GVRD: 24% speculative?
According to a story in the Vancouver Sun approximately 24% percent of new condo units are re-sold within 12 months (as of last april). That story puts the speculative rate peak in the early eighties at closer to 50%.. Funny how often I’m seeing comparisons these days that make our market look good compared to ‘the early eighties’.
Robyn Adamache, senior analyst with Canada Mortgage and Housing Corp. in Vancouver, said inventories of completed and unsold condominiums in Greater Vancouver remain very low — 160 in all of Greater Vancouver and only three in Abbotsford — as of July 1.
“We don’t see any evidence of oversupply so far,” Adamache said.
However, there were also some 14,779 condominium units under construction in Greater Vancouver, a near record. Another 665 are under construction in Abbotsford.
Adamache added that a clearer picture of how well housing supply is balanced with housing demand will emerge once more of those units are complete and owners either take possession of them or attempt to sell.
The article also says that sales are slowing and that Vancouver is no longer a “build it and they will come” market.
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July 31st, 2007 at 9:49 am
Doesn’t look very good for the American Flippers. Shiller warned them, but they listened to Lereah instead.
Standard & Poor report on housing indices
July 31st, 2007 at 9:54 am
Robyn Adamache is quoting the CMHC company line here. As you suggest, the comparison with the early 80′s smacks of Cam’s previous concern to reassure buyers that the bottom isn’t going to fall out soon.
Their 24% figure sounds hinky, especially when others in the industry have pegged it at 50%, and even that figure seems conservative when many homeowners are buying on speculation. They may not sell within 12 months as stipulated by CMHC, but they buy with future appreciation factored in and expect to sell & ‘move up’ within a few short years.
Many ‘RE experts’ claimed low inventory & supply in the US last year, but obviously that situation can change quickly when sales volume drops and specuvestors head for the exits en masse.
July 31st, 2007 at 9:58 am
I think that the overall economy is in a better place than it was in the early 80s, but not real estate (certainly not Vancouver RE). One of the areas in which we have virtually no wiggle room is the interest rate. In the early 80s it was sky high, and could go way down.
July 31st, 2007 at 10:02 am
Thanks Robyn, lure a few more.
July 31st, 2007 at 11:30 am
Pope:
“24% percent of new condo units are sold”
Should read “24% percent of new condo units are [b]RE[/b]sold”
———————————-
I was wondering what the hell you were talking about, if 75% are purchased in pre-sales how could only 24% be sold in the first year? But the “RE” you missed in the source article sorted it out.
IMO the reason the 12 month flip is only half of the 80′s benchmark is that many more people are holding on to their properties because they “know” that it’s just going to keep going up.
July 31st, 2007 at 11:48 am
According to a story in the Vancouver Sun approximately 24% percent of new condo units are sold within 12 months (as of last april). That story puts the speculative rate peak in the early eighties at closer to 50%..
I have railed against this silly argument many times in the past.
Defining speculation as a property resold in the past 12 months is ridiculously arbitrary. First of all, the metric lags by 12 months. We won’t see for 12 months wether TODAYS buyers are “speculating”.
IMHO, a speculator is anybody who buys out of expectation (or fear) of future appreciation in the absence of supporting fundamentals. There are other definitions, of course, but if we are want to a true measure of buyer/investor modus operandi, I immodestly think mine superior.
July 31st, 2007 at 11:53 am
drachen: good catch, I’ve corrected the post and I agree with your conclusion – speculation isn’t limited to 12 month increments.
July 31st, 2007 at 11:57 am
“Their 24% figure sounds hinky, especially when others in the industry have pegged it at 50%,”
Be careful, especially with these ridiculously arbitrary metrics which are said to represent “speculation”
About 50% of condos are owned by investors, now owners. That is one metric. Interpret it any way you want.
The second one, which CMHC and others like to quote as a measure of speculation, is the number of properties sold more than once in the past 12 months.
To conclude that there is less speculation now because there is less reselling than at the peak of the 81 bubble is total bullshit (I didn’t * that profanity). It does suggest that “flipping” is down, but that does not preclude speculation. Maybe these “flippers” are so overjoyed with the appreciation machine that they don’t want to let go, hence soaking up supply and keeping the market tight, which of course entices further speculation/extrapolation.
I hope this debacle ends soon so that these disingenous asshats get run out of town.
