“I explained that if the present rate of price appreciation continued that same house would be worth $92 million in 2051. He astounded me by responding, yes of course. That’s why he was buying a second house.”

“My idiot neighbour.
In his mind “real estate ALWAYS goes up”. When I tried to explain to him that Vancouver was in an unsustainable bubble situation and he said I was crazy. The example I used was a westside special that I know was purchased in 1969 for $38,900 and sold in 2010 for $1.89mm.
I explained that if the present rate of price appreciation continued that same house or 50×120 piece of dirt would be worth $91,800,000 (that is Ninety One Million Eight Hundred Thousand dollars) in 2051 and asked him if he thought that would be the case.
He astounded me by not even blinking and responding, yes of course. That’s why he was buying a second house. At that point I made the decision to leave Canada.”

Bob at greaterfool.ca 12 Mar 2013 9:25pm

75 responses to ““I explained that if the present rate of price appreciation continued that same house would be worth $92 million in 2051. He astounded me by responding, yes of course. That’s why he was buying a second house.”

  1. Yeah, and if we extrapolate the adoption of iPads into the next forty years, then maybe everyone will have half a dozen of them each minimum. I would encourage him to buy many, many more houses before he gets priced out of his phantasy…

    • Yes of course! People will buy i-Pads like they buy playing cards right now, in decks of 52. Because they’ll be thin just like playing cards. I’m astounded that you can’t see this.

  2. “A number of people have asked, both in comments and in emails, why compound interest isn’t the solution to all of our immortals’ money problems. It’s not a bad question, and it’s shown up in a number of places.

    It turns out that this isn’t nearly as workable a solution in practice as it is on paper. There are two main reasons for this. The first is historical, and the second economic, but together they conspire to make living off your interest a little harder than it sounds.”

    http://lawandthemultiverse.com/2011/01/10/immortals-and-compound-interest/

    My advice is to use Quicken.

  3. I would say that’s not unrealistic. 40 years is a long time in an inflationary paper money world. Price for a $1.89m house could go to $700k in 5 years and to $92 million in the next 35.

    • bananas $100/lb + 49.9% tax …

      • Real Estate Tsunami

        Funny, you’d mention bananas.
        The price per lb has been between 60 and 80 cents as long as I can remember.
        Shows you that no government has the guts to deprive us of our basic primal needs.

      • Yes, that’s how it works.

      • UBCghettodweller

        Haven’t bananas been used as a lost leader for a long time?

      • rod_jonsson

        oops, stuck on the lulu – i.e. gap, banana republic … anyway, pretty sure bananas were multiples cheaper 40 yrs ago … but maybe someday buy westside 920k-lbs bananas + tax …

      • I remember buying bananas for $0.19 a pound once upon a time….. but then, I am an Immortal Condo Imposter, so there you go.

        Lemme go ask my sister….

      • @kabloona, what does Amanda say?

      • Price of bananas has been flat in real terms for 50 years. Chart

        http://r0.unctad.org/infocomm/anglais/banana/prices.htm

        This has nothing to do with Vancouver house prices…why do I bother?

      • Real Estate Tsunami

        Farmer, thanks for the chart.
        Now, assuming that bananas and housing are both necessities, how come the price of bananas has remained flat over the last 10 years and the price of housing has gone through the roof (pun intended)?

      • Tsunami, that’s because food is a discretionary luxury item, whereas “you gotta live someplace”.

      • That and bananas don’t have the ability to generate cash flow!

      • Real Estate Tsunami

        Can’t eat cash flow! 🙂

      • Bananas were around 50 cents forever until recently but forget that … I just noticed recently that the price of a 4L jug of milk seems to have gone down about 30 cents or 8% … what’s happening there?

    • hahaha holy shit you gold bugs are fucking hilarious

      • As usual, you provide no arguments.

      • I prefer the term inflationista. Or deflationista. Crap I always get those two mixed up.

      • Jesse, I am not predicting that the price of the same house in 40 years will be $92 million. All I am saying is that it could happen. 40 years is a long time and almost anything can happen. Inflation is the preferred way how governments “solve” problems.
        I wouldn’t base any investment decision on the possible nominal price of things 40 years from now. I doubt that anyone was buying a $40k house in 1970 with the expectation that it will be close to $2m 40 years later (and yet, that is exactly what happened in some locations).
        As for the terms “inflationista”/”deflationista” – they are good words if you have no real arguments. What matt wrote is just stupid, but I don’t expect much from him.

