Crunching the numbers: Fundamentals will eventually matter

Thanks to everyone for the fantastic responses to the last post on Vancouver data.  Almost 60 comments on a single post in 24 hours…..a record for this lowly blog.

“Fundamentals eventually mattered…”

I’ve been meaning to repost a portion of an interesting article Jesse wrote over on his blog.  With Jesse having written a real zinger of a comment earlier today, I thought I might post the two of them combined.  It’s perhaps a fitting way to wrap up the Vancouver discussion.

First I want to highlight just one key sentence from Jesse’s post from last week.  Basically he discussed the work by Rich Toscano in analyzing the San Diego housing bubble.  The subsequent bust has been particularly painful.  This sentence speaks volumes:

“The biggest takeaway from Toscano’s work is that, in San Diego — a city with a growing population, a reasonably diverse economy, and desirable climate — fundamentals eventually mattered. As 2010 drew to a close, San Diego’s house price bubble has been summarily bookended with prices approaching fundamental values again, a process that took 5 years from their peak in 2005.”

Think about the underlined portion again.  Reflect on it.  Yesterday I highlighted a statement made in a comment earlier in the week and then asked a (rhetorical) question:

  • “(I’m) just trying to get you to kinda understand that you are really getting nowhere with all this data and a new framework is needed.”….In other words ‘it’s a new paradigm’ or ‘this time it’s different’.  The old rules no longer apply.  Throw out the data!  My question is simple:  Has there ever been an example of a bubble where this mentality was not prevalent?

The answer is a resounding ‘no’.  A prevailing mentality that fundamentals no longer matter is the single most crucial element to fuel any asset bubble.  Absent this popular delusion, bubbles die quickly.  But add this prevailing mentality, and the animal spirits of mass psychology are unleashed.  It bears noting that no market escapes the limiting power  of fundamental value indefinitely.  Not even one dominated by the uber rich of mainland China!  The fact that the average buyer in Vancouver (a handful of wealthy foreigners notwithstanding) requires continued low interest rates, a steady supply of greater fools, and increasing house prices to keep them but a flea’s hair from financial ruin is all you need to know.

Crunching the numbers:

Thanks once again to Jesse for this very insightful comment.

I’ve never posted the “rich Asian” effect, mostly because I thought it was rebuked when uber rich Hong Kongese and Taiwanese immigrated to Vancouver in significant numbers in the early ’90s only to have prices drop close to rental equivalence subsequent.

Anyways, here’s my methodology. In order to gain a sense of what is happening in a specific city, it is not correct to look at certain sub-regions within the city as evidence of a strong housing market. Instead the entire region should be looked at, as its people are geographically and economically linked, as are house prices.

To get a sense of the city’s ability to sustain high prices, we can look at the sum total of all residential property market values, and compare it to the ability of the locally-derived income to carry these properties. We then determine the shortfall, if any, and ask what mechanisms can contribute to filling the gap. These include: borrowing, black market activities, direct foreign investment, and direct foreign income. We can then look at the magnitude of the cash inflows and, taking a step back, asking how realistic it is to have that shortfall covered by some or all of these activities.

So the numbers:
Vancouver region population: 2,374,628
Average people per household: 2.6
Number of occupied private dwellings (est): 875,000
Average household income is about $78,000 (estimated)
Median household income is about $60,000 (estimated), provided for contextual purposes only

From latest January statistics, blended from Vancouver and Fraser Valley statistics packages, we derive total housing market capitalization by dwelling type:
detached = 250,000 * $840K = $250 BB
attached = 260,000 * $470K = $143 BB
condo = 360,000 * $360K = $158 BB
total = 875,000 = $551 BB

We now derive “average homeowner capital” as:
$551BB / 875,000 = $630K per household

This is an average price to average income ratio of 8. Now we have to determine how much additional income or capital not accounted for in the reported income is required to maintain this ratio. If we assume the long-term price-income trend is, say 5, that means we would be expecting an average dwelling price of $390K. This means a collective $240K per dwelling shortfall must be made up by non-reported sources. That amounts to a $210 BB collective capital injection that must occur over the next few years.

