Cynics are silent

[FunSugarDaddy]

See the big picture folks. Case Shiller Index. Vancouver is the fastest declining from the peak compared to other Major NA markets.

We're back to this again are we? fine.

I don't want to question the wisdom of someone like yourself, you're obviously knowledgable and I could simply be wrong, because predictions aren't my forte. Don't pretend that they are, but let's look a little deeper than a graph and seem what we find.

Firstly, you are aware of the lending differences between the US and Canada I assume. These differences are significant. For starters, we never had subprime mortgages, teaser rates, Alt-mortgages etc. The US also has non-recourse lending, we don't. This factor alone can significantly increase the amount of forclosures, relatively speaking.

We kept our mortgage qualification criteria fairly stringent over this entire period, although we did go from amortization periods of 25 years to 40, then reduced the 40 to the current 35 year period.

Also the mortgages of our principal residence isn't tax deductible as it is in the US. this policy encouraged American's to borrow as much as possible on their houses, essentially to use it as an ATM machine.

Thirdly, because of the first two factors, we never had a huge run up in price over the boom period. It may seem like it was a lot as prices seemed to almost double, but compared to Miami, Las Vegas, much of Europe, such as Spain, Ireland, England and Australia our rate of increase was far lower. I read the Economist weekly and so I've been up on this particular trend.

Fourthly, as mentioned in a previous post we had pend up demand from the younger generation, this is primarily what's currently driving the market.

The combination of these factors, I believe will dampen the decline relative to many of the cities on the Shiller-Case index. I could be wrong but we'll see. The major factor going against me, in terms of prediicting an outcome is the rent-to-value ratio (ie Cap rate) in the lower mainland is ridiculously low.

 

[FunSugarDaddy]

You asked a lot of questions in your last post and it so happens I have some time on my hands, so please allow me to address some of them.

Where was the central banks intervening during the last 8 years before the bubble burst? Answer that?

This obviously isn't defendable and I'm certainly not about to start defending the feds, especially under Bush. Basically because there was no regulation, and it was wrongly assumed that in a free market banks would do what was in their best interest as would every other party and therefore regulation wasn't necessary.

This was a flawed assumption in that the banks were approving almost any loan that came their was because they were simply selling the loans to third parties. They were allowed to do this because the third parties didn't understand the products (CDO's) being offered and instead relied on rating agencies, who essentially didn't understand them either but nevertheless rubberstamped them. They were also insurred by AIG.

Hyperinflation is a real possibility. The government has put in a stimulus plan that is UNPRECEDENTED. Trillions of dollars pumped into the marketplace. Combine that with manufacturers and natural resource producers who have stopped production until built up inventory levels are reduced. Think about it. Low Inventory and Unprecedented $$$$ and low rate injection. If you know your economic history that is a potential recipe for disasterous hyperinflation.

I believe I addressed this in the prior post. It depends on whether or not the demand for consumption resumes it's former level or if in fact the government is substituting this demand with their own. Most of the evidence is that it's the latter, not the former.

Humor me, tell me what is the core cause of this economic mess/implications and what has the feds done to fix this?

Basically the core problem was three-fold. One the unregulated use of leverage by the banks, hedge funds etc, along with the lack of regulation in the US lending market. The combination created a bubble in both the stock and the real estate markets. The feds were unknowing participants when they kept the fed rate extremely low with the believe that they could create a "soft landing" when it came to economic decline.

Attempts to mitigate this were greatly hampered when the Bush administration allowed Leman Brothers to collapse, as they were counter-party to various financial instruments. This essentially caused the credit market to freeze up and shook the banking industry to it's core. Over the last few months steps have been taken to unfreeze the credit market, but not before this financial crisis broadsided the real economy. Much of the Obama initiatives are attempts to address these extremely complex issues.

 

[bcneil]

For me, its either time to take some money out of the market. Or even look at some of the inverse index etfs. We got a little ahead of ourselves this week. Seeing the tsx drop 500 points and oil off $5 next week, certainly wouldn't shock me.

 

[hapkido]

I'm not sure if you even looked at the graph.

I was going to address your points but for the sake of brevity given all your reasons outlined below, my question is "Why does Vancouver have the fastest and steepest decline from the Peak relative to ALL the major cities and the worst - Miami? Doesn't it defy all your reasons?

And if you noticed we just hit the 1st leg of the decline as the others markets declines started 2-3 years ago.

See that blue line on your left? That's Vancouver.

http://1.bp.blogspot.com/_rt16FZ_z1...jQ9Quw/s1600-h/cs+total+decline+from+peak.jpg


Based on pure logic alone, given the steepness of decline, do you truly believe based on the current economic outlook that it's going to reverse itself or simply flat line from here on?

We're back to this again are we? fine.

I don't want to question the wisdom of someone like yourself, you're obviously knowledgable and I could simply be wrong, because predictions aren't my forte. Don't pretend that they are, but let's look a little deeper than a graph and seem what we find.

