Garth Turner - Real Estate in Canada

[opihiman2]

First, if 12% CAGR from 2000 is accurate, that is NO way sustainable.  All median housing prices per sq ft, in the U.S. at the very least, has only increased with wage inflation--which, since the late 70's, has mostly gone up with regular inflation.  The notion of housing affordability is strictly tied into incomes.  An "affordable" home should be, by a standard rule of thumb, 3-5x the household income.  A simple thought experiment will vet out that home prices cannot go up higher than incomes in the long term:

 

Suppose median house prices for homes are going up 1% higher than median house prices, then in 30 years, home prices will be 1.01^30 times higher than incomes (roughly 34%).  In 50 years, prices will be almost 64% higher.  That's just unsustainable.  Although, I do know that Vancouver has seem some tough times.  When I was there in 1999-2000, they were just coming out of a big recession, and back then, the USD/CAD was awesome.  The people I talked to around the city said that their local economies to a huge hit, it was hard to find jobs, etc...  So, I think that housing there must have been depressed--I'm speculating on this.  Thus, maybe the boom in housing up there is occurring from a very low point, and 12% CAGR for 14 years has now just created super expensive housing--possibly bubble territory.  So, this crap could keep going on for a few more years.  Who knows.  What I do know is that my old alma mater had probably the best value in higher ed back in the early 90's.  It was all over US News and Business reports.  Since then, though, the state has cut back majority of its funding, and tuition there has been skyrocketing.  It's insane, but I calculated the CAGR from when I went to school there, and tuition has been increasing by about 9-10% yoy for the past 20 years.  I thought in no way is that sustainable, but it has been growing at those rates for 20 years. 

 

So, who knows when this sucker will blow up.  But, I believe that it will.  There is no way 12% CAGR for housing prices is sustainable.  Even in the SF Bay Area, I calculated long term CAGR at just 5%.  I don't see how Vancouver has a leg up on SF's incredible tech economy--which I definitely think is in a bubble.

[opihiman2]

I really think US is well positioned for a decade or more of growth.  As the planet population doubles.... I think Canada and US are the two developed countries with the infrastructure and capacity for growth.  I'm very bullish about the US!

 

Are you being serious or sarcastic???  Please be the later.  PUHLEEZZZEEE

[gary17]

I really think US is well positioned for a decade or more of growth.  As the planet population doubles.... I think Canada and US are the two developed countries with the infrastructure and capacity for growth.  I'm very bullish about the US!

 

Are you being serious or sarcastic???  Please be the later.  PUHLEEZZZEEE

 

LOL.... i just simple minded i guess.... i wasn't sure when the planet is at 12B people... where those 6B should go.... China ? India ? Europe ?  I logically see North America, South America and Africa...    I like to think with the natural resources here ; the technology and the "matured" political system, there's a good chance good things could continue to happen.  Just my view :)

[original mungerville]

First, if 12% CAGR from 2000 is accurate, that is NO way sustainable.  All median housing prices per sq ft, in the U.S. at the very least, has only increased with wage inflation--which, since the late 70's, has mostly gone up with regular inflation.  The notion of housing affordability is strictly tied into incomes.  An "affordable" home should be, by a standard rule of thumb, 3-5x the household income.  A simple thought experiment will vet out that home prices cannot go up higher than incomes in the long term:

 

Suppose median house prices for homes are going up 1% higher than median house prices, then in 30 years, home prices will be 1.01^30 times higher than incomes (roughly 34%).  In 50 years, prices will be almost 64% higher.  That's just unsustainable.  Although, I do know that Vancouver has seem some tough times.  When I was there in 1999-2000, they were just coming out of a big recession, and back then, the USD/CAD was awesome.  The people I talked to around the city said that their local economies to a huge hit, it was hard to find jobs, etc...  So, I think that housing there must have been depressed--I'm speculating on this.  Thus, maybe the boom in housing up there is occurring from a very low point, and 12% CAGR for 14 years has now just created super expensive housing--possibly bubble territory.  So, this crap could keep going on for a few more years.  Who knows.  What I do know is that my old alma mater had probably the best value in higher ed back in the early 90's.  It was all over US News and Business reports.  Since then, though, the state has cut back majority of its funding, and tuition there has been skyrocketing.  It's insane, but I calculated the CAGR from when I went to school there, and tuition has been increasing by about 9-10% yoy for the past 20 years.  I thought in no way is that sustainable, but it has been growing at those rates for 20 years. 

 

So, who knows when this sucker will blow up.  But, I believe that it will.  There is no way 12% CAGR for housing prices is sustainable.  Even in the SF Bay Area, I calculated long term CAGR at just 5%.  I don't see how Vancouver has a leg up on SF's incredible tech economy--which I definitely think is in a bubble.

 

Isn't 3-5x on the high side for North America. I think something like 2.5 - 3.5x is the norm historically (but I'm going from memory of a GMO slide from a few years ago).

[wisdom]

Africa is supposed to be the centre for future population growth. 4 B from the current 1 B people.

