The Elusive Canadian Housing Bubble

[GRG55]

Re: May 2016 Canada 6-City Chart

A Chinese "cash buyer" story:

I've been in my old hometown since Friday and it is utterly insane here. Yesterday I held 4 business related meetings in the Lower Mainland with the final two downtown. There is a euphoric air about everything here - it's palpable. Easy to understand why nobody right in the midst of this feels there is any possibility of "danger" or of it changing in any way. The sky is the limit in VancouverGoingUp right now.

By chance walked by the under construction, close to finished Trump hotel downtown. I am guessing Chinese "cash" My friends here mentioned there used to be a Mexican flag on the site since there were so many workers from that nation on the job.

http://www.zerohedge.com/news/2016-0...-estate-assets

[Polish_Silver]

Re: May 2016 Canada 6-City Chart

No offence, but how is that any different from a Brazilian faevela/ghetto?

Well, one difference is that the people buying there have much higher incomes, and will presumably choose more posh houses.

[lakedaemonian]

Re: May 2016 Canada 6-City Chart

Two things not in short supply are land and trees. Could a "free building" zone be established near these cities where

anybody could cut down, build, and sell what ever they wanted?

No offence, but how is that any different from a Brazilian faevela/ghetto?

[Polish_Silver]

Re: May 2016 Canada 6-City Chart

When the government starts to get worried about something and decides to "fix it" it usually means it is already at, or close to, a peak in the problem. As for our boy Prime Minister's comments about a "drag on the economy", he must be smoking some of that stuff he wants to legalize up here...quite frankly housing IS the economy in Canada at this moment.


Morneau: Ottawa is doing a 'deep dive' on housing markets

TORONTO -- The federal government is conducting an in-depth examination of the country's real estate markets as it decides whether more changes are needed to rein in escalating prices or curb the impact of foreign investment on housing affordability, Finance Minister Bill Morneau said Wednesday.

Two things not in short supply are land and trees. Could a "free building" zone be established near these cities where

anybody could cut down, build, and sell what ever they wanted?

[GRG55]

Re: May 2016 Canada 6-City Chart

When the government starts to get worried about something and decides to "fix it" it usually means it is already at, or close to, a peak in the problem. As for our boy Prime Minister's comments about a "drag on the economy", he must be smoking some of that stuff he wants to legalize up here...quite frankly housing IS the economy in Canada at this moment.


Morneau: Ottawa is doing a 'deep dive' on housing markets

TORONTO -- The federal government is conducting an in-depth examination of the country's real estate markets as it decides whether more changes are needed to rein in escalating prices or curb the impact of foreign investment on housing affordability, Finance Minister Bill Morneau said Wednesday.

Bank of Canada warns elevated housing market a major risk, with strong price growth in Vancouver, Toronto unsustainable


Bank of Canada issues stern warning on Toronto, Vancouver housing markets


Trudeau: Hot housing sector 'a real drag' on Canada’s economy

[GRG55]

Re: May 2016 Canada 6-City Chart

I ...Incomes are being compressed, income tax revenues across the nation are going to fall (and be replaced with carbon taxes, user fees, now rapidly escalating property taxes, etc.), personal debt levels continue to hit new all-time highs. All that is left is for asset values to start to decline - and I think that is baked in the cake for Canada.

An amplification on the above...as income taxes fall (despite, or maybe in part because of, dramatic increases in the highest marginal income tax rates) Canadian governments have to tax consumption (carbon taxes and I expect in time an increase in the Federal GST/VAT tax) and wealth (property taxes, pension savings taxes on the largest accounts) to make up the shortfall.

As interest rates have fallen retail and fund investment capital has moved into the same spaces here as in the USA, dividend paying assets such as pipelines & utilities, REITS and so forth. The attitude here among fund managers holding these egregiously priced companies seems to be that, yes, asset prices may fall but income from those assets will not decline.

I am having some difficulty accepting that thesis.

[santafe2]

Re: May 2016 Canada 6-City Chart

All that is left is for asset values to start to decline - and I think that is baked in the cake for Canada.

Perhaps we'll have the bad manners to elect The Donald and a few million of your southern neighbors will cross the 49th. That's how much we care about your economic well being...

[GRG55]

Re: May 2016 Canada 6-City Chart

lol. otoh, referencing another chart you put up, those purchasers could just call their broker and put their money into gold, no?

I seriously doubt whether Mom or the folks around the office water cooler would approve of "risky" Au over "the safety" of more leveraging up in property.

