A Couple Of Tidbits

How can you tell the market is hot?  How about you get a call from a conveyancer at 9:30 looking for some information on a deal so he can get the sale ready to close?  I just got that call, from a notary who is still in his office, working on  deal that closes at the end of this month.  This isn’t the first time we’ve heard evidence of notaries and lawyers working very long hours to handle the demand.

I read the National Post/Financial Post each day.  I don’t always get to read everything, but I think its the best paper around.  The last three days its included excerpts from P.J. O’Rourke’s recent book on Adam Smith’s seminal book “Wealth of Nations”.

O’Rourke is a funny guy, (he’s the H.L. Mencken Research Fellow at the Cato Institute; anyone connected to Mencken probably has a sense of humour I like) and his thoughts on Smith are worth reading, even if you dont agree with them (and I’m sure we have a few around here in that camp).

A more real estate related piece by Brad Lamb was in today’s issue.  Brad writes about his take on Buyer’s Remorse.

I don’t think Brad is saying “Buy anything, anytime”; I think he’s saying that he’s advised clients to buy (because he can see it will be good for them), they’ve chickened out, and they regret it later. Fear of action will always be a challenge, regardless of the market, but it is exactly that: a challenge. I think Brad is pointing out that you can’t let emotion get in the way of a good move. Sometimes you have to feel the fear and do it anyway. If you want to be successful in real estate you have to realize that fear, on its own, is not a reason to run from a deal. (I’m posting the link in this case because I’m pretty sure that the sentiments expressed will arouse some discussion – for what its worth, I’m with Brad Lamb).

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36 Comments

Filed under Investment Approach, National Post

36 responses to “A Couple Of Tidbits

  1. mike

    Rob, you really need to get a better grounding in economics. Read a random walk down wall street. It’s a very easy read, and it’ll give you a better appreciation for the connection between risk and reward, as well as efficient markets.

    The fact simply is – the higher risk the higher reward. This has been proven out time and time again.

    However, the higher risk – the longer your horizon has to be. You also want risk that moves in different directions from one another. It would suck if you invest in different things and they all tank at the same time.

    So it’s not always fear that drives a lack of investing, but the fact that your horizons for the money you have to invest in RE aren’t long enough (maybe you need it for something else) or maybe you’ve already invested in too much which would go south at the same time RE has.

  2. first_time_buyer

    Mike

    To Rob your comment means yada yada yada. How do I know it? I know it because to me his comments mean the same. and since I can make some sense out of your comment, I know how Rob sees it. LOL.

  3. I wrote a bit on BRAD.

    He’s proud of stealing flags from veterans’ graves and selling them when he was a kid. He also calls those who buy into his projects suckers.

    He’s rich, but not someone I would want to be.

    I hope that you don’t admire him Rob. That would be…revealing.

  4. robchipman

    Mike:

    “So it’s not always fear that drives a lack of investing…”

    I think we both agree on that. I think the point is that sometimes it is fear that prohibits the investment, and not well reasoned fear, either. (Remember, I didn’t say “Buy anything, anytime, just to prove you’ve got guts”).

    What exactly is the relation between risk and fear? The risk (assuming it can be quantified) is often the same for different people, but the level of fear is not, true? Different people react to the same risk differently. That’s worth recognizing.

    In regard to efficient markets, while I’m not dismissing the theory, consider this quote:

    “And, by the way, I have a name for people who went to the extreme efficient market theory which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality”. That’s Charlie Munger. (Do his comments make sense to you, 1st Timer? 🙂 )

    Solipsist:

    Sometimes a cigar is just a cigar. Fear freezes too many people. To my mind there is no question about that, and I think that’s what Brad Lamb is saying. People seldom realize how lucrative real estate can be. I didn’t really understand it myself until I experienced it. Many people fear it unreasonably, and so don’t act when they should. How many of us considered buying property three, four or five years ago, but didn’t? How many of us would turn their noses up at a positive cash flowing property today?

  5. adweaver

    I think Brad is pointing out that you can’t let emotion get in the way of a good move

    Like the FEAR of being priced out forever, or the EXCITEMENT of making a ton of money like everyone else? I think these are the more common emotions of people buying in this market.

