Category Archives: 20. The Limitless Demand Argument For Ongoing Market Strength

Vancouver RE: Not As Expensive Provided You Don’t Think – “It’s clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.”

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The following excerpts from ‘Vancouver: Not as Expensive as You Think’, Jim Sutherland, Vancouver Magazine, 1 April 2013 [no joke -ed.]:

“The real estate market is soft, and it’s going to get softer. In the last year, average prices have dropped five percent or so, and they’ll sink some more, guaranteed. Less certainly, the market will…not plunge American-style but rather drift, sometimes downward, sometimes sideways, and perhaps not for very long.”

“… the Cassandras have gained the upper hand lately, and looking at some of the numbers it’s easy to see why. Sales running at only two-thirds the normal pace. Lots of dwelling completions due this year. Historical norms that are way out of whack. The unreasonable chunk of average income that buying a house here requires. Rents that stack up well against buying. Then again, there also exist other, less ominous numbers, some of which will be revealed here for the first time.” [What cheek. MOI has been well know in local RE discussion for years, thanks to the work of jesse (YVRHousing) and others. – ed.]…
The mystic metric is called months of inventory, which is the number of homes for sale divided by a given month’s sales. When the MOI is neutral-around six or seven-average prices change little. Below six, prices rise. And an MOI in double digits results in lower prices. The formula works so reliably, it’s bizarre. … Long before prices respond, anyone willing to make a simple calculation will know.”

“Of course, the mild price drops currently predicted by MOI look nothing like the armageddon forecast by those who believe we’re in a real estate bubble. Why not a U.S.-style meltdown here? The reasons are many (shortage of land, solid financial institutions, impressive livability, fiscal health, low mortgage rates…) even if far from categorical. A major safeguard is the provincial economy.” …
How can this be the case when so many sectors are in trouble? Film production, gaming, life sciences-so much for the halo industries that were going to make us a post-industrial poster child. But at the same time, a lot of industries are thriving. … (goes on to list lumber, mining, pipelines)…
TEDtalks, HootSuite, Plenty of Fish, and Lululemon sure sound like storytime selections at the daycare centre but actually mint money while helping to define the 21st century. Fortunes can be fickle out there on the cutting technical-entertainment-design edge, as a prior generation of civic champions like Angiotech, Electronic Arts, and Ballard Power Systems proves. Still, it’s an indication that at least some cultural creatives can afford to live here. So the local economy is almost certainly going to be just fine, which will help keep the real estate market from crashing, regardless of all those micro-metrics.”

“The monster that threatens to swamp us is declining immigration-and in Vancouver that’s the worst thing that could happen to property markets.”

“But why, one might reasonably ask, are immigrants to Vancouver so fixated on buying real estate? Isn’t it foolish to dive into such a pricey market? Reasons have to do with everything from cultural predilections to the perceived riskiness of other investments; from the apparent solidity and performance of our property market to the essential nature of being adrift in a foreign land. But beyond all that, the fundamental explanation is straightforward: especially to immigrants from Asia, real estate in Vancouver doesn’t seem expensive at all. In fact, it’s pretty cheap.”

“One [analysis], by the Serbia-based crowd-sourced website Numbeo.com, comes up with house-to-income ratios very similar to Demographia’s but analyzes 362 of the world’s largest cities in more than 100 countries. On Numbeo, Vancouver sits not second or even 25th, but as the 125th least affordable city in the world. Our price-to-income ratio is about one-third that of Chinese cities such as Beijing, Shanghai, and Shenzhen and comparable to or cheaper than most other places where Chinese emigrants might reasonably expect to land. Potboiler settings like Moscow, London, Paris, and Tokyo are up to twice as expensive, while secondary but still global cities such as Sydney, Melbourne, Amsterdam, Stockholm, and Barcelona-the kind that join us on livability surveys-are tightly bunched around us in terms of affordability as well. Comparable American spots like Seattle, San Francisco, and San Diego are a little to a lot more affordable, but prices in the U.S. recently experienced a catastrophic plunge and are now bouncing back strongly, even as ours soften. It’s clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.” […and why shouldn’t our housing be inexpensive? -ed.] …

“None of this means that housing affordability isn’t a problem in Vancouver. We know that mortgage payments are taking up too much of our income, that young people discouraged by the high cost of entry are leaving town, and that the situation isn’t sustainable. We also know that prices are currently falling and that the MOI the formula says they will drop some more. But unless we lose status as a global magnet or immigration is otherwise reined in, a real estate environment akin to that of other Canadian cities or currently depressed American ones is not a realizable dream.”

