A reader sent me this article last week, and I found it quite interesting.
I’m not here today, with the benefit of hindsight, to provide any sort of “I told you so,” but rather to look at why real estate bears like Garth Turner, or Hilliard Macbeth, thought that the Canadian real estate market was set to crash – before it more than doubled in many places.
Cynics will point to the profits these bears have made from directing followers and listeners away from real estate, but there simply must be reasons for their predictions, right?
In this article, Mr. Turner provided several…
(This is a transcript of the March 24th, 2006 article in its entirety)
The real estate boom is over. You may or may not like that news, but it is now official. I am calling the eight-year-long housing lovefest, finito.
Done like dinner. Does that mean housing prices are going to start spiralling lower, with a rerun of the equity-busting days of the early 1990s? Should families who have concentrated most of their wealth in their homes be panicking?
Hardly. I see no storm clouds on the horizon. But neither do I see the weather conditions that would allow prices to keep on rising. And there is one overwhelming piece of news that, more than anything else, should tell everyone that real estate is an overvalued commodity ripe for correction.
This past week my friend Peter Vukanovich, who came to visit me a few days ago in my MP’s riding office, pulled the trigger. His company, Genworth Financial, has now become the first mortgage insurer to cover 35-year home loans. That goes one better than CHMC, which three weeks ago said it would insure 30- year-long mortgages. And the country’s best-known mortgage guru, whom I spent time with as well last week in the boardroom of a Toronto law firm, told me in hushed tones he is preparing for the advent of the 50-year mortgage.
What does this mean? And what’s the big difference from today’s normal 25-year mortgage amortization?
Simply, it is this: Mortgages have always been very large debts for people to pay, and in order to make them more affordable, the payments have been spread over a long period of time – usually 25 years. The effect of this is that monthly payments are brought down, but the amount you end up paying back rises. At today’s interest rates, with a 25-year am, you actually pay the lender about twice what you borrowed – almost $580,000 in payments on a $300,000 mortgage.
So, when the payment period (that’s the amortization part – based on the French verb ‘to kill’) is extended, then the same formula kicks in, namely, lower monthly payments and a greater amount actually repaid. In the case of that $300,000 mortgage and a 35-year amortization, monthly payments fall from $2,000 a month to about $1,700, but the amount you dish over rises by $135,000, to a substantial $712,000.
So, why does this show the real estate market has peaked and is about to hit the down escalator? Simply because this is the third major indicator that housing prices have passed the ability of the average family to afford them. And anytime that transpires, the writing is on the garage wall.
First we have had the unprecedented use of the 5 per cent down payment program. Genworth’s Vukanovich told me in our meeting about the tens of billions in mortgages his company has just insured for buyers in that program – in fact, this is where almost all of the mortgage growth is. Not good. Buyers putting up 5 per cent of the price of a home and mortgaging 95% are doing the same things as stock market junkies snapping up securities on margin. The only way they make money is if the asset rises in value, and quickly. So far the 5 per cent down crowd have done very well, since their extreme leveraging has paid off in a rising market. But if housing prices move in the opposite direction, their tiny little bit of equity can evaporate in a week or two, leaving them with nothing but a sea of debt. Oh yeah, and a home they “own.”
The second indication this is a market living on somebody else’s oxygen was the announcement some months ago that several of the banks would lend money to people who don’t have any — hence, the zero-down mortgage. Borrowers with good strong employment earnings, but no savings, suddenly qualified to buy houses they could not afford. Need I say more? But, actually, there is more – because boutique lenders will now give you enough money for 100 per cent of the purchase prices, plus more cash for the closing costs and a new plasma TV.
So, here we have the third indicator – amortizations which have gone from 25 years to 30, then to 35 years and quite possibly now to fifty. This is irrefutable proof that houses at these levels are unaffordable if you play by the rules that have influenced real estate supply and demand for the last three generations. And layer on top of that the effect of five recent mortgage rate increases, with the prospect of a couple more to come, and you can see what’s going down.
Over the last year, Vancouver house prices rose 26 per cent. In Calgary, 24 per cent. In Toronto, just 6 per cent. I would argue that the inevitable correction in real estate prices has already started in the GTA and will soon be spreading west. In mid-town Toronto right now, you have to spend $1.3 million to buy an 80-year-old brick house on a street full of the same houses, on a 30-foot-wide lot with no garage. And this is not an area of wealthy millionaire families, but rather working couples with public school-age kids. They may live in million-dollar homes, but they quite often also have million-dollar mortgages.
The only way they’ll make money on those houses is if they find somebody to pay even more. And behind that indebted buyer will be a generous lender. And behind that lender, a creative insurer. And you don’t want to know what’s behind him.
