Why not buy now?
A monday question for ya’ll, courtesy of a reader, Its a bit more of a manifesto than a question: If you believe Vancouver Real estate is due for a correction, Should you try to talk friends and family out of buying right now?
“It seems to me that most people that believe that real estate prices in Vancouver will correct (as I do) want to warn others away from buying right now - but why? I personally would prefer that any correction is met with less competing cash to bid against. Some people seem to believe that NOT warning people about the evidence of a coming crash is the same as selling people overpriced leaky condo’s. I do not. I think people are responsible for their own financial decisions, and even though prices are very high right now, it may make sense for some people to buy anyways. Not everyone cares to shop around for the best deal on everything, and for some people the ‘having it now’ may be worth the premium. I say let them buy.”
So how about it? Do you feel responsible for warning people about market cycles and sharing data pointing towards a correction or crash? Do you fill people in on the minutiae of whats happening in the US market and how it relates to ours? Or do you let people make their own decisions and if that means they end up with an upside down mortgage then tough?
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February 26th, 2007 at 11:12 am
* I am glad that there are people like you. Less competition for me!
* Haha, [insert guru name] predicts that [Vancouver/Calgary RE] prices will grow another 15% this year. Who are you to say otherwise?
* Haha, keep putting your hard earned dollars to your savings account with 4% interest. If you were smart you would invest in RE as I do and save more money that most people do in their lives!
* Haha, you idiot, my home went up by $50k last year and I was able to get $50k home equity loan and buy stuff you will never have!
and from a really ’savvy’ investor:
* You don’t know what you are talking about. I bought my house with zero money down, then we had a huge run up in prices, then I got a $100k home equity loan and used it to make an investment with stable 12% interest! I will have my house paid off in 5 years!
There you have it. If you try to warn them, you look like an idiot.
February 26th, 2007 at 11:57 am
I know a lot of people have the same views of the current market as I do, but we are in a distinct minority. The people currently in the market or thinking of being in it hold to their views pretty fanatically, and with many it seems comparable to religious faith that real estate prices are just going to rise and rise.
In fairness, the bulk of MSM really does little other than shill for RE, and there is little counter analysis. In a lot of discussions I end up getting recent newspaper articles thrown in my face. Granted, the silliness has continued a lot longer than I thought possible, so my reputation as a seer is not that great….
February 26th, 2007 at 11:58 am
February 26th, 2007 at 12:05 pm
go figure, I guess not everyone is in the loop.
February 26th, 2007 at 12:06 pm
This is interesting because it seems like the longer it takes for a market to correct the less people believe that its even possible. How many people thought that Vancouver prices could drop in 1980, or right before any of our other corrections?
February 26th, 2007 at 12:08 pm
February 26th, 2007 at 12:24 pm
I remember in the dotcom bubble, people were hiring highschool kids to do the technical work who knew very little.
Like we’ve said before, it’s not different this time, and I’m sure many of the realtor’s out there don’t even know what sub-prime means, let alone what the hell is going on down south.
February 26th, 2007 at 12:25 pm
this house was on the market for about a week. the open house was a zoo and i felt totally pressured to make an offer.
my offer was a few thousand above asking and it came in as the second worst out of about a dozen.
needless to say, i’m pissed, disappointed and a little freaked out. where is this slowdown that i am so waiting for?
anyways… i also read in 24hrs that the new project in walley sould out in 4 hours
February 26th, 2007 at 12:33 pm
Oh come on. Lets give them some credit, a realtor who doesn’t know what sub-prime is would be like a chef who doesn’t know what MSG is. They may not be rocket scientists, but realtors aren’t mouth-breathing morons.
February 26th, 2007 at 12:40 pm
This is the kind of thing I’m refering to (I asked the original question). If you find a place that you like and you can afford the payments why should anyone else tell you not to buy? If you are aware of the possibility for a market downturn, and ready for it then what do you have to lose? Everyones circumstance is different and all that matters is what works for you.
No one can guarantee the timing or scope of a correction, prices may even double again in the next five years. Not likely, but possible considering the emotional nature of housing and the current markets detachment from traditional reality. The important thing is that you enjoy your new house!
February 26th, 2007 at 12:46 pm
even in a downturn - there will always be buyers and sellers
and yes, despite anything, if you found a place that you felt you could comfortably afford and be happy with then yes, buy it.
