Monday, January 12, 2009

Calamity on the Creek

I enjoyed reading the updates on the Olympic Village fiasco at Frances Bula and Condohype.

What I found striking in reading Bula and other journalists is that what they consider the 'worst case scenario' for the condo market is actually *still* pretty much in the lands of hopes and dreams. The scenarios they seem to be running are things like 20% off pricing, or waiting 2 or 3 years until the market 'comes back.' What I find striking is how people that are intelligent and presumably well-informed seem to be unable to clearly see where this market is going.

Here's one thing that Frances said:

Being a fence-sitter, as my loving critics like to call me, I find myself as unconvinced by those who say (with considerable glee) that the housing market as we knew it will never EVER return to anything near what it was as by those who thought condos would keep selling like cheap underwear at Wal-Mart.

What does she mean by 'what it was'? Yes, people will continue to buy and sell condos. At some point, sales will rebound. They will in fact again sell like underwear at Walmart. But at what price? Does she mean 2007 pricing? Of course, in nominal terms this will happen at some point, but not any time soon.

Here's how I see it. No, prices will not fall forever and they won't fall to zero. Instead, with speculators out of the market, the bottom for prices will be set by cash-flow investors and/or rent vs. buy residents. If these people need, say, a 7% gross yield on investment, then in order to get $1000/sf (which is the number bandied around as break-even for the Olympic Village), we need to see rents at (1000*.07/12)=$5.83/sf per month. This means that a 1000sf condo rents for $5830. Now, the Oly Village might be nice and ultraluxury and all that, but I think it will be awhile until incomes rise to allow $5.83/sf.

Now, maybe one of these assumptions is wrong. Maybe speculators will return to the market and blow a new bubble. Could happen, but I doubt it will happen in the next few years. Maybe investors don't need 7% gross. I don't know. But I'm pretty sure that, while not forever, it will be a l o n g time before rents justify $1000/sf.

Look. It's as simple as this graph. Forget the politics. Forget the legal mumbo jumbo. Forget Bob Rennie's new age condo spin. What people are apparently still not getting is that a 'return to normal' does not mean returning to 2007. It was 2003-2007 that is the anomaly; not 2008-09.

[note: updated graph to Q3 2008. Data here.]
UPDATE: Here is Gary Mason in today's G&M. My impression of Mason is that he is a hard-nosed, cynical journalist. Yet he is still caught in the hype:

The city may be able to take the long view and hold on to unsold condominiums until the economy and real-estate market turn around and the value of the units returns to something resembling what they were expected to be about now.

Then again, that might not be for another six or seven years. No one knows.

See, his worst case scenario is that the market recovers to 2007 wish prices (not actual prices, but the 2007 presale wish prices) in 6 or 7 years. Not. Going. To. Happen.


jesse said...

It is truly amazing, and scary, at how recent conditions are considered justified (i.e. the "hype") by most everyone. Prices have so far to fall -- it is so simple a concept it evidently boggles the mind.

Unknown said...

Agreed, this kind of thinking is rampant everywhere, and it's the real problem - rather than "negative press" as the "experts" seem to think.

In two generations it's shifted from being normal to comfortably afford a house for your family in your twenties with one income, to being able to barely afford a house in your mid-thirties with two incomes. Where's the breaking point?

macho slob said...

Yup, it's amazing and scary how the thirty something crowd who's entire adulthood is limited to a decade of prosperity has lost all sense of value. But things are changing fast, as the magnitude of a million bucks for a shack is beginning to sink in, especially when compaable homes in sunny parts of the US are selling for a third of the price and are still dropping.

Our plunge still has a long way to go.

mohican said...

Yes, I think 2004 nominal or 2003 inflation adjusted prices are a lock. The potential for an overshoot to the downside is substantial as well.

Generally, from what I observe, people are holding out hope for a miracle but none will be forthcoming.

mohican said...

Additionally, the best financial move for the city would be to carry the project for as short a time as possible. They should cut their losses as quickly as possible. This will reduce their financing costs and get them out of the development business, which they had no business getting into in the first place.

jesse said...

"Additionally, the best financial move for the city would be to carry the project for as short a time as possible."

Unfortunately this suggestion carries with it the most optics.

Something to keep in mind is that there is still speculation on the city's collective brain even while the bubble is deflating. Only when prices are back to fundamentals justified by cash flows will speculation be down for the standing 8 count. Whether the City realises this is up for question; if they don't -- and it looks like this is the case -- they'll be following the market right down to the mat. You can be pretty sure a committee will choose the slow death.

