Garth Turner - Real Estate in Canada

[wisdom]

Canada stopped the class of immigration that allowed rich immigrants to come to Canada as of 2012.

 

Look at the what is happening to sales to high end homes in Vancouver - they have slowed. Look at jobs in the financial and construction industry - it is not easy in those industries any more.

 

If your asset prices increase because of hot money coming in, it can drop just as fast.

 

If Chinese money can defy economics, then why are real estate prices in Chinese cities dropping?

 

At some point the excessive debt will catch up with the people and leverage is scary on the way down.

[gary17]

You think we will see the type of correction in the US here in Canada?

[leftcoast]

The problem, I think, is that there's simply no data on foreign buyers. So all you're left with are anecdotes and marketing hype. The flow of Chinese capital into the Vancouver housing market is certainly real, there's no question. Just look at what was happening in the investor immigrant program that was scrapped this year. From the WSJ today:

 

After Overwhelming U.S. Visa Program, Where Will China’s Emigrants Go Next?

At the time of the program closure, there were an estimated 48,000 applications made by mainland Chinese with the Canadian consulate in Hong Kong, and wait times were expected to be as long as five years.

The vast majority of those were going to Vancouver.

 

But what kind of impact is it really having on the market as a whole? Nobody has any idea, including Garth. This guy took a swing at it 6 months ago, but had to make so many assumptions that his analysis was basically reduced to guess-work:

Vancouver Home Prices to Suffer With End of Investor Immigrant Program

 

It really is mind-boggling that there's so little reliable data available on a market that is so fundamental to the Canadian economy as housing. Not just with regards to foreign investment, but in general. That shitty report that CMHC put out a few weeks ago just underscores the point... after years of research, they still can't even say what % condos are owned as investments vs. primary residences. Really?

[Potato]

I don't disagree with a correction.

But I think those foreseeing a big drop should consider that in the 80s we didn't have much millionaires from China, a country where rich people want to move out of for their wellbeing.

 

One of the big memes driving the speculation in the 80's was precisely the exodus of millionaires from Hong Kong, as it became clear that the British lease would not be renewed.

 

Plus ca change...

[wisdom]

Look at the history of Vancouver RE:

40% drop in 1 yr in 1981.

25% over 4 yrs starting in 1994.

 

If you say it is CHinese money - then look at HK RE history - it is not unusual for them to have a 50% drop once every decade. HK is the only city more expensive in the developed world based on median household income to median housing prices in the developed world.

 

Vancouver was about 11x median household income v about 5x back in early 2000s.

 

Why cant a severe drop happen in Vancouver?

[petec]

I don't disagree with a correction.

But I think those foreseeing a big drop should consider that in the 80s we didn't have much millionaires from China, a country where rich people want to move out of for their wellbeing.

 

One of the big memes driving the speculation in the 80's was precisely the exodus of millionaires from Hong Kong, as it became clear that the British lease would not be renewed.

 

Plus ca change...

 

Plus, all those Chinese departing will only help the *Chinese* RE bubble burst, which will have knock-on impacts elsewhere, possibly bursting bubbles all over the shop including in Canadian (and, closer to home for me, London) housing.

[Guest 50centdollars]

What if the chinese stop buying in canada? Why would they buy here when you can get a bigger house for half the price in the US?

[Liberty]

It really is mind-boggling that there's so little reliable data available on a market that is so fundamental to the Canadian economy as housing. Not just with regards to foreign investment, but in general. That shitty report that CMHC put out a few weeks ago just underscores the point... after years of research, they still can't even say what % condos are owned as investments vs. primary residences. Really?

 

This. Exactly this.

 

But what we do know is that if most of the data comes from realtors, it's going to be heavily biased to help them, not the other way around. That's why they quietly revise last year's numbers downward to make this year's numbers look better or double and triple count sales just because they've been listed in more than one place and stuff like that.

[Liberty]

Vancouver's the worst in the country, but the epicenter of a crisis doesn't even have to start there. It's about sentiment (certainly not about fundamentals -- look at multiples of incomes and rents), so if the market blows up first in Toronto or elsewhere, you can be certain that Vancouver people will take note and proceed to freak out in turn.

