Tuesday, June 12, 2007

Open Thread



Open to your thoughts today. Feel free to talk about anything but here are some questions I would like answers to.

- Why is Seattle real estate half the price of Vancouver real estate?
- Why is real estate cheaper in places with higher average incomes than Vancouver?
- Why don't BC residents save money?

60 comments:

BearClaw said...

Why is Seattle real estate half the price of Vancouver real estate?

-Vancouver has a relative nice climate in Canada while Seattle is pretty bland relative to the US.

-The Olympics.

-Vancouver wins all those "world class" awards.

-Irrational investment

Why is real estate cheaper in places with higher average incomes than Vancouver?

-Under the table income

-Muliple families in single dwelling

-Irrational investment

Why don't BC residents save money?

-Its been working out fine so far....

el bbub said...

Vancouver's a fraud capital of the world.

jesse said...

"Why is real estate cheaper in places with higher average incomes than Vancouver?"

Many people want to live here and are willing to sacrifice most of their disposable incomes to do it. How much house can you afford? The answer is your income minus food, clothing, maintenance, taxes, and transportation. That is actually quite a bit of house, even at today's prices. Remember the post a few months back with the guy who owned his house by working lots of jobs and scrimping like crazy? With enough people like him you can get pretty atrocious affordability.

"Why don't BC residents save money?"

See above. Saving for retirement is disposable income because it is not required for survival today.

jesse said...

"Why is Seattle real estate half the price of Vancouver real estate?"

Good question. I think the distribution of prices and incomes is important when comparing. Neighborhood quality varies more in Seattle so I would compare neighborhood to neighborhood to get apples to apples.

freako said...

I think the irrational investment is the stronger of the arguments.

There are some things worth investigating further.

We have had very high levels of sales for half a decade now. Yet, there still seems to be fair demand out there. Enough to swallow the new construction and then some.

1. Since our population is growing at a mediocre pace, I can only conclude that the ownership rate is going up.

2. That, of course, is almost by definition a case of borrowing demand from the future. The more people who own, the fewer people left to buy.

3. If the ownership rate is up, and demand is still strong, there must be a lot of investors getting into the market. More investors competing for fewer renters should lead to falling rents and increasing vacancies. Why hasn't that been the case?

Anyhow, sooner or later this twisted game will end, and it won't REQUIRE a worsening economy or a rise in rates. Merely an end to appreciation followed by reversing psychology.

canadidan said...

Has anyone else seen the Vancity ads for the mortgage that allows families to band together to buy a house? The ad ends with two couples in the same bed. Great product for ending your marriage and friendship if there is a crash.

canadidan said...

Here is the link http://www.tiny.cc/lRSux

beta said...

Saving for retirement is disposable income because it is not required for survival today.

Jesus, take the wheel.

tulip-Mania2 said...

Finally even the professional liars can’t hide runaway inflation.
Bond yields moving up, eventually interest rates will catch up to inflation.

Stagflation will be here just when the resource sector turns, Vancouver has run out of government projects, the Olympic hype is exposed, and the inventory of unsold boxes will be the highest levels in history.

Tick Tock, Tick Tock

freako said...

"Many people want to live here and are willing to sacrifice most of their disposable incomes to do it. "

Then why aren't rents higher? I will accept a moderate income versus price disparity, but absolutely NOT our monstrosity.

Remember, the owner's premium becomes the renters discount, becomes the landlords loss. If they tire of subsidizing renters, there is more than ample supply to smack prices right back where they belong.

"How much house can you afford? The answer is your income minus food, clothing, maintenance, taxes, and transportation. "

And once prices have reached the point of sucking all that up, then what happens? Appreciation tied to nominal incomes? What if rates rise? Dead end, no?

"With enough people like him you can get pretty atrocious affordability."

Ok, add three jobs to the above scenario. But then what? Housing will stay flat until people get sick of working three jobs, after which it falls?

""Why don't BC residents save money?"

See above. Saving for retirement is disposable income because it is not required for survival today. "

Au contraire, I think B.C. residents are a conservative bunch. Well, they think they are conservative. So why don't they save? Because of all the housing equity they have. The big flaw in their reasoning? They have bought the line that housing never goes down, hook line and sinker.

Once housing starts going down, it will be a huge wakeup call, and you can rest assured that consumer confidence plummets and the savings rate skyrockets.

freako said...

"Good question. I think the distribution of prices and incomes is important when comparing. Neighborhood quality varies more in Seattle so I would compare neighborhood to neighborhood to get apples to apples. "

That could not even come close to explaining such a price differential given how similar the cities are. No, it is much simpler than that. Vancouver is in "play" so to speak. Vancouver RE is hot because it is hot, drawing fearful buyers and greedy extrapolators.

Boombust said...

Sorry. Seattle is just "another" US city. Ain't nothin' special.

craigpbbrett said...

"Then why aren't rents higher? I will accept a moderate income versus price disparity, but absolutely NOT our monstrosity."

This is the thing that's getting me to start thinking Vancouver IS different. We're not just a very hot market, but a very hot market without the incomes and a corresponding influence on rent.

