Canada's 'housing bubble' deemed close to bursting

[geotag277]

Originally Posted by Klazu

I visited Ireland just before the crash I couldn't believe the number of new McMansions everywhere in the coutry. Even the rural countryside had huge new houses everywhere. It felt very strange at the time, but everything was explained just a year later...

What I am currently seeing here in Vancouver seems exactly the same type of phenomenon (just by different drivers). End to this crazyness is inevitable and it can't be far. Good thing I am living a debtless life.

The housing bubble in Ireland peaked at average prices at around 350k euros. The market in Vancouver is fundamentally different than that, especially regarding detached housing prices. Ireland's McMansions were being developed on green field land. That isn't the case in Vancouver, where people are spending millions for the land and just building a house on top of it. Fundamentally difference situation. Ireland's banks were also hit hard by the 2009 recession.

Dublin is also on track to erase all the losses from that recession. I wonder in a few years, if perhaps prices increase beyond the "bubble" peak, you will instead change your mind about Ireland and reframe the recession as an opportunity to buy there instead of a "crash"? Kind of like San Francisco property prices are now above where they were at the peak of the US market housing crash - now that dip is looking more like a missed opportunity to buy instead of a housing catastrophe.

Regardless, even if you don't want to invest in housing, why brag about being debt free? As long as you are gainfully employed, you are short changing your own returns by not leveraging your earning potential into some kind of investment vehicle - especially these days when interest rates are at rock bottom prices. When interest rates are high, cash is king. When interest rates are low, debt financing just makes sense. And it doesn't have to be housing.

[ssiguy]

The housing bubble in Ireland has nothing in common with the situation in Vancouver.

The Irish economy had been booming for over 20 years, remember the "Celtic Tiger"? Yes, there was certainly some speculation in the housing market but it was built on the fundamentals of a strong economy and soaring wages.

The real estate market in Vancouver is completely detached from the local economic fundamentals of wages, economic, and population growth. Vancouver is only growing by 1.1% per year. Its a decent and manageable growth rate but not at all booming like Calgary and Edmonton were.

In fact the worse the Canadian economy gets, the faster prices will rise in Vancouver because a depressed economy leads to a lower valued dollar giving the Chinese a built in discount.

[whatnext]

Originally Posted by ssiguy

The housing bubble in Ireland has nothing in common with the situation in Vancouver.

The Irish economy had been booming for over 20 years, remember the "Celtic Tiger"? Yes, there was certainly some speculation in the housing market but it was built on the fundamentals of a strong economy and soaring wages.

The real estate market in Vancouver is completely detached from the local economic fundamentals of wages, economic, and population growth. Vancouver is only growing by 1.1% per year. Its a decent and manageable growth rate but not at all booming like Calgary and Edmonton were.

In fact the worse the Canadian economy gets, the faster prices will rise in Vancouver because a depressed economy leads to a lower valued dollar giving the Chinese a built in discount.

Maybe, maybe not. Vancouver has many similarities to Ireland's and Australia's bubble:

When you can get better deals on vacant land in Malibu, California, two kilometres from the beach with a view of the Pacific Ocean than you can in Alice Springs, there’s something very wrong, he argues.

Between 1996 and 2014, housing prices and mortgage debt outpaced economic fundamentals like inflation, GDP, rents and incomes. “When you look at it today, between end of 1996 and 2014, household debt outpaced inflation at a rate of 10 to one,” he said.
He points out that new home buyers in Sydney will spend around six-and-a-half years worth of savings, assuming they saved 30 per cent of their income, for a 20 per cent deposit to buy a median-priced home.

Of 16 English-speaking cities, only residents of Vancouver spend more time saving for a deposit than in Sydney. Homebuyers in Melbourne, Adelaide, Perth and Brisbane will spend 5.78, 4.30, 4.09 and 3.97 years respectively.
The $1.9 trillion mountain of household debt in Australia has been fuelled by the “Irish-style wealth creation model” of home buyers and investors borrowing heavily from the banks to flip houses for the next buyer, who takes out even greater debt to speculate. (bold mine)


http://www.news.com.au/finance/real-esta...s-story/4fe05fed1c277a096df33242a26caf6c

[geotag277]

Mortgage servicing costs are a huge problem in Vancouver. People are buying properties they can't afford. Back in 2013 BMO said Vancouver residents were averaging more than 50% of their income towards mortgage servicing costs:

https://newsroom.bmo.com/press-releases/...ws-varying-de-tsx-bmo-201312050915919001

Instead of spending 3 years debating what should be done, they should have been trying everything. Re-zoning, building density, knocking down SFH, proposing provincial capital controls on foreign investment, etc.

