Garth Turner - Real Estate in Canada

[alertmeipp]

Wait until the stigma wears off once people start looking at the economics of their situation.  Or maybe you were being sarcastic, sorry if I couldn't tell.

 

No, I'm serious.  I think that real estate prices correct downwards more slowly because of the bankruptcy requirement and an unwillingness to sell at a loss.

 

If the economics of their situation dictate a change in lifestyle, you will see the impact in credit card debt, auto loans, rv loans, lines of credit, etc. well before you see the impact in housing.  It's like Maslow's hierarchy of needs for debtors :P

 

You don't need ppl to throw away their houses to get prices coming down quickly. When there is no bid, a few sell will do the wonder.

[Liberty]

I think the lesson of the past few years is that when people speculate and take on an unsustainable level of debt and leverage, there's absolutely no way to make the risk disappear. The law of economic gravity won't be suspended. Problems will find a way to come to the surface one way or another, and the longer it takes, the worse it'll be.

[SharperDingaan]

"So what do we short, guys" You don't. Park your $ in Canada's. If/when a particular property falls far enough for you - buy it.

[Liberty]

"So what do we short, guys" You don't. Park your $ in Canada's. If/when a particular property falls far enough for you - buy it.

 

I wonder what a RE crash would do to the Canadian dollar, actually. Might be a better deal on foreign exchange rate after such an event, if it were to take place.

[Uccmal]

I haven't read Turner's blog.  Did see him speak many years ago.  He puts on a hell of a show and makes alot of money on the circuit.  Worth considering why he says what he says. 

 

I recently went through the circus of getting a Heloc, for an addition, and a renovation.  My mortgage is held by a mortgage company, that doesn't do Helocs.  We went to TD where all of our brokerage accounts are held.  They assessed the house, conservatively, IMO, wanted to see pay records, tax assessments, the first lien mortgage paperwork.  They ultimately agreed to give us a HEloc up to 80% of their assessed value minus the first lein mortgage owing.  Imo, it was pretty stringent.  We got no credit for the assets in the brokerage account which would cover the HEloc by at least 3 x in a down market. 

 

IMO, the big 5 will not lose much in a housing downturn.  I really have no idea where people are getting this speculative money from.  I am guessing it is financing through developers, and non-bank mortgage companies, and of course the CMHC. 

 

There seems to be an overbuild of condos in Toronto.  Ultimately, there may be a correction but it will in no way equal what happened in parts of the US.  The market is so tiny, and so much of the population just does not participate.  Prices have risen faster than average the last few years but not enough that you could make money flipping properties.  Prior to the recent runup prices here were stagnant from 1990 until 2003. 

 

As for housing as an investment, it is just not something that ever turned my crank.  The frictional costs are too high, and I am not keen on being a landlord.  For me the house we live in is a place to live, not an investment.  I never hoped to do better than inflation.  If the shit hits the fan in a big way it is nice to have a roof over your head thats mostly paid for. 

[Studesy]

Great discussion everyone. As a Canadian, I also see the bubble we are currently experiencing.  Knowing with any reasonable level of certainty whether the bubble will burst or growth will remains flat the next 10 years would be way above my capabilities.  It is obvious however, that with the current market fundamentals and the previous 10 yr. track record, real estate as an investment at this point would not have an adequate MOS. On the other hand, I do think that this applies mostly to larger cities (as far as high prob. of significant capital losses anyway). 

 

As an example, I live about 1.5 hrs. west of Toronto, close to 401 in a small village between London and Woodstock. It's in a new subdivision of about 30 houses so far on a about 1/3 acre lot. The house is a 2-storey, about 2100 sq./ft, 2 car garage. We paid $275,000 in March of 2009 and the property taxes are about 2800/yr. You can buy the same house today for $295,000.  Noting the overvaluation in Canada's big cities, I have always thought to myself: what is my downside on this place?

 

Lets say the replacement value of just the building is $200,000.  This means I paid $75,000 for a 1/3 acre serviced lot.  Ok...off to Toronto.  I'm guessing the same house, on a much smaller lot would cost around $600,000 (someone correct me if they think this is way off..just a guess). So the replacement cost of the house is $200,000...same as my house. The land therefore cost $400,000.  Assuming we don't see significant deflation, that replacement cost isn't likely to change drastically. Therefore, it is land value decreases that we have to worry about the most I think. With a 20% decrease in residential land values nation wide, I would think I have a lot less to lose on both a absolute and relative (return) basis.  This is because the portion of the asset that is most likely to decrease in value is a lot smaller piece for me than the guy in Toronto. But its quite possibly less liquid.

