Sandy Garossino – “We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”

From a post by Sandy Garossino, independent candidate for city council in the recent civic elections, at her blog votesandy.ca 28 Nov 2011. The entire post is a must read for those concerned about Vancouver housing. Some excerpts below for our chronological archive. -

“Relative to household income, our property values are now among the most severely unaffordable in the world. Relative to income, Vancouver’s property values are 56% higher than New York’s, and 31% higher than London’s.
In its November, 2011 report on the Canadian housing market, RBC notes that 94% of average household income is required to cover the ownership costs of a 2 storey detached home in Vancouver.
This development is new and unprecedented.”
…

…
“Excesses in the housing sector can generate key vulnerabilities in the financial system and the economy as a whole.
Rather than stimulating productivity and competitiveness through business investment, cheap credit has been used to bid up the price of houses.
Vancouver residential real estate values began to detach from their historical relative values to the rest of the Canadian market sometime around 2006, when volatility began to get very choppy.”
…
“Many see Vancouver in a housing bubble, and it may well be. Others however, such as celebrated architect Gregory Henriquez, think our prices still have far to go to reach that point. Amazingly, Henriquez says that Vancouver is still under-priced. He is not looking at local economic conditions, however, but at the international forces in play. Viewed globally, Henriquez says that our market has become the “safety-deposit box for the world.”
…
“… circumstances militate against Vancouver being able to compete in the global marketplace for the best and the brightest talent needed to drive the knowledge and creative economies that will sustain cities in the future.
Our universities are losing key talent and find themselves unable to attract replacements or build on what we have. Our business sector cannot recruit, our local merchants are caught in a fight for an ever-dwindling supply of disposable incomes, and attitudes are hardening against even modest tax increases necessary to maintain our basic infrastructure.”
…
“Many Vancouverites seem unaware of the strange drama unfolding in many of our neighbourhoods.
The west side of the city is shedding residents almost daily as international buyers purchase more and more housing stock. These homes often sit empty or are re-cycled into the market and re-sold at significant gains within months to other international purchasers.
The west side real estate market is behaving exactly like a secondary market in financial instruments rather than a shelter market. Often the commodity is not actually used or consumed, but only traded. This trait allows valuations to inflate so long as the market is supported by global buyers, completely independently of local economic conditions.
During the recent civic election I was twice approached by people who reported that their homes were the only ones occupied on their block.”
…
“Yet Mark Carney’s sobering warning last summer seems to have fallen on deaf ears. To hear local developers, urbanists and planners discuss this issue, you would think our market is within the normal range, and people concerned about the speculative spree fueled by interest rates and global capital influx are alarmists and potentially xenophobic.” [Well put. - vreaa]
…
“The theory currently dominating the discourse on our housing market points to natural or systemic causes for our pricing: our limited land base pressured by in-migration. According to this view, the cure for this market is to build more housing—ie. condominiums.
Yet in-migration is occurring at historically normal rates and we didn’t grow mountains and a southern frontier overnight.”
…
“Conclusion: It is time to take off the rose-coloured glasses and face some hard truths. We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”
…

Great article. As we’ve said before, Garossino is to be applauded for publicly articulating the ‘hard truths’.
We agree with Garossino’s analysis in many respects.
The hope that there are ‘levers and mechanisms’ to ‘modulate the risks’ the market imposes, is similar to the hope for a ‘soft landing’ after a speculative mania. Some tweaking could alter the flight path, but who is going to be stepping in to buy very overpriced RE that has started a downward price trajectory?
- vreaa
[hat-tip Makaya.]

—

ADDENDUM 6 Dec 2011 8:20am

This comment posted to Sandy Garossino’s site:

Sandy,

Many thanks for this thoughtful and eloquent article.
We’ve headlined, excerpted, and commented on it in our chronological archives.

You are one of the few public figures speaking out on these issues, and we commend you for that. To point out these truths is brave; the thoughts are deeply unpopular in many quarters. As a consequence, most local  discussion of these issues has been done ‘underground’, in anonymous online forums. Some individuals, such as Gord Goble and Peter Ladner, have spoken out publicly, and you are a welcome continuation of that move.

