Housing market has big cracks
Don sent in this link to yet another housing bubble warning in the mainstream media – there seems to be more and more of these lately. They compare the two arguments for and against the case that we’re in a housing bubble. The no bubble side seems to rely on a “magic armour” defense:
Arguing for the armour case in a new report for the Federal Reserve Bank of Cleveland, University of Western Ontario economist James MacGee says the main reason Canada’s housing market hasn’t gone bust is because of much sounder lending practices. An explosion of subprime and high-risk mortgages, rather than merely low interest rates, was the primary reason that U.S. prices boomed and then collapsed, according to Prof. MacGee.
The result is that Americans took on too much debt, relative to the both the value of their homes and their incomes. That left them highly vulnerable. They bought homes they couldn’t afford, leading to an inevitable spike in delinquencies and tumbling prices.
So Americans bought homes they couldn’t afford by taking on too much debt. Are Canadians taking on too much debt? Carney seems concerned lately about the high levels of Canadian household debt, which recently hit 145% – higher than the American level.
The counterpoint argument is covered by economist David Rosenberg:
..in a recent Globe and Mail column, economist David Rosenberg, chief strategist at Toronto-based Gluskin Sheff + Associates Inc., raised the spectre of a Canadian housing bubble that is on the verge of collapse. He figures prices are 15 to 35 per cent overvalued, based on relative rental rates and incomes.
Canadians should pay attention. Mr. Rosenberg, a former Merrill Lynch economist, was among the first on Wall Street to warn of a housing-led recession in the United States. He knows what a housing correction looks like.
Homes are now less affordable in Canada than they’ve even been, relative to income.
That’s less affordable across Canada as a national market, the Vancouver market is leading the pack when it comes to being ‘out of sync’ with rent and incomes. Whether the root cause is risky lending or low interest rates, it seems the situation in Canada is similar to where the US was just a couple years ago. If I drive a mile to run head first into a wall, does it really matter which route I take?
UPDATE: On a similar note I see that Merrill Lynch has just issued a bubble warning as well:
RSS 2.0 comments feed. leave a response, or trackback from your own site.
1
X
Don Lapre Says:
December 15th, 2009 at 10:04 am
First!!!!!!!!
2
X
VanCityGuy Says:
December 15th, 2009 at 10:06 am
Not to offend anyone…but does anyone else see the similarities between the “no bubble” and the intelligent design crowd? Both just seem to cram their fingers into their ears when you provide them with logical evidence otherwise and walk away smugly knowing that they are right because “things have always been this way”
3
X
Anonymous Says:
December 15th, 2009 at 10:12 am
what was the level of ownership in the US before they blew up? What is it in canada/vancouver now?
4
X
pricedoutfornow Says:
December 15th, 2009 at 10:16 am
If all this media attention to the bubble isn’t a warning sign, I don’t know what is. However, by October I’m sure we’ll be seeing those sob stories on Global and “Who could have known?” Cry me a river.
5
X
luc Says:
December 15th, 2009 at 11:30 am
Bubble or not (and as a future buyer I hope it is and it will deflate) – didn’t most of the financial analysts loose their credibility when they couldn’t predict the depth of the recession and the fall of major US financial institutions?
In particular about Carney and government officials – didn’t they loose credibility when they couldn’t predict the budget deficits, country-wise and province-wise? It seems hypocritical now to blame the public for acting irresponsibly when the government is giving mortgage loans for very low interest rates. They still have the means to deflate the bubble instead of employing cheap rhetorics.
6
X
/dev/null Says:
December 15th, 2009 at 12:32 pm
@luc: It seems hypocritical now to blame the public for acting irresponsibly when the government is giving mortgage loans for very low interest rates.
I don’t know if I agree with that. People should still act responsibly when accumulating debt. Just because someone offers me something for a low entry price doesn’t absolve me from considering the lifetime costs.
7
X
blur Says:
December 15th, 2009 at 12:41 pm
I don’t know if any of you listen to David Ramsey’s radio show, but I listen to it sometimes and hear all these callers who are drowning in debt because of $200k in mortgages (interest is tax deductible) and $20k in credit card debt.
Here in Canada, people borrow $300k+ (not tax deductible) without even blinking an eye. I’m not sure how much debt people are carrying here, but I have a good picture of what’s ahead of us next year.
8
X
Purp Says:
December 15th, 2009 at 12:55 pm
The government is essentially trying to provide what most people want, access to home ownership and a stable (ie rising) housing market, through insuring relaxed lending standards and manipulation of interest rates. It’s clear they’re also aware of the difficulty of achieving this and the potential of bubbles forming, but to reverse course is not at all politically palatable (even the opposition isn’t interested, as witnessed by McCallum’s remarks in the G&M). It seems it’s almost up there with health care as sacred!
I too wish for some sanity to return to the RE market, but I just don’t see the government being a positive catalyst for change at this point. If anything, a drop in RE values will further re-inforce their need to try and prop it up (like the US) due to public pressure.
If and when this sucker collapses, it will be under it’s own weight, not some informed rational policy decisions.
