JUNE 19, 2011
It’s been a busy couple of days, but I wanted to write a quick post highlighting some articles of interest from the past few days.
In the news...
About a month ago, Larry MacDonald, business columnist for the Globe and Mail, sent me an email asking if I’d like to be featured in the ‘Me and My Money’ column. I was quite happy to be considered. Here is the article:
This particular column is limited to 400 words, so Larry had to heavily edit what I sent him. For anyone new to the site and perhaps wanting to read more on my investing approach, you can check out these posts:
To summarize....build a core of cheap, broad-based ETFs. Once that is in place, consider allocating a small amount to specific stocks or sectors that you feel will outperform. I like sectors that have been beat up and seem to have little upside potential, as that is often reflected in the price. There are not many sectors that are a strong buy at the moment, though the tech sector in the US has some ridiculously good looking stocks, while natural gas plays will likely outperform other commodity stocks going forward.
New data about the prevalence of Hot Asian Money (HAM) in Vancouver...
I have been a huge sceptic of the Hot Asian Money story in Vancouver. I’m sure most of my readers will know the story: Rich Asian investors, mostly from China, have bid the price of Vancouver real estate to astronomical levels (see the post from Thursday or this post about the Demographia survey), and will sustain house prices at levels that are the second highest of any city in the English-speaking world.
Now to clarify, I have never doubted that there wasn’t some demand from international investors. The immigrant investor data confirms that Vancouver receives the lion’s share of wealthy immigrants coming to Canada. That has never been in question. But is it enough to sustain house prices? And if the foreign purchasers are buying with cash, as the story is often told, how do we reconcile the immense debt load in BC compared to the rest of the country....or the negative savings rate for over a decade now? Something about that story doesn’t jive with the irrefutable facts.
My position has always been that the boom in Vancouver, as with the boom across most of the country, has been driven primarily by one factor.....access to cheap and plentiful credit. Where the 'rich Asian' story becomes important is in how it has encouraged new buyers to jump into the market out of fear that house prices will continue to outpace their ability to save. As Mark Carney noted in his speech last week in Vancouver, "The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear—greed among speculators and investors—and fear among households that getting a foot on the property ladder is a now-or-never proposition."
Nevertheless, I have searched for reliable stats to either confirm or refute the notion that wealthy immigrant investors are driving the market...(as opposed to Canadian citizens of Asian origin who are purchasing homes with similar leverage as the locals). In the most commented post I have ever made, I actually made a plea for hard data on the topic. The comments were quite fascinating, though no one was able to provide the needed data.
In the past few weeks, OSFI, the country’s top financial regulator, has announced that they will examine the impact of foreign purchases on real estate prices with an emphasis on the risk to financial institutions in the event that foreign capital flows dry up....as they very likely would if real estate prices dropped meaningfully in Vancouver or Toronto. These ‘investors’ are speculators...plain and simple. Speckers are notoriously prone to disappear if the illusion of perpetual cap gains evaporates.
Vancouver realtor, Larry Yatkowsky, among the very small group of realtors willing to acknowledge the crazy prices in Vancouver and present a reasonably balanced perspective on it, has made a great post over on his site:
It’s important to first note that these types of surveys are notoriously prone to errors. Nevertheless, in the absence of other concrete data, this at least gives us some insight. Let’s highlight the important tidbits. Note that first time buyers as a percentage of total buyers experienced a sharp drop in May, in line with my observations that the entry level market was drying up in Vancouver....not a good sign.
Next, note the percentage of buyers paying cash. Pretty impressive. But what this data hides is the buyers who had financing pre-arranged and placed an offer with no financing condition in place. It’s impossible to calculate what percentage this group would represent, but the true cash buyers are certainly less than the 15-20% described in the survey.
Note also that the percentage of conventional mortgages (greater than 25% down payment) is also extremely high. This is not at all shocking as this is aggregate data that captures both first time buyers and trade-up buyers. Anyone who has bought in the past decade in Vancouver has considerable equity available to put down when they sell and purchase a new home. What would be far more telling would be a survey of first time buyers, those most at risk in the very likely event of a significant market correction. Unfortunately that data is not available. The other thing that is lost in this stat is the amount of additional consumer debt carried by the buyer, most notably any home equity lines of credit. This also masks the true equity position of most home owners as it is not counted as mortgage debt. Given BC’s negative savings rate, it goes without saying that debt growth has been enormous in Vancouver. I would bet that this has largely been in the form of home equity extraction.
Finally, and here is the doozy, note the percentage of buyers who are not from Canada.....less than 10%....right in line with my estimates.
We’ll all anxiously await the release of the OSFI data. Until then, the debate will rage on.