Meanwhile 'just right' depends on who you are:
Look for headlines soon to come out of Toronto documenting their experience of renovictions. Everyone has to pay more for housing now because of 9 years of ZIRP & NIRP
Hat tip to @BenRabidoux for the chart below
FROM Alberto Gallo, Bloomberg, August 2017
Capitalism Doesn't Work at 0%
"It would pay to travel to Mars because the returns here on Earth are very very low."
Liabilities were an unimportant consideration because in a few days, a similar property would sell for even more and your balance sheet then became even more credit worthy; check and check.
On the way down, guessing the price that a vendor will agree to is still a requirement; is the vendor holding a property with too little of his own equity and perhaps reluctant to take a loss at this time, or is the property being offered for the first time in let's say the last decade? A single family detached house in Vancouver has increased in price by over 120% in the last 10 years (over 160% in Toronto). The vendor's equity position is an important clue in the guessing game.
Is the vendor attempting to sell in order to repurchase in the same market? That would suggest an end price is required similar to the current snapshot of market comparable sales if trading sideways is the objective. Is the vendor an estate looking to settle accounts for multiple parties? That implies that the end price is not as "sticky" because VALUE can be defined outside the parameters of "comps".
At some point definitions of value might again include an appraiser's use of the "income" approach. Investment real estate cap rates in a city like Vancouver are among the lowest in Canada and so a buyer must determine if there is value in the price. Potential investment capital can dry up and move very rapidly out of a declining market and seek out better (lower risk) returns elsewhere. Low cap rates are tolerated in a rising market but not so much when price momentum shifts to the down side. Vancouver prices peaked July 2016
A declining market requires more work on the buy side and exposes the potential purchaser with risk not seen on the way up.
The CBRE in their 2016 Report list cap rates for "A" class apartment buildings in Vancouver at 2.5-3% (in Toronto 3.25-3.75%, in Calgary 4.5-5%). This week the Bank of Canada benchmark 10 year yield is 1.76% similar to the full month of February plot on my yield curve chart.
What we don't see in the CBRE report is what expense items are used in the developing a theoretical cap rate (Net Income / Asset Purchase Price). I suspect that only the minimum data of property tax, insurance, maintenance and actual expenses paid out are used for a given year in these surveys. Is a vacancy allowance included? Not all tenancies are reliable. Is a management fee included? Someone has to spend time taking care of the asset. Is the asset subject to sudden strata fee spikes or revelations of past due maintenance? These are important questions that any real estate investor who has been playing the game for at least one cycle trend change will ask.
In my 2013 case study, I had to lower the purchase price by 25% to get a return that piqued my interest because I included vacancy and management.
With a 25% drop in sale price, the GRM has dropped nearly 6 points (lower is better) and the CAP Rate has gone up 40 basis points (higher is better) which not a huge move but the yield on investment (ROI) has increased to more than twice the 10 year bond return and that provides an investor the incentive in a ZIRP environment to buy and hold and allow other people's money (the tenant's) to turn debt into equity.
Owning real estate has risk attached both at the individual ownership level and in the broader market place. It's 2017, if anything, real estate as an investment is even more fraught with unknown risk.
Thanks to Steve Saretsky, Realtor for his
Hilliard MacBeth posted an interesting chart comparing the BIS housing price index data of Australia, Canada, U.S. Germany and Japan. I have mashed it up here adding inset charts of the BIS (Bank of International Settlements) debt service ratios and debt to GDP. Here is Hilliard's original post from December 9, 2016.
And the charts left are from the OECD via the IMF showing the recent ranking of cities with respect to house price to rent and house price to income ratios.
Canadians in Vancouver and Toronto are up against extreme increases in housing costs and no doubt conversations around the kitchen table probably include migration to more affordable housing jurisdictions and employment opportunities.
Hilliard MacBeth makes the point that in Germany there is a much higher population density than in Canada "Munich is more than 4 times as dense as Toronto and 5 times more packed than Vancouver." and that "In Canada, home ownership is at record high levels of about 70 percent, similar to the U.S. in 2005, while in Germany comparable numbers are 45 percent."
The idea of development land scarcity and the current regime of letting the market place dictate land values in Canada is of course absurd. We need reform, not a wild west of house flippers, money laundering and consumption at any cost.
I covered this observation in early 2014 with my post of "German Housing", and I regularily publish the census density of Canada as well. The point is really about the Social Contract we should be developing. We have an under supply of affordable housing in Canada because we the electorate do not have representation.
The housing and bond bubbles are reflections of the ignorance bubble that we the electorate are in and it's not likely to change.
The last two properties of Umberto Eco's list of 14 that define fascist ideology are cogent to our predicament:
"Selective Populism" – The People, conceived monolithically, have a Common Will, distinct from and superior to the viewpoint of any individual. As no mass of people can ever be truly unanimous, the Leader holds himself out as the interpreter of the popular will (though truly he dictates it). Fascists use this concept to delegitimize democratic institutions they accuse of "no longer represent[ing] the Voice of the People."