Firstly, you are aware of the lending differences between the US and Canada I assume. These differences are significant. For starters, we never had subprime mortgages, teaser rates, Alt-mortgages etc. The US also has non-recourse lending, we don't. This factor alone can significantly increase the amount of forclosures, relatively speaking.

We kept our mortgage qualification criteria fairly stringent over this entire period, although we did go from amortization periods of 25 years to 40, then reduced the 40 to the current 35 year period.

Also the mortgages of our principal residence isn't tax deductible as it is in the US. this policy encouraged American's to borrow as much as possible on their houses, essentially to use it as an ATM machine.

Thirdly, because of the first two factors, we never had a huge run up in price over the boom period. It may seem like it was a lot as prices seemed to almost double, but compared to Miami, Las Vegas, much of Europe, such as Spain, Ireland, England and Australia our rate of increase was far lower. I read the Economist weekly and so I've been up on this particular trend.

Fourthly, as mentioned in a previous post we had pend up demand from the younger generation, this is primarily what's currently driving the market.

The combination of these factors, I believe will dampen the decline relative to many of the cities on the Shiller-Case index. I could be wrong but we'll see. The major factor going against me, in terms of prediicting an outcome is the rent-to-value ratio (ie Cap rate) in the lower mainland is ridiculously low.

 

[hapkido]

Listen to Peter Schiff (who forecasted the melt down) - http://www.videonewslive.com/view/288549/peter_schiff_on_20092010_usa_hyperinflation

Now lets say Peter Schiff is overzealous and hyperflation is low probability. Now would it be reasonable to say rates in 3-5 years time could potentially hit 6-8%? So young folks who are locked in at 4.2% for 5 years prepared during renewal time? Do you recall 1980? Remember rates back then? 18-20% I guess all the bond traders and governments saw that coming and were able to control that one.

Quite honestly do you really believe the governments know the outcome of this massive stimulus plan? It's unprecedented. They have no idea whether it will work or not. And if you read financial history on what happens when governments do this it fails. Yes I'm citing one example only - Japan has never recovered since 1987 and their consumers savings rates were much higher than North Americans. And it was soley an asset bubble. It didn't include shadow banking - toxic derivative contracts.

You assume Markets have full control of rates. It's based on expectations of bond traders. They can't predict black swans or unsuspecting global events. If that was the case then financial models of investment houses like Lehmans would have forseen this event.
http://www.rhedabrown.com/Informational Links/howratesaredetermined.htm

Interest rates on mortgages closely follow the bond market, more specifically, the 10-year Treasury bond. Bonds move in increments of 32nds, and they move every day. As the price, or change on these bonds go down, the yield and interest rates go up. Bonds down, rates up. For example, if the 10-year bond is down 16/32nds, discount points on a given interest rate will go up one-half a point (fractionally speaking, 16/32 equals one-half). As the change on these bonds go up, the yield and interest rates come down. Bonds up, rates down. For example, if the 10-year bonds are up 8/32nds, discount points are likely to fall one-quarter of a point. But what makes the bonds move? There are many global factors that we can't foresee, however, following the economic indicators in our own economy is usually a pretty sure bet.

Here's how it works. Each month the government releases economic indicators on the state of the economy, including many sectors; among them are housing, manufacturing, retail sales, inflation, and unemployment. Prior to the reports being released, bond traders have already formed a consensus or forecast for the indicators about to be released, and have bought or sold bonds to position themselves for the reports. In general, as the economy shows signs of strengthening, and a report is higher-than the forecast, bond prices will fall and interest rates will rise. An example of this would be if the unemployment rate dropped below forecasts, and retail sales were reported stronger-than-expected, interest rates would rise.

As indicators come out weak, or lower-than forecast, bond prices will rise and interest rates will fall. An example of this would be if factory production was forecast to rise 0.6% and it actually rose 0.2% less-than-expected, interest rates would drop. Therefore, in general, anything that indicates a weakening economy is good for interest rates. And anything that shows an expanding or growing economy is bad for interest rates.

Here's a decent counter-argument about hyperinflation I read prior to posting earlier today.

It's a recent article from the Economist.

http://www.economist.com/daily/news/displaystory.cfm?story_id=13605679&fsrc=nwl

WHETHER it is for affordable homes or cheap goods, Americans are peering through the wreckage of the credit crunch and starting to buy again. After falling sharply in the second half of last year, consumer spending rose in the first quarter, and even sales of homes and cars have edged up from deeply depressed levels. Anticipating a rebound, shares of retail companies, especially those selling inexpensive items, have soared.