But this market is not all made up of people such as that. Those type of people create and maintain a sound and logical market.
The true debate is the speculation with this market and how many are buying to enjoy the appreciation and then sell off.
If its 0 speculation, then the market has no end. However no one really knows the exact numbers but we all are guessing its quite a bit… only the slowdown and the saleoff of speculators getting out will show that… but that has yet to come
February 26th, 2007 at 12:48 pm
For what **ego ** put in - how many of those things are STILL happening? granted, it kinda is nice when it is happening but is it still?
And you know what? as it relates to overpaying in a speculator market - let people overpay… sooner and worse the correction will be…
Nothing is infinite and lasts forever - the fact that there ‘no more land’ is proof of that…
February 26th, 2007 at 1:09 pm
I don’t know how much luck was involved, but by studying market cycles, economies and demographics, I’ve been fortunate to reap prfits beyond my wildest dreams since I started at age 20. The profits can be enormous, but so can the potential losses.
Had I not sold substantial holdings fairly recently, I would be scared s…less of the current market. I think our market would be much healthier today, had it undergone a normal correction in 2004 instead of coninuing the irrational climb.
With the downside far outwaying the upside, I can’t for the life of me see the point of trying to milk the last drop out of this market when 6 to 8% can be achieved with low risk alternate investments.
Despite the normal winter interlude with reduced listings, US prices continue to drop. The local downtrend of Sept/Oct 2006 is also poised to resume when inventory will reach the highest level in years after the flood of the usual spring listings. I would not be surprised to see this market crumble later this year that could be similar to the 45% drop in 1981.
February 26th, 2007 at 1:30 pm
This is going to end very, very badly for a lot of people.
February 26th, 2007 at 1:31 pm
To sum it up, partially because they are my friends, partially because they want me to join their RE religion and partially because I have seen this all before - just 7 years ago with stocks.
The ‘I told you so’ plays a role too, since they completely dismiss what I tell them.
February 26th, 2007 at 2:37 pm
My sister is a realtor and she doesn’t know anything about it. Brittney’s haircut and Anna Nicole’s baby, she knows all about. Seriously.
Besides, the CMHC made it clear that we won’t be affected by the US economy. Maybe you didn’t get the memo.
As for warning people - I’ve warned a few, but received similar responses as ego above (nice list, by the way!). One person told me they had heard about a bubble, but also heard that it was “just froth”, so they bought anyway.
February 26th, 2007 at 2:56 pm
i’ve seen several zoo like open houses too, mainly on the East side,
the owners were sitting around the living room watching as “crazed” wanna be home owners were eyeing the competition and checking out what was claimed as a “well maintained” family home….NOT!
offers were to be looked at by 4 PM on the first day of the open house… surreal pressure…
went home and had a stiff drink and then another one….
i’m sure this “froth” is a sign of the top or near it, it can not go on like this much longer
February 26th, 2007 at 3:02 pm
The comment by (djmk) about swamped open houses and multiple offers was widely predicted as a brief seasonal phemomena on these blogs a few months ago. I think VHB had posted some revealing stats in this regard. It’s sad to see innocent purchasers being mislead into panic buying by realtors who have the gall claim unawareness of the current US crash.
Don’t be fooled by the brief pause in the crash. The real panic will happen later this year, both, in the US and here.
February 26th, 2007 at 3:20 pm
February 26th, 2007 at 3:30 pm
The problem is that even if you’re right, its not going to help your personal relationships to tell people “see, I told you so” after they just lost $100k in equity.
I travel around the US on business, and never discuss religion or politics. In Vancouver, I try not to discuss RE.
February 26th, 2007 at 3:50 pm
I did manage to convince a cousin not to buy, but all that took was looking at his monthly payments vs. his monthly income and realizing that all he’ll be able to eat is Kraft Dinner…. if he could even afford that!
My wife has been a tough convert, a la ‘Suzanne researched this’ attitude. Over the last few months I have been teaching her basic economics and she is really starting to understand what is happening. She still desires to buy a home now, but luckily she is starting to see that she will do better long term.
The market psychology hasn’t changed yet because realtor’s have to continue to pump the market and will do all the way down as it is their job to do so after all (can you imagine a shoe salesman asking you what’s wrong with the shoes you have now?) So the psychology will stay until there are many LOCAL horror stories because ‘We aren’t the US’ and ‘We’re Different’ as I’ve been told by family and friends.
