Wednesday, April 12, 2017

Canada's Real Estate Mania?

Ian Vandaelle of BNN reports, ‘Full-blown housing bubble’: Economist alarmed by view of never-ending price gains:
More than half of the country believes home prices will never fall, according to a new poll from CIBC.

Despite lofty valuations in the Toronto and Vancouver housing markets, 54 per cent of respondents to the CIBC poll say housing prices will rise indefinitely, while only 40 per cent think prices will decline over the course of the next five years.

David Madani, senior Canadian economist at Capital Economics, thinks the unbridled optimism is just one more sign the Toronto housing market is in bubble territory.

“The fact that the majority of Canadians still think home prices can continue to shoot up is sort of testament to the fact we’re in a full-blown housing bubble,” he said in an interview with BNN.

According to the poll, those high prices are keeping homeowners on the sidelines, with 62 per cent of respondents saying they’re reluctant to sell their home, lest they become buyers again.

Home prices in Toronto are up more than 30 per cent over the course of the last year, and prices in Vancouver have risen more than 14 per cent.

Those who are looking to sell are largely of the baby boomer cohort, with more than two-thirds of respondents older than 55 saying they plan to downsize to a smaller home or condo. CIBC says boomers are motivated to sell not just due to the ease of maintaining a smaller home, but also as a boost to their retirement savings.

What’s less clear is who they’re going to sell their home to: 52 per cent of the millennial generation either don’t believe they’ll ever own a home, or are unsure if home ownership is in their future, according to the CIBC poll.

Of those in the younger generation who are already in the housing market, more than four of every five plan to sell, with 63 per cent complaining the mortgage and housing costs are making them cash-poor.

Madani said a confluence of the rising prices and expectations for higher interest rates is causing the skittishness for millennials.

“You see panic starting to creep in at the lower end of the market,” he said. “When you look at the younger homebuyers who are already fairly cash-flow poor, regret is starting to sink in because they realize they’re cash-flow constrained and also worried that at some point interest rates might begin to go up.”

“There’s definitely concerns creeping in to confidence levels of Canadian households.”
It's been a long time since I discussed the great Canadian housing bubble. Admittedly, I've been wrong on this bubble for the longest time and have suffered ridicule at the hands of my close friends who love pointing out to me how real estate prices "keep going up" no matter what.

Where did I go wrong? For one, I underestimated the influx of wealthy migrants looking to park their money in Canada. A few weeks ago, I met with representatives of a firm here in Montreal which basically caters to high net worth individuals from outside Canada who are looking to own a home here in case they ever need to flee their country.

Back in February, the CBC reported that an estimated 8,000 millionaires immigrated to Canada last year, according to a report:
Canada attracted an estimated 8,000 millionaires last year, trailing only Australia and the United States on the list of top destinations, according to a recent report from New World Wealth.

Australia drew 11,000 millionaires, while the U.S. received 10,000, the report says.

New World Wealth said the inflows into Canada were boosted by large-scale migration from China into Vancouver, and from Europe into Toronto and Montreal.

A South Africa-based market research group, New World Wealth said the overall number of millionaires on the move last year around the world rose to 82,000 from 64,000 in 2015.

Improved education and higher personal safety were the main drivers when those wealthy people sought out a new destination, Andrew Amoils, head of research at New World Wealth, told CNBC.

"They want the best schools for their children and to feel safe," he said. "Climate, health care and cleanliness all follow those top two."

While Australia, the U.S. and Canada make up the top three destinations for the wealthy migrants, France, China and Brazil are the top sources of them.

New World Wealth said about 12,000 millionaires left France, with Amoils telling CNBC they left the country because of high taxes on the wealthy and growing tension over religion.

About 9,000 millionaires departed China, while 8,000 left Brazil, the report says.

"At least in China, the millionaires who are leaving are being replaced by an ever larger number of new millionaires," Amoils said. "But you could argue that France is not creating as many, so it's a cause for concern."

The report covers only millionaires who moved to a country for at least half a year. It doesn't look at those who acquire property or get citizenship in a country but rarely live there, Yahoo reported.

For the report, a millionaire is defined as those with at least $1 million US in assets, without counting their primary residence.

In 2015, Canada began a pilot program to attract 60 millionaires to the country. However, as of January 2016, the program had brought in only seven applications.

Australia launched a similar program in 2012 to encourage the arrival of wealthy migrants.

