Garth Turner - Real Estate in Canada

[Phoenix01]

Let me apologize if this has already been posted.  I found the following presentation that is a little dated but very relevant:

http://www.slideshare.net/ndsouza22/the-big-short-ii

 

I also really enjoyed this article:

http://www.fool.ca/2014/12/02/10-jaw-dropping-numbers-from-canadas-real-estate-market-2/

 

In summary, the price appreciation of real estate in Canada is a result of higher lending.  The income to support that lending has not kept up and lending is at a saturation point.  It can't go much higher.  Calgary is a good example of what to expect.

 

http://www.bnn.ca/News/2015/11/10/Empty-floors-shadow-vacancies-new-norm-for-Calgary-tower-owners.aspx

[Libs]

http://www.theglobeandmail.com/news/investigations/the-real-estate-technique-fuelling-vancouvers-housing-market/article28634868/

 

Nice summary of the shenanigans realtors pull in Canada ( esp Vancouver).

 

A) Realtor sells A's house to B.

B ) Realtor invokes the assignment clause, and buys it himself

C ) Flips to someone else at a profit.

 

Legal, but scummy. Note the 500+ outraged comments to get a sense of how things are boiling over.

[RichardGibbons]

Legal, but scummy.

 

I don't actually see why this is scummy (and I tend to have very strong opinions about real estate). As long as the agent wasn't representing the original seller, I don't see the problem.

 

Like, once the deal is signed, the original seller has got what they want, and the buyer has all the risk.  Would it still be scummy if the market dropped, and the agent sold the assignment for a $200,000 loss rather than a $200,000 gain?

 

Is it scummy if a market maker in the stock market buys shares for you for $10, and then sells them 30 seconds later for $10.10? 

 

I don't see any real difference.  I think that this issue is simply media-created outrage over something that's actually ethical (and kind of stupid for the agent to do.) 

 

The people want to blame someone for the ridiculous Vancouver housing prices, so would prefer to blame agents rather than the stupid people buying houses that they can't actually afford, the Bank of Canada trying to keep the bubble economy alive by pumping debt into the system through low interest rates, and CMHC lubricating the system by pushing a healthy dose of moral hazard onto the banks.

[Viking]

I live in greater Vancouver (Langley). 2,350 sq ft houses sold for $600,000 six years ago. Two years ago they sold for $700,00. Last year it was $750,000. This year a house was listed for $850 and it sold for $1,030 (it is now affectionately referred to as the 'million dollar house'). My neighbour recently listed their house at $938,000; they had 40 people though, multiple offers, and a final offer of $983,000. Most of buyers are Asian looking to get their $ out of China. Total blows me away to see prices going up one hunded thousand dollars each year for many years. Hard to see how this is not a bubble.

 

The crazy thing is the flow of $ from China is expected to continue so we may very well see prices go even higher. Vancouver is such a small city it does not take much demand from China to cause prices to spike. Both of my new neighbours are from China (very nice families and great neighbours). :-)

[wisdom]

Interesting fact - permanent residents from China to BC are down 50% in the last 10 years.

 

City of Vancouver expects a 1,000 demolition permits this year. Could it be developers who own those properties. From what I understand there are a lot of individuals who have become builders and a lot of them own anywhere from 2 to 20 properties that they re- develop. Could this be the reason for the shortage in supply and crazy prices?

[nodnub]

Interesting fact - permanent residents from China to BC are down 50% in the last 10 years.

 

City of Vancouver expects a 1,000 demolition permits this year. Could it be developers who own those properties. From what I understand there are a lot of individuals who have become builders and a lot of them own anywhere from 2 to 20 properties that they re- develop. Could this be the reason for the shortage in supply and crazy prices?

 

Can you clarify what you mean by this, or provide a source?  It is ambiguous as it is written.

permanent residents from China to BC are down 50% in the last 10 years.

 

[alertmeipp]

Legal, but scummy.

 

I don't actually see why this is scummy (and I tend to have very strong opinions about real estate). As long as the agent wasn't representing the original seller, I don't see the problem.

