
Canada's Housing Bubble Will Burst - linkregister
https://www.bloomberg.com/view/articles/2017-06-21/canada-s-housing-bubble-will-burst
======
cletus
So I have two issues with this post.

1\. It needs to separate out Vancouver and the rest. Vancouver is its own
bubble of self-perpetuating nonsense propagated by Chinese money.

2\. The article states shares are better because companies can plow money back
into the business, which completely misses the point because price rises
aren't pure speculation. There is a HUGE labour cost in housing such that
housing prices track inflation (particularly wage inflation).

And that's the real value in property investment in periods like the 1970s
that saw really high inflation.

What's more land represents a largely non-renewable resource. Take Manhattan
as a fairly extreme example. They're not making more land to put things on.
Other cities like Chicago, LA and especially Atlanta can basically spread
forever. But even in those cities, inner city land is irreplaceable and
finite.

Now I'm not saying Canada isn't in a bubble or that bubble won't burst. But
the author takes a naive stock-centric view of things.

~~~
alacombe
> It needs to separate out Vancouver and the rest. Vancouver is its own bubble
> of self-perpetuating nonsense propagated by Chinese money.

Not just Chinese money, see my comment below.

To summarize: 1) best climate for Canada, 2) bounded north, west, and south,
3) land already developed, 4) high immigration

~~~
aianus
The climate in Vancouver is horrific. Rain and clouds for months on end with
no respite.

~~~
verelo
Seriously, it's like Seattle but without the jobs.

~~~
pinewurst
And the jobs there don't pay very well. The food is wonderful though, better
than Seattle IMHO and it's a lovely city in general.

~~~
verelo
Yeah, in my experience most of the US has shitty food. Take NY as an example,
if you want an expensive meal you can get great food, but if you want a quick
and healthy lunch you find yourself struggling.

~~~
linkregister
Almost any local New Yorker will know where to get a quick, healthy, $7-10
lunch.

Someone in town for the day might have to open Yelp:
[https://www.yelp.com/search?find_desc=Cheap+Fast+Lunch&find_...](https://www.yelp.com/search?find_desc=Cheap+Fast+Lunch&find_loc=Chelsea,+Manhattan,+NY)

~~~
verelo
I obviously need new friends.

------
bryanlarsen
The question isn't if it will, the question is when & how.

It's very easy to predict a bubble popping, it's a lot more difficult to
predict when. "The market can stay irrational longer than you can remain
solvent" \- Keynes

And the other question is how. Sometimes bubbles deflate slowly, for example
in our market house prices in $ terms were basically flat between the late 80s
and the late 90s. That's a definite decrease in real dollars, but nothing like
the chaos that the same decrease would cause happening instantaneously.

The third question is whether just Toronto & Vancouver will pop, or whether it
will affect the rest of the country.

------
cm2187
One thing that should scare anyone holding expensive assets (stocks, real
estate) is that even though US interest rates have started to rise, the size
of the federal reserve balance sheet hasn't even started to reduce [1].
Quantitative easing is still turned to 11. When the Fed starts pulling
liquidity out of the markets (which they are discussing starting to do later
this year), I suspect a lots of these asset classes are going to deflate, not
just in Canada.

[1]
[https://www.federalreserve.gov/monetarypolicy/bst_recenttren...](https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

------
mabbo
While yes, there is a serious bubble going on here in Toronto, it's also
important to note the complex causes.

Canada has something like 240,000 immigrants per year, and half of them come
to the Toronto region- or 10,000 people per month. Then you add in the
thousands of Canadians who are moving to the city as small towns and suburbs
stop being attractive. There's a greatly increased demand for housing here.

But supply is tricky. Toronto is full, land-usage-wise. There's something like
two small parcels left (Downsview Park and I forget the other place) where
there is honest-to-goodness undeveloped land. Apart from that, all new homes
are in the suburb cities around Toronto.

This means all new housing supply in the city is from building up and other
densification- which is moving too slowly. The suburb cities are also growing
like mad, but the infrastructure to support all that growth isn't there,
causing smaller price booms nearby any Go-train station.

But that's just the start. High demand, low supply caused housing prices to
rise- leading to speculators buying second homes to flip, which shrinks the
supply. It leads to people buying homes they don't want, at prices they can
barely afford, because they plan to sell it in 3 years for a profit. The
bubble inflates.

So why pop now? Ontario passed laws saying foreign buyers have to pay an
additional 15% tax. And foreign buyers were a large chunk of sales. The latest
numbers say sales are down something like 50% or more. Prices will start to
sink soon.

When the Bank of Canada finally raises interest rates to prevent total
catastrophe on the exchange rate, things will really get wild. In Canada, most
mortgages have to be renegotiated every few years- how many of them are going
to have homes worth well less than their mortgage with rates so high they
can't afford to make payments? That leads to a 2008-USA style pop.

It's going to be a bumpy ride...

Edit: also worth noting, this is just Toronto. Vancouver has some similar
dynamics. The rest of Canada may not have a housing bubble at all- they'll
just have to deal with the economic fallout of this mess.

