Garth Turner - Real Estate in Canada

[alertmeipp]

Same here. More than a few actually, more than pocket money. Some of those are retired ppl with deep pocket, some are working class ppl.

 

I am sure when I get in, it will burst.

 

LOL, why buy stocks when you are almost guaranteed large returns on a pre-construction homes? all you need to do is line-up on the first day when the sales office opens!!

 

The Aurora sites all start in the $700k, there's 3 new ones.

 

I knew of the people buying pre-construction but these people buying 3-4 year old homes are putting $10's of thousands and one home had about $100k put in after the people bought.

 

We're looking to go back to Newmarket in the old downtown area. Century homes with lots of tree lined streets and people take care of their property. We miss it, a lot.

We're tempted to list our place since all the homes here are selling for prices we thing are insane and selling quickly. 

 

But right now, we're just not ready.

 

 

There are many home owners I know of thinking of cashing in. But then the hard question comes, where to go? 

I know a family was thinking to move to Montreal as their son going to McGill there (very cheap tuition there btw), they sold their house early last year to get ready. Things change and they end up need to pay 15%+ more to get back a similar house in a not as good neighborhood.

 

Pure madness, but I wish I have get in when I moved here few years ago.

[Hielko]

Why not rent instead of buying back? Seems that it is pretty cheap based on this thread.

[alertmeipp]

Why not rent instead of buying back? Seems that it is pretty cheap based on this thread.

 

Not idea, but probably afraid it will go up further.

 

[wisdom]

The way I see it, the owners are subsidizing renters. I like to be the one who receives the subisdies rather than the one subsidizing others. If you factor in maintenance and vacancy on top of other costs, I think the returns are negative in a lot of cases.

 

Similar to Sir Templeton - make money by helping others - buy when they want to sell and sell when they want to buy. I see the subsidy the same way. I will buy when renters again start subsidizing home owners.

 

Yes, I am not seeing the gain in networth that the owners are because of leverage. But, I think of that as speculation as I cannot count on the gains and I am not smart enough to get out in time. Those leveraged gains on inflated assets dissappeared awfully fast in the US and some European countries.

 

BTW - nothing stopping us from investing those savings into other assets.

[gary17]

keep in mind those leveraged gains are all tax free

 

if one can make $500K flipping a house in 2 years that's about 1M pre-tax income or about 10 years worth of salary for a 'high income' job.  I can see why people take this risk.

[wisdom]

But, it can vanish. How much of it is just luck?

 

I would not take on a$500-700k mortgage and hope. But, I am sure we are gamblers.

[augustabound]

 

There are many home owners I know of thinking of cashing in. But then the hard question comes, where to go? 

 

 

We're thinking a condo in Vancouver or Toronto.  ;D

 

That's the problem. If you sell a high priced asset, you're just going to buy another high priced asset and you won't come out ahead in any meaningful way.

 

As far as renting goes, the rents here are getting high also. Some are renting their houses out for more than $2000 a month plus utilities.

Our mortgage that we're renewing now will be at 2.25% and our payment is $1600.

 

If we find a place in downtown Newmarket in our price range, that will be our forever house, or at least until the girls are in University and moved out. (They're 3 and 6 now)

 

My wife is a software consultant and makes enough money that if an opportunity comes up in Alberta or BC, a move may be the best for us.

From my weekly viewing of MLS, prices are not coming down in Alberta in any meaningful way and BC is the same as it has been for years.

When oil dropped below 60 and companies were cutting staff there was an influx of new listings in Alberta but that only lasted about a month. Prices and number of listings seems the same as last year.

 

We will move for our lifestyle to the West or Newmarket not for the sake of cashing in. 

[gary17]

Is the risk that great ?

