Tag Archives: Fundamentals

More MSM Reports Predicting Price Drops – “Vancouver’s average house now costing an astounding 11.2 times a family’s average income.”

“David Madani at Capital Economics expects Canadian housing prices to fall 25%” [Reuters, 6 Jun 2011].

“Vancouver’s housing market looks primed for a correction, according to a report from Sal Gatieri, senior economist at BMO Nesbitt Burns, with the average house now costing “an astounding” 11.2 times a family’s average income.” [G&M, 7 Jun 2011]

“My mother owns a condo in White Rock which she bought in 1995 for $144K. It is now assessed in 2011 at $275,000. Looks like it almost doubled in price right?” [Wrong!]

DM at VREAA 2 Jun 2011 10:31 am“My mother owns a condo in White Rock which she bought in 1995 for $144K. It is now assessed in 2011 at $275,000. Looks like it almost doubled in price right? It is now at the stage when it requires a renovation and realtors have suggested it its current state it may sell for around $239,000.
Purchase price $144,000
Leaky condo repair $42,000
Additional condo fees/repairs $6,000
Condo fees over 17 years approx $39,000
Taxes $23,600
Estimated renovation cost $40,000
Total cost, not including property transfer taxes, other repairs, mortgage interest and realtor’s fees: $294,600.
A loss for holding the property for 16 years of more than $20,000.”

Common scenario. Many RE investors use fudged headline ‘numbers’ to kid themselves and others that they have done better than is actually the case. They don’t bother to do the back-of-the-envelope math which shows different. DM’s example shows that, even through a rabid mania, RE can have very ordinary returns. In normal times, it can be a money sink. And, needless to add, in bear markets it can wipe people out. It’s just shelter, folks, it should be priced accordingly. – vreaa

“I now work for a firm in Silicon Valley, remote from Vancouver, at close to twice the salary they offered.”

Brendon J. Wilson at VREAA 24 May 2011 10:33am -
I returned to Vancouver from living and working in Silicon Valley for four years (I left after my MBA because Vancouver opportunities were lacking at the time). My wife and came back to start a family, and because we had grown tired of the Valley.
I interviewed at one company for a Chief Technology Officer position. When we got around to salary discussions, the employer indicated they would be willing to go as high as 90K. I pointed out that this was the salary I earned ten years ago.

“Oh you can’t compare a Vancouver salary to what you would get in Silicon Valley!”
“I’m not. That’s what I was paid ten years ago…in Vancouver.”
<awkward silence>

Ten years of additional experience, an additional advanced degree, plus international experience in the hotbed of technology in a significant role at a successful startup = no incremental value to a Vancouver firm.
Needless to say, I now work for a firm in Silicon Valley, remote from Vancouver, at close to twice the salary they offered. For those of you wondering – the cost of living in Vancouver is about the same as living in California.
What is wrong with this picture?”

[When you add in considerations such as taxation and cost of accommodation, does California end up being cheaper? - vreaa]

“My wife and I talk about giving up and moving to the ‘peg (or equivalent) every day.”

Felix Wilcox comment on article ‘Housing costs soar in Vancouver‘ at The Globe & Mail 22 May 2011 7:35pm -
“My wife and I live and work in Vancouver, $60-70K annual, no kids, and we talk about giving up and moving to the ‘peg (or equivalent) every day.”

Prospects Look Better In The US – “Ambitious people have left”; “I think we’ll be leaving too.”

Whenever we hear fellow Canadians slagging off the USA, we are reminded of the guy who said that you can’t criticize Sigmund Freud without referring to concepts that wouldn’t exist if Freud hadn’t described them in the first place. Yes, the US can be criticized in almost innumerable ways, but ask yourself what your life would be like, materially, culturally, intellectually, without it.
The US ain’t over yet, and that’s a good thing.

‘rp1′, in a comment on these pages [VREAA, 22 May 2011, 11:40pm]  eloquently summarized an argument for currently preferring the US outlook to that of Canada. He also embedded an anecdote in which he describes himself and his family as likely leaving Vancouver. That would be our loss. Here’s his post:

Wall Street cheered a non-existent US recovery in 2009, and 2010 was mediocre, but it does appear the bottom is in for the United States. Do you read CalculatedRisk? If not, here you go: Household formation, Business lending, ISM Manufacturing, Construction spending, and Job openings.
With all five of those things in the black, there is no real doubts of a US recovery. It is happening, largely due to currency debasement and asset and wage deflation. Painful, but they did it. Canada did not.

Canada took the “Greenspan approach” and avoided a sharp recession and purging of debt by holding interest rates at 1% for 3 years. Household debt exploded, everyone bought more house than they could afford at normal interest rates, and now inflation is eating family budgets. Whatever advantages Canada had in 2007 are long gone. We have taken precisely the same sequence of steps that the US did in the 2000′s, with the same results so far.

A closer look at the data is frightening. By most measures, Canadian real estate was fairly valued in the early 2000′s. Not true in the US. Their prices started going up in in 1998. Four years later, with housing already more richly valued than ever before, Greenspan cut interest rates to 1% and housing went up further in defiance of all fundamentals.

Canada started later and rose slower, with a lot of genuine economic growth backing the early rise. But our prices detached from fundamentals by 2005. Interestingly, we seem to have gotten the subprime mortgages first. That would be zero-down, 40 year amortization, with no income verification care of the CMHC. The Economic Analyst has some nice graphs: House prices and rents across Canada, and House prices and inflation.

So in 2008, with housing already more expensive than ever before, the BoC starts slashing interest rates. And guess what happens? House prices rise in defiance of all fundamentals. And we keep interest rates at 1% for how many years? 2009, 2010, 2011? Yup.

In short, we have done the exact same things as the Americans, in a slightly different order, with largely the same result. How much of our economy is now underpinned by housing? What percentage of our job base? How many people put down the minimum and and require low interest rates to service the loan? Those questions had people yelling at Peter Schiff on Fox News in 2006. I’ll make the exact same call for Canada right now. We are toast.

For the US, I think we’ll see a slow but steady recovery driven by manufacturing and consumer spending. The best investment I see is respectable houses with 8% rental yields in Michigan, upper New York, and Ohio. A lot of these are 70k. They could be over 100k in a few years, plus or minus the currency, which I think will be a plus. The courageous long term investor can buy classic homes in Phoenix and fix them.

For young Canadian families, affordable housing is the #1 issue. Canada has not had it for 5 years, and it could be another five years before the combination of a good job and an affordable house appears in this country again. In the meantime, expect a shitstorm of people who expect things for free, so maybe the US is worth trying. The weather is certainly nicer.

For the highly educated and frustrated, why haven’t you moved yet? Seriously. The US has lots of jobs for you, and it is easy thanks to NAFTA to get them. Stop hurting yourselves and go live your life. Living in a different country is interesting, it’s good for you, and you can always come back. Things are not going to get any better here for a while. Certainly not in Vancouver anyways.

And there’s no need to tell the ambitious people. They’ve certainly left. I think we’ll be leaving too. It has been a torturous decision, with family here and everything. But we have our own family to look out for. I’m worried that if we stay we’ll do very poorly. We have not benefitted from the housing mania (the jacuzzi tax credit was particularly painful). We’re just going to be asked to pay for it all. We have already reduced our expectations but now it’s getting ridiculous. What a crummy deal. It’s just too much.”

Family Wedding RE Chat – “Despite the American relatives pointing out the ridiculousness of these arguments, there was no convincing the Vancouverites that it’s a bubble.”

pricedoutfornow at vancouvercondo.info May 22nd, 2011 at 7:27 pm -
“Went to a family wedding this weekend. American relatives were attending, and as usual as per social conversations in Vancouver, the topic quickly became real estate. The Vancouverites were jumping up and down, telling my American relatives that “Vancouver is different, it won’t crash here, we have Chinese investors, we have mountains.” Despite the American relatives pointing out the ridiculousness of these arguments, there was no convincing the Vancouverites that it’s a bubble, and it will crash here too, just like it has in their home country. Finally, the Americans realized there was no convincing these delusional, irrational people, finally one just turned away, and remarked under his breath “Well, sure sounds like a bubble to me.”
I think the Americans would know, they’ve seen this hype before (and are now buying properties in Florida for half price). They just shake their heads sadly and sigh “Poor Canadians, they will learn.”

“My husband and I both went to university, have good jobs, make good money, and we are in disbelief that we cannot afford to own property at this point in our lives with the incomes that we pull in.”

ACP at VREAA 21 May 2011 12:17pm“My husband and I both went to university, have good jobs, make good money, and we are in disbelief that we cannot afford to own property at this point in our lives with the incomes that we pull in. Granted, $200,000 is the new $100,000, but still.”

Realtor Opinion – “It will get harder and harder to enter the Vancouver Real Estate Market. This is just a fact of life. The majority of people have a very hard road ahead.”

Vancouver Realtor Jay McInnes, Sales Agent, Macdonald Realty, as quoted at PropertyWire.ca, 20 May 2011“This is just the beginning. Affordability will be a factor from now on in the Vancouver Real Estate Market. [hasn't it always been a factor? - ed.]  The rate that the city is growing and the product ranges that we are seeing, it will get harder and harder to enter the Vancouver Real Estate Market. This is just a fact of life if you are living and working in this part of the world. If you want all of the luxuries that the world has recognised we have here in Vancouver, the majority of people have a very hard road ahead.” … “Without a crystal ball, I believe the market (in general) will continue to slowly rise over the next few years (assuming world economies move positively forward). Don’t forget, after the recession hit in ’08 the Downtown Vancouver market was back to where it began (pre-recession) within 9 months! I greatly thank the conservative levels of Canadian Banking for that and I don’t see that changing any time soon.”

