The Elusive Canadian Housing Bubble

[santafe2]

Re: The Elusive Canadian Housing Bubble

VANCOUVER (NEWS 1130) – We’ve heard the warnings for years — the housing bubble is about to burst in Vancouver. Well, some of Wall Street’s biggest investors are betting it is about to happen and are looking at the potential profits they could make if it does.

Short-sellers are looking at how much debt Canadians are holding and some are predicting a real estate crash could start as early as this fall if the US raises historically low interest rates and there is a financial spillover into this country.

Hedge fund investors who made billions of dollars in 2008 when the American housing market collapsed have been watching for a similar scenario to play out north of the border for years, but there are reports major investors are now actively “building positions” against Canadian housing targets.

“Vancouver’s market is something unto itself,” says Marc Cohodes, once considered one of the highest-profile short sellers on Wall Street.

Cohodes is out of the hedge fund business now, but spoke to NEWS 1130 from his home in Sonoma County, outside San Francisco.

“The problem is housing is no longer housing. Instead of being a shelter, homes have become more of a speculative game, akin to penny stocks, where value has lost all sense from price,” he says.

“When a place to live becomes extraordinarily speculative, where people invest rather than own to live to the degree we’ve seen in Vancouver, some people should be extraordinarily concerned.”

While some real estate professionals in Metro Vancouver believe the local housing market will be protected from any price correction by overseas investment, Cohodes thinks it is only adding to the problem.

“Frankly, it’s worse. In the brokerage business, there’s a saying: ‘You have to know your customer.’ I think with some of the prices and transactions going on in Vancouver, in my opinion there are things going on that should make someone scratch their head up there in a very big way. Whether it’s laundering money from China into Vancouver or other places, I don’t know exactly, but it’s not normal.”

No matter what happens, Cohodes says it is the ordinary home buyer who will feel the pinch the most, with people who make good incomes being pushed out of the market while some homes sit empty.

“People are getting pissed off. This concept of buying a place to park overseas money in Vancouver, to me, is a very, very dangerous concept and construct.”

[Polish_Silver]

Re: The Elusive Canadian Housing Bubble

I'd like to see numbers on the overseas home buyers. EJ at one point seemed think Canada could not have a bubble because their CB was so much better than ours.

While, it's only partly the personalities involved. The system of leveraged lending and public guarantees has built in vulnerabilities, which only the most diligent regulators could prevent. It should be called "designed by idiots to be exploited by villains".

[GRG55]

Re: The Elusive Canadian Housing Bubble

I'd like to see numbers on the overseas home buyers. EJ at one point seemed think Canada could not have a bubble because their CB was so much better than ours.

While, it's only partly the personalities involved. The system of leveraged lending and public guarantees has built in vulnerabilities, which only the most diligent regulators could prevent. It should be called "designed by idiots to be exploited by villains".

Overseas home buyers do not, by themselves, have the ability to create the insanity that is the Vancouver property market. It is the self-fulfilling cycle of the locals using: Central Bank sponsored cheap credit --> qualify for bigger mortgage despite flat income --> which drives up prices --> which allows real estate appraisal comparables to raise all valuations --> which allows even more borrowing --> aided by frightened Central Bank lowering interest rates yet again (as they did earlier this year) --> qualify for bigger mortgages -->...

The locals are doing it to themselves and eventually (maybe?) it'll be the locals that bear most of the consequences.

[lakedaemonian]

Re: The Elusive Canadian Housing Bubble

Overseas home buyers do not, by themselves, have the ability to create the insanity that is the Vancouver property market. It is the self-fulfilling cycle of the locals using: Central Bank sponsored cheap credit --> qualify for bigger mortgage despite flat income --> which drives up prices --> which allows real estate appraisal comparables to raise all valuations --> which allows even more borrowing --> aided by frightened Central Bank lowering interest rates yet again (as they did earlier this year) --> qualify for bigger mortgages -->...

