Monday, March 24, 2008

whither the crash?

OK! It's Spring now! Time for the Spring surge. Question is, will it be a surge in listings? A surge in sales? a surge in prices? All three? Things are so bent, that I almost don't care anymore.

I had no power on the week-end, so no computer, no Internet, no blogs, no music. It was actually kind of nice, but I was truly expecting to hook up today, and read that everything was crash. Bummer.

Last week I saw on CBC that flippin' mobile homes on rented pads were selling for $400 Gs in Fort McMurray. I guess that things could be worse here, but at least in Fort Mc... there are lots of Newfoundlanders. We have none.

It must end sometime. Please tell me that it will.

43 comments:

markoz said...

I knew some Newfoundlanders once. They were really nice. They gave up on Vancouver to return home saying they were excited about the sort of home they would be able to buy there, compared to what they would get in Vancouver. This was BEFORE the huge run up in prices here. Whither the crash? I thought prices were crazy at the beginning of 2004. I thought they had peaked at the end of 2004. Still waiting. I read on another blog (so it must be true) that San Francisco proper has only had a 0.2% decline in prices even in the midst of the worst RE crash since the Great Depression. Speaking of depression...

jesse said...

Crash? This will be a very slow moving crash and probably anti-climactic. I think prices will remain high in Vancouver compared to the rest of the country so don't get your hopes up too high. That said, prices can come down a long way with Vancouver maintaining its "most expensive" designation.

Mathematical said...

Hard to say what will happen. You're seeing inventory getting higher and higher but price are still the same. Give it a few months and then we will get a better undertstanding of where the market is going. Feel sorry for the people who get in now with a 40 year old mortgage. You can't possibly come out ahead with that investment. I have $30g for a downpayment and still waiting. I'm hoping things will turn around soon.

Anonymous said...

Hey I have a question for you and please don’t think I’m being overly critical or cynical, I love what you’re doing and we can always use a counter point to keep us grounded. My Questions is this: in retrospect do you think staying out of the market completely say in circa 2004 was a good idea? With the price gains we have seen in the past four years I would think that for one to lose money on what they bought in 2004 we would need nothing short of an apocalyptical economic meltdown on order of magnitude larger then what our big brother to the south is going through. Something like that would be felt not only by the guy with the 300 000$ mortgage but everyone else, in fact I would argue that if inflation runs rampant and if it affects everything - including wages, and you’re locked into a fixed term, you’re better off having your money in a property because of debt erosion etc.. while having a big bag of money stuffed under your bed will only lose purchasing power.

I think what you need to ask yourself (if you got in early) is not whether properties are overpriced now, but whether they were a bargain then… and I think they were.. One place I bought downtown for 263 is now being rented out for 1600 a month – every year I have increased the rent by 100$ a month and it seems like there is no end in sight. It almost like it’s a win-win situation to be a landlord downtown right now. Considering that most places are too expensive for the average person to buy – the option that makes most sense is renting. If the Market does turn sour and interest rates go up quite high and property values drop a bit – there will probably be even less people that buy and that will only increase the rental pool which in turn will increase the cost of renting and my profits. The other reason why its such a sweet deal is that living downtown has become so desirable; people are quite willing to pay a premium to do it. Some of the best jobs are downtown and what do you think the future holds for traffic? Can anyone see rush hour getting shorter in the future? Less traffic? I don’t think so. The worse it gets the more pressure it will put on the downtown market and it will get worse…

Looking at today’s market I wouldn’t advise people to buy the p/e ratio’s are quite high but if you were going to buy an investment property downtown is still the way to go. 0 vacancy – low maintenance, great pool of high quality tenants…

Although I wish there was a way to know exactly how many other investors there were out there because I would hate to see them all trying to sell at the same time. :S

jesse said...

Hi anonymous:

"in retrospect do you think staying out of the market completely say in circa 2004 was a good idea?"

No. But how about now?

"you’re better off having your money in a property because of debt erosion etc."

Yes if inflation, including wages, increases. The current outlook looks like low inflation based upon long-term bond yields. From this perspective, debt erosion will not be as fast as in past generations. I'd look at it this way: lenders are not giving you a free lunch.

