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

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

  1. it’s been 30 years since Vancouver home prices tracked fundamentals. Besides, when looking at fundamental such as price to income, all incomes are included in avg and measured against only one property class, the detached home.
    Like I said, if I knew how much $ detached buyers were using as a downpayment I’d have a pretty good idea as to how affordable or unaffordable these purchases are. Do you know this? If so, please provide. If not, step aside and admit you know just as much (or little) as I do about Vancouver affordability.

  2. Unless Vancouver becomes a small independent principality, the chances of turning into a New Monaco are zero.
    Perhaps Rusty could take some inspiration from the Grimaldis and enter the city hall disguised as a monk with a weapon under his habit. It would be a win-win for everyone. Vancouver either becomes the New Monaco or we will see an entertaining segment in the evening news.

  3. VREAA – great response. Thanks

  4. Several of my colleagues & friends have moved to New York as of late because they’ve been able to better make their living. No, they don’t live across from Central Park. Nor did they have mansions in Shaughnessy, here.

    One expressly moved because they could afford to buy a house there where they couldn’t here. In Queens. The ride into Manhattan is the same as her commute had been here; the neighbourhood is nice; and Queens is still urban & well served – more like Commercial Drive than Burnaby. And you can buy a townhouse for 3x income.

    So I don’t buy the argument that Vancouver is in line with New York: those of my circle who’ve left for New York have in part left because it’s *more expensive* here, and the jobs are better in a bunch of fields there. (Although Vancouver does win in video gaming…)

    Sure, Manhattan is redonk, but Manhattan also has a great concentration of North America’s financial, political, and cultural centres, from Broadway and the UN to publishing and Wall Street. A huge number of celebrities, financiers, and world political figures have a first or second home there, even if they don’t declare their income in that borough.

    So, I don’t buy it. I know nothing of London and Paris, but I do know New York, and we don’t have anything that even begins to compare to Manhattan, and the other boroughs do not have the price compression that’s going on here.

  5. Hawaii had a housing bubble in the late 80’s that coincided with Japans asset bubble. Vancouver 2011 sure looks like Hawaii 1990.
    Same myths
    – limited land to build
    – rich Chinese/Japanese want to move/invest here
    – fundamentals do not matter

    It was different in Hawaii until it wasn’t. Same will happen to Vancouver.

  6. The simple fact that people are discussing Vancouver being the new Monaco is a nuclear-red neon-glowing sell signal. Just sayin’.

  7. Australia crashing!

    Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions

    http://globaleconomicanalysis.blogspot.com/2011/05/economic-bust-in-australianear-record.html

  8. That Vancouver is being touted as the next “whatever” indicates the city has a long way to go. Turning it around, why don’t Monaco, Sydney, Paris, or Moscow aspire be the next Vancouver? Because they doesn’t aspire to be anything beyond “whatever” they already are. When Vancouver grows up we’ll see $/sqft rivaling the aforementioned cities. Right now, it’s the awkward teenager looking to others to validate its existence, which, sorry to say, means lower prices.

  9. I went to Japan a year and a half ago. Tokyo’s condo prices are very similar to Vancouver’s prices, so I wouldn’t describe them as “eclipsing” ours in any way.

    New condos in downtown Tokyo were going for roughly CAD$800/sq.ft (the developer’s asking prices– my tour guide pulled out brochures to show us how crazy their prices were, but I surprised her when I pointed out what Vancouver’s prices are similar). That’s less than Millenium Water was going for! Condos a half-hour commute from downtown were around $450/sq.ft.

    Rents aren’t crazy either– we stopped by a realty office to check rentals out of curiosity, and downtown apartment rentals were similar to Vancouver rentals.

  10. Nick,
    Only bears calling Vancouver a “new Monaco”. Do your backchecking. The question I had was, why are some high priced locations permitted to break with fundamentals while others are not? I’d given examples of many worldwide cities including Monaco. The question is still unanswered. Why are some cities many times the annual income (9, 10+) of the avg citizen, more than 40+ price/rent? These cities have been this way for years. How did this happen? VREAA argues that prices “always return to fundamentals”. Why did they not return in these locations?
    This is a very important question for you to ask yourself. It may give you the answer to the future of real estate prices in this city.

    • Rusty -> I think your question has already been answered in many ways, but you keep asking it. Let’s move on.

    • And you are trolling again. The question HAS been answered many times.

