Blessed by the Potato

I’ve had a number of only vaguely related thoughts on real estate lately, so let’s see if I can string them together into a coherent post:

A report recently came out from UBC asking the question “Are Canadian Housing Markets Over-priced?” The answer was not quite what I expected: the paper figured that Toronto was at equilibrium, Vancouver was 11% overpriced, and Ottawa 25% overpriced. If I were to rearranged those numbers based on my current understanding of the housing market, I would say that Toronto was 11% over, Vancouver 25% over, and Ottawa at equilibrium.

Some people have, naturally, been tearing the paper apart, especially since they rely on ads on Craigslist and in the newspaper to determine the market rent. While this will tend to give a higher rent than might perhaps be the true market rent (since those are the asks and not the actual agreed-upon market rent), I’m ok with using that as a tool to get an estimate. Others complained about how they figured the average (SFH, detached) home price.

My big issue with the paper is how they get to their equilibrium. It understates what the equilibrium yield should be. They include the cost of the capital (mortgage costs), maintenance, taxes, insurance, and then takes out the anticipated capital gains. They say that the market would be in equilibrium when the rental rates equal that net cost of owning. However, that leaves zero profit for taking on the risk and effort of owning/landlording. IMHO, there can’t really be an equilibrium until there’s at least some kind of profit/risk premium margin. If we were to put in even a 2% premium to where equilibrium should be, then the Toronto market for example goes from being balanced at ~$420k for the typical house to being over-valued, with a target of ~$308k to get to equilibrium, a drop of over 25%. Heck, just adding in the amortized transfer costs for owning real estate vs renting (taxes, closing costs, commissions) would up the equilibrium by a percent or two, again indicating that house prices should fall and are not at equilibrium.

That would also bring it more in line with the rules of thumb I’ve read about: for instance, that a house is overvalued when the price is more than 200X monthly rent; a 5% yield (as for the balanced Toronto market in the paper) translates to about 240X, whereas using my arbitrary 7% is a more reasonable 171X. ~125X should be the buy range, which is a gross yield in this sense of 9.6%.

Of course, the more pressing issue is perhaps how they managed to figure in anticipated appreciation into their return. Leaving aside the validity of attempting that at what they admit might be the top of a cycle, it leads to positive feedback and chasing performance: the markets that have gone up a lot then have more anticipated appreciation, so they’re not considered overvalued, whereas the markets that might be in equilibrium are considered overvalued because they didn’t have the price run-up, and so don’t have the same amount of anticipated appreciation to offset high house-to-rent values.

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The days of bidding wars seem to be coming to an end, but I’ve always wondered about that mispricing. It’s often newsworthy when a house sells for significantly over asking price (sometimes 20% or more). My question/revelation is: how could the house have been so mispriced to begin with? Shouldn’t the selling agent take a drubbing for that one for being so off on setting the asking price? Shouldn’t the buyer’s agent take a drubbing for letting things get so out of hand that a bidding war sent things up that far above the asking/market price? I never see any such issues for the realesnake agents…

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A recent New York Times op-ed says that the subprime mess wasn’t all bad. After all, “only” ~15% of subprime borrowers defaulted, so those subprime loans helped 85% of people who took them buy their own home, and that’s a good thing… right?

I don’t necessarily see it as good that some of these sub-prime borrowers got to become home owners. Everyone needs an (affordable) place to live, but not everyone needs to be a homeowner. Should young single people be homeowners? It was never really something I thought of single people doing, but there are a lot of condo projects out there with a lot of bachelor/1bedroom units, and a lot of young people jumping into the market earlier in their lives thanks to loose lending. Especially when they’re buying on zero-down — home ownership carries risks and potentially costly maintenance, so these people should have been showing that they could save and budget by coming up with a down payment.

Plus the rampant home inflation/bubble prices caused by suddenly opening the floodgates and letting everyone get credit to buy meant that people who would have been traditional prime buyers suddenly found that housing costs were going up faster than their downpayments were growing, and that they needed to become subprime borrowers themselves in order to “get in before they were priced out forever”.

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By its illiquid nature and the way the data is kept and tracked, it’s difficult to say what the health of the real estate market is until months after the fact. The anecdotal evidence is not looking too good: it may not be a subprime wasteland in Ontario, but things definitely look to have slowed down. Of course, anecdotal evidence is so unreliable it almost isn’t evidence at all… but that said, I saw my first set of houses up for auction here in London today. They were all student rentals near the university that had been on the market for a while (I think — hard to say if it’s the same houses when I only bike by every couple of weeks). I can’t tell if it’s a bank/foreclosure auction, or if the seller is auctioning themselves just to get things moving.

