The Elusive Canadian Housing Bubble

[GRG55]

Re: The Elusive Canadian Housing Bubble

I was in Victoria, British Columbia for an in-laws family function the past few days. Came across this in the local paper while having breakfast Friday morning.

Cracks showing in the Canadian property market foundation wall?

Oak Bay Beach Hotel pushed into receivership, but ‘business as usual’

Times Colonist
December 5, 2014 04:00 AM

Only two years after opening, the Oak Bay Beach Hotel is in court-ordered receivership with debt estimated at more than $125 million.

The hotel’s local developers, Kevin and Shawna Walker, are no longer part of its operations. Receiver Ernst and Young took over as manager on Wednesday.

“It’s business as usual. We’ll operate the hotel for a period of time until we have determined the appropriate time to start thinking about selling the business,” said Kevin Brennan, senior vice-president of Ernst and Young, on Thursday. From the perspective of guests, “nothing will change whatsoever,” he said.

It is too early to consider a sale price or the process that might be used to sell it, Brennan said.

A syndicate of lenders, who say they are owed more than $60 million, went to B.C. Supreme Court in Vancouver to have the receiver appointed. A list of creditors and claims will be posted on Ernst and Young’s website within 10 days, Brennan said.

Kevin Walker said he hopes to line up new financing and return to the hotel.

The 139,000-square-foot hotel includes 100 guest rooms, 20 condominiums, a spa with pools overlooking the ocean, the Snug pub, a dining room, the David Foster Foundation Theatre, a conservatory and Kate’s Café, named after the Walkers’ daughter. An appraisal valued it at $124 million, Walker said.

It opened in 2012, three years later than planned. The project went through a lengthy public process with the municipality. It faced financing issues and construction delays.

The hotel was built to replace the 49-room Oak Bay Beach Hotel, which the Walkers closed in 2006 and then dismantled to build the replacement...

...The hotel side of the operation is successful, but a changed real estate market following the recession led to financial troubles, Walker said. There are millions of dollars worth of unsold condominiums and strata-title hotel rooms.

Lenders brought in their own sales and marketing people from Vancouver in June 2013 to try to move units, he said.

“It was a dismal failure. I think we just have to conclude that market conditions have shifted dramatically from when we started this project.”

Guest rooms were sold as strata-title units that owners lease back to the hotel company. Some buyers hold title to their units. Others joined a bond fund that allowed them to move in prior to taking title. About 30 per cent of rooms fall into one of those categories. Fewer than half the condos have been sold. Two condos, priced at $3.5 million each, are unsold...

[GRG55]

6 City Chart Data - Nov 2014

Up, up and away...

From Brian Ripley's informative website:

[GRG55]

6 City Chart Data - Nov 2014

Up, up and away...

[EJ]

Re: Defending Krugman

But aren't the Chinese buyers individual investors and not corporations? Furthermore, it seems to me that the Chinese buyers are not borrowing very much money to buy overseas real estate. They are primarily using foreign real estate markets to move/launder money and establish a foothold in a country they'll potentially emigrate to. For these individuals, if they have a severe cash crunch in China, I seriously doubt they will liquidate their foreign holdings unless the cash crunch were necessary for them to purchase a get-out-of-gulag card. I also doubt these buyers are Chinese Sam Zells who are very skilled at real estate speculation and will sell at a perceived top. The Asian mindset is that real estate never goes down.

The famous Japanese busts in U.S. real estate were truly large purchases and they were bought by corporations. When the corporations got into trouble, they actually had an interest in trying to save themselves and thus sold assets. It doesn't seem likely to me that this will happen with individual Chinese buyers.

A friend who runs a hedge fund in NYC emigrated from mainland China with his family in 2005. He explains the movement by Chinese citizens to buy U.S., Canadian and European real estate with cash simply: for these Chinese families, China was the country that afforded them the opportunity to make money but is a terrible place to live: pollution, unsafe food, traffic congestion, and local corruption make quality of life there poor. They want the quality of life that we as Americans and Europeans take for granted and can afford to buy their way into it.

[Milton Kuo]

Re: Defending Krugman

I guess this is logical unless the Chinese investor is required to send bullets from his own chamber back to the mother land?

I'm concerned the Chinese are making the same mistake as the Japanese in the 1980s....except this time its residential real estate.

