Back to the levity - li'l solipsist has a book for the bath called Bubble Book, and I was inspired to take a little artistic licence with it. I re-wrote parts of it, and of course, had fun with Photoshop. Enjoy.
Young James has noticed that there are several housing bubbles outside. He begins to worry. Young James has bought beyond his means, and is beginning to understand.
Little Lucy snickers as she realizes that Young James has not noticed her Rennie The Raptor poster. Well, duh! she says.
Learnin' Lenny is doing his sums. He differentiates between mortgage payments and rent payments while Young James the Reformed explains the idea of compound interest. "Much better to earn interest than pay it" he admonishes. Learnin' Lennie wonders if Young James the Reformed has heard of market cycles. He also realizes that his $1000 bills stuffed into a soup can up on the shelf are earning no interest.
Young James the Reformed invites Scared Silly Sally out for a walk while he posts his mortgage payments. She is very worried about being priced out. Young James the Reformed begins to hatch a scheme in which he sells his place to Scared Silly Sally for "2008 prices". Scared Silly Sally has never heard of compound interest, but she thinks that maybe she is not priced out forever - what with the new zero-down, 50 year amortized mortgages (I'll be paid off by the time I'm 60, she ponders excitedly).
Stay tuned for the next exciting instalment - It's Just Bubbles Down the Drain.
13 comments:
I know some very intelligent people that still wouldn't get it if you simplified the bubble down to that level.
The Silly Sally I know owns a duplex and her family is pressuring her to buy a condo now because she's thinking of downsizing in a year or two. She was seriously contemplating it for a while too until my wife got a hold of her. Then apparently their conversation turned to how a colleague developed alcoholism, "Well, he sunk everything he had into a house at the peak in the '80s", said Sally, "after he lost everything he started drinking heavily."
Needless to say she's no longer considering buying another place before she sells the one she's living in now. Maybe that's how the children's book should go, follow some poor sod down the road to financial ruin and substance abuse.
Recently bought a townhouse in Richmond. Not cheap. But rent was getting expensive too. I was paying $1200 for rent but due to the plane crash in Richmond building, I had to find a new plce to stay. I too fear the market crashing, but prices just keep going up and up, I felt if I didn't buy, I won't be able to afford it. Paying morgage doesn't leave much for disposable income and fancy vacation trips. Vancouver is such a unique place, always rated top cities to live. Short of war in Canada, wide spread disease, earthquakes, etc .. it's hard to imagine prices going down. After 2010, demand might slow down, but prices won't decline by much. Any savings I get from renting, investing, saving, will not amount to much later on. Besides, we can't control future interest rates. Even if prices drop, so many people are waiting on the sidelines ready to jump in that prices will shoot up once again (either bidding wars or just the demand). Of course I hope I am wrong, so you all can jump in and get a good deal.
No offence Monk but you sound just like every other owner out there who doesn't want the biggest purchase of his life to evaporate to 1/3 of it's value.
I have heard almost exactly the same thing dozens of times and every time the exact same amount of rational support if provided (ie. none).
Go look at a graph, read a book, an article, ANYTHING to find some basis for what you say. The study of Economics is centuries old and if Vancouver Real Estate does NOT fall by 50% or more it will be completely unprecedented in the history of Economic study.
1st rule of bubble club, it's always different 'this time'.
2nd rule of bubble club, IT'S ALWAYS DIFFERENT 'THIS TIME'.
3rd rule of bubble club, rules 1 and 2 are for suckers.
I think I said a couple of times that bubbles are driven by greed anf fear. With great respect to Monk, his arguments for having bought are all fear based. It's a matter of some fears (being priced out forever) overriding others (no disposible income etc).
"Short of war in Canada, wide spread disease, earthquakes, etc .. it's hard to imagine prices going down."
Well luckily you don't need to imagine anything. You could just do a google search to find out if facts back up your fears.
That seems to be the big problem these days. People assume their own internal voices are spitting out "facts". I think Colbert calls this "truthiness".
I can understand monk’s teething fear. There are no sign of RE price relenting in Shanghai and Beijing re, even though Shenzhen re has dropped 40% in prices.
A 2% fall in Nikkei, DJ, Nasdag, TSX is sufficient to shake a mature market’s confidence, while ShanghaiA&B thrills the immature crowd roller-coasting on –7% +5 % on a regular basis.
One good thing is that you didn’t buy a unit at Rosario Garden, a leaky building even before the plane crash. Otherwise you would have to foot up a huge sum to the tune of $120k I heard.
