“People do have a set point after which it’s just not worth it for them to buy.
If you take for example my house purchased 14 years ago for $156K, large lot, but old 2 bedroom bungalow about 700 square feet. Currently this same house is $380K. I wouldn’t buy it at that price, period, just like I don’t pay $50 for a t-shirt.
Every person with some sense of who they are maintains this kind of price/value list in their head.”
- Rachelle at VREAA 17 Aug 2011 7:43am
[see Rachelle's similarly very sensible Ontario-based landlord blog at landlordrescue.ca].
Here in Vancouver people have been through 5-10 years of relentless invitations to lose their heads; to lose the “sense of who they are” compass. The speculative mania, with all its ramifications, has applied increasing pressure, and the population have succumbed.
“Can’t afford a $50 t-shirt? Sure you can! Why, that one over there cost $150. This is the price of t-shirts nowadays, where have you been? If you want to live in Vancouver, and you want to wear a t-shirt, this is what you’re going to have to pay. I have wardrobes of $75, $100 t-shirts… look at this one, only $65! Or stretch and buy the $72 one – think of the resale value.”
- vreaa
You should see what people pay for a pair of ‘selvage’ jeans these days. There is also a prevailing fashion trend for men to dress up in depression era ‘work clothes’ which cost an arm and a leg.
Quote ‘oTheDay…
“But now it’s different. It’s a flash game.” – Adrian Tan,Singapore Equities Trader
[Reuters] – Asia’s wealthy park cash in cars, homes, art and wine
http://tinyurl.com/44zzujw
[PostScript: a 'flash' is frequently accompanied by a 'bang']
hahaha
Flash? Aiyoh iPhones not doing well lah?
Meanwhile Europe drowns in Shit one of funniest serious business articles I have seen in a long time
http://www.vanityfair.com/business/features/2011/09/europe-201109
Bonus illustration….
[Wired/DangerRoom] – The Horribly Tacky Interior of China’s Aircraft Carrier Is Perfect for Karaoke Nights
http://tinyurl.com/3mj6zoy
if $50 is the going rate for a t-shirt and you don’t like the price you can always wear a tank top. Your choice.
Sure Rusty. And once a critical mass of people give up and decide to go for the tank top, don’t be surprised that you can no longer resell your t-shirt for $75.
Sure, Why not eat cake when you cannot afford bread..or maybe borrow money and then have your cake.because the price of cake always goes up.
“Here in Vancouver people have been through 5-10 years of relentless invitations to lose their heads”
Why u so blue?
bread is not the only staple
14 years ago wasn’t a chocolate bar 80 cents? A gatorade $0.99? I think a price hike of less than double in 15 years is reasonable given the current true rate of inflation, not the official squibbled CPI numbers with the hedonics factored in. Playing devil’s advocate here…But how does inflation factor in to the price of RE since ’97? How much actual value did the house increase by, if any?
“how does inflation factor in to the price of RE since ’97″
The best measure is price-rent or price-income ratio, same-property rents have gone up about 2% per year, or about 40% in nominal terms; incomes 3% or 50% in nominal terms. That would put Rachelle’s house at $220K-$234K to assuming it’s been reasonably maintained. If Rachelle’s neighbourhood is becoming more dense or more desirable a slightly higher price is justified, but as things stand a 40% drop in real terms is required to get from $350K to $220K.
On a completely unrelated topic, 5 year Canadian government bond rates are assuming inflation is going to be well below 2% for the next 5 years.
So let’s assume inflation stays at 2%. In 10 years that means a $220K fundamental value goes to $268K. That would require a -2.6% nominal drop per year for 10 years. If prices stay “flat” it would take 23 years for rents appreciating at 2% to catch up.
Fair enough, she wouldn’t pay $380K for her current house, but would she sell it for what she thinks it’s worth (around $154k)? I don’t think so … because why would you sell something for less when people are willing to pay more? When people don’t see the value or cannot afford, then we should see some price reductions. For some reason that I cannot understand, most people in Vancouver think this city is heaven on earth and they are willing to mortgage their lives to stay close to paradise. We won’t see prices falling until this mentality changes or borrowing money becomes more expensive/difficult.
“The best measure is price-rent or price-income ratio”
how so? I suppose you might be correct if every buyer borrows 100% from the bank to finance his/her purchase – this does not account for the equity involved in each transaction. And aren’t there immigration factors to consider? I bet level of immigration is more closely related to price than are your price-rent and price-income measures. (you’re still living in the 80s)
To me, this rustypost is the defining indication of the state of mind of your average Vancouverite. Only in Vancouver will some ask such a stupid question and this, my friends, is why the housing market in Vancouver is so overinflated.
