Real Estate Santa
Posted December 15th, 2009 in Real Estate, Sharing the Experience | 
Magic
Do you remember that moment when you discovered Santa wasn’t real? Were you heartbroken, did you cry, did you get angry? Worse, did that moment throw you into unprecedented disbelief, crushed by the acceptance that there was no Santa?
Scrooge
The Globe and Mail’s Barrie McKenna posted an article entitled ‘Housing Market Has Big Cracks’. Though unconfirmed, McKenna may be a Scrooge incarnate or, he is akin to one of those sadistic childhood friends who tells you “there is no Santa” moments before you fall asleep on Christmas Eve. He may well be that kid who first opens the door to doubt.
McKenna’s timing is of course critical! His words play out just as visions of Sugar Plums, the sounds of Bing Crosby singing White Christmas, the arrival of twinkly colored lights, the gathering of friends and the shinny presents under the tree enter our minds.
Logic
McKenna points to logic to support his claim that something very unattractive is about to fall down the Canadian real estate market chimney.
Comparing our market to other world real estate chimneys he claims -
‘The contrast is startling, and quite frankly, defies logic.”
‘It isn’t as if Canada was immune to the worst recession since the Second World War. The economy contracted, stocks tumbled, unemployment jumped more than two percentage points to 8.5 per cent, 321,000 jobs were destroyed and personal income fell.’
McKenna’s Rationale: 2 Maids a Milking and a Lump of Coal
- brilliant monetary stewardship at the Bank of Canada, prudent lending by banks
- the right dose of stimulus from the Harper government
- probably, a real estate bubble that will eventually burst – two years after the rest of the world
Maybe The Elves Know
Confounded by his own 2 Maids and lump of coal, McKenna calls upon the elf with opinion from the University of Western Ontario, economist James MacGee. His claim – one noted to have been espoused by many elves before, is that ‘the main reason Canada’s housing market hasn’t gone bust is because of much sounder lending practices.’ With elf like light-on-his-toes conviction, MacGee also says ‘Canada could face a correction some time in 2010′ but, he ‘admits he could be wrong – it could just be a slowdown.’
On Dasher, On Blitzen
Unsatisfied with opinion from the elves of academia, McKenna seeks wisdom from a bright red light, economist David Rosenberg who’s real job is being the ‘Chief Strategist’ at Gluskin Sheff + Associates Inc. Rosenberg’s view of ‘whether home prices are in a bubble’ sums it up with glowing perspective saying ‘if it walks like a duck…’
Market Forecast – Snow, Mixed with Rain
Vancouver’s weather like it’s real estate market, is characteristically out of sync with the rest of Canada. If it snows here we accept that the city effectively will shut down. When that happens we know it is for a short period of time for our optimism lies in the rain that follows. While the compounding rain and snow is initially messy, we know how ducks walk and we also know the rain solves our problem by washing the snow away – this is certain.
At first glance it seems that these economic meteorologists suffer similar fate. McKenna, McGee and Rosenberg are unable to sync their forecast for this city leaving as McKenna says, ‘big cracks’ of uncertainty in their forecast.
Belief
Suggested is that these cracks are the doubt in which sufficient room is left for the Vancouver real estate market to believe that Santa is real.
*Disclaimer: All quotes courtesy The Globe and Mail. While believed to be accurate they are not guaranteed.
Well, the fairy tale has to end some time.
If any sound mind thought this could go on and on without a significant correction, he or she must have lumps of coals for brains.
Boombust,
You may be right! Might end or it may just become the ‘Never Ending Story’.
Until we see the fat lady in the wings and the conductor cueing the orchestra we’ll have to wait. Even then watch for the guy with the hook.
Boombust,
I met a Realtor this month who owned a 400 sqft studio steps from GM place. Cost: ~$300K.
She tried, in vain, to convince me to buy. She even said “everyone eventually buys” to which I laughed at her. She seemed upset after that, so I spurred her on. I told her for the same price I was renting a 900 sqft 2 bdrm. She seemed surprised. Why? She, like most, never add up all the costs.