 

I don't think a lot of Canadians realize this....they think real estate just goes up forever. Over the very long term, they are right...but I believe the long term averages are only slightly above the inflation rate. After 15 yrs of huge growth, the probability of losses has to be much higher than say after a 15 year period of 3% growth.  Real estate is so difficult to value. Theoretically, rental rates for any given property, should determine the value.  However, if the rates are not predictable with a high level of certainty...it makes it pretty tough.  I think the only true "investment" in real estate is 1) buying distressed ( i.e., paying significantly less that the replacement value of the building plus getting the land free) and waiting  2) buying a property for a "good" price that has some sort of a competitive advantage or moat ( ie due to prestige, geographic location..etc.) I also think it would be much easier from an investment standpoint to stick with #1.  Buffett is on #2 so is Brookfield

 

 

 

 

[Liberty]

I haven't read Turner's blog.  Did see him speak many years ago.  He puts on a hell of a show and makes alot of money on the circuit.

 

I suggest you read at least this one, if only for the graphs that are based on data from other sources:

 

http://www.greaterfool.ca/2012/01/08/in-the-end/

 

It doesn't 'prove' anything - no one can predict the future - but those data points (and others elsewhere) are certainly cause for great concern, IMO.

 

Worth considering why he says what he says.

 

Absolutely true. Make sure to apply the same standards to all those economists working for banks, realtors, gov't officials, etc, though. For each Garth out there, there are thousands of people inflating the bubble. And that's not counting the millions of homeowners who just won't see any problems with real estate because they have huge sunken costs.

[Studesy]

@Liberty  Couldn't agree more. Even without those charts...after the 15yr run we've had it's a no brainer that one would have to be very careful looking at real estate in Canada's big cities..as an "investment" anyways.  As far as the exact way things play out the next 6 months or 5 yrs its hard to say.  But I doubt will see the same growth the next 10.

[Liberty]

But I doubt will see the same growth the next 10.

 

Unless wages more than double in a very short period of time and interest rates never go back up to historical averages, I just don't see how people who make 60K can afford these 800k+ bungalows and condos, or how the average house in Canada can cost twice the average house in the US... It just doesn't make any sense. Who knows how long it'll last, though.

[Studesy]

I know its crazy.  I'm not one for shorts but it would be interesting to find a publicly traded land developer who is sitting on a lot of serviced residential land in Toronto or Vancouver. A company with a huge debt load and low margins when things were good.  The land isn't likely to be reverted to farm land if it has been serviced.

[Studesy]

Timing is the hard part though. Better off finding assets on sale!

[WideMoat]

I really have no idea where people are getting this speculative money from.  I am guessing it is financing through developers, and non-bank mortgage companies, and of course the CMHC. 

 

This is the crux and where we need an answer.  Unless developers and non-bank mortgage cos also hold the loans for investment, they are just a conduit. 

 

Is it really true that no lender will grant more than 80% LTV in Toronto and Vancouver?  In the US, during the bubble, there were mortgage brokers popping up everywhere, from strip malls to commercial towers.  They were all offering loose terms, and offloading the loans as quickly as they could churn them. 

 

I see stuff like this--http://www.notapennydown.com/--and it all starts to look very familiar.

 

Most specifically, what do we know about places like Verico?

 

On their quite amateur website, they list the following as "preferred lenders":   

 

AGF Trust   

Bridgewater Bank

    Capital Direct

    Cove Mortgage

    First National Financial LLP

    Firstline Mortgages

    HomeTrust Company

    Industrial Alliance Pacific

    ING Direct

    Laurentian Bank

    MCAP

    Merix Financial

    National Bank

    Optimum Mortgage

    Resmor Trust

    Scotia Mortgage Authority

    Street Capital

    TD Canada Trust

    VERICO Mortgage

    XCEED Mortgage Corporation

 

[SharperDingaan]

Change the game.