"Newspeak" – Fascism employs and promotes an impoverished vocabulary in order to limit critical reasoning.
Critical thinking might as well be outlawed in the new world order of truthiness.
Word of the Year: "Post Truth"
Walter White: The New DEA Nominee
Bob Dylan: Only a Pawn in Their Game
Toronto Condos pile up on a 21 year high.
"10,368 condos were completed in January 2015 in Toronto
a record 21 year high and 8x the average over the last 10 years."
said Sal Guatieri, BMO Economist
Rent Reduction Time
Condo Glut? Yes. The lower chart shows a snapshot of houses and apartments for rent in the 6 biggest Canadian metros. What vacancy rate does your real estate investment model use?
"Rent... Don't Buy" Kevin O'leary
In preparing for my recent BNN Interview (July 9th) the producers sent some queries in advance of the spot; one was "Is it time to rent or buy?". We never covered it on air but my response would have been:
It’s always a time to rent or buy unless you're Hikikomori.
One should look at the fundamentals of one’s present balance sheet and not rely on past performance or future speculation. If you are risk averse then buy or rent what you can pay for if the scenario of your household income were to suddenly drop. Contingencies are for the unexpected. Two income households may have a cushion, one income households have a greater risk.
I mashed up the chart above from Mercer via ZeroHedge which shows the high rent cities (petro-finance-centric) and I included Manhattan averages with or without doormen as well as the 3 hot Canadian markets of Vancouver, Calgary and Toronto.
The fundamentals don't support buying in Vancouver, Calgary and Toronto especially since interest rates are at a low (will they drop?) and rents and resale prices are at the highs (will they rise?).
There is little room for improvement on cash flow unless buying hot market real estate to rent out has some potential for improving the ability to increase the revenue. As I demonstrated in my case study last year of buying a Vancouver condo for investment, the risk of a negative return is only going to be alleviated by a 25% reduction in purchase price if comparison to a 10 year bond is rational. Also last year at the time of the study, inflation (CPI) was running at half of what it is today; a rising CPI erodes the bottom line.
The mashup to the left is with thanks to the Vancouver Price Drop blogger who has been tracking the behaviour of Vancouver vendors who are chasing the market down as purchaser sentiment switches. They can't help themselves. The sample price drop building reminded me of New York where the term "jonesing" is said to have originated and the news item of Cory Weeds closing The Cellar Jazz Club reminded me that Vancouver ain't New York no matter what the condo brochure says. Why did everyone take on historic levels of debt just to live in inefficient housing units? Watch the 12.39min video explanation below by Belabed & Theobald of how the middle class, has just been trying to keep up with the consumption norms of the upper class, which kept expanding as more aggregate income flowed upwards. In other words you have depleted your savings and borrowed as much as you could because you have been jonesing to keep up with the Jones'.
Now listen to Sam Harris' 12.10min video explanation of how the illusion of Free Will can have you behaving against your own best interests. Finally enjoy Bob Dylan's live performance 6.52min video of the Ballad of the Thin Man.
Christian Belabed and Thomas Theobald: Inequality and the Current Account
Relative Income Hypothesis
Most economists think about aggregate consumption through the lens of Friedman’s permanent income hypothesis or Modigliani’s life-cycle hypothesis. But long ago there was a third contender, Duesenberry’s relative income hypothesis, which argued that household consumption decisions are powerfully shaped by the behavior of their reference group.
Institute for New Economic Thinking grantees Christian Belabed and Thomas Theobald and their co-authors have revived this old theory as a hypothesis to explain the apparent statistical link between rising income inequality and current account deficits. The middle class, so the argument goes, is just trying to keep up with the consumption norms of the upper class, which keep expanding as more aggregate income flows upward.
Duesenberry’s hypothesis arose from a melding of ideas from social psychology with ideas from economics. Revising his hypothesis is one way to bring economics back into contact with psychology and help the discipline get closer to understanding realistic conceptions of human behavior. That’s new economic thinking.
"Free will is an illusion so convincing that people simply refuse to believe that we don’t have it. In Free Will, Sam Harris combines neuroscience and psychology to lay this illusion to rest at last. Like all of Harris’s books, this one will not only unsettle you but make you think deeply. Read it: you have no choice."
Jerry A. Coyne, Professor of Ecology and Evolution at The University of Chicago, and author of Why Evolution is True.
First released on Bob Dylan's Highway 61 Revisited in 1965.
