Royal LePage predicts falling prices
realpaul pointed out this Vancouver Sun article. The day after we got the news that house prices are falling in Vancouver, Royal LePage has released a market survey predicting house prices and sales will ‘decline towards the end of the year’.
However, he pointed out, “This should not be interpreted as a severe correction but rather a natural reaction to the market having peaked quite early this year.”
This outlook is at odds with the BCREA and CREA market surveys released a few weeks ago that predict flat or rising prices for 2010 and then falling prices in 2011.
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July 7th, 2010 at 8:34 am
Sign you’re in a bubble: only relative prices seem to matter.
July 7th, 2010 at 8:36 am
I think everyone is waiting for a massive crash. Its not going to happen (as much as I want it too). There is too much stimulus globally. Jobs are not bleeding anymore in the US. There will be a price reduction but nothing that can be called a crash…. IMHO.
July 7th, 2010 at 8:50 am
According to a balanced and well-researched piece in the New York Times, it will be a minor correction, not a downturn.
http://www.nytimes.com/2010/07.....r=1&hp
July 7th, 2010 at 8:53 am
@househunter:
Didn’t you get a memo from Oprah? If you want it bad enough, it WILL happen!
Just post a note about it on your fridge and star at it every morning.
Honestly, it is so funny to watch theses guys trying to save their asses…
July 7th, 2010 at 8:56 am
Wow…a new low for Real Estate advertising…desperate times people…
http://ca.news.yahoo.com/s/cbc.....rt_procura
July 7th, 2010 at 9:00 am
Househunter, these two articles might be of interest to you, especially regarding your comment about the US. Our Government has managed to prop up our economy with cheap credit but it can’t continue for much longer. If a full on depression hits the US which many are now forecasting Canada will not be immune.
http://tinyurl.com/22ujgvo
http://tinyurl.com/263fskz
July 7th, 2010 at 9:05 am
Is this for real?
http://globaleconomicanalysis......ysis+(Mish‘s+Global+Economic+Trend+Analysis)
July 7th, 2010 at 9:06 am
Actually this is the shorter link:
http://www.theglobeandmail.com.....le1629806/
Cannot be that fast of a drop… can it?
July 7th, 2010 at 9:15 am
@Newcomer:
This is the “Great Homes and Destinations” insert to the NYT which is an advertising feature. It’s obvious from the format, they’re not trying to fool anyone. Don’t confuse it with the editorial content. But it’s still an entertaining read:
Utter nonsense of course, if prices are too high relative to rents they have to come down, land or no land. Hong Kong saw a 50% bust in the late 90′s. Also Mr Corros’ description of Vancouver sounds a lot like San Diego, CA. Say no more.
July 7th, 2010 at 9:16 am
I hope you don’t mind me going back to last week, but here is a challenge from Gordon C:
“Jessie and VHB, I have laid out my arguments.
Okay show me. Show me how you can estimate a yield from a GRM.”
Not estimate–calculate. Here it is:
GRM = price/(rent/month).
Multiple denominator by one, expressed as (12months/1year) gives us price/(annual rent).
Invert this to get (annual rent)/price. That is the definition of yield.
So, to go from GRM to yield, you just divide by 12 and invert.
An example: GRM is 200. 200/12 = 16/667. 1/16.667=6%. Done.
To conclude, there is a direct mathematical relationship between GRM and annual yield. They both take the same inputs (rent and price) and express the same thing in different ways.
July 7th, 2010 at 9:18 am
@VHB: typo correction.
this line: An example: GRM is 200. 200/12 = 16/667. 1/16.667=6%. Done.
Should be:
An example: GRM is 200. 200/12 = 16.667. 1/16.667=6%. Done.
July 7th, 2010 at 9:20 am
@househunter:
Good points househunter. This is not your typical downturn. As long as Obama and Bernanke are in charge, America will do anything to prevent falling prices.
I expect more and more stimulus and quantitative easing. I’ve said that the government will tolerate a 20% decline in prices nationally (i.e. Toronto), Vancouver may be more or less by that point.
Anything in excess of a 20% decline would be met with significant fiscal and monetary stimulus. I expect the government will flood the streets with money, which might support nominal prices.
In real terms, house prices will collapse, one way or another.
July 7th, 2010 at 9:27 am
Let’s look at this from a historical perspective. Let’s compare 2008 to today’s market.
Feb to Apr 2008: Aside from the turmoil in the US Financial Sector and the realization that their housing market is in trouble, Vancouver’s real estate market seemed to have lots of momentum except inventory levels reached new highs.
May 2008 Sales start to slow and by in the next 8 months the overall average market prices drop ~15%.
Bank of Canada ie. the Federal Govt rolls out the lowest bank lending rates ever prompting our banks to decrease mortgage rates to new lows which saves our real estate market and here we are today.
Today we have higher bank lending rates and higher mortgage rates which despite the recent miniscule reductions are expected to continue to go up. We have much more tighter lending guidelines and the introduction of the HST to new home purchases.
Forgive me if I feel quite bearish given the negative influences acting on our real estate market. The sales data from the last 2 months seems to be reflective of the influence of these factors.
As a side note, I am a realtor and former banker and I have no illusions of Vancouver being different or special when it comes to fundamental economics.
July 7th, 2010 at 9:34 am
@Mike:
How did that work out south of the border?
I challenge anyone who claims that the Canadian government can make more than a token effort to support house prices to explain how it could work here when it couldn’t in the US.
Also note that any resurgence in consumer price inflation would be met by a bond market bust. What would that do to the RE market?
July 7th, 2010 at 9:39 am
@carlk: Thanks for contributing. On this point:
“Today we have higher bank lending rates and higher mortgage rates”
Mortgage rates have edged up by a miniscule amount. I am not seeing much to indicate that rates will rise as much as many economists are predicting because there is a chronic unemployment/underemployment issue. Until that is fixed rates will remain low.
Will house prices fall even with low mortgage rates? Absosmurfly.
July 7th, 2010 at 9:42 am
@Bigbadbear1:
What’s really disgusting is that they stole the line from the Friendly Giant.
Is nothing sacred?
July 7th, 2010 at 10:01 am
Question, does anyone know if the first laneway in Vancouver East that was features on Global TV news when it had its open house got rented for $1700? I’m not talking about our favorite one near Cambie & 21st Ave that’s still advertising on Craiglist.
The Chinese newspaper is reporting that it got rented for that much because it has high end kitchen and furnishing. However even with that I find it kind of tough to believe it would rent for $1700 when you can rent in DT, MetroTown, and other nicer area for the same amount. Just curious if anyone knows where the laneway house is and if it is actually rented for that much?
thanks.
July 7th, 2010 at 10:07 am
Hey Bear, this article disgusting. How long will bull dump and pump RE? It’s big conspiracy just like FIFA referee against team England.
Don’t they know only bear can call market drop? This article just sleazy codeword for ‘market keep going up’. When will CREA stop lying eh bears? Everyone except idiots knows that last month stats is sign of 50%+ crash. Even smoking toddlers can understand this.
Keep giving each other fake cars at fake inventory parties bears. Don’t forget cranteeny. I would like Audi R8 and apple cranteeny. Thank you.
July 7th, 2010 at 10:36 am
@Mike:
“I expect more and more stimulus and quantitative easing.”