9
X
logic Says:
December 15th, 2009 at 1:21 pm
/dev/null Says:
December 15th, 2009 at 12:32 pm
@luc: It seems hypocritical now to blame the public for acting irresponsibly when the government is giving mortgage loans for very low interest rates.
I don’t know if I agree with that. People should still act responsibly when accumulating debt.
————————-
One has to remember that 90% of the public are idiots. Part of the government’s job it to restrict their natural idiocy, not aid and abet it.
10
X
Another Take Says:
December 15th, 2009 at 1:42 pm
Yes, but apparently these “idiots” realized some gains, and these so-called idiots if they bought early enough have enough to retire on. Just saying, even if they are an idiot by all conventional standards, many have made more money that the smartest bears…
And are they idiots for listening to people who said RE only goes up, or are they smart because they failed to listen to bear advice which has been predicting the end of this “bubble” since 2004….and its now almost 2010….
You can call them idiots IF this “bubble” that has defied logic every bursts…until that happens they are still ahead of those on the sidelines…
11
X
logic Says:
December 15th, 2009 at 1:50 pm
10 –
The “idiots” U was referring to – clearly, from the context of this thread – are those who are over-extending themselves due to the current CHMC-back boom. For you to suggest I was referring to those who bought early in the boom and who have sensibly sold up (I assume that is what you meant by “realised some gains”) is disingenuous. Next strawman argument please.
12
X
patriotz Says:
December 15th, 2009 at 2:00 pm
@Another Take: @Another Take:
People who bought in 2005 or later weren’t smart. If they sold at a gain – and remember it’s only a gain if you become a renter or buy a cheaper property – they simply passed on the hit to someone even less smart. If they still own the property, they have lost money compared to someone who has rented, and they will continue to lose money until and unless they take advantage of the opportunity that still exists to find a greater fool – a opportunity that will evaporate soon.
13
X
Anonymous Says:
December 15th, 2009 at 2:02 pm
“Yes, but apparently these “idiots” realized some gains, and these so-called idiots if they bought early enough have enough to retire on. Just saying, even if they are an idiot by all conventional standards, many have made more money that the smartest bears… ”
And the people who invest early in Ponzi Schemes also make a killing. The ones who get in late however, lose their shirts …
14
X
Purp Says:
December 15th, 2009 at 3:52 pm
“People who bought in 2005 or later weren’t smart”
– I’m not sure I agree with this statement,
If I bought a house for $400K in 2005 (say in E. Van) and mortgaged $375K, spent $4K a year for tax and maintenance then I would have spent about $100K in interest and upkeep, or $1600 / month. You certainly couldn’t rent a similar place for less than that. So your costs are roughly the same.
In addition your ‘investment’ has seen spectacular returns over those past 5 years, especially with the power of leverage. This is more than you could have ‘made’ betting on the markets. Of course it’s not real money until you sell, but that’s true of any investment. For this to have been a losing proposition, prices need to return to 2005 levels, when do you think that will happen? Maybe another 5 years? So you’d have to rent for at least 10 years to see any financial benefit. If you don’t mind renting then it’s no big deal, but lots of folks value all the intangibles that owning provides.
Has the situation deteriorated since 2005? Absolutely, but not everyone who’s purchased in the past 5 years is dumb.
15
X
Another Take Says:
December 15th, 2009 at 4:29 pm
You opened up the pandora’s box now Purp. None of the bears want to hear that buying was smarter than renting or that it will be another 5-10 years before they are ahead of those “idiotic buyers.”
16
X
nonymouse Says:
December 15th, 2009 at 5:24 pm
Deciding to hit on a 18 in blackjack and getting a 3 doesn’t doesn’t make one smart just lucky.
17
X
patriotz Says:
December 15th, 2009 at 5:44 pm
@Purp:
I don’t think so.
Assuming a 3 year mortgage term, you would have been paying an average of about 6.5% on that $375K or around $2000/month just in interest. You should also include the opportunity cost on the down payment which you could have invested.
If you would like to present a scenario where your numbers make sense, here’s some data for you:
http://www.bankofcanada.ca/en/.....-look.html
Every realistic analysis I’ve seen shows that we have not seen rent equivalence since the market bottom in 2000-2001.
18
X
ta da Says:
December 15th, 2009 at 5:44 pm
I’m no math wizard
If you bought a house in 05′ lets say mid point 540k and you owned it until today 740k that’s 200k profit or 37%
you have owned the house for 4.5 years.
37% divided for 4.5 years is 8.23% per annum assuming you have no bills.
What are the bills? I’ve owned homes before and 4k per year all in is about 50% light.
Taxes
House insurance
Capital costs avg/year
8k per year X 4.5 years = 36k
So 200k minus 36k = profit of 164k or 6.75% per annum
Transaction costs ie RE fees, closing costs etc. on a 740k house = 20k?!?
So 164k becomes 144k or 5.92%
What is the cost of capital for 540k for the last 4.5 years … stats canada says 5.8% on july 1st 2005 for a five year fixed term. At 5% (giving a break) a 550,000 mortgage’s monthly costs are 3198.83 are 38k per annum or 171k.
