“These things are obvious when viewed from the outside.”

“Had a nice talk with a doctor department head tonight. He moved here from Chicago where he’s still paying the mortgage on an underwater property. He looks at the prices here and he can see that it doesn’t add up. He was wondering when the tipping point would come for Vancouver. In any case, he has no intention of buying here for now. These things are obvious when viewed from the outside.”
N at VCI February 8th, 2013 at 12:18 am

When a group is trapped in the jaws of an asset bubble, the vast majority of participants don’t have the capacity to ‘view’ it ‘from the outside’.
With perspective, the speculative mania can be seen very clearly for what it is.
– vreaa

44 responses to ““These things are obvious when viewed from the outside.”

  1. once bit twice shy??

    • For that gentleman, perhaps.
      But, does one have to actually be bitten to learn that some animals bite?
      One would hope not.
      When your neighbour gets eaten by a lion, in full view of yourself and other neighbours, you’d expect everybody to be careful of lions.

      When its history is finally written, years hence, one of the most remarkable things about the Vancouver/Canadian RE bubble of 2000(1? 2?)-2012 will be seen to be that it occurred despite the powerful lesson of its dangers being played out in the US, concurrently.
      This is the equivalent of watching your neighbour being eaten by a lion, and then adopting the same lion as a pet.

    • Hmm… a Doktor… who’s seen it all before… Ergo… he’s been…

      Inoculated

  2. Im here in San Francisco where prices are as high as Vancouver but people actually have the income to support it. Rents though are through the roof. A 2 br in a gritty part of town, like the east side of Vancouver goes for 4k a month and there are bidding wars for it. Studios in this part of town go for 2600. In the nicer parts of town, 2br are going for even more. This is sick considering my mortgage on my Van west home is only about 3200 a month. Gives you some perspective about places that can actually support high prices about what rents really should be in Vancouver. My point is, the rent to price ratio is totally screwed up in Vancouver,so either rents need to go up, which is unlikely given all the supply,or prices are due to crash, which is more likely, as investors realize the cap rate is so low, its better to dump money in the stock market or elsewhere than Van real estate

    • Exactly, Brian.
      Price:Rent ratio is likely the most useful way of measuring ‘true’ value.

    • @brian +1

      Hello from Zurich, Switzerland. Look at all those graphs where they show price to rent. Prices here are high – – I would say about 1500-2000/sq ft. However, rents are about $4.50/sq ft per month You’ll get a cap rate of about 3.5%. You have absolutely no risk. Also – keep in mind that current Swiss Franc deposits have negative interest rates. . .

      Speaking of rents – there are detached houses here that are quite nice – but expect to by upwards of $20,000 per month in rent. This is for a $5M property. Think – 3,000 sq foot house on 8,000 sq ft lot – – . . So – again – Price and rent are really important and the fact that Vancouver is so far out of whack – there will be strong downward pressures.

      • hi zrh
        I’m going to headline your VCI market update comment tomorrow a.m.
        Thanks for keeping us all informed.

      • 3.5% cap with “no risk”? The Swiss are different! 🙂

      • @VREAA – – thanks for that. Feel free to paraphrase if needed.

        It is amazing. Friday had 1 sold and 25 new lists for Van West detached. Almost all stats continue to point ot problems. We are getting seasonal increases in average. Not sure why really as the median is going down but average seems to be sneaking up – likely because of a few $10M propertie selling on low sales. In any case – – One thing that just has to be hurting this market is the continued flat-down prices on condos. I just have to look at all the young people that I worked with in Vancouver in 5 years that had bought condos since 2007. So many of them are now at that stage in life where they should be looking to get to the next step. However, they have no equity from investment gains and transaction costs will eat most of their savings equity. They make decent income but pay $1800-$2000 per month to live in a 650 sq ft 1 bedroom. That really sucks – – One of my friends is really nice, super smart, motivated and a good worker. Can’t seem to get a better job and wants to move to a house in North Van (Must be the Persian connection.). However, . . . he’s stuck in a Rennie Special . . . . . . after 5 years of slaving the mortgage payments, the person that made the most money was Rennie himself – – ;. . . .

