Local Realtor’s Bullish Predictions – “Sorry, but you’re wasting your time with these charts. They mean nothing. There are only three factors: Supply of Buyers, Buyer’s access to funds, Supply of Sellers.”

Local realtor Will Wertheim laid out a bullish case for Vancouver RE in his comments [3 Dec 2010 10:18am] on our recent post presenting a technical analysis of the Vancouver RE price chart [Five Charts: Predicting Future Vancouver Housing Prices, 11 Sep 2010]. Will’s argument is headlined here, for the record, and our own comments on his predictions follow.

“Sorry, but you’re wasting your time with these charts. They mean nothing. There are only three factors (two related):
– Supply of Buyers, and
– Buyer’s access to funds
– Supply of Sellers

Like it or not you have to agree that there is a large enough pool of buyers out there right now and that will not likely dissipate over the next two years (as your hopeful charts try to say). Many of these buyers are not of local means. As long as these buyers have access to cheap money (be it offshore or through low interest rates) they will buy. The price balance and pressure is due to the small availability of homes for sale. As long as many homeowners are living in their homes and not listing them, supply will remain tight.

What happened in 2008 was an incredible event of such mind boggling reach. From media and those “in the know” a global crisis of confidence occurred. I knew (but did not realize its magnitude) of it coming about a year before it did from some higher-up bank VPs (no, I will not disclose who said what to me but they were a client who did not go forward on a deal and then proceeded to lose quite a bit of their investment equity, at least on paper). It stretched out into every sector of the consumer’s mind and retailers/sellers struggled to move any sort of product. What a great time to buy it was (in hindsight).

Now, what would have happened if that bubble didn’t burst? If there was no 2008 crisis? And where would we be today if the 2009 recovery didn’t happen? Doesn’t matter.

Fact: We don’t have enough land in the areas people most want to live for the type of homes most people want (westside detached).
Fact: We don’t have a high turnover of homes coming onto the market and likely won’t for a very long time.
Fact: Vancouver is desirable for a great many people, particularly those from outside Vancouver. I see that every day and hear it from tourists and foreign buyers.
Fact: Interest rates are low and general consensus is that they are unlikely to rise much over the next year or two. Beyond that, unknown.
Fact: Yes, unaffordability for locals is obscene. You’re talking average prices but as you know, that average house is pretty darn poor. While the average may be $1m for REBGV, on the West side it is $1.6m. The result is that locals will continue to migrate East where it is *cough* “affordable” while only those of generous means will be buying up the West maintaining that high average.


My bet: somewhere between 4 and 5. Not as low as 4 and not as high as 5. Unless another crisis of confidence spurs a massive dump of listings and a disappearance of money.”

—-
Our comment:
We welcome Will’s opinion and will take the opportunity to discuss it.
He sees as highly probable a mix of scenarios 4 and 5; scenarios that, in our original post, we weigh as having just 15% and 3% probabilities of playing out, respectively. So we differ substantially from him in our outlook on the markets.

Will’s position really comes down to a ‘demand-will-continue-to-overwhelm-supply’ argument:

1. Demand will remain high
– “(the) pool of buyers out there … will not likely dissipate over the next two years”
– “Vancouver is desirable for a great many people, particularly those from outside Vancouver.”
– “locals will continue to migrate East , … while only those of generous means will be buying up the West maintaining that high average.”

2. Supply will remain low
– “We don’t have enough land in the areas people most want to live for the type of homes most people want (westside detached).”
– “We don’t have a high turnover of homes coming onto the market and likely won’t for a very long time.”

3. Money will remain cheap and available
– “Interest rates are low and general consensus is that they are unlikely to rise much over the next year or two.”

Will is essentially saying “Things that have been happening will continue to happen, so price rises that have been happening will continue to happen.”

Will offers us caveats, but simultaneously downplays them:
– “As long as these buyers have access to cheap money (be it offshore or through low interest rates) they will buy.”
– “As long as many homeowners are living in their homes and not listing them, supply will remain tight.”
– “Unless another crisis of confidence spurs a massive dump of listings and a disappearance of money.”
He mentions these caveats in passing, but when it comes to factoring them into the final probability outcome, he appears to ignore the possibility (probability?) of any of these things coming to pass.

This is the difference between the bulls and bears at present.
The bulls say that things have gone well so far, despite the ‘crisis’ (the ‘Great Recession’), and thus, things are expected to continue to go well.
Bears say that, somehow we may have missed the bullets thus far, but there are so many potential downside risks, we’re expecting at least some of them will come to pass. And it’ll only take one or two of them to start a price avalanche. Bears give weight to factors other than ‘supply’ and ‘demand’, such as historically extreme fundamental measures, as indicating that a severe price correction is highly probable. Record high price:income and price:rent ratios; record high ownership rates; record low interest rates (now guaranteed to rise); record high household debt levels.

What Will doesn’t seem to get is that, rather than ‘meaning nothing’, analysis of charts takes into account the past behaviour of buyers and sellers. That’s the point. As we said at the beginning of the five-charts article: “Only a lunatic makes real estate sell or buy decisions based solely on charts, but, conversely, only a fool would say that past price action is irrelevant.”
-vreaa

15 responses to “Local Realtor’s Bullish Predictions – “Sorry, but you’re wasting your time with these charts. They mean nothing. There are only three factors: Supply of Buyers, Buyer’s access to funds, Supply of Sellers.”

  1. Village Whisperer

    Will says, “Interest rates are low and general consensus is that they are unlikely to rise much over the next year or two.”

    Mark Carney says, “The crisis is not over, but has merely entered a new phase… when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many with debt loads they can no longer afford.”