    Mike (and the thousand or so before him) has it right with the tradeoff between risk and reward.

    Rob, you’ve said youself that you don’t think future (short term) appreciation will be what is has in the past, and their certainly seems to be a ton of risk floating around right now, so how do you feel the risk/reward tradeoff on Vancouver RE is for potential buyers?

    Would you agree that, in hindsight, we’ll be able to pick a rough window of time where buying RE was not a good idea (assuming a correction of 20%+)? Could you look at past market corrections and say MOST of the people who bought in this time frame really made a bad decision to do so?

    Could we be in that time frame right now?

  6. robchipman

    BTW, Solipsist, I like the “asshole in Armani” bit.. That was funny!

    Adweaver:

    Could we be within 20% of a peak right now? Of course we could. I don’t think we are, but I’ve repeated many times that my predictive powers are limited.

    Will we be able to see the peak in hindsight? (That’s what you’re asking, right?) Absolutely. two thoughts occur to me: the dangers of buying at the peak are exaggereated, and the answer to your last question (that is “THE” answer, not my answer) is the most important local real estate question that we have: Are we substantially higher now than the next near future trough will be, or is the next trough still higher than today’s price levels?

    If you bought today and the numbers work for you, how bad a decision will it be? I know, opportunity cost, etc., etc., but still. Paint me a really scary picture of a cash flowing property (with scary picture being an appropriate image for a fear themed post).

    If you wait for a 20% correction, where do you start counting from? Now? Last year? Next year? More scary picture potential, I think. Definitely a harder question.

  7. LesserApe

    Risk might equal reward in some cases. But if you look at value investing, the less risk you take, the higher the potential reward.

    You’re buying an asset for less than it’s worth. If you can get that asset for half of what it’s worth, there’s less of a downside than getting it for 75% of what it’s worth. Plus, you get a greater upside, since former case has a 100% upside, while the latter has only a 33% upside.

    I’m ignorant about real estate — Rob’s almost certainly forgot more than I know — but I suspect the reverse is present now in the real estate market. People are buying above fair value, making a high-risk/low reward bet.

    On adweaver’s hindsight question, I’m interested in pushing it a step further. Rob, has there been any time in the past 50 years where, in retrospect, you think it was a bad time to buy Vancouver real estate?

  8. Annon

    So Rob, say your client took your advise and bought a house two years ago and he/she is happy about the appreciation so far. He/she may think you are the best agent ever and surely you would gladly accept the praises. What would you say to your client, if, in three years, the client loses all the gains and more due to a down turn? Of course, we never know if this will ever happen, so this is just out of my curiosity. When times are good, you can feel great about yourself. When times are bad, I wonder if saying “I am sorry it didn’t turn out too great for you guys.” means anything to those who took your advise. When times are this good, people tend to forget what it is like when times are bad. But bad times do come and go.

  9. LordNumskull

    LesserApe: I suspect Rob’s answer to the 50 year question will be along the lines of “if the metrics work, then it’s always a good time to buy”. And to some extent he’d be right. Obviously there would be numerous examples through time where if you only waited X months more you could have gotten an average property at a better price. But perhaps one is interested in a particular property that will not be available whenever a buyer feels the time is ‘right’.

    Anyways, considering my situation, the talk of investment properties can get as dull as the old bull/bear arguments are for Rob. If there was ever a case of needing money to make money, investments on $500k+ assets would be it.

    Being a young professional in the process of trying to save money for a down payment while supporting a wife and a newborn boy, I am puzzled as to how I am supposed to join this market. Short of acquiring an obscene down payment, on the order of $150k, the only property affordable in the entire Lower Mainland is the 1Br + den condo variety, which is totally inadequate for 2+ people. I for one do not envision raising my family in 600 sq ft.

    A serious question I’d ask would be what options a family has in Vancouver when limited to a $300k mortgage?

  10. CC

    Brad Leeb’s piece reads like an infomercial. He is a reincarnation of Tom Vu and he preaches his “seminar”. I agree that you can’t let fear run your life (or your financial decisions) to the exclusion of reason. The same is true of exuberance (and other emotions). If anything, impulse buying is a greater problem in today’s society than fearful inaction (many readers of this blog excepted).