Ben Bernanke, the Federal Reserve chairman, characterised the news on consumers as “somewhat better” on Tuesday May 5th. Still, that cautious endorsement qualifies as downright ebullient compared to the gloom of a few months ago. A Fed survey of bankers, released on Monday, gave a hint of good news for consumers; though banks are still tightening standards on consumer loans, fewer of them are doing so than three months before. Meanwhile, there has been a long-overdue flurry of activity in the Fed’s programme for restarting the securitisation market. On Tuesday it supported the issuance of $10.6 billion of securities backed by student, auto, credit-card, small-business and equipment loans.

But do not mistake a bottom for a vigorous rebound. Consumption may be growing again, but there is every chance it will remain depressed in coming years because of weak income growth, depleted wealth, and tightened credit. Since the early 1980s, spending by households on goods, services and homes has grown faster than GDP, making it the locomotive of American—and global—expansion. By 2006, it accounted for 76% of nominal GDP, the highest since quarterly data begin in 1947.

This was accompanied by a steady decline in the personal saving rate and a rise in household debt relative to income. By itself, this was not a problem; household debt has risen relative to income since the 1950s, as a growing share of the population bought homes with mortgages. Despite the higher debt burden, falling interest rates kept total household financial obligations—interest payments, rent, and leases—range-bound during the 1980s and 1990s.

An inflection point occurred around 2000. Income growth stagnated but debts continued to grow rapidly from 94% of income to 132% in 2007. The share of income devoted to servicing those obligations also jumped. A study in 2007 by Karen Dynan and Donald Kohn of the Federal Reserve attributed that partly to more of the population reaching home-buying age, and mostly to a rise in home prices which made it possible to borrow more.

Financial innovation also played a role, they say, as the industry devised new ways for Americans to borrow against their homes. One manifestation was the plethora of credit-card offers to even marginal borrowers: more than 8 billion poured through Americans’ mailboxes in 2006, according to Mintel Comperemedia, a consumer-research firm. From 2003 to the end of 2006, consumers borrowed almost $2 trillion against their properties via home-equity loans and “cash-out” mortgage refinancings. A dramatic reversal is now under way. Last year, household wealth fell by 18%, or by $11 trillion. Macroeconomic Advisers, a forecasting firm, estimates the resulting negative “wealth effect” will depress consumption by 2% this year.

The financial crisis has killed off many of the loan products that had expanded access to credit during the boom. Subprime mortgages have disappeared and refinancings that deliver cash to homeowners are subject to stricter underwriting standards and higher fees. In the first quarter, the credit-card industry sent out just one-quarter as many solicitations as it did a year earlier.

A more enduring restraint will be the pressure on consumers to reduce their debts to more manageable levels relative both to income and to the much lower value of their homes. This effect is difficult to quantify since so many factors determine consumers’ preferred saving rate and level of debt: assets, retirement goals, expected income, risk tolerance, access to credit, age, and so on. Some bearish analysts argue that debt ratios and saving rates have to return to their levels of the 1950s, but others argue it would be sufficient to return to their levels of 2000 for households to feel comfortable with their debts again.

This process, known as deleveraging, requires consumption to grow more slowly than income in coming years. The longer it takes for debt to return to more sustainable levels, the more it can occur through rising incomes. A sudden rush to return debt ratios to their level of 2000 would require ridding households of some $3 trillion in mortgage debt—an impossible task. More likely, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages, and new homeowners taking out smaller mortgages than in the past. Bruce Kasman of JPMorgan Chase estimates that the most dramatic phase of rising saving has already occurred and spending will grow only a bit less income.

But Martin Barnes of BCA Research, a financial-forecasting service, is more pessimistic. For debt to return to a more sustainable level, real consumer spending would grow just 1.3% a year from 2009 to 2013, the weakest such five-year stretch since the 1930s. It could grow even more slowly if taxes rise more quickly, he reckons, or if stagnant productivity impedes real income growth.

This implies that for America to grow at a trend rate of about 2.5% something else will have to grow more quickly. Ideally that would be exports and investment. But given the torpor in the rest of the world that will not be easy.

========================================================================

Now that article didn't address inflation directly but assuming the normal demand of supply and demand, they certainly see a significant shift in demand and normally inflation is associated with situations where demand exceeds supply and production is at or near full capacity. So while the fed's may have thrown trillions at the problem, it might be that this was to prevent deflation and it may serve as a substitute for consumer demand. If it turns out that consumer demand comes back to pre recession rates and the government stimulus is tacked onto it, then yes, hyper-inflation could occur, if this happened before the fed's could significantly raise interest rates. However if the markets thought that was going to occur they wouldn't be offering 5 year mortgage rates at under 4%, because unless the fundamentals of economic theory has changed since I graduated in the early '90s, interest rates are a function of the real return someone wants plus the anticipated rate of inflation. And I think it goes without saying that if you and I are aware of the potential of hyperinflation, those setting mortgage rates are as well.

 

[hapkido]

Basically the core problem was three-fold. One the unregulated use of leverage by the banks, hedge funds etc, along with the lack of regulation in the US lending market. The combination created a bubble in both the stock and the real estate markets. The feds were unknowing participants when they kept the fed rate extremely low with the believe that they could create a "soft landing" when it came to economic decline.

