Baby, we got a bubble!?

[cdr108]

I see what you are saying, Eug. However, one could also argue that a bubble bursting in China will cause investors over there (who are forced/decide to sell) to lose a lot of money. This will in turn hamper their ability to invest abroad. One could also argue that if people begin having financial difficulties the first thing they would sell are their foreign assets. Kind of like selling the cottage in Muskoka first instead of the primary residence (not the best analogy).

to add to that thinking, what are the rules for mortgages in China?
are they non-recourse like the US or recoursable (sp?) like in most of Canada?

IIRC in the 1990s, a sizable portion of the HK population owed more than the value of their property and left many with negative equity, and requiring them to sell in an unfavourable market.

if the same were to happen now, the Chinese foreign owners in Canada might have to repatriate funds back home.
just look at the Vancouver market during that time ... quick and dramatic price drops !

 

[KA1]

I have a deep respect for CN Tower to make a direct comment on his post.

For the perennial doom & gloomers -- Interested, Daveto, Redfirm and now UD -- I would like to repeat an English saying, that is " everything looks yellow to a jaundiced person".

These academics have grown up with the concepts like ROI, Bond yield curve, interest rates and the likes. These are yesterday's concepts and not at all relevant to the current environment. None of these academics have an iota of an idea about a concept that I learned in my studies -- opportunity cost.

Overseas investors who have invested money in Canadian -- read Toronto --real estate, it is a part of 'diversified investment' strategy. They are business persons and by their very nature are risk takers and not the type of individuals who like to hide in the safety of a regular pay cheque working for others. If the property has been purchsed with all down or most of the money down, then concepts of ROI, possible increase in mortage interest rates to reflect changes in the bond yield curve are irrelevant. If the unit is rented, then, that is even better. Although I have not gone looking for it, I have not been made aware of units in downtown area remaining unrented for a considerable length of time.

I would like to speculate -- although I have no hard evidence -- that, perhaps, money invested in TO R/E has been hidden away from the prying eyes of local tax systems. There are plenty of Greece and Italy's in the rest of the world. In that case, money will stay invested in Toronto R/E for a long time.

For the past couple of years -- and perhaps even more -- Bears have been staying on the sidelines waiting for the 'armageddon'. If they had, instead, dipped their toes in the local R/E, then, they would have been, financially, better off.

I have a distinct feeling that whenever these academics come out of their cocoon and into the real world, they will be able to afford a reasonably priced unit only in the upcoming slum otherwise known as City Place.

That's the opportunity cost.

 

[KA1]

http://www.theglobeandmail.com/repo...et-quiet-on-the-western-front/article2235279/

 

[CN Tower]

KA1 ,

I once again thank you for your kind words.

I am not one to so blithely spew such pedestrian terms as "bull" or "bear" when it comes to the local housing market. They're only useful as 20second sound bites for empty headed cable tv pundits or worse, self- annointed mavens of the land such as Don Campbell or Garth Turner, polarizing pundits of the pulpit.

I believe this forum, save for the odd interruption by vested realtors, intends to be impartial and objective. Let's be analytical; let's be dettached emotionally.

The point I highlighted was intended to illustrate how a strong market can reverse course mid-development and the multi-level marketing scheme concocted by our local developrment industry (ie friends and family/VIP agents/IP agents/agents/joe public/dentists and doctors/taxi cab drivers/shoe shine boys) can easily backfire and implode. If seems to me that the greatest risk that exists today in the new GTA condo market is the sheer volume of unsold units in new projects. If there are 50,000 new units under construction today and 80% sold that leaves in excess of 10,000 brand new condo units for sale. Who will be the ones to pick that slack? More than likely the convergence of speculators who simply cannot afford to carry units (and perhaps cannot even afford to close them in the case of the Ritz, the Trump, the SL, and the Four Seasons) with developers looking to close projects could easily be the tipping point of the new condo market.

So while $1 million houses renting for $800 month was a sure sign of trouble in Ireland perhaps 10,000 unsold inventory in Toronto could be a bigger sign of trouble than the fact that those units are listed for $650 PSF.

Please forgive me if my numbers are off. I haven't fact checked them and am shooting from the hip a little today. Our market to me feels a lot like Apple stock. It's unparalleled in its recent success, it has truly outshined other markets and continued to defy skeptics but even the mightiest wind eventually dissipates so a slowdown from 20,000+ unit sales to 10,000+ units sales would hardly be unexpected.

One final point- I don't buy the argument that the 80,000 new immigrants into the GTA annually are fueling the housing market. With households likely averaging 4 people in this demographic you will have a hard time convincing me that all 20,000 new immigrants households are purchasing 650 sq ft condos for $400,000 as soon as they land at YYZ.