 

If you look at comparable cities in the US -  Seattle , Portland , San Fran and New York --  have we gone back or go beyond the 2007 prices?  Keep in mind the 2008/09 crash of US was the wrost in history; they have subprime ...    we have a different lending practice, downpayment policy , etc here in Canada.  I think if you were planning to rent for 5 years or more you are probably better off owning a place

 

But, it can vanish. How much of it is just luck?

 

I would not take on a$500-700k mortgage and hope. But, I am sure we are gamblers.

[wisdom]

I think otherwise, but, that is ok. I see a lot of risk and it could just be that I am very risk averse.

 

We can keep going back and forth and never agree because the outcome is in the future. Based on my limited understanding all I care about are the following:

1) asset is overvalued based on long term historical measures - 5.5 x median household income/sub 3% rental yield

2) leverage is involved - highest debt levels

3) everyone is talking about it or involved - 70% ownership v 63%

 

We can keep talking about all the reasons in the world why this time will be different but I don't care because I have no ability to know why it has to be different this time. I prefer to be opportunitic rather than rely on my forecasting abilities.

 

All the history I have read says avoid the above scenario. It is always possible that this time the outcome will be different. But, in the end I would have learned why this time was different and hopefully be smarter as a result. I do not think enough time has transpired to change my mind. Or maybe I have my head buried in the sand. We will know at some point in time.

[wisdom]

I should add that this was further re-inforced because I was able to be opportunistic in 2008/2009 and 2011. Most individuals who have chosen to participate in real estate have not done as well even though they have used leverage and the market has been very favourable.

 

These individuals need to let me know that they live in million dollar homes. Because I do not have any physical asset to show they feel that there must be something wrong with me as I cannot figure out what is obvious to everyone here - buy a house and become a millionaire.

 

My conclusion is because human nature dictates that a million dollar house needs to have furnishings/lifestyle/vehicles/kitchens, etc that match the million $ house, the majority end up spending the equity. My best read is most of this has been financed as a result of which networth has not increased at the rate one would expect. But, again it is only anecdotal and one persons opinion.

 

But this could also be the reason why 40% of people living in Vancouver want to leave but can't bring themselves to do what is best for them - human nature is interesting to say the least. And it is possible that I am fooling myself because I already came to this conlusion and reality is that everyone else is right that - an average house in Vancouver is going to $3 mil by 2030 and we will be the first city where only multi-millionaires live.

[SharperDingaan]

This is what folks are missing.

 

Assume you could rent a townhouse condo in a typical Toronto or Vancouver dormitory satellite city for 2K/month + utilities. Alternatively you could buy it for 629K. If you choose to buy - the condo fee will be 300/month, the mill rate 0.007, and the variable rate HELOC mortgage rate will be 2.50%; there will be no principal repayment.

 

Crunch the numbers, and compared to the rent option; the house buyer can afford to pay 16K/year in interest. At 2.50% this would support a mortgage of roughly 640K, and release 11K of equity. If your banker wants a 25% down payment (158K), that 16K/year becomes 11.8K of interest and 4.2K of SAVINGS/year reinvested as principal repayment.

 

If the landlord can charge more than 2K/month, or the mortgage rate is less than 2.5%; that savings, or equity release, would be even more. Every $100/month you pay above 2K/month; reduces principal by 1.2K/year, or releases an additional 48K of equity.

 

If you believe that house prices will rise over time, the landlord will have a very tough time raising his rent. If you believe that interest rates will significantly rise sometime soon, the landlord will suddenly find rent increases easy amidst a sea of new resale listings.

 

Most folk recognize that houses are hard assets that grow, over time, at the inflation rate. Most folk also recognize that the global financial crises is not likely to end soon, and therefore variable rate mortgages are unlikely to rise significantly. And just about everybody knows that the further you are from the urban centre - the lower the cost of living is; a $200/month cost of living saving would reduce principal by 2.4K/year, or release 96K of equity.

 

That down town condo was not designed for 3, couples need the space, and that move out to the satellite cities is not a big risk. We just don’t like that we have to move.