Attempts to mitigate this were greatly hampered when the Bush administration allowed Lehman Brothers to collapse, as they were counter-party to various financial instruments. This essentially caused the credit market to freeze up and shook the banking industry to it's core. Over the last few months steps have been taken to unfreeze the credit market, but not before this financial crisis broadsided the real economy. Much of the Obama initiatives are attempts to address these extremely complex issues.

You have bits and pieces of the casual problems which caused the eventual collapse. I'm sure you didn't read this link provided below earlier because you could have easily referred to it. Warren Buffett during his Annual meeting with shareholders last week referred to it as a great summary of what happen and the proposed solutions.

2008 Jamie Dimon CEO & CharimanLetter to JP MorganShareholder

http://www.scribd.com/doc/13899164/2008-Jamie-Dimon-Letter-to-JP-MorganShareholder

This is a great picture to illustrate the seriousness of the problem the governments are grappling with today. See the top of that pyramid - Shadow Derivatives? See how huge that market is compared to the real economy? Well it's still on the balance sheets of major banks, insurance companies, hedge funds and other financial companies. I'm simplifying this of course..... A derivative is essentially an insurance policy. You have an underwriter and insuree (pays premium for insurance). The problem is that contracts were written with no central processing exchange and no risk management. Hence the term shadow banking. It was contracts privately arranged between 2 parties. Unregulated and not easily trackable. When the market kept rising like a bubble over the past 8 years all the parties were happy.

But when the market collapsed the underwriters couldn't pay out the insurees. Now multiply this a billion times. None of the underwriters or insurees foresaw this black swan event. Hence the paper is essentially worthless now and impossible to value and "unwind".

So all the institutions are carrying trillions of toxic worthless paper ON THEIR BALANCE SHEET and have not written it all off. It would cause a melt down. Companies would evaporate with a domino effect. So ask yourself who is really benefiting from the billions of bail out money? The counter parties - investment houses. At 100% on the dollar with TAX Payers money. So all bailout $$$$ is not trickling down to the real economy.

Also the government do not have a never ending flow of $$$$ to save all the institutions. It's a ticking time bomb. The cancer has not been completely removed. Governments are feeding morphine to ease the pain and extending a life line. In order to restore confidence in the market where money will easily flow again the cancer must be removed. But the price to pay is major pain - huge unemployment and many companies shutting down. Deservedly so. Why reward and prop up incompetence?


By the way, with the goverment bailouts and mamoth deficits realized, guess who is going to pay for it in the form of taxes? So you still have a rosy outlook? Oh I forgot Canada is different. Not when 80% of total GDP is exports to your partner down south.

 

[FunSugarDaddy]

I'm not sure if you even looked at the graph.

I was going to address your points but for the sake of brevity given all your reasons outlined below, my question is "Why does Vancouver have the fastest and steepest decline from the Peak relative to ALL the major cities and the worst - Miami? Doesn't it defy all your reasons?

And if you noticed we just hit the 1st leg of the decline as the others markets declines started 2-3 years ago.

See that blue line on your left? That's Vancouver.

http://1.bp.blogspot.com/_rt16FZ_z1...jQ9Quw/s1600-h/cs+total+decline+from+peak.jpg


Based on pure logic alone, given the steepness of decline, do you truly believe based on the current economic outlook that it's going to reverse itself or simply flat line from here on?

Look a graph's a graph, nothing more, nothing less, and I outlined a variety of reasons why the local market may not drop as bad as others, as mentioned the main reason it might drop further is the due to the low cap rate. What more are you looking for in terms of a reply?

As to whether or not it defies my reasons I think the jury is still out on that. If it continues to drop then yes, if it stablizes, which it is appearing to do, then no.

 

[FunSugarDaddy]

I find it hard to believe that you're essentially suggesting the economy or a variety of companies are basically going to collapse and then argue that's an inflationary situation. The fact is most of the government spending is designed to midigate the collapse of various institutions, the most notable being AIG and to prevent a deflationary spiral. If the governments did nothing, there would undoubledly be no domestic auto industry, rampid unemployment in the auto and auto parts sectors as GM and Chrysler both bring down the supply chain and the collapse of several banks. And if AIG would have collapses all hell would have broken loose. The influx of money to deal with these issues are essentially defensive measures, in what is a deflationary environment.

And Canada financial situation in terms of overall debt and debt to GDP, is relatively healthy compared to most of the G7 countries. Even our current deficit is relatively modest as is our spending initiatives.

 

[hapkido]

I find it hard to believe that you're essentially suggesting the economy or a variety of companies are basically going to collapse and then argue that's an inflationary situation. The fact is most of the government spending is designed to midigate the collapse of various institutions, the most notable being AIG and to prevent a deflationary spiral. If the governments did nothing, there would undoubledly be no domestic auto industry, rampid unemployment in the auto and auto parts sectors as GM and Chrysler both bring down the supply chain and the collapse of several banks. And if AIG would have collapses all hell would have broken loose. The influx of money to deal with these issues are essentially defensive measures, in what is a deflationary environment.