See below for one reader’s impressions of the article.
Personally, we won’t attempt a comprehensive analysis at this moment.
The author deserves credit for listing evidence that Vancouver RE is overextended and some of the negative effects of high RE prices. At the same time he also throws in many of the mythical reasons for ongoing relentless support.
One critique I would offer is that there is a strong possibility that the BC economy has only seemed relatively resilient because of the RE spec mania (and all its knock-on ‘positive’ multiplier effects), and thus using apparent BC economy resilience as a reason for ongoing future RE strength is a circular argument. We still believe that our economy will suffer badly when our RE inevitably reverts to mean.
Another thing: why shouldn’t our RE be as inexpensive as places such as the US?
- vreaa

Regular reader ‘space889′, alerted us all to the above article with the following [edited] comment at VREAA 23 March 2013 at 10:19 pm:

“OMG!! You have to profile this!!! I just flip through April 2013 issue of Vancouver Magzine’s cover story about Vancouver RE. It is simply unbelievable the extent to which they try to convince people that Vancouver RE is still cheap by global standards. Two things stuck out for me -

“The first is a map of Vancouver, Burnaby and North Shores redraw with new neighborhood names like – Hanoi for most of Burnaby, Macau & Kew Gardens for UBC, Downtown Abby for Cambie from Broadway to 41st, and then North & South Yorkshire from 41st to Marine Drive, Queenstown and Gaslamp Quarter for North Van, and Brighton, Monte Carlo, Chamonix Mount Blanc for West Vancouver. Unbelievable!!”

“The second is they tried to dispel the myth that Demography Survey tries to peddle that Vancouver is expensive by world standards. They gave these reasons why you shouldn’t trust that survey. One the survey only included 7 countries and excluded most of the world including Asia, Africa and South America. Second the backers of the survey is an ultra conservative right wing think tank that opposes any idea to moderate car use. As a counter example, they used data from a Serbia-based crowd-source website that shows on a price to income ratio, Vancouver is cheap, cheap, cheap, especially compared against world class cities.”

“Further, in a comparison they claimed to show that a desirable house in 7 cities with higher price to income ratios – Phnom Penh, Rome, St. Peterburgs, Tel Aviv, London, Mexico City, and Melbroune – all require you to spend “the same for less square footage, less lawn but more history”. However their comparison really got my blood pressure up… They do not compare apples to apples… The ‘desirable house’ in Vancouver they picked is a 4 bed 2 bath house near King Ed Canada Line station and they describe it as TEARDOWN! Let’s just let it sink in for a minute. An example of a desirable home in Vancouver is a teardown on a busy main artery road!!”

—-

Here are the definitely-not-apples-to-apples vanmag comparisons that got space889′s blood-pressure up:

“Around the World in Seven (sic) Homes
What does a desirable (but you know, not outrageous) house look like in cities with higher price-to-income ratios? In many cases, you’re spending the same for less square footage, a lot less lawn, and a lot more history.” 
[P:I ratios cited appear to be median city home price to median city income, not related to the specific properties. -ed.]

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More Undisclosed RE Industry Insiders Publicized As Clients – “In 1995, Allan and Karin Hoegg were mortgage-free. But no more. Today their Vancouver home is a valuable source of income as they plan for full retirement.”

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Allan and Karin Hoegg are pictured in their home in Vancouver, British Columbia on March 8, 2013 [image F.Post]

“In 1995, Allan and Karin Hoegg were mortgage-free. But no more: today their Vancouver home is a valuable source of income as they plan for full retirement.
Allan Hoegg says when their son and daughter-in-law wanted to buy a house, they took out a variable-rate mortgage so they could help them out. “We wanted to take advantage of the stability of the current rates.” To cover the mortgage payments, they rent out a suite in the home to students.
The couple also established a home line of credit that allows them to free up cash for investment purposes when they need it. “It gives you maximum flexibility and you can pay it any time you want without penalty,” he says. “It’s dead easy.”
Like many people planning their retirement, there’s a sentimental side to keeping their home, he says. But there are just as many practical reasons. In the Hoeggs’ case, selling to downsize would mean substantial commissions and moving costs. “Besides, real estate is a very good investment in Vancouver,” he says. “The longer we can stay here, the greater the possibility of no-tax capital gains.”

