[Canada] Canadian Politics Redux

[Camerus]

My thesis just gave particular emphasis to the role globalization, immigration and foreign investment is playing in driving prices up, and partly helps explain the sustained spike in prices since the 90s in certain hotspots. I speculated that this phenomenon will be ongoing and might make real estate investment attractive and could influence the real estate market in ways that pre 90s models may not take into account.  Obviously, as I also indicated, low interest rates make real estate a much more attractive buy for all, thereby further driving up prices.

Anyway, I was mostly just idly musing - I still haven't bought anything and nor do I intend to. I lack the personality for or interest in deal making.

[crazy canuck]

yeah, I think I have told everyone about a good friend of mine who was convinced by the experts that we were in a housing bubble and he decided to sell his house and wait for the crash to re-enter the housing market.  That was three years ago. And what is the value of the house he so sagely sold?  A couple of months ago it sold again for 2M more....

People like BB have been shouting from the sidelines since the 90s that the Vancouver and Toronto markets were bubbles that were going to burst anytime now.  As Malthus said, one decade they might be right.  But a lot has to change for that prediction to come true.  First, interest rates have to rise.  No sign of that but who knows.  Second, and perhaps more importantly, people have to stop coming to these two cities.  I really don't see that in the cards.  They are the only real job creation centres in the Country and have consistently been so.  They have both reached the point now that they are engines of economic activity independent of what might be happening in the rest of the country.

Personally I hope prices do come down a bit.  Its getting hard for most people to afford.  But prices are going to have to plummet before I become concerned 

[Barrister]

yeah, I think I have told everyone about a good friend of mine who was convinced by the experts that we were in a housing bubble and he decided to sell his house and wait for the crash to re-enter the housing market.  That was three years ago. And what is the value of the house he so sagely sold?  A couple of months ago it sold again for 2M more....

People like BB have been shouting from the sidelines since the 90s that the Vancouver and Toronto markets were bubbles that were going to burst anytime now.  As Malthus said, one decade they might be right.  But a lot has to change for that prediction to come true.  First, interest rates have to rise.  No sign of that but who knows.  Second, and perhaps more importantly, people have to stop coming to these two cities.  I really don't see that in the cards.  They are the only real job creation centres in the Country and have consistently been so.  They have both reached the point now that they are engines of economic activity independent of what might be happening in the rest of the country.

Personally I hope prices do come down a bit.  Its getting hard for most people to afford.  But prices are going to have to plummet before I become concerned 

And hopefully your friend has invested all of his profits from his house and earned a pretty penny on that as well?  Plus the savings from renting vs owning?  Your friend is not all that dumb after all.  Someone who sold all his dotcom stocks in early 1999 lost out on all the gains from the rest of that year... but they then didn't capture all the losses when the bubble burst in 2000.

Look, saying there is a bubble is a lot different from being able to time it.  I dunno - it could go on for years more.

Immigration to Toronto and Vancouver is nothing compared to the increases in property prices.  That is not what is driving price increases.

Interest rates rising... rates in the US are set to rise probably this year.  Rates in Canada will follow suit sooner or later (or else the loonie gets clobbered).  Historic low interest rates will not continue forever.

And what exactly is driving economic growth in Toronto and Vancouver?  Could it be... real estate?  Is that not circular reasoning to say that economic growth is raising housing prices, when that economic growth is from rising housing prices?

And I'm not saying that people like CC, Malthus and I are going to be in the poor house whenever the bubble pops.  We're not (unless you guys have been getting 2nd and 3rd mortgages and not telling me).  We're all middle aged guys who bought when prices were more reasonable and have been paying down our mortgages since then.  We'll all be okay.  But it will have impacts on the wider economy that should concern us.

[Jacob]

I don't think it's the price of real estate that has driven the job growth in tech jobs, to be honest.

[crazy canuck]

Immigration to Toronto and Vancouver is nothing compared to the increases in property prices.  That is not what is driving price increases.

do you have anything to back up that assertion?  We already know its not absentee off shore money.  It is people coming here to live.

Interest rates rising...

Yeah, we have been hearing that fairly constantly for a long time as well.

And what exactly is driving economic growth in Toronto and Vancouver?  Could it be... real estate?  Is that not circular reasoning to say that economic growth is raising housing prices, when that economic growth is from rising housing prices?

Already debunked that argument the last time you made it.  But I will repeat - all the sectors of our economy are growing at about the same rate as a percentage of GDP.  The resource sector actually grew more than any other including the real estate sector.  Add to that the booming tech, entertainment, tourism, shipping and transportation, and manufacturing sectors and you start to get an idea of why so many people want to live, work and invest here.

[Malthus]

I agree that if there is a bubble, and it bursts, the concern will be the effects on the economy as a whole. If all it effects are real estate prices, I'd welcome such an event - as I've said before, it will make a nicer house more affordable for me. 

The part that I'm not seeing is "irrational exuberance" and panic investing that the article claims is characteristic of a bubble. Sure. lots of people want houses, but they want them to live in, not to sell for investment profits. There are "flippers" but there have always been flippers. Not convinced current demand is significantly driven by flippers selling to other flippers.