Credit is still very easy to come by as people can max out their incomes (ie. my cousin above; ie. 100 year Japan style mortgages possibly coming(doubt it really), I know we have 40 year ones now though), this is wringing out the last of the FB’s and stealing buyers from the future, which is great because yes, less competition down the road means less demand which means lower prices.
So buy buy buy FB’s because once the credit supply tightens and the US hits recession by the end of 2007 (Greenspan said so today), the west coasts commodity driven economy will collapse and look out below.
On another note: I went and looked at a rental space the other day $1450 for a 3br dump in Burnaby. The owners were of course very nice and really trying to get us to rent as there isn’t a whole lot of interest (at least from DINK’S like us). This shows me that rents are going up, or… at least trying to go up. I highly doubt they will get what they want at least from good tenants. So maybe this attempt at rent increases is also squeezing a few more FB’s into purchasing.
February 26th, 2007 at 4:32 pm
Mr. Pope,you, the holiest of holiest Pontif! when you arrive at the gate, we will have to send you to Purgatory for while, but look at the bright side, you won’t be in the Inferno with Pastrick Muir et al. eeh eeh
February 26th, 2007 at 4:45 pm
Some of it will stay, but I hear some of it changing already. In the last year I know a few people who changed their tune from “buy now while you can!” to “Real estate here might not be a good investment”.
I do think there will be a critical mass that won’t change until the bad news hits that prices have dropped year over year and are still coming down with underwater mortgages and foreclosures. That will be the point that pushes the market down further than it maybe should as specuvestors panic and we get more supply than demand.
February 26th, 2007 at 4:46 pm
February 26th, 2007 at 4:57 pm
February 26th, 2007 at 5:22 pm
Similarly, saying “buy now or you will be priced out forever” is not the same as pointing a gun at someone.
February 26th, 2007 at 5:36 pm
I think the question could be asked in reverse as well. What about the people that try to pressure their friends into buying now at these prices? Are they guilty of perpetuating the bubble? Or are they just naive lemmings?
February 26th, 2007 at 8:41 pm
First of all, personally I am mostly interested in commentary. The same way armchair quarterbacks debate football. It is presumptious to assume that any expression of opinion is entirely self-serving and manipulative.
I do think that the net effect of a bubbles creation and deflation is a negative sum game, and as such I oppose severe market distortions the same way I oppose excessive taxation or global warming.
As for keeping quiet as to have less “competition”, it doesn’t quite work that way. Prices will not go down until people expect them to go down, or until fundamentals (such as a worsening economy FORCE home the point). Somebody overpaying now instead of in two years will not change prices beyond that point one iota. This is not an independently moving train that one jumps on and off. The act of jumping on and off does in itself control the train. If you are scientifically inclined, think something along the lines of Heisenberg’s uncertainty principle. By participating in the market (or not) you are affecting it.
February 26th, 2007 at 8:52 pm
Did you know that it actually made sense to buy a home in the early 1980s with high interest rates? With rising double digit inflation, everything including your wages goes up as well. While the mortgage may look high when you bought a home then in the beginning, that debt is fixed! It might consume maybe about 50-55% of your net income in the first 5 years or so, but your income rises with inflation, so by the end of the 5 year term, your income is high enough that when you go through the next round of financing, your mortgage may only consume 20-30% of your net income.
That’s the power of inflation. In the inflationary era, corporate profits actually increase (because they can exercise good pricing power), thus giving the ability to pay workers higher wages. Throughout the mid 70s to early 80s, both Warren Buffett and Gary Shilling were buying these low PE stocks, because stock generally don’t do all that well in a high interest rate environment. In the end, Berkshire Hathaway stocks flourished because of this. It’s a no brainer..
However, the era of the 1990s was met with decreasing interest rate , low inflation rate with most commodity goods that are now cheaper by comparison to the early 80s. Computers and disposable laser and inkjet printers for example. The stock market loves low interest rate environment, that’s also why we got the dot.com bomb.
Here’s the problem. While it may seems like our economy is booming and inflation is kept around 3.5%, why then our 10 year Government of Canada marketable bond yielding at 4%?
Don’t you think that’s a little bit on the low side, especially when you have a housing boom, expecting double digit growth of 7-10% going forward??