But aren't the Chinese buyers individual investors and not corporations? Furthermore, it seems to me that the Chinese buyers are not borrowing very much money to buy overseas real estate. They are primarily using foreign real estate markets to move/launder money and establish a foothold in a country they'll potentially emigrate to. For these individuals, if they have a severe cash crunch in China, I seriously doubt they will liquidate their foreign holdings unless the cash crunch were necessary for them to purchase a get-out-of-gulag card. I also doubt these buyers are Chinese Sam Zells who are very skilled at real estate speculation and will sell at a perceived top. The Asian mindset is that real estate never goes down.

The famous Japanese busts in U.S. real estate were truly large purchases and they were bought by corporations. When the corporations got into trouble, they actually had an interest in trying to save themselves and thus sold assets. It doesn't seem likely to me that this will happen with individual Chinese buyers.

[gorinv]

Re: Defending Krugman

[QUOTE=lakedaemonian;289518]
Yin-Yang version of Russian Roulette disconnect

Another way of looking at it might be a modified game of Russian Roulette with two players, one western and one Chinese investor in western real estate.

....

But do western property owners see the risk they are taking playing with the Chinese gun loaded with 5 or 6 chambers out of 6(84-100% equity Chinese investors can accept partial loss of in order to survive)? [QUOTE]

I guess this is logical unless the Chinese investor is required to send bullets from his own chamber back to the mother land?

I'm concerned the Chinese are making the same mistake as the Japanese in the 1980s....except this time its residential real estate.

[lakedaemonian]

Re: Defending Krugman

The difference is that Japan is a country run by elected officials and China is not.

Japan's over-investment in U.S. trophy commercial real estate was hubris.

There's none of that with the Chinese today. They are buying residential real estate in the U.S., Canada, Australia and the UK. Also to a lesser extent across Europe.

All of these countries are politically stable democracies, and some safer than others for personal investment.

Who are the persons investing their wealth outside of China?

They are the families that have benefited the most from the "economic miracle" that is China for the past 20 years.

What does that tell you about their confidence in the China that they have built?

At best they are hedging their bets.

At worst they are getting out of Dodge.

I agree completely EJ.

Here's my schtick when I talk to folks in the wealthy white english speaking west about real estate and the upside/downside impact that Chinese investors has on the market:

On the way UP:

Chinese investors act as a turbo charger accelerant to property prices.

On the way DOWN:

Chinese investors will act as an accelerant like in a fire caused by arson.

We are on the global real estate version of Titanic(Chinese owned and manufactured).

Chinese investor passengers who've bought their way onboard with all the western homeowner passengers are sitting on 5 suitcases full of money.

Boat hits iceberg.

The first Chinese investor passengers ask the pursor(western real estate agents) how much it will cost for a seat on the lifeboat?

After the first couple of passengers, it's 1 suitcase full of money(20% equity hit and change in comparable value price)

After the queue starts to crowd, to jump the queue now requires 2 suitcases full of money(40% equity hit and change in comparable value price)

How many suitcases of money are the Chinese passengers/investors willing to handover in order to get on the liquidity lifeboat?

I don't know.

What I do know, is that all cash Chinese investor/passengers are going to behave differently to low equity 30 year fixed mortgage western customers will.

And that behavior, even a fairly low percentage of total property owners, can drive substantial changes to recent real estate comparables.

-----

Yin-Yang version of Russian Roulette disconnect

Another way of looking at it might be a modified game of Russian Roulette with two players, one western and one Chinese investor in western real estate.

A game where you play based on how much equity the OTHER player has.

Maybe the Chinese player would knowingly play the game with the western gun with just 1 or 2 chambers loaded out of 6(16-33% loss of equity). I would hazard a guess most would take those odds, and accept the risk of survival.

But do western property owners see the risk they are taking playing with the Chinese gun loaded with 5 or 6 chambers out of 6(84-100% equity Chinese investors can accept partial loss of in order to survive)?

Just some thoughts......that's how I've been talking about it....and I haven't had any push back to it yet to alter my thinking.

[gorinv]

Re: Defending Krugman

The difference is that Japan is a country run by elected officials and China is not.

Japan's over-investment in U.S. trophy commercial real estate was hubris.

There's none of that with the Chinese today. They are buying residential real estate in the U.S., Canada, Australia and the UK. Also to a lesser extent across Europe.

All of these countries are politically stable democracies, and some safer than others for personal investment.

Who are the persons investing their wealth outside of China?

They are the families that have benefited the most from the "economic miracle" that is China for the past 20 years.

What does that tell you about their confidence in the China that they have built?

At best they are hedging their bets.

At worst they are getting out of Dodge.