That will only happen in the US as they have something called the worlds reserve currency.
For the rest of the countries, stimulus is finished.
Austerity is the name of the game.
July 7th, 2010 at 10:42 am
@Mike: America will do anything to prevent falling prices.
they are doing it already, so why have prices in so many of their markets collapsed?
July 7th, 2010 at 10:48 am
@The Pope: Isn’t it really about confidence (or lack of) in the US? The majority of people don’t see a home as a good investment anymore. That’s going to push prices down regardless of what the Gov’t does.
I wouldn’t be surprised if our market didn’t mirror the US exactly. If there’s a drop of 15-20% and the psychology hasn’t broken I think we could see support there with undulating prices within 0% to -20% for a few years (or maybe a slow grinding down). This short of any other external changes. If rates stay low, employment steady, then I think there might a lot more people jumping back in at 20% off. I hope not, but I think 2008 showed us anything is possible.
July 7th, 2010 at 10:50 am
OT: many people registered for a user account to claim their handle yesterday, but the automated confirmation system appears to have stopped working. I’ve updated that system and manually confirmed those that registered. Hopefully all new registrations will receive a confirmation email allowing them to activate their account from this point forward.
All new registrations need to confirm their email address to activate their account within 5 days to help prevent spam. VCI is anti-spam.
Anonymous comments are still allowed, but anyone can post using your name and your comment vote counts for 1 point instead of the 2 that registered users get.
July 7th, 2010 at 10:55 am
If you buy a place downtown, you don’t need a car because everything is so close. There are lots of great cafes and restaurant just outside your condo. Downtown is the place to be. It’s where the action is.
July 7th, 2010 at 10:56 am
Side by side properties….
http://www.realtor.ca/property.....Id=9661406
http://www.realtor.ca/property.....Id=9683896
July 7th, 2010 at 11:06 am
@patriotzed:
Anything in excess of a 20% decline would be met with significant fiscal and monetary stimulus.
…….
Why? With a drop of 20%, most people would hunker down and keep paying their mortgage. In some highly – over leveraged, bubbly location like Vancouver, a small number of idiots will lose dwellings that they have no equity in and couldn’t afford in the first place (just like the US). In the rest of the country, 20% of a significantly smaller original purchase price (compared to Vancouver) will not be significant and no-one will give a rat’s ass but would be pissed off if the Gov tried to bail out the morons that bought in Vancouver.
July 7th, 2010 at 11:07 am
@Girlbear: Huh? One built in 2001, the other in 2000? That seems unlikely.
“Buyer to verify all facts (if you’re weird and those matter to you).”
July 7th, 2010 at 11:09 am
@kwl: thanks.
July 7th, 2010 at 11:12 am
Real estate in the Gulf states is finished.
Tourism may be done as well.
http://news.yahoo.com/s/nm/us_oil_spill_realestate
July 7th, 2010 at 11:20 am
@patriotzed: The point is not that it would work here when it did not work in US, but that it will be tried here knowing it will not work, just like it was tried in the US knowing it would not work. It’s all about appearances. Politicians need to look good, and they can only look good when they are “doing something about it”. Sitting on their hands while an entire market segment collapses around them will not fly.
People talk about “black swan” events. The only black swan we need to worry about is sudden breakout of common sense and politicians doing the right thing.
July 7th, 2010 at 11:21 am
@Girlbear:
Decisions, decisions.
One is 950sf for $439K and the other is 847sf for $494K.
Pay more for less seems to be the correct choice. Being irrational is the vancouver way.
July 7th, 2010 at 11:27 am
@The Pope:
The American authorities never in their wildest dreams expected a property crash in the magnititude that was experienced. They let prices fall, until they crashed.
They were caught off guard by the crash, its causes and effects. They responded with ZIRP, QE, Fed asset purchases and the homebuyer tax credit. They also provided banks with enough liquidity to absorb real estate losses and put a moratorium on foreclosures. Like it or not, this pretty much stopped the decline in house prices. Home prices, by and large, stopped falling in the past six months.
The government has policy tools available to it to support prices and bring consumption forward. Like it or not. NOW – I completely 100% disagree with the government’s actions. We have structural imbalances in our economy, which need to be sorted out through a massive debt restructuring. Creditors must take losses. The best regulation is failure. The government is punishing the responsible savers who should be rewarded. The transfer of assets from the weak hands and poor managers to the strong hands and good managers should be well underway. The government is preventing Capitalism from doing its work…and I believe it will continue to do so until the system collapses.
Home prices in the US are falling again now that the government’s programs have expired. You are completely correct that prices are not supported by the fundamentals.
Let’s see what happens next. Paul Krugman wants a $15 trillion QE package. Do you not think this will elevate home prices?
Pope – I’ve read your comments. You know what you are talking about and your fundamental analysis is bang-on. Where we disagree is what the government will do and the effectiveness of those policies. I’m just trying to deal with reality.
The past two years should demonstrate that the government has tools available to it, that it is crafty and that its tools can be effective in supporting prices.
We need strong leadership and quite frankly I don’t think we’ve got it. The temptation to inflate, I fear, will be overwhelming.
July 7th, 2010 at 11:29 am
@Girlbear:
Nice find! I think I’ll take the larger one for less money, thanks!
The race is on…I can just see realtors cursing each other, calling each other up “How could you price it for less than mine? What are you trying to do, crash the market???” I’m starting to see more and more examples of this, my old neighbor is trying to sell her wreck of a house in Kelowna for around $400k (reduced from $429k) and suddenly a newer house pops up across the street listed at $339k. Lots of cursing going on I’m sure.
July 7th, 2010 at 11:36 am
@Devore:
Disagree. What on earth would the government gain by trying something that they know would not work?
I have said it before – IMHO the Cons will simply deny any systemic bubble, as they have been saying all along. Toronto and Alberta may well deflate slowly enough that they can get away with it. They got away with it in 2007-2008 when Alberta dropped 20%. As for BC, the rest of the country simply considers this province to be a bunch of idiots who will get what they deserve.
ALL attempts in the US to prop up house prices are to prevent banks from going under. The banks here already have their mortgages guaranteed, so there is no reason the government to attempt the same here.
July 7th, 2010 at 11:41 am
@D. Bone:
I didn’t say that, Mike did.
As I said, I think the Cons will simply ignore falling house prices as they did in 2007-2008.
That’s not to say they won’t take action to deal with the general economy. But I don’t think they will explicitly target anything to house prices, since they have denied all along that there has been a bubble and the last things the Cons will ever do is admit that they were wrong.
July 7th, 2010 at 11:46 am
“Disagree. What on earth would the government gain by trying something that they know would not work?”
votes?
July 7th, 2010 at 11:48 am
@Purp1:
No it’s not about “confidence”. Prices fell in the US, and everywhere else, simply because they were too high relative to prices and incomes.
And in fact prices in most US markets are still above historical norms, for example very much so in Seattle, so in fact “confidence” in RE must also still be above historical norms.
July 7th, 2010 at 11:57 am
When Royal LePage admits decline, it actually mean crash of 50% in the Greater Vancouver Area. Its going to get real ungly in the coming months.
