Tuesday, March 06, 2007

How High is Too High?

Well, since real estate prices aren't falling to earth this month, how high is "too high" for prices to go. The average price of a single family home in Greater Vancouver is nearly $750,000. Could that average be $1,000,000 (10% increase per year for 3 years) or $2,000,000 by 2010? Would that be "too high" or just right?

The median price of a townhouse in the Fraser Valley is just over $300,000. Is that "too high" or just right? What if that price rose to $500,000 or $750,000 in the next couple years?

The TSX Composite Index is trading just under 13,000. Is that too high? What if it was trading at 15,000 or 30,000? What level can it go to before you say it's too high?

A 2007 Toyota Camry is $26,000. Could they charge $35,000 or would that be too high a price?

My point here is that everyone is going to have a "too high" price for a given item. For me all of the above mentioned items are currently priced "too high" and I won't buy them for what the asking price is.

What about you? How high can the balloon fly before the air is too thin to breathe? How high would be "too high" a price for the biggest of bull believers?

38 comments:

littlemanrenter said...

Sorry for those who have seen this multiple times as I have posted but it actually seemed most appropriate here.

I really really want a bull or whoever to answer the question that...

Removing all the history and all the arguments, prices just keep increasing. Surely there has to be a limit - say its the limit for only Bill Gates and Warren Buffett. At some point there it is.

What does it take to convince 'bulls' that the limit has been reached?

Will it be via MSM? or the obvious, word of mouth?

And if they do see that indication, would they actually believe it? (guess it depends on the indicator)

And if they believe it, how do they react and still try to come out OK?

All we get from Bulls is that 'sky is the limit because of x,y,z' etc - but please just answer that question above - anyone

vineland said...

Value for me is location. Here is why (when we were looking to buy in 2004) we were chosing between my husband's vs. my workplace - Vancouver or Langley.

My attitude was Westside Vancouver was 1) wealthier 2) more attractive (beaches) and central 3) land in Vancouver proper was maxed out - unless they tore down parks all land was divied up and owned. So, the value would last (either because detached housing was maxed out or land could be sold to a high density developer).

Langley was/is a different matter to me. First, it is hardly the GVRD, just offically, not geographically. Who would pay a premium to live out here in a house? Acerages and estates sure, they are beautiful and worth it (beautiful countryside out here), but a house? They are building hunderds more of them all over the township, as well as in Surrey - which is closer to Vancouver.

Langley has its charm, mainly that it is not Surrey and so it costs more, but what else? Better homes I suppose,however see above paragraph.

Value: Westside of Vancouver could go up, but the rest of the GVRD would go down, its only qualification for overpricing is proximity to Vancouver.

Unfortunatley, we didn't want a shack on the Westside (still around $380,000 in Marpole back then) and moved to Langley, where we could afford a 'real' house. I doubt this place will hold its 2004 value. I bet the Marpole shoebox will hold its 2004 value. However, who can afford westside prices anymore? Not FTBs, so the demographics will be (rich) seniors.

mk-kids said...

sorry littlemanrenter, i'm not a bull so i can't answer your question.

i want value for my money so for me, the price to buy in vancouver has been too high for about 2-3 years. i sold my gastown condo in 2004 and didn't buy in because at that time the prices were too high in van. i looked at some property in pitt meadows/ poco last march and the prices were too high at that time for those areas.

when prices are about half of what they are today, i will buy. or when the rent-to-buy ratio is close to even, i will buy. maybe. renting & owning both have upside depending on the deal & what is important to me at that particular time.

Joel said...

Already well surpassed the 'too high' amount, IMO. Even a bull should admit this is not good for the long term health of the city ... but of course 'too high' doesn't mean they can't go higher yet.

OT: G&M reports: "Delta Air Lines Inc. has withdrawn from an aircraft maintenance contract with Air Canada Technical Services, a move that will trigger the loss of 700 jobs in Vancouver."

Those are most likely well paid jobs. Imagine having a $3K mortgage payment per month and you lose your job, if any of these people are in trouble, at least they could sell and get out in an hot market.

Boombust said...

Why are "some" people (realtors?) saying this is currently a "HOT" market? Because of Ozzie Jurock and other cheerleaders the other night on Global News?

Let the facts speak for themselves.

Current inbentory is now at 9450 units (25% above this time last year)

Feb. apartment sales ONLY up 5% YoY

Attached DOWN 15 % YoY

Detached DOWN 6% YoY

Total FVRB sales DOWN 15% YoY

Price declines have occured and "word of mouth" about a GVRD correction and slump in the US is gaining momentum.