We beg to disagree with Jay.
The uncalled for Vancouver RE bail-out of 2008-2009 is something to regret, rather than celebrate. Like giving cocaine to a dying racehorse to get one last sprint out of it, the ‘emergency’ interest rates gave unwarranted legs to our speculative mania, ensuring that the inevitable crash will be that much more destructive. 
And, regarding the “very hard road ahead”… let’s just say that ‘affordability’ will greatly improve… in the form of much lower ticket prices after the crash. – vreaa

Academics Avoiding Vancouver – “A world-class scholar we were trying for years to attract to UBC ended up going elsewhere. He turned our offer down flat in one day after going around town with a real-estate agent.”

mjw at VREAA on 20 May 2011 at 5:45pm -
“One issue that I have seen now for at least 5 years is that the most talented young academics NO LONGER come to UBC as a result of the insane cost of housing. Someone we were trying to attract for years to UBC (a world-class scholar, who is Canadian and who studied in the U.S. and Europe) ended up going to U. Alberta for a 150K per year chair position; he turned our offer down flat in one day after going around town with a real-estate agent. Instead we hired someone well down the list who is not remotely in the same league as this individual. Invariably, for our hiring we now make much longer hiring lists and end up going through a several rejections before the 4th one in line (typically a single young person just starting out with a rather mediocre record) accepts the job….. For the past year I not bothered participating in this hiring process. as it is clear that the process is excruciating and we are not getting the same quality people as we used to prior to 2005. Would you be concerned if the typical physician who stays in Vancouver is the one with family cash and a big inheritance and not the one who actually has the most skill in their profession?…. Perhaps reflect on this if you ever go in for surgery… The housing issue affects all working class people (blue collar, white collar etc…) who have local incomes…. Although our jobs are not so portable, and it will take some time to find academic jobs elsewhere, we are working hard to leave to a NON-WORLD-CLASS-CITY….. My view is that a “world-class” city does nothing good for 90% of the population besides attracting hordes of speculators from every corner of the planet…. we are not interested in this game…”

Local Realtor Calls Vancouver’s Housing Market “Unhealthy” – “At some point you’re going to have a lot of people burned big time. It’s not sustainable.”

From article by Jenny Uechi at vancouverobserver.com 20 May 2011 [hat-tip to Vangrl] – Andrew Hasman [local realtor] has been in the business since 1993. “The local person is completely out of this market,” he said. While skyrocketing prices have made business good, Hasman said that the current market, with housing prices rising 10-15 per cent each year, is unhealthy. “Anytime you have extremes in markets, it’s never healthy,” he said. “You end up with a bubble. If the local economic base can’t support these levels, then at some point you’re going to have a lot of people burned big time. It’s not sustainable.”
[He] cited homes bought and traded like stocks and bonds and investment properties sitting empty, but some see the Chinese home rush as a bonus to Vancouver, while another sees it as a liability.
“Many people who buy here aren’t buying because they’re moving here,” said Hasman. “They’re buying on speculation or to park money here … There have been cases where people come and purchase 5 or 6 houses. No one needs 5 – 6 houses unless you’re speculating.”
Overseas buyers from Mainland China have been the driving force behind the price rise, Hasman said. “That’s what’s driving the market, really — of single family homes that have sold in the last 18 months, I would say, they’re conservatively 70 per cent, probably 80 per cent of the buyers,” he said.
He said that in many cases, the houses are placed back on the market within weeks, at a 10 per cent higher price, or simply remain empty.

We’d imagine that, once realtors are going public like this, a critical mass of folks are going to start seeing the bubble for what it is.  Tipping point nearby? – vreaa

Carney – “Judgments on how well Canada came through the financial crisis should probably not be made until we can look back five years from now.”

Mark Carney, Governor of the Bank of Canada, made supposedly ‘off-record’ comments at a fund-raising event 18 Mar 2011. They were, nonetheless, released and then described in the G&M 19 May 2011“[His] tone was generally pessimistic on developed economy prospects, saying that we are still in the financial crisis (likely alluding to the hangover from fiscal stimulus in terms of sovereign debt, and the U.S. housing mess), and that judgments on how well Canada came through it should probably not be made until we can look back five years from now.”

Exactly. Stay tuned. Carney knows how precarious our position is, otherwise he wouldn’t say this, even in semi-private. We’d give an eye-tooth to know what he really thinks about the Vancouver housing market. – vreaa

Spot The Speculator #37 – “A guy I know owns 6 “investment” condos. He claims that they are all cash flow positive, but when you ask him for details, it turns out that he is losing hundreds every month.”

bubbly at VREAA 17 May 2011 10:41am“A guy I know owns 6 “investment” condos. He claims that they are all cash flow positive, but when you ask him for details, it turns out that he is losing hundreds every month on each of those condos before condo fees. However, according to him, because he will make money once he sells, thanks to the rising prices, his properties are really cash flow positive. I wonder whether he knows what cash flow means.”

“The idea of a highly paid surgeon leaving because he can’t afford to live in Vancouver is absurd.” ["No, it isn't."]

Pat at VREAA, 17 May 2011 8:11am, writes in response to the anecdote: Doctors Leaving Vancouver – “My friend, a surgeon at Children’s Hospital, said he couldn’t have the life he wanted in Vancouver because of the insane real estate prices here”, 16 Feb 2011 -
“Even though prices are obviously too high in Vancouver, the idea of a highly paid surgeon leaving because he can’t afford to live in Vancouver is absurd.
It says more about that person’s idea of ‘lifestyle’ than anything else. How is it that I can live here very comfortably on a self-employed salary ranging from $35,000/year to $50,000/year with my mature student spouse who earns maybe $15,000 part-time?
It’s ridiculous that someone says they can’t afford Vancouver on, what, $200,000/year. Utter nonsense.”

Pat -
Many thanks for your comment. Arguments similar to the one you make are made regularly and in various forms, so we’ll headline a discussion here.
We don’t find this surgeon’s decision absurd at all.
It is important to realize that, when “prices are obviously too high” in a RE market, they seem so to people at all levels of wealth and income. The surgeon takes a look at Vancouver RE, and realizes that he cannot afford the type of property that he’d expect to be able to live in, given his training and income. In actual fact he likely earns substantially more than you suggest, perhaps over $300K, or $400K, or even more. He could prudently afford a property selling for, say, $1.6M-$1.8M. But, take a look at what he gets for that on the westside at present. Then compare those properties with the houses that surgeons earning similar incomes, living in Washington State, or California, or Hawaii, or New York, or even Ottawa, get to call ‘home’. That’s the point. The surgeon in Vancouver cannot afford to live a lifestyle commensurate with his training and income. So he moves. This is a completely sane decision.
It is inevitable that a speculative mania in real estate should causes such forces to take effect; the misallocation of resources is characteristic of a bubble. In this case, valuable human capital is squandered and lost to our community. Many skilled professionals have made similar decisions, by either leaving or not migrating here to Vancouver in the first place. There have been anecdotes on these pages of business executives and university professors, amongst others, avoiding Vancouver for these reasons. [See the 'Avoiding Vancouver' post category for some examples.]
So, yes, it may seem that it is unfair for the surgeon to say that they “can’t afford” Vancouver; but their conclusion and their move is also perfectly sensible. It would be more accurate for him to state: “I can’t afford the kind of home in Vancouver that I can afford in every other North American city.”
This line of thinking is relevant to all Vancouverites. You may think you can ‘afford’ Vancouver, but have you considered what a similar income (or your home’s current market value) would get you elsewhere?
We’re not concerned that this specific force will leave our city deserted. Everybody can’t leave at once. It’ll only take a small percentage trying to cash out for the market to crash.
While the bubble remains in existence, however, it is sorely damaging our community by the many perverse pressures that it applies; having professionals leave town is one of them.
– vreaa

It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That.

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?


The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

- vreaa

“My choice is to live on the westside and raise my family there but because of all this foreign money, I no longer can afford it. Something must be done.”

“I am a Canadian-born Chinese male who is in his near 40s. My choice is to live on the westside and raise my family there but because of all this foreign money, I no longer can afford it. Something must be done. It is in the neighbourhood’s interest to stop foreign investment. These families send their kids to school in your neighbourhoods unsupervised…driving their Ferrari’s and BMW’s. How can unsupervised but very well off kids be good for any school or neighbourhood? Governments must step in to protect the integrity of these neighbourhoods and allow hard working 2 income families with strong family values to have a chance to live there.”
anon206444676 17 May 2011 12:04am, in the comment section of the Vancouver Sun article: ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’.

Archived here because this kind of ‘call for action’ on the part of ‘governments’ has become common in the Vancouver RE discussion. We fear the unintended consequences of government intervention in the market, and believe that the speculative mania will run its due course regardless of such intervention. – vreaa

“We cannot afford a home in our own city despite 12 years of university between my husband and I – both with masters degrees.”

“We cannot afford a home in our own city despite 12 years of university between my husband and I – both with masters degrees but no chance to compete against money of unknown, and too often criminal proceeds.”Bella Donna 17 May 2011 1:34am, in the comment section of the Vancouver Sun article: ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’.

“I am in my late 30’s and, if I wanted to, I could retire today, all because my crack shack on the east side is now worth 5 times what I paid for it 11 years ago.”

“Yes, I could complain about house prices blowing off the roof in Vancouver, but then again I am late 30’s and if I wanted to I could retire today, all because my crack shack on the east side is now worth 5 times what I paid for it 11 years ago. So for that I thank the wave of investors. Cash out and move to costa rica? belize? panama? or how about naniamo? or just wait for the real estate bubble to burst then I can slave away till I am 70 to retire.”
paul s 17 May 2011 2:24am, in the comment section of the Vancouver Sun article: ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’.

“Chinese buyers frequently are absentee owners, wealthy businessmen who buy second or third houses for their wives and children while continuing to live in China for work. You see a lot of these satellite families. The kids seem pretty nice.”

Anecdote extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Norman Chow,  is a fourth-generation Canadian engineer who lives near Quilchena Park on the Westside. “Chinese buyers frequently are absentee owners, wealthy businessmen who buy second or third houses for their wives and children while continuing to live in China for work. You see a lot of these satellite families,” said Chow. He said it’s not unusual to see college-age kids of wealthy Chinese parents driving Bentleys, Maseratis and Porsches around the Westside. “The kids seem pretty nice,” he said.”