        Anyhow . . . I’m looking forward to March as for sure it will be below 2009 . . . . . one month earlier than last year.

      • Zrh2yvr, I am looking to upgrade in a few years time but can stay put if need be. We have a 3br/4ba in van west now that has likely depreciated in value even though our assessments are up this year. No matter, I wish for the multimillion dollar McMansions to crash and burn so we can finally upgrade at a bargain. I can stomach a loss, as long as the houses we want are also gonna crash and burn, even more dollar wise.

  3. Off the top of my head I believe the US has a younger median age than Canada. That is an advantage when recovering after a housing bust. If you are familiar with velocity of money you will appreciate why that is.

    Younger populations drive business and create prosperity.

    For example, one dollar spent on a good or service within your own economy can be enriching for more than one person in acquiring production. If you go out and get a haircut for 15 bucks and then the stylist turns around and buys lunch at the local diner with the same money, then two people saw a benefit from the same money.

    Likewise, the diner owner uses the 15 to buy food supplies and the supermarket owner then turns around and gets movies tickets for his kids which gets recycled into popcorn for the theater.

    This is all fine and dandy. Money is circulating and we are all enriched.

    The problem arises when someone breaks the chain and actually stops spending or socks away the money which ends the cycle. This is why demographics and retirements are going to have a detrimental impact on wealth creation in Canada over the coming years.

    The short version of what is happening is that older people do not consume like they did when they were kids. Velocity thus slows. I am referring to the looming Boomer retirements here. We have always had older people but we have not ever seen such a large number retiring or planning on saving for retirement at one time.

    Actually, most have all their money tied up in thier houses. It spells trouble as it conincides with needs for cash savings.

    All the major Western nations are facing a similar dilemma of consumption declining in concert with a past housing boom or credit excess that threatens nest eggs. Part of this is an outcome of the post war baby boom group having arrived at the doorstep of their golden years and the collective decisions they made in the past that infuenced how our economy has progressed until now. So now the herd is moving again but this time it won’t feel quite so beneficial to everyone else who relies on high levels of spending to keep growth numbers up.

    We are seeing developed economies becoming sluggish everywhere and so this one factor is probably the most significant if you are wondering why the recovery since the Credit Crisis has been so slow. Older people and those planning to retire want to save, not spend.

    On the other side of the globe, in parts of Asia, down in South America and in most of Africa, many of the economies are outright dynamic compared to Western countries like Canada, the US, England, Japan or most of Europe. Some of these emerging market countries are booming and the ones that are most energetic are naturally those with the lowest median ages.

    Younger folks don’t generally save much as a rule….they want beauty care products, entertainment, games, cars, mobile phones, technology and plenty of take out food. Statistics back this up. Kids are terrific consumers and so the money flows and circulates in countries with low median ages.

    That keeps velocity high and enriches everyone as a result.

    Back here in the real world we call Canada, we are just now experiencing the first wave of retirements that will ultimately take housing prices much lower. The consumer cycle is also being broken and fewer dollars will flow as freely as they once did.

    The problem really arises though as real estate prices are now in decline and retirement money in the form of equity is evaporating as wealth flys off the family balance sheet. This magnifys the coming trend that was already in the pipe insofar as declining consumption is concerned.

    So we will have spending in retreat based on simple known demographic patterns combined with generally declining wealth and that recipe means dsiposable income will be in a chokehold in the coming years.

    This combination also bodes very poorly for home resale prices as fewer young buyers are remaining to take up the slack of the numbers of homes that need to be sold to balance the books of retiring families.

    Retailers in particular need to be aware of the coming risk as sales go soft and dont return to old bullish levels. With a median age in the mid fourties nationally and a rapidly greying population there is little that can be done to reverse the inevitable trend.

    Unless you move to south East Asia. Depends anyone?

    • +1 farmer.

