A Rare Post Worth Reading

Asset manager, blogger and twitterer (?) Morally Bankrupt wrote some thoughts on the factors affecting US house prices over the next few years.

"With mortgage rates near record lows, due both to low inflation and negative real rates, the leveraged purchasing power of real wages is near historic maximums. Additionally, for the most part, it looks like the bottom is in for housing price declines. Does this make it a good time to buy leveraged real-estate to capture future price appreciation while financing it at low rates? I do not think it's as clear as many people think it is."

I encourage "housing analysts", both professional and amateur, (me being the latter) to read the post to understand why. One of the big takeaways is on how mortgage payments that vary linearly with debt amounts relate to changing rates that affect affordability geometrically:

"For home prices to sustainably exceed inflation, wage gains have to outpace inflation by more than the increase in rates over that same time period... [P]urchasing power increases at an increasing rate as rates decline... [A]t a fixed interest rate, purchasing power increases at a stable rate with payment. This means that for home prices to sustainably increase, growth in wages not only has to outpace inflation, but it has to outpace it by a margin wide enough to compensate for losses in purchasing power from any changes in the mortgage rate during that same period."

This has implications for the Canadian housing situation as well. The conclusion:

"Depressed real estate prices and low financing rates are leading many to see the current climate as a golden opportunity to buy leveraged real-estate, but price increases are not guaranteed, and the pay-out on a leveraged bet on housing is dependent many different factors. While affordability remains high and payments as % of income are near historic lows due to the Fed's extremely accommodating policy, an economic recovery can put an end to Fed accommodation and suspension of the Fed's MBS reinvestment program would be reflected on both, the risk-free interest rate and the spread at which MBS trade, turning a tailwind into a headwind for price appreciation. Leveraged buyers also run the risk of near-term price declines or inflation rates below the rate priced in by nominal rates. Leveraged real estate requires price appreciation and/or profits from rents to outpace the rate of inflation built-in to interest rates, which as we already saw, is not near lows. 

"I don't have an opinion on whether residential real-estate is a good or bad investment, it's not my line of work, but I think many investors are failing to see that a leveraged bet on real-estate price appreciation is, indirectly, a bet on inflation exceeding current inflation expectations and future wages increasing at a rate faster than inflation. Under an inflationary environment, increases in the real price level of real estate would require a mix of an increase in the % of income spent on housing and real wages in order to allow growth in outlays to outpace the loss in purchasing power created by any increase in real-rates, inflation expectations, or mortgage spreads."

World Housing Bubble

Readers interested in Vancouver real estate should investigate the blog World Housing Bubble "China, Australia, Vancouver Real Estate News".

A recent post concentrates on the divergence of prices between regions of Vancouver:

If we break down detached by area and smooth over four months, we get the following chart (here). Areas of high growth in price:

• Richmond (which appears to be topping out. The REBGV tossed out that oh, it's balancing because it lost $25,000 in value since last month. Really, guys, it's come to this. Houses in Richmond lost 1/7 of the average house price in the U.S., in one month, and that's a "leveling off".)
• Van West (Rip roaring)
• West Van (likewise)
• Burnaby
• Van East (Our old reliable "average" gal)
• South Delta

The rest are making yearly returns close to or below the inflation rate.

The housing bubble in Vancouver is somewhat concentrated and blogger GG has parsed the data to show it. These areas are also areas with a higher-than-regional-average concentration of ethnically Chinese residents.

Another One Bites the Dust

Bubble Blogger "Tim" from Seattle just bought the detached house pictured above. I would recommend not looking at the price. Remember: Vancouver is different. It has to be or a great many people will be in for some major hurt.

The dangers of scapegoating

An unfortunate side effect of unsustainable speculative bubbles is the short-term distortions it produces between the balance sheets of the bold and the timid. As distortions continue and late-comers realise they missed the boat (or simply weren't old enough to board it), there will be feelings of unfairness and an innate desire to look for palatable root causes.

vreaa has written on this:

The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever...

...Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

A wonderful post by vreaa. A derivative danger to capital inflows piled on top of an already frothy market is to find scapegoats for what is primarily a locally-driven problem, as occurred in 1994.

Nonetheless there are signs that foreign capital flows are causing asset price distortions, and not just in Vancouver. As mentioned in a previous post, the Bank of Canada understands that foreign capital investment within Canada must be weighed against the underlying business case. On this front Vancouver seems prime as a case study of ignoring this guideline.

I share with vreaa the concern that some individuals will inevitably look to incorrectly attribute the problems of high prices to actors in abstract -- oft distant groups -- and not to the underlying issue, namely pouring into poorly-yielding investments, whether funded from foreign or local capital sources, the proverbial elephant in the room.