      Here are again some of the answers to the locations you mentioned in the past:
      Monaco – Tax Haven, REALLY limited land, Residency requires a lot of money in the bank, Mediterranean climate etc.
      Manhattan – REALLY limited land (overdeveloped island), One of the centers of World finance, Alpha++ World city; center of a densely populated and wealthy area
      – London – center of World finance, one of the most important commercial and trading hubs in the Europe, Alpha++ World city.

      Using any of these cities to justify prices in Vancouver is beyond ridiculous.

  11. and San francisco, Zurich, Copenhagen, Rome, Vienna, Bern, Oslo, Osaka, Milan, etc. etc?
    You can find an excuse as to why each of these cities are well above avg income affordability, just like you can explain why Vancouver is. Fact is, you can’t wave a magic formula wand at these cities; nor can you at Vancouver. The bear position of “having to return to fundamentals” is a juvenile one with limited understanding as to how supply and demand works.

    • Do Surrey and Coquitlam count among those cities? Just wondering if I should be buying in the suburbs or if I should be looking only in the downtown peninsula for low yields.

    • San Francisco – prices are down 25% from the peak. More in the surrounding areas.

      Zurich – rents there are about double of what they are in Vancouver. incomes are also much higher. (Btw, they had real estate crash in early ’90s).

      Rome – higher rents than Vancouver aside from the fact that it is the center of the world to about a billion of Catholics.

      Vienna – Much cheaper than Vancouver.

      Bern – much higher rents and incomes than Vancouver

      etc.

      Now fuck off already.

    • High average price to average income ratios can be sustained when only the wealthiest fraction of society participates in the housing market. That’s exactly what happens in places like New York, Paris, central London, San Francisco, and the big Swiss cities: the very rich own, and everyone else — from the poor to the upper middle class — rents, quite happily. Home ownership levels in those cities are low.

      In Vancouver, both average price to average income and home ownership levels are high. Everyone wants to own, and many people on the left side of the salary bell curve participate in the housing market even if it takes a huge fraction of their net income to do so. They buy at income multiples that would be unthinkable to those in the other cities you mention.

      Do any of these world-class cities you mention have the same level of home ownership and general RE infatuation that Vancouver (and similarly house-crazy Sydney) do?

  12. vreaa
    No, the question has not been answered.

    • Hm. Data I’ve found suggests to me that your Zurich price/income is 7x, and price/rent is about 400x … but also 70% of people rent because there are some serious market controls on RE purchase/investment. (And rental looks like a seriously affordable option on those incomes. Household incomes of 95K (chf) and median monthly rents of 2K? Nice.) There’s further chatter about RE prices in Zurich rising unnaturally recently.

      New York, the 5 boroughs, is still adjusting – but using the latest numbers it’s currently at 6x median price to income with less price compression. San Fran’s at 5.5x.

      Whether you like medians or averages, Vancouver appears to be more expensive with regards to fundamentals than all of these expensive places.

      • Ooh, plus, I’m doing back of the envelope based on Googling & in some of these places are at a disadvantages re: language with government docs… but the 2010 standardized data via Demographia shows Vancouver on the top o’ the stink pile even vs. San Fran & New York & London, England. And the divide has only gotten worse…

  13. bubbly
    yes, resort to bluster, that’ll win you the argument.

    • Sure, keep ignoring the answers.
      I wonder why you, as a rich homeowner, feel the need to come here and repeat the same debunked nonsense ad nauseam. You are obviously a troll.

    • Rusty is a brainless guy. Just ignore his bul*shit

  14. If everyone is living in a speculative instrument it will only retain value if there is a never-ending stream of new money. Never-ending, that’s the key point. The distortion must remain present forever.

    Sure, a market can detach from fundamentals, and clearly Van has because of imported cash and easy lending by the central bank that is itself detached from fundamentals. But can that continue indefinitely? When you run out of Chinese, who is next, the Vietnamese, the Cambodians? If CMHC stops insuring what we Yanks call Jumbo mortgages, does your scheme still work? How many tiny pillars is this market resting on, exactly?

    There must be a next party to play the game and bring in money or the valuations return to fundamentals, period. So, who is it going to be? High RE prices crush every other industry out of existence, so money must be brought in, and increasing amounts in total as the total housing stock grows. This is a house of cards where every layer is larger than the one below it. No small feat keeping it upright, especially since the usual rescue bullets like real interest rates of zero, have already been spent.

  15. I am in San Diego for a few days of vacation with the family staying on Coronado island looking around here at the nice weather and nice homes, big sandy beaches this stuff is probably worth millions of dollars for a home not kits!

    The new Monaco Argument is such BS Vancouver is not the new Manco you need tax haven status or a corrupt local government that you can buy off.

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