I’ll leave people to discuss the numbers above. Personally, taking a big step back, I don’t see $210BB pouring into the province through foreign investment and drug operations. To give context to the housing market capitalization, BC’s (not even Vancouver’s) “official” GDP is about $195BB.

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57 Responses to Crunching the numbers: Fundamentals will eventually matter

  1. D-dub says:

    Jesse should probably exclude Fraser Valley numbers, because Chinese buyers tend to ignore those areas. Still, the fundamental point is sound, because the influx of Chinese money doesn’t look like it’s sufficient to prop up the Vancouver market.
    Even without firm data on the number of mainland Chinese buying real estate in Vancouver, we can make some pretty reasonable guesses from immigration data. The figures are lower than what most people in Vancouver seem to assume.
    There were about 6000 business class immigrants to BC in 2010, which was up slightly from previous years (http://www.cic.gc.ca/english/resources/publications/index.asp –see 2010 report to parliament). We should also notice that not all 6000 are primary applicants. There are some spouses and dependents in that figure. We might charitably assume that this equates to 3000-4000 new affluent households in Vancouver, although I suspect the relevant figure is lower.
    While home values have skyrocketed in the past 5 years, the number of immigrants in the investor class and the criteria (how much money is needed) for entry haven’t changed much since 2005. (See the summary tables in each annual immigration report). The support from immigration should be already priced in to the Vancouver market.
    There is no prospect of investor immigration increasing substantially. Even if we assume that a limitless pool of millionaires is waiting to call Vancouver home, Canadian immigration doesn’t work that way. Immigration Canada is a slow moving bureaucracy which can take years to perform security and other checks before granting residency. Immigration policy is subject to convoluted national politics and it doesn’t change radically to counteract a slowdown in Vancouver real estate.
    So why bother posting on this after so much discussion has already taken place? I’m sure readers who live somewhere else are wondering why Vancouverites have this Chinese money hang-up. If you live in Vancouver, the “rich Chinese are coming” theory is the real estate bull’s trump card. It is an unfalsifiable, plausible sounding statement that seems to shut down all further discussion. Rates rising? Price to incomes look insane? Don’t worry—everything is explained by the influx of Chinese millionaires. If every bubble needs a self-sustaining mythology, the hot Chinese money myth is the first thing in Vancouver that needs to pop.

  2. jesse says:

    “Jesse should probably exclude Fraser Valley numbers, because Chinese buyers tend to ignore those areas”

    Actually my argument was the opposite. We MUST include the entire metropolitan area if we are to get a firm understanding of the total housing market capitalization. If rich Asians propel a certain region, fine, but that does not necessarily provide reason for other areas to have higher prices too.

  3. mac says:

    But the topic is Hot Asian Money or Myth… within certain segments of Vancouver and now Richmond. I think we all know it’s not widespread at this point. And certainly not to the extent of all the way to Abby and not for areas that comprise two million three hundred thousand people. What is Vancouver proper? Are we over 700K yet?

    I agree with you, folks in the out concentric rings use CMHC. Even CBC (Canadian Born Chinese) use CMHC. That explains some of the rise but not the crazy and recent rise in SFHs. And it ain’t over yet. With government restrictions on property specultaion coming in hard and fast within China, continuation of family loan syndicates ex-government, this hot gambling moola is looking for their other familiar roulette table–Vancouver/Westside/SFH et al.

    Now I’ll let Mango chew on ya.

    • jesse says:

      “But the topic is Hot Asian Money or Myth… within certain segments of Vancouver and now Richmond”

      Is it? I disagree. Based on my analysis, if homeowners with locally-derived incomes start deleveraging, it will have a significant impact on prices, even in the enclaves deemed immune to price drops. There is too much interconnectedness between regions to dam off certain neighbourhoods.

      In calculus parlance, house prices as a function of geography are continuous.

      • Mango says:

        Jesse, I believe you have either missed the Vancouver bull run or just don’t get it. The fact the Ben looked for data is that we need a better framework to understand why the DATA is not working?

        To go back and point at local incomes and graphs in the face of raising prices can be very upsetting, I understand your pain and frustration. But you really can’t believe you understand the market? Your analysis is wrong and has failed. Start a new one.

