The Government of Canada continues to take the “don’t worry, be happy” approach to governing the country. Canada never has bad new, only good news that maybe is not so great. The US Secretary of Commerce has his sights on Nafta, and it’s unclear what the implications will be for Canada. But the story is the same, it will all work out for the best. ∞
This is an article that you should read to just prove how stupid things are getting. London is one of the sleepiest cities in Canada. Talk about nothing going on. Yet there is some pressure on house prices there.
I lived there for two years. I know what I am talking about. This is truly ridiculous. ∞
Here is an article from the Financial Post quoting a recent study prepared by DBRS, the Canadian bond rating agency: Massive drop in housing prices would still leave Canadian households with more equity than debt. I find this one of the hardest articles to read that I have come across in a very long time. Here is a presentation by DBRS on the Canadian housing market. It summarizes their view on where things are. The numbers in the presentation are not supported by any calculations, so it’s not easy to see where they come from.
It’s hard to understand where the average household net worth comes from. Likely a Statistics Canada number. Once again, the average is used rather than the median so the number is heavily impacted by high net worth individuals.
Data from Statistics Canada
Here is a recent report prepared by Statistics Canada on the subject: Annual Household Distribution Tables, estimates of assets, liabilities, and net worth, 2012 to 2015 (provisional estimates). Here is a quote from this report which is relevant to the DBRS comments on the state of affairs in Canada:
Households in the middle of the income distribution have a higher debt burden
Household wealth, or net worth, is not distributed equally by income quintile. Looking at shares for both 2012 and 2015, households in the top income quintile (quintile 5) held more than 45% of total household networth, compared with about 9% for the bottom income quintile. From 2012 to 2015, the share of household net worth remained relatively stable by income quintile.
Households in the middle of the income distribution had a higher debt burden, or debt-to-asset ratio, than those in the top and bottom income quintiles. From 2012 to 2015, households in each income quintile reduced their debt-to-asset ratios by about 1 percentage point.
Households in the bottom income quintile held a higher share of their assets in life insurance and pensions than other quintiles, while all other income quintiles held a higher share of their assets in real estate and a higher share of their liabilities in mortgages.
You can see here how misleading the DBRS report is. It’s really disturbing to see such sloppy analysis. What Statistics Canada is telling us is that household wealth is not distributed evenly and that 45% of it is controlled by the top income earners. Think about that – 45%!!!
So when DBRS says that a significant drop in real estate prices would have a minimal effect on household equity, the statement is at best misleading. 80% of Canadians would be significantly impacted. This is the group that policy makers need to worry about, not the top 20%. In addition, note the comment on the assets classes. The bottom quintile held most of their assets in pensions and life insurance. Financial assets. While the higher quintiles held more real estate.
What the heck
It’s hard for me to understand why DBRS would choose to present the information on such a macro basis without any further analysis. It makes no sense other than it just sloppy. The fact of the matter is that Canadians who cannot afford a real estate price shock will be adversely affected if the market drops 30-40%. It will not impact individuals with exceedingly high net worth. So what’s new about that? ∞
I have been bearish on Toronto real estate for a while. The moon and the stars are lining up against the market. Affordability, new mortgage rules and the insane amount of debt that Torontonians carry. Here is an article that makes me wonder from the Motley Fool: Will 2017 Finally Be the Year Toronto’s Real Estate Bubble Bursts? Now I am not so sure. The Motley Fool is a tip sheet, in my opinion, selling products that no one needs. The writers are amateurs. In this case, the writer looks too young to have experienced any real estate downturns in Toronto, how quickly they happen and the damage done to homeowners. Some will say it doesn’t matter, but I believe that an experienced hand is an experienced hand.
The party will end
Every bubble ends badly. It’s only a matter of time.
I don’t know if 2017 will be that year. Nobody does. The market could continue rising for years. Or it could crash spectacularly. Anything could happen.
All I know is this: eventually, real estate will get out of favour. The froth will leave the market, and we will see values decline.
