Blessed by the Potato

I haven’t done one of these for a while. There was some bad weather for a few weeks there, and I didn’t get on the bike at all for a fortnight. Not owning up to my downfalls in the exercise routine kind of defeats the point of the public update/shaming, but I also reasoned that I didn’t have any links I wanted to share, either.

The last two weeks have been much better though: I broke the 20 km barrier, and rather easily at that, returning home feeling like I still could have done more, and wasn’t much sore the next day. Now the problem is going to be that to keep pushing myself to be able to bike further (e.g., to train for the Rona/MS bike tour), I need to start committing serious time. I did a (fairly hilly) 18 km on holiday Monday, and that took me about an hour and a half — I just don’t have the time right now to push it any further than that.

Diet: aaaah, you don’t even want to know. So far the multivitamin seems to be keeping away the scurvy.

Random thoughts:

Realtors to Canadians: Chill Out

“There will be no drastic drop in Canadian housing prices, the Canadian Real Estate Association said Thursday, because house prices will stabilize and climbing household income will make owning a home more affordable.”

Wow, I barely included tautology in my list of logical fallacies because I couldn’t think of any examples where it really came up, and circular reasoning is usually fairly easy to spot. But, here it is: there will be no drastic drop in house prices because house prices will not drop drastically.

Then that last tack-on about incomes doesn’t mention a timeframe. Incomes rise at about the rate of inflation, say 2%/year. If houses are 10% overvalued on average (and 30-50% in Toronto and Vancouver), that could be a very long period of flat-lining. If even the CREA is saying that the best case is a flat-lining of house prices for years, then why be in any hurry to buy, especially with uncertainty about where rates will go?

And if everyone’s in no hurry to buy, then won’t sellers have to lower their prices to attract buyers back? I just can’t see a stagnation as a likely scenario. Yes, house prices have stagnated for long periods of time before, but not usually so far from equilibrium, and not following such epic volatility (down ~10% in ’08, and then bouncing back ~20% in ’09!).

Plus there’s the issue that Canada is not homogeneous… a nation-wide decline of just a few percent could very well mean that Toronto and Vancouver got smashed while the rest of the country stagnated…

Michael James has a good set of links in his roundup this week, including a couple on your financial advisor, and whether small investors have no choice but to become DIYers.

My Bell bill arrived for the month, and I was greeted with a $30 over-usage charge. Bell’s cap of 25 GB is way more restrictive than Rogers’ 60 GB one (and even that is getting tight as more and more uses for the internet come out but the cap hasn’t changed in years). So even though I had a fairly moderate month (~40 GB in usage, well under what my cap was when I was with Rogers), that qualified me for the full $30 overage fee. What really ticked me off is that even though they have my email address (and phone number) they never notified me that I was getting close to (or exceeding) my cap. I thought I was being good. You can bet I’ll be switching to Teksavvy (with a 200 GB cap!) when my contract’s up…

Stephen Novella has another interesting post up on science and public perceptions. “[P]eople find stories much more compelling than data.”

Spoilers ahead!

Borderlands: I finally finished this thing. I had no idea I was that close to the end… it just simply ended. I must say, it was very unsatisfying. The beginning of the game had so much promise (and with multiplayer it would probably still be fun), but it felt like they rushed through it and did a little too much cut ‘n paste, as the charm and humour from the first little bit seemed gone completely by the end. It was a grind-fest basically. The reward for beating the final boss? The ability to run through the game all over again on a higher difficulty to unlock “achievements”. Whoopee. The last boss didn’t even drop any epic loot! Oh, and there is no treasure vault: the vault is a prison for some kind of Eridian demon thing, that is unlocked every 200 years by the alignment of the moons, which gives our hero the chance to finish the demon off once and for all. To quote the PA guys: “It is at this point that people begin to question the wisdom behind moon-powered demon prisons.”

Though you wouldn’t think it from the message some housing bulls have. “It’s different here, housing will never go down, the immigrants are coming in waves and buying everything in sight.”

No matter how overpriced the market gets, somehow the magical immigrants will ride down on their rainbow with their pots of gold and buy an investment property or three. Unfortunately, immigrants aren’t going to magically sustain a housing bubble indefinitely. Immigrants are not stupid, and won’t continue buying houses at prices that no one else would touch. Even if they would, there comes a time when there just aren’t enough people with money to keep the whole thing climbing to the moon and it all falls apart.

