Housing as a multiple of Canadian equities
I took a quick look at Canadian housing prices in certain cities over the last 25 years a multiple to the Toronto stock exchange – I took month end data but smoothed the TSX over trailing three months
- I figured that the TSX takes into account, interest rates, earnings, asset inflation,… and all the other factors that trickle down to housing prices.
What I found is that if the TSX doesn’t appreciate.
Vancouver real estate requires (based on comparative multiples):
1) a 10% drop just to be at the normal end of – expensive from extreme expensive
2) a 20% drop to be at the high end of normal
3) a 30% drop to be at the cheaper side of normal
4) a 40% drop to be in line with the lowest multiples we have seen in the past.
But what i am sure about is that there is no way that the multiple can expand anymore.
If I could trade vancouver real estate on an exchange – I would short it and us treasuries.
This post was submitted by real_professional.
Click here to view all comments chronologically
October 12th, 2010 at 12:26 pm
Our tax dollars at Work. No wonder we are running huge deficits, no one is watching the cash register
From today's National Post
http://tinyurl.com/2cwr5vs
October 11th, 2010 at 8:25 pm
@anonymous1:
People will always buy at market prices, by definition.
The reason the OV condos aren't selling is that Millenium/CoV are asking above market prices.
October 11th, 2010 at 1:25 pm
43 superduperbulltime
http://www.youtube.com/watch?v=Vn3dDc2mpjw
Is that YOU in the video ?
October 11th, 2010 at 12:42 pm
Stock market sold by crazy bear in seconds but house last lifetime bear. That's why Vancouver house price never go down. You can't live in stock bear you can live in house or condo.
October 11th, 2010 at 12:36 pm
Loose with the "facts" on the bears side again:
anonymous1 Says:
October 11th, 2010 at 7:42 pm
…buy a condo for $500k, which will rent out for $1500 a month (maybe)…
It's obviously still not a good return but the above would rent for closer to $2000 a month.
October 11th, 2010 at 12:35 pm
LEED Us Not into Health Problems
http://www.triplepundit.com/2010/06/leed-us-not-i…
Currently, a building achieves LEED status based on an aggregate score, with some measurements, such as energy efficiency, weighing more towards the final score than others, like air quality.
This makes it possible for a building to achieve the highest LEED certification, Platinum, even if it makes no improvements in indoor air quality, the study warns.
=========
Does the OV design address this ?
October 11th, 2010 at 12:25 pm
London's 2012 Olympic Village
The Olympic village
The village will have 17,320 beds and provide each athlete with 16m² floor space.
There will be 3,300 apartments
Each apartment will have a TV, internet access, and a private courtyard.
The dining hall will cater for 5,500 athletes at a time.
Difficulties experienced by developers Lend Lease[10] in raising funds for the village (the single largest project in the 2012 scheme) resulted in the scale of the village being reduced by "almost 25%"[11]. This was achieved predominantly by providing accommodation for London-based athletes only. Those competing in events outside London were to be housed elsewhere. Following the athletes' experiences in Beijing 2008 (and in particular through comments concerning athletes' welfare by International Olympic Committee President Jacques Rogge) this compromise was to be reconsidered whilst pressure built for the finance deal to be resolved.[12]
=======
Hmmm…where have I heard of this before…
October 11th, 2010 at 12:06 pm
BAD WATER after major Metro Vancouver infrastructure upgrade ?
http://www.globaltvbc.com/video/index.html?releas…
BS of bureaucracy.
New homes in Vancouver require complex filtration ? after we taxpayers spent almost a $ Billion on new filtration plant.?
October 11th, 2010 at 11:54 am
@anonymous1: Bingo. Agreed. That's another of the many problems at the ole' OV.
- 'Market prices' mean something different than what the CoV thinks it does.
- also, the huge uncertainty of the cost of the LEED platinum untested and untried technology. Who pays when this all breaks in 4 years?
- also, the persistent rumours of poor construction quality. Again, big potential cost for the strata down the road.
- and lots lots more!