So 144k minus 171k = MINUS 27k
Am I missing something?
19
X
ta da Says:
December 15th, 2009 at 6:21 pm
I didn’t finish
I’m guessing you could rent this house for 2200/month or 26.4k a year 118.8k over 4.5 years. If someone could Time Value that 118.k and paid a one time payment at the beginning of the lease it would be less than 100k but lets make it 100k for simplicity.
So 540k minus 100k = 440k I can use to invest.
440k invested at 5% for 4.5 years gets you approx. 108k
So you’re pretty much even. If you rented your 540k becomes 548k (540 – rent or 100k + investment income or 108k).
If you bought your 540k becomes 513k if you sell (540k – 36k or bills – 171k or cost of capital on ENTIRE dollar value – 20k transaction costs).
Better hope the housing market keeps going up 8% a year and interest rates don’t rise. I don’t think I would make that bet.
20
X
Anonymous Says:
December 15th, 2009 at 6:21 pm
This just in.
They have discovered a land making machine downtown!!
http://www.vancouversun.com/Hi.....story.html
21
X
Anonymous Says:
December 15th, 2009 at 6:22 pm
This just in!
They have discovered a land making machine!
http://www.vancouversun.com/Hi.....story.html
22
X
Anonymous Says:
December 15th, 2009 at 7:18 pm
http://www.vancouversun.com/bu.....story.html
23
X
Bizznitch Says:
December 15th, 2009 at 7:41 pm
@ta da: @ ta da
your calculations make sense ( I assume the math is correct, I didn’t verify it) but you can’t compare those two cases because in the first case ( when you buy ) you assume that you have to borrow the whole amount ( 540k ) while in the second case you assume that you have the money to invest. So if you make the same assumption in both cases ( that is you don’t have the money) you will end up with -27k if you bought compare to -118k if you rented. If the assumption is that you do have the money then you will end up with 144k if you bought compared with -8k if you rented.
24
X
Another Take Says:
December 15th, 2009 at 8:05 pm
Thanks 23 – As I said, those “idiotic” buyers are ahead of those sideliners….
25
X
!(EconomicsDegree) Says:
December 15th, 2009 at 9:03 pm
As mentioned, you only make money if you sell and don’t re-invest it into another house. Until you plan to sell you cannot claim a return free and clear.
Add in depreciation — around $5K per year — and then adjust for risk to be more fair. You need to compare returns of similar risk or adjust for it somehow. There are risks with home ownership that won’t show up in most peoples’ experiences but they reduce aggregate returns across all investors.
26
X
VRENGD Says:
December 15th, 2009 at 9:12 pm
Vancouver Real Estate never goes down. We have had a 10 year bull run. We will have another 10 year bull run. Why not? The same dynamics that propelled RE for the last decade will just continue for another decade. The government wants it to happen, banks want it to happen, the Bank of Canada wants it to happen, RE Agents want it to happen, developers want it to happen, the majority of the Canadian people want it to happen. Therefore, it will happen.
What can stop it? Nothing. All reasons to the contrary given on this blog have proven wrong. I have one word for you: up.
27
X
Absinthe Says:
December 15th, 2009 at 9:36 pm
$1600 / month. You certainly couldn’t rent a similar place for less than that.
I just started a rental this summer: a 4 bedroom 2 level suite in a SFH for $1400. I had a good deal more than one comp to look at, and I looked all over the city, and it was really only Kits/Dunbar/Kerrisdale/Pt.Grey that had nothing in that range.
Now, our place isn’t top o’ the line with granite and soaker tubs – but nor were $400K houses in E. Van in 2005. It is a solid old house for living a life, not a lifestyle, in.
28
X
observer Says:
December 15th, 2009 at 9:45 pm
One way to compare renting versus buying is to simply forget about the financing and pretend you are someone with 540K cash who wishes to invest it for 5-10 years (a person who needs financing will have to pay more due to interest, but if you can show that the person who buys with cash doesn’t break even, then the person with financing won’t either).
Either you invest in property that you live in, so you don’t pay rent but have to pay maintenance and property taxes. Or you invest 540K in say bonds and pay rent. If you buy, you could either gain in price appreciation or lose in price appreciation after the period of comparison.
You can run this through various periods throughout our RE history to compare buying versus renting.
But to predict what will happen in the future requires an extra input of expected price appreciation. Unfortunately, this is the crucial piece which can swing conclusion quite arbitrarily one way or another. There are many rent versus buy calculators, but they are ultimately only as good as the accuracy you have in estimating price appreciation (which is not good because price appreciation is unpredictable). People will have confirmation bias and plug in what they would like to see as price appreciation plus or minus some.
A better way is to pretend you are someone with 540K cash and you are deciding between buying and renting but never selling. This leads to what is called the fundamental value. It has some shortcomings, but over long periods of time, assets return to fundamental values or else the system will break down (it’s kind of like saying how big can you blow a bubble – it depends, but there are physical limits to how big it can get and the natural size is correlated with the fundamental value over long periods of time).