 

Like, once the deal is signed, the original seller has got what they want, and the buyer has all the risk.  Would it still be scummy if the market dropped, and the agent sold the assignment for a $200,000 loss rather than a $200,000 gain?

 

Is it scummy if a market maker in the stock market buys shares for you for $10, and then sells them 30 seconds later for $10.10? 

 

I don't see any real difference.  I think that this issue is simply media-created outrage over something that's actually ethical (and kind of stupid for the agent to do.) 

 

The people want to blame someone for the ridiculous Vancouver housing prices, so would prefer to blame agents rather than the stupid people buying houses that they can't actually afford, the Bank of Canada trying to keep the bubble economy alive by pumping debt into the system through low interest rates, and CMHC lubricating the system by pushing a healthy dose of moral hazard onto the banks.

 

I think some are thinking that's more trading with insider info.

[wisdom]

http://www.vancouversun.com/Permanent+residents+from+China+drops+half/11688716/story.html

 

Residents from China drop by half

[mcliu]

Do you have to be a permanent residence to buy a house?

[wisdom]

No - this was in reference to the anecdote that both their neighbors were from China. But, I don't see rich investors buying houses that are an hour out of the city in the suburbs for $1 mil (no backyard/no views). The suburb (Langley) is where most professional families are moving to as it is considered affordable.

 

And no Vancouver is no silicon valley - the city has one of the lowest median household incomes amongst major Canadian cities.

[nodnub]

http://www.vancouversun.com/Permanent+residents+from+China+drops+half/11688716/story.html

 

Residents from China drop by half

 

Wisdom, thank you for the source.

This would be a more accurate summary.

VANCOUVER — Overseas immigration to B.C. is down 22 per cent in the past decade, driven largely by a plunge in migration from China, which has long been this province’s largest source of immigrants.

 

The number of permanent residents moving to B.C. from China has fallen by half, to just over 6,000 in 2014 from 13,600 in 2005, according to Immigration, Refugees and Citizenship Canada. China’s proportion of B.C.’s new permanent residents dropped to 17 per cent from 30 per cent in the decade.

 

Immigration is what makes Canada a great country and will be critical to our future growth. I support it completely.

 

"Permanent resident" is people that have applied and received permanent status in Canada. This is different from "resident" as you summarized in both your comments above. A Permanent Resident is on track to eventually become a Canadian citizen, if they choose to. A resident is just some one that is living here (on a visa or whatever).

 

Some people choose to immigrate to Canada and work here and pay taxes here.  But some are just getting their money out of their own country and invest it in real estate in Canada. If real estate continues on the current path it is possible the government will add a tax on foreign ownership of property. There are other countries that have similar taxes or restrictions on property ownership.

 

Do you know the expression, "there are lies, damned lies and statistics?".  I can find a statistic to prove any argument I want. But to understand the data in context you need a broader perspective and more information. And I don't think we have all the data in front of us. For example, what if Harper made budget cuts in the immigration processing dept in 2013 and there was a huge backlog in 2014 so the numbers of approved were low?

[wisdom]

Nodnub - I was talking about PR's. It was just that I used a short form when you asked for the source. If you look at the graph in the article it does not look like a one time read - It looks like that is the trend. It is possible that 2004 was an anomaly. I do not know for sure though.

[mcliu]

With homes trading so far above replacement value, why aren't there people building homes like crazy in Toronto and Vancouver? The margins must be huge. And it's not like there's a shortage of land..

[gary17]

With homes trading so far above replacement value, why aren't there people building homes like crazy in Toronto and Vancouver? The margins must be huge. And it's not like there's a shortage of land..

 

homes aren't trading above replacement value -  it's the lots - the dirt - that's worth a fortune.

 

a house of $1.5M is $1.45M in the price of the lot; not the house!

[KCLarkin]

With homes trading so far above replacement value, why aren't there people building homes like crazy in Toronto and Vancouver? The margins must be huge. And it's not like there's a shortage of land..

 

At least one of your assumptions is incorrect.

