Canada's Housing Bubble Will Burst
bloomberg.com
bloomberg.com
1. It needs to separate out Vancouver and the rest. Vancouver is its own bubble of self-perpetuating nonsense propagated by Chinese money.
2. The article states shares are better because companies can plow money back into the business, which completely misses the point because price rises aren't pure speculation. There is a HUGE labour cost in housing such that housing prices track inflation (particularly wage inflation).
And that's the real value in property investment in periods like the 1970s that saw really high inflation.
What's more land represents a largely non-renewable resource. Take Manhattan as a fairly extreme example. They're not making more land to put things on. Other cities like Chicago, LA and especially Atlanta can basically spread forever. But even in those cities, inner city land is irreplaceable and finite.
Now I'm not saying Canada isn't in a bubble or that bubble won't burst. But the author takes a naive stock-centric view of things.
Not just Chinese money, see my comment below.
To summarize: 1) best climate for Canada, 2) bounded north, west, and south, 3) land already developed, 4) high immigration
The Okanagan valley seems like it might merit that title as well, being fairly dry and sunny (sagebrush and wine growing!)
https://en.wikipedia.org/wiki/Okanagan
Looks nice! https://goo.gl/maps/nWS4Stwc1WT2
Given that it's nice and dry, that's a feature, not a bug!
The sunshine coast a little up from Vancouver has reasonable climate as well, it's in the rain shadow of the Vancouver Island mountains.
So there's no shortage of land with similar enough climate. It just doesn't have "Vancouver" on it.
Someone in town for the day might have to open Yelp: https://www.yelp.com/search?find_desc=Cheap+Fast+Lunch&find_...
ya, 5000 entire people last year in CoV...
Not for cities like Vancouver. The cost is land. That is where the inflation is. Whenever you price out a house in the far outskirts, it is crazy cheap in comparison.
Also, the stock market historical average of annual return is 6-7%, whereas it's lower for real estate. As with anything, diversification is the most important point.
Eg. Chinese family has one member whose been granted citizenship. They all come together to pool money, transfer it to the Canadian relative, purchase together, profit(for now).
All thats recorded is a Canadian purchased a home, "how" they purchased is not yet a government issue.
The government/banks/real estate industry has known about this for years...
One observation I have is that even if it's just single digit as a %, it can exert very significant pressure on the market. A bubble is a mob effect. It begins with some properties purchased at prices the local market can't support, regional opportunists jump in seeing the opportunity for flipping, then fear of missing out, especially for first time buyers, results in a stampede as people see the ladder going up and leverage themselves to get the last rung before it goes out of reach. But there was never any real scarcity in the first place.
Point being, a small amount of foreign investment can have a leveraged influence on local markets.
I do think the "foreign" word there gets too much attention though. The more important question to ask is - should property as an investment be something we economically encourage. How much economic activity does a $5M 3 bedroom house actually generate? I don't pretend to know the answer but I think this focus on the "foreign" bogeyman is blocking us from having more important conversations about the role of real-estate in economic policy.
[citation needed.]
Atlanta's spread slowed to a crawl once it got to about an hour's drive outside the perimeter. If you pay close attention on Google Maps (satellite view), you'll see the growth hugs major highways and interstates, and falls off sharply after a point. There is definitely a limit.
This might change if the NIMBY crowd dies off or moves away and MARTA is finally able to expand to the metro area.
Why hasn't Atlanta embraced the concept of edge cities [0] as Dallas has?
Caterpillar did open a plant outside the edge, but it's also close to Athens with its airport and relative proximity to both a port and a major city.
The Dallas area did a very good job of organizing outward sprawl into rings like a sequoia. There are edge cities, sometimes more than one, within each ring (Far North Dallas & Richardson, Plano, Frisco & McKinney, Prosper...). Freeways delineate the rings (380 isn't a freeway yet, but plans are in the works), six-lane arterial roads are laid out in a nice, neat grid even extending into the exurbs' exurbs, and subdivisions are packed closely together to get more use out of the same space (I honestly can't stand how suburbs in eastern states look rural to my eyes... I grew up in a suburb filled with single-family homes with yards, and we still don't waste space like eastern states do).
For example, compare the northern sprawl of Dallas https://goo.gl/maps/qhK6geVaYKz with the northeastern sprawl in Atlanta: https://goo.gl/maps/PZsPw6YUyD92
In the case of LA, not really. The whole city is surrounded by mountains, and there are just a few mountain passes connecting most of Los Angeles County and Orange County to the rest of California [0]. The only part of Los Angeles County that hasn't been fully developed is the Antelope Valley around Palmdale, and that's separated from the rest of the county by the San Gabriel Mountains.