Jesse said...

"I bet the Marpole shoebox will hold its 2004 value."

You are likely correct. I seem to recall a cycle's average appreciation in % terms is comparable between areas though on a linear $ scale MP looks better. If people really care about the price of their property will they think of it as % or linear? I have always thought when an asset value is multiples of income, most people think of $ gain but with smaller investments, say around 20K, ROR dominates.

Pondering said...

My wife said someone said the North Van was still affordable. I had a look. Good luck finding a house in decent shape under 750k. Almost half are above a million. I don't get it. It seems that now all houses in and around Vancouver are near a million.

I realize I have said it before but where is everyone getting all of this money?

Rantenki said...

pondering:

I realize I have said it before but where is everyone getting all of this money?

They're not, or at least not in huge numbers. If you look at Chipman's blog, you will see only a couple of $1mil+ properties per day selling, out of the 180 or so per average that move. When you look at Rob's area, there is a much larger percentage of $1M+ properties in the listings, than in the sales.

AFAICT, it looks like approx 10% of the listings are over $1M, but only 3% of the sales.

That said, sales are definitely on the way up over the last month, but that is the nature of a bubble. There is no way to predict exactly when it will start to pop. Could be next month, could be 2011 (but I hope not).

** Ego ** said...

Who are the people buying at these prices?
Seriously. To buy the cheapest, crappiest house in Vancouver's West Side, you need 160k household income. For the average house, you need $250k household income. How many people have that? Are they all flipping?

el bbub said...

There's a russian saying "Duraku e morye po kolyeno", which roughly translates to english as "...and the sea is knee-deep to you, if you are a fool."

Clarke said...

I would have thought we had hit the wall in terms of prices last summer, but I guessed wrong. Prices have been out of whack in relation to rent for about four years now, so we are well past any rational "too high point".

Even with relaxed credit standards and relatively low interest rates, I have no idea who can actually afford to buy most of these properties. The mortgage payments would far exceed the realistic percentage of income one could allocate for shelter....

Freako said...

Obviously prices are set by supply and demand, so in that sense there is no too high.

The problem is that unlike say oil, corn or cocoa, housing is not consumable in the traditional sense, and a purchase necessarily includes speculation about future housing demand. However, the buyers seem focussed entirely on their present need for housing, and seem to be willing to pay the going rate, disregarding the very large be on the future.

Imagine if a heatwave came and the city ran low on ice cream. The last vendor with stock will sell you ice cream at inflated prices, but only if you sign a contract to buy a given quantity at these prices for life. You are so desperate for ice cream that you sign no questions asked.

The big "flaw" in the analogy is that buyer of the ice cream realizes he is making a bad decision, he just wants it bad enough. With housing, buyers don't realize it because they extrapolate the recent demand-supply imbalance to even higher prices in the future.

mohican said...

"because they extrapolate the recent demand-supply imbalance to even higher prices in the future."

Well said freako - this extrapolation of the current situation is what has given us the market we are in today.

A person with no sense of "intrinsic value" will pay anything for anything (more for speculative items) and has little concept of "value" in their purchasing decisions.

An informed and disciplined person who has some sense of "intrinsic value" won't pay the "too high" price for any given item because doing so would violate the values they run their life through. They understand the real worth of what they are buying and won't pay any more.

When applying extrapolation to an item like a house, or any item for that matter, many people forecast continued growth in demand, less supply, and consequently higher prices. Others look at the situation and say that there are ebbs and flows of demand, supply, and prices and will patiently wait until the situation 'ebbs' just as sure as winter follows fall and summer.

Peter said...

Have anyone started criticizing the government for having a part in this real estate madness? Since none of the real estate boom can happen without the "help" from the government. I have seen it happen in Hong Kong. A so-called real estate boom basically wipe out the buying power of a whole generation of middle class. The next thing you'll see is a large number of people going bankrupt and the business communities going downhill.

RentingSucks said...

I realize I have said it before but where is everyone getting all of this money?

Don't forget that we tend to look at this from the point of view of a first time buyer. If you are already in the market and some point on the property ladder you haven't lost as much ground as not being in at all.

I think though that now that most condos on the bottom of the ladder have hit about $300,000+ (you have to go pretty far out to get something decent for under $300,000 it seems) that this is the upper end of what median first time buyer with minimal downpayment can afford. Also I note in my area (Brentwood Mall in Burnaby) you can't swing a dead cat without hitting a high rise or low rise being built.