July 7th, 2010 at 12:03 pm
@Girlbear:
So I looked up the 2 listings. From what I could find, the 439K one was originally listed on June 22 at 498K. That’s a big haircut in such a short period of time. A seller coming to realizatoin or just desparate? Maybe both. But actions like this will send a ripple across the pond real quickly.
July 7th, 2010 at 12:06 pm
@Mike: “Like it or not, this pretty much stopped the decline in house prices. Home prices, by and large, stopped falling in the past six months”
Do you think the government can permanently keep house prices above their fundamental value with their policies? I don’t think they can and I don’t think the government does either.
The US’s policies temporarily kept prices elevated (after dropping 30%) but ultimately they have to revert to where they produce a decent income stream for the price.
July 7th, 2010 at 12:16 pm
#28 BPOM, I mentioned a couple of weeks ago that gulf properties had the potential to go to zero. These people still hunkering down are up against it now. Its not only the perception of the oil slick scaring away tourists for years, its also the very real possibility that one of this years hurricanes will deluge the coastal township and render them toxic wastelands that will require a HazMat certificate to get in or out. I can’t see many people wanting to buy if they have to weak a plastic suit and a gas mask to bed.
This section of the article also caught my eye.
“LOCAL GOVERNMENTS FEEL THE PAIN
And owners are not the only ones hurting. A drop in sales is prompting local governments to seek help as the ripple effect spreads quickly throughout Florida’s economy, highly dependent on property taxes and other revenue derived from real estate transactions. ”
This is exactly what I have forecast will happen here. I am going to say for the record that we can expect some kind of announcement on the ‘permanent nature’ of property taxes. Like a kids game of ‘no take backs’ the government will undoubtedly have already seen what has happened in other jurisdictions and had a secret contingency plan for what they will do when property values are reassessed at hundreds of thousands of dollars ( and millions in some cases) below current assesments. You heard it hear first.
I would like to see them rationalize spending before they pull some draconian tax crap on the citizens…but….looking at the record of draconian bullshit ( going so far as to suspend our charter rights for Olympic advertisers) I hardly feel confident that they will have the fortitude to start slashing the exhorbitant overhead they have figured in to the revenue projections.
Someone mentioned the ‘confidence’ factor, and said it exactly right. Its not that we are not confident, its the fact the prices have spiralled far too high for anyone, even at near zero rates, to afford the mortgage. Like any pyramid scam ( yes bulls it was a pyramid scam and you got suckered) they ran out of players by pricing everything higher than any normal person could afford to pay. All the ‘incentives’ in the world don’t change the bottom line on someones paycheque. The little extra that was available on peoples pay has now been clawed back on HST and the second tranche of the Gas (carbon) Tax. It only takes one straw to break a camels back, this is it.
July 7th, 2010 at 12:18 pm
Any suggestions for publically traded canadian residential real estate builders…preferrably with large projects currently on the go…and preferrably with low % presold?
seriously now, please reply back with stock symbols and I’ll do a some research into them.
I’ve looked into MEQ.TO, and am waiting for the perfect time to go short…I dont believe that this is the exact time.
Please list any tickers you know of.
July 7th, 2010 at 12:23 pm
@patriotzed: Once again, I don’t disagree with your argument about price/income, price/rent and fundamentals etc.
But it’s also clear that those aren’t the sole drivers of the market, either in the US or here. Call it ‘confidence’ or ‘irrationality’ or whatever you want. In the US prices dropped and continue to drop. Here, they dropped and then bounced right back up again, despite still being wildly overpriced. That could happen again.
What’s the difference betwen the two markets? They were both too high at the peak?
July 7th, 2010 at 12:30 pm
Those side-by-side condos really illustrate the future, and that is reverse bidding wars. Instead of gullible first-timers bidding up prices, desperate sellers undercut each other in a race to the bottom. Even with lots of interested potential buyers, they will have to keep cutting and cutting, because no one will buy today when they know it will be cheaper tomorrow.
July 7th, 2010 at 1:35 pm
@Purp1: “In the US prices dropped and continue to drop. “
When interest rates were lowered and homebuyer subsidies introduced, prices in many depressed markets, like San Diego, rebounded by 10%. UK prices followed the same trend.
Sudden step changes in interest rates and increased incentives bring forward demand and increase prices but are only a temporary reprieve. There are too many dwellings for too few people earning too little money.
July 7th, 2010 at 1:38 pm
@Purp1:
Simple. The US was two years ahead of Canada. So, the US bust had been under way for almost 3 years when the interest rates took a huge cut, while the bust in Canada (except for Alberta, which has not recovered to peak) had been under way for less than a year. The US was way, way, too far gone for the low interest rates to push prices back up to peak.
As for “confidence”, opinion polls in the US indicated that most people thought that RE prices were still going up 2 years into the bust. The problem was not “confidence”, but like all busts, it was simply that there were no more buyers at the current prices. The fall in confidence is a result of the bust, not the cause.
July 7th, 2010 at 1:46 pm
Yield Rate (Y)
A rate of return on capital for a specific time period, usually expressed as a compound annual percentage rate. A yield rate considers all expected property benefits, including the proceeds from a sale at the termination of the investment. Yield rates include, and are calculated in the same manner as, the interest rate, internal rate of return (IRR), overall yield rate, and equity yield rate.
What you are trying to show is not a yield rate or even a rate of return on capital but something like an Equity Capitalization Rate, cash flow rate, cash on cash return or equity dividend rate. Except not really, because its not complete without knowing the level of equity in the property.
All you did was invert the GRM and express it as a percentage.
Gawd, I hope you don’t work on car brakes.
July 7th, 2010 at 1:59 pm
@Gordon C.:
No it doesn’t. Yield for any equity (i.e. any asset for which there is no obligation for a party to redeem at some point in the future) is based only on price and earnings. And earnings are known only looking backward, and are estimated going forward.
Fixed income assets such as bonds do include the redemption price when calculating yield to maturity, because the issuer has an obligation to repay. That’s what counts, not “expectations”.
July 7th, 2010 at 2:05 pm
@Gordon C.: I showed the annual percentage yield on an asset. The yield on an asset is the income divided by the price.
The source you cite has very particular narrow definitions of very particular types of yield calculations. Those are all different types of yields–and that’s fine. But those are not the only applications of the principle of calculating yields.
What I did is to take the general principle of calculating yields (income divided by price) and apply it to real estate, as you would any asset.
That may not be in your text book, but some of us don’t have to scurry for a textbook definition for something so basic as the current yield on an asset.
And yes, all I did was to invert the GRM and multiply by 12. Because that’s how the math is done. I’m sorry it’s not more complicated than that.
July 7th, 2010 at 2:08 pm
I am thinking of Rona or Canadian tire as possible shorts. RON.TO has a nice head and shoulder pattern forming and does not have an auto repair business to fall back on the way Canadian Tire has.
July 7th, 2010 at 2:10 pm
@VHB: Can I make an appointment to get my brakes done on my car?
July 7th, 2010 at 2:15 pm
@VHB: Note that I am offering a yield rate, not The Yield Rate. A yield is the rate of return on an asset, defined in some way.
It looks like a nice name to this kind of calculation I am offering is the Current Yield.
