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The Canadian Real Estate Bubble?
Below is an email that I recieved from a reader:
RIO Canada is one of the biggest reit's in Canada I know some of there management and from what I can see they are buying property's left right and center that are in bad locations and are doomed to negative cap rates and are destine to fail. I think they would be a great REIT company here in Canada to analyze as a short candidate. As you may know the residential and commercial property bubble here in Canada has hit levels never seen in America or any where else in the world. The potential for gain in shorting these company's with the most exposure to down turn risk would be greater then any where else as they are so over valued and carry a much greater risk then company's involved in the property market any where else in the world. It would be great if you and your wonderful analyst team could analyze these Canadian property company's. The down turn is already on the way in Canada with Vancouver correct already 17 % and Toronto having the most condos being built in the world right now. I literally see cranes ever where with 142 condos projected to come on to the already oversupplied market by 2014. I own business here and know the real economy has stagnated and declined plain and simple people are becoming "broke" or the harsh times are starting to hit them.Canada's economy can not support the property bubble her and the collapse will be mush greater then what will come or already has come in the United States. With my stores and there retail sales falling already by 50-60 percent year over year since 2008. I speak with many tenants who own business who are struggling to pay there rents and some have not made a profit in almost a year the "thresh hold" has be reached people are either going to walk away or renegotiate there leases heavily. Yet these REIT continue to buy property's hand over fist paying outrages price with negative cap rates and outstanding leverage. The biggest residential and commercial property bubble will fall here in Canada and I thought I should bring it to your attention Reggie if it wasn't already because you do a great job of simply but completely analyzing a company and debunking there fallacies. Thank you for your time.
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I couldn't agree more. I would go even further and say that we should publicly execute anyone over 300 lbs and put druggies on trains to nowhere and fight for their survival there. Our populations needs a good cleanse.
Or we could address the root causes.
Dangerous thinking here. At the end of the day house prices will always be dictated by affordability. A stable market will have prices in the 3x-3.5x income range. Canada is approaching 6x. Investing in an asset with a high carrying cost and expectating it to continue to appreciate at an unsustainable (unaffordable) rate is simply foolish.
It seems that like economic policy, there is no feedback loop in the real estate industry. Any sensible Canadian that looks at what happened to housing in the US should be very concerned.
Median Income in Vancouver = ~$68k
Median House price = >$1 million
http://www.doctorhousingbubble.com/canada-housing-bubble-ripe-for-poppin...
What's the median income in NYC compared to house prices?
Irrelevant.
less than half that- bad example
what? less than half what?
NYC residents earn less than half what Vancouver residents earn or avg house prices are less than half?
last time I checked NYC real estate was booming
NYC is just retarded...th 'correction' is catching up:
Foreign investment in NY real estate drops New York, the most popular city for foreign investment in commercial real estate last year, had a 43% drop to $4.34 billion, falling behind Paris and London.
Read more: http://www.crainsnewyork.com/article/20120719/REAL_ESTATE/120719865#ixzz21riX5Y3B xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx NYC home prices drop 2.9% in 12 months Read more: http://www.crainsnewyork.com/article/20120327/REAL_ESTATE/120329902#ixzz21ritPRHfHomeowners in Seattle, San Fran or NY are not concerned. Why should Canadians be concerned?
Just because our banks allowed balloon mortgages on fucking shacks in the ghetto?
Erroneous on all counts. Canada price/rent ratio higher than anywhere else. Canadians more leveraged than anywhere else. HELOC's used to fund consumption, and taken out by a higher proportion of population than ever in the US, already saturated. CMHC mortgage insurance spigot turned off due to almost hitting regulator threshold = no more bulk insurance let alone regular. Tax code loop hole allowing foreigners to avoid capital gains being examined. Mortgage fraud rampant means put-backs to banks likely large = will not be able to afford to make new loans.
When you hear Canada, think US but five years late and stupider.
Canada stupider? I guess forcing banks to lend to unqualified applicants and then packaging those mortgages on Wall Street to use as collateral on highly speculative bets on leveraged derivatives is American ingenuity that those backwards Canadians just don't understand.
btw, stupider is not a word.
what's more stupid than "forcing banks to lend to unqualified applicants", yeah, that's the U.S., our government pushes those poor spineless banks around, too bad they dont have any representation in DC (sarc off)
First on the unfit mortagees, if that was all this was, just loans going to bad credit losers, this housing crisis would have been over in 2007...the real massive part of problem were good, high FICO score, well-employed people buying houses at over-inflated prices, with no-interest loans, people with good FICO scores HELOCing house at high value it later lost etc..