July 31st, 2007 at 12:51 pm
24% sold in the first year does not mean speculation. Death, divorce, job loss, ADHD, also acount for a big chunk. In the 80′s crash people were way over their heads financially and many “had” to sell for reasons other than speculation. In addittion to the flippers alo t of new buyers especially don’t understand just how expenesive home ownership is beyond the monthly pyaments.
July 31st, 2007 at 1:27 pm
24% sold in the first year does not mean speculation.
It doesn’t prove or disprove speculation.
It strongly suggests (but does prove) lower amounts of flipping than 1981. For what its worth.
July 31st, 2007 at 1:32 pm
I think the fact that we had 50% speculation and super high interest rates in the early 1980′s is instructive. It shows the limits of potential participants in the current speculative market. Just when I think that we are about to go over a cliff this time around, I see sales up and inventories down.
I have to admit (reluctantly) that we are some time away from a crash. Maybe next year?
What it would take would be one of the following: A crash in the Asian markets a la the 1980′s; a rapid increase in interest rates; another leaky condo scare; a huge wave of new condos (might see that soon); or some unforeseen global economic crisis.
IMHO the ’81 crash was due largely to the leaky condo crisis. Some of the younger bloggers don’t remember (or know) how bad that was. We don’t have a subprime loans crisis like in the USA, and credit is still tight relative to our neighbours down south. Could be some blowback though, but not enough, since borders tend to insulate RE markets from each other. If you don’t believe me, look at the Seattle vs. Vancouver markets.
July 31st, 2007 at 1:39 pm
From the article:
Real estate market researcher MPC Intelligence Inc. estimates that there is less speculation in Greater Vancouver’s condo markets, with slightly slower sales and more evidence of buyers arranging financing for their pre-sale units.
WTF? How the heck can they conclude this? You can’t base the amount of speculation only on the action at the margin. Even if the conjecture about slower sales and more buyer financing suggesting less speculation is true (I don’t think it is), it does not excuse that fact that the cumulative investor owned condo situation is alarming. Nor the fact that even owners “speculate” when they pay double rental expenses in ownership costs.
It amazes me the great lengths that the MSM/special interests will go to convince themselves/us that all is well. Reminds me of one of those “expert” witnesses who concoct outrageous theories to clear their clients.
July 31st, 2007 at 1:52 pm
I have to admit (reluctantly) that we are some time away from a crash.
Well, the wheels can be set in motion at any moment for any reason. However, I agree that even if it started yesterday, it will take time for it to unwind, much like in the States. I think Vancouver will be more like Florida than San Diego though, and we could reach double digit yoy declines rather quickly (in RE time scale).
July 31st, 2007 at 2:10 pm
si fu:
There was no wholesale change in the macro scene in the US, yet the bubble burst, and in spite of what the paid “usual suspects’ say the worse is yet to come.
Interest rates, and unemployment rate, in the US have not jumped dramatically, yet foreclosures are up significantly.
The sub-prime meltdown is a symptom, not the cause of the RE crash. The home debtors are walking away, and going into foreclosure because values have dropped significantly enough that they owe more than what the home is worth.
During the run up in prices, if debtors got in too deep, they would simply sell, and still walk away with a tidy profit, or refinance. Now that prices are in reverse, the longer they wait to bail the deeper in debt they get into.
Conveniently the bankruptcy laws change in the US about 1 year ago.
On another note:
Anyone see the headlines in the Vancouver Sun: Re fake students, bogus schools etc?
July 31st, 2007 at 2:19 pm
Adamache added that a clearer picture of how well housing supply is balanced with housing demand will emerge once more of those units are complete and owners either take possession of them or attempt to sell.
In other words, we will know how much speculation there is once the speculators all try to sell and nobody buys their units at inflated prices combined with real buyers who are attempting to sell their existing home when their new home is completed. Once we see that then we will say that there was oversupply.
We have a rocket scientist here!
Tongue out of cheek now. Assuming that developers are acting in a “balanced” fashion is a completely ridiculous suggestion which history and the current US situation would suggest is wrong-headed.
July 31st, 2007 at 4:21 pm
Assuming that developers are acting in a “balanced” fashion is a completely ridiculous suggestion which history and the current US situation would suggest is wrong-headed.
Yes, the notion that all is well because all construction is pre-sold needs to be put to rest. Once the unit is complete, one more physical unit of housing supply exists. Whoever moved in there vacated or sold elsewhere. Yes, a small portion will go to new residents, and inevitably some boomerang kids fly the coop.
