What’s My “Argument”, And Does It Even Merit The Name?

I get quite amused when people get so wrapped up in the bubble debate that they read things into what I say and try to make me some sort of anti-bubble Crusader advocating instant buys at any price. 

I’m not convinced by any of the arguments I’ve heard for a Vancouver real estate bubble. Sorry.  If you’re one of the people making one of those arguments, you failed to convince me.  Here’s the good news: its not a big deal.  We can have different opinions, and we can all spend or save our money any way we want.

I have read some interesting things in the bubble arguments that I’ve seen.  Comments about the mortgage gap, the coming supply of downtown condos and net migration levels are only some of them. 

 I’ve read other things that either strike me as old and tired (borrowed demand from the future, affordability), because I’ve heard them for literally decades.  I’ve read still more things that strike me as predominantly emotional, rather than reasoned, and those are probably the least convincing of all the bubble arguments.

So, where do I stand? Its not mystery. I don’t think we are in a bubble.  I  don’t think corrections only come after a bubble; they can come after any notable price advances.  We’ve recently experienced notable price advances, so we’re due a correction, but I don’t think corrections always come on time.   I also think that the longer something doesn’t happen, the longer the opportunity exists for something else to happen.

That’s it.  That’s my stand on the bubble.  Not much of an argument, I realize, but I’m not promoting it as an argument.  I’m just saying that bubble promoters don;t convince me.  

I look out upon a world that I find very complex.  As the years pass and I learn more, it appears more complex, not less.  I take no reassurance in over-estimating my ability to understand it or decipher its ways.  

I’m fond of saying that the real estate market is going to change because it always does. Its a cliche, but its a cliche that lasts because its true.  A correction is coming.  So is a rise in prices.  If you can time the market you can make a killing.  We’ve seen that time and again. 

 I’ve never succesfully timed the market, and I’m not sure I can do it.  I’ve never made the killings I’ve seen others make.  Based on my experiences it would be arrogant of me to assume that I could time the market. It would be hypocritical and irresponsible of me to recommend market timing to my clients.  I have clients who have market timed, but they didn’t do it on my advice.

I prefer “time in” the market to “timing” the market.  “Time in” has worked for me and for clients that I have advised.   Time in is based on an assumption (“assumption” being a very important word) that the real estate market will trend upwards long term.  Some assume an upward trend greater than inflation, some don’t.  The difference isn’t that important.  The important difference is “time in” versus “timing”.

 Buying anything, anytime, on the assumption that long term the market will rise is foolish.  No thinking person would ever recommend that.  (For that matter, no thinking person would ever suggest that I’ve recommended that).  Buying anything anytime reduces “time in” to “timing”, without making use of the arcane skills that market timers use. Its a mug’s game.

The time in approach requires making use of at least some sort of rudimentary analysis.  The easiest and one of the most sensible ways to approach it is to apply certain metrics to your potential investments.  Decide what kind of break even point, what kind of rent multiplier, what sort of internal rate of return and what cash on sale after a specific time you like.  Those are  personal decisions.  Be too strict and you’ll never get in the game. Be too cavalier and you won’t stay in the game unless you have a high paying job.  All things considered, I like 25%-45% down to break even, and a rent multiplier of between 150 and 175.  If I can get those two things I’ll look more closely at the other metrics, not to mention the characteristics of the property itself.
What does that mean today? Its pretty simple.  If I find something that breaks even with 25% down, and has a realistic rent multiplier of 150, I’ll take a very hard look at it, and if I’d buy it myself I’ll recommend it to others.  

Given today’s market conditions, does anyone think I’m finding those kind of properties?  I’ve highlighted those kind of opportunities in the past, of course, but I don’t think anyone can say I’ve done it lately. Why? Again, simple: they’re hard to find.

