Don’t be too bearish

Pimco says US and Canadian investors working under the assumption of a Canadian housing bubble may be too bearish.

“The great white short” is gaining popularity amongst hedge funds, but maybe they are being too pessimistic?

“Our secular view is that housing in Canada is overvalued and due for a correction,” he said. “We believe a 10%–20% real decline in national housing prices over a five-year period is very realistic, with much sharper corrections in some local ‘hot’ markets such as Toronto, Vancouver and Montreal.”

Read the full article in the Financial Post.

Meanwhile in yesterdays thread who is making money shared HPI results from the most recent 1, 3 and 5 year period:

For those of you who didn’t get the memo:

HPI INDEX June 2013 Lower Mainland (Total return)

1 yr. return -3.0%
3yr. return +4.6%
5 yr. return +5.7%

Total return with inflation
1 yr. -5.5%
3 yr. -2.9%
5 yr. -6.8%

I ask again, “WHO IS MAKING MONEY?”

44 Responses to “Don’t be too bearish”

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    Ralph Cramdown Says:
    1

    Who’s making money? People who bought 3-5 years ago and are leveraged. Looks like they’re only ahead by enough to cover the eventual selling costs, but still…

    Cash buyers are behind.

    Hot debate. What do you think? Thumb up 10 Thumb down 3

    I think total return should include income as well.

    Like or Dislike: Thumb up 1 Thumb down 5

    Not long ago Pimco would have been considered bearish for calling for a 10-20 percent drop. Today they are considered bullish. The mood has certainly changed. I wonder if investor psychology has any impact on markets…

    Well-loved. Like or Dislike: Thumb up 20 Thumb down 0

    I agree, total return should include income. But at recent prices, owning is more expensive than owning, so income is negative.

    Like or Dislike: Thumb up 5 Thumb down 1

    elf: “I think total return should include income as well.”

    Income = revenue – expenses

    With Vancouver housing over the past 5 years expenses are always higher than revenue so there is no positive income to include. What should be included is the negative income which makes the return much worse.

    Hot debate. What do you think? Thumb up 11 Thumb down 2

    China’s real estate bubble is reinflating. Is this bullish for Vancouver real estate? I’ve been hoping that a correction in Chinese RE would lead to a correction in Van RE. According to Zero Hedge, the Chinese real estate bubble is back on again:

    “Chinese home prices have now risen year-over-year for the sixth month in a row and June (at +6.8%) is the fastest rate since January 2011. As Reuters reports, the incessant rise in property prices across 70 major cities hides the real bubbles in Beijing (+12.9% year-over-year) and Shanghai (+11.9%) which, as we noted in detail previously, reflects the apparently unstoppable exogenous hot money (credit) flows that the rest-of-the-world’s-central-bankers are pumping into the markets.”

    http://www.zerohedge.com/news/2013-07-18/chinas-housing-bubble-re-inflates-fastest-30-months#comments

    Like or Dislike: Thumb up 4 Thumb down 0

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 3 Thumb down 16

    Pretty good summary and comparison of the US and CA RE markets:
    http://www.cansofunds.com/wp-content/uploads/2013/07/Canso-Px-The-Canadian-Housing-Market-July-2013-Revised-2.pdf

    Like or Dislike: Thumb up 5 Thumb down 0

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    Poorly-rated. Like or Dislike: Thumb up 4 Thumb down 14

    George Says:
    10

    Can some bears respond to my comment #6. So far the only responses have been from bulls.

    The Zero Hedge article makes a good point. Central bankers around the world are printing money like there’s no tomorrow. That money is keeping asset prices high. That is why the Chinese real estate bubble is growing again. Ben Bernanke just basically said that he’s going to keep up with QE. Nothing is really changing. The world economy is one big debt ponzi scheme and there are no signs that it is coming to an end anytime soon. Although I am a bear, I think that is the best argument for the bulls.

    Hot debate. What do you think? Thumb up 12 Thumb down 1

    George Says:
    11

    The politics of class, bike paths, and property values all wrapped up in this one flash point. Only in Vancouver.

    http://www.vancouversun.com/news/metro/Vancouver+Point+Grey+Road+become+park+rich+with+plan/8673535/story.html

    Like or Dislike: Thumb up 3 Thumb down 1

    Democrass Says:
    12

    ‘We cannot afford the houses we are living in’

    That’s the conclusion of this well-researched and quite alarming summary of the Canadian housing market and the risks it presents to individual and government finances, as well as the economy. A must-read if you believe the stronger sales numbers of the past month mean it’s onward and upward for housing. The authors of the report are the people at Canso Investment Counsel, a firm that specializes in managing portfolios of corporate bonds.