Immigration Lawyer Says ‘Bubble’ – “There is this psychological fear that ‘Ok, if I don’t get into the market, I might not be able to get in later on.”

Opinion extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com :“Low interest rates inflated home prices and created a bubble, said Lawrence Wong, an immigration lawyer with many Chinese clients. Unlike the U.S., Canada has no tax deduction for mortgage interest. “There is this psychological fear that ‘Ok, if I don’t get into the market, I might not be able to get in later on,” said Wong.”

Westside Architect – “I’ve never been busier. New homes for Asian clients make up two-thirds of my 30 current projects.”

Anecdote extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Many existing houses were built in the 1940s and ‘50s and have outdated electrical systems and plumbing and are “much smaller” than allowed today, said Vancouver architect Loy Leyland. As buyers prefer to demolish old houses than renovate, new homes for Asian clients make up two-thirds of his more than 30 current projects.  “I’ve never been busier” in a 30-year career, Leyland said. Leyland’s clients usually stick to traditional styles such as Villa or Georgian for exteriors. Inside, designs are changing. Every new house has two kitchens: a large Western- style one and a small “wok” kitchen with a stove, sink, strong exhaust fan and door to seal off cooking aromas, said Leyland.”

“Some buyers acquire multiple homes, one to live in and others for investment. They made their money in a variety of businesses, including mining, stainless steel manufacturing and real estate. About 10 percent of them speak English.”

Anecdote extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Winnie Chung, a Royal Pacific agent represented buyers or sellers in C$285 million of home sales in 2009 and 2010 combined. Chung employs eight full-time assistants and travels to China twice a year to meet potential clients. Some buyers acquire multiple homes, one to live in and others for investment, said Chung, the broker. Her clients made their money in a variety of businesses, she said, including mining, stainless steel manufacturing and real estate. About 10 percent of them speak English, she said.”

Westside Realtor – “Our office has done 50 sales this year, which is pretty incredible. Half of those sales are from mainland China.”

Anecdote extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Our office has done 50 sales this year, which is pretty incredible,” said Vancouver realtor Tom Gradecak at his office in Point Grey, where he has one colleague who speaks Mandarin and Cantonese and is hiring a second. “Half of those sales are from mainland China.” One Chinese buyer paid C$1.7 million in March for a five- bedroom, three-bath house that the previous owners had completely renovated in 2003, C$150,000 more than the asking price, said Gradecak. The buyer plans to tear it down and build anew. “There’s more value in the land,” he said. “We’re seeing a lot of empty nesters cashing out.”

“I hope the government can do something to control the price so younger generations can buy.”

Anecdote and opinion extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Cecilia Huang, a Canada resident since 2003, also is concerned about rising prices. “I hope the government can do something to control the price” so younger generations can buy, said Huang, who paid almost C$1 million for a condo in the Westside’s Kitsilano neighborhood two months ago so her daughter, now aged 6, could attend school nearby. She couldn’t afford a house and prefers apartment living because she doesn’t like yard maintenance. She also likes the views from her sixth-floor condo.”

Fueling a market by buying into it while at the same time hoping it moderates. Vancouver RE participants are overwhelmed and confused by the market action. – vreaa

Ladner On Bloomberg – “This makes it all the more difficult for people who are already struggling to get into the market or businesses who can’t hire people to come here because of the high housing prices. There are a lot of people who are really frustrated.”

Opinion extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “This makes it all the more difficult for people who are already struggling to get into the market or businesses who can’t hire people to come here because of the high housing prices,” said Peter Ladner, a former Vancouver city councillor and a columnist for the Business in Vancouver weekly newspaper. “There are a lot of people who are really frustrated.” Unlike London or New York, “we don’t have enough jobs with high incomes to justify” the home prices, said Ladner. He noted Australia has placed restrictions on foreign home ownership. The British Columbia government also could consider an increase in property transfer taxes for foreigners, he said.

“The schools here are the best and there are a lot of Chinese people here. Eastern Canada wasn’t an option because I cannot bear cold weather.”

Anecdote extracted from ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com : “Cathy Gong moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago. “The schools here are the best and there are a lot of Chinese people here,” said Gong, whose son is in sixth grade at Shaughnessy Elementary School. Eastern Canada wasn’t an option because “I cannot bear cold weather,” Gong said.”

Bloomberg – ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC ‘

We archive here the fact of this article, ‘Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC’, by Hui-yong Yu and Christopher Donville, 17 May 2011, at bloomberg.com, which was also reproduced in full in the Vancouver Sun. We will extract some individual anecdotes in a string of separate posts. Given Bloomberg’s readership, this is another landmark in the whole ‘foreign-money driving Vancouver RE’ debate. Here are some general excerpts:

Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive.

China, where home prices rose 28 percent in Beijing and 26 percent in Shanghai last year, has taken steps to curb property speculation within its borders. Chinese home prices gained for 19 straight months through December and climbed in almost all 70 cities tracked by the government during the first quarter. Premier Wen Jiabao placed curbs on mortgage lending, boosted down-payment requirements and limited the number of purchases.

“As the Chinese get more and more prosperous, they are diversifying their assets out of China,” said Jim Rogers, an American investor who moved to Singapore from New York four years ago so his daughters could learn Chinese. “Vancouver is very high on the list.”

Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100. Canada had a 4.6 national multiple, making it “seriously unaffordable,” while the U.S. at 3.3 was “moderately unaffordable,” the study showed. To be affordable, the multiple must be 3 or less.

“It’s definitely for real,” Gradecak [a westside realtor] said. “How long it’s going to last, that’s an unknown. I get asked the same question every single day.”

“I’m sure a BC Hydro lineman can make good cash, but I would think you need to make $200K a year to support a $800K mortgage.”

Krazy Kanuck at vancouvercondoinfo.com 12 May 2011 2:07 pm“I’m working near Squamish temporarily, and one of the young electricians was telling me about his brother. They both work for BC Hydro, his brother as a lineman. Anyhow, he was telling me about the new house that his brother is building. $800K!!! I couldn’t believe it. I’m sure BC Hydro pays decent, and a lineman can make good cash, but I would think you need to make $200K a year to support that kind of mortgage, and I’m pretty sure linemen don’t make that.”

Reply To Rusty #3 – The ‘New Monaco’ Argument For Divergence Of Vancouver RE Prices From Fundamentals

Readers we respect have pointed out the trollish nature of some of rusty’s comments here, and we’d agree. Having said that, rusty’s position does genuinely reveal beliefs that are shared by many buyers/owners of Vancouver RE, and for that reason, we have headlined this response, for the record.
Here’s the question that Rusty has posed:

vreaa,
you didn’t answer this question:
“what about when prices break with fundamentals? How do you explain Hong Kong, Manhattan, London, Singapore, Rome, Tokyo, Paris, Moscow, Monaco, Sydney, etc? They all easily eclipse Vancouver in $/sqft and price/income? If prices “always return to fundamentals”, why haven’t prices followed this path in the aforementioned?”rusty 12 May 2011 6:43am

We will magnanimously put aside the many questions that rusty himself hasn’t answered (most pertinent, his degree of leverage net-worth:local-RE), and also put aside the fact that price ($/sqft) is not a fundamental, and answer thus:

rusty -
80% of Singaporeans live in public housing, so how can we begin to compare that market with Vancouver’s?
Manhattan has lower ownership rates than Vancouver, and has price:GDP and price:rent ratios that support prices far, far better than similar ratios in Vancouver. We’d argue that Manhattan hasn’t really ‘broken’ with fundamentals.
The city you list that is arguably most comparable to Vancouver is likely Sydney, which is, like Vancouver, still in a large RE bubble.
The city that best supports your argument is possibly Monaco, a tax haven/resort town/plaything for Europe’s wealthy (which, BTW, really has run out of land. Visit and you’ll see.)

We see and understand the argument you are making. You’re saying that Vancouver has moved from being a town in which, prior to 1995, or 2000, or 2003, housing prices tracked fundamentals such as income, to being  a town where externally generated wealth is driving prices up beyond local fundamentals, such that local incomes don’t matter any longer (Rents should still matter, but let’s put that aside for now). This is essentially the ‘Limitless Demand Argument’.

In prior discussions here we have weighted the possibility of this being the case (Vancouver = ‘New Monaco’) as low (we’d say less than 5%). So, yes, we’ll give you that there is a small chance that we transition to become China/Asia’s Monaco, with Vancouver becoming a resort town/political haven for thousands of millionaires from elsewhere, but we rate that possibility as much lower than you do, for various reasons (China is less robust economically than people imagine; there are many alternatives to Vancouver; the foreign buyers are momentum players who will desert the market; etc).
So, that is the essential difference in our positions: You say “New Monaco”, we say “Not”. OK?

You should realize that, making an ‘all-in’ bet on “New Monaco” being the case (as you have, with leverage) is very gutsy because such an event only happens once in a town’s history, if it ever happens at all. In other words, it is a very low frequency event, and you are betting that it’s happening here and now. For every city that you list above where such a distortion may have occurred, there are thousands of others where such a distortion has never occurred and will never occur. So, you’re betting that this is ‘it’ for Vancouver. We see the Vancouver market action as being far, far more likely to be the result of a far, far more common occurrence, that of a speculative market bubble.

Either way, we have little alternative other than to wait and see how it plays out.
– vreaa

Landlord Mentality – “I expect my tenants to subsidize my speculative bet on Vancouver RE prices”

Hat-tip to reader Mike for pointing out the telling exchanges in the comments section of ‘Renters rally to protect rights against unfair evictions’, Vancouver Sun, 7 May 2011.
The article deals with the plight of tenants facing ‘renovictions’, “a tactic in which landlords attempt to kick out renters under the guise of renovating the suites before substantially raising the rents.”
The comments reveal much about landlord investment mentality. And MikeD5 produces excellent retorts:

anon873211976 7 May 6:40pm - “This is crazy….Remember your a “RENTER” your not an “OWNER”. There should be a simple rule of a maximum of 6 months notice of eviction, regardless of the reason. There, now throw all the rest of the eviction paper work in the garbage….Its no wonder investors wont build new rental buildings, their simply too much trouble…”

anon309334271 7 May 7:01pm – “This idea of entitlement that seems to be sweeping across the current generation. Renters are NOT owners. I believe that an owner should be allowed to do whatever they want to with their property, as long as they do not violate the lease agreement.”