 That’s a benefit to the time in approach versus the timing approach.  When railbirds crow that its a terrible time to buy its also generally tough to find good buys.  Of course, that doesn’t mean you don’t look, and it doesn’t mean you suddenly decide that you can time the market after all, now that it seems so obvious.  A little discipline and humility is often in order when everything appears to be crystal clear.   And of course, discipline and humility can prove the railbirds wrong.

 If the preceding is difficult to understand, and if you think it means “Buy now or be priced out forever”,  you haven’t gotten my message.

 If you think it means “Don’t rent, only buy”, you haven’t gotten the message either.

If you tink it measn “Buy anything and sit back, don’t worry, you’ll be fine”, again, you’ve missed the point.

 If you think it means that if you want to buy investment real estate I recommend abandoning market timing and embracing an objective, disciplined approach, even if easy opportunity doesn’t seem plentiful right now, then you’ve got the message.   (Yes, there is more to the disciplined aprroach than the 4 metrics I’ve touched on).

 If you think that message is an anti-bubble argument, you’re fooling yourself.

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15 Comments

Filed under Investment Approach

15 responses to “What’s My “Argument”, And Does It Even Merit The Name?

  1. Moneyfromasia

    E-mail me and I will give you my numbers. See what you find for me under your search perameters.

  2. djmk

    i got a new name for your blog

    “real estate philosophy 101 – a guide to feng shui harmony to today’s hectic market”

    you tell ’em rob

  3. Rob; It is not that the bears all want to cast you as some sort of scammer/superbull/crusader/whatever. It is just that whenever there is an argument, those who are the least rational are the loudest.
    I for one read your blog fairly regularly, just in order to see what the current inventory direction is. It is hard to argue with the numbers.
    That said, I am bearish on the market right now, but know that timing any market is nearly impossible. I sold, now I get to wait. Maybe I will be proven right, or maybe I will have to move to Tortonto 😉 I guess we’ll see.
    Anyhow, keep up the good work, and thanks for the data.

  4. johnnyrent

    Hi Rob

    Enjoy your blog and appreciate your stats. Although I’m decidedly bearish, I think you’ve taken a lot of unwarranted shots from other bears of late. I think we should all understand that someone in the real estate business isn’t going to discourage anyone from buying real estate and I don’t think this can be fairly characterized as cheerleading.

    One question though. To my way of thinking a bubble exists when prices have ramped up significantly, over a protracted period and beyond that which economic fundamentals would normally support. Indeed, you’re finding it harder to find properties where the investment metrics make sense (not to say some still don’t exist). You speculate that a correction is coming sooner rather than later, which coincides with my view, but you refute the existence of a bubble. What’s your definition of a bubble?

    P.S., What happened on Friday?

    Regards,

    JR

  5. Snick

    Yes, I would be mildly interested to also know what your “definition” of a bubble is.

  6. Stucco Adict

    Rob:

    Your balanced veiw point is fine. Let the numbers do the talking. Right now they are saying “shoulda bought”.

  7. bearette

    I come here for the numbers. Not so much the essays. Let’s let Rob stick to what he’s good at.

  8. uncertain_buyer

    Rob,

    I agree with you that it is really hard to time the market.

    I kept an open mind and kept looking even though I felt prices were too high. When a great house in an excellent location came up I decided to purchase it. I am very happy with my decision, even though I am sure prices will drop in the coming future. How much? No idea.

    My reason for buying back in was based on the property and not the market. It is extremely hard to get what you want and when it shows up you have to go for it.

  9. Concerto

    The sweetspot of the landlord game is to be renting a property you bought SOME TIME AGO. I agree, therefore, with Robs “time in” the market statement. The problem now maybe “not any properties to buy that show positive cash flow immediately”, but for landlords who bought some time ago, the ratios look very different – you know – better. It is a long term, relatively small margin business – with the longer term benefit of capital appreciation. This is very boring news to many investors.

  10. WoodenHorse

    Rob: “Correction after Notiable Price Advance” Vs. “Crash after Bubble”? What’s the diff?