"One place I bought downtown for 263 is now being rented out for 1600 a month – every year I have increased the rent by 100$ a month and it seems like there is no end in sight."

A gross yield of 7.3% is not bad. This offers a 2-3% spread above treasuries which is about right. Remember in this environment unemployment is low but it may not always be the case that rents increase if jobs dry up. For a few unfortunate landlords it could mean either keeping the unit vacant or worse accepting sub-par tenants. What would the yield be if you bought at current prices? I'm guessing below that of a treasury bond so you are effectively buying with future price appreciation in mind: this is the definition of speculation.

"if you were going to buy an investment property downtown is still the way to go."

Downtown properties are also more expensive than other areas. It could be that the inherent location advantage is already priced in. You points about transportation, convenience, etc. all have merit but even today there is a premium to be paid for this. I'm not so sure about the tenant quality issue; it's
a bit of a myth to think that higher rents weed out problem tenants. I think problems exist but do not manifest themselves the same way.

"Although I wish there was a way to know exactly how many other investors there were out there..."

There is no StatsCan database on this however by some estimates around 50% of condos erected in the past 5 years in the Vancouver area have been as investments (rentals). That seems about right based on anecdotally what I have observed.

Anonymous said...

Commodities are now in a correction likely to last the duration of the current -- yes, its on NOW -- US recession, which should be about 1 - 2 years. China is also teetering on the edge of recession and that will pull down demand for commodities yet again. Consequently, BC's commodity driven economy is due for a MAJOR, um, rest, to say the least. That will stop RE price increases dead in their tracks. And likely then lead to a sell-off of almost Phoenix-like proportions. The light at the end of the tunnel is that China should recover fairly quickly and start driving commodity prices skyward again, but this is going to take about 2 - 3 years, so yes, there is a happy ending, but home-debtors in Vancouver will have to tough it out for a few years. How many will have the stomach?

Anonymous said...

well said Jesse, thanks for the insight...

No I wouldnt buy now, definately not..

markoz said...

Hi Anonymous: Staying out of the market in 2004 was certainly a bad idea from an investment point of view. I agree that prices are extremely unlikely to ever go that low again. At the time I just wanted a place to live. I wasn't really thinking in terms of asset appreciation. I was thinking in terms of "How will I get all my stuff in this tiny little space?" Often those tiny spaces had a history of leaking and/or very little in the contingency fund. Since there was nothing suitable in my price range I just quit looking. I suspect that a lot of current bears are/were in the same position as myself. Our perspective on home ownership was a bit too one-dimensional and now we're priced out.

Drachen said...

The market will do what the market has always done; Correct to it's fundamentals.

You may nitpick over what the fundamentals ARE but it's pretty clear that 2004 prices won't even be a speed bump on the way down.

This Bubble has been 20 YEARS in the makings. Expect to see mid '80s levels (inflation adjusted and with perhaps a 5% premium) before 2014.

Buying a house in 2004 and holding on will definitely be a money loser in the long run because I suspect it will take many years for us to see such inflated prices again.

Repeat after me;

Bubbles always revert to the pre-bubble baseline.

Bubbles ALWAYS revert to the pre-bubble baseline.

Bubbles ALWAYS revert to the pre bubble baseline.

(for the sake of completeness I must add, the above is true except when there is a significant shift in fundamentals which we have not seen here)

solipsist said...

anon. - I do not regret buying in 2004, I did not because I thought that things were too extreme. Maybe I would have flipped by now if I had bought, and made a couple of hundred Gs, but I would have stretched my finances to an extreme. I have a feeling that I will be very glad if the economic shite really hits the fan in the next 12 months or so.

I agree with Drachen that this bubble has been building for a long time, and 2004 prices will just be a bump on the way down.

What we looked at in 2004 would have cost us $1800/month, plus repairs, etc. We are paying less than $1200/month for the house that we rent. While I am chuffed that we have not built equity n a property, I think that those $600+ a month in payments difference adds up to more than any equity would have.

I just don't get to tear down walls, or paint the outside pink!

