Discussion with Tom Davidoff – “A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity.”

Here follows an exchange via e-mail with Tom Davidoff regarding his recent talk:

“Glad to hear it went over well. I don’t think AV is available, but I hope the slides are self-explanatory. There is at least one typo that flips the sign of an idea, and I would be happy to clarify anything. I appreciate the standing offer of a soap box for my actual point estimates. I have a hideous schedule the next couple of months, but will absolutely maintain the idea on the back burner.
As you mention on the blog, a point estimate is in some ways more helpful than generalities. If I offer a point estimate, I will almost certainly be wrong. As I suggest in the slides, a fall of 30% over the next two years would not shock me at all. But I don’t think that’s the highest probability outcome. I would put something like 20% probability on a rise in home prices of 15%+ over the next two years. Not more than 40% probability of the giant drop in my mind. Between the two extremes I don’t have much to say. For the most part, prices here are driven by demand, and what people are willing to pay is in large part determined by what other people are willing to pay. That means that at any given date there must be “multiple equilibria.” External events like interest rate changes, mortgage generosity, and GDP fluctuations matter, but (a) I am not a macro forecaster and (b) I don’t think forecasters know much right now. Look at the S&P 500 over the last year: the market doesn’t know the right level within 20%, and I would guess that “smart money” drives stock prices more than it does home prices. Summarizing: I can’t tell you much you don’t already know.”

– Tom Davidoff

“You asked a specific question about a 58 year old.
If that 58 year old were an empty nester planning to exit Vancouver within 3 years, I would encourage her to think about cashing out and
renting. Why gamble with most of her wealth?
If she were planning to die in her Vancouver home and didn’t want to downsize, I would be reluctant to tell her to get out.
If she were rattling around a 5 bedroom home on the West Side but wanted to die in Vancouver, I would tell her to sell.
In between?”

– Tom Davidoff

Your probability weightings regarding future prices aren’t a million miles from mine…
I do lean more towards a higher chance of a big correction (I’d put it more at 60% chance), but agree there is a modest chance of ongoing strength.
And I agree with your estimations regarding the different possible 58 year old scenarios.
The crucial thing is that people can own in comfort if they are capable of withstanding a substantial downswing:
both from the point of view of whether their fiscal health is dependent on RE ‘wealth’,
and from the perspective of being able to refinance a mortgage against a devalued property.
But what are the numbers on this?
How many in Vancouver are consciously (or unconsciously) dependent on the presumed future value of their primary residence for their future fiscal well-being?
I’d estimate that it was, by now, a fairly large minority (25%? even 30%?).
Even a relatively small percentage of people in this position (say 10%-15% of total owners) could have a very large effect on the market if they try to realize paper profits in the face of a modest drawdown.
(Of course the flip side of this is how demand will respond to price drops.. I believe net demand will back off; others believe that people are waiting eagerly to ‘buy the dips’. I agree this is very hard to quantify/estimate.. we’ll simply have to wait and see.)
– vreaa

“I agree with your remark about dependence. A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity. I would guess most of these people would require a very high probability of success to gamble, say, 30% of $2 million, but by retaining ownership they are doing something pretty similar.
I suspect, but don’t know, that home equity extraction has fed a lot of spending by locals here. I have put zero effort into looking at the
“home ATM” phenomenon here, but someone should.”

– Tom Davidoff

34 responses to “Discussion with Tom Davidoff – “A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity.”

  1. Village Whisperer

    So many people are going to be completely shocked by what’s coming down the pipe.

    • People have lost perspective in Vancouver. They no longer understand the value of things and $100K has become a rounding error… ridiculous.

      This example (posted on VCI) just proves how ridiculous things have become in Vancouver. And we have well-rounded professors to explain us that this is normal, and prices may actually go up. When are people going to wake up for god sake???

      Here is what $900K gets you in Palm Beach… not quite the worse place in the US as far as I know: http://tinyurl.com/85vxxzu

      • No. WPB is not the worst place in the USA. It’s actually quite nice. For less than 200k a family can buy a 4bd townhouse in a decent area near’ish to downtown.

  2. Interesting exchange, vreaa. But… only a 60% probably of a major correction?? Have RE prices, in any market, ever drifted so far from fundamentals and NOT crashed?

    Davidoff’s remark that “people here are willing to pay what other people are willing to pay” is–besides useless–a tacit validation of the speculative approach to real estate. The real question is: what SHOULD those “other people” be willing pay? Answer: fair value based on rental income (or imputed rents saved through ownership). Because, eventually, what people should pay is what they will be willing pay. Everything else is gambling.

    • Okay, perhaps more than 60%.
      Here I estimated at least 70% chance of a very significant pullback/crash:
      5 charts:
      I still think that the most likely outcome is 50%-66%-off.

