Why there is no housing bubble.

Interesting commentary in MSN’s money central site:

With the 10-year U.S. Treasury bond yielding below 4% and 30-year mortgages available at 5.1%, there isnt a housing bubble

Mind you, I’m not saying that U.S. consumers don’t have too much debt, or that the U.S. economy isn’t dangerously dependent on the housing sector for growth, or that all the money sloshing around the globe isn’t encouraging dangerous speculation.

But those are different problems from the one getting all the headline attention at the moment.

It’s just that, for all the teeth-gnashing and pundit-moralizing, we really don’t have a housing bubble that’s anywhere near bursting. Current 10-year interest rates are just too low. And I certainly don’t see interest rates rising enough in the next year or so to burst a bubble, either.

..Interesting because it was published in June of 2005, right about the peak of the US market. Since that time prices and sales have dropped by record amounts and foreclosures have gone up 79%.

To make that monthly debt burden onerous enough to trigger a burst in a housing bubble, you have to look for a big drop in family income so that while monthly debt payments remain the same, they take up a bigger chunk of a diminished family income.

Huh. And yet mysteriously prices peaked in 2005 and started falling without a big drop in family income. Very strange!

The other trigger would be a big increase in interest rates that would push the monthly debt burden up on average and would strike especially hard at those home buyers who used an adjustable or no-interest mortgage to buy more house than they could really afford.

This trigger was also a no-show. There was no big increase in interest rates, but for some reason the buyers stopped showing up. Can housing markets collapse under their own weight? And if there is no housing bubble what happened in the USA?

Well, as the saying goes, prediction is hard, especially when its about the future!

update: On the local market front, Ella points out this article in 24hours that shows buying in Vancouver may make more sense than renting as long as you use some very questionable math, disregard half the numbers and base the rest of the figures on silly assumptions.

89 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
JF_Lovely
JF_Lovely
12 years ago

I think krrish1 is just cutting and pasting from a translation website. It's still pretty damn funny though following his idiotic logic.

btk
btk
12 years ago

Scullboy, we are on the same page for sure.

I do my best to track what is going on in the markets.

It took one too many absurd posts from our sporty friend to actually start posting.

My earlier posting was a bit sloppy and should have been proof read, I have had a nasty flu this week.

scullboy
12 years ago

AMEN BTK!

That's the funny part of it. If you rent you have to be careful about who you're renting from, but that's true anywhere. Small time landlords are the same wherever you go.

However to tradeoff is all the lovely extra money, which you can use to go skiing or whatever. 🙂 And if your unit is leaky…. so what? You can just move! No zillion dollar repairs needed (or at least repairing the unit isn't your problem :).

Pretty soon all those people who are maxed out on their "investments" are going to look around and start connecting the dots. Nothing form the outside world seems to impact, but I PROMISE you…. once they see how many units are sitting unsold or unrented they'll figure out the jig is up 🙂

btk
btk
12 years ago

Regardless of re sale prices. With 10,000 units hitting the market downtown, and a strong bias towards owning right now, it seems unlikely they'll be rental increases anytime for years. Look how many units are still available , for rent, at spectrum 1,2,3,4 (200 on craigslist today?) they've been available since November. Mode (538 Smithe) is hitting the market as is Coopers lookout (980 cooperage way?), There is the ritz and saphire coming in coal harbour even though the Cielo units haven't been fully absorbed (check prompton,bruceward, downtownsuites etc.) Plus every time a new tower completes first time buyers (renters) move in and vacate a rental, owners upgrade, tenants upgrade and move around so there is a vacuum. As an example of what i think was one of the nicer buildings in Coal Harbour, the Classico. Royalrental.ca had unit #2906… Read more »

Snark
Snark
12 years ago

Nominal prices are not going to drop by much more, because there are still a lot of people waiting for the right moment to jump into the housing market. At some point, they’ll get tired of waiting and buy during this flat period. Many will have substantial down payments. If this happens, nominal prices could go back to what they are now. What do you base this assumption on? BC has a negative savings rate and I don't know how many people are waiting to 'jump in' to the market. Certainly there are those on this blog, but is that enough to make a difference when prices start dropping? Most of the people that I know who would like to buy were priced out two years ago. The increasing cost of living, gas, etc has meant that their savings hasn't… Read more »

krrish1
12 years ago

well said but with no change as some people were making wild ### guess in 2005.you are at same point but inventory is almost 4000 down from the last year peak and we need to sell around 1000 unit every month to keep the price above the top line.

on your second last post I am agree with you but Idea around transportation hubs is almost sleepless(noisy,shaky)and that could lead to increase crime close to those hubs,Your point on the table should deal with that issue to proceed farther,almost good and you have great knowledge of everything here glad to read your posts.