  11. coco

    A piece on it’s a good time to buy, but Wednesday’s numbers are not posted yet. Is this reverse psychology because the numbers may not be so great?

  12. The unthinkable"Renter"

    Fear VS. Stupidity.

    C’mon we all know with out risk there can be no rewards.

    RE is a market. If you like today’s numbers and dont mind your purchase and projected long term situation then buy.

    If fear of losing a good chunk of principle over the next couple of years bothers you then you have a quite understandable case

    Markets fluctuate

  13. WoW

    BoC is expected to raise interest rates 1/4percent in September, with another 1/2 percent expected to follow – let’s say subprime melts down further and bond yeilds increase 150bps – what does this do to affordability/prices?
    Will be interesting to see if we breach 13,000 listings in Rob’s area by September.

  14. blueskies

    let’s say subprime melts down further and bond yeilds increase 150bps – what does this do to affordability/prices?

    liquidity is rapidly drying up, even the private equity markets are losing traction on putting together borrowed funds to make the really big deals, will there be cheap, easily available credit for presale buyers and investors later this fall?

  15. I’d be very surprised to see the B of C raise rates anytime soon. Detailed inflation data in today’s Globe indicates that the National inflation rate is driven by Alberta (due primarily to RE prices and rent increases) and that, ex-Alta, the rate is well below the BOC target. Add to that our near-par $ and the hits to what is left of manufacturing (and then retail as cross border shopping becomes a frenzy) and there isn’t a good reason left to pump up the lending rate.

    Consider this. China is sitting on enormous foreign exchange reserves (like 2 Trillion). With the Yuan pegged to a depreciating US dollar, these reserves are declining in value and given that the US current account deficit and national debt are increasing, the reserves are unlikely to appreciate.
    If China wants to keep the value of its reserves intact, they need to buy assets; assets in places with stable or appreciating currencies. So, could there be some new Canadian REITs on the way, owned by Beijing? Maybe I need to buy an apartment building and forget the house thing 🙂

  16. Dyugle

    Rob
    I already talked about the fact that conveyancers are real busy in my last post. My wife works at a law firm and their conveyancer is swamped. She says it is due to completions and not new sales. Looking at the sales they are no higher than last year when she was not as busy. Thus, completions and not sales are driving the long hours. You can look at the tables at CMHC and these show an uptick in completions. Title tranfers on completion.

  17. 1% Realtor

    We should note that Brad is in Toronto and every property runs positive cash flow there. Prices are as much as 50% lower in Toronto.

  18. e

    1%: very true. friend of mine bought even a 2br in GTA and it rents cashflow positive w/ 25% down. in fact the property manage guarantees it for x years. (of course the rent is much higher than what friend is getting).

    not bad for not having to manage it yourself!

  19. awum

    Yeah, I find it interesting that Brad’s successful first purchase story is so night-and-day different from the situation we face purchasing in today’s market. Owning cost them $400/month, and they rented for double that? Yeah, I’d buy that too. Duh. That’s hardly “courage”. There’s no fear in looking at a market in which my entire life savings plus my earning potential buys a piece of crap that I could rent for a whole lot less. Frankly, I wish I could even get to the point of being scared to make a home purchase. Then, I probably would buy…

  20. robchipman

    Dyugle:

    Your comment was the principal example I was referring to when I said we’ve talked about this before.

    However, I have two completions this week that weren’t sales on July 1. In fact, the backlog on reporting being what it is, one of them is still showing active and it competed yesterday.

    Completions lag agreement date by 2 weeks to 2 months. If your wife’s firm wasn’t this busy last year they simply didn’t have as much market share. I know that I had clients sign completion documents at 8:00 at night on various occassions last year. I’m not saying we’re more busy (although June’s volume was higher YOY), than last year, but we are easily as busy.

    Coco- you’re seeing too many conspiracies. That’s almost as bad as letting unreasoned fear make your decisions.