29
X
observer Says:
December 15th, 2009 at 9:49 pm
@VRENGD: US Real Estate never goes down. We have had a 10 year bull run. We will have another 10 year bull run. Why not? The same dynamics that propelled RE for the last decade will just continue for another decade. The government wants it to happen, banks want it to happen, the Fed wants it to happen, RE Agents want it to happen, developers want it to happen, the majority of the American people want it to happen. Therefore, it will happen.
What can stop it? Nothing. All reasons to the contrary given on this blog have proven wrong.
I have one word for you: DOWN.
30
X
spectrum Says:
December 15th, 2009 at 9:52 pm
@ta da: 37% divided for 4.5 years is 8.23% … Am I missing something
Yeah basic math skills. 37% in 4.5 years is not 8.23% APR. I was going to be really mean but I’ll be nice and suggest you try and develop your math skills and be more careful. The actual number is 7.2% which helps the point you are making although your other errors destroy it.
patriotz Says: Assuming a 3 year mortgage term, you would have been paying an average of about 6.5%. You would have to have the worst credit rating in history to be paying 6.75% at any point between 2005 and now. Understand no one pays the advertised rate on a mortgage you will always get at least 0.5% lower maybe more if you have good credit.
The simple fact is someone who bought in 2005 is miles ahead of someone who rented since then. If you can’t accept that as a fact you are as out to lunch as the people you are arguing with.
31
X
Arwen Says:
December 15th, 2009 at 10:35 pm
@spectrum: Only if they sell. You have to sell to realize the gain.
As a renter, I am substantially ahead in terms of what I can afford to live in, with enough left over to invest.
32
X
stagnate Says:
December 15th, 2009 at 10:50 pm
a lot of complex methods of calculating real estate- investment wise, but like observer says you can keep it simple and calculate out the percentage return as if had paid full price cash. generally when real estate yields are similar or better than gic’s real estate will do ok. these are strange times now so i wouldn’t count on the correlation being strong currently. at the top of the 81 boom/bust gic’s were going at 20%, while real estate was yielding 2-3. government induced credit crunch.
33
X
Roast Beef Says:
December 15th, 2009 at 10:58 pm
The simple fact is someone who bought in 2005 is miles ahead of someone who rented since then. If you can’t accept that as a fact you are as out to lunch as the people you are arguing with.
Nonsense! Your ‘fact’ is full of tunnel vision! I’m a renter and my investment portfolio has done very well. And, I change investments regularly so I don’t get emotionally attached to an asset that can’t be disposed of readily and who’s perceived value is only really tested on the day I sell (and although it may be perceived to be worth lots today, that doesn’t mean anything when you have to sell it next year at a significant loss). You could make a similar argument for my investments, except, I didn’t purchase at obviously inflated values, and I can make adjustments to my portfolio daily if necessary in order to protect the principal. Try doing that with a moldy yeast (sic) side dump. RE may have gone up a lot this year, but that was after a big drop last year. So over the last 18 months RE hasn’t actually gone up in Vancouver. When you deduct 18 months of inflated mortgage payments, interest, maintenance and taxes from the spring 2008 value, your 2005 investment doesn’t look as good, meanwhile my investments returned an average of about 24% per year over the entire period from 2005 to end of Nov 2009. Even with paying capital gains taxes and without leveraging my investments, I’ve done pretty well, and when RE tanks, and it will, all those that did leverage their RE purchase (which is anyone with a mortgage) will be hooped when the bankers come calling! Then, I’ll be the landlord (except I won’t because then, like now, I don’t want the hassle of owning a dump and having a single investment portfolio).
34
X
stagnate Says:
December 15th, 2009 at 11:07 pm
roast: keeping it simple-the majority who bought in 2005 has been pretty much cash flow neutral and seen nice paper gains. no need to expand beyond that.
35
X
Purp Says:
December 15th, 2009 at 11:11 pm
“Assuming a 3 year mortgage term, you would have been paying an average of about 6.5%” — I don’t where that rate came from, it must be the posted rate? We locked into a 5 year fixed at 4.54% in 2004.
“You should also include the opportunity cost on the down payment which you could have invested.” — OK, so let’s say 10% on 25K would have made me what, about 15K? This is versus what…about 250K in owning the home? It’s possible that may all evaporate if the bubble deflates, but it also may not.
“If you bought a house in 05′ lets say mid point 540k and you owned it until today 740k that’s 200k profit or 37%” — To be honest I don’t really follow this example. Are we talking buying with 540K cash or mortgaging the place? Big difference in terms of rate of return. Your mortgage costs of ~$3100 / month must be also including principal repayment, which I don’t think you’ve accounted for.
“I just started a rental this summer: a 4 bedroom 2 level suite in a SFH for $1400.” — Sounds like a good deal. But are we talking a suite here or the whole house? I’d challenge you to find a decent whole house rental in E. Van today that’s less than 2000K.
