Garth Turner - Real Estate in Canada

[gary17]

This is getting comical.

 

My aunt and uncle who live in Woodbridge have been borderline bankrupt for years just refinanced their house with none other than Home Capital Group. Home Cap gave them a $700K mortgage and they are in their 70's! My uncle is retired and my aunt works as the deli manager at Metro. How on earth can they ever pay this back? There only hope is to sell before the market goes down. If they don't they're bankrupt. But how can a lender give someone in their seventies $700K? And this is to people who have been on the verge of bankruptcy for years. They have only kept their house because they have borrowed over $150K from family members. This makes no sense to me.

 

50, you need to provide some context otherwise your statement makes no sense.

how much is the house worth ?

 

if it's worth $2M.  a 700k loan is no big deal at all.  even if they default or if market corrects 30%, the bank is still ahead by repossessing. 

[Peregrine]

This is getting comical.

 

My aunt and uncle who live in Woodbridge have been borderline bankrupt for years just refinanced their house with none other than Home Capital Group. Home Cap gave them a $700K mortgage and they are in their 70's! My uncle is retired and my aunt works as the deli manager at Metro. How on earth can they ever pay this back? There only hope is to sell before the market goes down. If they don't they're bankrupt. But how can a lender give someone in their seventies $700K? And this is to people who have been on the verge of bankruptcy for years. They have only kept their house because they have borrowed over $150K from family members. This makes no sense to me.

 

50, you need to provide some context otherwise your statement makes no sense.

how much is the house worth ?

 

if it's worth $2M.  a 700k loan is no big deal at all.  even if they default or if market corrects 30%, the bank is still ahead by repossessing.

 

Agreed with this.

 

One more thing to add: as a federally regulated lender, Home Capital needs to abide by debt servicing ratios to qualify mortgages on affordability.

 

50, you're probably not privy to all the details.

[Guest 50centdollars]

This is getting comical.

 

My aunt and uncle who live in Woodbridge have been borderline bankrupt for years just refinanced their house with none other than Home Capital Group. Home Cap gave them a $700K mortgage and they are in their 70's! My uncle is retired and my aunt works as the deli manager at Metro. How on earth can they ever pay this back? There only hope is to sell before the market goes down. If they don't they're bankrupt. But how can a lender give someone in their seventies $700K? And this is to people who have been on the verge of bankruptcy for years. They have only kept their house because they have borrowed over $150K from family members. This makes no sense to me.

 

50, you need to provide some context otherwise your statement makes no sense.

how much is the house worth ?

 

if it's worth $2M.  a 700k loan is no big deal at all.  even if they default or if market corrects 30%, the bank is still ahead by repossessing.

 

$950K but it depends on bidding war. So it doesn't matter about paying back the loan. Only selling the house?

[wisdom]

This is the typical belief system in Canada. You don't need cash flow because houses always rise. Why bother with cashflows? Borrow larger amounts and keep bidding asset prices higher so everyone can borrow even more.

 

It is a beautiful thing. If only the rest of the world could figure this out we would all have limitless funds.

[TBW]

I don't think anybody is going to take out HCG. I'd say that foreigner are probably gonna sit this one out and it's too small for Canadian FIs to matter. Since 4 of the 5 banks called the real estate situation a bubble I doubt they'd spring for a sub prime lender. But who knows Lauratian has done dumb things before.

 

There is no way a bank takes them out. Why would they do it when they have a risk free model with the government? I was thinking more along the lines of EQB taking them out or doing some sort of merger since EQB is in the same situation as HCG.

 

For the record, HCG and EQB are leaders in the alt-A regulated market. There's not many players, and it's a highly niche-type market. Take a look at their non-performing numbers over time - it doesn't jive with the fraud thesis.

