Canada's 'housing bubble' deemed close to bursting

[someone123]

Originally Posted by Berklon

Professionals can't stay because it costs too much to live in Vancouver, and companies can't afford to pay these professionals enough to stay to help afford living in Vancouver.

In practice I think the effect of this is quite nuanced. There's a range of businesses that gain from the housing bubble, individuals are all affected by the housing prices in different ways, and some people are more mobile than others.

There's a big group in the city that is either positively affected or only "potentially" affected because they own their house and/or cashed out of the market at a good time. This group may be shrinking. Beyond this there are all the young people who don't care about living in a dump or whose parents are helping them pay for housing. Both of these groups are larger than average in Vancouver because so many people have made money in real estate and because this is a place rich kids tend to choose to move to.

I think some of this might fall apart over time as the "no hope in hell of buying" crowd gets older and continues to have somewhat lower than average financial prospects here. The averages are probably also hiding the fact that this is a seriously segregated city as far as economic opportunity goes. A third problem is that, if housing prices collapse, businesses dependent on rising prices and redevelopment/construction will contract as well. The city's effectively putting more and more of its eggs in that basket over time as other industries get squeezed out.

[hipster duck]

Originally Posted by someone123

I think some of this might fall apart over time as the "no hope in hell of buying" crowd gets older and continues to have somewhat lower than average financial prospects here. The averages are probably also hiding the fact that this is a seriously segregated city as far as economic opportunity goes. A third problem is that, if housing prices collapse, businesses dependent on rising prices and redevelopment/construction will contract as well. The city's effectively putting more and more of its eggs in that basket over time as other industries get squeezed out.

I don't foresee a home price collapse - at least not within the Vancouver SFH market. The difference between Vancouver ca. 2016 and, say, Florida ca. 2006 could not be more stark:

In one market you have rich Chinese (i.e. almost inexhaustible number) who pay cash for a finite number of homes in a market that is approaching almost perfect inelasticity of supply. In the other you have a finite number of precarious American wage earners, leveraged to the hilt, buying homes in a market with almost no barriers to new supply (sprawl).

My guess is that, if there's a housing collapse in Vancouver, it'll be in the multifamily market, although it won't be nearly as spectacular as the American housing crisis.

In the multifamily market I see a combination of:

- huge supply; or at least supply meeting current demand
- terrible cap rates (nobody in their right mind would buy a Vancouver condo just to make money off rental income)
- Some middle income people who are first time buyers borrowing beyond their means.

and, somewhat unique to Vancouver, I think that a lot of wood-framed condos reaching a certain age will see their strata fees rise quite precipitously to take care of all the maintenance work that needs to be done. That's another disincentive from investing in condos.

[someone123]

Originally Posted by hipster duck

In one market you have rich Chinese (i.e. almost inexhaustible number) who pay cash for a finite number of homes in a market that is approaching almost perfect inelasticity of supply.

Is it really an inexhaustible number? One way to think of the situation is that China is churning out new millionaires by the hundreds of thousands, and they can and have obviously totally swamped Vancouver's detached housing market. Is the number of wealthy Chinese people still increasing though? How much of the investment was driven by the feeling that China would be growing at 10% per year for years and years, and that the $3M West Side house of today would be $4M next year and $5M the next? Do people actually personally value those properties that much or do they just think of them as investments with a stable or ever-rising market value? If it is inherent value driving the Vancouver prices, what happens if some other city becomes more attractive? How do we know there will be a steady flow of new wealthy Chinese buyers? I suspect that, along with vast amounts of credit being available to locals who believe in ever-rising real estate prices, might be necessary to keep prices where they are today.

There were about 4 million paper millionaires in China in 2014. Of those, presumably only a small percentage are willing and able to get $1-3M in cash into Vancouver to buy one or more houses. In 2014 the stock market in China appeared to be doing incredibly well and a huge number of people became millionaires. It seems like the reverse has been happening lately.

I'm not saying the detached housing market will crash but it doesn't seem particularly rock-solid to me either. It also seems shakier and shakier the higher it goes; there's no floor of locals who can buy at anywhere near market value, and other cities have become much cheaper.

[lio45]

Originally Posted by hipster duck

In one market you have rich Chinese (i.e. almost inexhaustible number)

Couldn't disagree more. Personally (and as I have amply discussed on here in the past), the top reason I've been extremely wary of the Vancouver market is that if for whatever reason the flow of dirty Chinese cash stops or even slows down noticeably, the house of cards collapses.

Just imagine, for example, a not-that-distant world where higher technology enables the Chinese government to successfully prevent money from illegally fleeing the country. That'd be catastrophic for anyone whose wealth is in the form of Vancouver property.