And please, banks were lending to any warm body because they needed a warm body to be able to act like they had a decent product to sell, not because they government had a gun to their head....do you read anything, have you ever read anything the insiders at coutnrywide etc had to say. Young kids at big banks, Coutnrywide, Indymac etc made huge money by whiting out sh*t, changin the borrowers documentaion, changing MBS info etc....and they used to opaqueness of their MBS and outright lies and frauds (sometimes as brazen as just changing numbers on a spreadsheet representing mortgages and hoping nodobdy spot checked them) - so it wasnt enough to they knew the mortgages were crap because they paid 25 year olds mortgage brokers tens of thousands of dollars to bring them crap, they also fudged the tallied numbers on those crap mortgages and then SOLD them like a hot potato, and made big money. Do these bankers care that 5-10 years later their bank is drowning in put-backs because there are emails and eyewitnesses prove they all knew the loans were crap? Did govt have to force countrywide to package garbage mortgages...I vaguely remember Wall Street being mad for this stuff, couldnt get enough of it etc...
Have you ever read Dodd-Frank? I don't recall in my post saying Banks lent only at the end of a gov spear. Of course there was a profit motivator for them. There was enough greed and blame to go around.
My point is that stupid things were done here in the U.S. that were not repeated in Canada. Maybe they're not the stupid ones and maybe you should learn about reading comprehension.
Ding, Ding. give the man his stuffed beaver prize.
Stupider because they seen in happen in the USA, stupider because they actually did more bailout per capita than the US (also to US owned car companies) and stupider because they are so "risk" adverse to anything outside resources.
yes, exactly. I think it's funny I've been junked four times. Canadians are not unintelligent people. But, when it looks like poo, smells like poo, is proven beyond a shadow of a doubt to be poo, and then insist that your heap of brown stuff is NOT poo, but something very different than your dumb southern neighbors - well, that seems like the definition of stupidity to me.
Funny thing. The HELOC's were used to buy cheap real estate in Palm Springs, Phoenix and Fort Lauderdale.
No, the US takes the cake. Giving huge mortgages to anyone with a heartbeat and people living in ghetto shacks was the stupidest thing ever.
But we had a war to fund and our banks were suffering a drought.
sure. Canadian HELOC's have been used to fund consumption and buying second and third properties that are cashflow negative and can no longer be flipped.
Roger that.
A drive on trans-can hwy approaching Calgary is an eye sore with houses stacked like Borg cubes. Seriously WTF ?
Every day, I thank god I left that rat-hole. Life on Ontario's West Coast is sweet.
"Life on Ontario's West Coast is sweet"
West coast? Isn't that Manitoba?
Good deep sea fishing there? Pretty beaches?
The deep fishing is dead, but the beaches on the Bruce Peninsula kick ass.
Check out Sauble Beach some time, my band & I played there Tuesday night. Great place for solstice & equinox sunsets.
Those beaches of Western Ontario are spectacular especially in contrast to the construction development (called 'progress') in other areas. If the frigid weather did not make my arthritis ache so much I'd move there in a sec.
Ugly like shit. But the average household income in any of those shit boxes is min. 100k p/a.
They call it vinyl village. Calgary builders and the resulting homes are some of the most sloppiet building standards in the western world.
Whole condo buildings (starts with the word discovery) slipping into the mud bog that is calgary.
Yep. Can't happen here. It's a new paradigm. Things are different. The demographics are in our favor. The world is running out of land. Real estate has never gone down. Think long term gains. They're not making any more land. Get in quick before prices go up.
http://www.bloomberg.com/news/2012-05-01/australian-house-prices-fall-fo...
Bloodbath to hit Australian real estate, global property analyst Jordan Wirsz sayshttp://www.news.com.au/money/property/bloodbath-to-hit-australian-real-e...
The irony is that land in Canada is cheap. The cash is in the condos and downtown housing.
Have you visited either Vancouver or Toronto? The populations are soon approaching 50% Chinese.
Canada is being invaded as we speak by Chinese and Indos. You're looking at 2+ billion people who have setup infrastructure, community and culture in a foreign nation of 30+ million. Any Chinese or Indo can land in Canada and find work in their own community. Shitty work and low pay but they're in Canada and they're working.
Canada's population has the potential to double in 30 years. It's completely crazy there.
You talk as if you don't live here, cause by your last sentence you don't. And obviously by your lack of perceptive understanding of personal and mortgage debt accrued by Canadians, have no idea what you're talking about. Our debt to income ratio is about 154%, and many people have bought homes all over close to 7-8 times their income. And the chinese are being restricted due to changes in immigration lately less and less. So please get your facts straight, I live here and see it first hand.
Different there eh?
Not all mortgages are backed by Canada Mortgage & Housing Corporation, only the ones with smaller than 20% down.
That being said, the feds just stopped with 40 & 30 year amortizations & 5% down, 5% cash-back mortgages. It is probaly too late here in Kanuckistan, and the pin is meeting the bubble. Nobody utters the term "sub-prime," even if they live it.
I have eight years left on my mortgage, then the celebration will commence.