NEXTLINK 7 May 11:25pm – “At one time I had the opportunity to rent my home out… The tenants were a nightmare! The first check was good…. after that it was constant “running after them for the rent” I have no pity …. The tenants didn’t risk their savings to buy a home… they didn’t spend weeks if not months making my home livable.”

anon873211976 7 May 11:49pm – “All renters do not deserve the excessive rights the governments have handed to them on a silver platter.
Any owner of any type of building with with renters, should have complete control over his or hers substantial investment.
Having the government regulate the rules, is simply manipulation of the economy, and makes everything more expensive for owners and renters.
[see CMHC -ed.]The most difficult thing for any building owner is to find “good, quality, responsible customers”
And renters can move any time they like….. and not have too pay rent, this is so one sided and flaky, i am amazed the courts even recognize the these one sided, so called regulations..”

anon801396618 8 May 12:18am – “I’m always amused when all these “Left” wingers (NDP & federal Liberals) cry because they want to rent in one of the world’s most sought after cities (Kits & dt Vancouver) BUT they want rents at 1970’s levels. If you want to live here, pay the freight baby ! These same “Lefty’s” are the first to invite the world to move to Vancouver, AND the first to scream when demand causes rents to increase. Grow a brain people.”

taxslave 8 May 11:22am – “Renters have right and landlords have bills. That is why there is so little rental housing available.”

realitbites 8 May 12:30pm – “I have seen first hand what happens when a landlord tries to be a nice guy and tries to fix up his suites without evictions: the tenants b1tch and moan about paint fumes and inconvenience, and some of them bail out on rent leaving the landlord screwed. So all you can really do is sit back and watch your suites slowly get trashed because renters want it both ways. Sorry folks, if you want to be secure, get an f’ing mortgage like the rest of us and shut the f up.”

anon498382070 8 may 1:20pm – “Maybe a little math will help. A building sells for say, $250,000 per suite. Rentals cost more to finance than owner-occupied homes, conservatively assume 6%. Principal & interest cost on $250,000 amortised over 35 years is $1,414 per month.
That’s 40% more than what the Brattens pay for rent. The landlord also has property taxes, management costs, repair & maintenance costs, periodic replacement of roofs, carpets, stoves, fridges, insurance & vacancy/credit loss.
Landlord are not a public service. We aren’t a small segment of society cursed with the obligation to provide subsidized housing to tenants. Landlords deserve a return on their investment.
I value the business of my tenants and strive to provide them good quality accommodation. But I don’t want to subsidize them.”

[Maybe a little math would help: The sales price of the suite is 2-3 times over fair value. Try the figures with a sales price of $100K and you'll see the rent makes sense. -ed.]

MikeD5 8 May 1:46pm – “If you can’t get the yields, than why do you stay in the business? There are a million other alternative investments.
Lots of landlords in this city accept low yields because they are speculating on property values. Fine than, but tenants aren’t going to pay for those increased values.
Also, vacancies are now 2% in Vancouver and 7% out in the Fraser Valley. There are actually far more apartments available than a few years ago, so even if the marker was totally unrestricted you wouldn’t get the yields you desire.
If you don’t like it, sell and invest in something else. If you like the property appreciation, deal with the low yields and shut up.”

[Brilliantly put. 'Mike', is that you? -ed.]

anon498382070 8 May 2:25pm -
“2 BR suite, theatre district NYC – $5,500 per month $Cnd
2 BR flat, London England – $6,847 per month $Cnd
550 sqft flat in Tokyo – 1BR, $2,641 per month $Cnd
Kitsilano 1 BR suite, new rent $1,075 $Cnd. Sounds like a deal to live in one of the most expensive areas, of one of the most expensive cities in the world. What are they complaining about?”

[ROTFLMAO regarding comparing Kits with those sites. 'Expensive' in price, not value, right? Market rents come closest to reflecting the actual value of a domicile. -ed.]

anon498382070 8 may 2:41pm – “There is a world of difference between low yield & negative yield. A negative yield is called a subsidy. If renters as a group need subsidy, by what logic does it fall to one small segment of society, landlords, to provide it?”

phreek11 8 May 3:05pm – “BC is already a HORRIBLE place to be a landlord, which is why so many foreign investors buy property and leave it vacant for many years and just rely on increase in value, rather than monthly income.”

TM7 8 may 5:05pm – “I have over the years seen so many landlords taken advantage of due to the Landlord Tenancy Act. Renters have all the rights, landlords have none. The ironic part of that is the fact that the person who owns the home, paid for the home, pays the taxes on the home, pays for all the repairs on the home, has zero rights.”

MikeD5 8 May 5:14pm – “When a unit vacates, a landlord can charge any rent they want for a new tenant. Despite that, even when they can charge any rent they want, rents are way way way below any kind of decent investment yield. This has NOTHING to do with rent controls or subsidizing tenants.
The facts are the prices of real estate are extremely out-of-line with fundamentals. You buy these days and you’re only buying to speculate. Anyone who buys Vancouver real estate for yield is totally out of their mind, and this has nothing to do with tenants.”

[Yes, this clearly is 'Mike'. -ed.]

anon498382070 9 May 1:23am – “MikeD you are wrong, this has everything to do with subsidizing tenants. Contrary to your view that real estate values are overpriced, when property changes hands between willing sellers & willing buyers – That establishes the value.
You’re saying that one who chooses to buy their accommodation must pay all costs associated with its occupancy, but a renter ought to pay only a fraction of the real costs that ownership of the property presents to the landlord. There’s no logic in that. If you want to live in a million dollar property, you’ll have to pay the costs associated with acquiring & operating million dollar properties – whether you own it or rent it. Renting should cost more because the landlord deserves a return on his investment & risk.
Can you think of any other business wherein you’d think it reasonable that the business sell it’s product at less than the cost of acquiring the product?
Why should landlords be singled out to provide subsidy to tenants?”

MikeD5 9 May 2:49am – “”landlord deserves a return on his investment & risk.”
That, my friend, is entitlement in a nutshell.
Million dollar houses are offered for rent for under $2500/month all the time in Vancouver. Check Craigslist, its quite common. One ad has a renovated 4 bdrm house in MacKenzie Heights renting for 2200/month. No government is setting that rent. The landlord is asking the market price if a tenant agrees to the rent.
You aren’t going to get Manhattan rents without Manhattan wages.”


Honourable mentions:

pineal g. 8 May 7:54pm – “Good landlords who observe the tenancy act and behave in good faith have nothing to fear if this legislation is passed.”

LuckySlevin 8 May 4:32pm – “I am so tired of hearing landlords whining about how hard and costly it is to maintain their rental properties. How about you all go and find REAL jobs, because flipping properties is not an actual job.”

MarshallYVR 7 May 10:06pm – “There’s a crisis of affordable housing in Vancouver. People of my generation can no longer afford to buy. Yet they have no security in renting, either. Landlords should not be able to evict perfectly good tenants just because they want more money.”

Open Reply To Rusty #2 – “I’m all in. This is pretty much a no-brainer since the rental market is always strong here.”

From comment discussion in VREAA thread ‘Open Reply to Rusty’ 30 April 2011. We headline Rusty’s position as testimony to the arguments being used by many who continue to buy and/or hold, even at these lofty price levels.

—–
Rusty: “So long as rents cover any mortgage then I’m OK with more risk. Sometimes you have to wait and build more equity before splitting one property sale into two more. I have a just a couple more years on one home before I’m ready to “double down”

vreaa: “Tell us about your RE situation, if you can. What percentage of your net-worth is in Vancouver RE?”

Rusty: “Not enough. It really is the only investment worth holding.”

vreaa: “When you say, “not enough”, we can take it, then, that you are ‘all-in’ on Vancouver RE?”

Rusty: “Yes, I’m all in. This is pretty much a no-brainer since the rental market is always strong here. So long as tenants are paying my mortgage is there any reason why I shouldn’t be “all in”? There is an end date to a mortgage after which any rental payment becomes total revenue (or gravy), this is on top of any appreciation. Gold, stocks, etc. do not produce revenue besides any increase in value. Demand for housing is constant, demand for any other investment will wane. What are your thoughts on the matter? I’m taking it you do not share my enthusiasm for real estate.”
—–

Our reply:

Dear Rusty:

Yes, you are correct, we do not share your “enthusiasm for real estate”, but that is only because of the current state of the Vancouver market. You are making an investment income cash flow argument for investment in RE; essentially that made by players such as REIT (are you affiliated with them?). In more ‘normal’ times, this approach may work very well (and we’d perhaps be as keen on it as you are now), but we are not in such an environment at present.

We have a few questions and observations for you to consider:

1. You talk of “tenants paying (your) mortgage”. Even at record low interest rates, one is very hard pressed to find examples of cash-flow positive properties in Vancouver and surrounds. Could you perhaps give us some examples of current properties on the market that would allow you to purchase and have “tenants pay your mortgage”? Give us all an example of something you would buy if you could.

2. You say you’re ‘all-in’, that you are waiting before you’re able to buy more RE, and that you have mortgages on the property/ies you hold. You’re using leverage in your RE investments. It follows that your entire net worth is less than the current market value of the property you’re holding. If you feel comfortable doing so, please share with us your net-worth to property holdings ratio (Twenty to one?, ten to one?, four to one?, two to one?). A corollary of this line of enquiry: How much would RE prices have to drop for your net-worth to drop to zero?

3. You assume that the rental market will always be “strong here”. How much would the rental market have to soften for you to be cash flow negative on your property/ies? How much do rents have to fall? What percentage vacancy rate on your property could you tolerate?

