Is there a bubble in Canadian real estate ?

[Thomas Beyer]

Several articles and economist`s comments in various Canadian major newspapers point out a "bubble" in Canadian real estate.One article is here: http://www.financialpost.com/news/Housing+...6046/story.html

Another one here: http://www.financialpost.com/related/topic...2634/story.html

The argument goes that money was too cheap .. money was too easy to get and people bought too many houses or too large a house. All this is TRUE !

Should this concern real estate investors: OF COURSE IT SHOULD .. as the "easy" money is gone. You can`t just blindly buy any real estate piece and expect to make money. Buy Don`s book, one by Ozzie and a 3rd by Donald Trump .. and one is an "expert" in real estate investing ??

But what is also true, but not mentioned in these headline grabbing reports is:
a) the average size of a home went up .. thus the price per sq ft over perhaps 2 or 3 decades, inflation adjusted, is actually lower than in the 70`s !
b) foreign immigration or 2nd home buyers in select markets such as Vancouver that drive the average up without any corresponding local employment strength
c) quite a few very large houses or condos skew the average up substantially, as $10M condos in Vancouver or $3M 3 BR condos in GTA did not exists 20 years ago. Today they do to cater to the very affluent few (and frequently non-Canadian)
d) increased new lot municipal fees that make a new home more expensive as the underlying land price is going up disproportionally

The question is: where can you invest relatively safely with cash-flow and equity upside ?

The answer: in many (but not all) Canadian (and even some US) cities or regions where the fundamentals are strong.

What are those fundamentals ? job growth ! diversity of jobs ! in-migration ! Transportation improvements ! low unemployment !

REIN has identified many such cities in the three areas it covers: BC, AB and ON. There are also some decent cities in SK (most in fact) and in E-Canada that are worthwhile considering: Moncton, Frederiction, St. John, PEI ..

Here`s what Don Campbell said in a recent Alberta Primetime TV Interview in response to these articles.

One implication for investors is higher down payments, say 25%. Run if someone tries to flog "zero down" as there is usually an undisclosed wart somewhere .. or it is outright crooked.

A 2nd implication is: look for cash-flow .. as the vale of the asset on a yearly basis is not as relevant. Inflation, over a 5 or better 10 year time horizon will lift all real estate boats like the tide, but if you think in 2 year .. or god forbid .. 6 months waves you might buy high and sell low indeed !

A 3rd implication is: there will be more renters as many would be home-owners can`t afford a mortgage, get denied by a bank or realize it may not make economic sense to spend $1000/month more than renting for an elusive equity upside. A key beneficiary here are smaller houses and apartment buildings that are designed for renters as opposed to the average single family home. Europeans (where I hail from) recognized this many decades ago: in many cases it is cheaper to rent than to own. Owning a house is a privilege and reserved for folks that have a bit more cash as a down payment and that chose to spend a bit more per month in a more classy abode.

A 4th implication is: it will take a bit longer ! Budget 5-6 years minimum .. maybe even 10 years. it is not a "get rich quick scheme" .. it is a "get rich for sure scheme" .. but it takes some time !!

I actually love these kinds of articles as it means: we get more tenants, lower vacancies and higher rents .. s.th. the articles did not mention !!

Stick to fundamentally strong regions .. buy with cash-flow in mind .. be a bit more patient .. and you`ll reap too .. IN TIME !

 

[addbo]

I believe all the articles are due to the Centre for Policy Alternatives Report about "Canada`s Housing Bubble"

http://www.policyalternatives.ca/newsroom/...-housing-bubble

Interesting little read, but good analysis and insight Thomas! At the end of the day real estate investing is local not a national event... and as well if it cashflows... then you can wait the 5 to 10 years for the market to come back.

 

[gwasser]

QUOTE (ThomasBeyer @ Aug 31 2010, 07:13 PM) Several articles and economist`s comments in various Canadian major newspapers point out a "bubble" in Canadian real estate.

One article is here: http://www.financialpost.com/news/Housing+...6046/story.html

Another one here: http://www.financialpost.com/related/topic...2634/story.html


I actually love these kinds of articles as it means: we get more tenants .. s.th. the articles did not mention !!

Stick to fundamentally strong regions .. buy with cash-flow in mind .. be a bit more patient .. and you`ll reap too .. IN TIME !