First off, the “rich overseas investor” is a fairy tale. Ok, yes, there are a few people who come from overseas and buy a house with cash (or “really cheap” unserviced vacant land) and don’t care what interest rates do, but not enough to keep inflating a bubble when all the other buyers face rising rates. Not by a long shot. I don’t have good statistics on the matter, but I wouldn’t be surprised if the wealth and incomes of immigrants is no different than the average Canadian — and if anything, may be lower. Just because a place in Vancouver is still cheaper than one in Hong Kong or London (the Other London) or New York doesn’t mean that people coming from those places will happily cough up Hong Kong prices for Canadian real estate without thinking about it (at least, not forever, and not all of them). Indeed, they’ll probably have Canadian jobs and so the price-to-income measures are every bit as relevant to them.

Secondly, immigrants have never before saved any city from a real estate bubble and collapse. What, you think immigration was invented in 2002? The US has immigration to all its big cities too, and look what happened there. Heck, one of the biggest periods of immigration to Toronto was in the lead-up to the Hong Kong handover in 1997, and real estate crashed big time from the peak in ’89 through the 90’s.

Thirdly, immigrants are not all that different than other Canadians in their desire for housing. So it doesn’t matter whether a person is an immigrant or not — it’s population growth and household formation that drives demand. I’ve actually had people argue that immigration drives housing prices because “immigrants stop at nothing to get a house of their own; they’ll pay any price and live 3 or 4 families/generations to a house until it’s paid off and then buy the next one.” Well, multiple families/generations living under the same roof actually decreases demand (households) for the same number of people, so that argument doesn’t hold a lot of water, it’s just trying to reach for an explanation as to why anyone would pay any price for a house.

For the country as a whole, population growth has been rather steady for a long time now: any increases (real or perceived) in immigration rates are really just offsetting our natural declining birthrate. Now, I don’t have any data on growth rates by city, so it is possible that recently the immigrants have decided to concentrate more on moving to Toronto and Vancouver, though I doubt that it’s actually out of line with any longer-term trends.

Speaking of household formations though, the one fly in my bear soup comes from this graph (via stats can) of the population pyramid:

The tail-end of the baby boom would have been passing through age 25 right about 1989, which may in part explain the housing boom and crash that happened then. The echo only just started working their way through their homebuying years a few years ago, and won’t be finished for another 5-10 years. I’ve long maintained that the unsustainably high housing prices were due to lax lending, low interest rates, and the madness of crowds. If, however, demographics also play a starring role, then this may take longer to unwind than I thought.

It’s interesting to see how sharp the baby boom was though — the start in ’46 is very sudden, for obvious reasons, but even the tail end sees a 20% decrease in just 3-4 years. The echo isn’t as sudden on either end (though oddly enough, is more pronounced in men than women).

Now, all this isn’t to say that immigration can’t have an effect on a housing market, especially in the short term and when immigration is not smooth — there’s a fundamental limit* to how sharp a baby boom can be, but an influx of new people to an area can happen quite sharply, which can distort a market badly in the short term. Ft. McMurray is a good example of this. As the tar sands projects ramped up there was a huge influx of people to Northern Alberta to work the oil patch. Housing simply couldn’t be built fast enough for the people coming in, and combined with the high wages, the cost of shelter shot up there, to the point where a house in Ft. McMurray was in many cases more expensive than a house in Toronto. But that’s all short-term: as the rate of house construction has a chance to catch up to the demand, then it’s reasonable to expect prices to settle back down to whatever the incomes can support (though in Ft. McMurray those are fairly high), and then down to the cost of building a new house when the builders overshoot the demand.

* – octomoms and bunny rabbits excepted.

So as you can imagine from the end of my last update, I took off most of the week from working out to let my back heal up. I got a good bike ride in on Thursday, and then was too busy on Friday, and then the weather was poor on Saturday and Sunday. So, not so good. Feel free to ridicule.

Links!

Tony Wong reports on a bearish forecast for housing. Is that a sign of the apocalypse?

For the third time in less than a month, the banks are raising fixed-rate mortgages again. Their “special” 5-year closed rate has gone up 0.9% in 28 days…

Hat tip to Jonathan Chevreau’s recent blog post: “Younger folk aged 18 to 24 are leading the charge, with those “very likely to buy” almost doubling to 15% from 8% per in 2009.

This is one of the signs of the end stages of the housing bubble.

Low/no downpayments allow people to buy earlier and earlier in their lives, stealing demand from the future, and driving up prices in the present. Skyrocketing prices convince people to buy now or be priced out forever. But there is a limit to it all, unless we start selling houses to children. Home ownership rates are at ~70%, and here we have 15% of people in the youngest (least home-owning) age bracket planning to buy (more than that, actually, since there’s another bunch in the “likely to buy” category below “very likely”), and presumably ~8% who bought over the last year. Won’t take too much more robbing of the cradle here before we run out of ways to bring demand up and hit a wall when high school students can’t join in bidding wars.

That is of course assuming that tightening of interest rates doesn’t do the job first (and now most bank economists are calling for that to happen before the end of the year).