October 11th, 2010 at 11:42 am
@VHB:
But…people aren't even buying the condos now at market prices, are they? And I highly doubt it's because they worry about living amongst the poverty-stricken and downtrodden. Think Woodwards. The problem is these condos have come up for sale at a time when the whole real estate market is drying up. I have a friend who is trying to sell not one, but two of those damn condos (resale, of course, he planned to flip but guess what, that didn't work out). My significant other said we should offer him $150k each. Then rent them out. At that price we'd actually have a profit. Huh. Imagine that. But with prices not increasing into never-neverland, no one has any incentive to buy a condo for $500k, which will rent out for $1500 a month (maybe), while the mortgage will cost you at least $1000 more. It's all in the numbers that this will crash, sooner or later.
October 11th, 2010 at 11:11 am
Mason in Tuesday's G&M on the OV. Advocates selling the social housing at market prices.
But that's only one problem of many at the ole' OV . . . .
October 11th, 2010 at 10:40 am
Securitized Mortgage Debt: The Shot That Will Kill Many Financial Entities
"Dear CIGAs,
I am asking for your attention again because of the depth of the fraud and now the size of the securitized mortgage debt OTC derivative pile of garbage that is in the trillions. This entire mountain of weapons of mass financial and social destruction is now in question. I have been telling you this for more than 2 years since the manufacturers and distributors of this crap were called by the NY Fed due to the loss of control over the paperwork.
I had dinner with my former partner, then lead director of and CEO of Bear Stearns. I could not contain myself so I asked him why he did so much business in OTC derivatives which were certain to bankrupt them. The answer I got was it was more than 50% of their profit. The right answer should have been it was more than 80% of their earnings.
Securitized mortgage debt is going to be the final shot that kills all kinds of financial entities in the Western world. The biggest holder of this putrid junk is pension funds.
Please! If you have not listened to all of the following video, do.
Please forward this to your friends.
The fellow with the sign that says the world is going to end is WRONG. Financially, it ended with the flushing of Lehman
Father, before you forgive them, please consider that they knew exactly what they were doing.
This is the largest fraud in the history of capital markets with the facts outlined with humor.
Click here to watch the video…"
http://www.msnbc.msn.com/id/21134540/vp/39582228#…
October 11th, 2010 at 9:41 am
32 Lilypad
I'll second THAT motion !!!
Thanks POPE !!!
October 11th, 2010 at 9:39 am
30 patriotz
Well, by signing the documents, this happened under Clinton watch.
He could have postured politcally..ie make a stand against it, even if its passing would be a fait accompli.
QUOTE
The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate[6] and by a bi-partisan 343–86 vote in the House of Representatives.[7] After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90–8 (one not voting) and in the House: 362–57 (15 not voting). The legislation was signed into law by President Bill Clinton on November 12, 1999.[8]
The banking industry had been seeking the repeal of Glass–Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the cases for and against preserving the Glass–Steagall act.[9]
========
If the banking industry was lobbying for repeal since 1980's , that wa under 2 Republican president. This bill was passed after Clinton had been in office for 7 years.
The Senate voting record as noted above shows it went form a 54-44 vote to a 90-8 vote.
Interesting to have been a fly on the wall……
I had originally thought this mess was Bush's fault, but thats why its good to read up on these things
October 11th, 2010 at 9:36 am
Happy Thanksgiving Everyone!!!
Let's see — what do I have to be thankful for?
1. POPE's blog
2. POPE's blog
3. POPE's blog
Three cheers for POPE!!!!
October 11th, 2010 at 9:35 am
@VancouverGuy(a): I agree but comparing real estate total returns to something like a REIT or utility with large land holdings should be as close as we can get to comparing RE to a publicly traded company. From that POV condos are overvalued by 50%.
October 11th, 2010 at 8:50 am
@No-lympics:
No, it was repealed by Congress. The President doesn't make laws.
The bill (which was sponsored by 3 Republicans) was signed by Clinton, but it would have become law even if he had vetoed it, as over 2/3 of the House and Senate voted for it.
That's not letting Clinton off the hook as he had the opportunity to show his disapproval even if he could not have stopped its passage.
October 11th, 2010 at 8:41 am
I was reading a week old copy of the Van Sun and a story related to a 'financial makeover' on a woman who was 'an administrator' at the Provincial health dept. The article stated that the woman took home net 'after all deductions $14,250 per month. Let me put that another way……some bimbo civil servant is gouging the taxpayer for close to thirty thousand dollars a month gross pay for pushing paper down at the Provincial Health dept. I was reminded of this atat.
http://www.vancouversun.com/business/public-secto…
the payroll of civil service workers making over $100,000 annually has jumped 22% this past year. I can only say "HOLY FUCK …… are we that stupid !!"
