Blessed by the Potato

I get a annoyed when people imply (or explicitly state) that a rental house cannot truly be a home. One reason seems to be the idea that since it’s “not yours” you can’t take any pride in how your place looks, and will not do anything to it, and will be at the mercy of your landlord.

Of course, Wayfare and I don’t buy into this at all. For making our place a home, we can paint as we wish (though our current and previous place had such good paint jobs with tasteful colours that we didn’t want to, though we did paint the institutional white of our apartment). For larger improvements it’s not that we can’t make them, it’s that we can’t make them without the landlord’s permission. We’ve found that landlords have been quite open to letting us work on improving the property, and in some cases have even been willing to share costs — after all, most things that make the place a nicer home for us also make it more attractive to future tenants. Some things are kind of halfway between a repair and an upgrade, and they’d be responsible for repairs anyway.

The biggest thing so far has been the installation of a dishwasher in the kitchen of our new place. There, we paid for the dishwasher itself (though our landlord sourced it through some discount supplier he knows), and our landlord covered the labour to remove the shelving, and the plumbing/installation. We didn’t mind paying $400 to get the use of a dishwasher for a few years, and then the landlord will have a dishwasher at a discount that can make the property more attractive for the next tenants. Win-win.

And of course, that idea of win-win is important with these sorts of negotiations: you have to make it worthwhile for the landlord as well as yourself, that’s the reality of the situation. But that’s not really a high hurdle to hit. Another big improvement to our current house was the installation of central air conditioning: we didn’t even (explicitly) pay anything towards that, we just had to point out that it was one of the only houses we were looking at that didn’t have central air, and the landlord agreed that it was becoming a standard feature. He agreed to install central air if we took the place a few weeks earlier than we were originally trying to negotiate for.

We’ve also made numerous smaller improvements on our own to this pre-war bungalow. We planned on being here for a few years at least, and understand that most small renovations do not provide any return at all, at best a recovery of some of the expense, even in an owned house. For the most part, you spend money on renos because that money spent on improvements makes the house a nicer place to live while you’re there, which brings you joy. It’s a cost of living. People shouldn’t look at them as something they want to get paid back on, and that to avoid spending any money on a house just because it’s owned by someone else is a way of thinking that doesn’t resonate with me.

Fortunately, Wayfare happened to be creating a list of all the stuff we’ve done just to keep our landlord in the loop, so it’s easy for me to cut-and-paste for you what improvements we’ve made to our home:

• Added a door to the bathroom cupboard [The bathroom has a nook with shelves for linens and other storage, but it was just open to the bathroom. We put in an accordian door to turn it into more of a closet.]
• Rehung the door to the middle bedroom [This was a repair rather than an upgrade — the door wouldn’t close properly because it was hung at an angle. Just had to take out the hinge and screw it back in properly/level.]
• Added a door handle to the door to the basement [The door down to the basement just had a hole from where the knob had been removed — here’s where our landlord gets a negative mark, as in my opinion that should have been fixed before we moved in, but he figured it also had a hook/latch to keep it closed, so it still functioned. We put an actual doorknob on it.]
• Put a peephole into the front door [Self-explanatory. For security reasons.]
• Installed a screen door closer and spring on the front door
• Took down the broken mailbox and replaced it [Technically, the old mailbox still functioned at its primary objective of holding mail, but failed at its secondary objective of keeping said mail dry.]
• Replaced the vent cover in the kitchen [Largely cosmetic: the kitchen has a chess-board inspired white and black tile floor, yet had a light brown vent cover. We got a black one to match. Plus the old one was filthy.]
• Added a oak hand railing to the basement [This one I think should have been done long ago, I don’t know how they had a staircase with no railing. We put one in.]
• Added a new baseboard and quarter round around the landing to the basement to plug up some cracks [Largely cosmetic, but with all the following cosmetic improvements to the basement it went from looking really unfinished and ancient and utilitarian to being a rather nice semi-finished laundry room and storage space.]
• Removed all of the plastic clothes dryer venting and installed new metal piping. The dryer now vents outside rather than in-between the walls. [Yeaaaaah… I’m pretty sure that vent do-hicky was supposed to go outside, and not into the void between the inner and outer wall.]
• Cleaned out under the basement stairs and threw out the paint that had turned solid as well as all the broken glass. All of the current paint is now stored there along with the drawers that were taken out of the kitchen when the dishwasher was installed.
• Installed doors to the area under the stairs to keep it out of sight. [The space under the stairs was just a mess. It’s both cleaned up and out of sight now, with a nice white-painted plywood triangle covering things up. Looks downright finished now.]
• Removed the broken blinds in the front bedroom and replaced them with a roller blind. [The blinds were left behind by the last tenant anyway.]
• Fixed the stove so that the plug on top now works [The actual problem turned out to be simple to fix, but I didn’t discover that until after I had taken the stove halfway apart.]
• Scraped the cement off of the interior basement wall near the laundry area.[Again, just making it look more finished.]
• Replaced the rotting shelves in the basement with melamine shelving
• Replaced the plywood shelves in the bathroom cupboard with melamine shelving [Yep, don’t know who would have put their towels that they’d put on their clean naked body on those shelves. Ugh.]
• Cleaned up the caulking and grout in the upstairs bathroom and added white quarter-round around the side of the counter where it meets the wall
• Fixed the missing wallboard in the middle cupboard space in the basement [There was just a weird hole in the wall in the basement. We figured that the first time the cat got into the basement, she’d go straight for that and get covered in filth and insulation. It had to get covered up.]
• Replaced the shower head [Water-saving, and it now has a hose/wand!]

