# Canadian Banks - A good buy?



## thompsg4416 (Aug 18, 2010)

Hello, 

I'm wondering what your opinions are on Canada's Big 5 banks. Its a sector I've owned but moved out of and I'm looking to jump back in but Im' just not sure if the price(time is right). 

They all have a PE 10-12 range and are all offering Div's in the 3.75-4.5 range. All at or near 52 week highs and they are all turning healthy profits..

I've looked at what the analysts have to say and they say the following:
BNS.TO - out perform - S.America exposure
TD.TO - out perform. - US Exposure
RY.TO - Hold
BMO.TO-Hold
CM.TO - Hold

Im a bit partial to BNS as I've owned it before and I know more about it. As an amateur investor perhaps there are some obvious techinals or some sort of news I'm not looking at? Opinions?


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## avrex (Nov 14, 2010)

Every dividend based investor should hold at least one big bank in their portfolio. 
As you mentioned, there's not much to differentiate between the big 5 banks. (all of the financial ratios, PE etc., look similar) 

However, my favourite at this moment, is the smaller 6th bank, National Bank (NA.TO).
It has a small PE and other the financial ratios look strong as well.

I just picked up some shares early this month.


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## james4beach (Nov 15, 2012)

I think the banks are going to have tremendous problems if real estate slows down. I am not bullish on the sector and am underweight financials, but that's because I'm not bullish on real estate. Your view may be different.

My view: our economy had tremendous exposure to real estate and it's a national phenomenon. When you look at construction and all real estate linked businesses (finance, RE services, etc) they now make up 27% of our GDP, an all time high. This is far MORE than even the American bubble at its high! Similarly, Canadian household debt-to-income ratios are at an all time high, and higher than the USA at its peak. All of this means that slowing real estate, if it happens, is going to have an enormous impact on the Canadian economy.

Right now the Canadian banks have very low loan losses, and very low impaired loans. The loan book patterns correlate with the real estate market. Declining real estate will similarly lead to sour loans and the banks will start to incur losses. This is obviously not happened yet, but I think it will (perhaps next year). See this credit report for the banks' last reporting quarter... all is still well
http://www.greatponzi.com/reports/cdn-credit/health-2012-Q4.html


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## doctrine (Sep 30, 2011)

In my opinion, they're a great buy. I did a calculation on the 10 year return for BMO - in January 2003, they had a P/E of 15, a dividend yield of 3.1% and a payout ratio of 45%. Fast forward 10 years, and your return was 8% a year. Even with great returns, in 2013 the P/E is better (11), the yield is better (4.5%), and the payout ratio still similar. The banks are rarely at this low of valuation outside of a crisis.


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## Bonzo86 (Mar 7, 2012)

I completely agree with doctrine. Canadian banks have been and continue to be a good investment and despite the run are still a good value. Some of them have been in business since the 1800's and were paying dividends back then. You can't really go wrong with any of them if you plan to hold although I personally like BNS the best!


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## Oldroe (Sep 18, 2009)

If you look at the daily price chart of the big 5 banks they will pretty much look the same. Every now and then some analysis will make some noise why this bank is under performing. 

My last buy was RY my #2 holding was on sale and I bought,3 months later the chart just looked like every other.

If real estate does crash and they put the banks on sale I won't sell my holdings I will buy buy and buy.

What is really true " a 6th major banks is never coming to Canada and the 5 are never going broke" no money/economy is moving without the 5 banks profiting.

I did every well buying and selling BMO a few years ago taking 1-3% profits on up ticks. After 11 months I was up 27% and spend way to much on computer.

I just buy hold and collect.


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## james4beach (Nov 15, 2012)

Do any of you bank investors actually read the bank's financial statements? Just looking at P/E, dividend yield and payout ratio is quite naive... these are extremely complex companies.

What do you think of their derivative exposures?
Do you know who their counter-parties are in case other banks fail? (USA, Europe)
What do you think of their leverage?
Do you think they are appropriately capitalized in case of a housing crash?
What do you think of their loan books?
Do you think their capital markets exposures are too aggressive?

How can you say you would blindly buy under all scenarios? Sounds like investment based on "faith" to me.


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## james4beach (Nov 15, 2012)

Bonzo86 said:


> I completely agree with doctrine. Canadian banks have been and continue to be a good investment and despite the run are still a good value. Some of them have been in business since the 1800's and were paying dividends back then. You can't really go wrong with any of them if you plan to hold although I personally like BNS the best!


Most of the Big Five banks required a total bailout as recently as 2009. The amount of government money given to for example CIBC actually exceeded the total value of the company.

I can't believe how bullish you people are on a bunch of banks that needed emergency government support just 4 years ago! Talk about short memories.


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## Charlie (May 20, 2011)

Your points are fair, James, but at a tax advantaged 4%+ yield, a sensible PE and payout ratio, and a solid cash flow business....I'm still pretty comfortable. If these banks are going under -- the rest of the economy is going to crash along with them. So since I'm not going to buy guns and gold, I'll take my chances with the banks for now.


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## james4beach (Nov 15, 2012)

Charlie: I understand what you're saying (and good points). But I'm not saying they're going to collapse, just that earnings could be terrible for a few years if housing slows down. That would be particularly bad for an equity investor.

