Cynics are silent

[FunSugarDaddy]

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?"

Now you're thinking alot more along my lines. Yes the fundamentals are wacked, especially if you're an investor. But they been wacked for decades by some measures, and if that was the only thing to consider, the market wouldn't have had it's recent 5 year run, so obviously there's more to house prices in Vancouver than fundamentals.

Human Psychology locally plays a huge role, as does low interest rates, as most focus on cash flow even more than price. Personally I think if the interest payments on your mortgage exceed what you could rent the place for, then it doesn't make sense. Most just think they want to own because they're throwing their rent money away. But how's that any different then paying interest on your mortgage? you're throwing that away too.

 

[hapkido]

Now you're thinking alot more along my lines. Yes the fundamentals are wacked, especially if you're an investor. But they been wacked for decades by some measures, and if that was the only thing to consider, the market wouldn't have had it's recent 5 year run, so obviously there's more to house prices in Vancouver than fundamentals.

Human Psychology locally plays a huge role, as does low interest rates, as most focus on cash flow even more than price. Personally I think if the interest payments on your mortgage exceed what you could rent the place for, then it doesn't make sense. Most just think they want to own because they're throwing their rent money away. But how's that any different then paying interest on your mortgage? you're throwing that away too.

Surely you don't take me a for a fool? Behavioural finance is critical to understanding markets. I've never ever discounted Psychology but let me tell you through financial history, laws of equlibrium and study of Buffett/Munger at some point Fundamentals will trump eventually Irrational Exuberance. It took 10 years to get to the bubble point...surely you know it doesnt take 1 year to unwind it. The heavy government intervention has only prolonged and propped it up. The cancer is still there.

It's called reversion to the mean. So knowing this..... why take the risk at this point in time with so much uncertainty? We can't forecast when it will drop precipitously but surely one can surmise there is a great likelihood.

 

[FunSugarDaddy]

I've never ever discounted Psychology but let me tell you through financial history, laws of equlibrium and Buffett at some point Fundamentals will trump Irrational Exuberance.

It's called reversion to the mean. So knowing this why take the risk at this point in time with so much uncertainty? We can't forecast when it will drop precipitously but surely one can surmise there is a great likelihood.

I think it depends why you're buying. If you're a first time home owner it makes sense because your overwhelming fear is that you're going to miss the market yet again and you might not get a second chance to get into the market, particularly in this low interest rate environment. And if the mortgage is actually less than your rent, it's even more justification because your cash flow is positive. Add that to the fact you may be buying it for family reasons, rather than an investment and you're planning on being in long term and it's justifiable on a number of levels.


For investors, one has to compare it to the alternative. Let's say you have $500,000 sitting somewhere and don't want to invest it into the stockmarket. For most that means either GIC rates of maybe 2-3% or buying something. So you look at a condo, if the net rent after strata fees, etc, is in the 5-6% range then it looks relatively attractive, from a risk-reward perspective.

If it's in the 2-3% range then unless you think prices are going to rise, what's the point? And when I say rise I don't mean next week, I mean over the next 5 years or so, because real estate should be a long term hold asset, as opposed to something you flip. Now for that $500,000 investment to make sense the rent would have to be in the $3,000 range if someone what's to net 2,500 a month, with about $500 a month going to property taxes, strata fees, and insurance. That's a rough guide.

But personally I think commerical real estate is more appealing if cap rates and fundaments are the focal point.

As mentioned though, if enough people start buying and there's a perception the prices are going to climb, then this feeds on itself and more jump into the market, thereby creating a self forfilling prophecy which can thwart the fundaments of the market if you're only focusing on net rent/price for a number of years. In fact that's what's recently happened to explain the last market surge as near as I can tell and lots of people make good $$ while the fundaments were out of whack for years.

That's a fact.

But unless you focus on the fundaments it's not a sound investment strategy. It may work but you're depending on house prices to rise to justify your purchase, which I think is dangerous. You should be able to justify your purchase absent an increase in price, So, I'm not disagreeing with you in the least, I think you're right, I'm just providing some counter-agruments.