 

ie: Buy a house/condo in city X, sell a long lease (25-40yr) on the land inclusive of property tax. Lessee lives in the shelter (house) on top of the land, pays the utilities, & maintains the property if desired. Lessor hands over the shelter keys, pays the annual property tax, walks away, & re-leases or levels/re-develops the property at the end of the lease.

 

The lease is a bond, valuing at the PV of the remaining CF. Maximum value is at initiation & in a low risk environment. Lease value declines every year & terminates at zero. Shelter cost between yr X & Y is the difference in lease value, identical to depreciation in a vehicle purchase. Shorter the lease, the lower the price, & the less/no need for mortgage financing.

 

[Kiltacular]

This is exactly right.  Mortgages are non-recourse in the US, which is why "it's different" in Canada.  You have to declare personal bankruptcy to get out of your poorly devised home ownership plan.  The result is that downward price trends are throttled because home owners can't just walk away like they did in the US.  I think RE prices will be forever buoyed by two things that people are loathe to do: one declaring bankruptcy and two selling at a loss.

 

I'm not sure you all fully appreciate what happened in the U.S. 

 

First, not all U.S. states have the protection you describe above.  While California does, some other large states -- I believe Florida -- for example do not.  I'm not going to go check but others here can.  Ultimately, it hasn't mattered which type of state you live in.  The biggest risk-takers have suffered the least relative the those that didn't take the risks.

 

Second, even in a state with such protection -- California as an example (which I'm familiar with and which is huge...12% of the U.S. population -- the protection DISAPPEARS once you refinance the loan.  And, of course, in order to "get cash out" you have to refinance the loan.  Naturally, this stipulation was to discourage people from doing excatly what they did do -- take out all their new "equity" and spend it.  Since most of the people that got in the largest amount of trouble had given up their non-recourse status, they should have suffered.  Yet, the banks -- by and large -- haven't gone after people.  Moreover, of course, most people didn't (don't) have any signifcant recoverable assets.  This rule -- where it applied -- had little practical effect on preventing the bubble.

 

Third, an additional discouragement was that if a homeowner engaged in a short-sale -- where the effect was that the lender "forgave" a large amount of the loan balance -- the dollar amount difference between the loan balance at the time of the short sale and the ultimate amount the bank accepted from the borrower was treated as income by the taxing authorities.  This law was summarily changed after the fact to protect those that had made idiotic decisions.  There were / are a lot of voters in this group, ya know.

 

Considering all three of these factors have gone out the window, the people taking the largest risks have suffered the least relative to their folly.

 

Moreover, those of us who warned about what was happening, while it was happening, and pointed out these negative aspects while the bubble grew ever larger, now see that as long as enough voters suffer together, the rules will be changed after the fact.  We're the chumps.

 

To now add insult to injury, those of us who stewarded our capital and, say, put it into the equity of a bank rather than into a home, have to listen as the banks are blamed for loaning money to these fools: "They should have known better", and then, when the fools (voters) can't pay (even though many of them took out all their gains -- my original point), the banks are blamed for not "properly foreclosing" (aka: robosigning).  As if poor foreclosure practices were the cause of these people not paying their contractual obligations in the first place.

 

Like I said: Comical.

 

But, and I mean this not in jest, I have no idea if this is likely what is going on in Canada.

 

[VAL9000]

You don't need ppl to throw away their houses to get prices coming down quickly. When there is no bid, a few sell will do the wonder.

As I said, people are unwilling to sell at a loss, generally speaking.  The situation you're suggesting requires some kind of forced sale.  The vast, vast majority of people who have mortgages in Canada today are able to make payments with their current income streams.  The forced selling scenario is one of unemployment.  Which means we're not forecasting an independent real estate bust, we're forecasting a sustained rise in unemployment.  Which we just went through.  House prices weakened for a year and then shot back up again.  Granted, it was a pretty mild spike - from 6% to 8.5%.  The unemployment spikes from the 80's and 90's were much more severe and resulted in much more drastic drops in real estate prices.

 

how the average house in Canada can cost twice the average house in the US

I think these are two major contributors to that conundrum:

- CAD/USD exchange - typically the Canadian dollar trades at a > 20% discount to the US dollar, but more recently the Canadian dollar has been trading at par.  If the dollar corrects itself (i.e. a US recovery is in full swing), then the price gap between Canadian and US real estate will narrow.  If it doesn't then maybe real estate values will do the correcting.