And Canada financial situation in terms of overall debt and debt to GDP, is relatively healthy compared to most of the G7 countries. Even our current deficit is relatively modest as is our spending initiatives.

I think this forum is too difficult to communicate very complex issues and you either have purposely choosen or accidentally misintepreted ...and drawn improper conclusions on my points. The problem is everyone's starting point of level undertanding of the various topics and issues are different. Even when I spoon feed it to you in links you choose to ignore it. That's fine not everyone has time but don't expect a reasonable and respectful debate.

Now I don't know everything but I do know when I know more than others and when I don't I will readily admit it. I have tested you on your genuineness and sincerity to hold an open and respectful debate and have tried to corner you on some tacticle flawed arguments to address head on but instead you conveniently danced around it and came back to the same rhetoric or simply ignored it. That's the beginning of the end of a healthy debate.


For the record.

1. Toxic assets are still held on the balance of companies and the Feds have done nothing to remove the cancer. Trillions of dollars are being spent to stem delationary pressures but the feds have no idea of the potential reprocussions in the FUTURE. They basically did a Hail Mary throw. It's the first time for the Feds to tackle such a problem. They don't know how much it will trickle down to the real economy. As history has evidenced very little ROI so the FEDS may have thrown everything possible in terms of $$$$$$ to overcompensate.

IN FUTURE (3-5 years?) it can potentially drive up industrial and consumer consumption quickly in a very tight low inventory environment which will require production to quickly ramp up with demand and forcing higher prices (thought I had to add this point so you can bridge the gap). And please don't tell me this is easy to do demand/supply forecasting especially in this environment. It's hard enough to do for a manufacturer let alone an entire economy.

What's the probability of inflation and interest rising? I say likely. What's probability of HYPERinflation and double digit interest rates? I say probable.
To ignore and not plan for this IS STUPID for home buyers rather than blindly thinking rates will remain at historical lows forever and take on more mortgage. Which quite frankly many young and new home buyers make such a mistake.

2. Back to the authors OP Gloating. First you can make money in any market bear or bull. No bear ever said you can't. You can short or go long or trade etc. But we are not out of the woods yet. The stimulus plan will have an initial positive effect which can last for awhile but underlying systemic issues still remains and will rear it's ugly head in the future. I can't just predict when.

3. Sorry but on a percapita basis the debt is big for Canada. And Harper misjudgeed in the original budget with a rosier forecast on the severity of unemployment and level of gov't spend. So guess what? The deficit is increasing as we speak. You and I will pay for it in TAXES. Stop dancing around the point and acknowledge it. This has real future implications on disposable income and deciding on buying a home.

I'm curious do you own investment property or carry a mortgage? I know you mentioned some of your clients do.

 

[hapkido]

Look a graph's a graph, nothing more, nothing less, and I outlined a variety of reasons why the local market may not drop as bad as others, as mentioned the main reason it might drop further is the due to the low cap rate. What more are you looking for in terms of a reply?

As to whether or not it defies my reasons I think the jury is still out on that. If it continues to drop then yes, if it stablizes, which it is appearing to do, then no.

Your 4 reasons listed means Vancouver is better off than all the USA major cities before during and after the crash. If that was the case why was it sliding faster from the peak vis a vis other USA major cities? So why would your arguement hold true from hereon? Because of low interest rates? Surely you jest with a such a simple answer. Doesnt make logical sense to a rational person does it? That's my point.

By the way, avg household income to avg price is 10x. That's a leading indicator of prices need to go down. By the way I didn't make that up. Yeah I know the rhetoric. Beautiful Ocean, Mountain and Foreign money. Funny Californians thought so too. I heard that in 1989-1990. Big CRASH.

 

[FunSugarDaddy]

Your 4 reasons listed means Vancouver is better off than all the USA major cities before during and after the crash. If that was the case why was it sliding faster from the peak vis a vis other USA major cities? So why would your arguement hold true from hereon? Because of low interest rates? Surely you jest with a such a simple answer. Doesnt make logical sense to a rational person does it? That's my point.

By the way, avg household income to avg price is 10x. That's a leading indicator of prices need to go down. By the way I didn't make that up. Yeah I know the rhetoric. Beautiful Ocean, Mountain and Foreign money. Funny Californians thought so too. I heard that in 1989-1990. Big CRASH.

If you know what a cap rate is, you would already know that this has been addressed, not once, but twice.

And yes it's possible that the local real estate market will crash, has it crashed at an alarming rate, I would say no, you think it has and time will tell. I don't know what more of an anwer you'd like. You seem to think that if I respectly disagree with you and you present a counter argument that unless I buy into I either don't know what I'm talking about or I'm wrong. Time will tell whether or not there's a housing crash or there's hyper-inflation. But as things stand now I would suggest there's a housing correction, not a crash, and that there's very little signs of inflation.

