Monday, November 30, 2009

Yes Virginia, There is a Housing Bubble


Condo lineups return

Yes Virginia, There is a Housing Bubble

Total madness. People lining up to buy a small box in the sky on a busy street next to a polluted waterway. Awesome!! Sign me up!
Reminder - the interest only payments on $500,000 are $1350 / month at today's 3.25% or nearly $2,200 / month at 5.25%.

33 comments:

david said...

All the more amazing is that these wont even be built until 2013. They cant even get the super low interest rates, so the rush to buy is truly mind numbing.

All of these purchasers are hoping prices go up by the time these are built. Even if they do plan to live there when it is built (a small percentage I would guess) they are still betting on the condo being worth more by then. Why else would they put a couple dozen grand down on a place when there are hundreds of new or almost new ones available now for about the same price?

chadmpnp said...

The bears looks more wrong day by day.....

mohican said...

I completely disagree, the bears have even more reason to be concerned about the welfare of our neighbours and the local economy now.

chadmpnp said...

Come on guys, you guys have been wrong for so long it's incredible. Like I've been saying for almost a year now, regardless of the facts bears will always be bears. The example I used in the past was that if you met a fortune teller that had 100% accuracy in the past and he told you real estate prices were headed higher, you guys would still be bearish.

vibe said...

chad, you're right, I wouldn't believe a fortune teller because fortune telling is nonsense. I guess we've finally figured out the fundamental difference between bears and bulls.

david said...

Chad,

I wouldnt be bearish no matter what. If I was in Phoenix right now I would probably be buying if I was in the same financial situation. I dont even think prices in Phoenix will be rising any time soon because the FTB credit will end and interest rates will rise, but houses there cant really fall much further, and it is cheaper to buy than rent there.

The further house prices outstretch rent the more bearish I will become.

You seem to be using the logic that if something has risen in the past then it will rise again in the future.

Imagine you were looking to buy stock and you had 5 choices. All stocks were worth $1 in 2000 and all companies had similar profits in the past 10 years. 4 of them doubled and one tripled. The company that tripled grew more because people thought it would do better (speculation). Its earnings are the same as the other companies and has about the same amount of assets and employees.

By your logic the one that went up more will probably continue this growth in the future, even though a person could buy stock with similar fundamentals for 2/3 the price. (I am not a master of stocks like yourself, so you will have to forgive me if this is over simplifying)

Unless the expensive company can justify its price by outpreforming the other companies in the near future, I would consider it overpriced.

It is the same with housing, but rents are like earnings. Other cities (like Phoenix) have much better rent vs buy comparisons. A house that rents for 750 can be bought for 80K!

Look, you bought and thats great. But dont think that just because you bought it is the right thing for everyone. Most people I talk to about housing think that owning is the way to go if they own. Especially people who have recently bought will argue to the death that buying is better. This is because they bought, so they think everyone should.

Good for you for buying, but believe it or not some people dont feel the need to buy right now. If you are so sure prices will rise then throw down 30K on one of these places and you will be a millionair in no time.

mohican said...

Yes, definitely untrue that 'bears will always be bears.'

I bought my personal residence when it was cheaper than renting and I was just looking at a vacation home for the family in Palm Springs - again - quite inexpensive considering everything.

I am, on the other hand, quite bearish on Vancouver real estate. I don't know when it will correct and I don't really care, but it will.

chadmpnp said...

Of course you don't care Mohican, you already own, but for those that have been sitting on the sidelines waiting for prices to correct they can wait for the inevitable correction all they want (I agree it will come) but like I've said over and over and over the correction will come from higher prices so saying "a correction will eventually come and I don't care when it happens" does no one any good. I could have told you at $50 that crude oil was a bubble and that it would crash, but it went to $150, then crashed, but those that went long at $50 and sold even at just $100 did quite well, even if they knew it was an unsustainable bubble. I agree with many of you that Vancouver RE is a bubble, where we disagree is that we're anywhere close to popping.

pricedoutfornow said...

The only incredible thing I see is how long this bubble has been sustained. Must be due to the Olympics and low interest rates. No other explanation. Oh, and the fact that people have lost their minds!
I would love to buy a house right now, get a dog and have a family. I love my neighbourhood, but someone please tell me how I can do this when the house prices here are $700k and I have about $70k down?? The numbers just don't work for me.
And no, I won't be sucked into the condo-trap, thanks I'd rather not pay those bloody strata fees, plus a lovely special assessment years down the road.

chadmpnp said...