Also I really am concerned about how healthy they are given how much government support they received (particularly via CMHC). I would feel much more comfortable investing in banks if they didn't need so much assistance
http://www.policyalternatives.ca/publications/reports/big-banks-big-secret


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## doctrine (Sep 30, 2011)

I've looked at the capitalization levels and see they are amongst the strongest in the world. They already meet the Tier 1 capital levels specified by Basel III that are supposed to be adopted by 2017. The bailout was a purchase of mortgages, not a recapitalization of the banks - they would have done just fine without them, but the government wanted to stimulate lending. I'm glad there are skeptics out there though that keep the valuations at good levels like here, because I'm still accumulating shares.

That being said, there's always risk. But a total real estate crash in Canada? I think it's unlikely unless oil crashes, and money gets more expensive. Even if people aren't qualifying for big mortgages, rates are still at record lows. Insanely cheap money will support the bottom end of the market. And if it does, the fair valuations of the banks will help mitigate losses.


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## Charlie (May 20, 2011)

I don't count on big capital appreciations from the banks....though I'd hope they'll rise with inflation and continue to raise dividends over time. If the dividend is safe (and most reports suggest it is) then the downside should be limited. Again...I look to them for safety and income. And long term holds. I can't go too far wrong if I can get a 4% real return over time.

Of course, I suppose the same could have been said about Citybank a while back. So we're never risk free. And I was scared when the div yields exceeded 10%. But the dividend held, so the stock price recovered. 

I


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## humble_pie (Jun 7, 2009)

Charlie said:


> ... I'd hope they'll [banks] rise with inflation and continue to raise dividends over time. If the dividend is safe (and most reports suggest it is) then the downside should be limited. Again...I look to them for safety and income. And long term holds. I can't go too far wrong if I can get a 4% real return over time.


these are the zero-brainers whose returns can be improved by selling options. Not atm or 1-strike-otm options. But 2-strikes-otm options or higher. These function as passively as royalty payments. It's possible to collect an exta 2-3% per annum in return for a few minutes' attention.

i don't think it matters which canadian banks one picks, as long as one holds more than one. Reason: one bank may lag behind but sooner or later it will figure out what it's doing wrong & scramble to catch up. However, more than 3 banks is redundant imho. While owning a canadian bank etf is tossing MER down the drain for no reason ...


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## Jungle (Feb 17, 2010)

Their domestic mortgage growth might slow, but most have diversified earnings outside of Canada. 

I know analyst forecast are like the weather, but I heard one on BNN say yesterday they could see RY reach low 70's if they do another blow out earnings like last q.


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## Oldroe (Sep 18, 2009)

Do you understand that every business that use the money markets was broke. When the money markets froze every bodies money was gone including your mom's GIC gone.

From the US banks , auto makers right down to any business using the money markets on a daily bases they were all broke. Canada a little less so but broke.

Guess what lead use out of bankruptcy, the Canadian big 5 banks and guess what has lead use out of every crash the banks so as Stated I don't buy guns or gold. If those banks go broke every investment you have is gone then I need the first alternative a gun (for hunting).


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## Eder (Feb 16, 2011)

If you don't have any exposure to Canadian banks you must hate money.


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## gibor365 (Apr 1, 2011)

doctrine said:


> . But a total real estate crash in Canada? I think it's unlikely unless oil crashes, and money gets more expensive. Even if people aren't qualifying for big mortgages, rates are still at record lows. Insanely cheap money will support the bottom end of the market. And if it does, the fair valuations of the banks will help mitigate losses.


Why Canadian real estate will crash?! Canadian government can always increase number of immigrants who coming with money and buy houses right away (like us in 1999)... Prices of housing here is very cheap comparing to countries were I lived before: Israel and Russia and ppl who wants to immigrate from those countries waiting for interviews many many years....


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## HaroldCrump (Jun 10, 2009)

gibor said:


> Why Canadian real estate will crash?! Canadian government can always increase number of immigrants who coming with money


Or they could increase the CMHC debt celing, or they could increase the secondary loan guarantees for the banks, or they could increase amortization periods again, or they could relax the minimum down payment rules again, or they could create more "creative" tax deductions to fuel RE speculation (like the "home improvement tax credit").

So many ways to pump the market, so little time...alas...


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> Or they could increase the CMHC debt celing, or they could increase the secondary loan guarantees for the banks, or they could increase amortization periods again, or they could relax the minimum down payment rules again, or they could create more "creative" tax deductions to fuel RE speculation (like the "home improvement tax credit").
> 
> So many ways to pump the market, so little time...alas...


All your suggestions are pumping the market  increasing number of immigrants with cash from 300K to let's say 600K - not pumping the market... whem we came to Canada in 1999, we needed proof that we have something like 20K in cash....increase this number to 200K and give then PR


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## KaeJS (Sep 28, 2010)

HaroldCrump said:


> Or they could increase the CMHC debt celing, or they could increase the secondary loan guarantees for the banks, or they could increase amortization periods again, or they could relax the minimum down payment rules again, or they could create more "creative" tax deductions to fuel RE speculation (like the "home improvement tax credit").
> 
> So many ways to pump the market, so little time...alas...