    • OMG that article is gold. Let’s keep an eye on it and revisit 2 years from now, and ask for a follow-up article in her column..

      She may be an acclaimed economist, with an impressive tenure (http://www.mcmaster.ca/ua/alumni/gallery/programs_recognition_gallery_09kunin.html), but looking over her publications one notices she has mainly specialized in labor economics, skills development, and immigration.. No evidence whatsoever she understands behavioral finance (of course it did not exist in the 60s, and by many accounts it still doesn’t exist at UBC dept. of economics today) and real estate valuation, which are to understanding asset mispricing/bubbles..

    • Just to repeat……hahahahahaha-phew!!!!

      That lady swallowed the Kool- Aid. One pathetic rationalization after another for every problem she understands exists. Almost all of it wrong too and contrary to facts as we know them where bubbles are concerned.

      Somehow she got it past the publisher who believed it enough to print. Ack!

  4. There’s really no point to debate the nominal value of something 40 years down the road.

    What matters is the intrinsic value.

    Bananas prices, on the other hand, have benefited from astonishing efficiencies developed in harvesting and transport logistics. But even they have not completely escaped high property prices and inflation which are ultimately factored into the mark up of bananas at grocery stores.

  5. On March 11 2013, the Conference Board of Canada released a document titled “Vancouver Housing Markets Cannot Fully Escape The Chinese Dragon”. It is worth a read so I will post the link here:

    http://www.conferenceboard.ca/economics/hot_eco_topics/default/13-03-11/vancouver_housing_markets_cannot_fully_escape_the_chinese_dragon.aspx

    This is interesting from many perspectives but the most important is the suggestion that Vancouver’s housing boom does in fact have a strong coorelation to Chinese GDP. I had in fact asked almost this exact question last week when I reposted an article titled “The Amazing 30-year History of Hong Kong Property Market in One Chart”. My question then was to ask if there was a coorelation between the two markets.

    Well, it seems it was noticed and an analysis proves there is indeed a relationship.

    Today I came across another new article discussing the Conference Board of Canada conclusions. You can find it on Seekingalpha.com under the name “Why It’s Important If The Secular Bull Market In Vancouver Real Estate Is Over”. I encourage you all to read it and comment on the conclusions. It is written by one of our better Vancouver analysts….a local guy named Cam Hui.

    “Why It’s Important If The Secular Bull Market In Vancouver Real Estate Is Over”
    http://seekingalpha.com/article/1281011-why-it-s-important-if-the-secular-bull-market-in-vancouver-real-estate-is-over

    I think the significance of this study is that it is saying Vancouver is inextricably linked to Mainland China where the fate of its housing bubble is concerned. Notwithstanding the fact we currently have a bubble it is worth keeping in mind that they also have one there and ours may resist a true deflation as long as China remains bouyant.

    Very sorry if that is bad news for the bears.

    • A well articulated and quantified article! To add to that, given Vancouver’s economic size relative to the inflow of Asian capital, the correlation is more pronounced.

      Now what Vancouver needs to do is to bump up the property transfer tax rate for existing property owners and we will be closer in line with our socialist values. This will make the hurdle higher for speculators and investors. But this needs to be a national initiative and of course Vancouver is too far away from the powers that be for any meaningful action to be taken.

      • According to Stats Canada, by the end of the 4 quarter of 2012, mortgage debt hit $1.1 trillion. Mortgage debt in Canada, not China.
        As for the market’s correlation – Russia started the speculative ordeal with the properties in Spain when looking where to park the money overseas. But it were locals that started to build like crazy and hoard the properties by bunches in hope that these wealthy Russian will keep buying (and local banks were lending for that grand business idea) – and they – local people and banks – were left holding the bag after the interest from Russia was over when the price reached its ceiling and further appreciation was not expected. Russia continues to grow at 7% a year but look – the RE market in Span is dead.
        On the other hand in Russia itself, there is an immediate 30% sale tax if non-resident owner sold the property (less than 183 days residing out of every continued 365 days even if the person hold the local passport). It is not the 30% of the added value but a simple 1/3 haircut from the overall sold price- regardless if it grew or otherwise in the time it was held. Makes any investing in RE a complete absurd, works a s a charm.

      • Olga62 – There’s a difference between Russian money in Spain and Asian money in Canada.

        The latter is less speculative. Yes, we can safely assume some locals have been caught up in speculating. But the money coming from Asia to Vancouver is less likely to speculate (as in flip). They buy for self usage and the wealthier might buy multiple condos for rental to generate income for local spending.

