Spot The Speculators #42 – “In my neighborhood, the people who are buying the overpriced homes sold their smaller overpriced home and took on a new mortgage. They are not speculators.” [Yes, they are.]

Glenys 7 Jun 2011 in the comment section ‘Vancouver home prices poised for correction, could fall 21 per cent: report’, The Canadian Press, 7 Jun 2011
“For the last decade or so these reports by “experts” continually say Vancouver’s housing market is overpriced and the bubble will burst and prices will fall. Still waiting for it to happen – small adjustments that last less than a year don’t count. Still people from somewhere able to buy and keep the market high, regardless of world economy or interest rates.
In my neighborhood, the people who are buying the overpriced homes sold their smaller overpriced home and took on a new mortgage. And they were originally able to buy the smaller overpriced home because they sold their overpriced condo or even smaller home. They are willing to take on the debt because they like living here and want to live here. Not because they are speculators or investors.”

Anybody attaining more RE exposure, in an ‘overpriced’ market, based on an underlying belief that price growth will remain strong, is a speculator. This is true regardless of whether they know it or not, and regardless of whether they are selling one property to move up to another. If they are borrowing money in order to make the move up, they are using leverage in their speculation.
This is a fine example of the thinking behind the unseen, unidentified, unconscious speculation that has been a major driver to our market since at least 2003. – vreaa

39 responses to “Spot The Speculators #42 – “In my neighborhood, the people who are buying the overpriced homes sold their smaller overpriced home and took on a new mortgage. They are not speculators.” [Yes, they are.]

  1. I don’t think it’s speculation when one buys a home as their principal residence and intends to live in it long term.
    Some here will stop at nothing to frame all buying as manic speculation. Grow up

  2. framing a routine home purchase by someone using it as principal residence as speculation? When will the insanity stop. Get some help vreaa

  3. Anytime more than 1/4 of your assets are in one sector it is speculation.

    Climbing the ladder assures that the household will never own outright, ever. They will forever rent from the bank carrying all of the downside risk on their own shoulders the whole way. It also means they are forever one job loss or personal crisis away from a forced sale. Long term intentions mean bumpkis if you leave no margin for error.

  4. AG,
    when more than 1/4 of your assets are in real estate it probably means you haven’t owned it for long. This is usually the course young people follow – gradually reducing their exposure to property fluctuations. Calling it speculation is pure partisan

    • My brother has owned his crappy Edmonton condo for about 10 years. Bought it at $120K, it is currently valued at $150K and he owes $146K on it. Why? Because he used his equity as an ATM to help finance a new car and pay off the credit card he used to buy all his toys. He has speculated and lost. I don’t even think he has quite gripped the steaming pile of crap he is standing in right now. All he knows is that he has to keep working at his crap paying job so he can keep paying his mortgage on his crap condo. Debt slave. nd I’m sure that most “young” people in this market are a lot like him.

    • Everyone’s view of what a house should cost is distorted way out of proportion. That’s the real problem. You are saying that young people should jump seriously into debt on a single asset while having kids while they are still saddled with student loans, all at the same time?

      “Gradually reducing exposure” != climbing on the property ladder (to get back to the original topic). The property ladder assures that you are a first time buyer relative to exposure, forever, even into retirement.

  5. D and DW are the same poster.

    Question for them: Would these people be buying if they anticipated that prices would not continue to rise?

  6. We agree with AG Sage, and think that the equation Garth Turner likes to cite for recommended percentage of wealth in RE makes good sense:

    [% wealth in RE] ≤ [90 – age]

    (And, yes, we know what that implies for a very large portion of BC owners and prospective buyers… that is the point.)

  7. I would argue it is speculation if it costs more to buy the house and make monthly mortgage, tax and insurance payments that it does to rent the same house.

    • I might agree with this DM, except you leave out the cost of stability for your family. How much is that worth? For those without family, nothing. Even for some with family, not much. But for people with kids who value a stable home where they aren’t moving every two years its worth a heck of a lot. I think there are a lot of posters here who are childless. How else can there be no understanding of how valuable a nest is for your little chicks?

      • I would argue it is speculation if it costs more to buy the house and make monthly mortgage, tax and insurance payments that it does to rent the same house.

