Canada Housing Sentiment

[EdWatchesBoxing]

I am concerned that the housing price levels in certain parts of Canada are unsustainable. I don't think that it will end well, especially for those buying with little (or zero) down and in this low interest rate environment.

 

I wonder if it's possible to profit off this.

 

 

[Partner24]

Well, I've been saying that since 4 years now...

 

I hope that you're right! My family would be happy  ;D

[nodnub]

I think you are right about unsustainable prices. Vancouver comes to mind. Professional incomes are too low in Vancouver to justify the high cost of housing. 

 

A purchase price to monthly rent multiple of 150 or 200 might be considered more normal. In Vancouver last year this ratio is often 400 or higher.  A 1 br condo that would rent for $1000/month often sold for $400,000 or higher.

 

Now the real estate prices are coming down a bit and rent is going up.  The ratio might be closer to 300 now.  I think the local system will continue to balance, rent prices will continue to rise and house prices will continue to fall.

 

I would be interested to hear other people's thoughts on this..

 

Also what are typical rent multiples on properties in other areas of Canada and US?

 

 

[leftcoast]

FWIW, I agree with you about Vancouver's housing market. It will be very interesting to see what happens when mortgage rates start moving back up again.

 

I'm curious what you see as the driver(s) for continued rising rents in Vancouver?

 

Regarding "typical" price-to-rent ratios, this Fortune article has some good data on the US market:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

 

Here is the relevant data:

 

Metro area	Jun-2007	15-year avg.
East Bay, Calif.	50.9	31.6
San Francisco	38.2	27.4
San Jose	42.5	27.2
Honolulu	35.2	25.5
Orange County, Calif.	36.2	24.3
Seattle	38	23.3
San Diego	34	22.4
Stamford, Conn.	26.4	22
Portland, Ore.	31.7	20.8
Nashville	26.8	20.5
Raleigh	26.8	19.4
Sacramento	28.7	19.4
Denver	24.4	19.1
Las Vegas	27.9	18.9
Inland Empire, Calif.	27.5	18.8
Chicago	22.7	18.3
Charlotte	26.2	18.2
Memphis	21.5	18.1
Milwaukee	24.2	18.1
Boston	23.2	18
Norfolk	26.8	17.9
Palm Beach County, Fla.	27.1	17.6
Columbus	18.9	16.9
NATIONAL AVERAGE	22.8	16.9
Richmond	24.9	16.8
Austin	19.1	16.3
Salt Lake City	24.1	16.3
Dallas/Fort Worth	17.8	16.1
Los Angeles	26.7	16
Miami	27.2	16
Greater Washington, D.C.	26	15.9
Fort Lauderdale	24.5	15.7
Long Island, N.Y.	24.5	15.7
Minneapolis	19.3	15.5
Cincinnati	16.3	15.1
Hartford	18.7	14.9
Indianapolis	15.6	14.9
Orlando	23.8	14.9
Atlanta	19.5	14.8
Greater Kansas City	16.8	14.8
New Orleans	16.1	14.8
Tampa	21.4	14.5
North/Central N.J.	20.6	14.4
Cleveland	13.2	14.3
Houston	16.5	14.3
Jacksonville	20.1	14.3
Phoenix	21.5	14
St. Louis	16.6	14
San Antonio	17.7	13.5
Oklahoma City	15.5	12.7
Baltimore	20.7	12.6
Philadelphia	18.6	12.5
New York	17.8	11.7
Detroit	10.3	10.9
Pittsburgh	11.9	10.6

 

It's interesting to me that P/R ratios seem to be higher in cities that are considered desirable to live in. Intuitively, I'm not sure why that would be... if a city is desirable to live in, shouldn't that mean people are willing to pay higher rents to live there as well? There seems to be a big intangible "ownership premium" in desirable cities that has nothing to do with rental yields. Why are people willing to pay more to own vs. rent in these cities?

 

Whatever the reason, it would suggest that Vancouver, which by most standards is seen as a very desirable place to live, should be at the higher end of the scale in terms of "typical" P/R, at least for Canada. Right now, with historically low interest rates, it's around 27. Ten years ago, before the huge run-up in prices, it was around 17. And the 15-year average for Vancouver seems to be around 21.

 

[EdWatchesBoxing]

I've been waiting about 3 years for housing to correct in Toronto. Vancouver is in worse shape because of the income factor, which was mentioned earlier. The Vancouver market may stay high due to the demand created by the Olympics, then again it may not (but I believe the Olympics may hurt owners due to property tax hikes).