Exactly. The posted comment sounded very similar to statements coming out of Wall Street just before the tech-bubble collapsed. “P/E and other such fundamental ratios are so 80′s and have nothing to do with valuation in the new economy”. Boom! Pop! Suckers!
sorry, i must have missed that memo – all immigrants come to canada with enough money to buy a house sans mortgage?
wow, i guess the world really is changing.
Immigration levels are poorly correlated with home prices everywhere in Canada, B.C. included.
http://theeconomicanalyst.com/content/superficial-appeal-population-growth-drives-canadian-house-price-argument-does-it-hold-water
“Sure Rusty. And once a critical mass of people give up and decide to go for the tank top, don’t be surprised that you can no longer resell your t-shirt for $75″
critical mass do not give up – not here. Check 2008 fella. It wasn’t 6 months before this critical mass came back twice in number
“I bet level of immigration is more closely related to price than are your price-rent and price-income measures. ”
Ah yes but they are not “MY” measures. They are measures used by investors the world over. I’m just delivering you from salvation so don’t think this is anything personal; I’m accountable to a Higher Order, A=L+E.
Jesse,
OK, so assume these measures are used by investors all over the world to detect prices bubbles. Does these mean that every city in the world should follow a 3:1 price:income ratio? And that if a location separates from this rule it’s a bubble? By this way of thinking Calgary real estate should be more expensive than Vancouver.
I think the lady doth argufy too much lol
“Does these mean that every city in the world should follow a 3:1 price:income ratio?”
No I am not claiming that one city cannot have a price:income ratio that is higher than another. I am claiming that an investor is for the most part geography-independent and will seek higher yields in other cities if Vancouver’s yield is too low. This breaks down when capital gains are assumed, rightly or wrongly, because part of the total return is attributed to capital appreciation. This isn’t exactly new information and certainly isn’t controversial even for the most ardent bull.
All’s I know is that Vancouver’s P/E ratio is high, meaning they expect high earnings growth. We shall see; it’s not necessarily impossible I suppose.
And may He be with you always.
No dummie … investors use price:rent ratio return to measure the rate of return on their investment. The higher the ratio, the lower the rate of return. Why would a rational investor choose a investment with a lower rate of return? The reason some “investors” buy real estate in Vancouver is because they believe prices will keep on going up, but that’s not RE investment it’s more like RE gamble.
price:income ratio is a measure of affordability. Sure the ratio varies among different cities and it is expected that RE in Vancouver would cost more than Regina (all other things equal) just because it’s a more desirable city. However, the fundamentals hold no matter where you live … you should only buy a house if you can afford it. The price:income ratio for Vancouver tells that people are overstretching their budget just to own a house. Do you understand now?
So yes, everyone wants to move to Vancouver and RE prices go up, but if the city is not producing more wealth then prices cannot keep on going up forever.
Places with stable, higher price to income ratios have a significantly lower percent of homeownership (24% not 70-80%). SF, NYC, for examples.
It is actually pretty easy to show a positive correlation between immigration and home prices in Vancouver but I will not go into the statistical details. In addition to the immigration factor, other cities also show a stronger positive correlation to other factors including income levels and rents, etc. Most investments are analysed using well-demonstrated methods based on risk-adjusted discounted cash flow. Vancouver real estate shows cash flow characteristics that are extremely poor (ie. the common ratios look terrible) meaning that if you asked other people for money to buy Vancouver property claiming that you will pay them some return in a few years time you are more than likely to come up empty handed. Investment is generally not based on the greater fool theory that underpins assets like gold (which pays negative carry) and Vancouiver real estate which also pays negative carry but also some positive “convenience yield” (because we consumer shelter). For most people, Vancouver RE has a negative yield; however HAM may argue that this negative yield is justified because it’s offset by some other positive yield factors (a Cdn passport, store of wealth, etc). The result is pretty obvious: HAM crowds out all other money over time because Vancouver RE is a bad investment from the point of view of non-HAM and eventually a form of the “Dutch disease” sets in and the bubble pops as the HAM pulls out. This is exactly why there are restrictions on foreign capital inflows in many small economies all over the world – to prevent the social consequences of the boom and bust associated with fickle offshore money. Generally, this is not a Cdn issue – it’s an Vancouver issue (which is a small local economy). In my view, it’s just a matter of time until there are restrictions and additional taxes on HAM in Vancouver (like university tuition where foreigners pay double).
great post, thank you
what also concerns me is that HAM may buy back in large numbers post crash at low prices just to secure said passport, etc.
what say ye? is this an exercise in ‘soft/subtle’ hegemony?
ditto/great post… albeit your concluding remarks fall into the category of ‘essentially contested’ (political backlash? here? well, anything’s theroretically possible in a quantum universe – but some things are more ‘likely’. Dollars count for more than ‘votes’ these days, Airedales… ergo… ?)
