Canada's 'housing bubble' deemed close to bursting

[someone123]

Originally Posted by Truenorth00

Real estate pumper math is always entertaining.

One very simple mathematical illustration of how price gains and losses by percentage can be misleading. If prices go up by 50%, then go down by 50%, where do they end up?

Start - Price is $1M
Go up 50% (of $1M) - Price is $1.5M
Go down 50% (of $1.5M) - Price is $0.75M

Final outcome is -25% of baseline.

[Truenorth00]

I am going to show you in three charts why there will be a crash and why it will be spectacular. (Great to have friends with access to a Bloomberg)

1) Canada, UK, US. Debt vs. disposable income.




2) US Household Debt as a % of GDP.




3) Canada Household Debt as a % of GDP

[wave46]

I'd be curious what the servicing cost of the average Canadian debt is.

A lot of the accumulation of debt has been financed by really low interest rates. I mean, mortgages are at 3% and new cars are practically interest-free. Which means (in theory) that debt should be plateauing, since interest rates have nowhere lower to go now.

What worries me in Canada isn't the people who are 0 to ~200% in debt - a family with an income of $100,000/year with a $200,000 mortgage and no other debt is sitting pretty.

It's the extreme cases. If one is 400-500+% in debt on the cusp of losing it all, they're the cases who are going to have to be foreclosed on. If one bought in the most expensive cities in the last few years and they lose their jobs, they're hosed.

It's also what kind of debt and the interest rates of that debt. Someone who has a $20k car note is in a very much less worse spot than someone with $20k of credit card debt.

Averages obscure a lot of the real picture. Who has this debt? What's the rate on that debt? What's the asset coverage of that debt? My parents haven't had debt since the late 1990s, so they hugely drag down any average. People who own homes outright aren't affected by price crashes, unless they were betting their retirement on it.

I need more information before I make any Nostradamus-like predictions.

If I had to make a (probably wrong) guess, I'd wager that there's a big peak for indebted younger people in their 30s to early 40s in certain regions of the country. It would taper off as the average age increased. Those are the people who are going to get hosed - they've a big mortgage with not much space for interest rates to decline, student loans, new car, raising a family, etc. etc. etc. They'll be the ones hit really badly if they're forced into liquidating or bankruptcy.

[Truenorth00]

Originally Posted by wave46

I'd be curious what the servicing cost of the average Canadian debt is.
.

Buddy pulled another chart for me. Mortgage debt to income. Here's what's interesting, disposable incomes have been rising, so debt as % of income has been going down. But, in a recession the denominator gets smaller really quick.

[wave46]

Originally Posted by Truenorth00

Buddy pulled another chart for me. Mortgage debt to income. Here's what's interesting, disposable incomes have been rising, so debt as % of income has been going down. But, in a recession the denominator gets smaller really quick.

I still would be reluctant to draw any conclusions from this data.

It's like COVID-19 and fatality rates - you need a deeper dive to draw proper conclusions and how to best approach it.

That being said, there are worrying trends.

[CityTech]

So today I put in an offer on a condo. Its a very good deal - a good $40k lower than something like it would have cost a year ago (which I confirmed with comparable sale data). And with only an hour to go for the deadline to submit offers, only two other offers have been received (besides mine). The realtor was shocked - a property like that would "normally" receive a dozen offers and sell for $40k over asking in a bidding war.

[WarrenC12]

Originally Posted by Truenorth00

I am going to show you in three charts why there will be a crash and why it will be spectacular. (Great to have friends with access to a Bloomberg)

1) Canada, UK, US. Debt vs. disposable income.




2) US Household Debt as a % of GDP.




3) Canada Household Debt as a % of GDP

Can't see any of these.

[misher]

I think the perception that landlords are "rich" is going to lead to a lot of trouble per the American article below. Its completely wrong to assume that landlords can afford to bailout 100% of tenants rent, especially when margins tend to be low. We've increasingly pushed more burdens onto homeowners while seeing tenants as a class to be shielded, but many tenants are richer than homeowners and are happy to abuse the power they gain even if they can easily afford to pay. A progressive system differs by income or wealth not homeownership status.

Nobody’s bailing out Connecticut landlord Maribeth Shields.

More than half of the tenants in the 27 low-income apartments she owns in the city of West Haven and its vicinity aren’t paying and there’s nothing she can do about it. The state banned evictions until July and allowed tenants hurt by the pandemic to defer with no penalty.

But Shields can’t pay, either. Her profit last year came to only $24,000, and now she’s behind on $1.2 million in mortgages. Like millions of other U.S. landlords, who owe lenders more than $1 trillion combined, her fate is tied to renters now urgently focused on their own self-preservation...