Rofl, Harold. 

This made me laugh for real. 

It's all true, though. Personally, I don't think the Canadian housing market is going to crash. Not any time soon. I say it's probably safe for the next 5 years. And in 5 years if the economy has snapped back a bit, then it's probably safe for another 5 years after that. 

The only problem is replacing baby boomers with immigrants, just like gibor has mentioned. 

Someone's gotta fill those houses when the boomers downsize and die.


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## gibor365 (Apr 1, 2011)

Guys, detached house with 3 bedroom in GTA that cost 500K - it's NOT expensive compaaring to majority of the big cities in the world.


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## james4beach (Nov 15, 2012)

It's impossible that Canadian banks are under-owned (they are not beaten up, not hated, not out of favour). *They're the top holdings of virtually every mutual fund*... they're the most popular investment in Canada. They're unanimously recommended by every advisor and every analyst.

Why even bother buying the bank stock? You're already exposed to those stocks -- everyone is in some way. If you own a mutual fund, it's probably a big chunk of that. If you have a pension plan, the big banks are a huge part of that. The CPP (which you're a shareholder in) owns over $2 billion of the banks. Do you work at a company? Their cash holdings sit in money market funds consisting of short-term paper from the big banks. Their long-term investments hold bank stocks too. Do you live in a city? Their short-term and long term investments consist of tons of bank equity and debt. Do you go to university or have kids who might? Universities have bank investments too. If bank stocks do well, you benefit in every aspect of your life. If bank stocks fall, your pension suffers, CPP suffers, your employer suffers (and may lay you off), your municipality suffers and your property taxes go up, your university tuition increases, etc.

This is what happens with a super popular / massively over-owned sector... the shares (or debt) shows up EVERYWHERE, unavoidably. You already have exposure and you're already benefiting... why increase your exposure?

If you buy the banks, you're joining a crowded trade and increasing your personal exposure above what you're already exposed in via work / pension / government. It's the MOST crowded trade in Canada. And you're buying them at a 6 year high... personally I avoid stocks such as those. And that's even before considering the fundamentals, which include tremendous derivative exposure and growth due to the greatest real estate boom in Canadian history (where we're likely in the final 1-2 years of the cycle).


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## thompsg4416 (Aug 18, 2010)

Well at least its good to hear a counter argument..... That said if they are already in every aspect of our lives they really are too big to fail which means they are as good as a GIC with a better rate


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## thompsg4416 (Aug 18, 2010)

gibor said:


> Guys, detached house with 3 bedroom in GTA that cost 500K - it's NOT expensive compaaring to majority of the big cities in the world.


A detached 3 bedroom house period in most big cities of the world outside of N.America is uncommon Beijing and Moscow - both cities between 15-20 million and not a single detached house to be found. You can find a 5 room flat in a large apartment complex for that though!!


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## Potato (Apr 3, 2009)

I agree with much of what james4beach is saying... even if there isn't a full-on crash but rather a mythical soft landing, it would mean earnings growth slows. If people are just after the dividend then, they might be better off in the preferreds: they should be money-good even in most housing crash scenarios, and will give you a higher dividend than the common.


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## Oldroe (Sep 18, 2009)

Under james terms their are no other stocks that can be owned.

I'm not buying a this time but every opportunity will be taken.


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## HaroldCrump (Jun 10, 2009)

gibor said:


> All your suggestions are pumping the market increasing number of immigrants with cash from 300K to let's say 600K - not pumping the market...increase this number to 200K and give then PR


How is that not pumping the market? But of course it is.
Tinkering with immigration criteria to increase the minimum funds required (I believe it's called settlement funds) _purely_ for the purpose of sustaining housing demand is indeed pumping the market.

Let us stop importing taxi drivers with PhD. degrees, and simplify the whole thing - we tell immigrants to show up at a ReMax kiosk at the border crossings, put $200K down for a house, and get the PR visa stamped on their passports right then and there.

Hey, we can even get rid of the CIC dept. and save millions of $ for the tax payers.


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## Toronto.gal (Jan 8, 2010)

gibor said:


> increasing number of immigrants with cash from 300K to let's say 600K


How many good people would be left behind under this scenario?


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## marina628 (Dec 14, 2010)

I believe Canada is rightfully focusing more on Education when approving immigrants.Many are starting to come over on Student visas and then they get in the work force this way .Still takes 3-5 years but at least the people who don't have the $300,000 but are still an asset can come to Canada.I employed a part time student from South Africa last year who is a full time student and had just received his study permit.I plan to keep him on once he gets his degree in 2015 ,of the 15 applications he seemed the best on paper and also he was grateful just to get a job interview.Sometimes we all take too much for granted and more and more people have the attitude the world owes them.


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## thompsg4416 (Aug 18, 2010)

All this bank talk got me in the buying mood. I picked up 100 shares of BNS at 58.08! I've already made 6 bucks.. enough to cover my transaction fee's..lol


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## andrewf (Mar 1, 2010)

gibor said:


> Guys, detached house with 3 bedroom in GTA that cost 500K - it's NOT expensive compaaring to majority of the big cities in the world.