Well, today was a bit of a nasty day on the stock market. Oil stocks were hammered in particular, though financials didn’t escape without a haircut, either. Oil is coming down, and yes, I have officially been proven wrong in my prediction back when oil was $140 that it would pull back, but not below ~$120. However, I look at these oil stocks and think that the sell-off might be a little over-done. Oil is still above $100 a barrel, yet the oil company stocks have fallen to where they were when oil was less than $80/barrel. I don’t want to catch a falling knife, but my value senses are starting to tingle so I’m going to do some research, particularly into Husky (HSE), Petro-Canada (PCA), Opti-Canada (OPC), and Russel Metals (RUS). HSE and PCA are mature, integrated oil companies — they do everything from getting the oil out of the ground to refining it to selling gas at the pumps, so they get a bit of exposure to everything, though PCA has a much higher proportion of its business that is refining/retailing, which partly explains why it’s been underperforming lately. OPC is a pure oil sands play — they’re not even into full production yet, but their Long Lake project has been built using a new type of steam assisted gravity drainage which will hopefully cut the costs of getting oil from the tar sands by using less natural gas. They’ve gone down over 12% today alone, which might be overdone, unless there’s something I’m missing (though a few days ago it was reported that their Long Lake project wasn’t ramping up production at the expected rate). RUS isn’t an oil company per se, but they make steel that is used in the oil patch, and so tend to move around a bit with the perceived health of the oil and gas industry. They offer an attractive dividend; I bought in around $25 last year, and sold around $30 a few months ago. Today they’re back into the $25 range, and I’m wondering if I like them again at that price.

One more stock of note is Potash (POT). It’s way down over the last month, and has also been hit by another 7.5% today, down to $150. I find this stock almost defies value analysis, and is so volatile I really don’t want to touch it, as cheap as it may seem at the moment.

It looks like I’m going to spend some time tonight doing some research to see if any of these are values, in my opinion anyway, and start thinking about what to do from there. As I mentioned a while ago, I don’t actually have any cash left to invest, so any values would have to be compelling enough to get me to sell something else. Teranet’s had a few takeover offers and is up nicely on the news. I’d like to hold on to it through the bidding process to see where it can go, but at the same time it might be about as high as I can expect now, and it might be decent to lock those profits in and move on to another value… or, I could do some leveraging, and borrow money to invest in an attractive oil patch investment now, and repay the loan with Teranet once the buyout goes through (if one materializes).

Update: Well, Opti is a tough one to analyze since they’re in the early stages, it’s more a gut feeling than anything at this stage of their development. I’ll continue to watch, but being behind schedule isn’t giving me the warm and cuddlies with everything in the oil sector being down.

Petro-Canada is coming out as one of the best-looking bargains. It closed at $39.09, and my spreadsheets are telling me that $42 is the point to start looking at buying (including a small safety factor). Husky is close with $36 coming from my spreadsheets, vs $39.43 at the close; I’m a little more tempted to go for Husky at the moment because of their higher dividends and because they do more oil extraction, while Petro-Canada has more refining/retail business which can be a bit of a drag if/when oil prices spike again.

Russel metals did well for me once, and I don’t see too much that’s changed there, so I’d buy it again around $24 if it continues to be driven down.

Since I don’t have any cash I’m not going to jump the gun and won’t put in any bids tonight, but I’ll be keeping a close eye on the market in the morning!

Disclosure: I’m an amateur investor, and really only looked at how thick Security Analysis by Benjamin Graham was before reading Value Investing for Noobs [or something like that], and even then I’m doing it wrong. This is not advice, and listening to me can lose you money. Speak to a financial advisor, or better yet give all of your money to me. I’m building a rocket that will take it to the moon, where it will be safe, and where you will certainly never see it again.

The Cons have been campaigning non-stop since the last election, itching to throw down by making nearly every issue in parliament a confidence vote. Finally sick of working within a surprisingly functional minority government, Harper has broken his own fixed election date legislation and called an election. I’m actually quite surprised that it’s coming — I felt sure the Governor General would slap him about the head with his own fixed election date, and give Dion a shot at being PM for a week.

Looks like I’m going to have to get off my butt and do some thorough research into the Liberal Green Shift plan — though my riding is likely to go Liberal anyway.

Weddings are such a royal pain in the ass with so many finicky little details to work out, strange traditions to uphold, planning that takes years of (and off) your life, and everything, everything has to be coordinated. So you would think that at the very least, you get to register for an assload of gifts you might want, and that, if nothing else was, would be easy.

Unfortunately, not quite so much.