I think some other items she forgot include rehanging the fridge/freezer doors so they open the right way around, and also levelling the fridge, updating some of the smoke detectors that appeared to be over 10 years old (and putting in a photoelectric type near the kitchen/bathroom), and the biggest one, actually getting damned electrical service into the garage, with a lightbulb! (It looks like there was a light bulb and electrical in the garage at some point in the past, which had then been torn out… fortunately for us, there was still a hole into the house for the conduit, which I guess is a kill-two-birds-with-one stone solution, as we also plugged that hole in the foundation between the house and the garage :) One that I think may help our health was covering up the hot water pipes with foam pipe insulation. The pipes were wrapped with “some kind” of insulation — it appeared to be old cloths, and they had basically fused to the pipes. We had to wrap the foam over whatever-it-was to seal it in, rather than mess with trying to remove the old stuff from the pipes. That alone made a huge difference to the appearance of the basement, as those ratty cloths hanging from the unfinished ceiling were downright creepy. Who knows what may have been growing in that browned fabric. Oh, and I rewired the phone and cable lines. Much better reception now :)

So you can see that it’s not very hard to make your space your own, even if you rent. You just have to work things out with your landlord. Most small improvements that people would want to make are quite easy to negotiate — indeed, your landlord may be thrilled that you’re helping to make the place better, and may share costs with you. Granted, more major renovations, such as redoing a kitchen or putting an extension on a house are probably nonstarters, but that’s not a big loss as you have the freedom to move as a tenant to find a place that suits you for a medium-term time period. You probably aren’t in the situation where you’ve got a starter home that’s just too small for you after a few years, and find it may be easier to renovate than move. That said, commercial tenants with aims to stay in one spot for a decade or so very often do work out renovation plans for their space, and it’s not like it’s illegal for a residential tenant to do the same: it’s just rare and tricky. But I suppose if you absolutely had to have granite countertops and were willing to pay for them anyway, then the only thing stopping you is your own negotiation skills.

I fell for absolutely no good reason today — was running to grab the phone, then PLOP! flat on my face on the floor. So I’m kind of sore and miserable, and my glasses are now sitting a little crooked on my face, which is just adding to my general thesis-related misery, so if I’m particularly snarky and scatterbrained here, please do forgive me faithful readers.