 

SD

 

[alertmeipp]

SD - u are missing out a lot of expenses.

[Aberhound]

My neighbour in Vancouver just sold out to a Chinese businessman who bought the $3.5M house as a guest house. Ten years ago it cost $650,000. When it is legal to move capital out of China, which they need to do to be a reserve currency, thousands more will be looking for "guest houses". We are a resort city. My other neighbour is heading to Saudi to a project to build 120 towers. He is just one of many who have been recruited to do the same. Instead of building one tower at a time here they intend to build many at once. The abundance of capital worldwide means that there are many who can afford Vancouver. Why come here? If you visit it is obvious. Crime is low thanks to a school system that teaches tolerance, and, unusual for North America, critical thinking (not all schools unfortunately). Or maybe it is the cheap pot that keeps people mellow. We are currently experiencing the best June weather in Vancouver in my lifetime. Sunny and warm with a cool breeze from the north. California drought means better weather here. Isn't California real estate much riskier than Vancouver? We will never have a drought. Will BC be paid for water exports via NAWAPA? Site C dam makes no sense unless the government intends to build NAWAPA.

 

Property in the interior of BC has risen even more than Vancouver proportionately. People sell in the city then move to the interior. The land I bought in the Kootenays has risen far more than the city because of the lower cost base. I am not selling because old Crown grants like I have have provisions that the government has to pay you reasonable amounts if they take water. I wonder if I will be able to enforce it once water is monetized? BC Hydro now has an entire office floor devoted to software to measure water flows and the government has passed laws to control ground water with a license system. Why measure it when there is so much excess here of little value? I expect they plan to monetize it. When water is monetized Canada will have a water-dollar like US has had a petro-dollar since the 1970s. I suspect it will be a North American currency by that time.

 

So I am not selling, instead I am looking for hedges. Right now I am looking at riverfront land which should fit 90 RV lots, a few hundred miles inland where it is sunny and close to the highway, hospitals and malls in a growing community. My trouble is that I am debt adverse as I believe it is too risky to hold real estate if you can't hold it through the cycles. Selling and trying to time the market rarely works. The dips have been minuscule in the long term trend. In theory if the market turns down the foreclosures and defaults will drive demand to the RV sector and modular homes are getting much better. It seems like a perfect hedge to me. Get a long term mortgage so it cannot be called by the bank then sell lots on a lease to own basis. I have been studying the business and in the US post 2008 it was exceptionally profitable. I suspect both the hedge and the land I hold and want to hedge will rise in value. Rising rents will drive many who do not own property out of Vancouver. You have to own property to stay unless you have skills like my neighbour the builder. Technology drives huge increases in wealth when globalism prevails and Vancouver and other well run beautiful places will prosper so long as the trend continues. It takes decades of good government and prosperity to create the trust which generally prevails here. The high levels of trust and tolerance is the true wealth of Vancouver. Robots should give another decade of gains and by that time then cheap energy should be available driving more gains but the great wealth created will tend to concentrate where there is high levels of trust and tolerance. Send your wives and daughters here and we will send you back well educated and fertile young women. Many of my neighbours are households with women and children and husbands who earn elsewhere. There are plenty of ex-hippy farmers who live by natural law ie the golden rule and the philosophy of reap what you sow to ensure you can buy good food. The newly arrived Chinese who practice Tai Chi in the parks fit in well as do the Japanese mothers and children who have such impeccable manners.

[SharperDingaan]

Actually, it does not miss the expenses; we just do not like what it says.

 

Utilities. Rent + utilities = Condo fee + property cost + utilities. Utilities are on both sides of the equation and are therefore irrelevant for comparison purposes. If you use more of the utilities than the average person, and are not paying for it – good for you. You have a foolish landlord.

 

Maintenance, grass cutting, property management, capital repairs, etc. Your condo fee pays for exactly that, and the landlord includes it in the rent he/she charges. If you bought a condo and have been assessed for additional reserve funds – too bad for you. You simply under-contributed in prior periods, and are making up for it today.