 

[hapkido]

I don't discount the rational of why people are buying now. The unknowing general populace will move markets but does it mean that investments (stocks or RE) are at its true intrinsic value? Frankly, they can overpay and justify it to themselves which ever way they want. I just choose not to be a Greater Fool. It's short sighted thinking . As I repeated, you in 2003 (early in cycle) got in at a good time now fast forward to 2009 RE has risen 300%. You may brag to friends and say you are RE genious. But hind sight is 20/20. Will it continue rise 400 or 1000%? Who knows? Take your gamble but a cautious person would hold back and watch with so much uncertainty and given the fast run up. Essentially the current gambler is taking higher risks making a decision now with a 15% pull back from peak. That's my whole point. It's about timing with the biggest investment in ones life. Irrational exuberannce and animal spirits.

What makes you think it will continue to rise defying fundamentals and all logic? The game your playing (counter points) assumes the market will continue to rise indefinitely and this was just a blip correction. This is the very same logic which destroyed people, companies and governments.

I think it depends why you're buying. If you're a first time home owner it makes sense because your overwhelming fear is that you're going to miss the market yet again and you might not get a second chance to get into the market, particularly in this low interest rate environment. And if the mortgage is actually less than your rent, it's even more justification because your cash flow is positive.


For investors, one has to compare it to the alternative. Let's say you have $500,000 sitting somewhere and don't want to invest it into the stockmarket. For most that means either GIC rates of maybe 2-3% or buying something. So you look at a condo, if the net rent after strata fees, etc, is in the 5-6% range then it looks relatively attractive. If it's in the 2-3% range then unless you think prices are going to rise, what's the point? And when I say rise I don't mean next week, I mean over the next 5 years or so, because real estate should be a long term hold asset, as opposed to something you flip. Now for that $500,000 investment to make sense the rent would have to be in the $3,000 range if someone what's to net 2,500 a month, with about $500 a month going to property taxes, strata fees, and insurance. That's a rough guide.

As mentioned though, if enough people start buying and there's a perception the prices are going to climb, then this feeds on itself and more jump into the market, thereby creating a self forfilling prophecy which can thwart the fundaments of the market if you're only focusing on net rent/price for a number of years. In fact that's what's recently happened to explain the last market surge as near as I can tell and lots of people make good $$ while the fundaments were out of whack for years. That's a fact. But unless you focus on the fundaments it's not a sound investment strategy. It may work but you're depending on house prices to rise to justify your purchase, which I think is dangerous. You should be able tojustify your purchase absent an increase in prices.

BTW, I'm not disagreeing with you in the least, I think you're right, I'm just providing a counter-agrument.

 

[FunSugarDaddy]

I don't discount the rational of why people are buying now. The unknowing general populace will move markets but does it mean that investments (stocks or RE) are at its true intrinsic value? Frankly, they can overpay and justify it to themselves which ever way they want. I just choose not to be a Greater Fool.

Makes sense to me and I personally wouldn't be buying investment property now either. But that doesn't mean there aren't people who will and these people may end up making lots of money.

 

[hapkido]

Makes sense to me and I personally wouldn't be buying investment property now either. But that doesn't mean there aren't people who will and these people may end up making lots of money.

Sure anyone can make money anytime if you are smart or lucky What people don't tell you is when they lose. As you know it's very difficult to make money trading and timing markets over the long term. Very small percentage...just ask honest day traders. Houses are not liquid which makes it even worse if you are caught on the down draft. NO auto stop loss. LOL

 

[FunSugarDaddy]

Sure anyone can make money anytime if you are smart or lucky What people don't tell you is when they lose.

True enough, but time also plays a huge factor. I know people who have owned real estate for decades. One couple makes well over 100K a year from their rental income, and they paid under 50K for some of their houses in the late 50's and 60's. Not sure if the rent/price fundaments made sense at the time, but they've certain done well over the decades and they couldn't care less about this recent correction as they have no intention of selling and their mortgages have been paid off ages ago.

On the flip side I know of one guy who was thinking the fundaments were out of whack over the last 13 years. He was probably right and he continued to rent. But in the meantime house prices doubled and no matter how long he waits, he would have been better off buying something then, then he'll be now. So sometimes when it comes to real estate you can be right and still end up being wrong.