“My tenants think I’m rich,” Shields says. “They have better cars than me, better nails, and better tax refunds.”

The next housing crisis is here, and this time, it’s about rentals. Across the U.S., landlords and tenants are wrangling over next month’s rent while an approaching avalanche of evictions threatens to bury them both...

“That caricature of the white landlord in the suit who has suitcases of money—in our case, every one of us has a day job”

Many landlords operate on thin margins, typically 9 cents for every $1, according to the NAA, and have nowhere to turn for help if their rental income dries up. Most don’t qualify for federal mortgage forbearance, because only about a third have mortgages backed by Fannie Mae, Freddie Mac, or another federal agency. The Small Business Administration is bolstering companies that keep workers employed, but many property owners don’t have a payroll. Shields, who tours the property with a lawn mower crammed into the back of her Toyota Prius, handles most everything herself and hires contractors for the rest.

https://www.bloomberg.com/news/articles/...t-wiped-out-wall-street-wins-not-renters

[WarrenC12]

Originally Posted by misher

I think the perception that landlords are "rich" is going to lead to a lot of trouble per the American article below. Its completely wrong to assume that landlords can afford to bailout 100% of tenants rent, especially when margins tend to be low. We've increasingly pushed more burdens onto homeowners while seeing tenants as a class to be shielded, but many tenants are richer than homeowners and are happy to abuse the power they gain even if they can easily afford to pay. A progressive system differs by income or wealth not homeownership status.

She owns 27 units...

If she's not "rich", whatever that means, she vastly overextended herself. Guess what happens in a sudden recession?

This is the exact debt problem you have been talking about, in action.

[someone123]

Originally Posted by WarrenC12

She owns 27 units...

If she's not "rich", whatever that means, she vastly overextended herself. Guess what happens in a sudden recession?

Crazy leveraged investment gambling, a story older than the hills. Had the property values gone up she would have won big, but she didn't, so she is broke.

Are we going to start offering bailouts for people who make the wrong roulette bet and lose $100,000? How can we even have a system like that? It rewards risky gambling instead of constructive work.

[misher]

Originally Posted by someone123

Crazy leveraged investment gambling, a story older than the hills. Had the property values gone up she would have won big, but she didn't, so she is broke.

Are we going to start offering bailouts for people who make the wrong roulette bet and lose $100,000? How can we even have a system like that? It rewards risky gambling instead of constructive work.

Why would the tenants deserve a bailout more than the Owner?

They don't have to pay rent but the Owner has to keep paying property taxes for services to the tenants, for their electricity, water, etc?

I'm not saying 100%, but at least the costs on the Owner from the government should be delayed just like rent is.

The government is saying tenants don't have to pay rent. But its being two faced and saying that property taxes (which are very similar to rent) have to be paid. Why isn't the government, the biggest landlord, also chipping in?

And why does the landlord need to be able to support 26 tenants if they stop paying rent but the tenants don't need to be able to support themselves? Why does being a tenant give you more rights? Especially when the tenant may be richer than the landlord? Is this progressive or regressive?

[Truenorth00]

Originally Posted by misher

Why would the tenants deserve a bailout more than the Owner?

If the tenants don't get bailed out, she doesn't either. Simple as that.

If she "deserves" a bailout than so does every single person who saw the value of their stock portfolio drop and dividends cut. I'd like to know why some people keep advocating for one asset class to be given preferential treatment over investments? How exactly does this help the efficient allocation of capital?

[WarrenC12]

Originally Posted by someone123

Crazy leveraged investment gambling, a story older than the hills. Had the property values gone up she would have won big, but she didn't, so she is broke.

Are we going to start offering bailouts for people who make the wrong roulette bet and lose $100,000? How can we even have a system like that? It rewards risky gambling instead of constructive work.

Exactly. The leveraging of real estate is huge, since it's normally a pretty stable, low risk investment. Well, sometimes there's a margin call!

[WarrenC12]

Originally Posted by Truenorth00

If the tenants don't get bailed out, she doesn't either. Simple as that.

If she "deserves" a bailout than so does every single person who saw the value of their stock portfolio drop and dividends cut. I'd like to know why some people keep advocating for one asset class to be given preferential treatment over investments? How exactly does this help the efficient allocation of capital?

Exactly.

By bailing out nobody (but telling tenants they don't have to pay) the government does risk the fallout of landlords defaulting, banks taking the property, maybe evicting people, and so on. BC gave tenants some money and said they must pay rent. Seems like a reasonable compromise.