Things will revert to the mean - they always do. I'm just fed up with the continuation of this madness.

Tony Danza said...

I agree that prices are extremely unlikely to ever go that low again.

I agree that you are in for a surprise.

Is it just me or are we living in a time warp here in Vancouver? These are exactly the same kind of posts I was reading on the US housing bubble blogs about two years ago. Coincidentally just before all hell broke loose down there.

Did all the folks who predict prices can't fall back to 2004 levels predict the run up in prices from 2004 until today? I doubt it.

Anonymous said...

Anecdotal info.

We have been looking for a good while in Killarney area.

Last year (less than a year ago) these 3 places sold:

MLS®: V695979 for 620k now listed for 808k
MLS®: V692301 for 630k now listed for 868K
MLS®: V695744 for 640k now listed for 748k

We were seriously interested in just living in them! Imagine. Every one of these has been "updated" for flipping.

So, how many flippers are there out there?? Got to run out of these types to sell to soon.

BTW the second place is like 40 yrs old and is listed for the same amount as the brand new place over a block.

Pretty sad when you're just waiting for financial armageddon so you can afford a home on a regular lot.

TheCollective said...

"Pretty sad when you're just waiting for financial armageddon so you can afford a home on a regular lot."



Indeed!!! Pretty sad.

I feel like all of us 'oddballs' who are treated as 'crazy' by owr sheeple-mortgage-burdened-coworkers are in 'stand-by' mode. We are all standing on the lines with our cash waiting for the sheeps to die so we can charge in and collect the remains.
Do we need to coordinate efforts? I would not want us ALL guessing the bottom together. We need a plan.

Personally? I (me, wife, 3 girls) rent a 3bdr townhouse in Richmond for 985(!) a month, and put a side 15-20 grand a year. No hidden expenses. In 2016 I buy the house cash.


Patience, my friends.

markoz said...

Hi Tony Danza, Solipsist:
I hope you are right. I will jump into the market if you are! The only other crash of that magnitude was the early 80's so I'm not holding my breath. Even if it does occur, I'm inclined to agree with Jesse that it will be a slo-mo type of unraveling. We can only hope for the best! There is a lot of money and influence pushing the other way though. Fed bail-outs for Bear Stearns, English banks looking for more help from the BoE, suggestions by Bernanke that banks forgive some of the principle etc. Remember that when prices couldn't be sustained because 25% down was needed they dropped it to 10%. When that wasn't enough to keep prices up they decided to let you raid your RRSP for a down-payment. When that wasn't enough to keep the market moving the down-payment was dropped to 5% and now we have 0% and 40 year amortizations. It may all collapse anyway. The point I'm making is that people like us who think prices are crazy keep waiting for a crash while the government enforces the desires of the real estate/development/banking lobby by doing everything in their power to make sure that prices continue up so that their pockets get lined and we all end perpetual debt slaves for badly built tiny condos. Existing home debtors don't want to see price declines either because they see their home as a future nest egg, not just a place to live. This makes we bears very much in the minority. To reiterate: we may win in the end but there is a LOT of money and influence pushing the other way.

Mathematical said...

I will have to agree with markoz. There is a lot of pressure from the other side to keep prices of RE high. Condo flippers, developers, RE agents, media, banks and Gov. Got to love the CIBC commercials indicating its good times, get in if you can and the 0% and 40 year amortizations.

Unless you have done your research it's very easy to get sucked into the market. Greed and fear have been the main two driving forces. But it saying that, economics always prevails. There will be winners and there will be losers but only time can tell.

Anonymous said...

some good discussions and valid points going on here...

If you treat it as an investment and you're getting 1600 a month on a 260000 investment then it looks to me to be pretty solid, I think at that price its a good deal (7% per year) and i also feel like its future prospects for tenancy is also very strong because of the reasons outlined above - Todays prices on the other hand just dont mash, you dont have to be a scientist or an investment analyst to realise that the same property which is now valued at about 420K would be a poor investment unless you were "speculating" - speculating that prices would go up and that rental rates will catch up to the value of the property.. are the fundamentals there to support such an assumption? I dont think so... Are they there to support such an assumption at 2004 prices? I do think so.