    • “other people are willing to pay.”

      If they were paying cash from savings I’d agree 100%. They are leveraging with someone else’s money. Whole different ball game. Why analysts can’t seem to grasp this is annoying as heck.

  3. “For the most part, prices here are driven by demand…” -BINGO!!!
    Simple supply and demand graph, where Price is on the Y axis, quantity on the X. Supply is upward sloping, demand is downward sloping. Market clears at crossing.
    1. Demand pushes way out and to the right due to credit expansion.
    2. Price goes up, but does not go up fast enough to keep up with that point where the supply and demand curves cross, there are shortages.
    3. Supply in housing is also sticky, it takes time to dig holes and build more homes. Supply curve starts to respond but lags, price keeps climbing towards the curve crossing point.
    4. Access to credit disappears; demand curve re-coils and moves in and to the left, very very quickly.
    5. Supply continues to push out as product is in pipeline, speculators exit, and people try to sell.
    6. Inventory builds, prices are sticky, remain high, and market does not clear. Surplus builds.
    7. Prices crash until once again the market finds equilibrium where demand meets supply.
    I am not sure why Tom, who as mentioned seems pragmatic, shies away from this simple economic analysis. The million dollar (or crappy Van house) question is what is happening to demand (access to credit)? CMHC on the ropes, Government talking austerity, banks jacking interest rates and calling in LOC’s, complaining about new banking rules, selling off mortgage arms…isn’t it obvious? Vancouver and Canada more generally is at the cusp of stage 4 above. And if that and the above outlined analysis are true, price drops are certain, and they will be huge. 60% chance of a giant drop?? I think 95% probability of a ‘giant drop’ a more prudent bet.
    Prices in Vancouver will still be twice the national average, but will be a small fraction of what they are today.
    The City will remain one of the most scenic in all the world.

    • The supply demand curve on the upside is driven by speculators who hold inventory out of not only the market but often out of full productive use or any use at all. Outside of a speculative market, most people are sanguine about buying one property because it’s not a beanie baby, it’s shelter. Inside of a speculative market some percent of participants decide they need 3 or 4. It creates a demand curve that goes non-linearly upward with price rather than downward. The market bifurcates, but that doesn’t matter as the sane buyers who fall to zero demand because of the high price have exited the market outright.

      Funny, one sign of the end of a bubble is when those “sane” buyers capitulate and reenter.

    • how the heck do you measure demand? No-one in the world can determine how many potential buyers there are for product in Vancouver. But somehow on this renter site there’s an “expert” with graphs based on diner napkin calculations.
      No end to the amusement here. Keep ’em coming.

      • Demand for credit, or demand for shelter? They are both easy to measure, actually. Demand for speculative instruments bought with leverage, agree absolutely, there is no limit on that.

  4. Giant bubbles seen flowing from West Vancouver:
    848 Younette Dr, listed for sale in Sept 2010 for $1.99 million (built 2009)

    Just listed in Feb 2012 for $3.588 million

  5. not really on topic but i thought the crowd might enjoy it. an article from Toronto Life on why it’s apparently so hard to get by on 196k…


  6. “Summarizing: I can’t tell you much you don’t already know.” Tom Davidoff

    Overall, I though this was a great exchange. Tom seems genuine and is open to a more in depth interview which I look forward too. I appreciated his candid acknowledgment (noted in the quote above) that there is already a good level of awareness and expertise amongst those who closely follow real estate. I hope everyone here begins to see that we are indeed the experts and sites such as this provided by vreaa have become sources of insight for the wider media. In that sense, the small dedicated group of people who each day challenge conventional ideas of our real estate markets and question the bland commentary of the so-called experts, do represent a sort of brain trust and repository of knowledge. So give yourselves a pat on the back too for a job well done and keep up the good work. In the meantime let us be thankful for the few experts out there who do offer opinion that is not biased by the agenda of others. You just know I am referring here to another Sauder professor who has not gained our respect or trust these past two years as he has appeared to us to be pandering to the demands of media and the local real estate cartel rather than supporting the public interest.

    Thanks for weighing in Tom. Hopefully you will be back.

    • I suppose one must be balanced to garner open dialogue. Apologies in advance for being curt, but to most people peering through the rabbit hole this seems a bit on the mad side.

      • Which part Jesse? It would helpful if you were more specific because you have not really stated a clear objection. I encourage you to do so. You surely must recall that almost everyone with a public opinion on Vancouver real estate (I am referring to locals here) has been clouding the topic, issuing denials, manipulating data, outright bullshitting about the truth or running an agenda. From where I stand as an outsider it strikes me that Tom is at the minimum being forthcoming while acknowledging that a 50% price drop is a possibility. Now how can I compare that to the utter star-struck crap that was up until recently being dispensed by Global, CTV, the Province and Sun, Cam Muir, The Gvreb, Tsur Sommerville and a host of other realtor spokesmen and spin masters..