The locals are doing it to themselves and eventually (maybe?) it'll be the locals that bear most of the consequences.

But surely they(largely Chinese grey money purchasing property overseas) can act as a catalyst or force multiplier when more than just a few with deeper than average local pockets enter any given local property market? No?

If a few foreign buyers, relatively indifferent to local costs/values/norms enter a given market surely they have some upside impact accelerating prices?

With the same potential for catalyzing a downside as well I would think(due to higher equity levels and less robust local ties).

What real/perceived value is placed on local market "comparables"?

If the real/perceived value on local market comparables is high......isn't this where foreign buyers have the greatest potential to influence(if not control) local real estate markets?

[Milton Kuo]

Re: The Elusive Canadian Housing Bubble

But surely they(largely Chinese grey money purchasing property overseas) can act as a catalyst or force multiplier when more than just a few with deeper than average local pockets enter any given local property market? No?

If a few foreign buyers, relatively indifferent to local costs/values/norms enter a given market surely they have some upside impact accelerating prices?

That most certainly seems to be the case in Arcadia, California.

[lakedaemonian]

Re: The Elusive Canadian Housing Bubble

That most certainly seems to be the case in Arcadia, California.

I was visiting Queenstown, NZ at the beginning of the year for a final planning meeting for a large event we were running there.

At O' Dark Hundred the entire hotel was evacuated due to someone cooking in their room setting off fire alarm.

Nearly the entire hotel was booked out to two separate Chinese property tour groups.

I sometimes wonder if it doesn't even need THAT higher level of foreign buying/selling frenzy.

What effect would a few paying with blank cheques have on the upside for comparables/purchase sentiment?

What effect would a few selling with 100% equity and a very high threshold for financial pain have on comparables/sales sentiment?

[Milton Kuo]

Re: The Elusive Canadian Housing Bubble

I was visiting Queenstown, NZ at the beginning of the year for a final planning meeting for a large event we were running there.

At O' Dark Hundred the entire hotel was evacuated due to someone cooking in their room setting off fire alarm.

Nearly the entire hotel was booked out to two separate Chinese property tour groups.

I sometimes wonder if it doesn't even need THAT higher level of foreign buying/selling frenzy.

What effect would a few paying with blank cheques have on the upside for comparables/purchase sentiment?

What effect would a few selling with 100% equity and a very high threshold for financial pain have on comparables/sales sentiment?

I agree with your suspicions. In my opinion, bubbly real estate markets are very heavily juiced by Chinese money. From the numbers I've seen, most of China's wealthy are either looking to leave the country or are purchasing residences in other countries as part of an escape plan. I'm not entirely sure of the rationale but I suspect it's because these buyers don't want to make the same mistake either they themselves or their parents made in 1949. My understanding is that my paternal grandparents nearly stayed too long at the "party" and had to spend a few gold strips to get the hell out of Dodge before it was too late in the late 1940s.

Things were and are quite a bit better in Taiwan and the U.S. than they were and are in China. The Chinese people who left along with Chiang Kai-shek fully avoided the madness, idiocy and poverty-creation of the Great Leap Forward and Cultural Revolution.

I suspect that is one very strong reason why wealthy Chinese people are purchasing foreign real estate. When my grandparents were forced to flee China, there were still some wealthy Chinese people in China although the smartest ones had already left. Twenty years after they left China, there was no one in China who was wealthy.

With that kind of experience in living memory, I can't imagine any Chinese person who is well-off risking the possibility of another 1949 situation. Couple that with the fact that Chinese people tend to buy where there is already or will be a relatively large Chinese population (you'll see lots of buses of Chinese buyers in the Los Angeles area but not in Jackson, Mississippi), the target cities typically aren't mega-cities, and there are going to be millions if not tens of millions of Chinese people looking to make preparations for leaving China and it seems natural to believe that real estate prices in certain markets, like Vancouver, are very heavily influenced by Chinese buyers.

