RR # 180 - Is Canada Really in a Housing Bubble?
Вставка
- Опубліковано 15 гру 2021
- There is no doubt that housing in Canada is expensive, but are we really in a bubble? Today on the show we explore the user cost equation and how it can help us answer this question. Before the main topic, we get warmed up with a behind-the-scenes look at Dell’s growth path in Cameron’s review of Play Nice But Win. From there we address Peter Lynch’s recent warning against passive investing as well as reiterate our position on the performance of small-cap value versus large-cap growth. Heading into our discussion on housing in Canada, we provide a working definition of a housing bubble and present the model used to work out user cost, addressing each factor in some detail. We discuss the risk premium for owning versus renting and highlight an interesting point on high price sensitivity during low-interest rates. The major takeaway after looking at Canada from within this framework is that user costs are in line with what they should be historically, and that saying we are in a housing bubble would be a little drastic!
Book From Today’s Episode:
Play Nice But Win - amzn.to/3IW2BWC
Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/
Shop Merch - shop.rationalreminder.ca/
Join the Community - community.rationalreminder.ca/
Follow us on Twitter - / rationalremind
Follow us on Instagram - @rationalreminder
Benjamin on Twitter - / benjaminwfelix
Cameron on Twitter - / cameronpassmore
'Want to Be Happy? Hire a Financial Advisor' - static1.squarespace.com/stati...
'Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions' - www.aeaweb.org/articles?id=10...
'Owner-Occupied Housing and the Composition of the Household Portfolio' - www.aeaweb.org/articles?id=10...
'Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis' - www.newyorkfed.org/research/s...
'Owner-Occupied Housing as a Hedge Against Rent Risk' - academic.oup.com/qje/article-... - Навчання та стиль
The chart at 58:22 is corrected in Episode 183 at 21:22
Once again I am really excited that the UA-cam Video is here at a convenient time for me :)
I am excited for another great episode! Thanks in advance at the RR Team
Edit: If you want to skip the Sex and the city spoiler starting @1:18 then go to 4:23
I laughed so hard at 15:49 :D
Good Job at the editing again. You guys all definitely earned a christmas pause. Celebrate and have a good time :)
I bought 2 books because of Cameron "defi and the future of finance", "economics for everyone"
Happy holidays Cameron/Ben!
Merry Christmas guys. Y'all are having an effect on me. Last May I changed my smart speakers from F to C. They are still C.
Perfect timing; I was looking to get a toque!
Will there be a revisit to RR model portfolios?
You cautiously explained that we can't say it's a bubble, but a couple of things to perhaps give more weight to:
Impacts of lower wages:
Consumer dollar locked in RE
Consumer dollar not in retirements
Money laundering in RE/snow washing (a big deal, see Wilful Blindness)
Also, US interest deduction coupled with capital gain exemption on residence.
Ben and Cameron you both have improved immensely! Love all your content even episode 1 👍
I won’t speak for myself, but agree that Ben’s tempo and cadence have changed over the years, which make his points much more powerful.
I'd love to clarify the distinction between expectations and predictions. When I hear Ben and Cam say the word "expected returns", I try to differentiate that from a prediction. Here's an analogy that I use in my head, but wouldn't mind some feedback on whether or not the analogy is taking me further away from what Ben and Cam mean:
In the game of craps, I "expect" the dice to add up to 7 more than than 5 (mathematically true). If was to say the next dice roll adds up to 9; that is making a prediction.
Or here's another one:
Vancouver is playing Toronto in the Stanley Cup finals. Vancouver finished top in their division and Toronto just scraped by to make it into the playoffs. Without any further data, I could say I expect Vancouver to win. My long time friend is predicting Toronto to win (because of home team bias).
Not sure if these work... but it's what I try and use to differentiate the different terms. I have most of my net worth in equities because I expect their value to grow but I make no predictions on how much they'll grow, nor the journey they take it get there, and when they'll reach such a value. I'm certainly making a calculated "bet", but all risk is a bet of some form.
The expected return is what you would expect on average over a long period of time. It is also the discount rate used to discount expected cash flows to the current price. A prediction would be "markets will return 15% in 2022". An expected return would be "all else equal higher priced stocks have lower expected returns (lower discount rates) than lower priced stocks".
@@BenFelixCSI Thanks! The investing specific example makes it very clear.
I wonder, if interest rates rise, do we expect prices to go down, or user costs to increase, as the people already in the market will need to charge higher rent.
Maybe a mix of the two?