        Which would you really prefer?

      • I don’t “prefer” anything, only that this same person cohabitating the space of pundits Stateside will look a bit out of place.

        Look the major objection I have is one of a pure investment perspective. Davidoff is not separating the personal investment/insurance part of the market from one of pure earnings. Take condos as an example. They are a business no more than a taxi cab, power plant, or banana stand. That people are putting a higher P/E on Vancouver condos specifically compared to other cities where ratios are significantly better is odd. He seems to — and correct me if I’m wrong — state that Vancouver holds some semblance of stability and lower risk. But from a business perspective — the sheer nature of the investment’s earnings, revenue, and expenses — condos in Vancouver are a piss-poor investment.

        But investment condos are never segregated and analysed properly, instead we get confusion with the heady SFH part of the market which includes substantial luxury and intangible component. When we talk about prices dropping we should be looking at both investment and non-investment states of mind because the two often have diverging goals, if only briefly, and the marginal price from an investment perspective is much lower than current. That’s one heck of a consumer surplus to continue ad infinitum.

      • The other thing that is food for thought is that should renting be more expensive or cheaper than owning. It’s a basic question and one that the US has found out is answered as, generally, renting is indeed more expensive than owning, as we would expect from any capital asset let out.

        So we can then turn it around and ask, in a market comprised of a healthy mix of investors (rented units) and owners (owner-occupied units), is it reasonable that the owners price in their intangibles? If investors, who receive no ownership premium, suddenly care about cash flows instead of capital appreciation — as they did Stateside — the bottom is a long way down and those prognosticating stable prices had to re-read the concept of marginal pricing.

        I guess I see the problem framed differently compared to the analysis in the slides.

      • I don’t know Jesse. When I think back to past years I just recall everything being more straightforward. People saved, bought a house, rented to help pay down the mortgage. Generally they got ahead and were better off. There was no big panic though and you just expected to be stuck with the maintenance expense. Tenants seemed more reasonable too though. Plenty of them were willing to do the small repairs and help out. Nobody gives a shit anymore. If you own you pay for everything and renters resent owners like never before. They have no sympathy either if you get strung out on payments or maintenance and taxes. I really think a housing disaster is coming. I really do.

  7. Agree with Farmer that Davidoff’s position is far more valid and credible than the stuff we’ve seen so far from other local public RE commentators.
    Also, considering XYVR’s comment above, I realize that my own estimation of a large coming drop is actually significantly higher than the 60% I suggested in my e-mail exchange with Tom. Perhaps I came up with a moderate sounding estimation in an unconscious attempt to seem less like a lunatic!
    I have always accepted the possibility of a ‘New Monaco’ outcome, where a limitless amount of finance from elsewhere allows prices here to remains strong, forever, regardless of local fundamentals. But I have always put that risk as very low (3%-5%); a very unlikely outcome.
    [see: http://wp.me/pcq1o-1fX%5D
    Short of that outcome, I see no way in which the current speculative mania can resolve itself without sustaining large price drops.
    At present I’d weigh the possible outcomes very much as I did in the linked ‘5 charts post’ [Sept 2010]:
    ‘New Monaco’ (ongoing price growth, no significant pullbacks): 3%-5% probability
    Moderate drops (up to 30%-off) with muddle through until fundamentals catch up: 15% probability
    Crash (drops of 35% to 80% off): 80% probability
    [also: Most likely outcome: 50%-66%-off]

    So, 80% chance of a large crash, in my opinion, not 60%.
    Each market watcher could at anytime come up with such an outcome estimation ‘profile’ to express the way they are seeing the market.

  8. Renters Revenge

    “A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity.”
    Think about that for a minute. A market crash combined with the demographics of boomer retirement is going to be simply brutal. Brace! Brace! Brace!

  9. Haha! But some people (I.e. the Sun editors and readers) think that Vancouverites aren’t invested enough in RE. See how many house-pumper fallacies you can find in this letter to the editor from yesterday:


    • Oh God. Are they still at it. I cannot believe that kind of claptrap gets past an editor. Its only saving grace is that it was a short article. They still have editors in newsrooms, right?

  10. From the slides:
    Luckily, our labor income doesn’t move with housing . . .
    e.g. investment banker in New York
    Oil people in Texas

    This is the great mystery to me. What is driving Vancouver’s economy? Film and software seem to have tailed off a bit, and rail and shipping is all about automation and efficiencies. I can’t help but feel that real estate development and speculation make up a disproportionate share of the local economy, though I can’t find figures.

    • Market indicators, Reed, buildex…

      Authors were able to put together some information from the 17 people in six different organizations, who did speak.