      • jesse says:

        Yes the data are lying. Good luck with that!

      • Mango says:

        Jesse if the data is right, why is the market not reflecting this? Why are prices still going up?

  4. John in Ottawa says:

    And then we have Reuters reporting: Vancouver still world’s most liveable city: survey

    Vancouver, Toronto, and Calgary made the top ten in the world.

  5. Severus says:

    “Asians driving SUV 10Km/year” ….Pathetic. They are all nouveau rich and yes they started the speculative bubble in Vancouver way back when Hong Kong was going to be handed over. Talk to folks that were living in Vancouver at the time and they will tell you about the chinese invasion and prices being bid up by them.
    Also a lot of them leave their families here and spend half the year in China managing their business.

  6. rp1 says:

    *Eventually* matter? Really? In the long run we are either old or dead. In 20 years Vancouver has rarely touched fundamental valuations. The stock market is the same, and with all the money printing now I’ll suggest we are a long ways from seeing fundamentals mattering in any market.

    Look at recent moves in prices of cotton and oil. What do they have to do with physical supply and demand? Nothing. It’s all one big financial bubble now, and with prices going up up up and interest rates at zero, you’d better learn to play the bubble game or you’ll be obliterated. The majority has moved on, and it’s sink or swim time for the bears. Adapt or die impoverished.

    • Yes I’m sure that house prices and income gains in Vancouver can continue on at their current trajectory so that in another decade the carrying costs of the average family home in Vancouver will consume 200% of the average family’s income. You can print a quadrillion dollars but if it doesn’t buoy incomes it won’t lead to a sustainable increase in house prices. Perhaps in your parallel universe fundamentals mean nothing but unfortunately we live in the real world where there are very real constraints to asset growth.

      • Mango says:

        The problem Ben is that today’s crazy spread in Van of local income to local prices is working and going higher. That spread can continue into future, you are assuming that income is just the reported income or income will not grow.

        Let’s start with a simple life time line – education is basically free in Canada, a couple out of university can easily get jobs with 60k salary? So 120k gross for our newly minted grads sound ok?
        That is 5k after a month after tax, assume a 50% to home, 2500 a month, on just a i calculation, at 5% rate, they can easily carry 600K home. Which is double the national average.

        I don’t see any breaking point here. The fundamentals are here to support this market.

      • Jungernaut says:

        Problem, Mango, is the down. We’ll get some folks getting a sweet injection from their parents, sure, but not all. Kevin O’leary said on his show that prices go in an inverse relationship to interest rates. I’ve plotted them before and it’s close — sorry, didn’t save the graphs. But the access to credit has to have been a bigger factor. So if the 5% down stays along with cashbacks, yes, your college grads will remain an influence as well.

        Forget HAM. Why did prices drop in 09 dramatically if rich Asians are infallible an pay cash? Inventory? Fear? If rich Asians were still bidding on the prime spots without local buyer or credit influence, then the avg prices should have gone up if anything. But fundamentals did matter and they do matter.

        Btw, $60k is a bit of a stretch depending on the faculty.

      • rp1 says:

        If we continue with negative real interest rates and very loose government-backed credit, this will undoubtedly happen.

    • Mango says:

      you nailed it rp1. I agree with you, people need to take the nudge and step in or be priced out.

      • Let’s chase this down a bit more. So your advice to everyone who has not yet bought is to buy or else they will ALL be priced out forever. To whom will all these homeowners be selling to realize these prices if everyone is priced out? Don’t say “wealthy Chinese immigrants”. We know that they account for at best 8% and much more likely 5% of the total volume of sales.

      • Best place on meth says:

        Wow, Mango.

        That was a frantic and pitiful bout of cheerleading. The worst I’ve seen anywhere.

        And so many falsehoods and lies to boot.

      • Jordan says:

        For me, “step in or be priced out” is the clincher. It’s a sure-fire indication of someone whose financial health is dependent on the fate of the housing market.

    • Sam says:

      Not everyone. But yes, if can buy and have a family at peak. Not planning to move for a long time, good job, buy within your budget. Most canadians already have, we have high ownership. It will continue.