 

I used to think this.  However it doesn't really pass the reality test to me anymore.  I think their numbers are too good to be true.  Genworth Canada is a good example.  Their delinquencies are really low.  Part of the reason is that they restructure a lot of these loans and then don't disclose it.  They amend payments, delay payments etc and I think this gets them out of having to show these actual troubled loans more clearly in their accounting (ie. the semantics become different and thus not needed to report).  In Genworth's case the number of cases where they are 'proactive' is buried in one report they put out annually (I forget which one atm).  Here is a video that explains their process https://www.youtube.com/watch?v=ECHZ0a_-Ojw.  I suspect the other suspects EQB, HCG do something similar.  Read those SA articles on how HCG was selling off some of their Brampton originated loans.  Too much smoke here, anecdotal evidence for me to believe their deliquentcy numbers or more importantly that they will stay this low.  Seems impossible to me that you can lend in lower quality borrowers and face less risk.  Normal US banks has loan loss provisions in the 1 to 2% - and EQB and HCG are 0.10% - doesn't make intuitive sense to me.

[Peregrine]

I don't think anybody is going to take out HCG. I'd say that foreigner are probably gonna sit this one out and it's too small for Canadian FIs to matter. Since 4 of the 5 banks called the real estate situation a bubble I doubt they'd spring for a sub prime lender. But who knows Lauratian has done dumb things before.

 

There is no way a bank takes them out. Why would they do it when they have a risk free model with the government? I was thinking more along the lines of EQB taking them out or doing some sort of merger since EQB is in the same situation as HCG.

 

For the record, HCG and EQB are leaders in the alt-A regulated market. There's not many players, and it's a highly niche-type market. Take a look at their non-performing numbers over time - it doesn't jive with the fraud thesis.

 

I used to think this.  However it doesn't really pass the reality test to me anymore.  I think their numbers are too good to be true.  Genworth Canada is a good example.  Their delinquencies are really low.  Part of the reason is that they restructure a lot of these loans and then don't disclose it.  They amend payments, delay payments etc and I think this gets them out of having to show these actual troubled loans more clearly in their accounting (ie. the semantics become different and thus not needed to report).  In Genworth's case the number of cases where they are 'proactive' is buried in one report they put out annually (I forget which one atm).  Here is a video that explains their process https://www.youtube.com/watch?v=ECHZ0a_-Ojw.  I suspect the other suspects EQB, HCG do something similar.  Read those SA articles on how HCG was selling off some of their Brampton originated loans.  Too much smoke here, anecdotal evidence for me to believe their deliquentcy numbers or more importantly that they will stay this low.  Seems impossible to me that you can lend in lower quality borrowers and face less risk.  Normal US banks has loan loss provisions in the 1 to 2% - and EQB and HCG are 0.10% - doesn't make intuitive sense to me.

 

Genworth Canada as a mortgage insurer doesn't hold mortgages, they guarantee them. They can't amend payments or delay them. If a mortgage that they insure goes into default, they reimburse the lender for any losses. Typically, losses get minimized because of the substantial LTV cushion. But if you're worried about their underwriting, look at their combined ratios.

 

It doesn't make sense to you, so you're trying to distort the facts so that it does make sense to you. Have you considered the possibility that your initial premise is wrong?

[TBW]

I suggest you watch the video I linked.  Explains how Genworth does all the things I mentioned.

 

There certainly is some chance I wrong and EQB and HCG are conservative lenders.  But I am sceptical.

[Peregrine]

I suggest you watch the video I linked.  Explains how Genworth does all the things I mentioned.

 

There certainly is some chance I wrong and EQB and HCG are conservative lenders.  But I am sceptical.

 

Yes, I'm aware of remedial programs that Genworth (and CMHC for that matter) uses for mortgages in delinquency or default. These programs are there to help avoid foreclosure, which is a costly situation for both the homeowner and the lender.

[CalvinL]

This is the typical belief system in Canada. You don't need cash flow because houses always rise. Why bother with cashflows? Borrow larger amounts and keep bidding asset prices higher so everyone can borrow even more.

 

It is a beautiful thing. If only the rest of the world could figure this out we would all have limitless funds.

 

The truth is you still need to "prove" cashflow. But that proof is where some brokers would bent the rules. I went to 2 different mortgage brokers and they both suggested me to "prove" cash flow by simply drafting a renting agreement with someone. There will be tax on those rental income, but the interest would be deductible. They really dont care if those rental incomes are legit. The message was "this is common sense and everyone does it. You are missing out if you don't" Their job is to present a case to the underwriters so that they don't have a reason to reject them.

[EliG]

This is getting comical.