You are mistaken, mr1963, at least partially. No, no all mortgages are guaranteed. Only those where the homebuyers did not meet a minimum downpayment, which I think is about 20%. That was and is indeed mandatory. Therefore, the minimum equity for all houses should be 20%. What is comical though is that the rest that is not guaranteed, if it is hedged, it is but among the same Canadian banks, so that the systemic risk is all there.
Now,having said this, whoever tells you that the market is ripe for collapse, has to say to you too, why does he/she think that the Asians are going to stop recycling their US dollars with Canadian real estate and resources. Just a week ago, China bought Nexen. So, as long as the chinese keep bidding for them, and immigrants are allowed in, it is hard to see how this hot potato game will not continue, unless the Bank of Canada stops intervening to keep the Canadian dollar undervalued.
Mr1963 is NOT mistaken. CMHC has two types of coverage.
1) Default insurance is issued when someone with less than 20% equity gets a mortgage.
2) Bulk insurance which is portfolio insurance the banks purchases to cover all other low risk conventional mortgages.
Almost three-quarters of CMHC’s outstanding mortgage insurance is of the low risk conventional type and constitutes the plurality of their insurance book.
As it stands, the CMHC cap is C$600 billion which has been periodically revised upward. If CMHC is prevented from raising its ceiling by the legislators, banks would be on their own. This would also raise the risk premium on covered bonds banks issues in an attempt to maintain their capital adequacy ratio to sell more mortgages.
Banks have very little skin in the game. Moreover, to think the Canadian government would not bail-out CMHC through bond issuance and BOC monetization is naive.
Sorry, but Canadian banks here have lots of skin in the game. HELOC loans. People were allowed to take a line of credit on their house equivalent-get this- to 90% of the value of the home on purchase or even more if the assessed value of the home went up. If people can't pay their mortgage, I can't see them paying a 300000-600000 HELOC. So the banks and the public are fucked when this goes all tits up.
I was only referring to mortgages, not all other types of credit products. Your point is well taken.
CMHC has turned off the mortage spigot, that's why. And, there is no political will to increase the regulatory threshold. That Vancouver has turned is easy to see. Toronto condo's are suddenly becoming harder to off-load, which is not so well-known.
Spam
If I'm not mistaken, all mortgages in Canada are guaranteed by the government. The banks have little risk in the loans. Of course, even governments run out of mon -- er -- other peoples money...
Rock solid like fanny and freddy.
No. Not all mortgages are insured by CMHC.
Buyers with 20% or more down, are not required to participate.
"Let us first get one thing out of the way; the Canadian housing bubble will burst. Just like real estate bubbles in Ireland, Spain, England, and the United States real estate bubbles do burst.
The median household income in Vancouver is $67,550 yet the average detached home price is above $1 million. That is simply madness and even makes the California housing bubble look modest in comparison."
full article from teh Good Doctor:
http://www.doctorhousingbubble.com/canada-housing-bubble-ripe-for-poppin...
And it does not translate into commercial property either.
The upside, is that mortgage interest is not tax deductible, therefore, you do not have the huge run up in prices that was seen in the US.
Yes, you do.
Correct.
In Canada you can not just walk away from your mortgage. It will follow you.
Federal government backs up most mortgages through the CMHC ~ Garbage paper that consists of a vast majority written on 40 year paper, with less than 3% down. These mortgage holders are barely holding their financial nose above the under water line now! Just a fall of 5% to 10% of real estate valuations will throw them out of their sinking boat.
As for the mortgage holders outside large urban areas, this segment is in much better shape. The suffering will mainly be contained to the three hottest markets ~ Ontario, Alberta and especially British Columbia.
Further, the CMHC steps into the shoes of the lender and sues the borrowerr. The collection and garnishee procedures are customary, with one additional twist. The Canadian government collects on behalf of the CMHC by using its tax collection authority to seize bank accounts and tax refunds at will. The borrower can't have a bank account in Canada, since his Social Insurance Number would ID his bank account for seizure.
The rules vary from province to province.. here in Alberta we can walk from an underwater mortgage.
yes, full-recourse is a great thing. Except, what happens when 1)the homeowner has misstated assets, 2)the value of the home has been misstated, 3)the bank suddenly has a bunch of used cars (being the second major asset a person is likely to have)? All these protections only work when one or two mortgages default here and there. When it is systemic, its a vicious downward cycle.
Take a look at the over-valuation from this perspective? http://canadabubble.com/bubble-watch/2375
This is probably a repost.
http://www.crackshackormansion.com/
Crack shack or Mansion? Reinds me of those trailer homes in California selling for $680,000.
Hilarious!
I am not claiming that prices are not overvalued, they are and the condo boom in Toronto is beyond sustainable.
But, we did not have people with $30k per year jobs buying $750k houses here either.
yes, you did. NINJA is alive in well in the robo-approval of CMHC insurance. Soft-fraud levels mean a huge part of the prime market in Canada is actually Alt-A at best. Bank mortgage reps are as incentivized to do stupid sh*t as in the US.