When thinking about housing affordability and risk, would you factor in what percentage of your house that you own? If you don’t have a mortgage, the low interest rate environment isn’t a benefit and if you owe 90% on your house, isn’t there a great long term risk associated with future rate increases/fluctuations/normalization?
@@alankoslowski9473 I completely agree. The only instance where I’d keep a mortgage to make non-tax sheltered investments is if my amortization horizon was within a locked in rate period, and the rates were amazing.
Rewind to Spring 2020: if you could borrow against your house at 1.8% for 5 years, it would still be worth to to use those funds to invest in a taxable account.
Fast forward to 2023, with rates ~3-4% and it’s really hard to guarantee a better, after tax, rate of return, in the market.
@@Kevin-ky5vg Yeah I got really lucky a few weeks ago. I sold off most of my taxable investments and put it towards my mortgage. I couldn't pay it off entirely, but paid most of it so about 90% of my monthly mortgage payment is principle. So while I still have a mortgage payment, I've eliminated most of the interest penalty.
I’m going to miss listening to new rational reminder episodes for the winter break. Not sure how you guys find time to do everything you do but thanks.
Well lucky for you the year-end episode is a bit longer :)
With the Evergrande drama playing out right now, there's a real possibility that it could be the first domino to take out the rest of the current housing market. Not saying I necessarily buy into all the sensationalism, it'd just be funny if this video happened to be released at the most ironic possible time, i.e. if right now were the top of a bubble.
Of course no one knows, really, as confident as everyone is in their gloom and doom. I appreciated the fresh commentary and clear headed analysis in this video. Although as a renter who may buy soon I would love if you were catastrophically wrong (particularly in Vancouver) haha :-)
This is tulip frenzy. The bubble has grown 800% faster than the US housing market. Canada housing is increasing 21.4% annually, nearly double 11.6% the US. Canadian home prices have increased 140% since 2005. That is 819% faster then any country in the G7. The Canadian housing market is not only a bubble, it is potentially the largest asset bubble ever witnessed. 😀 👍
@The Rational Reminder Podcast : I need your expertise to review my portfolio. Do you folks offer fee based sessions ?
This housing bubble information is so INCREDIBLY helpful!! Thank you very much for the detailed information that thoughtfully includes the user costs etc. I am a renter surrounded by homeowners telling me over and over that I'm being unwise by not buying a home "RIGHT NOW", so this information certainly provides a rational reminder of the facts and figures I need to feel less like a moron and more like a reasonable investor who rents 😊
Do not let people fool you, this will collapse.
I'm a regretful owner. I plan to sell in a couple years and return to renting.
@@jeffmahoney1271 I don't know if it will collapse, but it might stagnate.
@@alankoslowski9473 As inflation continues to set in, people will not be able to survive and pay their mortgage/rent. Rates don't even need to rise at this point, a collapse is inevitable.
@@alankoslowski9473 Why not sell now?
Housing bubble talk starts at 36:50
Question for you Ben, you said you started modeling it and you came to your conclusion. Can you please shed more light on how you do analyses and modeling to test your hypothesis?
Thank you, love you videos and this pod!
Nothing fancy. It's in Excel. The User Cost model is straightforward. The hardest part was finding data. I will copy it to a Google Sheet and post it eventually.
@@BenFelixCSI Thank you Ben, I appreciate taking your time to respond.
*Toronto/GTA/Ontario housing is unique due to the fact we have +450K immigrants coming to Canada each year, rich immigrants who come with money from back home, a different type of immigrant as compared to the 1980's & 1990's, which why this bubble will not pop maybe just cool down once interest rates increase, also Canada's favourite past time is Hockey & investing in housing, and buying value stocks like the big 5 banks* 😂🤣😅
The immigration numbers are meaningless unless you know what net migration is. Canada's net migration has been falling for over 10 years now and is continuing to deteriorate. Bear in mind as well that not every single immigrant needs a new home.
Also, the narrative that waves of extremely wealthy immigrants are pushing house prices is poorly supported by data. In 2015, new immigrants to Canada had an average savings of $47k. Unless you have real evidence that's it's changed somehow in the last 6 years, this means your average immigrant is nowhere close to being "rich".
The actual evidence points to Canadians being the problem in the Canadian housing market. They're buying up too many homes as a speculative investment, and using too much leverage to do it. Immigration isn't helping the problem, but it's not the primary driver of the housing crisis.
