"This Is Going To Blow Sky High" - Observations On Canada's Housing Market

Tyler Durden's picture

For months we've been warning about real estate bubbles re-emerging in various markets around the world from Canada to Australia (see "There Are 66,719 Empty Mansions In Vancouver" and "Vancouver Home Sales Crash 40%, As Toronto Home Prices Soar 22%").  And while facts and figures clearly indicate that certain markets are bubbling over courtesy of all the same mistakes that caused the 'great recession' in 2008, nothing helps to confirm the truly obscene nature of a real estate bubble quite like attending a good ole-fashioned, get-rich-quick real estate expo. As such, below are the musings of one financial market observer who recently attended the Canadian Real Estate Wealth Expo as a joke but walked away convinced the system is about "to blow sky high."

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Originally Authored By Tim Bergin of On Beyond Investing

Originally, I thought this would be a bit of a joke.  There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo - learn how to become a millionaire.  I thought this was so ridiculous, it may be fun.  What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches.

Prices were originally $150 per ticket, but I was able to buy for $50.  While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market.

I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong - 15,000 people were there!  I was blown away.  Bubbles are largely psychological.  This crowd was tangible proof of that.  15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment.  The whole experience was horrifying.  The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned).

The first real segment of the expo was a panel of Canadian developers and real estate agents giving their views on the market.  It actually started off a touch bearish, which surprised me.  Two of the panelists were saying that prices are exceptionally high and no market goes up forever.  With that slight bit of caution thrown out there, it became a real estate FOMO-building talk.

There are, apparently, two very important things to know when dealing with real estate.  First, you have to face your fear; this fear is to be ignored and then you should ‘just do it’ and 'buy now'.  The next step is find what you can afford and then buy it.  Ignore all ‘non-doers’, don’t overanalyze or focus on the numbers, just fucking buy.  To allay fears the speakers are actually quite clever as they shift between a long to short term focus when it suits.  For example, now is a great time to buy because short-term the market is on fire. If, however, markets cool then you just hold because it always goes up long-term - and you are a savvy long-term buyer, aren’t you?  By showing no scenario where you can lose I can see how this pitch works on the susceptible.

The second important factor in real estate is financing.  Not everyone has money, so what can they do?  The answers were shocking.  Be ‘creative’ was the first response.  Pool your money, borrow from friends and family, own just 5% of a house, get the money however you can and just do it - remember, it only goes up.  Other financing suggestions were get cozy with a lender and they will ‘bend the rules’ for you!  The fact that the biggest condo developer in Canada (Brad Lamb) said lenders will bend (but not break, apparently) rules to get you financing in front of 15k people with most people smiling and nodding was shocking.

So there you go - when it comes to Toronto real estate, just do it (using borrowed money any way you can get it).

The booths outside of the presentation hall were just as troublesome.  Plenty of “high double-digit monthly yields”, retire early with real estate, “everyone needs a place to live - buy apartments” type messages.  Almost all of these pitches were second lien lending.  Most offered yields in the 8 to 10% range.  The presentations all suggested that you can borrow money, if you don’t have it, at 4% and then buy these investments at 10% - easy money.

The apartment pitch booth was like most other pitches - it revolved around stable cash flows + mortgage paydown by renter + equity appreciation = profit.  (Now that all sounds great but owning a condo at current prices in Toronto is a negatively carrying asset, so where does this cash flow come from?)  Further, investing in apartment funds is even better if you borrow the money to do so.  The pitch goes on to explain that levering a 30% return makes you more money than not levering...

The Paramount Equity pitch was also interesting and stated in all caps “HIGH DOUBLE-DIGIT RETURNS ON YOUR CASH, RRSP”.  This product pays monthly, is a second lien mortgage, with a one year term and LTV <85%.  Paramount uses clever language that states they cover the cost of defaults.  By that they mean they pay some of the fees, not the default risk itself.

There was a space to pick up business cards.  I got quite a few from real estate investors.  I plan on emailing them all to learn just how bad their pitch/product is.  I want to learn more about how these second lien investor pools are sourced and just how bad this is going to be.

Also, perhaps there will be an opportunity to meet a bunch of distressed sellers, before they even know it themselves…

Nowhere in any of this was there ever a mention of risk, the dangers of leverage, how terrible negative equity can be, how that can trap you, etc.

The amount of shadow leverage in this system is crazy.  The terms on these second lien loans is 1yr.  What happens when all of these loans are called?  Even lenders with first positions will see clients sell when these loans become due and there is no money to pay them.

This is going to blow sky high.

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BobEore's picture

To which I should have added...

long before the banks are on the mat, their retail customers with mortaged properties will have expired. This is how the system operates.

Like a spider's web.

Ergo, my comment - house always wins.

