Tag Archives: Fundamentals

‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

The Vancouver RE market can only be understood as part of a global phenomenon of too-cheap money encouraging ‘extreme speculation’. -vreaa

“When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.
We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.”
– from ‘Setting the stage for the next collapse’, Steve Saville, The Speculative Investor, 22 July 2014

“Yellen will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. … I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck… The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”
– from Jeremy Grantham’s latest newsletter, GMO Q2 2014

One Chart – Canada is “a country where house prices still haven’t found fair value.”

“A chart that shows those countries where housing prices still haven’t found ‘fair value’.”

– chart and excerpt from ‘Of housing booms and busts’, David Keohane, ftalphaville.ft.com, 26 Jun 2012 [hat-tip Ralph Cramdown and JS]

[If you find charts eloquent, see also this post from two years back: ‘Two Charts: All You Need To Know About Canada’s Housing Bubble’, VREAA, 26 Aug 2010]

White Rock – “Who the hell do they think will buy this stuff at these prices? Especially when so much more is being readied every single week? “Overbuilt” doesn’t begin to describe it.”

“It was so interesting biking through White Rock the other day. Even if I wasn’t an ardent bear, it would have been hard to miss the sheer number of For Sale sings. I have no idea if the official totals reflect it, but there sure seems like a ton of them when you’re on the street, sometimes several in the same block. Three or four carried the “New Price” message.

But on top of that, the flood of new product and new developments just…doesn’t…stop. We rode past at least a half-dozen new condo/townhouse/SFH developments that day alone. Meanwhile, back here in my own between-the-border-crossing neighbourhood, construction continues unabated. They’ve opened up a whole new section of land since my photo essay a couple months ago (building roads, infrastructure, etc) that looks big enough to handle a hundred townhouses and dozens of row houses.

You gotta remember that there are already 90 (!!!!) listings just in this mini-neighbourhood alone, nearly all of which are new. And unloved, apparently. These places were being snapped up a year ago, but not now. The weekend open houses here are seemingly drawing nothing but flies.

There’s one house in particular that bears mentioning. It’s situated where prospective buyers can’t miss it when they drive into the area, and it’s been in a constant state of “open house” for the last two months. Yet there it sits today, un-purchased, while dozens more just like it are nearing the final stages of completion.

Honestly, who the hell do they think will buy this stuff at these prices? Especially when so much more is being readied every single week? “Overbuilt” doesn’t begin to describe it.”

Gord at VREAA 20 Jun 2012 9:33am

‘The Province’ Publishes BC’s Shocking Price:Rent Fundamentals – “If the number is higher than 15, it’s generally not a good time to buy. Our numbers are through the roof, from 29 in Prince George to 73 in West Vancouver.”

A map of the price-to-rent ratio of cities throughout Greater Vancouver.

“Take the house price and divide it by what it costs to rent for a year to get the price-to-rent ratio: Price divided by (Monthly rent x 12) = X.
(Estimates for additional costs of homeownership, such as taxes, maintenance and insurance are factored into the equation.)
If the number is higher than 15, it’s generally not a good time to buy.
If the ratio is less than 15, buying is a better deal than renting, if you plan on living there for at least five years to offset moving and closing costs.
By the time the number hits 20, renting is apparently the way to go, except if buyers expect to stay put for at least 15 years, according to a formula used by trulia.com to rank major urban U.S. centres every year.
B.C.’s numbers, as shown in the graphic, are through the roof, from 29 (Prince George) to 73 (West Vancouver).”
“Local real estate experts say the number is simplistic and doesn’t factor in other market drivers.”

– from ‘Where it’s cheaper to buy (or, more likely, rent) in B.C.’, Susan Lazaruik, The Province, 12 May 2012

Ergo, it is not a good time to buy, anywhere in BC, especially in the LML.
The only other “market driver” of importance is the insanity that accompanies a speculative mania.
Almost all purchases are speculative, and have been so for years.
It is good to see The Province printing something like this.
Will their readers realize what it means?
– vreaa

‘First We Take London and Manhattan, Then We Take Berlin’ – Limitless Demand Argument Revisited, Again – “Anytime a midlevel city grows and becomes a popular destination to live, people come, demand increases, supply dwindles, and prices go up.”

“Anytime a midlevel city grows and becomes a popular destination to live, people come, demand increases, supply dwindles, and prices go up. Witness New York and London 100 years ago and what it’s like now.
New York City police and firefighters earn about $100k a year yet can’t afford to live in Manhattan. They live in New Jersey and commute. When I was in London, a shuttle bus driver told me he grew up in Earl’s Court, but had to move to Reading and commuted to work. This is a normal state of affairs.
Vancouver is an international city. People are going to move here, as is happening in Germany. Real estate prices in Berlin and other cities are increasing because the remaining wealthy Europeans are moving and investing there because of the solid economy and collapsing prices in their home countries. They are pushing out middle-class Germans. The movement of people and capital to better places is normal development. What’s happening is not new. It has happened since the dawn of civilization.
If [anybody] feels disenfranchised and displaced, [they] should remember the plight of the First Nations people. Their homes were taken from gun point and they were subjected to genocide. The remainder were made to feel really welcome by being forced to live on reserves and treated like second-class citizens in their ancestral homeland. At least the Chinese purchased their homes legally and are contributing to the economy by buying Canadian natural resources from which she is benefitting.”

