Globe & Mail article - "The great BC real estate bust"

[noreason]

@ Registered

I never said the RE up market was rational. In fact, buying is very much emotion rather than logic or else all the fundamentals everyone quotes wouldn't be so out of wack. People tend to buy because of needs/wants rather than financial ratios/forecasts, etc.

I don't think anyone has a clear idea on how much this upswing in the market is being generated by first time buyers and upgraders versus speculators. If you do have some reports, please do share, my personal view at this time is most of the activity seems to be the owners upgrading their homes.

And if your neighbour sold for $300k when you bought for $500k, are you going to say "Oh noes, i better sell at $250k while I still can!". If your neighbour sold at 700k, are you going to say, "hmm I better sell now and make 200k". Probably not, unless its part of the normal life events you stated which I don't disagree with you about.

Normal life events will happen, people will buy and sell RE at whatever the current price but my belief is that the majority of recent demand has been from owner occupied sales whether from first time buyers or previous owners now upgrading. Not all of them have overstretched finances and not all of them will trample over each other to sell once the market starts to fall.

The market is in store for a correction in the near future but I doubt it will be the bloodbath that some people suggest here and if that gets me labelled as having "bullish" ideas, then its pretty funny

[bestplaceonmeth]

You're being silly. Prices don't fall much if the overwhelming majority don't sell. That matters. It is the reason why Vancouver RE didn't collapse. In the States, the foreclosures were liquidated in a messy spiral all the way to the bottom. Momentum matters.

2% of homeowners can sink the market if panic ensues.

The other 98% of you can sit on your sticky prices and spin.

[jimtan]

You're being silly. Prices don't fall much if the overwhelming majority don't sell. That matters. It is the reason why Vancouver RE didn't collapse. In the States, the foreclosures were liquidated in a messy spiral all the way to the bottom. Momentum matters.

2% of homeowners can sink the market if panic ensues.

The other 98% of you can sit on your sticky prices and spin.

Stick with the facts not fantasies. In Vancouver, the 2% didn't. So live with it!!

[meeeeeep]

Jim, does your belief in the positive future outlook of the Vancouver real estate market have anything to do with your purchase of a condo in the spring? How's 1000 Beach working out for you?

[Johnny Horton]

Meeeeeeep, does your bitterly sour outlook have something to do with the fact that you've been shut out of the market for such a long time that you have nothing in common with others at cocktail parties because you're just a renter???

[Taipan]

Meeeeeeep, does your bitterly sour outlook have something to do with the fact that you've been shut out of the market for such a long time that you have nothing in common with others at cocktail parties because you're just a renter???

I didnt realize that they invited 7/11 store owners to cocktail parties, or were you moonlighting as a waiter?

Meeeeep will look back in a few years and look around him at the poor owners whose lives have been ruined by paying top $ for real estate.

[kansai_92]

I don't think anyone has a clear idea on how much this upswing in the market is being generated by first time buyers and upgraders versus speculators. If you do have some reports, please do share, my personal view at this time is most of the activity seems to be the owners upgrading their homes.

It doesn't matter if the market is driven by speculators or FTBs.
The fact is the upward trajectory in prices mirrors almost to the "T" the run up in household debt.
If you make money and debt cheap, people are going to use it.

Take this scenario.
Person A buys a property in 2000 for $400K with a $100K down payment and $300K mortgage.
Person A then sells this property in 2009 for $650K to person B.
Let's say person A's remaining mortgage on the previous property is $200K.
Person A then upgrades to a $900K property by mortgaging the difference ($250K).
Now he has a mortgage of $450K.
Repeat this scenario many hundreds of times.
Is everyone suddenly richer now because all property prices have gone up in value?
Has person A's income increased dramatically? Has person B's?
Has any of the fundamentals in town changed?

You take away the cheap money and the entire thing collapses.
Why? Because incomes haven't risen enough and rents haven't risen enough.

[jimtan]

You take away the cheap money and the entire thing collapses.
Why? Because incomes haven't risen enough and rents haven't risen enough.

Cheap money? What do you mean? Real interest rates are high. That means money is expensive. See United States Real Interest Rates on Page 10.

http://www.oecd.org/dataoecd/10/32/43615812.pdf

[vreaa]

You take away the cheap money and the entire thing collapses.
Why? Because incomes haven't risen enough and rents haven't risen enough.

Cheap money? What do you mean? Real interest rates are high. That means money is expensive. See United States Real Interest Rates on Page 10.

http://www.oecd.org/dataoecd/10/32/43615812.pdf

[kansai_92]

Cheap money? What do you mean? Real interest rates are high. That means money is expensive. See United States Real Interest Rates on Page 10.
http://www.oecd.org/dataoecd/10/32/43615812.pdf

Real interest comes about from GDP growth and productivity growth.
Green shoots? Give me a break.

