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The One Thing That Will Slow Down The Canadian Housing Market With Housing Analyst Ben Myers

On this episode Ben Myers and Andrew talk about the factors behind the growth in house prices and the one thing that could slow down this price growth. They also discuss how Australia and New Zealand are dealing with foreign investors, and examine why house prices have risen dramatically in many countries around the world in the last 25 years.

Click Here for Interview Transcript

“Welcome to the True Condos podcast, with Andrew Le Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto”.

Andrew la Fleur:
All right, it’s my pleasure to welcome back to the show once again, one of the favorite guests that we’ve had on here many times, Ben Myers. Ben is the senior VP at Fortress Real Developments, and he is the Senior VP of Market Research and Analytics. We welcome you back to the show. Hey, Ben, how you doing?

Ben Myers:
Not too bad, thanks for having me on.

Andrew la Fleur:
Great, and thank you again for your time here today, and we want to obviously get into the reason for the interview today is your new market manuscript is out, which is always exciting to see what you’ve got for us. Is it at twice a year you do?

Ben Myers:
Yeah, twice a year.

Andrew la Fleur:
Twice a year, yeah, and this is number?

Ben Myers:
This is the 6th. The 6th market manuscript report, yeah, so, 3 years worth of intensive research on the Canadian housing market.

Andrew la Fleur:
Beautiful. We want to get into that, but first, of course, we got to talk about the Jay’s. Your thoughts on the Jay’s and how are things looking right now, from your perspective?

Ben Myers:
Yeah, so it’s 4 games left as we speak. One game up for the first wild card, and two games up over the second, the team that’s out. It’s going to get very interesting over the next couple days to see if they make the playoffs and if there’s going to have a home wild card game, and see how they do in the one-game winner take all wild card game. Kind of disappointed in the bull pen lately, starters have been good, hitters up and down, so, you never know what you’re going to get game to game.

Andrew la Fleur:
Overall, what are your thoughts on the season as we’re get to the tend of the season here, are you happy with what the Jays have done overall, taking a big picture look? You disappointed? You think they are what they are, they sort of landed where they should be?

Ben Myers:
I’m disappointed obviously that they didn’t win the division and happy obviously with the starting pitching. A little bit disappointed in the hitting. Obviously we didn’t think they were going to hit as well as they did last year, but the drop off in getting the big hit is a little bit frustrating, but here they are with a chance of getting to the playoffs after having not been in the playoffs prior to 2015, for you know, 20 some odd years, we’ll take it.

Andrew la Fleur:
For sure. Yeah, it’s funny because I was thinking back to the last time we spoke, which was about 6 months ago at the beginning of this season, and I think I recall we were talking about the fact that, probably the hitting would be no issue at all, but the pitching would be sketchy, and it was pretty much the opposite of that.

Ben Myers:
My baseball analysis may not be as good as my housing analysis, but there you go. It’s more unpredictable, the baseball market than the housing market I guess.

Andrew la Fleur:
Absolutely yeah, well, hopefully the Jays like you said, can pull it through, and hopefully we’ll still be able to watch them play for several more weeks. It’s not just a one and done with the wild card, if they get the wild card.

Ben Myers:
Exactly. Exactly.

Andrew la Fleur:
We will see where that goes. You’ve done a lot of great work for me here. In your manuscript you started off with the major questions that the manuscript will address and answer. I obviously encourage everybody to go and download it and read the full thing, and we will include a link to the in the show notes for this episode, but you’ve got some great questions here that I want to use as an outline for our discussion, some of them. The top one of course, everybody will talk about right now, with Vancouver and everything that’s gone on there, is foreign buyers. What were the key findings that you find on foreign buyers in Vancouver and from there, what can we understand about the foreign buyer in Toronto here, in our market?

Ben Myers:
I wanted to look more in depth at this issue and get an idea of why people are buying, why are foreign buyers buying. It came down to an interesting split, and obviously we don’t know the numbers for the trial in Vancouver, but a lot of foreign buyers are buying because they want to eventually immigrate to Canada, so they’re trying to get their foot in the door by buying real estate. It’s really, what they say, pulling demand forward. There’s a lot of, quote, un-quote, foreign buyers that actually live here in Canada already.