So big supply and high prices on the bottom rung could cut the legs out of all the move ups one by one. However if the interest rates stay low and the economy good it is going to be a slow boat to China because there is still a LOT of home equity out there.

fozziebear said...

Peter,

This is what is under way in the US. The people who have lived on cheap money have propped up the economy until now. It seems to be unravelling down south as we speak and I can not see how this won't negatively affect us here in some way.

If what you mean by "help" from the government is a low interest rate policy, than it's the greater fool in the end that has to look in the mirror when there left holding a $500k mortgage on $300k rotting shack.

I sold and left town in 2004 and at that time I figured the current prices were high. I bought immediately in another part of the country were values have risen at half the rate of GV and I don't have that aching feeling that the bottom is going to fall out of the market.

The GV prices are way to high and this has been illustrated by the fundamentals time and time agian.

rentah said...
This comment has been removed by the author.
aetakeo said...

(sarcasm) The prices are too high when Rennie says they're too high. Not before. (/sarcasm)

rentah said...

Newsflash: VHB: extra data point:

> VHB HAS MOVED AWAY FROM VANCOUVER

betamax said...

A person with no sense of "intrinsic value" will pay anything for anything (more for speculative items) and has little concept of "value" in their purchasing decisions.

Given today's 'easy credit, no money down, have it now but pay more for it later' ethos, you have described most consumers out there.

People's estimation of value for money seems to have been distorted by the unexamined assumption that they will make more money later and therefore debt will continue to be manageable. That assumption will prove false for many, as servicing their increasing debt will invariably become onerous.

rentah said...

Given today's 'easy credit, no money down, have it now but pay more for it later' ethos, you have described most consumers out there.

By world standards, North American consumerism is a disgusting orgy.
Speaking broadly, it's another deviation from a mean that has to ultimately revert: the world won't keep financing the ridiculous indulgences at everything from the personal to national level. Rome, anyone?

Warren said...

I have 2 thoughts:

1. As price increases, people look for alternatives. In the case of RE, its renting. For whatever reason, there's a large stigma attached to renting, so demand to own is inelastic for a lot of people. Personally, the price of ownership is way too high when the price of the alternative (rent) is considered.

Conversely, this same relationship helped convince me to buy in 1999.

2. Easy credit makes people live beyond their means, now more than ever. Consider two people: one who lives cheaply, saves money, and dies with a giant bank account. The other borrows like crazy, lives in a big house, drives a big car, dies with a giant debt. Who's lived a "happier" life? It all depends. Personally I hate being in debt.

North American consumerism is horrible, its bad for everyone and the planet. But faced with the choice of making the plasma TV or watching it, which would you do?

Freako said...

"Given today's 'easy credit, no money down, have it now but pay more for it later' ethos, you have described most consumers out there. "

Again, with housing I think the attitude is more like:

'have it now and make buckets of money later'

And that is the problem.

Pondering said...

Interestingly enough Vancouver's cost of living is now higher than San Fran according to the economists intellegence unit. Using New York as a base 100 San Fran is a 92 and Vancouver a 96. This index represents a common basket of goods and is currency converted.

It does not include the cost of housing.

Another interesting data point on the road to the correction.

Interesting that VHB in the end decided that he didn't want to wait for the correction and moved.

We are being a bit more patient due to family reasons but it will wear out.

mohican said...

"We are being a bit more patient due to family reasons but it will wear out."

Pondering - I think your attitude is typical of many, including mine. The bonds of family and friends can become stretched because of finances. Eventually everyone needs to make a personal decision that is the best for them.

Barney said...

o be honest, I don't know how High is Too High. For me, we have sailed past that already for the local housing but I seem to be in a minority (not on these blogs though) and I am honestly beginning to struggle to see how the market will come back to reality / fundamentals.

Put another way - another year or two of this and I am outta here.

rentah said...

I am honestly beginning to struggle to see how the market will come back to reality / fundamentals.

Easy, a crash.
barney, I understand your sentiment, but if you step back, it's far more of a struggle to imagine how this market can sustain itself than imagining it crashing.
The more extended it becomes, the more dramatic the snap-back. This may all seem glib now, but just watch.
I watched the tech bubble explode (watched the markets daily from 1999 on, awaiting the event), and it felt very similar to this... 99 felt completely overextended and insane, the bear blogs were frothing at the mouth, and then the nasdaq ran up through 2K etc.. same flavour... the bulls were completely besotted with the market going on forever (rhymes, doesn't it?)..the only place I could find any bears was on the 'net, never met a flesh-and-blood one at the time..