Derp!… keep using words like “hegemony” and you’ll make ‘you know who’s’ head explode..
psst – some here are better suited to Doctor Seuss, but you want Doctor Susan!…
Cave: Hic Dragones – A Critique of Regime Analysis
http://tinyurl.com/3pvy5fd
Maybe Vancouver has some qualities that other cities do not have and people are flocking there. Is that why things are expensive? What other city in Canada has comparable qualities and is cheaper to live in?
so if Vancouver price:rent ratio doesn’t make sense for the investor then why are people inveesting here? Using your argument there should be no way an investor touches Vancouver…yet, just in my block there are 4 highrise condo projects starting. And, this market has made millionaires out of thousands of homeowners. I guess you can just wipe your ass with your price:rent measurement for all it’s worth lol
“Using your argument there should be no way an investor touches Vancouver”
Try to keep up! People are expecting future earnings, whether by rents or future sales price, to increase faster than inflation. This isn’t rocket science.
Oh Dummie … you keep change the topic … price:rent ratio does not matter for developers. They could care less about rent in this city. All they care is finding a bunch of smart people like you to pay up front before they deliver their product. In fact their risk is quite minimum. If they don’t find dummies to pay up front, they simple won’t build.
VHB used chocolate bars for RE analysis and he folded. this blogger used t-shirt…see where it is going!
Thanks for the memories, Fred.
We can’t recall the chocolate bar, but we do remain particularly fond of the argument/example that VHB once made regarding ‘affordability’ (it may or may not have been his original idea).
Paraphrased here:
A pencil is selling for $1,000.
You need a pencil.
You can afford to spend $1,000.
So, why don’t you go ahead and buy the pencil?
Because…. let me think now… Yes!! Yes!!… That’s it…. because if I’m going to spend THAT much on a pencil… I simply must have a Faber-Castell!… [They're 'all the rage', Dahhling!... and only the 'best' people have them!]….
“A limited edition of the Graf von Faber-Castell Perfect Pencil, the most expensive pencil is made of 240-year-old olive wood and has an endpiece and extender with built-in eraser and sharpener, all made of 18-carat white gold. The pen’s cap even features three diamonds beneath the Faber-Castell coat-of-arms. – Only ninety-nine limited edition Perfect Pencils were created. At a retail price of €9,000 (about $12,800), it truly is the world’s most expensive pencil.
http://tinyurl.com/429n4lu
That reminds me, I thought I saw some of those in the RichmondNightMarket for about a ‘fiver’… Gotta be ‘knock-off’, right!?
“so if Vancouver price:rent ratio doesn’t make sense for the investor then why are people inveesting here?”
There’s a huge difference between investing and speculating. People are buying Vancouver real estate, not because as investors they get a good return on their money, but because they think next year the price will be higher. It’s like buying crappy mining shares vs buying dividend-paying preferred shares. I’m an investor, I own some preferred shares that pay me a good return on my money (4-5%). But watching the price of the stock is like watching paint dry (boring, never really goes up or down a lot). But I’m also a speculator because I own crappy mining shares because some guy told me a story about a property the company owns and said by this time next year I’ll be a millionaire. Smart investors (not speculators) want a good, safe return on their money and wouldn’t touch those mining shares with a ten-foot pole. Even though they may go up next year. But more than likely they will go down (ie-risk). The smart real estate investor doesn’t care if the price of the house goes down from one year to the next, because he’s happy collecting his rent at 3-5% (or whatever it is supposed to be these days).
Investor/speculator semantics aside, there is a point that Rusty is making, that investors in Vancouver are accepting lower yields. They may be betting on appreciation but maybe not. They may be happy with low yields and low total return because it is perceived as a safe or low risk investment given the alternatives, a part of the “flight to safety” the bond market is experiencing.