- Urbanization - US and Canada have similar urbanization rates, but Canada's is much more concentrated at the high end.  About 7.5% of the US population lives in cities with a population > 1mm.  In Canada, this number is 50%.  That's crazy.  As a comparison, for cities of populations > 100,000, you're looking at only 28% of the 300mm people that live in the US.  That means that 75% of Americans live in cities smaller than Waterloo.  So that's another major contributing factor for why real estate prices are so comparatively high.

 

I am somewhat regretting wading into this discussion about house pricing because it's kind of pointless.  It's like trying to forecast the price of gold or any other non-producing asset.  The price of real estate depends too much on other factors - it can't be forecasted independently.  It is fun to get a better understanding of the real estate picture, though.  My fundamental belief is that homes are not normal assets.  They are romantic, reusable, and they have significant utility for the buyer.  I would never view a home as anything other than an expense and I encourage everyone I know to consider homes this way.

 

[VAL9000]

States in the US that had that exact same legal system didn't fare much better than others (Arizona and Nevada among others, iirc). Garth Turner has addressed that point fairly convincingly, IMO. I suggest you read a dozen of the most recent posts and see how it tickles your fancy, as most of the counter-arguments that I heard everywhere are addressed.

 

I'm not sure you all fully appreciate what happened in the U.S. 

 

...

 

Like I said: Comical.

 

But, and I mean this not in jest, I have no idea if this is likely what is going on in Canada.

Thanks Liberty and Kiltacular.  I was misinformed regarding the non-recourse nature of loans in the US.  I had read that it was the default for all mortgages, but I've since gotten a nice little education on the law of the land ;)

 

[Liberty]

I think these are two major contributors to that conundrum:

- CAD/USD exchange - typically the Canadian dollar trades at a > 20% discount to the US dollar, but more recently the Canadian dollar has been trading at par.  If the dollar corrects itself (i.e. a US recovery is in full swing), then the price gap between Canadian and US real estate will narrow.  If it doesn't then maybe real estate values will do the correcting.

 

That's a good point, but I think it only accounts for a small fraction of it. Canadians earn incomes in Canadian dollars, so the exchange rate has very little to do with their ability to pay for their houses, and wages have lagged inflation for many years while house prices have surged very rapidly. I also think that historically, even when the FX difference was wide, houses in both countries have mostly tracked inflation and each other, unlike now.

 

- Urbanization - US and Canada have similar urbanization rates, but Canada's is much more concentrated at the high end.  About 7.5% of the US population lives in cities with a population > 1mm.  In Canada, this number is 50%.  That's crazy.  As a comparison, for cities of populations > 100,000, you're looking at only 28% of the 300mm people that live in the US.  That means that 75% of Americans live in cities smaller than Waterloo.  So that's another major contributing factor for why real estate prices are so comparatively high.

 

Here again, this isn't a new trend afaik, yet the major discrepancy between the two countries is pretty recent. Despite this difference in urban density averages, house prices in both countries have fairly closely tracked in the past. And I'm pretty confident that if you compare just cities to cities, Canadian prices are out of whack compared to US prices, to rent prices, and to incomes.

 

I don't pretend to be an expert on the intricacies of real estate, but I think I can recognize when people are living dangerously beyond their means. It could last a while longer, though. We'll see.

[Olmsted]

 

...To now add insult to injury, those of us who stewarded our capital and, say, put it into the equity of a bank rather than into a home, have to listen as the banks are blamed for loaning money to these fools: "They should have known better", and then, when the fools (voters) can't pay (even though many of them took out all their gains -- my original point), the banks are blamed for not "properly foreclosing" (aka: robosigning).  As if poor foreclosure practices were the cause of these people not paying their contractual obligations in the first place.

 

Like I said: Comical.

 

But, and I mean this not in jest, I have no idea if this is likely what is going on in Canada.

 

"Comical" really isn't the first word that comes to my mind.

[RichardGibbons]

I am somewhat regretting wading into this discussion about house pricing because it's kind of pointless.  It's like trying to forecast the price of gold or any other non-producing asset.  The price of real estate depends too much on other factors - it can't be forecasted independently.

