Saturday, February 16, 2008

of chickens and eggs

I managed to bust my head out of the box ever-so briefly this afternoon, and wondered what really drives the RE market.

There are lots of boffins - be they economists, policy wonks, finance ministries, schools of business, etc., and we hear from them all the time. But what justifies their positions? I did not hear many of them predicting price reversals in London or San Diego, or Paris, Texas for that matter. I don't really remember anyone saying that prices would ratchet up so much before it began, either.

I really doubt that people who bought in 2001-2003 really thought that they would see the values sky-rocket as they did. Few who bought in 2004-2008 were likely see the impending correction in values either.

Seems that the market may have a mind of it's own.

Corporations are considered as "persons", and are afforded rights and privileges commensurate to actually being a living human being. Of course, corporations are made up of a bunch of people, all performing more or less correctly, who are made up of a bunch of mindless cells that perform their functions more or less correctly. Those cells are in turn made up of atoms made up of protons and electrons, which are made up of sub-atomic particles.

So, back to the macro - All of those corporations seek growth, and the RE related companies do likewise. Pretty soon it is rolling on it's own, and all of we perform our functions more or less correctly to keep it going. The problem is, the market is feeding on us, rather than feeding us. Pretty soon, the cells are not able to function correctly because of the stress on them, and they turn bad. The body becomes tired and ill, and ceases to function correctly. Then the vultures and bugs come to pick over the carcass.

So, does the market drive "us"? or do "we" drive the market?


Larry said...

Hunger, love and a roof. three things for which we will pay dearly.

M- said...

Perhaps it's like a cancer that has metastasized.

There's all these weird growths that start coming out of the ground, around the same time as people's (I hope I got that apostrophe right!) equity starts growing abnormally. This begets even more growths out of the ground, and more strange equity growth.

The patient knows something's not right, but thinks this is kind of like superpowers, that maybe it does good, so they leave it be. Nevermind the mess it's creating in the downtown eastside, or the troubles it's causing young couple who want more space to raise a family...

Really, the problem needs to be treated. Government-built non-market rental projects to help ease the strain on the tight rental industry. Government-built projects to help the homeless, treatment for the drug-addicted and mentally disabled. ...And so on...

...But instead, the problems are ignored, left for somebody else to take care of. They don't seem that bad, except for just about everybody who's been a victim of crime...

...Which leaves the cancer to continue to develop. As it continues to develop, the tumours become larger. The special powers the patient thought they had? The magical equity? Buildings rising out of the ground, held up by speculation? ...Turns out that WAS the cancer, growing as cancers do when left untreated. Eventually, the patient succumbs to the cancer.

Much of california is -20% YOY, and 23% of sales in January were foreclosures. The patient has died. Much the same in Florida.

Right now, we're still high on the housing bubble cancer. Or maybe that BC Bud that's rumoured to keep the market high. But soon enough, the market will succumb to the disease throughout. The house of cards will collapse. Housing is not a magical, risk-free, profit-guaranteed investment vehicle.

What will be left when the disease has run its course?

solipsist said...

Hunger, love and a roof. three things for which we will pay dearly.

So true Larry. But how dearly? A pound and a half of flesh for a half pound of nails? People just don't quite understand what 40 years of payments @ $3,200/month, or whatever, really means.

I'm just a blue-bottle waiting for a bloated...oh, never mind.

m- excellent rant! I feel like you have been over, and that we have lapsed into liberal libations of the viney type, and we are rapping.

For what it's worth, I don't judge others' uses of apostrophes, or misuses of grammar, or such. I have always found your views worthwhile, and erudite. We all are familiar that Albert Einstein was almost useless in school, but...never mind.

All I can say is that ... never mind. We are all of us anonymous here, and I don't give a hoot about IP #'s.

I've never mentioned it m-, but I've always thought that you have the coolest avatar.

Drachen said...

It's self reinforcing. People drive the bubble upwards and the bubble drives the psychology upwards.

This has been building since the '80s because of the constant low returns which began in the mid '80s and ran into the '90s there became a perception that real estate always goes up (most people seem to have 10 years or less memory of current events). The build of the mid '80s was because of the trough after the boom of the early '80s which was the last time that real estate was actually a good deal here.

The cyclical self reinforcing nature of all this means that it will only end when the money supply dries up. Either like in the UK where so many people could no longer make payments that inventory climbed beyond absorbable levels or when the banks cut off the money because of their reluctance to take on the risk (not likely with the CMHC bending over backwards to force the risk onto the canadian taxpayers). Reminds me of a comment on the British situation I read today.