It really is a situation where they need to be doing everything at once all the time. Instead nothing is happening.

If I were a Vancouver resident I would be extremely frustrated as well. There are ways out of this which protect current home owners and provide more affordable options for new entrants to the market. It is inexcusable.

[someone123]

Originally Posted by geotag277

If I were a Vancouver resident I would be extremely frustrated as well. There are ways out of this which protect current home owners and provide more affordable options for new entrants to the market. It is inexcusable.

The idea of "protecting" homeowners is pretty absurd when you take a step back and look at it. It would be one thing to insist that the government should protect the rights of owners to enjoy their property (through the legal system), but somehow a lot of people have come to believe that governments have a duty to prop up the value of this particular type of market commodity. That is a zero-sum game that makes winners out of the people who are already the richest in this city. Basically the wealthiest and most privileged people are using the political system to ensure that housing will never be affordable.

It is politically untenable but in a fair world, instead of talking about how important high real estate prices are people like Christy Clark should probably be reminding the public that prices can go up and down and that they should buy housing based on their personal needs and priorities, not because real estate is a foolproof moneymaking scheme backed by the provincial government. But we literally have governments saying that they will intervene to keep prices up, so who can blame people for piling into real estate?

On top of this I agree that there needs to be more multi-unit construction, better multi-unit construction that is more comparable to detached houses (if that were true and the housing market weren't dominated by people speculatively buying up land instead of looking for housing I would expect that to put stronger downward pressure on detached homes), better transportation infrastructure, and there should be protections that prevent the permanent sell-off of land to people who don't really live here. However, I think it's way too late for the housing market to be painlessly corrected through these sorts of efforts. I think that we will have more years of affordability problems and hollowing out followed sometime in the difficult-to-predict future by protracted deflation and some personal financial disasters.

[geotag277]

Apparently I struck a nerve with the word "protecting", which is perhaps not the right term. What I meant is that there are policy decisions that can be made that compromise between the balance of making current home owners happy (perhaps less happy) and making new entrants more happy. It's called compromise.

There are extremes. For example, ex-appropriating all the single family detached housing land and building multi-family on top would not make existing home owners happy. The other extreme is essentially the in-action towards density and turning a blind eye to unaffordable basic land values which form the basis of the market, which applies maximum value add to current home owners but alienates new home owners.

The point is ultimately the city needs to be doing everything. Increasing density and limiting this situation where the average mortgage servicing costs are above 50% - which is not a healthy financial picture for the city at large. While banks are the ones who ultimately take on the risk, the city needs to be developing sustainable housing solutions.

[someone123]

Originally Posted by geotag277

Apparently I struck a nerve with the word "protecting", which is perhaps not the right term. What I meant is that there are policy decisions that can be made that compromise between the balance of making current home owners happy (perhaps less happy) and making new entrants more happy. It's called compromise.

There are extremes. For example, ex-appropriating all the single family detached housing land and building multi-family on top would not make existing home owners happy. The other extreme is essentially the in-action towards density and turning a blind eye to unaffordable basic land values which form the basis of the market, which applies maximum value add to current home owners but alienates new home owners.

The debate has been framed such that nobody ever seriously contemplates anything remotely near the pro-new-entrant scenario that you've proposed. But maybe it would be worth bringing it up to make it clear how slanted the current situation is.

The City of Vancouver has literally banned multi-unit residential construction on most of the land there, and for years the province and federal government made it easy for foreign real estate speculators/investors to buy up and flip land. The province has also failed to invest in the type of urban transportation infrastructure that would open up new and desirable areas to significant amounts of development.

[lio45]

Originally Posted by geotag277

Regardless, even if you don't want to invest in housing, why brag about being debt free? As long as you are gainfully employed, you are short changing your own returns by not leveraging your earning potential into some kind of investment vehicle - especially these days when interest rates are at rock bottom prices. When interest rates are high, cash is king. When interest rates are low, debt financing just makes sense. And it doesn't have to be housing.