[Liberty]

Extrapolating population numbers is hard. Iran used to have like 7 kids per women a few decades ago and now I think they're below replacement rate (2.1). Things change fast.

 

Latest numbers I've seen show us plateauing under 10 billion, but that could change too...

 

Not that I would base in any way my thinking on Canada's RE on this...

[opihiman2]

I really think US is well positioned for a decade or more of growth.  As the planet population doubles.... I think Canada and US are the two developed countries with the infrastructure and capacity for growth.  I'm very bullish about the US!

 

Are you being serious or sarcastic???  Please be the later.  PUHLEEZZZEEE

 

LOL.... i just simple minded i guess.... i wasn't sure when the planet is at 12B people... where those 6B should go.... China ? India ? Europe ?  I logically see North America, South America and Africa...    I like to think with the natural resources here ; the technology and the "matured" political system, there's a good chance good things could continue to happen.  Just my view :)

 

Ok well, I was just wondering, because you said the global population doubles.  I'm like, 7 billion to 14 billion?  I don't think that will be the case for another 200 years or if ever.  In fact, I think the general consensus is that the global population will top out at 10-11 billion and then start to fall. 

 

But, in terms of land mass, Canada has most countries beat.  They should just start creating more cities and develop them.  You just can keep jamming people into Vancouver. 

[opihiman2]

First, if 12% CAGR from 2000 is accurate, that is NO way sustainable.  All median housing prices per sq ft, in the U.S. at the very least, has only increased with wage inflation--which, since the late 70's, has mostly gone up with regular inflation.  The notion of housing affordability is strictly tied into incomes.  An "affordable" home should be, by a standard rule of thumb, 3-5x the household income.  A simple thought experiment will vet out that home prices cannot go up higher than incomes in the long term:

 

Suppose median house prices for homes are going up 1% higher than median house prices, then in 30 years, home prices will be 1.01^30 times higher than incomes (roughly 34%).  In 50 years, prices will be almost 64% higher.  That's just unsustainable.  Although, I do know that Vancouver has seem some tough times.  When I was there in 1999-2000, they were just coming out of a big recession, and back then, the USD/CAD was awesome.  The people I talked to around the city said that their local economies to a huge hit, it was hard to find jobs, etc...  So, I think that housing there must have been depressed--I'm speculating on this.  Thus, maybe the boom in housing up there is occurring from a very low point, and 12% CAGR for 14 years has now just created super expensive housing--possibly bubble territory.  So, this crap could keep going on for a few more years.  Who knows.  What I do know is that my old alma mater had probably the best value in higher ed back in the early 90's.  It was all over US News and Business reports.  Since then, though, the state has cut back majority of its funding, and tuition there has been skyrocketing.  It's insane, but I calculated the CAGR from when I went to school there, and tuition has been increasing by about 9-10% yoy for the past 20 years.  I thought in no way is that sustainable, but it has been growing at those rates for 20 years. 

 

So, who knows when this sucker will blow up.  But, I believe that it will.  There is no way 12% CAGR for housing prices is sustainable.  Even in the SF Bay Area, I calculated long term CAGR at just 5%.  I don't see how Vancouver has a leg up on SF's incredible tech economy--which I definitely think is in a bubble.

 

Isn't 3-5x on the high side for North America. I think something like 2.5 - 3.5x is the norm historically (but I'm going from memory of a GMO slide from a few years ago).

 

Yeah, 5x is definitely on the high side.  But, it's doable.  I think 10x is what it was at the height of the real estate bubble, and that's like, dumpster diving for food because all of one's income is going into their mortgage.

 

I have this interesting story about that too.  I met and dated this girl online back in 2006 or so.  This was the height of the real estate bubble in the Bay Area.  She was living in the East Bay, and she just bought a house.  It was a crappy house, but that's all she could afford on her single and moderate income.  I found out that she paid a little over 11x her income for that house.  She then later told me on our first date that she couldn't afford food, and was scrapping by whatever she could get at the office or from her back yard.  I almost LoL'ed but then realized she was serious.  So, I paid for her dinner.  After awhile, I started realizing that she was doing this online dating to meet guys who would take her out and buy her dinner or lunch.  Man, people will do whatever nowadays to buy a house.

 

[Liberty]

But, in terms of land mass, Canada has most countries beat.  They should just start creating more cities and develop them.  You just can keep jamming people into Vancouver.

 

Canada is almost a 2D country, though. Most people live in the South, along the US border. Not that many people want to live in the Yukon or Northwest Territories... The US is smaller in total area, but a lot more of it is pleasant to live in.

 

But the whole "running out of space" thing isn't a very convincing argument. China has over a billion people and still has a lot of space to build new cities (which they do, many of them are even empty).. The earth's carrying capacity depends more on our sources of energy and food than on actual living space for people. If we had 100% clean energy and very efficient sources of food that don't require too much arable land, we could probably fit 100 billion people on Earth easily.

[opihiman2]

But, in terms of land mass, Canada has most countries beat.  They should just start creating more cities and develop them.  You just can keep jamming people into Vancouver.

