The real estate industry spin machine in overdrive: Some Sunday reading to make you chuckle
MAY 29, 2011
I have nothing against the real estate industry in general. I really don't. At the end of the day, they are looking out for the best interest of their members. I understand that. It's really no different than the multitude of publicly-traded companies who try to spin negative news into a positive light for the benefit of their shareholders or management.
What does bother me though is the massively asymmetrical information relationship between the real estate industry and the general public. The public gets only the information the real estate boards choose to release. If the real estate board chooses not to divulge important stats like sales and inventory numbers (like the Ottawa board), there is little the public can do to gauge the true well-being of the housing market in that area. That needs to end.
Even more frustrating is the willingness of the mainstream media to take the press releases from the real estate industry and pass them directly on to the public without any sort of critical analysis of the content. I've explored that phenomenon several times before. The bottom line is that the real estate industry is one of, if not the, largest source of advertising revenue for newspapers. It's exceptionally difficult to critically analyze and refute information from the very source of a large chunk of advertising revenue. As noted in an article in the McMaster Journal of Communication,
"Building relationships with advertisers limits what news a medium will include. Anything that can be viewed as contrary to business priorities or will interrupt the “buying mood” of consumers often dissuades the advertisers that fund newspapers."
"It would not be financially reasonable for newspaper owners to publish editorials that offend their advertisers or deter consumption. This results in the censorship of news content, whereby journalists are less likely to pursue (certain) stories"
"Since publishers like CanWest Global are more dependent on advertising revenues than they are on subscription payments, selling advertising space becomes the top priority of the company"
We should always keep this in mind when reading anything in the media. But every now and then stories come along that are so absurd that they just make you chuckle. There were three of them this week:
Busting the myth of Vancouver real estate- The Globe and Mail
Should more appropriately be titled, 'Busting the myth of a critical media'. Condo shill expert Bob "Buddy Holly" Rennie offers some interesting insights that that supposedly 'busts' the 'myth' that Vancouver houses are actually expensive (the second most expensive of any city in the English-speaking world according to Demographia). Some quotes from the article:
"Vancouver: Not really as unaffordable as you think it is."
"...People who specialize in housing affordability in the region say their statistics also indicate that the perception of Vancouver’s affordability problem is distorted by high prices in some places."
"...But Mr. Rennie noted the average condo in Metro Vancouver sold for a mere $313,000 last year after the most expensive condos in the top fifth of the market were taken out. Similarly, single-family homes in the top fifth of the market average $1.72-million. But once those high-end sales are removed from the price-averaging mathematics, home buyers in the rest of the region paid an average of $632,000."
Yes, you read that correctly. Vancouver is not really expensive. It's just that many of the houses there are expensive. Once you strip out the expensive ones, it's not so expensive anymore. I'm not sure what impresses me more, the iron-clad logic of that statement or the analytical critique by the journalist who reported it.
And to think that here I am focusing on such meaningless things as fundamentals. How foolish of me. The overvaluation issue in Canada can be solved quite simply if we just don't focus on expensive houses.
Property sales are dropping- Richmond News via Canada.com
This one is actually a couple weeks old, but it fits nicely in this post. It's no shock to any readers of this blog that property sales in most of BC's lower mainland are wilting big time. Of course it's widely explained that when house prices rise inexorably, it is the impact of wealthy Asian investors who consider BC real estate an absolute bargain. But when sales suddenly plummet, well, then we have to figure out how to spin it. Consider this gem:
"Statistics released by the Fraser Valley Real Estate Board on Tuesday show a 33 per cent decrease in sales for detached homes in Abbotsford last month compared to sales in April 2010.
Townhouse and apartment sales also dropped by 43.5 and 7.1 per cent respectively from where they were a year ago.
In Mission, the number of sales fell even lower. Sales of detached homes tumbled by 42.1 per cent from April 2010, and 48.4 per cent from March to April.
Sales of townhouses and apartments in Mission for April 2011 also decreased by 77.8 and 71.4 per cent each compared to April 2010."
Pretty sobering numbers. The explanation?
...the recently concluded federal election.
"That could've had some effect," he said. "People were distracted, they wanted to know what was going to happen, who was going to get in . . . people like to know before they make a major purchase decision because [the election] could affect them drastically."
There you have it. Wealthy investors in China were so captivated by the Harper-Iggy-Layton slugfest that they forgot how great a bargain real estate is in the Fraser Valley. Makes sense.
Smart money on Toronto condos- The Standard
Barely a week after a Toronto research firm estimated that 45-60% of condos were being purchased by 'investors' we get more insight into the irrational behaviour of this interesting, and increasingly important group of condo buyers.