Canadian average house prices are just about double that of the US.

"This time is different".


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## mrPPincer (Nov 21, 2011)

Small town home prices aren't necessarily as overinflated as in the big cities.
A detatched solid 3+ bedroom 3 storey home about 150 metres from mine was recently listed for 40K
Sadly the sold sign was up before I was even aware of the list price; I'm guessing it sold within a day or so.
These opportunities don't come around too often :chargrined:


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## Spudd (Oct 11, 2011)

Wow, where do you live, MrPPincer?


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## gibor365 (Apr 1, 2011)

thompsg4416 said:


> A detached 3 bedroom house period in most big cities of the world outside of N.America is uncommon Beijing and Moscow - both cities between 15-20 million and not a single detached house to be found. You can find a 5 room flat in a large apartment complex for that though!!


Really?! In Moscow suburbs there are a lot of detached houses that cost big millions. I talked recently to my friends in Novosibirsk (Sibir, 3.5 hours flight to Moscow), new detached houses (pretty far from downtown) costs 400-500K, in Tel-Aviv suburbs, also, a lot of detached houses that cost millon plus...


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## gibor365 (Apr 1, 2011)

marina628 said:


> .Still takes 3-5 years but at least the people who don't have the $300,000 but are still an asset can come to Canada.I.


You misunderstood me  I meant to increase independent/business immigrant quote from current 300,000 to 600,000 or so... by cash I meant 200K or so in assets... Sure, that assets shouldn't be the only criteria, but it can be increased from 16-20K...For sure, immigration officers abroad should do a better selection and consider age and potential...
Bringing educated immigrants is also a big saving , as government shouldn't pay for their schools/universities


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## gibor365 (Apr 1, 2011)

andrewf said:


> Canadian average house prices are just about double that of the US.
> 
> "This time is different".


It doesn't mean that they are expensive here, it means they are cheap there . I don't know where you found about "double", 2 years ago when prices were at minimum in US, we got ofer to relocate to N. California (Sacramento area). We flew and were searching houses with realtor... New houses were costing about the same like similar in GTA (but without basements), old houses (short sale and similar) maybe 20% cheaper....Maybe in some states it's much cheaper, but also in Canada in MB or SK prices are much cheaper


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## mrPPincer (Nov 21, 2011)

Spudd, without getting too specific it was in small town southern ontario near lake huron population 3K-ish.


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## andrewf (Mar 1, 2010)

Median home price in the USA is $180k.

http://ycharts.com/indicators/sales_price_of_existing_homes
http://www.realtor.org/news-release...isting-home-sales-and-prices-maintain-uptrend

CREA says average home prices in Canada are around $360k. These stats are not directly comparable (median vs average), but are directionally accurate.

http://creastats.crea.ca/natl/index.htm


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## mrPPincer (Nov 21, 2011)

Deals like the one I had mentioned upthread pretty much call for a total gutting and re-wiring, insulating, probably some plumbing if your moving the bathroom or kitchen, drywall, taping, painting, plus any other things you discover along the way, but it's not a huge deal if you have the time/skills to do it all yourself.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Median home price in the USA is $180k.
> 
> [CREA says average home prices in Canada are around $360k.


...and average people tempeture in Nort America is 36.6 C 

Compare GTA home prices with similar cities like Boston, Chigaco, Seattle, Phoenix etc ... in US much more places where "average" house looks like dog house....
Also, about comparisson.... condo in GTA cost about the same that Apartment in apartment building (pretty bad quality....no pool, gym etc - what almost every condo has here) in desert city of Beer-Sheva (Israel) with weekly/monthly bombing from Gaza  . My relatives sold their place recently....


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## Hawkdog (Oct 26, 2012)

Its been reported that Vancouver housing is second in price only to Hong Kong:

http://www.globaltvbc.com/vancouver...st+unaffordable+housing/6442793512/story.html


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## gibor365 (Apr 1, 2011)

Hawkdog said:


> Its been reported that Vancouver housing is second in price only to Hong Kong:
> 
> http://www.globaltvbc.com/vancouver...st+unaffordable+housing/6442793512/story.html


Don't know wwho doing those reporting..... but we can afford to buy house in Vancouver and cannot afford it Paris, London or Moscow... 

Just personal example, we bought detached house in GTA 13 years ago, now it costs about twice from original price.... so it's coming to 7.7% annual increase , substruct inflation 2-3%, we get appreciation 5% annually. Is it bubble?! I could've earn more in GIC! Also, when we bought it , it was new subdivision, no grass, no trees, just mud... now it's nice, green with huge plazas and GO train station in walking distance...


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## andrewf (Mar 1, 2010)

Well, the US used to have an avg home price close to what Canada's is. I wonder what happened...


Keep in mind that GDP/capita is significantly higher in the US as well. They are richer than us, and have half the house price...

The risks are to the downside in Canada. Maybe it won't crash, but I don't see it as being likely for house prices to gallop higher.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Well, the US used to have an avg home price close to what Canada's is. I wonder what happened...
> 
> 
> Keep in mind that GDP/capita is significantly higher in the US as well. They are richer than us, and have half the house price...
> ...