It's mostly speculation on part, but I'm increasingly of the opinion that Vancouver's underground economy is exerting a significant influence on the market.

This story is from 2005, but interesting nevertheless. Some quotes:

"Insp. Paul Nadeau of the RCMP maintains drug money underpins much of the market for large, luxurious SUVs in this part of the country. And Rainbow says it's a major force in rising real-estate prices. Marijuana growers "aren't price sensitive," she says, noting that a few years ago, they used to rent small homes, but the profits are such that now, they often own large ones. She cites an instance in her own neighbourhood where a house sold for thousands more than the asking price. "Six weeks later, the grow-op was up and running."

... "the math in a paper published this year by Simon Fraser economics professor Stephen Easton is spelled out in detail. It concludes the total is $2 billion a year for marijuana exports alone, not to mention local consumption of B.C. bud, plus all the other things that criminal gangs do. All in all, Easton reckons, marijuana-growing accounts for about 2.8 per cent of B.C.'s GDP. With the GDP figure reaching $142.4 billion last year, that would be about $4 billion."

... "Meanwhile, a Forbes magazine article late last year pegged the annual value of the B.C. pot crop as high as $7 billion US. That would put it in the range of more than six per cent of GDP.

Yet even that huge number, says Kelly Rainbow, a civilian analyst with the RCMP in Vancouver, is "conservative, laughably conservative."



--Vancouver Sun
http://tinyurl.com/ywavlj

Patiently Waiting said...

But you can't have a grow-op in a condo...or can you? Nah, I doubt it.

Condos have appreciated faster than SFH. This weakens the grow-op argument. I agree it is a factor, but nothing compared to pure, stupid speculation.

craigpbbrett said...

patiently waiting

If you had the reading comprehension of, say, a 7-year-old you would have seen in that article that the RCMP inspector said the proceeds of crime are underpinning the market for luxury SUVs.

Even though there are no grow-ops in SUVs!

It's a shock, I know, but there is something called proceeds of crime and, amazingly, they are spent on things like condos and cars.

Patiently Waiting said...

I was talking about the effects of grow-ups not the proceeds of crime.

Chill out

The funny thing about SUVs is they are going down in price, sometimes a lot.

Warren said...

I agree that crime (drugs) contributes to various areas of the economy in a way we can't measure. Driving up the price of old houses in east van? Sure, as grow ups... but $750/sf for a downtown condo and $1.5m bungalos on the west side? I don't think so.

I'd expect the proceeds of crime to push up the rents of high end downtown condo rentals, much like they do with new luxury SUVs.

Patiently Waiting said...

Another thing to consider, places in the US (eg. Florida) must have even more crime money flowing through the economy but are now seeing significant RE price declines.

tulip-Mania2 said...

holy toledo, my buddy boombust!!!!

How goes the battle?

jesse said...

"Then why aren't rents higher?"

It could be that ownership premiums in Vancouver are creeping higher. Building a little piece of year-round Eden is difficult when renting: inelastic demand for ownership and stability. We see this recently with so-called "gentrification" of some neighborhoods.

"What if rates rise? Dead end, no?"

Nah, just get a raise or work more jobs. You'll get by somehow, just like your parents did. It seemed scary to them too but it'll work out. :)

"So why don't they save? Because of all the housing equity they have."

Partly. Also pensions. I'm not convinced the mass sales will happen after retirement. A lot of retirees will stay put. Those that have to sell will come out positive and either revert to renting and/or live off OAS. I don't buy the extreme doom-gloom portensions. People may not be rich in retirement but they won't starve either.

"Vancouver RE is hot because it is hot, drawing fearful buyers and greedy extrapolators."

You mean Vancouver RE is hot because people can still afford it and fear next year being that much more priced out? Maybe some failed math and upgrade or enter the market near the peak.

jesse said...

"If they tire of subsidizing renters, there is more than ample supply to smack prices right back where they belong."

Your margin arguments are valid. I am aditionally arguing inelastic demand that cares not for margins. Mr. Inelastic better hope for a stable income, tho.

Patiently Waiting said...

One retiring boomer couple I know just sold their modest house in Surrey and moved to an acreage in rural Ontario (where the husband is from). I know this is one anecdote but I can see this happening. Makes sense to me.

They may also go South for some cheap US real estate. Our cold, damp weather is bad for arthritis.

freako said...

"It could be that ownership premiums in Vancouver are creeping higher."

Again, that is a landlords shortfall. Barring anticipation of future demand, there is no reason why rents should not be in line with prices (and vice versa).

"Nah, just get a raise or work more jobs. "

So you are saying that there are no limits? Even for the guy with three jobs?

What if risk premiums return and rates creep up? Four jobs?

"Partly. Also pensions"

There are least as many pensions if not more in the rest of Canada. Why is our savings rate the worst?

I can only see the one culprit.