[Barrister]

I agree that if there is a bubble, and it bursts, the concern will be the effects on the economy as a whole. If all it effects are real estate prices, I'd welcome such an event - as I've said before, it will make a nicer house more affordable for me. 

The part that I'm not seeing is "irrational exuberance" and panic investing that the article claims is characteristic of a bubble. Sure. lots of people want houses, but they want them to live in, not to sell for investment profits. There are "flippers" but there have always been flippers. Not convinced current demand is significantly driven by flippers selling to other flippers.

What is irrational isn't exuberance, but fear.  The sentiment is "I have to buy a house now or else I'll never be able to afford one".  The feeling that you're a failure in life if you don't own real estate (and that renting is for losers).

[Malthus]

I agree that if there is a bubble, and it bursts, the concern will be the effects on the economy as a whole. If all it effects are real estate prices, I'd welcome such an event - as I've said before, it will make a nicer house more affordable for me. 

The part that I'm not seeing is "irrational exuberance" and panic investing that the article claims is characteristic of a bubble. Sure. lots of people want houses, but they want them to live in, not to sell for investment profits. There are "flippers" but there have always been flippers. Not convinced current demand is significantly driven by flippers selling to other flippers.

What is irrational isn't exuberance, but fear.  The sentiment is "I have to buy a house now or else I'll never be able to afford one".  The feeling that you're a failure in life if you don't own real estate (and that renting is for losers).

That's a wholly different motive than investment panic buying.

The point about investment panic buying is that it can turn on a dime. One minute your exotic tulip is worth as much as your house; the next, it's just a flower. You make money in a panic buying "irrational exuberant" market by playing musical chairs or hot-potato with the over-valued investment - flipping it to the next panic buyer as fast as you can, so you aren't caught with the worthless tulip when the music stops and everyone comes to their senses.

This is the "bubble" atmosphere described in your article.

Now, it may be that a cultural liking for owning houses over renting contributes to high house prices. But as long as that cultural imperative exists - as long as people really truly believe that "renting is for losers" and so are willing to pay a premium for buying a house - it isn't "irrational exuberance". It just means that this asset is "overvalued" as far as you, subjectively, are concerned - on the assumption that a 'rational' person would not care whether they owned or rented.

The effect on the market of these two impulses would, I think, be quite different. If the players in the market are truly motivated by "irrational exuberance", as soon as prices start to come down (because interest rates go up or whatever), they will attempt to sell - to leave the market in droves - for fear that their investments will be worth less than they paid for it. Leaving the market in droves leads to further panic selling in a self-sustaining chain reaction.

If, on the other hand, the market is driven by a genuine cultural liking for house ownership, if the market goes down people won't sell in droves - because they still like owning houses. It is more likely to lead to a 'soft landing'.

[Jacob]

If, on the other hand, the market is driven by a genuine cultural liking for house ownership, if the market goes down people won't sell in droves - because they still like owning houses. It is more likely to lead to a 'soft landing'.

Yeah, the pattern we've seen in Vancouver this last decade or so is that once prices start coming down two things happen:

1) Fewer people put their houses/ condos on the market - they live in them and are in no hurry to move.

2) More people come to market, now that prices are down a bit, feeling that they're no longer priced out (or rather, I think, looking to get more house for the money they're ready to spend).

... this has tended to stop prices from going down too much for too long, as demand increases while supply shrinks.

Personally, I think for some sort of "burst" moment we'll need to see more people selling once prices come down. A significant interest rate increase could trigger that, as mortgages become unaffordable for people, as could various calamities. But I don't think it's something that's going to happen just because a bunch of people wake up in a different mood one day.

[Barrister]

If, on the other hand, the market is driven by a genuine cultural liking for house ownership, if the market goes down people won't sell in droves - because they still like owning houses. It is more likely to lead to a 'soft landing'.

Yeah, the pattern we've seen in Vancouver this last decade or so is that once prices start coming down two things happen:

1) Fewer people put their houses/ condos on the market - they live in them and are in no hurry to move.

2) More people come to market, now that prices are down a bit, feeling that they're no longer priced out (or rather, I think, looking to get more house for the money they're ready to spend).

... this has tended to stop prices from going down too much for too long, as demand increases while supply shrinks.

Personally, I think for some sort of "burst" moment we'll need to see more people selling once prices come down. A significant interest rate increase could trigger that, as mortgages become unaffordable for people, as could various calamities. But I don't think it's something that's going to happen just because a bunch of people wake up in a different mood one day.

As I understand it, housing prices are fairly "sticky" going down.  Even in Calgary right now (which is an economic disaster zone) prices have declined very little.  What happens is people are either underwater on their homes (they owe more than the home is worth) so they can't sell, or emotionally they don't want to sell for less than what they paid for it.  So they sit in their homes.

In order for significant price declines you need foreclosures.  Which is where interest rates come in.  When interest rates rise, and suddenly people can't renew afford their mortgage, or banks refuse to renew (because the home is worth less than the mortgage), then you're going to see significant price declines.

[Malthus]

If, on the other hand, the market is driven by a genuine cultural liking for house ownership, if the market goes down people won't sell in droves - because they still like owning houses. It is more likely to lead to a 'soft landing'.

