Novel perspective – “Months of rent at risk with a 1% change in interest rate.”

“This is how I could argue for current price-rent being reasonable (see chart above). Sure you’re back to valuation of 2000-2002, but recent prices were briefly 100% overvalued, then okay again. That time they were fixed by lower yields and credit spreads as well as slightly higher inflation. Next time price might be the adjustment mechanism. How can you go from reasonable value to 2X overvalued in a heartbeat? Answer: a lot of interest rate risk.”

“This is why I still think it’s bad risk/return. Months’ “rent” at risk with 1% change in “interest rate”. No wonder people are selling their basements.”

– charts and analysis by Zerodown, 14 May 2012
[Many thanks, Zerodown. -ed.]

29 responses to “Novel perspective – “Months of rent at risk with a 1% change in interest rate.”

  1. Renters Revenge

    I don’t think I understand.
    It seems the implication is that interest rates are the most important variable?

    • It seems the implication is that interest rates are the most important variable?

      that’s what vreaa would have you believe. But “emergency rates” didn’t kick in until 2009 while price-rent was rising dramatically well before this; starting 2002. Prices in Vancouver rising in double digits for many years while interest rates 3-4% higher than emergency rates. Looks for co-variables

      • Co-variables, in no particular order…

        1: New government incentives favouring home buyers.
        2: Rush to “safety” of RE following stock market volatility.
        3: Capital flight out of corrupt / communist China.
        4: Largest- and wealthiest-ever demographic (baby boomers) as unprecedented source of funds. Bank of Mom and Dad help kids make “most important investment of their lives”.
        5. CMHC raises insurance coverage.
        6. Commodities boom and government stimulus create illusion of strong Canadian economy. Uninformed / biased media complicit in “it’s different here” myth.
        7: Cultural shift. Home ownership glamourized as never before via TV programs, marketing, etc.
        8: Mass speculation and greed. Price rises beget price rises.

      • formula1 -> “that’s what vreaa would have you believe.”
        Huh? Another strawman argument. Not sure where you’ve seen me say that ’emergency rates’ were present prior to 2008-2009; I never have.

        All you need for a speculative mania are (1) people who convince themselves for one reason or another that an asset will go up in price in future, and (2) ready money…
        Interest rates weren’t at emergency levels when our bubble began, (2001?, 2002?, 2003?) but they were already at very low levels by historical standards; low enough to fuel the bubble.
        The emergency rates are what bailed us out of what was going to be our crash (starting 2008); the free money simply delayed our crash.
        As to what’s happening going forward: this market will crash even if rates are kept low. In fact it may be beginning to do that already. But, if rates are indeed increased, our market will be exquisitely sensitive to them, as Zerodown’s chart shows.

      • “As to what’s happening going forward: this market will crash even if rates are kept low. In fact it may be beginning to do that already”

        if any of the posters here actually believed that they’d put their money where their mouth is. So far no takers to my offer. Again, city of Vancouver total avg price at 40% off current benchmark by end of 2013.
        My e-mail again,

      • Nobody has any need to wager on this with you, formula1.
        I suspect we already all have our positions; we’re already all putting our money where our mouths are.

        As an aside, why are you setting the 2013 limit?
        When it comes to RE, there is no special bell that will ring 31 Dec 2013.
        You’ll still be holding a leveraged asset on a downward trajectory come 1 Jan 2014.

      • formula1,

        Why -40%? Sounds like a very low over/under if you are so confident of Vancouver’s RE market.

      • “Why -40%? Sounds like a very low over/under if you are so confident of Vancouver’s RE market”

        40% was not my figure, it’s from another thread. I offered to put up $ in opposition. Seems like the renter isn’t all that confident about this prediction

      • nobody you know

        Want to bet on Vancouver real estate prices? Go to Intrade. They have a market based on the Teranet index. Right now it’s 168.3. You can bet whether or not it will hit 120 by Jan 31 2012.

        I’m looking forward to seeing your wager on there. Please keep us updated.

      • I really want to see a screenshot of this.

  2. Convexity FTW

  3. I don’t think interest rates are the most important factor. However, they are the best factor for justifying the current valuations. So, I think you either have risk from overvaluation or you buy into the low rate argument to justify prices and subject yourself to this escalated interest rate risk.

    • ++ very well putted

    • “However, they are the best factor for justifying the current valuations”

      they are the factor easiest to digest for a renter.