We agree with your concerns about the multitudinous deleterious consequences of the massive misallocation of resources that comes with a speculative mania in housing. The optimist in us wishes you well with your endeavours to alter policy for the better. The realist is concerned that the only path forward for the speculative mania is a crash.

Judging by historically valid underlying fundamentals such as incomes and rent levels, Vancouver RE market prices are 2 to 3 times fair value, perhaps even more.
You see the speculative mania for what it is, and you are suggesting we attempt to orchestrate a ‘soft landing’ (no mean feat, if it is possible at all).
That suggestion itself creates a massive dilemma:
Given that there is such a large difference between the market price of properties, and their fundamental values, who do we hope to be buying these properties at perhaps slightly reduced but still massively elevated prices in the coming years?
Wouldn’t any such buyers be risking financial suicide?
Isn’t the only credible resolution a marked drop in prices, and then a recovery from the rubble?
Aren’t band-aid solutions on the way down simply going to put even more locals at dire financial risk?

Keep up the good work,
vreaa
(vancouver real estate anecdote archivist)

“I guess I will keep watching everything and restrain myself from jumping onto the Vancouver housing bandwagon even though I missed the Shanghainese one.”

“I came to Raincouver three years ago. I was working and living in Shanghai for two years: it’s a nice city, more transparent and efficient than its counterparts in inner part of the country. More foreign investments and more job opportunities. And therefore more attractive for young people, either uneducated, educated or over educated At that time I remember the main topics between colleague is either stock market or property price. There is pressure for me to buy apartment before I got married with my wife (we both live and work there) but I didn’t go that route by empty my pocket (not much) and by asking my parents for their help (not much they can do either). At that time, 2006-2007, the price of a 2-3 bed apartment in outer skirts of city will cost 7 to 10 times of my annual income with at least one hour (doesn’t matter you drive or not, could be two if you are not living beside subway) commute to work.
Well, I guess I’m lucky not be part of the housing party in Shanghai, but here in Vancouver, it’s definitely another show going. I’ve been here 3 years now and realized the house price was shooting up. I don’t know the exact price range here in Burnaby but some SFH will easily cost you 1mil. Consider all the fun facts undergoing these days: QE3, bailout, Euro crises, BPOE, HAM, I guess I will keep watching everything and restrain myself from jumping onto the Vancouver housing bandwagon even though I’ve missed a Shanghainese one.”
- GuyInBurnaby at VREAA 30 Nov 2011 12:59pm, commenting on “If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it. Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”

If real estate values were to fall by 25%, or even 15%, there’d be a social crisis – “I have friends that are selling their possessions to make payments. The scary part is, I tell people the truth and they look at me like I am from Mars.”

Tom is sixtyish. Rents a swishy place in a glass tower in downtown Vancouver and has his wealth in liquid assets, smugly invested. “A lot of my friends (mostly poor media types) are in deep trouble,” he says. “I have friends that are selling their possessions to make payments. One gal had to be talked out of a reverse mortgage yesterday. I begged her NOT to do it and explained the basics. The scary part is, I tell people the truth and they look at me like I am from Mars.”
As we all know, real estate did this to BC. The average SFH is now $1.1 million in Vancouver, and $592,034 in Victoria. The average family makes $83,300 and $76,600 respectively. Figure it out. If real estate values were to fall by 25%, or even 15%, there’d be a social crisis. Global TV would have a kitten. Whole condo towers would be full of under water owners. People with the bulk of their net worth in a house would suddenly understand how Americans felt when their market tumbled.
- story relayed by, and commentary from, Garth Turner at greaterfool.ca, 4 Dec 2011

“My friend bought here, and so did her mom. Two units. They got their deposit refunded the day after because they decided the units were too small, but before that, they had raved about how it was perfect. They then went the same day and bought elsewhere.”