I am loving it.

sheeplessinvancouver
sheeplessinvancouver
12 years ago

"Well, as the saying goes, prediction is hard, especially when its about the future!" I'm going to try to do the hard stuff. Disclaimer: For a number of reasons including the mountains, it's a beautiful city and we're running out of land, I'm more bullish on Vancouver than many on this list. Housing prices in Vancouver have peaked due to a convergence of factors already discussed on this blog, including media attention to the sub prime problem in the US, affordability and new stock coming on the market. We are in a decline, or at least a steady state for the next four or five years. As those who have to sell are forced to lower their prices, prices will come down by 10 to 20% and then level off for a few years. High inflation and interest rates could… Read more »

scullboy
12 years ago

Not to poke a hole in your logic but….

*why* exctly would pay a rent on a place that covers the mortgage cost? Why exactly wouldn't I buy my own place if I were willing to shell out that much money?

sheeplessinvancouver
sheeplessinvancouver
12 years ago

Re the letter from the realtor in today's Province. Unless the have an inheritance, or a good salary and the discipline to save, people in their 20s have always been priced out of the core of Vancouver. That's one of the reasons they rent. And where is this ALR land he's talking about in Vancouver? Stanley Park? Vancouverites are already complaining about the lack of green space for the kids to play or to walk their dogs, so should we use it up by building more 500 sq ft condos to cram them into? Destoying our green space would certainly bring down property values, not just because they would add to the supply of housing but also because Vancouver would be a less attractive place to live. Lack of affordable housing (and I'm not talking about social housing) is a… Read more »

krrish1
12 years ago

Blueskies,

You can share your accomodation that will creat more room to increase the supply.

blueskies
blueskies
12 years ago

satv/k

given your stature here please don't weigh in on any of our problems…you just reinforce our perceptions of "lightweight"

krrish1
12 years ago

"In Vancouver, Philip Hochstein of the Independent Contractors and Businesses Association said it's time to rethink the ALR, which makes up 20 per cent of Metro Vancouver's so-called Green Zone. It includes parks and public spaces and accounts for 70 per cent of Metro Vancouver." "It's one of the things driving up the cost of housing," he said." Comment by sheeplessinvancouver "Please don’t believe everything you read in this “report” It is obviously funded by a lobby group that exists to give developers and others keen to make money in real estate something to back up their arguments when seeking approval, money, rezoning or whatever. You know, the same people who gave you the real estate bubble in the US, who profited from it and left the losses to others. They even have a banker doing the introduction! Sleepless, I… Read more »

freako
freako
12 years ago

Demographia and their anti-zoning agenda is crap. I can't believe the amount of uncritical MSM coverage they get.

hughz
hughz
12 years ago
Reply to  freako

I'm sympathetic to what you are saying. Zoning with some foresight and view to the common weal can make for a better outcome. Take a look at almost any city in Texas and see how unrestricted zoning looks and whether you would want to live there.

At the same time, zoning restrictions go a long way in artificially propping up real estate prices. Take a look at Santa Cruz, CA. Land and land all around, but some of the highest prices and pricing ratios. What makes me really sick about zoning is the whole political process which rewards those with an "in" to profit off any change.

hughz
hughz
12 years ago

I have always been struck flying out of and into YVR…the amount of land locked up in the ALR is astounding.

And sorry to be contrarian, but highly doubt that the agricultural production of the ALR is near the Canadian average in terms of caloric provision (and not value-added). I'd be curious if anyone had numbers on this.

Rezone it, level it, and build it up.

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  hughz

Your thinking is extremely short-sighted. The ALR issue is much more complex. Farmers can't make a living growing food on the best land in Canada because we can get everything cheaper from California and Mexico where agricultural labour is cheaper, even when you add in the price of fertilizer, pesticides, warehousing, packaging and shipping costs. Relative to our other expenditures, food is really cheap in Canada at about 10% of average household gross income. This may change as oil prices go up and inflation takes its toll. Soil fertility and climate in the Lower Mainland rate high for Canada. Floodplains are excellent places for growing things. In our stupidity we build more condos (so realtors, bankers and speculators can make a profit) on floodplain. Next, we have to spend money on dikes so the condos don't get flooded. And if… Read more »

hughz
hughz
12 years ago

At the moment, there are probably higher private and/or social returns to converting it.