[gary17]

I can see big condo correction... Not so much houses ,,,  a lot of Chinese people are buying with cash... Excess cash ... And are for their kids.  There are also a lot of retired people from elsewhere in Canada who prefer to retire here. WE could see some correction but I doubt it will be significant in the single family market in Vancouver.

 

You can't really apply conventional value investing / relative valuation when it comes to RE. This is a type of asset for family, for status, for a lifetime of hardworking ... There's a reason why only certain cities in the world attracts premium valuation such as HK, Shanghai, London, New York, etc. most immigrants want to live where other immigrants go to , it creates a network effect if you will.  So you won't see premium even just 2h drive from Vancouver.   

 

This situation is also not like The early 80s when HK people moved because of fear or HK. There's no fear driving mainland Chinese moving here. It's simple for the sake of their well being because china is too crowded ! If you are the 1% in china, you would do what you can to give your kids the best - and that's why they like certain markets.

 

Finally, most Chinese don't take out a mortgage with these houses. Cash. Mortgage is viewed as a bad thing in their culture -  Rheas the picture I'm seeing with the single family houses in Vancouver.  Condo market is another story.  Toronto is another story.  I think real estate is very localized.

[wisdom]

If everyone is paying cash in Vancouver, then why do people in Vancouver have the highest debt levels in Canada.

 

Where are the stats to show that all houses are being bought by Chinese immigrants with cash? Or are these anecdotes based on a few sales?

 

Reality does not support the view that people are buying a majority of houses for cash. It is possible that 1% or so of the sales might fall into that category.

 

Bob Rennie (local realtor - highest sales) in a speech had stated that he was not worried about the cancellation of the program for rich immigrants because 69% of all sales in the last 5 years had been to locals buying 2nd property. His statement contradicts the statement that rich immigrants are buying everything for cash.

 

All you have to do is title searches on houses and you will know if banks have a charge against houses. Try a few and see what shows up.

[A_Hamilton]

Are there any thoughts from Canadians on this board in regards to Calgary/Edmonton? In a slowdown what happens to Canada's basic materials economy? I've thought about Houston in the early 80's a good amount and wonder why the same bust won't come to these cities. Would 25% vacancy rates really be that hard to believe if you had oil prices fall 30-40% and stay down for a few years (this is something everyone tells me cannot happen...which in my mind means the inevitable next step is that it will happen)?

 

 

[gary17]

i suppose the higher debt level is because there are more working class people here who are trying to afford a condo or an entry-level home.   

 

i've been waiting for a few years now to buy a house with no luck... and the prices keep on rising faster than income !  perhaps i'm one of those that has changed my view on RE in Vancouver.   

[wisdom]

Gary, you seem to be agreeing with me that the locals have taken on a lot of debt to keep up with the high prices - whatever the reason for the high prices. Isn't that a bubble when people do something because others are doing it and it has worked for the last 10 years?

 

I would ask you to consider what portion of housing sales are made to new immigrants and the percentage of sales to residents. I would assume immigrants buy well under 5% of the properties. Most immigrants are not wealthy and cannot afford to buy within the first 5 to 10 years. This is why a lot of imigrants migrate.

 

Check out the historical housing affordibility for Vancouver from the RBC study. It shows an average person now has to use 81% of their pre-tax income to buy a bungalow v 50% before this run up started.

http://www.rbc.com/newsroom/_assets-custom/pdf/20140828-HA.pdf

 

If you were a betting man, how would you bet on this? Is it more likely that a house will get more expensive relative to income or cheaper.

 

[Liberty]

i suppose the higher debt level is because there are more working class people here who are trying to afford a condo or an entry-level home.   

 

i've been waiting for a few years now to buy a house with no luck... and the prices keep on rising faster than income !  perhaps i'm one of those that has changed my view on RE in Vancouver. 

 

Timing is always hard. A lot of people thought there was a tech bubble in the mid 90s and had to wait for years before it burst. Some even changed their minds, capitulated, and bought near the top.

 

What we have to remember is that the market doesn't have to do anything on a schedule that is convenient for us, but the laws of economics haven't been repealed either.

[SharperDingaan]

A large part of Vancouver RE is Asian owned investment property, & is mortgage free; get over it. If condo prices fell in any major way, those investors would simply club with their friends & buy the 2nd condo cheap - in anticipation of a later sale 1-3 yrs later. If they needed cash in the interim, they would simply mortgage the condo, & rent it out cheap to pay the P&I.

