The Elusive Canadian Housing Bubble

[verdo]

Re: Va Va Voom Vancouver...

Perhaps time to think about shorting the Canadian banks. NPLs will rise as this thing finally blows up, and it's gone on so long it means they are well and truly exposed.

that's a good idea too.

Why would anyone short the Canadian dollar here? That ship sailed years ago and the loonie is still down 25% from the peak. Housing is an issue but Canada's economy appears to be turning the corner. Housing, even a horrible retrench will not cause the Canadian dollar to fall from here unless there are outside contagions that cause a worldwide issue decreasing demand for commodities. I don't see that happening.

That being said, if one could confidently time the inevitable Canadian mortgage crisis collapse, the currency may have a brief and sudden spike down to some ridiculous low value before quickly returning to its normal range.

My rationale was along the lines of what thrift said here. It's hard for me to see a Trudeau administration which believes in the idea that "deficits don't matter" allowing thousands of canadians to sink on these loans without putting out some sort of major debt relief program. I don't think Canadians can just walk away from their mortgage obligations as easily as they could in the USA. There would be huge pressure on a government already heavily in favour of massive spending to do something. In that scenario, i could see the Canadian dollar dropping to surprisingly low levels in the short term. I mean, is there an argument that could be made for the CAD rallying under such a scenario? I feel like the worst one could expect was for it to go sideways. It's not something I'd short right at this moment, as i haven't seen any sign yet of a turn around in the housing mania. Just something i'm looking into as a possibility. However, I hear what you guys are saying in terms of a rebound in the Canadian economy.

[GRG55]

Re: Va Va Voom Vancouver...

Why would anyone short the Canadian dollar here? That ship sailed years ago and the loonie is still down 25% from the peak. Housing is an issue but Canada's economy appears to be turning the corner. Housing, even a horrible retrench will not cause the Canadian dollar to fall from here unless there are outside contagions that cause a worldwide issue decreasing demand for commodities. I don't see that happening.

The major tailwind for the Canadian economy is the large fiscal deficits that the Federal and most Provincial governments are running, and intend to keep running for some years to come. The secondary tailwinds are an expanding US economy (our largest trading partner) and a continuation of mortgage and other household debt increases funding housing, construction and other consumption.

Otherwise Canadians are now well into a secular disposable income compression phase (right across the country), the unemployment rate is now rising (unlike the USA), household debt levels are at all time highs and suggest risk of a extended de-leveraging period to come (given income compression and the potential for a housing correction enabled "negative wealth effect"), and although the fallen Loonie has prompted the transfer of production to Canada to fill existing manufacturing capacity slack, I don't see evidence that there is sufficient confidence in a perpetually low Loonie to prompt any material capital investment to expand capacity.

Personally I would like to see our Canadian governments actively issue 100 year bonds at these low interest rates to fund the deficit infrastructure programs, and temper their pie-in-the-sky ideology that somehow in the space of 10-15 years they can magically remake the entire highly resource dependent Canadian economy into some mass quantity of high-paying green jobs nirvana - "better living through ever more regulations".

[jk]

Re: Va Va Voom Vancouver...

buy canadian gov't long term bonds. i know the current yields look low, but look at the u.s.: they can go lower. canada is several years behind the u.s. in entering a deleveraging/disinflationary/deflationary period. the crash of housing will lower yields further.

[thriftyandboringinohio]

Re: Va Va Voom Vancouver...

buy canadian gov't long term bonds. i know the current yields look low, but look at the u.s.: they can go lower. canada is several years behind the u.s. in entering a deleveraging/disinflationary/deflationary period. the crash of housing will lower yields further.

Thanks jk. Do you think Canadian bonds have the potential for the sort of big gains we saw in US bonds?

[jk]

Re: Va Va Voom Vancouver...