“Update on my friend who I mentioned earlier was gonna buy here.
Well she did, and so did her mom. They bought 2 units, said it was a gong show at the sales center.
They actually commented how it was like in China now, how everyone goes crazy sales day and everything gets sold out day 1. After I mentioned China real estate market was going down recently, she was genuinely shocked and thought I was crazy, and said no way, then after awhile said well depends which city and not big cities.
Then I sent her ‘Property Prices Collapse in China. Is This a Crash?‘, by Gordon Chang, Forbes, 6 Nov 2011
I ask where do you get your info about Chinas market, no answer. But she says news always overhypes the situation. Which I replied can be used in both ways. Just look at RE pump stories.
She said the same thing as many people believe about Lower mainland real estate and why prices will remain high,
-everyone wants to be here
-China money (millions of millionaires coming)
-who cares if market goes up or down, as long as you have a comfortable place to live
-you may die tomorrow (lol)
But guess what, they got their deposit refunded the day after because they decided the units were too small. But before that, they had raved about the location and price and how it was perfect,
The same day they got their deposit back they went and bought at the Viceroy, which was “perfect”.
The whole conversation was like living in bizarro world.”
- 4SlicesofCheese at VREAA 29 November 2011 at 6:11 pm

Tom Davidoff Knows About RE Cycles

We recently [2 Dec 2011] posted a quote from a CTV interview with Tom Davidoff, of UBC’s Sauder School of Business, and an e-mail exchange that followed. We have since found a very sensible and informative article published by Prof Davidoff regarding the California housing bubble, reproduced below. We aren’t aware of him writing a readily available analysis of Vancouver’s market, and would greatly appreciate seeing an account of his thoughts in this regard, given his experience with the US RE boom and bust.
We suspect that, given his expertise, he could enrich and inform the online dialogue regarding our market. We’d welcome him posting something of this nature here at VREAA, but it’d be just as good to see it elsewhere on the web, or in a local paper, or publication.
Is Vancouver RE in a ‘bubble’? What are the estimated risks of price corrections? How much could prices correct? Is it different here? If so, why?
- vreaa

—
Why this housing bubble was different
Jon Lansner Interviews Tom Davidoff
The Orange County Register, 6 Mar 2010

Tom Davidoff, is an assistant professor at the Sauder School of Business University of British Columbia who has studied real estate cycles — including California’s wild home-price rides. We asked him to help us understand what’s happened …

Us: What made this housing bubble different?

Tom: We can compare the boom and bust cycle in housing in the late 1990s and 2000s to that in the 1980s. The increases and decreases were much sharper this time than the 1980s. This time around, I think it was more clear that there was a bubble. Where I disagree with some people is that it wasn’t the coastal areas like Orange County that made it clear — at least, after the fact — that there was a bubble. In the 1980s, the big price gains were in areas like the coasts where it’s hard to add new supply (there was an earlier oil boom and bust in some energy industry areas like Houston. Those “oil patch” markets are elastically supplied and I would guess the bust in prices was predictable). The problem with using prices in areas where it’s hard to add new supply to judge whether or not we’re in a bubble is that it’s hard to say what the right price of a home is in those markets, even relative to rent. Was there a bubble in the 1980s? In hindsight, hard to say yes, as if you bought a house in 1989 in New York or San Francisco and held it for 15 years you made out like a bandit.

In markets like Las Vegas or Phoenix, or arguably most of the Central Valley and Bakersfield, in the long run you can build lots of new supply, and the location of new homes isn’t much worse than the location of existing homes. You don’t have the same downtown or ocean premiums in those markets. So when prices get far away from the cost to build new homes in markets where it’s not hard to build new homes, you start to suspect over pricing. Like a lot of other economists, I personally didn’t suspect an impending bust probably until sometime in 2006. My problem was that I was too focused on the coastal markets. I wondered about Las Vegas, but felt like there was a world in which prices in places like Boston and coastal California were justifiable. I wish the Cassandras, who deserve credit for prescience, had been griping about Las Vegas instead of San Francisco. I think any economist who really gave prices in the relatively easily supplied markets serious thought would have been very worried as early as late 2004 and certainly mid-2005.