Her cost:
10% down, at 4% over 25 years == $1400/mn
taxes == $150/mn
condo fee = $300/mn
total == $1850/mn
My cost:
rent == $1850/mn
So she argued that she’s building equity cause housing always goes up. I disagree, cause we’re not even back to the 2008 peak even with historic low rates, CHMC taking all the risk, and long amortizations.
Her potential profit after 5 years if she sells:
sale price: $300K (flat, no gains)
10% down = $30K
2% CHMC insurance = $6K
lawyer = $1K (x2 for buy/sell)
5% commission = $15K (lets assume she’s subject to the same pain the rest of us are)
remaining mortgage == $235K
net result == $12K profit ($300 – $235 == $65K – $30K == $35K – $15K – $6K – $1K – $1K == $12K)
My potential profit from investing the $30K for 5 years @5% == $8K
She comes out $4K ahead. That means prices only have to drop 1.3% before I’ve made more money than her, and I didn’t live in a glorified closet for 5 years.
—
Now some will argue that prices will still go up, so she’s bound to make more money. I’ll even agree, that made sense 5 years ago yet not now. I’m a homeowner and bought during the runup (2004) yet would never consider buying now.
I’ll throw this out there:
I wouldn’t want to count on buying an asset after a long runup, fueled by once-in-a-lifetime events, during a recession, with a looming rate and tax (property and HST) increase, while wages have been frozen, disposal income dropped, job quality figures (FT vs PT) in the toilet, and unemployment having risen then throw in the coming Olympic downturn that every Olympic city for decades has suffered.
Yet that’s just me. Apparently there’s a lot of gamblers out there, I just hope they know the risk.
Worst case, if property values drop, I can at least rent my property for a price that covers all expenses. Meanwhile, she is stuck selling for a loss, renting for a loss, or living in a closet at an age she would consider starting a family. Good luck renting her 400 sqft closet for $1850 considering:
Vacancies are WAY up in Vancouver, even with the Olympics less than 2 months away. My bball teammate is looking for a place to rent and has talked a 1000 sqft 2bdrm steps from Kits beach down to < $1700/mn.
Larry,
Japan’s version of the “Never ending story” is not one we should wish for. As many soon-to-be retirees have their investments in their property, and many young people threw all their savings into property, we cannot afford for property to take a never ending spiral downwards.
Chris,
you may have set a record for a comment longer than my posts – well done! “Same pain” – now Chris, you know you love paying Realtor’s commissions!
Japan, yes it could get nasty. However, there are things you and I can control and the rest of it is timing and luck.
BTW: todays Globe and Mail had an opposite perspective from yesterdays – go figure.
Bottom line Chris, after all is said and done, somebody will be the winner at some point in time. The sad part is that like everybody else, neither you nor I know the final answer.
Larry,
I knew you’d like the “same pain” comment
My current Facebook picture is of a little girl in the US holding a sign saying “Am I paying your mortgage?”. Despite who wins, the real loser will be tax payers, especially future tax payers (that little girl) who will have to pay for the mess we’ve created.
We’ve throw $59B at the problem already, allowed CHMC to take on $450B of more risk, and currently have tax programs that reward those willing to gamble (HBP raised to $25K, Home renovation tax credit).
My only hope is that the government doesn’t step in with home buyers grants or rate subsidization like in the US. Let those who gamble, lose, and not tax those of us who played it safe.
Have you every watched the Disney version of The Ant and The Grasshopper? Its the biggest scam played on society – in the original written story, the grasshopper dies. Perhaps if more people had to own up to the risks they take, they wouldn’t risk it.
“The sad part is that like everybody else, neither you nor I know the final answer.”
Hmmm…I think you have a fairly good idea.
BoomBust,
RE: hmmm. Lest we forget, I am but a humble peddler.
Chris,
re: own up – as time passes suspect is that some will have no choice but to do exactly that – It’s a heart breaking process!