Or imagine that Canada starts to tighten their regulations allowing money to enter the country.

[someone123]

Originally Posted by lio45

Couldn't disagree more. Personally (and as I have amply discussed on here in the past), the top reason I've been extremely wary of the Vancouver market is that if for whatever reason the flow of dirty Chinese cash stops or even slows down noticeably, the house of cards collapses.

I am far from an expert when it comes to the Chinese economy but here's an example of an article that talks about the link between stock market declines there, devaluation of the yuan, and Vancouver housing (i.e. people trying to get out of yuan-denominated investments in China): http://business.financialpost.com/invest...o-send-more-money-into-vancouver-housing

If China actually is going through the beginnings of an economic crisis it could mean that (1) Chinese people won't be making a lot of new money to export in the near future, and (2) Chinese people are particularly interested in getting their money out of China right now. This suggests that the influx of cash to Vancouver could decline or be cut off for a long period or indefinitely. What happens to the $3.2M shacks that are in the middle of being flipped? What happens to the $3.2M shacks that are owned by Chinese people who, it now turns out, don't have a lot of other assets?

[hipster duck]

Originally Posted by lio45

Couldn't disagree more. Personally (and as I have amply discussed on here in the past), the top reason I've been extremely wary of the Vancouver market is that if for whatever reason the flow of dirty Chinese cash stops or even slows down noticeably, the house of cards collapses.

Just imagine, for example, a not-that-distant world where higher technology enables the Chinese government to successfully prevent money from illegally fleeing the country. That'd be catastrophic for anyone whose wealth is in the form of Vancouver property.

Or imagine that Canada starts to tighten their regulations allowing money to enter the country.

I don't think growth will continue at current rates, but I don't see a dramatic collapse. For one, the people who stand to lose the most are also in cahoots with the Chinese Communist Party. If they enacted regulation to prevent wealth from migrating to Vancouver, they'd likely be shooting many of their own higher-ups in the foot. The onus to do something rests on Canada.

Secondly, I think we are overestimating the size of the Vancouver real estate market and underestimating the size of Chinese wealth. There are, maybe, 20,000 properties at play in all this discussion, of which only 1-2,000 are actually on the market. At the same time, the size of the Chinese multimillionaire class is quite substantial, even with their economic downturn, and the rate of wealth growth climbs the higher you go up the ladder (and, I believe, climbs even higher at times of economic crisis).

Finally - if I may be a bit judgmental as a person of Chinese descent - Vancouver is a luxury good, and [rich] Chinese people don't scope out other luxury products or markets with a better rate of return. They double down on a familiar brand and pile in, or they stay out entirely. There's a reason why the price of Chateau Lafitte has climbed astronomically, while perfectly decent St. Emilions and Pomerols just across the river have stayed relatively "affordable".

[ssiguy]

While certainly SF, Sydney, and L.A. have seen Chinese money flow into the real estate market, their impact has not been near as great as in Vancouver.

Syd/SF/LA are all world class cities with strong and diverse economies. They are high wage cities with large head offices, major manufacturing, and centers of finance. Vancouver is none of those things.

It's a low income city with no head office that is ranked in the top 40 on the TSX and it has no manufacturing base. When you compare it to Seattle just 250km down the road} Vancouver is just as important as Portland in the scheme of things.

It's all about the foreign {overwhelmingly Chinese but also some Indian} money inflows/laundering. Businesses can't come even remotely close enough to compensate new workers to make the job palatable so the talented workers leave and the businesses eventually have to follow.

BC {and certainly BCers} may find that unfortunate but they are just "collateral damage" in the BC economy. Although Christy and co. couldn't personally careless about the impact on individuals they are right in that they can't do anything about it now. The BC economy and government revenues are completely dependent on the largess of the housing market, house flipping, and money laundering. Stopping the inflow of foreign money into Vancouver would be like Calgary telling all the oil companies to leave town.

[cornholio]

Originally Posted by hipster duck

I don't foresee a home price collapse - at least not within the Vancouver SFH market. The difference between Vancouver ca. 2016 and, say, Florida ca. 2006 could not be more stark:

In one market you have rich Chinese (i.e. almost inexhaustible number) who pay cash for a finite number of homes in a market that is approaching almost perfect inelasticity of supply. In the other you have a finite number of precarious American wage earners, leveraged to the hilt, buying homes in a market with almost no barriers to new supply (sprawl).

My guess is that, if there's a housing collapse in Vancouver, it'll be in the multifamily market, although it won't be nearly as spectacular as the American housing crisis.

