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March 24, 2016 | Seriously?

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

KIDDING modified

Over the last two days dozens of people posted the same article in the comments section of this blog, in hopes I’d be proven an idiot. While that’s a low bar to clear, this didn’t do it. Let me tell you why.

For those who think Canada’s being overrun with rich people speaking Mandarin, the headline said it all: “Chinese investors buy one-third of Vancouver homes: National Bank estimate.” It was just what a lot of them wanted to read, as it confirmed their bias, observations, prejudice or the urban myth they’ve adopted. And, wow, it came from a bank. Gotta be true, right?

Actually the National Bank, the sixth largest, based in Quebec, should be ashamed of its analyst, Peter Routledge – who spends most of his career dissing Canadian bank stocks. This report was arguably the worst ever to leave a research shop. It was even more pathetic than one done by a Van-based real estate company who counted the “Chinese ethnic-sounding names” on sales reports to determine the nationality of buyers.

Unbelievable, that was. Fantastic, this is.

The report’s headline conclusion: a third of Van houses are falling into Chinese hands. That compares with the 5% estimate adopted by both the BC government and the provincial realtors’ association, plus a survey of members done by the local real estate board. In other words, what Routledge ‘discovered’ would be a six-fold jump over the best estimate of everybody else.

So, how did he do it? Where did this data come from?

He made it up. Routledge admits it was a “back of the envelope” conclusion that he drew from 100% non-Canadian data that “could have built-in biases that overstate (or understate) the amount of capital inflows.” So, the methodology, whatever it was, probably sucked.

But, wait. We actually do know the methodology. Routledge took total sales figures for purchases by non-US residents from the American National Association of Realtors, which showed a big jump last year in Chinese action. He then found a completely unrelated survey done by the UK-based Financial Times which (in a multiple choice format) queried 77 high net worth Chinese guys who had purchased real estate abroad. Yes, 77 people. “Admittedly not a statistically significant sample size,” Routledge admits. No kidding.

Anyway, he took the results of the Times survey then applied the ratios of buyers in Vancouver (there were nine of them) and multiplied the US numbers by this factor to come up with a total probable dollar investment value for the YVR market – assuming any of this was representative of the larger wholes.

That led him to this: “One could hypothesize that for every four high net worth buyers from China who purchase a U.S. residence, one purchases a residence in Toronto; and, for every three high net worth investors from China who purchase a U.S. residence, one purchases a residence in Vancouver.” Of course, given the fact Routledge had zero Canadian stats to go on, he could only deal in probable dollar values. That means, even if he were correct, there is no way of knowing how many homes in Vancouver went into Chinese nationals’ hands. It certainly was not 33%.

“Due to the lack of Canadian data, the analyst based his estimate on a Financial Times survey and data from the US,” blog dog Roberta writes. “Makes me wonder who was actually paying for this thing.” Me, too. Bogus report.

But is there any other explanation why Canadian real estate costs a stupid amount, especially on the wet coast? The International Monetary Fund thinks so. Here it is…

DEBT LEVEL modified

Cheng Hoon Lim is an assistant director in the IMF’s Western Hemisphere Department and concludes that houses here are too expensive because money is too cheap.

“Low mortgage rates are an important factor feeding the housing market boom,” she writes in a report. “This has helped keep interest payments low even as the size of the average mortgage has risen. As the chart shows, the share of interest payments in households’ disposable income declined from 9% in 2008 to 6% in 2015, while the average size of mortgages increased by some 40% over the same period. This means more households are able to afford more expensive homes, which, in turn, prompts households to borrow more money and get further into debt, while house prices continue to be pushed upward.”

As this blog has pointed out with utterly boring, mind-euthanizing regularity, rates and prices are negatively correlated. Houses are not intrinsically worth a greater amount, but the carrying costs have fallen with the rate plunge – so prices have shot higher to fill the gap. The end result is clear – (a) houses have never cost more, (b) household debt’s never been higher and (c) property risk is extreme, as rates will eventually normalize and debt servicing costs swell.

But, but, but, the deniers and garth’s-a-weenie crowd protest. If it were just cheap rates then why wouldn’t houses in Regina cost the same as in Kitsilano? That’s easy. Normal people live in Regina.

YVRers are the most property-obsessed hornies in the nation. It’s a cult, evidenced by BC having the only negative savings rate. Layered over that is the heavy Asian presence that has always characterized the city, but now exacerbates and visually magnifies the impact of foreign buyers. Do they exist? Of course, and are concentrated in certain neighbourhoods. But this is hardly unique to Vancouver. Toronto’s the same – as is ever major city on the continent. And yet, no moans from 416.

I know this won’t change a single mind. Foreigners are great scapegoats, and give guaranteed media exposure to slagging careers. Ask Peter Routledge.

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March 24th, 2016

Posted In: The Greater Fool

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