36
X
Purp Says:
December 15th, 2009 at 11:13 pm
Stagnate: “keeping it simple-the majority who bought in 2005 has been pretty much cash flow neutral and seen nice paper gains. no need to expand beyond that.”
- Nicely summarized. Those who bought in 2008 or 2009, well that’s another story.
37
X
Anonymous Says:
December 15th, 2009 at 11:15 pm
@stagnate: I want to know what Roast is investing in to get 24% APR over a period of time while the DOW is flat, the S&P has gotten about 4% and Warren Buffet is running a bit under 5% APR. You are either taking insane risks or flat out making stuff up.
38
X
stagnate Says:
December 15th, 2009 at 11:24 pm
he may have been successfully cycling in/out of metal/resource stocks, the volatility in those sectors over the last 18 months makes the real estate market look boring.
39
X
Anonymous Says:
December 15th, 2009 at 11:30 pm
@stagnate:he may have been successfully cycling in/out of metal/resource stocks, the volatility in those sectors over the last 18 months makes the real estate market look boring.
Like I said either taking insane risks or flat out making stuff up.
40
X
Anonymous Says:
December 16th, 2009 at 12:52 am
@Another Take:
Sorry to say, every one who bought is dumb. No exceptions. Taking on high risk is dumb. Just because it looks good so far doesn’t make is smart. Betting your entire fortune and borrow as much as you can to play blackjack is dumb, even if you come out on top. Dumb is dumb. No exceptions.
41
X
rp Says:
December 16th, 2009 at 2:00 am
#40 @Anonymous: Don’t be silly. Take a look at the Teranet graph. In 1999 the market was low, in 2002 it was looking good, and in 2003 it was heating up. But that’s not a reason to stay out if you’re buying for the long term with sound financials. Most people weren’t over-extended at that time.
If you were already in the market when the bubble started, there were a lot of good ways to take advantage of it. If you were advancing in your career, you could keep debt proportional to income while trading up into nicer houses further away from high priced areas. You come out massively ahead. Or if you were older and already had a big house, you could trade down and come out debt-free with a big chunk of change. Neither strategy had much risk.
The risks were taken by first time buyers and anyone who substantially increased their debt relative to income, including many “investors” and many middle class people who feel that home ownership has made them millionaires. In any case, when making major life decisions one should be aware of large macroeconomic trends. The artificially low interest rates were easy to see in 2003, and the housing bubble was an easy call in 2005.
I personally remember lots of people jumping into real-estate in those times, while others made profits comparable to annual salaries after only 2-3 years. Now we have this monster bubble which our society seems intent on feeding everything to. The wealth of an entire generation 25-40 has been swallowed up. A huge chunk of their lifetime earnings are committed and have been spent. Furthermore, there is nobody to follow this age group as youth unemployment is very high. Lots of 20 year olds have skipped education as the costs for that have risen even faster than housing. A free money mentality now prevails.
What kind of future hellhole awaits us? Seriously. The way I see it, most of the baby boomers can’t or won’t retire. Some have no savings. Others want to maintain their standard of living. What about the 25-40 group? Expect to have the same boss in 20 years. What about the under 25 group? Compete with visibly aging boomers for menial jobs. I think the only way to get ahead will be to be your own boss. Maybe that’s been true for a while now, I just hadn’t been contemplating it as much.
42
X
realpaul Says:
December 16th, 2009 at 2:04 am
Golly Gee, they give away free money and only 70% of Canadians take it? Man, there is a lot of dumb people out there. I’m sure the government was shooting for 100%. Whats wrong with you people? Don’t you want free money?
http://www.vancouversun.com/bu.....story.html
Terrible headlines in todays finacial section of the Guardian this morning. Inflation has shot over the ‘expected target. No way!!!!!!!!!!!!! How can free money flushing the sewage out of the banking system create inflation?
43
X
Absinthe Says:
December 16th, 2009 at 2:35 am
Sounds like a good deal. But are we talking a suite here or the whole house? I’d challenge you to find a decent whole house rental in E. Van today that’s less than 2000K.
It’s a suite – 2 floors, but there’s a basement “helper”, too, and it is similarly inexpensive.
But in 2005 we were priced out of anything comparable to this place in terms of size, yard, quality, and location, even if we stretched and ceased our (smallish) payments into our other investments. We were priced out then on all SFHs and townhouses in Vancouver, with any sensible debt to income measurement.
And we were priced out with $25K saved to put down, and we considered the possibility of a mortgage helper. But after taxes, it stopped making sense again.
It doesn’t make a lick of sense to me to cease paying into RRSPs and RESPs in order to cram a family into an 800 square foot, badly laid out nightmare, in order to “own” a square box of glass in the sky that might leak and cause special assessment and will no doubt go through tedious Christmas wreath permission related strata policy meetings. Yuck. No thanks. Rather give myself paper cuts and pour lemon juice in ‘em.
We’re just trying to raise a family – not to make a million unearned bucks with savvy RE flipping. We’re a young family of average income, working to pay off those student loans and put a little nest egg by… but wanting not to kill each other in the meantime.