Another difference is where the bad loans were. In the 1980s, I think largely because of tax laws and regulations, the bad loans and excessive pricing was largely on the commercial and rental residential side. In the 2000s, exotic owner occupied residential loans were also a problem.

Us: If this bubble was different, will the recovery be of the unexpected variety, too?

Tom: The recovery may be fast or slow. I can believe that we are at a bottom, and I can also believe that there will be a continuing wave of mortgage defaults on both the residential and commercial sides that could certainly lead to price declines of 10 percent or more in many U.S. markets. The massive number of owner occupied homes with mortgages much larger than current market prices, and even market prices in the foreseeable future, is different from anything at least since the Depression. In the long run, barring very rapid global warming, prices should not be below replacement cost in a lot of the “sand” markets where they currently are. So price below replacement cost would usually be a good signal for time for prices to start rising. The potential for mass defaults and an attendant second dip in lending and GDP makes that argument harder to swallow.

Us: Are bubbles a quasi-natural economic occurrence that are going to happen in real estate every so often?

Tom: “Bubble” is a tricky word. In markets where it’s hard to replace the existing stock, like the coasts, people will always value homes in large part based on what other people think they are worth. That means that prices can fluctuate a lot even without anything changing in the real economy. So I suspect coastal U.S. prices will continue to look like a roller coaster. Ditto stocks like google, masterpieces of painting, etc.

Getting prices to move like that in places like Phoenix requires that both buyers and lenders are not motivated to consider the likelihood of huge losses. I hope we don’t see the lack of discipline in owner residential lending that allowed the giant bubbles in markets that should be disciplined by supply for a long time. Between the legitimate benefits to financial innovation and the political power of financial institutions, I suspect it won’t be too long before the next crazy price increases arise in some asset class. A guess is that it won’t be housing next, but housing will surely have another turn. By the logic of Willie Sutton, the money to be made in housing finance is too tempting to be ignored.

Us: What policy changes could prevent such economic distortions in real estate, if any?

Tom: I don’t think price volatility on the coasts requires much “economic distortion.” The problem in the real “bubble” markets of the 2000s was that both owners and lenders had the incentive to ignore the very real possibility of large losses. Both parties had valuable default options that left downstream investors and taxpayers on the hook for losses, so that only the upside mattered. For now, the market is probably self-policing. Once investors are no longer spooked, it may be necessary to (a) limit or tax high risk loans or (b) do a lot of work to make sure downstream investors are aware of risks and (c) force financial institutions to pay for the “too big to fail” burden that they place on taxpayers.

—

“In Victoria a 100 year old, 2bd 1 ba, 700 sqft. POS house that needs asbestos remediation in a dodgy neighbourhood costs $400K. That same $400K in Seattle buys me a 5 year old, 4bd 2.5 ba, 2000 sqft. house in a very desirable neighbourhood.”

“I live in Victoria, which is only 3/4 as stupidly expensive as Vancouver. My wife and I are both dual citizens and have lived and worked in both countries. We have family in Victoria, Vancouver and Seattle. How we decide where to settle has less to do with being near in-laws or love of country and more with where we can do the best for our own little family and get the most value for our money.
Here in Vic, I can buy a 100 year old, 2bd 1 ba, 700 sq. ft. POS house that needs asbestos remediation in a neighbourhood I wouldn’t want my wife walking around after dark for $400,000. That same $400,000 in Seattle buys me a 5 year old, 4bd 2.5 ba, 2000 sq. ft. house in a very desirable neighbourhood with some of the best public schools in Washington state.
I lived in the States before, during and after the bubble. When that sucker burst it was ugly and has created a permanent underclass of bubble buyers. If that were to happen here it might make real estate less expensive but I’m not sure people are prepared for the inevitable economic and political fallout. The cheaper house prices will be a wafer-thin silver lining on an otherwise very dark storm cloud that will hang over this region for many years. I’d rather not live through that again.
I don’t think any price drop would get me to stay. Mind you, I’m in a different situation than most as the border is not an obstacle and we’ve got family all over, but I would still encourage those who don’t have US citizenship to explore their options and keep an open mind when considering where to settle.”
- ‘nobody you know’ at VREAA 3 Dec 2011 10:09am [A follow up to 'We Came; We Saw; We're Leaving' statement by 'nobody you know' 2 Dec 2011.]