 

http://www.thestar.com/business/real_estate/2015/10/24/the-rise-of-willowdale-torontos-hottest-new-neighbourhood.html

 

"Land values alone have escalated so dramatically the last couple of years in this area just east of the North York Civic Centre that Jalali says banks are appraising most original homes at 97 per cent land value."

[wisdom]

Land is valuable to developers. I believe that is where most of the inventory is sitting - it takes a while for city approvals, demolishing and building.

 

When this is over and done with - it will be interesting to look at the number of Canadians who became builders.

[gary17]

Land is valuable to developers. I believe that is where most of the inventory is sitting - it takes a while for city approvals, demolishing and building.

 

When this is over and done with - it will be interesting to look at the number of Canadians who became builders.

 

i personally know of quite a few family friends and relatives just buying up lots and holding...  not developing.    many Asians would save money in land rather than in a savings account lol 

[nodnub]

Nodnub - I was talking about PR's. It was just that I used a short form when you asked for the source. If you look at the graph in the article it does not look like a one time read - It looks like that is the trend. It is possible that 2004 was an anomaly. I do not know for sure though.

 

Yes I see what you are saying.  I think this is a more telling excerpt from that article.

 

Henry Yu, a history professor at the University of B.C. who studies migration between China and Canada’s west coast, said the decline in permanent residents does not mean there are fewer Chinese in B.C.

“What you’re seeing is the benefits of permanent residency have declined over time. It doesn’t mean there are less Chinese here. It just means that permanent residency as a desirable decision has declined, at times precipitously.”

 

Yu points to the former Conservative government’s introduction of a 10-year super visa as “ground changing.” Super visas are valid for 10 years and allow parents and grandparents to visit children in Canada for up to two years at a time. The government introduced the program in 2011 as it capped the number of new permanent residence applications for parents and grandparents it would accept because of a lengthy backlog.

 

For Chinese parents who have children studying in Canada, for example, it often makes more sense to apply for a super visa than for permanent residence, Yu explained.

 

“If you have a 10-year super visa, then what’s the upside of being a (permanent resident)? In fact, there’s quite a few downsides to being a (permanent resident),” Yu said, noting that having to pay taxes in Canada is at the top of that list. There is also no requirement to be a permanent resident in order to own property in Canada.

Again,  I would love to have these people come and stay and become permanent residents and become citizens and work and pay tax in Canada.  But if the parents live and work overseas and buys a big house for their 18 year old kid to come study here and live in the big house by themself and use it as a tax dodge (personal residence exemption), then what value does that family contribute to Canadian society?

 

 

 

 

[wisdom]

That is the hot money that may be coming in and will be first to leave when and if things go south. Just makes for larger swings. The unfortunate thing is that this is real estate that we are talking about that is being used to speculate and tends to have a large impact with each move because more people own homes and leverage. Leverage can be 20x.

 

For perspective - Last year home prices increased 30% in Vancouver on top of a 15 year run up. There are several examples where I know people who are turning around and selling a house the same day for $90k more than the purchase price.

 

Never been easier to get rich.

[Phoenix01]

The graph in this article needs to be seen to be believed.

 

http://www.news1130.com/2016/02/02/vancouver-house-price-new-record/

 

 

[nodnub]

That is the hot money that may be coming in and will be first to leave when and if things go south. Just makes for larger swings. The unfortunate thing is that this is real estate that we are talking about that is being used to speculate and tends to have a large impact with each move because more people own homes and leverage. Leverage can be 20x.

 

For perspective - Last year home prices increased 30% in Vancouver on top of a 15 year run up. There are several examples where I know people who are turning around and selling a house the same day for $90k more than the purchase price.

 

Never been easier to get rich.

 

That is definitely how it looks! I used to believe the following expression would come true "what the wise man does in the beginning the fool does in the end".  But not sign of that yet.  It's a crazy time. 

