Toronto Condos pile up on a 21 year high.
"10,368 condos were completed in January 2015 in Toronto
a record 21 year high and 8x the average over the last 10 years."
said Sal Guatieri, BMO Economist
Rent Reduction Time
Condo Glut? Yes. The lower chart shows a snapshot of houses and apartments for rent in the 6 biggest Canadian metros. What vacancy rate does your real estate investment model use?
Rent vs Buy
In preparing for my recent BNN Interview (July 9th) the producers sent some queries in advance of the spot; one was "Is it time to rent or buy?". We never covered it on air but my response would have been:
It’s always a time to rent or buy unless you're Hikikomori.
One should look at the fundamentals of one’s present balance sheet and not rely on past performance or future speculation. If you are risk averse then buy or rent what you can pay for if the scenario of your household income were to suddenly drop. Contingencies are for the unexpected. Two income households may have a cushion, one income households have a greater risk.
I mashed up the chart above from Mercer via ZeroHedge which shows the high rent cities (petro-finance-centric) and I included Manhattan averages with or without doormen as well as the 3 hot Canadian markets of Vancouver, Calgary and Toronto.
The fundamentals don't support buying in Vancouver, Calgary and Toronto especially since interest rates are at a low (will they drop?) and rents and resale prices are at the highs (will they rise?).
There is little room for improvement on cash flow unless buying hot market real estate to rent out has some potential for improving the ability to increase the revenue. As I demonstrated in my case study last year of buying a Vancouver condo for investment, the risk of a negative return is only going to be alleviated by a 25% reduction in purchase price if comparison to a 10 year bond is rational. Also last year at the time of the study, inflation (CPI) was running at half of what it is today; a rising CPI erodes the bottom line.
I had to Post This
The mashup to the left is with thanks to the Vancouver Price Drop blogger who has been tracking the behaviour of Vancouver vendors who are chasing the market down as purchaser sentiment switches. They can't help themselves. The sample price drop building reminded me of New York where the term "jonesing" is said to have originated and the news item of Cory Weeds closing The Cellar Jazz Club reminded me that Vancouver ain't New York no matter what the condo brochure says. Why did everyone take on historic levels of debt just to live in inefficient housing units? Watch the 12.39min video explanation below by Belabed & Theobald of how the middle class, has just been trying to keep up with the consumption norms of the upper class, which kept expanding as more aggregate income flowed upwards. In other words you have depleted your savings and borrowed as much as you could because you have been jonesing to keep up with the Jones'.
Now listen to Sam Harris' 12.10min video explanation of how the illusion of Free Will can have you behaving against your own best interests. Finally enjoy Bob Dylan's live performance 6.52min video of the Ballad of the Thin Man.
New Economic Thinking
Christian Belabed and Thomas Theobald: Inequality and the Current Account
Relative Income Hypothesis
Free Will by Sam Harris
"Free will is an illusion so convincing that people simply refuse to believe that we don’t have it. In Free Will, Sam Harris combines neuroscience and psychology to lay this illusion to rest at last. Like all of Harris’s books, this one will not only unsettle you but make you think deeply. Read it: you have no choice."
Ballad of the Thin Man
First released on Bob Dylan's Highway 61 Revisited in 1965.
"You know something is happening but you don't know what it is, do you Mr Jones"
The id (German: Es) is the unorganized part of the personality structure that contains a human's basic, instinctual drives. Id is the only component of personality that is present from birth. It is the source of our bodily needs, wants, desires, and impulses, particularly our sexual and aggressive drives. The id contains the libido, which is the primary source of instinctual force that is unresponsive to the demands of reality. The id acts according to the "pleasure principle"—the psychic force that motivates the tendency to seek immediate gratification of any impulse—defined as, seeking to avoid pain or unpleasure (not 'displeasure') aroused by increases in instinctual tension. If the mind was solely guided by the id, individuals would find it difficult to wait patiently at a restaurant, while feeling hungry, and would most likely grab food from neighbouring tables. (Wikipedia)
Housing prices in Germany are rising as demand for owner occupied dwellings increases for the rising levels of employed.
But only about 53% of Germans own their homes, compared with 70% in the U.K. and Canada and 65% in the U.S.
Since the end of WW II, the national consensus in Germany has been that housing provision is an essential public resource to be protected from speculation using regulation that promotes rental accommodation and fosters tenancy protection as well as municipal planning that releases land with incentives for developers to create rental housing when needed.
As the lower panel of the chart mashup above shows, a big incentive to provide rental housing is the yield on rentals being superior to Government 10 year bonds and stock dividends over time.
In the OECD, German households on average spend 21% of their gross adjusted disposable income on keeping a roof over their heads and 93% of people say they are satisfied with their current housing situation, more than the OECD average of 87%. This high level of subjective satisfaction reflects Germany’s good performance in objective housing indicators. SOURCE
Buy Rent or Live at Home
Lance Roberts makes the cogent observation that what really drives long term economic growth is not residential investment as much as "household formation". I have mashed up only 2 of his 6 chart argument to show that total U.S. housing activity in the U.S. has rallied out of the 2009 pit of gloom, but the action appears to have faded in 4Q 2013 and is stalled at 2008 levels.