Completely agree, it makes no sense to be debt-free if you have assets you can leverage. Even at more historically normal interest rates, it still makes sense to leverage as long as you don't do anything too risky.

I currently have in the low 7 figures in debt, wouldn't have gotten anywhere without some borrowing...

[someone123]

Originally Posted by lio45

Completely agree, it makes no sense to be debt-free if you have assets you can leverage. Even at more historically normal interest rates, it still makes sense to leverage as long as you don't do anything too risky.

Doesn't this advice assume a few things though?

- You can tell what is or isn't risky, and you have the means to ride out rough patches without going bankrupt (I'm guessing you hold valuable assets compared to that 7 figure debt; if not, have you really gotten somewhere yet?). History demonstrates that most people don't have reliable special information (some do well randomly, but they can't repeat that over and over), and the riskiness is generally speaking priced into the investments.
- The opportunity cost of putting your labour into something else isn't that high. I bet your good property investments took some work.
- You can get significant amounts of credit with interest lower than the reliable returns you will get.

I see how it can make sense to take on debt even if you have assets (i.e. don't always randomly sell stuff off to avoid debt at all costs) but for most people I suspect this is niche advice compared to the bread and butter "don't spend too much". I don't think the typical Vancouverite for example would be better off if only they'd leverage themselves a bit further.

Most people who say that debt is bad and being debt-free is good are mostly thinking about consumer debt, which I think really is bad. The norm here is for people to spend beyond their means and to suffer from a lower long-term living standard than they otherwise would have been able to afford as a result.

[geotag277]

It assumes you can educate yourself on investments. That's pretty much it. It isn't black voodoo magic, it is understanding the basics of acquiring a portfolio of appreciating assets which yield a rate of return. For many people the straightforward path to leveraging large sums of money is property, but there are other options and even line of credit interest rates won't be too far off mortgage servicing costs.

Even a cursory look at corporate bonds, one of the lamest safest least risky investment vehicles you can leverage, shows arbitrage opportunities against current interest rates.

Being debt free in this environment is not a badge of honour, it's a mark of an inexperienced investor.

[someone123]

Originally Posted by geotag277

For many people the straightforward path to leveraging large sums of money is property.

Specifically the property they live in, because they save the cost of rent somewhere else, and because they derive other benefits from home ownership. This assumes you can live in an area with a sane property market that will generate long-term returns, something that was untrue for an entire decade across the entirety of the United States, on average.

Even a cursory look at corporate bonds, one of the lamest safest least risky investment vehicles you can leverage, shows arbitrage opportunities against current interest rates.

What's an example? It would have to make sense given:

- An extra premium for the risk that the company will default.
- An extra premium for risks you have to take on related to changing interest rates or inflation (wouldn't it 🞵🞵🞵🞵 if you were heavily leveraged and it turned out you got negative real returns? this has happened to generations of bond holders).
- An extra premium to cover transactions costs.

[geotag277]

This isn't the right platform to spoon fed investment advice. There are three main avenues for common investment:

- stocks
- bonds
- property (not necessarily where you live, see: REIT)

Furthermore there are private businesses, partnerships, and other vehicles that can be used to leverage debt into yields.

Yes, any of these things are "risky", and that is an important consideration, but it is also "risky" to throw away the opportunity cost of holding on to cash in a low interest rate environment, especially when interest rates are so low that depending on the rate you get, inflation could be higher. You are losing equity by holding on to that cash.

So yes, education is a factor. Risk is a factor. Being debt free in this environment, is in general, a sign of an inexperienced investor who is sitting on capital that is losing money and wasting earning potential by ignoring opportunity costs.

Anyways, back to real estate.

[cornholio]

Originally Posted by Bcasey25raptor

If the real estate market collapses in BC, what would be the economic fallout both provincially and Federally?

I posted this in the Vancouver section.

Relevant to the topic. Real-estate is 25% of BC's GDP. 18% real-estate and 7% construction. Alberta's oil sector at its height was 27% of Alberta's GDP.
https://www.biv.com/article/2016/1/b...ay-economists/
We talk about growth in BC but much of that growth is actually real estate, and seemingly as a result of a massive ever increasing speculative bubble.

Just Metro Vancouver's residential resales (not new construction, and only in Metro Vancouver) are worth MORE to BC's economy then BC's entire forestry, mining and natural gas industries, COMBINED. And the dollar volume is up 41% from last year to a estimated $38.6 billion.