~~~
asdf33323
You forgot to note that Vancouver has returned to all time high prices in all
housing types 6 months after their tax.

[http://www.mikestewart.ca/wp-
content/uploads/2017/06/Vancouv...](http://www.mikestewart.ca/wp-
content/uploads/2017/06/Vancouver-Real-Estate-Price-Chart-from-
January-1977-to-May-2017.png)

~~~
mabbo
Ugh, seriously? I hadn't heard that.

I officially don't understand how markets work anymore.

~~~
nikanj
The US, Japan and the EU are all printing absurd amounts of money. That
"stimulus" needs to go somewhere, and right now it's going to every single
asset class.

The central banks wanted inflation, but they got some perverted form, where
wages and prices remain stagnant, and only stocks/real estate/etc have had
their prices increase.

~~~
Danihan
So what's next?

~~~
nikanj
Depending on how idealistic/cynical you are, a new feudal dystopia of renters
vs rent seekers, a bloody revolution, or just a gradual increase of consumer
inflation to match.

I mean, as a sorry Java jockey, I make around $5,000 per month. I frequent
Reddit, a news aggregator with comments. Reddit is worth $1,700,000,000
dollars, according to the latest funding round.

------
gsylvie
Berkshire Hathaway just invested $400 million into the Canadian alternative
mortgage market, as well as providing a $2 billion loan at 9%:

[https://www.forbes.com/sites/nathanvardi/2017/06/22/warren-b...](https://www.forbes.com/sites/nathanvardi/2017/06/22/warren-
buffett-rides-to-the-rescue-in-canada-with-1-8-billion-investment-in-lender-
home-capital/#2a304f49d0bf)

This alone should prevent any bubbles from bursting in 2017. Especially if
Home Capital Group starts lending again (see:
[https://www.linkedin.com/pulse/government-need-make-some-
dra...](https://www.linkedin.com/pulse/government-need-make-some-drastic-
change-ameera-ameerullah) ).

Edited to note: $2.5 billion is probably not really a significant amount as
far as the Canadian mortgage market is concerned (e.g., around ~700 houses in
Vancouver's good neighbourhoods), but the fact Warren Buffett is behind this
should calm nerves and cause the lending taps to re-open a bit in the subprime
markets that are so key to the bubble. The government backed Canadian Mortgage
and Housing Corporation (CMHC) won't sell default insurance for mortgages over
$1 million CDN.

~~~
lubujackson
One counter to that is Buffett doesn't try to time the market, he finds
stable, productive businesses and buys in. Housing might collapse but in 10-15
years he will be profitable. Most homeowners aren't looking at things with the
same perspective.

~~~
gsylvie
Yeah, and frankly the deal doesn't really look that reassuring to me. HCG had
already negotiated a 9.5% loan on the $2 billion CDN (around $1.5 billion
USD). Buffett is letting them refinance that loan down to 9% and he's buying
some stock at a 30% discount. But the general market will not look that
closely at the details, and will just be reassured by the Buffett brand name.

------
triangleman
>Here is a harsh truth about homeownership: Over the long haul, it’s hard for
homes to compete with the stock market in real appreciation (Robert Shiller
quote)

>By contrast, real home prices should decline with time, except to the extent
that households shell out some money and plow back some of their incomes into
maintenance and improvements, because homes wear out and go out of style.