"You mean Vancouver RE is hot because people can still afford it and fear next year being that much more priced out? "

I don't follow. Whether buyers stink at math or not, they up from down. Rising prices means worsening affordability. And being priced out is not a discrete all or nothing, but rather a continous event. Prices out of West side SFH? Look at east side SFH or West Side townhome. Priced out of East side SFH? Look at Eastside townhome or Langley SFH and so on. We can all extrapolate.

" I am aditionally arguing inelastic demand that cares not for margins."

Huh?

1. Demand is only inelastic as long as prices are going up. The moment they start falling, demand will be very very elastic. That is the paradox.

2. A flood of discretionary supply (read investor owned) would swamp demand. Remember, this little bubble of ours is riding feedback loops. They can easily reverse. As I argued, physical demand for ownership is finite, and speculative demand is very finicky and very reversible. All that is needed in a place like Vancouver is that spark to set it all in motion. I have argued that oldschol CF landlords are oblivious to opportunity cost. I still think they are, but just maybe there are limits to the spread that they can handle, especially if price appreciation slows to a crawl or reverses.

Time will tell as always. Unfortunately, it seems that this story requires a lot of it (time) to play itself out.

patriotz said...

Amazing how many contortions people can go through to try to evade the central issue.

Yields on Vancouver RE are grossly subpar. That means that, barring continued price appreciation, owners of Vancouver RE will lose money. Continued appreciation requires an exponentially increasing amount of investment at subpar yields. And nobody, repeat nobody, has come up with a scenario where rents can rise enough so that yields can become competitive again.

Meanwhile the supply continues unabated. When the last fool buys, it's all over. Just like in every other bubble market.

It's not different here.

jesse said...

"'Nah, just get a raise or work more jobs.'

So you are saying that there are no limits? Even for the guy with three jobs?

What if risk premiums return and rates creep up? Four jobs?"


No, foreclosure or forced sale is the result. I am not disagreeing: what will burn these guys is unemployment ticking up or some reason they cannot work 3 jobs. They are price immune as long as they can afford the payments. I say the general sentiment is that jobs are always around to keep CF up. Tragic when unemployment rises.

"There are least as many pensions if not more in the rest of Canada. Why is our savings rate the worst?"

My argument goes that saving for retirement is less of a concern in Vancouver than in other areas of the country. Maybe people here don't need a large nest egg to retire with. Your argument on saving through property is another argument. I know of retirees living off CPP and OAS with a $2M house in Dunbar. Others cashed in and moved to Peachland.

"The moment they start falling, demand will be very very elastic."

Sure. I honestly cannot wait to see how this plays out and I hope I live to see it. By "inelastic" I mean someone has $X per month to spend on mortgage and will spend this regardless of what it gets. I think our definitions differ.

freako said...

" mean someone has $X per month to spend on mortgage and will spend this regardless of what it gets. I think our definitions differ.
"

No, I think we are in agreement that demand is inelastic AT THE MOMENT.

I think you also agree that this is not inlelastic demand in the true sense, but rather extrapolation of prices. This is what I have called reversed elasticities in the past. The quantity demanded INCREASES as prices rise, and vice versa. From a basic economics perspective, that is totally counterintuitive, but common sense is one of the victims of extrapolation.

sutluc said...

Regarding grow-ops; while there is no doubt large amounts of money being made, I have little faith in the official numbers.
For a long time whenever I saw a bust reported the police value estimate looked vastly inflated. How they arrived at a number I don't know, but their numbers looked unlikely to me.
Now the bust numbers I see look more realistic, but most of the time they don't even report a value anymore.
Since the police use figures like these to promote the need for more officers, special grow-op units, the purchase of forward looking infra-red cameras, etc., they have a vested interest in them being high, so I see no need to accept them at face value.

Why is Van/Fraser Valley real estate so high? Hype.
A brick-layer I worked for many years ago told me:
"The prices of houses rise until the men building them can't buy them, then there is a recession and prices fall."
I think his basic premise was okay, but he didn't account for double incomes and ridiculously easy credit, which have allowed prices to get much higher than they would have in his scenario.

BC Buds said...

Here's a story for the bulls to enjoy and a question about opportunity cost for the bears. I have been a long time bear and one year ago sold my condo for a large profit. Today I notice my very unit listed for 100K more than I sold it for and I have paid approximately 20K rent for the past year. So in my opinion I made a terrible call and gave up a huge potential profit. Whichever way you slice this one, as a bear I made an incredibly bad call. I am still bearish based on fundamentals etc. but obviously this view has not served me well over the past year.

Bears - calling for a fall year after year while forfeiting gains does not make you right. What will trigger a fall, when will it happen and how much of a decrease do you foresee? Without these parameters your arguments are baseless. Repeating the same argument until one day it becomes true is not really a strategy and obviously has an opportunity cost. Opportunity cost HAS to be considered to be truly a successful investor.

Bulls - how much more upside do you see and for how much longer? What will make you cash in? Bulls have the same issue as the bears as far as strategy so there has to have a point where you take profits or you are simply gambling.

patriotz said...

What will trigger a fall, when will it happen and how much of a decrease do you foresee? Without these parameters your arguments are baseless.