“Yes, There Is Such A Thing As Falling House Prices” – Ordos Down 62.5% Or More In 2 Months

For example, local “Jinxin Han Lin Yuan” project , its second-hand house prices are around 10,000 yuan , while the market price now only is 3750 yuan.
The example given is a 62.5% decline but some properties may have fallen 70%. Either way, that is one hell of a price decline since September.
- From ‘Home Prices Crash 62.5% Since September in Erdos, a Chinese “Ghost Town”, Global Economic Analysis, 25 Nov 2011

“My Brother-in-Law bought his house last year in Burnaby and tells me that it is now worth $300K more. Seriously, what is the point in actually working for a living in Vancouver?”

“I rent a house in Kits and the houses to my direct left and right sold the same week in July, both OVER asking. So, I’m not sure that Kits is dead, just yet. The house to my right sold $500K over asking and the house to my left sold just over asking at $2M. They bought that house in 2006 for $700K, so not a bad profit in 5 years. They plan to rent and buy back in after the correction. The family that made $500K on their house are renting the house back from the mainland Chinese purchaser for the next year and are basically flippers and looking for their next Kits project. They bought the house in 2009, so a tidy $500K profit in less than 2 years isn’t bad either. I’m just a sucker with a really high paying job that can’t afford squat in this town. …
I am seriously banking on a correction in Vancouver next year. I have noticed in the last several months that house prices are slowly coming down (barely) or at least stagnating and definitely selling under asking in the burbs (I almost bought my dream house, but kept strong!). I do now notice that houses are being pulled off the market and there isn’t much selection these days. Lots of crap on the market. I’m hoping this is just seasonal and that next spring will show plenty of inventory at reduced prices. The Vancouver market seems to be resilient for the time being. Very frustrating to say the least. My BIL bought his house last year in Burnaby and tells me that it is now worth $300K more. Seriously, what is the point in actually working for a living in Vancouver?”
- chris at greaterfool.ca 20 Nov 2011 at 9:16 pm

“I’m 200% certified woman and would be perfectly happy in a 800 sq ft apartment with a decently sized balcony for my BBQ. My man is the one who “must” have the house that goes for $1.1M in Vancouver.”

This leisurely exchange at saskatoonhousingbubble earlier this year:

“Women are driving the housing bubble, because they got to have the expensive house or it’s no good.” [ February 2, 2011 12:53 PM ]

“Bull. I’m 200% certified woman and would be perfectly happy in a 800 sq ft apartment with a decently sized balcony for my BBQ. My man is the one who “must” have the 2-door garage, huge backyard and all the dirt bikes and hot tubs and kayaks he can fill it with.
That house goes for $1.1M in Vancouver and our median salary is $40,000. I WISH I had your problem.”[May 3, 2011 3:09 PM ]

CBC – “Canadian housing bubble about to burst.”

CBC cited the recent ‘The Economist’ article, and interviewed David Madani of Capital Economics, 30 Nov 2011.
Podcast available at this link.
Hat-tip to ‘VanAddict’ who also writes:
“My husband and I left Vancouver due to high housing prices. We now live in the Waterloo region, about an hour northwest of Toronto. I listen to CBC radio on a regular basis. I recently heard a couple of pod-casts that made me think of your blog. The housing bubble is a big concern for all of Canada, including the Waterloo region. We are homeowners as well, so we could very well be affected when the bubble bursts. Luckily, we aren’t overextended like some people.”

Request To Readers From Edmonton Journalist Max Fawcett

Max Fawcett, an Edmonton journalist, writes: “I’m working on a story for an Edmonton magazine about educated/middle class people leaving Vancouver for Edmonton. Do you know anybody like this? Have you run into anyone like this in the course of your online travels?”
Any readers who can help Max with his request, please contact him at maxfawcett@gmail.com
[Max's own story about his leaving Vancouver was featured at VREAA 14 May 2010.]