Then, after the meltdown, everybody claimed to have "known" it was a bubble (yet almost none had acted.. retrospectoscope effects..)..

I'm expecting similar play with Vanc RE.
In fact, I'm expecting it to be even more spectacular now than I did last year.
And when the dust settles, everybody will be nodding sagely about how 'nothing grows to the sky', etc, etc.

Jim said...

"Vancouver's cost of living is now higher than San Fran according to the economists intellegence unit. Using New York as a base 100 San Fran is a 92 and Vancouver a 96. This index represents a common basket of goods and is currency converted."
By that metric, if housing is excluded, then housing should be about 8% more expensive in Vancouver than San Fran to be consistant. Is it?

betamax said...

Again, with housing I think the attitude is more like:

'have it now and make buckets of money later'


Correctamundo.

betamax said...

Who wants to live in sunny San Fran when you can experience freezing rain 28 days a month? Plus, we have that 2-wk sporting event in a few years.

Jim, your metric assumes all things are equal; they're not.

Warren said...

Why does everybody talk about leaving? Newsflash: you don't have to own RE to survive. What's wrong with renting?

I travel extensively around North America and I don't understand that survey on cost of living. Vancouver is average compared to other typical urban environments. Places like San Fran, NYC, Chicago are very expensive when you want to live "in the city" compared to Vancouver.

You can't beat our parks and greenspaces either. I'm not trying to sound like the usual RE bulls out there, but I don't understand this "moving away" as the only solution.

Buy a house in Regina that you can afford for a few years and then come talk to us.

aetakeo said...

Now everyone's talking about rents going up. If rents start following mortgages, we'll be looking at leaving, too. I do not wish to pay more than 35% of our monthly earnings to housing.

patiently waiting said...

We may be experiencing price compression with rent too. Reading Craigslist is confusing because I see rents in Langley that seem similar to the North Shore.

With all the new housing supply being built, I wouldn't assume rents have permanently gone up. But if rents are starting to go the same way as real estate prices, I'll join the exodus.

exvancouverite said...

""Why does everybody talk about leaving? Newsflash: you don't have to own RE to survive. What's wrong with renting? "


What the deal is: there is no one-size-fits-all.

A reasonable decision made by a 28 year old is not a suitable fit for someone that's pushing, say 58.

I've sadly fallen into the bull camp and proclaim that prices should go higher and higher - to the moon Alice.

We wanted to buy a retirement home in 2-3 years on Vancouver Island, but that is looking less likely. Seems that both of us have been looking at some retirement options in Mexico and not really talking about it. Now we've decided, this looks good.

In a sane RE market, we would have never considered leaving the area, but now, the idea is a real turn-on. Imagine living in a place where the sun shines, not just once in awhile, but regularly.

The higher the RE prices go on the BC coast, the more resolved we are to move away from this dreary mudhole and start a whole new chapter in a nice climate (as opposed to a pretending nice climate).

I only hope our RE market doesn't crater before the job contract runs out in April 2009. That's why I'm hoping for higher and higher prices - it seals the deal that I can finally leave here. Phew.

Barney said...

What a change a few months make? Simply put, rents seem to be catching up to cost of buying and if this happens then adios. Yes, Vancouver is a nice city - but is a gateway to all the great outdoors.

I guess, like alot of the commenters, I am just sick and tired of waiting for a more balanced market. Y'know - I hear great things about Portland...

exvancouverite said...

barney sez..
Yes, Vancouver is a nice city -


Ah hem, not really, barney. Speaking as a person that lived here in the early 1970's I can say with total sincerity...it *used* to be a nice city.

Now it has all the earmarks of a third world cesspool - huge gaps between the haves and have-nots; complete with the mayor's new initiative to criminalize poverty and homelessness in anticipation of the wonderous two-week sporting event.

The 'great outdoors' exist everywhere. You don't have to live in Vancouver to get next to nature.

It's easy to check out.

mightymouse said...
This comment has been removed by the author.
mightymouse said...

We’d like to ‘check out’. Unfortunately our family situation ties us down. We looked at prices in Blaine and seriously considered trying to get a green card. If we could move, we’d have been gone a couple of years ago. We’ve decided to wait it out. Not because we can’t afford it, but because we think real estate is due for a correction. While we wait, we’re saving like Scrooge. If housing prices stay about the same or increase a little, then we should be able to buy something outright in a few years.