Condominiums, or condos - as apartments are commonly referred to in Canada - can be seen almost everywhere in Toronto's downtown area, where more than 250 buildings providing 50,000 to 60,000 units are currently under construction.
Not only do the locals buy condos, they have also attracted investors from China, the Middle East and India.
"Overseas buyers sometimes purchase several units simultaneously."
And what motivates these investors? High cap rates? Positive cash flow? Nah!
...Most investors look for capital gains rather than rental return. On average, the rent for each square foot was C$2.50, meaning a 680 sq ft apartment can generate a monthly rent of C$1,700.
The condo owner would need to make a mortgage payment of about C$1,617 a month...In addition, the owner would need to pay property tax and maintenance fees which could add another C$450 per month on average in monthly expenses.
What in the world would motivate the 'smart money' to purchase cash-flow negative condos where they have to subsidize their renters by putting more of their own money towards monthly servicing costs?
"So far, the property market here has not had any big correction."
Ah yes! Smart money = momentum chaser. Forgot about that. So what if there is a correction? Will all of these 'investors' still hold these cash-flow negative properties? And with so much inventory in the pipeline, what if demand from investors even just softens (forgot about them dumping their investments for a moment). What would that alone do to prices?
This will end well!
-Ben
Posted in:
21 Comments
Good post. That's what I've been contemplating as well: every time we see a news clip on "Wealthy foreigners buying up Vancouver real estate!" I wonder why the media isn't more objective about the story? Why aren't we laughing at these fools? Because really, they are no different than those people who bought Nortel at $100-looking for capital gains of course. But when prices go down, suddenly nobody wants to buy those Nortel shares at $70. And then prices drop even further. I guess we are at the cusp right now of a momentous fall...we shall see....
I was on a trading desk when Nortel first broke and dropped into that 70 area, the lineup to buy was astonishing....and it was
Iike that all the way down. There was no lack of buyers even though It was the last company standing at the time and seemed to defy gravity. And remember that Scott mcneally of sun micro talked about the tech crash in retrospect, do you know what he said?: they didn't see it coming! He axtually admitted that. We are talking about the guys on the forefront of the boom, didn't see the blow up coming and were swept away by it. Now reflect on the real estate industry and all the minions dependent on it. They won't see it coming either. They didn't see it in 2008, or the credit melt the year before. Take their advice at your own peril.
Their self interest and myopic view based on very specific highly specialized knowledge, is like being a hammer and everything is a nail. They won't see it coming because they know nothing else, and can't imagine a world without the story they are selling. It didnt help Nortel, or the beleaguered shareholders that rode that one all the way down, it won't help homeowners when the trend changes either. Buyer beware.
You missed my personal favorite: the rise of the Chinese "middle class" that is sending their money abroad to buy homes that the western middle class can not afford, despite our higher median income. There must be like, what, a billion millionaires in China according to this myth? Sometimes they also refer to this magical country as a "developing nation".
Agreed excellent post, my wife and I used to consider the real estate section of the Saturday (Calgary) Herald, the comedy section! It was hilarious as they trotted out the example buyers posing it in their new digs. One columnist in particular, one Marty Hope, used to have us in fits as he hyped one or other development under the guise of "reporting". Ditto for the many generic descriptions of developments with no byline, we always wondered who did the writing as it was truly creative.
On a more serious note, ever notice how it used to be just the homes section, now they've added separate condo and rec property sections no doubt to allow advertisers to better "feature" their products.
I remember reading last year that a group of disgruntled readers were suing their local newspaper for losses related to biased real estate reporting. I think it was in Ireland or Scotland but can't find it on line anymore. Anyone know anything about this? Would be great to see a precedent set and remind the media that they need to be accountable to their readers and not just their advertisers.
So what if there is a correction?
I do not understand why there has NOT been a correction in Toronto real estate - can anyone please enlighten me?? I am very serious.
Thanks.
Jeanne
In the short term, house prices are a function of confidence. In the long term, they are closely tethered to underlying fundamentals. While deviations away from fundamental value occur and can persist for years or in some cases decades, prices always find their value.
House prices in Toronto are quite overvalued based on incomes, rents, GDP, affordability, etc. They sit at a dangerous level of valuation. But what can not be predicted is exactly when perception of real estate as an investment will turn.
To answer your question, real estate in Toronto has not corrected simply because the belief remains that it is a sound investment. If that perception does not change, and if all the other stars line up perfectly, Toronto may manage to stagnate for a decade while fundamentals catch up. I doubt it, but it is at the very least possible. But should that perception change, there is a lot of dead air between current prices and underlying fundamentals.