I have a fairly good grip on private sector salaries and I know people who work for multi national companies and have signifagant responsibilities who don't pull in $300,000 a year. Lets not forget about the rest of the articles figures…this cow will also receive a strong six figure pension when she retires….all for what????????
I have a sneaking suspicion that this outrage tends to scew the markets of many areas when you have dipshits who have no end of money and no reason to save because they get bailed out for life by the taxpayer.
October 11th, 2010 at 8:39 am
@townhomer:
There was a substantial increase in real wages during the 1960's, and as well an increase in the labour participation rate (more women working, remember the baby boom ended in the mid-60's when oral contraceptives became widespread).
1960 and 1969 were really different eras (not just in incomes!). For the former look at the "post-war" houses you can still see in areas like Boundary and Grandview.
October 11th, 2010 at 8:37 am
"If I could trade vancouver real estate on an exchange – I would short it and us treasuries."
should add…..and go long gold and silver
October 11th, 2010 at 8:27 am
@Happy Renting:
I disagree. Although not quite 50 years old,I live live in a townhouse that was built in 1969 as affordable family housing unit. At approximately 1400sq ft this three bedroom features a patio leading to a huge back yard, a huge front yard, a garage, lots of storage, real hardwood floors throughout, a kitchen where a dining table and six chairs take laess than a third of floorspace, tons of cabinets and counters, lots of windows, two balconies with enormous patio doors, a separate laundry room, utility room on the ground floor (now converted to a fourth bedroom/recroom).
I have looked far and wide to find a brand new unit even remotely as "luxiorious" as my modest seventies place to move to, but I couldn't. And I didn't even care what it would cost. Honestly.
Unless you count granite and stainless steel as luxury, which there 's penty around for sure. Which will be as cool in 20 years as avocado appliances and shag carpet is today anyway.
October 11th, 2010 at 8:26 am
House prices are unlevered, whereas stocks are levered.
On top of the added financial risk, stocks are also riskier from the perspective that they are often in competitive, dynamic markets with operational risk.
Stocks also retain a portion of earnings in order to fund future growth (hopefully) at a rate greater than GDP if possible. Real estate earnings should grow more in line with inflation.
As a result of all of this, the value of stocks should grow faster than the value of real estate. As such, I do not think there is any validity in a prediction based on stock market prices.
October 11th, 2010 at 8:03 am
Base Metal prices?
Copper is up largely due to the increased electronic sytems they place in motor vehicles. Copper in construction has beeb supplanted to a large degree by plastic.
However, the increased sophistication of cars simply leads to faster rate of obsolecensce.
Regardless, Canada seesm to be reverting back to hewers of wood and drawers of water. We sell the world raw materials, and they ship us back their finishd product.
I wouldn't be surpised if places like China are simply stockpiling thse raw resources and when the hammer falls, resources will get whacked.
October 11th, 2010 at 6:48 am
@Anonymous:
No, it's a positive relationship – i.e. RE and stock prices tend to move in the same direction. Simple reason – both tend to go down in recessions and go up in good times. The post-2001 RE bubble has been an exception.
Also both RE and stock prices have a positive relationship to bond prices, i.e. a negative relationship to interest rates.
There really isn't much asset shifting between stocks and RE. Few people own stocks (either individually or in mutual funds) outside of RRSPs. People get money to buy RE by borrowing it.
October 11th, 2010 at 6:31 am
Granny Bashing hits the mainstream…I was wondering when they'd notice. I have been observing this for years as the smarmy losers who want to tlive a life style they aren't smart enough to buy themselves result in bashing granny for downpayments, groceries, school fees for the kids, vacations, credit card payments etc etc etc. Now…the incidents of outright theft and in many case violent muggings by relatives are becoming the norm.
"Canadian cases of elder financial abuse rising: police
The centre has noticed a rising number of incidents where relatives with joint accounts or access to debit cards steal from the elderly, and Watts believes the problem is about to become much worse because of the debt load of baby boomers.