      • Thanks Cyril. To be honest though, it was not my best writing. I just wing it off the top of my head. Some days I can’t get the point across as clearly as I would like. In any case the basic premise is already well known and has been discussed in detail over many years by others. We know without a doubt that demographics will play a large role in our economy in the future and that rising age is a factor we cannot ignore. The advent of a housing bubble has just made things worse in the recipe and means the correction now in progress will be more painful that first envisaged. Home ownership meanwhile, which is a marginal investment over the long term when it is inflation adjusted for upside potential is just a fools game when it is so overpriced. Some of us think that should be obvious but there is no accounting for the ignorance and greed nor the herd effects of the crowd.

    • I think Canadian society hates young adults and pursues anti-youth policies for the benefit of older cohorts. So thank you for explaining the economic importance of youth for the health of the overall economy and all age groups.

  4. I’m not sure I’m convinced by the median age argument. A quick look at the list of countries by median age shows that all the ones with low median ages are impoverished whereas most of the ones with high median ages are affluent. Monaco has the highest median age and life there looked pretty comfortable last time I was there.

    http://en.wikipedia.org/wiki/List_of_countries_by_median_age

    If I look at my friends and neighbours and if I check out the high end restaurants and luxury car dealerships they seem to be catering to not so much to the twenty something’s but more to older folks, many of whom are free spenders because they have had a lifetime to accumulate it.

    I also question why older people would still be saving. Most I know have spent a lifetime building assets which they intend to use to support a relatively free spending lifestyle in retirement.

    Maybe my cohort is not representative of societal norms but I still think most people save with the intention of using those savings to support their retirement, most do not intend to continue saving until they die.

    I do think the boomer effect spells problems for single family home prices and the stock markets as vast amounts of holdings are slowly withdrawn from those areas but, I do anticipate that most other purchasing will continue unabated and some areas like luxury cars, luxury cruises, fine restaurants, etc, could well prosper as my cohort settle in to enjoy our “golden years” with it’s accompanying sense of entitlement to the retirement lifestyle we have saved so long for..

    • Pretzels...thirsty

      @ KC
      I don’t think you have thought this through.

      Consumption on credit does not equal growth. You comment on the developing countries with low median age as “impoverished” is misleading because what is of value is the rate of growth and real consumption (rather than increasing debt leading to a false consumption growth).

      What has happened in BC is that RE debt (and more debt in terms of LOC) have stretched economics so much beyond the economic fundamentals that ultimately the proverbial excretum will hit the fan and it will not be pretty.

    • Fastest growing economies or those projected to do so include Gambia, Rwanda, Libya, South Sudan, Mongolia, Timor, Cambodia, Laos, Zambia, Congo, Iraq and Gunea. Obviously this is not a list of so-called developed Western nations. What it tells you is where the action is happening. Some of these countries are coming off a low economic base and are considered poor by any standard. Double digit GDP growth attracts investor attention and as you can see emerging market economies are dominant. The point is that this is where dynamic growth opportunities exist today that are quite different than what is found in the West. Low wages, less restrictive regulatory environments, young populations and a growing middle class are what define them.

      • Farmer is absolutely right. Of course, countries with lower median age are poorer, less developed. But those countries have growth potential and many of them do have economies that are growing strongly ( Brazil comes to mind). Developed countries have old populations and are stagnating.

    • KC…the facts speak for themselves. Boomer savings are dismal and few have assured retirement plans. This is one chicken that is coming home to roost as the housing market corrects and amplifies the dearth of RRSPs and cash savings.

  5. I’m a Canadian living in L.A. and to me the bubble as been clearly visible for many years. Now, my interest has evolved, and I’m more fascinated by the ‘cultural’ aspects of the canadian bubble. Like real estate people being invited as ‘guests’ on the evening news. To my eye, that alone screams overvaluation and speculative mania. Believe me, in a couple of years, that’s the kind of details that will go in the “what were we thinking” category.

    I flew to Montreal recently and *everyone* there has something to say about real estate. I wasn’t the one who it brought up. They talk about how this condo sold for X amount, how holding on to a (bubbly) property is the best investment known to man. Greed permeates every one of theses judgments, but greed is never acknowledged. It’s just “common sense”.