“For the most part, people want to stay in their homes, says Rob Regan-Pollock, senior mortgage consultant with Invis – Team Rob Regan-Pollock mortgage brokers in Vancouver. “The fact is they’re sitting on a big nest egg. So when they get near to retirement, they start asking how they can use that equity to help them in their retirement.”
There are plenty of options to consider, from applying for a line of credit or reverse mortgage to renting out your property to finance your monthly costs at another residence.
A line of credit is the most flexible option, Regan-Pollock says. “If for some reason you can’t meet your monthly expenses, a line of credit on your home can be a very good buffer. The interest rates are low — typically prime or prime plus one per cent, depending on the institution and your qualifications. It’s also quite sustainable, since your home will often appreciate in value more than the amount of debt being drawn down against it.”

- from ‘Home is where the retirement money is’, Denise Deveau, Financial Post, 13 Mar 2013

Comments from ‘Bo Xilai’ below the FP article, 27 Mar 2013:
“Denise, why didn’t you mention Allan Hoegg works for Invis – Team Rob Regan-Pollock mortgage brokers. Of course he’s going to use his house as an ATM… he’s just eating his own cooking. And at the same time you’re interviewing Rob Regan-Pollock as an “expert” in your piece. http://www.teamrrp.com/team/
More fake real estate stories using employees as plants.” …
“They used an employee of the “expert” interviewed without disclosure and, I would argue, in a deceitful manner to promote a strategy beneficial to the “expert’s” reputation and business interests.”

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Allan Hoegg (top left) part of Team Rob Regan-Pollock mortgage brokers [image teamrrp.com]

[thanks to ‘C’, for sending news of the article and ‘Bo Xilai’s comments to vreaa via e-mail, 27 Mar 2013]

This article is interesting..
1. for the undisclosed insider publicized as client
2. for the journalist’s ineptitude or, alternatively, collaboration
3. for the retirees’ dependence on RE holdings for retirement funds
4. for the fact that such borrowings were used to purchase more RE
5. for the need for tenants in their ex-SFH to cover mortgage payments
6. for the assumption that Vancouver RE is “a very good investment”
7. for the assumption that prices will continue to rise.
- vreaa

For those readers unfamiliar with the recent high profile case of industry insiders masquerading as condo buyers, please see:
CTV TV News Featured ‘Condo Buyers’ Actually Marketers Of Very Same Condos!, VREAA 13 Mar 2013

UPDATE:
This article also headlined and discussed by Whisperer here:
‘Another media scandal from the real estate industry? News article appears to be contrived shill piece from PR company.’, 28 Mar 2013

“Vancouver is an urban resort whose value mostly resides in its real estate and not much else.”

“Many of these people are filthy rich and treat Vancouver as the gorgeous playground that it primarily is. These are global cosmocrats who make their money in the real business centres of the world – Hong Kong, London, New York – and then drop in here as a respite from the hurly-burly of their hectic lives. Some bought condos for their kids to stay in while they attended school here. In some cases, those children have moved on but the apartment remains.
In most cases, these wealthy purchasers are buying high-end units with golden views of the city, posh pied-à-terres that are out of reach for most of us. And they pay the requisite taxes to the city to maintain them. To which I say: What is the problem?”

“Are we going to start telling people that if you’re buying a condo in Vancouver you have to make sure you, or someone else, lives in it year-round? Are we going to say you can’t buy a condo as an investment property and sit on it for as long as you want before selling it for a profit?”

“I also find it amusing that we get so up in arms about “foreigners” buying up our real estate but think nothing of the thousands of Canadians who have poured into the United States in recent years to take advantage of the housing mess down there. Does anyone doubt that many of those same Canadians are buying those condos as investments in the hopes they’ll cash in once the market returns to normal? “

“You can’t say: “Oh, it’s different because we aren’t driving up real estate values in Phoenix or Palm Springs the way investors are apparently doing in Vancouver.” You either believe in a free market system or you don’t.”

“Whether we like to admit it or not, Vancouver is an urban resort whose value mostly resides in its real estate and not much else. And when that’s the case, you’re going to encounter the types of situations that we see now, with some buying condos as expensive business-class lounges and others purchasing them as an investment decision.
And I’m not sure there’s much you can do about it or would want to.”

- from ‘The ‘great unoccupied condo scandal’? Get over it’, Gary Mason, ‘The Globe and Mail’, 22 Mar 2013

A few ‘random’ thoughts; any reader suggestions of a comprehensive critique of the article will be appreciated:
1. How is it that local judgments of Vancouver have gone from the embarrassingly over-reaching (“Best Place On Earth”), to the other, nihilistic, extreme (“Value mostly resides in its real estate and not much else”), without touching on the intervening reality (a provincial city with a fair amount going for it).

