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Kyle Bass: Canada is coming to a halt

13426 Views 26 Replies 12 Participants Last post by  james4beach
I think Kyle Bass does some very nice analyses, and in this recent talk he references Canada, in particular real estate. He thinks Canadian real estate is unsustainable, and a slowdown in China is going to hit us hard in the next 12 months. Skip to 35:30

Transcript below. Emphasis is mine

China is slowing down much faster than people think it is ... One of the potential butterfly effects of China is Canada. Everyone thinks Canada is a nation that is extremely prudent in their lending practices, and that it's very natural resource rich and doesn't carry many debts. Canadian household debt to income is now 100%. It's higher than the US. Canadian home prices are now, on a median, 9 times median income. Does anybody know where US housing prices got (median home price to median income) at the height of the subprime bubble? It hit 7.

Where Canadian housing sits today is completely unsustainable. The question is, if China slows down, what happens to the resource areas of Canada? One is mining, one is energy. You look at the forward curve for energy. The crude curve is so backwardated ...

All the prescriptions for a problem in Canadian housing are out there. We're starting to see inventories build very rapidly. When you look at these equations the brokers put out, they give months of inventory. Two variables, one is inventory, two is the velocity. So you can't look just at the months, you have to look at the aggregate inventory and how long it's taking you to sell them.

It sure looks to me like all of a sudden, Canada is coming to a halt. Volumes are drying up. 9 times median income. I don't know when Canadian housing breaks, but if we're right about China, in the next 12 months it's going to be a real problem. There are similar scenarios to the US housing problem that exist in Canada. They're not all the same, but there are some similarities that are worth paying attention to. If you're looking at Canada, I advise you to be extremely cautious.
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If we keep predicting a correction, which I think we all agree is coming, sooner or later we'll be right.
The other thing to consider is, if the taps are turned on, and we get strong, if not hyper inflation then people who own real estate will actually owe less...the price of the loan doesn't change, they may correct the prices by inflating away the debt.

Not a good solution, and difficult to achieve if you overpaid to begin with but, if you paid a reasonable amount, could be very beneficial in the long run.
I'm reading The Downfall of money, which examines Germany between the wars, and the hyperinflation than ensued.

Realistically, if a loaf of bread costs $5 today, but due to inflation now costs $50... Then wages have to increase or people starve and die...

However, if I lock in a mortgage at $100k for 5 years (for arguement's sake let's say the place is "worth" 100k as the down payment was eaten up by lawyers, realtors, and bank fees), neither the interest rate, nor the value of the mortgage changes for that period. When I go to renew, the "value" of the loan is now 1/10 of what it was originally or the "equivalent" of $10,000 in today's money.

So, in the future, housing doesn't increase along with inflation because it was overpriced and suffers a 50% correction...I can only sell the place for $500k now (a 50% reduction in buying power! but still an overall increase). My loan will still be close to $100k, but I've significantly reduced my debt load due to inflation from 100% to 20%...the bank would probably be content in letting me keep the place. So, your house value, adjusted for today's dollar went from $100K down to $50k, but your initial costs, adjusted to today's value, was reduced by 90% from $100k down to $10k, giving you a 500% ROI, even with a correction.

If these are rentals, there's even more news...Even if rents didn't increase lockstep along with inflation, let's say only by 50%, my rent may have gone from $1000/month to $5000/month...if it did keep up with inflation (and it should as it's an inflationary element) I could be making $10,000/month and could probably easily afford to pay down the mortgage quickly if required.

Now, remember, these numbers are exaggerated....and don't take into consideration other was designed to illustrate how hyperinflation can correct the housing market, while still increasing your investment and make you money.

Oh, and if the government creates a new currency, to replace the devalued one, the scenario basically remains the same as far as buying power and the loans are concerned the numbers just become lower...
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Don't get me wrong, I wasn't advising this as an investment strategy, I was merely explaining a hypothetical scenario.

From the looks of things, I'd say we're already in stagflation.
Personally, I'm a Canadian real estate bear...but that doesn't stop me from picking up cheap properties if they become available and will cash flow.

I just picked up a 1000 sq.ft. 2 bedroom today for 85k (found out today) get possession in 30 days, have a renter lined up for 1125/month. Similar units have sold in the place for $125k+, so I'm pricing in a decline and getting good cash flow. Figure I could survive a fairly aggressive correction with it.

Real estate is much more of a local than global market...that's why Vancouver will always remain high...even in a downturn.
I don't think you'll see prices on par with let's say Saskatoon, or Newfoundland. I also don't think the prices in Vancouver or Toronto affect the prices in other parts of Canada. Alberta remains stable as long as oil and gas do...Ontario depends on manufacturing...

As for where to buy, I have searches going on all over looking for my criteria. Doesn't cost anything for a realtor to set it up.
I started buying again about three years ago, 5th deal in 6 months. Before then, I hadn't picked anything up for about 5 years, there just wasn't anything that fell into my criteria, the market was completely nuts. Good part is, there's not a lot of bidders on these properties yet, in fact I usually get them significantly under list, because no one thinks they are out there, so you'll understand why I don't say the exact areas...

This is the most expensive one of the lot, never even got to see the interior, but it's in a nice area and I talked to the condo people (realistically, we tend to have to redo the entire interior, so seeing the place on the inside isn't a priority anymore). Hardest part is convincing the banks to lend me money. I think this is the fallout of 2007/8, people who bought at the renewals came up, the properties aren't worth what they paid, they can't afford it, so they go into forclosure.

Real estate, because of the locked in rates, usually follow behind by several years. So, if interest rates rise, I don't think we'll see the full effect right takes a few years for those mortgage renewals to come up...I expect to pick up more and more properties in the next few years as long as I can get the banks to agree.
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