I think you reach a certain point where it becomes more about gambling then it does about investing and thats where were at.

WoodenHorse said...

Tony Danza said...
Is it just me or are we living in a time warp here in Vancouver? These are exactly the same kind of posts I was reading on the US housing bubble blogs about two years ago.


It's not you. Go to Ben Jones site and look up some of the old postings. A find and replace of [american city] for "Vancouver" and voila! you have something that may as well have been written here yesterday.

Aleks said...

"in retrospect do you think staying out of the market completely say in circa 2004 was a good idea? With the price gains we have seen in the past four years I would think that for one to lose money on what they bought in 2004 we would need nothing short of an apocalyptical economic meltdown on order of magnitude larger then what our big brother to the south is going through."

Obviously in hindsight, I should've been flipping condos this whole time rather than working and saving. However, without the benefit of knowing that the bubble would not burst for four years, I do not regret not buying. As the stock investing saying goes, better a year too early than a day too late. Every year around this time we were watching to see if the winter slowdown would turn into a downturn. It didn't happen, but there was no indication during the preceding fall one way or the other.

Back in 2004 I thought the prices were unsustainable and I still think that: 2004 prices are unsustainable. It's a bubble, and bubbles burst. To repeat Drachen's mantra: Bubbles ALWAYS revert to the pre bubble baseline. If that means financial apocalypse then I should be investing in canned food and guns, not real estate.

The idea that something won't happen just because it's too horrible to think about is idiotic. Childish even--cover your eyes and the monster will disappear. But I hear it all the time from home-owners; they refuse to believe house prices will go down because of what it will mean for them personally. Well, sorry, but the market doesn't care about you. Bubbles ALWAYS revert to the pre bubble baseline.

Anonymous said...

IMVHO As long as its a good investment (removing the speculation of potential price increases) then its not unsustainable, so by saying that 2004 prices are unsustainable you're saying that the current rental rates are unsustainable. Thats a pretty broad statement, is that what you claim to be saying?

Sorry maybe im just a noob with this stuff, does anyone know if renting has gotten cheaper in the US or has it gotten more expensive? anyone have any hard information?

I think we may be having a difference of opinion based on context. What i am specifically referring to is: downtown condo's, and nothing else, because thats the only market i know. So please understand thats all im talking about - not house prices or anything like that.

Anonymous said...

ps: seattle hasnt seen any significant declines yet :P

Rob said...

"seattle hasnt seen any significant declines..."

I guess it depends what you mean by "significant." According to the S&P Case Shiller Index they are down 6% in the last five months and also down over the last 12 months.

see:
http://www2.standardandpoors.com/spf/pdf/index/032508_homeprice_webcast.pdf

Patiently Waiting said...

"There will be winners and there will be losers but only time can tell."

I think a lot of them have already been determined.

Tony Danza said...

Markoz,

All of the REIC tactics that you mention (40yr mort 0 down etc...) are already priced into the system. The market is priced for the lowest interest rates, lowest unemployment, lowest lending standards and unprecedented willingness of consumers to assume debt that we have seen in generations.

Things are priced for perfection and never ending demand. Folk who can identify these anomalies and capitalize on them usually end up being the Warren Buffett's of the world.

Drachen said...

Markoz

"The only other crash of that magnitude was the early 80's so I'm not holding my breath."

The records in Vancouver only go back to the '70s, there are records elsewhere going back 400 years and they clearly show that each bubble returns to the baseline. Also the 'bubble' of the '90s was actually a characteristic of the mega bubble we're in right now, it's quite common to see that kind of a bump when P/Es go out the window and the serious investors drop out.

Anonymous 3/26/2008 5:57

Rents have come down in the major bubble areas and extrapolating from the graphs they're going to keep dropping steeply for some time (although not as sharply as purchase costs).

Downtown condos will, IMO, fit into two categories in the collapse.

1) 2+ bedroom 750+ sq feet. Prices will fall somewhat more than SFH but will be 1/2 to 1/3 of current values.