So long as you are clear on how you are defining it, I don’t care what you call it. Call it The VHB Yield for all I care. If you don’t find it a useful measure, then use your own. But you can’t tell me that I can’t call it a yield, ’cause that’s what it is.
I think it is useful because it tells us what percentage return there is on the value of the asset. If you are getting, say, 8% yield and your non-interest costs are 3% of value, then your net yield is 5%. Compare that to your cost of capital and figure out if it is worth the risk. That’s how I would evaluate a real estate investment opportunity, anyway.
July 7th, 2010 at 2:15 pm
OT: We appear to still have a problem with registration approvals. For now we’re manually approving them, so it may be anywhere from a few hours to a day for your account to become active after registration until we get this sorted out. The inconvenience is better than wading through a spam swamp.
July 7th, 2010 at 2:26 pm
@Mike
I quite agree that the government does not want a housing correction. They played their hand in ’08 to prevent it. But I think that hand has been played and they are done.
(1) IMHO the biggest prop to the housing market was through the NHA MBS program by CMHC where CMHC insured roughly $300 billion in mortgage-backed bonds, effectively turning them into government bonds. A rough ballpark figure suggests this adds about $5-$8 dollars per $100 to the present value of the bond. The banks responded to this incentive by increasing mortgage lending since they were profiting roughly 5-8% with no risk. Thus the big run up in mortgage lending. Since the CMHC has wound down this program (roughly since April) mortgage lending is drying up. As goes lending so goes housing since most buyers borrow (and some quite heavily). I note that this program basically gave $15-25 billion to the mortgage lenders (and not all were big banks — I really wonder about corruption here). You can find this info on the CMHC site but you’ll have to dig into the various bond prospectus. Try 975 ones for example. I would imagine this is a bit of an accounting nightmare for the CMHC and indeed I can’t find it accounted for anywhere. Certainly not included in the $600 billion notational limit on insurance in force. And finally these MBS were exempt from the withholding tax for foreign holders (maybe why they are so popular?).
(1b) The CMHC also bought roughly $70 billion in outstanding mortgages — I’m guessing these were the Genworth ones that were only 90% guaranteed. The banks appear to be deleveraging housing.
(2) The BoC cut interest rates to near zero. This has lead to questions over the Bank’s commitment to its inflation target. But more importantly, this step has been done. Realistically, it can only be financed by higher short rates in the future. Since most mortgages have a 5 year term in Canada, this implies some risk further out and there isn’t much the Bank can do about it.
(3) QE — one could print money and the nominal value of the asset will rise. But see Hungary, Weimar, Bolivia and Zimbabwe as examples as to why the government and the Bank won’t pursue this policy.
(4) Real incomes are falling. Check the tourism and resource industries as examples. Or better yet, take a drive through the interior valleys. They are on sale because second-home buyers are disappearing and locals don’t make enough to afford the current asking prices. Seems like a good indicator of falling incomes to me. It’s hard to imagine tax revenues are not falling. So how is the government going to finance it’s current obligations and even it’s future ones? (e.g. pensions?)
On a side note, the US is in real trouble. Prices are still low even though they can get 30 year fixed mortgages at historically low rates. The US household balance sheet cannot be good. And QE 2 won’t help. After all, government debt is foregone taxes or fewer future services (think about shorter school years for instance — this increases daycare costs for parents). Both imply higher household outflows. (And 15 trillion is obviously a joke — that’s over 100% of GDP.)
So I’m not optimistic about a government bailout this time. I think those sellers that took advantage of the government’s largesse last year were smart. And @superbullboy, yes the Chinese will save the world, you’re right. Just like the Japanese before them. And the Brits and Dutch (if you’re Spanish). Oops, the Spanish are playing the Dutch and so that means super bulltime to buy homes in Spain getting loans from the Dutch while both are glued to the TV. Then if Dutch lose great time to buy in Mallorca! My bad.
July 7th, 2010 at 2:37 pm
@anonymous:
I think the government will tolerate a 20% decline in national averages. The government will largely step out of the way and allow a “correction”…
Some on this board are calling for a 60% crash in prices. This is very possible in nominal terms and very probable in real terms.
The government can create all the inflation it wants. A few strokes of a computer key and they’ve doubled the monetary base.
A 20% collapse in home prices, with today’s debt levels, will lead to fairly significant deflation and credit contraction. The government could easily increase the money supply to prop up asset prices without a significant increase in consumer prices…at least temporarily.
The government will not sit idly by and watch a crash. I wish they did, but they won’t. I also disagree with Pope. I think they have more tools than he or I can think of.
July 7th, 2010 at 2:38 pm
Regarding what to short, just stay in cash. As house prices fall, the value of each dollar you have, priced in real estate, goes up.
July 7th, 2010 at 2:48 pm
@jesse:
Of course. And why can’t lower prices have the same effect? If you asked today whether prices at 20% off would be a good deal, I’m sure the majority would say yes (if they believed that prices were headed back up longer term). That might put some upward pressure back on prices. Of course if the mood is negative and everyone takes Patriotz’s introduction to price to income and price to rent ratio course, then maybe prices keep falling back to some sort of fundamentals. The point is you don’t know.
That’s a big statement. Are you talking all of Metro Vancouver or only certain segments?
July 7th, 2010 at 2:51 pm
If a big crash happens in Canada and there are lots of foreclosures, who loses money on those mortgages? Banks, Government, Insurance companies???
July 7th, 2010 at 2:54 pm
@patriotz:
Agreed. But if a 20% decline is not perceived as a bust, but a great buying opportunity and rates are low and jobs available, then there’s no fall in confidence right? To me that means the future includes the possibility of a rebound after a small correction. I hope I’m wrong.
So if this is true (link please), why didn’t people re-enter the market at this great buying opportunity? Maybe a decrease in the ability to pay, despite the desire? Lack of financing? Lack of employment? Lack of cash? If so, are you positive we are going to see the same thing here if prices drop 20%?
July 7th, 2010 at 2:57 pm
@Purp1: “If you asked today whether prices at 20% off would be a good deal, I’m sure the majority would say yes”
That doesn’t make it a good deal in my books. If you are stating that the direction prices will head will not be a straight line then yes I agree 100%.
“Are you talking all of Metro Vancouver or only certain segments?”
Based on the data VHB has sourced, between 2000 and now there have been more dwellings built than people who can accommodate them. Statscan shows incomes are flat to falling. So yes it’s a very big statement but also true in a very big way. It also means people thinking 20% off is a good deal can’t change the market price for very long because 1) there is significant competition and 2) they have likely already bought.
July 7th, 2010 at 2:59 pm
I always read the posts that are marked “FORECLOSURE”
There something into them, worth reading
July 7th, 2010 at 3:06 pm
@Mike:
“The government can create all the inflation it wants. A few strokes of a computer key and they’ve doubled the monetary base.”
True (see graph), but not quite seeing the impact on US house prices you suggest.
http://www.chartingstocks.net/.....1917-2009/
July 7th, 2010 at 3:08 pm
Count the reasons this crash will be steeper than 2008:
1) Rental vacancies are way up and rents are falling. I’m laughing at the slumlord who owns the house next door as he tries to rent a basement suite in a former grow-up for $900 while nearby purpose-built rental apartments go for $700-$800. I know he easily found tenants before at $900, but now he has lost a months rent and reality is just setting in. He is going to have to shave off $200+ or forget it.