 

If the Vancouver condo market were a slum, we would call this process gentrification, & have no trouble pushing out the poor living there - making them homeless. If you want to live in a nice place, either outbid everyone else in the world who would like to live there, or accept the fact that you cannot afford to live there anymore. You would not listen to that poor persons angst, so why would you expect anyone to listen to yours.

 

No different to parts of London, Paris, Geneva, Toronto, etc.

 

SD

[A_Hamilton]

A separate question. If one believes that Canada's housing market will have significant delinquencies in the future are you better off shorting the Canadian banks or shorting the Canadian dollar given the large linkages the banks have to the central government via CMHC?

[Otsog]

No opinion on anything, just thought this was an interesting data point.  I read about Canada's population growth in a book recently and grabbed this data from the UN (http://esa.un.org/unpd/wpp/Excel-Data/population.htm)

 

http://i.imgur.com/XuWa1tc.jpg

 

5th fastest growing G20 country, kind of surprised me some of the countries we were ahead of.  Also, a bit surprising just how much faster Can + USA are projected to grow over Europe. 

[Guest 50centdollars]

No opinion on anything, just thought this was an interesting data point.  I read about Canada's population growth in a book recently and grabbed this data from the UN (http://esa.un.org/unpd/wpp/Excel-Data/population.htm)

 

http://i.imgur.com/XuWa1tc.jpg

 

5th fastest growing G20 country, kind of surprised me some of the countries we were ahead of.  Also, a bit surprising just how much faster Can + USA are projected to grow over Europe. 

 

Annualized, thats growth of less than 1%/year. My house has gone up in value 35% over the last 2 years. That doesn't make sense to me. How many rich people in this world want to come and live in canada?

[ASTA]

I am not rich but whould like to come to Toronto :) tired off Europe. Have been thinking Singapore or Toronto lately lucky enough my wife is born in Toronto so it's easier to convince here to move there :)

From what I read and see in Europe my very personal opinion is that to many low wage people getting in too Europe and they are why smarter then gullible swedes for an example. But my family has lived in four different continents the last 40 years. So I am used to moving.

[Otsog]

Annualized, thats growth of less than 1%/year. My house has gone up in value 35% over the last 2 years. That doesn't make sense to me. How many rich people in this world want to come and live in canada?

 

Vancouver is going to be faster than Canada, so I grabbed these #'s:

http://i.imgur.com/xPffABp.jpg

http://www.cmhc-schl.gc.ca/en/corp/about/cahoob/data/data_008.cfm

http://www12.statcan.gc.ca/census-recensement/index-eng.cfm

http://www.metrovancouver.org/planning/development/strategy/RGSBackgroundersNew/RGSMetro2040ResidentialGrowth.pdf

 

35% over 2 years doesn't make sense to me either.  Idk if a crash, correction, soft landing, slow down, stagnation or apocalypse are coming.  If one of them does Canada looks pretty attractive to me. 

 

 

[wisdom]

You will be surprised how many of the so called rich immigrants have actually bought using financing. In Canada, a new immigrant can get 65% of the property financed without any credit (FICO) or income. Apparently, a similar product in the US was responsible for the subprime debacle - NINJA loans. You could add no credit to that in Canada if you have been in Canada for less than 5 years.

 

You could sell an apartment in Beijing for $1 mil and use that as a down payment and buy a house for $2 mil. If you get a HELOC you have a interest only payment of under $3,000 a month while you wait for capital appreciation and then sell. This has worked well for the last 10 yrs. Why would it not work in the future?

 

Few more points to consider:

For perspective - US which has 10 times our population has 7000 visa's for Chinese investors.

 

http://money.cnn.com/2014/08/27/news/economy/china-us-visa/index.html?iid=HP_LN

 

Even if Vancouver gets 100% of our investor immigrants from China - assumption based on our population - 10% would be 700 immigrants.

Could 700 individuals be responsible for the prices in a city of 2.5 mil?

 

Another interesting stat to look at - the correlation between increase in debt in BC and property prices. It says to me that the increase in prices is not due to cash purchases, but, rather financed by debt.