4. Similarly, how much would mortgage rates have to increase for you to be cash flow negative on your property/ies?

5. You say “rental payment becomes total revenue (or gravy), this is on top of any appreciation.” Have you taken into account possible depreciation scenarios in your calculations? What is the worst case RE price deflation scenario that you are prepared for?

6. You say “Demand for housing is constant”. Actually, demand can be very elastic. Especially when there is a speculative component to buyer behaviour. Have you considered the effect that falling prices will have on demand? How do leveraged speculative RE holders behave when prices start dropping and then drop further?

7. At what percentage price drop would you be forced to liquidate your RE holdings?

8. You say of RE: “it really is the only investment worth holding.” Have you ever made profits investing in any other asset class?

– We’d be interested in your responses to these questions. You likely represent a significant subgroup of RE investor/owners, and we find your position on these issues useful in trying to understand the market.

We foresee potentially very large price deflation, so we personally like cash far, far more than we like Vancouver RE for the foreseeable future. We also like some other investment positions, but that is beside the point: this is not an investment blog. After the crash, our position may change, and we may find local RE a lot more attractive. Currently, however, we’d say that it’s a “no brainer” to NOT buy Vancouver RE at these prices, so we’ll simply have to agree to disagree with you.
Keep in touch and we’ll see how it all plays out,
vreaa

The Third Fundamental: Total Housing Market Value to GDP – BC in the Stratosphere

BC Housing Stock value: >$1 Trillion [actually, $1,043,127,129,141]
BC GDP: $191 Billion [2009]
Ratio: 5.46 to 1

sources: 2011 BC Property Assessment Notice, nfbpsh.blogspot.com 1 May 2011, and wikipedia [with hat-tip to commenter 'GG' at nfbpsh].

Price:Rent and Price:Income ratios suggest that BC housing is two to three times overvalued. The TotalHousingValue:GDP ratio supports those conclusions and, in fact, suggests that the overvaluation may be even greater.  It seems almost impossible to conceive, but this ‘third fundamental’ suggests that housing values in BC could drop by about half and we’d still be as overvalued compared to GDP at the Irish were at the beginning of their collapse! Note, too, that the market ‘value’ of housing in BC is likely underestimated as it makes use of property assessment values and we all know that housing in Vancouver is ‘worth’ at least 25% more in current markets.
There is absolutely no doubt regarding the existence of a massive bubble.
How much more extreme can things get before we implode? – vreaa

Open Reply to Rusty – “Just because you perceive a bubble does not make it so. Bubbles are only identified after they’ve burst.”

Rusty at VREAA 30 April 2011 8:47am -
“vreaa,
Just because you perceive a bubble does not make it so.
Bubbles are only identified after they’ve burst.
Or do you define a bubble as a real estate market where you personally cannot afford to buy?
What is your “pre burst” definition?”

—–

Dear Rusty

Thanks for your question.

It is a myth that “Bubbles are only identified after they’ve burst”. The myth is propagated by those directly or indirectly benefiting from the bubble, and also by vested interests in postions of responsibility, who could make a difference, but decline from so doing. An example of this is Alan Greenspan keeping monetary policy too loose through the tech and US housing bubbles, claiming that you can’t identify a bubble in advance. Greenspan is simply wrong on this point, and many observers saw those bubbles for what they were during the process of them being inflated. Yet, we still hear this myth perpetuated (as in your bold claim). This is closely related to the ‘hoocoodanode’ responses you’ll get from various players after a bubble inevitably bursts. It’s also a way of those guilty of policies and actions that perpetuate bubbles to claim innocence after the fact.

A speculative bubble can most definitely be identified while it is inflating. Such a bubble occurs when prices of any asset lose contact with fundamental values of the asset and start rising higher and higher simply because they are rising higher and higher. All buyers in such a market buy with the expectation of higher prices, some buying solely for the expected higher prices.
Almost all bubbles are supported by fallacious arguments citing ‘reasons’ for differences between bubble price and fundamental value. For instance, during the tech bubble, we heard the argument that P/Es of 1000 were merited because “we’ll be able to sell to everybody” (neglecting to take into account the fact that everybody else will be able to sell to everybody, too).
Bubbles are also facilitated by large quantities of easily available cheap capital.
They are all versions of Ponzi schemes, where, essentially, the late-comers are left holding the bag after prices collapse, and the only players who profit are those who get out early enough (surprisingly few), and those who sell ‘shovels to the prospectors’ (brokers; some developers, some in construction, etc).
All bubbles deflate, no exception (If you can think of any, let us know). Prices return to levels that make sense according to fundamentals. In fact, as we see now happening already in some areas of the US housing market, they often drop well below fundamental value, and may remain depressed for the better part of a generation. Bubbles are very, very destructive to a community, both through the terrible misallocation of human effort & resources on the way up, and through the tragic financial, social, and psychological consequences of the aftermath.

In Vancouver currently, median housing prices are about ten times median income, and rental yields are extremely low, much lower than one would expect even at current low interest rates. Thus, prices are far, far removed from those merited by fundamental value. By our calculations, prices are 2 or 3 times fair value, meaning that we’d expect price drops of well over 50% when the bubble deflates. But people continue to buy believing that prices are only going to go up (or, a slightly different version, that prices couldn’t possibly drop by more than 5% or 10%, before continuing higher). Higher and higher prices are ‘supported’ by fallacious arguments (“we’re running out of land/best place on earth/never-ending demand/foreign buyers”). Capital is very freely available, along with low deposits, long amortization periods, and government loan insurance.
By all measures, we are in a massive speculative bubble. Massive in terms of both the percentage of citizens involved, and the size of the overvaluations. This is not an opinion, it is a fact.

You have suggested that we may define ‘bubble’ as a market in which we, vreaa, cannot afford to buy. That is a fair thought for you to have. We could claim that this information it is neither here nor there to this discussion, but it is fair for you to know if we’re just ‘talking our book’. So, we’ll share with you that we can indeed ‘afford’ to buy, even at current prices, and definitely by all Vancouver standards. But we choose not to, because of the massive disconnect between price and fundamental value; because of the RE bubble. There is a very small minority of prospective buyers in this position in Vancouver. It is never easy to be on the wrong side of a bubble, but what else can you do but call it as you see it?

Say we had to reframe your statement to read: “Bubbles are only identified by the vast majority after they’ve burst.”
That we’d agree with. By definition, once even a minority start bailing, the bubble bursts. We haven’t reached this point yet in Vancouver’s remarkable market, but we will get there, and after we do, there will be a very broad consensus that we have indeed been through a very large bubble.

regards,
vreaa

“When I bought a new condo in 2001, I negotiated a price of ~$271k, because with GST, that was the limit the CMHC would insure at the time with 10% down.”

Ahab at vancouvercondo.info April 23rd, 2011 at 1:54 am- “When I bought a new condo in 2001, I negotiated a price of ~$271k, because with GST, that was the limit the CMHC would insure at the time with 10% down. I don’t know exactly when they went ‘no limit’, but I’m certain that is a major component of what has driven this market to such obscene levels.”

Vancouver RE Demand – Immeasurable or Simply Unmeasurable?

thinktom (a local realtor) at RE Talks 19 Apr 2011 7:20pm“We just called a Shaughnessy listing, currently showing as ‘active’ on MLS, for our buyers. It’s listed in the $2.9 million range. It has already sold. It had 11 offers, only one of which was the asking price apparently and the rest over asking. The final sale price was $3.7 million. Amazing that there are at least 11 groups searching for $3 million dollar homes. This also means there were probably 3-4 waiting in the wings but not willing to bite due to too many competing offers.”

silverman (another local realtor) 19 Apr 2011 7:29pm“Shhhhh… there are many wounded bears in here.”

poundcruncher 19 Apr 2011 7:41pm“Yep, no $3M + listings on the westside….
Wait, only 180 of them.
Wait… only 120 of them listed for more than 30 days.
Wait… where are all the multiple offers on those ones?
I’ve got 120 anecdotes of homes not selling.”

eyesthebye 20 Apr 2011 5:01pm“It’s puzzling how little bears know about the demand for a detached home in this city. It’s almost like they know nobody here – work alone, and have no family. If they had an ounce of social skill they’d have heard all the stories about folks living in a condo/townhouse or renting that wanted to buy a detached property. Maybe it’s healthy to deny the truth – they sleep better at night. I’ve been saying all along that we have no more than 10-15% to shed at the very worst here in Vancouver – and likely less than this, or zilch. Remember my “itchy trigger finger” theory.” [The theory that buyers on the sidelines will jump in at any small pullback in prices. -ed.]


Immeasurable – Too large, extensive, or extreme to measure.
Unmeasurable – Impossible to measure

Very common Vancouver RE logical fallacy:
Vancouver is a very nice place to live; therefore many, many people want to live here; therefore demand is essentially limitless; therefore prices will never drop in any significant way.

Demand is hard to measure. More like raindrops than bricks, it can evaporate in a single afternoon.
We are of the opinion that, when prices do next start dropping in earnest, the speculative component of the market (those buying and those holding largely because prices are going up) will create supply that will completely overwhelm any demand from sideline buyers.
But this is just an opinion; again: Demand is hard to measure.
– vreaa

Peter Ladner On CBC – Foreign Buyers; Eroded Communities; Resort Towns; Avoiding Unaffordable Vancouver – “A chief financial officer from a mining company could not afford to move to Vancouver because of housing prices.”

Peter Ladner, former Vancouver councillor and former mayoral candidate, made the news recently by calling for some form of restrictions on ‘foreign’ ownership of local RE. The story was covered widely, at CBC [11 Apr 2011], News 1130 [11 Apr 2011], and discussed in the blogosphere.

Broadly, we are opposed to excessive government intervention in markets that affect the daily lives of citizens. We feel this way because markets are highly complicated, governments are highly limited & inefficient, and measures always have unintended consequences. Things seldom go as planned. Witness the government interference regarding the existence of the CMHC: Though mandated to make housing more affordable, the CMHC has very definitely fuelled the price bubble by artificially distorting the price of risk, and drawing many more into ownership than would be there under free-market conditions. The CMHC has paradoxically made house-ownership less affordable. If there is a  significant chance of doing more harm than good with an intervention, government should stay out.