I guess there's some room left to sprawl in the Inland Empire too, but that's technically not part of the LA metro area, and it still has the problem of the mountain passes bottlenecking any commute between LA and the IE, so businesses will have to embrace the edge city model and start locating their headquarters in the Inland Empire.
[0] Here's a satellite map: https://goo.gl/maps/oK9Kt3zb3vr
(Edit: Oh, and as for Chicago... they're not quite as free as landlocked cities. They've got Lake Michigan to the east, and they can't go too far north because then they'll run into Milwaukee's suburbs. That just leaves the west and south. Landlocked cities can sprawl in all four directions.)
It seems to be you who is perpetuating the non-sense. Provide some actual data and proof of this and then we can talk. No anecdotes please.
Counter proof: since BC's 15% foreigner tax was implemented, has the Vancouver housing market cooled off? No. To the contrary, it has actually heated up even more. This indicates that the "illegal Chinese dirty money" that the wonderful local Vancouverites keep spouting is not, in fact, the driver of this growth. It's too bad because they are such an easy racial scapegoat, aren't they?
It could also be possible that the Chinese market for Vancouver houses is inelastic enough that the foreigner tax doesn't have teeth.
As Shiller demonstrates and you even agree to, home prices track inflation over the long term. Further, Shiller -- in Irrational Exuberance -- shows that this is largely because of the money some owners reinvest in keeping their homes modern, so this isn't even a passive tracking of inflation, on average.
The arguments about finite land mass, etc, have been said for decades and I suspect one of two things is true: (1) It's wrong: Manhattan continues to build vertically and while it has a high average rent, the median and lower quantiles are actually much lower than on the West Coast, for example. (2) It's already priced by the market.
Finally, stocks also perform very well in high-inflation environments, so this isn't unique to property. The one difference is that most people have 5-to-1 leverage on their homes, so they enjoy outsized gains, but this is a risk as much as a benefit.
Prices have risen _way_ above inflation in Vancouver and Toronto the last 10-15 years. Incomes have been virtually flat, possibly even dropped in real terms after adjusting for inflation.
It's very easy to predict a bubble popping, it's a lot more difficult to predict when. "The market can stay irrational longer than you can remain solvent" - Keynes
And the other question is how. Sometimes bubbles deflate slowly, for example in our market house prices in $ terms were basically flat between the late 80s and the late 90s. That's a definite decrease in real dollars, but nothing like the chaos that the same decrease would cause happening instantaneously.
The third question is whether just Toronto & Vancouver will pop, or whether it will affect the rest of the country.
[1] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
Canada has something like 240,000 immigrants per year, and half of them come to the Toronto region- or 10,000 people per month. Then you add in the thousands of Canadians who are moving to the city as small towns and suburbs stop being attractive. There's a greatly increased demand for housing here.
But supply is tricky. Toronto is full, land-usage-wise. There's something like two small parcels left (Downsview Park and I forget the other place) where there is honest-to-goodness undeveloped land. Apart from that, all new homes are in the suburb cities around Toronto.
This means all new housing supply in the city is from building up and other densification- which is moving too slowly. The suburb cities are also growing like mad, but the infrastructure to support all that growth isn't there, causing smaller price booms nearby any Go-train station.
But that's just the start. High demand, low supply caused housing prices to rise- leading to speculators buying second homes to flip, which shrinks the supply. It leads to people buying homes they don't want, at prices they can barely afford, because they plan to sell it in 3 years for a profit. The bubble inflates.
So why pop now? Ontario passed laws saying foreign buyers have to pay an additional 15% tax. And foreign buyers were a large chunk of sales. The latest numbers say sales are down something like 50% or more. Prices will start to sink soon.
When the Bank of Canada finally raises interest rates to prevent total catastrophe on the exchange rate, things will really get wild. In Canada, most mortgages have to be renegotiated every few years- how many of them are going to have homes worth well less than their mortgage with rates so high they can't afford to make payments? That leads to a 2008-USA style pop.
It's going to be a bumpy ride...
Edit: also worth noting, this is just Toronto. Vancouver has some similar dynamics. The rest of Canada may not have a housing bubble at all- they'll just have to deal with the economic fallout of this mess.
http://www.mikestewart.ca/wp-content/uploads/2017/06/Vancouv...