July 31st, 2007 at 4:40 pm
don’t u dare to comp.van-florida
shut the star off
do we have state of katrina and charlie in vancouver?.does vancouver deal with 16 billion dollars damage to property every few year like florida does?.do we have land and the size of florida in vancouver?
what are you talking about.when ever i go away from my desk you guys screwing up things here.I would say “sense is bigger than education”
there are few cities in this world,which are powered by both natural cause and human controled nature.
city of vancouver is one of them,
we might have run out of land,but for price to go up this city have lots of potential and lots more room. this city is build to go up only.
boc is just playing little part just to control rapid magnitude to turn into gradual speed,but there are lots who don’t need mortgage approval or rental income they can manage their properties by keeping them empty.
when people want more, price are definitely going to cross all the fundamentals.thats why there were lots of calls for our own residents to make final attempts.
there is a saying that”people who wait for crash were never in position or nor they going to be” because hell can not be measure by square feets.
don’t be misguided about vancouver your expectations were never been recieved since when ever to what ever, nor that is going to be ever after.hey krrish can I have glass of water?thanx.
July 31st, 2007 at 4:51 pm
“Adamache said that as of April of this year, the average was 24 per cent of those condos resold within 12 months. In the early 1980s, the number of speculative buyers in the Vancouver market approached 50 per cent.”
As already mentioned, you will not know current speculation % until 12 months from now, according to Adamache’s measure anyways. He later says you don’t know the true measure of speculation until after it occurs but the connection was not made obvious in the article.
I am not sure when the peak of speculative activity occurred in the 1980s: when prices were rising or when prices were falling. I wonder when the 50% number he cited occurred…?
To be fair, the 1980s runup was very steep compared to the current runup so he may have a point about short-term flippers, though I’m not so sure about the medium-term guys who can live with negative cash flow for years.
July 31st, 2007 at 5:23 pm
don’t u dare to comp.van-florida
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
Vancouver is a lot like Miami.
July 31st, 2007 at 5:32 pm
To be fair, the 1980s runup was very steep compared to the current runup so he may have a point about short-term flippers,
The similarity between 1981 is size of the runup on poor fundamentals.
There are also large differences. The runup and crash happened quite quickly. If you went a broad for a couple of years in 1980, nothing really changed. Cam has mentioned that affordability was poorer than. While true, there is a big difference. Very ordinary people entered the market during that short time. In the present, however, a large number of owners have a very high cost base, and will roast like marshmallows if rates rise. As I have mentioned untold times, when you have piss poor affordability at historically low rates and record employment, there is huge downside.
If 1982 was the SARS, the past 5 years is the plague. It is much more pervasive in terms of the number of people it will impact.
July 31st, 2007 at 5:32 pm
Vancouver is a lot like Miami
do they have blackcomb on the head of that city.
July 31st, 2007 at 5:41 pm
do they have blackcomb on the head of that city.
Nor does Vancouver. BTW, did I mention that Vancouver’s real estate situation bears a resemblance to Miami? With two year lag of course.
July 31st, 2007 at 5:51 pm
I will put another note to my file.
July 31st, 2007 at 5:58 pm
What happened SATV? Usually you would have responded with something like:
I will invest other to write down to my document.
July 31st, 2007 at 6:32 pm
Mr. Imbecile Satv: Vancouver is different from Miami in one respect. There aren’t the thousands of American retirees that would flock here for the high cost of living, and the rain.
PS u be vely nice of we call Robnumbers and make infection s on your Windows32 file.
July 31st, 2007 at 7:12 pm
okey
these are some crazy who might thinking i have million’s of $$$in my pigyy bank.
remote address:
218.50.1.119
74.107.174.26
222.68.64.14.0
60.41.217.65 these decent peoples are trying to download malware in my computer.most decent in above is “mydoom in” this lady is active 24/7.
they are blocked now so far, but I think even elementry kids can genrate anything.well I have nothing to loose . I just published those don’s(underworld dogs)if any body else have same guest or above to make in future just compare with them.
I would like to thanks ms kids-akhen-vineland-patiently waiting-,and si.fu for their comments on riverview that was really good to know insite and history of dtes.before I use to think how come this cluster is located close to police station ,and court I have never seen anything like that before ,but now they have open my eyes.(awake on dtes site).
July 31st, 2007 at 7:13 pm
Speculation is difficult to judge, but assuming the Sun uses the same criteria to judge current speculation vs. the early 80s, you can at least draw something from the conclusion. However as others have pointed out, things went up and down much faster during that bubble.