      • it’s a nice, tidy way to contemplate risk … which btw, is the 1st and most important consideration when placing a bet … free to draw your own conclusions

      • You’re right, why bother doing analysis at all, when there are completely valid, albeit non-measurable, reasons why prices have become so high; reasons enough for how many a lucky sod makes his millions, but ask how he did it and the answers are all over the map. The ones I give a wide berth are those who owe it to acumen and prescience; while it may be true I’ll wait a few years just to be sure.

      • 🙂 big difference between a lottery winner and a self-made

    • Still doesn’t pass the smell test, there are assets with equivalent business risk that are returning better. I think Vancouver’s only “reason” justifying its high prices at this point is perceived safety.

      I’m no bond trader but it seems that long duration assets have the same duration risk, the market on occasions seems chillingly unperturbed with this.

    • Some interesting analysis by Chovanec. Worth a read.

      Not that the US is China but US house prices were under some pressure a full 2 years before the wheels came off. These things can move slowly, but the Chinese economy may surprise to the upside… in terms of speed of its change in fortunes anyways.

    • Should add on this, it was observed by Chovanec previously that the build quality on many structures is questionable. The actual depreciation of these structures may be much faster than what buyers are assuming. Further Chovanec (correctly in my view) points out that private ownership in property in China is a relatively new phenomenon, stretching back only about 15 years or so. This means that many owners are unfamiliar with the ins and outs of property management and ownership, not least the full costs associated with a complicated capital asset.

      So on one side we have a credit and investment boom in China that has built significant amounts of capital assets. Capital to finance these investments has almost certainly been mis-allocated. That’s bad in and of itself. But the other side is whether the asset was built well and whether the asset is maintained properly over its useful life. If the answer to these is “not as much as it should be” there is even more deflationary pressure ahead for China.

      For these reasons I think there is a good chance that China may slow down more than people are thinking. The old problem of applying first-world assumptions to a developing economy is rearing its head again.

      And, conversely, the old problem of applying developing-world assumptions to a first-world economy has caused some issues for Vancouver as well.

  4. Paul Streppel

    age 42 is said to be the age of peak housing. The age at which the largest purchase of housing is made, designed to sustain the family thru the child(rens) teenage years.

    Obviously we’ve seen housing move outside the natural needs, and become a vehicle for speculation.

    If China’s housing market doesn’t become speculative, 42 years minus 2012 brings us to 1970.

    which brings me to this: Starting in 1970 and all throughout the 1970’s China’s fertility rates drop substantially.

    • “which brings me to this: Starting in 1970 and all throughout the 1970′s China’s fertility rates drop substantially”

      can’t look at this effect in isolation. Also see how Canadian immigration policy has changed, especially since late 1980’s when our Fed became aggressive.
      Chinese housing and economic policy has changed too. Night and day difference from just 5 short years ago.

      Too many ingredients in the Vancouver house price soup to determine where the dominant flavour comes from…unless you’re the cook.

      • Paul Streppel

        cooking with oil today..

        “Home prices in China fell in a record number of cities last month and car dealers posted inventory levels that foreshadowed deeper price cuts. China is the second-biggest crude consuming country after the U.S.
        ‘The latest news out of China suggests that they are not seeing good growth, and that will weigh on the oil market,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.’

  5. a few yrs ahead …
    “The push is on to turn single-family rental homes into an asset class that can be bought and sold on Wall Street.

    Last week, the Journal reported that publicly traded home-builder Beazer Homes had teamed up with buyout firm KKR & Co. to launch a real-estate investment trust to manage its small portfolio of single-family homes as rentals. Beazer’s REIT is still private, for the moment, but has plans for an IPO to take the company public in the coming years.

    Others are jumping in as well. Los Angeles-based Colony Capital, led by distressed debt investor Tom Barrack, has also formed a single-family rental REIT, based in Phoenix, with plans to ramp up acquisitions and expand to new markets in the coming months. ”
    ps. tom barrack knows RE

  6. VREAA, you got to check out Garth’s post tonight, 250K mark up in 90 days for a Kits property –

    Old Listing – $1,488,000:

    New Listing – $1,798,000:


  7. Vreaa, I’m not sure if you’ve seen that one yet.

    “Condo king says talk of bubble just a lot of hot air”

    I’m sure you’ll live that article and all the assumptions our beloved Bob is making…

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