Again, thanks to a reader for finding this 12-year-old article and sending it my way.
I’d be remiss if I didn’t mention what you all already know…
The average Toronto home price in March of 2006 when this article was published was $353,134. This past May of 2018, the average was $805,320. That’s an increase of 128%.
The Canada-wide HPI Benchmark Index sat at $307,700 in March of 2006, and has risen some 108% to $637,500 this past month.
But let’s get that out of the way. I’m pretty sure Mr. Turner doesn’t care anyways.
I’m more interested in his reasons for the impending “end” to the real estate boom, and how looking back, they were so right – even though they were completely wrong.
What I mean is, he identified issues in the market that, he thought, would be troublesome.
And looking back, many of these issues were noted and acted upon by the Finance Minister and/or CMHC (making Mr. Turner right), and yet the market still continued to climb (Making Mr. Turner wrong).
Mr. Turner first noted that buying with a 5% down payment was a problem, as it would leave buyers “owning” their homes with a 95% debt-load. Perhaps he wasn’t wrong in identifying this was an issue, considering the changes that have been implemented by the CMHC since then:
1) Minimum 20% down payment over $1,000,000.
2) Minimum 20% down payment on investment and/or second properties.
3) Increased down payment requirement on mortgage amount from $500,000 – $999,999 from 5% to 10%.
The second point that Mr. Turner made was about 0% down mortgages, and even cash-back mortgages. In 2007, I had a client buy with the 107% financing plan, whereby he purchased for $1,000,000 and provided a $50,000 deposit cheque, and upon closing, was given the $50,000 back by the lender, plus another $20,000.
But these programs were long done away with, as the minimum down payment requirements above explain.
The third point that Mr. Turner made was actually two points – first about the increase in amortization periods, the second about the five consecutive hikes in mortgage rates.
Amortizations did reach 40 years, but then came back down to 25 and 30. Most buyers out there right now look for, or can only qualify for, a 25-year amortization. The 30-year product still exists, but isn’t nearly as prevalent. As for the potential “50-year amortization,” I had honestly never heard of this as a possibility until I read this 2006 article. I don’t know how close this was to ever becoming a reality.
As for the increase in mortgage rates, and prediction of subsequent rates, Mr. Turner was hypothesizing here. Or if you want to try to get into his head, based on his feelings on the market, he might have been catastrophizing. Adding potential increased rates to his other qualms would only make the fire burn brighter!
Looking back on this article twelve years later, and knowing Garth Turner‘s track record, and history of disastrously-incorrect predictions about the real estate market, I’m actually going to come away giving him more credit than I previously did.
His predictions, at least, were based on ‘problems’ in both the real estate and mortgage markets, several of which were rectified.
As I said, it’s ironic (or more disastrous for his predictions) that increasing down payment regulations and shrinking amortization periods didn’t make the market turn and run the other way.
But I have to give him credit for putting this into print – even before the housing crisis in the United States began two years later.
Carl
at 8:13 am
So GT was right that a big crisis was coming, but he was wrong in working out the effect on Canadian real estate. That effect was the opposite of what he predicted. Money has been cheap for the last ten years, because central banks worldwide made it so after the global financial crisis. The results is an appreciation in many assets, including real estate.
We can only speculate what would have happened if governments did not intervene on such massive scale.
Natrx
at 12:07 pm
Very accurate comment. Without such intervention, we would have all been in the dog house. People have no idea how bad it would have gotten. It was the equivalent of playing poker with real money then all of a sudden when you lose huge on a big pot, saying “Hey, unlimited buy in.. no real money need to be put in” is what they did. Nobody predicted that.
That’s why you have such extremism today. The haves and have nots and why a guy like Donald Trump is in office to be the voice of the disgruntled who got left behind in this NEW RULES Game.
Waterloon
at 9:50 pm
Yeah, how’s that working out for the “disgruntled”? Tax cuts for the rich (and rich-ish), immigrant bashing for everyone else. Hope the 99% are happy.
ed
at 8:29 am
I hope you didn’t poke the bee hive and draw all the crazies over to this blog. They are nuts over there.
Smoking Man
at 9:40 am
I am already here… bzzz bzzz 🙂
ed
at 10:52 am
over there you qualify as sane and normal
Daniel
at 10:18 am
You’re giving Garth way too much credit. Maybe that’s just your way of avoiding confrontation, or as a reader below suggested, having all his insane doomsdayer peeps attacking you on here.
Garth Turner may have identified a few potential issues in the lending sphere, but don’t let him off the hook when it comes to his predictions.