What to do?

Well, I am not sure how to put this exactly. I am thinking of taking an extended break from this blog because of competing priorities. I have a wife, two kids, hobbies, work, friends, etc and, quite fairly, this blog is what gets cut when the other priorities come up.

I feel a little torn sometimes since I really am interested in writing about the subject matter and I would like more time to do better research and crafting interesting posts but it just isn't possible with my lifestyle right now.

I don't think I will shut down the blog completely since I believe I will find time to post once in a while and some of the other regular contributors will likely want to post from time to time, but you shouldn't expect the same regular posts that have been a big part of this blog since January 2007.

Open Topic

I am going on vacation so here is an open topic for discussion.



I have a couple books I am looking forward to reading.


Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing
by Hersh Shefrin (Author)

Why Your World Is About to Get a Whole Lot Smaller
by Jeff Rubin (Author)

I am also looking forward to spending some time canoeing, hiking, and playing with my kids.

Ho-Hum

Sorry for not posting much lately. I've been incredibly busy at work with Tax Free Savings Accounts and RRSP contributions for my clients. Additionally, there really hasn't been compelling things to write about in the Canadian housing market. The script has already been written and played out in the US and other International markets so I think those of us who have been watching for the past couple years know what to expect next. More price declines - - especially here in Southern BC.

Back to the grindstone for me. Have a great day.

Welcome to Housing Analysis - Vancouver Condo Info Shuts Down

This post is the 400th post for this blog and I had hoped that I could post about something good but it appears that just as pope's blog - vancouver condo info - was really starting to hit it's stride, the Real Estate Board of Greater Vancouver has 'expressed concerns' about some of the content. Consequently the blog has been shut down.

I am interested in what concerns the REBGV has precisely and if they try to pull a stunt like that with me, I will make it very hard on them. I will vigourously defend my freedom to speak the truth.

I have my hunches on what the REBGV was concerned about and I would note that the pope's 'wiki' was likely incredibly embarrassing to many people in the real estate community. Although the real estate board could likely never win a legal action, they can exert pressure to make it difficult for a blogger to express themselves.

As usual this blog will be data based and analysis driven. I take a great amount of pride in the work we do here. Me and my co-bloggers really enjoy doing the analysis.

Pope's wiki is still up: http://vancouvercondo.info/wiki/index.php?title=Main_Page

Happy Thanksgiving

Have a great Thanksgiving everyone. I have alot to be thankful for: family, friends, health, rewarding work, a free country, and great food!

I'll be away for a few days. Have fun.

Mohican Buys House

Yes it is true and here is how it happened.

Me, Mrs Mohican, and Baby Mohican are expecting another addition to the family soon. We don't have enough space for the new baby in our current rental unit and we were considering our options. We were looking at renting a reasonable suite or townhouse as a first option since we don't like the prospect of spending more to own than rent and we especially don't like the value of our property dropping before we even move in.

The rents for the places that would be suitable ranged from $1400 to $1700 / month and the quality range was dramatic. Suffice to say that for me and the Mrs to be happy, we would need to spend $1600 / month to rent a suitable place for a family of four in the Fraser Valley. We would also have the prospect of moving again once we found a suitable place to purchase and we didn't really like the thought of moving with two small children.

The question then came up, what could we purchase for the same amount of money? Here is the formula which you may be familiar with by now:

Fair Value = 100/(5 Year Mortgage Rate) * (Annual Rent - Taxes - Strata - Maintenance)
Fair Value = 100/5.35 * (19,200 - 3,200)
Fair Value = $299,000

So the question became, can we find something to purchase that meets that criteria? The answer, as you've probably figured out by now, is yes we did. This would have been impossible even 3 months ago as we found a brand new unit available from a developer who was trying to unload the last unit in the complex at nearly 20% off the last sale price (May 2008) and more than 20% off current listings in the development. They had several offers fall through due to others being unable to remove subjects (sale of own home) and they were very willing to consider our lowball offer. We came to an agreement at well below the Mohican Fair Market Value and the deal was done.

We are comfortable with securing a residence which costs us less per month than renting an equivalent unit. We are also cognizant of the fact that our residence will likely fall in value over the next few years, a loss that is compensated for by not having to move again and the fact we are paying less than rent to own our new home. Some solace also comes from paying $50,000 less than my neighbour did for a similar unit only three months ago. Additionally, we have a 10 year mortgage payoff plan. The plan is quite realistic so although our Loan to Value ratio is low (60%) to begin with it will decline very quickly toward zero.