How can you say "how long this bubble has sustained"? Prices dropped violently last year and are just basically at highs again. Being at prices of 2 years ago hardly screams of a market that has defied gravity. The market pulled back violently, recovered violently, now it is resuming it's trend higher. Please people, start referring to facts.

buff_butler said...

my prefrence is for US property; I see a whole lot less risk; far greater reward and you can use a carry trade against the dollar. Plus term loans for 30yr vs 5.

david said...

Chad,

Your opinion of what a bubble is may not be the same as other people. I would say that we are in a bubble now, we were in a deflating/popping bubble (but still a bubble, as prices didnt drop out of bubble territory) last year and we were in a bubble for years before that.

Someones opinion of what is a bubble is not a fact. Pricedout never said that the market rose forever and never waviered, he just said this bubble has lasted a long time, and I agree.

chadmpnp said...

Look back at any real estate YoY % appreciation chart. If you were to buy after 7-15% YoY appreciation while the market is not at new highs and had recently been down in excess of 5% YoY then you would have made money without many fluctuations over the next few years. If you guys can find a single chart, in any real estate market in the world where this was not the case, then present it here.

Rob said...

Not a "bubble theorist," so I'm genuinely wondering (help out, those who know), whether bubbles can perhaps be defined two ways:

1) Current price (x) vs fundamental value in normal conditions

2) Rate of change (dx/dt) of that price vs expected rate of change in normal conditions.

Does Chad perhaps have a case that we don't have a Type 1 bubble (though I think we do), even though we may have a Type 2?

david said...

Chad,

Even if I wanted to poke around the internet for hours to find such a graph (with those very specific numbers) I wouldnt bother because it wouldnt prove anything.

I think if not for the emergency interest rates the bubble would have continued to burst. Even if this exact pattern has never occured before that doesnt mean squat, because interest rates have never been this low before.

Look, here is what I think a housing bubble is.

1) When the average house costs more than 5X the average income. (Vanvouer is around 8X)

2) When renting is signifigantly cheaper than buying. Generally I use 25 year mortgage at around 6% for this comparison. Sure if you use 2.25% at 35 years it would be closer, but I think that is a crazy risk, and I also dont want to be paying off my first home when I am 57.

3) When people treat houses like stocks, not shelter.

4) When I can buy a home in Vegas or Phoenix for 1/6th the price of a home here.



Oh and about that graph. When you say "you would have made money without many fluctuations over the next few years" what do you mean by that? In order to make money you must sell. And then you must subtract realtor fees, taxes, interest paid over the years, strata and property taxes over the years from the difference between purchase and sale price. If after all of that you make money every time then kudos to you.

chadmpnp said...

David, I suppose saying you would have made money every time was the wrong way of phrasing it. The correct way of phrasing it would have been that if you bought several years after those conditions I pointed out were met, you would have paid significantly higher prices for your home. I like you guys, I just disagree with the majority of you and I've asked since the market started headed higher from it's trough to provide actual historical evidence like I am presenting through actual numbers or plots on a graph, to date no one has done so, and for a very long time, and a very significant increase in prices, you guys have been wrong. I also find it pointless to start shoving Phoenix and Vegas stats in bulls faces, unless you can get up and move there now then what's the point? This is a forum on Vancouver real estate, not which area in the world is the best real estate investment right now, I bought my home when prices started to creep up again because I thought it was a good time to upgrade as I thought prices should head higher, rates were good and I loved the house, the house is a home first for me, an investment second, but an investment nevertheless.

ReductiMat said...

Chad, if you recently bought your house, why are you here?

If the place you wanted to live in cost $3,000 a month in rent, but to purchase would cost you $7,200 a month, which would you pick?

david said...

chad,

I really find it difficult to find patterns in real estate charts. Most real estate data for Vancouver goes back 40 years at most (at least as far as I have seen) and markets take years to move.

Real estate is a slow moving asset. You will not see a house lose or gain 30% of its value in 1 day as can be seen on the stock market (individual stocks, not necessarily the whole market).

Because of this cycles take years to happen. I was once told that the average real estate cycle lasts 7 years. After more research I find that isnt really true but I would say that most rises and drops last a few years at least. Even though demand can change reasonably quickly, prices are slugish to respond to this as sellers dont just drop prices based on 3 days on the market.