Nobody has been as wrong as Garth. Nobody. Not even close. And not for as long a period of time either. He could have jumped off his own bandwagon in 2007, 2008, 2009, 2010, etc. But he never did. He just kept saying “The crash is coming, just wait.”
In the process his loyal followers lost out on the largest tax exempt gain they could ever dream of making. The fact that he also works in wealth management and has directed people toward his fund all these years is unconscionable.
steve
at 6:29 pm
Turner Investments does not have a fund. They will buy index funds (like Vanguard or Blackrock) and re-balance them on your behalf for a fee. I know many people who only invest in RE … and during the 90s lived through 0% capital appreciation. Today, I know people who buy apartments with negative cash flow, but with the expectation of future rent increases/capital gains to make up for losses today. I call that speculation.
Condodweller
at 10:06 am
I don’t know what GT is doing today but if what you are saying is true, the irony is that it is considered the best method of investing for the long term. This is probably why he is so successful and has a strong follower group. The question all the RE bulls and naysayers should be asking is what do all GT’s followers know that they don’t.
Appraiser
at 10:18 am
Speaking of Barf Turders disastrous real estate predictions, here’s a classic from December 2011:
http://www.greaterfool.ca/2011/12/
I especially like the “condos will crumble” and “house prices will fall” pronouncements.
Marina
at 10:59 am
Well, he was clearly wrong, but the more time passes, the more he has to stick to his prediction, hoping time will work for him. Which it very well might – over long enough time there will likely be some correction. However
1. For most people, their gains will far outpace any correction. My house can go down by 25% and I’ll still have made a 50% gain on my investment tax free.
2. One of my UK friends has a story about when her dad and aunt bought a house split into 3 flats in London together 40 years ago. They tried to get their other brother to join them, but he refused. That house is now worth about 5 million pounds – they are rolling in money. Their brother still lives in a rented apartment in the outskirts.
steve
at 6:32 pm
Your “gains” are only realized when you sell …. and then when you try to buy the next place, also inflated, vanish.
ian taub
at 11:16 am
I appreciate your article, but you are leaving out pertinent facts.
Our real estate market did decline in 2008 across Canada and all mortgage financing froze.
Mortgages went bad throughout the Canadian banking system and as a result, a bailout was enacted by CMHC, Bank of Canada, and the US Federal reserve (to Canadian Banks, not just American)
In fact CIBC and BMO were insolvent at that time. This is all public information
Without the bailout, the stellar returns you are writing about would never have happened.
Housing Bear
at 11:35 am
While I do agree that anything GT says should be taken with a grain of salt. He has his agenda of pushing people into funds and what not. It is a pretty solid prediction at the time considering what was about to happen in the US and the rest of the world.
What no one could have predicted, and what absolutely saved countries like Canada and Australia, was a combination of 1. Record low and sustained interest rates. 2. global QE – unprecedented and continued at the FED until 2014, only started to reverse in the last year. (Impact to further reduce borrowing costs) 3. The insane debt/building binge taken by China as a reaction to the great recession and fear of a slowdown in exports. (China poored more concrete between 2011-2013 then the US did in all of the 20th Century) 4. Massive exodus of cash from China into perceived global safety assets. (after the chinese stock implosion of 2015, Chinas foreign reserves dropped by a trillion dollars (US) by the end of 2016)
For resource rich countries that didn’t have the same debt issues as the US and most of Europe going into the Great recession. The results were a huge boost to economic growth relative to other countries (thank you china) pared with record low emergency interest rates (Thank you FED), plus a huge latter cycle stage inflow of foreign capital (thank you china). Assets all over the globe have exploded in value over the last decade. Especially in areas that were not as impacted from the recession or had a faster recovery.
Now we are seeing the easy money reverse, (higher rates + quantitative tightening), a complete slowdown in foreign investment ( capital controls in China + certain countries targeting foreign investment, Trump uncertainty doesnt help either) and a slow down in resource demand. (China and other areas starting to go through a deleveraging cycle). How much of an impact will this have on global assets and Canadian real estate in particular?
Too soon to say, but until we know its impact we can’t say for certain whose predictions were wrong. Identifying a bubble doesnt mean that its going to blow up tomorrow or this year. It can just mean that you are saying fundamentals are now detached. Until a correction or crash happens and the market fines new support levels its hard to say whether or not that person was right or wrong. Sure you can miss out on some paper gains by staying clear (and bubbles can go on for a while), but only those that got their chips off the table over the bull run will ultimately be the ones who walked away with a profit.