    Vancouver’s bubble story is all about interest rates. As long as they stay low, Will’s view will prevail. But over the past few months both our central banker (Carney) and America’s former central banker (Greenspan) have been sounding the alarm that the ability of the central banks to manipulate this are coming to an end.

    It’s all about interest rates.

  2. Perhaps the situation is not as dire … debt scenario may not be as bad as some would suggest: http://www.cbc.ca/money/story/2010/12/14/f-debt-analysis.html

    I live in Calgary; bought a condo in Vancouver (Yaletown/marinaside) earlier this year. Vancouver is a desirable city to live in compared to the other drab cities in Canada. I don’t see a dramatic fall in RE; that being said, I am bullish on real estate and a child of immigrants (who have made millions investing in RE).

    • Uhh, from the linked article:

      A closer inspection of the numbers Statistics Canada released Monday shows more reason for optimism.

      Yes, the debt-to-income level has gone from around 100 per cent in 1990 to almost 150 per cent today (the orange line on the chart above). But assets — the green line (showing net worth as a percentage of income) — have gone up too: from 417 per cent to 610 per cent over that same period.

      In layman’s terms, “assets are again growing faster than debt in absolute terms,” says Porter.

      That suggests that the assets Canadians are buying are padding their net worth more than enough to offset the debt load they take on to buy some of them. And debt as a percentage of net worth (the blue line on the chart above) has remained relatively flat.

      Most of these “assets” are the houses the people live in. Meaning if the markets correct these “good numbers” will come crashing down.

      To count RRSP etc. as an asset is apt, but dishonest if you think about it for a moment: The money is supposed to be for retirement, it shouldn’t be used to offset any other losses. Additionally you end up having to pay income tax on any money you take out, so realistically whatever your RRSP statement says is not what you have. If tax rates would rise your asset would lose money, even if you don’t take money out.

      The TFSA is a different matter as any money in it is yours without any deductions, but this is a very new vehicle, merely two years old so the maximum room people have in there right now is 10K, even if they made some wise investments with it, it won’t be able to offset any serious correction in the real estate market.

      This RBC Economist is spinning the numbers to make it look good by heavily omitting a lot of the finer points and they will make all the difference in the end.

  3. Did Will see the TOM spread on 10 year US Paper today>?

    Case – Shiller Index saying 15-18 largest American Housing Markets are sliding, again. You can buy homes in Detroit for 15 K. (*yeah, I know – but still).

    Our Biggest Trading partner is this close to being downgraded to Aa1. HOLY CR**!

    Carney is TELLING US RATES ARE GOING TO JUMP. Hello, Earth to Willie Boy.

    Read “Freakonomics” – matter of fact – send Will a copy.

    • Hate to break it to you. But unless the US sorts out their own mess, our rates aren’t going anywhere. If we make our rates jump it would be like committing suicide. Imagine US dollar worth only 80 cents canadian, that would not be good for Canada. So.. unless the US jumps their rates, expect only slight increases on our own rates.

  4. Village Whisperer

    Carney pointed to other countries whose banks made the “classic mistake” of lending based more on borrowers’ assets than their liabilities.

    “The debt endures, the asset prices go up and down. People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out.”

    If rates go up, and assets decline, that debt picture becomes a time bomb. Which is what we saw in America.

  5. This realtor is a buffoon. Not worth the time to deal with. He just go right on believing.

  6. As a former mortgage lender, the analysis based on the debt to asset ratio is flawed when it comes to risk. The risk lies in the ability of the mortgage holder to be able to make the required payments along with property taxes, insurance and maintenance.

    The amount of equity one has in a property only comes into play in the case of foreclosure or default. Sufficient equity will ensure the lender is paid back the mortgage balance plus the foreclosure related expenses and whatever is leftover or residual goes to the owner.

    Having lots of equity does not guarantee non-default. Whether one defaults or not depends on the ability to service or pay the mortgage payment and related expenses as noted above.

  7. I just did a quick look on MLS and there are 50 listings in Shaugnessey. Where are the rich Asians to buy those properties? Things will stay the same until they change.

  8. “Fact: Vancouver is desirable for a great many people, particularly those from outside Vancouver. I see that every day and hear it from tourists and foreign buyers.”

    Talk about biased sampling….

  9. Village Whisperer

    Biased sampling?

    It is what Will see’s firsthand and experiences. We remember what most recently rewarded us, and internalize that. That is human nature.

    It is why in 1931, after the stock market had gained back over 60% of what it had lost in 1929 (just like it has now), everyone thought the deep recession was over and prosperity had returned.

    We view the Great Depression in panorama, but events move one day at a time.

    As Carney said, this Crisis is not over – it has simply entered a new phase.

    We are like the general public in 1931. We think the crisis has passed and the worst is over.

  10. Yes, it is biased. People who buy in Vancouver, see Vancouver as a desirable city to live in. People to visit Vancouver see Vancouver as a desirable travel destination. Wow, shocking. Hope no one paid any money for that survey. To find out how desirable Vancouver is, ask some people on the streets in New York or Paris. Van-what?

  11. Devore,
    Exactly what I meant!

  12. Toronto is becoming more desirable than Vancouver if trends continue.

  13. Guys, hate to say it to you, but I can see where he is coming from. If you need to know if what he says is true, just go to a few open houses on Vancouver’s west side. Talk to the people who is going there (if they even speak english). Ask them a few questions:

    1. Why in this world are you buying this house at this ridiculous price?
    2. Where did you get all this money do so?
    3. Are you actually borrowing money to buy it? And if so, how much?

    I did a bit of home work, the results are more or less what Will says. And here is the kicker, interest rates mean zelch to these people. Why? Cause they don’t borrow money. They already have it. I realized something on that day, Vancouver Westside is only for people who do business or invest for a living, not for those who actually earn salary.

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