No they're not. The basis of the bear argument is that the yield for Vancouver RE (net rental income) is at a historical low and far below alternative asset classes, including riskless assets. This is exactly the same argument the dot-com bears used, and need I add they were right.

No external trigger is necessary. The market will collapse when there are no longer any more buyers (greater fools) willing to accept subpar yields. Remember the market turned in 1981 a whole year before the recession hit. Of course external factors - such as interest rate increases which we are already seeing - can move things along.

As to how far the market falls, that depends on the severity of the upcoming US recession which I feel is inevitable. If it's as bad as 1982, I think we'll see a similar drop. If not, it could be a mild as the late 1990's bear market.

exvancouverite said...

"One retiring boomer couple I know just sold their modest house in Surrey and moved to an acreage in rural Ontario (where the husband is from). I know this is one anecdote but I can see this happening. Makes sense to me."


Another couple anecdotes; (and I live a very sequestered life) they just keep cropping up...

These aren't even retired boomers, more like in their early to mid-40's. One couple wanted ocean front property and knew they couldn't get it here, found an old Victorian seaside place for $75K. It's a labour of love and they'll plough more $$$ into it, but it's on the ocean.

Another couple are taking a 2 week vacation to NS and will buy a place. Don't have any family or friends there. They'll sell their house on Van Isle and use the remaining money for investment/retirement funds.

Both couples wanted something more affordable, along with a less frenetic lifestyle. Makes sense to me, too.

Jim said...

jesse:
By "inelastic" I mean someone has $X per month to spend on mortgage and will spend this regardless of what it gets.

Most accurate staement I have read on any blog anywhere this year. The real "buyer exhaustion" kicks in when you either can buy nothing(ftb) or will not lower your standards further.

beta said...

Whichever way you slice this one, as a bear I made an incredibly bad call.

Given how things turned out, it was a bad call, but you didn't know how things were going to turn out. You didn't lose money; you simply didn't max your gains, which doesn't count as a mistake.

If staying in would have been gambling at that time, then you shouldn't have stayed in, no matter how a bet might have turned out. You may as well berate yourself for not putting all your money on red on the roulette wheel after the spin is over and the wheel stops on red. The 'correct' bet only seems obvious in retrospect.

In the long run (which is the only run that matters), a truly successful investor will come out ahead by making sound decisions, despite the unpredictability of temporarily irrational markets.

As for me...I'm deliberately staying out of the market, so I'm definitely missing out on current appreciation, but I expect a correction to remove that appreciation and more.

There may be an external trigger, like a US-led recession, but prices will also collapse of their own weight. When appreciation breaks affordability limits it will flat-line, speculators will flee and prices will drop. It never fails.

craigpbbrett said...

"Sure, as grow ups... but $750/sf for a downtown condo and $1.5m bungalos on the west side? I don't think so."

You may not think so but that is exactly where the money is being parked. And it's not just the billions generated by grow-ops. Skads of illegal cash is arriving here from China. (The Bank of China employees who took the bank for half a billion bought properties in Richmond. Just one corrupt HK cop bought a dozen high-end properties in Vancouver.)

Here's an example of how the laundering works. A mortgage broker was busted last year for fudging mortgage applications for drug gangs. Police found 100 of his properties being used for grow-ops and many others being paid for with hundreds of thousands of dollars in deposits that had no apparent origin. This one broker's total number of applications? 900.

Much of the money coming into Vancouver cannot be tracked. The triads use their own form of Western Union. You take your ill-gotten gains to a network rep in China, the network takes a hefty cut, and when you arrive here you're paid your sum by the local rep.

My social circle rubs up against a circle involved with this stuff. You have no idea how heavily these people are into property. That and cars are the only places they can put their cash.

This isn't fantasy. The RCMP are saying exactly the same thing. But there seems to be a high degree of cognitive dissonance out there. We see the wealth, we cannot explain it with the usual metrics, we continue to squeeze the usual metrics for an explanation.

For over a year I've seen intelligent people crunch the numbers on Vancouver's market, and I've agreed with much of it. But it's increasingly clear that something is seriously missing the data.

RentingSucks said...

The whole crime thing again?

I'm going to do a rough estimate here so bear with me.

In Chippy's blog generally it looks like about 150 homes a day are sold on average. That's about 4500 a month or 54000 a year.

How many criminals are there out there snapping up all these houses? Plus the run has been 5-7 years long. Eventually you'd think you would run out of well heeled criminals and grow operators.

I guess the other question is how many criminals you need to be buying house each and every year to squeeze the margins enough to push the prices up to these levels. Seems like you would need a lot. If we even had 10,000 B&E artists in the city it would be an intolerable place to live much less 10,000 really successful criminals.

Aleks said...

A couple more anecdotes. I know of one couple who sold a house in Vancouver for a million and moved to Halifax to partially retire. They still have kids living at home, which is presumably why they can't completely retire.

Another couple from Victoria moved to Toronto and got a bigger house and more land, and don't have to have a mortgage.

At some point, the amount of money involved becomes life changing. If unemployment starts playing in, there may be an exodus from the west.