      The study found the Canadian commercial construction sector is at a moderate to high risk of corruption and organized crime.

      The study found two glaring points in the construction process that were most vulnerable to criminal infiltration: the procurement of contracts and project management. – http://www.joconl.com/article/id48807

  11. Data that might be useful for this thread, also just posted on a previous thread (sorry for the repetition, if it’s irritating!) [No problem at all when appropriate. -Ed.]

    Early in January, I was forwarded some data about recent immigration from a reliable source.

    According to this source, apparently BC Stats from the Real Estate Foundation show that in Q3 2011 BC saw the highest ever recorded net Non Permanent Resident influx of 8,613 people, representing nearly half of the population growth in BC (46%).

    If I’m not mistaken, Q3 was about the height of the buying mania here, though local, anecdotal evidence I’m seeing suggests that there’s still a lot of offshore buying going on.

    But please note also I am quite convinced by the VREAA host’s opinion that local speculators, banks and the CMHC have enabled this whole mania here.

    • Whoops, to clarify: Q2 was the height of the buying mania; Q3 would have been, for example, when students or families arrived after the buying.

      • Huge influx of NPRs, we’re not sure exactly who or of what nature the NPRs are, though the data are likely available. Maybe someone at the local universities can chime in on any increase in foreign student intake. But if it is the case that students are buying permanent properties either they will become immigrants (reducing total amount of future purchases), or they will leave and have to sell.

        If prices start falling, it’s unclear how willing foreign students’ families will be to purchase into a falling market. Call me skeptical that they will.

      • We’ve PRs, TWVs and SVs.
        How do they classify this category of people:
        – representatives of foreign companies
        – diplomats
        – temporary residents of foreign government & international bodies.
        who pay the same tuition fees and enjoy child care benefits as the local residents.

  12. I am one of those boomers (sold,sadly before the huge boom, and now rent) and can say that many of my contemporaries do indeed think they will “live off the equity” forever. Several of my friends and acquaintances have purchased houses, condos or whatever in places like Vernon or Chemainus, where prices appear cheap, in the hopes of renting them out at Vancouver rents to provide income for a pleasant old age. In every case, when an emergency has come up in one of these far-flung rental properties the costs have skyrocketed and home equity loans or lines of credit have been tapped. When interest rates go up, along with all the other costs associated with owning, these pensionless people will be screwed big-time. The other group of people that should keep bankers up at night are those that took out second or third mortgages to become “property developers” near their own homes. There are several older individuals that I know on the west-side that bought knock-downs for well over $1 million and had houses constructed thinking that they will be able to sell them for a huge profit. Almost every one of the houses I know of is still for sale after hitting the market last year. These are the types that will have to sell at some point or risk losing everything. The other thing that I’ve noticed is the sheer number of empty houses for sale – how long can and will they sit there before the owner/developer hits the wall and is forced to sell.

    • How long can they sit empty? Judging by some hard hit US cities the answer is ….long enough to get repossessed, taken over by squatters, torn down by city contractors or burned out in an arson. Be thankful if you do not live on a block of empty houses when the correction comes.

    • “These are the types that will have to sell at some point… ”

      This is the shortsightedness of greed. They did not look forward and project who the new buyer would be and what conditions the new buyer would face. This is why there isn’t a futures market in real estate.
      A bank will not support a new buyer in an overinflated market, note tightening of requirements and fee increases despite low rates. Banks will let the seller eat depreciation until the market flattens or the new buyer pays higher interest. If defaults grow, so do interest rates, and the seller has carrying costs waiting for a shrewd buyer with cash. Alas, those people are in commodities which are projected to inflate. The best thing your friend can do is buy a big barrel of rice and sign a contract for job security.

  13. A few weeks ago there were some very funny postings to this blog about the noises untied, inflated balloons make when they are let go (I think the context was a Sherry Cooper fatuity about how we don’t have a bubble market, we have a balloon).

    I’m starting to hear some noises like this over here on the West Side, which would confirm what LS in Arbutus is saying.

    Stopped by an Open House for a place built in the last 8 years, a few blocks away from where there have been recent bidding wars for teardowns. $3-million plus pricetag for this place. The listing realtor said close to 150 people had come through over the course of multiple Open Houses. No bids yet. The would-be seller has already bought a new house in another nearby neighbourhood. I got the feeling that not only the listing realtor but the seller was starting to get nervous about unloading this house.

    Saw another very unbusy Open House a few blocks away for a $2-million- plus newer place, built in the last 15 years and reno’d 3 years ago.

    Teardowns look like they may be the most popular right now in this neighbourhood, but I’m wondering if the first signs of a real West-Side SFH slowdown are appearing, as I’ve suggested before, in the more newly-built inventory.

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