 

Garth Turner has a blog on RE and I was surprised that banks are finding ways to get people locked into "zero-down" mortgages. I thought the government closed this off last fall. I guess the financial institutions always find creative ways to get around obstacles when they really want to.

http://www.greaterfool.ca/2009/06/15/part-deux/

 

If this stuff is true, I am glad I am on the sidelines right now.

[arbitragr]

I'm not a big real estate investor, but prior to this, I was hoping that there would be a serious Great Depression #2, so that world prices on everything would crash.

Prior to the credit crunch, I was mainly in cash and was hoping to buy everything, even real property at bargain basement prices.

Unfortunately the US Govt. stepped in and bailed out everyone, which sucks.

In the end, still stuck to equities/securities/bonds, rather than real property.

 

Where I live, the govt. has made things even worse by giving people tax incentives and govt. grants to purchase property, which has inflated prices even more than they should really be. The crash that was supposed to happen, never happened.

I wish they would just let the free markets work sometimes and play out (crash in this instance), it's unfair to those who have done the right things leading up to the downturn and not get themselves into a sh*&tload of debt and ruin themselves.

I can certainly see where the arguments for NOT bailing Wall St are coming from.

[bargainman]

I'm not a big real estate investor, but prior to this, I was hoping that there would be a serious Great Depression #2, so that world prices on everything would crash.

Prior to the credit crunch, I was mainly in cash and was hoping to buy everything, even real property at bargain basement prices.

Unfortunately the US Govt. stepped in and bailed out everyone, which sucks.

In the end, still stuck to equities/securities/bonds, rather than real property.

 

Where I live, the govt. has made things even worse by giving people tax incentives and govt. grants to purchase property, which has inflated prices even more than they should really be. The crash that was supposed to happen, never happened.

I wish they would just let the free markets work sometimes and play out (crash in this instance), it's unfair to those who have done the right things leading up to the downturn and not get themselves into a sh*&tload of debt and ruin themselves.

I can certainly see where the arguments for NOT bailing Wall St are coming from.

 

Are you really serious about this?  You wish there was a great depression 2?  have you read about the Great Depression and the human suffering that occurred at that time?  You wish there was a Great Depression so you could buy stuff really cheap and make money?  This crash has been unfair to a lot of people for many different reasons.  But life is unfair, that's no reason to wish for human suffering on that scale.  I would never wish for a Great Depression.  Go read Grapes of Wrath and then think about what you are wishing for.

[EdWatchesBoxing]

In the US, hasn't it already crashed in certain places? Phoenix and Las Vegas come to mind.

I imagine in places like NYC and San Fran, there would be higher demand, even in recessionary periods, that results in less of a drop.

 

RE is what it is, I think that board members see RE differently compared to the general public. I wouldn't want > 50% of my net worth in my house, but for many this is the case. I think this is why the US govt is "smoothing" out the decline, but I think that people still feel the hurt.

 

In Canada, I believe that the lower overnight rates are creating the unintended effect of cheap money for home buyers. In general, I don't think Canadians are much better off than Americans w.r.t. debt to income ratios. It's just that the sentiment is still generally positive up here.

 

 

 

[bargainman]

In the US, hasn't it already crashed in certain places? Phoenix and Las Vegas come to mind.

I imagine in places like NYC and San Fran, there would be higher demand, even in recessionary periods, that results in less of a drop.

 

RE is what it is, I think that board members see RE differently compared to the general public. I wouldn't want > 50% of my net worth in my house, but for many this is the case. I think this is why the US govt is "smoothing" out the decline, but I think that people still feel the hurt.

 

In Canada, I believe that the lower overnight rates are creating the unintended effect of cheap money for home buyers. In general, I don't think Canadians are much better off than Americans w.r.t. debt to income ratios. It's just that the sentiment is still generally positive up here.

 

 

The decline in California has been brutal.  50% in some places.  San Francisco, San Jose have areas with 40% declines.  The government has done very little to help California, at least in the Bay area.  The special refinancing they've set up  only goes if the loan isn't more than 105% of the house value, which with 40% declines just doesn't cover it (even if someone put a 20% downpayment).  Also any of the special refis above 417K haven't hit the system yet, so people with those loans (most people) haven't been able to refinance in the bay area.  Florida has been similar, but at least most condos aren't above 417K.  Several properties went from 350 to about 150 so the crash has definitely happened.  Supposedly it's going to continue down another 10-15% on average. 

