Monday, January 21, 2008

how low can she go?

I've been up to my arse in alligators, hence the lack of pies.

I stole the image below from Garth Turner's blog posting Pop Heard Around The World. (don't think that he didn't lift it from somewhere) Politically, he's...well anyway, he is telling it like it is vis-a-vis the economy, and some of the comments are good too. It's kind of like wading through comments at Rob Chipman's , but there is stuff worth reading.



Look at that down slope. Pretty steep. And the timeline - aren't we "two years behind the US"?

This is it. The Wile E. Coyote moment has passed. How about that 600 point drop on the TSX today? And the 900 points off last week? That is some 12% down in seven days. My stock list is a sea of red - except for the ones that have Halts on them :[

Oil down below $90. the CAD below .97. Quebecor up shite creek in a lead colander.

Some are talking about TSX below 12,000, try below 10,000. The rout is global. Look for 8700. Then buy. Rinse. Repeat.

Oh, and house prices? How low can she go?

I know that we are immune to everything, elsewhere, but I am in Vancouver, and I'm watching my stocks go down. And I thought that I was different. It's so great to be living down a rabbit hole in The Land of Oz.

Here is some light reading at the Gloom and MarketCrash

And just to round things off -

10 comments:

Drachen said...

"Oh, and house prices? How low can she go?"

In Vancouver, 30-35% of current values. Not OFF, OF.

Then a bounce back of 5% or so to settle at around 35-40% of current values.

(all based on adjusted dollars)

Scullboy said...

Drachen man, I really hope you're right!

I read in another blog some economists are saying this will be the worst recession since WWII.

Even if the fools are right and it's different here, then the collapse of everything else should mean all those "wealthy foreigners" would want to sell their one remaining overpriced asset, that shoebox in Yaletown.

Right....? I mean that would make sense, right?

Drachen said...

I'm not just throwing that out there Scullboy. There's a lot of evidence that things started to go beyond fundamentals in 1987, there was a slow inflation of prices from then until the '90s (known among bubble economists as the 'stealth phase' which I think pretty well describes why so few people recognize it goes back that far). There was a bump in the mid '90s as the value investors sold off realizing that prices did not match the fundamentals. But by that time Real Estate had been rising gently for about 10 years and a little bump was not enough to scare off the speculative investors, from there things climbed gently for a while until it gathered enough momentum that non traditional investors began to get into the game and that's where it really took off (year 2000 or so).

Below is a graph of Vancouver RE with a bubble graph out of an economics textbook superimposed over it. I think it fits beautifully well and if I am correct the proper valuation of a median detached house today should be in the $250k range (adjusting 1987 prices for inflation).

Graph

Radley77 said...

Cool graph drachen.

I have started a real estate analysis website for Calgary here:

Calgary Real Estate Market Blog

Scullboy said...

Drachen,

That seems about right, given current income levels. I've been astonished since I got here at how expensive RE was, and how totally deluded most people are. I'm getting a bit impatient waiting for things to get to some semblance of sanity.

I just can't figure out how people are affording these prices. EVERYONE who buys must either be a Hollywood actor, a grow-op kingpin or a wealthy foreigner.

Either that or (and this is my suspicion) the RE industry here is REALLY f**king crooked.

It's very frustrating. I don't want an "investment", I just want a decent roof over my head.

I think I want things to crash so badly it leave a bitter, bitter taste in a lot of mouths, so people stop looking at RE with such greed.

Tony Danza said...

Anyone else unable to access the Vancouver Condo Info blog or is it just me?

had enough said...

Tony Danza,

Me too! Maybe he is changing it.

had enough said...

Tony Danza,

Me too! Maybe he is changing it.

blueskies said...

i want my fix!!

i want instant gratification
and i want it now!!

Drachen said...

Scullboy:

There are 3 proven accurate methods to determine 'realistic' prices.

1) As I said, historic comparison. RE does not really appreciate over time with the exception of suburban land that becomes urban or rural land that becomes suburban and that only applies to certain plots of land and not a city average/median price. As my graph shows we're about 3x historic norms.

2) P/E or the simpler 150-200 rule (prices that are not below 200x the monthly rent will ALWAYS return below 200, normally they rest around 150). Again shows that prices are nearly 3x what they should be (this is the only method that comes short of 3x, I believe it's because, like in the states rental prices have been squeezed to the max and when the sales market returns to normal rents will come down too).

3) As you said family median income compared to median family housing. Should be 3-4 multiples, actually is 12-14 multiples.

All 3 methods show that prices should be approximately 1/3 of what they are right now and they will almost certainly return there. Of course some areas will be harder hit than others (Yaletown, Coal Harbour, Kits, Point Grey... all the 'desirable' locations that have gone up more than the mean)