They have already immigrated here. The are going to school here. They have taken a job here in Canada and are working towards their citizenship’s. That’s really a group that people don’t really focus on and think, “Oh well, they’re taking away housing from a Canadian”. Well, you know what, their plan is to be a Canadian. They’re contributing to our society, so they certainly shouldn’t be lumped in with the, what I would call the pure investment foreign buyer, which is simply buying a home to store the value of the currency, to get their money out of a country that they already might have some type of political or financial strife.

I think it also needs to be pointed out where there is a difference between a foreign investor that buys a home that they plan to rent out and one that keeps it vacant. I think that in a low rise market place in Vancouver, and certainly here in Toronto, there is a lack of rental single family homes. I think that is a needed aspect of our market place, Not every family needs to own. There’s families that are looking to rent because they are in the country for a short period of time, or because of they’re on contract or something like that.

It’s needed to actually have some low-rise rental supply in the market place, so they’re providing a service there. Obviously, in a market which has tight supply, which both Toronto and Vancouver does, and what we would call, inner-elastic supply curb, any increase in demand is going to result in pretty steep price increases right? That’s certainly something I wanted to look out for. I did some crude mathematics on the Vancouver market and looked at some different assumptions, saying is this an aggressive number of foreign buyers here and an aggressive price, and what kind of diffusion by market tier.

I know that’s a weird saying to say, but essentially what is the ripple effect? What is the filtering effect of a foreign buyer buying, which they typically tend to buy on the higher end of the market place. How does that affect the homes that they don’t buy? If someone was in the market for a luxury home, now that they can’t afford a luxury home, so they have to look at in affluent market. Now the people in the affluent market are pushed down to the mid-market. Mid-market is pushed down to entry level and entry level people now, maybe not able to purchase, because of this filtering effect, this ripple-down effect in the market place.

Again, that is very, very difficult to assess the impact of that, right? I often say, was great to provide new homes, even though they’re slightly more expensive or they’re not, quote, un-quote, affordable to certain people in the mid-market, but people move out of the homes that they’re already in, in to those homes, freeing up the other homes for less expensive people to get in. There’s is filtering that’s happening in the market place, but it’s always really difficult to determine how much of an impact of that was.

I basically came to the determination and I thought, foreign buyers account for less than half of the increase in the market place, but then again there’s the – one more caveat I want to add that, and that’s foreign capital. There’s actual foreign buyers, so they’re putting their name on the contract and they’re not a citizen of Canada, but then there’s people that are citizens of Canada and they’re getting the money that they need for a down-payment from someone that’s in another country. That is a whole different ball of wax, because it gets very difficult to track that information.

The thing that I always talk about is, if one of my relatives in England died and for whatever reason left me an inheritance of say, 100 thousand dollars, or 200 thousand dollars and say I held on to that, and then 2 years from now, I went and bought a condominium for rental purposes with those funds. Is that, is that a foreign purchase? I mean, I’m a Canadian, is it a foreign-funded purchase? Maybe, right? What if I put in an extra 50 thousand of my own savings in to that purchase? Now, is it a foreign capital funded real estate purchase?

It’s really muddled, how you might actually track that information, but really the conclusion is that yes, foreigners – foreign buyers are contributing to house price growth but the bigger issue is actually a lack of housing supply. If there is adequate supplying then when these buyers came in to the market place, we’d be able to increase the supply in the market place by building new homes to off-set this increase in demand but because we’re not building enough supply, they are contributing to price increases in the market place. It was the conclusion I came to. You wouldn’t see as many investors, you wouldn’t see as many off-shore buyers if we didn’t have high price growth. If we didn’t have high price growth if we had adequate supply.

Andrew la Fleur:
What is the barrier to new – well, what are the key barriers in your view of new supply? Why can we not add more supply to – the market is obviously screaming out for more supply and the demand is so much higher than what we’ve got to sell. Why can’t we just add more? I mean everybody wants to be a developer it seems, so it’s a good business to be in, but yet we just constantly are not seeing enough new supply. What is the issue? What’s the hold up?