[MolsonExport]

Originally Posted by misher

I think the perception that landlords are "rich" is going to lead to a lot of trouble per the American article below. Its completely wrong to assume that landlords can afford to bailout 100% of tenants rent, especially when margins tend to be low. We've increasingly pushed more burdens onto homeowners while seeing tenants as a class to be shielded, but many tenants are richer than homeowners and are happy to abuse the power they gain even if they can easily afford to pay. A progressive system differs by income or wealth not homeownership status.



https://www.bloomberg.com/news/articles/...t-wiped-out-wall-street-wins-not-renters

Somewhere in the distant background is the sound of the world's tiniest violin.

My investments went to hell, as everyone else's did. Do I deserve compensation? (No).

[esquire]

Originally Posted by someone123

Crazy leveraged investment gambling, a story older than the hills. Had the property values gone up she would have won big, but she didn't, so she is broke.

Are we going to start offering bailouts for people who make the wrong roulette bet and lose $100,000? How can we even have a system like that? It rewards risky gambling instead of constructive work.

I didn't see the woman in the news story asking to be compensated for diminished property values. Her problem is with cash flows that have disappeared as a result of government decisions to remove the only real tool at her disposal to deal with non-payors, i.e. eviction.

Would you think it is reasonable for government to seize a place of business for its own purposes without compensation to the owner? Because the scenario at hand isn't much different than that.

As I've said before, it's fine if the government wants to temporarily turn private property into de facto public housing. But I don't see why a landlord shouldn't be compensated for that.

[misher]

Originally Posted by esquire

I didn't see the woman in the news story asking to be compensated for diminished property values. Her problem is with cash flows that have disappeared as a result of government decisions to remove the only real tool at her disposal to deal with non-payors, i.e. eviction.

Would you think it is reasonable for government to seize a place of business for its own purposes without compensation to the owner? Because the scenario at hand isn't much different than that.

As I've said before, it's fine if the government wants to temporarily turn private property into de facto public housing. But I don't see why a landlord shouldn't be compensated for that.

And as usual there's no requirement that the tenants be suffering. A good portion of tenants not paying rent still have their jobs or are making good money.

Thats not progressive.

Originally Posted by Truenorth00

If the tenants don't get bailed out, she doesn't either. Simple as that.

If she "deserves" a bailout than so does every single person who saw the value of their stock portfolio drop and dividends cut. I'd like to know why some people keep advocating for one asset class to be given preferential treatment over investments? How exactly does this help the efficient allocation of capital?

The tenants are.....so I'm glad you agree with me.

[someone123]

Originally Posted by esquire

I didn't see the woman in the news story asking to be compensated for diminished property values. Her problem is with cash flows that have disappeared as a result of government decisions to remove the only real tool at her disposal to deal with non-payors, i.e. eviction.

Would you think it is reasonable for government to seize a place of business for its own purposes without compensation to the owner? Because the scenario at hand isn't much different than that.

I don't think these scenarios are comparable. It's my impression that rent is only being deferred. And many people are still paying rent. It's possible for tenants to fail to pay their rent under many other scenarios. It's always a risk.

I would be okay with some kind of government loan being extended to landlords in the name of fairness since the government intervened. But that doesn't change the bottom line of high risk highly leveraged investing where you can't handle 1-4 months of semi-interrupted cash flow.

[Truenorth00]

Originally Posted by esquire

I didn't see the woman in the news story asking to be compensated for diminished property values. Her problem is with cash flows that have disappeared as a result of government decisions to remove the only real tool at her disposal to deal with non-payors, i.e. eviction.

Public health interest > her economic interest

And it's not just a pandemic. Let's say there was just a sudden market crash and her tenants could not or would not pay. She'd be in same boat and still have months of hearings to boot them.

That said we give people EI, so they can actually pay rent. And we need to have a system to ensure that people aren't stiffing landlords just because they can. And all that said, non-payment of rent is part of the risk of being a landlord. And why they should screen tenants properly. That risk is no different than mall owners not getting rents from tenant stores or bondholders facing defaults. This is what happens in recessions. And it's part of what you accept as a real estate investor.

More sophisticated investors understand the risk of leverage and hedge or limit their leveraged risks. Amateurs go bankrupt every recession. No different this time. This is just the market teaching those who got a bit too greedy some very important lessons about risk and leverage.

[ssiguy]

Renters are NOT getting bailout and are not receiving a nickel of government assistance anymore than owners are. These non-eviction decrees are not, in anyway shape or form, a rent subsidy but rather just a deferment. If the tenants can't pay all or most of their rent they cannot be evicted due to our unique circumstances but they still owe ALL of the money to the landlord.

Yes there will be people who take advantage of the situation but is no different than landlords who refuse to give back deposits when the tenants leave for the smallest of details, don't properly maintain the apt, try to soar the rents due s small improvement of the apt, or toss the tenants out due to "renovictions". Unfortunately you will always have unscrupulous landlords and tenants.