I have been spending a lot of time the past few weeks researching the residential Canadian real estate market, Home Trust/Capital and Equitable Bank. We had no exposure to any of the above (other than personally, most of us own a house) but when there are such serious dislocations, and retail investors are involved, there is always opportunity, so to work I went. (Full disclosure, we now have some exposure...at what I believe to be the right risk/return profile).
Part of my research was hopping on a conference call on Tuesday that National Bank Financial (NBF) hosted on the topic. It was actually a pretty good call with various NBF Economists and Analysts giving their research/views on what has been happening in both the residential real estate market and Home Trust/Capital.
I won't go into the dislocation I think I uncovered from retail investors, but I thought I would share a simple perspective on some views on the Canadian residential real estate market.
First, no question, housing prices in Canada (especially Montreal, Toronto and Vancouver - and their suburban areas) have shot up like rockets the past year. The reason why is varied from low interest rates, immigration, economic growth, etc.
Here is a chart to show just how crazy the the price appreciation has been the past year or so:
Looks a little bit too much, doesn't it?
However, if we look at another metric, one I have thought about, anecdotally, for about the last 15 years, we can see that Canadian major city home prices are actually...cheap, on a global scale. Have a look at Montreal, Toronto and Vancouver home prices vs income levels:
Look at that. Montreal is the cheapest of the bunch and Toronto is third cheapest. Keep moving to the right of the chart...some you would expect to be more expensive than our three big Canadian cities, but others, hmmm. Buenos Aires, Stockholm, Montevideo, Rio...heck even Paris and Rome, given the fiscal situation of the Eurozone puts the nations of these two cities in awful shape (but tourists still like to go there). And then of course we have the expected cities as the most expensive like London, Beijing and Hong Kong.
I remember about 15 years ago, a Consultant (who was German and from Frankfurt) from McKinsey was transferred to Toronto and bought a brand new build house about four down from our house. The small neighbourhood we live in was all-a-buzz about the fact that these crazy Germans paid an unheard-of-at-the-time price for the neighbourhood of $2.25mm. I remember meeting Franz (not kidding, I think that was his name) at a neighbourhood Christmas party shortly after they moved in. I sort of said, "Wow, thanks for single-handily moving the price of the neighbourhood up". His response was simple and factual, "Housing in Toronto is so cheap. There is no option to live 6kms from the office downtown in Frankfurt, but if there was, it would have cost me twice as much to have a large house like this and so close to downtown". There you have it. (They got divorced, sold the house and moved out about 7yrs ago).
So, yes, home prices have moved up way too fast over the past year but maybe they are just playing catch-up on a global basis? I think they will likely stabilize here and I put about 0.5% probability of another 33% year of price appreciation. However, maybe there will be a solid base put in for Canadian home prices given how cheap they are on a global basis? With Toronto being the fastest growing city in the developed world and with huge immigration numbers, there may be a support bid not too far beneath here. Stabilization at this level or slightly below would be a good thing and then the price appreciation chart (first chart) wouldn't look so "expensive" given the past year would roll off. Time will tell.
Some of this I wrote about in an Open Letter to the PM and Min of Fin back in July 2015 (I never sent the letter to them, but maybe should have). highrockcapital.ca/pauls-blog/open-letter-to-prime-minister-trudeau-and-finance-minister-morneau-on-the-state-of-the-housing-markets-in-toronto-and-vancouver
What I should do, is update the Compound Annual Growth Rate (CAGR) of an average Toronto house vs Royal Bank stock over the past 20 years. Maybe for next week but I bet, even after the past year's move in Toronto home prices, Royal Bank stock is still way ahead of the average Toronto home price on a 20 year CAGR basis.