Garth Turner - Real Estate in Canada

[rb]

The Teranet data is very good but it doesn't go far enough. The previous peak was in 1989. The Teranet data for Toronto only goes back to 1997. Before that you have to use CREA numbers. I splice CREA with Teranet as Teranet data starts. You also have to keep in mind that CREA data has an upward bias in prices and growth rates due to their methodology. Teranet doesn't have bias.

 

For affordability I didn't build my own models. Part of it is lazyness and part is that I don't really work with RE so it's not worth it for me to invest a whole lot of time to build a complicated profitability model. RBC Economics used to put out a quarterly house affordability report which was decent. It overestimated affordability cause they wanna sell mortgages after all, but was good enough so I used that one. They stopped publishing that report last August - I wonder why?

 

For what if scenarios yea, they're interesting. If things continue at this rate in less than 7 years 100% of household income will go to pay for the home in Toronto. Vancouver will be well over 100%. But that's ok because house prices never go down.

[permabear]

For what if scenarios yea, they're interesting. If things continue at this rate in less than 7 years 100% of household income will go to pay for the home in Toronto. Vancouver will be well over 100%. But that's ok because house prices never go down.

 

That's incredible. Does that include incomes rising at the same pace too?

[rb]

For what if scenarios yea, they're interesting. If things continue at this rate in less than 7 years 100% of household income will go to pay for the home in Toronto. Vancouver will be well over 100%. But that's ok because house prices never go down.

 

That's incredible. Does that include incomes rising at the same pace too?

That's with incomes rising at the pace over the past few years and RE rising at the pace of over the past few years.

[permabear]

Craziness. There's your catalyst! We all know incomes aren't going to start skyrocketing.

[mcliu]

The Teranet data is very good but it doesn't go far enough. The previous peak was in 1989. The Teranet data for Toronto only goes back to 1997. Before that you have to use CREA numbers. I splice CREA with Teranet as Teranet data starts. You also have to keep in mind that CREA data has an upward bias in prices and growth rates due to their methodology. Teranet doesn't have bias.

 

For affordability I didn't build my own models. Part of it is lazyness and part is that I don't really work with RE so it's not worth it for me to invest a whole lot of time to build a complicated profitability model. RBC Economics used to put out a quarterly house affordability report which was decent. It overestimated affordability cause they wanna sell mortgages after all, but was good enough so I used that one. They stopped publishing that report last August - I wonder why?

 

For what if scenarios yea, they're interesting. If things continue at this rate in less than 7 years 100% of household income will go to pay for the home in Toronto. Vancouver will be well over 100%. But that's ok because house prices never go down.

 

Not sure if you're referring to these reports, but these RBC affordability studies are still being published:

 

http://www.rbc.com/newsroom/reports/rbc-housing-affordability.html

[JBTC]

http://www.visualcapitalist.com/vancouver-real-estate-mania/

 

Some information in here, but it seems hard (to me) to tell if they describe a bubble or simply a boom...

[gary17]

lol

 

http://www.news1130.com/2016/06/02/prospective-buyers-shut-out-of-townhome-sales-in-richmond/

[Guest Schwab711]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

 

How do they get mortgages for these properties? Where's the income coming from? If there's a default, is there recourse?

 

Many dont need mortgage. Not sure how they move so much cash over given the Chinese regulation...

 

Circumventing the regulation limiting it to $50,000 annually has been covered in the media a bit already.  One way is paying a bunch of people a fee to use their $50,000 allocation.  I'm sure there are many other methods.

 

Bitcoin

China -> HK -> Panama/Barbados bank accounts -> Canada

gold

shell companies

insurance payouts

the list goes on

 

I don't believe there is recourse on Chinese income for US or Canadian residents, unless the deal was originally above-board. That is the advantage Mainland folks have.

 

Friends at a Canadian bank say that execs know the big markets are overheated but they can't afford to show low loan originations because of the potential market reaction. I thought this was a big problem in 2013. It's amazing how much shady volume is happening in plain sight. I can't imagine what this correction is going to look like. There's just so much Chinese capital that wants to leave the Mainland that it is hard to tell when this will happen. I think we may be seeing an opinion on the Chinese economy more than anything else with this bubble.