 

[hapkido]

True enough, but time also plays a huge factor. I know people who have owned real estate for decades. One couple makes well over 100K a year from their rental income, and they paid under 50K for some of their houses in the late 50's and 60's. Not sure if the rent/price fundaments made sense at the time, but they've certain done well over the decades and they couldn't care less about this recent correction as they have no intention of selling and their mortgages have been paid off ages ago.

Dude I don't have time to cover every situation. I'm not saying no one can make money. Of course if you had 30-40 years to ride the cycles up and down with inflation you will be ok. But as an asset class houses don't outperform stocks given the same duration. I can't remember the study but house prices over long periods of time rise with inflation.

But what they should really think about in their old age and if they will depend on that money, when do they cash (a house or 2) out to maximize their ROI. Maybe they can withstand a 15%, 20%, and 40% haircut but psychologically lots of old people wouldn't be able to handle that when they need that money at that time. So what do they do? They refuse to sell and hope the market will ride out by that time they are dead or cash out at the worst possible time. How do I know? Happen to my Dad.

Or just maybe they are lucky and cash out at peak. Or pass it on their lucky children.

Here is a risk factor albeit low probability - we live on the Cascadia fault line. The last major equake in North American West Coast was 1907....what happens if there is a major equake and 90% of their wealth is tied up in RE? Shouldn't they hedge and spread some of that wealth to another asset class?

 

[FunSugarDaddy]

Dude I don't have time to cover every situation. I'm not saying no one can make money. Of course if you had 30-40 years to ride the cycles up and down with inflation you will be ok. But as an asset class houses don't outperform stocks given the same duration. I can't remember the study but house prices over long periods of time rise with inflation.

But what they should really think about in their old age and if they will depend on that money, when do they cash (a house or 2) out to maximize their ROI. Maybe they can withstand a 15%, 20%, and 40% haircut but psychologically lots of old people wouldn't be able to handle that when they need that money at that time. So what do they do? They refuse to sell and hope the market will ride out by that time they are dead or cash out at the worst possible time. How do I know? Happen to my Dad.

They don't need any more money and haven't need any more for years. They're set. Their houses have been paid in full for years, including the one they live in. At this point they have 6 kids so they've also been helping them out too.

As things stand now they're getting so much income annually that they're borderline having their OAS clawed back. If they did need extra money they could get mortgages on these properties. I suppose eventually they'll have to sell them to transfer more of their shares to their children, as the houses are owned inside a corporation.



Or just maybe they are lucky and cash out at peak. Or pass it on their lucky children.

Here is a risk factor albeit low probability - we live on the Cascadia fault line. The last major equake in North American West Coast was 1907....what happens if there is a major equake and 90% of their wealth is tied up in RE? Shouldn't they hedge and spread some of that wealth to another asset class?

Well I personally have a deductible in my insurance policy for earthquakes, so most are covered in that eventuality. Should they diversify? Well they are to some extent in that they have RRIF's, but the vast majority of their wealth is in real estate and people who have done well in real estate for over a 50 year period tend to get set in their ways.

 

[hapkido]

Then they are set financially (they represent 1-5% of population...can't say that for 80% of the population. Back then people were fiscally conservative. Now a days every body wants the bling bling life style and have it all now. = young people and families (little savings and in debt to their eyeballs and working 24x7). Avg family income of $60K one wonders how? lol

They don't need any more money and haven't need any more for years. They're set. Their houses have been paid in full for years, including the one they live in. At this point they have 6 kids so they've also been helping them out too.

As things stand now they're getting so much income annually that they're borderline having their OAS clawed back. If they did need extra money they could get mortgages on these properties. I suppose eventually they'll have to sell them to transfer more of their shares to their children, as the houses are owned inside a corporation.

Or just maybe they are lucky and cash out at peak. Or pass it on their lucky children.



Well I personally have a deductible in my insurance policy for earthquakes, so most are covered in that eventuality. Should they diversify? Well they are to some extent in that they have RRIF's, but the vast majority of their wealth is in real estate and people who have done well in real estate for over a 50 year period tend to get set in their ways.