 

My aunt and uncle who live in Woodbridge have been borderline bankrupt for years just refinanced their house with none other than Home Capital Group. Home Cap gave them a $700K mortgage and they are in their 70's! My uncle is retired and my aunt works as the deli manager at Metro. How on earth can they ever pay this back? There only hope is to sell before the market goes down. If they don't they're bankrupt. But how can a lender give someone in their seventies $700K? And this is to people who have been on the verge of bankruptcy for years. They have only kept their house because they have borrowed over $150K from family members. This makes no sense to me.

 

50, you need to provide some context otherwise your statement makes no sense.

how much is the house worth ?

 

if it's worth $2M.  a 700k loan is no big deal at all.  even if they default or if market corrects 30%, the bank is still ahead by repossessing.

 

$950K but it depends on bidding war. So it doesn't matter about paying back the loan. Only selling the house?

 

Is it an insured mortgage?

 

$950K number is kinda curious. Hight enough to keep LTV under 75% but low enough to be eligible for CMHC insurance (< $1M). I wonder if HCG deliberately low-balled the appraised value to off-load the risk to the taxpayers.

[SafetyinNumbers]

I thought CHMC insurance is only applicable if the LTV is more than 80%?

[wisdom]

Above 80% is required but you can get it for lower amounts.

[scorpioncapital]

The thing with insurance it's fun while not paying out, but when you have to pay out, things can get messy. It's like theory vs practice .

 

 

[bbarberayr]

https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to

 

Highlights from the Toronto Real Estate Wealth Expo

[clutch]

I live in Toronto, and this bubble is definitely insane, but I can't wrap my head around whether I can bet against it or not.

 

Because to me, the premise "this bubble must pop" is not good enough, obviously because of the timing aspect. In some sense, I need to identify potential catalysts for the bubble to pop, and be sure that the catalyst(s) would happen soon.

 

Here are some scenarios that I though about...

 

- Highly levered, speculative local investors default on mortgage payments or must sell the property for other reasons. This requires one of 1) interest rate rising fast, 2) cannot find tenants (or rental market tanks), or 3) the investors lose their sources of income / wealth. 1) is unlikely given that the government can control it to prevent popping the bubble, 2) is also unlikely looking at Toronto's rental market right now (no sign of population decline) and 3) likely means some sort of global financial melt down, which is hard to predict.

 

- Foreign investors suddenly need to sell, perhaps because they suddenly need the money, or they now have an incentive to sell (better investment opportunity elsewhere or maybe China says bring your money back now and you can legitimately keep it?) or they figure that the investments no longer meets their hurdle rates. I really don't know whether any one can predict timing of these events...

 

Anyone else can think of other catalysts and their estimated timing?

[mcliu]

I don't think you can really time these things..

[KCLarkin]

I don't think you can really time these things..

 

Ask Steve Eisman.

 

I think a lot of people are looking at Canada as a repeat of The Big Short. But what made The Big Short work was the asymmetry of the bet. You didn't need to worry about the timing of the bubble or even the size of the bubble. You just needed to know that you were buying CDS on subprime debt but paying AAA prices.

 

I don't see that opportunity in Canada. But maybe it exists and I just don't know where to look.

[Studesy]

I don't think you can really time these things..

 

Ask Steve Eisman.

 

I think a lot of people are looking at Canada as a repeat of The Big Short. But what made The Big Short work was the asymmetry of the bet. You didn't need to worry about the timing of the bubble or even the size of the bubble. You just needed to know that you were buying CDS on subprime debt but paying AAA prices.

 

I don't see that opportunity in Canada. But maybe it exists and I just don't know where to look.

 

Timing is one difficult element of this, but the nature of the correction is another.  I mean, we could see a quick and large decline (like the US did) or we could see a flat market for a prolonged period of time. 

 

If I was making a bet on this, it would be a relative bet.  Ie. Short the most expensive, levered Toronto/Vancouver REIT or group of REIT'S and go long a real estate market somewhere in the world with more of a value profile.

[CalvinL]

I live in Toronto, and this bubble is definitely insane, but I can't wrap my head around whether I can bet against it or not.

 

Because to me, the premise "this bubble must pop" is not good enough, obviously because of the timing aspect. In some sense, I need to identify potential catalysts for the bubble to pop, and be sure that the catalyst(s) would happen soon.