And if in the future, when food becomes exorbitantly expensive to import and the returns reverse, level the condos and plow it.

LaLaLand
LaLaLand
12 years ago
Reply to  hughz

Oh sure, turf the masses out (to where?), but no amount of leveling and plowing and fertilizing dirt will make up for the destroyed topsoil that is essential for growing food. Once it's gone, it's gone. For generations.

A country that can't feed itself is a poor country indeed.

hughz
hughz
12 years ago
Reply to  hughz

I'd say a country that insists on feeding itself, contrary to its relative endowments, is a poor country indeed.

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  hughz

Oh, if it were that easy. The fertility of the soil is a result of hundreds of years of silt coming down the river and being deposited in the delta. You'd have to tear up condos, asphalt, sidewalks, etc., and cart everything away. Then you'd have to add top soil. Lots of it. The usual way to clear farmland is to cut trees, burn them and then plow. The topsoil is already there to plow. The environmental cleanup alone would be prohibitively expensive. You can build condos on polluted landfill, like parts of Yaletown and False Creek North, that you couldn't grow vegetables on. And where would all the residents in the condos live? Higher private returns to the few, maybe, but what social returns are there from not knowing your neighbours or having to drive to the stores and… Read more »

hughz
hughz
12 years ago
Reply to  hughz

Come on, people. No one still cries about the precious farmland of Kent and Middlesex that has been eaten up by the relentless spread of London over the past 1000 years. And yes, this was the former breadbasket of England. Why is the ALR any different?

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  hughz

Although food costs per capita in Canada and Britain are comparable, our climate and geography is different. Vancouver Island and the Lower Mainland are two of the best agricultural areas in this county. Why don't we put new developments in areas where agriculture doesn't work? Granted, we'd have to address issues of the stability of the mountain slopes, but there are lots of places where development would make more sense than taking land out of the ALR. Housing development is not just affecting agricultural land, but our industrial land base as well. Part of our economy relies on our location as a port city. We need a balance. If the current crisis in the US teaches us anything, it's don't rely on a single thing like real estate to keep the economy going. And there are people crying about the… Read more »

Billy 2Baulz
Billy 2Baulz
12 years ago

too funny. Let's all admit that land is worthless for growing food (who needs food) and we can then move on to getting everyone rich by building condos on the ALR. What's that cree saying about "only when the last river is poisoned, the last leaky condo built, and the last tree cut down, will mankind realize that you cannot eat money".

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  Billy 2Baulz

Or gold.

blueskies
blueskies
12 years ago

"farmland" they are not making it anymore…..

Ignore the Jackass
Ignore the Jackass
12 years ago

Theres a letter from a realtor in the Province today about just this issue: Opening up the ALR so we can build millions of new condos at affordable prices!

http://tinyurl.com/39null

scullboy
12 years ago

Interesting. Let's parse: Essentially he's not complaining not about supply and demand. He's complaining about price. Vancouver's RE market is now priced to where first time buyers can no longer purchase a place, *ANY* place at current prices. The last of the couples willing to buy a 515 sq ft condo at the absolute outside of affordability has been squeezed out of the system. So, what we have here is confirmation that the RE market has lost any tether to local fundamentals. Speculators won't trade one condo for another of equal value, at least not forever. Demand for condos people want to live in (rather then speculate on) at current prices has finally dried up. This, ladies and gentlemen, is the top of the market. Sooner or later the people who own because "real estate always goes up" are going… Read more »

Ignore the Jackass
Ignore the Jackass
12 years ago

I'm going to disregard my own advice and respond. Is the gist of the 'supply of land' issue that the government can change a policy and WHAM! we've got a bunch more supply in the pipeline, driving prices down to 'affordable' levels? If that happens I feel sorry for the people that bought at todays 'unaffordable' levels.

Ignore the Jackass
Ignore the Jackass
12 years ago

Like the Nasdaq in 2000? Its a whole new paradigm!

krrish1
12 years ago

A former resident of Toronto,Ontario.

" I left Toronto becuse I figured the grass was greener in BC".