 

Canada is almost a 2D country, though. Most people live in the South, along the US border. Not that many people want to live in the Yukon or Northwest Territories... The US is smaller in total area, but a lot more of it is pleasant to live in.

 

But the whole "running out of space" thing isn't a very convincing argument. China has over a billion people and still has a lot of space to build new cities (which they do, many of them are even empty).. The earth's carrying capacity depends more on our sources of energy and food than on actual living space for people. If we had 100% clean energy and very efficient sources of food that don't require too much arable land, we could probably fit 100 billion people on Earth easily.

 

Oh, most definitely.  I read a while ago that if you took the 7 billion people on the planet, stood them shoulder to shoulder, we could all easily fit in LA county.  There is a lot of land mass for sure.  But, even from a logistical point, it's much better to have more cities than one big one.  I read a really good urban planning paper that used a novel simulation in Sim City (pretty LOL, but it was really interesting) to show this.  Although, some guy did develop the most evolved city ever using one megapolis in Sim City. 

 

Anyways, I agree.  Resources will be our major constraint to population growth.  Just like it is for bacteria in a petri dish.

[Liberty]

http://qz.com/287510/where-in-the-world-you-should-rent-instead-of-buying/

[Guest 50centdollars]

http://www.bnn.ca/News/2014/11/20/CMHC-drops-hints-housing-market-may-be-overvalued.aspx

[Liberty]

Some nice charts via Ben Rabidoux on twitter:

 

 

 

 

 

[augustabound]

Unless the contrarian play is a severely depressed US housing market?  :P

 

................no, I don't believe that either.

 

 

[CanadianMunger]

If oil prices stay low, are they finally the straw that breaks the Canadian housing markets back?

 

-CM

[Viking]

My guess is interest rates are the key. As long as rates stay low the machine will continue to roll. Once mortgage rates move up a couple of percent things will get interesting.

[Liberty]

http://www.bnn.ca/News/2014/12/3/Canadians-now-owe-more-than-15-trillion-in-consumer-debt.aspx

 

[Guest 50centdollars]

http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/price-for-detached-home-in-greater-vancouver-nears-1-million/article21887389/

[Guest 50centdollars]

http://www.theglobeandmail.com/report-on-business/economy/bank-of-canada-says-housing-market-overvalued-by-as-much-as-30/article22021768/

[Liberty]

I thought this was interesting, especially the graph on page 3:

 

 

 

http://policyschool.ucalgary.ca/sites/default/files/research/kneebone-unemplfinal.pdf

 

 

Found via:

[enoch01]

Hilariously, Mr Market is still pricing Canadian banks at about 2xBV.

[LongHaul]

I may agree that Canada is in a bubble - I need some more data.

 

Just curious - if I buy an average home or condo in Canada what is the unlevered cap rate for the owner?

This should basically be rent minus taxes, home insurance, maintenance, hoa fees if any and other misc.  I would exclude leasing fees, vacancy, utilities (pd by owner I assume if he rented it to a tenant).  For maintenance I would assume $1 a SFT for a home which is probably roughly right.

 

This helps me quantify the unlevered return (excluding appreciation/depreciation) of buying a home.

 

For example - in Southern California the cap rate for average places went to ~2% in 2006.  That is a P/E of 50 unlevered and makes no fundamental sense. 

 

My area in Texas is ~ 5%  15k on 300k home which is nothing great but not so horrible either.

 

Thank You

[no_free_lunch]

Where I am, ballpark, 3-5%.  5% would be a multi-tenant building and would assume 100% occupancy and minimal problems from tenants, e.g. not realistic long-term.  That is also after property tax/insurance/maintenance/etc but before income tax.

 

EDIT: Also that is based on current rental prices which have risen substantially (roughly 100%) over the past decade.

[moody202]

I may agree that Canada is in a bubble - I need some more data.

 

Just curious - if I buy an average home or condo in Canada what is the unlevered cap rate for the owner?

This should basically be rent minus taxes, home insurance, maintenance, hoa fees if any and other misc.  I would exclude leasing fees, vacancy, utilities (pd by owner I assume if he rented it to a tenant).  For maintenance I would assume $1 a SFT for a home which is probably roughly right.

 

This helps me quantify the unlevered return (excluding appreciation/depreciation) of buying a home.

 

For example - in Southern California the cap rate for average places went to ~2% in 2006.  That is a P/E of 50 unlevered and makes no fundamental sense. 

 

My area in Texas is ~ 5%  15k on 300k home which is nothing great but not so horrible either.

 

Thank You

 

The cap rates also vary by type of property. As an example the lower priced properties have a higher cap rate....the slums have the best cap rate!!!

 

Also -- In my area I have found single family homes have higher cap rates than condos but also come we more headaches.

[mcliu]

http://www.airdrie.ca/getDocument.cfm?ID=2722

 

http://renx.ca/wp-content/uploads/2014/10/14oct16-ColliersQ3-caprates1.pdf

 

Sub 4.5% cap rates in Vancouver/Toronto for multi-family units.