I recently read an interesting article in the Globe and Mail about Canada’s supposed housing bubble. Here’s the thing about bubbles. If you predict them every year for 20 years, you will eventually be right, a regular soothsayer, a clairvoyant, potentially brilliant, and book-worthy.
The latest “expert” to be quoted is Ben Jones; an Arizona-based accountant who is 2002 apparently was the lone voice crying wolf about the vulnerability of the U.S. housing market. What??? Are you joking??? Tens of thousands of people, me included, were in that club; by no means a lonely club. An idiot saw that catastrophe unfolding in slow motion.
The U.S. housing market collapsed and continues to struggle for a combination of factors. The principle reasons are the following: absurdly easy mortgages and loans, no mortgage insurance, non-recourse loans, mortgage fraud, 110% loan-to-value mortgages, no income mortgages, no credit mortgages, bad credit mortgages, bundled asset-backed mortgage derivatives, low natural population growth, low immigration growth, and a host of other factors. Many of these lead to speculation, all together, they were the cause of a financial calamity.
By and large, the real estate economy, around the world has collapsed and is slowly rebuilding. The idea that a world-wide bubble is currently in the making is absurd. No doubt China has an inflated real estate economy; it is also a controlled economy, a type of twelve-man dictatorship passing itself off as a communist regime. State-run economies are very hard to predict, and I doubt very much that the Chinese property market will implode any time soon. It is the dream of 1.2 billion Chinese to own a home.
I will focus on Mr. Jone’s comments on the Canadian/Toronto situation only because his statements are so uninformed. I doubt whether Ben has ever visited Vancouver or Toronto, certainly not recently.
He compares Toronto and Vancouver’s condo market to Miami in 2004. He cites the large numbers of investors in the market place. Miami is not a city, it is a beach. It has a tourist based economy and not much else. It is a place of seasonal homes, and in comparison, it is a small, poor city. The population is 399, 457 (U.S. Bureau, 2010) with 32.4% living in poverty (MSNBC January 9, 2012). Huge tracks of downtown Miami are vacant and have for a long time been low quality real estate (warehouses etc.). The rich are very rich, everyone else struggles.
Toronto could not be more different. It is a huge North American city (#5 in North America behind New York, Los Angeles, Chicago, and Dallas), with 6.05 million people and a population growth of 125,000 people per year. It is one of the fastest growing large cities in North America. It has a huge, diverse economy with a vibrant growing middle-class. It is true that foreign money is buying here, but not for a holiday home. It is to invest for the long-term. Well over one hundred thousand units have been sold and built in Toronto since 2001; the market has remained stable because most investors have rented their suites to tenants. This is not a lot different to larger investors buying apartment buildings as landlords. Rental accommodations are essential in any growing city.
Ben says he read of Chinese investors buying entire floors of buildings. He believes that is clearly speculation. Is it? I have done that, and then rented all of the units; how is that speculation? It is more likely investing, much different than speculating. If he knew any Chinese investors, he would know they typically don’t sell anything. As astute real estate investors, it is more likely they will they will typically keep the property for a very long time. Additionally, developers in Toronto can’t sell a floor to any one investor; their banks don’t allow it. Most banks allow an investor to buy only 1 suite. If Ben bothered to do any research, he would know this. Even in the recession of 2008-2009, we didn’t see a big jump in listings for sale.
He talks of greed being the driving force of bubbles, yet his fund “the Joshua tree” has not a made a single acquisition in Phoenix largely because of his greedy desire to bottom feed. How is one greed different than another?
He talks of the Chinese using their bubble wealth to buy property in Toronto and Vancouver, just like the Californians did in Las Vegas. He calls them “equity nomads.” This is not at all the same. Californians are not like the Chinese. The Chinese are not buying hotel rooms in the deserts to party in; they are systematically moving their money to a country and its two most Chinese populated cities. They are getting out of China because it is a controlled society and economy, and their entrepreneurial tendency is being stifled.
50% of all Chinese millionaires recently polled, and there are tens of thousands of them, have said Canada is their #1 choice to emigrate to. The Chinese real estate market is exactly what they want to leave. Toronto has 500,000 Chinese – it is one of the largest populations of Chinese outside of China. This is nothing like a Phoenix or a Las Vegas, or a Miami, which are not cities. They are seasonal boomtown holiday spots which will always over-correct because they are vulnerable. This says nothing about the Iranian, Syrian, Indian, Pakistani, Afghani, Pilipino, Taiwanese, Korean, Vietnamese, Tamil, Nigerian, Libyan, and dozens of other foreigners that have chose Canada as one of their of top places for investing their money.
The Globe’s interview of Ben Jones is a dangerous thing. For the Globe to print his interview on the front page of a Saturday Focus is irresponsible. I would not be surprised if he is still renting a home. This guy is typical of all doomsdayers, frozen by fear, the market can never fall far enough, and they are forever searching for the non-existent bargain.
No doubt our real estate market is due for a correction. Sometime in the next 3-8 years we will see it. It won’t be because Ben called it, and it won’t be a bursting bubble. It will happen because real estate prices fall every so often when the economy shrinks.