2. There is the implication that we should accept that RE is primarily a financial instrument, rather than shelter. People buying and selling RE, always, it seems, at a profit: Foreigners sitting on Vanc RE and selling for a profit; Canadians buying US RE with plans to “cash in”.

3. Contains a common “you can’t handle the truth”-type taunt about free markets. But who is this aimed at? Who in Canada is currently taking a strong position that there really should be a completely ‘free-market’ in shelter? When did Canada last have a free market in RE? The Vancouver RE market is already far from a free market. It is a market where lending risk has been mispriced, partly by ‘emergency’ low interest rates (where no need for RE price support has ever existed), partly by tax-payer backstopping of lenders (through the CMHC), and partly by loose mortgage lending guidelines (political expediency). Yes, speculative manias occur in free markets, but they would be far more self-limiting if people and institutions were all forced to play with their own money rather than perversely cheap debt. If Vancouver RE was genuinely a free market, it probably wouldn’t have gotten to its 2008 heights in the first place (let alone its 2011 highs), and, if it had, it certainly wouldn’t have been ‘bailed out’ at the very moment when it least needed it.

4. The article displays the kind of hyperbole that we expect in the vicinity of bubble tops, when everything can be interpreted to be so frothy and paradigm-shifting that it’s overwhelming to some observers. It’ll be interesting to see how all these dilemmas and debates settle down after some healthy price-to-fundamental-value reconciliation.
Vancouver will still have housing and city planning challenges, but they’ll look very different once the massive speculative demand disappears.

- vreaa

“So, if you want some Vancouver real estate should you buy now even if you pay a little more and get a little less than you had hoped? Probably. And should you sell your Vancouver real estate in the hope of buying it back later for less? Definitely, not.”

“Will the Vancouver housing market crash? Should I be waiting for a major drop in prices before buying a home in Vancouver? Should I sell my Vancouver home, rent for a while and then be able to buy an equivalent home for a lot less money? The answer to all of them is a resounding NO.” …
“Housing prices did crash in the 1980’s but a major difference is that at that time many homes had been bought by speculators on very small margins and interest rates soared well into double digit levels.
Now, very few homes are held on spec and any anticipated increase in interest rates is expected to be very modest. Mortgage rates may even go down. Canadian banks make a significant share of their profits from mortgage lending and it is a low risk part of their business since their prudent lending standards reduce the chance of default. Also, many mortgages are guaranteed by the Canadian Mortgage and Housing Corporation (CMHC).” …
“The cost of housing in Vancouver is not likely to change dramatically for the foreseeable future. It may soften a bit or it may even rise a bit.” …
“Prices are about 3 per cent lower than they were six months or a year ago, but are 4 per cent higher than they were three years ago. Prices for detached homes have been the softest, while apartments and townhouses have seen much less change, reflecting the trend to condos as a more affordable form of housing.” …
“There are two groups which would benefit from declining home prices. First are people in the Vancouver area who do not own real estate and whose income level does not enable them to afford the size and location of home to which they aspire. Many have adjusted by seeking a smaller home and/or one in a less costly neighbourhood. But some cannot afford even that.
A second group are the retirement age baby boomers across Canada who hope to spend their golden years in this small corner of Canada where you don’t have to shovel snow. They are frustrated because a home anywhere else in Canada buys much less home in and around Vancouver. They are also one of the main reasons why a housing crash will not occur. Any drop in prices will lead to retirees entering the Vancouver housing market, putting a floor under prices.
Those in the international community do not seem to mind our house price levels. When looked at in a global context, home prices in Vancouver are not unreasonable. Ask anyone from London or Hong Kong. And people from around the world see not only good value in our real estate, but also an open society, a pleasant climate and a stable political environment.
Finally, the majority of people in greater Vancouver already own real estate, benefit from current housing values and would be hurt by a crash or any serious drop. They do not want to see the value of their biggest asset decline. Home equity often forms a large part of retirement savings and people count on it in their financial planning.” …
“So, if you want some Vancouver real estate should you buy now even if you pay a little more and get a little less than you had hoped? Probably. And should you sell your Vancouver real estate in the hope of buying it back later for less? Definitely, not.”
- from ‘Little chance of correction in Vancouver real estate market’, Roslyn Kunin (‘Troy Media BC’s Business columnist; consulting economist’), Troy Media, 18 Mar 2013 [hat-tip ATP, who added, perceptively same old, same old“.]