Having said that, we do live in a country where governments are very involved with many markets: transport, education, health care, gambling, car insurance, alcoholic beverages, interest rates, our currency, etc etc. So, one could argue, why should foreign RE investment remain relatively untouched by government restriction? We wouldn’t let foreign interests take control of our water, our energy, or our food supply, why let them distort our access to accommodation? And, with restrictions on property ownership in countries like Australia and China, there is the possibility that speculative money runs to the last markets that allow them access, increasing the risk of our houses becoming the play-things of international speculators.

For the record, we don’t think that having the government step in here is essential or particularly desirable. We strongly suspect that any such restrictions would be slow-coming, ham-fisted, and easily circumventable. In other words: “too late, folks; let’s let this all play out”.  As often occurs with calls for restrictions, the calls come at the wrong time in the cycle. We believe that the Vancouver RE market will sort itself out regardless of any such measures; the bubble will implode without such restrictions. Once the inevitable initial price drops establish themselves (10%?, 15%?), speculative buying of all types (foreign, local, and, our personal favourite, local-speculative-buyers-disguised-as-normal-folks) will evaporate, speculators will become sellers, and prices will plummet. The issue of foreign RE ownership will very rapidly become an absolutely moot point. Any social concerns about foreign ownership will disappear (just watch). In a RE crash, the community will welcome any buyer of any description (witness the US, circa 2011).

Here follows a transcript of a CBC radio interview with Peter Ladner, in discussion with Rick Cluff and Tsur Somerville, from The Early Edition, 11 Apr 2011. [ thanks to Angela for the transcript. -ed.]
Foreign buyers are discussed, of course, but the piece is at least as interesting for mention of changing communities, Vancouver as a ‘resort’ town, local non-resident owners, and businesses & individuals avoiding Vancouver directly because of RE prices.
Note that they all dance around the elephant in the room, the massive speculative bubble that must inevitably implode. They simply don’t see any possibility of this outcome. All of the ‘problems’ that they wrestle with will eventually be resolved with RE price deflation and a return to fundamental values. – vreaa

RICK CLUFF:  It’s no secret that real estate is expensive in our part of the world.  The popular consensus is that the market is being driven by Chinese buyers.  Is that cause for concern?  How expensive is too expensive?
To debate those questions we’re joined by two guests:  Peter Ladner, former NPA councillor and columnist for Business in Vancouver newspaper, and Tsur Somerville is the Director of the UBC Centre for Urban Economics and Real Estate.

TSUR SOMERVILLE:  Good morning.

PETER LADNER:  Good morning, Rick.

RICK CLUFF:  Peter, you’ve expressed concern that the market is being driven by foreign, specifically Chinese ownership.  Why does that matter?

PETER LADNER:  Well, it doesn’t, actually.  It doesn’t matter where the foreign ownership comes from, but if our prices are being driven up by people who are simply investing in our community and not living here, there are a whole lot of problems that result.  We have difficulty — actually, I got onto this when I was at a meeting of the Business in Vancouver Editorial Advisory Board and somebody from the mining industry said that a chief financial officer from a mining company could not afford to move to Vancouver because of housing prices.  And that’s just one indicator of how high housing prices, when we’re now the third most unaffordable housing city in the world, can undermine the economy, people can’t find people to — employees to work here, even managers can’t afford to live here.
So it erodes the economy, it erodes the community when people come here and buy homes they don’t live in and it makes the neighbourhoods unsafe and — and less vibrant, it splits up families.  If you want to — if you’re already living here and somebody squeezes you out of your — you can’t afford to buy a home in your neighbourhood, you can’t live with — near your children, your parents, your grandparents, and it blocks social mobility for people who are — a whole generation of people who can’t afford to buy here, new immigrants who want to come here and work here and live here and pay income taxes here can’t afford to buy homes.  So it — it — and it adds to the division in the community between the rich and the poor and you end up with a resort community that’s unlivable, in spite of all our great reputation for being the most liveable city in the world.

RICK CLUFF:  Tsur Somerville, how do you respond to that?

TSUR SOMERVILLE:  I’m really worried about the government sticking its hand on these issues which are based, to a great extent, on perception.  I mean, part of it is if you want to be an international city you can’t really stop sort of international people from — from being here, even if they want to be here and investors and so I think we kind of have to decide what kind of city we want to be.
I think the other thing is, is that this is really driven by sort of what’s going on on the West Side of Vancouver, which is not the whole Lower Mainland and there’s some really unusual dynamics on the West Side and in Richmond that aren’t matched anywhere else in the entire Lower Mainland.  So I think this is a little bit of navel gazing.  It doesn’t mean that there aren’t some issues for concern, but it would be hard to walk around the West Side of Vancouver and say, “Gee, there’s all these empty houses and no one living here.”

RICK CLUFF:  Peter, in your recent article you suggest that we should consider foreign ownership restrictions in Vancouver real estate.  Why?

PETER LADNER:  Well, just for the reasons I said, Rick, that if you have — if you have a community where so many people are priced out of the market by people who are not living here and not paying income tax here and not contributing to the community here, you have a more unliveable community.  And I agree with Tsur that — that government meddling in this kind of thing is a big — it’s not easy and it’s not simple and it’s fraught with political landmines and all sorts of bureaucratic problems.  It is done, however, in some countries and we do — we meddle in the housing market in other ways, by massive public spending on subsidizing people with rent supplements and social housing and so on.  And so it’s a question of just where do we spent that public money?  Are we content with that kind of a city?
And in spite of the recent flare-up in the West Side of Vancouver, the whole Lower Mainland is nine times more than the average income to — to live here.  The whole place is unaffordable.

RICK CLUFF:  Tsur, is there evidence to suggest that restricting ownership might in fact help cool prices?

TSUR SOMERVILLE:  Well, I mean, there’s cooling — there’s — it’s not going to make this place, you know, affordable.  So, you know, if your — if your concern is affordability, you know, this is not the issue that’s driving unaffordability and I think it’s important to separate those two out.  I mean, there are places in the world that — that do treat non-residents differently.  Florida has a different property tax rate on non-residents and on residents.  You know, China makes it very difficult to — for foreigners to buy property.  I don’t know if sort of the government model we want is the Chinese government model, though.
So I mean, I — I think that the notion about — the notion about affordability should not be mixed with the notion of the issues about what kind of neighbourhoods we want.  These are actually somewhat separate and I — I do think that, you know, if you go back to the 1980s and the sort of worry about Hongcouver and all these kinds of things, I mean, Hong — Vancouver’s been through this story before about, you know, foreigners coming in and changing the character of our neighbourhoods and pushing up prices and making it unaffordable and hard for families.  I mean, that was all the arguments that people used in the last 1980s and I think most people think that the city is better off now than it was in 1987.

RICK CLUFF:  Peter, do you restrict ownership or do you change the taxation structure so that foreign owners have to contribute more to the community in which they own the property?

PETER LADNER:  Well, I would start, Rick, with just looking at the options.  I don’t hear any public discussion of these options.  The only person I know — the only study I have ever heard of that’s looked into this issue is Bing Thom, the architect, on his own dime commissioned a study to find out what really is going on, what really is the impact.  And is Tsur is right, is it foreign ownership that’s — do we have empty places that are just sitting idle, just somebody speculating on the property or what is going on?  And if we want to look at the options, okay, if it’s not restricting foreign ownership what are the options?  You can increase supply and — and we’re trying to do that, but that’s — that’s a big problem, too.  So let’s look at this thing and let’s have a discussion about it.

TSUR SOMERVILLE:  Rick, if I could just, you know, pop in.  If we go down this road what we’re going to discover is a place that isn’t really happening, it’s not sort of, you know, Chinese capital buying houses on the West Side of Vancouver, but it’s all the downtown condos that are mostly owned, you know, all — most of the new buildings are owned by people who aren’t residents in those — in those buildings.  But that’s also an important part of our supply rental housing.  So, you know, it’s — it’s not a sort of simple bullet that you can sort of target, you know, what — you know, Chinese multi-millionaires who are buying houses on the West Side and not living in them.  I mean, that’s not our sort of non-residency ownership issue or non-residency ownership issue, which is what [indiscernible] looked at.  It’s really condos downtown, but those are also where we get a lot of rental units from.  So it’s — this is not — not simple.

RICK CLUFF:  I’d like you both to respond to this question.  I mean, we always hear that Vancouver is the best city in — one of the best cities in the world to live in, certainly the best in Canada.  So what consequences are housing prices having on the character of this city?  Peter, you first.

PETER LADNER:  Well, I mean, it just — it changes who can live here.  People who can live here, the rental that Tsur’s talking about for sure, there’s an increased supply but it’s all at the high end.  And the people who are trying to work here and — and raise families here cannot do it, so they end up having to move to another — another town or another city.  If they’ve been educated here they don’t — they go away somewhere or they end up living right at the — way out in the fringes of the region and we spend billions of dollars building transportation infrastructure to move them around.
So I think there are a lot of downsides and if the biggest upside is we get some more luxury condos downtown, well, that’s — to rent, that people can rent for uncertain lengths of time because the owners might come back one day or sell them, we should look at that.

RICK CLUFF:  Tsur.

TSUR SOMERVILLE:  I think that it’s — it’s complex.  I mean, one of the things that people do do is they trade off the amount of housing that they’re going to consume in order to live here, but that’s no different than what people do in New York City or London or San Francisco, or a whole bunch of expensive cities.  I mean, you know, there is a dynamic that way.  I think there is concern, there’s certainly certain types of businesses that aren’t going to locate here, which is why we have so few, you know, corporate headquarters because of the high housing prices and there is a point where housing prices can really restrict productivity and growth.  You know, it’s not clear that we’re at that point yet and while housing is expensive here, you know, we’re not the only city in the world that has absurdly expensive housing prices, it does manage to thrive.