    • I find that “common sense” (not in the form above) is not so “common”. Perhaps to distinguish what most of us probably refer to as “common sense”, we should instead call it “rational sense”. And the other “common sense” (which is subject to bubbles and irrationality) can just be left for what it is. A “fool’s sense”.

      (And trust me, I have plenty of “fool’s sense” to go around… working on the other one though.)

    • Pretzels...thirsty

      I love warren Buffet’s line about fear and greed.
      Be fearful when others are greedy, and greedy when others are fearful.

      Buying RE in Vancouver in the next 2 years is like hitching a ride on Titanic.

  6. Cardiac procedure at (redacted) hospital. During treatment the attending nurse was texting on her iPhone putting the final touches on a real estate purchase. I love this city.

  7. all those African Countries probably have higher wages than Vancouver

    • Naked Official #9000

      Disloyal cadre, if only you foolish Canadians would open your mines like the africans to the party’s slave labour, you too could reap the benefits of the new colonialism.

    • You want to know what is the crazy part, Ted? All the ones I know have far more in the way of cash savings than 60% of the American population whose bank accounts contain less than 2000 bucks. It was not so long ago we learned the true extent of the very low level of savings in the US. Some of us were shocked. On the other hand, there is no social safety net in many of these poorer countries so options are limited if you don’t have cash on hand. You simply cannot afford to run out of money in some parts of the world. The poor (a relative term) therefore make a big effort to save but their children have Western idealism and spend like there is no tomorrow. Ironically enough living standards are better in poorer countries for many. It is purchasing power that creates a divide. You have to take note of how people earning 3 or 4 dollars daily can afford housing, educations, good cothing and 3 or more children to appreciate the vast differences in how incomes are allocated and the gulf between the daily costs of living in the Third World versus the developed countries. They only sound poor relative to Western incomes when priced in US dollars. What is always forgottwn is the steep costs of doing business and living in a First World nation where every dollar earned is barely enough to cover all your expenses despite being many multiples higher than that seen in poorer countries.

      Do you have a gardener, driver and housekeeper in Vancouver?

      • Farmer, you are brilliant! I have tried to explain this to people and they never understand it. They just think of the commercials showing starving children in Ethiopia with expanded bellies and think that is representative of living standards in third world countries. Thank you so much for your smart contributions to this website. Please don’t ever go away.

      • Thanks anonymous. Will do my best.

  8. CanuckDownUnder

    vreaa, here’s another personal finance story for you. Earns $100K per year, has a $1.8 million house with no mortgage, yet can’t afford to buy a new car! She can barely afford the interest payments on her $100K LOC (which I’m not sure why she even has). 75% of net worth in housing at age 64.

    The killer is that the “expert” doesn’t suggest the obvious – sell the house and rent. When owning is so much more expensive than renting, why bother selling the house to buy an overpriced leaky condo?

    http://business.financialpost.com/2013/02/08/will-this-womans-out-of-control-spending-cripple-her-retirement/

    • Thanks CDUnder. Also, mentioned by Kermodei on another thread.
      Will headline.
      Note the $888 per month “for medical therapies the province won’t cover”.

      • Generally the province doesn’t cover certain “medical therapies” for good reason – they’re bunk.

  9. CanuckDownUnder

    Sorry I missed that earlier. The medical costs must be aromatherapy to deal with all the financial stress.

    Those “hidden” costs of owning though – $1550 per month! Surely you could rent a half decent condo for that much and live quite comfortably off the returns from the house sale.

  10. Pingback: ‘Drop From Peak Chart’ and Recent Market Action – Paint Dries Faster In Vancouver! | Vancouver Real Estate Anecdote Archive

  11. Pingback: “I’m a Canadian living in L.A. and to me the bubble as been clearly visible for many years. I’m fascinated by the ‘cultural’ aspects of the Canadian bubble.” | Vancouver Real Estate Anecdote Archive

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