I agree with freako that 12 months is a rather arbitrary number. Considering that some places are 12 months behind on their original completion estimates its a little crazy. If you pre-buy something 2-3 years ahead of completion, there’s no doubt that many life circumstances could change in that time period and you end up selling for reasons other than RE speculation.
July 31st, 2007 at 7:24 pm
Vancouver is different from Miami in one respect. There aren’t the thousands of American retirees that would flock here for the high cost of living, and the rain.
robsnumber
shhhi shiii robs number not retirees (stock sitters man)they are all visiting here too often to see their young kids(dock sitters) hiking-snow boarding-bike riding-ski etc.etc and claping their both hands to appreciate their discovery,worlds best vancouver.
July 31st, 2007 at 8:09 pm
Satv, you brave mans ,but maybe not smart. I think Robnumber guys he government guy spy, Make look like simple blogger but maybe he find out troll, catch many guys brag big tax scam.
He then record, from Rob blog, and BC real estate talk, who big shots. Then he investigate.
I no magic, I just suspect this story.
July 31st, 2007 at 8:53 pm
cameo appearance
thanx to bring that forward.anybody should have been ask me frankly. I work for westfair,loblaw,and pc.for bc’s number one billionaire galen weston(canadian)number 2.I get my pay cheque after tax so no scam.
July 31st, 2007 at 9:00 pm
All the shills eventually come clean, once its impossible to deny and they have cashed out. Like our friend Cramer:
http://www.youtube.com/watch?v=c7e9H4zTqk4
July 31st, 2007 at 9:10 pm
Satv, maybe Mr.Spy is interested in property investment income/loss,not earnings taxed at source
July 31st, 2007 at 9:32 pm
know body knows
I have purchased 4 properties since 97-98-2006-2007.
but so far did not sell anything. I have plan to sell just one next year after july.all other are to keep to adjust big family.
August 1st, 2007 at 5:32 am
satv, are you crazy! Don’t sell now! It can only go up?
Why would you sell?
August 1st, 2007 at 5:56 am
reductimate.
thanx but that would be regardless up or down to make adjustment or ,to prepare some ground to buy house in 2010 regardless too. that house would be my final purchase @40.I will work 8 hour shift after,and relex little bit if I can manage.so far almost 100% spending and tough to neck life.
I won’t be avialable for comment till aug2.
August 1st, 2007 at 6:39 am
I don’t think Vancouver is at all like Miami? I think Vancouver has more in common with Toronto. Having just got back from Seattle where I was looking to buy a fixer upper I think we are more like Toronto than Seattle, let alone Miami or even San Deigo. Unless you are comparing on factors other than Federal governement policies, demographics(racial). You know I am not gonna say its different here but I have travelled extensively in the US and *I* am differenet from the average yank. I think, act, and more importantly spend different. I could be wrong about the logic that says we are like the Miami, San Deigo etc. But I doubt it.
August 1st, 2007 at 6:58 am
Further to my last post. I do not believe we will arbitrarily track US real estate markets as we have in the past. I have expected GVRD correction since 2003 and have actually put my money where my mouth is. Factors which are unique to Vancouver which will lead to a correction are. Buyer burnout, the end of our massive infrastructure builds, change in government, the Olympic hangover. Interest rate increases alone won’t do it.
I have moved my prediction for a correction to the end of 2009/2010 and I will probably get more risk adverse at that time.
August 1st, 2007 at 7:33 am
I don’t think Vancouver is at all like Miami? I think Vancouver has more in common with Toronto.
Specifically, my comparison between Vancouver and Miami related to patterns of depreciation. Not climate, access to ski hills, demographics etc.
August 1st, 2007 at 7:36 am
The builders just took a humungous hit on the stock market. Bezer is teetering on bankruptcy. This is much worse than the MSM and analysts ever imagined. Who would’ve thunk? Now we have to laugh at the builder’s CEO’s who talked about recovery before it even got started. The verdict is in, they are shaved apes compared to the small group of prescient bloggers who saw the whole thing from a mile away. Of course they are going to blame the “perfect storm” blah blah … unforeseen blah blah. Hogwash.
August 1st, 2007 at 7:40 am
Jim
Like you I’ve been predicting a correction for a while now and put my money where my mouth is. I sold in late 2005 – probably 18 months too soon however despite the recent market melt down I’m no further behind.