RICK CLUFF:  Thank you both for your time this morning.

PETER LADNER:  Thanks, Rick.

TSUR SOMERVILLE:  It’s a pleasure, Rick.  Thanks, Peter.

RICK CLUFF:  Tsur Somerville, Director of UBC Centre for Urban Economics and Real Estate, and Peter Ladner, former NPA city councillor and columnist for Business in Vancouver.
—-

“People are getting older and some want to cash out of their ‘million dollar homes’ for various reasons but the young potential buyers can barely afford the cheap rent here”

“I live in mid Vancouver Island (on one of the Islands). People are getting older and some I talk to want to cash out of their ‘million dollar homes’ for various reasons but the young potential buyers can barely afford the cheap rent here… I rent a $700K home for $1200 a month and there is a lot of rental inventory to choose from. Americans aren’t coming back for a long time and Asians don’t seem to like living on rural ‘islands off islands’. The Alberta people might come back but for these prices they could go to the US and get castles… Vancouver Island north of Victoria seems to have a minimum of 25-50 years supply of million+$ homes. No MSM or local paper will even touch this story but it’s obvious we here are in a very depressed market.”
JPG101 at greaterfool.ca 14 Apr 2011 1:18pm

1. Rents are still relatively low.
2. The price/rent fundamental ratio on properties like these indicates a massive, massive speculative price bubble. The ratio is 583/1 in this case, indicating this house’s market price is about three times over fair value.
3. The US comparison remains very important: Sell your BC home, buy 4 or 5 equivalent homes in California, live in one and retire off the rent from the others. Such market irregularities can’t last. Only when that kind of cross market osmotic-pressure returns to zero, will our market have finally equilibrated. It’ll occur at prices far below current levels.
4. Most interesting, note the older home owners who are expecting to be able to cash out of their ‘million dollar homes’ whenever they like. These shadow speculators will add their homes to the market once prices have dropped 10% or 15% or 20%, as their paper profits (and their retirement plans) evaporate. That added supply will take prices below the 2008-2009 trough lows and then the wheels will really come off. We’d be very surprised to see BC price lows higher than 50%-off, and they could well go lower.
– vreaa

Rent Is Still Relatively Low – “Just moved to Vancouver. The place I’m renting in the West End is nearly identical to my Toronto rental, only it’s 100 dollars cheaper and it’s right downtown, instead of 8km away in High Park.”

“I found Toronto’s rental prices to generally be higher than in Vancouver. Just moved [to Vancouver] a month ago. The place I’m in is in the West End and it’s nearly identical to my previous, only it’s 100 dollars cheaper and it’s right downtown, instead of 8km away in High Park. It’s also has a wicked view of English Bay.”megapickles, reddit.com, 13 Apr 2011 [hat-tip matt]

Real demand remains modest. The rent/price ratios prove we are in a massive speculative price bubble. -vreaa

Global News Switch – ‘Real Estate Bubble?’ Story Becomes ‘Steady Climb’ Story

Global BC TV, 12 Apr 2011, Noon news -


Randene Neill: “Vancouver’s real estate market continues to lead the country in terms of price. the latest survey by Royal Le page shows detached homes in vancouver sold for nearly three times the national average but as Tanya Beja reports some analysts are suggesting that these prices can’t be sustained for much longer.”

Announcer: “It takes just over a million dollars to put a ‘sold’ sign on the average Vancouver home. It’s a little less if you’re buying east of Main Street, and 50% more on the westside. Those figure released today by Royal LePage, showing that prices of homes rose 10% in the first quarter of this year, compared to last.”


Chris Simmons, Royal LePage Realtor: “The vast majority of buyers on the westside and Richmond buying single family homes are from mainland China.”

Announcer: “Royal LePage says strong demand from overseas and low interest rates helped push the price of Vancouver homes three times above the national average.
It’s cause for concern say analysts, who warn buyers are taking on too much debt:”


AJ Sull, Pacifica Partners: “[inaudible]..income concerns, especially here in BC. The debt to income ratios are quite lopsided. We’ve exceded the US averages at the peak of the US bubble. So, that to us is not very comforting.”

Announcer: “The average Canadian household debt reached a record $100K last year, more than one and a half times the average income. Experts warn with rising interest rates, Canadians will no longer be able to service their debts and their mortgages. They say a correction in housing prices is inevitable.”

Sull: “We do think about a 25% price decline would start to balance incomes and housing prices off, quite well.”

Announcer: “AJ Sull says with a federal election looming, it’s time for politicians to weigh in on real estate prices. But unless there’s a drop in demand for Vancouver housing, some realtors say they don’t see prices going anywhere but up.”

Realtor: “We have people who want to live in Vancouver, people from Toronto want to live here, people from China want to live here, people from Iran wish to live here, people from all over the world want to live in Vancouver. So it’s a place where there’s an awful lot of demand.”

Okay, so that was the Noon news on Global, 12 Apr 2011.
Noteworthy for having the words ‘Real Estate Bubble?’ heading the piece, for mention of the word ‘bubble’, and for having an analyst on camera suggesting that 25% price drops are possible, perhaps even desirable, in the Vancouver market. (A concept familiar to bear blog readers. FWIIW, we would tease AJ Sull that he is being overly optimistic. If he’d suggested a 50% price drop, however, he’d likely not have gotten air-time, so “hats-off”, it’s a start).
The realtor, of course, gives the perennial “demand, demand, demand” argument for never ending price increases. -vreaa

The message is softened somewhat on Global between the Global Noon and 6pm news slots [hat-tip to Brian via Garth at greaterfool.ca for alerting us all to this]. Here is the later version, also verbatim, for the archive record:

Global BC TV, 12 Apr 2011, 6pm news [archived by Greenhorn here]-


Announcer: “And even as you ponder how much cheaper your car insurance could be, the price of real estate just keeps going up. According to the latest industry report, a typical home in Vancouver sold for nearly three times the national average in the first quarter of this year, and three things appear to be at work here: low interest rates, a limited supply of houses, and increased pressure from foreign buyers.”

Announcer2: “Putting down roots in Vancouver is getting more expensive, especially if you’re shopping for property in some of the cities most desirable neighbourhoods.”

Simmons, Royal LePage Realtor: “You know you’re probably looking close to two million dollars for an average sale price of a SFH on the westside of Vancouver, and maybe not quite so high in West Vancouver”

Announcer2: “A new survey by Royal LePage shows that vancouver housing prices are now three times the national average, with condos going fro a half a million dollars and bungalows about double that. It’s an increase of almost 10% from the first quarter of last year. according to realtors, it’s fuelled mainly by low interest rates, and demand from abroad.”

Realtor: “There is a large demand for properties in Vancouver and Richmond amongst the Chinese population, and they’re looking to immigrate.”

Announcer2: “While the focus on Chinese buyers has prompted some to push for restrictions on foreign ownership, some analysts say the bigger concern is whether Canadians are taking on too much debt, without having the income to match rising prices.”

AJ Sull: “Canadians had a little bit of complacency, saying that in Canada we don’t incur debt like Americans do..well, we’ve started to trade places with the Americans.. the Americans are paying down debt at a fairly rapid clip, and Canadians have yet to face that and bite the bullet on that.”

Announcer2: “Historically housing prices are three and a half times Canadian’s income levels, they’re now almost six times higher [sic], the average family has a debt of almost $100K, and, unless wages keep up, AJ Sull says, the real estate bubble could soon burst.”

Sull: “… concern is that, as interest rates go up, and they will eventually, will people be able to service that mortgage and the credit card debt that’s been piled on.. and that will have an impact on the economy over time, because people’s ability to spend is going to be more and more constrained.”

Announcer2: “Sull says a market correction of between 12 and 25% could be in Vancouver’s future. For potential buyers, it could just be a matter of being patient.”
—-

Between Noon and 6pm, the segments ‘Real Estate Bubble?’ headline has become ‘Steady Climb’, and AJ Sull’s self-stated “25%” becomes voice over “12 to 25%” mentioned by the announcer. The realtor drones on about foreign demand in both segments, using different words but saying the same thing.
Global have, however, in the second segment, introduced the idea of ‘patient buyers’, which we’ll give them credit for. That can’t be something the RE industry wants to see. Buyers becoming VERY patient will be part of the coming crash. -vreaa

Burnaby-Based Professional Investment Advisors Call ‘Bubble’

Pacifica Partners, a Burnaby based investment advisor firm, are, we imagine, advising clients to lighten up on BC RE. A brief article on their website 7 Apr 2011 ‘Canadian Real Estate – The Ignored Election Issue’ covers ground that is well known to readers of greaterfool.ca, vancouvercondo.info, financialinsight, and other ‘bear blogs’, including VREAA. It is noteworthy, however, to see local professional investment advisors starting to put their names behind these ideas. Excerpts:
“The overvaluation of real estate (“bubble” is so overused it has lost its shock value) in many parts of Canada has been propelled by a Canadian addiction to debt and federal government policies that helped to create a runaway freight train in the form of real estate prices.”
“For housing prices to revert back to the GDP growth rates by the end of 2011 (assuming the BC economy grows at 4% in 2011), we would require at least a 12% and up to a 31% correction in home prices. This of course assumes that BC’s GDP isn’t linked to a housing bubble bursting. In truth, the dependence on real estate to spur economic growth has been very apparent, especially in Vancouver, and therefore a deeper correction would actually be required to find a sustainable equilibrium.”