Tom Davidoff, Sauder School of Business, UBC – Clarification

Following up on a post from yesterday, this e-mail exchange between Tom Davidoff and vreaa took place 2 Dec 2011. Tom left it up to us to decide how to best clarify his position for our readers, and we’ll do that by simply recording the exchange here:
—

Dear VREEA

I have gotten some hateful and threatening email from followers of your blog, so I thought it might be helpful to shed some light on the interview with ctv that you cite. I believe you have interpreted my comment on camera as answering the question: “what do you say to people who believe the current price level does not reflect fundamentals?” That is not the question I was answering when I made my remark about entitlement. Later in the interview, in fact, I said that I would be reluctant to buy at current prices for investment purposes. I would not be surprised by a large correction in the next year or two. I also would not be surprised if real prices are higher in 10 years than they are today. The question I was answering was closer to “what do you say to people who believe they are entitled to own a home?” I don’t recall the exact question, but my point was just that it is not the end of the world if some people are not able to buy (as opposed to rent) the home in which they want to live. Should the government take steps to promote greater housing supply? That’s an interesting question, but not the one I was answering.

I would be delighted to discuss further.

Regards,
Tom Davidoff
—

Dear Tom:

Thanks for the e-mail.
At their website, ctv still has an article up by Darcy Wintonyk that states the following:

(quote)
Tom Davidoff of the UBC Sauder School of Business said that young Vancouver couples simply don’t have a right to own a home in the city they grew up in. “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality,” he said.
The economic reality adds up to a growing sense of frustration and hopelessness for an entire generation of Canadians.
On the upside, Davidoff said that renting isn’t the end of the world in this expensive housing market.
(end quote)

I think you can see how this reads.
If this doesn’t reflect what you said to CTV, and is substantially different from your main position on Vancouver RE, get in touch with CTV and tell them to change that.
This is a risk one takes speaking to the media.
You could insist that you refuse to be quoted out of context, without an opportunity to state your full position.
For instance, get them to include quotes such as:
“I would be reluctant to buy at current prices for investment purposes.” and
“I would not be surprised by a large correction in the next year or two.”
Those aspects of your position may come as a surprise to many CTV readers/viewers.

If you like, I can post the e-mail that you sent me at the blog, by way of your explanation of your position.
Or you could post it yourself as a comment.

Better still, why not lay out your entire opinion on the Vancouver RE market unambiguously, and I’d be happy to headline that as a new and separate post. That would be the best way of clarifying your position.
Let me know.

Regards,
vreaa
(vancouver real estate anecdote archivist)
—

Dear VREEA

Thanks for your reply. I think my original email to you conveys what I meant to say. I’ll leave it to you as to how to clarify for your readers. I don’t think I was quoted out of context by ctv. They were asking about people who grew up in the area and can’t afford to buy a suitable home in Vancouver. Whatever happens to housing prices in the next few years, the problem of people not being able to own the home they want in the location they want is going to persist. I agree that there would be fewer such people if prices were not higher than supply, demographics,and mortgage terms would typically support, and I told ctv that I think it’s likely that prices will fall in the short run, but that’s not what ctv was asking. I should add that in a market like Vancouver where supply is constrained and there is reason to think that there will be growing demand over time, it is not easy to know when or if a price correction is coming because it is difficult to do discounted dividend analysis. What are the correct dividend growth trajectory and risk premium to pin down a price based on today’s observed rents and riskless yield curve? “Not easy to know” is not the same as “it’s impossible to infer that there’s a high probability of a large price decline.”

Regards,
Tom
—

Dear Tom:

Thanks for the reply.
By way of clarification, I’ll post our e-mail exchange.

Regards,
vreaa

—/end

UPDATE:
See also ‘Tom Davidoff Knows About RE Cycles’, VREAA, 4 Dec 2011

We Came; We Saw; We’re Leaving – “Vancouver is “nice”. I was sent here by my firm 6 months ago for a permanent transfer. My wife and I are leaving. It’s just not nice enough.”