 

Transport, cost of living, etc. These are side-by-side houses. Whether you rented, or bought, the costs would be the same under each option and are therefore irrelevant for comparison purposes.

 

Principal & savings. Reduce the $4,200/yr to zero, and the maximum the renter would pay is $19,797/year – or $1650/month if the place is unfurnished. If you can buy and finance for less than $1650/month you would do so. Don’t much care if the property value could go down – it is cheaper than renting every month; the property value could also go up as well.

 

So … the equation is really rent = condo fee + ppty tax + mortgage interest.

 

Buy new and the condo fee is minimal, buy in an area where there is a lot of new build and ppty tax is minimal (as the new development is paying for upgrades), buy when times are tough because interest rates will be low, and buy when rents are high. 

 

Yes there is lots of rental property. But the property’s that have been fixed up cost more than $1650/month to rent, and are old. The property’s that have not been fixed up you would not want to raise a family in – unless you had to. So buy new, live better, and put up with the 3-4 months of delay that it may take to build the place.

 

There should be a stampede of buyers for new build high price condos in newly developing satellite towns, accessible to the urban core. There should also be bitching about the additional commute time. Exactly what we are seeing, and hearing, in the GTA.

 

Your biggest risk is a rapid rise in the variable interest rate, as a 100bp rise increases your cost/month by $400/month. But so what; does anyone really think that in today’s global economy we are going to see a rapid rise in rates anytime in the foreseeable future? And if we did - does anyone really think that the BOC would not be doing everything it could to mitigate it? Yes it is a risk, but not enough to paralyse.

 

So … everything we are seeing, really is very rational. We just do not like what it is telling us.

 

 

SD

 

Book1.xlsx

[Guest Schwab711]

 

The average down payment in Canada is 7% not 25%.

 

Thank you! I have always wanted to find this statistic because it's frustrating to hear Americans talk about Canadians as the world's most prudent folks. You just cannot have 25% down payments as common place without lots of other problems (given the size of houses globally).

[SharperDingaan]

Sorry but the 7% number is inaccurate.

 

Per the CMHC website the minimum is 5% for a single family dwelling and 10% for murbs. This 7% may be accurate for a brand new entrant with no prior real estate history, but it ignores the thousands of other trade up transactions where buyers already have significant equity from their previous home. If the 7% were representative, most Canadian posters on this board would have a mortgage equaling 93% of their house value - just how likely is that? http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_003.cfm

 

Folks finance the land transfer tax, they do not pay it out of pocket. The Ontario tax on a 629K property is 1.26% (7,910) of the property value, the interest cost would be 197/year; $17/month is not a show stopper.

http://www.fin.gov.on.ca/en/tax/ltt/

 

First time buyers are not buying 629K townhouse condo's either, as they cannot withstand the bidding wars. Different story for a 200K condo - but that is not the market we are talking about. But even if folks do take out the CMHC insurance, they will finance it. The CMHC premium for a 20% down payment is 1.25% of the home value. Again, $16/month is not a show stopper.

 

Rent also goes up every year if you have a terrible landlord. No difference.

 

SD

 

[Liberty]

 

The average down payment in Canada is 7% not 25%.

 

Thank you! I have always wanted to find this statistic because it's frustrating to hear Americans talk about Canadians as the world's most prudent folks. You just cannot have 25% down payments as common place without lots of other problems (given the size of houses globally).

 

This meme about Canadians being financially prudent will be looked back on later with great amusement.

[wisdom]

I am relying on my memory so could be wrong on the numbers - 50% of all mortgages in Canada at this point are insured. That implies there was something missing in the underwriting - either the 20% down payment wasn't there, there was no proof of income, etc.

 

The 3 insurers are CMHC, Genworth and Canada Guaranty. CMHC had virtually pulled out of the market because after the crisis they had insured 50% of all mortgages in Canada.