I don't know what's real to you, but on $100K mortgage over 25yrs at 5% payments are $584.
At 2.5%, payments are $448.
That, my friend, is real.

[jimtan]

Cheap money? What do you mean? Real interest rates are high. That means money is expensive. See United States Real Interest Rates on Page 10.
http://www.oecd.org/dataoecd/10/32/43615812.pdf

Real interest comes about from GDP growth and productivity growth.
Green shoots? Give me a break.

I don't know what's real to you, but on $100K mortgage over 25yrs at 5% payments are $584.
At 2.5%, payments are $448.
That, my friend, is real.

Kansai,

Ah! I see the problem. I've been talking about textbook economics and the bears have been talking bear economics!

So, you are right and affordability is important. So, why didn't the bears predict that the RE market would bottom in Spring/Summer. Surely it wasn't a surprise to you.

So, the $10m question. When do you think mortgages will back up by 2.5%? Will it be bfore 2011 or after?

Why? Discuss!

[Thompson]

You take away the cheap money and the entire thing collapses.
Why? Because incomes haven't risen enough and rents haven't risen enough.

If things go down to two factors only, interest rate and rent, then RE prices can be calculated. Throwing in some information or data about each specific property, we can see clearly what percentage of the RE price increase was due to rent increase, and what percentage price change was due to lower interest rate (ie, cheap money).

I bought several condos in highrise building in North Burnaby 10 years ago, some were sold but I added more. So, I have the confidence that I can use some of my personal data for the calculation.

The market price of 2br was 125k 10 years ago, rent was $780/m; today price is 260k, rent is $1300/m.

Rent ratio is $1300/$780 = 1.667. According to Bear's "fundamentals", this 2br suite of highrise should be sold at $125K x 1.667 = $208K without "cheap money help".

So, $83K ($208 - $ 125K) in the price increase was due to rent increase, ie, inflation; $52K (260K-$208K) in price increase was due to "cheap money", that is 20%. If you call this is a bubble, that's a 20% (not 50%!) bubble due to the low mortgage rate. Clearly to me, take away the cheap money "the entire thing" will not collapses, at least in North Burnaby condo market! ... Sorry Kansai.

[islandlandlord]

You take away the cheap money and the entire thing collapses.
Why? Because incomes haven't risen enough and rents haven't risen enough.

If things go down to two factors only, interest rate and rent, then RE prices can be calculated. Throwing in some information or data about each specific property, we can see clearly what percentage of the RE price increase was due to rent increase, and what percentage price change was due to lower interest rate (ie, cheap money).

I bought several condos in highrise building in North Burnaby 10 years ago, some were sold but I added more. So, I have the confidence that I can use some of my personal data for the calculation.

The market price of 2br was 125k 10 years ago, rent was $780/m; today price is 260k, rent is $1300/m.

Rent ratio is $1300/$780 = 1.667. According to Bear's "fundamentals", this 2br suite of highrise should be sold at $125K x 1.667 = $208K without "cheap money help".

So, $83K ($208 - $ 125K) in the price increase was due to rent increase, ie, inflation; $52K (260K-$208K) in price increase was due to "cheap money", that is 20%. If you call this is a bubble, that's a 20% (not 50%!) bubble due to the low mortgage rate. Clearly to me, take away the cheap money "the entire thing" will not collapses, at least in North Burnaby condo market! ... Sorry Kansai.

Great post thompson. You're speaking from experience, not from text book theory and wisful thinking.

.

[kansai_92]

So, $83K ($208 - $ 125K) in the price increase was due to rent increase, ie, inflation; $52K (260K-$208K) in price increase was due to "cheap money", that is 20%. If you call this is a bubble, that's a 20% (not 50%!) bubble due to the low mortgage rate. Clearly to me, take away the cheap money "the entire thing" will not collapses, at least in North Burnaby condo market! ... Sorry Kansai.

Call it what you will, bubble or overvalued.
Read my posts, I only predicted a 19% decrease from the peak to be played out over 3 to 4 years.

Rent yields are always better farther away from the city core.
Inner-city properties have a component of future appreciation built-in (due to densification and potential future zoning re-classification).

[kansai_92]

Great post thompson. You're speaking from experience, not from text book theory and wisful thinking.
.

You're sadly mistaken. I don't wish for anything. Right now I'm an observer.
I'm an old-school investor so I simply respond to the market.
If I think there's money to be made, I move in. If I don't, I move my money elsewhere.
My money has no loyalty. Neither should yours.