Yeah, the pattern we've seen in Vancouver this last decade or so is that once prices start coming down two things happen:

1) Fewer people put their houses/ condos on the market - they live in them and are in no hurry to move.

2) More people come to market, now that prices are down a bit, feeling that they're no longer priced out (or rather, I think, looking to get more house for the money they're ready to spend).

... this has tended to stop prices from going down too much for too long, as demand increases while supply shrinks.

Personally, I think for some sort of "burst" moment we'll need to see more people selling once prices come down. A significant interest rate increase could trigger that, as mortgages become unaffordable for people, as could various calamities. But I don't think it's something that's going to happen just because a bunch of people wake up in a different mood one day.

As I understand it, housing prices are fairly "sticky" going down.  Even in Calgary right now (which is an economic disaster zone) prices have declined very little.  What happens is people are either underwater on their homes (they owe more than the home is worth) so they can't sell, or emotionally they don't want to sell for less than what they paid for it.  So they sit in their homes.

In order for significant price declines you need foreclosures.  Which is where interest rates come in.  When interest rates rise, and suddenly people can't renew afford their mortgage, or banks refuse to renew (because the home is worth less than the mortgage), then you're going to see significant price declines.

There is no doubt that an increase in interest rates would have an impact. The concern is whether that would result in a bubble bursting, or in a soft landing.

The real issue is whether there exists an 'excessively risky lending bubble'. My impression is that Canadian lending rules are more conservative than those in the US, that it would be more difficult here to end up in a cascading disaster. 

[Jacob]

As I understand it, housing prices are fairly "sticky" going down.  Even in Calgary right now (which is an economic disaster zone) prices have declined very little.  What happens is people are either underwater on their homes (they owe more than the home is worth) so they can't sell, or emotionally they don't want to sell for less than what they paid for it.  So they sit in their homes.

In order for significant price declines you need foreclosures.  Which is where interest rates come in.  When interest rates rise, and suddenly people can't renew afford their mortgage, or banks refuse to renew (because the home is worth less than the mortgage), then you're going to see significant price declines.

Yeah, we are in agreement here. I guess the conversation then becomes about the likelihood of an unanticipated and steep increase in interest rates.

[PRC]

Even in Calgary right now (which is an economic disaster zone) prices have declined very little. 

While office space may not have a full vacancy rate compared to a couple of years ago, describing Calgary as an "economic disaster zone" is off the mark.  Oil & gas may not be so rosy, but some other sectors, notably tourism are up.  Fully anecdotal experience so ymmv.

May Long weekend for myself was spent on the West Coast where I brought up the topic of vacant houses in Vancouver (with four friends, all homeowners in East Van, Commercial Drive area) that Jacob and CC dismissed as a non-existent problem.  All of them said they definitely had vacant homes in their area, the majority sitting empty because of months long renovations via house flipping, but several noted that houses had sat empty, lights out, for quite some time with no activity whatsoever.  No one ascribed any "Asian menace" to the empty houses, but they all agreed they were present.  Once again, ymmv.

[Jacob]

May Long weekend for myself was spent on the West Coast where I brought up the topic of vacant houses in Vancouver (with four friends, all homeowners in East Van, Commercial Drive area) that Jacob and CC dismissed as a non-existent problem.  All of them said they definitely had vacant homes in their area, the majority sitting empty because of months long renovations via house flipping, but several noted that houses had sat empty, lights out, for quite some time with no activity whatsoever.  No one ascribed any "Asian menace" to the empty houses, but they all agreed they were present.  Once again, ymmv.

Didn't dismiss it as a non-existent problem. I said that people who think it's a big problem, applies it to all kinds of instances where it's not the case.

F. ex. I don't think a house sitting empty for months because someone's renovating it to flip it should go in the category of "people park money in houses they don't live in as a way to store their foreign wealth", which you frequently hear.

There are some houses around that sit empty for quite a while, yes. There are a bunch of different reasons for that, but some people make the jump to claim that it's always proof of offshore money storing wealth; your friends did not, but enough people do and that's the part of the debate I was getting at.

[crazy canuck]

Even in Calgary right now (which is an economic disaster zone) prices have declined very little. 

While office space may not have a full vacancy rate compared to a couple of years ago, describing Calgary as an "economic disaster zone" is off the mark.  Oil & gas may not be so rosy, but some other sectors, notably tourism are up.  Fully anecdotal experience so ymmv.

May Long weekend for myself was spent on the West Coast where I brought up the topic of vacant houses in Vancouver (with four friends, all homeowners in East Van, Commercial Drive area) that Jacob and CC dismissed as a non-existent problem.  All of them said they definitely had vacant homes in their area, the majority sitting empty because of months long renovations via house flipping, but several noted that houses had sat empty, lights out, for quite some time with no activity whatsoever.  No one ascribed any "Asian menace" to the empty houses, but they all agreed they were present.  Once again, ymmv.

Yeah, anecdotes abound without evidence o that vacancies have increased at all over the last decade.  To the contrary, the study that did examine the issue found no such effect.   But people need to find some kind of explanation beyond basic supply and demand I guess.