"This was "nationalization of risks and losses, and privatization of gains.""

jesse said...

"I don't really remember anyone saying that prices would ratchet up so much before it began, either."

There were lots around saying this but at the time they didn't know when prices would go up. Now they look sage indeed! There is an ingrained belief that Vancouver is the world's undiscovered gem and, finally, the rest of the world is taking note. This is of course the belief of those with skin in the game so while they may be right their motives for their belief cannot be purely objective.

It seems like Vancouver as a whole has decided its self worth is higher now, and not that the rest of the world has welcomed Vancouver to its inner circle.

jesse said...

"not likely with the CMHC bending over backwards to force the risk onto the canadian taxpayers"

Mortgages insured under CMHC is not free money for banks. Going through insurance claims with Genworth or CMHC is hardly simple for the bank (due diligence is required and this takes time) and it means that the mortgage servicer has already spent considerable effort chasing down delinquencies. I'm guessing that when MI is called upon to shore up balance sheets banks will stop lending regardless of CMHC mortgage insurance.

Also with mortgages in Canada, if the CMHC check valve opens the delinquent buyers will be out of the market for at least 5 years, and likely way longer.

Drachen said...


with the "bending over backwards" comment I was referring to the constant lowering of standards a borrower requires to be 'insurable', which serves no purpose except to keep the bubble going longer and therefore sink CMHC deeper into the middle of the mess.

solipsist said...

the "bending over backwards" comment

With all that bending by CMHC, I wonder if the tax-payers will be bending over another way.

Drachen said...

Pass the KY

jesse said...

drachen: yes CMHC can perpetuate lending but I don't think can do much to prevent banks from tightening when prices are falling.

markoz said...

I "owned" a house once for about 2 and a half years. The commute was long and the mortgage was high relative to my income at the time. I was tired and broke. I have never owned since (that was about 14 years ago) because I just don't see the value in paying all the money I make to a bank so I can either live in a tiny condo in town, or a house that is a one hour+ commute each way. That, however, is what separates me (and, I presume, many people on this blog) from most people in the market. Most people are willing to endure all sorts of deprivation just to say they own. "It's half the size I really need, but, hey, I own!" "I have no disposable income anymore, but, hey, I own!" I know 2 lawyers each of whom commutes every day from Maple Ridge into Richmond and the downtown core. That's over 4 hours a day of commuting just to avoid the embarrassment of having to call yourself a renter. A few years ago I contemplated getting back into the market and viewed a few properties. Nothing I could afford to buy was anything I'd want to live in. I saw suites where families had piled their possessions outdoors on the balcony and covered them in tarps because there was not enough room indoors. As long as people are willing to make these sorts of sacrifices just to be "owners" I'll always be a renter because I am simply not willing to live like that while most people are.

Tony Danza said...

I love being a renter and I have not noticed any difference in how I am treated by our acquaintances/neighbours since transitioning from owning to renting on the west side. In fact of our acquaintances made within the last few years the issue of whether we are owners or renters has never even come up. Either the majority of people really don't care whether we own or rent or they're all talking about us behind our backs...:) Makes me wonder why people would feel so insecure in their lives that they need the cachet of being an "owner".

jesse said...

The best line to use when a renter is that you're planning on moving to [Sydney, Paris, New York, London, Tokyo] in the next few years and don't want to waste time with listing a property on the market. Money is no object for renters; call them stupid I guess ;)

markoz said...

I'm not sure how many of my acquaintances would be embarrassed to be renters; I know I'm not. I guess my point is really that it is the real estate crazed populace that is driving this market. They will pay any amount for any property, no matter how crappy. Unless the collective buying public make an overnight decision that a tiny leaky 800 sq ft condo is not worth $600,000 then that is what we will all be doomed to pay if we want to participate in the market.

patriotz said...

I'd rather rent my money to someone else for 5% and little risk of loss, than use it to buy a house that would return me 2.5% in rental value with plenty of risk of loss.

People who "buy" houses are actually renting money from the bank at a much higher rate than they are getting from renting their houses to themselves.

So it's the "owners" who are the real renters, not "renters" like me who are the real owners.

Anonymous said...

What nobody ever seems to mention is what happens when the renters are 65, on a fixed income & the rents keep rising. My home will be paid off at least 10 years before I'm 65. I'll just have property tax to pay. The rent from the suites in my basement will more than cover that!

solipsist said...

Real-estate values and construction have peaked one to two years before a depression, and have stayed at peak levels until the onset of the downturn.
The historical evidence is consistent with the theory that speculative booms in real-estate prices and construction act as an impetus for the downturn itself.

Found the above here.