 

Real estate is a producing asset.  That's how you know that it's overvalued.  I think it has fewer influencing factors than most stocks.

[SharperDingaan]

And what happens < 3yrs of the crash ...

 

http://www.icenews.is/index.php/2012/02/29/iceland-property-prices-increased-fastest-in-europe-last-year/

 

Property prices in Iceland increased faster last year than in any other European country surveyed. The increase in par value of houses was higher even than in Norway, where a property boom is in progress

 

 

[Liberty]

And what happens < 3yrs of the crash ...

 

http://www.icenews.is/index.php/2012/02/29/iceland-property-prices-increased-fastest-in-europe-last-year/

 

Property prices in Iceland increased faster last year than in any other European country surveyed. The increase in par value of houses was higher even than in Norway, where a property boom is in progress

 

Sharper, do you work in real estate? Just curious.

 

Iceland's such a small market (320k people for whole country) that I'm not sure I would extrapolate too much from it. Especially if the numbers are nominal units of currency rather than inflation adjusted. And even after fast growth, you can still be underwater for a long time if the peak was inflated enough. Took 13 years to get back to the same level after the 1989 GTA crash, and the current bubble seems much bigger and widespread.

[SharperDingaan]

We have european family who are Quantity Surveyors.

 

Iceland is an indicator canary, & this one has been having serious discussions around adopting the $C as its currency. Additionally, were an investment made it would be done at todays lows & not the historic highs. An investment today would exploit the capital controls on purchase, rely on them for interim appreciation, & use Krona conversion to cash out - over the short term.

 

Notable are the rejected currency choices of Euro & $US, & why. Aberdeen, Inverness, & St John's mansion prices before the development of off-shore o&g. 4 hours flying time from Toronto.

 

 

 

[SharperDingaan]

 

http://www.nea.is/oil-and-gas-exploration/

"Exploration for oil and gas on the Icelandic Continental Shelf is in an early phase"

 

With Canada's Hibernia, Beufort, & other northern offshore fields, it is not hard to see why there is interim interest in the $C. The Dreki field alone will turn them into a petro currency, Gammur is bonus.

[VAL9000]

Took 13 years to get back to the same level after the 1989 GTA crash, and the current bubble seems much bigger and widespread.

 

You have to look at the factors that moved real estate prices into negative territory, and what kept them there for thirteen years.  Here are three important factors that I looked into:

1) Real estate prices prior to 1989 shot up much more quickly.  They more than doubled in a period of 4 years - from ~200k to ~425k (real).  Prices came down by 40% over the course of 7 years.  The current rise in housing prices has taken much longer to culminate.  If we assume that real estate prices are overvalued by 40%, then you're looking at a cohort of about 10-12 years of buyers.  A 40% drop over the course of the 90's only captured about 3 years worth of buyers.

 

2) Interest rates and first-time buyers.  Lending rates came down steadily through the 80's.  Initially in the 12-19% range in the early 80's, potential home owners saw some relief in the form of 9-11% rates through the mid 80's.  The economic events leading to a real estate bubble were three-fold:  relatively low interest rates, a period of rapid economic growth from 86-90, and the baby boomer cohort reaching home buying age.  The eldest baby boomers were 40 in 1986 and the youngest baby boomers were ~ 25 in 1989.  Approximately the entire cohort was in the first time home-buying age at this time.  Combine that with good economic prospects and interest rates come down from 19% to 10%, and the result is a crazy buying spree.  This buying spree came undone when interest rates shot up in 1989 and 1990 to 13% and 14%.

 

3) 1990's recession.  Even after interest rates started to come down in the 90's, real estate dropped unabated.  At this point, the recession and resulting unemployment had taken over as the driving force behind lower home prices.  Unemployment jumped from < 8% in 1990 to 12% in 1992.  Even as employment figures improved, overall average earnings didn't recover to their 1989 levels until 10 years later, in 1999.

 

So, it definitely took a long time to work back up to those levels, but I don't think we are mimicking the same scenarios today:

1) Price rise is much slower.  The bubble mentality / bursting activity requires a faster rise and fewer individuals "caught in the bubble".

2) The boomer cohort is saturated.  Current housing prices are not being pushed up by a pent-up glut in housing formation.

3) I can't predict the future, unfortunately.  We did just go through a mild recession, but there was little impact on real estate pricing, which I think is strange.

