Tuesday, April 08, 2008

fool on the hill

the pope already wrote about Garth Turner's new book: Greater Fool - the troubled future of real estate, and there is a blog that goes with it. He did a post on Vancouver (you have to check it out), and I was compelled to reproduce some of his commentary here.
I own a downtown [westend] Vancouver condo in a very good building within 3 blocks of the seawall and many other amenities. At 750 sq ft. it is pefect for a young couple or retirees. The market value is currently about 440K and I have about 110K equity. Is this type of property going to be affected to the same degree as other properties? Would you advise to sell now and wait out the coming crash?
Thank you in advance,

You have a condo the size of my garage, worth $440,000, with condo fees, property taxes and other carrying costs, and you ask if this is a solid long-term investment in an over-valued market teetering at the tipping point of unaffordability? Are you serious?

This is exactly the kind of unit which has an uncertain future since there are scads of competing condos in the area, and a limited universe of “young couples or retirees” able or silly enough to buy one of them. Unless your unit is unique, with a full water view or the latest in amenities, or on the trendiest block, then there’s no reason to believe it will escape the coming correction in Vancouver prices. Get used to it. Or get out.
What is remarkable, is that Turner is an MP in Ottawa, and is quite vocal about the impending downturn in the economy, and the concomitant RE melt-down.

Mr. Turner is best known (lately) for being kicked out of the Conservative party by Herr Harper for being...too vocal. He sat as an Independent for a while, and since joined with the Liberals. He also was an MP in the short-lived Kim Campbell gov't (hey - she's from Vancouver) after losing a bid for the PC leadership to Ms. Campbell. He had a regular column in the Toronto Sun, and has written numerous articles published in other major Canadian daily newspapers.

Turner also has a political blog (link at Greater Fool), that is filled with mostly tedious comments, and Turner's reportage of events on Parliament Hill. Mr. Turner is a great advocate of Mr. Turner. Vexatious, and often vituperative, but both of his blogs are worth checking out.

I just like him because Charles McVety despises him.


markoz said...

I hope Garth is right about a real estate crash but it seems a bit rich when he lambastes this guy for having a condo "the size of my garage". In his book he says that in the energy challenged future, people will shun large suburban homes with their attendant heating and commuting costs.

aetakeo said...

Agreed, Markoz.

Although I sort of get the garage slur, because I wish there was more "middle ground" inventory out there. There's a big difference in livability for a family of four 'tween 750 sq feet and a generous and hard to find 1000 - 1200 sq. feet. My family doesn't need a suburban home of 2300 sq ft, but this 825 is pretty full!

Feels like all the condos down here are 750 sq feet and in that space there are 2 (or 2.5?!) bathrooms and no cupboard space. For the reasons you say about energy challenges, we already have decided to shun the large suburban home, but it'd be nice if there were some just slightly larger 2 bedrooms. Or (gasp), 3 bedrooms.

Then it'd not just be club kids and retirees in this Urban Density experiment, but actual (peak earning-years) families, who are otherwise the group that might most need help being more green - since busy schedules often means corners cut.

Mathematical said...

I hope Garth is right as well. I'm tired of renting and I'm not buying an overvalued property.

I've been spreading the word of slow sales and price correction to as many people as I can to help start the ball rolling.

Anonymous said...

Too bad Mr. Turner's garage wasn't three blocks from the seawall ... or perhaps three blocks from one of the largest urban parks in north america... or a beach and the ocean and downtown core .. I wonder what my uncle's garage is worth in roblin, manitoba... it's around 900 sq ft?

The west end will always be very desirable ... too bad however there aren't more slightly larger spaces for families of more than two plus one child... I'm with you aetakeo.

Lurks said...

mathematical. I completely agree with you and am currently sick of renting too. I too spread the word of the inevitable downturn. Some of my friends that have recently bought sure don't like my viewpoint on this issue :-)

Anonymous said...

The west end will always be very desirable ...

Depends on who you're talking to, and what they want out of life. I used to live in the West End, 15 years ago, and I was totally smitten with it. A whole cross-section of ages and genders and a great cosmopolitan feel. Loved it. That was 15 yrs. ago.