    The Canso report is here: http://www.cansofunds.com/wp-content/uploads/2013/07/Canso-Px-The-Canadian-Housing-Market-July-2013-Revised-2.pdf

    http://www.theglobeandmail.com/globe-investor/personal-finance/carrick-on-money/carrick-on-money-we-cannot-afford-the-houses-we-are-living-in/article13296040/

    Hot debate. What do you think? Thumb up 18 Thumb down 0

    Democrass Says:
    13

    From page one of the Canso Report:

    Imagine two cars in a race. One is the Canadian housing market and the other is the American housing market.
    The Canadian racing team is continually losing to the American. The Americans have developed a new type of engine, called “securitization”, which has allowed them to reach much higher speeds than the Canadians. The securitization engine uses a fuel called GSE that can only be found in the United States.

    The Canadians study the American design and come up with their own version of the securitization engine. Since the Canadian teams cannot use the GSE fuel, they develop their own variety called CMHC. They do this by modifying an existing lower octane fuel called BHA (Boring Housing Agency) and turn it into a much higher octane fuel using the “bulk portfolio insurance” process which uses additives like longer amortization and 100% financing.

    The new Canadian securitization engine is very good. For the first time in many years the Canadians can keep up with the Americans and even pull slightly ahead of them. Both cars race faster and faster. The Americans notice their engine is overheating. The Ca-nadians notice the same thing.

    The Americans are worried about blowing their engine. They slow down. The Cana-dians pull farther ahead. The Americans talk it over and are unwilling to risk completely burning out their engine so they direct their driver to pull into the pits for a look. Once they lift the hood, they realize that the problem is the GSE fuel. Their car is running so hot it risks an explosion. They drop out of the race and the Canadians win.

    People are shocked that the leading American team has lost and racing commenta-tors marvel at the Canadian design. The Canadian team is lauded for the genius of their design and the Canadian team members become famous. They like it.

    The Americans decide to change their securitization engine and run with a lower oc-tane fuel. The Canadians stick with the CMHC fuel, although it runs very hot, and even add a secret ingredient called IMPP. This makes the Canadian car run even faster. The prob-lem is that the risk of explosion with the Canadian securitization engine is now even higher.

    The Canadians see that their engine is running hot, but they ignore it. For the first time in many years, they are far ahead of the Americans and winning races. They like the feeling of winning and get glowing international media exposure. The speed of the Cana-dian car increases and the racing world marvels. No one listens to the few Canadian team members worried about the risk of explosion. They believe the safety of the car and driver are being sacrificed for fame and fortune. Winning races has become everything.

    Well-loved. Like or Dislike: Thumb up 57 Thumb down 0

    Harvey Says:
    14

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 1 Thumb down 20

    It's simple Says:
    15

    I love that report #13 bull’s are going down

    Like or Dislike: Thumb up 3 Thumb down 3

    elvince Says:
    16

    @George #10:
    I’m bearish but I do see your point. It seems like since we’re slushing in money and every investment class should skyrocket upward. This is certainly true for bonds, which are at (almost) record low yields. But you have to keep in mind that rents are not skyrocketing. They are actually stable throughout most of canada, and heading sightly down in Vcvr. Why is that?
    1-Overbuilding. You’ve seen those cranes in the sky, they were there for a reason. New units have outpaced new household formations in the last few years. Realtors can sing songs about chinese immigrants and the echo boomer generations, but numbers are numbers, and more living units have been built than the number of household that has formed. Now, no matter how much money you send into the system, if you have an oversupply of something, prices will come down. If rents go down (or just don’t keep up with inflation), then the price has to come down to keep the same Price/Rent ratio. That is true because even if you’re slushing in money, you want to pay as little as possible for any given good or service, and in an era of oversupply, the consumer (renter) has more negociation power than the producer(landlord).

    2-Negative income. As the price to rent a place to live in goes down, so does the generated income for the owner. But the relationship isn’t 1:1. Meaning that if you halve the rent, you don’t just halve the net income, you’re probably going under. Rental reat-estate net incomes, as compared to other investment class (let’s say a bond) is dependant on many more factor than just the money supply. It’s also dependant on material costs and labor cost to some extent. Basically every expense on your piece of real estate will climb with inflation. So even if interest rates were 0%, there is a point where investor could lose money renting their condos or houses. Imagine if you owned a bond with a negative yield so you’d have to pay every month to keep it: you’d weight your option about getting rid of it, even if you had to sell it much under par. That’s about the same for amateur landlords.