 

The biggest shared risk factor between the 1990's real estate weakness and today is recessionary.  We've seen that the debt to income ratio has come up steadily in the past 10 years.  This is a combination of low interest rates, as well as a significant increase in home ownership rates - from 62% to about 70% today.  A lot of what we're seeing is younger families with bigger mortgages, which is both a good and bad thing.  The bad is obvious - interest rate impact on these families is much greater because they have the full mortgage on their books and a long time horizon to pay the mortgage off.  The good side is less evident.  Younger families have a lot more flexibility to adjust to interest rate increases.  For example, a 3% interest rate increase is offset by a 2% per annum rise in earnings, assuming 5 year fixed on a mortgage valued at 5x net income.  Younger families can expect greater wage increases as they attain experience and seniority.  Older earners tend to plateau earlier, but are less exposed to interest rate shocks.

 

If we enter another recession, then there's a good chance that we'll see some serious price decline.  Interest rates are about as low as they can go, so using them to prop up demand is not an option.  From what I can tell, there are very few tools that the government has left to maintain or incent economic growth.  This is extremely concerning for all markets, including real estate.

 

I guess the question of real estate pricing really centers around interest rates, and I think we're stuck on the low end for quite a while.  Canada can't really raise rates, because doing so will push the dollar up, causing further economic pain to our exports.  Plus, given all of the debt that people have taken on, doing so would probably cause additional harm in terms of bankrupties, etc.  It's politically unsavoury.

 

It could be that the political choice is to just keep rates really low for a long time.  The resulting exchange rate impacts and inflation will help Canadian asset prices enter more normal territory.  In addition, a few years of high inflation will help push down nominal debt obligations, which would help out.  Eventually rates would have to rise, but this would be when the economy is firing on all cylinders.  Perhaps in 2-3 years?

 

Does anyone have a macro argument centering around why we would raise our interest rates?  Why we would be forced to?

 

[Liberty]

You have to look at the factors that moved real estate prices into negative territory, and what kept them there for thirteen years.  Here are three important factors that I looked into:

1) Real estate prices prior to 1989 shot up much more quickly.  They more than doubled in a period of 4 years - from ~200k to ~425k (real).  Prices came down by 40% over the course of 7 years.  The current rise in housing prices has taken much longer to culminate.  If we assume that real estate prices are overvalued by 40%, then you're looking at a cohort of about 10-12 years of buyers.  A 40% drop over the course of the 90's only captured about 3 years worth of buyers.

 

I don't see how that would change anything in a RE bubble bursting panic. Please elaborate.

 

2) Interest rates and first-time buyers.  Lending rates came down steadily through the 80's.  Initially in the 12-19% range in the early 80's, potential home owners saw some relief in the form of 9-11% rates through the mid 80's.  The economic events leading to a real estate bubble were three-fold:  relatively low interest rates, a period of rapid economic growth from 86-90, and the baby boomer cohort reaching home buying age.  The eldest baby boomers were 40 in 1986 and the youngest baby boomers were ~ 25 in 1989.  Approximately the entire cohort was in the first time home-buying age at this time.  Combine that with good economic prospects and interest rates come down from 19% to 10%, and the result is a crazy buying spree.  This buying spree came undone when interest rates shot up in 1989 and 1990 to 13% and 14%.

 

I think the baby boomers reached house-buying age many years earlier than that, but they are now certain reaching retirement age, and they haven't saved anything, and most of their net worth is in a single asset, their houses. They're all going to want to cash out at the same time in the next few years, 9 million of them.

 

3) 1990's recession.  Even after interest rates started to come down in the 90's, real estate dropped unabated.  At this point, the recession and resulting unemployment had taken over as the driving force behind lower home prices.  Unemployment jumped from < 8% in 1990 to 12% in 1992.  Even as employment figures improved, overall average earnings didn't recover to their 1989 levels until 10 years later, in 1999.

 

Indeed. Who knows what will be a catalyst this time, but all I know is that what we have now can't last; either wages go up like 30% a year for 3-4 years to catch up and that nothing happens in the meantime to make people lose their animal spirits over houses, or it's going to go down at some point because there just won't be any more buyers who can afford these houses, no more greater fools. There's also the fact that the gov't is progressively tightening the situation (from 0 down and 40 years mortgages in 2006 to 5 down and soon 25 years mortgages), and that inflation is above the BoC's target and that at some point - especially if the economy goes well in the USA - they'll have to raise rates.