In its report, New World Wealth said Australia's location makes it a good base for doing business in emerging Asian countries such as China, Hong Kong, Korea, Singapore, Vietnam and India.
No doubt, Australia, Canada and the United States have been the main beneficiaries of this trend of foreign millionaires looking to move or just looking to park their money in a "safe and clean" country which isn't fraught with political and other risks.

And there is no sign that foreign demand for "safe haven housing" is abating. In fact, one of my friends in Toronto sent me this after I sent him an article posted on Zero Hedge yesterday, Tony Robbins, Pitbull And 5 Other Signs That Toronto Real Estate Is About To Crash:
I am not sure about that, I spoke to a real estate broker and he said in the downtown core, supply is the lowest it has been in 6 years. In fact, even construction is at a 5year low.

Foreigners continue to buy as Brexit, European concerns, geopolitical risks (Middle East and Asia) and anti-immigrant sentiment in the US leaves Canada, Australia and New Zealand as preferred destinations. This foreign money is sticky and won't leave until things settle down globally. Canada is a safe haven and pricing to them is still cheap.

Unfortunately, locals will find it difficult to buy single family dwelling so demand will spill over to 2 and 3 bedroom condos.

The governments have to be very careful as housing has been one of the key drivers in the economy, consider all the jobs it has created in addition to the tax revenues.

It is unprecedented but there are external factors at work and I don't see them abating. Besides the foreign money (parking money) the GTA is growing by 100k a year.
There is a supply issue ....
Another friend of mine had this to say on the Maclean's article, Canada’s housing bubble looks disturbingly familiar, comparing the Canadian housing market to what happened in the US before the 2008 crisis:
Interestingly enough, there is an argument that our real estate is cheap by global standards.

The measures in Vancouver and Toronto will drive a portion of the safe haven money to other parts of Canada (eg. Calgary and Montreal).

Unless they uncork supply (which means putting a moratorium on municipal regulations that slow development) nothing will change.

This is the big difference between our housing issues today and those in the US in 2007. We do not have a massive oversupply of housing, unless all of the Chinese decide to cash out simultaneously which will not happen.
I agree, there is a supply issue and the housing trends in Canada are not comparable to what happened in the US prior to the financial crisis.

Having said this, there is also a demand issue as locals are priced out of the market. Foreign demand might continue indefinitely but it alone cannot carry the housing market in Canada, Australia, New Zealand or the United States (it's been a boon for specialized firms that cater to these high net worth migrants, immigration lawyers, high end real estate brokers and big banks charging them hefty fees as they're making a killing off this foreign demand for safe haven housing).

What worries me most is we are living an illusion in Canada, one that the economy is humming along just fine. You all need to read Ted Carmichael's latest macro comment, What's Happening Inside Canada's Labour Market, where he states:
While many economists were quite upbeat about Canada's latest labour market report, I see troubling signs of weakness in the changes occurring inside Canada's labour market. More Canadians are forced to work multiple jobs to make a decent living. High-paying jobs are harder to find. Employment gains are concentrated not in a thriving private sector, but in low paying industries benefiting from a cheap currency, in a bubbly and unsustainable real estate sector, and in activist, meddlesome governments.
I've been short Canada for the longest time, I think far too many Canadians are delusional when it comes to housing trends and the economy. Things are not going well and all you need to do is scratch beneath the surface to take a hard look at the data to understand why.

I'm amused by those who think Canada’s housing bubble can be traced to Mark Carney and his bias for easy policy. What about the CMHC, Canada's mortgage monster, and its policy to keep backing up subprime real estate loans? Only recently has this organization started sounding the alarm stating house prices could drop 30% on interest rate spike.

Lastly, there is poor old Garth Turner, publisher of the Greater Fool blog, who has been "sounding the alarm" on Canadian real estate over the last decade and has been completely wrong.

I still read his posts once in a while and enjoyed reading his last post on Agony. But Garth still doesn't get it, he is convinced interest rates are going to skyrocket up and that will spell the death knell for Canada's housing market.

Let me explain something to Garth and others. Interest rates are not going up. The clear and present danger in the global economy is DEFLATION, not inflation. That's why the reflation trade is doomed.

In a debt deflation economy, the key thing to watch is employment trends. If unemployment rises and even one person loses a high paying job in a two income family, good luck supporting those mortgage payments, it's not going to happen. That's why Ted Carmichael's comment is important.

Like I said, Canadians are delusional when it comes to housing and their means to support their houses which are heavily leveraged. It's a recipe for disaster which is why we've seen a few big bank CEOs sounding the alarm lately.