Not ecatly true: "_The wealth numbers, in particular, are shocking. As of 2005, the median family in Canada was worth US$122,600, according to Statistics Canada, while the U.S. Federal Reserve pegged the median American family at US$93,100 in 2004. Those figures, the most recent available, already include an adjustment for our higher prices, and thanks to the rising loonie Canadians are likely even further ahead today. We're ahead mainly because Americans carry far more debt than we do, and it means that the median Canadian family is a full 30 per cent wealthier than the median American family. "The fact that we're now richer is a big reversal," says Jack Mintz, former president of the C.D. Howe Institute and the current Palmer Chair in public policy at the University of Calgary. "It's a huge change in the way we view the world." 

_

Full article from Maclean's: http://www.macleans.ca/canada/national/article.jsp?content=20080625_50113_50113&page=1


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## HaroldCrump (Jun 10, 2009)

gibor said:


> Compare GTA home prices with similar cities like Boston, Chigaco, Seattle, Phoenix etc ... in US much more places where "average" house looks like dog house....


I disagree...$ for $ you get better acreage and better features in most new US houses (I mean constructed within the last 15 years or so).
andrewf said Canadian prices are approx. double than US prices - I think it is _more_ than double once you account for better features, quality, and acreage you get for typical middle class suburban homes in most US cities.

Of course, you can't compare with run down or older neighborhoods in Chicago, LA, etc.

Also, general wide comparisons with housing in far-away countries like Russia are apples-and-organges.


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## Toronto.gal (Jan 8, 2010)

HaroldCrump said:


> general wide comparisons with housing in far-away countries like Russia are apples-and-oranges.


True, but that's where he used to live not that long ago, so the comparisons are rather automatic.


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## andrewf (Mar 1, 2010)

8 year old stats? A lot has changed...

Americans have higher gross incomes and after tax incomes.


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## gibor365 (Apr 1, 2011)

andrewf said:


> 8 year old stats? A lot has changed...
> 
> Americans have higher gross incomes and after tax incomes.


I doubt that gross income in US increased more than here in last 8 years...


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> I disagree...$ for $ you get better acreage and better features in most new US houses (I mean constructed within the last 15 years or so).
> andrewf said Canadian prices are approx. double than US prices - I think it is _more_ than double once you account for better features, quality, and acreage you get for typical middle class suburban homes in most US cities.
> 
> Of course, you can't compare with run down or older neighborhoods in Chicago, LA, etc.
> ...


the same way it's not fair to compare prices in US and Canada... as i mentioned our neighborhood house appreciation was about 5% (after inflation) per year for last 13 years. Is it too much?!


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## kyboch (Dec 23, 2011)

humble_pie said:


> these are the zero-brainers whose returns can be improved by selling options. Not atm or 1-strike-otm options. But 2-strikes-otm options or higher. These function as passively as royalty payments. It's possible to collect an exta 2-3% per annum in return for a few minutes' attention.
> 
> i don't think it matters which canadian banks one picks, as long as one holds more than one. Reason: one bank may lag behind but sooner or later it will figure out what it's doing wrong & scramble to catch up. However, more than 3 banks is redundant imho. While owning a canadian bank etf is tossing MER down the drain for no reason ...


Hey humble, I'm just getting interested in writing covered calls. When you say 2 strikes out of the money do you mean find the strike that is at the closest to the stock price and just go down 2 in the options chain? I've heard some people recommend OTM strikes 5% from the stock price if you want to avoid the option being exercised.

Do you sell 1 month calls or longer? Aren't you concerned that the stock might get called away?

Hey man I'm a total newb at this, haven't bought or sold an option in my life so at this stage of the game I have a lot of questions!

One thing that I do notice though is that the premiums on the bank stocks and stocks like BCE are very small, I guess that's because of the low volatility of these stocks right? It also seems to me that writing covered calls on more volatile stocks produces way higher premiums but quite a bit more risk of the stock going way down or way up. I guess you'd be protected by the amount of the premium on the downside and run the risk of losing out on the upside that's over and above your strike price because you would get exercised right?

It's a very interesting subject, and confusing too!
cheers


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## HaroldCrump (Jun 10, 2009)

Toronto.gal said:


> True, but that's where he used to live not that long ago, so the comparisons are rather automatic.


I see, now it makes sense. It's natural to compare.
I think moving to Vancouver Island is the best solution - then you can see Russia from your house ;o)

Housing prices are tricky to compare, unlike stocks and bonds.
Even at the height of the US R/E bubble, I felt some of my friends in the US had cheaper houses than we did here in the GTA (2005 - 2007 timeframe), based on what the same amount of $ bought you in terms of quality, features, etc.
Leaving aside Manhattan, Hollywood, etc.


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## HaroldCrump (Jun 10, 2009)

gibor said:


> the same way it's not fair to compare prices in US and Canada... as i mentioned our neighborhood house appreciation was about 5% (after inflation) per year for last 13 years. Is it too much?!


By inflation, do you mean topline CPI?
So, nominal annualized increase is around 7%?

I think that's about right, for 13 years or so.
I'd guess that the major share of that increase happened in the last 5 years or so.
House prices were pretty stagnant in the late 1990s. and early 2000.