On the lower panel we can see that household formation in the U.S. has plummeted off the 2005 peak and the percentage of owner occupiers is back to 1980 levels.
Owner occupier levels in Canada, according to the StatsCan 2011 Census via The Financial Post, is at a level that corresponds with the peak in U.S. levels of 2005. Canadian national home ownership was 68.4% in 2006 and 69% in 2011 spurred on by a high-rise condominium boom; 30.9% of owner households in Canada live in condos and in Toronto it's a very high 67.4% of homeowners that do.
But household formation it is not. Single non-family households make up 45.5% of condo owning dwellers in the top 10 Canadian metros. This, along with the underemployed is perhaps Canada's Freeter class.
FREETER: Japanese expression for people who lack full-time employment who are underemployed, who do not start a career after high school or university, but instead earn money from low skilled and low paid jobs. (Wikipedia)
Here is the distribution of owner-households by household type, for owner-occupied condominiums and other owner-occupied dwellings in 10 CMAs (Canadian Metros) with the highest number of occupied condominiums. StatsCan 2011 Catalogue 99-014-X2011003
CBC DOC ZONE VIDEO "The Condo Game"
"Downtown condos are "more a commodities play than a housing market". Charles "King Cobra" Hanes, Toronto condo broker.
The Condo Game was produced by Helen Slinger and directed by Lionel Goddard and Helen Slinger.
Are you thinking of buying a condo? If you do, you should set aside money for special strata assessments that are additional to any regular monthly "contingency" strata fees. AND read this CONDO USER'S GUIDE prepared by Ted Kesik, University of Toronto building science professor.
Here is an excerpt from the BC Housing Home Owner Protection Office website "Managing Strata Repairs FAQ"
Can the strata corporation use the Contingency Reserve to fund repairs? What options are available to fund the repairs?
Timing is Everything
Now that we are on the seasonal down ramp into the 2014 spring bottom for sales and listings, it might be worthwhile for those Canadians who are heavily debt encumbered to look at what happens to a "C" class income generating country after their real estate bubble gets pricked by a swift change in buyer sentiment.
As for The Irish Miracle "The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it. The entire Irish episode will be studied internationally in years to come as an example of how not to do things." (David McWilliams Irish economist writer, broadcaster and journalist)
News Item CNN November 14, 2013: Three years after turning to the EU and International Monetary Fund for €85 billion in aid, Ireland is poised to become the first bailed-out eurozone country to make a full return to financial markets.
Notice the polar opposites of the U.S. (B Class GDP) and Japan (D Class GDP) since 1Q 2000 when the DotCom bubble burst; they also experienced severe housing price deflation; Japan's slide began a decade earlier. Timing is everything.
Trick or Treat
I have reported in the past (July 24, 2013) on big money buying up swaths of bank owned U.S. residential properties in the last 2 years for buy, hold and flip when capital gains return despite current negative yields. Today Bloomberg is reporting that:
"Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S. is using its experience to replicate the model in Spain where property prices have dropped 40 percent."
A few quotes from the Bloomberg article follow:
The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.
While Spain traditionally has a lower percentage of renters than the U.S., the (Spanish) government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.
Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to rent (rather than own) and (banks) to attract foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.
Blackstone (in the U.S.) is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.
Oh, did I mention that the wire services have reported that Spain is officially "out of recession" according to the Madrid-based Bank of Spain: "Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years."
Happy Halloween, here's some Wikipedia reading:
...and here is Richard Wilkinson's Ted Talk (2011): How economic inequality harms societies. The hard data on economic inequality shows what gets worse when rich and poor are too far apart; real effects on health, lifespan, even such basic values as trust. "If Americans want to live the American dream, they should go to Denmark".
It's different in Canada
The Economist has a useful user input tool for comparing different real estate markets. This 4 pack looks at the difference between the U.S. and Canadian real estate markets from 1Q 2009 (the pit of gloom) to 2Q 2013 with respect to real values (nominal less CPI) and relative to incomes and rents.
The Canadian real estate market diverged from the U.S. market path after the 2009 interim bottom (chart below) and for the last 4+ years thanks to 1) the government price fixing of interest rates and 2) tax payer funded insurance of high ratio debt to equity financing and 3) credulous buyers willing to bid up prices on the promise of price inflation without the experience of wage inflation; Canada has extended its bull market in housing. If you are looking for negative yield, Canadian real estate fits the criteria.
CLICK TO ENLARGE CHART
"There’s perhaps never been a better time to sit on the sidelines and see how things shape up over the next year from the comfort of your rental condo."
That's a quote from Ben Rabidoux in The Globe and Mail's April 17th post "Is Canada’s condo boom coming apart at the seams?" Here are some snippets with respect to the ballooning inventory level of condos:
Ben Rabidoux is a Canadian analyst and strategist with U.S.-based Hanson Advisors, and author of The Economic Analyst blog.
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'