2) Shoeboxes, prices will probably be around 1/4 or less of what they are now, there are SO many of them and simply not enough people who want to live like that. I expect there will be a brisk business in contractors who specialize in converting two or three neighbouring units into one liveable sized one.

solipsist said...

already priced into the system

and more...

Also the 'bubble' of the '90s was actually a characteristic of the mega bubble we're in right now

That is interesting, I have read that before.

Up until the 1980s, or so, the average house cost 3.5 times (more or less) of average household income. That would put the average house in Vancouver at about $180K now. People are paying (or, borrowing) more than 10x that income.

But, what Adam Smith said about paradigms.

People are still buying, because they believe that things just are what they are, and will never revert. Has there been a society-wide paradigm shift? Perhaps the sheeple are dumber than ever, and are more willing to be debt slaves?

I agree about the DT condo stratification too (pun un/intended). There likely will be a lot of combining of smaller units. I have seen some of the low-rise former apartment buildings go condo and do that. Two and three floor condos. Not too bad actually - for what they are.

Drachen said...

"That is interesting, I have read that before."

Yeah I mentioned it here before, complete with a series of logical proofs why it's likely true. Some people believed me, some didn't. It doesn't matter to me, we'll see where things go in 3-5 years or so when normality is restored.

For anyone who doesn't believe me, I'll cover bets that call for anything less than a 50% drop from peak to trough no problem.

Anonymous said...

And what about supply and demand? back in the 80's there was alot more supply Vs Demand than there is now? I dont think there are enough houses in the vancouver city limits to support prices anywhere under 500K a pop... So unless we see a mass exodus of people or a massive economical collapse IE: no jobs, or we see people taking massive pay cuts in the future, how could they go that low...? When in the history of histories have we seen significant wage deflation?

of course i have no concrete data to support my claim and im basically talking out of my ass, it does seem like a logical concept to me....

and remember im saying 500K average house prices and not current market prices.

Also I think it will be interesting to see how things play out in the US. while we are seeing a correction - the correction is nowhere near at 2000 levels, they still have a long way to go before people who got in early start losing money. I wonder how much farther it will drop or if it will level off..?

Anonymous said...

It almost sounds like what some of you are predicting isnt just a housing bubble correction, but a another great depression type situation.

If rents decrease and property values decrease people will have alot of extra cash in their pockets unless we see a big decrease in wages too, no?

People with a ton of extra cash tend to do things with their money like buy places or compete for rental units which in turn drive up prices?

Maybe i don't have a clue what im talking about; I'm no economist thats for sure!

Mathematical said...

One thing I would like to cover is how many units in Vancouver have been setup as grow-ups? This also could add to increase in prices and lack of supply. The BC bud insdustry is equivalent as Alberta's oil industry. Potentialy a drug dealer can live in one condo and operator out of three. If one gets shutdown just open another one.

I'm betting more grow-ups are getting added then removed. If you think about BC's location and law regulations it makes it an attractive place for criminals to migrate here.

Drachen said...

"im basically talking out of my ass"

Well thank you for at least admitting as much. I assure you the supply is greater now than it was in the '80s. The supply of SFH in the city is proportionally less than it was in the '80s but you're (apparently) not very well versed in economics. You see if condos or SFH outside the city fall dramatically it will put downwards price pressure on SFH in the city.

"People with a ton of extra cash tend to do things with their money like buy places or compete for rental units which in turn drive up prices?"

Well that wasn't true for the 400 years of recorded real estate history prior to the 1980s, I'm not sure why you think it should be true now.

Also, several things;

BC residents have a -5% savings rate, they need to pay their debts SOMETIME.

It's not like home owners are spreading the cash around now (except for those who get equity loans), many new owners have had to sell one or both family cars and cut many corners to be able to afford a house.

There wouldn't be a TON of extra cash anyhow, currently an average family buying an average house is paying MORE per month in taxes and mortgage payments than they make. This doesn't include food, transportation or entertainment.

It is considered healthy for housing to take more than 30% of a household's budget in Vancouver I believe it's now 75% for homeowners.

In 2001 in the US the median household spent $658 in housing costs.

My family rents, we have over 150% of a median Vancouver family income and with kids in day-care we still stretch the budget each month and can't really get ahead on savings. If we owned our monthly payments would be over double what we pay now.