[EdWatchesBoxing]

The decline in California has been brutal.  50% in some places.  San Francisco, San Jose have areas with 40% declines.  The government has done very little to help California, at least in the Bay area.  The special refinancing they've set up  only goes if the loan isn't more than 105% of the house value, which with 40% declines just doesn't cover it (even if someone put a 20% downpayment).  Also any of the special refis above 417K haven't hit the system yet, so people with those loans (most people) haven't been able to refinance in the bay area.  Florida has been similar, but at least most condos aren't above 417K.  Several properties went from 350 to about 150 so the crash has definitely happened.  Supposedly it's going to continue down another 10-15% on average. 

 

I heard about the drops in San Diego and LA, but a friend that owns a place in Sunnyvale was saying that SF hasn't really gone down.

 

Sounds like CA's in pretty bad shape. I know prices were/are crazy high in the Bay area, so a lot of people are hurting. I don't think we'll see those type of drops here, except maybe for some of the poorly located condos.

[Guest Broxburnboy]

The price differences in the US and Canadian housing markets reflects the differences in supply and demand fundamentals.

It's hard to appreciate the magnitude of the housing bubble in the US. The market has been totally oversupplied at almost every level to the point that there are not enough potential buyers for the existing inventory even at historically low interest rates and recently depressed prices. Every person who was vaguely interested in home ownership was signed up for a mortgage. Although there will be some local growth spurts, it will take years for the excess inventory to disappear and prices (inflation adjusted) to recover.

The mentality of the boom years still survives, people still regard their homes as an asset that will appreciate over time simply because in recent memory this has been true, even though the cycle has obviously reversed.

The real value of a house as an investment business (like commercial real estate) is the "capped" value of the annual cash flow it produces. A home that produces an after expense annual cash flow of 20,000.00$ is worth 200,000.00 at a cap rate of 10% or about 260,00.00% at 7.5% (which is about the recent minimum low cap rate investors have been willing to accept). Any additional difference the market is willing to pay is a speculative premium, based on the perceived future worth of the property. These speculative premiums have been dissapearing as reality sets in after markets have collapsed on oversupply. Prices will continue to drop in those areas that experience recession induced downward trends in local rents.

 

The Vancouver market has recently enjoyed favorable local conditions and the value of close in real estate has held up fairly well over time. Like the Manhattan, Hong Kong, and Singapore markets, the local geography limits the available space for housing and forces prices up as more and more people opt for the urban (no commute, no car needed) lifestyle. Up the valley in satellite towns like Surrey and Chilliwack, prices are more reflective of the general trends in the country.

I also believe however that prices are holding up due to the prepaid rents already received for the Olympic period. I believe that there will be a post Olympic bust in downtown condo prices, a market that has been defying gravity for some time. Right now would be a good time to sell.

[ubuy2wron]

I see that Genworth is doing some kind of IPO in Canada has any one looked at this as a potential short. I admit I have not looked at this at all ,I believe that the RE bubble is alive and well especially on the wet coast where I live how ever other than selling my home I see few ways to profit from this from an investment point of view. Most of the publically traded reits in Canada are reasonably priced and there are very few builders in Canada that are public and the banks just do not have the same exposure in Canada re residential RE because the risk remains with the mortgagee unless the mortgagor declares bancruptcy.

[Guest kawikaho]

Unless you've lived in an area for 10 years, it would be unwise to generalize the housing market across the spectrum of zip codes.  The Bay Area is a multitude of cities, counties, and municipalities.  Each one has different socioeconomic and desirability factors that affected the price drops.  South SF, Daly City, large portions of the East Bay, and parts of San Jose have taken big hits.  The rest have barely taken hits at all.  Maybe 10%, if that.  I suspect those areas that were little affected will take a long term grinding like many regional markets have had in varying periods before.  But, who knows, with the huge government intervention, it's difficult to determine the likely outcome. 

 

 

[nodnub]

FWIW, I agree with you about Vancouver's housing market. It will be very interesting to see what happens when mortgage rates start moving back up again.

 

I'm curious what you see as the driver(s) for continued rising rents in Vancouver?

 

Leftcoast, 

 

I am not a RE expert but it is my opinion that too many Vancouverites have been drinking the Kool-Aid with respect to home-ownership. Many residents forced themselves to buy overpriced homes simply because they were worried they would miss the boat, and be "priced out of the market forever" (that is what fear-mongering realtors would tell them). This scramble to own property at any cost had a negative affect on the rental market.  During the boom, new construction added supply (rental suites and condos) and rental demand was lowered by first-time purchasers moving out of rentals. I think as people start to realize that RE prices do not grow to the sky without rest, they will re-consider the wisdom of purchasing a home... and these negative pressures on rental prices will dissipate.