Spot The Speculator #33 – House $650K; Rental $585K; Debt $995K; 450% Of Net Worth In RE

Anecdote extracted from ‘Two properties, one complex problem’, Financial Post, 1 Apr 2011 [hat-tip SM]-
“In British Columbia, a couple we’ll call Harry, 36, and Felicia, 33, have a 15-month-old daughter and a complex problem. Their total combined monthly take-home income, $7,594, plus $400 of rental income, adds up to $7,994 per month. It covers current expenses, but for the future, income gains will have to come from Harry’s job.
Felicia, recently diagnosed with a neurological condition, is on long-term disability that pays her $2,394 a month after tax. Harry, an architect, works four days a week for monthly take-home income of $5,200. Their combined income services mortgages of $606,000 on their house and $384,000 for a rental property. Those two mortgages with associated property taxes take $5,420 out of their monthly take-home income. Property taxes take another $509. That’s a whopping 74% of after-tax income. “
“Harry and Felicia have just $20,000 in RRSPs or other financial assets, not including $2,400 in a registered education savings plan. Expenses eat up total after-tax income with almost nothing left for little extras.”

Assets
House $ 650,000
Rental property $585,000
RRSPs 20,000
RESP 2,400
Car 10,000
TOTAL $1,267,400

Liabilities
House mortgage $606,000
Rental mortgage 384,000
Student loan 4,680
TOTAL $994,680

Net Worth $272,720

This, people, is why the Vancouver RE market is so very, very ill.
Harry and Felicia have 450% of their net worth in RE (yes, 450%, not a typo).
If RE drops just 20%, they are wiped out.
When RE drops 50%, they will have a negative net worth of $345K.
($618K drop in value of RE – $273K current net worth).
They are relatively young, but this setback will colour their financial health for decades to come.
Again, we see rabid speculation in the guise of normality.
There are many in this kind of situation, and only a very small percentage will be able to lighten up before the market crashes.
– vreaa

“My wife and I could buy a place outright and have no mortgage which is much less than what we pay in rent. That still doesn’t mean we should buy.”

CanuckDownUnder at vancouvercondo.info April 7th, 2011 at 2:46 am offers a position that applies as well to the Australian bubble as it does to ours – “My wife and I could buy a place outright and have no mortgage, which is much less than what we pay in rent. That still doesn’t mean we should buy.”

A simple truth that is still lost on many. – vreaa

DTES Shipping Container Apartments – $85K; 320sqft

Excerpts from ‘Shipping containers to be Vancouver housing’, CBC 5 Apr 2011 -
“Vancouver will soon see a new type of social housing for disadvantaged women — an apartment complex made out of shipping containers.
The structure — the first of its kind in Canada — will occupy a currently empty lot at Jackson Avenue and Alexander Street in the Downtown Eastside.
Vancouver city councillor Kerry Jang supports the project, as long as the units are liveable. “This is an issue I’ve been very concerned about [is] liveability. I mean, as soon as you say the word ‘container,’ people think you’re just warehousing people.”
Despite the concept, residents won’t feel boxed in, said project supervisor James Weldon.
[haha -ed.]

Commenters point out that similar conversions have been done for $10K per unit, and surmise that the $85K must include land value. But perhaps not. Is the city selling or leasing the land on which they are built?

A quick search for ‘$85K, Florida’ came up with this, the first RE hit, we’re sure there are hundreds of other examples:
12 Sep 2010: 1216 Oregon St, Orlando, FL 3280, $85K

Yes, a short sale/foreclosure, but, you get the idea.
We in Vancouver are so brainwashed by $1M, $1.5M, $3M handles on RE that $85K for a 320sqft pre-fab unit in the DTES starts sounding like a deal.
Everything in Vancouver and vicinity is screamingly overvalued. – vreaa

“I was living in a motorhome in Vancouver, a nice clean RV.”

“I was living in a motorhome in Vancouver, and the city kept sticking $100 fines on my windshield and taking photos of my vehicle. A nice clean RV. A couple of people I knew received over $1000 in tickets.” – comment by Lli at yahoo.com 5 Apr 2011

Mortgage Rates Rise: 5yr fixed @ 5.69%

The big lenders raised interest rates this week, with the 5 year fixed rising by 0.35% to 5.69%. Noted here for the chronological record.

“Mortgage lenders and realtors I know are really busy because rates are rising. Buyers are trying to beat the higher rates and are scambling to spend their preapproved and locked in mortgage money.”SethM at RE Talks, 5 Apr 2011 7:03pm (with Global TV news video)

Subprime, Overextended, Whatever You Want To Call It – “Two friends of mine who are both broke bought property last year.”

jbc at VREAA 4 Apr 2011 6:28am“Two friends of mine who are both broke bought property last year [2010].
Friend #1 bought a condo for a little under $200,000 in Victoria with a down payment from a credit card and moved in with so little money he couldn’t fix his broken stove for 6 months.
Friend #2 bought a dumpy townhouse for $350,000 in Victoria and once again used the credit cards to do it. He’s worked for the government for a little more than a year and his wife is unemployed. 2 kids, #3 on the way. Maxed out credit cards once again and they can’t afford to fix the fridge. But the bank thinks they can afford to be $350,000 in debt. WTF?
Both friends can barely make ends meet with their 5% down, 35 year mortgages at record low interest rates. How on earth will they manage when rates normalize and why do banks think they’ll make their payments on time every month through the year 2045? Both of these people have sketchy job and credit history.
And these are just a couple of examples off the top of my head. If you surveyed Victoria and Vancouver readers in the 25-35 age range I’m sure you’d get swamped with hundreds of similar stories. I have no clue what these people are thinking but I know for a fact they are just scraping by right now and would be devastated with a 1-3% interest rate increase.
Oh, and retirement plan? Ha ha ha ha ha ha! What retirement plan? There’s no money for trivial expenses like retirement. It’s all about the house. Or in these cases it’s all about the condo and townhouse.”

What Percentage Of Your Net Worth Is In RE? – “I’m 38 with a net worth of about 1.4 million… 700k in real estate.”

Valyrian Steel at greaterfool.ca 3 Apr 2011 8:45pm“I’m 38 with a net worth of about 1.4 million… 700k in real estate (Vancouver condo + Gulf Island acreage), so according to Garth, right where I should be. [Turner gave an equation recommending '90 - age = percentage of net-worth in RE'.] As my property is all paid for, I manage to sock away about 5k per month in savings/investments, so my real estate ratio is actually dropping significantly. Not everybody in Vancouver is financially moronic.”

This individual has 50% of net-worth in RE. They will weather a crash okay; not great (they risk losing more than 25% of net-worth), but okay. But there are many others who will do far, far worse because of considerably greater exposure and leverage.
Regular readers of this blog know that we believe that the question “What percentage of your net-worth is in RE?” is seminal.
We tried to poll people about this exact question 2 years ago
[“How Exposed Are You To The Vancouver Real Estate Market?”, 19 April 2009] and got a whopping two responses, both of which were from renters with 0% exposure. Perhaps it’s time for another try.
The net-worth question also relates to a recent discussion, where we shared our opinion that being exposed up to 25% of net-worth in ones primary residence may be reasonable, regardless of bubble-risk. That is because the risk of loss of 10-15% of net-worth may, for some, be worth the convenience of owning. The problem is that only a very small minority of people are wealthy enough to be able to stake that low a percentage of their net-worth on a property that they at the same time are happy residing in.
Anybody care to share?:
“What percentage of your net worth is currently in RE?”

10%? 20%? 40%? 75%? 120%? 400%? 500%?? – vreaa

“China’s ghost cities look like our condo building in North Vancouver. 27 out of 88 units occupied after 1 year.”

kilby at greaterfool.ca 31 Mar 2011 11.35pm“China’s ghost cities look like our condo in North Vancouver, 27 [units] inhabited out of 88 after 1 year. Tower next door I think has 8 or 10 out of 88, not many lights on at night!”

“I don’t know who is buying. I don’t care where the money comes from, or what country the buyers come from – the higher this thing is pushed up the harder it will fall.”

wes_coast at greaterfool.ca 31 Mar 2011 11:13pm - “I live in the Vancouver area and I still see new housing starts. Old crappy houses being bought up and torn down. Most listings in the last month are on the market for less than a month. I don’t know who is buying. I don’t care where the money comes from, or what country the buyers come from – the higher this thing is pushed up the harder it will fall.”

Vancouver Construction Industry Slowing?

Vansanity at vancouvercondo.info March 23rd, 2011 at 10:36 pm- “My buddy works for a company that specializes in a particular component of building material used in all construction. They had been busy recently, he was working 6 days a week. Well, that industry can be feast or famine and he’s being laid off as of April 3. He’s been with the company 15 years. In my opinion companies like his are the equivalent of canaries in the mine shaft and it shows that a slow down is coming. I think a lot of construction jobs are going to start getting lost. The fortunate ones will be able to get onto ongoing projects and the rest will ride some EI and maybe look at moving away eventually if nothing turns up over the next 12 months.
In my employment I deal with a lot of developers, contractors and the like, a lot. Many of the ones you all know by name. Recently, I’ve noticed a shift of their focus on redeeming lines of credit and payments that are outstanding… I can sense that for some of them the purse strings are starting to tighten. Again, this is another sign for me that construction is going to start winding down.”

“I worked my ass off to earn money in Europe, and saved up enough to buy a house in Vancouver. I’m ‘long’ Vancouver- political stability, bank stability, food security, fresh water security, good natives and immigrants, climate stability.”

LAF at VREAA 25 Mar 2011 at 8:32am“Folks, part of [all this] might be Asian money, but part of it is just, heck, Vancouver is a great place to live and people are becoming more aware of it (thanks Economist and Forbes surveys). I worked my ass off to earn money in Europe, and saved up enough to buy a house- in Vancouver. I still live in Europe, but I’m “long” Vancouver- political stability, bank stability, food security, fresh water security, good natives and immigrants, climate stability. C’mon guys, don’t blame the Chinese, realize the long term prospects of Vancouver and you’ll understand why so many of us foreigners/Expat Canadians see it is a very positive place in a highly uncertain future.”

We also like Vancouver, a lot, but we think Vancouver RE is disproportionally very overvalued, and in a bubble.  Those are not incompatible thoughts, to like Vancouver but see the bubble.
Two questions for LAF:
Did you take fundamentals into account at all when you made your purchase?
What percentage of your net-worth is represented by the current market value of your house in Vancouver? 20%? 50%? 100%? 400%? Ballpark is okay. Please share. -vreaa