Ben Myers:
The thing is that the example I would give, I used to live in Dallas. I went to university there. I worked there for a year after I graduated university. The thing about Dallas, and having traveled to Houston on a fairly regularly basis as well, is these are fairly new cities, right? They don’t have a real concentration of employment in their down-town core, and they’re able to grow the city in all directions.

They grow the city and then they put in a giant ring road, several several lanes of traffic and everyone can move around there and then office towers get built around that ring road and then the market grows out a little bit more and then they build another ring road out there and employment pops up around there, and therefore prices stay relatively affordable because the demand is being satisfied by the supply and supply is not being impeded by water, it’s not being impeded by mountains. It’s not being impeded by urban containment policy, something like a greenbelt or NBC agricultural land reserve, or whatever they’re calling it, which I had no idea was actually, as large as it is, actually larger than the whole country of Denmark, so it gives another sense of what’s driving up house prices in the Vancouver market place.

Whereas Toronto, what we have is water, to ourselves and on top of that there’s a country border right, so it’s not like someone who lived in Rochester could easily just grab a boat and come over to south. There’s no-one commuting from the south in Toronto, and on top of that, we layer on the fact that we’re an older city, so a lot of the employment is all centered down-town and then we layer on the fact that we have a fairly inadequate subway system, that makes it difficult for people to get down town. Then layer on top of that, the greenbelt that’s taken out a bunch of land, and then the last factor is everyone wants a single detached home.

You know, everyone wants that low-rise home. They don’t necessarily want to live in a condominium. Once the land is built up, which essentially city of Toronto is completely built out. Maybe there’s a couple of vacant properties here and there, but certainly nothing of any substance, well, people are going to compete for that, the central homes which drives prices up and so it’s very, very difficult for you to go out an hour and half and be able to get in to jobs that are in downtown Toronto. Those are kind of the major factors that I see driving up pricing.

Andrew la Fleur:
Do you see anything – sorry Ben – do you see anything changing, any of those factors changing in the near term?

Ben Myers:
It’s going to be changing for the worse actually. There’s talk about expanding the greenbelt and changing the dense requirements for new developments, meaning you are going to have – you’re not going to have any bungalows, single detached homes on 80-foot lots. We’ll be getting stat town homes and apartments and 15 and 14 foot wide, back-to-back town-homes. Those are the types of development that they want in the suburbs now, in these greenfield properties. What that’s going to do is, yes I think affordability will drive people to those units, the same as affordability has driven people to downtown condominiums. Yes, I think there’s been a shift.

I had talked about it before. Once people get in to condominiums, they kind of like it. They like the amenities that are in downtown communities. Unfortunately we’re getting to the point where, because of financing, because of pre-sales, because of the lag time from buying a pre-construction condo to completing a pre-construction condo. We’re not providing enough family condominiums, and then again the prices, even if we were, the prices that a developer like myself will have to charge for them, they’re still not a big enough gap between the two. Families want to live in single detach, and they want to live in a low-rise home for room for the kids to play in the backyard, for the basement to put all their junk, to have cheaper day-care, obviously it’s expensive for commercial and office properties downtown, so that means it’s going to be expensive for day-care.

Just adds on all these additional layers of cost. There’s a continuous demand for that single family in that traditional townhouse with the backyard, just puts additional pressure on those homes in the centralized locations and locations that are close to jobs and close to transit. Barring any type of major recession that comes out of nowhere. I only see prices [inaudible 00:15:34] go up. Hopefully they don’t go up at this continuous pace of 15 to 20%. Hopefully it moderates a bit but I certainly don’t expect to go in to any major negative territory any time soon.

Andrew la Fleur:
You looked at Australia and New Zealand markets quite a lot over the past few months, you’ve been studying those markets. What did you – what are the take-aways for you from those markets? In what ways are they similar to Canada? In what ways are they different? Are there things that we can learn from those markets? Is the lesson really just that what we’re going through in Canada is actually a trend you’re seeing in other similar countries around the world?