  7. jesse says:

    “it’s sink or swim time for the bears”

    That’s funny. I think you mean “buy now or be priced out forever.”

  8. Wow Mango. This may well be your most ridiculous statement yet:

    “Let’s start with a simple life time line – education is basically free in Canada”

    Been to college or university lately?

    “…a couple out of university can easily get jobs with 60k salary? So 120k gross for our newly minted grads sound ok?”

    Source? I highly doubt that the average grads are pulling in 120K….or some 50% more than the national average. Yes in certain programs, but highly unlikely when averaged.

    “That is 5k after a month after tax, assume a 50% to home, 2500 a month, on just a i calculation, at 5% rate, they can easily carry 600K home. Which is double the national average. ”

    You’re talking total nonsense. The monthly carrying costs of a $600,000 home bought with 5% down and amortized over 30 years is over 3K not counting taxes, insurance, maintenance, etc.

    Mango, your credibility is shot. Time to move on.

    • Sam says:

      I am talking about a couple making 120. Not one. Using zero down, you can finance interest at my rate. My point is that people can afford lots of home. Why are you upset tonight?

      Irony here. You have a great blog with all this data and graphs and are always wrong. Prices and markets are booming. Myself and a few others are actually the only ones correct month after month, year after year with our real estate market calls and investments. And you ask us to move on?

      Unreal Ben, unreal

      • I was talking about a couple making 120K as well. It is a HUGE stretch to assume that this is the average….since it is 50% above the average Canadian household.

        I’m not upset at all, just exposing the flat out lies you’re posting on this site. With zero down and using the numbers you referenced, a 600K house would still cost $3200 a month. You are so wrong it’s laughable. When you post crap like that do you honestly think no one can crunch the numbers and call you on it?

        Are you also perhaps going to explain how post secondary education in Canada is free? I’d like to hear that one.

        And by the way….I thought your name was ‘Mango’. ‘Sam’ left this blog about a month ago and swore he would never return…….

        Incidently, ‘Mango’ appeared about the same time.

        And about me being wrong, this blog is 5 months old. Let’s revisit that assertion when the life of this blog is measured in years. In the meantime, load up on real estate in Vancouver before the influx of foreigners forces you to the sidelines.

      • Mango says:

        I knew my login switch would get your attention.

        600,000$ at 5% costs 30k a year – 2500$ a month. How is that laughable or wrong? I said to you it was looking at i?

        Please explain to my crunch mis calc you are talking about?

        Congrats on your five months and I know I always push you over the line into frustration, but I have to believe that it is helping you to become a bit sharper, some how you lost it on my math and are not making sense. Get yourself together and find some CIBC 7% cash back screen shots.

      • SuperPL says:

        Again Mango assumes you only need to pay i and the bank wont ask for p,

        Mango; what happens when you miss your mortgage payment by p a few months in a row?

    • Mango says:

      “Wow Mango. This may well be your most ridiculous statement yet”

      They can’t be that bad, your largest commented blog post was based on my questions.

  9. mac says:

    FYI, Ben, bears, eons ago, used to mock the bulls with, “What? You think average house price in Vancouver can reach 1 Million bucks?” So I’m a bit weary of speculating that the spread Mango speaks of can’t go on beyond my ability to comprehend or accept. I think that may be her point, although her calculations will be wishful thinking for the locals if there’s any inflation fighting (a long shot at this point).

    I’m really enjoying reading the strengths and weaknesses in everyone’s thoughts, including my own. Great post, again.

    I wish I could have taken a snapshot for you of the OV sales office today. Roughly 85% asian ethnicity visitors. That’s up from roughly 50 asian/50 caucasian-mixed on Saturday. And it’s a cold miserable day, so I’m guessing that the people who are in the sales office today could possibly be even more serious than the people on the weekend, who may have been looky-loos out for a stroll in the sunshine.

  10. jesse says:

    I could care less if some hoity toity enclave stays permanently high. There is simply too much proletariat fodder out there to justify aggregate prices being so high and I that’s the message I would want people to come away with.

    Go ahead and justify how your particular neighbourhood or property purchase is different. I, and probably 99.9% of people out there, don’t really care. It’s the overall numbers that are out of whack. When they’re in whack again, and your property has contrarily doubled in value due to your glorious prescience and acumen, we will bow to your demigod-like abilities and wish you well.