Now, I've no interest in living in a rabbit warren. It's better to have a garden that's so prolific you can give fresh veggies to the food bank.

Why would people pay hundreds of thousands of dollars to live in a box? At one time it made sense to me, now it's nonsensical.

'Desirable' is in the eye of the beholder.

patriotz said...

The west end will always be very desirable ...

The desirability of living in any place has an objective measurement - the market rent.

The value of any asset also has an objective measurement - the present discounted value of its future earnings.

Now put those together and tell me the value of that West End condo. Guess what - it comes out to about 100x monthly rent.

Notice how the bulls are allergic to any kind of quantitative analysis of value?

solipsist said...

Notice how the bulls are allergic to any kind of quantitative analysis of value?

It's funny, I haven't thought of bulls and bears for a while. It has come down to the insane, and the rest of us - who are beginning to wonder if it's really us that are nuts.

I wonder if it is an allergy to quantitative analysis, or an incapability of any critical thought. I suspect the latter. It's positively Sisyphean, because none want to know.

Anonymous said...

Notice how the bulls are allergic to any kind of quantitative analysis of value?

But the value of property as an cashflow investment is so poor that the only money making could be in asset appreciation. By just sticking to like property comparisons there doesn't have to be messy fundamentals involved.

Rent to purchase price makes logical sense for a cash flow investor. There is one big difference between rental price and purchase price in my mind. Rents get paid with real money and most properties are bought with borrowed money.

The scale of the numbers even for expensive rentals is understandable to almost everyone.
In contrast I think that most people can't grasp the scale of present price numbers. I'm just not sure that humans are very good with numbers of that scale.

markoz said...

Further to Aetakeo's comment, I have always wondered about the scarcity of 3 bedroom condos in this city. The US seems to have plenty of them. I also wonder why when you check out 2 bedroom condos you have large luxurious master bathrooms and second bedrooms you couldn't swing a cat in. Then they put a fireplace in the living room which effectively cancels the use of one wall for book cases etc. Fireplaces and large bathrooms are desirable if you have a large living area, but when you are already space challenged they just make things worse. Then there is my personal favorite - the 3 floor 1200-1500 sq ft "townhouse". Take everything I've just said about 2 bedroom condos then slice off a huge chunk of useless square footage for stairs and landings. There must be a reason they build places this way but I can't, for the life of me, figure out why people buy them. BTW I have no fondness for "shoebox living". My comment about Garth is solely related to the fact that I have an inherent mistrust of people who make contradictory arguments and hope you won't notice (even if that person's point of view supports my own).

markoz said...

Further to my last rant about condo space... I used to rent a 2 bedroom, 2 bathroom apartment in Oakridge. In 2003, I thought that if I could find something similar in my price range I'd buy it. The rented place had 10 x 14 bedrooms (both of them - I measured) and 23 feet of closet space. There was no fireplace. The bathrooms were both full bathrooms but were small. The place was around 1000 sq ft (never measured the whole place, but a realtor told me it was about that size). Needless to say, all I found were the kind of places in the previous rant. Many of them had previously been leaky too. Now I rent a 2000 sq ft house with a yard.

Paul said...

RE: chilliwack housing

30% drop in sales...


patriotz said...

But the value of property as an cashflow investment is so poor that the only money making could be in asset appreciation.

If you buy an asset for more than its fundamental value - pdv of future earnings - either you or a subsequent owner (the greatest fool) must lose money on it. That is a mathematical certainty.

Present buyers in Vancouver are counting on a greater fool to pass the bag to. But the chain of greater fools must come to an end, because each fool is taking on a greater deficiency to fundamental value, and the deficiency will become so large that nobody will be left to take it on.

Anonymous said...

Anonymous @ 4/09/2008 3:26 PM,

Have fun paying for it with two jobs. By the way, I know of many people who don't find Coal Habour and Yaletown desireable. People with families don't like to go to parks where homeless loiter.