[GRG55]

Re: The Elusive Canadian Housing Bubble

I agree with your suspicions. In my opinion, bubbly real estate markets are very heavily juiced by Chinese money. From the numbers I've seen, most of China's wealthy are either looking to leave the country or are purchasing residences in other countries as part of an escape plan. I'm not entirely sure of the rationale but I suspect it's because these buyers don't want to make the same mistake either they themselves or their parents made in 1949. My understanding is that my paternal grandparents nearly stayed too long at the "party" and had to spend a few gold strips to get the hell out of Dodge before it was too late in the late 1940s.

Things were and are quite a bit better in Taiwan and the U.S. than they were and are in China. The Chinese people who left along with Chiang Kai-shek fully avoided the madness, idiocy and poverty-creation of the Great Leap Forward and Cultural Revolution.

I suspect that is one very strong reason why wealthy Chinese people are purchasing foreign real estate. When my grandparents were forced to flee China, there were still some wealthy Chinese people in China although the smartest ones had already left. Twenty years after they left China, there was no one in China who was wealthy.

With that kind of experience in living memory, I can't imagine any Chinese person who is well-off risking the possibility of another 1949 situation. Couple that with the fact that Chinese people tend to buy where there is already or will be a relatively large Chinese population (you'll see lots of buses of Chinese buyers in the Los Angeles area but not in Jackson, Mississippi), the target cities typically aren't mega-cities, and there are going to be millions if not tens of millions of Chinese people looking to make preparations for leaving China and it seems natural to believe that real estate prices in certain markets, like Vancouver, are very heavily influenced by Chinese buyers.

It might "seem natural", and it makes a convenient story for those that benefit from marketing properties - the logical extension of this being all this Chinese cash money means a bust cannot happen and prices will keep rising. When the bust does happen, and it will, it will be because locals cannot meet the debt servicing obligations. That's when this BS story will evaporate along with a lot of Vancouverite local's equity.

The stats show that non-national, foreign buyers are a tiny fraction of the total transactions there.

[GRG55]

Re: The Elusive Canadian Housing Bubble

June data is in:

Too bad all those "Chinese buyers" don't speak French...Montreal is getting left behind.

[GRG55]

Re: The Elusive Canadian Housing Bubble

It might "seem natural", and it makes a convenient story for those that benefit from marketing properties - the logical extension of this being all this Chinese cash money means a bust cannot happen and prices will keep rising. When the bust does happen, and it will, it will be because locals cannot meet the debt servicing obligations. That's when this BS story will evaporate along with a lot of Vancouverite local's equity.

The stats show that non-national, foreign buyers are a tiny fraction of the total transactions there.

For those that remain unconvinced, exactly how are the Chinese responsible for this?

These data in these charts is more than a year old, but the StatCan info shows the trends are still intact.

Make no mistake, Canadians are doing this to themselves; nobody from China is forcing them.

[Milton Kuo]

Re: The Elusive Canadian Housing Bubble

June data is in:

Too bad all those "Chinese buyers" don't speak French...Montreal is getting left behind.

Perhaps the Chinese buyers are as interested in Montreal, Canada as Jackson, Mississippi?

[jk]

Re: The Elusive Canadian Housing Bubble

it's worse than this appears. the left scale is more spread out than the right. if the scales were made proportionate, i.e. 1200 on the left were the same height as 120 on the right, you'd see that mortgage credit was rising even faster relative to prices.

[GRG55]

Re: The Elusive Canadian Housing Bubble

it's worse than this appears. the left scale is more spread out than the right. if the scales were made proportionate, i.e. 1200 on the left were the same height as 120 on the right, you'd see that mortgage credit was rising even faster relative to prices.

The chart stops at end of 2013, but the trend continued. According to the Bank of Canada in the 12 months ending May 2015 total household credit increased by $84.2 Billion, of which $16.4 B was Consumer Credit (credit cards, car loans...) and $67.8 B was Residential Mortgages.