Thanks jk. Do you think Canadian bonds have the potential for the sort of big gains we saw in US bonds?

i don't know, but i don't see why not. as i said, i think canada is several years behind the u.s.

one problem for u.s. investors is whether to hedge the currency. also the loonie is not the reserve currency, and it's not clear to me how much that's contributed the treasuries' gains. another problem i could see is that if you get a big defense spend plus a big "make america great again infrastructure act" with a lot of fiscal stimulus in the u.s., that could raise u.s. rates and the effects could certainly leak into canada.

i think if i were a canadian and didn't have the currency risk i'd want to put some of my assets into canadian long bonds. i'm not sure about vehicles- i just did a quick check and all i could find was the etf xgb, which has a duration of less than 8 years. there might be a canadian open end fund, i don't know.

i was just trying to address the question of what would benefit if the canadian real estate bubble pops. i think i'd take a flyer on it myself if someone can come up with an appropriate vehicle. i'm curious about what others think of this theory of mine, and also whether others think a 7.8 year duration is enough to capture a move.

[GRG55]

Re: Va Va Voom Vancouver...

i don't know, but i don't see why not. as i said, i think canada is several years behind the u.s.

one problem for u.s. investors is whether to hedge the currency. also the loonie is not the reserve currency, and it's not clear to me how much that's contributed the treasuries' gains. another problem i could see is that if you get a big defense spend plus a big "make america great again infrastructure act" with a lot of fiscal stimulus in the u.s., that could raise u.s. rates and the effects could certainly leak into canada.

i think if i were a canadian and didn't have the currency risk i'd want to put some of my assets into canadian long bonds. i'm not sure about vehicles- i just did a quick check and all i could find was the etf xgb, which has a duration of less than 8 years. there might be a canadian open end fund, i don't know.

i was just trying to address the question of what would benefit if the canadian real estate bubble pops. i think i'd take a flyer on it myself if someone can come up with an appropriate vehicle. i'm curious about what others think of this theory of mine, and also whether others think a 7.8 year duration is enough to capture a move.

The Fed has reversed rate policy. And seems hell bent to prime the market for a June/July round #2. Interest rates in Canada will not be able to avoid following (market rates, not the Bank of Canada rate, which probably won't change for a while yet). If the curve flattens perhaps there is a bond play at the long end, but not hedging the currency risk might result in some serious pain. I am avoiding just about all things Canadian in my personal portfolio at the moment.

[GRG55]

Re: Va Va Voom Vancouver...

The major tailwind for the Canadian economy is the large fiscal deficits that the Federal and most Provincial governments are running, and intend to keep running for some years to come. The secondary tailwinds are an expanding US economy (our largest trading partner) and a continuation of mortgage and other household debt increases funding housing, construction and other consumption.

Otherwise Canadians are now well into a secular disposable income compression phase (right across the country), the unemployment rate is now rising (unlike the USA), household debt levels are at all time highs and suggest risk of a extended de-leveraging period to come (given income compression and the potential for a housing correction enabled "negative wealth effect"), and although the fallen Loonie has prompted the transfer of production to Canada to fill existing manufacturing capacity slack, I don't see evidence that there is sufficient confidence in a perpetually low Loonie to prompt any material capital investment to expand capacity.

Personally I would like to see our Canadian governments actively issue 100 year bonds at these low interest rates to fund the deficit infrastructure programs, and temper their pie-in-the-sky ideology that somehow in the space of 10-15 years they can magically remake the entire highly resource dependent Canadian economy into some mass quantity of high-paying green jobs nirvana - "better living through ever more regulations".

[GRG55]

Re: Va Va Voom Vancouver...

An interesting chart based on a survey of realtors by the Vancouver Real Estate Board regarding April, 2016 sales statistics. Even if one treat a survey of realtors with great scepticism it is nigh impossible to conclude that it's rich Chinese Dudes driving this mania.

Virgins = first time buyers; Move-up = people who sold and bought again; Speckers = locally resident investors and speculators (some of whom are no doubt realtors themselves); Condo Refugees = selling multifamily and buying single family housing; Downsizers = selling single family homes and buying multifamily; Foreign Dudes = self explanatory.



And a link to an entertaining blog by a couple of Canadian Millenials who seem to have managed to avoid the "our parents say we have to buy a house and they will help us with the down payment" trap.

http://www.millennial-revolution.com/about-us/

[ProdigyofZen]

Re: Va Va Voom Vancouver...