First up, I want to go back through the haze of memory to an earlier time, back to when I first really started getting concerned about a housing bubble in Canada. I was an imaginative lad back then, and had a picture of how the unfolding would happen: how it would differ from what was happening in the US at the time, and how it would be similar. The picture in my head was complete with all the lavish details. When I saw the lineups for people to snatch up preconstruction condos for 1 Bloor at ridiculous prices, I figured that would be the mania moment. The image that would get played on the news 3 years hence when the folly was evident. I figured that the downturn would start in the winter of 2008/2009, and while a bottom might not be in by late 2010/2011, things would have come off enough that with hard negotiating you could get a place and at least be back to breakeven vs rents. Of course, I’ve been wrong. I thought I was close in late 2008 when the market seemed to just seize up alongside the stock market crash, but it was not only revived but sent into overdrive by the emergency interest rates. 1 Bloor was cancelled, wiping out the imaginary headlines of speculators trying to back out of their units on completion.

Now it looks like Vancouver may get the prize of being the quintessential bubble example, as the former Olympic Village (Millenium Water) condo project has gone bankrupt after being unable to sell units in a timely manner. Yes, it looks like there is some limit to how much the people of Vancouver (or — tongue planted firmly in cheek — China) will pay for a box in the sky. Once the news that there may be a cap on how high valuations can go, will the speculators continue to fuel the market? I would be inclined to say no, but hey, I’m the guy who thought this correction should already be in the 2nd inning by now.

Oh, speaking of the Chinese, the Globe has an absolutely ridiculous article on Chinese buyers driving the Toronto real estate market, claiming that they are responsible for up to 40% of all new condos purchased. I’ve written before about how the “immigration will make real estate go up” meme is junk, but this article is still chalk full of fuzzy thinking rant bait. Now, that number is probably not too far off, but some of the others are demonstrably false, making it appear as though these buyers are disproportionately driving the market. For example, in the first paragraph, the article says that there are 100k “local Chinese”. Now that’s not a rigorously defined term, but it’s too low by at about a factor of 5. I don’t have good demographic information on sub-regions of Toronto, but my understanding is that the people are not uniformly distributed: people of Chinese descent are concentrated in Richmond Hill, North York (esp. along Yonge, Finch, and Sheppard), and downtown (esp near Spadina). The article doesn’t touch at all on the facts that a large amount of the new condo construction has been in Richmond Hill, in North York along Yonge and Sheppard, and downtown near the Gardiner (with the biggest clusterfuck concentration near the base of Spadina). I.E.: neighbourhoods that are already largely Chinese (perhaps upwards of 40%!). In which case the figure is perhaps not so outrageous.

“Just two years ago when prices for new suites reached the stage where they made little economic sense as a rental unit, investors fled the market. […] This fall, however, builders managed to cut selling prices at newly launched projects simply by reducing the size of suites. The cost per square foot remained the same, but the price per suite was down by about 10 per cent. Once again investors could plunk 20 per cent down and see enough in rent to cover mortgage and maintenance payments with a reasonable return.”

Err… that seems to be making the assumption that the rent for a unit that’s 10% smaller will fetch the same rent as a larger one… Anyhow, it doesn’t matter who’s doing the speculating, or why (“They often avoid resales because they want to make sure nobody died in the home,” – really??): if there’ s a lot of speculation in the market, that will eventually end badly. You can’t keep building units no one will live in forever.

Anyway, to finish off this mini-rant, I’ll point you over to a post by Barry Ritholtz. The “Chinese buyer” meme is not unique to Toronto or Vancouver. Heck, neither of these supposed hot Chinese meccas even made it to the summary infographic.

Next up, over at CMF poster dogcom started a downright silly thread, trying to argue that renting was throwing your money away, and that “Of all the people I know I don’t know anyone who has done well in stocks or mutual funds and never owned a house. Everyone I know despite the expenses who owns a house and have kids and the whole bit are worth a lot more then those who have always rented.”

I composed a response that, in my admittedly sleep-deprived and pain-filled state, I thought was borderline brilliant, and will repost it here:

I’m a huge housing bear as you may well know, but even then I would say that most of the time owning your shelter is the better way to go. After all, under normal conditions landlords make money.