        The Chinese are doing that because of strict capital controls in China that prevent individuals and companies from taking money outside of the country without government approval. Pretty much every Mainland Chinese buyer has had to circumvent their government to get their money out of the country so it is not in their interest to ever move it back.

        With that in mind, a foreign buyers’ tax on local properties is not effective. Many properties are bought with shell companies that make it hard to identify the shareholders.

        The Mainland Chinese lot are also very willing to seek help from friends and family and if they need to ask someone to legally buy on their behalf they will. A side deal to transfer assets between the two parties in Asia may also be done.

        Some insight for you that is not easily found elsewhere.

      • Real Estate Tsunami

        Agree with your comments regarding Offshore German investors.
        Vancouver’s mascot should be a giant washing machine. 🙂
        Seriously, though. Australia and HongKong had the same issues and dealt with it.
        I just takes some political backbone.

      • stuff is weak … there’s nothing new in it …
        – could probably pick a few other cdn cities and get similar results
        – i saw the hk wave up close … real people diversifying, buying, living, spending on westside … and it did nothing to prices westside, city-wide, etc. like what’s happened now … those are facts … what’s the difference? access to credit, imo – i.e. your friends at the fed, boc, cmhc, etc. … if true, when RE credit limits out, look out
        – why not correlate prices to credit measures? what/when/where-ever … i’m sure we can find a lot there
        – otoh, for analysis worth considering … rabidoux’s been thru all this in detail and last i recall, he just doesn’t see it … said in effect if such a big external boost, why the record local indebtedness? doesn’t add up
        – prices are way up b/c everyone’s levered out … simple

      • rod -> Agreed. Far and away the largest engine and most important correlate is local debt.

      • @BLM – re.”the money coming from Asia to Vancouver is less likely to speculate (as in flip).” The buyers from Russia were not going to flip the properties in Spain as well – they were going to use it as a second residence in a winter, a vacation home of sort. It were the locals that started to buy the properties for a flip – the same like here in Vancouver, hoping that the foreign buyers will keep coming and buying indefinitely.

      • olga62 – There is of course a point of overbuilding in any market.

        From what I understand, the profile of overseas buyers in Spain were mostly Northern Europeans and Russians looking to buy vacation properties in a country with more sunshine. That type of buying in a market like Madrid is more akin to Florida, Arizona, Hawaii or even Whistler.

        The foreign buyers in Canada are immigrants with real intentions to live there and to send their kids to school in a Canadian University. How do Russians and Norther Europeans view Spanish universities?

    • Food for thought, Rob…..food for thought. Lets just call it one more in a long line of versions on our little bubble. It will really only be in the aftermath that the truth gets sorted out and better conslusions can be arrived at. We are all pretty sure credit and low rates are at the heart of the matter but that is not to discount contributing factors. Why didn’t Phoenix or LA or Dallas or Denver or Houston reach such lofty bubbly highs as Vancouver? Lets not forget that Vancuver has the second biggest bubble on earth next to Hong Kong. Coincidence? I do not think so. This in itself indicates something else may be at play given that the Vancouver population is so heavily weighted with those of Chinese and HK origin (I am not blaming here by the way so don’t anyone misinterpret). We cannot just dismiss the coorelation out of hand. Where else in the world are two similar bubbles in existance on two separate continents that are substantially made up of the same family of buyers. Name one pair. Hmmm?

  6. Real Estate Tsunami

    The Chinese Connection has never been news to me. Anyone just looking around would have come to the same conclusion.
    How the current bubble in China will affect our bubble remains to be seen.
    This year, the Chinese New Year rush has not materialized.

    • Agree. It is not news. There is has never been enough evidence to show conclusively that Asian money was behind Vancouvers price rise either. What we may actually be seeing is the outcome of sentiments on the market and how price changes really can be dramatic from the margins. So if Chinese money was only impacting 5% of the whole market that was still enough to push it right over the top and send homes explosively higher.

  7. If property taxes were to increase on average 2% per year, “idiot neighbor” could be looking at a annual tax bill in the neighborhood of $800,000 by the year 2051 (which is almost what the average detached home in Vanc goes for nowadays). There is a silver lining in all of this, however, as that mortgage pmt (which he would likely still be paying) wouldn’t seem so bad at this point.

    http://jaybanks.ca/real-estate/greater-vancouver-property-tax-calculator/

  8. Amsterdam is one of the few western cities where real estate stats have been compiled for the past 400 years and often quoted an example to debunk this compounding theory.