You must have your logic mucked up. There are more houses in Vancouver, Burnaby, and the rest of lower mainland than condos downtown. They are worth more in the market. Another words, these people could sell their homes and buy a place downtown with some money lefted over. I don't see everyone of these people selling their house for a condo, do you?????

Anonymous said...

Id really like to see the Bear people put their money where there mouth is and take a short position on some canadian real estate backed stocks...

not trying to be rude but it seems like all you guys do is complain about how insane everyone is compared to the all seeing "you" yet you dont seem to do anything to take advantage of it?

What gives?

sure the market will dip a bit but the fundamentals are there to support 2005 prices with the current rental rates...

Panda said...

anonymous (1:41), did you have some suggestions that have not yet dropped? seems to me the opportunity already is gone. With hindsight, xmc was a good candidate but I wouldn't short it now.

markoz said...

Anonymous at 1:41 - I have no desire to "invest" in real estate either up or down. When I went to look for a place I wanted a place to live not a highly leveraged investment. I was shocked to see how little other people were prepared to accept for their money. I could not find a large enough place at a price I was willing to pay so I didn't buy. I hope the market will go down. I don't KNOW that it will or when it will. People in Vancouver have amply demonstrated that the only thing that will prevent them from paying more and more for real estate, ad infinitum, is if they are absolutely prohibited from doing so by prices, availability or cost of credit etc. Then prices will stall or fall. That doesn't make me want to "short" builder's stocks it just makes me want to rent.

solipsist said...

it just makes me want to rent

It all makes me want to retch.

markoz said...

Solipsist - yeah, that too...

Anonymous said...

thank you paul. i wondered where cadreb was hiding.


cabinman said...

Anonymous 1:41

I am a bear on Vancouver Real estate.
Shorting building stocks is not a bad idea. Better would be to short Vancouver real estate specific. This could be done if we had a Case-Shiller index of Vancouver real estate. These exist as a derivative market in the U.S. and many have made a great investment shorting U.S. city specific real estate.

This is the beginning of the great recession and no where near the
end. It has yet to reach Vancouver but is most certainly coming. The level of desperation being exhibited by the U.S. Fed is on a level like the 1930's. Good luck with your debt leverage and over valued real estate many will go bankrupt.

seeker said...

Markoz said:
People in Vancouver have amply demonstrated that the only thing that will prevent them from paying more and more for real estate, ad infinitum, is if they are absolutely prohibited from doing so by prices, availability or cost of credit etc.

Hmm, maybe something like that is coming.. this is a link to the yield curve chart..check out what has happened in March


Tony Danza said...

not trying to be rude but it seems like all you guys do is complain about how insane everyone is compared to the all seeing "you" yet you dont seem to do anything to take advantage of it?

So you jeer the Bear People as "all seeing", yet you claim to somehow magically see our investment accounts? If you do have some magical powers that allow you to see the "Bear People's" investment accounts I would like you to contact me as I have an employment opportunity for you.

DaMann said...

Anonymous@4/10/2008 1:41 PM

I'm doing just that. Putting my money where my mouth is. I'm selling my place and getting out of this insane market while the getting is good. To show you how stupid this market is I'm selling in the burbs and moving back to westside and renting a small SFH home worth 1.2 million for $2100 a month. All of which is cheaper than what I was paying for my townhouse mortgage that was bought 3 years ago.

So I will live in the nicest area of Vancovuer, in a SFH with a wad of cash in the bank. Then sit and watch the carnage.
I know you shouldn't specualte with your own home but we are living under the poverty line cause every single penny goes to the townhouse. We already decided that we don't want to stay long term so we have to get out now or be trapped for another 5-7 years when it all goes to hell.

You enjoy your place.

solipsist said...

I know you shouldn't specualte with your own home...

Why not? everyone else is a speculator - since 1999-2000.

If I had a place that was worth $600k - that I paid only $200k for, I would sell it and take a round the world trip with the kids that they, nor I, would ever forget. Then, after a few years, I would come back and buy at the bottom. I would not rent anything in Vancouver - it's (rent) over-priced too.