 

There is no advantage to having that additional volatility in the housing market.  I keep thinking hot money flows in real estate just seems like it will end badly some day. That was essentially the problem in the US real estate boom in early/mid 2000s,  except the hot money was coming from inside the country (people that couldnt *really* afford the mortgage, or people that bought more properties than they could handle because credit terms were soooo loose - you had a pulse, you could get a zero-down IO mortgage).

 

[nodnub]

The graph in this article needs to be seen to be believed.

 

http://www.news1130.com/2016/02/02/vancouver-house-price-new-record/

 

That is very interesting chart.  Again there is an issues with statistics/data.  I wish they would publish the median value. I wonder what it would look like. I think it would show what the price increases were on a "more typical" house and be less skewed by the most expensive properties.  Maybe the median is only up 10% this year.  who knows.

 

--

edit:  okay I stopped being lazy. and spent a couple minutes with google. 

MLS has the Home Price Index (HPI) which is calculated using the median price instead of the average price.  I opened this report for Feb 2016 http://www.rebgv.org/sites/default/files/REBGV%20Stats%20Pkg%20February%202016.pdf

 

In the first table in that report you can discover the median price increase in the last 12 months to Feb 2016 for Detached houses, townhouse and apartments in various areas. eg.  Vancouver East, Vancouver West, West Vancouver, Burnaby South, et al.

or consolidated to Greater Vancouver level.  All numbers are lower than the headline 30% increase,  most of them are in the mid-20s. 

 

Given that the median prices are increasing at lower rate than average I think that the higher end properties are going up a lot more than 30% in the past year.  It's tough luck to be a millionaire in Vancouver if you haven't bought your 3 million house yet  :)

 

 

[JBTC]

That is the hot money that may be coming in and will be first to leave when and if things go south. Just makes for larger swings. The unfortunate thing is that this is real estate that we are talking about that is being used to speculate and tends to have a large impact with each move because more people own homes and leverage. Leverage can be 20x.

 

For perspective - Last year home prices increased 30% in Vancouver on top of a 15 year run up. There are several examples where I know people who are turning around and selling a house the same day for $90k more than the purchase price.

 

Never been easier to get rich.

 

Shouldn't a 15-year run indicate there are long-term fundamental factors supporting the market?

 

The price chart says apartment prices have increased more modestly than detached homes, suggesting it's land that has become scarce.

 

I am not saying the current price is fully justified, because it likely reflects both investment merits and speculation.

 

If Chinese buying is indeed key, then it's difficult to know when the run-up will stop. My guess is if adjusted for quality and lifestyle, Vancouver housing is likely still cheaper than China.

 

[alertmeipp]

just like many bubbles (I don't know if this one is but it sure looks like one) ... it will be hard to see how it stops until it does.

 

as this continue, pretty much all locals will need to move to condos, while foreign ppl (mainly from China) taking over all detached.

 

does this look like sustainable to you?

 

most other major cities in around the globe do have some rules in places to stop the inflow while Canada has done nothing so far. That makes the situation way worse as Canada is becoming the easiest place to move money into.

[JBTC]

just like many bubbles (I don't know if this one is but it sure looks like one) ... it will be hard to see how it stops until it does.

 

as this continue, pretty much all locals will need to move to condos, while foreign ppl (mainly from China) taking over all detached.

 

does this look like sustainable to you?

 

most other major cities in around the globe do have some rules in places to stop the inflow while Canada has done nothing so far. That makes the situation way worse as Canada is becoming the easiest place to move money into.

 

My guess is the problem is mostly in Vancouver and Toronto, not really Canada wide.

 

The global affluent go after these highly livable cities. You hear the same complaints when you talk to someone from London or Sydney.

 

I presume even before the immigrants arrived in scale a couple of decades ago, the same trend was taking place, albeit not as visible. People from other cities moved in, neighborhoods gradually gentrified, local low-income households moved out.

 

So this broad trend has been in place for many years and will surely continue. Only the characters have changed and the pace has accelerated.

 

I agree if Canada changes its immigration policy, it will likely slow the Vancouver market a bit. In addition, the government could force the foreigners to buy new apartments rather than existing properties, which is the rule in Australia.