If it really was a case of paying “a little more” and getting “a little less”, few would be discussing the matter. We fully expect that people will “pay a little more and get a little less” in the Vancouver RE market. Fact is they are paying a lot more and getting a lot less.
This “same old, same old” column archived here for the record. It will eventually be noteworthy that in March 2013 some people were still making ‘limitless demand’ arguments for ongoing endless price strength in the Vancouver RE market.
And it is remarkable that an economist would not give any thought to economic fundamentals in their discussion, and wouldn’t consider indicators such as price:rent or price:income ratios in their analysis.
- vreaa

“I explained that if the present rate of price appreciation continued that same house would be worth $92 million in 2051. He astounded me by responding, yes of course. That’s why he was buying a second house.”

“My idiot neighbour.
In his mind “real estate ALWAYS goes up”. When I tried to explain to him that Vancouver was in an unsustainable bubble situation and he said I was crazy. The example I used was a westside special that I know was purchased in 1969 for $38,900 and sold in 2010 for $1.89mm.
I explained that if the present rate of price appreciation continued that same house or 50×120 piece of dirt would be worth $91,800,000 (that is Ninety One Million Eight Hundred Thousand dollars) in 2051 and asked him if he thought that would be the case.
He astounded me by not even blinking and responding, yes of course. That’s why he was buying a second house. At that point I made the decision to leave Canada.”

- Bob at greaterfool.ca 12 Mar 2013 9:25pm

The Unshakeable ‘Running Out Of Land’ Meme – Vancouver Mentioned In Tokyo ‘Coffin Apartment’ Article‏

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Young people in Tokyo are living in 50-75 square feet rooms paying between $500-$1000 a month in rent.

“How much do you want to live downtown? It’s an important question. Because young people in the world’s greatest cities are juggling unaffordable rents and sometimes working several jobs just to live in a glorified closet with four other people.
We often get the bulk of our nightmare apartment stories from places like New York City and Vancouver, where “micro suites” are now popping up everywhere, allotting people 350 sq. feet of living space for significantly more money than you’d imagine. If you can get a table a bed and a sofa in there, you’re pretty much a black-belt in efficiency.
But no matter how unpleasant you think our situation sounds, these micro suites are positively palatial compared to the way some people live in Tokyo and Hong Kong.
In Tokyo there is something known as “coffin apartments”. These dwellings are essentially share houses that consist of communal bathrooms and locker-sized sleeping quarters stacked on top of one another. These lockers, which in a disturbing way sort of resemble morgue refrigerators, run anywhere between 50 to 75 square feet.”

- from ‘Tokyo’s ‘coffin apartments’ are more expensive than you’d think’, Jordana Divon, Shine On, a Yahoo Canada blog, 1 Mar 2013 [hat-tip ‘terminalcitygirl’]

The Vancouver mention in this article occurs for the sole reason that the author is Canadian (a journalist from the Toronto area). Nobody else would dream of unquestioningly comparing apartment size in Japan or NYC with that in a Canadian city.
Japan, Population 127.3 Million, Area 378,000 km2, Density 336 persons/km2
British Columbia, Population 4.4 Million, Area 944,700 km2, Density 4.7 persons/km2
The idea that anybody should have to live in a cramped space in Canada is patently absurd. Unless, perhaps, if they were in jail.
One meme of the RE cult is that we have no land, whereas in actual fact we have even more land than we have rain.
See the Doug Coupland video below.
- vreaa

doug's house
Frame from video

“I grew up here, in a suburb just across from Grouse Mountain, overlooking the city. On one side of the fence there is home; and on the other side wilderness until the North Pole.” – from ‘Douglas Coupland’s Vancouver’, a promotional video for Canadian Tourism, 2012.

From Prices Soaring Towards The ‘Stratosphere’, To The Limits Of A ‘High-Water Mark’ – “Could these maps be a snapshot of the real estate market’s high-water mark?”

“For the last three years, Andy Yan, a researcher and urban planner with Bing Thom Architects, has been mapping the assessed values of single-family residences in the city of Vancouver.
You see his latest efforts here today. …
The question is, could these maps of Yan’s be a snapshot of the real estate market’s high-water mark?”

- from ‘Pete McMartin: The high-water mark of Vancouver real estate?’, Pete McMartin, Vancouver Sun, 2 Mar 2013

Perhaps of interest because this is the same Vancouver Sun columnist who just one year ago wrote:

“Vancouver, of course, will always be the centre of things in the Metro area. It has history and critical mass on its side. And by its very nature, it is going to attract people who want to come here and live in the city.
… the market will propel any kind of property here into the stratosphere.”

- from ‘Short commutes and easy access to an Ethiopian restaurant are not the natural order of things’, Peter McMartin, Vancouver Sun, 22 Mar 2012, as headlined at VREAA 23 Mar 2012