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> By inflation, do you mean topline CPI?
> So, nominal annualized increase is around 7%?
> 
> I think that's about right, for 13 years or so.
> ...


Not exactly...actually last couple of years price practically didn't move.... we bought in 1999 and the biggest % increase was from 1999 to 2004-5... by inflation I mean Canadian Inflation rate that was on average just above 2% for last 13 years...
P.S> I can estimate prices because neighbours around constantly selling similar houses


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## andrewf (Mar 1, 2010)

gibor said:


> I doubt that gross income in US increased more than here in last 8 years...


The stats you quoted were net worth, not income.


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## HaroldCrump (Jun 10, 2009)

gibor said:


> Not exactly...actually last couple of years price practically didn't move.... we bought in 1999 and the biggest % increase was from 1999 to 2004-5... by inflation I mean Canadian Inflation rate that was on average just above 2% for last 13 years...
> P.S> I can estimate prices because neighbours around constantly selling similar houses


I did a quick check on Teranet for Toronto home prices for last 10 years.
Here is their chart:









As you can see, the growth rate is pretty consistent.
The rate seems to be about the same between 1999 - 2004 and 2004 - 2009.
After the dip of 2009, it seems to have really picked up in the 3 years and is at all time highs.

Their annualized rate of growth is 6.29%

Now, of course there will be local variations within the Greater Toronto region.
I have no idea whereabout the GTA region you are.
Some areas would obviously have experienced higher than 6.3% growth, and some lower.
I believe this would have driven prices at higher than average rates in the suburbs.

Based on this, your 7% annualized average sounds about right.


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## gibor365 (Apr 1, 2011)

and where do you see bubble?! 7% annually without inflation adjustment it's imho pretty normal...


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## HaroldCrump (Jun 10, 2009)

gibor said:


> and where do you see bubble?! 7% annually without inflation adjustment it's imho pretty normal...


At that rate, it is exactly equity like returns.
In fact, it is probably out-performing TSX by about 100 bps or so over the same period.
Far, far above historical norms.

And, within the same time frame, far above income growth (with or without inflation).

It is scary when people expect residential housing to appreciate by 7% annualized YoY.

But I am not betting against the market, if that's your next question 
As they say in the US : _Don't fight the Fed_.
I'm not gonna fight Carney and Flaherty.


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## humble_pie (Jun 7, 2009)

kyboch said:


> ... I've heard some people recommend OTM strikes 5% from the stock price if you want to avoid the option being exercised ... One thing that I do notice though is that the premiums on the bank stocks and stocks like BCE are very small, I guess that's because of the low volatility of these stocks right?



yes bank, telco & XIU calls are low-premium, slow-moving, dull & sedate creatures that have to be sold at least 6-9 months out in the future in order to harvest any premium at all. Normally i'd stay more than 5% OTM, in fact i would stay closer to 10% OTM, although there is no hard & fast rule. Circumstances for each stock vary.

in the end, one arrives at a bunch of Good Old Stuff such as banks & telcos that is thickly overlaid with a grid of short puts & calls.
it's these options that get tweaked as time passes, not the underlying stocks. The stocks just grind on year after year in their dull stodgy manner, paying their dividends dutifully & usually rising faithfully if one looks at ultra-long-term trends such as 20 years or a lifetime.

& now we can get back to regular programming - the price of GTA housing !


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## GoldStone (Mar 6, 2011)

gibor said:


> 7% annually without inflation adjustment it's imho pretty normal...


It's not normal, because average employment income doesn't grow anywhere close to 7% annually. The difference between two growth rates (income vs. housing) erodes affordability. Falling mortgage rates supported affordability until now, but they can't go any lower.

Statistics Canada:



> From 1981 to 1998, average real hourly wages of full-time workers aged 17 to 64 increased by a total of roughly 4%, less than half the growth rate of 10% observed during the shorter 1998-to-2011 period. *Overall, average hourly wages of full-time workers increased by 14% from 1981 to 2011.*


4%, 10% and 14% are total numbers (not annualized).


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## andrewf (Mar 1, 2010)

If you bought a house for $100,000, and it went up by 5% in real (after inflation) terms each year, after 100 years it would be worth the equivalent of $13,150,000 in today's dollars. Long term, houses can't rise in value by much more than inflation (more accurately, income).


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## gibor365 (Apr 1, 2011)

GoldStone said:


> It's not normal, because average employment income doesn't grow anywhere close to 7% annually. The difference between two growth rates (income vs. housing) erodes affordability. Falling mortgage rates supported affordability until now, but they can't go any lower.
> 
> Statistics Canada:
> 
> ...


I odn't know about statistic Canada and their calculation, I know that from 1999 when we came to Canada up to now , my and my wife salary increased by 300%... maybe they are talking about low=paid people with $8-9/hour salary... but those don't buy detached houses in GTA..... 5% / year after inflation is NOT a big appreciation... in 1999 I remember 90 day GIC gave me 4.5% interest....
When we talk about GTA...about 200,000 new immigrants coming every year to Canada and a lot of them buying houses right away (we bought within 1 month, I know about 10 families - friends and relatives - who immigrated to Canada and ALL of them bought new houses within 1-3 months after immigration)


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## gibor365 (Apr 1, 2011)

andrewf said:


> If you bought a house for $100,000, and it went up by 5% in real (after inflation) terms each year, after 100 years it would be worth the equivalent of $13,150,000 in today's dollars. Long term, houses can't rise in value by much more than inflation (more accurately, income).


