Monday, May 17, 2010

In answer to Chad...




I think Chad's point in the last post's comment section was that inflation was rampant from money-printing CBs and zero rates therefore Gold, which is limited and Vancouver RE which is also limited should be priced against each other. At least I think that was his point.

And he said that gold was indicating inflation.

Well the graph above shows inflation for the US. Even if assume some manipulation, there is no inflation.... and apart from China, I think the chart would look the same for most large economies.

Meanwhile here is gold over the same period:

http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=3&mn=0&dy=0&id=p52154258457

Not much of a correllation.

The only thing we should measure Vancouver RE against is:

1) Local earnings

2) The cost of carrying debt

3) Government incentives to buy

4) Add in a % for Out-of-Province buyers. eg Albertan retirees and Asian buyers who may not show up in the earnings stats.

1) is way off the charts. 2) is as low as it can get. 3) the government is coming to it's senses after helping drive us into this bubble. 4) who knows?

I do think the end game for all this debt, and we are amongst the most indebted in the world, is high inflation to wash it away. However we are some way from that.

32 comments:

  1. This is my point EXACTLY. Core CPI is absolute garbage. Let's figure out what inflation is minus the 2 things everyone needs, food and energy. What sectors have seen huge inflation over the past 5-10 years? Oil and certain foods... this is exactly why gold is a better judge of inflation than a manipulated measure that furthermore doesn't include the two most important inflationary factors for society.

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  2. Dont forget shelter chad. Pretty much everyone needs shelter (minus the homeless, but even they use homeless shelters from time to time).

    Inflation is very hard to measure. Using gold as a short term measure of inflation is (IMO) worse than CPI.

    Gold almost doubled in 2 years. This doesnt mean RE or anything else is worth less unless you own a ton of gold and trade it for goods. Gold will have bubbles just like every other comodity.

    Sure, gold tracks inflation reasonably well over time, but doesnt everything else as well? I mean, thats the point, in theory, everything should hold its value against everything else (except cash) unless demand or supply has a permenant change.

    Comparing gold to RE year over year doesnt make much sense. The CPI isnt perfect either, but what is?

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  3. Davers,

    My point when I brought up Van RE not being anywhere close to all time highs when inflation adjusted using gold instead of the CPI was that those that are using the argument that inflation adjusted Vancouver Real Estate prices are far too high don't have much of a leg to stand on as the inflation numbers are so arbitrary that it makes them almost useless. The price to income ratio is in my opinion not a good indicator either. Nor is price to rent. The one metric I would look at potentially would be price in terms of payments per month determined by currents rates relative to rent. I'll look around to see if I can find the chart on this but it would suggest that we are in a stable market.

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  4. http://1.bp.blogspot.com/_rt16FZ_z1N8/STsd1GdXXjI/AAAAAAAABq8/uFfrOPkOhr0/s1600-h/Mortgage+Payment+vs+Monthly+Rent.jpg


    Here is the chart of the mortgage payment to rent ratio... This clearly shows that we are no where even close to 1980 levels

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  5. Second hand anecdotal info from OV today.

    About 200 Realtors looking round. Bob Rennie spoke, and said 36 of 220 units avaliable sold. 12000 people went through on the week-end. Expectations were for higher sales.

    80% Realtors from one back-ground.

    $4 Million + penthouse sold. Another one available for twice that.

    Very nice interiors.

    My comments..if the info is correct ( and feel free to correct it anyone):

    36 doesn't seem like much compared to 12,000 folks.

    Lots of people have nothing to do in Vancouver, even on a sunny day.

    Off-shore buyers are most likely to buy.

    The more they sell the better. less of a catastrophe for the City and for the rest of rest.

    Suggest Rennie fly to Shanghai and sell the rest directly.

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  6. Chad,

    While I do partially agree, that really doesnt have any ability to see into the furture.

    The only 2 major factors in payment are rates and price. Since you are basically saying payment determines price, then interest pretty much determines price.

    Thats what makes price vs rent and price vs income more consistant (IMO). Rates are just above the all time lows seen mere months ago. I think we can agree rates will rise at some point. By your logic, this would cause prices to fall.

