreciation depreciation.

 

San Diego was ~2% at the peak in 2006 for an average apartment.  Totally insane. 

Now we have centuries low interest rates and people think that is normal.

 

I am not sure any single metric can define a bubble.

 

But definitely look forward to anyone making a comprehensive case why Canadian housing is a bubble and ideally, putting forward suggestions what factors could cause the bubble to deflate, the probabilities of such triggers occurring, the possible time frame, and the potential magnitude of price declines.

 

Any such analysis would be highly useful.

 

Personal anecdotes are not entirely useless, but will more likely keep us trapped in our own biases and do not lead to superior insights and actionable investments.

 

[alertmeipp]

850k house rent out for 2k per house.

property tax around 4k.

 

cap rate ~2% assume no expense other than property tax, (i.e. no agent cut, no maintenance, etc....).  :o

 

[LongHaul]

Alert - is than in Vancouver?

Any other cap rates on residential in different cities in Canada?

 

2% = a P/E of 50!!!!    That is totally insane and far above and fundamental long term value.  Seems like it could easily go down 50%+ in real terms.  The bigger the boom the bigger the bust.  Might be worth 15-20x to me.    Good luck if you are long this stuff and gambling without even realizing it. 

 

In Finland I heard 1.5% cap rate for residential.  That was totally out of my frame of reference.  Just Bonkers.

 

I live outside of Houston and cap rates might be 5-6% or so. 

 

 

Vancouver and Canada are small parts of the overall boom.  China has an enormous housing bubble so do many other places - BRAZIL, Nordics, Australia, India, London, NY, San Fran, etc. 

 

I think China busts and interest rates rise - (not sure of the timing) and then the whole party is over.

 

The anecdotal stories are great and symptomatic of manic buying in a bubble.  Easy lending, buyers fighting each other, everyone afraid of missing out, historically increasing prices, funny rationalizations etc.  Peoples brains melt in these things.

 

 

 

BTW - if you are frustrated - I know I used to be frustrated at waiting, etc.  Don't be.  What is ultimately tragedy is really comedy in the end.  It took me awhile but I realized that the bubbles will just happen again and again and again.  Same mistakes and patterns over and over and over.  It is so ridiculous that it is nuts.  I just laugh now.  It is just a crazy show.

If you think the Canada housing bubble is new or unique - there are similar rationalizations regarding Australia right now and in the Florida Land bubble in the 1920's people made all types of population arguments. 

 

A little warning for those true believers in high Canadian prices.  I heard a story of a guy who thought Arizona real estate would go up forever.  When prices started to dip ~06/07 he bought more because he had faith, then he bought more as prices continued down.  Then he basically went broke as the bust continued. 

 

 

 

 

[alertmeipp]

It's happening in toronto suburb. Other areas in Toronto might not be as severe. I feel many ppl here are not using cap rate ... they just think how much it will go up next year.  You can see many large double garage houses being rented out for 3k 4k but they cost 1.5m to buy.  :o

 

Just check Richmond Hill, Markham and Scarborough.

 

Montreal Ottawa for sure closer to 4 5%..

 

[Potato]

Key question- what are the rough owner cap rates of your city?  I define owner cap rate as rent minus all expenses a tenant would not pay (real estate tax, insurance, etc excluding broker commission to rent the place out) in the numerator and in the denominator the unlevered home price.  I am trying to get a sense of the unlevered return an owner is making by buying a home excluding appreciation depreciation.

 

Toronto is becoming a market with several answers. Condo appreciation slowed way down over the past few years, and now many condos are at ~225X price-to-rent, whereas detached houses have been bonkers for the last few years (on top of the already bubbly start), so price-to-rent in much of North York is up to ~350-400X. For example, a $1.5M house rents for about $4k/mo ($48k/yr). Property tax would be $10.5k/yr, insurance likely about $1.5k/yr, maintenance would be a bit tougher to estimate but likely at least $5k/yr, so about 2.1%, not including transaction costs.

 

For a condo in downtown Toronto a $310k place may be $16.8k/yr to rent; prop tax of $2.1k, insurance ~$0.5k, condo fees ~$3.5k, other maint ~$1.5k, so about 3%, not including transaction costs.

 

I called out transaction costs because even though they're one-time, they can approach 10% round-trip up here, so even with 10-20 year horizons they can be meaningful.

[wisdom]

The real estate bubble in India burst in 2013. Even though it is the fastest growing large economy there is a huge oversupply. It is difficult to sell and prices are down everywhere - prices are down from 20-50% over the last 2 years in an economy with inflation averaging closer to 7%. Thus, the real drops are larger.