[Libs]

I'm just grateful Parsad is getting in on the action, via Premier. Would be nice to cash in on a bubble for once  ;D

 

http://nebula.wsimg.com/c65f92956e487e536a15840eedd70b17?AccessKeyId=D9BC91A237FD97511E7C&disposition=0&alloworigin=1

[scorpioncapital]

So if the bubble bursts, do we get inflation or deflation? I see arguments for both.

 

[rb]

So if the bubble bursts, do we get inflation or deflation? I see arguments for both.

You get deflation. Or maybe I should say deflationary forces. It may be averted by superhuman efforts by the government and BoC.

[rb]

Ok friends,

 

So I'm doing some weekly reading and I run into this sort of article.

 

http://www.theglobeandmail.com/report-on-business/top-business-stories/toronto-home-prices-soar-as-fears-of-the-b-word-mount-in-vancouver/article30257082/

 

Turns out that this week CREA put out the may numbers. So they're saying YoY detached homes in Vancouver are up 37%, detached homes in Toronto Proper up 17.5%, and detached homes in Toronto burbs up around 21%.

 

First of all, these are frightening numbers. But I went to dig deeper in the data and maybe I'm stupid but the numbers don't seem to add up. Just to caveat that both Teranet and CREA did not update their numbers for May so what we're looking at below are YoY numbers for Apr15-Apr16. I don't think it should make that much of a difference to shift the year by a month unless May 2016 was really a blockbuster month. So the numbers:

 

                                            Van            TO

YoY Change Teranet              19.8            10.5

YoY Change CREA                  25.4            12.6

YoY Change Condos CREA      20.6              6.9

 

1. There seems to be a significant discrepancy between teranet and crea numbers. I mean crea numbers do have an upward bias but it should creep over time, not be so big just over 1 year.

2. While I wouldn't trust crea to babysit anyone's kids I don't think they'd go out and right out lie about the numbers.

3. If detached homes performed so well why are the averages so off?  Is there just a handful of detached transactions and shitloads of condo transactions?

4. If we're really looking at massive - around 20% - increase in house prices is this the part of the cycle where prices go vertical just before they collapse under their own weight?

 

Any thoughtful ideas would be appreciated.

[RichardGibbons]

Teranet numbers are calculated using linear extrapolation of "same house" price changes.  In other words, it looks at a house that sold 2 years ago for $100K and is selling today for $140K, and assumes that the price went up 20K last year.

 

CREA numbers are a true average, just dividing the sum of the sale prices of the houses by the number of sales.  Thus, they are affected significantly by product mix.  If one year, people only bought condos for an average price of $250K, and the next year they only bought houses for $1M, then--even if prices didn't actually change at all--CREA would say average prices went up 400%.

 

This is a theoretical case, but in practice, it's also been true historically in Vancouver that product mix matters.  (i.e. you can see the effects of several big sales in pulling up the average.)

 

I think it's also worth noting that other real estate indices in BC created by the BCREA should be viewed with skepticism, since they aren't disclosing their methodology in any way that would allow an outside party to make sense of their numbers.  So their indices should largely be viewed as a marketing number, not representing anything about the actual state of the real estate market.

[scorpioncapital]

So if the bubble bursts, do we get inflation or deflation? I see arguments for both.

You get deflation. Or maybe I should say deflationary forces. It may be averted by superhuman efforts by the government and BoC.

 

Right, so would this mean the Canadian dollar gets stronger and since we have such an import based economy day to day life would get cheaper?

[rb]

So if the bubble bursts, do we get inflation or deflation? I see arguments for both.

You get deflation. Or maybe I should say deflationary forces. It may be averted by superhuman efforts by the government and BoC.

Right, so would this mean the Canadian dollar gets stronger and since we have such an import based economy day to day life would get cheaper?

