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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Freako
Freako
13 years ago

Like I told Rentah. YOU implied that I said buy anytime.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… Read more »

the pope
the pope
13 years ago

Hello Aaron,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.

rentah
rentah
13 years ago

aaron: I'm not sure how you calculated at 50% or greater drop in Values. Can you expand on that?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.

rentah
rentah
13 years ago

freako: But wouldn't the same logic extend to selling when the market is peaked?Yes, but it's such a drag to be bothered with selling. Much easier to close your eyes and hope for the best.

rentah
rentah
13 years ago

freako: Let's see if you can figure that out.I know, but only because I've seen you discuss it before, and it's very valid.

Freako
Freako
13 years ago

I don't think you can really debate the logic of buying & holding. The historical stats speak for themselves.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?

Freako
Freako
13 years ago

Over the past 25 years SFH in GVRD have seen an average of approx. 7% growth. 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… Read more »

aaronbest
aaronbest
13 years ago

Rentah said…"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."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… Read more »

aaronbest
aaronbest
13 years ago

Freako said…"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?"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.

aaronbest
aaronbest
13 years ago

freako said…"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."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.

aaronbest
aaronbest
13 years ago

Freako said…"Aaron, you are outshining thy master. With all due respect, the "I don't know where prices are going but in the long run they are up, so anytime is a good time to buy" logic makes me want to hurl."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.

aaronbest
aaronbest
13 years ago

rentah said…"aaron, some thoughts on some of your comments: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?

Freako
Freako
13 years ago

Aaron, you are outshining thy master. With all due respect, the "I don't know where prices are going but in the long run they are up, so anytime is a good time to buy" logic makes me want to hurl.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… Read more »

rentah
rentah
13 years ago

aaron, some thoughts on some of your comments: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… Read more »

Anonymous
Anonymous
13 years ago

That could very well happen. If it did, you only lose money if you sellYeah? And who's paying the mortgage that costs you 3x the rent for the same house? Santa Claus?

aaronbest
aaronbest
13 years ago

rentah said…"400 drops to $250k? in vancouver that would not happenYou gotta love this kind of comment.Complete ignorance of history."I agree.

aaronbest
aaronbest
13 years ago

"The people who buy into a 10% dip (AKA sucker rally) are just hesitant bulls."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.

aaronbest
aaronbest
13 years ago

"400 drops to $250k? in vancouver that would not happen."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.

aaronbest
aaronbest
13 years ago

patiently waiting said…"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."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,… Read more »

rentah
rentah
13 years ago

400 drops to $250k? in vancouver that would not happenYou 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.

rentah
rentah
13 years ago

The people who buy into a 10% dip (AKA sucker rally) are just hesitant bulls.well said

Anonymous
Anonymous
13 years ago

400 drops to $250k? in vancouver that would not happenIt'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.

patiently waiting
patiently waiting
13 years ago

John,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.

john
john
13 years ago

I'll buy when everyone says its the stupid thing to do.Isn't that right now?