2) Many more “For Lease” signs on empty buildings throughout this city. Businesses are failing and new retail space is adding to the woes. Everyone with a set of eyes can see this.
3) Falling incomes for workers. I was laid off from eBay last year. Some of my former co-workers are accepting jobs at 25% less pay as their EI is nearing an end. Others, like myself, are retraining. And many more have gone home to Winnipeg or Cape Breton or Hong Kong.
and
4) The Owelympics have come and gone. No anticipation now. Just disappointment.
July 7th, 2010 at 3:11 pm
Well, I actually I can tell you that it is not a yield rate for real estate. What it is, is a calculation of an annual rate of return, assuming no costs to maintain and no financing. Oh, I suppose its fine when talking about bonds on a very elementary level of understanding. On assets that you don’t have to repair or mortgage, but this blog is not about bonds but real estate.
So, I suppose you could say that your home is giving you a 6% return. But is that based on your purchase price? The properties current price. Including or excluding expenses? over the last year or the 18 months you have owned it?
Would that be the same yield as someone else could get? Is it rational to say that since you get a 6% return, so will I?
The problem with using math from the finance world, is that real estate is more complex. For example, do you have anything in the bond market that has mortgage paydown in the calculations? All your calculations are based on simple compound interest tables. Canadian mortgages are not, giving you an effective interest rate that is not the same as what a car loan or an American mortgage would be.
July 7th, 2010 at 3:21 pm
@Mike: “The government can create all the inflation it wants. A few strokes of a computer key and they’ve doubled the monetary base. ”
Doubling the monitary base is meaningless if the money does not circulate; vilocity of money would simply fall by 1/2 and inflation would be the same. This is why dispite the printing in the US they are still experiencing deflation.
There have to be entry points that the govnt would implement such as public spending programs. Otherwise, it just sits on the banks balance sheet and gets gobbled up by the Canadian equivalent of the overnight lending mantience cycle. There are ways they can raise inflationary targets by combining monitary and fiscal strategies but BOC/Govnt would probably cry.
July 7th, 2010 at 3:22 pm
@Gordon C.: “The problem with using math from the finance world, is that real estate is more complex.”
THAT is funny.
I’ve heard the argument that finance is too complicated for its own good, but never that it is not complicated at all. I guess Wall Street hires all those PhD physicists and statisticians not to design derivatives, but to wash the windows and get coffee?
Of course, the talents of Cameron Muir and all those 6-week course Realtors are working on a higher plane of intellectual existence than the Wall Streeters.
Again, it’s not that wall streeters are infallible. They are. But you’d have to be fairly ill-informed to argue that what they do is less complex than analyzing a boring asset like residential real estate.
July 7th, 2010 at 3:25 pm
“What it is, is a calculation of an annual rate of return, assuming no costs to maintain and no financing.”
Yes. We agree. Precisely. That’s why it’s a useful calculation. You then can subtract off your costs and compare to the price of financing and you’re good to go.
Gross yield = 8%. Non-financing costs (maintenance, prop taxes, etc) 3%. Net Yield = 5%. If cost of financing is 4%, you’re good. If cost of financing is 6%, stay away. Easy peasy.
July 7th, 2010 at 3:27 pm
These two listings look about the same with a 100k difference in price:
http://www.realtor.ca/property.....Id=9539158
http://www.realtor.ca/property.....Id=9539104
July 7th, 2010 at 3:37 pm
@buff_butler: Doubling the monitary base is meaningless if the money does not circulate
If you put created money in a vault that doesn’t circulate then yes it doesn’t do much. But there are other ways to get money circulating. If the government really wanted to inflate, they would a la throwing piles of $20 bills from helicopters. It just so happens they don’t want to because rising interest rates that inevitably result would crush any chance of an economic recovery.
Bernanke gave his famous “helicopter” speech a few years’ back on how to inflate away a deflationary trap. He’s not doing it now because he finally figured out the cure is worse than the disease.
July 7th, 2010 at 3:39 pm
@specialfx3000:
That listing sounds an awful lot like blog dog Jane (greaterfool post June 4/5). So Garth’s advice has reduced all those condos by 60k. Thanks Garth!
July 7th, 2010 at 3:40 pm
I didn’t say that. You inferred it.
The world of real estate doesn’t start and stop with houses. Which is more complicated estimating a price for a stock offering and derivativer or valuing West Edmonton Mall leases. How about a Saskatchewan pot ash mine, one mile underground complete with machinery and equipment, How about a chain of hotels in Cambodia? How about a strip of highway, 8 miles long and two feet wide? How about the value of the natural gas line leases from Alberta to the USA. How about air rights and water lots in Vancouver? What about Vancouver Airport itself? How about Native land claims?
A little apple to apple
July 7th, 2010 at 3:46 pm
@Gordon C.: I don’t know much about any of those assets. But to each of them I would take the same principle. What is the income the asset spits off? What is the price of the asset? Dividing one by the other gives me the yield. That’s a good place to start, I think.
July 7th, 2010 at 3:46 pm
“I’ve heard the argument that finance is too complicated for its own good, but never that it is not complicated at all. I guess Wall Street hires all those PhD physicists and statisticians not to design derivatives, but to wash the windows and get coffee?”
To be fair, it was the application, nay the misguided application of incorrect formulas to derivatives and the securitization of mortgages that served as the fuel production for the sub prime bomb that nearly brought down the entire world economy. It was actually a Chinese born, Canadian University trained PhD who developed the formula that was used to justify the faulty premise that created the whole house of cards- the idea that a securitized tranche of collateralized debt obligations consisting of almost all subprime mortgages could contain zero risk. This was based on the formula developed by the aforementioned genius. (yes, once again, blame canada)
Now I am such a bear that people have begun to use my name in the famous rhetorical question – “Does so-and-so sh*t in the woods?” but surely you cant think that the use of those finance morons was a net positive for the world economy?
As Warren Buffett always says: “when doing asset valuation, avoid formulas with greek letters in them”
Basically what I am saying is we would all be much better off if we hired those guys to JUST wash windows and get coffee.
July 7th, 2010 at 3:51 pm
@bridgeman: Yes. That’s why I wrote “I’ve heard the argument that finance is too complicated for its own good, but never that it is not complicated at all. ”
You are making the argument that finance is too complicated for its own good. I am quite sympathetic to that argument.
But this is evidence against Gordon’s claim that real estate is SO HARD relative to high finance.
July 7th, 2010 at 3:56 pm
Well bear ask yourself this question. If stimulus worked why so much worry by stimulus proponent about stimulus program ending? Goal of “stimulus” was for economy to recover and be self sustaining yes? Anyone stimulus fan have answer for this interesting paradox of problems?
July 7th, 2010 at 4:02 pm
If you did that, then you would grossly over or under value those assets.
Eventually, those asset might sell. Then the person who lent the money, wants some answers to why the hell they hired you and who is going to pay for their loss.
July 7th, 2010 at 4:02 pm
@chip:
Exactly. It took that hocket stick spike to put a floor in house prices (coupled with all sorts of other policies)…
The US barely saw any consumer price inflation despite that massive expansion in the money supply.