Land of milk & honey indeed.

 

[ILuvTO]

I have a deep respect for CN Tower to make a direct comment on his post.

For the perennial doom & gloomers -- Interested, Daveto, Redfirm and now UD -- I would like to repeat an English saying, that is " everything looks yellow to a jaundiced person".

These academics have grown up with the concepts like ROI, Bond yield curve, interest rates and the likes. These are yesterday's concepts and not at all relevant to the current environment. None of these academics have an iota of an idea about a concept that I learned in my studies -- opportunity cost.

Overseas investors who have invested money in Canadian -- read Toronto --real estate, it is a part of 'diversified investment' strategy. They are business persons and by their very nature are risk takers and not the type of individuals who like to hide in the safety of a regular pay cheque working for others. If the property has been purchsed with all down or most of the money down, then concepts of ROI, possible increase in mortage interest rates to reflect changes in the bond yield curve are irrelevant. If the unit is rented, then, that is even better. Although I have not gone looking for it, I have not been made aware of units in downtown area remaining unrented for a considerable length of time.

I would like to speculate -- although I have no hard evidence -- that, perhaps, money invested in TO R/E has been hidden away from the prying eyes of local tax systems. There are plenty of Greece and Italy's in the rest of the world. In that case, money will stay invested in Toronto R/E for a long time.

For the past couple of years -- and perhaps even more -- Bears have been staying on the sidelines waiting for the 'armageddon'. If they had, instead, dipped their toes in the local R/E, then, they would have been, financially, better off.

I have a distinct feeling that whenever these academics come out of their cocoon and into the real world, they will be able to afford a reasonably priced unit only in the upcoming slum otherwise known as City Place.

That's the opportunity cost.

These investors buying with 100% cash may not care about cash flow, interest rates, etc. However one day they will want to sell their investment property. In this scenario, who will they sell to? If local wages can't support never ending price increases, and thus locals can't afford to buy, who will the purchasers be? More foreigners? Are you suggesting that long term Toronto will turn into a completely foreign driven market? I have a hard time believing that.

With hindsight being 20/20, you are correct that people should have bought in 2008, but that's easy to say now, at the time, not so easy. Glad you were smarter than the rest of us though.

 

[KA1]

CN Tower,

As far as I can recall, this is the first time someone has made reference to unsold inventory of new units. A very legitimate point.

Any idea as to where one can get these figures/estimates? I am wondering as to how come no one one this thread made reference to this unsold inventory in the past?

 

[interested]

I believe there are about 15-20% unsold inventory but not on 50,000 but rather about 26000 units. I don't know where I read that but it seems to stick in my mind.

Ka1,
I feel I must respond to your quote below:

"These academics have grown up with the concepts like ROI, Bond yield curve, interest rates and the likes. These are yesterday's concepts and not at all relevant to the current environment. None of these academics have an iota of an idea about a concept that I learned in my studies -- opportunity cost."

Every time any investor invests he looks at opportunity cost; the cost that the money could have brought in had it been invested in an alternative investment. To suggest that academics talking about the other indices you refer to (and I am not an academic) fail to appreciate that is really in ny view unfair to the majority of academics.

Had one invested in gold bullion 3 years ago, one would have made as much as in real estate or more so one could say there is a lost opportunity. And remember, this would have occurred without the leverage risk inherent in real estate. I believe true investors and academics consider opportunity cost, even if not expressly stated. I certainly do whenever I make an investment and I believe a lot of posters on this forum have eluded to it when they say things like: I could invest in RBC stock and get a 4.6% dividend while I wait and hope that the stock will increase in value over time, so if I have money tied up returning 3% on a rented property, then I better hope for price escalation there as well. People have talked about the opportunity cost of having ones funds tied up in property.

I think CDR brings up a good point about the "recourse mortgages" if they exist in China. As stated by he and others, if they exist in China, and should money have to be repatriated, believe me these foreign investors are going to sell Canada and other investments to cover their obligations unless they plan to leave and tax avoid which is not for the faint at heart and not a realistic solution in my view. As was pointed out, one will sell the 2nd home before one lists one principal residence and I suspect the same would hold for a Chinese or S.Asian or other Foreign investor holding a speculative/investment property here unless there were good reasons to tax avoid in his country of origin.

 

[Eug]

to add to that thinking, what are the rules for mortgages in China?
are they non-recourse like the US or recoursable (sp?) like in most of Canada?

IIRC in the 1990s, a sizable portion of the HK population owed more than the value of their property and left many with negative equity, and requiring them to sell in an unfavourable market.

if the same were to happen now, the Chinese foreign owners in Canada might have to repatriate funds back home.
just look at the Vancouver market during that time ... quick and dramatic price drops !