The time to sell is before this happens. Don’t worry about capturing the last 10% or 20%. Just focus on the 100% run-up.
Sounds like wise advice, but it provides little help for those that need to get into the market……some day it will happen. I’m not sure if he’s talking about homeowners or stock investments. Matters not. In the end, the inevitable rise in interest rates will bring this to a crashing halt the same way other real estate bubbles were brought to a halt. But this does not mean to say that the rise in real estate prices over the long term will not occur, albeit at likely a more muted pace. ∞
Here is an interesting read on a lawyer who is under investigation with respect to BC real estate transactions and Chinese investors. It’s a bit complicated, but it’s worth a read. B.C. Law Society takes over part of Richmond real estate lawyer’s practice. There is a lot going on here, but here is one of the points that I find most fascinating:
In a B.C. Supreme Court civil suit, Guo has accused two former employees of conspiring to steal over $7.5 million from her trust account with forged cheques, laundering funds in a B.C. casino, and ultimately sending cash to China. Guo claims, in court documents, that the employees are jailed in China.
Court transcripts show that in September, Xiao Yong Sun’s lawyer examined Guo in efforts to discover her interests in various investment companies and properties, and also asked Guo to provide documents to prove her former employees are jailed in China.
The lawyer claims that her employees were responsible for the theft of funds, which they shipped off to China. I don’t know about you, but this sounds awfully convenient to me. Finding them in China will undoubtedly be a daunting task as I suspect that the Chinese government will be somewhat less than cooperative when it comes to assisting a Canadian court on a local criminal or civil case.
I guess the moral here is that due diligence is required when you are doing a deal. Perhaps that should include doing some due diligence on your lawyer. It will be interesting to see what the outcome of all this is if the newspaper follows up on it in the future. ∞
In the long list of nonsensical thoughts, this one should be one of the toppers. Guess what, if you determine real estate property values every three years, it will be lower than if you adjust them every year. This is just math. And to be honest, I am amazed that anyone at Calgary City Council understands math. That’s the real shocker!
The point is that municipal spending is too high and hence the increases in property taxes. It’s not whether you adjust the taxable value annually or every three years or every ten years. Municipal governments seem to feel that it is their right to raise property taxes forever. Perhaps the council member should focus on reducing municipal spending as opposed to fooling around with arithmetic averages. Perhaps this mathematics is much too “heavy lifting” for him. ∞
Looking at the press on the “tweaking” of the mortgage rules you have once again the Canadian spin on the world. Everything will be fine. Don’t worry. Be happy. Years ago a friend of mine told me that Canada is a plantation with kind masters taking care of the people that need taking care of. How true it is.
“If you’re worried that housing prices are too high, the single rate that the Bank of Canada targets is too blunt an instrument,” says University of British Columbia economist Tom Davidoff.
Great to see this commentary from Professor Davidoff. This is commonly referred to as a meaningless statement. Interest rates have historically been used to adjust the economic temperature. There is nothing new here and it has now become a blunt instrument. These guys prefer the incessant tweaking that has gotten the Canadian economy absolutely nowhere.
The Canadian government has gotten us into this conundrum. The economy stubbornly refuses to grow. And the Bank of Canada has a great talent for finding excuses for it. Whether it’s the fires in Northern Alberta, Donald Trump and whatever excuse they can create. Where is the Prime Minister on all this? Nowhere to be seen.
Of course, Poloz was speaking before last night’s presidential debate, but in his Monetary Policy Report, the bank governor drew a dotted line from poorer-than-expected Canadian exports to low business investment in the U.S. to uncertainty over American politics.
Wow. Can Poloz never take responsibility for anything? Dump it on the Americans, dump it on Trump. Meanwhile, the US stock markets are stable and from time to time bumping into new high, Canada languishes.
These guys are great at passing the buck.
As to real estate, it is overpriced. It is too expensive, it is out of control because of the wrong-headed policies of the Government of Canada.
When will they ever learn, when will they ever learn. Sounds like an old song.
Good luck to us Canadians, we are going to need it with this lame government and even lamer central bank.