House prices in most countries, especially Canada, are fundamentally overvalued when measured against rents and incomes.
If the government tries to counter falling house prices with inflation, it may put a floor in home prices. They will fall significantly when measured against Gold and foreign currencies.
I also do think Canada has more limited monetary options versus the United States. The USD is the reserve currency. I doubt the bond markets will permit the same kind of response in Canada.
Interesting times!!
July 7th, 2010 at 4:03 pm
Gordon C:
Well, price is what you pay, value is what you get. Or in other words, you can pay a twenty pound price for a ten pound pig, but all you gonna get is a ten pound pig.
The intrinsic value of an asset as an investment is the sum total of all future cash flows (income) discounted to present value. At the end of the day, the total you receive in income divided by price plus any capital gains appreciation (realized at the time of sale) is your yield, or what you make.
If you are looking at Vancouver real estate in the aggregate from an investment perspective, at first blush, recent capital gains appreciation plus added to the small amount of rent you get (small relative to mortgage, tax, and maintenance costs) has in the last 5 years produced a nice yield, for those able to buy low and sell high.
To steal another Buffett phrase, we are currently Cinderella dancing in a room without a clock. We simply dont know when or if the clock has struck midnight. (midnight being when capital gains appreciation stops and people realize they are cash flow negative, and the whole thing crashes)
So you can use a lot of fancy words and a lot of fancy formulas to evaluate assets and projects, but unless the sum total of money going in exceeds the sum total of money going out (CAPEX, interest payments and principal payments, maintenance, labor, etc.) you are losing money. It is all talk until the check clears, and you have a positive balance in the account. Sometimes that takes years to develop, another downside to leverage- it clouds the picture of a things true financial health, as it does in Vancouver.
July 7th, 2010 at 4:04 pm
You brainiac bears should help me find a new rental condo! I’m taking your advice and selling our place. Now instead of spending $550K on a two bedroom, two bathroom condo in downtown Vancouver or in Kits we are looking to rent. Thinking $2200 would get us a great place but there doesn’t seem to be all of the desperate, by accident landlords I keep hearing about on this blog. At 2200 your looking at a cap rate in the high 3′s after expenses.
July 7th, 2010 at 4:07 pm
“If you did that, then you would grossly over or under value those assets.
Eventually, those asset might sell. Then the person who lent the money, wants some answers to why the hell they hired you and who is going to pay for their loss.”
That made absolutely no sense, and I award you no points. We are all dumber for having read that.
July 7th, 2010 at 4:10 pm
“But this is evidence against Gordon’s claim that real estate is SO HARD relative to high finance.”
We park our cars in the same garage then. Gordon reminds me of those “doctors” that drop out of medical school but still illegally practice in some florida neighborhood that caters to immigrants.
“I know what I am doing, now hand me that spatula, stat!”
July 7th, 2010 at 4:12 pm
@Mike:
Actually US prices continued to fall for another 6 months after the doubling of money supply, then recovered slightly and plateaued. And I don’t think you can attribute this solely to the money supply when there were other factors in play such as the home purchase rebate and perhaps a simple floor in terms of affordability.
And finally, while the government has the printing presses on overtime actual bank lending has been falling at the fastest pace in history.
July 7th, 2010 at 4:16 pm
@specialfx3000: This sounds exactly like a letter send to and posted on the Greater Fool site recently. A female blog reader send a letter saying she dropped the price on her condo from $498K to $439K to match the lowest listed condo in her area after no one showed up for an open house.
July 7th, 2010 at 4:16 pm
@Anonymous: “These two listings look about the same with a 100k difference in price:
http://www.realtor.ca/property…..Id=9539158
http://www.realtor.ca/property…..Id=9539104”
Well, the $100k more expensive one is only $660/month in strata fees, whereas I’d pay an extra $13/month on the cheaper suite. I’d better get the more expensive one.
July 7th, 2010 at 4:21 pm
@Anonymous:
If a big crash happens in Canada and there are lots of foreclosures, who loses money on those mortgages? Banks, Government, Insurance companies???
…..
Your logic makes sense but your premise is faulty. There can me a massive price correction with very few foreclosures. My folks paid off their house 10 years ago. They’ll be pissed if there’s a huge drop in prices, but if there is, they’re not going out on the street. Neither will almost all other Canadian who will just go on paying their mortgage under the assumption that there will be a rebound (in fact, all the usual suspects – including the Government, will be telling them that there will be a rebound and that there’s nothing to worry about). Some will hurt – only those that have to sell but that will be a very small minority and won’t warrant any Gov bailout. Do you really think that the Gov is going to risk the ire of voters across Canada riding in to rescue a few underwater fools in Vancouver and Toronto? Not the current Gov! Give your head a shake!
July 7th, 2010 at 4:33 pm
@chip:
Yes. Home prices continued to fall, because as I’ve said, the authorities did not imagine a crashing scenario. Policies have some lag time. It often takes more than 6 months for new policy to have an impact. Think about tax cuts. It takes a good year before the benefits cycle back into the economy.
I believe that Carney and Flaherty are monitoring the situation closely and will continue to do so.
Bank credit is contracting. You are right. Have you considered that part of this might be because businesses and individuals don’t want to borrow? US Corporates are awash in cash. They have all this money that they won’t invest. They won’t invest it because they don’t trust Obama, they fear tax hikes and misguided regulation.
More than anything, the smart money knows that the way the global economy is structured is unsustainable. Small businesses realize that the bailouts and resulting debt have done nothing to benefit communities, employers and employees.
All they’ve done is kicked the can down the road and prevented a much needed restructuring of the finance markets.
Banks will continue to hoard the excess reserves. The only other way to circulate the money is for the government to spend it.
We have a choice between a painful restructuring where educated creditors take a haircut or more and more socialism, taxes and government intrusion.
July 7th, 2010 at 4:35 pm
Bridgeman, I don’t think that was a fair comment.
Why attack the person.
July 7th, 2010 at 4:38 pm
@Girlbear:
BC Assessment 2010 value
PH3: $455,000
PH2: $397,000
Asking price
PH3: $439,000
PH2: $494,900
Purchase price
PH3: $280,000 in 2003
PH2: $477,500 in 2007
Take away the realtor commission and the owners of PH2 are probably already looking at a loss.
July 7th, 2010 at 4:46 pm
#81 Chip. It was the $8500 cash grant the US government handed out, not doubling the money supply that saw buyers coming back into the market. When the free cash giveaway program ended, the number of sales crashed within days of the door slamming shut and has continued to fall. The banks have the money to lend, they just don’t have as many people who qualify to recieve it under the new more stringent lending guidelines.
July 7th, 2010 at 4:46 pm
Got off the phone w/ my dad who has his rental property for sale … some aggressive Korean lady low-balled him & wants to take possession of it no later than Aug 1st (it’s currently rented out) … she then made it no secret that she wants to convert the place (a 530 sqft 1BR) into a TWO BEDROOM to rent out to FOUR Korean students!
His realtor (who is actually a real nice guy, knows his stuff & has already made his fortune over his 25 years in the business) makes no bones about letting him know this market is tanking BAD!
