More data on the prominence of Chinese buyers in Vancouver; The Economic Analyst in the news
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:
Going against the crowd requires courage
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:
Building a winning investment portfolio (part 1, part 2, and part 3)
Reader question about stock picking and stocks I own
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.
Cheers,
Ben
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- Larry yatkowsky,
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8 Comments
Congrats on making the Globe. Nice write up. How in the world did they not mention your views on housing?
WRT Vancouver, just spoke to a friend in the soggy city. Mortgaged to the eyeballs....almost a mil in debt. No worries at all. He's convinced he'll be able to sell at any time in a bidding war to a gaggle of wealthy asians. Hope that works out for him. I don't know how some people sleep at night.
Mark Carney stated it pretty clearly that there is nothing the BoC can do for the moment. In 2008 the global financial bailout had equalized major economies however, we are now seeing economies diverge via capital flight into inflating or stagnating economies as a safe measure or protection of wealth (yes it's come down to these types of investment choices). In my view it appears that foreign investors are willing to risk their investment by 'riding the inflation wave' and taking a chance at exiting the market before a top. I highly doubt that in the post-market correction Canadian policy will allow that money to flow out as fast as it came in; foreign investors may be caught in trap. If not trapped, you can expect that money to flow-out faster then it came abroad leaving the housing market in a very dangerous position.
Carney lifting rates is like pulling the plug on grandma's life support.
"stated it pretty clearly that there is nothing the BoC can do for the moment"
No but the BoC isn't the only entity that can affect prices. He hinted ("pretty clearly" IMO) that said entities not acting would be a "risk" for the bank raising rates sooner than it otherwise would.
Carney's words are no different from what we are hearing from the Federal Reserve's 'finger pointing' policy. He is elusively referring to the CMHC which we all know is a ramshackle entity that has gone unregulated for too many years. Remember that the CMHC is a hybrid entity that is NOT regulated by OSFI and regulates itself as stated below from it's 2009 annual report:
"Retained earnings related to the insurance activity are appropriated in
accordance with guidelines set out by the Office of the Superintendent of
Financial Institutions (OSFI). CMHC’s target for capitalization is 150 per cent of the minimum capital test recommended by OSFI. Under these standards, the insurance activity is fully capitalized. Currently, CMHC maintains approximately twice the level of capital reserves recommended by OSFI. In 2009, retained earnings set aside for capitalization represent 1.3 per cent of the total insurance-in-force of $473 billion. Retained earnings set aside for capitalization in 2008 also represented 1.3 per cent of the total insurance-in-force of $408 billion."
All shall be revealed when the CMHC releases its 2010 report (that is being delayed) as we may discover that its total liabilities confirms its position as the #1 Too Big To Fail. Carney will then have the pleasure of saying "I warned you" as he prepares a mass bailout.
The problem here is the bartender, not the drunk driver.
"The problem here is the bartender, not the drunk driver."
On this I think both are culpable. As for the bartender, I have suspicions that CMHC is coming across as a bit too arrogant for the likes of the government. The way the arrangement with the government works now, I don't think the government is being given appropriate access to CMHC's books and are being stymied when trying to influence how CMHC operates. We think that government is some omnipresent and omnipotent entity that can elicit anything it wants but from what I have seen, this is likely not the case. Instead I expect CMHC has been deft at avoiding increased oversight and is becoming more and more at odds with its master.
I don't know much about the inner workings of Ottawa but I think CMHC is in for a rude awakening over the next year.
I don't think that CMHC seems somewhat disparate from OSFI has been lost on Carney. An act currently before parliament gives the finance ministry significantly more control over the balance sheets of insurers. As they should, perhaps, given the exposure the government has to insurer default.
There are two issues: first, calling out that CMHC's situation was completely avoidable by legislators, you know, actually DOING their job of "fiscal prudence" 10 years ago; second, asking what should be done going forward. On that front, I think Bill C-3 is a step in the right direction, at least compared to where we are now.
The damage has already been done. When the Finance Ministry looks over the CMHC's books and quantifies the contagion risk, they are going to wish they kept looking the other way. That's when the finger pointing game begins and Canada Action Plan V3.0 commences.
This event will be a copycat of the insolvent FDIC. More bailouts—more closed door operations. The belief that Bill C-3 (created by the same lawmakers that have ignored the issue for years) will do any justice is preposterous.
One of the few sane opinions about the obvious Canadian RE bubble. Regarding the Asian "investors", chances are they could change their priorities fast and defy the typical behaviour of a typical investor considering the way their wealth was created.
http://www.guardian.co.uk/world/2011/jun/17/report-corruption-chinese-go...