    Unthinkable renter:

    The piece isn’t about risk/reward. Its about fear. That said, the idea that there is no return without risk is overused. Risk is seldom accurately quantified. Fear is more accessible. While Bernanke talks about the sub-prime challenge I’ve been approached by investors interested in the opportunities presented by the depressed US market and new home seller incentives. How many people reading this blog will say “Don’t buy in Vancouver now, because its too high; buy when prices fall”, but will also say “Buy in Florida now? You have to be crazy”? (I’m not picking sides in that particular investment decision – I’m just showing that two sides exist, and one gives way more play to fear. The risk largely remains the same for both sides).

    Putting it another way, I think a lot of people use the old risk/reward argument to justify not taking action, and they marry that to the efficient market thesis. I think Lesser Ape does a great job of highlighting this.

    I don’t disagree with you when you say that the risk of losing a good chunk of principal over the next few years should be a concern. However, if you’re holding long term how big is the chance that you’ll lose principal? Isn’t the danger really that you won’t make as much as some predict, or that you’ll miss some other opportunity? I’d argue that you’ve still got a bit of unreasoned fear in your position, and aren’t figuring the pot odds properly (even if the pot odds, ultimately, aren’t so good).

    ceejay:

    I’m with you. High dollar and high interest rate are both deflationary, as you point out, and Canada has a diverse economy. The BoC may well be talking more of a fight on i% than we’ll really see.

    blueskies:

    I read that in the commercial world liquidity is drying up (its harder for companies to raise capital through bond issues, for example, and that’s important), but in terms of Vancouver real estate liquidity is not drying up. It might happen, but its not happening yet, and certainly not happening rapidly.

    Annon/Lord Numskull:

    I’ve got some answers for you, but I need to do other stuff right now. More later!

  21. Dyugle

    Rob
    Completions that I am talking about (according to the conveyancer) are mostly presales from a couple of years ago and not recent sales.

  22. robchipman

    Dyugle:

    Interesting, however I’d point out that we’ve been doing pre-sales for years now. Its not like a flood of them just cropped up, right? Still, interesting thought.

  23. M-

    Wow, his first real estate deal was impressive– I wish I could get returns like that– 30% gross on the value of the property. Vancouver today is off by an order of magnitude! You’d have to be really tight on cash, or have some really good investment alternatives to NOT get in on that kind of a deal!

    My condo’s numbers were in the 4-4.5% range.

    Heck, I’m only expecting to see returns like that on my most speculative investment…

  24. ADWeaver

    Rob said…
    Risk is seldom accurately quantified

    I think you’re bang on with this statement.

    So, on average, is the market under estimating risk or over estimating it?

  25. coco

    ceejay,

    You seem to have your inflation information mixed up. BOC target rate is 2.0% anything above that will be an automatic interest rate increase in September.

    http://tinyurl.com/23rzog

  26. coco

    Rob,

    Can’t take a joke.

  27. robchipman

    Adweaver:

    I don’t think the market, as a collective entity, accurately quantifies risk, or if it does, that if you could distill some useful risk number (I mean, you can total and average anything, right? But is that metric useful? A foot in cold water and foot in hot water does not equal comfort).

    I think I need to exclude some sub-markets – apartment buildings are selling at very low cap rates. Returns, in other words, are low. Is risk, therefore, low? I think that, long term, apartment buyers think that it is, and have expressed as much, but I’m sure other observers will argue that apartment building purchases are very risky, or just plain don’t make sense at a 4% or less cap rate. However, you can’t dismiss people who buy apartmant buildings as starry eyed fools, and I think they evaluate risk, return and value in a similar manner, among themselves. Lots of consistency there.

    On the other hand, is the market’s estimated risk level relevant? If you’re a builder, for example, and buying a South Burnaby building lot for $620,000, is that risky? Are returns potentially really high? My answers would be yes and no, in that order, but what does the builder do? Stop building? Or simply realize that he’s in a riskier environment and continue his activities? I think the latter. Efficient market/rational investor theory subscribers will disagree with me, but its what I see happening. Again, builders do have a pretty consistent approach to value, within their own cohort. They know the value of a piece of dirt and generally won’t bother with something over-priced. Still, I think we can perhaps agree that margins on building are thin right now, and the pot odds aren’t fantastic, so the idea that risk and return exist in some sort of cast in stone relationship clearly doesn’t apply. Other factors (the need to do business, or the fact that you can’t buy when the numbers are good because there are no sellers then) force peoples’ hands.