One comment that caught my attention from the Zero Hedge post was this:
Individual houses in Toronto stopped appreciating in 2013. What you're seeing these days is just the tail-end of a bubble as only upper-end units are actually transacting.

Creating the illusion of rising prices when all that has changed is the part of the market being 'sampled' by the sales process. The average man's individual house is still the same price as it was in 2013 for the most part.

Flippers aren't making any money and are actually taking YoY losses. Average people are still spending because the banks are extending their LOCs, but even they'll be burned sooner or later and forced into perma-austerity.

Of course, when the steam runs out of the shift to the mix, prices will crash quite violently. When this finally happened in Vancouver last year, 30% drops in 'average' prices weren't uncommon.

Claiming that there's a RE mania in Canada or even Toronto, IMHO, is just yet another example of fake news.
More food for thought but all this makes me wonder why don't we have better real estate data in Canada? How many foreigners are buying homes and actually living in them or not living in them? How many flippers are speculating on housing? How sustainable are these trends in real estate which admittedly is a key component of the economy?

It scares me to think how many people on both sides of the great Canadian housing bubble debate are getting it wrong or have gotten it wrong. I include myself in this group but I remain short Canada, short the loonie and I'm highly skeptical that real estate prices in Canada (or Australia) will keep rising indefinitely.

We are one global financial crisis away from a severe contraction in Canada's housing market. It's not soaring interest rates I'm worried about, it's soaring unemployment and the replacement of good high paying jobs with mediocre ones that will mean people are one mortgage payment away from losing their home.

I hope I continue to be wrong about Canada's housing bubble but something tells me there is a lot of pain ahead and many Canadians are going to get crushed.

And if you don't believe me, read what David Rosenberg has been writing lately: Make no mistake, the Toronto real estate market is in a bubble of historic proportions.

Below, 5 Signs Canada is in the grips of real estate mania. No worries, unless you see this guy appearing in your city telling you how to get rich off real estate, I think the coast is clear for now (click on image):


In all seriousness, we need a real open and honest debate on Canadian housing trends and we need better statistics on supply, foreign and domestic demand and sustainability.

We're living on borrowed time and I'm worried a lot of delusional Canadians drinking the real estate Kool Aid don't see the storm ahead. When it strikes, they will be crushed for decades.

Update: Not surprisingly (to me at least), the Bank of Canada decided to maintain its overnight rate target at 1/2 per cent on Wednesday, stating this:
The Bank’s Governing Council acknowledges the strength of recent data, some of which is temporary, and is mindful of the significant uncertainties weighing on the outlook. In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent.
Below, you can watch the Monetary Policy Press conference with Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins. One thing that struck me from Wilkins's opening statement:
Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short term, but a downside risk over the longer term.
Also, listen carefully to what Governor Poloz says in minute 14 responding to a question on housing. And people think the Bank of Canada is going to raise rates in this environment? Not a chance.

Update #2 (21/04/17): It seems my this comment on Canada's real estate mania has proven to be extremely popular.  I'm increasingly concerned about Canada's $1.1 trillion shadow banking system which is now half as large as banks, and you can see the dominoes are beginning to fall as Home Capital (HMC.TO) melted down yesterday on the stock market the same day Ontario was trying to hammer housing (read Garth Turner's comment, Cold Comfort).

Still, Home Capital's stock is bouncing up today (wouldn't touch it with a ten-foot pole!) and I was surprised to see the Royal Bank is the latest Canadian firm to explore a sale of bonds backed by uninsured residential mortgages after that bank's CEO warned of a frothy Canadian housing market.

Also, Ted Carmichael discusses Toronto's real estate boom, stating that while say that house prices will never decline, the city's history clearly demonstrates that there is a good chance that, like its two predecessors, this boom will end badly.

Update #3 (26/04/17): Well it seems like Canada's housing bubble exploded today as Home Capital's stock crashed the most in history today (click on image):


I embedded another clip below with legendary short seller Marc Cohodes who has long been Home Capital's most vocal critic. He joins Bloomberg TV Canada's Lily Jamali to discuss what the embattled Home Capital Group needs to do to right the ship. He's right: "Jesus Christ couldn't right this ship."

Lastly, read my latest on Canada's subprime mortgage crisis here (April 27, 2017).

To my former BCA Research colleague, Steve Poloz, who is now the Governor of the Bank of Canada, all I have to say is "be very afraid of Canada's housing bubble."



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