I guess my concern from an Australian perspective is that if the "economic miracle that is china" falls over then we have a major revenue problem with our major trading partner. Approximately 25% of our mining exports are to China and growing at an of average 20% pa. Japan is second at app. 15%.

Australia is faced with lower commodity prices for our two major exports - coal and iron oar. Government revenue is evaporating and our deficit is escalating at a rapid rate. The immediate outlook does not look good and government is being blocked in the senate from implementing reforms.

I note that the Japanese were largely invested in commercial real estate. However, I believe the Chinese focus on residential real estate is more threatening to the average Australian. Chinese investors who have benefited from the 'miracle economy' are paying cash and driving up prices while the average Australian is taking on larger and larger mortgages to compete. Servicing these mortgages are only going to get harder in a declining economy.

I hope the Chinese miracle keeps on keeping on. My concern is that if it doesn't then a large portion of that Chinese investment in Australian real estate is most likely to be needed back home - setting off a major correction in an already over hyped and expensive property market.

[EJ]

Re: Defending Krugman

While we're talking about Chinese property investors.

Here in Australia, Chinese investors can only buy new stock "off the plan". There's one "property concierge" in Sydney who has sold AUD$120m this year alone to Chinese investors! Her goal is to increase that next year to AUD$200m!

Needless to say Chinese investment is propelling our real estate Ponzi scheme to new heights:

http://www.abc.net.au/news/2014-11-2...estate/5923764

The frenzy is absolutely ridiculous. It was the Japanese in the 1980's.

History will repeat itself!

The difference is that Japan is a country run by elected officials and China is not.

Japan's over-investment in U.S. trophy commercial real estate was hubris.

There's none of that with the Chinese today. They are buying residential real estate in the U.S., Canada, Australia and the UK. Also to a lesser extent across Europe.

All of these countries are politically stable democracies, and some safer than others for personal investment.

Who are the persons investing their wealth outside of China?

They are the families that have benefited the most from the "economic miracle" that is China for the past 20 years.

What does that tell you about their confidence in the China that they have built?

At best they are hedging their bets.

At worst they are getting out of Dodge.

[gorinv]

Re: Defending Krugman

Chinese real estate investment seminar.....with what looked like 90%+ of hotel capacity being ethnic Chinese based on the 2am fire alarm.

While we're talking about Chinese property investors.

Here in Australia, Chinese investors can only buy new stock "off the plan". There's one "property concierge" in Sydney who has sold AUD$120m this year alone to Chinese investors! Her goal is to increase that next year to AUD$200m!

Needless to say Chinese investment is propelling our real estate Ponzi scheme to new heights:

http://www.abc.net.au/news/2014-11-2...estate/5923764

The frenzy is absolutely ridiculous. It was the Japanese in the 1980's.

History will repeat itself!

[lakedaemonian]

Re: Defending Krugman

I wish it was a parody but unfortunately no. The Bank of Melbourne is a subsidiary of one of our 4 major banks here in Australia.

Australia is a commodity based economy which is about to experience a precipitous drop in mining investment which has underpinned the whole real estate game for the last 10 or more years. Can the Chinese continue with their miracle economy? Australia has become totally dependent on commodity exports to China at the expense of any TECI type industries.

Unfortunately Australia has 20% of the world's poker/gaming machines. That is a extraordinary statistic for a population of 23 million.

Reality is we're a nation of gamblers and the ad is just playing to our cultural habit!

Having just returned from Melbourne, I was stunned at the expansion of the casino there....very much US Vegas sized compared to nearly 10 years ago.

And saw a noticeable increase in Chinese customer focus with the fairly large gambling areas dedicated to Asian-centric gambling(Pai Gow poker).

But in having said that, a week prior I was in Queenstown, New Zealand which has only 2 very small casinos(I'm not a gambler....was at Melbourne and Q'town for meetings)......but the hotel where I was staying was hosting a Chinese real estate investment seminar.....with what looked like 90%+ of hotel capacity being ethnic Chinese based on the 2am fire alarm.

[gorinv]

Re: Defending Krugman

I wish it was a parody but unfortunately no. The Bank of Melbourne is a subsidiary of one of our 4 major banks here in Australia.

Australia is a commodity based economy which is about to experience a precipitous drop in mining investment which has underpinned the whole real estate game for the last 10 or more years. Can the Chinese continue with their miracle economy? Australia has become totally dependent on commodity exports to China at the expense of any TECI type industries.

Unfortunately Australia has 20% of the world's poker/gaming machines. That is a extraordinary statistic for a population of 23 million.

