Bears to the rescue?
Browse through blogs and forums with a local Vancouver focus right now and you’ll likely find a lot of skepticism about the current state of real estate prices in Vancouver. How many blogs are there out there now looking at the downside of our market? VHB, (Un)realestate, BC Housing, heck even investment realtor Rob Chipman seems to exhibit some bearish ideas*. Even over at the RealEstateTalks BC forum you don’t see much ‘vancouver is a great investment‘ sentiment these days.
There seems to be no shortage of people that think rent/price fundamentals are out of whack, or that the massive supply of new condos completing over the next couple of years will dramatically shift the supply/demand equation. People argue that as Vancouver gets more expensive people will move away to where they can get more for their buck reducing demand, and that if we (god forbid) see any real negative economic impact from the US housing market crash then we could be in for some big losses on real estate investments.
Through it all the common thread is people discussing the future of our real estate market, and that means one thing to me: they are interested in our real estate. And if they are interested that means they would like to buy it. They are our ‘reserve tank’ of demand.
So will the bears awake from hibernation in the spring and absorb some of the new housing stock? Will they buy some of those stale listings? Are there enough hungry bears out there to counteract all of the factors that hungry bears hold up as proof that our market is unsustainable?
*I’m sure the postings of ‘anonymous’ and ‘boombust’ will keep him from ever fully joining the bear army.
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December 22nd, 2006 at 12:34 am
Lets see.. I notice that I see a lot of the same names on bear boards, Maybe representing 30 different individuals, plus a few anonymous posters (I saw one anonymous poster claiming to be five different people yesterday).
Say commenters make up 10% of the people that read these boards, so multiply the 40 or so commenters by 10 to get a ‘rough’ number of potential buyers = 400. Clearly thats ridiculous and my math is off by a factor of at least 4, so lets quadruple that to get 1600 potential buyers.
Right now the number of listings in the GVRD just dropped below 10k to 9,982. So if we could only rely on our ‘reserve tank’ of my (likely faulty) estimation of 1600 potential bear buyers that would mean we would exhaust our reserve tank in 6 years.
..As long as there were no new listings in that time (nobody else sells for 6 years).
December 22nd, 2006 at 8:35 am
Fear of being wrong (on both sides of the argument) appears rampant. I do agree that the pool of bears waiting to buy is a drop in the bucket. When the psychology shifts to “wait and see”, then “real estate is vulnerable” then “real estate is falling”. then “real estate is boring”, then I will buy, and buy a lot. I post anonamously becuase its not MUCH more anonymous than your goofy blogger name.
December 22nd, 2006 at 9:01 am
I feel that it will take most of next year to see where we are headed.
December 22nd, 2006 at 9:36 am
To comment on the original post, I think there’s always people waiting around with money to snap up the good deals, in RE as well as the stock market. How much of a difference they make to the downside? Minimal I’d say. Although the money that evaporated from the economy with the dot.com and 9/11 busts seemed to come roaring back quickly, was that a result of easy credit? Can it happen again?
December 22nd, 2006 at 9:46 am
Point is we bears are such a small number I doubt we can be counted upon as a transfusion.
When this thing goes flat, it’s lights out for a long long time.
It’s typical of bubbles to capture the greed/ imagination of the majority.
December 22nd, 2006 at 10:06 am
And many are trying to offload what they have.
So its that game of chicken. I’ve waited this long… I can wait longer, watch my money grow and your price come down… the only pain that causes me is that I don’t have the place… whereas the seller is burning a hole in his pocket
December 22nd, 2006 at 10:17 am
Hope you don’t think my blogger name is goofy! ;-]
Anyway, I don’t like anonymous posts ‘cuz I can’t keep track of you all. You all look the same to me. And if one anon blogger really is trying to be five different people, well what can I say except “WOW, too scary”. (I can say WOW backwards, can you?)
December 22nd, 2006 at 10:32 am
December 22nd, 2006 at 12:18 pm
And from reading the threads there are those people trying to get a place trying to look for tips and advice and are furious at them.