    To sum it up real quick: Even if the BoC was to print a few bilion pieces of plastic with the queen’s face on it, it wouldn’t make the rents in Vancouver go up that much, but it might very well raise the cost of fixing the roof and mowing the lawn.

    Hot debate. What do you think? Thumb up 12 Thumb down 2

    Son of Ponzi Says:
    17

    2 articles in the G&M today.
    1. Property puchases at all time high in Toronto.
    2. Toronto condo sales fall 46%.
    Which one is it?
    My advise is : Stop listening to the experts. Do your own research. Look what’s happening in your community.
    And always remember, what goes up must come down.

    Well-loved. Like or Dislike: Thumb up 22 Thumb down 0

    It's simple Says:
    18

    BREAKING NEWS (detroit filed for bankruptcy)

    Like or Dislike: Thumb up 8 Thumb down 1

    Son of Ponzi Says:
    19

    #18
    Bye, bye Miss American Pie, drove the Chevy to the levy but the levy was dry.

    Like or Dislike: Thumb up 4 Thumb down 2

    Harvey Says:
    20

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 1 Thumb down 10

    Devore Says:
    21

    The problem with “world awash in printed money” is that it isn’t. Extremely few people in the world are in a position to get 0% interest loans from the government or able to trade in toxic assets for face value to the central bank. Actually, the number is roughly zero. Only (some) corporations are allowed to do this. So even though the monetary base might be exploding, almost no one has actually received this free money. Much of it is ending up filling in holes in government budgets left by the absence of growth, so it is being misallocated on a gross scale, but that’s about it. Otherwise, please inform me how I may obtain my suitcase of money to buy a trophy house on Bike Lane Road. Where is this money being handed out?

    Hot debate. What do you think? Thumb up 18 Thumb down 3

    ‘BREAKING NEWS (detroit filed for bankruptcy)’

    If they only had mountains, ocean, rain, traffic congestion, bike paths through exclusive residential areas, extensive drug dependencies, oddball soft drinks, the Olympics, large rat population, HAM, yellow helicopters, skiing, overpriced tear-downs, gangs, Victorian liquor laws, riots, crappy transit, rain (I know, I said it twice – sue me), crappy hockey teams, AA baseball, more bridges, RE agents moonlighting as actors, and a few other things, then Detroit would be: The Best Place in Michigan ™.

    Hot debate. What do you think? Thumb up 16 Thumb down 2

    ‘Is it clear now for bears why houses in Detroit go for 10 bucks?’

    Totally!

    What’s not clear is why similar houses in Vancouver go for $10M

    Well-loved. Like or Dislike: Thumb up 31 Thumb down 1

    @23

    have you been to Detroitshima recently?

    Like or Dislike: Thumb up 1 Thumb down 7

    George: “Ben Bernanke just basically said that he’s going to keep up with QE. Nothing is really changing. The world economy is one big debt ponzi scheme and there are no signs that it is coming to an end anytime soon. Although I am a bear, I think that is the best argument for the bulls.”

    Except the fact real estate is supported by consumer debt which is limited. It does not matter how much money they print people can only service so much debt. The only way consumers in Canada can go in more debt is to lower rates. That jig is up and rates are heading the up now. At least the bond rates are which are what mortgages are correlated with.

    Hot debate. What do you think? Thumb up 13 Thumb down 1

    @Jack,

    I would like that to be true, but haven’t bond rates gone down short term since Ben Bernanke said no changes.

    I know within the next few years interest rates will go up, but for the time being it doesn’t look there will be much change to the rates.

    Regardless I think people are overspent and the market will go down before the rates go up, just my opinion.

    Like or Dislike: Thumb up 2 Thumb down 1

    New Listings 180
    Price Changes 113
    Sold Listings 140
    TI:18019

    http://www.paulboenisch.com

    Well-loved. Like or Dislike: Thumb up 55 Thumb down 1

    Son of Ponzi Says:
    28

    Houses in Detroit for 10 bucks.
    I buy ten, my sister buy ten.v

    Hot debate. What do you think? Thumb up 9 Thumb down 1

    franko Says:
    29

    The Next Detroit?

    Put me down for:
    Cleveland
    Cincinnati
    Buffalo
    New Orleans

    It’s much easier in North America to walk away and find greener pastures than in other parts of the world. Who knows what will happen to the mega-cities in China in 20 years.