    So go ahead and buy now, if you dare! You can’t say you haven’t been warned.

    • Mango says:

      LOL, your frustration is out. You missed it and are probably a mortgage helper and will continue to be someones. Keep renting, we need more people like you.

      Ask yourself why are out of whack? You really think the dim sum cart pusher is buying those 1M + homes? Banks are giving fat sub-prime loans to losers with no income?

      • jesse says:

        I don’t appreciate ad hominem attacks. It undermines this blog. If that is your intent, then please carry on and I will mark you down as a troll. If you have a point to make that is personal in nature, start up your own blog and let people visit at their own prerogative; otherwise, stick to the argument, not the person.

        I’ve presented the city-wide data. Get mad at them, not me.

        And with that I bid you a pleasant night.

      • Mango says:

        No one is insulting you Jesse, you warned people not to stay in RE, I am said the opposite.

        Good night.

      • Best place on meth says:

        So let me get this straight. You have 2 id’s and they talk to each other?

        What a whack-job you are, even for a pumper.

        There’s a free mortgage calculator on MLS that shows your $600K mortgage at 5% coming in at $3202 per month. Add in taxes you can bump that up to $3500. Again, it’s free and will save you trying to crunch these numbers in your head where your 2 personalities are already causing extreme havoc.

        One more thing Sybil, no couple just out of college pulls in $120K. Not one.

  11. ‘Sam’/’Mango’

    Here’s a little tip. When you make a comment, the moderator (myself) gets to see your IP address. The comments from ‘Sam’ and ‘Mango’ are from the same address.

    Who goes onto an online discussion and posts under two separate names, using one to welcome the other back? What motivates someone to do that? Your credibility was shot when you used blatantly false statistics to support your position, but it’s beyond sad that you would go to these lengths.

    • Mango says:

      You still have not showed me my math was wrong Ben?

      Yes, Sam is my husband. I used his computer. That is why you see that, I told you that when I first blogged here. Anyway. The math is right, folks in RE are making money is the bottom line. You did lose him as a user, I continued. Congrats on your discovery.

      What motivates you to operate a blog for five months that is wrong about the RE market? You keep going with your graphs and etc hoping that you can have your “I told you so” moment that will not pay you, you might get a 3 second story on global (at least Garth swears on his blog and his some interesting/bizzare pics – but he is making $$ selling books at least while the bulls are right, what are you doing? Hoping for a job at stats can?). In the meantime, myself and others are enjoying the wave of credit and a commodity boom that is taking this country of only 30M people by storm and will continue further. Keep renting, wasting money and never own a place. I will do the exact opposite and be in line with those Chinese, because I know there is hell of lot standing in line behind me.

      • Best place on meth says:

        I hope you bought 3 and your husband bought 3.

      • LS says:

        >> You did lose him as a user, I continued.

        Oh dear. I can’t imagine sitting through a dinner party in that household.

        >> What motivates you to operate a blog for five months that is wrong about the RE market?

        Wow… Such a profound ignorance of how markets work.. You mean Ben is not a magic fairy that can pick the precise moment when a market turns? You can’t argue that the fundamentals are totally out of whack and you still haven’t come up with a single instance where that didn’t turn out badly. Yes the market could go up a bit longer, but time is running out, and real estate, being incredibly illiquid, is not something you buy for 6 months.

        >> I will do the exact opposite and be in line with those Chinese, because I know there is hell of lot standing in line behind me.

        When even the wives of trolls start giving real estate advice, you know it’s time to run for cover… 🙂

  12. “You still have not showed me my math was wrong Ben?”

    Seriously? You invest in real estate and you can’t figure this out? Here, let me point you in the right direction:
    https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi
    You’re wrong. Get used to it.

    “Yes, Sam is my husband. I used his computer. That is why you see that, I told you that when I first blogged here.”
    That’s believable. You definitely never indicated that Sam is your husband. That’s a lie.

    Good luck with your investments Sam/Mango.

