See what Kyle Bass – a US investment heavyweight thinks about Canadian housing

Hayman Global Outlook Pitfalls and Opportunities for 2014 by Kyle Bass

Start at 35:30

Estimated March 2014 Sales data

Estimated Mar/14 month-end official stats:
Sales: 2640 (+12% YoY) (Feb/14 was +41% YoY)
Inventory: 14450
Months of Inventory: 5.5 (was 5.3 in Feb)
Only other time Mar MOI> Feb MOI was in 2008 (4.8 vs 4.3)

Greater Van 10Y March Avg Sales: 3362
Est. March Sales: 2640 (-21% vs 10Y)
(Feb/14 was -3.8% vs 10Y)
(Jan/14 was +5.9% vs 10Y)

Looks like a disappointing March.  If the sales malaise continues, does not bode well for the Spring market.

Daily Reads: 1. Middle Class. 2. Pimco.

The Star: Closer reading of StatsCan report troubling for middle class

Most of the net worth increase in Statistics Canada survey is due to phenomenal inflation in home values, not in income growth.

"First, most of this net worth increase is due to phenomenal inflation in home values. The median value of residences was up almost 50 per cent since 2005, which includes the period in which Canada was in recession (when, other things being equal, one would expect house prices to flatten or decline). Anyone who thinks these increases are normal and will continue indefinitely believes in Santa Claus or still holds stock in Bre-X."

"Do these numbers suggest a financially thriving middle class? Hardly. They paint a picture of a population that has unprecedented access to credit at historically low interest rates. The principal residence has become a new version of the ATM machine, allowing people to access credit against equity in their house to fuel consumption. This is a relatively new phenomenon in Canada. But is it a good and sustainable thing for personal finances and the national economy?"

Pimco takes more bearish stance on Canada
Mar 2, 2014
Pimco, the world’s biggest bond investor, has slashed its exposure to Canada – one of its top country holdings – as it predicts home prices will start to fall this year amid broader concerns that it could be the next global housing bubble ready to burst.”

“Pimco’s flagship $237bn Total Return Fund, managed by Pimco founder Bill Gross, halved its exposure to Canadian debt – which includes provincial bonds – to 2 per cent of its portfolio in the third quarter from almost 4 per cent a year earlier, according to data compiled by Morningstar.”

““I’ve been talking with clients and writing about how the housing market is overvalued,” said Mr Devlin. “The change this year would be that I actually think it starts this year.””

Some Thoughts on What CMHC May Announce on Friday

As CMT noted, “CMHC will be making an announcement Friday at 11:00 A.M. EST. They’ve notified reporters well in advance, which is somewhat unusual.”

I agree that it is somewhat alarming that CMHC has summoned the media for this “announcement”. In the past, Flaherty has been the one announcing mortgage rule changes. However, right now Flaherty is in Australia for G20 Summit.

This could mean:
1. CMHC will announce low-impact news 

(eg raise insurance premium, tighten debt serice ratio etc), not important enough to require Flaherty to be the one giving the speech. However, if this is simply a low-impact announcement, why make the unusual move to summon the media well in advance and then delay the announcement from Thursday to Friday?

2. CMHC will announce moderate-impact news, 

possibly mortgage rule changes. These “mod-impact news” may very well directly impact the public (eg down-payment requirement) rather than some internal bank rules that the public don’t quite get, that’s why they’re requesting media presence to give the reporters a chance to ask questions on behalf of the broad public. (I doubt CMHC would’ve summoned media just to tell them they’re tightening MBS)

Why do they pick a time when Flaherty is out of the country to do this? Perhaps the new CMHC leadership and recently appointed Board want to make their faces seen in public, an attempt to salvage their public image by appearing like they’re “proactively making changes to reduce tax-payer risk”.