I don’t think we’ll be waiting until late 2009. Most large infrastructure projects will have to be complete or virtually complete at least a year before the Olympics. As they move towards completion, they use exponentially fewer workers so you’ll start seeing less infrastructure employement in late 2007/early 2008.
Also, I believe we’re either approaching or have already equalled the longest bull run for RE in our history. Buyer fatigue, dwindling demand, the effects of the US market etc. will likely kick in sooner rather than later.
August 1st, 2007 at 7:44 am
Name one market that only goes in one direction. People looks to fundamentals to justify their argument, but what are the incremental fundaments that were not there before … Fundamentals is a factor, but good fundamentals translates to shallower troughs and higher apexes compared to cities with bad fundamentals.
Never ever deny the business cycle…I’ve sat through 3 cycles in 2 different markets. RE is a cyclical asset. What goes up will eventually go down and the professional large developers knows this!
SATV, i’m glad that you are able to hold…keep in mind that most of your purchases were either near/at the trough of the last cycle’s bottom to the beginning of this cycle. This cycle started showing an upward momentum in late 2000 and is the longest cycle yet. RE cycle is about 10 years peak to peak. So, expect a down period to be as pronounced. Again this is from a macro perspective.
From a micro perspective, pundits and analysts are as proned to following the herd as anyone else. Remember those of the tech cycle … “Oh, we are of new metrics…things are different this time as we’re dealing with electronics” Oops! Remember the discussion of a separation between analysis and investment banking?! Well, try calling the market speculative and therefore, BEWARE! when all your client’s are from the BUY side of the market.
Again from a micro/daily perspective, it is extremely difficult to pinpoint the exact factors and time when the market says, “i’m heading down”. That’s why most peaks and troughs are pointed out months after it happened. This explains why there is such strong debate between the Bulls and the Bears.
That said, factors making for a downtrend is in the works…
August 1st, 2007 at 7:50 am
People looks to the olympics as a spur on demand … yea, of the foreign nature! The Olympics announcement changed the psychology of the market ONLY because the market had been down for such a long time, and was ready to go up. It was waiting for the catalyst.
Similarly, as the market upcycle gets drawn out, it will do the same … look for a reason to change the psychology.
Surf the trend, my friends!
Ahken
August 1st, 2007 at 7:51 am
Buyer fatigue, dwindling demand,
As I posted on Mohican’s blog, could the slowing sales in FV be a result of exhaustion of the pool of buyers? I suspect that FV has a lot less speculative buying, and should be the first place where we notice exhausted fundamental demand. The GV market could still be tight due to speculative buying, or perhaps catering to a different demographic that is not quite exhausted yet.
August 1st, 2007 at 7:58 am
It’s ludicrous to define speculation as selling purchases within the first year. Firstly, the interest rate environment were significantly different. During the 80s, it was real expensive to hold as compared to the current low interest rate environment. Secondly, Vancouver has a much higher international profile now which invites greater number of deep pocketed international players that are able to hold longer and who are more savvy in their understanting RE cycles.
In any case, it would seem that MPC Intelligence only reads with BuySide intelligence. Forget their interpretations, show me their data.
August 1st, 2007 at 8:04 am
I think the challenge is that ‘speculation’ can’t be accurately measured. As many have pointed out it includes a whole range, from those that believe ‘prices never go down’ to those that intend to slap down some laminate and sell in a month.
Its always easier to spot the problem in hindsight.
August 1st, 2007 at 8:28 am
I think the challenge is that ‘speculation’ can’t be accurately measured.
My gauge is fairly simple: The gap between rents and ownership costs. A lot less arbitrary than say percentage of resells over 12 months.
August 1st, 2007 at 8:30 am
“Name one market that only goes in one direction”.
I don’t know if its a “market”, but world population is rising steadily, and at an accelerated rate for the last 50 years. Perhaps a comet or two or could reverse *that* trend.
August 1st, 2007 at 8:35 am
The recurring error in both bull and bear logic is that the affordability ratios are relevant. Show me an affordability ratio for West Point Grey. I bet it looks pretty sustainable versus say….Newton.
August 1st, 2007 at 9:34 am
As per bubbltracking blog, Metro Seattle now has 19,604 units of inventory. Pretty big jump from the 10,827 it had in January.