 

So, it definitely took a long time to work back up to those levels, but I don't think we are mimicking the same scenarios today:

1) Price rise is much slower.  The bubble mentality / bursting activity requires a faster rise and fewer individuals "caught in the bubble".

 

I disagree. What matters is the massive overvaluation, not how long it took to get there. In fact, the longer it takes, the more people become convinced "this time it's different" and the harder the fall will be when they realize it isn't.

 

2) The boomer cohort is saturated.  Current housing prices are not being pushed up by a pent-up glut in housing formation.

 

Yeah, at this point it seems to be mostly first time buyers and speculators, people who can even less afford/desire these million dollar shacks, especially in a falling (or even stable market, because they are counting on prices going up to refinance and build equity).

 

3) I can't predict the future, unfortunately.  We did just go through a mild recession, but there was little impact on real estate pricing, which I think is strange.

 

There are already bad signs for RE in certain areas (ie Vancouver), but not in others. Can't predict future, but like someone who understands the difference between price and value looking at the dot-com bubble, it's easy to see that this can't last and will end very badly. It's like looking at a stock with a PE of 100 that people keep buying and expecting to go up endlessly...

 

The biggest shared risk factor between the 1990's real estate weakness and today is recessionary.  We've seen that the debt to income ratio has come up steadily in the past 10 years.  This is a combination of low interest rates, as well as a significant increase in home ownership rates - from 62% to about 70% today.  A lot of what we're seeing is younger families with bigger mortgages, which is both a good and bad thing.  The bad is obvious - interest rate impact on these families is much greater because they have the full mortgage on their books and a long time horizon to pay the mortgage off.  The good side is less evident.  Younger families have a lot more flexibility to adjust to interest rate increases.  For example, a 3% interest rate increase is offset by a 2% per annum rise in earnings, assuming 5 year fixed on a mortgage valued at 5x net income.  Younger families can expect greater wage increases as they attain experience and seniority.  Older earners tend to plateau earlier, but are less exposed to interest rate shocks.

 

I think you are underestimating the psychological aspect of the bubble/bursting cycle. There's always going to be a certain number of people who have to sell, and since prices in a market are set at the margin, even those who don't sell will see their house market value go down and down, and hear all the doom & gloom in the news, and see their monthly payments go up and their small sliver of equity melt and then disappear, etc.. A 2% raise per year won't compensate IMO. And there's been so many mortgages where banks have not done their due diligence (no home inspection, just basing loan on postal code -- self-reported income loans, cash-back loans with no down-payment, etc) that these will probably start the ball when things become difficult.

 

 

I guess the question of real estate pricing really centers around interest rates, and I think we're stuck on the low end for quite a while.  Canada can't really raise rates, because doing so will push the dollar up, causing further economic pain to our exports.  Plus, given all of the debt that people have taken on, doing so would probably cause additional harm in terms of bankrupties, etc.  It's politically unsavoury.

 

Yes, that's why I think it could last a while longer, but a lot will depend on what happens in the US. But the longer it goes on, the worse it'll be. If 800k bungalows become 900k bungalows, it won't help the situation one bit...

 

It could be that the political choice is to just keep rates really low for a long time.  The resulting exchange rate impacts and inflation will help Canadian asset prices enter more normal territory.  In addition, a few years of high inflation will help push down nominal debt obligations, which would help out.  Eventually rates would have to rise, but this would be when the economy is firing on all cylinders.  Perhaps in 2-3 years?

 

Inflation would have to be terribly high and for a long time to catch up. I don't think we'd ever get to that point without that causing a big enough shock to the economy.

 

Fact is, houses are not artwork or fine wines. They can be valued in relation to rents and wages and historical standards and such. And right now, most of the country really can't afford houses, but they keep buying because of a speculative mindset (I have to buy now or I'll be priced out forever! it's a lot of debt, but it'll be worth more when I sell it anyway). It's the only thing that keeps this thing going. When that mindset changes, well... It's not entirely - even in majority - about rational economic decisions at this point, IMO. All about animal spirits.