I still believe that prices will likely correct 30% to 50% from peak pricing and that some areas and housing types will correct more than others. I have never been tied to the idea of buying at the perfect 'bottom of the market' so I am free to rely on my cash flow / opportunity cost metrics instead or market timing. I am comfortable buying a home for personal use using the formula above but buying an investment property is another issue. We can examine that further at a later date.

Life, the Universe, and Everything

Thinking about the markets, real estate, life, the universe and everything brought to mind this poem. Enjoy.

The Tide Rises, the Tide Falls by Henry Wadsworth Longfellow.

The tide rises, the tide falls,
The twilight darkens, the curlew calls;
Along the sea-sands damp and brown
The traveler hastens toward the town,
And the tide rises, the tide falls.

Darkness settles on roofs and walls,
But the sea, the sea in darkness calls;
The little waves, with their soft, white hands
Efface the footprints in the sands,
And the tide rises, the tide falls.

The morning breaks; the steeds in their stalls
Stamp and neigh, as the hostler calls;
The day returns, but nevermore
Returns the traveler to the shore.
And the tide rises, the tide falls

300th Post and I'm at Housing Bubble Ground Zero

Happy 300 posts and nearly 300,000 visitors!

I sat back today and assessed how my personal housing situation has changed in the past few years. My wife and I bought a condo in 2004 for a reasonable price that made our mortgage payments plus strata and property taxes less than the cost of renting. We were happy with our purchase and paid down our mortgage quickly, starting with a 15 year amortization and making double payments until we sold the unit last August for nearly double what we paid.

Needless to say we were happy with the profits and would have gladly purchased a reasonable townhouse to accomodate our growing family but no such suitable unit was found after a fairly extensive search.

We are now renting a larger condo in a brand new smaller building and we enjoy our location close to work and amenities. Our cost of renting this unit is half the cost of purchasing on a monthly basis and we are socking away our savings for an even larger down payment once we find a suitable home at a reasonable price. This extra monthly savings combined with the earnings from our extracted home equity is very substantial by any account and make these renters quite satisfied with our lowly renting status!

Now I find myself at Vancouver Housing Bubble Ground Zero

The building we live in has 32 units and currently 20 of these units are listed on the MLS website. Yes, that is right, no typo - 2/3rds of the units in our building, including the one we rent are for sale at this very moment. My landlord was hoping for quick profits by flipping this condo and realizing no quick sale he franticly sought a renter to help cover his costs while trying to sell the unit. His asking rent was ridiculous but was easily bid down by 25% with some fairly convincing arguments and some stiff competition.

The parking garage is empty and we have watched the poor realtors hold open houses all spring long with no traffic and no bids. Reluctantly the sellers lower their prices by $2000 and $4000 at a time but still no takers. Nobody realizes the game is over yet and there are a declining supply of greater fools to buy mediocre houses at inflated prices.

I am happy with my spectator status. It is going to get real interesting so grab some popcorn and a cold pop!

200,000 Visitors

Good day,

Just thought I'd shout out a quick thanks to everyone of my readers - you - for making the work of blogging quite enjoyable. We reached 200,000 visitors on Saturday last week after 13 months of activity here.

To summarize some observations about the traffic on the blog:

• We get a lot of traffic mid-day during most people's lunch break I assume.
• Most visitors (50%+) use the most common local ISPs - Shawcable and TELUS to visit the blog.
• We also get lots of traffic from financial institutions (RBC, Vancity, TD, etc)
• We also get lots of traffic from Government and school domains and (gc.ca, gov.bc.ca, ubc.ca, bcit.ca)
• Other corporate domains are common as well
• 650 visits per day
• Average visit length of 3 minutes
• It seems that the majority of visitors come direct to the blog without a referral
• Referrals from other local blogs is the next most common way people get here
• Google search results cause an increasing number of visits - especially in the last month or so

Cheers

Happy Thanksgiving

I'm tired and I am taking a break for a week. I hope you enjoy some time with your family this holiday.

Another One Bites the Dust

Blogging on Vancouver Real Estate just gets lonelier and lonelier. RESteven, who provided us with accurate daily inventory numbers for the past couple months has packed it in and moved away from Vancouver to Los Angeles. But the weather is so good here in so called 'Lotus Land', why would you go to California!

Seriously, good for him, maybe I'll do the same.

About Mohican

Hi, mohican here.

Well I am feeling a little weary of this current real estate discussion and financial markets appear to be apathetic to the current risk climate so I thought I'd stray a little from the debate and the analysis to do a post about myself.