August 1st, 2007 at 9:38 am
I don’t know if its a “market”,
No, that is definitely not a market. Markets are forward looking, and if efficient incorporate accurate probabilities of future events. If the probabilities are accurately set, “surprises” are symmetric, which is why prices are as likely to go up as down. Adjusted for risk, of course. Population growth just is.
August 1st, 2007 at 9:41 am
The recurring error in both bull and bear logic is that the affordability ratios are relevant. Show me an affordability ratio for West Point Grey. I bet it looks pretty sustainable versus say….Newton.
Could you please explain this? Affordability irrelevant?
August 1st, 2007 at 10:14 am
Okay, let me define “market” … “A formal or informal exchange where types of or category of assets are traded by buying and selling participants where price is the primary measure of value”
I am not referring to the participants in the market where the number may grow or decline but rather the price and level of participation.
August 1st, 2007 at 10:19 am
Affordability is of course relevant. But averages applied across a Province don’t tell much.
Population is of course not a market but its an example of a non reverting trend.
August 1st, 2007 at 11:22 am
Population is of course not a market but its an example of a non reverting trend.
Yes, but it’s not a market. As mentioned, markets are forward looking, and once risk adjusted outcomes are as likely to be underperforming as overperforming.
An asset that can only rise in value essentially wins every 50-50 bet it encounters. Theoretically possible, but implausable. And still only retrospective with no guarantees for the future.
This continous run of RE points squarely at a market efficiency. There is no way that random walk factors would continously come out in the favor of RE.
August 1st, 2007 at 11:28 am
Affordability is of course relevant. But averages applied across a Province don’t tell much.
Ok, what about Vancouver CMA numbers? Are they not relevant? The RBC affordability study calculates it broken down by housing type.
And why isn’t relative affordability relevant? If Vancouver SFH numbers go from 55 to 60 to 72%, does that not indicate that there is less appreciation headroom?
August 1st, 2007 at 11:38 am
Well, firstly I don’t believe in the random walk principle and I absolutely do not believe that the RE market is efficient.
Samuelson argues that randomness is achieved thru active participation of many investors seeking greater wealth and as such, pounces on even the slightest informational advantage resulting in prices quickly reflecting new information. BUT … here is the big BUT, why then do markets trend?
Secondly, Efficient Markets Hypothesis requires frictionless market transactions and information distribution. We all know that the RE market is not that. Even the stock market is not efficient.
Lo and McKinley’s statistical work originally published in 1999 provides empirical evidence that markets are predictable to some degree. However, they didn’t provide a model for such predictability.
Again, going back to 24% speculative, in the absence of active government intervention, speculation is unavoidable. It feeds on itself until the last one gets caught holding the bag with the rest running for cover.
ahken
August 1st, 2007 at 11:43 am
I think affordability is one of the indicators of the speculative ferver. I think it is relevant, but should only form one aspect of one’s investment approach.
On the whole, it is rather difficult to point to any given statistic that shows speculative ferver. It’s all up to interpretation.
August 1st, 2007 at 11:49 am
Well, firstly I don’t believe in the random walk principle and I absolutely do not believe that the RE market is efficient.
You don’t agree with random walk theory, or you don’t think that the markets follow a random walk?
A random walk is an ideal, if markets were perfectly efficient, that is how prices would move.
From this we can conclude that:
a. Prices have not followed a random walk.
b. Therefore the RE market is not efficient.
c. Markets do strive for long run market efficiency (they don’t have a bias to the upside or downside).
d. Therefore expect a reversal of prices.
e. UNLESS the runup was a correction of a previous inefficiency (underpriced RE to start with)
f. Metrics such afforability and price/rent multiples do not support the previously underpriced argument.
August 1st, 2007 at 11:58 am
BUT … here is the big BUT, why then do markets trend?
They do trend, and that is usually a sign of market inefficiency, BUT there are other explanations:
As I have mentiond untold times, its just not about market direction, but also magnitude.
If you cover 35 out of 36 numbers on the roulette wheel, you are likely to have long streaks of winning 1 dollar per spin. Is this a trend? Clearly not, the wheel is random. Every 36 spins or so, the ball will land on the number you didn’t cover and take away all your winnings. The results look non-random, but of course they are.
By the same logic, RE appreciation 12% a year for 5 years and then dropping by 60% could be random.
I don’t think RE is remotely efficient, but you can’t conclude non-random walk by “trends” alone.
August 1st, 2007 at 12:07 pm
Yes, there is a primary and significant difference between the roulette illustration and the markets. Price inflections are the result of active decision whereas numerical outcomes in a roulette is not. Therefore, the comparison is flawed.