Reality is we're a nation of gamblers and the ad is just playing to our cultural habit!

[Milton Kuo]

Re: Defending Krugman

GRG, we Australians don't even pretend anymore. We just tell it as it is!

Good Lord. I guess by your comment, this is a legitimate commercial for an actual bank and not a parody. I am utterly flabbergasted. Calling purchasing real estate the "property game" and even showing the rolling of the dice. This is unreal. Even at its peak, I don't recall the corruption-driven U.S. housing bubble being this blatant. About the worst I remember for larger banks here were Washington Mutual's "We Say Yes" advertisements.

[gorinv]

Re: Defending Krugman

You folks south of the 49th are amateurs at this. Read on:

The tale of two nations. Part deux. This is certainly getting interesting.

The average moist virginal homebuyer in Canada is 29 years old, just emerged pasty and blinking from his parents’ basement, and plans to spend $510,000 in Vancouver and over $400,000 in Toronto to buy real estate. Almost all of these buyers take high-ratio loans, since they lack a 20% downpayment, and end up paying CMHC insurance – which can add $15,000 to that Van price.

But despite the fact this amounts to an awesome debt loan, the home ownership rate among the twentysomething set (according to BeeMo) is 50%. That’s down from the past level of 55%, mostly because houses are so stupid expensive.

In Canada the average place costs more than $400,000, says CREA. In the States, the average is $176,500.

So, you’d imagine US kids would be swarming to real estate, since mortgage costs are roughly equal (thirty-year loans are 4% in the US, but tax-deductible), as are big-city incomes. But you’d be wrong. Home ownership among this group hit 40.6% as the housing boom was ending in 2007, then fell to 34% last year and is now just 29%. Of new-home purchasers, just 16% are first-timers.

What could possibly account for this huge gap between the Yanks and the Maples?

Well, many US kids saw their parents get their butts roasted in the housing correction that bottomed about four years ago. The US middle class was vacuumed for about $6 trillion, and millions of families found that having a one-asset investment strategy, leveraged over a mountain of debt, was a toxic idea. A whole nation of house-hornies discovered real estate does not always go up.

But that’s background. More salient reasons American millennials are renting are (a) student debt, (b) higher youth unemployment and (c) a lack of affordable properties. Sound familiar? So, we still don’t have an answer.

Until we look at lending practices.

To get a mortgage in the States, you typically need a credit score of 750. Yikes. Not only that, but most lenders usually won’t dole out any funds unless a buyer can cough up a downpayment of 20%. Compare that with Canada, of course, where 5% is all you need, and the bank will give you at least half of that for showing up.

Of course we also have teaser-rate and adjustable-rate mortgages, which are now banned in the States. That’s how banks here sucker in people with 1.99% or 2.2% two-year terms. It’s also worth remembering the Canada Interest Act dictates all mortgage terms have to expire after five years, so you cannot lock into a 4% rate for the next three decades, as so many Americans are doing currently. (Refinancings have jumped 23% as bond yields fell.)

The result is obvious.

Half of our kids buy houses and the average price is $408,795. South of us, in a similar country, less than a third can buy – and homes cost $176,500.

This is no coincidence. Real estate doesn’t cost more here because it’s better-built, or since we have a larger population and a better climate, or because people in Seattle make half what Vancouverites earn. Prices are higher because houses are easy to buy, and debt flows.

It’s been deliberate. Pushing real estate’s been a key policy initiative of governments which are financially strapped, strangled by election cycles and bereft of other ideas. By pushing citizens into borrowing and spending massively, politicians don’t need to pare spending, enact stimulus programs or reform taxation, especially when the economy turns south. They just get the fool voters to do it. Simple. It works.

So we got forty-year amortizations and zero down payments, along with first-time homebuyer tax credits. This was layered over the Home Buyer’s Plan allowing RRSPs to be raided, and provincial grants to encourage newbies. Land transfer taxes are slashed or eliminated for the virgins and, of course, CMHC wipes away all lender risk for mortgages up to 95% of a property’s value. We now have an entire banking sector that’s grown fat on giving home loans to people who have been too challenged, lazy, undisciplined or juvenile to actually save any money.

The result?

Unaffordable houses and record debt.

Genius country, eh?

GRG, we Australians don't even pretend anymore. We just tell it as it is!

[GRG55]

Re: Defending Krugman

This is fast approaching a full blown mania. Nobody, not even the bankers and politicians, can plan those.

Here's the chart updated with October 2014 data. To the moon, Alice!