I think the past annoymous poster saying these guys (speculators) are living in mommy’s basement and have no balls is completely inaccurate. just my humble observation.
December 22nd, 2006 at 12:25 pm
I was exagerating to make the point that its a fairly unknowable quantity, and one can represent themselves as many.
I post anonamously becuase its not MUCH more anonymous than your goofy blogger name.
The only problem I have with you posting anonymously is I cant tell if you are the guy that thinks that oil will be selling for 20 cents a barrel in six months or if you are the one that thinks that leaky condos are an awesome investment. The goofy blogger names just make it easier to keep track of who you are talking to.
December 22nd, 2006 at 1:20 pm
One thing I know for sure is that despite my strong personal connections to Vancouver, if this crash doesn’t start next year, I’m gone.
December 22nd, 2006 at 1:36 pm
How spurious of you.
On the assumption that you are a frequent reader of this blog, would you disagree that a person frequently posting under a given alias brings extra context to their message?
If so, [insert ad hominem here].
December 22nd, 2006 at 1:38 pm
One thing I know for sure is that despite my strong personal connections to Vancouver, if this crash doesn’t start next year, I’m gone.
Ok, I’m in roughly the same situation, but lets say looking at a $400k place and interested in buying it at $300k. Even if it drops to $250, I’m still going to make out ahead when it hits $500 at the top of the next boom. Regardless of when you buy real estate, its a long term investment. Flipping is a trend that develops near the peak of the boom. This isn’t stock options.
And where would you go if I may ask? It seems the industrialized world is in a RE boom. The US is the first market to slide…
December 22nd, 2006 at 1:50 pm
I see what your saying about a long-term investment, but the pessimist in me worries about job-loss and having to unload a condo I can’t afford in the middle of bitter recession. Even in good times its hard to see long-term when we typically change jobs every three years. I once made the mistake of leaving a decent job for what I thought was a better opportunity and ended up quickly leaving a rotten employer and unable to back to the decent employer.
December 22nd, 2006 at 1:51 pm
And where would you go if I may ask? It seems the industrialized world is in a RE boom. The US is the first market to slide…
Same boat, I will watch the market and when it feels right - I’ll buy. But you can’t lose sleep over ‘did I buy at the right point in the slide’ - you’ll lose for the most part. In that case, you buy when it feels right AND you are comfortable with the amount of mortgage payments you are making. That goes with the statement above. Sure you take on the $250K place knowing that at some point - it will go back up to $500K or something - thats the best, we’ve seen a boom and hopefully a bust so in the next wave, we WON’T be muttering ‘it always goes up’
But point being above… while you know it may go up again, you still need to comfortable with making payments on $250K for the possible long haul - if not, don’t do it.
As for destinations - getting work is always the deciding factor… Kelowna would be nice as its close to what Vancouver is like but also stupidly expensive… I’ve like Ottawa too…
December 22nd, 2006 at 2:04 pm
But what if in that time, the one dollar you had when you bought the house was worth fifty cents at the peak of the next boom?
Or more directly, ignore inflation at your own peril.
December 22nd, 2006 at 2:25 pm
December 22nd, 2006 at 2:44 pm
In the third quarter of this year, 21,867 people moved in to B.C. while 19,742 moved to other provinces, increasing B.C.’s population by 2,125 individuals. Only Alberta surpassed this, adding 24,535 individuals in net interprovincial migration during this period.
Two thousand folks enough to prop up the market?
December 22nd, 2006 at 2:47 pm
You are conveniently using nominal break even as decision making criteria. You are obviously free to use whatever criteria you want, but I am fairly sure that most people would want to make optimal decisions rather than arbitrary nominal break even points.
If we include opportunity cost, is pretty obvious that it is better to wait if a sharp decline was likely. That way you get more home for the same amount of money, or the same home for less money.