“You have an asset-rich older generation. You’ve got a debt-ridden, poorer population having a difficult time in the markets,” said Watts.
http://www.ctvbc.ctv.ca/servlet/an/local/CTVNews/…
October 11th, 2010 at 4:34 am
@real_professional:
” target=”_blank”>http://www.tmxmoney.com/HttpController?GetPage=EquityIndices&Language=en&Exchange=T&SelectedTab=QuoteResults&IndexID=0000&OpenIndex=
October 11th, 2010 at 4:10 am
Mikey Campbell and the other dipshit cheerleaders have been leading the unwashed into the US market to buy distressed real estate for the past year…touting to the rooftops that these are the deals of the centuries………Did they ever fuck up and the sheeple that believed them are not in deep shit. It seems that a majority of the foreclosed deals have been illegal transfers. What these new 'vultures' have bought themselves is years of expensive style litigation…. Bwahahahahahahahahahahaha…thats what you get when you turn to the pimps on the radio for your financial advice.
http://www.greaterfool.ca/
#12 McLovin…. I follow what your saying and on the surface it makes sense…but…the bottom line is that we have rampant inflation and a huge problem with debt in Canada…without a cool down Carney and F are going to be looking at a lot more than a slow down they will have effectively locked the Canadian economy in the freezer as rising costs and zero consumer activity creates the biflation we have been discussing here for the past year.
The bottom line for big business in this country is healthy…don't look at the headline numbers for the battery factories in Hamilton….this is already a jobless recovery that will rotate away from real estate and widgets. The CBC audits the profits of big energy increasing 340% by the 4th Q..the banks are uber profitable…metals and mining are rocking. Every recession is led by a change of the guard…We have to look past what got us into the recession and look forward to what will get us out. It may seem counterintuitive to see headline jobless numbers exploding…but that means nothing. Wath what the smart money is doing for a clue to what happens 18 to 24 months from now and position yourseld accordingly. After all……the newsp[apers and radio chimps have proven themselves as unreliable sources of advice….the cheerleaders will just get you into trouble….unless you'd like to buy a nice condo on the end of the YVR runway? It Richmonds 'Coal Harbour' Bwahahahahahahahahahahahahahahahahahahahahahahahahahah!!!!!
October 11th, 2010 at 3:58 am
This one's really a stretch! Come on bears it's going to happen – don't resort to useless and obscure data sources to build weak relational conclusions!
October 11th, 2010 at 3:39 am
If one considers all current markets – equities, bonds, US RE, USD/loonie, gold, silver, emerging markets, commodities, etc, etc – one is very hard pressed to find any investment situation that is more compelling than to be short Vancouver RE.
October 11th, 2010 at 3:34 am
@Jaap: I don't see any <a>17th century houses around here. Not that it matters, because comparing computers to houses is like comparing apples and oranges. They don't grow in the same climate.
October 11th, 2010 at 3:07 am
@domus: I'm interested too because I'd never think of doing this and I like this ratio very much! What I'm interested in seeing is if theres an inverse relationship between performance of the TSX composite and RE prices. That is, when RE tanks people take their money out and put it in stocks, and vice-a-versa.
October 11th, 2010 at 3:02 am
While TSX,NYSE,NASDAQ,AMEX are depend on life support from self motivated gangs,It takes only 15 minute for any stocks to depriciate it's value on quick downgrades compare to real estate that takes years for the similar value to drop.Vancouver real estate has been specially build to defeat both types of domestic idiots from real estate and stock market because it is surrounded by……..
☆**5 Vancouver BC*♥☆
**♥☆**♥☆**♥☆**♥☆**
*♥☆WAVING FLAGS♥☆**
October 11th, 2010 at 2:47 am
Actually Housing its a "stock"
People have been burned by the markets in the past, latest was the dot com bomb.
http://en.wikipedia.org/wiki/Dot-com_bubble
Isn't this problem RE rooted in the financial markets, whereby Goldman Sachs types became shadowy puppetmasters.
Recall the GLASS STEAGALL Act was repealed by Clinton in No. 1999, just prior to the Dot.Com bomb COINCIDENCE…did the vested interests either have this planned or knew the dot.com bomb was coming.
The irrational exhuberance via the ability to buy that dream home with NINJA paperwork.
People simply saw homes as stocks, they weren't made of paper, you could live eat sleep drink shit, get laid, etc. in your stock (previously known as a home)…it couldn't go down.
Goldman Sachs or Realturds, what was the difference.
BTW, isn't October the traditonal Witching Hour for stock markets to collapse?
October 11th, 2010 at 2:04 am
I don't understand how the analysis was performed. What is the valuation of the TSX you are using? In dollars? What basket? Do you include dividends?