What is more interesting to me is that the rocket shot of Vancouver housing prices took off in mid-2014, June to be precise.

The same time that oil began to crash and the Canadian dollar crashed with it.

........ Interesting.........

[GRG55]

Re: Va Va Voom Vancouver...

What is more interesting to me is that the rocket shot of Vancouver housing prices took off in mid-2014, June to be precise.

The same time that oil began to crash and the Canadian dollar crashed with it.

........ Interesting.........

But is correlation causation in this case?

The Canadian dollarette has had a nice bounce back up in value against the US$ this year (from 1.4602 on Jan 20 to 1.2539 on May 2), but Van city single family home prices only accelerated even more vertically in that time. As did Toronto.

[Milton Kuo]

Re: Va Va Voom Vancouver...

Milton you make good points.
Even though Canadians seem to be suffering an epidemic of home-mortgage-madness, it is not plausible to me that the currency truly collapses.
Canada just has too many fundamentally good things going for it when you compare it to other nations.

Oh, my! I did not intend people to think that I believe that the Canadian dollar will experience a hyperinflation a la Zimbabwe or Venezuela. Instead, I think relative to the U.S. dollar today, the Canadian dollar will be depreciated by 10% - 20% due to government actions when their housing bubble busts. A 10% to 20% move in currencies is normally quite large but we've already seen it twice with the CAD/USD: A tremendous increase in the strength of the USD over the past few years and a 10%+ strengthening of the CAD in the past few months.

A housing bubble bust and subsequent government/CB actions should be a relatively easy thing to identify compared to some of the other things that affect exchange rates. Thus, I was thinking that one could use an FX contract with a bit of leverage (or an option) to juice the returns instead of just buying currency.

My personal poster child for such opportunity is stock in Ford Motor Company during the financial crisis.
In November 2008 a smart person could have backed up the truck and filled it with Ford stock at $1.43 per share.

Three short years later in Jan 2011 those shares were $18.65 each, for a 13x return. Sweet.
They say one should buy low and sell high. Spotting an opportunity to buy at unreasonably low prices makes that strategy work like a charm.

Was it really smart to have backed up the truck on Ford at that time, assuming one didn't know that there would be bailouts, Cash for Clunkers, and multiple rounds of QE? It didn't seem like a slam dunk at all to me since Ford had put up everything it had--including its name and logo as I recall--as collateral for loans prior to the AFC that enabled the company to not need government money.

In light of the company's very high debt levels and the wipeout of their customers, I had very little confidence sales would pick up in time for the company to not default on its loans. I was fairly certain that GM and Ford would not be allowed to go bankrupt and then be dissolved and dispersed by the vultures. However, I wasn't willing to risk money that such a rescue wouldn't utterly destroy shareholders.

I'm not a car guy so maybe the investment was obvious to someone who knows more about cars. I don't regret not making that money at all: the thought of making a trade that seemed excessively risky was never considered.

If the Canadian mortgage crisis happens dramatically, and I see CAD/USD get to 1.75, I will pay attention, and if it hits 2.0 I would fill my truck with Loonies.
I certainly don't expect to get that chance.

I'd be very surprised if the Canadian dollar gets that weak. But, the Vancouver housing bubble has lasted far, far longer than I believed possible and the prices have gotten higher than I thought possible, too.

[ProdigyofZen]

Re: Va Va Voom Vancouver...

Correct. I was thinking more along the lines of accelerated capital flight out of China correlating with the rocket shot in Vancouver.

We know that the majority of buyers are Canadians but on the margin the reflexive thought process of the Canadians is: Chinese are buying like mad and paying cash over the asking price, I must buy now or I won't be able to afford. This causes the market to rocket and more Canadians jump on as they begin to think "prices can only go up and with the added buyers from overseas it will only get worse." Chinese continue to buy at any price to get capital out of China.

Rinse and repeat X 1000

[jk]

Re: Va Va Voom Vancouver...

we can't assume that the composition of the population of buyers lately is the same as that of 2 years ago.