 

Here are some scenarios that I though about...

 

- Highly levered, speculative local investors default on mortgage payments or must sell the property for other reasons. This requires one of 1) interest rate rising fast, 2) cannot find tenants (or rental market tanks), or 3) the investors lose their sources of income / wealth. 1) is unlikely given that the government can control it to prevent popping the bubble, 2) is also unlikely looking at Toronto's rental market right now (no sign of population decline) and 3) likely means some sort of global financial melt down, which is hard to predict.

 

- Foreign investors suddenly need to sell, perhaps because they suddenly need the money, or they now have an incentive to sell (better investment opportunity elsewhere or maybe China says bring your money back now and you can legitimately keep it?) or they figure that the investments no longer meets their hurdle rates. I really don't know whether any one can predict timing of these events...

 

Anyone else can think of other catalysts and their estimated timing?

 

I agree with your logic - the timing and probability is uncertain and no one will know if this is a bubble that's gonna burst soon or a bull market run that's just beginning.

 

Other Catalysts:

- Capital control by the Chinese Government. (Usually ineffective as people will always find a way)

- Anti-immigration policy, Reduction of student permit/parents visa/work permit. by the Canadian Government - not likely given the current political environment

- New immigrants preferring other cities instead of Vancouver/Toronto - I dont see how that's probable

- Racism riots/Terrorist attack in Toronto/Vancouver - probability unknown, but that will be enough to scare off some immigrants who are here for their kids.

- increased capital gain tax of any kind on property. That will trigger short term selling - We will know today.

- Sudden jump in CAD - back to 1:1 USD?

- Government providing significantly more permits for condo development in the next few years

 

Valuation of housing is always relative. imagine a new Chinese immigrant from a major city come over and look at what $2MM can buy in Markham. And it comes with free English schools+free healthcare. Most would find it a steal. Our 35mm population just find it hard to understand what the 1.4B ppl are thinking.

[scorpioncapital]

Btw, the best capital gains tax is a bubble. if anyone dares to sell it pops. and if they just hold it, there's no tax, but also no way to use the bubble money :) However, I think they should stop the principal residence gains exclusion and instead allow deductibility of mortgage interest from income. capital gains taxes are lower and why should owners of real estate get an advantage over other forms of gains? Likewise income taxes are unacceptably high in Canada so a deduction makes sense to me.

 

[KCLarkin]

capital gains taxes are lower and why should owners of real estate get an advantage over other forms of gains?

 

Assuming houses appreciate at roughly the same rate as inflation, you are taxing "phantom gains". At the end of 20 years, you own the exact same house as you bought (actually a bit worse for wear). It makes no sense that should also need to pay tax on this "gain".

 

Capital gains on stocks make some sense, since the retained earnings are taxed at a lower rate than dividends. So the real value of a company increases over time. There is still a stealth inflation tax though. Which is why capital gains taxes should be much lower than dividend or income taxes.

 

Mortgage deductibility subsidizes borrowers, not homeowners. So if I have paid of my house, I pay the stealth inflation tax. But I don't get to deduct interest.

[scorpioncapital]

True but I would argue most homeowners are borrowers, few buy all cash, some perpetual borrows for life. And also , in a bubble, the gains are far in excess of inflation. Actually, I like what the British do, they have a base capital gains exemption each year. It's sort of a middle ground between the other two methods and you can adjust up and down. But it's generic enough not to cater to one type of activity versus another.

The goal of fairness for all I feel never works. It always degenerates into unfairness for all. This is a consequence of the reality that you can't cater to every special interest group that shouts the loudest or has the most lobby dollars.

[alpha]

 

http://www.bnn.ca/top-toronto-condo-developer-warns-tax-on-foreign-buyers-could-trigger-recession-1.703067

 

 

Brad Lamb (large Toronto condo developer) now claims a foreign buyer tax in Toronto would throw the Canadian economy into a national recession.

 

 

[Liberty]

[rb]

http://www.theglobeandmail.com/real-estate/toronto/investors-super-heating-the-toronto-market/article34380897/

 

You know you've got something special when even realtors start calling it a bubble driven by speculators. I've attached the report they mention in the article. It's definitely worth a read.

InvestorDemandHouses.pdf