There is absolutely no fear of debt remaining in Vancouver or Toronto. Even in Alberta, where job losses are still rising and businesses are being squeezed out of existence, there still seems the attitude that debt (household or government) doesn't matter (reminds me of Cheney's line on that topic).

Incomes are being compressed, income tax revenues across the nation are going to fall (and be replaced with carbon taxes, user fees, now rapidly escalating property taxes, etc.), personal debt levels continue to hit new all-time highs. All that is left is for asset values to start to decline - and I think that is baked in the cake for Canada.

[jk]

Re: May 2016 Canada 6-City Chart

The Vancouver line on the chart is becoming predictable. One could almost draw the rest of the year in now, eh?



There has to be a VirZOOM game idea somewhere in that blue line from Canada's self described "most environmentally conscious world class city".

Maybe you're a real estate agent desperately driving clients around Vancouver in your electric Tesla Model S, so they can be first in line to enter a bidding war. If you pedal fast enough your Tesla will fly them over all the traffic jams on the bridges. But that uses more power so its a race between a) the client getting the overpriced crack house of their dreams, b) running the battery pack dry thus plunging from great height into the Burrard Inlet, or c) losing valuable time (and maybe the deal) plugged into a Supercharger station while house prices rise another 6% in those 40 minutes.

Just a thought...

lol. otoh, referencing another chart you put up, those purchasers could just call their broker and put their money into gold, no?

[GRG55]

May 2016 Canada 6-City Chart

The Vancouver line on the chart is becoming predictable. One could almost draw the rest of the year in now, eh?



There has to be a VirZOOM game idea somewhere in that blue line from Canada's self described "most environmentally conscious world class city".

Maybe you're a real estate agent desperately driving clients around Vancouver in your electric Tesla Model S, so they can be first in line to enter a bidding war. If you pedal fast enough your Tesla will fly them over all the traffic jams on the bridges. But that uses more power so its a race between a) the client getting the overpriced crack house of their dreams, b) running the battery pack dry thus plunging from great height into the Burrard Inlet, or c) losing valuable time (and maybe the deal) plugged into a Supercharger station while house prices rise another 6% in those 40 minutes.

Just a thought...

Chart courtesy of Brian Ripley's website

[GRG55]

Re: For You Gold Bugs Out There :-)

That Canadian Peso currency whipsawing during the commodity bull and bust made a big difference.
But I think the bubble is still alive and well and living in YVR and TO. Most Canadians get paid in Loonies, not ounces of gold or any other denomination, and they have to use some of those Loonies to pay their mortgages (after tax Loonies because mortgage interest is not tax deductible in Canada)

This entire "one asset strategy" nation is now undergoing both nominal and real income loss/compression from a combination of rising unemployment, wage cuts, retiring Boomers, the inflationary effects of a falling currency and rapidly rising income taxes (for Alberta residents the top marginal combined Federal and Provincial income tax rate went from 40.25% in 2015 to 48% in 2016).

When I read the sort of stuff posted just below it's difficult not to believe this isn't going to end badly. Very badly.

An excerpt from the Greater Fool blog yesterday:

...“We’re looking at a $500,000 purchase price for a house (emotions running high after being extremely conservative for 5 years). Our young family has about $50k to put down. Parents will also need to co-sign (because of temporary job scenarios). We’re considering having them pull a HELOC on their house and then gift us $50k. This gives us the 20% down, enabling us to get a 30 amortization (near $150-200 lower monthly payments) while also avoiding the CMHC premium (around $18k). Between us we have enough liquid reserves ($60k) in the form of RRSP’s and TFSA’s to wipe out the $50k loan if it was ever called or if the rate went through the roof. Our cash flows are such that we can service the mortgage and loan along with all other housing costs, without moving into a bad zone with debt ratios. We have enough scraps elsewhere to cover closing costs.

“This idea stemmed from only being able to qualify for homes in the mid 400’s in our current situation. Consequently this idea enables us to get the purchase price needed to get into the neighbourhood we require. Despite the slightly higher rate for the HELOC, it also enables us to repay as we go without a bunch of repayment rules. So – smart or stupid?”...

...Stupid, dude. Buying that house (you can’t afford) will put you $500,000 in debt, leave scant reserves, result in a 30-year amortization (bigger interest payments) and soak up your cash flow. It’s a classic one-asset strategy, exposing you to market risk (housing will correct), rate risk (you’ll renew higher) and employment risk (job loss would kill ya). Sounds like you have kids, yet no savings for them (RESPs), and buying this place will mean nothing to put aside for your family for years to come...