I've certianly been watching the TO market... and right now... lack of inventory is goosing sales. Once the new flood of supply kicks, just watch the prices tumble. I've seen a few re-listings in my neighbourhood... $9,000 down here, $13,000 down there.... not much, but it's a start... the cracks are starting to show.
Interest rate will do the job quite well!
Ben
Your analogies are for the most part quite correct. Some other basic reasons why our real estate industry is overbuilt is for three reasons. First the fed and provincial governments did three things to pump up the speculation a) warned of the impending HST to buy now or pay the higher price b) the rule change to first time home buyers of shorter amortization periods c) the biggest reason, cut interest rates to half of 2008 rates. As a home builder in the Niagara area for 27 years I have a longer historical view of the damage of rate reductions have on speculation. We overbuilt the market in 1985 till 1990 then you know what happened for the next five years. This boom has lasted for nine years or twice as long as the 85 to 90 boom, which will only force a longer stagnation to restart the construction industry. "Reversion to the norm" has not been used in Canada as it is now frequented by our American friends. We should have seen the correction three years ago as they did in the US but will only prove more painful when we must revert to the norm. In 1982 condo prices in Toronto corrected by 70%. This time should prove no different. I you Google average 5yr mortgage rate in Canada over the last 75 years you will see where are interest rates are headed. Believe it or not this is the first time I have ever responded to a blog. John Ravenda Ravenda Homes Ltd
If you haven't seen this interview with Uncle Ben http://www.youtube.com/watch?v=JvNClShQapo then you should have a look. I think it addresses your question quite well. Regards, Tony
Glad I sold in TO. Buy low , sell high is a simple philosophy. Now is the time to sell...
I really would like to know what planet Rennie's on. That $320K for a *condo* - plus fees & taxes, natch - is affordable to a population where singles make $30K median and families (who need Bigger Condos) make $70K median. Psh.
Correction.....that 'mere' 320K average is once the most expensive condos are removed.
I for one, do not doubt there will be a correction. Although it has been suggested that there is a remote possibility that real estate values will stagnate while incomes catch up, I doubt this will happen. I work in the financial industry (BC) and more of our clients are calling us asking for advice on bankruptcy. We have been expecting this for awhile and know exactly who is at risk. They simply have too much debt (and not enough income to support this debt). It's like it's been one wild party for the past few years, with people buying real estate left and right, and now it's the morning after. This is scary.
Unfortunately, even some people who I thought were absolutely safe (own their houses outright, have some savings) have confessed to me that they made a huge mistake-and bought that condo to flip (or 2 or 3) and now they haven't sold. So they're stuck with an unaffordable mortgage, and the tenants' rents don't cover the mortgage. And the LOC is maxed out.
It's just astonishing how many people have been caught up in this real estate mania. Even if a few people go under, I don't see how this can't effect the wider market. It's those at the margins who will eventually bring it down.
Smart people bought with 0 or 5% down and took the maximum HELOC out of their house, and now will file for bankruptcy while living on cash for 7 years.
This is the only way to play the fraud society that we have become.
I would not be surprised to learn that HAM also has been putting 5% down, taking HELOC and sending money to China instead. We will find out eventually.
Ben,
Here's another funny piece: it seems what you don't understand about foreign investors willing to invest in negative cash flow propositions is that many are perfectly willing to do this if it means increasing their access to quality eating:
"It's been a perfect storm, a confluence of local high-quality ingredients, a wealthy, educated class of Chinese immigrants with demanding palates, and their equal demand for value, Stowe says. "Part of their reason for buying second homes in Vancouver is the culture of good food and education. That's basic. It's not the houses or weather."
"Food is foremost to the Chinese," he says. "They spend a lot of money on eating. Life is about food-family-financefuture, with future meaning education. But they want their food at a good price."
There are about 600 Chinese restaurants in Metro Vancouver with most in Richmond and Vancouver."
Read more: http://www.vancouversun.com/life/best+food+outside+China/4821868/story.h...
VREAA posted a copy of a "report card" from the BCREA 2009-2010 Annual report. Very interesting.
http://vreaa.wordpress.com/2011/05/31/bc-realtors-as-influence-peddlers-...
http://www.bcrea.bc.ca/about/2009-2010AnnualReport.pdf
Jeanne
In the short term, house prices are a function of confidence. In the long term, they are closely tethered to underlying fundamentals. While deviations away from fundamental value occur and can persist for years or in some cases decades, prices always find their value.