I officially don't understand how markets work anymore.
It's seriously disappointing, but if the claims by people crying out about "Chinese money" are correct, 15% was never going to be enough. If your concern as an individual is your currency losing 50% of it's value over night [likely worse case for these individuals], then a 15% tax, even in a bubble market starts to look like a good deal.
The central banks wanted inflation, but they got some perverted form, where wages and prices remain stagnant, and only stocks/real estate/etc have had their prices increase.
I mean, as a sorry Java jockey, I make around $5,000 per month. I frequent Reddit, a news aggregator with comments. Reddit is worth $1,700,000,000 dollars, according to the latest funding round.
The government and their developer pals were counting on the tax not making a huge difference. And when prices started moving down they immediately relaxed it to counteract that. At least that's one way this story can be told.
There were already loopholes where foreigners could avoid the tax through local corporations or have relatives buy for them.
It has huge push on the surrounding City housing markets.
People either leaving Toronto to retire selling while prices are high.
Or simply people giving up on Toronto and moving outside the city to commute, happy to pay high prices for the city but low compared to Toronto.
The thing is labor/wages in smaller towns hasn't increased to match the rising house prices. A city like Toronto with lots of jobs the costs can be justified. But when you have 'rich' people from Toronto come in to buy a home they push local First Time buyers/less affluent out or cause them to take on bigger mortgages(and when rates go up with their lower incomes, they'll suffer most).
I live in Markham (suburb bordering the north end of Toronto) -- houses here get sold over asking within days of the listing, and most of the houses in my area are actually occupied by the owners. The demand appears to be real. Any time a house in my area has an open house, there are piles of cars on the street.
I've seen home prices in my neighborhood triple in the 12 years I've been here, and houses here are more expensive than a lot of areas inside the 416. Our property taxes are also generally higher than Toronto.
Don't you mean the other way around? Homes worth less than the mortgage?
If prices level off in the GTA (I don't think prices will sink), I think it will be because of the upcoming bylaws relating to AirBnB more than the foreign buyer tax.
https://www.forbes.com/sites/nathanvardi/2017/06/22/warren-b...
This alone should prevent any bubbles from bursting in 2017. Especially if Home Capital Group starts lending again (see: https://www.linkedin.com/pulse/government-need-make-some-dra... ).
Edited to note: $2.5 billion is probably not really a significant amount as far as the Canadian mortgage market is concerned (e.g., around ~700 houses in Vancouver's good neighbourhoods), but the fact Warren Buffett is behind this should calm nerves and cause the lending taps to re-open a bit in the subprime markets that are so key to the bubble. The government backed Canadian Mortgage and Housing Corporation (CMHC) won't sell default insurance for mortgages over $1 million CDN.
>By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.
Wow, I never really thought of it that way. I guess I implicitly understood that buying a home was, at best, a hedge against inflation. But it also seems like a good investment. But it's not, really, in the long run, unless you are "timing the market" and buying into an area with long-term population growth.
$2m plus the cost of a full teardown for maybe two thousand square feet of flooded land.
People all want to live on the same land. That's why house prices go up, not because the physical homes are somehow getting more valuable. It's so obvious... how was this article written?
> The Golden Rule of Real Estate:... Buildings never go up in value. Ever. Period. ... Only land can go up in value.
I take some minor exception with the absoluteness of the statement (I could imagine a building designed by some architect who later became extremely famous increasing in value), but overall it's obviously true.
Look into the history of the LinkedIn building at 2nd and Howard for example (which was for many years a parking lot).
Actually I'm just bitter I didn't buy in 2013.
When you run the numbers for places like Vancouver and Toronto it's probably cheaper renting, small towns in the prairies the opposite might be true. We're paying $1250/month to rent a nice $200k townhouse on Vancouver Island, so the numbers are similar either way when you factor in property tax, water, etc., and we don't have to worry about maintenance.
However, you can absolutely compare rental income (a kind of perpetuity, or an annuity with an indefinite payment stream duration) with another annuity (such as a dividend producing stock or a bond). In general, these all can (and in my opinion should) factor into your investment diversification strategy.
Real estate cash flows tend to be more volatile than say a bond from a AAA+ rated borrower (leases end, people stop paying, roof leaks, etc), but that should be measured against your required rate of return for the said risk.