I have spoken to at least one of these investors, who happens to know several others in the same situation. Their homes back in China are paid up in full, in cash, and the same goes for their properties in Canada. Mortgages don't even enter into it.

Furthermore, one of the reasons to buy in Canada is specifically to keep the money out of China. Many have businesses outside China, and they keep their earnings from outside of China, outside of China. Also, these often aren't traditional personal real estate purchases. These are purchases by corporations owned by these individuals, as there are tax advantages when they sell.

 

[ILuvTO]

I have spoken to at least one of these investors, who happens to know several others in the same situation. Their homes back in China are paid up in full, in cash, and the same goes for their properties in Canada. Mortgages don't even enter into it.

Furthermore, one of the reasons to buy in Canada is specifically to keep the money out of China. Many have businesses outside China, and they keep their earnings from outside of China, outside of China. Also, these often aren't traditional personal real estate purchases. These are purchases by corporations owned by these individuals, as there are tax advantages when they sell.

Thanks, Eug. Very interesting to indirectly hear from these investors. But I still have to wonder, who do these investors think they are going to sell there investment properties to when they want/need to liquidate? If the minority rich continue to escalate prices far beyond what local wages (either local Toronto, Beijing, Shanghai, etc) can support, who are they going to sell to? Who will be able to afford to buy? At some point fundamentals will have to kick in. The rich can't keep buying and selling properties with one another. Based on the hearsay evidence of ghost cities in China, it would appear there are a number of empty properties there with very few people actually able to afford to buy them for what the current owners have paid.

To KA1's point, I salute the people who are riding the wave up and making money in the current market. In two years many of us may look back and kick ourselves for not buying today and realizing an increase in our investment. But eventually, long term, fundamentals will rule the day IMO.

 

[interested]

To KA1's point, I salute the people who are riding the wave up and making money in the current market. In two years many of us may look back and kick ourselves for not buying today and realizing an increase in our investment. But eventually, long term, fundamentals will rule the day IMO.

Actually, this is exactly the type of thinking that precedes all bubbles. It is different this time. Fundamentals don't matter. We are in a new paradigm. Then IF and I say with the greatest of respect "IF" it there is a bubble and it does burst, everyone then adopts the position that "it was obvious in retrospect" and "how could people not see it".

History teaches us bubbles occur and recur. There must be something about the human psyche that leads us to conclusions that we wish to arrive or are biased to arrive at. I am not a psychologist, so I won't delve further into issues I know nothing about.

 

[Eug]

Yes, there are baseline fundamentals that are important, and for the record, I'm not saying all Chinese investors are like this by any means. Obvious my n=1 example doesn't necessarily represent all Chinese investors and probably doesn't represent the majority.

However, the point here is that there are different forces at play here than simply just bond yields and interest rates. I think a lot of people were making predictions almost as if all condo purchasers are financially stretched young Canadians, etc.

 

[KA1]

Thanks, Eug.

To KA1's point, I salute the people who are riding the wave up and making money in the current market. In two years many of us may look back and kick ourselves for not buying today...

If you know how to swim, then riding the wave 'up' is quite alright. When the wave goes 'down', then you won't drown.

In the year 1999/2000, when I started looking for a place to down size to, I stayed in hotels for a few days each in Markham, Scarbrough, North York, Mississauga and in Delta Hotel to decide as to the area where I would like to move into. I choose to move downtown Toronto despite the fact that prices in downtown Toronto were about $ 70,000 more than for a similar size unit in, say, Scarborough. I had the dough.

In two year's time, you won't kick yourself for not buying now. You, and the others like you, will just settle for an affordable unit in the soon to become slum -- otherwise known as City Place.

Relax. Stop worrying. It won't be the end of the world.

 

[KA1]

Eug,

Considering that you have been responding to an intelligent, savy investor like Interested, a bit of correction, if I may. Proper word to use is not 'bond yields'. It is bond yield curve.

 

[interested]

Thanks for the compliment Ka1.
Not sure how savy or intelligent I am. If I was that savy or intelligent, I would be rich. LOL.
Just an average guy trying to think of problems in a logical fashion, hopefully arrive at some logical conclusions, and learn from others along the way. Oh, and hopefully have some fun as well.

 

[ILuvTO]

Eug,

Considering that you have been responding to an intelligent, savy investor like Interested, a bit of correction, if I may. Proper word to use is not 'bond yields'. It is bond yield curve.

This comment as well as the comment about the bears moving into a slum in two years is uncalled for and immature. Thanks for keeping the thread on track.