[GRG55]

Re: Va Va Voom Vancouver...

we can't assume that the composition of the population of buyers lately is the same as that of 2 years ago.

I seriously doubt it's changed more than a few percent between the various categories in the past 5+ years.

Normally a drop in the Canadian $ will attract a lot of US buyer interest in cross-border property, especially along the south coast. But that does not appear to be the case this time, so far, as Canadian property valuations were already so inflated compared to similar US property before the Loonie started to fall. We are seeing the same thing inland. Texans and California buyers are still preferring the Flathead Valley and Whitefish Montana over the Canadian side of the border just to the north, despite the currency differential.

Correct. I was thinking more along the lines of accelerated capital flight out of China correlating with the rocket shot in Vancouver.

We know that the majority of buyers are Canadians but on the margin the reflexive thought process of the Canadians is: Chinese are buying like mad and paying cash over the asking price, I must buy now or I won't be able to afford. This causes the market to rocket and more Canadians jump on as they begin to think "prices can only go up and with the added buyers from overseas it will only get worse." Chinese continue to buy at any price to get capital out of China.

Rinse and repeat X 1000

Some of the idiot prices being suggested by Chinese buyers of companies in takeover plays would seem to support that thesis.

But I don't know to what degree different emotional stimuli are driving this. But it sure looks like a full blown mania now.

[GRG55]

Re: Va Va Voom Vancouver...

...But I don't know to what degree different emotional stimuli are driving this. But it sure looks like a full blown mania now.

From the Greater Fool blog today.

Yes Virginia, it's a Mania:

Judith’s an accountant. “Every day I am feeling astounded and astonished at people’s financial illiteracy,” she tells me.

Worse, she’s an accountant in Vancouver, the current epicentre of dumb.

“I met with some clients today who between them have a household income of $120k, (they are “educated”), and have a SFH in Vancouver worth about $1m-$1.5m MORE than what they paid for it 15 years ago. So what do they do with their new-found wealth? Maybe sell, and rent? Retire (net worth is probably $2m including the sale of other real estate holdings)? NO! They…..buy MORE real estate, and mortgage it to boot, determined to be landlords in a market that will never fail (real estate in YVR always goes up, they tell me!).”

“If that doesn’t make you roll your eyes,” Judith continues, “this might. I had a nice conversation with the wife today about RRSPs (they had no idea RRSP contributions made today become taxable as RRIFs after age 71) and she told me she has no idea if her work has a pension plan. Um, ok? After ten years of working there, she has no idea if there is a company pension plan in place, and if it is defined contribution or defined benefit or? Just that she “thinks they have something upon retirement”, what it is, she has no clue (just two decades from retirement).

“Here is a case in point about the mentality in Vancouver these days. Who needs pesky things like pension plans when we have the all godly REAL ESTATE to save us? I fear for people in our city, and I am doubting this will continue much longer. I would say this is the peak, given what I’ve seen. I’m no expert but this is all downright scary, the infallible faith people have in just one asset class, and a government assures us that this is the way to go, debt be damned.”

The longer this goes on, the more insane the chart, the greater the house lust that Judith references, the more I’m coming to believe that the landing will be hard. Splintered-tail-fin-&-body-parts-in-a-smokey-hole hard. It’s not Chinese guys primarily responsible for this (there are far too few offshore buyers) but the unbridled house horniness that spreads in a city where everyone is real estate manic.
Look what they’ve done. Average detached price $1.817 million (see chart attached)

Those who want to blame others for what we’re doing to ourselves figure in a place with ho-hum wages that prices can only bloat because they’re being fed by foreign cash. But Judith says otherwise. People with real estate assets are leveraging them higher. Subprime lending is exploding as buyers stretch to make down payments on houses too dear for CMHC to insure. Family money is doubling down on a single asset class – real estate – as parents borrow against their illusory equity to buy more for their kids. And it’s all happening while people are oblivious to the fact interest rates have finally started their ascent. This is a far more dangerous situation than any invasion from Guangzhou...