Really, the question is: if renting is cheaper than owning a house, why buy real estate?

For an investor to buy a rental property is only worthwhile when he/she makes a profit. At REIN we prefer that the rent is higher than the cost of owning the property, how else do you achieve positive cash flow?

The added profit bonus of appreciation most of us consider speculative. First priority is to have enough cash flow to hold on to the property infinitely (we can choose when to sell). As Thomas always points out there is also the mortgage paydown. So when determining when an investment is worthwhile, you may want to include this in your assesment as well. Then you should consider investing only when net income (so net cashflow plus mortgage paydown and excluding appreciation) is positive.

Real estate markets and individual deals should be considered on their own merits not on arm-waving national studies.

So is it always better to invest in real estate? No! Do we have a bubble? Who cares! As long as the property(ies) we buy meet(s) OUR investment criteria and we can hold on to them for the long term.

 

[housingrental]

Too much increase in outside investment in a region can create bubble situations
See Vancouver as an example
Or Waterloo investment properties

 

[randy]

Buy Terry Paranych properties they always go up. It is interesting how I can not reply to his post? I thought REIN was different. Sorry to hijack your post

 

[housingrental]

Hi Randy
Your post is confusing
Who is Terry Paranych, you replied to the post above?, and REIN is different than what?

 

[gwasser]

QUOTE (randy @ Sep 4 2010, 08:55 PM) Buy Terry Paranych properties they always go up. It is interesting how I can not reply to his post? I thought REIN was different. Sorry to hijack your post

Randy, if you are talking about promoting Terry, which was a hell of a speaker at last weekend`s Multi-family seminar, this is not the right place to do so. There are other posting streams on this forum to do so.

If not considered appropriate, your earlier posting may have been removed or moved to another section (classifieds?) on this forum by the Moderator. Sometimes, you may also lose a posting when your website connection goes bad or the program crashes, which has happened to me a number of times.

I hope, I understood your posting correctly. So that we now can go back to this streams topic.

 

[housingrental]

Tell me more about Terry`s presentation and why there`s any concern with it?

 

[bizaro86]

QUOTE (gwasser @ Sep 5 2010, 10:16 AM) if you are talking about promoting Terry.

I had what I would consider an extremely negative experience with this "group" in Edmonton when I was selling my house there. I didn`t end up using them, and was certainly glad that I didn`t, as it made literally a $30,000+ difference.

I doubt their behaviour violated any real estate law, which was why I never really pursued it, but it certainly left a bad taste in my mouth.

Regards,

Michael

 

[Pheenix]

QUOTE (ThomasBeyer @ Aug 31 2010, 09:13 PM) . . . A 3rd implication is: there will be more renters as many would be home-owners can`t afford a mortgage, get denied by a bank or realize it may not make economic sense to spend $1000/month more than renting for an elusive equity upside. A key beneficiary here are smaller houses and apartment buildings that are designed for renters as opposed to the average single family home. Europeans (where I hail from) recognized this many decades ago: in many cases it is cheaper to rent than to own. Owning a house is a privilege and reserved for folks that have a bit more cash as a down payment and that chose to spend a bit more per month in a more classy abode.
. . .
Stick to fundamentally strong regions .. buy with cash-flow in mind .. be a bit more patient .. and you`ll reap too .. IN TIME !

QUOTE (gwasser @ Sep 1 2010, 03:08 PM) Really, the question is: if renting is cheaper than owning a house, why buy real estate?

Hi Thomas / Godfried
Clearly many points being raised here. The most interesting are how government policy and financial practices can influence home ownership rates, pricing and therefore `bubbles` and the discussion about whether it is cheaper to rent or to own.

Just to drive the point about the impact of government policy on the housing market, bubble or no bubble, I submit the following

. . . government`s housing policy can also have a significant impact on homeownership rates. For example, in the U.S., Mexico, and the Netherlands mortgage interest payments are tax deductible, thus promoting homeownership through individual financial incentives. In the U.K., the number of owner occupiers increased by 28 percentage points between 1951 and 1981. A significant portion of this increase can be attributed to the sale, at below market rates, of rental housing by private landlords. . . . Private landlords sold these properties to tenants largely as result of laws protecting security of tenure for tenants and government-imposed rent restrictions that negatively impacted the value of these investment properties. The growth of owner-occupiers in the U.K. in the 1980s can largely be attributed to the sale of state-owned properties to tenants by local authorities and new towns through a government program championed by Margaret Thatcher, entitled the "Right to Buy." During Thatcher`s tenure as Prime Minister, from May 1979 through November 1990, the homeownership rate in the U.K. rose from 54% to 65%.