Money may not be important to you, but to the vast majority of people it is. The money saved will result in more plasma TV’s, more free time, or earlier retirement if you so desire. The fact that nominal break even will eventually be reached is no excuse to piss away money.
All assuming that prices have a high probability of decline.
December 22nd, 2006 at 2:49 pm
Inmigration was negative until recently. However, immigration is still quite large. Interprovincially, the lower mainland lost people to the rest of the province last time I checked. VHB has a nice compilation of immigration stats.
December 22nd, 2006 at 4:36 pm
(1) put down that $5 latte. (2) grow some balls and (3) move out of mommy’s basement already
December 22nd, 2006 at 4:48 pm
Yeah OK - that makes as much sense as the people paying $2000-$3000 for PS3’s to try and sell them on eBay - guess what? No one’s buying those.
Thats pretty sad that people may be convinced that owning a house is a measurement of who they are… its an object (albeit it plays an important and crucial role in your life) but there’s a huge difference in being smart/buying at the right price and being well… ignorant.
December 22nd, 2006 at 4:55 pm
r u krazy?? 400 drops to $250k? in vancouver that would not happen and if it does its cuz the Soviets are crossing the border, the Americans are bombing the RE and our glorious dear leader is committing suicide at some unknown concrete bunker.
December 22nd, 2006 at 4:58 pm
You are conveniently using nominal break even as decision making criteria. You are obviously free to use whatever criteria you want, but I am fairly sure that most people would want to make optimal decisions rather than arbitrary nominal break even points.
What? You are conveniently twisting my words. My point is that if value drops 25% and you decide to buy in at that point, don’t sweat it if things drop another few points, real estate is a long term investment play.
Money may not be important to you, but to the vast majority of people it is.
Any more life altering wisdom you can impart on us? If you’re one of those people insistent that the next great depression is imminent, and you’ll be able to buy things at 30% of their current value in real dollars, enjoy the wait.
December 22nd, 2006 at 5:03 pm
“(1) put down that $5 latte. (2) grow some balls and (3) move out of mommy’s basement already”
They mean to say:
“Be smart like me, buy. Don’t worry about anything, just buy. Take mommy and daddies money like I did and just throw ‘er down. No more land. It’s money in the bank. Olympics/immigrants/retirees/space aliens all coming. Long term, short term, so easy to get rich when you’re smart like me. Flip those assignments, play the market. Old hat for a someone with balls and smarts, that isn’t afraid to just throw that money down. Like me”
December 22nd, 2006 at 5:22 pm
Sorry misread your post.
“Any more life altering wisdom you can impart on us? If you’re one of those people insistent that the next great depression is imminent, and you’ll be able to buy things at 30% of their current value in real dollars, enjoy the wait.”
No I am not one of those people. However, I don’t agree with the any arguments which ignore opportunity cost and justify prices based on eventual nominal break even. I have heard that argument many many times. If you want to sarcastically classify my pointing this out as “life altering wisdom”, be my guest.
December 22nd, 2006 at 5:30 pm
guess what, its called speculation, flipping. argghhh
December 22nd, 2006 at 5:31 pm
(I have heard this realtor call radio talk shows with above phrase every time)
What about the possibility, the market crashes just like it always has after price run ups and goes back to being driven by fundamentals, and return to historical norms?
December 22nd, 2006 at 7:33 pm
December 22nd, 2006 at 7:53 pm
The Nova Scotia government is hoping to capitalize on that.
Faced with a shortage of skilled workers and a tightening labour pool, the government has launched a marketing campaign targeting Nova Scotians living in Calgary.
The campaign includes newspaper ads and billboards with slogans like “Buy a home or two” and “Calgary is a nice place to visit.”
December 22nd, 2006 at 10:31 pm
Isn’t that right now?
December 23rd, 2006 at 12:50 am
Most people still think real estate can only go up. At most, they might acknowledge that things are slowing down or that prices might crash after the Olympics. Many think Vancouver is resistant to downturns because of rich foreign investors or our wonderful weather. Even in the United States, where the crash is now happening, there are still Greater Fools sniffing at real estate.