 

And India has a real shortage of housing. But, people can't buy at the prevailing prices. I had read somewhere that less than 10% of Indians have mortgages which is low compared to most of the world.

 

Brazil would be similar but they are having a tough time too.

 

This helps me put things in perspective when I look at China, Australia, Sweden, Denmark, Canada. But of course we are running out of land in Canada.

[original mungerville]

Agreed that well researched stats are in short supply. I also agree that crazy low interest rates are the fundamental factor driving the market higher (although I am not sure that explains the 30% increase in prices we are seeing year over year as I think interest rates have been roughly flat over this period).

 

On my street in Langley (30 minutes outside of Vancouver) 5 houses have sold in the last 24 months; 4 buyers were new to Canada from China. My neighbour who listed his house earlier this year had 40 people come through in 24 hours and told me 'the vast majority' were Chinese buyers. It may be that my neighbourhood is being targeted (as it has a reputation for having very good schools). Bottom line, I do think Chinese buyers are goosing prices in certain neighbourhoods in Greater Vancouver. Unfortunately, it is all happening 5 years too early for me (if my kids were out of the house I would be happy to sell, pocket the gains and rent or downsize (to a townhouse).

 

You might look back and think that you should have inconvenienced yourself and sold now. I would - nothing wrong with renting somewhere for 5 years while you sit on a mountain of money.

[original mungerville]

The real estate bubble in India burst in 2013. Even though it is the fastest growing large economy there is a huge oversupply. It is difficult to sell and prices are down everywhere - prices are down from 20-50% over the last 2 years in an economy with inflation averaging closer to 7%. Thus, the real drops are larger.

 

And India has a real shortage of housing. But, people can't buy at the prevailing prices. I had read somewhere that less than 10% of Indians have mortgages which is low compared to most of the world.

 

Brazil would be similar but they are having a tough time too.

 

This helps me put things in perspective when I look at China, Australia, Sweden, Denmark, Canada. But of course we are running out of land in Canada.

 

This was inevitable. I have some commercial land there (which was purchased quite a few years back), which we plan to eventually put a small condo building on over the long-term...more of a location play rather than a general real-estate play. I felt this general bust was going to happen with near certainty as the prices were so out of balance relative to even high incomes in India.

[wisdom]

I was talking to a couple of homeowners looking to rent out their homes in Vancouver. The example below lays it all out:

person looking to rent out an old home at above market rents. When I asked them for the reason, this was their reply - even with a large down payment, they did not realize how much the payment would be. They only realized the cost when they were signing documents at their bank. The rent was not going to cover their mortgage payment even though they had gone with a 1 year term to get a lower rate and they're hoping the rates do not go up in the next year. Purchase price $1.5  mil and trying to rent the property at $2,800/ month and property taxes should be 7,000 or so. Not accounting for any other expenses, net is sub 2%.

[LongHaul]

Very helpful thanks.  This is fascinating.

Any other people who have cap rates feel free to post.

 

Paying 50 P/E for a home, a home is beyond crazy.  But like rolling in poison ivy some things can only be learned through experience.  So much for a long history of bubbles to instruct people.  Who knows when it tops out.  I guess it could go to 60 or more. 

 

Why would condo's be at a lower cap rate than landed homes?

 

Also - another interesting exercise.  A condo really has 2 components - land value and replacement value of the improvement.

When I did the math (with rough numbers) of the land  portion of a condo apartment in Manhattan, NY the land may have been 5-10% of the overall price.  I may be somewhat off in my math and assumptions but when one divides $50m for an acre by 1k units it only works out to $50k per unit. The unit might go for $1m USD so that would be 5%.  The point is that although Manhattan land is very scarce the land component of the condo is small and you can build more condo's in NY over time.  So only 5-10% of the price people were paying in Manhattan might be land.  Depends on units, price etc but I think you get the overall gist.  Be curious if it similar in Vancouver and Toronto. 

 

Also Ireland is an interesting example.  After it busted I think the population stated declining.  Replacement value of the improvement can also be cyclical. 

 

Didn't realize India has topped.

 

 

 

 

 

 

[scorpioncapital]

Some people say Canada has recourse mortgages but if many buyers are dual citizens, they can pack up and leave the banks holding the bag without much recourse. This is a dynamic that may not existed to such a degree in the States. I wonder how a bust would affect the dollar...