I’ve been bearish on real estate for going on 3+ years now, and I’ve been hesitant to get too excited about the correction that I know must be coming because real estate moves in long, slow cycles. It’ll be years before the time to buy (the undershoot) finally arrives… plus, I get in trouble for being “optimistically bearish” from people with house lust that I’ve convinced to hold off (“the market’s up 20% this year! We could have bought last year, damn you!”). Nonetheless, I can’t help but feel that the stars are aligning for this nonsense to finally end.

Flaherty brought in some rules that I thought would be fairly minor tightenings to the mortgage market. Real basic, common sense tweaks, like that banks shouldn’t give someone all the money they can borrow at today’s rock-bottom rates, but instead have to qualify people on the still-low 5-year rate. I didn’t think there’d be anyone walking that close to the bleeding edge of affordability, but apparently CIBC is forecasting that this rule alone will have a ~5% impact on the mortgage market (hat tip: Canadian Mortgage Trends). The new rules also require a 20% downpayment for non-principal residences, which should help reduce the speculation out there.

Canadian Business had an article this week on “Why Buying a House is a Bad Investment”. Despite the title, it’s not nearly as bearish as I am, though that may be because they’re talking about “Canadian housing”, which is a tough concept, because the market in London and Charlottetown is vastly different than Vancouver or Toronto.

Even some realtors are starting to think that there may be, possibly, just the teenist whiff of a bubble happening, despite their inherent bias towards believing that real estate prices will always go up.

So I think the end is finally arriving (well, the end did arrive in the fall of ’08, but low interest rates drove it back for an age), and I can start to make some prognostications. Time may prove me wrong, but time’s a bitch like that. I predict that by the end of the year rates will begin moving back up as the need for the emergency stimulus eases and inflation returns. The real estate market will stall around midsummer; by this time next year, it will be clear that the market momentum is down, and by the fall of 2011, the media should start picking up on the slide. Since real estate moves in slow cycles you probably won’t find a decent time to buy until late 2013 (rent-to-buy of <150X), with the final bottom coming somewhere around 2016. For Toronto, top-to-bottom, my crystal ball says we’ll see a 35% drop — still about 10-15% above the 1996 trough in real terms, but a real kick in the nards for anyone that bought in the last few years.

These prophecies of doom are for entertainment only of course, and I’ll be changing my opinions as new data emerges… but now you know what I’m thinking.

In other eschatological news, Netbug has cancelled his World of Warcraft subscription. The end times, they are nigh.

There are at least a half dozen measures that you can use to tell whether the real estate market is over- or under-valued.

Some are purely historic, relative to a long-term trend line (such as looking at inflation-adjusted returns vs. a long-term trend of about 0.5-1% above inflation — a 5-year run of ~5-10%/yr probably signals trouble). Those can be handy, especially for looking across different sectors and for trying to point out to people that something has gone awry, but may not take into account actual “it’s different this time factors” that can kink the trendline such as the construction of a subway line, the changing of the laws (such as relaxing downpayment requirements), or large demographic shifts (post-war; Toronto vs Montreal).

Some reference a general affordability of housing; here I find the simpler ones are better. Looking at median income and median housing prices, and looking to see what the multiple is works a lot better than the formulas that try to measure affordability as a combination of interest rates, taxes, etc., because these formulas can be “tricked” by interest rates that are out of whack with historical norms (i.e.: if interest rates are very low, and housing prices high, you could get a moderate level of affordability when in reality things are getting out of hand). Worse yet are cases where your formula is constructed wrong, as happened with the UBC study that accidentally(??) included housing appreciation in its measure of affordability.

Personally, I prefer the measures of comparing rentals vs purchases. For the simple reason that it’s a measure that is easy to determine on your own (no need to run to Statistics Canada or a secret realtor cabal to get your data, just see how many times the monthly rent goes into the purchase price of the unit you want to live in), and it’s the most relevant to my personal situation of trying to figure out how I should live my life. After all, you’ve got to live somewhere, and you may have an idea of where that somewhere is. If there is indeed a premium to living in Toronto or Vancouver vs London or Seattle, and that’s where your job is and you want to live, then you’re just gonna have to pay that premium. Saying it’s not in-line with historical trends is not going to change the way things are for putting a roof over your head today. However, you still have to make the decision between renting a place or owning it (and surprisingly often, both options can be available for the same unit). If the rent multiplier is 200X then forgetaboutit, dilemma solved, you rent. If it’s 100X then hey, pick up two places and rent the other out, because you may have just found yourself an investment worth owning, or at the very least, you’ve found a city where it’s cheaper to own your shelter than rent it.

There are of course more factors to the rent-vs-buy argument, and you can calculate it out in detail if you like, but this is a nice, simple, round number that’s easy to use, and easy to talk about.