 

I believe that 50% of mortgages would amount to over $600 B in a country with GDP of $1.7 trillion or so.

 

Maybe this is rational, maybe it isn't. Maybe it is prudent, maybe not.

[Guest notorious546]

http://www.nytimes.com/2015/06/24/business/economy/more-americans-are-renting-and-paying-more-as-homeownership-falls.html?ref=business&_r=1

 

[augustabound]

We bought in 2011 for $349 and as of last January when new phases were released, our model is up to $505. Our next door neighbour who just sold for $629 paid $369 in 2011.

Yes, in Bradford, Ontario.  :o

And it continues.

 

We had our home appraised for our mortgage renewal this September. Our broker wants to be able to lock us in to 2.25% so he's getting the ball rolling now.

 

The appraisal came in at $560.

[wisdom]

Fascinating - flipping properties and fear of missing out.

 

http://business.financialpost.com/personal-finance/mortgages-real-estate/luxury-home-buyers-in-vancouver-flipping-houses-to-other-desperate-buyers-before-ink-even-dries-on-sale-contracts

 

[wisdom]

http://www.financialexpress.com/article/industry/banking-finance/ordinary-canadians-turn-bankers-as-shadow-mortgage-lending-rises/98032/

 

anecdotal evidence on how these purchases are being financed.

[Guest Schwab711]

Who holds the loans in Canada? Do the big 4 keep them on their books or are their MBS or Canadian mortgage funds out there? Who is poised to take the losses?

[LesPaul]

http://www.financialexpress.com/article/industry/banking-finance/ordinary-canadians-turn-bankers-as-shadow-mortgage-lending-rises/98032/

 

anecdotal evidence on how these purchases are being financed.

 

No idea how big this market is - but I've seen a few of these deals on the desks of an acquaintance - private 2nd mortgage with a 9% or 10% interest rate and a 1% fee upfront - interest only payments for 12 months or so.

 

Personally, if this was something I'd want to invest in, I'd probably just put my money into a First National (FN.TO - 7.5% Yield) or MCAN (MKP.TO - 9.5% Yield) today. At least most of those mortgages are backed by CMHC...although who knows how far that would get you in a crisis!

[wisdom]

I believe 50% of the mortgages are held by CMHC, Genworth and Canada guaranty. I could be wrong (relying on memory here) but i think these are 90-80% backed by the government.

 

The majority of the remaining mortgages are likely to be held by regulated FI's the banks, credit unions, etc. But, it is easy to beat the system if you know how to play the game which brokers/lenders do.

 

1) banks do not report mortgages on credit bureau's - thus, borrowers lie about primary residence v RE for investment. As far as the new FI is concerned this would be the only mortgage this individual would have.

2) by under holdco and the mortgage/HELOC is not reported on credit bureau. Lie when you apply for your next mortgage under another holdco,  whether you have a mortgage or not (similar to point 1)

3) often the down payment can be from an equity take out on the above properties as they increase in value.

4) Brokers/lenders advice individuals to apply for as many lines of credits as possible once a mortgage is approved to come up with the 5% down payment.

5) of course - private lenders - it is common to have small pools of  upto $10 mil or so lending to purchasers who do not have down payments or to builders. Often the source of the funds in first place are HELOCs on properties.

 

Back in 2007 individuals took out HELOC's at P minus 1% or so and lent to borrowers before getting burnt. This time around the money chasing this market seems to be more organized though often linked to brokers or pooled funds with no previous experience in downturns.

 

Often the term on these are for 1 year at 12-14%.

 

The down payments can come from private mortgages. If true, the official stats on %age of houses that have less than 20% down or the number of investment properties are, in my opinion, under reported.

 

The article about flipping also shows that a lot of the demand being reported may be artificial because the properties are being bought by either speculators or builders who plan to tear down and build more expensive homes. We will know at some point whether it is the end user buying or just flippers creating this demand.