Vancouver RE’s “Reality Distortion Field” – “She conceded that I might have a point, but last time I spoke to her she was back to predicting only a modest drop in local prices.”

“I work with someone from Ireland. She argued with me about how real estate isn’t inflated in Burnaby. Her particular story has something to do with the houses in her neighbourhood not being priced for first time home buyers because she moved up into it. So others will have to sell to move up into it. She misses the fact that she’s describing a pyramid scheme. But after a trip to Ireland recently she was less sure of herself. She conceded that I might have a point after all. She saw homes skyrocket into the the 700-800 Euro range only to drop right back down to the 200-300 Euro range. Last time I spoke to her she was back to predicting a modest, 10-20% drop in local prices and then years of flat. I guess it doesn’t take long for the reality distortion field to kick back in once you get within the media bubble of BC.”
lexlimo at VREAA 20 Sep 2011 8:08am

It is difficult to not be swept along by group-think. – vreaa

9 responses to “Vancouver RE’s “Reality Distortion Field” – “She conceded that I might have a point, but last time I spoke to her she was back to predicting only a modest drop in local prices.”

  1. Here is the thing that I don’t understand about the whole thing, everyone has been telling me that Vancouver’s fundamentals are way off, and while it may be true for the SFH market, I am not sure if that is true for the condo market.

    I have a few friends who own condos in various places such as DT, Burnaby, Coquitlam, Surrey, their price to rent ratio is about 210 – 230 range,which is only 20% higher on average than the 180 norm that many people use and that doesn’t even take into account the demographic / cultural differences that I have been talking about. So if their condos correct by about 20%, then it would actually make sense from a cash flow perspecutive. If it corrects by 50%, then it’s a no brainer to start buying these as I can’t get this kind of return elsewhere. At 50% correction, their condos are at 110 price to rent, I can get my money back from buying a place in 10 years by renting it out? Of course I will do that. Now I am open to the possibility that they have made very prudent choices and have chosen the best of the bunch, so I am unsure and some stats in this area would help.

    SFH is where you are seeing the distortion from the fundamentals where your price to rent ratios are sometimes in the 300 to 350 which is pretty crazy. But even then, that may not be the case for all of Vancouver, most of the examples that people have shown are from the Westside which as we all know are where these new immigrants have poured into and that will distort prices.

    • What will happen to the ability of tenants to pay rents in a housing market crash?
      Housing crash -> Economy very soft ->
      Decrease Employment/Wages -> Rental Market very soft.

      Another thing: Even when it becomes a ‘no-brainer’ to start buying cash-flow positive properties, who is left standing to buy?
      (Witness USA RE, circa 2011)

      • Has rent decreased significantly in the states then? I am actually looking at some desirable cities in the US for cash flow opportunities ( I would only consider cities like Seattle, SF, Chicago, NYC, Washington, LA). So far I have only examined SF, the rent to price ratio is only about 180 on some of the properties that I have seen , it is still not ridiculous enough for me to buy. For the places where the ratio is good, let’s just say that I wouldn’t buy there anyway.

    • So you can buy a condo for $330,000 in the areas you mentioned? Or are you just paying over $2000 a month to rent. It it’s the latter – give your head a shake man!

      • Coquitlam friend bought his for 240K, rents out 1100. DT friend bought his for 450K, rents out 2000, NW friend bought his for about 300K, rents out for about 1500, Surrey friend I have no idea, but doesn’t seem like what he bought was very expensive, and the amount his rents out seems reasonable, like 1200 or so. Divide the two numbers and you get the ratios that I am talking about. Now you could say that these people made prudent choices, cause some of my friends are really good at getting the best deals in terms of cash flow, but I have a hard time seeing 50% drops on these prices. Take the Coquitlam apartment for example, if that apartment goes to 120K, I would buy it in a heart beat, wouldn’t think twice about it.

        Now, there are plenty of other friends of mine who bought non-condo properties such as duplexes and SFH (for some reason none of my friends seem to buy townhouses so I have no idea), their ratios are ridiculous. One guy probably has a 300 ratio on his place, another guy has a 350, but they all live in their own place so I am not sure how I am suppposed to measure them exactly.

  2. I think SFH in close-in, good neighborhoods will hold more value in a drop then the condo market.

    • Totally agreed, same logic that I used when I bought my house last year. I chose a good neighbourhood closedin with good schools and close by to shopping but not close enough to get any sort of bad elements coming around.

      • agreed – if I buy I’ll purchase in an desirable location because the housing market makes me very nervous. Ideally I want to watch the market for about two years (in my not-Vancouver Canadian city.)

        In the U.S. housing drop homes went down in certain patterns. First low-income areas and over-built places dropped in late ’06-early ’07 and the rest of the U.S. mostly didn’t notice.

        Then SFHs 1 hour outside of S.F. and L.A. went down the fastest and held their value the least; places in better locations held much more value. (50% drops vs. 25% drops.) In some locations prices went down very quickly while others ground down month over month.

        Warning Generalization: Condos did a bad job of holding value overall.

        I’m watching the stock markets today. Oil was down around 80$. Not good, but I still can’t tell if these slowdowns in Europe/N.America are going to have a soft landing or a hard landing. Some are saying might be worse then ’08, particularly if the Eurozone can’t get it together. If so, I think Canada will start taking some larger hits. Oil will protect Canada some, but among other things consumption in the US. isn’t going up, and Canada is too dependent on the U.S. for trade. But maybe it’ll be a soft landing.

      • I think the US issue is largely overblown personally, Eurozone is causing me much more concern.

        I don’t think the US GDP is going to shrink nor do I feel that US corporations are going to cut more jobs. I think one thing that the recession has done is make US corporations, which were already some of the most productive in the world become even more productive with less. So you are seeing the massive profits from corporations and the cash that is sitting in their balance sheets. On the other hand, these corporations have become a lot more prudent so they would rather not spend their money till they feel the market is ready. So I think the US has more of a wealth distribution issue than a real productivity issue. The last round of stimulus has stablized corporate America, the banks are much better capitalized than they were in 2008. You have to remember, even though the US lost a ton of manufacturing jobs due to outsourcing, the ones who win the most from the outsourcing is still US corporations. In fact, globalization has largely helped the US, just not the US middle / lower class. So now you have a lot of US corporations who are well capitalized and are ready to gain new marketshare with their innovation which is still unmatched anywhere else in the world.

        I am in no way believing that this is worse than 2008; during that time, the entire financial system is nearing collapse, we are nowhere close to that today. For the US, it’s a matter of if Obama can get his policies implemented and get some of that wealth from the rich to balance the budget and kick start the economy.

        Eurozone though is in a different situation. Unlike the US, I think they actually have fundamental productivity / innovation issues. To me, other than Germany, England, and maybe France, most of Eurozone has been devastated by globalization. Many of these countries can’t innovate like the US, nor can they manufacture the way that China can. The one thing that globalization does is that it allows countries who are good at one area to dominate that area. So as some of these Eurozone countries were always stuck in the middle as they are ok at a lot of things but no great at one thing, countries that can dominate in their areas are now taking their business away from them. I am unsure how Eurozone will get out of this one.

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