"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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Houses Depreciate's picture

With record high supply, collapsing demand and prices down 40% and falling in Vancouver it looks like it's a long way down for housing in Canada.

rich1657's picture

How's the market in Kingston?  That town seems good enough.  The Noon Daily Mass at the Cathedral is pretty well attended.

Justin Case's picture

"on going  inflation"

What does the bank do when there is inflation? Maybe you weren't born or old enough to remember 1981-2 when mortgage rates hit 17% and CSB were paying 20 1/4%. If the Gov't raises rates even to the norm of 6% how many people will be able to pay their mortgage? Many snowflakes think that 0% or 3% money is normal b/c it's been that way for so long. No son, it's not normal, it's distorted everything in our world. We are a living monetary experiment. The banksters have no exit plan. A quarter point at a time, trying not to topple the economic apple cart. Like that little leak in a dam. It all starts with a little spout of water and we all know what happens in the end. Mexican stand off, last one out is left holding the bag.

Albertarocks's picture

"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!"  

Give credit where credit is due... 14,600 of those people were sellers looking for clues about how to dump their properties for as much as possible.

shovelhead's picture

Ok, we get it.

Nobody wants to buy your single-wide at any price.

Ajax_USB_Port_Repair_Service_'s picture

Owning 5% of a house that doesn't sell is better than owning 100% of a house that doesn't sell. There's that.

squid's picture

Losing 5% of a house is better than losing 100% of a house.....

Except, if you OWN it, how do you lose it?

 

Squid

TheRideNeverEnds's picture

You don't own anything, you rent it from the government.

Try not paying those taxes and fees, see what happens to that house you "own".

DEMIZEN's picture

Is not just that. servicing an overpriced house puts in you higher tax brackets, its a rat race for cubicle monkeys.

Zer0head's picture

unlike America, mortgages in Canada (ex Alberta) are full fucking recourse straight up your ass to your empty wallet. (think Gaddafi's final moments if you're a nice young couple with a $900k mortgage on fixer upper semi detached shit hole)

https://www.youtube.com/watch?v=wknw5UwClFI&bpctr=1490059375

pitz's picture

Even in Alberta, most mortgages are full recourse.  And quite frankly, it didn't matter in the USA during its crash as banks are not getting money from broke people, recourse or non-recourse loan.

Justin Case's picture

Same as Canada Inc.

Prior to 1913, most Americans owned clear, allodial title to property, free and clear of any liens or mortgages until the Federal Reserve Act (1913) “Hypothecated” all property within the federal United States to the Board of Governors of the Federal Reserve, -in which the Trustees (stockholders) held legal title.

The U.S. citizen (tenant, franchisee) was registered as a “beneficiary” of the trust via his/her birth certificate. In 1933, the federal United States hypothecated all of the present and future properties, assets and labor of their “subjects,” the 14th Amendment U.S. citizen, to the Federal Reserve System.

Knight who says Ni's picture

Very interesting to read this having just sold my 3 bedroom townhouse in a western suburb of Toronto.  Bought it for $770k 3 years ago and just sold it to Chinese money for $1.43M.  The market is going up 30%+ annualized.  Everyone I know here is talking about the "bubble" and trading stories about how this house or that went for some ridiculous amount, not sustainable, etc... It's 90% Chinese money chasing very little inventory.  There is a LOT of Chinese money still trying to get out of the country.  Who the hell knows much longer it can continue.  I'm betting not long, but I could easily be wrong.  Look at Vancouver.  

Zer0head's picture

no it's cash and it's chinese and iranian Lots of money still trying to exit Iran

pitz's picture

There's tons of "inventory" in Toronto.  WTF you talking about? 

Xena fobe's picture

I couldn't sell my country to them for any amount of money.  I hope your descendants are learning Chinese.

CRM114's picture

Educate yourselves on the Canadian housing market

http://www.crea.ca/housing-market-stats/

http://www.moneysense.ca/spend/real-estate/canadian-real-estate-market-o...

