A Toronto townhouse recently fetched $1 million over asking, which is fueling growing concerns about a housing “bubble”. But despite surging prices, some say the real estate market in both Toronto and Vancouver could stay hot because of rising global demand. Michael Craig, Senior Portfolio Manager at TD Asset Management joins Kim Parlee on the outlook for the red-hot Canadian housing markets.
Joining us to give us a more, a higher perspective on real estate is Michael Craig. He's a senior portfolio manager at TD Asset Management. He's going to explain what in the world is going on in the red hot Canadian housing markets. No pressure. So that's a big thing for me to ask you to do. What the heck is going on?
But let me ask you. Because usually, you're here to talk about what's happening in currencies and in markets. And now you're talking about real estate. How come?
So actually, a year ago, we set out on this work. And a lot of what we do is try to understand global credit. And to understand credit, you have to understand the major collateral against credit, which tends to be real estate. So again, if you get a view on real estate, you can really understand how an economy might progress or how growth will turn out.
But what also became important was, for a lot of our clients, real estate is actually a bigger chunk of their net worth than ever before.
And growing. And so how do you structure your financial assets around it? So there was a couple of key takeaways from our work, for both our own purposes for investing as well as our clients.
So what did you find? I mean, you're looking at real estate as an investment class, really, around the world. What are you looking at? What did you see?
Well, first off, across the world, real estate prices have been growing. And more and more countries are seeing price growth over the last five or six years. In fact, we're almost to the point now where about 80% of the global markets are actually seeing price growth year over year. So it's not just in Canada. And so we're really-- we're getting to the point where we're at levels just pre-financial crisis.
What's interesting with what happened last year is that bond yields actually rose. So the cost to borrow actually increased, but prices continued to trend higher. So there's been a bit of a disconnect between prices and the cost of money.
So house prices are rising around the world. And I mean, is real estate taking a different rule for people, as opposed to-- depending who you are and how you invest, I mean, it always has. But is it now, not just a place to live for some people, but it's actually a store of wealth, like we're putting money into real estate now?
Yes, when we started looking at it, there's different ways you should think about real estate. In some cities where there's not a lot of immigration and you typically have a few industries, real estate really is more of a utility. It's a place to live. It has more. If you were to compare it to a financial asset, it would be more like a bond.
And as cities grow and they become more diverse, you get this idea of store of wealth, where people actually see real estate as a nest egg. And prices become-- start to grow faster than just population growth. And so we see, as you grow bigger, become more of a store of wealth. So that London, England will be a good example of that. But what happens-- oh sorry.
No, no, I was just going to say. I want to come back to this for a second. We're actually taking a look at this, because you mentioned about certain cities. And you brought this chart, which I love. So I'm going to ask the control room, keep it up for a minute, because I want to talk about this.
You've got different people looking at real estate different ways. In the bottom here, you've got utility. So this is like, I need a place to live close to where I work.
Great examples. Fort Mac.
And also, the funny thing is, most the time, when people try to value real estate, they use the methods that would apply to yield utility type market. So what's my rental yield, or what's my cap rate, and such? And really, those types of metrics make sense in that type of market, but don't really make sense in bigger, bigger cities.
Next level up, store of wealth-- tell me again just what that means, as opposed to the next level up.
So store of wealth, people start seeing real estate as actually a nest egg as well, where they actually want to preserve their wealth. They're not there just to live, but they actually see their real estate as an asset. And generally speaking, that happens in economies that are a bit more diverse and have more and more industry.
And then pop up to the top here, you've got Toronto and Vancouver in this category, speculative.
Yeah, so speculative is-- what happens is you have foreign capital coming in. You still have foreign capital buying. But you also see credit increasing at an aggressive rate. And generally, when we look at credit growth, we look at it versus GDP. So we think about credit growing, versus the overall revenues of a particular country.
And when that's growing quickly, we can then deduce that we're in more of a speculative phase, where-- what people really care about is price. And the thing with the speculative market is prices either go up rapidly or they go down rapidly. It's very hard to see it cooling off. And so buyers and sellers become very, very set on price trends more than living or other factors.
Let's take a look here at a chart you've got here about, I think, price trends and some of the global trends. Because I think the one thing that you highlight as well is that, when you get to this global city category, people are looking at all cities around the world. And suddenly, you're kind of in the same bracket as New York, London, those types of things as well.
What's happened, what's quite interesting in Canada is-- and what this chart shows is that, prior to the financial crisis, if we looked at Ontario, and BC, for example, prices in the main jurisdictions in those provinces-- Vancouver and Toronto-- generally rose with the rest of the province. It cost more to live in Vancouver. It cost more to live in Toronto. But price growth was pretty much constant with the rest of province.
And after the financial crisis, this became detached. And it became dramatically detached, where the price growth in Toronto, versus, say, Ottawa, there's no comparison. And ultimately, this is a factor of foreign money, looking at these markets as a place to go, because of lack of diversification in their own jurisdictions.
How does credit play into all of this? I remember just hearing anecdotally some people saying, well, some of these people are paying for these houses in cash, so upping the mortgage rate doesn't really matter. Is that-- I mean, that's a very, I know, tactical example. But when you look at growing credit and this, I mean, is there obviously a direct correlation or not?
Well, Governor Poloz mentioned this week that they could raise the bank rate to 5%, and it wouldn't have a difference.