        I understand what you are saying KaoBoi as I’ve been both and owner and a renter. But how much value do you put on the stress that is involved struggling to make mortgage payments and worrying if the water heater breaks down? I do have a child and I agree I don’t like the disruption for her when we have moved. However, I can also argue that being a renter has given us the freedom to do many things we might not have been able to do if we had been owners. My husband has taken an overseas posting with an international bank and we will join him at the end of the school year. If we had bought a property when we moved here 3 years ago, I’m not so sure we would have sold it and broken even. I believe there is a British study from a few years ago that talks about how renters are less likely to be unemployed because they are able to move for a job far easier than someone who owns. I’ll have to dig, or perhaps VREAA can help find this. It’s an interesting perspective on owning versus renting.

  8. specialfx3000

    Buying anything with a price chart as that of the Vancouver one is speculating.

    A person buying at the peak of the doc com period with the intent of holding those stock long-term in their retirement portfolio is speculating.

    • 药剂师是一个机器人

      but this time it’s different..

      the chinese are coming, and the canadian people will never tire of the ceaseless wave of immigration, NEVER.

  9. Well, predicitng the market will go down is also speculation. Not buying because you belive the market will go down is speculation. Or am I wrong?

    • 药剂师是一个机器人

      you’re wrong, because unless your shorting something, you have no exposure.

      when you have a mortgage, that’s called exposure.

      hurr derp?

      • 药剂师是一个机器人

        actually, you’re right, there is no speculating, only investing – just that the losses will be socialized so you could buy a new bimmer.

  10. Vreaa, I’ve noticed that there are more and more worried owners showing up and dropping comments on this blog. Would it also be a sign that the message is finally getting across people’s mind?
    I have the feeling the burst is getting really close…

    • yeah – I’ve been curious about this also. These sorts of comments rarely appear at Vreaa. Perhaps Vreaa was linked at some real estate blog? Or perhaps people are getting nervous and feeling the need to pump?

  11. Did Anyone else that wrote to the Finance minister a few months ago get any responses, I got a 2 page scanned pdf file response, would be happy to share the response with the finance minster but there is no way for me to upload a pic or a pdf and I don’t want to retype the two pages.

  12. It’s a tough one because some people are overpaying but as long as they don’t rely on selling to fund their retirements I see it as consumer surplus and not abject speculation.

    • Another way of putting this is “If a modest enough amount of their net-worth would end up being in RE, then it is okay to buy.” (and we agree with that).
      So, if an individual has either high enough net-worth to be able to buy and, say, have only 25-40% of their net-worth in RE, it’s okay for them to buy. (They’d be facing a 12.5-20% drop in networth with a 50% pullback in RE prices… painful but NOT a wipeout). (Those with very high guaranteed income going forward could also make an argument to buy.)
      However, the vast majority of recent buyers have a much, much larger % of net-worth in RE, often well over 100%. So most are relying on selling to fund their (financial future). They are speculating with their PRs, even if they don’t see it as such.

    • The problem is banks get used to the easy money and stop lending to businesses. Business lending in Canada is falling dramatically, just like it did in the U.S. Starving the real economic engine of resources is what brings on a long painful recession along with the housing decline. The excess money sunk into houses is not neutral.

  13. it’s all about jealousy – nothing else. the bear blogger will take cheap short at anything related to Van RE.

    • Actually not, Fred.
      We eagerly seek out good stories about Vancouver RE, and we post them if we come across them. We’d like to post more stories of those who profit from the boom, if you have any, please send them along.
      And, if you find any shots that are ‘cheap’, please address the content of the argument rather than making sweeping generalizations.

    • you said it.
      It all boils down to a group of owners having something the renters want and haven’t much hope of every attaining. This is a classic class struggle. The energy expended in justifying the renter position borders on lunacy, and crossed over into pathetic a long time ago.

      • This is a classic class struggle

        Not really. This is a credit-fuelled bubble and It’s more about willingness to take on debt than about salary, wealth, or “class”.

    • It’s all about what decision makes most sense today, not 5 or 10 years ago. It’s easy to look at historical numbers. It’s much more interesting to decide what to do next, and looking at all the factors that may affect RE prices, the most interesting of these being human psychology.

    • Yeah, because we bears don’t own houses. (Your assumptions are as bogus as you accuse others of. Good job.)

      My question to you is, why do bulls love watching the middle class get destroyed?

  14. My question was quite guiless as speculation is a bet on a market direction. I am betting on a fall. If I have bet wrong and I indeed do buy later I have lost money due to my sepculative bet. Speculation defined is :A conclusion, opinion, or theory reached by conjecture.
    Makaya how do you spot a homeowner? By their comments?