Strangely enough, none of the people I know who are or would like to be FTBs have gone elsewhere, they're all either buying condos or waiting it out.

exvancouverite said...

For over a year I've seen intelligent people crunch the numbers on Vancouver's market, and I've agreed with much of it. But it's increasingly clear that something is seriously missing the data.

I think you're onto something, Craig. I used to discount the crime thing, probably through naivete or wishful thinking.

Even the (illustrious?)Fraser Institute rails on about 'the underground economy' and everyone automatically thinks of grow lamps and stolen hydro. It's way bigger than that.

If drug money can float Wall Street; propping up a pretentious little podunk city like this should be a walk in the park.

Considering that BC has a history of being a criminal friendly place - what you say rings true.

blue said...

bc bud - as a side note - you said that your old condo is listed for sale - it hasn't sold yet

when it sells for $100k more - THEN you made a bad decision

if it sits for months - the listing expires - and the new owner is still paying the mortgage - then you made a good decision :)

Jim said...

The criminals don't actually have to buy real estate to drive real estate prices higher. They just have to buy the goods and services that multiply into our economy and stimulate employment and sustain the housing boom beyond what the visible GDP would dictate.

beta said...

We see the wealth, we cannot explain it with the usual metrics, we continue to squeeze the usual metrics for an explanation.

The 'Vancouver crime economy' theory myopically ignores the fact that most developed nations (and many in development) are all experiencing an RE boom.

It's a world-wide speculative bubble fueled by cheap credit, any other explanations are merely attempts to rationalize the irrational.

beta said...

freako: Once housing starts going down...consumer confidence plummets and the savings rate skyrockets

I agree the savings rate will rise, but I wonder if it can skyrocket, given that most people will be servicing their current debt (consumer credit, mortgages) for decades to come. Could be a huge drag on the economy and put off a recovery for much longer than historical stats suggest.

jesse said...

"They just have to buy the goods and services that multiply into our economy and stimulate employment and sustain the housing boom beyond what the visible GDP would dictate."

Money laundering is a way of bringing in black money into the legit economy. Laundering activities should show up in GDP. Try buying a house with non-laundered money.

craigb: "We see the wealth, we cannot explain it with the usual metrics, we continue to squeeze the usual metrics for an explanation."

Your argument is compelling. I will say Vancouver has a long history of boom/bust cycles before the recent advent of gang activities. And looking at somewhere like Montreal, where gang activity is also active, I don't see similar price runups. Contrast that to Dublin and Auckland where prices are similarly high but I don't know if the uground boys are using the same tricks there or not.

Even if, say, 1% of properties are gang-owned, I don't know if that will be enough to hold off a reversal of sentiment.

exvancouverite said...

It's a world-wide speculative bubble fueled by cheap credit, any other explanations are merely attempts to rationalize the irrational.

Nobody is suggesting that CBs haven't been blowing helium into every corner of the planet.

It is peculiar that Shiller refers to Vcr as 'the most bubbly city in the world'. This falls out of the parameters of normal credit pumping.

Who is trying to rationalize the irrational?

exvancouverite said...

>>> And looking at somewhere like Montreal, where gang activity is also active, I don't see similar price runups. <<<

Province of Quebec has authority over their own immigration policies; separate and apart from the Canadian Fed mandate. As a Canadian, you already knew that. Comparing H.A.s to multinational syndicates is misleading, at best.

>> Contrast that to Dublin and Auckland where prices are similarly high but I don't know if the uground boys are using the same tricks there or not.<<

Depends on whether they have a business climate as crime-friendly as B.C. Besides, Dublin has major history, New Zealand has sub-tropical weather.

Vancouver has neither.

jesse said...

"Province of Quebec has authority over their own immigration policies; separate and apart from the Canadian Fed mandate."

Montreal CMA population increased by 5% from 2001 to 2006. Vancouver CMA is just under 7%.

freako said...

"Today I notice my very unit listed for 100K more than I sold it for and I have paid approximately 20K rent for the past year."

First of all, level the playing field.

How much interest expense did you avoid?

What did return on the proceeds of the sale?

How much money for repairs/maintenance/taxes did you avoid paying.


"So in my opinion I made a terrible call and gave up a huge potential profit. "

Not really. The outcome was terrible, but the call was not. You play with the odds on your side. Those currently in the market are playing against the house.

Maybe you could have hung in there, figuring that you could have gotten out when there are tangible warning signs. But what will likely happen is that the market will become illiquid, and the gates will shut. Check Florida for guidance. It is not easy getting out once the tide has turned, unless you are willing to sell below market.

"Bears - calling for a fall year after year while forfeiting gains does not make you right."

What is the point of this statement. Prices are overvalued IMHO. They are likelier to go down than up in the long run.

My buddy won at the casino and wants to put all his winnings on the number 11 on the roulette wheel. I talk him out of it. Lo and behold, the next spin stops at 11. Did I give him bad advice?

And what is this forfeiting gains bit? Are gains yours to forfeit? If so, please buy back in double margined to make your riches back.