He was the one who said it. You're right. I know I heard it somewhere.
I'm not certain that would quite play out, but certainly, in the local speckle, the demand is very much credit driven. And so one way, if you really want to bring that back, is to increase the cost of credit. But what I think he's trying to tell people is that there is other forces that are global driving prices, not just local. And it's really challenging for local politicians to deal with this, because really, they're dealing with a global issue. And really, it goes back to some of the imbalance work we've talked about in the past.
All right. Stay with us. When we come back, we're going to have more with Michael Craig. We're going to be asking again, where does he see prices going? And what does it mean for you, if you've got some money in your real estate, and what should you be thinking about terms of diversification? You watching Money Talk. We'll be right back.
All right. So we're talking about real estate and what we've seen in terms of housing prices. Michael Craig joins us from TD Asset Management. He's walked through in terms of what's been driving this. It's a big question. Does it keep going?
- So in a speculative market, it's really important to understand that prices-- higher prices beget higher prices, and lower prices beget lower prices, meaning if I bought property looking to sell it for someone for a higher price, and I start to see prices flattening out, I'm going to act quickly and sell. And so it's hard to really get a handle on where it's going to go.
I can say it's two things. It's likely going to go very much higher or a lot lower. And ultimately, what matters is can capital still leave China? And what kind of regulations get put forth in the various jurisdictions to try and cool demand? And that's important.
- So what's-- I mean, we've heard, I mean, the media has been reporting on all sorts of things. But it could be as early as tomorrow. We could get some-- we've already got restrictions in Vancouver. There could be some coming into Toronto or GTA. And what impact could that have? I mean, the impact they want is to lower prices. What are the secondary impacts that can have? Because, I mean, as much as we say we don't want housing prices, if all my wealth is tied to my house, and suddenly I don't have that anymore, that impacts how I act.
So if they put in a foreign buyers tax, like they did in Vancouver, you're likely to see the market cool briefly. But I was just out in Vancouver last week, and they're well through the prices that were pre--
They're back at it again.
They're back at it again. And also, what's also interesting is it's very timely that they put that in, and all of a sudden, you saw prices explode in Toronto. And so ultimately, it's like putting your fingers in a dike. As soon as you plug one hole, another spot of water shoots at you. So maybe Montreal is the next location for the capital to flow to.
So that's really-- the flip side of that is, if we don't go with the tax and go with more of a prohibition, then you have a much different situation.
And what would-- when we say prohibition, meaning--
Basically buying-- banning foreign ownership of real estate.
Which is unlikely, I think, isn't it?
Unlikely. I mean, it does exist in the world. It's unlikely that it happens in Canada. But you know, you've got to prepare, be prepared for these things. And that would be a significant blow to the real estate market.
If there was a blow to the real estate market, then take me through in terms of what the secondary effects might be to the economy. Because as I mentioned, my personal net worth goes down, because my house, it affects my behavior.
So we talked on work that the Bank of International Settlements did a little while ago. And what's really interesting is that, when you go through these credit booms, you generally see a drain on productivity as more and more of your economy gets shifted to the real estate sector. And so when we looked at Canada, we looked at three major, main provinces-- Alberta, BC, and Ontario. And what we found is that in each of these provinces, a dramatic amount of the economy and the workforce has been reallocated to real estate and real estate related activities over the last 10 years.
For example, in Ontario, if you X out this trend growth, there's 100,000 more people now tied to-- their livelihoods now tied to the real estate sector than they had 10 years ago.
Contractors, but anyway, keep going.
Contractors, real estate sales, mortgage brokers, et cetera.
Lawyers, everyone, yeah.
Finance lawyers, et cetera. And so if that slows down rapidly, the effects from a real estate slowdown will be far more severe today than they would be 10 years ago, because we have so much more of our economy tied to it. And so it's really, for policymakers, it's really tricky business. And I think they're well aware of this, because-- and this information is not proprietary. It's out there. It's a really tricky business to try and manage this rapid rise in real estate prices without hurting the overall economy.
What about for individuals then? So I'm in a lucky position, where I've got a house. It's appreciated a whole heck of a lot. Do you think people sometimes maybe get lulled into a sense of like, oh, this is great, I'm paper rich, or whatever it is? And they're not kind of managing other things. I mean, what do you think needs to be done?
Well, first off, if you look at retail sales data, that's absolutely what's happened. So human nature is, when you feel wealthy, you tend to spend more money. And we've definitely seen that in the retail sales data. Even though overall growth has been somewhat modest, we are spending quite a bit. So that's the key.
For us, when we talk to-- when we think about it for clients, if you've become paper rich through your property, the best financial investment, I would argue, is having more of an international exposure in your portfolio. And that's the way we've approached it within our own portfolios. And what does that mean? It means holding global equities, US, European, Japanese, emerging market equities, as well as having non-Canadian dollar exposure; so having the exposure of the US dollar, euros, Japanese yen. And that's a really smart way to diversify your portfolio if there is a housing problem in Canada.
Well, we'll have to have you back in not too long. And I'm a little leery of your prediction, though, in terms of it's going to go either a lot higher or a lot lower. I think those are-- just it worries me. That's all I'm going to say. Great to have you here, Michael. Thanks so much.
Michael Craig, he's with TD Asset Management. And he joined me here in the studio.