For example, if I buy a tulip bulb for 20 bucks. Sell at 200. The price then skyrocketts to 1000, followed by a crash all the way back down to 40 bucks. Was I wrong to sell at 200?
steve
at 6:39 pm
No amount of information will shake a housing bull, so don’t bother. Best to make sure you don’t put all your eggs in one basket and assure that you are not a heavily leveraged “owner” when the credit tide turns and we end up in another sideways moving market (for another decade).
Natrx
at 12:05 pm
Housing would have crashed if it wasn’t for the unprecedented intervention by the US (Who would have thought they would have turned to the Chinese model of State Ownership) and virtually unlimited MONEY printing by the US Fed. Garth got that part wrong. But so did many. Otherwise, many Canadians would have gotten smoked back then as he predicted.
Appraiser
at 12:10 pm
Yeah…’woulda, ‘coulda, ‘shoulda. You clowns never give up.
crazyegg
at 1:53 pm
Hi All,
Good ole Garth.
Never bet against the US dollar. EVER. Just ask the gold bugs. I used to be one BTW, when I was green.
Regards,
ed…
Natrx
at 2:15 pm
Lol @ Appraiser. Hey, I have a house from before then, plus detached rental property. I’m glad all this happened. Worked at a credit rating agency then and am amply aware of the benefit we all got.
joel
at 12:14 pm
Appears that there is a strong presence of Garth Turner fans amongst your readers! Predicting a boom or bust over an undefined time period is always going to prove to be both right and wrong.
That guy is a sensationalist and not unlike Trump has built a following by making big, bold and loud claims. It has worker very well for him both financially and in becoming recognized. Proof that you don’t need to be correct, just loud!
Professional Shanker
at 12:58 pm
A RE bull’s case always rests on 1 statement – I used leverage XX number of years past and my place is worth XX% more than it was. The primary reason why the value of your asset increased significantly had less to do with location, etc. (as evidenced by David’s Canada – 108% increase vs. Toronto – 128% price increase) and had more to do monetary policy decisions employed across the G8 over the past decades. In comparison take a look at equity markets to see the impact of monetary policy – same deal!
We isn’t this understood, it is ignorance, etc….. quite frankly I don’t get it but it doesn’t really matter anyways.
The important decision going forward is what will the landscape be – will interest rates increase/decrease…..
steve
at 6:20 pm
This is a good point … the EZ money policies designed to provide liquidity and prevent a freeze of capital markets have goosed RE and Equity values alike. The basic point Garth raised, about over extending one self still applies. Interest rates, while still low, are going to rise.
Ralph Cramdown
at 1:54 pm
Thing is, there’s essentially two Garth Turners. There’s the loudmouth macro tourist who’s been wrong about interest rates, wrong about Canadian real estate prices, wrong about Trump’s electability, wrong about foreign capital in Canadian real estate, and many, many other things.
Then there’s the somewhat more humble guy who admits he can’t see the future, and recommends a broadly diversified, low cost portfolio of global financial assets, rebalanced periodically, and isn’t averse to owning real estate if you can afford it. He’ll do it for you for a fee, or you can do it yourself for peanuts with a discount broker.
God help anyone who bet with his macro calls (nothing sadder than seeing somebody ask how they can short Canadian housing — if you have to ask…), but people who’ve implemented “humble Garth” (or Canadian Couch Potato, or Bogleheads) have been doing just fine. And can sleep at night, because any scenario short of the collapse of Western civilization will probably work out OK for them. E.g. the Loonie shrivelling like a raisin in the sun this morning on crap Statscan data.
If you bought Toronto real estate 12 years ago, made big, and are now diversified with maxed-out RRSPs and TFSAs, plus beaucoup de home equity, I celebrate your victory. If you’re not so diversified but have been paying down that mortgage, maybe by keeping payments the same or bumping them when you renewed at lower interest rates, you are probably still in really good shape, though maybe a bit more at risk. If you now owe $400k on a place you bought for $300k (YOLO!) whether that equity was used to buy an investment condo, for private mortgage lending or just Mexican vacations, well, if you’re sleeping well, I’m hoping it’s the Ambien.
There are many, many incompetents, greed-heads and outright fraud peddlers in both the real estate industry and in financial asset management, because, as the man said “that’s where the money is.” I don’t think Garth qualifies for the hall of shame, though I do understand why the real estate industry, and those invested in it, froth at the mouth at the mention of his name.
ed
at 2:51 pm
I think the biggest thing people hate about Garth is that he will never admit that he is wrong and by not doing so he is a liar. Eg- He’ll say something like ‘Condo prices have nowhere to go but down’ and then later will say ‘I never said that’.
People don’t like loudmouth Garth cause he has a ego the size of who knows what?