“Vancouver is nice. That’s it. It’s “nice”. I was sent here by my firm 6 months ago for a permanent transfer. My wife and I (we’re just under 30) are leaving. It’s just not nice enough.”
- RayRay at VREAA 1 Dec 2011 7:13pm

“Similar situation here … moved permanently but have started considering other options. Not asking for “free lunch” or “entitlements”, I will gladly pay for housing and a city premium, but YVR is off the charts. Have colleagues and friends with similar background in other cities and I can easily compare what value/cost you can get for your money.
People have completely lost perspective of the insane prices or what it takes to generate that kind of money. Prices are raised 100,000 – 200,000 without thought. Or crappy, expensive shoebox condos that would buy a house with acreage 30 mins. south are sold out. Insane, really.”
- Clipper at VREAA 1 Dec 2011 10:11pm

“I was in Seattle a couple of times last month. If you like city life and the west coast check it out. Nice houses in nice parts of town are half the cost of Vancouver or less. Hell, you can get a nice house in an inexpensive suburb for $250,000 easy. I’m seriously considering it as I could be mortgage free in my 40s if I go back to the States.”
- nobody you know at VREAA 1 Dec 2011 10:33pm

“People have completely lost perspective of the insane prices or what it takes to generate that kind of money.” (Amen)
RayRay, Clipper, nobodyyouknow -> How much would prices have to drop for you guys to consider staying? – vreaa

Tom Davidoff, Sauder School of Business, UBC – “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality.”

“British Columbian couples with young children are being squeezed in an economic vice because of high housing and child care costs, according to a UBC family expert who dubs the group “Generation Squeezed.” Paul Kershaw says the high cost of housing coupled with skyrocketing child care costs is making it nearly impossible for young parents to raise a family in B.C.’s Lower Mainland.”
…
Derek Atkinson, a 28-year-old university educated dad who lives in Burnaby, said he has a bleak outlook when it comes to buying a home.
“It’s something that is getting closer to being a pipe dream than any sort of reality,” he said.
With a combined income of $92,000, he and his wife could qualify for a $500,000 mortgage. But Atkinson said the minimum $25,000 down payment is too rich for him and his young family.
“We’d have to save up for at least five, six years just to get a decent down payment…and that’s really frustrating,” he said.
The average B.C. couple only makes $66,700, enough to qualify for just a $300,000 mortgage. A November search of the residential real estate listings in Metro Vancouver (MLS) turned up only seven two-bedroom properties in that price range.
…
Tom Davidoff of the UBC Sauder School of Business said that young Vancouver couples simply don’t have a right to own a home in the city they grew up in. “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality,” he said.
…
- excerpted from ‘Housing, child care sting ‘Generation Squeezed’, Darcy Wintonyk, ctvbc.ca, 1 Dec 2011
(hat-tip 4slicesofcheese)

Noting that there is a speculative mania in Vancouver housing is not the same thing as asking for a free lunch. – vreaa

—
ADDENDUM, 2 Dec 2011, 7:50am:

Dan, writing in the comments below, asks “Can someone explain what Prof. Davidoff said that was so objectionable?” and then segues to talk of a speculative bubble (which Davidoff did not mention) and asks “What’s so terrible about renting?” (Davidoff did end up mentioning renting, but that was not the statement he made that has been objected to).
We’ll share our response to Dan’s question here.

Davidoff said: “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality”.

Here’s the objection, Dan -
Davidoff reiterated a sloppy, tired argument that deflects from the issue at hand:
Young couples (or any other prospective buyers) point out that housing prices are extremely overextended in Vancouver.
Davidoff retorts with an argument that directly implies that prospective buyers are asking for something for “free”, that prospective buyers feel “entitled” to get something for nothing. Where did any of these buyers make such ridiculous claims? [They did not!]
Davidoff’s fallacious implications are a straw-man argument; they have the effect, by design or otherwise, of dismissing the prospective buyers’ initial (and very valid observation): Housing prices in Vancouver are very overextended.