    If I knew rates would stay this low for the duration of my mortgage I would seriously consider buying now.

    Heres the problem: no one knows when rates will rise or by how much.

    The low payments (via low interest rates) do partially explain the current prices(I say partially because the US is still falling in some areas even with crashed rates), but at these rates an increase of a few % would mean huge increases in payments to those who are buying with low DPs.

    Oh and the graph, 18% interest rates vs 4% interest rates, do the math. That graph doesnt surprise me in the least.

    Fish:

    The OV is pretty much just something do to on a nice day. We all paid for it, we heard so much about it, so lots of people wanted to see it. 95% of those people had zero intention to even consider buying.

    That being said, I really hope they sell them all quickly.

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  7. I appreciate the arguments both of you make.. it's refreshing to debate real estate with bears that are able to hold a civil discussion.

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  8. Chad,

    I think the chart you posted is more an explanation of how the bubble was able to get out of control than reason to believe it will continue. Even though prices are way to high, extremely low rates have prevented payments from getting completely out of hand.

    Even so, the chart shows that payments are still above normal levels. I assume this was originally posted in 2008 during the mini crash. If so I think it is safe to say we are now back above the last peak. As others have noted, as interest rates rise this chart will shoot up pretty quickly (assuming prices don't plummet at the same time).

    Just for fun compare your link to this one showing Mortgage Rates

    Look at how well the peaks correlate. Each time the rates peak since the 80's they are a little lower. Correspondingly the peaks in payments to rent are a little lower each time too, except for now. And rates only have one way to go from here.

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  9. Bubbly West Van...19 new 2 changed 1 sale. Still very stupid pricing.

    Paulb's numbers show list/sales well under 50% and price changes (reductions) outnumbering sales by quite a margin.

    A good night to be a bear.

    With the stock markets coming down too, a good night to be in cash and patiently saving more.

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  10. Owners Equivalent Rent is an artificial number subject to manipulation.
    From the BLS in the States. (A quick search didn't show up anything from Canada.)

    The expenditure weight in the CPI market basket for Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence:
    “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

    http://tinyurl.com/23ek3uw

    Some adjustments are then performed, without specifying what they are. Huge flaws in this. Without the belief that they are wisely investing in an appreciating asset most people would choose more modest homes, in addition they may not be entirely realistic about how much the house would actually command in the rental market. Owners Equivalent Rent tends to greatly overstate the real value of the accommodation benefit received, understates inflation in a rising market as the assumed figure used doesn't rise with the RE costs, and currently overstates it.

    The methodology used to derive owners equivalent assumes that the owner would actually rent that 5000 ft McMansion and pay 50%+ of disposable for the privilege, sometimes a good deal more than 50%. It takes a fervent belief in RE as a path to wealth to justify such sacrifice, a belief that has indeed been rewarded during the building of the credit bubble, but possibly not any more.

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  11. Well Chad -I would say gold has come down a good chunk in the last few days. So maybe RE will now follow :)

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  12. Fish, that's not my point one bit in terms of how gold relates to RE.. RE is way below all time highs when priced in gold... gold would have to absolutely collapse or RE will have to absolutely skyrocket for that to change. You pick.

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  13. I think the first is more likely than the second.

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  14. I'm curious as to what you bears think of this. With sites like hometrader.ca and other companies offering incredibly low fees to find and sell a home and making real estate agents obsolete, this in essence can potentially take almost 5% off the purchase price of a home. Theoretically then home prices should fall by 5% once this becomes the norm (you can liken this to like when a stock goes ex-dividend and the stock falls by it's dividend amount) -- just wondering what you all think on that, not making an argument either way.

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  15. Ex-dividend would not be the correct metaphor. Craigslist would.

    I doubt sellers, who are the ones that need to list their product will say..OK I just saved X% so I will pass that on to the buyer.

    It is probably more like..I just put an extra X% into my own pocket. Yippee.

    prices will go down when supply exceeds demand. The rest is meaningless.

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  16. Ex-dividend is actually the exact correct metaphor. If prices go down a few percent yet the seller saves that exact percentage by saving money on the commission fees then it's exactly the same amount in their pocket as if the market did not move at all? Get it now?