This is one reason the government is rightfully scared to do anything, they are hooked and they actually can't do anything without risking economic collapse. The real-estate bubble finally collapsing in BC would lead to a BC recession like never before.
https://www.biv.com/article/2015/12/...gest-industry/

When you look at the numbers they are actually kind of scary. Amazing that we allowed things to get this far. Like I always say, the ending wont be a happy one. When ever that comes.

The government is afraid to interfere and they will let the market implode under its own weight. Not if but when. When this happen the job loses and lost economic activity to the province would be huge and I would expect a Alberta style recession or worse.

Keep in mind the above numbers are from 2015, things have accelerated since then. Sales have been hitting all time sales records in South West BC (not just Metro Vancouver) and panic buying is in full swing, which for anyone who wants to see the unavoidable end come sooner rather then latter is a good sign.




Somewhat common sense I would think, when one looks at a bubble from the outside but anyways this was a very good article that explains speculative bubbles in layman terms. http://www.macleans.ca/economy/economicanalysis/the-anatomy-of-a-housing-bubble/

[ssiguy]

The family was having dinner the other night and my nephew was damn pissed off. His dislike of the nouveau riche Chinese was palpable. Turns out in the last 4 months,, 3 more of his high school friends had left the province and he said all of them due to the cost of living. He gets tired of the politicians trying to "study" the matter when everyone knows it's due to Chinese money laundering.

He said his friends, like himself, feel both angry and demoralized knowing that the province and city don't care about them or their future but are so exclusively fixated on bringing in foreign money. He said that he and his friends also greatly resent not being able to get into university but they allow in thousands of Chinese students who can buy their way in.

He also dislikes what the situation is doing to himself on a personal level. He is the nicest kid around and abhors any form of racism, sexism, and homophobia but he admits the current situation is effecting his views of the Chinese. He said when he sees the Chinese drive their expensive cars he automatically assumes they bought it with dirty money. When he sees the Chinese he assumes they are xenophobic, homophobic, arrogant, and willing to break any law to bring in the almighty dollar.

He says amongst his friends talking about the Chinese in a derogatory way has become somewhat socially acceptable because the Chinese who make all the news in Vancouver are the money launderers who use Vancouver as a place to park your money for a quick get away. He openly admits that when he thinks of the Chinese in Vancouver, he doesn't think of the hardworking people who have been around for decades but automatically thinks of the nouveau riche money launderers.

He actually summed things up quite nicely.........."the Chinese, like their money, have become a dirty word".

[geotag277]

Originally Posted by cornholio

The government is afraid to interfere and they will let the market implode under its own weight.

I don't buy that the government is afraid to interfere due to some pending implosion, as if simply by wiggling their pinky finger the entire market would collapse. I think it's just a case of politicians being politicians, in that the general population in Vancouver cannot agree what exactly to do, and it creates an environment where the political capital and willpower is just not there.

You clearly have a case where more density everywhere is needed, yet you have guys like whatnext railing against the entire concept of removing single family housing stock because he thinks everyone should live in his basement suite and the mere thought of condo/apartment/townhome living is "second class".

Then you have guys like whatnext, who complain about foreign investment driving up prices, and yet can't seem to stop talking about that rude Chinese guy down the street who happened to raid the community garden.

It's a politically schizophrenic atmosphere that lends itself directly to inaction. Really, residents of Vancouver should be getting behind every idea - higher density, foreign capital restrictions, affordable housing, basement suites, rezoning - everything should be on the table in all areas. It needs to be a united front.

As it stands, there is zero political fallout from ignoring the problem - as will be proven in the next election.

[dleung]

Originally Posted by geotag277

You clearly have a case where more density everywhere is needed, yet you have guys like whatnext railing against the entire concept of removing single family housing stock because he thinks everyone should live in his basement suite and the mere thought of condo/apartment/townhome living is "second class".

Then you have guys like whatnext, who complain about foreign investment driving up prices, and yet can't seem to stop talking about that rude Chinese guy down the street who happened to raid the community garden.

T'was me!

[casper]

Originally Posted by ssiguy

The family was having dinner the other night and my nephew was damn pissed off. His dislike of the nouveau riche Chinese was palpable. Turns out in the last 4 months,, 3 more of his high school friends had left the province and he said all of them due to the cost of living. He gets tired of the politicians trying to "study" the matter when everyone knows it's due to Chinese money laundering.