 

I don't think that rental prices will increase without stopping... but I do think that we will see some convergence of rental prices and home values.  The home values will either come down or rent will go up or a combination of both--to converge on a more logical P/R ratio. 

 

Perhaps all bets are off if consumer credit remains easy in Canada (zero down mortgages as mentioned by EddiePlaysO8 in this thread)

 

Anyone with other thoughts on this?

[RichardGibbons]

Nodnub,

 

I'd agree with most of what you said.  The Vancouver housing market is in a bubble, and will almost certainly correct significantly in real terms.  The typical ratio between median household incomes and median housing prices is about 3.  Even if you consider Vancouver attractive enough to warrant twice that ratio, Vancouver at the peak was somewhere areound 9.  So, that would imply a 33-35% correction.

 

The price to rent ratio is out of whack too.  Not so much as it used to be because of falling rates, but if you're buying, you probably shouldn't get a 30-year amortization mortgage on the assumption that mortgage rates will remain at multi-generational lows for the next few decades.  If you assume reasonable long term interest rates, the price to rent ratio is insane.  (When I looked at it last summer, the typical family would have had to spend 70% of their gross income to buy the average house with 25% down.)

 

The correction is extremely likely to happen in real prices falling rather than rents rising, because rents are constrained by rationality more than prices.  If you earn 60K, you really won't rent something that takes 50% of your gross income, whereas if you're buying, you can do that, because someone will lend you the money even if you're unlikely to be able to afford it.

 

So, I think the most likely scenario is falling prices in Vancouver.  (That said, I'm talking my book since I'm someone in Vancouver who could afford to buy, but is renting.)

 

[Hoodlum]

We just sold our house which is in the Toronto Suburbs.  We had multiple offers and sold above asking in less than 48 hours.  Home prices is our neighbourhood have now reached, if not past, the previous price peak in 2007.  This is great for us but not good for our economy long term.  People are taking on huge mortgages with these low rates.  With increasing unemployment and possibly higher rates next year the housing market in Canada is gearing up for another pull back.

[Cardboard]

"We just sold our house which is in the Toronto Suburbs.  We had multiple offers and sold above asking in less than 48 hours."

 

When you read stuff like that you cannot but recall the U.S. housing bubble. Plus you add to this the speculation going on in Vancouver as described in another post due to the Olympics and other reasons.

 

Some Canadians (I should say many) somehow think that our economy is now immune to the global malaise. They think that our banks are great and that nothing will derail our real estate market, not even the unemployment now perking up everywhere. Housing starts have declined quite a bit since 2007 and 2008, but prices are holding up if not going up. Last time I checked, Canadians on average were spending more of their income on housing than Americans and home equity represented a greater percentage of their total equity. I should add that this is a comparison of Canada today vs America at the peak of their bubble.

 

I would really like to ask risk managers at our 5 ultra smart big Canadian banks how they are prepared for a potential 15-20% pull back in real estate prices. Do you really believe that they have reserved for that properly? I would be also curious to ask them about credit cards and lines of credit.

 

But, why worry? It is only the Americans who are lending recklessly. Oh really?

 

Cardboard

[nodnub]

I had thought buyers were getting more cautious here in Vancouver.  Then last week a 1/2 duplex on my street sold for $860k. It sold over the asking price and within 1 week of listing (on the day of the first open house).

 

I am curious as to when people here will regain their senses.  It's not happening quickly.

 

 

[EdWatchesBoxing]

We just sold our house which is in the Toronto Suburbs.  We had multiple offers and sold above asking in less than 48 hours.  Home prices is our neighbourhood have now reached, if not past, the previous price peak in 2007.  This is great for us but not good for our economy long term.  People are taking on huge mortgages with these low rates.  With increasing unemployment and possibly higher rates next year the housing market in Canada is gearing up for another pull back.

 

Wow?!? I know that May and June TREB numbers were off the charts, but this is crazy.

I guess if people are buying mainly with cash, then it won't be so bad. However, I imagine a good number of people are jumping in because of the low rates. Don't they think about where rates will be in 3-5 years from now and how it will affect their monthly payments? Maybe I'm missing something?

 

Hoodlum, are you planning on renting for the time being, or are you going to downsize so that the possible drop doesn't affect you as much?

[benhacker]

In local lenders in the Vancouver market that are doing anything particularly stupid that we should be looking at for potential short ideas?

 

There has to be an opportunity here, and there is zero media coverage of this.