For me, this is the final point. Those with lots of money can play tradsies on property indefinitely, and the price can go up and up – I’ve been watching that. But it’s gotten really sad. As the years go by, the difference in quality between what we can afford to buy (we’d stretch, now, for a 1 bed in Port Moody) vs. what we can rent (a 3 or 4 bedroom suite in a SFH in Vancouver with yard and storage) keeps growing, with all the “quality living space at a decent price point” showing up on the renting side.
To me the value of a house is as a place to live.
So anything this wildly out of step, and y’all can have it…
44
X
domus Says:
December 16th, 2009 at 10:24 am
Rents dropping in the US:
From the BLS report on the Consumer Price Index this morning:
The index for all items less food and energy was unchanged in November after rising 0.2 percent in October. The heavily weighted index for shelter, unchanged in October, declined 0.2 percent in November. Within the shelter group, the indexes for rent and owners’ equivalent rent both declined 0.1 percent and the lodging away from home index fell 1.5 percent.
Of course, Vancouver is different, better and rents will never fall. Just saying……
45
X
rp Says:
December 16th, 2009 at 10:38 am
Denninger’s reaction to Vancouver prices is hilarious:
http://market-ticker.org/archi.....rview.html
46
X
DaMann Says:
December 16th, 2009 at 10:51 am
Whoever said “hitting on 18 in blackjack and getting 3 is just plain lucky and by no means smart” is brilliant.
For me that sums it all up. All these people running around saying you were an idiot not to buy in 2005 miss the point. If you couldn’t afford to buy a place in 2005 why buy one now? Absinthe makes a great point about LIVING. Some people have to live, have families, and gasp, have to save and buy things on their own while raising a family. This has been utterly lost in Vancovuer over the last few years. No one gives a toss about living or raising a family. It’s alll about cramming yourself into shoeboxes to make money!
I’m tired of all the people who were “brilliant” for flipping a 3 on the hit, soon, very soon, all these idiots will be flipping 4’s on their 18 in hand, and I won’t shed a single damn tear.
47
X
Arwen Says:
December 16th, 2009 at 11:22 am
@rp – Good link.
But what the heck is BNN’s price to income graph representing?
48
X
Anonymous Says:
December 16th, 2009 at 11:28 am
So the two hi rises going up in teh West End are not new land?
Maybe they are being built on a bubble and not land?
“Although surprised by the rapid return of multiple bids, Royal Le Page real estate agent Monte Hannah said there is no magic behind the city’s perennially high house prices. It’s simple supply and demand economics, and limited building space.
“There is no more land to develop in Vancouver. We have even developed all the parking lots downtown,” he said.”
It’s amazing!
49
X
Purp Says:
December 16th, 2009 at 11:30 am
One of the things that the bears on this blog always point out is how they’re basing their analysis on rational thought and careful analysis and bulls are just shameless hucksters run on emotion. In most cases I’d agree that’s true, as the market is clearly out of whack, driven by greed, and getting crazier by the day.
But the bears have lost the plot a bit. Making statements that all people who bought in 2005 are dumb and this was somehow the same as a reckless bet in blackjack is just not true. I’ve shown a scenario where in fact you would be cash flow neutral having bought in 2005 vs renting, and it gets shouted down with howls of protest and faulty math. What gives? Is this what passes for careful analysis now? Pretty sad.
50
X
Anonymous Says:
December 16th, 2009 at 11:56 am
@Arwen: I assume that it refers to standard deviations away from the mean price/income ratio over the whole period. So a value of zero would refer to the average over the period.
The graph still looks weird, however, since (if my assumption about the measure is correct) we were about 0.75 standard deviations below average as recently as 2008. This would seem absurb, until you consider the starting point of the graph-1980–which was well into a cyclical peak in real estate. Which once again serves to demonstrate that one can lie with statistics just as easily as with words.
51
X
rp Says:
December 16th, 2009 at 12:23 pm
@Arwen: I think they just subtracted 3.
52
X
rp Says:
December 16th, 2009 at 12:26 pm
Actually, I have no idea what they did. I think this is somehow an “affordability” index, related to interest rates, etc.
53
X
rp Says:
December 16th, 2009 at 12:32 pm
This is getting too good: Crisis? What crisis?
http://www.vancouversun.com/Gl.....story.html
Maybe it’s the one where 35 year olds are bidding 8x annual income to buy a shoebox, because they can’t borrow 30x to buy a house.
54
X
patriotz Says:
December 16th, 2009 at 12:32 pm
@Purp:
No you haven’t. You’ve just pulled some numbers out of the air. Show us price, rent, taxes, and mortgage rates for an actual property and we’ll start listening.
The reason I don’t take you seriously is that I was involved in the market in 2004 and I could see that buying was more expensive than renting even then.
55
X
YouCouldBeWrong Says:
December 16th, 2009 at 12:35 pm
Imagine how pissed off all you bears will be in 10 years when all your wild predictions of a big crash once again do not materialize. It’s completely possible the bull run will continue for another decade bears and you know it deep down. It’s time to put up or shutup. If you can’t take the heat get out of the kitchen. Be like scullboy and give up.