My dad had also mentioned that this has happened about 3 times in Vancouver during his lifetime. In 1981, our house in North Delta was pretty much brand new & appraised at $250k … rates went up to 28% & people were walking away from their places … parents got divorced & wound up selling it for $87k …
Can it REALLY not happen again?!? There were rich asians back then too!
July 7th, 2010 at 4:53 pm
@Anonymous:
BC Assessment 2010 value
TH7: $471,000
TH20: $480,000
Asking price
TH7: $649,000
TH20: $548,000
Purchase price
TH7: $500,000 in 2008
TH20: $261,800 in 2000
Sellers who bought at peak prices are competing with those who bought pre-bubble. The latter can easily lower their asking prices and still walk away with a nice profit.
July 7th, 2010 at 4:54 pm
‘Real Estate Math is more complex’ Bwahahahahahahahahahahaha ad perpetuum.
Here it is, the secret formula……drum roll please….. ‘I’ over ‘R’ equals ‘V’. Theres nothing complex about it.
July 7th, 2010 at 5:00 pm
@Mike:
“Bank credit is contracting. You are right. Have you considered that part of this might be because businesses and individuals don’t want to borrow?”
Well, that’s exactly what I was considering. Despite a massive expansion of the US monetary base — which you argue will prevent a crash in Canada — in the US it did not lead to increased borrowing and home purchases.
I haven’t seen the correlation between the cash grant and home purchases, but I don’t think it would any different than cash for clunkers: ie, the govt going deeper into the red for the sole purpose of stealing some demand from the future.
July 7th, 2010 at 5:07 pm
Mr.Paul, have we got any fresh numbers today?
Thanks in advance
July 7th, 2010 at 5:11 pm
@realpaul:
It was both…if you think 30 year fixed mortgages at 4.75% had nothing to do with it, you are crazy!!
The Fed directed 1.25T of the QE program to buying mortgaged backed securities. The Treasury handed out $8,000 tax credits and the FHA issued the mortgages.
This is why many suggest the Fed has no independence anymore and requires an audit. I couldn’t agree more.
Chip, agreed. The homebuyer tax credit brought forward all sorts of buyers, many of whom would have bought anyway at prices supported by fundamentals.
July 7th, 2010 at 5:14 pm
New Listings 254
Price Changes 130
Sold Listings 125
Inventory resumes it climb
18,084
July 7th, 2010 at 5:32 pm
There’s nothing complex about real estate at all.
You do not need a PHD to buy and sell real estate.
All you have to be is of legal age to sign a contract.
And of course, own a calculator that has i, r and v on it.
And a book of Buffet quotes.
It’s difficult to contradict the myths of real estate, that are so entrenched in so many people, that they will never accept a different view. I no longer wish to be the lone wolf.
Thanks to those who offered respectful contrary arguments to the many posts that I have made. I may not have agreed with them, but I respected them and they made me rethink and question the basic understanding of real estate.
I am now, and forever more DELETED.
July 7th, 2010 at 5:38 pm
@Gordon C.: “Why attack the person.” Bridgeman attacked your words, not your person. Go read it again.
In contrast, you attacked me and others personally.
Look in the mirror. In my experience, most people around here will respond respectfully when they are treated with respect. Often, your posts dripped with condescension. That typically doesn’t go down well.
July 7th, 2010 at 6:00 pm
Nice numbers paulb.
Since it can take a couple of weeks for sales to get recorded, it shouldn’t take long for the pre-approvals to run out….and sales to dry up.
July 7th, 2010 at 6:04 pm
Here’s the prognostication first hand;
http://www.youtube.com/watch?v=agFe6h2GvRU
July 7th, 2010 at 6:40 pm
@Gordon C.:
Does that mean the raging debate over yield is finished?
I was hoping you guys would apply it to blueberries when you had a moment.
July 7th, 2010 at 6:50 pm
@Anonymous:
Those strata fees seem rather ridiculous to me; they work out to almost $8,000 per year! And that doesn’t even include property taxes! Yikes!
…It makes me wonder if there isn’t some “exceptional” maintenance going on around the building– leaky condo repairs funded by maintenance fees, rather than a special assessment…
July 7th, 2010 at 7:26 pm
Would somebody please help?
As you all know, we are running out of land, and Vancouver RE, being the best place on earth, is highly sought by the whole world.
I have 10 rich Asian friends who want to desperately buy a few properties (CASH), but are having great difficulty finding anything, as listings are almost non existent, and I was hoping that somebody on this site would have enough influence with RC to allow for comments on his blog so that I can leave my friends phone numbers where they can be reached.
Please time is of essence, they don’t want to miss out, as prices are set to rise again, and although, they are very rich, they too fear being forever priced out.
July 7th, 2010 at 7:39 pm
Jenny,
Bite me.
Please.
Junius
July 7th, 2010 at 7:43 pm
@junius: Junius, please stop using my account. Thank you.
Junius
July 7th, 2010 at 7:48 pm
Another fail prediction from Van bears’ ass which contain no nutrient at all man;anyone believing them will be priced out and eat shit in their miserable retirement;don’t forget paying your rent on time.Old age and poverty doesn’t mean you guys will be exempted from your obligation to landlords who are smart enough in retirement preparation while those bears are wasting their money in beer and grass .
July 7th, 2010 at 8:19 pm
The numbers out of the Okanagan seem incredible.
http://fishyre.blogspot.com/20.....untry.html
Are they really that bad.
July 7th, 2010 at 8:45 pm
@No Longer Looking: “Many more “For Lease” signs on empty buildings throughout this city. Businesses are failing and new retail space is adding to the woes. Everyone with a set of eyes can see this.”
So true. The thing that astounds me is that this is happening in the *absence* of interest rate increases. Anyone remember what 1981 and 1991 rate increases did to small businesses? I do. Ow. If these guys are failing when money is free, imagine what would happen if we return to historical norms.
This economy of ours is built on sand. No, scratch that. On magic fairy make belief sand.
July 7th, 2010 at 8:45 pm
@Frank:
Just take a trip to the Okanagan. Lots of For Sale signs, very few SOLDS. Too many people I know there (my hometown) have huge mortgages-one, two or three properties with up to $900k in debt (and the guy with $900k in debt makes $50k per year) Okanagan=ground zero for real estate meltown.
July 7th, 2010 at 8:57 pm
“If these guys are failing when money is free, imagine what would happen if we return to historical norms.”
I’ve been imagining it since I moved out here 7 years ago. Got a taste in ’08, so most definitely welcoming a return to normal. I am concerned for the pain it will cause people though – most likely worse than the minor inconvenience of renting I’ve been doing for a large portion of that time.
July 7th, 2010 at 10:46 pm
@Rob A., I think you meant: If you rent a place downtown, you don’t need a car because everything is so close. There are lots of cafes and restaurant just outside your apartment.
I was walking through the West End by Stanley Park today and noticed lots of for rent signs on nice buildings. Craiglist shows lots of place for under a grande, many with heat/hot water included. And no additional Strata Fees, Property Tax, Homeowners Insurance.
July 7th, 2010 at 10:59 pm
@Frank:
They are that bad. Median price for detached residential is only down to 455k from 460k in May, but…
http://www.omreb.com/page.php?sectionID=2
11 MOI for detached residential and 2 years for condos!
And only 17 lots sold before the July 1 HST deadline?! With an inventory of 864!