August 1st, 2007 at 12:17 pm
Price inflections are the result of active decision whereas numerical outcomes in a roulette is not. Therefore, the comparison is flawed.
It was an illustration of how the ddirection and magnitude of price movements can interplay to create the false appearance of non-random outcomes. I chose it because it is easy to understand and removes non-relevant factors.
It was not intended as a perfect model of the real world, so I don’t know where your “flawed” comes from. It is what it is.
Give me a minute, and I will think of some real world situations where this type of thing can occur.
By the way, the biggest “flaw” in the analogy isn’t the active decision making. If active decisions are made in an efficient market, the outcomes are entirely determined by probabilities and for all practical purposes similar to a roulette wheel.
Rather, the biggest differences are are that the outcomes are independent and discrete.
August 1st, 2007 at 1:35 pm
In any case, I don’t think the issues and debate between both the school of thought is going to be resolved through our discussions. This has been raging on for over 100 years, and there are just as many studies supporting each side of the debate. Though the EMT and the Random walk theory seem to have a greater level of acceptability.
August 1st, 2007 at 2:08 pm
Jim said… I don’t know if its a “market”, but world population is rising steadily, and at an accelerated rate for the last 50 years. Perhaps a comet or two or could reverse *that* trend.
Jim, check out this timely opinion piece courtesy The Economist:
http://tinyurl.com/2yxlgu
Note that immigration is ruled out as a solution to falling birth rates.
August 1st, 2007 at 2:21 pm
This has been raging on for over 100 years, and there are just as many studies supporting each side of the debate.
I am not exactly sure what the debate you are refering to is. Besides, most of modern finance theory came about in the 60′s, 70′s, and 80′s. EMH itself is from the early 60′s.
August 1st, 2007 at 2:27 pm
“LIVING THE AMERICAN NIGHTMARE
FORECLOSURES ON THE RISE: As the housing market softens, a combination of consumer naivete and aggressive lending means owners with subprime loans are increasingly getting sucked down a financial black hole”
Hey is San Francisco a close enough comparison to Vancouver?
August 1st, 2007 at 2:52 pm
“If you cover 35 out of 36 numbers on the roulette wheel, you are likely to have long streaks of winning 1 dollar per spin. Is this a trend? Clearly not, the wheel is random. Every 36 spins or so, the ball will land on the number you didn’t cover and take away all your winnings. The results look non-random, but of course they are.
By the same logic, RE appreciation 12% a year for 5 years and then dropping by 60% could be random.
I don’t think RE is remotely efficient, but you can’t conclude non-random walk by “trends” alone.”
Okay, freako … I will respond.
If the market prices are entirely random as purpoted by you and many other pundits, and that trends merely appear to be related to each other, then why is there statistical correlation between discreet price movements based on the study I previously mentioned. That study backs up what Keim and Stambaugh (1986) and Fama & French (1988) found. Though no definitive studies have disprove random walk model, evidence to the contrary are found.
I did not conclude non-random walk by “trends” alone. I asked how could random walk explain trends when prices should be reacting rather quickly to new information (whether mildly or wholy efficient). The material itself is significantly complex and I truly don’t believe that this blog is an appropriate place to play out this debate.
“By the way, the biggest “flaw” in the analogy isn’t the active decision making. If active decisions are made in an efficient market, the outcomes are entirely determined by probabilities and for all practical purposes similar to a roulette wheel.”
If active decisions are made in an “efficient market” and a random market setting, prices do not trend. They generally jump to the consensus perceived value and trades flat. Further, if each trade is discreet and entirely unrelated and merely “appear to” trend but entirely random, they do not show a significant statistical correlation to each other.
August 1st, 2007 at 3:12 pm
If the market prices are entirely random as purpoted by you and many other pundits,
Whoah, slow down. To borrow a quote from Chipman, you are seeing what is not there. EMH is a framework for analyzing market, not a dogma with unrealistic assumptions. As mentioned, I don’t think RE at the moment is even weak form efficient. Once more, so that there is no misunderstanding,I don’t think RE at the moment is even weak form efficient. FYI, the EMH framework allows for three levels of efficiencies, weak, semi-strong and strong. It does NOT have an opinion about what is out there, it just provides a framework for evaluating efficiency.
I did not conclude non-random walk by “trends” alone.
Didn’t say you did.
