Local realtor Will Wertheim laid out a bullish case for Vancouver RE in his comments [3 Dec 2010 10:18am] on our recent post presenting a technical analysis of the Vancouver RE price chart [Five Charts: Predicting Future Vancouver Housing Prices, 11 Sep 2010]. Will’s argument is headlined here, for the record, and our own comments on his predictions follow.
“Sorry, but you’re wasting your time with these charts. They mean nothing. There are only three factors (two related):
– Supply of Buyers, and
– Buyer’s access to funds
– Supply of Sellers
Like it or not you have to agree that there is a large enough pool of buyers out there right now and that will not likely dissipate over the next two years (as your hopeful charts try to say). Many of these buyers are not of local means. As long as these buyers have access to cheap money (be it offshore or through low interest rates) they will buy. The price balance and pressure is due to the small availability of homes for sale. As long as many homeowners are living in their homes and not listing them, supply will remain tight.
What happened in 2008 was an incredible event of such mind boggling reach. From media and those “in the know” a global crisis of confidence occurred. I knew (but did not realize its magnitude) of it coming about a year before it did from some higher-up bank VPs (no, I will not disclose who said what to me but they were a client who did not go forward on a deal and then proceeded to lose quite a bit of their investment equity, at least on paper). It stretched out into every sector of the consumer’s mind and retailers/sellers struggled to move any sort of product. What a great time to buy it was (in hindsight).
Now, what would have happened if that bubble didn’t burst? If there was no 2008 crisis? And where would we be today if the 2009 recovery didn’t happen? Doesn’t matter.
Fact: We don’t have enough land in the areas people most want to live for the type of homes most people want (westside detached).
Fact: We don’t have a high turnover of homes coming onto the market and likely won’t for a very long time.
Fact: Vancouver is desirable for a great many people, particularly those from outside Vancouver. I see that every day and hear it from tourists and foreign buyers.
Fact: Interest rates are low and general consensus is that they are unlikely to rise much over the next year or two. Beyond that, unknown.
Fact: Yes, unaffordability for locals is obscene. You’re talking average prices but as you know, that average house is pretty darn poor. While the average may be $1m for REBGV, on the West side it is $1.6m. The result is that locals will continue to migrate East where it is *cough* “affordable” while only those of generous means will be buying up the West maintaining that high average.
My bet: somewhere between 4 and 5. Not as low as 4 and not as high as 5. Unless another crisis of confidence spurs a massive dump of listings and a disappearance of money.”
We welcome Will’s opinion and will take the opportunity to discuss it.
He sees as highly probable a mix of scenarios 4 and 5; scenarios that, in our original post, we weigh as having just 15% and 3% probabilities of playing out, respectively. So we differ substantially from him in our outlook on the markets.
Will’s position really comes down to a ‘demand-will-continue-to-overwhelm-supply’ argument:
1. Demand will remain high
- “(the) pool of buyers out there … will not likely dissipate over the next two years”
- “Vancouver is desirable for a great many people, particularly those from outside Vancouver.”
- “locals will continue to migrate East , … while only those of generous means will be buying up the West maintaining that high average.”
2. Supply will remain low
- “We don’t have enough land in the areas people most want to live for the type of homes most people want (westside detached).”
- “We don’t have a high turnover of homes coming onto the market and likely won’t for a very long time.”
3. Money will remain cheap and available
- “Interest rates are low and general consensus is that they are unlikely to rise much over the next year or two.”
Will is essentially saying “Things that have been happening will continue to happen, so price rises that have been happening will continue to happen.”
Will offers us caveats, but simultaneously downplays them:
- “As long as these buyers have access to cheap money (be it offshore or through low interest rates) they will buy.”
- “As long as many homeowners are living in their homes and not listing them, supply will remain tight.”
- “Unless another crisis of confidence spurs a massive dump of listings and a disappearance of money.”
He mentions these caveats in passing, but when it comes to factoring them into the final probability outcome, he appears to ignore the possibility (probability?) of any of these things coming to pass.
This is the difference between the bulls and bears at present.
The bulls say that things have gone well so far, despite the ‘crisis’ (the ‘Great Recession’), and thus, things are expected to continue to go well.
Bears say that, somehow we may have missed the bullets thus far, but there are so many potential downside risks, we’re expecting at least some of them will come to pass. And it’ll only take one or two of them to start a price avalanche. Bears give weight to factors other than ‘supply’ and ‘demand’, such as historically extreme fundamental measures, as indicating that a severe price correction is highly probable. Record high price:income and price:rent ratios; record high ownership rates; record low interest rates (now guaranteed to rise); record high household debt levels.
What Will doesn’t seem to get is that, rather than ‘meaning nothing’, analysis of charts takes into account the past behaviour of buyers and sellers. That’s the point. As we said at the beginning of the five-charts article: “Only a lunatic makes real estate sell or buy decisions based solely on charts, but, conversely, only a fool would say that past price action is irrelevant.”