Hey, a bit OT, but speaking of condos and repair bills, what happens when you own a condominium townhouse or condo and the entire complex or building gets decrepit in 30 years or so? Does this mean the condo association can vote to build new townhouses or a building? Or if you all vote to sell the land for redevelopment, does everyone pocket their share of the proceeds? I'm just wondering if you could be hit with the ultimate repair bill around retirement, at the same time that your townhouse has gone to pot.
(these sorts of worries are what make me unwilling to even consider buying a non-freehold property)
Thanks all for commenting. I have to admit that I'am no economics major. I didn't based my opinion on books, graphs, or historical data. No matter what, it's all pure bet. I can't tell the future. Wheather I buy or rent, invest or save, I'am still taking a chance either way. If indeed prices drop 1/3, it doesn't mean I have to sell during those times. I'll just live there, wait for the next bubble cycle and sell then. But yes, I would have like to buy low and sell high. And yes, reason I buy is partly due to fear but partly due to necessity of starting a family. Timing wise, of course I wish I bought during 2001-2002 period. But it's all about timing. Didn't have the cash flow or stable job then. Just like the plane crash, there is always a reason for everything. Just have to do the best under the circumstance.
"No matter what, it's all pure bet. I can't tell the future."
You could if you did your homework.
This is, ultimately what strikes me as the most bizarre of traits in the RE world. Most people will do at least SOME research before buying a car, but they just trust their gut on a decision involving 10x or more money...
Actually I lie. Even MORE bizarre is that most people doubt everything the car salesman is pushing at them but accept the RE agent's 'wisdom' as the word of god.
Asset prices must track fundamentals in the long run. If they don't, there will be a supply/demand imbalance that will bring prices into line.
It is simply not possible to have ownership costs twice as much as rents, long term. Either rents must rise or prices must fall.
Now find some historical charts of RE prices and rents in Vancouver, or anywhere else, and tell me which adjust to which.
Monk:
It's not really a bet at all. The trick to making smart purchases is:
1) Understand what resources you have available (how much cash, how much credit)
2) Understand the value of the good or service you wish to purchase
3) Understand the inherent risks involved in long term financing (you could get sick, you could get divorced, you could lose your job, you might get money in a will, interest rates could go sky high, your purchase could lose value etc)
It's just that simple.
All those people who are absolutely maxed out on a mortgage probably didn't consider risk. If it takes everything 2 people have to make ends meet, what happens if one loses a job? That's a fairly good risk alone.
Most people chose not to consider these things because they were blinded by double digit gains in the RE market. They thought if they made a purchase of X, in 2 years it would be worth 3X because of reasons 1, 2 and 3.
They failed to consider the scenario of what happens if Bad Events 4 5 and 6 strike.
In a way you're right. It's a bet. YOu're betting that you can continue to afford the payments and that the asset will either gain value, or not lose value.
When you're playing poker, do you bet just randomly or do you consider your cards, other players' cards, the dealer's cards and the probability that your hand is going to win? If you have a bad hand do you just say f**k it and throw in all your money?
Of course not.
So what mystifies me is, why do people insist on doing this with a mortgage?
YOu're betting that you can continue to afford the payments and that the asset will either gain value, or not lose value.
Like all bets, this has a winning side and a losing side. Today's buyer loses his bet when he loses his job and has to sell the house at a loss, tomorrow's buyer wins the bet when he buys the house at a lower price.
Bubbles happen when too many players assume they will be on the winning side. For someone to make a speculative gain on an asset (i.e. greater return than justified by yield), someone also has to take a loss. You can only find another player - the greater fool - for so long. The first player who cannot find someone to pass his loss to is the greatest fool.
The Vancouver market is already "priced to perfection" provided no external shocks strike the price could sustain. This scenario seems unlikely given that the U.S. economy is on the verge of the next great recession. The financial conditions south of the border are worse than 1990 and simular in scope to the 1982 recession.
Monk you should look into risk management and site a chart of Vancouver real estate during 1982. The market has the potential to repeat with equally devastating consequence. It is human nature to become ever more confident as prices rise sustaining and enforcing an illogical market.
...Vancouver real estate.
If the U.S. recession takes hold Vancouver real estate prices are done. Consider what a 40% drop in real estate values might do to your finances. Its called the crying game. Good luck to you. For the rest of you consider a good precious metals fund or gold/silver.
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