Inflation rate = 3% and long bonds = 4%, which is a 1% growth. Obviously, some smart investors believe that we either don’t have a bright economic future or we are facing an impeding deflation.
Owning significant debt in a deflationary period can be very bad.
If the bubble burst and if we enter an era of mild deflation, goods will become even cheaper. Wages, however, will also be reduced to balance the changes. But the cost of your home that you bought during the boom WILL NOT DEFLATE. This cost of the debt is fixed!
The problem starts when what you thought was affordable mortgage that only consumes maybe about 50-60% of your net income suddenly becomes 70-90% of your net income down the years, because your income has gone down. Ofcourse, when mortgage payments consume more than 100% of your income, you’ll be dead because you’ll have nothing left to buy food. But the banks may not let you foreclose that easily. Which means, amortization rates may need to be increased just like Japan did to 100 yrs to lower your mortgage payments down so you have some money left to buy food.
In Japan, not all of its inhabitants suffer from this burst. People with secure jobs working for the government, academics and public works were generally spared.
The key is “secured jobs”.
If you buy now, you need to make absolutely sure you have one of those secured jobs that won’t get hacked during any severe downturn. A job guaranteed that wages won’t plummet, so being in a strong union might help.
February 26th, 2007 at 9:02 pm
“This is interesting because it seems like the longer it takes for a market to correct the less people believe that its even possible.”
Yes, that is the nature of the beast. There are quite a few people who do not accept things at face value, and prefer to stick objective measurale criteria such as fundamentals. But such reasoning should be strengthened the more fundamentals worsen, some lose their faith in reason and jump on the extrapolating bandwagon. Contrarian investors need balls of steel.
It is a matter of perceived payoffs. Going with the crowd and being wrong doesn’t hurt as bad as going against the crowd and being wrong. In the case of an owner, I can certainly see the frustration of seeing other make foolish purchases and still be making money hand over fist, several years running. Of course, in the case of ownership, it is not that as black and white as the case of an investor. There are several good reasons to own despite the high prices. It really is an indiviudal decision.
February 26th, 2007 at 9:22 pm
Your assumption is that inflation stays high for as long as rates stay high. But I know what you are getting at. Again, since those making long term loans are no dummies, there is no free lunch. Expected inflation is implicitly included in the rates (as made obvious by the fact that real interest rates are much more stable than nominal).
“That’s the power of inflation. In the inflationary era, corporate profits actually increase (because they can exercise good pricing power), thus giving the ability to pay workers higher wages. “
But that means diddly squat in real terms, and real terms is what matters. Besides, wages are set by supply and demand, not ability to pay. Productivity gains are what we desire. The spoils of these get split between shareholders and workers. For some reason or other productivity has been strong for the past 5 years or so, but real wages have not done so well.
“The stock market loves low interest rate environment, “
The correlation is definitely there, but since markets are forward looking (or at least have the potential to be) it is hard to separate cause and effect. It could be that interest rates are low when productivity is high. Productivity allows for low rates AND large real earnings growth. Rates are high and low for a reason. They are not set by lever pulling monkeys (though it may appear that way from time to time). In fact everything but overnight rates are set by market expectations (of inflation).
“While it may seems like our economy is booming and inflation is kept around 3.5%, why then our 10 year Government of Canada marketable bond yielding at 4%?”
That is a good point worth raising. We have discussed the cause of the near inverted yield curve ad nauseum on the VHB (RIP). There simply is no risk/liquidity premium and/or the market expects a very low inflation environment.
“Obviously, some smart investors believe that we either don’t have a bright economic future or we are facing an impeding deflation.
“
Yes, this is what I call the Back to the Future paradox. Long term debt markets may have priced in housing crash and a deflationary spiral. That means lower rates, which boosts RE prices which increases the potential of a bubble and ensuing deflationary spiral. It is as if something from the future came back to influence the present which influences the future and so on.
“But the cost of your home that you bought during the boom WILL NOT DEFLATE. This cost of the debt is fixed!”
Yes, if we see actual deflation (which is a long shot, even in the opinion of extremists such as myself), weird things will happen. Wages are fairly sticky to the downside though. More likely nominally flat. For a good lesson on a deflationary spiral, check out Japan over the past 16 years or so. Interesting times when you can earn a real return by putting your money in the mattress.
“People with secure jobs working for the government, academics and public works were generally spared.
The key is “secured jobs”.”