"What will trigger a fall, when will it happen and how much of a decrease do you foresee? Without these parameters your arguments are baseless. "

No it isn't. Let's say your house sits beside a huge mountain with an enormous snow pack. I warn you about the huge avalanche danger. You respond "What will trigger the avalanche, when will it happen and how much of snow do you think will come down? Without these parameters your warning is baseless."

If you told me that, I'd tell you to p*ss off and go sit in your house. There are time tested true and valid arguments as to why housing prices are in great danger of reversing. You know them, so not point rehashing them. Agree with them or not.

"Repeating the same argument until one day it becomes true is not really a strategy and obviously has an opportunity cost."

No, if prices are on borrowed time it is not opportunity cost, any more than your wife hauling away from the poker game cost you the big one.

"Opportunity cost HAS to be considered to be truly a successful investor."

As mentioned above, you are misinterpreting opportunity cost. But on that topic, if CF positive investors woke up to it, you'd see a heck of a lot of supply in a jiffy.


"Bulls - how much more upside do you see and for how much longer? What will make you cash in? Bulls have the same issue as the bears as far as strategy so there has to have a point where you take profits or you are simply gambling. "

Four alternate points of view:

1. The value investor: Housing will fall. I don't know when, so I will exit now.

2. The market timer: Housing will fall, but I will keep playing

3. The random walk (The Chipman argument): I don't know where housing will go, but it will return 5% over the long haul, so I will just stay in.

4. The permabull: Housing will continue to rise forever.


You seem to want to play game #2. Good luck to you. Whatever responses you get will be very unscientific guesses. Might as well guess when and where a cow will sh*t. But sh*t it will. And the longer since its last sh*t, the sooner its next one. I think we are way way overdue, but what do I know. On that topic, why not google Newton and the South Sea bubble? I will spare you the effort. He got out with a good profit. Watched his friends get richer and richer. Second guessed himself and got back in. Then ...

freako said...

"No they're not. The basis of the bear argument is that the yield for Vancouver RE (net rental income) is at a historical low and far below alternative asset classes, including riskless assets. "

If you only follow prices, you could argue that bears were wrong. But on the flip side, one can argue that the bears are now more right than before as the rationale is stronger than ever (worsening fundamentals.).

And for the love of god, can we put that stupid "even a broken watch is correct twice a day" argument out of its misery?

It is not about prices going up or down in a given year. It is about whether prices go eventually go back to prices BEFORE the bears started voicing their pricing concerns.

I tell you that price will go down. Prices double again and then drop by 80%. Did I give you good or bad advice? Or did you want the timing of the reversals to minute?

Basic fundamental analysis such as yield, and p/e can't give you that. Nobody can. Place your bets with the information you have.

freako said...

"They just have to buy the goods and services that multiply into our economy and stimulate employment and sustain the housing boom beyond what the visible GDP would dictate. "

But you also have to subtract the cost of my stolen car deck, which was traded for drugs, then sold, ... and so on. The villas of the Colombian drug lords don't come from nothing. I presume we could argue that we give more than we take.

freako said...

"I agree the savings rate will rise, but I wonder if it can skyrocket, given that most people will be servicing their current debt (consumer credit, mortgages) for decades to come. "

Don't quote me on it, but I believe that paying down principal counts as saving. Anyhow, whether it counts or not, for all practical purposes, it is the same thing, namely money not consumed.

craigpbbrett said...

"The 'Vancouver crime economy' theory myopically ignores the fact that most developed nations (and many in development) are all experiencing an RE boom."

It's not that Vancouver is booming, but why Vancouver is accelerating past other North American markets without the income and migration to explain that rise.

"And looking at somewhere like Montreal, where gang activity is also active, I don't see similar price runups."

The dynamic is different. Montreal isn't the grow-op capital of the world and doesn't show up on the radar in big Chinese corruption cases. Vancouver does. Fat Lai was China's biggest smuggler, worth several billion, and where did he go when the Chinese politburo changed hands: to Vancouver. He didn't throw a dart at the map. He chose a city where he had connections and the means to continue doing what he does.

The Washington Post recently did a story on Vancouver as a magnet for foreign white-collar criminals. Here's what they said:

"Vancouver prefers to revel in politically correct politics, a squeaky-clean environmental image, and a laid-back mood fostered by persistent melancholy rain. But it also is a haven for some of the most wanted fugitives in the world and for con men working scams in the shadow of the law."

I know most of this is just speculation. But too many things don't jibe about this market. And if we take even lowball estimates of the value of criminal activity, the scope is simply massive.

jesse said...

"Depends on whether they have a business climate as crime-friendly as B.C. Besides, Dublin has major history, New Zealand has sub-tropical weather.

Vancouver has neither."


The issue is whether Vancouver RE prices are higher than other jurisdictions because of organized crime cash injections. I think we agree yes. We can argue over the magnitude of its impact.