    Spent a couple of weeks in Beijing and Shanghai 2 years ago…people squeezed in like insects gasping for air. Smog in B is unbelievable. Felt trapped while driving for hours in bogged down traffic. Easy to loose sense of direction with visibility reduced to a few blocks. Can look straight at the sun at 3pm with bare eyes. It’s hard to see the top of those 100+ storey buildings in S without a good sea breeze. Had a sore throat for a month.

    Hot debate. What do you think? Thumb up 11 Thumb down 1

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    Son of Ponzi Says:
    31

    Felt trapped while driving for hours in bogged down traffic.

    That’s what a friend who recently moved from Kamloops to Vancouver told me.

    Hot debate. What do you think? Thumb up 10 Thumb down 1

    hardy har Says:
    32

    @25,26 I jotted down some periods that may dispel some common rate beliefs

    ‘65-’69 — 5yr mortgage rates soared from 7-10.5% , prices soared
    ‘72-’75 — rates soared from 8.5-12%, home prices soared
    ‘78-’81 — soared from 9-18%, home price soared
    ‘81-’84 — 5yr mtg rates plummet, home prices plummet
    ‘08 — rates plummet, home prices plummet
    ‘09-’11 — rates rise, home prices rise
    ‘11-’12 — rates fall, home prices fall

    Takeaway — the link between bond (mtg) rates and prices does not always work the way everyone believes.

    Hot debate. What do you think? Thumb up 9 Thumb down 16

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    hardy har Says:
    34

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    pricedoutfornow Says:
    35

    As we prepare to leave our rental condo for a rental house, our landlord is freaking out because he doesn’t have tenants for next month. He’s trying to blame US, since we are in the process of moving, the place isn’t really in showable condition, he insists nobody wants to rent it “because they can’t see past the clutter” (though only 2 people have been to see it the whole time it’s been listed). I call BS and think he’s aiming to have an excuse to keep our damage deposit. Guess we’ll have to take it up with the tenancy board. He’s sweating…doesn’t want to do any upkeep on the place after we leave, though nothing’s been replaced or fixed since it was built 7 years ago (carpets are not in great shape and walls could use a good paint job). Yeesh some people! Luckily the next house we’re moving to doesn’t have any mortgage on it, so no worries next time about desperate, financially-strapped landlords.

    Hot debate. What do you think? Thumb up 13 Thumb down 1

    Ralph Cramdown Says:
    36

    “Otherwise, please inform me how I may obtain my suitcase of money”

    I can’t promise a suitcase full, but a family with good credit can borrow a lot with credit card teaser rates for six months or a year. Your broker’s margin money should be well priced. Not free but very cheap.

    Like or Dislike: Thumb up 3 Thumb down 0

    #6 George: “China’s real estate bubble is reinflating. Is this bullish for Vancouver real estate?”

    Probably. Chinese (over)building has sustained high commodity prices, and with that comes a high Canadian dollar. Consider this argument:

    http://www2.macleans.ca/2013/07/17/a-high-dollar-means-higher-wages-not-lower-prices/

    “I’ve been hoping that a correction in Chinese RE would lead to a correction in Van RE.”

    China is clearly overbuilding on a scale the world has *never* seen before. Economies are driven by credit which makes them susceptible to the dynamics of a Ponzi scheme. When the government prints money and prevents restructuring, the Ponzi dynamics are reinforced by reward, and the capitalist dynamics take a back seat.

    “The world economy is one big debt ponzi scheme and there are no signs that it is coming to an end anytime soon. Although I am a bear, I think that is the best argument for the bulls.”

    It’s the only argument left for the bulls, and the same dynamic is operating on the S&P 500. Bad economic news means more QE and higher stock prices. Good economic news is bad for stocks. The question is whether we can ever get back to normal. This anti-capitalist dynamic is incredibly sick, and the longer it goes on the bigger it gets, and the more painful it will be to reverse.

    Like or Dislike: Thumb up 7 Thumb down 1

    Laurey Says:
    38

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    Who is making money? Says:
    39

    “oh well you can always rent 2 mil place for 1,200. can you”

    Maybe not $1200 but certainly $3000.

    Sounds just fine to me.

    Like or Dislike: Thumb up 6 Thumb down 0

    Laurey Says:
    40

    hey you were posting about ficttious inflation. what are you talking about? we have deflation since 2008.

    Like or Dislike: Thumb up 0 Thumb down 2

    [...] steady as she goes -Canadian housing market in danger -The Canso race car analogy -Vancouverites get worked up -Duncan mall in foreclosure -Detroit files for [...]

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    42

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    43

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    ブルガリ キーケース Says:
    44

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