Basically,there's Vancouver and the Greater GTA (i.e Toronto and its satellite cities), which are both going nuts with Chinese money, and the entire rest of Canada. Nobody in Saskatchewan or Montreal gives a flying f#ck what's happening in the two big conurbations, and nobody in rural Canada even knows what's going on.

It's Chinese money pushing two regional markets up to Peak Silliness.

pitz's picture

Only problem is there's next to no evidence of "Chinese money" showing up in Canada's banking system.  And injection of foreign capital would be, on the net, de-leveraging.  Which isn't happening in Canada either. 

Zer0head's picture

and the sound of Millennials whining  to mother government, fuck those old people they suck money from the system and fuck all those foreigners (who we normally love and with whom we wear the hijab in solidarity) but when it comes to housing fuck the foreigners. We demand  a backyard for our precious offspring within walking distance to a Starbucks and Organic food market

Cognizant Millennial's picture

I rented at Yonge-Eglinton for 5 years...there were 5 Starbucks within a 5 minute walk and 3 organic markets.

 

 

Justin Case's picture

The entire semi project by my house, not one Chinese family living there. Condos are poping up like mushroons in the dew right here at Hurontario and Eglinton. They ain't no Chinese buyin round here. Just them plain old stupid white folk.

pitz's picture

Don't mistake Canadians, who are often of Asian ethnicity, for "Chinese".  You might be surprised to know there is a big difference, especially in light of collapsed birthrates amongst the more traditional "old-stock" Canadians.

ebear's picture

"Don't mistake Canadians, who are often of Asian ethnicity, for "Chinese"."

LOL!  Chinese people constantly mistake my Japanese wife for Chinese, so exactly how do you propose we spot the difference when they can't?

Incidentally, I put several stuffed bears in the back window of my wife's car so people will give her a wide berth.  She's an excellent driver BTW.  The bears are just an additional safety feature.

scubapro's picture

just borrow against your stock portfolio.   Securities Based lending is all the rage, everyone's doin it so it must be safe!      

remember how everything with leverage got whacked last time?  no? doesnt matter i guess b/c in the long run 'it'll come back'

indaknow's picture

I live and work in the GTA. All I hear is that it can't happen here. We have laws and regulations in place that are designed to prevent the same scenario that happened in the US. These investors believe wholeheartedly in this line of BS. Because they want to believe in it. 

When the inevitable crash comes they will be the next batch of suckers that believed in the "real estate only goes up" crap until it doesn't.  

Then the smart investors will swoop in and pick up the bargoons!

northern vigor's picture

I saw it in 1980 and 1988, in the GTA. By 1990 the sellers were herd stampeding to the exit doors. 

Oh wow...I just realized most of the kids buying today weren't even born yet. No wonder they don't know what is about to happen. The Asians don't know about it either.

Somebody should tell them....lmao.

Zer0head's picture

It's not the GTA of 1989 but it is a bubble and there will be blood on the streets

northern vigor's picture

I have a daughter an hour east of Toronto wanting to buy a house. I keep telling her to hold off a little longer. Never buy "until the blood is running in the street".

Fundies's picture

Dont forget Sydney and Melbourne. Apparently the bubble can be seen from the moon.

bentaxle's picture

When some of the smartest people on the planet think a ponzi is the smartest thing ever, what chance has anyone got? http://www.telegraph.co.uk/finance/property/house-prices/11436459/Welcom...

ZeInfidel's picture

was reading through it waiting for the part where he explained why it was a bubble etc. didn't see it.

toronto is on fire because asian money has moved out of vancouver because of foreign buyers tax - seattle and toronto are beneficiaries. why can't it go on for a long period of time like it did / is in vancouver?

seriously asking...

Xena fobe's picture

Only thing I can think of is a down turn in China's economy.  Which of course will happen. Probably sooner than later.

ebear's picture

China is an exporting nation that relies on the purchasing power of its foreign customers.  So, if all your customer's income goes towards housing, what's left over to buy Chinese goods?