Say the market cap of all Vancouver real estate is $350K X 1 Million households = $350B. How much of this is owned outright by organized crime? 1%, or 10,000 properties, puts the bosses' share at $3.5B. I'm guessing these guys will want their equity withdrawn sometime or it's useless. Sounds to me like organized crime is speculating along with the rest of us. I would think of them as a bunch of investors with deep pockets but not deep enough to have a significant impact on the entire market unless you think 1% of the market can control the remaining 99%.

Warren said...

A couple more anecdotes.

I'd like to know who is buying all of these places. I think the buyers should explain our situation more than the sellers.

Old people retire and move out of the city? That's not really news. Sure they are moving out of BC, but I bet many are thinking or planning of moving to BC for retirement.

patriotz said...

Sounds to me like organized crime is speculating along with the rest of us.

And this is the key. What does it matter where the money is coming from? If money from organized crime had driven the dot-com boom, would prices have stayed high? No. The tulip mania? No. Florida? No. Fundamentals matter regardless of the source of the money.

It's always the same story. People want to blame some source of money that is insensitive to trivia such as rate of return, whether it be HK millionaires, Alberta oilmen, or drug dealers. Well Mr. Market doesn't care.

And one more time, if you want to see what actual demand for RE is, black money or no black money, look at rents.

patriotz said...

I bet many are thinking or planning of moving to BC for retirement

You can think and plan all you want, if the dinero aren't there you're not going anywhere.

Doesn't common sense dictate that the retiree flow into BC will be decreased by the rising gap between BC prices and the rest of the country? How many Americans retire to California?

BC Buds said...

When will this happen here:

http://www.winknews.com/news/local/7896352.html

Townhomes a steal in Fort Myers
By WINK News
Fort Myers - You're not going to believe what some brand new townhomes went for on the auction block Thursday night in Fort Myers, considering where prices have been. A three bedroom townhome previously priced at $310,000 sold for about $180,000! First time home buyer Brandon Quarterman, a student at Florida Gulf Coast University, was the lucky bidder. He said, 'I'm feeling great. more money in my pocket!"

The two and three bedroom townhouses in the San Simeon development, which is off of Winkler Avenue, were selling for prices we haven't seen in Southwest Florida in quite some time. And that was the whole point. Marketing reps with the developer, Levitt and Sons, say they're trying to quickly unload the fifty homes. Most of them were left over after people and investors backed out of deals when the housing market changed. Levitt and Son's Jama Shaw said, "This is our aggressive approach in moving onto our next phases and new floor plans."

Greg Toher was outraged when he heard the prices some of the homes were going for. Walking out of the auction room, he told us, "$145,000! Unbelievable! We paid $300,000! They just got rid of at least four for $145,000!" He says he closed on his three bedroom San Simeon townhome in December, "You've got to be kidding me, that's not fair."

New buyers may be getting a steal, but current San Simeon homeowners, like Greg, tell WINK News they feel like they've been ripped off. Tara Gionpalo said, "I feel really mad, really sad, hurt."

Victoria Toher said the developer went back on their word, "They promised us they were not going to go below market value." A Levitt and Sons representative told WINK News on Thursday night that the homes did go for fair market value...as determined by the hundreds of bidders at the auction. He went on to say they feel terrible for the homeowners, but the prices were reflective of a challenging real estate market and they're confident it will once again shift in the homeowner's favor.

Bruce Sexton, another San Simeon homeowner who closed on his house in October is not convinced, "I don't think they have loyalty to the people who purchased early. They're just trying to dump the houses and get what they can."

craigpbbrett said...

"How much of this is owned outright by organized crime? 1%, or 10,000 properties, puts the bosses' share at $3.5B."

According to BC Hydro estimates, there about 18,000 grow-ops. As the RCMP inspector said, most of these are in purchased properties. Most of these operations skirt the meter box so as not to raise red flags with BC Hydro, so the number is much higher. On top of that you have the number of properties bought as investments, to live and otherwise park cash.

"I'm guessing these guys will want their equity withdrawn sometime or it's useless."

And put it where? For a grow-op owner the property is an essential operating cost. For the corrupt businessman who's into credit card fraud or bringing his money out of China, it's often the only default position for his cash. Cars are too cheap and banks can notify the authorities of suspiciously large deposits.

In any case, direct purchases of property aren't the only way the black economy drives up prices. The underground economy contributes a share of provincial GDP that may rival forestry. Yet, unlike forestry and other legal industries, a third of it is not handed to the government. It's cycled straight back into the economy through consumption of goods.

Anyway, I've banged on enough about this. The facts are these:

1) Vancouver real estate is approaching the most expensive in North America.

2) In-migration is historically low.

3) Incomes rank near the bottom of North America's 60-odd jurisdictions.

4) Vancouver's second-biggest industry is drugs.

5) Vancouver is considered a haven for black money to the extent that most of China's biggest corruption cases (Bank of China, Fat Lai etc) always seem to thread there way through this city.

Conclusion: No one has enough data to call this market It is effectively opaque.

freako said...

"Sounds to me like organized crime is speculating along with the rest of us.

And this is the key. What does it matter where the money is coming from? If money from organized crime had driven the dot-com boom, would prices have stayed high? No. The tulip mania? No. Florida? No. Fundamentals matter regardless of the source of the money."