But, my contention is that for the last few years these have not been normal conditions, and that first time buyers would be better off continuing to rent, and putting their money to work for them in the stock market. In a few years, things should return to normal for housing, and it will once again make sense to own. Someone who bought their first house at the peak of the last market top (1989) may be worse off than someone who got into RE a few years before, or a few years after. I don’t think anyone just buying a house to live in found themselves destitute as a result of overpaying, but they could have had a noticeably easier go of things. Consider it: if you’re a typical family that’s only saving ~10% of your take home pay each year, then there’ s a big difference between your housing costs being 25% of your pay or 30% of your pay.

The Globe has a little article on what to do to put your money where your mouth is if you think there’s a real estate correction coming. Unfortunately, the advice isn’t very good:

– Selling your home is really the only option to ‘short’ the housing market. Even downsizing is not a good option unless you want a smaller place anyway: all the transaction costs and hassle of moving, plus the inconvenience of living in a smaller place… and you only modestly reduce your real estate exposure. The best solution is to sell your current house to an unwary investor and rent it back — eliminate your exposure and you don’t even have to move! Note that the real estate guy’s comments about the cost of rent making the attempt of selling your house at the top and renting until you’re comfortable with buying back in a bad idea are a red herring: if real estate is over-valued, one of the best indicators is that it will be cheaper to rent than the carrying costs of the same house. It’s really just transaction costs, inconvenience, and the uncertainty of being wrong that should stop you from taking that action if you currently own.

– Shorting the banks is not a great idea because the yield is a stiff headwind, and mortgage lending is explicitly guaranteed by the government via CMHC, so you don’t have the opportunity for a bank to blow up and go to zero like in the states. Even in a bad housing downturn, the banks will probably just suffer reduced earnings as new mortgage originations slow. Not a great case for shorting. There are no CDSs to short (or to take out a default swap against), again, because the mortgage securitizations are largely explicitly government guaranteed.

– Similarly, shorting say Rona wouldn’t be a very good idea as it’s already underperformed since the 2009 lows: the expectation of slowing renovation expenditures may already be baked in.

– The thinking on going long the apartment REITs is also flawed: rents may very well go down in a housing crash, as speculators who currently eat carrying costs in the hopes of a quick flip and sky-high appreciation may look to start renting out their empty units. Plus it’s not like rents are low relative to incomes or other measures at the moment. Plus, the apartment REITs like Boardwalk are already trading at a premium to diversified REITs.

Really the only way to go short real estate is to participate in the Teranet derivatives market, and to do that you must be an accredited investor.

Oh, and speaking to my first point above – selling your home and renting, there was another article that got under my skin a while ago on the Star’s real estate porn blog. [Sorry, didn’t keep the link] In it, a reader asked about what to do in the situation where they bought a new home in pre-construction, and it won’t be ready for another 2 years. Should they sell their current house now and rent, or just hold on? The responder starts with some preamble about not trying to time the market, and then concluding that the reader should stay in their house because of the fees involved. Unfortunately, in that case not timing the market means selling as soon as you agree to buy the pre-construction house. Otherwise you’re effectively carrying two houses for a time, and you’re exposed to the risk of a downturn over the next 2+ years — if there is a crash, you could be in a bad spot, especially if you’re counting on extracting a certain amount of equity from the sale of the first house to close the deal on the new one. Yes, it may be more expensive on average to sell so soon and have to move twice, to have to discharge your mortgage then get a new one, rather than porting… but think of it like insurance. Most of the time, it costs you a small, manageable amount. In exchange, you avoid the risk of a large rare event that could make your life suck.

I have talked in general before about the “you can’t time the market” statement. About how it comes from the world of equity investing, and may not strictly apply to the real estate market — where, I believe, measuring overvaluation is more straightforward, allowing you to say when you may be close to a peak or trough, though the when part of timing is still difficult (as you can perhaps see based on my old predictions not coming to fruition yet; ah well, if you can’t predict well predict often).

And I will end on this: remember that pretty, but overpriced house that I linked to in my last post that was up for rent or for sale? Well, the ads have been revised, and the asking rent lowered to $2400, while the asking sale price reduced to $650k. It’s now an even better option to rent rather than buy this house, as the rent multiple is a rich 270X now, or if you prefer percent, a gross yield of 4.4%.