Other cities have low yields, not just Vancouver. For whatever reason these cities’ properties are given high credit ratings in the eyes of marginal investors. Fine, but there are risks. Perceived safety is just that: perceived.
Hi all,
The answer to the question is I’m not selling because I need a place to live for the rest of my life and for now this place is fine.
The house is worth the use of it.
speculators? What bunk have you been reading? I see people buying homes to live in and raise their families. The fact that it appreciates in value is irrelevant to the owners I know.
“The fact that it appreciates in value is irrelevant to the owners I know.”
—
Assumed price appreciation is far from irrelevant; it has become integral to buying and holding RE in Vancouver.
Ask a buyer about to sign on the line for a $1M mortgage on a Vancouver purchase whether they’d go ahead and sign if they thought there was a 75% risk of a 20% pullback in prices. If they hesitate (at all) then they are showing that “appreciation in value” is NOT “irrelevant” to them. (I’m being conservative with that risk example, to make the point that people are not taking downside risk into account. The actual downside risk is arguably much higher.)
Or, similarly, ask current holders of real estate if they would sell if they foresaw a similar risk.
Really….What disingeniousness !!
“People are expecting future earnings, whether by rents or future sales price, to increase faster than inflation”
wrong. I don’t know one couple who bought a home that calculated the future return. They buy the home to live in a raise a family.
You are so completely blinded by your frustration that you see everyone who buys as an investor, speculator, greedy, etc.
To suggest that expectations of strong future RE prices are “irrelevant” to Vancouver buyers and owners is simply preposterous.
At these price levels, people are buying and/or holding expecting future price strength, or, at the very least, for housing to hold its value… do you disagree that that is the case?
absolutely wrong vreaa. If people are buying to speculate then why is it that 95%+ of all detached homes in Vancouver were or are used for raising families? Don’t childless couples speculate too? There must be something more at work here if speculators stay away from detached homes. You need to check condo market if you’re looking for speculators.
Rusty -> You don’t understand what we mean by ‘speculation’, and there is always a danger of semantic differences when the word is used.
Speculation is not confined to people trying to flip.
Take a look through the ‘spot the speculator’ series for some prior discussion.
We’ll elaborate upon this subject sometime soon in a headline post.
speculation is your contention. Yet, there is no evidence that people buy homes because it’ll be worth more in the future. In fact, since most people buy a detached home to raise their family there’s strong evidence that non-speculative reasons are at the forefront.
Virtually every couple I know is banking on price appreciation. Every conversation about the purchase and the qualities of the house includes something along the lines of “..plus, it’s a good investment”. Or “I was lucky to get in during the pullback becuase it is only going up”. A member of my family that bout a house in North Van that is currently too small even paid 5+ figures for architectural plans for a second floor that they are planning to finance with expected equity increases over the next few years.
A few weeks ago you were claiming that prices will continue to increase (especially under your other aliases on the other forums). Now that there are some slightly bearish signals you have changed your tune to ‘nobody buys for appreciation’. Getting a little uncomfortable perhaps?
BTW – You still have not responded to my question about how to calculate East Van MOI from Larry’s latest stats.
Not much aof a chance our poll of couples attitude toward price appreciation could be so different. You’re full of shit JRoss
Perhaps you move in different circles.
Rusty/Lies et. al.
You are on the right track. Judging by the inconguity of our observations, one of us is definitely full of shit.
However, given the dreck you and your multiple personalities spew across the blogosphere I think it is patently obviuous exactly which of us that is.
How’s the MOI in East Van?
resist the urge to feed eyesthebye – he’s obviously sweating bullets at losing all the paper gains he pretends not to care about
“our poll of couples attitude”
————————————————————————————
That does not even make sense.
Any way an opinion poll is not a substitute for thought
How many people would stretch to buy that dream house if they knew they were guaranteed to lose money?
Never mind I can see already how many people are financing depreciating assets of all kinds (cars and furniture)
Maybe this blog is useless after all, VREAA you have made a logical error in thinking that if only people were informed of their foolish behaviour they would change. Clearly the sheeple are beyond help.
Get your cash ready and let the bleeding begin!
(No offense VREEA, my blog is pretty useless too!) After all what’s more insane than buying one house at today’s insane prices? Two, three, four or more, all in negative cash flow position? I know a guy with 5 cash flow negative houses and the 3 buildings I manage cost the owner 26K this month.
Agree how crazy it all seems right now.
This blog has turned out to be a number of things but it remains, primarily, an archive of personal stories.