What I am trying to say is that I dont really believe that any reasonable patters can be found in a 40 year graph when bull and bear markets last for years. We have probably only seen 10 cycles in on the graph. That is hardly enough to draw a conclusion (in my opinion).

Looking at the graph there are sharp turning points. Many of these can be attributed to interest rates, the unemployment rate and the general economy. I think these factors play a much larger part in prices than simple patterns on charts.

Regardless, it still comes down to rent vs buy for me. I have no need to buy. No wife wanting to settle down, no kids on the way and no fear of being priced out forever. If prices made sense then i would buy, but I certainly see no reason to increase my monthly payments to move to a smaller and older location.

And after renting for a while I find I actually quite like it. The landlord never calls or comes over. I give her 3 cheques every 3 months and she asks if everything is ok and we carry on with our day. She says we are the best tennants she has ever had (though I think she has only had a couple) so I have little fear of being kicked out. I have the option of moving when I want with minimal cost and hassel and never have to worry about replacing aging or broken appliances or the dreaded special assessment.

Maybe people have been burned by landlords in the past so they have a dislike for renting, but I honestly dont see a downside to it right now as I am saving money and would live exactly like I do now if I owned the place. (well maybe I would attend the strata meetings).

Unless my rent goes up 40% (cant happen with the RTA) or house prices fall enough to come close in rent vs buy, I will be in no rush to change my living situation.

chadmpnp said...

True RE charts only go back about 40 years (US charts are closer to 100 years) but in a slow moving market it is a small sample size, but the bottom line is it's the only quantifiable data we have to work on so that is what must be used. Whoever told you RE cycles move in 7 year cycles is out to lunch.

van_coffee said...

Sorry to interrupt the entertaining "back and forth? here, but I said it two years ago (on this blog) and I will say it again, it is going to take a few years for house prices to reflect fundamentals, and until that time there will be some bounces, albeit, this one is starting to feel like that last heave that a corpse gives before never moving again.

Naveen said...
This comment has been removed by the author.
chadmpnp said...

I looked back at quite a few charts today as it's been a slow day at work and what I see Vancouver doing is similar to what California, specifically San Francisco was doing in 2004. While everyone knew Cali was a bubble (I never said Vancouver wasn't a bubble) real estate prices continue to skyrocket until late 2006 early 2007 and we all know what happened then. Will I sell my property and rent in 2011/2012? I might, I'll cross that bridge when I get there but as of now, prices are headed higher.

Ross said...

http://www.papereconomy.com/CSI.aspx?id=DEXR&yoy=all&showall=1

Ross said...
This comment has been removed by the author.
david said...

chad,

I quickly looked up a san fran graph and I dont see any real drop in 2004, perhaps we have different sources. Mind giving me a link for the graph you were looking at?

I am curious to see similarities between vancouver and san fran.

thanks

chadmpnp said...

Hey David,

My dates were a bit off, and off in a way that is actually more supportive to the bulls. I just looked at the chart Ross posted and San Fran dropped about 7% in about 2001 followed by a very quick and sharp rebound to new highs at already very elevated and inflated prices (remind you of any market??) the market continued higher for 4 and a half years before ultimately crashing but the crash only took it back to the levels seen after the snapback rally. I see a very similar situation in Vancouver, rally for a couple of more years and then we'll see what happens but there will probably have to be a correction of some magnitude, but it isn't coming any time soon guys, DON'T FIGHT THE FED.

ReductiMat said...

Chad, so if I understand you correctly, the only thing that will bust this non-real estate bubble is if the central banks raise rates?

david said...

chad,

First, a smartass comment; we fight the BoC in Canada, not the FED. I know what you mean, the fed rate is basically our rate, but I just couldnt resist.

OK I see that dip in 2001. My graph shows a drop from about 470K to 420K. This graph says "house prices" so I think it is only refering to actual SFH's. Our homes peaked around 800K. Assuming the graph I have for san fran is all housing then I think ours peaked around 600ish.

The main difference I see is the income disparity. In 2001 the median household income in san fran was 59K (look, facts! http://www.census.gov/acs/www/Products/Ranking/2001/R07T160.htm ) and ours is around 55K (for GVRD, I know, I was shocked too) in 2006 (most recent i could find without looking too hard).

http://www.metrovancouver.org/about/publications/Publications/KeyFacts-AverageHouseholdIncome1991-1996-2001-06.pdf

That alone is a huge difference. Over 60% difference in peak prices (or about 30% if they mean all homes) and the incomes are almost the same.