Hell, you don't even have to be broke to stop buying their shit, just pissed off enough, like I am now.  When I do have to buy something, I go out of my way to avoid Chinese products.  Not always easy, but it can be done.  The payoff: athough you pay more, the item generally lasts longer, so over time it's actually cheaper.

Maybe someone's already done this, but I had an idea for an online store called NOT Made in China....LOL.  I'm too lazy to pursue it, but I'm sure it could be done.

OK, so here's a related joke for our Hindi speaking members:

https://www.youtube.com/watch?v=5wjGc1zGWBc

 

 

 

 

 

HRH Feant's picture
HRH Feant (not verified) Mar 20, 2017 5:56 PM

Folks that sign up for second mortgages will find out, the hard way, how hard it is to refinance or sell that property once prices fall. Oh well. Not my problem.

Fluxite's picture

Tell us something we don't know Tim,

 

Like:

 

The real problem is not the people that purchase homes they can't afford.

 

'Canadian Banks are solid' only because here in Canada, each mortgage loan is guaranteed to the bank, by the gov :-) 

 

Banks are and have been activly pushing realestate prices up for 3 years to fatten their own wallets. (higher prices=higher monthly morgage returns)

 

When it blows up the Canadian gov are the ones that will discover they are insolvent ~ to the tune of 25 trillion.  

wow thats crazy's picture

All in all Canada has alot going for it! size, resources, education, largest army to the south to protect it low crime rate and everyone is so polite!

wow thats crazy's picture

Ya who down voted me eh! where are you from south chicago? maybe Cali dumb lib tards. Well you can suck it hoser, Canada is great eh! go eat yellow snow!

Womb Service's picture

I've been hearing this about Vancouver (and TO) for a decade. Until China implodes, Canada is the real estate laundry of choice. If central banks can keep the plates spinning, this will go on for decades. It really is different this time. In order to have a collapse, you need something to collapse against. Gold is captive and Bitcoin is getting centralized. Enjoy your servitude.

wow thats crazy's picture

I really believe the same thing! for this to collapse it needs something to collapse against and gold would do it. Its would show that printing fiat to infinity is bad! People will always believe that gold is money people need a choice of something else they can trust in as a store value! maybe Bitcoin

Anyways the music is still playing so try and grab a chair!

Dilluminati's picture

I read a really long commentary: Why we're in for a repeat of the 1929 crash

 http://www.businessinsider.com/why-were-in-for-a-repeat-of-the-1929-cras...

And as I was reading this I thought, if GDP is 2% and the spread on physical delivery is much greater than that, then how many years to make up that delta assuming a higher bid?

Look out but I think metals will correct further and in the next downturn except for emergency money not what I would call an investment.

I was looking at their fund MAGTX and thinking despite referring to Irving Fisher repeatedly in their article they seem to make many of his same mistakes.

Zer0head's picture

"I've been hearing this about Vancouver (and TO) for a decade"

 

That thinking is what makes a market. 

But gov intervention in Toronto region is imminent and I think they're going to put the hammer down on them foreigners (disguised as a 25% speculation tax) they're going to kick the shit out of the market even though the builders and trades are a nice chunk of the economy. It will be a provincial initiative for the whole Toronto region (but the force behind this is a terrified fed government) the tax will be rev neutral (Ontario and Toronto make billions off land transfer taxes and that golden goose will be cooked) so the spec tax goes to the province and municipality as a rev neutral fucking tool. 

 

They have zero clue what they are doing except that braindead millennials with million dollar mortgages need to be protected.   This will end so badly. 

Winston1984's picture

 

The only way out is to nix the CMHC.  The moral hazard of lending freshly printed cash to a third mortgager, while governmentally backstopped, is insane. 

Banks, credit unions, REITs, everyone is lending in to this situation, at rates that makes sense with the CMHC as a safety net.  If that is removed, real estate speculation won't happen at a tidy 2.35% any more.  If the risk (of full default) is priced correctly, then I think real estate 'plays' will only return normal economic rents (risk adjusted).  Government mortgage insurance distorts the market.

RBC's dividend yield is 3.61%, and its offering a 5 year fixed at 2.79%?