The concept of a gift registry is actually pretty good. Traditionally, kids marry when they’re young and stupid and still living at home. Their moving out day is just about the same time as their wedding day, so part of the tradition became to get presents for the new couple to help them get their household started. The whole community coming together to help these young people get their lives started off right. As the ages progressed and everything became more commercialized, it became a real hassle to get this going: people might end up with 4 fondue sets (or on PEI, a hundred embroidered pillowcases) and a complete mismash of other stuff. A registry allows a couple to get a complete set of things, without duplication. In exchange for taking on the administrative burden of running a registry, the store the couple registers at gets a near monopoly on thousands of dollars of gift purchases, as well as some continued word of mouth (oh yes, we registered at Store X). In theory, it’s a great system with win-win benefits.

I’ve been quite disappointed with the gift registries offered by major retailers lately. First off, you’re pretty much limited to one or two stores (trying to hand out 3+ gift registries to relatives just doesn’t work), and while the department stores can be relatively all-encompassing, they don’t quite have everything. Plus, we’ve had some trouble with HBC from the gift buyer’s point of view recently. HBC should be just about the perfect place to register at: a huge nationwide chain of stores that carries nearly everything from fine china to linens and even vacation packages. But they wouldn’t mark an item as sold if we were to buy it somewhere else, even though they were out of stock, which is just poor sportsmanship — it’s one thing to be handed a de facto monopoly by the bride and groom, but quite another to try to enforce that by not updating the list with purchases from other stores — even other stores owned by the same company! There were serious communication problems across their different store personas: Home Outfitters wasn’t sharing list information with The Bay, etc. Plus they were pretty keen on just having the item shipped to the bride’s house, without giving us a chance to wrap it or anything. It was their excuse for not letting us strike an item that we bought somewhere else: “Well, you can just order it directly from the registry and we’ll ship it to them in 6-8 weeks.”

So we wanted to open it up and make it easier for people to buy anywhere, and also to buy equivalent options, to give them that sort of option where it’s not really important to get something exact. To that end, I found an open source PHP script that does the job very decently: we create our wishlist (including comments and links out to potential retailers) and let the guests mark things off that they have already bought or want to reserve to buy. Unfortunately, being hosted on our wedding website and not anywhere in store, it failed the “aunt test” — it wasn’t quite immediately intuitive enough for one of our aunts to just fire up the web browser and click something off. So, having become disenchanted with HBC, we went to Cayne’s.

Cayne’s offers kitchen and housewares, though not a whole lot else. However, they have very good customer service and return policies, as well as some of the best (non-sale) prices around, which is good because we don’t want our guests overspending on us. We went in and set up a registry by writing down the UPC codes for anything we wanted. Then we found out that the registry is on paper. That’s so 20th-century. Guests can, in theory, call in at any time to check what’s on the registry and even order over the phone, but as a practical matter we had to wonder if a sales associate would actually read out a list of 30-some items over the phone, especially if they were getting hammered with in-person customers on a saturday. Also, in the rare case where two guests show up to shop on the same day, a duplication would be possible since the registry (on paper, remember) wouldn’t be updated until the end of the day. Plus, there’s only the one Cayne’s location. True, it’s in Thornhill, highly accessible to 75+% of our invitees, but nowhere near the presence of HBC. All the factors came together and Wayfare decided that the Cayne’s registry would have to go. I wasn’t quite as pessimistic: after all, the only major problem with it was that the gift list wasn’t accessible online, and we had our own database for anyone who did want to check things online. The stodgy aunts could go in person to Caynes, and everyone else could use our PHP gift registry to buy gifts from any category in any store.

So of course, next thing I knew, we had an appointment at the Bay downtown to set up our registry. It was impressive, with several sales staff/consultants who just deal with registries. We got a scanning tool to run amok in the store scanning to our heart’s content. That store is this huge retail mecca, with something like 8 large floors of goods. We went from china to luggage to kitchen stuff to bath towels, with several more floors for seasonal stuff and clothes. Unfortunately, the Bay and Home Outfitters/Zellers still aren’t on speaking terms as far as registries are concerned. And oddly enough, it was a really tiring, disappointing shopping spree. First off in luggage, the piece Wayfare really wanted was being discontinued, and we can’t register for discontinued items. Over in the kitchen area, it was a big mess organizationally speaking. They had it organized for the most part by brand, rather than type of kitchen goodness, which made finding and moreover comparing quite a chore. Plus, we had already gone through the kitchen stuff once at Cayne’s and so had a pretty good idea of what we wanted… and the Bay just didn’t have it. They had hardly any pots that were sold as pots. Instead, almost all of their pots were solely offered as parts of giant sets. For glasses, they had the brand and style we wanted, but only the very largest size. They were these huge misproportioned goblets that we felt like we needed two hands to hold. They had the kitchen scale and food processor we were looking for… but both were about $60 at Cayne’s vs. $100 at HBC. Yes, they do quite often have sales to bring that price down, but it made us feel bad for putting those on the registry. Since there are usually multiple rounds of gift-giving leading up to a wedding (the shower, the engagement party, the tea party, the lingerie party, the stag and doe, the beach blast, the kegger, the rehearsal, and the wedding itself), I suggested we keep a number of items on the registry at Cayne’s for the shower, just for those people who absolutely can’t be talked into giving cash (and unfortunately Wayfare is herself one of those people) and then the registry at the Bay for the wedding itself. She wasn’t fond of that idea, because, well… I think by that point she had just gotten accustomed to not being fond of my ideas (and I think in her secret heart, she’s hoping that she’ll have a bigger shower than the 15-some items left on the Cayne’s registry would provide for).