I am sure it is interesting, I just don't get the procedure you used.
October 11th, 2010 at 12:58 am
RealPaul:
"The pimps forget that Canada has already agreed to raise rates in lock step with several other G8 economies and will raise again in October as scheduled."
Canada has not "agreed" to anything. As far as lock step, very few G8 countries are raising rates anything more than token amounts. The bond markets are putting a nearly zero percent chance on any interest rate increase in October.
While I would like to see higher rates Canada is in a bind. We can't raise rates too much more as the US will be stuck in a Japan like 0% rate situation for many years to come. If we raise much more our dollar will go well above par and the government would rather have low rates than a high dollar. This can be evidenced by the jaw boning from Carney about Canadian's debts. He knows he can't raise so he warns us that he might.
Low rates are here for a while IMHO.
October 11th, 2010 at 12:43 am
@ Japp
What I was hoping to capture is the wide economic factors that people argue support the idea of "it is different this time".
Just an example: the multiplier effect on the economy of a strong Albertan oil or BC mining industry was commonly voiced as a justification of higher housing valuations in Vancouver… by looking at the TSX the impact on the Canadian economy would be somewhat reflected by rising stock price.
Based off valuations the stocks should rise in correspondence to expected future earnings, or better, future cash flows. The idea being: how can one set of risk-adjusted cash flows be worth more than another? (your comment on rent to price makes good sense)
Your comment comes in, "one ’standard house’ is measured against a bunch of changing 30 companies" – Don't think of them as companies think of it as: one average house is compared to a basket of 300 proportionally weighted cash flows that are generated off of 300 proportionally weighted assets.
Price/rent ratio or rent/Price (rental yield) is a very good test of housing assets being overpriced. I believe we both see things the same way – I was trying to look at big picture from another angle to ensure I wasn't missing something.
And, I don't believe I am.
October 11th, 2010 at 12:13 am
@ joseph_dreamcoat:
this index is like comparing apples with oranges. here one 'standard house' is measured against a bunch of changing 30 companies which happen to be traded publicly.
of course, it is AN indicator, but the price/rent ratio is a lot cleaner, even if it doesn't take interest into account, which the stockmarket does.
@ happy renting:
computers have improved a lot more in the last decade than housing did in 50 or 100 years. do you consider computers a luxury-good? or cell phones?
in fact, many houses out here built in the 17th century are still liveable, though improved in some areas, they still look the same.
October 10th, 2010 at 11:41 pm
@ House
In the interest of time – and again this was just done quickly as "food for thought" – I used the simple price index – But yes, the Total Return Index would have captured the dividends.
I agree that homes are more like capital assets than businesses. Especially, Condos units where the oddities of non-depreciating land are minimized in proportion to the total asset.
October 10th, 2010 at 11:40 pm
@Jaap: Most people (both renters and owners) live in much more luxurious housing then most people did 50 or 100 years ago.
October 10th, 2010 at 11:19 pm
And where are dividends in that calculation. TSX retains earnings where houses are just a capital asset, not true businesses.
October 10th, 2010 at 10:21 pm
@ Jaap how is this irrelevant?
Housing isn't something magical – it is an asset class like equities. A home, as an investment, has a balance sheet and an income statement – it is impacted by depreciation and borrowing costs. In the end it comes down to cash flows and comparing them with what you can get elsewhere. The TSX can be a relevant measure – I think the point is, this is food for thought and another way to look at fatty housing.
@ other ted: nope, inflation charts are one way to look at housing, however, multiple contraction and expansion versus a comparable asset class is another (Don't try to be smart and put Vancouver housing vs gold prices – simply put commodities don't have cash flows).
The above would assume a level of mean reversion and is interesting nonetheless.
October 10th, 2010 at 9:28 pm
nice, but irrelevant.
housing is not a luxury, and will go the same way as food. we will spend less and less on this as a % of our income. actually, like rent has been doing for ages.
October 10th, 2010 at 6:27 pm
And since the TSX does not appreciate, wouldn't a simple price to inflation chart show the same thing? If not where did you go wrong?
October 10th, 2010 at 6:26 pm
What are your criteria for all of these categories?
October 10th, 2010 at 6:05 pm
better yet… number 5 – a U.S. type housing crash
October 10th, 2010 at 6:04 pm
I hope for number 4