    If you want to own investment property and to do so you have to buy under-rented, under-developed places, and then reno and raise rents, are you under-estimating risk? Probably not, because you probably know your business. But, if you throw in the idea that you’ll have to sell in the short term, you up the risk factor substantially. The point is that a recent listing got thumbs down on the blog (viewed as too risky/not enough return), but some relatively smart buyers competed over it, paid over list, while still paying under assessment. Whats the collective risk assesment in a case like that? Do we include the opinions of non-players as well as players? Tough call.

    Do principal residence buyers really evaluate the degree of risk? And if so, how? In my experience they actually do the math, decide if they can weather a downturn, decide whether they’ll be in the place long term, and then act accordingly. Again, rational investor/efficient market theorists will explain that this is wrong, mistaken, or irrational on the part of the buyer, but the fact is that a large proportion of buyers have always done the math that way, and always will.

    Last, my approach to this thing is to take care of the downsides and let the upsides take care of themselves. I don’t recommend plans based on short term trades. I do recommend some pretty strict metrics. Diminishing risk is clearly the name of that game. I probably often over estimate risk, as a result. I can’t tell you what the market as a whole is doing.

  28. The unthinkable"Renter"

    Thanks, Rob for the reply. I am opened minded and yes the idea of being priced out forever has crossed my mind.

    I look around though and see that CHMC has changed every rule in their book to help affordability and theres nothing more they really can do. So for houses to continue to climb we have to see wages increase, rates stay low and rents go up.

    Wages are not significantly rising, niether are rents for that matter. 😛 Rate are comming up though.

    So if a family total income is $80 k a year how much morgage is reasonable? $300k

    Whats the usual now Rob?>

  29. robchipman

    I often see higher mortgages, but I sell to all kinds of people (just saw a $600k one and a $110k one).

    I’m not sure the buyers and sellers (and that’s who sets prices, remember) really discuss what a global “reasonable” mortgage level would be, given average family incomes. I think that buyers say “Can we figure out how to do it?” and sellers say “What do we need to get out of this?” Some would characterize sellers as greedy. I just sold a house under appraised value because the seller felt the tenant had contributed to the increase (the tenant bought the house). I just sold another where the seller is using the proceeds to pay off his kids’ mortgages. I sold another where the seller had a health challenge and needs to clear the decks, so to speak. He sold for less than we could have gotten. In each case the sellers weren’t greedy, but the prices we got were still high.

    Rents are rising. Existing rents are under rent control, but if someone tells you that rents aren’t rising, they’re lying. I’ve bumped re-rents 10% and 20% after a year, easy. You can call me evil for eroding affordability, but rents are rising, nonetheless.

    Another thing to remember about rents is increased density. It used to be that we rented single East Van houses. Then we got basement suites in them. Now we have a few of those places with two basement suites and a main floor. And the City is talking about allowing “coach houses” (hey, anyone want to rent my garage?) Even if rents per unit haven’t climbed (and I maintain that they have) the numebr of units per lot is climbing.

    Down the street from me in North Van a friend had a detached granny suite. Nicely done, safe, but completely illegal. He rented it for years but was recently busted upon a re-rent. The district made him de-commission it. They may ahve gottena complaint (I doubt that) or, as indicated, they may scan the “for rent” ads. Similarly, in some suburbs (Maple Ridge, for example) basement suites can be dangerous for a landlord. It used to be that way in Vancouver, but has changed. The Westside didn’t have tons of basement suites in the old days. How long until the suburbs change practical density?

    All that said, a product can’t be sold if the consumer can’t pay for it, and complaints that housing shouldn’t be a product aside, housing must pay for itself. You won’t be priced out forever unless its a matter of choice (lifestyle over owning). Where I bought a house and put in a suite to start, you might have to put in a suite, and a suite, and a garage suite. Somethign will give. I don’t think it will be as simple as a price drop massive enough to take us back to the good old days.

  30. I just read a good article over at mohican’s place – exerpted below. It is pertinent to the talk about fear.

    When the next downturn is upon us, we will stay focused on this additional bit of wisdom from Warren Buffett: “Fear is the foe of the faddist, but the friend of the fundamentalist.” In other words, market corrections and environments of fear and risk-aversion are devastating to trend-chasing speculators, but to long-term fundamental investors they need not be so harmful. The best approach is to minimize exposure to such downturns, to endure them, and to be ready to capitalize on them as they pave the way for better risk-adjusted opportunities ahead.