Within Residential Mortgages 61% was lent by Canadian Chartered Banks, 24% was lent by Non-Banks (the shadow banking system) and 15% of the funds came from "Off Balance Sheet loans securitized by banks and non-banks", almost all of the latter from the Canadian Mortgage and Housing Association's National Housing Act mortgage backed securities.

I wonder how many foreign Chinese buyers qualified for any of that, including "The Bank of Mom"...

Canadians are doing this to themselves...and our worthless politicians should be arrested for being accomplices to the crime.

IMF again cuts Canada’s growth forecast ahead of interest rate decision

The Globe and Mail
Published

Thursday, Jul. 09, 2015 9:06AM EDT

Rate cut could add fire to Toronto, Vancouver house markets

Even fears of recession aren’t slowing down buyers

Published on Fri Jul 10 2015

A further interest rate cut by the Bank of Canada could further fuel flames in the country’s two biggest real estate markets which are once again showing signs of overheating, housing watchers say.

“It’s another log on the fire for the Toronto and Vancouver housing markets,” says economist Sal Guatieri, vice president of BMO Economic Research, who expects to see a cut next week in an attempt to kickstart lagging growth...

...Both of Canada’s priciest cities are already swamped with far more buyers than properties for sale.

Sales — and prices — have hit new records in both Toronto and Vancouver this year. The frenzy has been driven by low interest rates, an ongoing shortage of listings and a growing sense of panic, especially among first-time buyers, that if they don’t get in now, they will be locked out of the market forever, particularly the low-rise house market...

...Last January’s surprise Bank of Canada rate cut to .75 per cent has been a contributing factor to those escalating sales and prices, says Penelope Graham, editor and spokesperson with mortgage comparison site RateSupermarket.ca.A cut to .5 per cent, as is expected, would see the five-year fixed rate dip below the current low of 2.39 per cent and further boost the illusion of affordability, she said.

“There are more people now entering the market with just five per cent down, because that’s all they can afford. There is a real sense of urgency in the bigger markets to get in now, before it’s too late, and get in with what you have,” says Graham.

“That’s potentially putting people in a really vulnerable position in terms of their debt levels.”

Toronto realtor David Fleming says he’s seeing a surge in demand even for condos — especially under $400,000 — and younger buyers than ever, backed by low interest rates and help from their real-estate rich baby boomer parents who want only the best for their children.

“I’ve seen a serious culture change. Young buyers used to be 26 or 27 years old. They’d graduated university, worked for a few years and lived at home then rented and bought. Now buyers are cutting out those middle steps.”

He’s seeing first-time buyers as young as 22 determined to own rather than rent...

...“None of my clients are talking about the Big R word,” says Toronto-based mortgage broker Jake Abramowicz.
“They’re confident that rates will stay low for a very long time now and that the market — both condos and houses — will not correct anytime soon.”

[Polish_Silver]

Re: The Elusive Canadian Housing Bubble

Overseas home buyers do not, by themselves, have the ability to create the insanity that is the Vancouver property market. It is the self-fulfilling cycle of the locals using: Central Bank sponsored cheap credit --> qualify for bigger mortgage despite flat income --> which drives up prices --> which allows real estate appraisal comparables to raise all valuations --> which allows even more borrowing --> aided by frightened Central Bank lowering interest rates yet again (as they did earlier this year) --> qualify for bigger mortgages -->...

The locals are doing it to themselves and eventually (maybe?) it'll be the locals that bear most of the consequences.

I wonder if Vancouver has had a housing price crash in living memory?

People apparently thought that in Manhattan "prices only go up". They found out otherwise at least twice in the last 30 years.

[Fiat Currency]

Re: The Elusive Canadian Housing Bubble

I wonder if Vancouver has had a housing price crash in living memory?

I guess you've never seen this ...

https://youtu.be/hqOn5XEm86A

https://youtu.be/hqOn5XEm86A