I don’t watch the Agenda on TVO as often as I should. Last week was an episode on the case against home ownership. It’s a nice program, the host basically just asks a few questions from time to time and lets the guests hash it out.

Some points:

Home ownership rates in Canada, from starting at a lower level than the US before the recent boom, are now higher than even the peak in the US. The guests don’t make too much hay over this, except to point out that it’s been driven in large part by younger people (especially young women) buying homes sooner, while they’re still single (perhaps with the intention of remaining single). I of course have to ask how long this increased demand can last for before falling back to historic (or lower) levels? We can’t start selling homes to high school kids…

The Royal LePage guy then pulls out the results of a survey that suggest that people who got into home ownership earlier in their lives did better financially later in their lives. That might support the increased levels of home ownership and the notion of buying younger, but I’d say instead that it’s confusing correlation and causation, or at least ignoring the changing landscape. Those who bought younger may simply have been the ones who were more financially savvy, and not that the early purchase of a home caused them to be on better financial footing for the rest of their lives. Also, for most periods of the past few decades, owning your shelter has been the better option, financially… it’s only when real estate prices rise to ridiculous levels that renting becomes cheaper, so those results may not apply to someone buying today.

“When a venture capitalist invests, they have one criteria in mind: exit. If you’re in a career which requires you to be mobile… if you think you may have to move around… Americans are facing the fact that they have to move around, Canadians less so, but Americans have to move around for their jobs. My dad had one job in a factory for his entire life; Americans are now switching jobs quite a bit. So I think about exit. I wouldn’t even worry that much about ‘am I gonna take a little hit’… that’s bad, but it’s not terrible. What terrifies me is these people who can not sell their homes, who cannot exit. So I think renting — there’s a financial comparison — but if you’re in a labour market where you may need to move, that question of exit I believe becomes paramount.”

He says in another point of the program that job mobility hasn’t been as big of an issue in Canada as in the US — often people will switch jobs or switch careers here, but stay within the GTA for example, so being able to sell their home to change jobs has not been as critical, so far. But I also worry about those small condos I was talking about last week. What’s going to happen to those people that bought condos barely large enough for one person when these people want to get married and have kids? If they’re underwater on their condo, will they have to put off having a family? Will their fears of being “priced out” and rushing to “get on the property ladder” backfire completely? Needing to move is not always career-driven.

One of the panel members is a renter in Toronto, but they didn’t go into the details of how she came to the figure that it cost her $2000 to rent or nearly double to own her condo, or how this is a recent phenomenon (that IMHO, may not last) which is of course one of my favourite bugbears.

Speaking of which, here’s an excellent comparison for you all: a house for rent near the Danforth and Pape in Toronto. They did a fantastic job on the website advertising it, namely being full of pictures not just of the house as it is, but also of the renovations to bring it to its current state. We would not be worried about water coming in the basement of this place.

Here’s the Craigslist ad, from which you can find their dedicated site.

This house is up for sale or for rent, here’s the homefinder and MLS listing for the sale side.

To continue to beat that dead horse of mine, at $2700/mo, it’s a much better deal to rent than buy this house for $680k. That’s a rent multiple of 252X, or if you prefer to think in percentages, the annual rent is only 4.8% of the purchase price — an amount easily eaten up by mortgage interest/opportunity cost, insurance, and property taxes, let alone closing costs or a margin of safety.

It was not a good week for the diet, as my love of candy and deals conspired with the arrival of half-price Halloween candy. Combined with more than a few all-nighters as I struggle to make timely progress on that thesis thing, and the end result is that I’ve gained back all the weight I lost at fat camp the Turkish conference.

The Ontario government just came out with a lucrative scholarship program… for foreign students. At $40k/year, it is a very rich scholarship indeed. For comparison, the next-best provincial scholarship is the OGS program at $15k/year (which foreign students are also eligible for). I’m not opposed to the government trying to recruit foreign students, but I don’t think a program that’s nearly three times as lucrative as what’s out there now should be exclusive to foreign students… why not allow Canadian students at Ontario schools to compete side-by-side, as with the OGS? Don’t we want to recruit the best students period to Ontario universities, no matter whether they’re from Ontario, the rest of Canada, or a foreign nation? Plus there’s always the issue with foreign students that we may be putting out the money to educate them, just to have them take that investment back to their home country when they graduate. A better program for getting talent to Canada may be the other Ontario initiative of late, allowing master’s students to apply for permanent residency without needing a job offer.