In the multifamily market I see a combination of:

- huge supply; or at least supply meeting current demand
- terrible cap rates (nobody in their right mind would buy a Vancouver condo just to make money off rental income)
- Some middle income people who are first time buyers borrowing beyond their means.

and, somewhat unique to Vancouver, I think that a lot of wood-framed condos reaching a certain age will see their strata fees rise quite precipitously to take care of all the maintenance work that needs to be done. That's another disincentive from investing in condos.

As someone who is married to a Brazilian with fairly strong ties to South America through marriage, property ownership, constant trips and friends I have to point out a major inaccuracy. Miami is a huge, and I mean huge target of foreign investment from South America and has been for a long time, and that includes in the run up to 2008. The level of inequality in South America is extremely high, growth was high in the run up to 2008, and there were/are piles of very wealthy families, and all of them, and I mean every single one in the entire South American continent, wants a home in Miami and they pump money into that market. Miami actually had a huge foreign investment problem. It was not Chinese. It was Brazilians, Colombians, Venezuelans, Argentinians, Chileans, Peruvians etc. And they all speculated and do it again and bought multiple homes, homes for their kids to go to school, homes to escape to etc. Americans kept up. Locals over leveraged and saw the money to be made by speculating on this phenomena. And then it all crashed. Actually Miami is a very good comparison to Vancouver and there is a reason Miami was the hardest hit, it was because of foreign investment from South America, a rapidly developing unequal continent with many wealthy families taking money out and pumping it into a place they liked where all their wealthy country men also pumped money into and sent their kids to and the locals had low interest rates that allowed them keep up, and prices rose rapidly and people got rich over night, and others saw that and gambled.

Carry on...

[Drybrain]

As to the stability of the Vancouver market, it doesn't require sophisticated economic analysis to see that it may not be on particularly reliable ground in the long run.

The single-family market is clearly beyond all reason, but even condos, as of 2015, were averaging nearly half a million—a full $100,000 higher than Toronto, itself under fire for affordabilty, and in a city with lower average incomes.

And look at the rate of escalation in aggregate home prices. 1 percent or less per year in most cities, and approaching 2 in a few. But in Vancouver, 4.5 percent increase last year. Was there a corresponding bump in incomes, employment, or anything else to explain this? Not really. A decent increase the labour force, a slight increase in the participation rate, but also a slight increase in unemployment.

It's all pretty clear on page 8 of this report. The current prices, and the escalation, aren't at all supported by local fundamentals. A geopolitical crisis in China, a major blow to the Chinese economy, a shift in preference of foreign buyers, etc, could easily undermine the market and end up seriously screwing over not only government finances in BC but also the equity of existing homeowners.

[lio45]

Originally Posted by cornholio

As someone who is married to a Brazilian with fairly strong ties to South America through marriage, property ownership, constant trips and friends I have to point out a major inaccuracy. Miami is a huge, and I mean huge target of foreign investment from South America and has been for a long time, and that includes in the run up to 2008. The level of inequality in South America is extremely high, growth was high in the run up to 2008, and there were/are piles of very wealthy families, and all of them, and I mean every single one in the entire South American continent, wants a home in Miami and they pump money into that market. Miami actually had a huge foreign investment problem. It was not Chinese. It was Brazilians, Colombians, Venezuelans, Argentinians, Chileans, Peruvians etc. And they all speculated and do it again and bought multiple homes, homes for their kids to go to school, homes to escape to etc. Americans kept up. Locals over leveraged and saw the money to be made by speculating on this phenomena. And then it all crashed. Actually Miami is a very good comparison to Vancouver and there is a reason Miami was the hardest hit, it was because of foreign investment from South America, a rapidly developing unequal continent with many wealthy families taking money out and pumping it into a place they liked where all their wealthy country men also pumped money into and sent their kids to and the locals had low interest rates that allowed them keep up, and prices rose rapidly and people got rich over night, and others saw that and gambled.

Carry on...

This is happening again right now, FYI. Not sure where it will end up going, but IMO Miami has already passed the point where it would've been interesting to get in. (Which I did seriously consider back in 2013-2014.)

A guy from Sherbrooke with whom I have a little joint venture bought several condos in Miami Beach a few years ago, back when the market was barely starting to pick up again. In retrospect, it was a very good move, which few Canadian real estate investments outside Vancouver could have matched for that timeframe.

But it can't continue growing like that -- the time to get out will have to come pretty soon if it does. Just like Vancouver.

[lio45]

Originally Posted by ssiguy

While certainly SF, Sydney, and L.A. have seen Chinese money flow into the real estate market, their impact has not been near as great as in Vancouver.

Syd/SF/LA are all world class cities with strong and diverse economies. They are high wage cities with large head offices, major manufacturing, and centers of finance. Vancouver is none of those things.