When compared with stocks, real estate cash flows tend to be less risky (if valued properly), because even in disastrous situations you have some salvage value, whereas if a company goes bankrupt that's kind of that. (Gross oversimplification but still.)
One aspect of homeownership that I am a very big fan of is that even in a flat market, the mortgage acts as a type of forced savings account with negative interest (that is, you pay the bank). In a culture where the savings rates are dismally low, this is better than nothing. Unfortunately, refinancing and HELOCs really screwed this up for people. At the extreme of the last housing bubble, people were literally treating their home as an ATM...
Great general comment but this specific point is one I try to make to people I know that are in the insanely stressful, desperate search for buying a house.
In LA, there are plenty of neighborhoods on the way up or already there with houses at minimum of $600-700k. I hear all the typical rhetoric from these folks of "why waste all my money on rent, when I can get equity, etc." and I try to point out that yes, you're "building equity" for 30 years but you should also be ready for the reality that in 10-15 years (or sooner) the shit could hit the fan. When looking at a house, instead of purely as investment vehicle, maybe approach it as "If the house doesn't grow in value, or even sinks a little bit, would I still be happy to call this place and my neighborhood my home?"
Because I think that gets lost and none of the reality tv shows help. You're taking out a 30-year mortgage and hopefully you get 30 years good use out of the house and much more. Will it be enough to raise kids, relax, enjoy neighborhood stuff, what have you?
So much is about the money/investment side of it that I think lots of folks lose sight of the idea of a "home".
Contrast with owning stocks where you (in the typical buy-and-hold case) have to keep 100% of your money in the stock in order to keep owning the stock.
While it's a small sample size, I keep on hearing of friends who want to buy a house but are waiting for the current "bubble" to deflate a bit. Combine that with a limited supply in popular metro areas, a larger percentage of young (and old!) people renting and you get demand that will likely last a while (yes my personal sample size of N is small). As the renting population ages and sees themselves flushing thousands down the pipe every month, more renters will be saving up war-chest sized nest eggs to make the plunge into home ownership. I suspect that'll prop up prices for a good while.
If you want to buy a house, I don't think you can count on another great downturn to make popular locations more affordable. More likely it'll take an increase in supply or some major change in our lives to push people out of cities.
Cue popular rant on housing density
Is it really a limited supply, or just speculators buying them and not bothering to rent them out? Vancouver has 25000 empty homes.
Edit: They key section of that study is the section called "Expensive cities and expansive cities"
The argument has merits, but can there be other arguments? Such as US and Canada are becoming dissimilar economically, or a change in real estate desirability in the eyes of foreign investors?
If looking at the past price data can predict the future price trend, the stock market would be a very different beast altogether.
There's a long stretch of land between Vancouver and the US border (30 min drive maybe?) with mostly empty land. Am I missing something?
The house prices in that 30 minutes worth of land (I live in it) are also approaching $1 million. The only reason they don't go higher is because of commuting.
The newly elected provincial government has just announced they will suspend the construction of a new bridge; many condo and houses to the south were built with the assumption that the bridge will open and make the southern suburb much more attractive.
For whatever reason, the mayor of Vancouver and its immediate surrounding satellite cities (Burnaby, Richmond, etc.) are fighting hard to not expand the road system. Instead they are 'pushing' for better mass (not rapid) transit between the out-rim suburb and the core cities. I don't know if they are sincere in reducing traffic, but this has an knock-on effect of keeping the house prices in the core cities much higher than otherwise (eg. a rapid transit thru that 30 minutes worth of land.)
Not expanding the road system is a counter-intuitive strategy to reduce traffic jams, see: https://news.ycombinator.com/item?id=7965077
I won't pass judgement on whether it works or not, but it does appear to be supported by logic and data, so those mayors aren't just acting on NIMBYism.
Real estate is only an investment, and a very good one, when you are buying property that you then rent out. Then the leverage helps you out as long as you have renters and rents go up or stay the same. The price of the home matters far less in that case until you are ready to trade up.
I am sure at this level though inverters are having a much harder time finding real estate that is cash flow positive.
But the majority of the value of homes in expensive cities (i.e. SF, New York) is actually the real estate it sits on.
Stupidest decision of my life. 4 years appreciation on that property is likely another 200-300k that I walked away from. Should have rented, rather than sell.
What does that mean?
When there's a really big storm coming in, it's an even darker grey.
The sky is, in fact, sometimes blue, but would your statement about Canada's housing bubble be untrue on a cloudy rainy day?