    • Yes, there is a semantic problem.
      ‘Speculation’ has at least three meanings:

      1. Two common non market senses of the word:
      (a) ‘Contemplation or consideration of a subject; meditation.’, and
      (b) ‘A conclusion, opinion, or theory reached by conjecture.
      For instance: “There was speculation amongst the fans that the Canucks would win in 7.”

      2. Regarding investments: ‘The process of selecting investments with higher risk in order to profit from an anticipated price movement. ‘ [Investopedia]
      Variations add leverage, timeframe, growth vs income, and other factors, into the definition of speculative investing.

      Bears who anticipate price drops are ‘speculating’ that this will happen only in sense of 1(b) above.
      We argue that buyers of almost all properties in Vancouver are market speculators (as in 2 above) in that they are making large bets that prices continue to go up. The question we always ask to prove this conjecture is “Would they be buying if they foresaw price drops ahead?”. If they truly were buying solely for the utility of the property, they wouldn’t care about price direction. But the vast, vast majority of Vancouver buyers do care about price direction, they care very much; they are only overextending themselves to buy at these nosebleed levels because of the belief that prices will rise.
      They are swayed to buy for future anticipated price growth, not for income/utility.
      This is a factor in almost every current purchase.

    • You can only get nervous about the outcome of the RE market if you have some skin in the game and something (big?) to lose. I have no shame to say that I’m a renter in Vancouver (and owner somewhere in Europe). I have nothing to lose if the market crashes here, and nothing to win either as I wouldn’t be buying even at normal prices. For me to buy here, I would need to be sure that I would not need to sell within 5 years. I’m not sure I will be staying in Vancouver for that long due to my professional situation and I want to keep some flexibility if my employer ask me to move somewhere else.

      As a long time reader of this blog, I have noticed that since the “news” of the RE bubble in Vancouver hit the MSM, an increasing number of people are dropping bitter comments and criticizing Vreaa for his work. I’m also a faithful reader of Garth Turner blog and I’ve also noticed recently an increase in the number of DNS attacks on his blog (ie making the website unavailable for some time).

      These little facts are indicative of the increasing nervousness of people that have a vested interest in RE and an imperative need of price increase: heavy indebted/highly leveraged home owners, RE agents, brokers, contractors, marketers, etc.

      You can shoot the messenger (Vreaa), it won’t change the outcome (RE burst)…

      • his name is robert paulson
        his name is robert paulson…

        ..sorry

        shows you how vulnerable a ‘free market’ can be,

        not to mention an ‘enduring speculative mania’, where even sentiment must be managed, and dissenting opinions from the consensus spammed down with condescension and loathing and claims of jealousy, etc.

        entertaining, though! keep it up

    • if you didn’t buy in late 2008 early 2009 you’ve already lost your bet. Continuing to wager money on your horse will not change the fact that the race is over. Find another track.

      • which they no doubt will, but not before denigrating the dealer and spitting on the floor

        who doesn’t enjoy watching Lebron lose??

      • Some of us aren’t betting with houses.

  15. Call it what you want, speculation or just crazy. In the olden days people bought a house and when it was time to move up they moved into a bigger place that cost more but because of the equity they’d built up they’d have a similar mortgage. Some people never moved up, they just stayed in the same old house and paid down their original mortgage and lived there and were happy.. Gasp!! Seems that people are moving up but the equity in the old place doesn’t make much of a dent in their new debt, so the payments are bigger. I don’t know if that’s spec, but that’s pretty nuts, unless you’re a lot better off than you were when you bought your first place.

  16. I moved out of Vancouver…bought a new house…300k….I certainly considered the possibility that I would lose money…I make 90k/year…My hope is that when I sell eventually, I will have paid off my mortgage and with a little luck I will be able to get my money out as well.
    The house is beautiful and my husband and I really enjoy living in it.
    My point is that I would consider myself a quasi-speculator. I didn’t buy the house to lose money…I bought it cause I figured that over the next five years I would be paying 60k in rent if I did not buy a house. So if housing drops 20% I am probably still better off to have bought.
    Anyone buying a house period is a speculator. If you asked the person buying a primary residence if they would still buy if they knew for sure that they would lose 20% in the next five years…I bet the answer in 99% of the cases would be NO! My answer would have been no, but I really doubt that Fort Nelson is as inflated as Vancouver. I am gambling on the high wages up here to support the RE.

  17. 4SlicesofCheese

    Depending on how you define speculating everyone can be described as one, whether you expect the market to go up or down.

    The real test of spotting a speculator that I think we are trying to identify here is simple.
    Ask them if they believe that real estate has the possibility of going down. If the answer is no, then there you have it.

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