    I guess I’m a fundamentalist when it comes to buying my own place, though I never had any fear of buying, I just didn’t see value by the time I had a decent deposit. Prudence is a lot different than fear.

    On the other hand, I invest only in venture capital. I have no fear there, because I only invest what I can afford to lose. I never lose sleep over that.

  31. robchipman

    Solipsist:

    Thanks for that. I love both Buffet and Munger.

    Prudence is different from fear. No question. One is reasoned. The other, not necessarily so.

    While I’ve told people to buy what they can hold now, if it makes sense, I’ve also advised my clients to arrange re-advanceable or LOC mortgages at current values, but not draw them down. If we can’t find good metrics today, we might find them tomorrow, and our powder will be dry. If we do find good metrics today, we can take a good look at them.

  32. coco

    Perhaps the prudent people are the ones others mistake as bears or fearful.

  33. The unthinkable"Renter"

    Rob, would a 15% correction seem wrong by maket standards. Look at raising rates as a motivating facter.

  34. coco

    Unthinkable renter,

    Besides rising interest rates.

    BC has the lowest negative savings rate of all the provinces in Canada -5.1% (2006 BC annual stats) PEI which also has a negative savings rate still saves more then BC. Credit card debt must be up there too, if saving rates are in the negative.

    BC has the highest amount of adjustable rate mortgages in all of Canada.

  35. robchipman

    UR:

    15% doesn’t require a huge stretch of imagination, but by the same token current interest rate increases aren’t that huge. I think it would take a lot more than we’ve seen.

    $725,000 benchmark – 15% = $616,000.

    Does that bring back “reasonable” affordability for the “average” family? I don’t think so. Something else will have to give.

  36. robchipman

    coco:

    My mistake onthe conspiracy thing. I confused your handle with someone else. Sorry 🙂

    I try not to confuse prudence with fear, but there is a lesson for buyers to do the same thing. Fear of action can definitely cost you money. I’ll use solipsist for an example (don’t get mad!).

    He didn’t buy in the past, and he says it was because of prudence, not fear. By the time he had a decent deposit he didn’t see value in the properties.

    Let’s be clear on what we don’t know, because it limits us and makes it clear that I’m not criticising Solipist. We don’t know when exactly he was talking about, what a decent downpayment was, and what he thinks is value. We’re going to make some assumptions, and so I’m not roasting him for a bad decision. I’ll accept that his past decision was based on prudence.

    When prices were lower he lacked a deposit, but was on a savings plan. By the time the deposit got sizable prices had outstripped the savings and he didn’t see value.

    When prices were good wouldn’t it have made sense to purchase with a larger mortgage and apply what was being saved for a downpayment to the extra mortgage costs? No more rent, higher monthly accomodation costs, no savings, but increasing value. Not bad, right?

    I think the answer depends on ability to handle the payments.

    If a higher mortgage simply cramped lifestyle, I think it would have been good to buy. The upside of saving was clearly less than the downside of waiting (and that was pretty clear to most people). Besides, he was saving anyway. Suck it up for a few years and build some excellent equity for the little solipsist (not even a twinkle in the eye at that time…). If someone explained that upside to solipsist, or if he saw it himself, but didn’t act on it, that’s fear.

    On the other hand, if the increased costs of a mortgage were so much more than the costs of saving that it would have been more than onerous, and in fact downright dangerous to borrow more and buy earlier, then solipsist is clearly prudent to not buy, even if he’s priced out for several years and misses some great appreciation.

    If someone argues “Who knew that prices were going to go up?”, all I can say is “Hooey!” Lots of us knew, and advised our clients, and acted on the information. Many of today’s bears say they would buy if the numbers made sense, but the fact is that the numbers made sense in the past.

    Many people on this blog say they didn’t buy in the past (for example, when they arrived here from somewhere else) because they felt prices were unsupportable. Those people needed more information, and I think its clear that fear played more of a role than prudence for many of them.

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