...Buying now because (a) you fear you never will or (b) the house will make you rich with sure-thing cap gains is emotional, not logical. Face it, if you (i) need your parents to co-sign for your debt, (ii) you have to borrow from family to buy, (iii) you opt for a ridiculous 30-year amortization, (iv) you end up with virtually no equity, half a million in debt and only sixty grand saved plus (v) owning means you become an irresponsible parent, then buying is foolish.

House lust. Debt embrace. So many people have no idea what they’re doing...

Edit added:

The B.C. economy may on the surface appear as though things are well, but outside the overheated residential property sector on the coast, and in a few inland centres (such as Kelowna) where Boomers selling in Vancouver are moving their money, the signs of an economy that is slowing just like the rest of Canada are visible:

White elephants weigh on Metro office market

Empty new office towers show energy efficiency, location don’t guarantee occupancy

Despite being owned by experienced developers and built to state-of-the-art environmental standards, close to transit in what is arguably Canada’s top commercial real estate market, several new Metro Vancouver office towers remain nearly or completely vacant.

The highest-profile example is the 32-storey Exchange tower, scheduled to be completed next year after a $240 million speculative play by Credit Suisse/SwissReal Group.

Designed by Swiss star architect Harry Gugger, known for Beijing’s Bird’s Nest stadium and London’s Tate Modern gallery, the Exchange is one of the first, and Canada’s second-tallest, LEED (Leadership in Energy and Environmental Design) Platinum office tower.

Yet it remains 90% empty, with only a single tenant who has pre-leased 36,750 square feet of space on the top three floors. Normally an office building at the Exchange’s stage of construction would be 60% pre-leased.

A few blocks away, all 48,050 square feet of office space in the podium section of the LEED-standard Telus Garden on Robson Street is also vacant.

Elsewhere in downtown Vancouver, the Century Group’s five-storey Ormidale Block on West Hastings is scheduled to open this year and still has no tenants signed up, according to Avison Young.

The seven-storey Renfrew Centre near a SkyTrain station in Vancouver’s Broadway corridor opened last week. It has no tenants signed for its 161,000 square feet of office space, leasing agent Cushman & Wakefield has confirmed. The tower was built on speculation by AIMCo Realty, the real estate arm of Alberta’s largest public pension fund...

...The 14-storey Anvil office tower, built on speculation in 2014 by the City of New Westminster and sold to an investment group led by Kingswood Capital Corp., also appears to hit all the leasing hot buttons: it’s next to a SkyTrain station, built to high environmental standards and has been awarded for its energy-saving fenestration design. Yet, two years after completion, it remains vacant, with at least two floors being converted into strata office space...

And here in Calgary, spoke yesterday with a neighbour who builds 50 to 60 residential units a year mostly in his own neighbourhood developments. Pre-sold about a dozen units last year in his latest SFD development on the west side of the city - target audience is older professional couples with their kids out of the house and wanting smaller but higher end finished homes where all maintenance is taken care of (the benefits of condo living, but with more privacy and a garden). So far this year...two sales.

[jk]

Re: For You Gold Bugs Out There :-)

Many years ago an iTulip member (I can't recall the nom de plume but I believe he lived in Seattle or somewhere in the Pacific NW) posted some long term charts comparing housing costs vs ounces of gold. He said he used the macro trend to time the sale of his house (before the crash) and invest the proceeds in gold. Have not seen anything like that recently, but for some fun here's a comparison of three Canadian city house prices in ounces an Au.

where did the real-estate bubble go?

[GRG55]

For You Gold Bugs Out There :-)

Many years ago an iTulip member (I can't recall the nom de plume but I believe he lived in Seattle or somewhere in the Pacific NW) posted some long term charts comparing housing costs vs ounces of gold. He said he used the macro trend to time the sale of his house (before the crash) and invest the proceeds in gold. Have not seen anything like that recently, but for some fun here's a comparison of three Canadian city house prices in ounces of Au.

[GRG55]

Re: Va Va Voom Vancouver...

Hose down Toronto and Vancouver housing markets, OECD urges

The Globe and Mail
Last updated Wednesday, Jun. 01, 2016 12:04PM EDT

The OECD is ringing fresh alarm bells over the frothy nature of the Toronto and Vancouver housing markets and high levels of consumer debt.

“Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market,” the Organization for Economic Co-operation and Development warned again today in its latest outlook.

“In relation to household incomes, both house prices and household debt are high,” it added, throwing more fuel on the fire for those who are fretting over bubble fears.

“Macroprudential measures have strengthened recently but should be tightened further and targeted regionally.”...

...The OECD considers the risk of a “disorderly housing market correction,” notably in Toronto and Vancouver, as the biggest threat to Canada’s economy.

“This would damp residential investment and private consumption, and could threaten financial stability.”...



Scotiabank curbs mortgages in Vancouver, Toronto as prices soar: ‘We’re a little concerned’

Bloomberg News | June 1, 2016 2:26 PM ET

Hot housing markets in Vancouver and Toronto prompted Bank of Nova Scotia to ease off on mortgage lending in those cities, Chief Executive Officer Brian Porter said.

“We’re a little concerned about housing prices in the greater Vancouver area and Toronto,” Porter, 58, said Tuesday in an interview on Bloomberg TV Canada. “We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto.”...



CMHC's exposure to housing market inches down to $520 billion

May 31, 2016 4:11 PM ET
CBC News

Canada's national housing agency says it managed to ratchet down its exposure to the country's mortgage market in the first quarter of the year.

The Canada Mortgage and Housing Corporation said Tuesday had $520 billion worth of mortgages on its books as of the end of March. That's a slight reduction from $526 billion at the end of 2015.

By law, the CMHC can't hold any more than $600 billion and last year the agency said it would take steps to reduce its exposure as it got near the threshold.

Anyone looking to buy a home in Canada with less than 20 per cent down must get CMHC insurance, which is paid for by the borrowers but pays out to the lender in case of default. All in all, the agency says 38.1 per cent of all outstanding Canadian mortgages had CMHC insurance on them at the end of March...

[GRG55]

Re: Va Va Voom Vancouver...

...But I don't know to what degree different emotional stimuli are driving this. But it sure looks like a full blown mania now.

From the Greater Fool blog today.

Yes Virginia, it's a Mania:

Judith’s an accountant. “Every day I am feeling astounded and astonished at people’s financial illiteracy,” she tells me.

Worse, she’s an accountant in Vancouver, the current epicentre of dumb.

“I met with some clients today who between them have a household income of $120k, (they are “educated”), and have a SFH in Vancouver worth about $1m-$1.5m MORE than what they paid for it 15 years ago. So what do they do with their new-found wealth? Maybe sell, and rent? Retire (net worth is probably $2m including the sale of other real estate holdings)? NO! They…..buy MORE real estate, and mortgage it to boot, determined to be landlords in a market that will never fail (real estate in YVR always goes up, they tell me!).”

“If that doesn’t make you roll your eyes,” Judith continues, “this might. I had a nice conversation with the wife today about RRSPs (they had no idea RRSP contributions made today become taxable as RRIFs after age 71) and she told me she has no idea if her work has a pension plan. Um, ok? After ten years of working there, she has no idea if there is a company pension plan in place, and if it is defined contribution or defined benefit or? Just that she “thinks they have something upon retirement”, what it is, she has no clue (just two decades from retirement).

“Here is a case in point about the mentality in Vancouver these days. Who needs pesky things like pension plans when we have the all godly REAL ESTATE to save us? I fear for people in our city, and I am doubting this will continue much longer. I would say this is the peak, given what I’ve seen. I’m no expert but this is all downright scary, the infallible faith people have in just one asset class, and a government assures us that this is the way to go, debt be damned.”

The longer this goes on, the more insane the chart, the greater the house lust that Judith references, the more I’m coming to believe that the landing will be hard. Splintered-tail-fin-&-body-parts-in-a-smokey-hole hard. It’s not Chinese guys primarily responsible for this (there are far too few offshore buyers) but the unbridled house horniness that spreads in a city where everyone is real estate manic.
Look what they’ve done. Average detached price $1.817 million (see chart attached)

Those who want to blame others for what we’re doing to ourselves figure in a place with ho-hum wages that prices can only bloat because they’re being fed by foreign cash. But Judith says otherwise. People with real estate assets are leveraging them higher. Subprime lending is exploding as buyers stretch to make down payments on houses too dear for CMHC to insure. Family money is doubling down on a single asset class – real estate – as parents borrow against their illusory equity to buy more for their kids. And it’s all happening while people are oblivious to the fact interest rates have finally started their ascent. This is a far more dangerous situation than any invasion from Guangzhou...