56
X
patriotz Says:
December 16th, 2009 at 12:41 pm
@Anonymous:
No it can’t be that, because the real price peak in 1981 (which was also the price/income peak) was not surpassed until 2006. Compare to the real price graph:
http://cuer.sauder.ubc.ca/cma/.....couver.pdf
Note that real incomes have been pretty much flat from 1980 to today.
That graph makes no sense to me whatsoever, particularly the peak in 1988.
57
X
Tsk Tisk Says:
December 16th, 2009 at 12:46 pm
55
Oh Supraboy…posting under another name because you have been kicked around hard a few discussions ago….keep the dream alive in your parents basement
58
X
gork Says:
December 16th, 2009 at 2:08 pm
YouCouldBeWrong, interesting point of view. What major factors do you think will keep the bull run going over the next decade? Asking since there are a lot of indicators for a major correction.
59
X
rp Says:
December 16th, 2009 at 2:25 pm
@YouCouldBeWrong: “If you can’t take the heat get out of the kitchen.” Huh? We are out of the kitchen. The kitchen appears to actually be on fire. By all means, keep cooking if you want to.
60
X
Purp Says:
December 16th, 2009 at 2:29 pm
@Patriotz: “No you haven’t. You’ve just pulled some numbers out of the air. Show us price, rent, taxes, and mortgage rates for an actual property and we’ll start listening.”
— Oh come on, do I need to provide an actual address to make the numbers believable? Like I said, an average house in E. Van was ~400K. Taxes ~2K. Maintenance ~2K. 5 year fixed ~5% (Interest payments ~87K over 5 years). Rent ~1500-2000K for comparable house rental. Total carrying cost: 87,000 + 5*4,000 = $107,000 or ~$1800 / month. So it’s pretty much a wash with renting, with a slight advantage one way or the other, depending on assumptions used. Which numbers do you think are pulled out of thin air and wrong enough to change the overall analysis significantly?
“The reason I don’t take you seriously is that I was involved in the market in 2004 and I could see that buying was more expensive than renting even then.” — That’s a silly statement, because YOU couldn’t find a deal that worked for you, that means there were no deals that worked for anyone? Total rubbish. A lot of us were in the market in 2004/05 who found deals that worked out well based only on cash flow.
61
X
Rent-o-rama Says:
December 16th, 2009 at 3:20 pm
If one assumes that people who invested in 2004 were “smart” – i.e. have broken even on a cashflow basis and that they now have large paper gains – then doesn’t it follow that the these same “smart” people are the ones who are now selling to the “dumb” ones who are buying? Wouldn’t that be what a smart investor would do (i.e. crystallize their profit)?
If this is happening, then who do the “dumb” buyers of today sell to in 2 years? Are there even dumber people out there? Is there a never-ending supply of dumb people?
Just wondering…
62
X
Absinthe Says:
December 16th, 2009 at 3:42 pm
I have an appointment to speak to my MP tomorrow about CMHC. I wrote an email and got invited to the constituency office. I suppose some politicians are more responsive than others!
63
X
VRENGD Says:
December 16th, 2009 at 4:09 pm
“What major factors do you think will keep the bull run going over the next decade?”
The endless prosperity engineered by government manipuation of the markets. Interest rates will never rise. Mortgages rates will go down to 0.25 percent as the government buys bonds on the market (financed by BOC printing presses) to keep yields low.
Lower rates cause higher prices. When prices appear to stall at a 0.25 mortgage rate, mortgage interest will be made tax deductible. Prices will rise more.
When the price boost from interest deductibility peeters out, the Gov will dish out new buyer tax credits or other subsidies and prices will go up even more.
All the while, all the Gov printing will cause inflation, which will do its part to push prices up.
It is easy to see this taking 10 years to play out. The Gov is not out of bullets yet. Not by a longshot.
64
X
rp Says:
December 16th, 2009 at 4:10 pm
#61 @Rent-o-rama: “Are there even dumber people out there? Is there a never-ending supply of dumb people?”
Yes there are, but they appear at an insufficient rate. That’s why the bubble is unsustainable.
65
X
VRENGD Says:
December 16th, 2009 at 4:10 pm
But, hey, renting is fine. Nothing wrong with it. Just know that you will be waiting another decade to buy.
66
X
patriotz Says:
December 16th, 2009 at 5:22 pm
@Purp:
No it wasn’t, that’s what you would have paid for a teardown, probably on a substandard lot. I.E. the very bottom of the bunch.
Historically the average house in E. Van has sold for about the UBC (Sauder) benchmark. In 2005 that was about 500K. An independent data point is the REBGV benchmark for E. Van, which was $478,500 in June 2005.
http://www.rebgv.org/housing-p.....2005-06-01
67
X
Boombust Says:
December 16th, 2009 at 5:30 pm
I just heard Kevin Newman on Global say that Mark Carney is getting very worried, and is cautioning Canadians about taking on too much debt.