and to why renting can be cheaper than owning (or the converse only seemingly so, and part of the trouble in the US)
. . .
One measure of the ease of access to funding is the loan-to-value ratio (LTV) offered to consumers. Loans with LTVs as high as 97% are readily available in the U.S., and organizations concerned with affordability may offer 100% LTV products. In the U.K. in the early 1990s, banks offered loans with 130% LTVs to help homeowners who were in a negative equity position sell their existing homes and purchase new ones. In contrast, in Germany LTV ratios are low and average between 40% and 60%. . . . Since first-time homebuyers in Germany require more time to amass substantial savings for downpayments the average first-time homeowner in Germany is older than those in many other countries where average LTVs are higher.

quotes from a 2002 article http://www.allbusiness.com/finance/1016522-1.html

Drop the rent for money (interest) to zero or close to it, with a LTV close to 100, on a non-recourse basis, allow `liar` qualification and you are going to have an price bubble. Talk about the life of Reilly! - take this new monster home in the irrigated desert please!

We can only presume that some people, and maybe more Europeans than North Americans, either concioulsy or by circumstance recognize that home ownership is a forced savings account (normally) and choose not to save, or in a way similar to the old adage about life insurance "buy term [rent] and invest the rest", although this seems to be all messed up lately too.

In some parts of our country the afforability index is extremely high and people do have to make a substantial stretch to pay more to buy than rent, drastically compromise their life style to get `on the ladder`, or seek an entirely new place to live and work.

As RE investors we are either able to pool capital, leverage our own circumstances or utilize the portability of money to plug into situations where those who can`t or won`t, whether permanently or temporarily, make the move into ownership, still need to be housed. This is true regardless of whether it is `cheaper` to own or rent on a personal cash flow basis for the tenant.

I would argue therefore that we are indeed in a housing bubble in Canada - an `ownership bubble`. More people should rent to improve mobility and encourage other economic activity such as entrepreneurship (and not just our bottom lines).

As RE investors we want rent to be `cheaper` than owning, for a substantial portion of the population. It is a relatively recent phenomenon that businesses, a la dot-com, have `hockey stick` patterned growth, notwithstanding a large percentage of these have a mushroom shaped demise. We do need more innovation and alternate wealth generation or development paths. Home owneship should not be regarded as an `automatic` part of everyone`s life.

As an aside, (this is a broad generalization, not meant to be exhaustive and I recognize there are exceptions so don`t get on my case) which is likely to be a better tenant; someone who can not, and never will, afford to buy, or someone who by virtue of a transient situation, can afford to buy or will one day (new or temporarily located workers, students, young families, immigrant professionals, etc.)? Now add someone who has decided that notwithstanding the capital gains exemption on housing they are are able to invest in other things or other ways for an equal or greater gain over time (ok, if you don`t believe, pretend).

Sorry if this a bit of a ramble. Just my 2 cents worth, or is that the deflated $20 that was tossed about recently?

 

[TheVancouverMarket]

In Vancouver where I work as a realtor (Westside and Downtown) prices down 3% since May. May was the peak. Different dynamic but same feel to the market as the last correction in April/May 2008 when prices adjusted about 15% give or take over about 9 months.. I think we are looking at another 15% price cut over a 12 month period. Double that number if US goes into a double dip recession. Canada has used up all it`s policy instruments to maintain the housing market. I don`t think quantative easing will even help that much. It`s likely that in 2011 onwards that the Emperor will be seen to be wearing no clothes. Sellers sell-price real sharp. Buyers be patient.

 

[gwasser]

Hi Brad and Bruce,

I am not a market expert in Vancouver. However, a price cut of 15%, although for some investors painful,
does not represent in my book a `bubble bursting`. On the contrary, it more likely represents a correction from some elevated demand due to the earlier HST implementations and the fear of an end to low interest - emotion driven, that is all it was.