I'm pretty sure Sydney is much closer to Van than to SF in these affordability metrics, from what I've heard.

[lio45]

Originally Posted by someone123

What happens to the $3.2M shacks that are in the middle of being flipped?

I wonder if we can at least all agree in here (even the "deniers") that those $3.2M shacks would currently never be worth anywhere near $3.2M without the existence of that massive pipeline of cash flowing from mainland China into Vancouver?

Any new development (whether in Canada or China) or any new geopolitical factor shuts down or reduces drastically the flow of that pipeline, the Van market instantly collapses. It's very fragile...

[someone123]

Originally Posted by Drybrain

The single-family market is clearly beyond all reason, but even condos, as of 2015, were averaging nearly half a million—a full $100,000 higher than Toronto, itself under fire for affordabilty, and in a city with lower average incomes.

I have never found the Vancouver-Toronto comparisons all that convincing. They are two very different cities, thousands of kilometres apart. In the US I'm not sure anybody would think anything of, say, Portland OR being pricier than Chicago.

Beyond this I think it's natural for Vancouver to have somewhat pricey real estate. It's the only large-ish, well-connected gateway city in Canada with a nice coastal setting and passable climate. Because of the mountains and water it also does have less available land than many other cities. But I think that premium was already included in the price of real estate here back in 2000 or so. It doesn't explain more than a small portion of the increases in recent years.

[Coldrsx]

Edmonton housing prices remain steady despite economic downturn.

http://edmontonjournal.com/business/real...es-hold-steady-despite-economic-downturn

[whatnext]

LOL don't look to the crackdown on dirty money in China to lead to any meaningful slowing of cash flowing into Canada, when the Panama Papers have just revealed China's president and other top leaders are linked to setting up offshore companies to move money around.
http://www.bbc.co.uk/news/world-asia-35962326

Just another sign the corrupt kleptocracy in Red China leads to nothing good.

[kwoldtimer]

Originally Posted by whatnext

LOL don't look to the crackdown on dirty money in China to lead to any meaningful slowing of cash flowing into Canada, when the Panama Papers have just revealed China's president and other top leaders are linked to setting up offshore companies to move money around.
http://www.bbc.co.uk/news/world-asia-35962326

Just another sign the corrupt kleptocracy in Red China leads to nothing good.

Just because The People's Apparatchiks move dirty money offshore doesn't mean that Canada has to allow it to be spent here.

[cornholio]

Well looks like Vancouver home sales hit a all-time record in March with over 5,000 sales.
http://www.huffingtonpost.ca/2016/04/04/vancouver-real-estate-sales_n_9612396.html
I believe it. Hopefully this leads to the market seizing up at some point. Its gotta happen sooner or later. Panic buying and selling could be a good sign for that. I don't know. Its messed up. And its not jut Vancouver but Fraser Valley is crazy too and I know for a fact Sunshine Coast set records so the craziness is spilling out of metro Vancouver to nearby regions. It cant last. I want to see the breaking point...Also wish I timed this thing better, I did not see this coming especially when growth is slowing. I know the saying that markets before imploding tend to be irrational, I would say what we are seeing right now is pretty irrational. At this rate if the wheels don't fall of this year expect to see double digit increases in 2016 again (on million dollar properties that is 6 figure increases). This cant possibly end well.

[crazycrazydoesdoes]

Hey guys I'm looking to see if there are any colour coded maps of Hamilton (or Toronto) that indicate average house prices, say by census tract. Might help in my research for buying rental property. Thanks!

[lio45]

Originally Posted by crazycrazydoesdoes

Hey guys I'm looking to see if there are any colour coded maps of Hamilton (or Toronto) that indicate average house prices, say by census tract. Might help in my research for buying rental property. Thanks!

IMO, if you need that then you should probably pass on that market and stick with a city you know. (Or, if you really want to invest there, then wait until you know that market before doing so.)

[koops65]

"First-time homebuyers looking to enter the Toronto market are increasingly scooping up condos, even as competition drives the average price of a detached home up to $1.2 million.

Residential property prices in Toronto have shot up 12 per cent over last March, according to first-quarter numbers from the Toronto Real Estate Board. Those numbers were boosted by the ever-rising price of fully detached homes and condos in the city. The average detached price is now $1.17 million, while the average condo price is at $416,251, according to the report."

http://www.ctvnews.ca/business/condos-a-...ronto-detached-prices-hit-1-2m-1.2845790

I still don't see that much has changed after all these years. Prices continue to go up, and construction activity is still at a breakneck pace.

PS. Offshore wealth is NOT limited to the Chinese... people from all over the world engage in that activity...