December 23rd, 2006 at 3:00 am
It’s already happened wise guy. In 1981-1985. So why can’t it happen again?
Once a falling market becomes established in the public mindset, there is only one floor to prices - rent equivalence. Often the markets undershoot this. I’m not greedy, so I’ll buy at the equivalence point.
And the real bears are the people who follow this strategy. The people who buy into a 10% dip (AKA sucker rally) are just hesitant bulls.
December 23rd, 2006 at 1:46 pm
well said
December 23rd, 2006 at 2:35 pm
You gotta love this kind of comment.
Complete ignorance of history.
That’s why a good deal of owners will be stumbling around asking ‘wa happened?’ come any substantial pullback.
December 23rd, 2006 at 2:47 pm
I don’t know if I’m welcome over here or not, but what the hell. I thought I’d say hi!
There are people from both sides of the coin who are uneducated about RE. Some people will tend to follow the crowd. It happens in the stock market too. I think you might be generalizing just a little too much in your comment.
Vancouver will have its ups & down, no question. There are so many variables, like: Governments, Wars, Terrorist attacks, and Natural disasters. It’s hard to predict the future.
That being said, if the past is any indication of the future, it is safe to say that over the long term RE in Vancouver is a fairly safe investment.
I have though about investing in Vegas. I was looking at 2 or 3 bdrm condo/townhouses 10-15 mins. from the strip. I was looking at some property last time I was there. 2/3 bdrm places were selling for under $200,000. Rents were similar to our rents for similar properties. I’d rent them out to hotel workers, with an agreement that they keep one room open for me or my family or friends to stay at when I/we’re down there. I don’t agree with the US foreign polices, and I’m not a fan of the current administration. That makes me hesitant about investing in the states. Also at the time, I didn’t feel like I was financially ready for that type of commitment.
December 23rd, 2006 at 2:52 pm
That could very well happen. If it did, you only lose money if you sell. People will use scare tactics to try to get you to sell, so they can buy your place at a discount. They know eventually the price will go back up.
December 23rd, 2006 at 2:56 pm
I would think anybody who buys a place at 10% below they previous peak is banking on the market eventually turning around. They see that 10% dip as potentially a 10% gain in equity. I would categorize these bulls as aggressive.
December 23rd, 2006 at 2:57 pm
You gotta love this kind of comment.
Complete ignorance of history.”
I agree.
December 23rd, 2006 at 10:41 pm
Yeah? And who’s paying the mortgage that costs you 3x the rent for the same house? Santa Claus?
December 24th, 2006 at 12:05 am
1.
‘Vancouver will have its ups & down, no question. There are so many variables, like: Governments, Wars, Terrorist attacks, and Natural disasters. It’s hard to predict the future.’
There is no need for any adverse events for there to be a substantial RE price pullback; natural market cycles will do it all for us. If we do, however, get a ‘perfect storm’ (recession, US cold/ Canadian pneumonia, spike in unemployment, spike in interest rates, natural disasters, failed Olympics, drop in immigration (no jobs; unaffordability), etc, etc), then watch out below, a 50% or greater markdown is possible.
——-
2.
‘That being said, if the past is any indication of the future, it is safe to say that over the long term RE in Vancouver is a fairly safe investment.’
&3.
‘If it did, you only lose money if you sell. People will use scare tactics to try to get you to sell, so they can buy your place at a discount. They know eventually the price will go back up.’
Over the long term, RE makes mid-single figure percentage returns, nothing to write home about.
Timing the market vaguely right makes a MASSIVE difference to your returns and to your overall financial health.
So don’t make light of the timing; all of these 2 & 3 kinds of statements imply that buy and hold is the way to go, so buy anytime. It’s a deeply flawed perspective.
———————-
December 24th, 2006 at 6:47 am
That type of reasoning would be great … if the market followed a random walk AND our time horizon is long enough.