He said his friends, like himself, feel both angry and demoralized knowing that the province and city don't care about them or their future but are so exclusively fixated on bringing in foreign money. He said that he and his friends also greatly resent not being able to get into university but they allow in thousands of Chinese students who can buy their way in.

He also dislikes what the situation is doing to himself on a personal level. He is the nicest kid around and abhors any form of racism, sexism, and homophobia but he admits the current situation is effecting his views of the Chinese. He said when he sees the Chinese drive their expensive cars he automatically assumes they bought it with dirty money. When he sees the Chinese he assumes they are xenophobic, homophobic, arrogant, and willing to break any law to bring in the almighty dollar.

He says amongst his friends talking about the Chinese in a derogatory way has become somewhat socially acceptable because the Chinese who make all the news in Vancouver are the money launderers who use Vancouver as a place to park your money for a quick get away. He openly admits that when he thinks of the Chinese in Vancouver, he doesn't think of the hardworking people who have been around for decades but automatically thinks of the nouveau riche money launderers.

He actually summed things up quite nicely.........."the Chinese, like their money, have become a dirty word".

Wow.

The problem with all of these is how much of it is based in fact.

Money laundering is taking funds that were illegally obtained (e.g. theft, extortion etc.) and running through some legitimate looking transactions to make the money look legit.

Here is the problem....

All this money coming in from China is being brought in by individuals or business. Some it probably from illegal activities while some of it is legit. I don't think anyone (including the people responsible for policing it) have a clue how much is in each category.

The universities have a budget for local students and criteria for getting into programs. That is completely independent of any foreign students. Do universities waist a lot of money on non-academic stuff? Absolutely. That is the main reason the regional collages have always had cheaper tuition.

All these foreign students are paying their own way and then some. They are spending money in the local community. Here on Vancouver Island it is an important aspect of the economy that employs a lot of well paid individuals. People that otherwise would be out of a job. If you talk to a lot of these new PhD grads they find it challenging finding work after graduation. Not unique to Canada, the UK and the US institutions have a long history of international students.

[Xelebes]

Originally Posted by geotag277

This isn't the right platform to spoon fed investment advice. There are three main avenues for common investment:

- stocks
- bonds
- property (not necessarily where you live, see: REIT)

Furthermore there are private businesses, partnerships, and other vehicles that can be used to leverage debt into yields.

Yes, any of these things are "risky", and that is an important consideration, but it is also "risky" to throw away the opportunity cost of holding on to cash in a low interest rate environment, especially when interest rates are so low that depending on the rate you get, inflation could be higher. You are losing equity by holding on to that cash.

So yes, education is a factor. Risk is a factor. Being debt free in this environment, is in general, a sign of an inexperienced investor who is sitting on capital that is losing money and wasting earning potential by ignoring opportunity costs.

Anyways, back to real estate.

(Someone who works in finance here. . *ahem*)

You are missing the point of being "debt-free". "Debt-free" does not mean that you are sitting on cash. "Debt-free" means you have the option of leveraging your assets. Leveraging assets is only meaningful if you plan to do something more than what you are already doing with what you have. If you are getting as much utility out of your assets as you want, being debt-free is an enviable position.

[geotag277]

Originally Posted by casper

Money laundering is taking funds that were illegally obtained (e.g. theft, extortion etc.) and running through some legitimate looking transactions to make the money look legit.

The vast majority of people who refer to modern Chinese money laundering are in fact referring to the draconian capital flight law that says any Chinese citizen cannot move more than 10k of their own money abroad. Any one who does this is viewed as a money laundering criminal in the eyes of guys like whatnext.

Nevermind in the same breath they will also condemn the Chinese regime as being the most oppressive in history, this one tiny law kinda sorta works in their favour for their own political gain and so it is of the upmost importance that China (and Canada) properly enforce this draconian capital restriction.

Cognitive dissonance at it's finest.

[geotag277]

Originally Posted by Xelebes

If you are getting as much utility out of your assets as you want, being debt-free is an enviable position.

That seems disingenuous. At any given moment you want to optimize utility out of your assets. Your logic here is equivalent to turning down trading 10$ for 20$ simply because you are satisfied with your utility.