Do you need more points? Those are just a few off the cuff.

Anonymous said...

" solipsist said...
anon. - What we looked at in 2004 would have cost us $1800/month, plus repairs, etc. We are paying less than $1200/month for the house that we rent. While I am chuffed that we have not built equity n a property, I think that those $600+ a month in payments difference adds up to more than any equity would have."

You got yourself a steal of a rental. In this case, I would rent too. But are you not worried if the owner decides to sell? You may be force to move and pay higher rents.

Drachen said...

"It is considered healthy for housing to take more than 30% of a household's budget"

That should read NO more than 30%

Anonymous said...

"Anecdotal info.

We have been looking for a good while in Killarney area.

Last year (less than a year ago) these 3 places sold:

MLS®: V695979 for 620k now listed for 808k
MLS®: V692301 for 630k now listed for 868K
MLS®: V695744 for 640k now listed for 748k"

Killarney is one of the more desirable areas in Vancouver. You have newer homes on standard lots asking in the 900+ range.

solipsist said...

But are you not worried if the owner decides to sell?

No. In fact, I am thinking of asking for a rent reduction.

solipsist said...

another great depression type situation

That is correct, and what I have been saying for quite a few years now.

If rents decrease and property values decrease people will have alot of extra cash in their pockets unless we see a big decrease in wages too, no?

Non sequiter...

If you paid $600K for a place, and are renting it out for $2400/month and the rent goes down, where does the extra money come from?

If you paid $600K, and the value goes down to $300K, you are out $300K - no extra cash there either.

Drachen said...

He's talking about the people who BUY at 300k as opposed to 600k.

solipsist said...

He's talking about the people who BUY at 300k as opposed to 600k.

Damn! Another of my knee-jerk reactions!

seeker said...

About Killarney area..

Desireable? Yes I suppose if compared to Mount Pleasant or Hastings East?? But it's not Point Grey , Kerrisdale OR Southlands for that matter.

And about the comment 'having more money in the pocket'..

Geez, my food bill is getting worse all the time and I saw gas at 122.9/l this aft! We'll be losing big to inflation.

Michael said...

I totally sympathize with these posts. If you run through the numbers and the fundamentals, Van house prices just don't make sense. Yet prices aren't going down that quickly.

That being said, MLXchage showed a sales/listing ratio of 43% for the first half of March 2008 which is abysmally low, and certainly means things are taking a downturn. But who knows, maybe next year it will be up another 11% and I'll be kicking myself. The whole thing is already irrational, so what's to stop it from becoming even more irrational?

solipsist said...

The whole thing is already irrational, so what's to stop it from becoming even more irrational?

A 9.2 earthquake? The Plague? A stray 5-15 megaton warhead? Debtors' Prisons? 22% interest rates? A Depression?

Something's gotta happen.

fgah said...

Why you bears are still in state of denial? Price will keep going up at healthy pace.If you wait any longer,you will never can afford a chicken shack in Van.It wasn't happened in 04 so will never happen in 09,and beyond.Price will only be flat and move forward at a health state.

solipsist said...

fgah - it is not the "bears" that are in denial...

eug said...

Things are not looking good for Vancouver Real Estate... If you search two areas of Vancouver (Van West/West Van) on mls, you get over 500 listings of houses 2 million and up (and some of them are crap shacks)... This happened in Toronto about 10 years ago... check this criteria in Toronto, but search ALL the GTA, and you get don't even get 500 listings of 2 mill and above.. and all are well appointed houses, minutes from transportation (offering easy 1/2 hour access to city)
If you were to search all metro van I'm sure you'd get well over a thousand properties over $2 million... many of which require hour commute times to city.

Pop of metro van: 2.2 million
Pop of GTA: 8.1 million

As well, the city of vancouver has a higher density of condomiums than Toronto.... are all these places vacant or something?? What gives.... Another thing... the median income in Vancouver is lower than in Toronto... these prices just can't be sustained... they are obviously created from real estate and foreign investment... if you can't tell that it's a bubble...then you're a frickin' idiot...