3. CMHC will announce high-impact news. 

Potential impact (& public backlash) is so high that they had to time the announcement to After the Budget, and During the time when Flaherty is out of the country, so that Flaherty could later say “look, I wasn’t even in the country when this happened!”  ;)

_____________________________________________________________________________

On separate (but not sure if related) note,

"RBC has just eliminated all of its advertised “special offer” rates today" (first reported by @CdnMortgageNews )

eg. on its website, there is no longer any “discounted rate” of 5Y 3.49% Fixed mortgages, just the “posted rate” of 5Y 5.14% Fixed mortgages.

(Sure, this could be just RBC updating its computer database to prepare for their next promotion, but this timing is interesting a day or two before the CMHC announcement)

A Crisis of Faith? - The Emergence of Ex-RE Bulls

(archived from my forum posts today)

Remember yesterday I said I had heard from 10 people in the past few days saying they think Vancouver home prices will drop?
Well, make that 11.

While chatting with my new landlord, he said “I think Vancouver home price will be dropping for next couple years, now that they removed the IIP. We were about to buy a $1M house in Vancouver few weeks ago, glad we didn’t. Vancouver real estate is not worth investing anymore” (landlord was from China but had been in Vancouver since late 1990s.)

__________________________________________________________________________

There is the hard stats aspect of RE, things like Current Inventory, monthly sales, new lists, months of inventory, etc. These values are useful for retrospective analysis of already completed sales, from which we may have a glimpse of the near-term price movement should current market momentum stays course.

Then there is the soft “investor sentiment” aspect of RE which is difficult to measure. When my family, in-laws, friends, colleagues, even landlords who were previously adamant that “Vancouver RE will never go down” now have respectively changed their minds, “predicting” RE will go down and “advising” me to wait a bit before buying, it almost felt like they were all suddenly brain-washed in unison.

Then I realized that the truth is in fact the opposite. They were brain-washed by media and RE industry to believe that Vancouver RE was untouchable Because thousands upon thousands of Rich Chinese are coming. No matter how we attack their ideology with stats, figures, reason and logic, their belief in RE was immune due to the impregnable shield of HAM-delusion. After Feb 11, this HAM Shield Generator which was grinding along for 28 years had abruptly been shut down. The (perceived) backbone of Vancouver RE had been broken. What these ex-RE Bulls are experiencing, is a Crisis of Faith – and it can be terrifying.

Imagine them opening their favorite local Mandarin Chinese newspaper and finding the RE Headline that reads “Rich Chinese Now Abandoning Vancouver, Swarming Seattle Instead”. Hardly believing their eyes, they opened their favorite local Cantonese newspaper and found the exact headlines. 

Feeling shell-shocked, they turned on their computers and surfed Hong Kong news instead. Lo and behold, both Oriental Daily and Sina Finance are putting the same news on their RE headlines.

Discouraged, they opened another window for China news, only to find China’s XinHua Net is printing the same news.

Not wanting to give up, they surfed to Taiwan newspapapers, only to find several prominent Taiwanese newspapers bashing Vancouver RE.

It almost seemed like the Entire World is against them…

Can you beat my Price-To-Rent Ratio? ; )

Just moved into a new rental house.

Good time to talk about Price-to-Rent Ratio (Price/Annual Rent)

According to Investopedia
Ratio 1-15:   better to buy than rent
Ratio 16-20: typically better to rent
Ratio >21:    much better to rent

My old place~ 26 (assessed price ~$700k)
My new place~ 32 (assessed price ~$800k)

Rent’s slightly lower (after we bargained the asking rent down by $350/month – the perks for being a “desirable tenant” with a wife who can probably teach a course on bargaining) 

Living area increased from ~1700sf to ~2000sf, house also <10 years old, better view, pleasant landlord looking for long-term lease. Overall a comfortable place to watch the RE drama unfold.

- If you have time, check out The Province's piece on P-R Ratio for Greater Vancouver

As an aside, I had heard from almost 10 people (including my mother-in-law, my parents, Chinese clients (who are home owners), friends) in the past few days telling me (without being asked) that they think Vancouver home prices will drop. Could the tide really be turning this time?