Regarding Brad`s remarks about government influence on bubble behavior I agree, and I suspect Thomas also admits the influence of government on housing prices and interest. However, a high level of home ownership does not necessarily mean `bubble`. It only means that it is easier to own than to rent. Many Canadian home owners, as pointed out at REIN a number of times, have relatively low debt levels. The low interest environment may have encouraged a somewhat higher home ownership than before, but when using the Calgary market in 2006-2007 as an example, even those years of dramatic housing increases did not represent a `bubble`. More likely, the markets were playing catch-up as Calgary (and Edmonton) was for years undervalued compared to other major Canadian cities in spite of its prosperous economy.

When speaking bubbles, you have to look at whether the pricing makes sense based on fundamentals. Also, the fact that landlords do not make enough rental income is not a necessarily proof of a bubble. That may be more the resullt of rents being too low. So you have to look at the total price level, including owner occupied values, to conclude whether there is a bubble or not.

Finally, not every overvalued market represents a `bubble`. A small price correction or a period of slower appreciation may do the job rather than a full scaled market crash. We see these days bubbles everywhere, even when none are in sight. This is just media-hype to sell more papers and scaring potential home buyers, which in turn increases the number of renters. I think we have a bubble in bubble fear mongering!

 

[housingrental]

An excellent, excellent post!!

!!!!
QUOTE (TheVancouverMarket @ Sep 8 2010, 01:12 AM) In Vancouver where I work as a realtor (Westside and Downtown) prices down 3% since May. May was the peak. Different dynamic but same feel to the market as the last correction in April/May 2008 when prices adjusted about 15% give or take over about 9 months.. I think we are looking at another 15% price cut over a 12 month period. Double that number if US goes into a double dip recession. Canada has used up all it`s policy instruments to maintain the housing market. I don`t think quantative easing will even help that much. It`s likely that in 2011 onwards that the Emperor will be seen to be wearing no clothes. Sellers sell-price real sharp. Buyers be patient.

 

[RedlineBrett]

Really great post Thomas. Perhaps some of these magazines should interview you. I particularly like this bit

QUOTE "But what is also true, but not mentioned in these headline grabbing reports is:
a) the average size of a home went up .. thus the price per sq ft over perhaps 2 or 3 decades, inflation adjusted, is actually lower than in the 70`s !
b) foreign immigration or 2nd home buyers in select markets such as Vancouver that drive the average up without any corresponding local employment strength
c) quite a few very large houses or condos skew the average up substantially, as $10M condos in Vancouver or $3M 3 BR condos in GTA did not exists 20 years ago. Today they do to cater to the very affluent few (and frequently non-Canadian)
d) increased new lot municipal fees that make a new home more expensive as the underlying land price is going up disproportionally
"

The $/ft^2 metric is golden. Thanks for posting.

 

[Pheenix]

QUOTE (gwasser @ Sep 8 2010, 12:16 PM) . . . When speaking bubbles, you have to look at whether the pricing makes sense based on fundamentals. Also, the fact that landlords do not make enough rental income is not a necessarily proof of a bubble. That may be more the resullt of rents being too low. So you have to look at the total price level, including owner occupied values, to conclude whether their is a bubble or not.

Finally, not every overvalued market represents a `bubble`. A small price correction or a period of slower appreciation may do the job rather than a full scaled market crash. We say these days bubbles everywhere, even when none are in sight. This is just Media-hype to sell more papers and scaring potential home buyers, which increases the number of renters. I think we have a bubble in bubble fear mongering!

I think we are in agreement on a number of things including the inflation of fear Godfried.

Just as clarification, should any one have missed my point. My concern is that in goverments` quest to promote ownership they may (or may have) missed the need for mobility in the population, both generally and in specific segments, that both drive and respond to, the local fundamentals, thereby distorting the market, and thus pricing, for purchasers, tenants and landlords at different times.

Who`s for a Bubblicious party? Sure would get sticky fast!

 

[RussellWestcott]

REIN™ Members, you have access to the presentation by Carl Gomez at the recent BC workshop.

He addressed many of the topics that are discussed on this thread

Set aside about 60 minutes to watch and listen.

click here for the full presentation

 

[gwasser]

QUOTE (Pheenix @ Sep 8 2010, 01:36 PM) Just as clarification, should any one have missed my point. My concern is that in goverments` quest to promote ownership they may (or may have) missed the need for mobility in the population, both generally and in specific segments, that both drive and respond to, the local fundamentals, thereby distorting the market, and thus pricing, for purchasers, tenants and landlords at different times.
Who`s for a Bubblicious party? Sure would get sticky fast!