The contention of the “bear blogs” is that markets HAVE NOT followed a random walk, and that the chance of a signficant price drop is very very high. Answering that with “prices go up, prices go down, but mostly up” is dodging the issue (or missing the point).
It is as if Mr. Bear says “markets will drop for x reason”.
Mr. Bull answers: “no it won’t, for y reason.
Mr. Best pipes in with “it doesn’t matter if markets drop because of z reason”
Good enough, opportunity cost is subjective, Aaron, so you really are only speaking for yourself. To nail down the issue, here are two questions for you, (or anybody):
Do you think markets follow a random walk?
If you knew with CERTAINTY that prices would be down 20% over the next 2 years, would you still buy today? Similarly, would you sell your investment properties.
I don’t believe that prices follow a random walk. I believe that one reason for that occurring is that people follow the reasoning you shared with us and as a result there is no objective valuation of prices to keep them in line.
Hence, I believe that prices will fall. As a result, I would not buy more investment property in this market.
You say that people use scare tactics to get people to sell. Maybe. But then your comments can be construed as disuading people from selling. Is one better than the other?
December 24th, 2006 at 12:04 pm
There is no need for any adverse events for there to be a substantial RE price pullback; natural market cycles will do it all for us. If we do, however, get a ‘perfect storm’ (recession, US cold/ Canadian pneumonia, spike in unemployment, spike in interest rates, natural disasters, failed Olympics, drop in immigration (no jobs; unaffordability), etc, etc), then watch out below, a 50% or greater markdown is possible.”
I should have clarified. What I meant to say was…On top of Vancouver’s market conditions, there are other external events that can effect the market. Making it difficult to predict future markets.
I’m not sure how you calculated at 50% or greater drop in Values. Can you expand on that?
December 24th, 2006 at 12:19 pm
I didn’t mean to make you sick! When quoting, try actually quoting what was said. Like I told Rentah. YOU implied that I said buy anytime.
December 24th, 2006 at 12:27 pm
With all do respect I think this question is a little flakey, but let me humor you.
If I knew the market was going to drop 20%. I would obviously know what the exact date was that was going to happen, so I would wait for that day to buy so I could time the market perfectly.
If my investment properties were 3 legged dogs, with low rents, and high future repair costs, I would unload them. However, if the properties were in good shape, with good tenants, and positive cash flow. I would probably hang on, unless I needed to liquidate at that time.
December 24th, 2006 at 12:40 pm
I guess it could be construed that way. What I wanted to get across was, it is pretty stupid to sell when the market takes a dive. It is the same as when your stocks take a dip. If you sell, you crystallize your losses. If you absolutely need to sell, then it is a different story.
December 24th, 2006 at 12:43 pm
Timing the market vaguely right makes a MASSIVE difference to your returns and to your overall financial health.
So don’t make light of the timing; all of these 2 & 3 kinds of statements imply that buy and hold is the way to go, so buy anytime. It’s a deeply flawed perspective.”
Over the past 25 years SFH in GVRD have seen an average of approx. 7% growth. That may seem like a small return, but when you are dealing with 300, 400, 500, $600,000 investments the returns aren’t all that bad. What do you recommend investing in? What kind of returns are those investments producing?
Actually YOU implied that I said buy anytime. Obviously buying when the market is down is smarter than buying when the market has peaked. I don’t think you can really debate the logic of buying & holding. The historical stats speak for themselves.
December 24th, 2006 at 1:23 pm
Over the last 25 years (Q2 1982 to Q2 2006), the (arithmetic) average appreciation was 6%. Inflation was 3.4% Compounded, it would be higher, as early inflation was quite high, but I am too lazy to crank out those calculations.
That may seem like a small return, but when you are dealing with 300, 400, 500, $600,000 investments the returns aren’t all that bad.
Yes, not a huge real return. But when dealing with large amounts such as several hundred thousand dollars, most of us have to use the “magic” of leverage. The average mortgage rate for the period was … drum roll please … 9.87%. That would result in a … negative return. Not entirely fair comparison from my end as I left something out that should be included. Let’s see if you can figure that out.