Ben Myers:
Yeah, I think that was one of the number one reasons I wanted to compare, because I think that people think oh, well, China or Vancouver, we’re the only countries that this is happening to. We’re the only country where house prices are going up higher than incomes and we’re the most unaffordable places in the world, and they’re getting really angry at us. Well, guess what? Maybe go to Melbourne. Maybe go to Sydney. Maybe go to Auckland. The exact same conversations are being had about foreign buyers coming in and buying land. They have the same thing. They have these urban containment policies, these, whatever you want to call them, environmental protected lands, that they can’t build on.

They have a lack of supply in the market place. What Australia did is, they actually require any resale home buyers to register, to purchase them. If I want to put in a bid to buy a resale home, I have to register with the government and then they’ll decide if I’m allowed to bid on it or not. For the most part they don’t allow you unless you are a current resident of Australia, so you currently live here, you have a job here, and all that, you can bid. If not, they don’t allow you to do that. They want to push foreign buyers in to new housing. They want them to help get new housing built. In some instances, foreign buyers are buying 40 or 50% of the new housing that’s been built in Australia, because they just – the Chinese buyers, they love Australia, so they’re buying a lot of the condominiums and low-rise developments in that market.

Again, you’re now creating a new market that’s almost exclusively rental as opposed to ownership, right? That has potentially, some issues as well. I wanted to point out that – and then on top of that, just to – it hasn’t decreased the house prices in either of those market places, but the additional supply that the foreign buyers are helping get built, and the resale prices, even though essentially are banned foreign buyers, those markets, both of them, are still depreciating at the same put that they have over the last couple of years. Interesting thing that a couple of their banks no longer will provide mortgages to foreign buyers, which is an interesting thing.

Obviously they think that there’s a potential issue with foreign buyers in the market place, so it will be interesting to see if our banks start to take that stance. I think our banks are, based on my conversation, having had major banks an construction lenders as my clients in my previous job, I think they are very, very conservative on who they lend to. I feel confident that they’re making conservative lending choices. I guess my only real concern, when people ask me, is that are major banks being too conservative and then forcing people to seek out secondary lending sources that maybe not as prudent in their underwriting of mortgages. That actually adding more risk to our housing market as opposed to less.

Andrew la Fleur:
Do you find that Australia, New Zealand, they have the same problem that we have, in the sense that it’s very difficult to actually accurately track the foreign buyer and how – what percentage of the market and what effect the actual foreign buyers have?

Ben Myers:
Yeah, I mean both countries decided they were going to start tracking them, and start tracking the amount of foreign buyers in the market place. I mean, that’s probably something we need to do in Toronto, all right? You know, every transaction, let’s track where that person residence is, right? Current residence, most of them are going to be, well I’m moving to this residence, that’s going to be most of what the transactions are, but it would be interesting to know about how many are investors, how much investors are buying in the market place. That was one of the things that – I think it was the University of Western Australia, or Western Sydney, one of those two, determined that they thought domestic investors were much more influential in the housing market than foreign investors.

I think that’s an important thing to note, because when prices are going up high, people tend to buy that second home or buy that investment property, and you’ve got to be worried about the mom and pop’s that maybe not fully understand what’s involved in being a landlord, and having an investment property right? You are more likely to make these type of investments in your own backyard. You say, “Oh, wow, my neighbor Jim just sold his house for 200 hundred thousand dollars over asking, so why don’t we go buy that house down the street and we’ll paint the walls and we’ll build a dog-shed in the backyard and we’ll make millions, right?”.

That’s how you always might worry about people being too over-leveraged in making these types of commitments. Getting back to – sorry, that was on a tangent, off of foreign buyers but I think they’re making an effort to track these things and I think we should as well. The more data the better. The more that we have, the more granular it is, the better it will be for everyone right? I would love to have some type of national database that tracks who the owners are, what their incomes are, where they’re moving from, or where they currently live.