He’ll be reporting more on this on his show at 5:30.
68
X
Rent-o-rama Says:
December 16th, 2009 at 5:43 pm
@VRENGD:
I agree that one of the problems with looking at housing as a normal investment decision is difficult due to the massive government intervention in the markets. Basically, it is politically safe to try to keep housing prices inflated when 70^% of Canadians are “homeowners” (some say “debtowners’, but why quibble on semantics). However, I also see that massive government incentives in the US didn’t help their market recover. I also see rates in Japan having been at or near zero for decades and their housing is still half of what it was at the peak.Perhaps our politicians are smarter than in the US and Japan but I doubt it.
69
X
Anonymoose Says:
December 16th, 2009 at 5:53 pm
“It is easy to see this taking 10 years to play out. The Gov is not out of bullets yet. Not by a longshot. ”
I really do fear you could be right – from a fundamental standpoint things are grotesquely out of whack in Vancouver, and in Canada overall to a lesser extent.
All the same there’s obvious lack of trust in market fundamentals now by the Powers That Be – nothing can be allowed to fail, needed contractions can’t happen, etc. They may well game the system for years to come to prevent any corrections.
One of the few barometers I still kind of trust is POG – the price of gold is telling us that things are profoundly unwell (and that’s coming from a non-goldbug).
70
X
Arwen Says:
December 16th, 2009 at 7:59 pm
@VRENGD: For as long as renting means living in double the space at half the cost in a livable location, I’ll be perfectly happy not to buy. If that’s a decade, or two, or fifty, so be it!
71
X
rp Says:
December 16th, 2009 at 8:28 pm
#63 @VRENGD: The government already has a huge deficit, and the losses are coming for the CMHC. Borrowing to spend raises interest rates, at least for a small country like Canada.
72
X
observer Says:
December 16th, 2009 at 8:32 pm
@Boombust: This guy has a sense of humor. It’s hard not to laugh when a drug dealer sounds genuinely concerned and tells his clients not to take too much blow.
73
X
observer Says:
December 16th, 2009 at 9:59 pm
@YouCouldBeWrong and VRENG: In any bubble, there is that one person who pays peak price. Imagine how pissed off you will be to find out that person is you and that all your wild hopes of price gains start to fade again. It’s completely possible the price drops will continue for another decade. Bulls, you know it deep down inside it can’t last. Sure, we’ve had a great run, but it’s now time to sell or you’ll be waiting another decade before you can get rid of your properties. It is easy to see this taking 10 years to play out. The Gov is not out of bullets yet. Not by a longshot. The problem is that it has been shooting so many bullets that the gun is now jammed and is backfiring.
74
X
Purp Says:
December 17th, 2009 at 11:11 am
@66 Patriotz:
Look we can argue what $400K bought you in 2005, and of course it depends when in the year (it was increasing pretty rapidly), in what area, and the condition of the house. In my neighborhood, $400K bought you a decent (not updated) solid post war bungalow in mid 2005.
But anyways, lets use the benchmarks you linked to. The benchmark ranged from 430K in Jan to 523K in Dec of 2005.
Keeping our down payment at 25K, and assuming you qualified for a mortgage that large, the revised montly carrying costs (with above assumptions) range from $1900 to $2300. Again, rent for a whole house was around $2000. So it doesn’t really change the outcome that much, some deals were probably losers and some were winners, why can’t you just accept the facts?
75
X
patriotz Says:
December 17th, 2009 at 12:33 pm
You haven’t presented any facts. Just hypothetical numbers.
Here’s a fact for you. A whole house in E. Van for $1500/month:
http://vancouver.en.craigslist.....08362.html
Now either rents are the same today as in 2005, which means your estimated rent is too high, or they’ve gone down. Either way you’ve lost money.
76
X
Purp Says:
December 17th, 2009 at 1:09 pm
@Patriotz:
“You haven’t presented any facts. Just hypothetical numbers.” — I’m not sure what passes for ‘facts’ in your world, do they have to pass your ‘confirmation bias’ filter? Oh wait, here comes a fact…
“A whole house in E. Van for $1500/month” — A single data point from Craigslist, that’s your case? First of all, it’s listed as $1600/month, not $1500, so it’s an incorrect fact right off the bat, but that’s ok, not a big deal. Secondly, I’d bet dollars to donuts that this place is a dump at this price, not a ‘benchmark’ E. Van house. But of course there’s no further information provided about the place to verify. But since we’re trading facts, I did find a fact of my own for $2400:
http://vancouver.en.craigslist.....43795.html
“Now either rents are the same today as in 2005, which means your estimated rent is too high, or they’ve gone down” — So, let me get this straight, based on a single data point for a home we can’t verify as to age, size or condition, you are able to discern rental price trends for all of E. Van over the past 5 years. That is spectacular analysis of the facts and surely proves your assertion that everyone who bought in 2005 is dumb, how could I have not seen it sooner. I will humbly retract my shoddy ‘hypothetical’ analysis in favour of your elegant single data point. Well played sir, well played.