"You know something is happening but you don't know what it is, do you Mr Jones"
The id (German: Es) is the unorganized part of the personality structure that contains a human's basic, instinctual drives. Id is the only component of personality that is present from birth. It is the source of our bodily needs, wants, desires, and impulses, particularly our sexual and aggressive drives. The id contains the libido, which is the primary source of instinctual force that is unresponsive to the demands of reality. The id acts according to the "pleasure principle"—the psychic force that motivates the tendency to seek immediate gratification of any impulse—defined as, seeking to avoid pain or unpleasure (not 'displeasure') aroused by increases in instinctual tension. If the mind was solely guided by the id, individuals would find it difficult to wait patiently at a restaurant, while feeling hungry, and would most likely grab food from neighbouring tables. (Wikipedia)
Housing prices in Germany are rising as demand for owner occupied dwellings increases for the rising levels of employed.
But only about 53% of Germans own their homes, compared with 70% in the U.K. and Canada and 65% in the U.S.
Since the end of WW II, the national consensus in Germany has been that housing provision is an essential public resource to be protected from speculation using regulation that promotes rental accommodation and fosters tenancy protection as well as municipal planning that releases land with incentives for developers to create rental housing when needed.
As the lower panel of the chart mashup above shows, a big incentive to provide rental housing is the yield on rentals being superior to Government 10 year bonds and stock dividends over time.
In the OECD, German households on average spend 21% of their gross adjusted disposable income on keeping a roof over their heads and 93% of people say they are satisfied with their current housing situation, more than the OECD average of 87%. This high level of subjective satisfaction reflects Germany’s good performance in objective housing indicators. SOURCE
Lance Roberts makes the cogent observation that what really drives long term economic growth is not residential investment as much as "household formation". I have mashed up only 2 of his 6 chart argument to show that total U.S. housing activity in the U.S. has rallied out of the 2009 pit of gloom, but the action appears to have faded in 4Q 2013 and is stalled at 2008 levels.
On the lower panel we can see that household formation in the U.S. has plummeted off the 2005 peak and the percentage of owner occupiers is back to 1980 levels.
Owner occupier levels in Canada, according to the StatsCan 2011 Census via The Financial Post, is at a level that corresponds with the peak in U.S. levels of 2005. Canadian national home ownership was 68.4% in 2006 and 69% in 2011 spurred on by a high-rise condominium boom; 30.9% of owner households in Canada live in condos and in Toronto it's a very high 67.4% of homeowners that do.
But household formation it is not. Single non-family households make up 45.5% of condo owning dwellers in the top 10 Canadian metros. This, along with the underemployed is perhaps Canada's Freeter class.
FREETER: Japanese expression for people who lack full-time employment who are underemployed, who do not start a career after high school or university, but instead earn money from low skilled and low paid jobs. (Wikipedia)
Here is the distribution of owner-households by household type, for owner-occupied condominiums and other owner-occupied dwellings in 10 CMAs (Canadian Metros) with the highest number of occupied condominiums. StatsCan 2011 Catalogue 99-014-X2011003
CBC DOC ZONE VIDEO "The Condo Game"
Are you thinking of buying a condo? If you do, you should set aside money for special strata assessments that are additional to any regular monthly "contingency" strata fees. AND read this CONDO USER'S GUIDE prepared by Ted Kesik, University of Toronto building science professor.
Here is an excerpt from the BC Housing Home Owner Protection Office website "Managing Strata Repairs FAQ"
Can the strata corporation use the Contingency Reserve to fund repairs? What options are available to fund the repairs?
According to the BC Strata Property Act, monies in the Contingency Reserve Fund can be used for emergency repairs without approval from the owners. Beyond emergencies, owners must give their approval at a general meeting to use these funds.
The strata corporation has two options for raising money:
1) The strata corporation can borrow money and collect additional amounts from owners each month to repay the loan
2) Special assessments can be levied against each strata unit
Either course of action requires approval by the owners at a general meeting of the strata corporation.
What happens if not all owners are able or willing to contribute their share of the repair costs?
Once the strata corporation has approved a resolution to levy special assessments, the Strata Property Act provides remedies for those who do not pay on time. Ultimately, the strata corporation can place a lien against the strata lot requiring it to be sold and monies owing to the strata corporation are collected from the sale proceeds.
Now that we are on the seasonal down ramp into the 2014 spring bottom for sales and listings, it might be worthwhile for those Canadians who are heavily debt encumbered to look at what happens to a "C" class income generating country after their real estate bubble gets pricked by a swift change in buyer sentiment.
As for The Irish Miracle "The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it. The entire Irish episode will be studied internationally in years to come as an example of how not to do things." (David McWilliams Irish economist writer, broadcaster and journalist)
News Item CNN November 14, 2013: Three years after turning to the EU and International Monetary Fund for €85 billion in aid, Ireland is poised to become the first bailed-out eurozone country to make a full return to financial markets.
Notice the polar opposites of the U.S. (B Class GDP) and Japan (D Class GDP) since 1Q 2000 when the DotCom bubble burst; they also experienced severe housing price deflation; Japan's slide began a decade earlier. Timing is everything.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy