Latest TD report: Canadian Household debt a cause for concern indicates that Canadian household debt has tripled from 50% to 150% from the mid-1980's and has reached US levels.
How has this happened:
Bank of Canada decline in interest rates to combat inflation
People feeling secure and confident to take on debt because of prosperity and job creation (created for the most part by low interest rates)
Home ownership rates higher
Culture of now: buy today even if you can't afford it.
Credit availability to younger Canadians (consider Tuition fees in Ontario have 207% since 1991 to 2007)
Credit availability in general (Canada does have securitization of debt instruments and Banks know that line of credits are "sticky" products.)
TD feels that Canada won't reach a US style housing collapse but are concerned carrying higher debt loads will cause difficulty for many people to weather the storm of a double-dip in the economy.
X6J5VV27TKMP I chose a dang scary picture for today's post.
As of September 8th the Bank of Canada has set the Overnight Rate is 1% Where do banks predict the overnight rate will by this time next year:
Scotia Bank: +0.75% (9/2/10) CIBC: +0.5% (9/30/10) TD: +0.63 (10/4/10) - This the annual average for the end of 2011 BMO: +0.58 (10/1/10)
Money is still going to be relatively cheap next year, so this will keep the real estate market buoyant.
What will cause a collapse
- Massive Jobs losses - Credit Crunch and no lending - People teetering on the brink of insolvency or have very little equity on their property (i.e Those in arrears in their mortgages) - Big daddy of SARS or swine Flu
I think I'll take my chances buying right...especially since the volatility index of stocks is very high
According to StatCan, there is huge demand for Canadian debt-instruments as people around the world are losing faith in the US dollar.
Expect the Canadian dollar to continue to strengthen against the US as people around the world dump US assets and invest in our commodity based dollar (good news for Mining Centre of Canada: Vancouver?).
Surprise, the number of people going insolvent is up about 35,000 people (up 28.6%). At last check, according to the Office of the Superintendent of Bankruptcy Canada, there are 151,712 total insolvencies by consumers in Canada, as a percentage of the population (33,504,700) this is about 0.005%.
Lets look at the top towns:
Calgary +74% (to a total of 3,755 people or 0.003% of its population)
Kelowna +57.3% (to a total of 744 people or 0.004% of its population)
Edmonton +53.5% (to a total of 3,860 people or 0.003% of its population)
Thunder Bay +47.1& (to a total of 600 people or 0.005% of its population)
Vancouver +42.6% (to a total of 5,985 people or 0.002% of its population)
Toronto is up 34.4% (to a total of 25 653 people or 0.005% of its population).
Just in case you wondered, check out the bankruptcy numbers for the US here
So E12, and E11 did well for appreciation. Why? Well, you would assume because interest rates are so low there were a lot of first time home buyers taking advantage of the times to buy a home. Well let's do some quick analysis with data from TREB (note this is for overall sales including semis, towns and condos - TREB doesn't break down totals for each housing class).
Both e12 and e11 had listings go down a significant amount. In e12 in particular, sales remained the same while listings went down 21.65%
It should be noted that both in 2008 and 2009 there was only 232 sales.
In e11 listings went down and sales went up, again showing a supply shortage. Following the trend, it only represented a total number increase of less than a 150 sales.
So it seems more of a listing crunch that is causing the appreciation - as opposed to a mad dash of "sub-prime" buyers teetering on the brink of insolvency.
According to the City Mayors Website, many of the fastest growing cities in the world are home to south asians (see here). No surprise to those in Toronto, as now South Asian's represent the single largest visible minority group (just edging out Chinese Torontonians).
Since there are more South Asians taking post secondary education than the population of Canada, this represents a great opportunity for Toronto businesses if immigration can be fast tracked and education/experience abroad would be better recognized. US's tougher immigration laws would lead Toronto to be a beacon of skilled labour for large US corporations looking to set up shop in Canada.
These initiatives were something close to the late David Pecaut, who saw skilled worker immigration as one of the tools to a prosperous city.
Snap shot of the Economic Fundamentals of the GTA by CIBCWM available here.
Notice housing starts and permits plunged from 46k to 26k...Brad Lamb expects another supply bottle neck in 2012 as a result
TD also published their Employment monitor. Ontario gained 27,100 jobs (however according to Ben Tal, Senior Economist, CIBC World Markets Inc., Toronto is still hurting)
The US sub-prime mortgage crisis has led to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.
TD bank recently published a Resale Housing Outlook report (see here)
TD comments if the real estate market is in a bubble.
Conclusions:
On a national level, they feel that prices are overvalued 12% based on market fundamentals (income growth, job growth etc).
Most of pent up demand from the sales crash last year should be clear by now
From next year on, we should see the real estate market return to growth based on fundamental drivers (or have price growth slow to catch up to the fundamentals since incomes are expected to go up).
They don't expect prices to fall, in fact their fear is prices may continue to rise.
Real Experts Comment: Yes the market overshot, and people have been taking advantage of rates to get into the market. As more supply comes online in the market (finished condos, and new listings) and as supply of buyers capable buyers fall, prices should level off to a lower growth rate.
This video is a follow up to a previous blog post on bringing in skilled workers who can't get US visa into our major cities.
Vivek Wadwha in the interview illustrates how great an opportunity it is to poach these folks before the go back home to India and China.
Since many of these skilled workers are entrepreneurs, we could be opening up the red carpet to the next RIM in Canada.
More Skilled Entrepreneurial Immigrants = More RIM's = More Jobs + Higher Incomes + Population Increase = Price Increases for Real Estate and more prosperity for our country.
Will Calgary's skyline getting better? Will Calgarians lose all those damn parking lots all over downtown?
It just might: Alberta is the only province without HST and financial services companies are not eligible for any HST tax credits. Think of the iconic buildings in Toronto, they are all home to the financial services industry.
Will we see an explosion of banking, insurance, pension fund management in Calgary and Edmonton because all of these companies in Toronto will see an 8% increase in costs?
We'll have to see how this plays out. Increased costs vs Being in close proximity with the best in your industry and your suppliers.
I can understand Ontario's position, Toronto is the hub of the Canadian financial world but their bread and butter is manufacturing (which will benefit the most from HST)
The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.
Those worried that China was completely dependent on US consumers were wrong. Expect Canadian commodities to start recovering...as a result more jobs in resource towns..which in turn increases population density and raises rent and real estate prices. NICE
As an aside..this is a great example of motivations of government. Because of the massive layoffs, workers in factory towns that export goods started to protest and riot. Chinese government definitely doesn't want a revolution on their hands so pumped $1.2 Trillion to businesses and consumers and forced them to spend it..completely propping up the economy with lightning speed.
US is definitely not in revolution territory and the government doesn't control the banks so things do move as quickly.
"More equity and debt issues hit the market, and REITs on both sides of the border started to deleverage their bloated balance sheets. As a result, REIT units quickly raced off their market bottoms, rising 55% through Friday's close, compared with 43% for the broader benchmark here in Canada, and more than 80% in the U.S. versus 51% for the S&P 500. Simon Property, which plunged to US$25.95 in March, closed yesterday at US$64.77."
With increased liquidity, the Canadian REIT sector is now well positioned to address its debt due in the second half of the year and 2010, said Neil Downey, RBC Capital Markets analyst.
According to CIBCWM, if you invested in a REIT you have earned 34.3% last year.
So who's right?
Seasoned experts who have been waiting for CAP rates to go up have been waiting a long time...in fact, some believe cap rates might go down further because interest rates are at historic lows. Lenders are giving 5 and 10 year mortgages at rates that would knock your socks off 10 years ago.
I know I have blogged that infrastructure improvements (i.e. adding rail and highways) increase real estate values...it's not always a golden rule. In some cases, removing trains and highways can spur a real estate renaissance in a neighborhood because removing them eliminates a barrier or a border vacuum in the city.
Essentially, a highway is a massive single use entity that forms a border..a border that attracts blight to a neighborhood and depresses property values.
Why does a border create a single use entity and why is that no good for real estate investors?
The answer is simple: few uses = few purposes to visit the area = fewer users = fewer future buyers of the real estate in the area. In addition, When borders are added, you start to see increased crime in the area.
Think of places you see graffiti...they are usually in places where there are fewer people to keep an eye out for criminal behaviour (see above). This creates a further negative feedback loop on real estate in the area.
In the Life and Death of Great American Cities Jane Jacob's tells us the following:
"..literal and continuous mingling of people, present because of different purposes, is the only device that keeps streets safe. It is the only device that cultivates (diversity)."
Cities have started to realize this and have begun to re-think the benefits of keeping Urban freeways. Essentially tearing down the highways would re-connect different neighborhoods bringing people into the area and thus make real estate more valuable.
Interesting article from ABC money news that you can take a look at here.
States that university towns are not facing the "squeeze" the recession.
Here's their stats:
Provo, Utah, where the university is located, has added jobs to its economy. Over the last year, there's been a 2.97 percent rise in jobs in Provo; the national unemployment rate has now hit 8.9 percent.
There are also business booms in college towns like College Station, Texas (home to Texas A&M and up 2.06 percent); Baton Rouge, La. (up 2.16 percent), which Louisiana State calls home; and Durham, N.C. (up 2.49 percent), where Duke University have been major drivers of economic activity.
Why?
Research universities tend to be great environments for business, as they're flush with cheap, highly talented labor (recent grads), and the massive research and development budgets universities have. Plenty of the world's top companies, including Dell, Cisco Systems and Google, began in university settings.
So how does this effect the real estate market?
It appears buying in college towns is a good hedge against steep downturns during a recession. Going to Zillow (why can't we have this site in Canada) we can take a look:
The Zindex for Provo shows that prices have fallen 8.8% from last year and about 15% off the peak. In comparison, according the same ZINDEX, America has a whole has fallen 14.2% and 21.8% from the peak.
One of the key things we look at is our real estate is close to a university.
So here we are. The entire world is looking to Canada for lessons to keep the financial sector strong, whose strength essentially saved Canada from a prolonged real estate slump.
While politicians chest thump how great Canada is, and how crappy the US is, we still can't rest on our laurels. There is still a gap in the prosperity of Canada vs the US... and it's time to action to strengthen our cities further to power real estate across the country.
First off, why is there a prosperity gap?
Simply its because of our poor productivity performance. According to Martin Prosperity Institute at the University of Toronto, Canadians do not innovate enough or create comparable value add in our hours worked (take a look at their full report here). Our low dollar has allowed this to happen for too long.
Why is improving the productivity gap important to real estate investors?
First and foremost, increasing increasing our GDP/capita would increase our after-tax disposable income. Which means Canadians would be able to afford mortgages and more rents...increasing the value of real estate.
As can be seen from exhibit 4 from Martin Prosperity, if Canadians close the prosperity gap we would increase our disposable income by $11,500. This increase in disposable income would basically match the total Canadians spend on mortgages.
Finally, what should governments in Canada do to improve our economy?
According to Martin Prosperity, we should take on an attitude of offense and not defense:
Develop a more competitive economy (hello cell phone providers and CRTC)
Encourage business leaders to be ambitious, raise their sights, seek out and capitalize on new opportunities and focus relentlessly on improving how their business opportunities via a tax system that encourages investment and innovation in the long term.
Regain our mindset to be the best...no more Mr Nice Canadian. Think bold and go all out baby
What do real estate investors do?? seek opportunities where cities and neighborhoods are fostering innovation. This will attract high income jobs, increase the population of skilled people from around the world and, in turn, cause real estate to boom.
Take a look at Richard Florida's theory on city prosperity here:
Every town has a great economic development office that talks up a town and sells itself as having a bright future. Examples of passionate people like the folks of Plano will excite you about the future and may cause you to rush off and buy real estate (I have no Idea if Plano is a good place to invest...watching their video inspired me to write).
The problem is: Every city has an economic development office and it's hard to tell if their actions will have an impact.
One key that David A Wolfe, professor of Economic Development at my Alma Mater University of Toronto, uses for measuring the effectiveness of a town's economic development office is the ability to mobilize local resources to tap into national and provincial/state funding.
Why? According to Professor Wolfe, it gives the city the "organizational institutional infrastructure for collaborative action." Examples of such type of infrastructure includes:
When you start seeing an economic development office with a proven track record..then and then only get excited about prospects for the town's real estate.
What are the factors we need to look in order to get a sense the real estate in a town will start kicking butt?
Analysis of real estate markets hard for two reasons:
is the fact you have many factors that drive real estate... they don't add up in a linear fashion (i.e. x+y=great real estate)
There is such a long time lag for the results of the local leaders actions before real estate could change.
Let's take a story of Ottawa and Kitchener-Cambridge-Waterloo area in 1990's. Ottawa hi-tech was on fire, companies like Nortel, JDS Uniphase, and Newbridge Networks were the darlings of the TSX. On the other hand KCW was a region in the middle of no where along the 401.
Flashfoward to now. RIM is on fire and KCW is home to many hot up and coming companies. Ottawa has some small promising startups...but nothing on the level that it once had.
Large companies have a huge impact on real estate, not only from driving up demand for office and industrial space...but in attracting employees for residential space. Understanding where a city will go real estate DOES involve studying the major employers in the area and to understand if they are on solid footing.
One question that I always ask: How can we find the towns where growth will be strong before anyone else knows about it?
To find up and coming markets is a difficult task, there is no one answer because there are multiple different factors working together...lots of research by Ajay and I helps us understand what's going on to spot trends.
What we have learned over all of our research: what a city and its residents do today will have a huge impact on its real estate for years.
So what does this have to do with the synchrotron? Everything.
In 2004, the synchrotron was built in Saskatoon for a cost of over $170 million. The synchotron in Saskatoon is world class and has many different applications. Companies from computer engineering to medical research rely on the synchrotron for their research; as a result, high paying skilled jobs are being created now and expect more in the future...which is great for real estate in specific neighborhoods in Saskatoon.
Right now change is happening at an accelerated pace as governments are spending their way out of the recession. A communities ability to mobilize local resources to get provincial and national funding will be key to it's future success.
While most cities realize this, they don't always make the right choices (hello Windsor...how does it look in hindsight building your schools around Chrysler).
Research what's happening around your town and see how you can profit from it.
Don Campbell was recently on the Hour telling us Torontonians why Hamilton would be a better place to invest than Toronto. Crazy? No
Picking up on my GDP example from my previous post I remembered an article I read in the Hamilton Spectator. the article noted that Hamilton ranked 7th of all the cities in Canada to do business (see here). Toronto didn't even break into the top 10.
Here's why: it costs too much in Toronto to do business. The article states:
It would cost a 300-person insurance firm or IT company at least $2 million more a year to operate in Toronto than in Hamilton.
So jobs are more likely to be created, real estate is generally cheaper...won't this increase the population? Won't more people working in a town mean more tenants (driving up rents) and more demand for housing (driving up prices). Amid the bad news, take a look at the back pages to find the opportunities (I mean for clips like this, not the classifieds)
Real Experts Inc is a real estate investment company that is focused on delivering above market returns to its investors and to provide in depth real estate market research to the general public. Real Experts Inc is your source for up-to-date real estate market research and information.
Our research looks at 8 key local market conditions and trends that drive long-term real estate value appreciation. We consult with various government groups (local, municipal and federal) and private research organization to compile market data. All pertinent data points and information are analyzed – both the economic and real estate specific variables.
Posts