 

[hapkido]

If you know what a cap rate is, you would already know that this has been addressed, not once, but twice.

And yes it's possible that the local real estate market will crash, has it crashed at an alarming rate, I would say no, you think it has and time will tell. I don't know what more of an anwer you'd like. You seem to think that if I respectly disagree with you and you present a counter argument that unless I buy into I either don't know what I'm talking about or I'm wrong. Time will tell whether or not there's a housing crash or there's hyper-inflation. But as things stand now I would suggest there's a housing correction, not a crash, and that there's very little signs of inflation.

No I don't expect you buy into my arguements if there is no logic and not based on facts. But to even suggest that because of low interest cap rates during a normal historical spring blip is the main arguement for a potential turn around or stabilization is simply weak and short sighted.

My main message is there are future risks that needs to be acknowledged and planned for. Bubbles don't burst in one fell swoop. Anyone who follows asset markets would understand this. Quite frankly I don't think young naive folks or new home owners did. CAP or No CAP.

 

[FunSugarDaddy]

No I don't expect you buy into my arguements if there is no logic and not based on facts. But to even suggest that because of low interest cap rates during a normal historical spring blip is the main arguement for a potential turn around or stabilization is simply weak and short sighted.

My main message is there are future risks that needs to be acknowledged and planned for. Quite frankly I don't think young folks or new home owners did. CAP or No CAP.

You really have no idea what you are talking about. A low cap rate is a rate of return on real estate and it being low is the main argument of why prices might decline around the lower mainland. If you didn't understand what a cap rate was you should have said something. The cap rate is basically the net rental income /purchase price.

The fact that it's low is a very compelling indication that house prices might decline and it is essentially the arguement put forth by Shilller as to why prices might drop in Vancouver.

"Economist Robert Shiller of Yale called Vancouver the "most bubbly city in the world"

http://thetyee.ca/Mediacheck/2007/02/20/VHB/

Having said that, the cap rates been low here for as long as I can remember and house prices seem to be leveling off. I remember 5 years ago a client of mine who owned 5 houses at the time asked for my adivce and I told him he should sell a property. (mostly due to his cash flow), instead he bought another one for 600K. That property is now worth about 1.2M down from about 1.4M from last year. But if interest rates hadn't dropped so drastically during that period of time, and if real estate never had such a huge run up, the picture would have been very different.

http://en.wikipedia.org/wiki/Capitalization_rate

 

[hapkido]

You really have no idea what you are talking about. A low cap rate is a rate of return on real estate and it being low is the main argument of why prices might decline around the lower mainland. If you didn't understand what a cap rate was you should have said something. The cap rate is basically the net rental income /purchase price. The fact that it's low is a very compelling indication that house prices might decline. Having said that, it's been low for a number of years amd house prices seem to be leveling off.

http://en.wikipedia.org/wiki/Capitalization_rate

Ok I will admit that I misinterpreted your definition of CAP Rate. In context of interest rates and inflation I made a genuine misinterpretation. My Bad. It supports my arguement then there is room for further decline. So from an investors standpoint until prices decline to provide a reasonable ROI there is no reason to buy right especially when there is potentially more dramatic decline. The general rule of thumb to decide to buy RE is that one's full carrying cost (mortgage, property taxes, repairs, maintenance etc), should be lower than the prevailing rental rates assuming 25% down payment or CAP rate should be 10%. We are far from it.

Now why don't you provide the same level of respect and courtesy that you don't understand all the underlying issues and the severity of the situation which I laid out? Respect works both ways. It is because you read the Economist weekly? I read too but I choose to see both sides and draw up my own independant conclusions. I learn never trust anyone as there are always hidden agendas or the person's circle of competence is not all encompassing or skewed. Just look at the track records of Industry pundits, Journalist, Reporters, Economists, Banks, RE Association Presidents, and Vancouver Dailys fed by their masters Developers/Builders.

Any more cheap shots? Would you like me to list the laundry of arguments you have conveniently ignored, dimissed, and danced away from?

 

[FunSugarDaddy]

Ok I will admit that I misinterpreted your definition of CAP Rate. In context of interest rates and inflation I made a genuine misinterpretation. It supports my arguement then there is room for further decline. So from an investors standpoint until prices decline to provide a reasonable ROI there is no reason to buy right especially when there is potentially more dramatic decline.

Now why don't you provide the same level of respect and courtesy that you don't understand all the underlying issues and the severity of the situation which I laid out? Respect works both ways.

Of course there's room for decline. I remember over the last couple of years clients asking why real has risen so high and me telling them I didn't have a clue. Going by the fundamentals real estate in Vancouver shouldn't have risen at all during this last run up, but it doubled. So the underlying principals of what we belief drives house prices which is net rent/purchase price, doesn't take into account the nature of supply and demand or the fact that people just want to own their own home. To me a house purchase, especially your first one and/or a principal residence, is far from just a financial decision. I remember my wife saying we aren't having any kids until we own a place.