Sob Stories coming in post-cancellation of Immigrant Investor Program

in today’s Sing-Tao Daily (One of biggest Chinese newspapers in Canada): 

Immigration dream lost, house purchase plan aborted, some forced to sell (Chinese) 

(I’ll attempt to translate below)

After IIP was abolished, there are fears that not only Greater Vancouver RE will be impacted, but also sectors such as education, retail, tourism, etc. We (Sing-Tao) will launch a series of reports to investigate in-depth the economic impact of this new immigration policy.

1. [Mr Zhong] is a Taiwanese businessman working in Shang-hai. He applied for IIP in 2010, however his case has been stuck on wait-list. To move forward on his children’s education, he sent his children to study in Coquitlam in July 2012 as international students (Dr Charles Best Secondary & Como Lake Middle). His wife accompanies his 2 children, currently renting near the schools. Mr Zhong thus became an “astronaut.” The Zhong family was about to purchase a $400k condo in Coquitlam last few days prior to Budget announcement.

Upon hearing that IIP is abolished, the Zhong family’s plan was in complete disarray. First, they immediately cancelled home purchase plans. Second, Mr Zhong is now planning to send his children either back to Asia, or to U.S. to contiue with their education.

When asked if he will consider applying for immigration via the upcoming “immigrant Investor Venture Capital Fund pilot project”, Mr Zhong thinks that 90% of money invested will likely be gone, and people who choose that route will most likely lose money. “If local businessmen are already having a hard time making money, for foreign capital to make money doing business here, is most likely difficult, if not impossible,” said Mr Zhong.

2. [Mr Zhong’s Friend] is also a “Victim” of IIP abolishment. His child is also studying as an international student while his family awaits IIP application approval. Mr Zhong’s friend purchased a $800k house in 2012. Now that IIP is canceled, he is going to sell his home.
“However, Canadian Dollar has depreciated against Chinese Yuan in the last 1-2 years. My friend will stand to lose the equivalent of $100k CAD, just from selling his house,” said Mr Zhong.

________________________________________________________________________________

It is important to note: (which I forgot to mention when commenting on IIP cancellation last couple days):
- It is common practice for parents who’re on waitlist for IIP to send their children first as “International Students”.
- These students will occupy housing space, they could be renters (but more likely owners).
- We know that there were “45,000 rich Chinese families on the waitlist eager to come to Vancouver” as of last week.
- Some or many of these parents already sent their children to Canada, whether to study in grade school or to “claim an intention to study” and came in via “Student Visa” (rules will be tightened by Jun 1st, btw)
- Therefore, we should not just look at the loss of “2000 wealthy IIP families/year to Vancouver” starting 2015. We should also consider the RE that’s already purchased/occupied by thousands, if not tens of thousands of waitlisted applicants’ families (thanks to no foreign ownership restriction).
- These families will no longer be able to settle in Canada (at least can’t immigrate), and they will have to make major decisions whether to seek greener pastures (eg Australia/US, even back to Asia).

- The cancellation of IIP, per se, will not only reduce future demand but also actively increase housing supply in the near future.

-HAM: easy come, easy go.

Mainland millionaires turning backs on Canada and looking to the US & Europe, say migration agencies
Feb 14, 2014
“A rising number of wealthy Chinese are moving to the US and Europe because their once-favorite destination, Canada, has been scaling back entry, migration agents say.

Hong Kong-based immigration consultants are also trying to provide would-be migrants with alternative programmes after the scrapping of Canada’s investor visa scheme.

Hu Xiaofeng, a Chinese banker who obtained PR in the US last year through an investment programme, said “I wanted to move to Canada, but my agent told me the process was more complicated and the chances of obtaining Canadian residency status were slim.” “The important thing is to move away. I don’t speak English so the destination really doesn't matter.”