December 24th, 2006 at 1:26 pm
Buying and holding makes sense if the market follows a random walk. Do you think the market follows a random walk? That is the crux of matter.
If it does not, then market timing will pay off big. Which implies that the logic of buying and holding is very much open to debate.
Obviously buying when the market is down is smarter than buying when the market has peaked.
But wouldn’t the same logic extend to selling when the market is peaked?
December 24th, 2006 at 3:28 pm
I know, but only because I’ve seen you discuss it before, and it’s very valid.
December 24th, 2006 at 3:30 pm
Yes, but it’s such a drag to be bothered with selling. Much easier to close your eyes and hope for the best.
December 24th, 2006 at 3:41 pm
Sure.
The last four major pullbacks since 1970’s have AVERAGED 28%.
The current runup has been excessive, even in historic terms, in terms of fundamentals, as well as technically.
So, I’m expecting a pullback of close to 40% peak to trough.
Add a ‘disaster’, or a perfect economic storm (or even a few components thereof), and you’ll easily see 50%.
That’s just rhyming history.
Note: I’m not naive enough to expect to time the next bottom accurately, and I’ll personally be happy with anything above a 30% drawdown, or when rents come into line with prices, whichever comes first.
December 24th, 2006 at 3:53 pm
whether everyone agrees with your views or not you are %100 percent welcome here, in fact as I’ve stated I like to hear both sides of the debate.
If you sell, you crystallize your losses. If you absolutely need to sell, then it is a different story.
You toss in ‘need to sell’ almost as an afterthought here, but I think its worth more attention. The market has natural cycles that bring prices up and down, but those can be pushed to the extreme by economic factors.
One of the factors that would contribute to a BIG drop in prices would be a bad economic climate where the ‘need’ to sell becomes a lot more likely for people that are over-extended by todays prices and have no financial cushion to protect them from job losses, reduced income or other problems.
December 24th, 2006 at 9:50 pm
No, you implied it, I said it. In fact, don’t you find it telling two people independently feel that you implied it.
How did you imply it?
>If it did, you only lose money if you sell.
That suggests that you only lose if you sell. Implicitly, it says that you win (the opposite of lose) anytime you buy. By that logic, there is no bad time to by.
On that topic, do you think right now is a good or bad time to buy?
t is the same as when your stocks take a dip. If you sell, you crystallize your losses.
That makes absolutely no sense at all. I thought we went through this a few weeks ago. And what the heck does “crystalize” mean? Do you mean actualize? Anyways, who cares, sunk cost. Paper losses are real losses. Would you argue that a gambler in Vegas hasn’t lost as long as he can get back into the casino and has a chance to win it back?
Here is my age old example:
Mr. X buys into Acme Co. at $10. Mr . Y buys in at $20. Mr. Z buys in at $30. The company slides back to $20 and change on some bad news. What should each investor do (they have identical risk tolerances etc.)
With all do respect I think this question is a little flakey,
The purpose of this hypothetical situation is to remove the ambiguity and extraneous information in order to focus on the core issue.
Perhaps I should have phrased it “if it was known with certainty that prices that prices would drop by 20% over the next 2 years and then increase by 30% over the next 5 years, what would you do?”
The UNAMBIGOUS answer is hold off buying (or sell if already an investor) and wait for prices to drop.
But still I hear people argue that it is “OK” to buy because over time you don’t “lose” anything if you just wait. That is just a plain dumb argument, as compared to a person who acted optimally you lost vastly.
If my investment properties were 3 legged dogs, with low rents, and high future repair costs, I would unload them. However, if the properties were in good shape, with good tenants, and positive cash flow. I would probably hang on, unless I needed to liquidate at that time.
Makes absolutely no sense to me, but to each his own. Wouldn’t the shape, cash flow etc. be reflected in the price? The only other person who keeps making this argument is Rob. Shouldn’t the decision to sell be based on value relative to potential?