 

Ben

[Myth465]

Perhaps play it similar to the US Housing Crash. Short Banks, Long CDS

[nodnub]

Ben,

 

I am not sure about local lenders and their lending standards. Canadian Western Bank is the only western-focused bank I can think of off-hand that is publicly traded.  They have operations from BC to Manitoba.   TSE:CWB and preferred shares CWB-A.

 

I think someone here brought to my attention that Cdn banks are giving zero down mortgages via a mortgage signing bonus equal to the 5% min required down payment. http://scotiabank.com/cda/content/0,1608,CID10969_LIDen,00.html.   Zero down combined with low rates may keep adding fuel to the fire.

[Cardboard]

"Perhaps play it similar to the US Housing Crash. Short Banks, Long CDS"

 

I remember that housing in the U.S. was on the decline for almost 2 years before the crisis really erupted in the financial market. I am not sure if it would take that long in Canada if there was some signs of a retreat in housing. Although, it would really surprise me considering the higher degree of alertness by investors nowadays.

 

A big difference is that there is no massive securitization via CDO's and other exotic securities going on up here. There are a few players dependent on securitization such as Equitable Group, First National Financial Income Fund, Home Capital Group and Xceed Mortgage. One would have to investigate their individual lending practices/balance sheet to see who could get strapped for cash if a downturn was to occur.

 

On the other hand of the spectrum, the big Canadian banks stocks have experienced a massive run since late February. They are currently trading at 11 times 2007 earnings, 13 times 2010 estimated earnings and 1.9 times book value (2.3 times tangible). The dividends are attractive being north of 4% and 6% for CIBC. Although, here is a little secret: they have been quite agressive using dividend reinvestment plans lately to avoid paying out the dividend in cash which would reduce their equity ratio. And this means dilution.

 

If you believe that a pop is likely to occur in Vancouver real estate, then I am sure that it will have an almost immediate impact on Calgary, Toronto and Montreal. Once it gets in motion, the 5 big banks will take quite a hit since they are no smarter than American banks. Their earnings will vanish and you will find out that they are not as well capitalized as they claim. The only two reasons I can find why they fared much better so far is because Canadian real estate held up and because they are shielded from competition. Complacency seems very high.

 

In fact, institutional imperative is so great among them, that they pretty much do all the same things. Bonuses are built as such and they are as bureaucratic as you can imagine. You will hear that CIBC is more into U.S. capital markets, that TD is in U.S. discount brokerage, Scotia Bank in Caribbean markets, but this is such a small part of their capital that it means next to nothing. What happens to Canada is what counts for all of them.

 

Cardboard

[ubuy2wron]

In local lenders in the Vancouver market that are doing anything particularly stupid that we should be looking at for potential short ideas?

 

There has to be an opportunity here, and there is zero media coverage of this.

 

Ben

\\Ben some of the Cdn. banks are lending with pretty close to zero down however I am unclear as to how much of the risk they are retaining. Genworth just did an IPO yesterday in Canada it was priced at the bottom of their indicated range and it was almost entirely a secondary offering. Genworth is the private mortgage insurer in Canada. I have not looked into this, the greensheet indicated that Genworth had zero finanical leverage however I am unsure how many dollars of mortgages they are guaranteeing  and what would happen to their equity if we had a serious real estate set back. The one difference on mortgages in Canada is you can not just walk away you have to declare bancruptcy in Canada before you can walk away from the liability on an upside down mortgage.

[Guest Broxburnboy]

"The one difference on mortgages in Canada is you can not just walk away you have to declare bancruptcy in Canada before you can walk away from the liability on an upside down mortgage."

 

This is governed by Provincial law and varies depending on locale. In Alberta you can walk from a title..last time around the place was full of "dollar dealers" who bought homes for a buck and rented them out for the six months it took for the foreclosure process to return title to the bank.

 

Some other differences between US and Canadian housing markets... No income tax credit for mortgage interest payments, which added another layer of leverage to home prices. Again, its hard to appreciate the overbuilding that took place in the States in the face of shifting demographics that should have been negative for demand.

 

The demographics of demand are still intact in Vancouver and the rest of the West generally. The Maritimes have always had a large ratio of homeownership without mortgages and enjoy a decent economy (much better than most periods).

 

The Canadian banks ARE better capitalized and are enjoying a boom in merger and acquisition brokerage profits. Their business loans are into a commodity based economy whose citizens enjoy an economic safety net that will help them make their loan payments which never reached the percentage of household income as that of their southern neighbours.

 

It may be that there will be more erosion in the US and Canadian economies and housing markets, but its severity will be less in Canada.