@@ewaste8318 Continuing to deteriorate? That's misleading. Although true, we still have one of the highest net migration rates in the world. So you could say they are extremely meaningful. And that study doesn't really explain much of anything. Showing up with $47,000 of savings doesn't explain what is happening in any tangible way. Its just a piece of information. People can own assets besides savings. Or they could have already settled families that can purchase houses with their wealth that they acquired from previous housing gains. They have got to live somewhere, so theoretically there is at least some for of push on demand. Or when you factor a family of 4, of which this study says nothing of age, that could lead to a combined actual 200k for the breadwinner of that family to have in savings... which is very different scenario when purchasing a house. I could keep going. Point is.. this study doesn't explain nothing. It is way too broad.
@@mylesunderwood979 Net migration has been falling ~1.5% consistently almost every single year. What would you call it other than a deterioration? More and more immigrants are already deciding to give Canada a pass thanks to our ridiculous housing market and stagnant jobs market. Imagine what's going to happen when interest rates rise, and our housing market is at these valuations. You might as well go wave a flag at the airport that says "You can't afford to live here, don't bother.".
Wealthy people would have much more than 47k in savings. Claiming that they're just hiding their savings or have it all tied into hard assets doesn't seem likely to me. Especially since global elites are hoarding cash right now in record numbers. The myth of the tsunami of well-heeled foreign investors causing our problems doesn't align with reality. If it was real then the coming foreign buyer ban might actually have an impact on prices (which it won't).
Recent immigrants to Canada are also twice as likely to live with extended family than Canadian-born people are. There's plenty of evidence that Canadians are the problem, not immigrants.
When Ben is discussing complex formulas we see Cameron staring at his monitor as if he is reading something. Is he just looking at Ben & tuning out, or are they sharing a screen with the notes/formulas that Ben is using? If it is the latter can those notes be shown to the viewers too? It would potentially make it far easier for us in UA-cam land to follow the discussion. I for one could benefit from visual aids.
That’s a good question. I never tune out. I also try to put myself in the listener’s spot, and do my best to seek clarification when something may be overly technical. While I review the notes ahead of recording, I deliberately don’t over analyze any formulae to ensure that I have fresh ears for the recording.
@@cameronpassmore1561 Thanks Cameron.
"They're like NFTs, but real"
Boom.
I'd watch a video of Ben just responding to UA-cam comments
That’s a good idea!
Ben really loves AVUV hahaha(I do too btw)
I wonder if Detroit has ever been a glamour city?
Hi Ben, possibly some flawed logic here, the higher home prices the less % gain an owner would need in appreciation to beat out renting. In this mental model homes look less risky the pricier they get because the lower % return needed to justify - which of course makes no sense, buying a higher priced home all else equal should worsen the rent vs buy equation.
The comparison is done in absolute terms. If the user cost of housing is 3%, that needs to be multiplied by whatever current prices are to compare to rents. This accounts for greater dollar appreciation (and higher dollar costs) on higher priced homes. The risk premium is one of the inputs to the user cost equation (meaning it is also multiplied by the price). I think it would be wise to apply a higher risk premium to high priced markets or when rates are low. I don't see a flaw in the logic though.
C'mon Ben, this is very disappointing. Based on your "rational" rationale, every other world RE market would be undervalued if Canada is not in a bubble. Are you going to tell us next US is not bubbly with a CAPE of 39? How does your reasoning compare to 1989 prices, does the logic only work too if interest rates do not rise? How did that work out?
The User Cost model suggests that current prices are in line with fundamentals and do not require unreasonable assumptions for capital appreciation (though they do require slightly higher than normal appreciation). This does not mean prices can't fall. When rates are low prices are extremely sensitive to changes in rates. If we see rates rise it would be reasonable to expect prices to decrease significantly. But that's not a "bubble", it's the expected price effect based on the model. The model is not predictive. Calling something a bubble implies you know it will pop.
Likewise with US stocks. Prices are high but that could tell us that expected returns (discount rates) are low, cash flow expectations are high, or some combination. It does not tell us that there is a bubble, which again would imply that we can predict when it will pop. In an efficient market we can only call something a bubble in hindsight.
In both cases, I think the asset classes are unattractive. I would not buy a house in Canada without a 30 year time horizon. I would not want to be too heavily invested in US market cap weighted stocks because the expected returns are low (but US value stocks look cheap).
@@BenFelixCSI How does the User Cost model compare with the late 80s? Does it also show it was not a bubble then?
@@Jaywed I only have data starting in 1990 for all the points needed to run the analysis. In 1990 user cost was high. It would have taken a 3% real growth expectation for the ratio of user cost to actual rent in 1990 to equal the average ratio for the next 30 years.