As far as my understanding of the current economic crisis and what's caused it, I certainly think I have a handle on this, might not know 100% of what's going on, but I believe I understand most of what's going on. I do read the Economist weekly, watch CNN almost daily, read the most pestimistic blog on US real estate you can imagine.

http://patrick.net/housing/crash.html

and personally bought a condo in the US, and experienced first hand the troubles of trying to get a mortgage, so I believe I have a great degree of knowledge in this area, as do you, as does Cosmo, as do others.

I don't recall ever questioning anyone's knowledge, just the interpretation of data that leads people to suggest they should put everything into gold, the stock market is going to crash, the local housing market is going to collapse, and that beyond a doubt we're headed for hyper-inflation. Alll these things could unfold, but I don't think any of them are the most likely scenario to occur. The most likely scenario is a slow recovery that will take in the neighbourhood of 2 - 2.5 years.

I wouldn't be spending my time responding to these threads if the discussion wasn't of interest. And it's not that any of your arguments are necessarily wrong, it's just that their impact on various economic indicators, especially inflation rates etc. is open to debate.

 

[hapkido]

Okay we agree but disagree on the level of severity and risks.

I follow and read about the markets and economics intensively as both a serious stock investor (independant no advisors) and potential house purchaser (I sold former home at peak not planned due to personal circumstance. Just Lucky) I'm the type of person who will research exhaustively and then formulate valuation and risk probabilities of occurences and make an informed decision. I vividly remember all the major down cycles since 1980 and read the past majors. I always plan for the worst case scenario which may or may not happen.

Of course there's room for decline. I remember over the last couple of years clients asking why real has risen so high and me telling them I didn't have a clue. Going by the fundamentals real estate in Vancouver shouldn't have risen at all during this last run up, but it doubled. So the underlying principals of what we belief drives house prices which is net rent/purchase price, doesn't take into account the nature of supply and demand or the fact that people just want to own their own home. To me a house purchase, especially your first one and/or a principal residence, is far from just a financial decision. I remember my wife saying we aren't having any kids until we own a place.

As far as my understanding of the current economic crisis and what's caused it, I'd truly be hard pressed to find anyone whose spend more time on this than myself. For better or worse, I get paid for my financial opinions, which is nice because as my wife says I'd be doing this for free anyway. But I do read the Economist weekly, watch CNN almost daily, read the most pestimistic blog on US real estate you can imagine.

http://patrick.net/housing/crash.html

and personally bought a condo in the US, and experienced first hand the troubles of trying to get a mortgage, so I believe I have a great degree of knowledge in this area, as do you, as does Cosmo, as do others. I wouldn't be spending my time responding to these threads if the discussion wasn't of interest. And it's not that any of your arguements are necessarily wrong, it's just that their impact on various economic indicators, especially inflation rates etc. is open to debate.

 

[hapkido]

Yes (You removed post? focusing most likely occurrence and ignoring outliers. Not sure why?) that methodology works in a stable and rising market.

But in early stage run ups or run downs or unprecedented events like we are facing today it's prudent to always take into account worst case (even if it's less than 20% probability) because if you don't it can kill you.

Just asked those who underestimated the black swann event and bet the farm. Manulife, Lehman, AIG,etc. To be honest people saw this coming assumed markets will continue to go straight up fueled by cheap credit but they didn't realize the severity of the event because so many causal factors all aligned at once.

Bill Miller, Legg Mason Mutual Fund, who has the most successful 15 year track record of outperforming the market.. got clobbered (fund 80-90% down) and erased 15 years of 15% avg annual returns for his clients. So not being aware or planning of outlier events is not being responsible if you are a professional financial advisor.

 

[FunSugarDaddy]

Yes (You removed post? choosing most likely occurrence. Not sure why?) that methodology works in a stable and rising market.

But in early stage run ups or run downs or unprecedented events like we are facing today it's prudent to always take into account worst case (even if it's less than 20% probability) because if you don't it can kill you.

Just asked those who underestimated the black swann event and bet the farm. Manulife, Lehman, AIG,etc. To be honest people saw this coming but they didn't realize the severity of the event because so many causal factors all aligned at once.

Bill Miller, Legg Mason Mutual Fund, who has the most successful 15 year track record of outperforming the market.. got clobbered (fund 80-90% down) and erased 15 years of 15% avg annual returns for his clients. So not being aware or acknowledging of outlier events is not being responsible.

Being aware of something and acting on it are two different things. I bought a couple of houses over the last 6 years based on my belief housing prices would continue to rise, now if I simply focused on the cap rate, I wouldn't have done that and from a financial perspective that would have been a huge mistake.