Now I know that there are more than just working people buying here, but I have lived in Vancouver all my life and I havent met many people (see: none) who own here and just hang out without having some sort of job.

My point is people have to be able to afford the place with a job. Now san fran was pretty inflated, but not to the degree that vancouver is now with respect to incomes. Couple that with falling interest rates from 2001-2006 (I think, correct me if I am wrong) and you can see how san fran still had a bit more air to fit into its bubble. Now however, rates cant go lower.

Basically I think real estate is a confidence game. If a large majority of people think prices will go up/down, then it will probably happen. Lots of places in the states have great deals, but people are afraid/cant buy because they were burned by the bubble (bankrupt, no credit for 7 years) or know someone who was.

In vancouver everyone knows someone or is someone who made huge money, mostly on paper, in real estate. They think it can continue so they buy, sometimes second or third homes for investments because the first one worked out so well. Once people start seeing losses all around them it could shatter this confidence and cause a US style collaps. I hope it doesnt, but it could happen. Then again prices could stabalize for a while and we could see Japan style deflation for many years.

Either way I think we both agree these prices cant last forever.

chadmpnp said...

Reducti, no, I'm not going to get into a post about what I think will fundamentally spur the rally to continue and what may ultimately bust it, I've laid out my thesis in previous posts so you can look back.

David, I know, but no one says don't fight the BoC, I know you know what I mean. The cost of $ is cheaper now than in was in 2001, which changes the price/income ratio dramatically if you include the cost of capital into the equation. Fighting the trend in real estate is a losing game, the trend is higher for now and it's not ending any time soon. All I have to see is you guys are VERY lucky you can't actually short real estate because things would be very ugly for your balance sheets! :)

david said...

chad,

Im not saying that prices will drop tomorrow, but they will drop. I dont want to buy now because when I do buy I would like to hold for at least 10 years. I am also still young and may want to live somewhere else for a year or so. My parents lived in the Bahamas for 18 months before returning to buy a SFH in burnaby for 129K, now worth about 750K! I dont think they timed it that way, they just got lucky.

Anyway my lease goes until september so I wont be jumping in any time soon.

As long as we agree that prices will fall (in real dollars, and probably nominal ones too) in the next 5 years then I think we are actually have a pretty similar point of view. When that drop happens I will be ready with a 40% down payment and asking for a 10 year amortization.

chadmpnp said...

David,

I never really talk about my projections in real dollars, I'm talking about nominal values for the most part. If you plan on buying a place and staying in it for 10 years then I suppose buying when it is "cheaper" would be prudent. I strongly believe the market will remain strong for a year or two, possibly three years and then probably weaken from there but I'm not going to make projections that far out because there's just too much that can happen between now and then. The reason I see a correction down the road is because on most measures (price/income, inflation adjusted prices etc) we are overvalued, but we will become even more overvalued in the next few years. We're in agreement that the market is inflated, but it will not deflate for quite some time.

chadmpnp said...

Also David, putting down 40% and having a 10 year am is excellent and you almost guarantee yourself a secure future with manageable payments and no enormous risk to huge fluctuations in your lifestyle due to your property regardless of where the market goes. It seems to me you don't really care where the market goes after you buy, you'd just prefer to buy when the market comes down so you can purchase on your terms with a big down payment and short amortization and I can't argue with that thinking, my points here have simply been where the RE market is going, not any individuals situation, although I think you're doing the right thing for yourself.

david said...

chad

You are right I dont really care where the market goes after I purchase. If I can own for about the same as renting then that is great with me. I probably expect to buy a condo first then maybe an SFH depending on where my life goes.

Idealy I would pay off the condo before I want to switch and could rent it out to help with the new mortgage. This is a big maybe which, for a change, would depend on rent vs SELL.

As for when the drop happens, I really have no idea. The market seems to be driven more by peoples perceptions of the housing market than on actual numbers. The only thing that would force the housing market down would be a quick jump in interest rates, and I dont really see that happening unless something changes.

If eveyone loses the "it's different here" mantra then we could see a drop, but again, I dont see that happening.

Who knows, maybe the drug game has a much bigger influence over RE than I think and prices could stay this high for ages.