Canadian Capitalist embedded a good lecture about index investing in his latest wrap-up post. One of the minor points made was that index investing doesn’t make for good newspaper or magazine articles, so there’s a whole industry that has an interest in reporting on active management. I have to say it’s the same for bloggers — though I do index a large part of my portfolio, I only ever seem to talk about the stock picking side.

The Globe has a short article about Toronto’s condo market. True to form, I will pick out parts, and then proceed to spread fear. “Insiders suggest that, in some areas, investors accounted for up to 60 per cent of sales in those newly launched projects and with about 4,000 new suites coming to market, the impact was indeed profound.” Yowzah, on one hand, that’s a lot of investors. On the other hand, why aren’t the other 40% also investors given the issues with pre-construction? Anyhow, what I found even more alarming: “So what drove investors to […] plunge back into the market? The chief factor […] was price. Believe it or not, the index price for condos actually dropped $14,608 in September from August to stand at $410,730. Bit of smoke and mirrors really. Average price per square foot stayed nearly constant at around $493. The price drop came from builders creating smaller suites – about 831 square feet or 10 per cent smaller than August.” I’m already appalled by how small the new condos around are. Granted, I like my space and my stuff (after all, right now I’m filling a small 2-bedroom apartment all by me onesies), but I don’t think that this is going to go well for people when the units are actually built at some indeterminate point in the future and find out how small 10% smaller than “already too small” is. Plus of course, the implication that even “investors” are getting priced out of the market.

Speaking of being a housing bear, MoneySense has an article on Canada’s housing market online now. It’s 4 pages, because of course putting it all in one or two wouldn’t fit on the internet. As you can probably guess, I agree most with the advice about just simply waiting longer if you don’t already own a home — even most of the bulls don’t think the market’s going to run away from you, so there’s no rush. I agree least with the advice about shorting the banks or home furnishing companies to hedge against a falling market. While I can totally see the logic behind the banks doing poorly if the housing market goes down, it’s a dangerous trade to get into, which kind of goes against the idea of hedging your housing exposure.

Even the CREA is now calling for activity and prices to decline next year.

All that negativity out of the way for the Canadian side, if you haven’t been paying attention to the foreclosure crisis in the States (and it’s always a “crisis” these days), then you should be. Yes, it’s another example of just how deep into the lake of batshit crazy the US system went — which doesn’t help my recurring theme — but it’s just insane that these companies are basically stealing houses. Foreclosing on houses without mortgages even. Even when a house should be foreclosed on, they’re not engaging in the proper notice procedures, which would give people the chance to defend themselves, or at least move out (there was one case of a locksmith showing up to lock the person being foreclosed on in the house; they didn’t even check if the house was empty before changing the locks!). Barry Ritholtz has been providing good summaries of the stories as they come out, including this one about the process servers lying in their affidavits that testify that they did indeed serve notices to the homeowners. Cases are coming to light where that is demonstrably false, including some where people have visa stamps in their passports that prove they were out of the country when the alleged serving took place.

Like Netbug, I played Force Unleashed 2 and found it lacking. It was short, but moreover, kind of boring. I found the various large mech enemies annoying — while they could be killed in fairly traditional ways, you generally had to find a way to trigger their special quicktime event sequence death scene. If you didn’t, they were incredibly powerful. The regular stormtroopers were very weak (which I suppose is to be expected), and kind of fun to find new ways to kill them, but I also found some of the other enemies tough. The snipers in particular seemed to do way too much damage from way too far away, and the other force users were too good at defense. There was really no middle ground when it came to the opposition. In general I found that there was no technique or timing to the basic lightsabre attacks/combos, which did seem to be present in FU1 — this time around, just mash X until you get lucky and slip past their defenses. Also, every one of the other lightsaber-wielding enemies had two sabers. Come on, Lucas. And as to the length, it was not only a short game overall, but very poorly paced — it seemed like fully half the playtime was spent in that epic go-nowhere duel with Vader at the end. So, how short was it? Well, I didn’t time it, but I finished the game in a week. The same week I spent in all-night thesis sessions at the lab, with all my free time from two nights spent at curling. I had maybe 4 hours of playtime, mostly interrupted time at that, as I was mostly playing while dinner was in the oven, and then again for a bit as I was digesting before heading back to work…