AndrewJ said...

Found this interesting article relevant to fundamental value discussion here. The article is about us housing bias.

"Simply put,
Americans may have overinvested in housing.
This has been a worry of conomists for a while. It’s a concern based on what they see when they compare the rates of return — profit per dollar invested — for a variety of
capital types. Most studies look at two broad categories: housing capital and nonhousing fixed capital. The latter consists of investments in manufacturing plants, machinery, and other sorts of investments that produce goods.
Economic theory suggests that the rates of return for each form of capital should equalize over time."

I've also been enjoying the source site ttp:// It's a news aggregator with articles about economic crisis and how to fix it.

Two-armed said...

To paraphrase Upton Sinclair, it is difficult to get a city to understand something, when the city's finances depends upon not understanding it! Hubris carries a heavy price.

patriotz said...

Americans may have overinvested in housing.



AndrewJ said...

There were a few more layers than that. I thought mention that the love affair with housing is much longer than just the last few years. In fact it is systematically and psychologically encouraged perhaps to the long term detriment of the economy.

Interesting things I pulled from the article:

1) It not only a poor individual investment choice to pay too much for housing but possibly bad for the economy in general.
2) The predilection for housing is a relatively recent thing (50 years) and due to a variety of historical and political reasons.

patriotz said...

Absolutely right. We have been in a secular bull market for housing since WWII due to the convergence of economic, demographic, and government policy factors. All of which are reversing, or in the case of government policy must be reversed to get investment back into productive assets.

The party is over. Once the current bust has settled down, I cannot see real prices exceeding 2001 levels for the foreseeable future, and I would not rule out declines to mid-1980's levels.

Van Housing Blogger said...

A few updates:

1) Ex-Mayor Phillip Owen was quoted in the press yesterday saying that the market would be back to peak levels in three years.

2) I heard City Councillor Susan Anton on CBC this morning saying that the city can just rent out the units for a couple of years until the market 'comes back.'

De-lusional. De-nial. De-pressing.

3) On the same CBC panel, I heard Alan Garr say that if Millennium goes belly up and the city takes over the development, the presale 'buyers' of the 1/3 of units currently 'sold' will have the option of canceling due to the change in the terms of the contract.

We've always wondered whether these guys are (a) honestly deluded about the state of the market or (b) know what's going on and are trying to pull one over on everbody.

I honestly think it is (a). These people have been drinking at the fountain of Rennie for so long that they can't mentally process what is so obvious to our eyes.

It makes me think of the TNG star trek episode where Picard is being tortured by the Cardassian and asked how many lights he sees. Although there are only four lights, by the end of the experience he actually sees five lights as suggested by the interrogator. (Although he refuses to give his torturer the pleasure of knowing this.)

Bob the Cardassian has almost the entire city under his spell. It is simply shocking what some people are able to will themselves to see.

I therefore say unto you Bob: THERE ARE FOUR LIGHTS!.

ReductiMat said...

How did Phillip Owen make money before he 'served' publicly? Was it in real-estate/construction/etc.?

RossK said...

Re: VHB's Updates...Mr. Geller was on CBC yesterday afternoon saying pretty much the same thing as Ms. Anton...Although over at FABula's he's been hedging his bets kinda/sorta. For example in a discussion that involved condohype (and I think VHB) he staked out a supposed middle ground of $750/sq ft in a year or two.

I have a no RE expertise question to ask of you all....Given that Spec-U-Vesting is set to be a big part of the financing for the big roof on BC Place Stadium, is something like that enough incentive for Mr. Campbell (not Larry) to get him to swoop in and 'save' MWater in an effort to slow the slide enough to get those latter projects up and going?



condohype said...

VHB, I'm with you. It's disconcerting to see so many "elite" opinions informed by emotion and wishful thinking. Is real estate boosterism a form of patriotism in Vancouver? Whatever it is, the irrational exuberance is alive and well.

Tonight on Global, I watched Helmut Pastrick say he expects prices to rebound in 2010 or 2011 and that Millennium Water is a property that will "outperform" the market. I've recorded his comment for use on my annual top ten quotes list.

BTW, Frances Bula talked about Olympic Village loss estimates on the Bill Good Show yesterday. She mentioned your $500-million figure as one of the projections.

Van Housing Blogger said...

Hi CH. Not patriotism. Religion. They see the Cardassian's five lights. Those of us who see the actual four lights are heretics.

I saw that Pastrick thing too.

Again, I don't think most of these people are malicious. I think they are simply brainwashed by the opium of Van's masses: Real estate.

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