Also he likes to try and belittle people.
Call it what you will, maybe short man’s disease.
Miss your posts there Ralph. You always brought up good thinking points which I’m sure that 75% of the time never made it through the moderator because they didn’t back the Loudmouth’s viewpoint.
RPG
at 3:08 pm
“Never made it through the moderator.”
Therein lays the problem.
I’ve always loved that TRB has no comment moderator, no filter, and anything goes. Garth’s ego gets in the way of his ability to have an unbiased and spirited comments section. The one thing that continues to attract me to David’s writings is that he really doesn’t care what people say. Either about his posts or about him.
Ralph Cramdown
at 4:30 pm
I think I had one off-colour post which didn’t make it through moderation, one which did but which I wish hadn’t (not popular with the crowd), and one at the end which was edited, which I wouldn’t abide.
ed
at 6:44 pm
I’ve had maybe 30 moderated because I disagreed with his opinion and provided proof. Much of the proof was info provided by his own blog. He can’t stand being wrong.
Hey I get it, when you have a strong opinion you might get some calls wrong. Fine. Admit it and move on.
Joel
at 12:38 am
You don’t see why him suggesting people sell their homes while he invests in real estate is a problem? The guy says what he thinks will make him the most money, which is not what you want in a financial advisor. If you have to read between the lines of what a financial guru is saying, then he is doing his job very poorly and should not be trusted with money!
I am the first to admit that he is very good at building a brand and making money for himself, but don’t think anyone should defend the selfish that prey on others.
I will put some real estate agents in that group and some financial advisors, we should not be sticking up for either.
Ralph Cramdown
at 8:29 am
He provides conservative investing and financial advice on a free blog. He thinks real estate is a good investment, in some places at some times for some people, but that others are overleveraged and underdiversified in places that are overvalued. On that, he and I agree. Many people arguing with him aren’t even old enough to have lived through a bust.
steve
at 7:16 pm
Bingo.
Juan
at 2:26 pm
As an outside observer, the RE bulls are just as obnoxious as the bears. I really wish there was a more balanced and fair look at the market available somewhere.
Boofus
at 3:55 pm
GT has always been a moron. What’s attracted people to his blog is his interesting writing style. He’s a businessman. He cares not for your wallet, but for his, as would any good capitalist. He’s used his trusted position all these years to direct money to his fund, as one would if they had his clout. He’s done it in a way that’s been sneaky. At the same time, he’s certainly invested in all sorts of real estate himself. Anyone in the know should find out how much that is, for all of us.
paul
at 6:42 pm
i read on garths blog saying NEXT SUMMER is a good time to buy Lol.
imagine listening to him for the past 10 years, and RE goes up over 100% then it dips 5-10% then he tells you to buy next summer. what a crock
Kyle
at 6:56 am
Garth Turner and his followers are the 4chan and incels of the real estate world.
Izzy Bedibida
at 6:36 pm
He wrote a very nice piece o crypto currencies today.
Condodweller
at 9:57 am
I missed this conversation over the weekend. Kudos to David for recognizing that GT was correct in some aspects. When he was more in the mainstream media many years ago I used to think that some of his ideas made a lot of sense. I haven’t followed him since, but many of the negative comments about him surprised me and did not jive with the opinion I had formed of him. I have never put any weight in what people have spewed about him on this board, I never judge a person based on other people’s judgement, but based some of the more balanced comments about him here make sense to me. I don’t read the GT blog but if some of the facts mentioned here are correct about him, and I don’t have a reason to believe they are wrong as they align with my past views, it really highlights how a lot of loud mouth negative comments by a group can be wrong about a person.
Tommy
at 12:26 am
I don’t know what to make of GT. He has always written bearish pieces about real estate, yet he’s a huge real estate investor, and has made millions buying, renovating, and selling multi-million dollar houses all the while chirping about an impending real estate crash.
Jason S
at 1:46 pm
I’ve been following Garth for awhile now and find most of his commentary interesting and worth consuming.
I think he’s always been predicting what a rational person would predict given the scenarios of the time. I recall very well the boom times prior to 2008 and based on what we’ve seen historically, I don’t think one has to be crazy or even wrong to say prices shouldn’t have continued to go up like this.
Where he runs into trouble with me is each time his predictions turn out to be wrong, he neatly sidesteps them and moves on without acknowledging that he guessed wrong. Instead, pretending like its always going to plan.
I think it’s important to realize that bulls and bears are ultimately just guessing. Some may be more informed than others but ultimately its just a guess and should be treated as such. Buyer beware.
Maverick
at 10:16 pm
You write so holnetsy about this. Thanks for sharing!