Wow, I never really thought of it that way. I guess I implicitly understood
that buying a home was, at best, a hedge against inflation. But it also seems
like a good investment. But it's not, really, in the long run, unless you are
"timing the market" and buying into an area with long-term population growth.

~~~
sologoub
A primary residence shouldn't be compared to stock market investment on pure
returns basis, as you get additional utility out of the home by living in it,
using all that the neighborhood offers etc.

However, you can absolutely compare rental income (a kind of perpetuity, or an
annuity with an indefinite payment stream duration) with another annuity (such
as a dividend producing stock or a bond). In general, these all can (and in my
opinion should) factor into your investment diversification strategy.

Real estate cash flows tend to be more volatile than say a bond from a AAA+
rated borrower (leases end, people stop paying, roof leaks, etc), but that
should be measured against your required rate of return for the said risk.

When compared with stocks, real estate cash flows tend to be less risky (if
valued properly), because even in disastrous situations you have some salvage
value, whereas if a company goes bankrupt that's kind of that. (Gross
oversimplification but still.)

One aspect of homeownership that I am a very big fan of is that even in a flat
market, the mortgage acts as a type of forced savings account with negative
interest (that is, you pay the bank). In a culture where the savings rates are
dismally low, this is better than nothing. Unfortunately, refinancing and
HELOCs really screwed this up for people. At the extreme of the last housing
bubble, people were literally treating their home as an ATM...

~~~
JBlue42
>using all that the neighborhood offers etc.

Great general comment but this specific point is one I try to make to people I
know that are in the insanely stressful, desperate search for buying a house.

In LA, there are plenty of neighborhoods on the way up or already there with
houses at minimum of $600-700k. I hear all the typical rhetoric from these
folks of "why waste all my money on rent, when I can get equity, etc." and I
try to point out that yes, you're "building equity" for 30 years but you
should also be ready for the reality that in 10-15 years (or sooner) the shit
could hit the fan. When looking at a house, instead of purely as investment
vehicle, maybe approach it as "If the house doesn't grow in value, or even
sinks a little bit, would I still be happy to call this place and my
neighborhood my home?"

Because I think that gets lost and none of the reality tv shows help. You're
taking out a 30-year mortgage and hopefully you get 30 years good use out of
the house and much more. Will it be enough to raise kids, relax, enjoy
neighborhood stuff, what have you?

So much is about the money/investment side of it that I think lots of folks
lose sight of the idea of a "home".

------
galonk
Non-clickbait headline for this article: "Canadian housing prices will
continue to go up until they don't"

------
fnbr
I completely agree. In Vancouver and Toronto (and to a lesser extent, Edmonton
& Calgary), housing prices are raising at ridiculous rates, while income is
largely stagnant. I have multiple friends who've bought houses in terrible
condition with 5% down because that's all that they can afford. If interest
rates increase at all they're in massive trouble.

~~~
analyst74
Edmonton & Calgary have both seen moderate price correction (~10%) since 2014.

------
goalieca
I hope it crashes because I want to buy a house.

~~~
justnoise
Well you'll never get your wish if you keep wishing for that!

While it's a small sample size, I keep on hearing of friends who want to buy a
house but are waiting for the current "bubble" to deflate a bit. Combine that
with a limited supply in popular metro areas, a larger percentage of young
(and old!) people renting and you get demand that will likely last a while
(yes my personal sample size of N is small). As the renting population ages
and sees themselves flushing thousands down the pipe every month, more renters
will be saving up war-chest sized nest eggs to make the plunge into home
ownership. I suspect that'll prop up prices for a good while.

If you want to buy a house, I don't think you can count on another great
downturn to make popular locations more affordable. More likely it'll take an
increase in supply or some major change in our lives to push people out of
cities.

 _Cue popular rant on housing density_

~~~
cpncrunch
>limited supply in popular metro areas

Is it really a limited supply, or just speculators buying them and not
bothering to rent them out? Vancouver has 25000 empty homes.

~~~
justnoise
In the case of US cities (sorry, I don't know about research that covers
Canadian cities) research shows it's a limited supply and failure/inability to
grow that makes popular cities expensive:
[https://www.buildzoom.com/blog/cities-expansion-
slowing](https://www.buildzoom.com/blog/cities-expansion-slowing)

Edit: They key section of that study is the section called "Expensive cities
and expansive cities"

------
guardiangod
The article makes the argument that US and Canada shared similar house price
trajectory till 2005, then diverged significantly.

The argument has merits, but can there be other arguments? Such as US and
Canada are becoming dissimilar economically, or a change in real estate
desirability in the eyes of foreign investors?

If looking at the past price data can predict the future price trend, the
stock market would be a very different beast altogether.

~~~
alacombe
Also, there is space constraint. Eg, Vancouver: everything which can be built
has been built. South, it is blocked by the US border, north by the mountains
and native lands, west by the ocean. The only option really is east, though,
it directly translate into crazy commute time. Combine this with one of the
best weather conditions in Canada (mild winter/summer) and high asian
immigration, and that's a recipe for [very] high prices.