TheABaum's picture

Guess Moozlem immigrants don't buy mansions.

shimmy's picture

Why is it there are a group of morons that post at this site who bring up Muslims in EVERY thread. A thread could be on a world series game and there'd be the "Moozlem" brigade doing their shit. Did "Moozlems" rape your mothers/daughters/wives in order for you people to constantly go on about them? Sweet fuck.

 

Luc X. Ifer's picture

Says Shimmy the system agent/troll in charge to keep the can rolling. 

ZD1's picture

"Why is it there are a group of morons that post at this site who bring up Muslims in EVERY thread."

Wrong. 

A thread could be on a world series game and there'd be the "Israel" and "Zionist" hating brigade doing their shit.

Why the fuck weren't you complaining when they posted their shit earlier? Shimmy the moron wasn't triggered until the word "Moozlem" appeared?  

It's Zionist Jew haters who try to hijack EVERY thread. No doubt they're Islamists paid by Soros, Hezbollah or some other terrorist shit group.

 

 

 

 

 

 

BobEore's picture

You were on a roll - till you got a little careless in the closing...

and unintentionally let the cat out of the bag.

It's Zionist Jew haters who try to hijack EVERY thread. No doubt they're Islamists paid by Soros, Hezbollah or some other terrorist shit group.

While most of us might suppose the phrase "zionist jew haters" to read -as you intended- haters of zionist jews...

the revealed truth of your f/u is this: 's/zionists,' as in the real racial supremacists who invented talmudic judasim post AD and fall of temple, and the many myths of an Israel belonging to pharisees that went with it - have no love for 'jews' at all, using then as a convenient smoke screen behind which to hide their gangster satanist cults and make sure all of the crimes they commit are blamed on somebody else.

Most of the jews who indeed got smoked in the WW2 era were the unfortunate objects of those same s/zionists hate - those many who refused to leave their homes in East Europe for the desert wastes of Palestine were deemed expendable by the Haganah-type terrorists of ultra s/zionism...

who worked closely with their nazi colleagues to ensure as many of them as possible were murdered in organize pogroms.

Zionist... Jew...Haters. Like Soros... and the rest of the Sabbatian gang...  of 'jews who are not jews," Exposed at last. Good work lad!

 


TheABaum's picture

It was fun triggering the shimmy.

TheABaum's picture

Because Canada invites them with abandon, Achmed.

Muad&#039;Grumps's picture

After the CBs revalue gold we'll see a similar phenomenon with gold juniors.

Rainman's picture

Nobody ever went broke underestimating the stupidity of humans.

Oldwood's picture

Something for nothing is the human condition. We just can't help ourselves.

It is amazing though that above all other things that so many humans are so devoted to self destruction. I say this because there are no threats in existence that are not well documented and many have existed since the beginning of time, with unending warnings from elders and anyone else with an ounce of wisdom....and we do it anyway. We ARE the exception to every rule.

greenskeeper carl's picture

Borrow at 4% and earn 10%? That shit is insane. Does it come with a unicorn that shits skittles, too? Have none of these people heard the old phrase that if it sounds too good to be true, it usually is? Probably, but they believe 'this time is different'. We will never learn.

Luc X. Ifer's picture

the show was put in place tipically per Ponzi life-cycle, when the scheme is close to pop then u do a mega party for suckers to ensure them everything is cool and they should put even more money into it.

Arrow4Truth's picture

There's a unicorn under my bed... and it shits skittles.

swmnguy's picture

Don't you mean over-estimating our stupidity?  Or under-estimating our intelligence?

Hillarys Server's picture

Yes, but the thirteen up votes for his original sentence cleverly proves his thesis.

Delving Eye's picture

I thought the same thing.

natty light's picture

No. You are saying people are smarter than your estimations.

The Real Tony's picture

There's none stupider than the ones in southern Ontario. Take for instance Mississauga, no city on Earth has more races of third world tripe or garbage all smattered together like a human zoo than Mississauga. If you want to see how the world will end just take a drive in Mississauga. Every traffic light is red in all 4 directions 24 hours a day.

Greendawg's picture

yep sauga is a muslim shithole!!!  arguable the most disgusting city in all of Canada.

shovelhead's picture

Shhh. Don't say moozlim.

Shimmy is sensitive about his mail-order bride.

Killdo's picture

it really is a shithole - I've been there

Almost Solvent's picture

Lewiston farts in Mississauga's general direction

Lore's picture

I'm amazed at how much Winnipeg and Calgary have declined. Yikes.

Cognizant Millennial's picture

I work in Oakville and pass through Sauga to get here and...yeah. As a brown haired, green eyed white dude with Irish Heritage I'm far and away a minority in Toronto now, in pretty much every part of the city outside of Leaside. Actually...no, probably there now too. 

chubbar's picture

Waiting for the 1st comment advocating debt forgiveness for these folks because they didn't know any better and they were told they would make (earn) money if they only bought this house (degree).