For starters, I'm married and I have been for a few years now. We have a young son who was born a few months ago and he has been a wonderful addition to the family with grandparents, uncles and aunts all taking time to enjoy his company. I never imagined how wonderful fatherhood could be and I am planning on cherishing every day. More children are planned.

My wife and I are very practical people who grew up in families of very modest means. My wife's father died in a tragic accident when she was young and finances and family life, although adequate, were never comfortable for her, her mother and siblings. This taught her about prudent financial management among other important lessons.

I also grew up in a family who made choices about lifestyle that meant financial and material sacrifice. I am the oldest of four children and the most meaningful sacrifice that my family made was enabling my mother to stay home for most of my and my younger siblings growing up years. This has had obvious benefits and I am appreciative of the sacrifice my parents made. This also taught me some valuable lessons about personal choice and freedom, namely that it is not necessary to conform to the typical pattern of North American life.

My wife and I are both commited Christians and have been for most of our lives, not without much distraction and wandering on my part. My beliefs play a large role in forming my views on family and finances as I believe God has a place for everything and it is our role to discover the ideal way and put what He has given us to the best possible use - this is a way of thinking called stewardship. This includes how I use my time, talents, belongings, and finances. I am not intending to be preachy here and I've never used this blog as an outlet for that but I believe this part of my life is so formative of my views that I must inform you of it.

I wandered a great deal on an interesting and challenging path of discovery as a teenager and young man. I have always been a hard worker and I was an avid saver during my teenage years. As I gained more freedom as a young man I did not control my spending and consumption habits and got myself into a great deal of debt. I realized that my pattern of consumption was going to end me up in self imposed slavery if I didn't do something drastic so I stopped spending money. I gradually, over a period of 5 years paid off all of my debts and actually started saving money and investing it into some very basic mutual funds at my bank.

Having come out of that experience I wanted to help other people realize that they do not need to be slaves to their finances and that they could take control of the situation by implementing 3 simple steps:
1) stop spending so much
2) pay off debt fast
3) start saving as much as possible

Pretty basic procedure I must admit. At this point the attraction of helping others with their finances was so great I decided to leave my very successful career in the telecommunications field and go into financial planning. This meant a meaningful pay cut and a career restart but I had to do what I felt was right. I do not regret my decision.

I have had two different positions with two different companies since making the decision to go into finance and the one I have now is immeasurably better than the first one. The first job I had was a fully commissioned role with a large insurance company. I did pretty well but I could not come to grips with the fact that I had to sell certain products to the exclusion of others in order to make a decent living.

After one year, I switched companies after a friend told me about an opportunity with one of the big five bank's brokerage division. The institution I work for now pays me a base salary and some small bonuses. The focus is on writing financial plans for my clients and ensuring they are on the right track. I enjoy this role immensely more and I appreciate not having the continual pressure to sell certain products or rely on a commission payout. After helping my clients with a financial plan I help them with their investments, which for the type of clients I have, mostly means mutual funds, bonds and GICs. I do not receive commissions based on what I sell.

I hope that wasn't terribly boring but I like knowing where people are coming from and I thought you might too. Cheers.

Friday Humour and Misc. . .

There is clearly more to life than finances and I find humour a great way to escape from the day to day. I don't know if you have a similar sense of humour to me but its my blog and I get to do what I want with it!

Some things I found funny this week:
http://thereisnohousingbubble.blogspot.com/ which reminded me of http://vancouvercondo.info/2006/07/you-can-get-rich-in-real-estate.html

This was kind of funny:
http://househuntvictoria.blogspot.com/2007/07/victoria-mansions-keeping-msm-honest.html

This was serious:
http://calculatedrisk.blogspot.com/2007/07/housing-demand-shifts.html

This was pointless:

Bear Cave - Feel Free to Growl

Good morning,

There are lots of little things going on that are not worthy of their own post so here is a place we can discuss them all.

1. Interest rates went up today. As was widely expected, the Bank of Canada raised the short term rate to 4.5%. They also said that "some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term.”
2. There is a new blog on the block where we can find daily updates to the local real estate inventory situation - http://vannumbers.wordpress.com/. Welcome REsteven.
3. Canadian Housing Starts are still hot, hot, hot. In the words of Beata Caranci at TD Economics, "Canadians can sleep well under their roofs tonight with the belief that the housing experience on this side of the border looks to be day-and-night versus its U.S. counterpart."

The Breakup

This goes out to all the financial planners, banks, and insurance companies out there who don't get that "IT'S ABOUT THE CONVERSATION."

Baby Mohican

I am taking an understandable break from the blog for a little bit to spend some time helping my wife and with the new addition to the family. He was born on Monday and he is very healthy.

M- will be holding down the fort in the meantime.

Regards.