Overall, we found the gift registry process to be pretty draining. That is of course because we live in modern times, and we’re not just leaving our parents to set up our own household. I’ve been off on my own for almost 6 years now, and Wayfare for even longer. We already have everything we need. A lot of our stuff we got new after we moved out, and even a lot of the stuff we left with second-hand (our microwave and toaster oven, for example) we’ve used up and have since replaced with new stuff. Heck, just from birthdays and potatomasses we’ve burned through almost all our gift ideas — we’ve even got a vacuum sealer, a bread maker, and the Griddler, which has been used twice in 6 months. There are precious few kitchen gadgets left that we don’t have — and that’s only because we probably wouldn’t use what’s left. I mean Wayfare hasn’t even taken the slow cooker she got for Potatomas out of the box yet. We have a coffeemaker we haven’t used once. We forgot we had it when we were in the store and wondering if we should register for one (neither of us drinks coffee, but one day we might have a guest who might — even after remembering our unused 2-cup maker, Wayfare was wondering if we should register for a larger one because our hypothetical guests might not want to wait for the coffee to burble out a single large mug at a time). Our kitchen (and by extension, house as a whole) is complete, perhaps even moreso than our <sappy> love for each other </sappy>.

And a quick interjection — Toronto friends, we miss you. Please come stay with us. We truly mean it when we say we’d love for you to come down and stay with us. We have too much guest stuff (guest towels, guest sheets, guest coffee maker, guest room) to have our guests be so very hypothetical.

This seems to be a generational trend: gift registries are fast losing their relevance as people already have their households established before they get married, often with two sets of stuff. People are marrying later in life — I’m not married yet, and I’m old, grey hair and everything.

A kitchen full of new stuff is nice, even if your stuff is only 6 years old as it is. And there is the romantic sentimentalism of being able to say that that toaster was given to us by uncle Bob, or the set of linens from the next-door neighbours. Unfortunately, it’s really hard to find that many things to register for in the first place, but because uncle Bob doesn’t want to be stuck as the schmo buying us whatever it is he thinks is uncool and left at the end of the registry (face cloths, meat thermometer, whatever), we have to register for more presents than we think people will ever buy us, just so they have choice. Personally, I find this a very difficult thing to do.

Well, I renewed my license today. I had been in a rush to get it done today because my car is still registered in Toronto, and they are going to start charging a $60 surtax to renew your plates next week — but then I found out that they’re planning on retroactively charging people who managed to avoid it this week anyway, so instead I bit the bullet and changed my address to my London address. At least that will make picking up my mail and voting easier. I still went today because I had some time, and the lady at the MTO office was great — I ran in in a bit of a fuzzle and while I did bring my drive clean report (passed, but the NO was a little higher than I would like) I forgot my insurance, and hadn’t filled out or signed any of my paperwork. The lady just typed it straight into the computer and said it wasn’t any slower than having to try to read my writing anyway, and even waited while I ran back out to the car for my insurance (though I was in the closest spot). There wasn’t anyone behind me in line though, so it’s not like that was a huge favour she did me.

That kind of service at the provincially-operated facility stands in stark contrast to what faced my sister at the recently privatized driver testing centre. She had an appointment for a 4 pm road test to get her full-G license. This was in Barrie, and there was a bad accident that closed the 400. My parents had left early in case traffic was bad, but this was particularly rough. She was told she had to show up 15 minutes early, and she walked in the door 15 minutes before 4. She was 2nd in line. When she got to the front, the wench there took her test fee and told her that it was ten to and she wouldn’t be allowed to take the test, bu-bye. No make-up, no understanding that she was there 15 minutes early, just a thanks for your test fee to pad our bottom line, suckers.

Back to the Toronto tax thing: I don’t necessarily disagree with it. It’s not a terrible way for the city to try to get some extra money from the drivers who use the roads… but it’s steep for a surtax (almost as much as the provincial registration was to begin with), and moreover it’s really bad to try to squeeze the people of the city to make ends meet when the city seems to have such poor fiscal restraint. Granted, I’m out in London so I don’t get much Toronto local news, but the optics don’t look good from out here. To top that off, the tax was a bit of a surprise, and wasn’t part of any councillor’s platform in the last election.