House prices in Toronto are quite overvalued based on incomes, rents, GDP, affordability, etc. They sit at a dangerous level of valuation. But what can not be predicted is exactly when perception of real estate as an investment will turn.
To answer your question, real estate in Toronto has not corrected simply because the belief remains that it is a sound investment. If that perception does not change, and if all the other stars line up perfectly, Toronto may manage to stagnate for a decade while fundamentals catch up. I doubt it, but it is at the very least possible. But should that perception change, there is a lot of dead air between current prices and underlying fundamentals.
Hi Ben,
I appreciate your response. However I don’t understand what you are saying for these reasons:
I agree houses in Toronto are quite overvalued based on incomes - rents - GDP affordability. I agree they sit at a dangerous level of valuation.
I question your comment:
But what can not be predicted is exactly when perception of real estate as an investment will turn.
This has absolutely nothing at all to do with “perception of real estate” nor
“an investment” - at all.
This has to do with:
The entire world, including the European Union, is in a disasterous situation and possibly and probably will fall apart – the US – is literally bankrupt – Japan – is finished – due to the Tsunami, nuclear meltdown, China is in trouble - et al.
What does that leave us?
Canada.
Housing prices in Canada are ridiculously high – at least 25% - 30% in Toronto alone. Yet – people are paying these ridiculous prices?
Eg. A condo listed in Toronto at $700K is selling for that – when it should be selling for $525 – or $490.
I will again ask you – why??
Hi Jeanne - I won't pretend to respond on Ben's behalf, or to be as smart as Ben. You pose a very good question. I moved back to Calgary after 15 years on Fl, and lived through the US housing boom/bust. The short answer to your question is 'greed'. People think they have a short-cut to making a quick buck, so that is what they are doing. They will buy the condo and flip it/rent it while it appreciates. It is IDENTICAL to what happened in the US. And unfortunately it will probably also end in the same way.
There was a great article in the local paper in about 2003/2004 where a Miami-based realtor, who had been in the business for 20+ years made the comment "70%+ of condo buyers are investors - in the past it was reversed. What happens when all the investors want to sell at the same time?" He has his answer now.
There were lots of stories of 30 year olds in the US that got caught with 5 properties when the housing market tanked, and we will probably see the same thing here. The response from 'pricedoutfornow' is anecdotal, but he/she is seeing that people are maxed out on credit/debt. There is a link on another post on this site that shows the Housing Affordability Index, and one of the graphs shows the skyrocketing growth in Lines of Credit. I was trying to rationalize how, if 95% of Canadians have gross income <$100k (as reported in the Globe or FP, I forget which) they can afford all this real estate and all the toys - now I know - Lines of Credit. This is going to end ugly.
I found, speaking with friends and family here in Canada, that its the mindset of 'we are different' - basically a play on 'this time is different'. So Jeanne, you are not alone out there and you are not crazy - you and the people reading this site have connected or are trying to connect the dots, as things don't make any sense.
I would take your question, and expand it to "why has Canada not been hammered by the global financial crisis like the rest of the world?" Based on data on this site, I would agree with most of the posters here - its only a matter of time - question of course is - when?
Ben - on a separate note - fabulous site. I -REALLY- enjoy it. I have spent a lot of time over the past 18 months reading Shilling, Mauldin, Boekh, and Ed Easterling. And this site. I am totally convinced of a 20-50% drop in Canadian real estate, esp in the major metro areas - the data on this site has convinced me that my gut has been correct for the past 18 months. And of course all the follow-on effects of that drop. It won't be pretty. So keep up the great work. It's lonely out there when you are trying to connect the dots and convince the herd that they are going in the wrong direction, but there are some of us that get it and value your work. Thank you.
BTW - can't you just block that person with the two names? I forget who they are, but they are SO stupid and irrational, I wonder why they even waste their time posting here.
I lived through the US real estate crash. In fact I lost all my savings on a house I sold in North Carolina back in 2009. I am glad I cut my losses and ran as prices fell further.
There were tell-tale signs of an impending correction I saw over a period of 4 years. On example is signs saying "Will buy your house for cash". OMG, I have been seeing the same tell-tale signs in TO over the past few months and this is seeming like deja-vu.
From someone who has lived though it all, Toronto seems in phase lag with the US. That is why I am renting a Vaughan 570k home for $1800 per month versus buying it. I am considering 2 opposing strategies going forward.
1. Keep renting and buy a foreclosure down the road
2. This is going to shock you- buy a home in Toronto soon despite knowing that the market may crash. I will put the least possible down with the strategy that if and when prices crash and I am upside down I will do what I saw others do in the US- simply walk away from their home!