Caledonian's picture

A fool is born every second.

Anopheles's picture

Toronto condos start at $400k for 500 square feet.... 

 

 

Global Hunter's picture

In 2011 when I left toronto monthly condo fees on that kind of condo was easy 600 month. Rent or buy a parking space in the basement cost 20k to 50k for parking space.

Place is retarded. Had to go back last month for the day and almost everybody seems stressed and depressed. Felt like the party was over.

U4 eee aaa's picture

Stressed and depressed

The fruit of debt slavery

swmnguy's picture

I remember I did an event at the Westin Diplomat in Hollywood, FLA (Ft. Lauderdale), 3 Augusts in a row, 2005, 2006 and 2007.  In 2005 there were tower cranes on either side of the ocean-front convention resort hotel, building condos.  In 2006 there were all those pennant flags and banners announcing deals available in the sales office, so the peak had already passed.  In August 2007, one of the condo buildings was wrapped in Tyvek and completely dark, while the other one had lights on in one or two units out of a hundred or more, the banners and flags were all shredded and flapping in the wind, and the perimeter was chain link fence topped with razor wire.

At that time, August 2007, when I started telling people what I'd seen and what it meant, they told me I had Bush Derangement Syndrome, hated Capitalism and success, didn't understand how markets worked, thought somehow they'd keep creating new real estate, didn't know the long-term trends in real estate pricing, didn't understand the power of finance; and probably a few insults I can't remember.  I just smiled.

Sounds like you've seen the same thing in Toronto.  Once you see it, you can't un-see it.  People can call you whatever names they can think of, and they'll get more creative the louder they have to whistle past the graveyard.

Anopheles's picture

Believe it or not, in Toronto, it's accelerating, not slowing down.  Usually 75% of the units are PRE SOLD before building even starts. 

swmnguy's picture

Good God.  That's completely insane.  That's hot money looking for a place to land, not real-estate buying.  Looks like Chinese grifters think the regime is going to crack down, maybe?

Anopheles's picture

There's a LOT of chinese money flooding in and it has been for a couple years. 

A friend told me that in Waterloo (1-1/2 hours west of Toronto, where Blackberry is located and Google just moved there in a big way)  about a year ago in a new condo building, that they hadn't started building, just pre-sales, a chinese lady came in and bought 50 units.  Put down cash for them.  They are typically used for thier kids going to university, and then rented out afterwards. 

As for the 75% sold, that's for financing.  The builders don't get financing to start building until they hit 75% sales.   More often than not, the buildings are comletely sold out before construciton starts, or at least when they have the basement excavated.   

Nuts?  Yep, and it's been that way for almost the past decade. 

 

asteroids's picture

Homes 20min east of the city limits have risen 30% over the past 18months. Completely nuts. But, the real problem is that unless you declare bankruptcy, you can't discharge your mortgage. It's going to be an bloody ugly mess.

Xena fobe's picture

Not for the Chinese.  They can just walk away and return to China.

Houses Depreciate's picture

A lot of dumb borrowed money.

booboo's picture

Well here is the kicker,

"Mortgage insurance in Canada is backed by the federal government through the Canada Mortgage and Housing Corp. Insurance is sold by the CMHC and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company. The federal government backs the insurance offered by the two private-sector firms, subject to a 10-per-cent deductible."

http://www.theglobeandmail.com/real-estate/four-major-changes-to-canadas...

Xena fobe's picture

That's a shame.  Average Canadians will be bailing out banks when the insurers fail. Sounds familiar.

Houses Depreciate's picture

But it doesn't prevent defaults.

booboo's picture

Sure it does, do you really believe the insurers will be allowed to default, they are too big to fail.....oh, you mean the little guy,pffffft, he's toast but they have learned from their american cousins, they will stay in them homes until hell freezes over before moving out. So you tax serfs in canada will get a double dose fucking when your child el presidente grants them all free homes on your nickel.

Houses Depreciate's picture

And of course that massive wave of defaults floods the market with inventory.

Delving Eye's picture

Who the hell wants to live in Toronto? At any price? Give me warm weather and a sturdy tent.

Lore's picture

My thought as well.  I used to attend trade shows and wondered what the fuss was about.  All those tickytack residential towers are a recipe for future trouble.  Yikes.  Get out.

ebear's picture

Lived in TO for 8 years til I couldn't take any more. Friend and I bought a 5 ton truck and moved to Vancouver, Beverly Hillbillies style.  Best decision I ever made.

ebear's picture

We had a lot of gear, plus moved a couple of other people's stuff which paid for the trip.   Truck went on the road as our first business after we found a place to live. Both of us found better jobs within a few months - sold truck for more than we paid.  We were enterprising young guys.  Any more questions?