That could be sliced up in a million different ways. You can really sense of what’s happening and there’s not this cloud of, “Hey, look at the person’s last name”. That’s just banana’s, that we take those types of things as gospel. In New Zealand they were saying that 40% of the buyers in Auckland were Chinese investors, based off of their last names, and then they started tracking the market with this national database, it turned out to be about 5%. The assumptions from what I call the Twitter edge, those types of folks tend to be fairly off.

Andrew la Fleur:
Here’s a great question. Housing has become less affordable globally for the last 25 years, what is the major contributor to this hockey stick like price growth?

Ben Myers:

Andrew la Fleur:
Yeah, what do you say about that?

Ben Myers:
It was interesting findings by a couple of academics in Europe when they studied a number of different countries and they wanted to carve out all the com-positional changes, with moving towards more condominiums and it tried to strip out all that stuff to really get a sense of what’s happening with real house prices, get out inflation, get out the impact of lower rates. They noticed that it was – once they stripped out all these factors, it was almost a relatively flat or just a slightly up curve in house prices for a long period of time. Then going back, depending on the city, 10 to 15, even 25 years ago, in some of the older cities, it really started to spike up.

The factor that they determined was these cities were able to expand rapidly because of the car, because people were now have their own personal vehicle and they could drive out as far as half an hour, and drive in to work and then once it got out to an almost untenable commute, which tends to be about the hour range, that’s when house prices started to really rocket up and it’s only getting worse in these cities because now there’s more cars on the road and now there’s less parking spaces downtown and so it’s really driven up. Commuting distances is a big influence on house prices, right?

Especially now, with some of these areas putting in greenbelts so that potential one hour commute is now gone because we have eliminated the ability to build homes in that arc, that one hour arc around, where the major employment is. That’s really contributed to it. I’m so tired of people saying, “Hey, house prices have gone up more than incomes, right?”. It’s happened in very single major Canadian city including Windsor, right, over the last 15 years. It’s not a reason – affordability and housing values are completely different. They’re completely disconnected as much as you think they would be connected, they’re actually very much disconnected.

A market can be really properly valued and be very, very unaffordable. People like to quote this UBS study that came out that says Vancouver’s the most over-valued housing market in the world, but it also said that New York was not over-valued at all. If you look at average incomes in New York, and average house prices, it’s hugely disconnected. It’s because some of these home prices literally, like 80 million dollar condo’s are selling Russian [inaudible 00:25:56]. It’s really throwing off the prices in the market place. I think, obviously that’s happening in Vancouver and to a smaller extent, that’s happening in Toronto as well.

Andrew la Fleur:
Are Canadians prudent borrowers? Are we up to our neck in debt? Is it all going to come crashing down? What were your findings on that question?

Ben Myers:
It was – I asked mortgage brokers the same question for my fall – no, spring, 2016 market manuscript and I asked realtors this time around, of their client base, how many did they anticipate were over-leveraged, bought a home that they really shouldn’t have? It turned out, I think it was 8% of the mortgage brokers and about 7% of the realtors, something like that, or switched around, but their clients were buying a home that was – they were over-leveraging themselves in buying the home. Lower than maybe some people think. Yes, disappointing that there’s that group of people out there, but it certainly wasn’t alarming in anyway.

What I really wanted to do and I make the point all the time, we need compare apples to apples. If we compare the average house price in the market and you compare the average income, it’s not apples to apples because it’s comparing all the houses but only, the incomes are for all the people, not just the home-owners. We need compare a home-owner to a home-owner and I wanted to eliminate the investor in the market place, the person that’s buying a second home or vacation home. I really wanted to look at people in the same place in their life. It was interesting that I stumbled upon a report from Gen-Worth, that looked at their – some of the average numbers for their insure clients.

It’s important, their insured mortgage clients, for the most part they’re going to be younger buyers in the market place, so we’re getting a sense of, these are the most, quote, un-quote buyers in the market place. What are they doing in terms of their leverage. Interesting in Vancouver, in Toronto, they’re buying homes that about 4%, 4 to 4.3% times their income, so maybe a little bit higher than what your father or mother would have said, “Don’t go higher than 3 times your income”, but not crazy. Certainly not 11 times your income or 32 times your income in Hong Kong, or whatever the numbers that always gets thrown out.