You are right and I don't expect appreciation in future more than 2-3% annually... There is also house amortization etc.... 
On the other hand , I know guys who bought houses in 70's at lakefront Mississauga for couple of thousand and now those houses cost several millions


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ....The CPP (which you're a shareholder in) owns over $2 billion of the banks....


That sounds impressive and I'm guessing this is seen as possibly being risky.

But wait ... $2 billion of the $170 billion total under management represents less than 1%. 

Now factor in that only 33% of the $170 billion is in public equities (or $56 billion) which is spread across 400 Canadian public companies and 2,100 International public companies. So even considering just the equities portion, at $2 billion the Canadian banks represent 3.5% - hardly a large segment.

So yes, the banks tanking will affect CPP but far less than is implied. 

http://www.cppib.ca/Investments/Total_Portfolio_View/




james4beach said:


> .... Do you work at a company? Their cash holdings sit in money market funds consisting of short-term paper from the big banks. Their long-term investments hold bank stocks too. Do you live in a city? Their short-term and long term investments consist of tons of bank equity and debt...


Sure ... but another way to look at it as these are likely all customers paying the fees and adding to the bank's profits.


Cheers

*Edit:*
I checked the list of public equity holdings ... as of Sept 2012, the seven Canadian banks listed account for just under $2.6 billion of the $56 billion invested in Canadian public companies. So the percentages change a bit to somthing like 4.6% of the public equity and 1.5% of the total portfolio.


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## andrewf (Mar 1, 2010)

From the Economic Analyst blog:


















I don't know how you can look at those charts and not be concerned about the housing price situation in Toronto.

The deviation from trend is bigger than during the late 1980s housing bubble, and people remember that as being quite painful.


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## My Own Advisor (Sep 24, 2012)

Love all the CDN banks! Yummy dividends


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## HaroldCrump (Jun 10, 2009)

gibor said:


> 5% / year after inflation is NOT a big appreciation


Assuming CPI of 2% on average, a 7% annualized rate of growth in housing is indeed dangerous levels
This means a house bought in 1999 for $300K is today $725K.
5 years later, this house will be $1.19M
10 years later, this house will be $1.43M

_Do you feel lucky? Well, do ya?_ 



> When we talk about GTA...about 200,000 new immigrants coming every year to Canada and a lot of them buying houses right away (we bought within 1 month, I know about 10 families - friends and relatives - who immigrated to Canada and ALL of them bought new houses within 1-3 months after immigration)


So your solution to the housing issue is simply to keep importing rich immigrants?
Keep increasing the minimum limit of settlement funds so that they can buy houses the day they arrive?
Just so we can sustain our housing bubble?

As I said above, let's just set up a ReMax kiosk at all the airports and border crossings.
Rich immigrants can land, put $300K down on a house, and get a citizenship card.


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## My Own Advisor (Sep 24, 2012)

No way houses are going up 5% per year after inflation long-term. Not sustainable.


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## CanadianCapitalist (Mar 31, 2009)

This NY Times column published in 2006 is relevant to discussion of home prices.

This Very, Very Old House




> That is to say, where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long-term investments, this longest of long-term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."


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## thenegotiator (May 23, 2012)

HaroldCrump said:


> Assuming CPI of 2% on average, a 7% annualized rate of growth in housing is indeed dangerous levels
> This means a house bought in 1999 for $300K is today $725K.
> 5 years later, this house will be $1.19M
> 10 years later, this house will be $1.43M
> ...



i am an immigrant.
nevertheless this post was utterly funny Harold.
lets franchise a remax then?:tongue-new:


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> Assuming CPI of 2% on average, a 7% annualized rate of growth in housing is indeed dangerous levels
> This means a house bought in 1999 for $300K is today $725K.
> 5 years later, this house will be $1.19M
> 10 years later, this house will be $1.43M
> ...


I did a little different calculation...we bought house in 1999 for about 240K, now it cost about twice from this proce, so 100% appreciation for 13 years and it's coming 7.7% .
annually.... imho, the prices of houses are not expensive today, they were cheap in 1999....don't forget , we're talking about GTA, I just can't imagine how much then was cost similar house in "big Tel Aviv"...
As per your comment about increasing number of immigrants with money.... I'd say Why not?!
btw, when in 1999 I was still living in Israel, I remember a lot of advertisement to buy condos in Toronto and rent...with nice calculation about potential income


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## andrewf (Mar 1, 2010)

Your math is wrong. 100% price appreciation means 2 times original value. To get the correct compound rate, you take 2^(1/13)-1=5.47% increase per year, not 7.7%.

Increased immigration can't save the housing market. Immigration can't keep a housing market inflated when prices are not supported by incomes. The value of houses flows from incomes and rents, not the number of people. Remember, we add people, but we're adding housing units at a faster pace.


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## gibor365 (Apr 1, 2011)

I just want to understand...so you guys think that housing market gonna crash and as a result Canadian banks gonna crash???


