I hate to call anyone out on this blog, but sometimes you can’t ignore the exceptionally misleading rants of the increasingly delusional Vancouver bull crowd.
In all fairness to ‘Mac’, he is by far the most articulate and convincing critic of this blog. Though he describes himself as a housing bear, his comments call that into question.
Mac was the one who convinced me to explore the likelihood of a sideways market for bubbly areas like Vancouver. You can read my conclusion here. He was also the one who drew our attention to the comments from Dr. Ian Lee, leading to this post debunking them. Commenters like Mac force me to explore my own convictions and support them with factual evidence and not mere hunches or anecdotes. For that I’m thankful. In turn I hope my posts cause the housing bulls out there to question their own convictions.
I’ve often said that I have yet to hear a single convincing argument for the sustained increase in prices in Vancouver. Typically they revolve around the Rich Asian story, or some other anecdote. I would love it if someone could provide some concrete facts about the percentage of offshore buyers purchasing Vancouver houses. To date all I’ve heard are anecdotes. I would love to be able to post a convincing argument on behalf of the bull crowd. If you are able to piece something together, fire it off to me: email@example.com
I will post it.
Now in reference to the Vancouver bull crowd, I think some of the latest comments by our friend Mac reveal a great deal about the typical arguments used to support the likelihood of a rise in home values, or at least a sideways market.
“The question is, how much more hot air is coming from the billions of newbie billionaires from the Far East? And what about when they start creating a middle class of just regular millionaires looking to shunt money illegally out of country and park it in Dunbar or Kits. Could it be enough to keep our 40 square miles (?) of West Side SFHs inflated? Enough to delay a correction for another decade or two?”
“Then should the advice to Vancouverites be, get in while the market is going sideways and the FED is hellbent on QE 2, 3 & 4 (according to Roubini). Find a distressed sale. Find a fixer upper. Do it responsibly, don’t get into too much debt, take a smaller place, live with less and hang on.”
Billions of billionaires?
The first tool in the arsenal of the bull (or sideways) crowd apparently is hyperbole.
Billions of new billionaires? Not sure if Mac’s done the math, but China has less than 1/6th the total number of millionaires as our neighbours to the south? There aren’t even half a million millionaires…..the notion of billions of billionaires exposes a complete ignorance to the magnitude of the numbers suggested.
So how many billionaires are there? Well, according to Forbes, China had 64 billionaires in 2010. Collectively, the ‘Far East’ has less than 200 billionaires in total. If we include Russia, it’s still less than 250. So, the notion that there are more than 1,000,000,000 new billionaires in the Far East is so ridiculous that it is laughable.
But what about the notion that there are a number of wealthy individuals looking to shelter some of their wealth by buying foreign real estate? I have no doubt that is true. My question is simply how many of them are actually doing this in Vancouver. Give me a solid stat! Further to that point, are we assuming that these wealthy Asians are also extremely dumb? Consider this scenario of two potential investment homes:
House #1: A single family residence in a city with a population of approximately 600K and a metro population of approximately 2.1 mil. Average home prices in the city slightly under $1,000,000. Median income is 42K giving a home price /median single income of 23.8 to 1. Favorable geography to inhibit expansion, thereby making land more valuable.
House #2: A single family residence in a city with a population of approximately 600K and a metro population of 4.2 mil located approximately 100 miles south of house #1. Average home prices in the city are about 370K. Median income is 44K giving a home price to median single income of 8.4 to 1. Similar geography and climate.
House 1 in in Vancouver. House 2 in Seattle. Someone explain to me how this is rational behaviour? And if it isn’t rational behaviour, then the word for that is speculation. Do some research to find out how real estate booms supported by blind speculation always end.
Renting in Vancouver….smart during a sideways market?
Let’s deal with the second assertion. It may well make sense to buy in a locale that is likely to experience a sideways market, provided that price/rent ratios are at or near their historical norms. I can buy that.
But let’s talk specifically about Vancouver. Let’s analyze two different scenarios, one involving renting in this current market, and one involving buying. We’ll examine both a 5 and 10 year time horizon, and we’ll look at condos in particular, as they are the overwhelmingly popular among the new homeowner crowd.
The benchmark price of a Vancouver condo hit 390K last month. Using the formula for average maintenance fees and property taxes described here, taxes would be roughly $1450 per year, or $120 per month. Maintenance fees could conservatively be estimated at $250 per month (700 sq. ft x $0.35).
Assuming the buyer puts the typical 7% down, it would leave a mortgage of $363,000. If we amortized over 30 years, at a low fixed rate of 3.5% which we’ll assume will remain at this historically low rate over the 5 year and 10 year periods (unlikely), the monthly mortgage payment would be $1625. Once we add property taxes and maintenance fees, it rises to about $2000/month. We’ll assume a stable property tax rate (unlikely) and a stable monthly maintenance fee over 5 and 10 years. We could also add on to that the lost opportunity cost of the $27000 downpayment, which if invested conservatively could generate 4% per year, or another 90$ a month. So the real cost of buying is $2090/month.
At the end of 5 years, you would have an outstanding mortgage balance of 325K. Since the property has not appreciated, you now have equity amounting to 65K.
At the end of 10 years, you would have equity of $110K, assuming no capital gains.
The most recent CMHC rental report from April 2009 indicated that the average rental on a two bedroom Vancouver condo was $1150. Let’s be generous and assume that the rent has increased to $1200 today. If property values go sideways, rent tends to also move sideways as it maintains an equilibrium in the price/rent ratio. Therefore we’ll use a stable $1200 per month value.
That means that the average savings per month over renting is $890. We’ll assume that the renter is starting with the same $27K downpayment and adds $890 to it every month and manages a 4% return, which we will reduce to 3.5% after-tax.
The total after 5 years is $90,000, which easily dwarfs the $65,000 of equity of the homeowner.
After 10 years, the renter would have $166,000, easily eclipsing the $110,000 in equity by the homeowner.
Once again we find that the arguments of the housing bulls/sideways crowd hold little water when explored rationally.
Mac’s comments validate my assertion that the ‘arguments’ advanced in support of Vancouver’s miracle housing market amount to nothing more than weak anecdotes and hyperbole. If someone has an argument to support the sustained price level in Vancouver, currently the most unaffordable city in the world, please post it here.