 

[augustabound]

You will be surprised how many of the so called rich immigrants have actually bought using financing. In Canada, a new immigrant can get 65% of the property financed without any credit (FICO) or income. Apparently, a similar product in the US was responsible for the subprime debacle - NINJA loans. You could add no credit to that in Canada if you have been in Canada for less than 5 years.

 

At the international arrivals at Pearson in Toronto, right at the end of the ramp coming out into the concourse there's a CIBC kiosk.

A large kiosk. I'd say it's about 20' by 40' with huge signs for people new to Canada to apply for different products.

 

Last Friday I picked up my wife coming home from Portland and I counted 12 staff members from CIBC. 

[gary17]

Let's do a bit of math here

 

If an entry level house is $1M in Vancouver - like an old 50 year old house with a basement suite that can be a mortgage-helper -- 

 

Let's assume 10% down - so $900K mortgage , 3.5% , amortized for 25 years,

my excel formula:  =PMT(3.5%/12,12*25,900000)  = $4500 / month for the mortgage.

The basement suite is probably going to rent for $1500 - so mortgage is $3000. 

$3000 x 12 = $36000.    And if this is 80% of pre-tax income = > the household is making $45000 pre-tax.  This doesn't make any sense.    I don't believe a family making $45,000 in Vancouver are living in $1M homes - they are more likely to be in $300 - $400K condos. 

 

On the other hand, if say a couple earns $100,000 gross and spends $80,000 on mortgage a year = $6666 / month + $1500 mortgage-helper = $8100 => $1.6M house.   

 

I'd say I don't know of any couple earning $100,000 living in $1.6M homes. 

 

What I see are the rich Asian money in $4M ~ $6M homes , cash deal.  Last week a friend of ours came from China and dropped $3M on a lot with a creek - cash deal; and didn't even bother with inspection.    They probably have a printing press for RMB in China so they don't give a >>>> if there's a correction in Canada - they just want the money out of communist reach.  And be available for their children!

 

---

 

Now to answer your question:  I'd say immigrants are likely responsible for 30% of new high-end houses in West Van and Vancouver West-side. (i.e., $3M+ homes)  Then there's the $1.5M - $2.0M range for the successful professionals in town -- (doctors, lawyers, good value-investors, etc)   

 

And then there are high end condos $800K - $1.5M for those who are downsizing from their big home in West Van (i.e., after selling it to the Chinese for $3M+) 

 

And then you have the working class people (earning $60K - $100K a year) living in $500K - $800K condos

 

As always, when the thing collapses it'll be the working class people getting their equity in condos wiped out while the high-end houses will not likely be affected because there's limited supply & there the top 1% of 1.5B people is a lot of demand. 

 

I use Chinese - but don't forget there are a lot of wealthy Canadians from Calgary (oil money), US, Europe, etc.    They too likely don't have a mortgage. 

 

Gary

 

edit: On debt: I don't know how that's calculated - I think there are a lot of house builders here that leverage their principal home to build a spec-house to then sell to others....  That could be a source of debt....    I suppose if those people get into trouble we could see quite a few real estates up for grabs - but I'd say as soon as there's a 10% below market price, it'll be gone .  I'm still seeing a lot of multiple offers at 10% - 20% over asking in decent areas...    Every weekend I think about: where do they all print their money????

 

 

 

 

 

Gary, you seem to be agreeing with me that the locals have taken on a lot of debt to keep up with the high prices - whatever the reason for the high prices. Isn't that a bubble when people do something because others are doing it and it has worked for the last 10 years?

 

I would ask you to consider what portion of housing sales are made to new immigrants and the percentage of sales to residents. I would assume immigrants buy well under 5% of the properties. Most immigrants are not wealthy and cannot afford to buy within the first 5 to 10 years. This is why a lot of imigrants migrate.

 

Check out the historical housing affordibility for Vancouver from the RBC study. It shows an average person now has to use 81% of their pre-tax income to buy a bungalow v 50% before this run up started.

http://www.rbc.com/newsroom/_assets-custom/pdf/20140828-HA.pdf

 

If you were a betting man, how would you bet on this? Is it more likely that a house will get more expensive relative to income or cheaper.

[alertmeipp]

clearly, I hear many jump in now because they believe the price is only going to go up.

 

I haven't seen mid inome ppl buying more than one in presales event, their thinking is price can only go up.

 

We only need a slight price drop to make ppl worry.