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>Speculation can hide some of that dynamic during periods of rapid price increases but a lot of speculators go broke and give up. We saw a lot of that during th

by ABCLAW 8y ago

>Speculation can hide some of that dynamic during periods of rapid price increases but a lot of speculators go broke and give up. We saw a lot of that during the mortgage meltdown. In Vancouver, ownership costs exceed the median household pre-tax income. This is literally impossible to sustain over the long term if we agree those prices are generated by housing demand from 'people'. It makes a heck of a lot more sense when we consider that this is an investment bucket that is attracting surplus foreign capital in a world where there is fierce competition for returns. Speculation isn't 'hiding some of the dynamic'. It is the dominant force in pricing. The typical 'healthy' value in most markets is 30% to 40%. Many specific 'hot' locations are hitting north of 66%. In Canada overall, the median is around 55%. Will the bubble pop? Eventually. But the damage is already being inflicted. There's an entire generation where home ownership rates have fallen off a cliff.

ChuckMcM 8y ago
Take the analysis a step further though, population density matters, not median income. Take the ownership cost, and the total supply of housing, now align that with the households (groups who would live in one housing unit) and align it to the right side of the income distribution. You will find that all housing is consumable by households for which their income exceeds the ownership costs. That is how the market works, the people who can afford houses buy them. If there are more people who can afford houses than there are houses, the prices adjusts upwards to capture that value, if there are more houses than people who can afford them, the price adjusts down to capture that value. There are no houses (typically) that are otherwise market acceptable that are not owned. What is more, it has been shown that if you add houses, that widens the overlap with incomes, starting from the "high" end and moving down. That is why Sunnyvale has authorized the building of thousands of new houses and apartments. Even trying to artificially hold units out for "low income" people results in fraud where low income people "rent" those houses and then sublet them out at market rate to recapture the value. We just convicted a woman of doing that and she isn't the only one.
- ABCLAW 8y ago
  >Take the analysis a step further though, population density matters, not median income. With respect, I'll maintain that it's an issue if the supporting cash-flow underlying the market can no longer, numerically, support the market pricing. >You will find that all housing is consumable by households for which their income exceeds the ownership costs. That's not what's going on in Vancouver's case and the numbers make it very, very clear. No one here is confused about supply and demand. If housing prices tracked 'people's ability to pay for housing', as you're positing, then the ratio of income to total ownership costs would remain reasonably linked. The issue is that demand isn't from 'households'. It's from REITs, speculators and foreign capital. You can feel free to look at the spread between total ownership costs and rental rates. In the most expensive cities the spread is largest. In other words, the rental rates have changed far less than the total cost of ownership, because there is very little ability for personal incomes to absorb the housing price increases. What's more, the correction isn't going to be quick, nor is it going to be soon. The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity. When the bubble pops and speculators are suddenly underwater, they'll prune their portfolio and keep the accrued equity gains, which will put them very far ahead of those who didn't get in. This is why people advocate for regulatory intervention. Because the only way this train stops is when it slams into the concrete wall at the end of the track.
  - throwaway082729 8y ago
    "The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity." - Can you ELI5? I recently sold a home that I bought for $600k a while back in a decent school district for $1.15M and bought a $1.8M home near Sunnyvale. Was that a stupid thing to do?
    - mandelbrotwurst 8y ago
      Maybe some of that jargon went over my head, but I'm not convinced that his option for investors to "prune their portfolio and keep the accrued equity gains" ... "When the bubble pops and speculators are suddenly underwater" is practical. Are said investors not themselves speculators who would be underwater post bubble pop? If you have a high confidence that "the correction isn't going to be quick, nor is it going to be soon", then sure, it makes sense to lever up and take on more debt - IFF you're similarly confident that you can get out before prices drop! Re: your situation - I wouldn't call it stupid, but you do now have a ~50% larger share of your assets in your home, and so you're now that much more subject to future shifts in home prices in your area.
remote_phone 8y ago
I have lived in Vancouver since the early 80s. Vancouver has always been extremely expensive. The prices have only gone up since the 80s. Our house went from $250,000 which was 50% more expensive than our Toronto house to $1.4M when we sold in 2010. So unless you are talking geologic timelines, Vancouver sustained unreasonably high housing costs for 3 decades or more (it continues to be high) with no significant pullback and no discernible industry like Silicon Valley. In the 1980s they blamed Hong Kong immigrants. More recently they blamed the Mainland Chinese. Now is it foreign investment? There has always been a bogeyman in the minds of Vancouverites but they have always been wrong. Regardless what the reasons, the costs have always been hard for regular Vancouverites to afford and yet the prices kept going up for decades.