Good point,

 

[Thomas Beyer]

QUOTE (Pheenix @ Sep 8 2010, 12:36 PM) .. My concern is that in goverments` quest to promote ownership they may (or may have) missed the need for mobility in the population, both generally and in specific segments, that both drive and respond to, the local fundamentals, thereby distorting the market, and thus pricing, for purchasers, tenants and landlords at different times.

I strongly agree here. 5% down is just way too low to buy a house .. coupled with interest rates in the sub 4% range and home ownership becomes too affordable .. or too unaffordable as soon as rates go to a more normal 5 or 6% interest rate. Thus: house prices are artificially inflated by too loose a government regulation. Expect house prices to correct as CMHC tighten rules .. not nearly as bad as the US but downwards nevertheless !!


The recent changes in CMHC from 5% down to 20% down for investors and testing debt coverage on a 5 year fixed (as opposed to variable) rate is a step in the right direction .. but do not go far enough.

I think 25% down for single family investments and 10% down for a first home up to a certain value (say $300,000) ..and 20% for any sub-sequent one is the right CMHC policy to bring in line the desire for home ownwership by many with reasonable and sustainable (inflationary upwards) pricing in the long term.

The current CMHC policy still has a lingering sub-prime smell to it !

 

[brendan82]

TQUOTE (ThomasBeyer @ Sep 8 2010, 06:53 PM) I strongly agree here. 5% down is just way too low to buy a house .. coupled with interest rates in the sub 4% range and home ownership becomes too affordable .. or too unaffordable as soon as rates go to a more normal 5 or 6% interest rate. Thus: house prices are artificially inflated by too loose a government regulation. Expect house prices to correct as CMHC tighten rules .. not nearly as bad as the US but downwards nevertheless !!


The recent changes in CMHC from 5% down to 20% down for investors and testing debt coverage on a 5 year fixed (as opposed to variable) rate is a step in the right direction .. but do not go far enough.

I think 25% down for single family investments and 10% down for a first home up to a certain value (say $300,000) ..and 20% for any sub-sequent one is the right CMHC policy to bring in line the desire for home ownwership by many with reasonable and sustainable (inflationary upwards) pricing in the long term.

The current CMHC policy still has a lingering sub-prime smell to it !

Thomas, i would be curious to know how much downside you see in the markets of Grande praire, Edmonton and Calgary. We have already see a correction in all but how much mure downside do you see? I`m thinking 20-30% of the next 5 years.

 

[Thomas Beyer]

QUOTE (brendan82 @ Sep 9 2010, 07:23 PM) ... downside .. I`m thinking 20-30% of the next 5 years.hardly ..

Assuming oil stays over $60/barrel .. and no drastic CMHC lending tightening as proposed by me, property values, on average, in Calgary, Edmonton and all AB and SK cities will likely be 15-25% HIGHER in 5 years !!

Why: money is cheap and will remain cheap for quite some time due to excessive boomer savings, in-migration from poorer economies like ON, BC, US ... strong universities, job creation, new infrastructure (ring roads, trains, hospitals, ...), quality of life, low taxes, low to no government deficits/debts, no PST, low energy prices for homes & businesses, lower gasoline prices ..

this is different from ON or BC where I think prices will remain flattish for quite some time unless more conservative, pro-growth, pro low taxes governments get elected. Look at SK: a huge boom when Brad Wall got elected .. after decades of left leaning policies .. look at the US or UK or ON: poor economies after left leaning high-tax, pro-union, anti-business governments got elected ! Now living in BC .. far more socialistic despite a pro-business liberal party under Campbell .. but he may not last either. Without Asian investors/immigrants BC would be a basket case !

see this article: "Reject unions .. and prosper": http://opinion.financialpost.com/2010/09/0...ns-and-prosper/

or this one on "Power without the people" on Ontario`s wasted energy policies : http://opinion.financialpost.com/2010/08/1...out-the-people/

A province (or state) with a high deficit to start with, higher taxes, strong union legislation and high energy prices is doomed. Jobs will disappear, and real estate prices will fall !!

BC and ON (investors/politicians): take note !!