Well... we don't actually have such an import based economy. Secondly, it's not entirely clear to me that CAD will go up. As I mentioned a bubble burst will have deflationary effects. Those effects will put upward pressure on CAD.

 

On the other hand the federal government will probably start to borrow lots of money - to finance fiscal stimulus, plug holes at CMHC,.... bail out CIBC. Hot RE money will probably start leaving Canada. And, i imagine that Bank of Canada will get really aggressive. All of which will pull CAD lower. It's hard to say for sure what will happen to CAD. My view is that CAD will go lower.

[scorpioncapital]

So if the bubble bursts, do we get inflation or deflation? I see arguments for both.

You get deflation. Or maybe I should say deflationary forces. It may be averted by superhuman efforts by the government and BoC.

Right, so would this mean the Canadian dollar gets stronger and since we have such an import based economy day to day life would get cheaper?

Well... we don't actually have such an import based economy. Secondly, it's not entirely clear to me that CAD will go up. As I mentioned a bubble burst will have deflationary effects. Those effects will put upward pressure on CAD.

 

On the other hand the federal government will probably start to borrow lots of money - to finance fiscal stimulus, plug holes at CMHC,.... bail out CIBC. Hot RE money will probably start leaving Canada. And, i imagine that Bank of Canada will get really aggressive. All of which will pull CAD lower. It's hard to say for sure what will happen to CAD. My view is that CAD will go lower.

 

My concern is it turns into a Japan style basket case - or a Euro type. Both countries have negative rates and massive QE and yet still can't seem to get their currencies to weaken much versus the US dollar. Yes, in a crash you may have massive government stimulus but there is a lag and the currency between the event and the response could be very much in the opposite expected direction - for a while anyway.

[Liberty]

http://www.bnn.ca/News/2016/6/3/Another-record-breaking-month-for-Toronto-housing-amid-fears-of-overheating-.aspx

 

http://ctvbnn.s3.amazonaws.com/Images/ImageLibrary/RealEstate/Suburbs.png

 

http://ctvbnn.s3.amazonaws.com/Vancouver.png

[Guest 50centdollars]

Who is insuring this?

 

[wisdom]

Genworth if insured. Otherwise, private mortgages or fraud either by lenders or borrowers.

[scorpioncapital]

Who needs stocks with returns like these? Of course the Canadian dollar has tanked 30% since a few years ago so it may be less in foreign currencies. Great for foreign buyers, not so hot for locals.

[rb]

http://www.bnn.ca/News/2016/6/3/Another-record-breaking-month-for-Toronto-housing-amid-fears-of-overheating-.aspx

 

http://ctvbnn.s3.amazonaws.com/Images/ImageLibrary/RealEstate/Suburbs.png

 

http://ctvbnn.s3.amazonaws.com/Vancouver.png

As I did a couple of pages back, I'm claiming BS on those numbers. They seem to be on the high side esp for Toronto. They don't even line up with CREAs numbers. Either May 2016 was a totally bonkers month or they're cherry picking or they're flat out lieing. I don't know how they do it.

[alertmeipp]

I live in GTA . Those numbers match what i see.

Actually in some area, its higher.

 

[rb]

I live in GTA . Those numbers match what i see.

Actually in some area, its higher.

Thank you for that very astute and insightful observation. Can your great sense of vision tell the difference between 9% and 6% growth? Maybe your sight can clarify why the match pairs sales data for GTA comes in at 10% when semis and detached are supposedly going up at 20%?

[gary17]

We should ask the MPs and Mr. Prime Minister if as the highest paid public post in Canada he can afford to live in Vancouver LOL!!!!

[gary17]

RB -

as someone who has made 10 offers in houses in North Vancouver - I can tell you those numbers are REAL!

 

The last one I made for $1.1M went for $1.3M -  basically you can search "City of North Van map" and "District of North Van Map" and find the assessment price - and compare that with listing price - typically one lists 2x assessment value; and get 10 offers and finish 300K$ over asking.

 

and the seller likely gained 37% last year , leverged... 5x?  so 100%  ..... oh, did I say TAX FREE? LOL