There are a few big developments which could come to a major standstill and future development will surely go on hold, especially with the HST in effect. Aside from the price cuts that are sure to come, those developers employ a lot of people in Kelowna’s tiny job market.
Things are looking ugly.
July 7th, 2010 at 11:00 pm
lol. Gotta love Mish’s “Housing Collapse Cascade Pattern” as it relates to Canada/Vancouver. Which stage are we at? I say we are at point #3. Other guesses? Timeframe? Tiimmmmmbbbeerr
http://globaleconomicanalysis......rcent.html
Vancouver Home Sales Drop 30 Percent , Calgary 42 Percent – First Comes Volume, Then Comes Price; Canada Housing Peak is Finally In
This pattern is quite similar to how things cascaded in the US once the top was in.
“Housing Collapse Cascade Pattern”
•Volume drops precipitously
•Prices soften a bit
•Inventory levels rise slowly
•High-end home prices remain relatively steady for a brief while longer
•The real estate industry tries to convince everyone it’s “business as usual” and homes are affordable because rates are low
•Bubble denial kicks in with media articles everywhere touting the “fundamentals”
•Stubborn sellers hold out for last year’s prices as volume continues to shrink
•Inventory levels reach new highs
•Builders start offering huge incentives to clear inventory
•Some sellers finally realize (too late) what is happening
•Price declines hit the high-end
•Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
•Gimmicks do not work
•Price declines escalate sharply at all price levels
•The Central Bank issues statements that housing is fundamentally sound
•Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt
July 7th, 2010 at 11:14 pm
@VHB:
That’s the thing that always strikes me when I get back to Vancouver twice a year. Where is the business activity? Why are all the new buildings residential rather than office?
Singapore and HK have bubbly real estate prices but new (and full) office buildings are everywhere. When I hit my local coffee shop I’m just as likely to sit next to an informal meeting of the board for a satellite company discussing million dollar deals (yesterday morning) as I am to a guy and his financial advisor, gas workers from the Natuna field, a banker’s wife just back from viewing a $20,000 a month rental or some guys from an Indian med tech company having an ad hoc powwow about new markets in China.
It’s buzzy and I love it.
When I’m having a coffee in Vancouver, it seems there’s the guy from Remax, a mortgage broker, several students probably in their fifth year of study before becoming baristas and some flashy 20 somethings pulling up in their Beemers and $5000 cash in their wallets.
July 7th, 2010 at 11:23 pm
@VHB:
I don’t know if the dust has settled yet, but going back to the original argument:
GRM is by definition Price divided by Gross Rent (Gross Rent Multiplier).
Any useful definition of Yield is definitely much more than just gross rent divided by price.
As you conceded, there are more particular types of yield, but in the most basic form you have the “Current Yield” that you referenced (I think in real estate that would equate to the cap rate). But to calculate current yield you still have to account for operating costs so it would be net income divided by price … which you can’t compute from GRM alone.
You can argue semantics and say that gross rent divided by price is “a yield rate, not The Yield Rate”, but it wouldn’t be useful, and I don’t think it was the original intent of question.
July 7th, 2010 at 11:40 pm
@fatjay: “But to calculate current yield you still have to account for operating costs so it would be net income divided by price … which you can’t compute from GRM alone.”
For very specific types of properties, with very well understood maintenance costs and tenant prospects, we can estimate very well expected monthly NOI. Gordon C is right that certain types of property cannot be properly valued by simply looking at GRM. But for a Yaletown condo with a very well understood set of inputs (i.e. rent coming in; ongoing taxes, maintenance, general administration, and some planned renovations some years hence going out) I think there is a very tight relationship between yield (however it’s defined) and GRM.
Appraising isn’t a 5 week course at the community college. It’s complicated and high stakes. But there must be some admission that for some of the simplest real estate assets around, namely residential condos or apartments, the calculation should be simple, at least as a first pass estimate of investment value. If a condo/apartment price doesn’t even come close to this first-pass estimate it’s unlikely any more detailed calculations will markedly improve matters.
July 7th, 2010 at 11:52 pm
If a big crash happens in Canada and there are lots of foreclosures, who loses money on those mortgages? Banks, Government, Insurance companies???
…..
Your logic makes sense but your premise is faulty.
..
This was just a question. If many defaults/foreclosures happen, such as in the USA, who loses the money, mortgages are insured, will the bank lose money, insurance company who insured it or the government who bought up loans to get banks lending? I’m not suggesting the government will bail anyone out, they already have. Who stands to lose the most if people walk away from mortgages?
July 7th, 2010 at 11:54 pm
#113 Chip. Your spot on. There is no noticable buisness climate in Vancouver. Compared to Singapore …..well there is no comparison. Vancouver has completely mismanaged its development, it’s backwards. Singers , for example, is mixed commercial and residential along the waterfront Esplanade and canals and that brings a lot of people down to the waterfront.
The seawalls are lined with businesses and restaurants where people can enjoy making commerce.The seawalls are dark and empty here, good places to get mugged, raped or step in vomit and dog shit, they’ve designed them as unusable dead zones for ‘jogging’. Hey….douchebag planners, not everyone wants to run, bushwalk or cycle on their time off. Some people want an upmarket lifestyle that does not include the grouse grind. I hardly think that giving the homosexuals a discreet place to have public sex should have been the focus of the Vancouver planners.
For a place thats so ‘international’ none of the businesses have head offices here. Singapore is packed with open lively markets, above and below ground for every type of weather. Food can be had in and out without restriction. Vancouvers planning dept has ruined a Singapore like location and permanently consigned it (Vancshithole) into the toilet bowl. Vancouvers population has become a parasite within itself, selling real estate and pot to one another, there is no commercial hub. When the real estate money gets cut off, the entire place will wither and die.
July 8th, 2010 at 12:19 am
@Dyugle, @“A-sharp” Accountant: Check out Mainstreets vaccancy rate numbers. Their terrible. It would be interesting to read more about this one and do analysis when i have time.
In regards to what to target, Rona is good, as well any furniture companies would be decimated once household formation drops off. Alternately taking some form of a long/short spread using options against SP500/TSX in terms of USD would be safer but may not pay off the same way.
July 8th, 2010 at 12:50 am
@jesse: Personally, I think an employer of last resourt (ELR) labour pool could probably help them create inflation along with a long list of other benifits.
http://www.thomaspalley.com/do.....ployer.pdf
However, republicans/austrian economics would argue it would rain fire and puppies if this went through so I don’t think this would ever pass.
Note the chartalist taxes drive money concept should be thought of broadly. Example: food is a life tax that must be serviced.
July 8th, 2010 at 1:34 am
@Gordon C.: I’m not sure why your comments got voted down.
It was a good discussion and I tend to agree with you; markets are interconnected and complexity spills over especially when you are looking at projections of yeild going into the future.
July 8th, 2010 at 3:18 am
@anonymous:
Correction: Prices in the US are still high. Apart from the real disaster areas like some Florida markets, prices in the US still exceed historical multiples of rents and incomes. Particularly places like Seattle and NYC that were slow to start the bust.
Prices in the US has been inflated for so many years that people have lost perspective on what fair pricing really is. In most markets, that’s 3x median income. That goes for here, too, although historically Vancouver has been 4x income.