Rogers is getting into the home security field. Interestingly enough, over 2 years ago I was part of a survey that was asking about how to brand and price a Rogers home security offering. I’m surprised that it took so long from that step to the roll-out. The paranoid part of me wonders if maybe it’s somehow deeply flawed.

An interesting science article in the Globe today as well about electrical stimulation improving math skills. The MSM article didn’t cite the publication, so here’s the abstract. When I read the Globe’s story, I thought they were talking about a direct electrical stimulation (i.e.: DBS), but it turns out to be a non-invasive transcranial stimulation. I’m surprised a weak, external, DC stimulation does anything at all. I’m going to have to read more on TDCS… some other time.

Canadian Dream (free at 45) is having a 1000th post contest, giving away a Kobo e-book reader.

Finally, a request of you: please suggest a topic for me to blog on. I feel like I may be getting stale railing against real estate, but at the same time it’s just so easy to do since these articles tend to get under my skin somehow. I’d like to blog more while thesising to keep the fingers moving (and hopefully the other writing muscles to get this thing done), but often feel just as blocked here as when staring at the flashing cursor in Word. Also, if anyone knows of a good easy-to-use captcha plug-in for WordPress 1.5 I’d be happy to try it, as the spam comments have been getting ridiculous lately (200/day and climbing!).

From RFD, but not an uncommon viewpoint:

Basically, the argument of the pro-bubble crowd here has been: ‘it happened in the US, therefore it must happen here’. But they fail to appreciate the magnitude of the mortgage mess that created the US bubble. Canadian banks are much more prudent, and we never had that sub-prime mess here. It is safe to say that 99% of home-buyers here are able to afford their mortgage payments in the long-term, therefore there is no ‘bubble’.

One sad thing about the US subprime contagion was that it lead many to believe that such terrible, terrible mortgage lending was a necessary condition for a real estate bust to take place. It’s entirely possible to have a real estate bubble form even with ostensibly sane lending — we had it happen here in 1989, and several times before that. Back then property speculation was much harder to accomplish than it is now… but it still happened. Bad lending standards can make bubbles inflate faster and higher, and the waves of foreclosures that then follow can make the correction sharper and deeper, but the bad lending is not the bubble. Over paying for real estate (or whatever asset is in question) for whatever reason is the bubble.

Imagine if you would a small, remote town. Let’s call it “Ft. Mac” for the sake of this example. Then, have some event happen that changes what people are willing to pay for real estate in that town, for instance the opening of a new business, call it “Tarco”, that’s paying high wages to workers. More people decide to move to Ft. Mac, chasing the money. But, there aren’t enough houses built and ready for the influx of new workers. People get into bidding wars for houses, paying far more than they ordinarily would so they they can get a shot at one of the lucrative jobs with a roof over their heads too. The construction guys move in and start building more houses. Eventually though, the hiring spree at Tarco peters out, and the influx to the town stabilizes. Now when a new worker comes to town and is looking for a house, they’re the only one bidding. Without the insanity of a bidding war, they don’t see the logic in paying 5X their income for a house in Ft. Mac, and so they don’t… prices fall back down.

This little story is the core of how price distortions can happen and later correct. No need for the construction guys to over-build and create a glut of houses that will never be lived in (though in real life that often happens and makes the bubbles worse); no need for speculators to buy houses and take out mortgages they have no intention of servicing (but in real life the speculators would probably show up too), and then get foreclosed on when they can’t flip for a profit. It doesn’t have to be real estate in the parable, it could be playstations, internet stocks, or tulip bulbs. Leverage definitely adds to the severity of these situations, especially when handed out like candy on Halloween, but it’s not a necessary part to the story.