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  17. For an apparently calm bull- you are very volatile.

    the dividend on RE is the rental return

    What you are talking about is the selling cost.

    Until recently folks had to pay for a newspaper ad to sell stuff, now they dont. Have prices come down - I doubt it. Though there is more choice and instant comparables for buyers.

    Now we have a cheap way to sell RE. Will this bring prices down? IMO No. Lower demand and higher inventory will bring prices down. Nothing else.

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  18. I'm not sure you quite understand what ex-dividend falls are.

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  19. Chad,

    I think if FSBO becomes the norm then prices will be unaffected by the change.

    Homes are priced to sell for as much as possible. If realtor commissions were 50% of the house price it doesnt mean that buyers can now afford to pay more. At the same time if commissions are eliminated then it doesnt affect the amount that buyers are willing to pay.

    Even though the seller sets the price, there still needs to be a buyer to have a sale. So really, the buyer sets the price. You can price a studio downtown for 2 million bucks but if no one buys it then its just a number you picked out of mid air.

    It can be compared to the HST. If a developer can get 500K (after taxes) for a place before July 1st then he can probably still only get 500K (after taxes) after July 1st. The only difference is more goes to the government and less goes to the developer.

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  20. That being said, I think that FSBO right now may offer a few % discount because the sellers are trying to compete with realtor listings. MLS gets more exposure than FSBO so they need to price a bit lower to drum up interest.

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  21. Personally I would use a good agent to sell my property and pay them for it. I think most people would still use agents even after FSBO is given the same market access. Property is too complex an asset to sell by one's self unless you really know what you're doing and you have the time to do it.

    Low inflation doesn't mean interest rates will stay low. In 2000 the cost of capital was close to double what it is today and CPI inflation was about the same as today's. Low interest rates are not a good thing. It means the economy isn't growing near its capacity and wages are falling on average.

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  22. My point is the main argument against high RE prices in Vancouver is affordability, right? I know 5% is not a lot but making a house 5% more affordable is a step in the right direction if affordability is the main issue.

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  23. Yep is would be great if we could knock 5% off prices, but I dont think this would do it. Buyers are willing to pay what they will pay. They really dont care where the money goes.

    If there was a new technology that made it so building a condo cost 5% less I somehow doubt that buyers would see a dime of that savings. They dont price the things so they make a certain profit, they price them so they can be sold for as much money as possible.

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  24. Bingo Davers. You got it.

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  25. You don't need a new technology to make a condo cost 5% less to build. All you need is a surplus of workers and lower wages will give you 5% savings easy.

    Even if building a condo cost 5% more, most developers would compensate by paying 5% less for the raw land.

    Further to davers's point, the sum of building costs, raw land costs, and sales commissions cannot exceed what buyers are willing to pay for very long.

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  26. You guys still aren't understanding what I'm saying. Again, my point is if RE falls 5% on it's own (due to whatever reason, excess inventory, interest rates, whatever) and the seller sells for that new market price down 5%, but does not pay that commission to the real estate agent, then they are receiving the same amount they would have if the market never dipped and they used a full priced realtor. Anyway, it was just something to discuss it isn't a big deal either way. Another thing I wanted to bring up was the HST. It makes sense that the HST should make used condos much more favourable than new condos with the HST difference being so enormous between new and used. Therefore one would assume new construction would fall off a cliff, in turn draining inventory which theoretically should increase prices unless demand completely goes away.

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  27. "Therefore one would assume new construction would fall off a cliff, in turn draining inventory which theoretically should increase prices unless demand completely goes away"

    No. Developers pay 7% less for the raw land and everything equals out. Anyways isn't there an HST rebate or something for lower priced housing?

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  28. For lower priced housing yes, I think under $500,000? That's why I think things will even out from it's latest trend of very expensive homes of $1,000,000+ being bought to condos under $500,000 being the in vogue price range, which is where the majority of the excess inventory is. I'm not saying the HST will make it more expensive for the home builder, I'm saying that 7% is charged to the buyer making new condos in much less demand than pre-owned. Lower demand leads to less building.

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