  13. Vanman says:

    Perhaps mango/Sam is a real estate clerk that is hard up for money. Or someone that over leveraged themselves and is trying to reaffirm their poor choices.

    It is laughable and a disgrace to this blog to have ‘the mango!’ (snl reference) constantly commenting, but doesn’t even know how to use a mortgage calculator.

    This bitter renter is enjoying his debt-free life with hundreds of thousands of savings, a business store front on the side and a trip to Barbados in march.

    I’m begging for some pumpers to pity me!

    From Edmonton

    Btw: I have a buddy in Burnaby with two condos near the skytrain. One he lives in with his fam and the other one, he is 40k under water.

    • ATP says:

      “Or someone that over leveraged themselves and is trying to reaffirm their poor choices.”

      Sounds like it. Rationalization is a powerful mental defense mechanism.

    • Lumpen says:

      Actually, if I only had one guess, I’d say Mango/Sam worked on Bay St. either as a buy-side analyst or a sell-side analyst at a boutique shop. During 2005-06, there were a couple of people on the US HBBs that came from that domain.

      They may or may not have believed that their position was correct, but they knew the biases of the collective group, and pushed them hard for their thought process and supporting data. Basically, think of it as free research for them, as the bank research wasn’t putting out that viewpoint.

  14. mac says:

    What? Mango and Sam are one and the same? Mango, didn’t you boot your husband off the blogs years ago and then go on to make a fortune in real estate? Sam aren’t you a New Yorker and not invested at all? WTF? I’ve got the flu and am sick with fever and am well confused. What’s your backstory dude(ette)?

  15. Mango says:

    One can only take so many insults. Here is a video of the condo that Ben claimed was a line scam. It sold out. Wish you gentleman all the best. You can keep feeding on each other’s negativity and come up with conclusions. At the end of day, you lads keep pushing rubbish in the face of a rising market. Ben’s have come and gone, here is a RE graph since 1980 in Canada. It goes up/down sideways, but with time has always gone up. I will continue to believe in this trend as did my dad when he invested.

    http://canadabubble.com/charts/real-canadian-existing-home-prices-for-30-years.html

    Everyone knows where I stand(no pun intended).

    • Chad in Burnaby says:

      Good riddance. There’s only so much baseless bull (pun intended) we can take.

      But, I’m afraid you won’t leave that easily. What’ll be your next nickname?

    • Best Place on Meth says:

      With 2 personalities you should be able to take considerably more insults than the average person.

      But you keep right on believing real estate always goes up, even at a 9.5 multiple. Go forth and multiply your holdings.

      Go. Go now.

    • ATP says:

      “One can only take so many insults.”

      Since you’re such a fan of us Chinese, here’s a gift for you. It’s an ancient Chinese saying: “Others insult you because you insulted yourself first.”

  16. Don says:

    Mango the early 1980,s was aroung the time the credit machine really got rolling. I think that we are seeing the last gasp of this. Private credit was headed for historys dust bin in 2008. We are now finding out just how far governments can push the envelope.

  17. Vangrl says:

    nope, no problem here, no mainland chinese buying going on in these parts

    http://www.bclocalnews.com/richmond_southdelta/richmondreview/community/116513228.html

  18. Vangrl says:

    favourite line

    ““It’s nothing with me,” Wang said. “I cannot say something to you. I’m only a realtor. I cannot tell you much.”

    man i love what’s happening to Vancouver … gag

  19. mfx says:

    the book (Bubbles, Booms and Busts by Blanche Evans) I bought in 2007 mentioned a paragraph / chart for San Diego median housing price (reached 600K in 2005 Q1). The paragraph says even the price is so high but people still buy it due to low interest rate, easy to get loan, tax benefit and rich buyers.

    Just checked the current median housing price of San Diego. It’s 370K in Jan 2011.

    I guess the fundamental eventually matters. The old rules will apply.

  20. mfx says:

    look like vancouver housing price is still in uptrend (2nd wave?). It has been up for years, and it’s better to reduce the leverage (more conservative on money management as the main (1st uptrend) has been ended in 2008/2009 and housing prices of major canadian cities are currently going side trend. Just my guessing. Nothing lose to be more conservative at this stage from both fundamental and technical perspectives.

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