I truly don’t believe that this blog is an appropriate place to play out this debate.
Sounds great, but I am still not sure what is being debated.
If active decisions are made in an “efficient market” and a random market setting, prices do not trend.
As I explained, it is possible for a market to “trend” while being efficient. For example, imagine a company that has a high chance of a steady earnings, but a small chance of a random unpredictable catastrophe. As time goes along with the catastrophe occuring, prices climb steadily. When the calamity occurs, the price collapses. This is efficient, yet appears trendlike.
Further, if each trade is discreet and entirely unrelated and merely “appear to” trend but entirely random, they do not show a significant statistical correlation to each other.
I don’t know what you mean by trade, but in the example I gave above, the company could gain a decent real return (as compensation for the risk) annually. Say 12% give or take. This surely looks like a “trend”.
August 1st, 2007 at 4:01 pm
and why isn’t relative affordability relevant? If Vancouver SFH numbers go from 55 to 60 to 72%, does that not indicate that there is less appreciation headroom?
Hi Freako,
I think the affordability measures are relevant. However, there is no good reason for it to be constant.
If 2/3 of Vancouver’s housing market is non-SFH right now, and that increases to 3/4 non-SFH in the future, then I’d expect the SFHs to get apportioned to the highest bidder. The price of an SFH goes up compared to the median income as more of the population moves into non-SFH housing.
I don’t have the numbers, but my guess would be that Vancouver’s fraction of households in SFH’s has gone down dramatically over the last 30 years. As an extreme example, consider what the affordability would be on an SFH in Manhattan.
I’m not trying to argue that this trend drives short-term housing run-ups, but I don’t think expecting SFH affordability to drop to pre-2000 levels is a fool-proof strategy.
August 1st, 2007 at 4:33 pm
JMK:
“consider what the affordability would be on an SFH in Manhattan.”
Are there any similarities Vancouver/Manhattan?
I do see many differences, in size, population, incomes, economic base, but not many similarities.
August 1st, 2007 at 4:38 pm
I don’t have the numbers, but my guess would be that Vancouver’s fraction of households in SFH’s has gone down dramatically over the last 30 years.
Good point. Priced in density potential skews SFH comparisons. I have posted pictures in the past of the West End a century ago, and it was nothing but houses. Those few SFH that remain have impossible affordability, and would likely not be owned by an owner/occupier.
In any case, SFH affordability is poor even if we widen the area to the entire GV.
August 1st, 2007 at 6:05 pm
jmk: SFHs becoming unaffordable compared to median is generally a result of increasing population. In the current run-up, population growth has been fairly small, compared to late 90′s and early 2000′s.
I wouldn’t want to assume the same trend of population growth for the next 20 years as the past 20 years. Vancouver is already a major metropolitan area, with very high cost of living.
August 1st, 2007 at 9:43 pm
One odd thing though. Most of the stats I’ve seen show condos have increased more than SFH in the last few years.
August 1st, 2007 at 10:30 pm
…world population is rising steadily, and at an accelerated rate for the last 50 years…
Global population growth rate has not only stalled over the past 40 years, it has been cut nearly in half.
http://www.census.gov/ipc/www/img/worldgr.gif
August 2nd, 2007 at 7:22 am
Patiently Waiting said…
One odd thing though. Most of the stats I’ve seen show condos have increased more than SFH in the last few years.
How true, perhaps SFH has appreciated so much because we ran out of land 20years ago, and now condos are appreciating so rapidly because we are running out of sky.
Or perhaps, it’s just a bubble.
August 2nd, 2007 at 10:41 am
One odd thing though. Most of the stats I’ve seen show condos have increased more than SFH in the last few years.
And that is a f*cked up market for you. Condos are depreciating assets. I can not say for sure that an east side SFH is overpriced, because I cannot possibly know Vancouver’s future population growth. But for downtown condos, there is no frigging way that the present value of future income streams comes close to todays prices (is we make the assumption that inflation will continue to outpace rents).
August 5th, 2007 at 1:53 pm
IMHO the ’81 crash was due largely to the leaky condo crisis
Well sorry to let you down, but the leaky condo crisis – in the public eye anyway – began in the late 1980′s, and the new NDP government appointed Dave Barrett to investigate it, perhaps in part to try to embarrass a certain Vancouver mayor of the late 1980′s who had a new job.
Even the current RE bulls admit the ’81 crash was about affordability (it’s not so bad now by their calculations).