    I can not remember the exact numbers but experts claim that if Amsterdam prices had gone on a Vancouver trajectory a two bedroom apartment would now cost something like hundreds of millions. Fortunately, thats not the case. Overall, Amsterdam prices have only gone up by about 0.2% per year.

    • Real Estate Tsunami

      Exactly, my point.
      In a mature economy, shelter cannot be more expensive than bananas, except for legal costs associated with carelessly discarded peels.

      • Did you hear that Bananas are cash crop in Cyprus by the way? It is true. They are officially a banana republic.

  9. Amsterdam has a lot of public housing supply, unlike Vancouver. Maybe that is part of the solution for us but we can’t have it for one Canadian city and not another.

    In any case, different laws, different geographies, different countries, so we can’t take it as a one for one comparison.
    .
    Vancouver’s a growing city in the new world (North America). It’s still finding its identity, unlike Amsterdam.

    There is no doubt Vancouver’s connection with Asia adds a premium to real estate prices here. The great debate is how much that premium is worth.

    • Real Estate Tsunami

      European cities such as Amsterdam never comprised their identity,. In the case of Amsterdam it is Dutch.
      Rome is Roman, Paris is, well Paris.
      Vancouver, is, well what is Vancouver?
      A place where foreigners build their vacation homes?
      Where you can ski and play golf on the same day?

      • We might have been reading different history books, RET. They have had millions of people shifting back and forth in Europe since forever. Migrations of people have been going on since the beginning. The Moors and Southern Italy for example. The Gypsies of Romania and elsewhere. The conflict between Muslims and Chrisitians resulted in millions of dislocations alone. The Crusades, the Spanish wars, Jewish Diaspora, Roman conquests of far flung places like Ireland. What I am getting at is that the past 2000 years has been anything but stable and few can truly trace ancestral history with certainty. My own family is Italian but not long ago we discovered the family name originated from Spain. Cripes….I might be a Catalonian but don’t know it for sure. I will say this though,; the Europeans sure knew how to mix it up genetically. Vancouver does not yet seem to be there. You guys live like two separate societies as far as I can tell.

      • A Gateway to the Pacific. A border town to Asia Pacific. Canada’s Hotel California.

        Naturally a cultural melting point.

      • A Gateway to the Pacific. A border town to Asia Pacific. Canada’s Hotel California.

        Naturally a cultural melting point..

      • Real Estate Tsunami

        Farmer,
        Have you been to Berlin?
        It is becoming the cultural centre of Europe again, as it was before the 2nd World War.
        Vienna is regaining the cultural and commercial spot it had before the 1st World War.
        Great cities, like phoenix will always rise again, does not matter if they were overrun by the huns, turks or damned yanks or brits.

      • Interesting you mention Berlin, Ret. I have not been there but often run into people that have passed through. They almost always have great things to say about the place (unlike London which is despised universally and for good reason). I am certainly interested in seeing it one day. They say rents are low and a big arts scene is underway.

      • I’ve been to all – Ams, Berlin, Paris and Vienna and I have to say that I agree with Real Estate Tsunami – they all kept their distinct national character. I love Berlin! May be the large quantities of the historical buildings makes us feel these towns more authentic than they really are? At least Paris for sure feels like a town with no locals only tourists wandering in hordes trough the places..

    • “Vancouver’s a growing city in the new world”

      What year are you living in, BLM? 1800?

  10. Real Estate Tsunami

    never compromised. time for bed.

  11. Public housing in Amsterdam, or any other western city, is a relatively new concept that took off after the 2nd world war. We are talking data for 400 years and not the past 60 years.

    Amsterdam as a city has been through all different phases. It was the head office for the Dutch East Indian company, a corporation that probably had more clout than walmart and Exxon combined. They were the main market for the global spice trade. They were a centre for the arts. They were real world class. However, by the 19th century they had fallen to a 2nd tier European city, overtaken by london and paris. Therefore, Amsterdam is a perfect barometer since it has been through all different phases. The biggest lesson learned from Amsterdam is that real estate prices always deviate to the mean as dictated by fundamentals. If I were a betting man I would be placing my bets on the 400 year old Amsterdam numbers than Vancouver numbers generated after a 10 year madness.

    Just like Vancouver, Amsterdam also has a limited supply of land. However, this has not stopped Amsterdam prices from falling by 50% during tough times.

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