Ah, I see that you addressed the wages issue. Secure jobs have sticky wages. Contractors and commissioned people will obviously get kicked in the gonads by deflation.
February 26th, 2007 at 10:09 pm
Wages may not be as sticky as they used to be. Construction and related industries affected by the multiplier could get flattened almost instantly.
I sense there is no great appetite for huge government fiscal stimulation, and as far as monetary stimulus how much lower can they go?
February 27th, 2007 at 7:00 am
If nominal interest rates say are 16 percent, general inflation at 13 percent, the real interest rate is 3 percent. Which means, prices go up by 12%, wages by 12%, homes by 12% but nothing has changed in the economy. You consume the same goods that are produced as if nominal rates are at 6% and general inflation at 3%.
And banks aren’t dummies??
As if loaning and writing off non-performing loans off Enron, Nortel and a host of other bad investments in the past plus risky loans to home owners are a sign of excellent loaning practices??
The problem with being in debt in a low inflation environment is this. Long term rates can’t go any lower. If interest rates keep going down, then it means the economy is in poorer shape than it seems. Japan had their 10 year bond yielding at 1% as of 2002 and we’re at 4 now! So with lower rates, some people can afford even larger mortgages, but that means it magnifies our impending doom later on. With high rates, we are also screwed since Americans with adjustable ARMs will be massacred when they all reset or our home owners renewing new terms. Which ever way the pendulum swings, we are a looser in this low rate environment.
Freako said,
Besides, wages are set by supply and demand, not ability to pay.
Employers pay their employees a competitive wage that is in line with the adjusted cost of living in the region they are operating in.
There is of course a limit how much an employer can pay, but the problem these days is that modern workers are highly mobile thanks to the advent of the internet. We all live in a global village, so what would stops us from packing our bags and leaving for the next city if wages there are more attractive?
In a global village, the supply and demand factor can pretty much be limitless by your desire to move, NOT by its inability of the employer to pay.
As has been demonstrated by foreign doctors and engineers who immigrated to Canada, but got stuck working at Home Depot. Some of them I know had since left for the States or Europe.
So, it all comes down to you and your choice. Choice was not all that easy and clear in the past.
February 27th, 2007 at 8:15 am
I am confident that there are realtor’s out there that aren’t certain what sub-prime means.
Caveat Emptor.
February 27th, 2007 at 10:14 am
Hey that reminds me of those irksome happy happy joy joy Capital Direct radio ads — from listening to the ads, one would think that being a HELOC provider is almost as virtuous as being Mother Teresa…
February 27th, 2007 at 10:33 am
I agree. To a certain extent, the downside seems so obvious that I have to wonder if I’m missing something. Reading through comments, debates and points on Vancouver real estate blogs and forums though I don’t see a compelling argument for upside, and I see many points against the current market. Perhaps I’m just being too negative and analytical, but I don’t see how a market can be sustained long term on emotion alone.
February 27th, 2007 at 8:44 pm
But inflation is an aggregate number, and not a uniform price inflator. Why would you assume that prices appreciate 12%? There have been several periods of time where prices are NEGATIVELY correlated to inflation BTW (sensitivity to high rates). Don’t forget that RE has a sizeable investement portion that is theoretically forward looking. That fact much it much too complext to simply assume that RE follows inflation.
“And banks aren’t dummies??
As if loaning and writing off non-performing loans off Enron, Nortel and a host of other bad investments in the past plus risky loans to home owners are a sign of excellent loaning practices “
I wasn’t talking about banks. I was talking about the ultimate holders of long term debt, namely the aggregate bond market. Besides, I hardly think that pointing out a few extreme examples allows you to paint the entire (and very profitable) banking industry as dummies. In fact, are you sure that banks have taken writeoffs of Nortel debt. I know that the bonds are junk status, but that is a different bag holder.
“The problem with being in debt in a low inflation environment is this.”
What you say is true, but I think you refuse to see the tradeoffs. The good part about being in debt in a low inflation environment is that rates are low. In the long run, the relationship between lenders and borrowers is “fairly” set by the market. You are arguing that it is a bad time to be in debt when rates are low. Therefore you are implicitly arguing that it is a good time to lend money when rates are low. Obviously, rates themselves IS the price that both parties agreed upon. No free or expensive lunch there. In a reasonable facsimile of an
efficient market that is.