You need to save for 24 years before you can afford a home, all that kind of – the average home, all that kind of yes stuff that makes the headlines, that really is completely irrelevant. What is someone – what are the actual homes that people are buying and what are their incomes? Interestingly, Toronto and Vancouver were putting a higher percentage down than any of their major CMA’s in Canada, so despite the fact that they’re buying 450 thousand dollar homes on average, they have incomes of 100 thousand on average, and they’re putting over 10% down.

It makes me feel not too bad that they’re buying homes that they can actually afford and Gen-Worth and TMHC are not lending people in to homes that they can’t afford and quote, unquote, burdening the mid-government with potential problems because these tax payers are going to be on the hook with these people and they’re not verifying their incomes and all that fun stuff. Yes, I’m sure that there – they have the computer programs that automatically do the underwriting for them, but I think the proof is in the pudding with really, really lower interest rates, and it looks to be – obviously on an average, looks to be fairly prudent underwriting that they’re doing.

Andrew la Fleur:
That’s great Ben. Listen, it’s been great chatting with you today and hearing all your awesome insights. I don’t want to take up too much more of your time, and I know that there’s a lot of great stuff in your report that I want people to read for themselves as well. Was there anything else that you wanted to touch on today, or any questions I didn’t ask you, that you wish I did about your market manuscript number 6?

Ben Myers:
Well, maybe not in the market manuscript but I just wanted to say, one last point that just grinds me like crazy, when the media reports or when someone says that there’s like 540 thousand lots in the GTA, and that developers are just sitting on properties, just waiting for the values to go up. That’s just absolutely not happening. Are there a few land speculators that are holding on to land, waiting for it to go up? Sure. Are there due developers own property that 5 to 10 years out, that they don’t have allocation for, meaning there’s no sewer or water connections to that area? Yes.

There’s not developers with land that could be developed right now, that could be building homes and selling them for 1.2 to 1.5 million dollars. Guys aren’t just sitting on those properties saying, “You know what, I’m just going to sit here, right? I’m going to keep paying the carrying costs on this land. I’m not going to employ the – and have people at my company doing work they should be doing. I’m just going to sit here”. That’s absolutely not happening and it’s absurd that people keep saying that developers are just sitting low-rise land, waiting for it go up. It’s just absolutely not happening.

Andrew la Fleur:
Right. I mean, just like any other business, land is the – it’s the input, it’s the raw material that goes in to producing the final product. Just like any other business, you’ve got various inputs that are at different stages and some of them, like you said, are – you buy that land, but you don’t buy it to necessarily to build today, you’re buying and you’re working on your other projects and your other land. You can’t develop every single piece of land at the same rate all the time. It takes time to go through your raw material and your inputs before the final product comes out.

Ben Myers:
You have to go through the approvals process and some of the land is just – you can’t build on it, even though you want to, you can’t build on it. It’s going to take a few years before that is available to build on. Anyways, that’s just – it seems to be coming up a lot lately, that I think there’s this massive amount of developers just sitting on land. There’s probably even some farmers that are out there, saying, they’re stuck on their price.

I’m going to wait till I get this price. There’s no need for me to sell it right now. I’m sure that’s obviously happening all over the place, but it’s not the developers that are the one’s with property that they could develop right now, just sitting on it, saying, “No, I’m going to wait another 10 years, I’m going to wait another 15 years”. The market’s hot now, all right? You never know what the markets going be like the next day, so you’ve got to strike while the iron’s hot.

Andrew la Fleur:
Absolutely. Ben, if you want to get a hold of you, or just reach you online and find more about you, what’s the best way for people to do that?

Ben Myers:
Yeah, I put blogs up there, and the market manuscript, you can download it from there. This one’s been up for about a week. We’ve got about 1400 downloads, so it’s been a good little run there. I’m fairly active on Twitter, at myers29, unless you call me names, I won’t lock you. Always up for a rousing conversation with you.

Andrew la Fleur:
Great, great. Thanks a lot Ben. Appreciate your time today, and we hopefully have you again soon.

Ben Myers:
Perfect, thanks Andrew.

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