You are absolutely right. In the heat of debate we get our signals crossed.

1. Inflows of money can cause prices to rise, but will do diddly squat for fundamentals (reminds me of Chipman when he thought prices themselves were fundamentals, talk about circular).

2. If indiscrimate inflows occur, prices will indeed rise, and rise and rise, as long as more money is coming in than is flowing out. But the moment it stops, FUNDAMENTALS will rule, which of course means prices returning to reality.

Want a somewhat long winded and dirty analogy of what this is all about?

Picture a water line with a valve flowing into reservoir. The line connects half way up the reservoir. If there was no water pressure, this is where the water level would be.

The water pressure is generated by a pump at a nearby lake. The pump is regulated by flow. When the valve at the reservoir is opened, water flows, which cranks up the pump above its baseline pressure, a positive feedback loop.

One day, talk started about a future drought, so our reservoir owner cranked the valve open and walked away to take care of some errands. Water flows and flows and flows. The reservoir rises and rises and rises.

Some neighbours come to look at the rising reservoir. Nobody thinks it will ever stop rising. But lo and behold. Eventually the back pressure became large enough that the flow slowed. Thus the pump slowed, which caused less water to flow, which caused the pump to slow. Soon the water flows backwards, and the pump stops dead. Under the enormous pressure, the reservoir empties until the pressure falls below the pump baseline again, at which point the cycle starts all over again. Actually would start all over again. The pump overheated.

Not a perfect analogy, I know, but: it explains:

1. It explains how inflows, no matter how large, can only temporarily distort prices. Just like water, prices will find its own level, once the inflows stop.

2. The valve was left open. That is exactly what happened with RE. Think valve jammed wide open. Normally, it is a much more measured process based on carefully estimated usuage. If the valve won't regulate, the laws of physics/economics eventually will step in.

3. Guessing how long the "valve" can stay open. With a pump and reservoir, a reasonable calculation can be made by a civil engineer. With RE, there are too many psychological factors. Who can possible know how irrational markets can get, and for how long? All I can conclude is that the bigger they are ...

Two-armed said...

My guess as to what makes the Vancouver real estate market so special is the psychology of the place. It makes us vulnerable to the classic real estate pyramid scheme.

We are inclined to think of this as a particularly special place, in which we are lucky to live. So, we reason, real estate is a good bet. So, we bet on it. We make some money on our bets, which encourages us to speculate some more, either by moving up to a bigger place or by investing in rental property. Time passes, the market rises, we forget the past, and we discount the down-side risk. This all works for quite some time, especially when its fuelled by easy money. The real estate gains get re-invested in real estate, and further leveraged. Its a classic pyramid scheme fuelled by this city's preoccupation with itself, more particularly our preoccupation with our real estate.

In the end, however, we price the first-time-buyers out of the market. At first, this might actually raise the average sale price, because the bottom has dropped off the market. But eventually this sucks the life out of the scheme. The rotting foundations bring down the whole pyramid. Only, because its real estate, it all happens at a glacial pace. Prices are sticky on the way down.

You don't need to imagine a whole new underground economy fuelling this bubble. The bubble is self-inflating. Besides, white collar crime and grow ops are hardly a new phenomenon in this city. We have a long and proud history that significantly pre-dates the recent surge in property prices. So, I don't see cause and effect there. I see the same old pattern repeating itself - a self inflating speculative bubble followed by a gradual return to historic norms.

freako said...

"You don't need to imagine a whole new underground economy fuelling this bubble. "

Nope, you just need the expectation of rising prices. Though the latest affordability numbers are really making me scratch my head. Where is the money coming from? You can't play a pyramid game if you don't have any money. Officially we don't even have exotic mortgages here, and subprime is supposed to make out a small percentage. Bullsh*t I say.

M- said...

two-armed: well said, you captured the spirit of the current market quite well!

freako: more and more people are taking out 35-year or longer mortgages. The FTBs find that they can at least afford *something* if they buy it with a 35-year amortization. So they buy, perhaps without looking at the larger implications-- if they stretch themselves to buy now, with a 35-year mortgage, they've probably just committed themselves to working almost their entire working lives to pay off their crappy "starter" condo. Without significant pay raises, it'll be quite a long time before they'll be able to upgrade to a nicer/larger place. And at that point, 10-20 years in the future, will they be able to pay off the mortgage on their upgrade before they retire?

In my mind, if prices stay this high (without a coresponding inflation of wages to match), the market will forever strangle itself-- anybody buying at high prices may not be able to upgrade for decades. If prices remain high forever, the market will forever be strangled by people who can only afford a "starter" condo.

If the market crashes, there will be tears for some people, but the market will return to normal, where people don't feel compelled to spend so much money that their starter home will be their lifetime-home...

freako said...

"freako: more and more people are taking out 35-year or longer mortgages. "

Perhaps, but for perspective, the yoy appreciaton reduced affordability by almos the same amount that would be gained by going interest only. What is next? Neg am?