LAND USE

"but because urban planners and governments limit urban sprawl, according to the fourth annual report by a U.S. public policy firm called Demographia".

SUPPLY OF LAND

"There's "one clear conclusion: The affordability of housing is overwhelmingly a function of just one thing, the extent to which government place artificial restrictions on the supply of residential land,"

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  krrish1

Please don't believe everything you read in this "report". It is obviously funded by a lobby group that exists to give developers and others keen to make money in real estate something to back up their arguments when seeking approval, money, rezoning or whatever. You know, the same people who gave you the real estate bubble in the US, who profited from it and left the losses to others. They even have a banker doing the introduction! Stating that affordability of housing is a "function of just one thing", is simplistic. Claiming that urban planning and government "interference" places the biggest constraint on land supply in Vancover is a stretch. Clearly, the biggest constraint here is geographical. Based on this report, I've reached the "overwhelming" conclusion that people will pay more to live in warm places and larger urban centres.… Read more »

blueskies
blueskies
12 years ago

But come on people, its very simple math! If the numbers don’t add up they don’t add up.

the RE spinmeisters will suggest the equity appreciation going forward will more than cover any deficit in the current cash flow……

scullboy
12 years ago
Reply to  blueskies

The problem is the math doesn't add up *now*, but the reason for the relentless optimism is that people have ALREADY bought in. They damn well better be optimistic! 🙂

Ignore the Jackass
Ignore the Jackass
12 years ago

All I see is a market based purely on psychology, when the psychology changes the market changes. The amazing thing is the resiliance of the local psychology as housing markets go down around the world. I guess there is a lot of dope in Vancouver and that tends to affect judgement and awareness.

But come on people, its very simple math! If the numbers don't add up they don't add up.

NO
NO
12 years ago

he will endeavor to tell bears the truth there is no body else can see the crash other than krrish himself keep on holding the tail of flying bull.hey krrish she want you to stick around you tard/retard stay here i will cheer up for you.

scullboy
12 years ago
Reply to  NO

Wasn't krrrish's big thing "UP UP UP FOREVER" just a couple of months ago?

And now, its only krrrish can see the crash?

I assume that's because he's fallen off some kind of cliff….

Drachen
Drachen
12 years ago
Reply to  NO

He's calling himself a retard? At least we're getting through to him on one front.

scullboy
12 years ago
Reply to  NO

On the other hand he's referring to himself in the third person. And he's referring to the tail of the bull.

I think he's blown some kind of circuit.

ulsterman
ulsterman
12 years ago

Can people PLEASE stop rising to Krrish1's baiting tactics! Hit the PgDn key and be done with him.

Drachen
Drachen
12 years ago

Freako

"If price relative to value gets out of line, and the market wakes up to this fact, NOTHING can stop the realignment."

In this case I think the market will not wake up, there will simply be an easing of the money supply (mostly on the banks' side of things).

patriotz
patriotz
12 years ago
Reply to  Drachen

The market wakes up when it runs out of buyers. It's that simple.

sheeplessinvancouver
sheeplessinvancouver
12 years ago

"The mortgage specialist says old strategies such as debt consolidation coupled with a 40-year mortgage, a relatively new product, are allowing more buyers into the real estate market."

Really scary. Consolidate your debt with us and we'll lend you the money for a mortgage.

The numbers don't make sense to me either. To start with they're comparing renting an apartment owned by a slumlord to buying a high end condo or small house.

The woman is 24 years old. My parents were in their mid-30s before they bought their first house. Why do 24 year olds feel compelled to get into the real estate market?

And who paid 24 hours to publish this?

Tony Danza
Tony Danza
12 years ago

Yeah my folks were mid 30's when they bought in the early 80's, almost lost it all when rates went up. And they had two professional incomes! The 80's were a lean decade for many "homeowners".

sheeplessinvancouver
sheeplessinvancouver
12 years ago
Reply to  Tony Danza

Do you know why they bought then? Was there the same pressure to buy in case you were priced out of the market back then?

I returned to Vancouver in '81, was shocked by the housing prices (they tripled in the two years I'd been away), figured I was priced out of the market forever, but didn't worry because owning a place didn't seem to be an issue for those of us in our twenties. Turned out I wasn't priced out forever anyway.

It would be interesting to hear from those who did buy back then. Especially interesting would be the reasons they did so. A growing family? Peer pressure? Speculation?