Terry Chan, Letter To Editor, Vancouver Courier, 20 Apr 2012

Excellent debating technique, Terry.
– Hand-waving comparisons linking our (modest, small, provincial) city to capitals such as New York, London, Berlin.
– Vague claims of historical precedent (“since the dawn of civilization”).
– Superficially arresting but essentially empty concepts (“Vancouver is an international city”)
– Avoid mention of all non-supportive data (thus let’s not talk about any actual numbers)
– Pre-empt dissent by associating any would-be opponents with historical atrocities (“plight of First Nations people”).

While it is true that cities do develop, the problem is that the vague arguments used by Terry, if accepted, can be used as an excuse to justify just about any price, for any property, in any growing city.
Show us the math that supports current Vancouver prices. None does.
Yes, Vancouver will develop.
But, yes, too, Vancouver is in a huge speculative RE mania that can only end with implosion.
The two ideas are not mutually exclusive.
There are at least 150 other cities around the globe as important as Vancouver – Does Terry argue they are all on the brink of becoming the next NYC; London; Berlin?
– vreaa

Also see:
Various posts in the sidebar category “Limitless Demand Argument For Ongoing Market Strength”.

Opinion; Food For Thought – “The people of this region have a near infinite capacity for diminished expectations. Personally, I’m planning to move because I want something better.”

“It may not end.  The people of this region have a near infinite capacity for diminished expectations.  They seem to always do what they are told and accept what they are given, and no matter how ridiculous it is.  They will pay more and more for less and less.  Today it’s $700k for an old basement on a busy road in hookertown.  Tomorrow it could be $1 million dollars for a tent and a license to beg in the rain.  It’s the best place on earth you know.

That’s the true value of Vancouver: chumps.  There is an inexhaustible supply of fools who will never look elsewhere and the media apparatus to direct them.  Pay $10 for a hot dog?  Lineups for days.  Why not $100?  Limited time only.  Buy now.  These people will pay anything and do anything, regardless of whether it makes sense, and that’s why Vancouver is so valuable.  It’s not the land, or the scenery, or the climate, and it’s certainly not the standard of living.  It’s the people.

You can argue from simple mathematics that eventually this must end.  The population will be unable to pay for it.  This is true, but don’t ignore the fact that so many 60 year olds have 40 year mortgages.  When the general population can wield sums of money that they have no hope of repaying the integrity of the system is lost.  Money doesn’t mean anything in Vancouver, and under current policies Canada is sure to follow.  We have socialized credit and destroyed capitalism.  Newcomers don’t own anything in Vancouver and won’t get the opportunity.  It’s like a communist country, which is maybe why HAM finds it so appealing.

As for options, with the precedent established and the trend so firmly in place, there is no reason to bet on a reversal.  In 2008 this new system cracked and the authorities handed out gobs of money to favoured groups until it was fixed and the transformation could continue.  They invited corrupt CPC officials to immigrate and launder an unprecedented amount of money through Canada.  Anyone betting on an ounce of fairness or responsibility was badly burned.

That’s it as far as I’m concerned.  The social structure in Canada is ossifying and the economic structure is in decline.  Our neighbours to the south have once again shown the way, by restoring balance to their system after only a few crazy years.  Despite this enormous cost (or actually, because of it) sensible investment opportunities exist in the United States.  That country is dynamic again.  The fact that an American dollar today buys twice as much food, twice as much house, and twice as much gas is a harbinger of things to come.  Canadians foolishly think they are better off, but Canada is going nowhere.  Trade your Canadian dollars at par while you can, and move to the US to enjoy the standard of living you expect and get the opportunities that everyone deserves.

The worst thing you could do in life isn’t buying a $700k Vancouver basement suite, it’s sitting around waiting for that to change.  It may not change, or if it does, it may take too long, or you may not like it anymore.  So you better have a plan in motion.

Personally, planning to move because I want something better, full stop.  Vancouver is just crap with a zero on the end, and Canada is grossly overrated too.  I’m 50% out of Canadian assets because I don’t think our dollar is worth what the world says it is.  I see China imploding instead of leading the world.  Their model of over-investment is near an end.  I think the next great invention will come from the United States, and the next bull market will be born there.  They have so many small companies working on the next big thing, you have no idea.  If you want opportunity, it’s there.  They have nice houses for $100,000.  Buy one and get on with life.  It doesn’t have to be perfect.  It’s as close to economic freedom as you are ever likely to get.  I am astounded that people on this website could be offered this and somehow turn it down.

Real estate and credit bubbles were the last decade, so why is Canada still mired in it?  Who even gives a shit?  In the greater world, nobody.  And nor should they care.  And nor should you.”

rp1 at VREAA 26 Feb 2012 1:37am

Vancouver’s Too Expensive For Entrepreneurs – “Last night during a meeting we realized that of five, only two of us aren’t thinking about leaving the city in the next year or two.”

“Over the past year I began working with a loose group of consultants; there are five of us who work together in complementary ways. We’ve taken steps towards forming a more formal business together, but last night during a meeting realized that of five, only two aren’t thinking about leaving the city in the next year or two. Vancouver’s too expensive to be an entrepreneur and have a family, and we all want other things – like retirement funds, or the ability to travel and take vacations, etc.”
Absinthe at VREAA 20 Feb 2012 11:37am