Customer: “How much are your sandwiches?”
Storeowner: “$50 each.”
Customer: “$50! That’s a little steep…”
Davidoff: “What do you expect? For someone to give you free food?”

Davidoff is supposedly an academic with, we’d imagine, some claim to expertise in the area of housing markets.
We are in the midst of a global housing market disaster; we have housing prices in Vancouver that are preposterously higher than fundamental values determined by income and rent; we have personal debt levels that are higher than they were in the US before their bust; we have a local economy that is overdependent on real estate … and the only analysis that this School of Business can march out is flaccid non-arguments in favour of the status quo? (Davidoff’s “reality” that has to be “accepted”.)

Are there no sensible academics in this business school that can do back of the napkin math?
‘The Economist’ has just published an article implying that Canadian housing is overvalued by at least 25% (A remarkable 71% as determined by rental rates). Numerous other respectable commentators have pointed out the unsustainable housing valuations in Vancouver.
Has anybody seen any commentary from anybody at UBC’s Sauder ‘School of Business’ that in any way attempts to discuss or analyze these arguments?

When the speculative mania in Vancouver RE collapses, it will be remarkable to look back and see how deficient local economists and financial commentators have been for not warning about this obvious bubble.

The fact that Davidoff even threw in “the most beautiful place on earth” canard just makes his statement that much more pathetic.

Come on, Sauder.
Have any of you studied anything about ‘speculative manias’?
Is the 2011 Vancouver housing market not a wonderful, soaring example of such a beast?
What are you telling students who ask such a question?

- vreaa
—

UPDATE:
See also ‘Tom Davidoff Knows About RE Cycles’, VREAA, 4 Dec 2011

Squamish Townhouse – 2008 $499K, 2011 $358K – “It was supposed to be an investment, not a nightmare.”

Roberta and Johnny can’t wait to dump the Squamish condo townhouse they bought three years ago. “It was supposed to be an investment,” she says, “not a nightmare.” Not that the tenant’s much trouble. She’s not. But it’s tough to know what you paid $499,000 for thirty-seven months ago is now worth $358,000.
At least, that’s the offer they have. Worse, the deal has hair on it. Lots of conditions. Long close. Small deposit. Not much of an offer at all, actually. But better than no offer, the alternative in a town where the market’s died.
Johnny writes: “A side note of potential interest is that the owner of a comparable unit in the same complex priced $100K (yes, one hundred) over ours and that has been sitting on the market without viewings for months, if not a year now, called me the other day and left a message saying that he wanted to talk to me about my price. He felt that I would be leaving “a lot of money on the table” and gave indication that I must not understand the state of the market in the area very well. In the meantime, another comparable brand new unit (one of many that are coming out) in a complex down the street was just listed under headlines of ‘receivership pricing’ for $345K. Needless to say I haven’t called him back.”
- Excerpts from a story relayed by Garth Turner at greaterfool.ca 29 Nov 2011

Sellers compete with other sellers, not with buyers. – vreaa

“If your household income were $100,000, how expensive a home would you be comfortable buying?”

Results of a poll at Seattle Bubble (27 Nov 2011):

If your household income were $100,000, how expensive a home would you be comfortable buying?

• Under $150k (2%, 7 Votes)
• $150k to $199k (10%, 33 Votes)
• $200k to $299k (33%, 111 Votes)
• $300k to $399k (36%, 120 Votes)
• $400k to $499k (12%, 41 Votes)
• $500k to $599k (4%, 13 Votes)
• $600k to $699k (1%, 4 Votes)
• $700k or above (2%, 5 Votes)

Hat-tip to Jeff Murdock, for pointing out this poll. Jeff adds “This from the country where you can lock in a mortgage at <4% for 30 years, and where your interest payments are tax deductible, and from the state with no state income tax.”

In Seattle, 69% of people would feel comfortable buying a house in the $200K to $399K range with a family income of $100K.
In Vancouver, family incomes average somewhere between $73K – $83K, and the average detached bungalow sells for $820K [RBC pdf].
- ed.