Just as you believe the market will drop substantially, the danger is that if you're wrong you may find yourself in a much higher interest rate environment, especially if hyper-inflation, does in fact come to pass. In that circumstance you want to owe money because it's value gets inflated away. But borrowing in that environment will be a completely different story.

As for the local market, I just reviewed the year over year rates for the month of April and the market appears to be down about 12% on average. And the average is skewed by a whopping 29% decline in West Vancouver. Either way, I would call this a correction, and a healthy one at that, and not a crash. Although one could argue what's ocurred in West Van is pretty close to a crash, but they did have the biggest run up in prices and who gives a damn about those rich bastards..lol

http://www.rebgv.org/housing-price-index?region=all&type=all&date=2009-04-01

 

[hapkido]

Yes of course there is always risk with decisions. And cap rate shouldn't be your only focus. There are other variables to consider. I've taken that into account. I can live with occurence of risk of rising rates but on the flip side you may have lower prices. This is where each individuals circumstance differs...how much will they put down and mortgage take on. What's their time horizon? Is this a life style decision or an investment? Do you live within your means and purchase a smaller place and account for potentially higher rates in the future so you can afford to pay it?

Your timing of purchase 6 years ago was early in the cycle before the huge run up so you have a margin of safety. Based on my recollection, this was 2 years after 2000-2001 tech bust. So the market at that time was simply a tech sector focus bust but the underlying economy was sound. Like usual the market overreacted with housing despite good fundamentals. So you were lucky to get in at a good time with a "discount". So yeah in hindsight if I had to choose between then and now I would have dove in 2003. But take at look at the below chart. Look at that hockey stick rise starting in 2003. Do I believe with my analysis that with a 15% pull back from the peak that I'm getting value? Do I believe fundamentals and current economic outlook support a 300% increase from 2003? My bet is a resounding NO. Is Vancouver comparable to all the major hot and expensive cities around the world? NO. It's a lazy leisure, retirement and tourist city with an influx of mainland china money to hide and store for safety. Most of the Vancouver's economic wealth and gov't coffers was primarily generated by RE activity/development in the past 5 years. Is it sustainable long term? It's not a diverse economic hot bed of innovation and entrepreneurialism. Do the best and brightest stay to contribute to local economy? NO. Does it attract the best talent from other cities and the world? NO.

Historical Vancouver price chart

http://www.affordablevancouverhomes.com/4a_custpage_416.html

But this time it's drastically differently. This unprecedented systemic global melt down in ALL asset classes with pervasive implications will take a very long time to work through. You are comparing apples with oranges. Different severity of crash 2001 vs 2008.

So in my analysis to dive in at this point is premature with so much uncertainty....I maybe wrong or maybe right. But I can live with my decision if I'm wrong. Some people can't. They rush in due to pressures from family, girl friends, media and industry pundits. 2 Agents were pressuring me to buy in Q3 2008 saying its a great time to buy with the slight drop. I'd be kicking myself if I did but I knew better. So far I'm happy with my cautious researched approach. By the way I expected the spring bump knew it was coming. Let's wait until Q3 and after Olympics, it will be interesting.

Houses are not liquid like stocks. You can pull out of stocks anytime and stock markets turn more quickly around after a bust. With a house there are tremendous friction and time costs and if you need to sell quickly in a declining market you are screwed.



Let's follow the Vancouver market trend over the next 12 months.

http://1.bp.blogspot.com/_rt16FZ_z1N8/SgDAGXdBwgI/AAAAAAAAB7E/PhjaVDNbM-I/s1600-h/rebgv+sales.JPG

Being aware of something and acting on it are two different things. I bought a couple of houses over the last 6 years based on my belief housing prices would continue to rise, now if I simply focused on the cap rate, I wouldn't have done that and from a financial perspective that would have been a huge mistake.

Just as you believe the market will drop substantially, the danger is that if you're wrong you may find yourself in a much higher interest rate environment, especially if hyper-inflation, does in fact come to pass. In that circumstance you want to owe money because it's value gets inflated away. But borrowing in that environment will be a completely different story.

 

[hapkido]

71% BCers think it’s a good time to buy a home: poll

http://www.chineseinvancouver.ca/2009/02/71-bcers-think-its-a-good-time-to-buy-a-home-poll/

There has been healthy debate on what drives markets and are future expectations already priced in (efficient market theory - which is flawed) despite overwhelming evidence that fundamentals in Vancouver RE are wacked.

Human Pyschology plays a big factor in markets. The animal spirit to own a home at any cost has defied the bearish views and fundamentals. This will continue to prop up the RE market for some time given the historic low interest rate environment.

However, the average layman doesn't know that there is a price to pay in the future in the form of potential market uncertainty, rising unemployment, higher taxes, rate hikes and the ability to attract talent and companies to BC.

The million dollar question "Is the optimism real and justified in this unprecedented and uncertain environment? Is this a sustainable turn around inflection point or dead cat bounce?"