    However, what you’ve wrote here is pretty much what I’ve pegged you for. If the numbers make sense…buy, if not…don’t.

  11. awum

    Rob, I do think you underestimate the downside of the current unprecedented run-up in prices. By unprecedented, I mean in terms of the length of time of uninterrupted upward movement, highest price in “real” terms, and lowest level of affordability.

    On the other hand, I’ve seen little evidence that you are especially pro- or anti- bubble or that you even really see things in those terms. You are a bit of a cheerleader at times, maybe, but that just makes you a good old-fashioned capitalist. A true believer. No shame in that.

    Frankly, I think its the real shame is that real estate has gone from being about home ownership, to being an investment vehicle, to being a (mostly) bad investment. What I really mean is, I’d like to own my own home, but the metrics are just too stupid to swallow. Regardless of how well my investments are doing, the (virtually inevitable, I think) correction can’t come too fast or too deep for me. I don’t believe in a bubble so much as I want a burst.

    I appreciate that you do what you do. I haven’t met you, but you strike me as honest — I would count you as one of (very) few real estate agents that I like. Wait, “like” may be a strong word…”respect” maybe…

  12. robchipman

    woodenhorse:

    When I think bubble/crash I think ’81/’82. I was around then, so its a memory for me, instead of a legend. The results had large, tangible effects on my daily activities for several years after. Things changed in a big way. The value both arrived very quickly, and disappeared very quickly. We’re five years in to the current price run up in local RE.

    When I think “correction” I think of something less than “crash”. 20%, say, or a return to ’05 values. After a 20% correction (should we see it) I don’t see things changing in the same way. If I heard someone call a 20% correction a crash I’d assume that they really didn’t have a lot of imagination. (BTW, we could see less than a 20% drop).

    awum:

    Vive le difference, my friend. In terms of unprecedented length of time of upward movement, could we not consider ’86-’90, or ’91-’95? Is it worth considering that ’94-’03 saw virtually no price gain? This has been a good run, and I’ve said as much, but it might already be over, and without a crash.

    I’ve been in real estate a long time. Its always been called an investment, and that aspect has always been huge. To go further, Vancouver real estate and “speculation” have long gone hand in hand. We really are the wild West in that regard. Its not new.

    Ownership has always, in my experience, carried a premium. Like geezer, I could share stories of how hard it was for me to buy when I began, but those stories are always dismissed by current non-owners as ”it was uphill both ways” sort of scenarios.

    Do I underestimate the downside of the current market? I’m not certain I’d agree. Wealth fluctuation is a given in any market. I tend to think bankruptcies and foreclosures are signs that the system is working and keeping people honest. My goal is to avoid being a bankrupt or being foreclosed on, not avoiding bankruptcies or foreclosures for everyone. Is that cold hearted? I don’t think so. First, I can’t control those things. Second, I don’t think the capitalist system would work without a real spectre of loss. Third, in a world where genocide is a daily occurrence that goes by largely ignored I think the costs of a local real estate downturn have to be kept in perspective. Do I want widepread foreclosures? No, of course not, but I don’t think they are a danger right now (mind you, the duct tape on my crystal ball may be obscuring my vision ;-)!

  13. WoodenHorse

    Hi Rob,

    I think we’ll correct much more than 20%, and I agree with AWUM that this is an unprecendented run up in prices (both real and nominal). You yourself said “breakeven at 25%-40% downpayment” or “rent multiplier of 150 to 175”. What has to happen to prices or rents for the general market to come even close to that? I’d said-at the very minimum-a 40% price drop for the market to return to those levels. Rents could go up, but rents are harder to move than prices.

    To be honest, I hope that the coming crash isn’t too much worse than ’81-’82. Have you viewed that “housing prices as a roller coaster” video? I know it’s american prices, but geez…the run up leading into 81 was a mole hill compared to the current run up in prices.

  14. great blog on easy cash advance.

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