by ABCLAW 8y ago

ChuckMcM 8y ago

Take the analysis a step further though, population density matters, not median income. Take the ownership cost, and the total supply of housing, now align that with the households (groups who would live in one housing unit) and align it to the right side of the income distribution. You will find that all housing is consumable by households for which their income exceeds the ownership costs. That is how the market works, the people who can afford houses buy them. If there are more people who can afford houses than there are houses, the prices adjusts upwards to capture that value, if there are more houses than people who can afford them, the price adjusts down to capture that value. There are no houses (typically) that are otherwise market acceptable that are not owned. What is more, it has been shown that if you add houses, that widens the overlap with incomes, starting from the "high" end and moving down. That is why Sunnyvale has authorized the building of thousands of new houses and apartments. Even trying to artificially hold units out for "low income" people results in fraud where low income people "rent" those houses and then sublet them out at market rate to recapture the value. We just convicted a woman of doing that and she isn't the only one.

ABCLAW 8y ago
>Take the analysis a step further though, population density matters, not median income. With respect, I'll maintain that it's an issue if the supporting cash-flow underlying the market can no longer, numerically, support the market pricing. >You will find that all housing is consumable by households for which their income exceeds the ownership costs. That's not what's going on in Vancouver's case and the numbers make it very, very clear. No one here is confused about supply and demand. If housing prices tracked 'people's ability to pay for housing', as you're positing, then the ratio of income to total ownership costs would remain reasonably linked. The issue is that demand isn't from 'households'. It's from REITs, speculators and foreign capital. You can feel free to look at the spread between total ownership costs and rental rates. In the most expensive cities the spread is largest. In other words, the rental rates have changed far less than the total cost of ownership, because there is very little ability for personal incomes to absorb the housing price increases. What's more, the correction isn't going to be quick, nor is it going to be soon. The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity. When the bubble pops and speculators are suddenly underwater, they'll prune their portfolio and keep the accrued equity gains, which will put them very far ahead of those who didn't get in. This is why people advocate for regulatory intervention. Because the only way this train stops is when it slams into the concrete wall at the end of the track.
- throwaway082729 8y ago
  "The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity." - Can you ELI5? I recently sold a home that I bought for $600k a while back in a decent school district for $1.15M and bought a $1.8M home near Sunnyvale. Was that a stupid thing to do?
  - mandelbrotwurst 8y ago
    Maybe some of that jargon went over my head, but I'm not convinced that his option for investors to "prune their portfolio and keep the accrued equity gains" ... "When the bubble pops and speculators are suddenly underwater" is practical. Are said investors not themselves speculators who would be underwater post bubble pop? If you have a high confidence that "the correction isn't going to be quick, nor is it going to be soon", then sure, it makes sense to lever up and take on more debt - IFF you're similarly confident that you can get out before prices drop! Re: your situation - I wouldn't call it stupid, but you do now have a ~50% larger share of your assets in your home, and so you're now that much more subject to future shifts in home prices in your area.

remote_phone 8y ago

I have lived in Vancouver since the early 80s. Vancouver has always been extremely expensive. The prices have only gone up since the 80s. Our house went from $250,000 which was 50% more expensive than our Toronto house to $1.4M when we sold in 2010. So unless you are talking geologic timelines, Vancouver sustained unreasonably high housing costs for 3 decades or more (it continues to be high) with no significant pullback and no discernible industry like Silicon Valley. In the 1980s they blamed Hong Kong immigrants. More recently they blamed the Mainland Chinese. Now is it foreign investment? There has always been a bogeyman in the minds of Vancouverites but they have always been wrong. Regardless what the reasons, the costs have always been hard for regular Vancouverites to afford and yet the prices kept going up for decades.