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## thompsg4416 (Aug 18, 2010)

gibor said:


> I just want to understand...so you guys think that housing market gonna crash and as a result Canadian banks gonna crash???


I think that is the opinion of a couple people. I think they are puffin


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## HaroldCrump (Jun 10, 2009)

gibor said:


> I just want to understand...so you guys think that housing market gonna crash and as a result Canadian banks gonna crash???


At least I did not say that.
I said clearly in one of my posts above that I am not betting against the market.
Don't fight the Fed.

Also, as a home-owner for many years, it would not be in my interest to have the market crash significantly.

Can't speak for others.


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## blin10 (Jun 27, 2011)

banks will never ever go out of business, but buying right now is not the smartest thing to do when they're all above 52week high.... canadian housing doesn't need to crush for banks to go down, canadian market is a follower of usa market, if dow/spx takes a nose dive, so will canadian stocks... it's funny, when banks on sale close to 52week low not many buy and I read comments how they are over prices, when banks at 52week high people always say how it's good time to buy and try to justify their purchase... human mentality amazes me



gibor said:


> I just want to understand...so you guys think that housing market gonna crash and as a result Canadian banks gonna crash???


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## andrewf (Mar 1, 2010)

Canadian banks have enjoyed a decade of huge credit growth over the past 10 years. Credit growth means asset growth means profit growth. Canadians are just about maxed out. We can't double our indebtedness. So expecting a repeat of the last ten years over the next ten years seems, shall we say, unwise.

Do I think Toronto's RE market will crash? Well, prices would need to fall by about 30% to get back to trend. Is that a crash? A 30% fall back to trend is what happened in the late 1980s, and people called that a crash.

When will housing prices revert to trend? Good question. It could be that this year is a top, or it could be that we continue to muddle along. A bad bet is that house prices continue to deviate even further from trend. The odds are not in your favour.


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## Oldroe (Sep 18, 2009)

When your house is payed off you don't give a flying cr...p about house prices.


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## bettyboop (Dec 13, 2011)

Oldroe said:


> When your house is payed off you don't give a flying cr...p about house prices.


That's true, plus the more they go up the more property tax costs.


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## HaroldCrump (Jun 10, 2009)

bettyboop said:


> That's true, plus the more they go up the more property tax costs.


Exactly, now you begin to see why this is such a goose-that-lays-golden-eggs for all levels of the govt.
Keep pumping house prices up and up, MPAC to re-assess every 3 years, and municipalities to simply sit back and listen to the sweet sound of ka-ching.


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## andrewf (Mar 1, 2010)

Property taxes have nothing to do with house prices.

If everyone's house price doubled, the mill rate would be cut in half and everyone would pay the same property tax.


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## slacker (Mar 8, 2010)

andrewf said:


> Property taxes have nothing to do with house prices.
> 
> If everyone's house price doubled, the mill rate would be cut in half and everyone would pay the same property tax.


Is that true? I thought property tax is a percentage of the value of the house, no?


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## My Own Advisor (Sep 24, 2012)

Property taxes are determined on a few factors:

The market value assessment of your property (provided by MPAC (Municipal Property Assessment Corporation), and
The tax class into which your property falls, and
The tax rate for the applicable tax class (set annually by city councils), and 
The tax rate for the education portion of that class (set annually by the province).


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## GoldStone (Mar 6, 2011)

slacker said:


> Is that true? I thought property tax is a percentage of the value of the house, no?


Yes, but.... municipalities adjust their tax mill rate each and every year. As house assessment values rise, municipalities reduce their tax mill rate to keep property taxes relatively flat (adjusted for inflation).

If your taxes go up much faster than inflation, it can be the result of:

1. Out of control spending by your municipality.

2. Relative shifts in property values. For example: 

Let's say that property values across the city go up 5% on average, while your house goes up 10%. Your taxes will increase more than city as a whole. Houses that appreciate less than 5% will see a tax reduction.


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## avrex (Nov 14, 2010)

> "If you look at the multiples banks are trading at - around 11x earnings - a lot has to go wrong for them not to deliver as much in earnings over a 10-year period as a typical good-quality company trading at 15 or 16x"


-- David Ramsay, Calrossie Investment Management.


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## uptoolate (Oct 9, 2011)

Hawkdog said:


> Its been reported that Vancouver housing is second in price only to Hong Kong:
> 
> http://www.globaltvbc.com/vancouver...st+unaffordable+housing/6442793512/story.html


That is not what the research actually showed. It found that Vancouver had the 2nd most 'unaffordable' housing prices. The result was arrived at by dividing housing cost by annual household income. This is quite a bit different from having the second highest housing prices. That said, it still costs an arm and a leg to buy a house in Vancouver!


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## Sampson (Apr 3, 2009)

uptoolate said:


> It found that Vancouver had the 2nd most 'unaffordable' housing prices. The result was arrived at by dividing housing cost by annual household income. This is quite a bit different from having the second highest housing prices.


This needs to be emphasized. A major part of the unaffordability stems from low income prospects.

Give the average working couple in Vancouver $150,000-$200,000 / yr in income and the situation would not be as 'precarious' as it currently is.


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