~~~
hiphipjorge
> South, it is blocked by the US border

There's a long stretch of land between Vancouver and the US border (30 min
drive maybe?) with mostly empty land. Am I missing something?

~~~
guardiangod
Yeah, the lack of high-capacity bridges across the rivers.

The house prices in that 30 minutes worth of land (I live in it) are also
approaching $1 million. The only reason they don't go higher is because of
commuting.

The newly elected provincial government has just announced they will suspend
the construction of a new bridge; many condo and houses to the south were
built with the assumption that the bridge will open and make the southern
suburb much more attractive.

For whatever reason, the mayor of Vancouver and its immediate surrounding
satellite cities (Burnaby, Richmond, etc.) are fighting hard to not expand the
road system. Instead they are 'pushing' for better mass (not rapid) transit
between the out-rim suburb and the core cities. I don't know if they are
sincere in reducing traffic, but this has an knock-on effect of keeping the
house prices in the core cities much higher than otherwise (eg. a rapid
transit thru that 30 minutes worth of land.)

~~~
desdiv
>For whatever reason, the mayor of Vancouver and its immediate surrounding
satellite cities (Burnaby, Richmond, etc.) are fighting hard to not expand the
road system. Instead they are 'pushing' for better mass (not rapid) transit
between the out-rim suburb and the core cities.

Not expanding the road system is a counter-intuitive strategy to reduce
traffic jams, see:
[https://news.ycombinator.com/item?id=7965077](https://news.ycombinator.com/item?id=7965077)

I won't pass judgement on whether it works or not, but it does appear to be
supported by logic and data, so those mayors aren't just acting on NIMBYism.

------
jtwebman
I am sorry the house you buy that you live in is not an investment it is a
liability.

Real estate is only an investment, and a very good one, when you are buying
property that you then rent out. Then the leverage helps you out as long as
you have renters and rents go up or stay the same. The price of the home
matters far less in that case until you are ready to trade up.

I am sure at this level though inverters are having a much harder time finding
real estate that is cash flow positive.

------
acchow
> By contrast, real home prices should decline with time, except to the extent
> that households shell out some money and plow back some of their incomes
> into maintenance and improvements, because homes wear out and go out of
> style.

But the majority of the value of homes in expensive cities (i.e. SF, New York)
is actually the real estate it sits on.

------
notadoc
And so will the current USA housing bubble in western states and a handful of
other trendy locations where housing has far exceeded the realm of
affordability by median income standards.

~~~
brink
I live in Grand Rapids, and just sold my house for a price that I never would
have bought it for.

~~~
notadoc
I would bet it still sold in the realm of affordability though. Out west we
have many completely average mediocre homes selling for 10x-25x regional
median income levels, which is beyond absurd when historically an
affordability marker is somewhere from 1.5x-3x.

------
saghm
Stupid question from someone not well-versed in economics/finance: is it even
still considered a "bubble" if it never bursts?

------
diogenescynic
So will the Bay Area's. Incomes aren't keeping up with property values and
eventually property values will have to adjust. Property values are derivative
of incomes. I'm not sure when or how, but it's not possible for it to keep
going up forever.

------
mahyarm
I thought it would pop over 10 years ago too, look how wrong I was.

~~~
purephase
Agreed. I sold in Toronto nearly 4 years ago believing that the end was nigh.

Stupidest decision of my life. 4 years appreciation on that property is likely
another 200-300k that I walked away from. Should have rented, rather than
sell.

------
paulpauper
Yeah but the Canadian dollar has lost 30% of its value to the US dollar since
2013

~~~
sdm
It's more that the US dollar has gained 30% on the Canadian dollar. The
Canadian dollar has been relatively stable compared to most currencies while
the US has been actively propping up the USD higher. You can't just compare
two currencies -- you have to look at the whole market to have a reference
point.

~~~
linkregister
_> the US has been actively propping up the USD higher_

What does that mean?

~~~
colefichter
Sounds like a reference to quantitative easing.

~~~
linkregister
It must be a misunderstanding, since we both know QE reduces the value of a
currency.

~~~
colefichter
Yeah, I have no idea. Just taking a guess at what the poster above was hinting
at :)

------
maelito
France's housing bubble will also burst

------
baybal2
I hope it will!

------
briga
In other news, the sky is blue.

~~~
mfringel
Right now, where I am, the sky is grey.

When there's a really big storm coming in, it's an even darker grey.

The sky is, in fact, sometimes blue, but would your statement about Canada's
housing bubble be untrue on a cloudy rainy day?

