Popping the Housing naysayer's Statistical Bubble
Popping the Housing naysayer's Statistical Bubble
Sat, Sep 8, 2007 at 9:39 AM
To: livio.dimatteo@lakeheadu.ca, nationalpost
Cc: Bob Linney -CREA-, Jim Flood -OREA- , trebpres trebpres@trebnet.com
Dear Professor and Editors,
I was glad to see you take a cautious, perhaps apologetic in your Our housing bubble may be next to pop in the FP Comment section FP15 of Sept 8/07.
With all due respect, I'm compelled to challenge your analysis on three points: the 1995 starting point for your % gain stats; the use of the 'whole population's' median income when calculating the % of income required to carry the average home; and the choice of two wholly unrelated housing items in creating your P/E ratios.
I think you've taken too skinny a slice of time in making your comparisons to today's prices. 1995 was the trough after the late-80's boom and is 12 years ago - why 12 and not 10 or 20 or 15 or 25? I suggest you picked it precisely because it was the bottom and unfortunately that decision has skewed your results.
If you pick 1972 (pls see my attached chart with hand-drawn -apparently technically incorrect: the scale s/be semi-log & the top & bottom lines in parallel) and first just examine a straight line connecting column A to the most recent column, you'll see an incredible gain, but also, more importantly, see the markets of the late 80's and early '90's as the aberrations.
Factors also to consider are inflation (CPI at least) and household earning increases (far more 2 healthy-income homes now).
My gross calculations (Jan'72 at $31,169 to May'07 at $382,707) show 1,127.84% gain over 35.3 yrs or 31.95% annually about $10,000 per year.
CPI inflation (as furnished by the Bank of Canada's Inflation Calculator with 1972 at 100 produces a result (last month when I did this) of 514.67 . So taking 414.67% out of my 1,127.84% leaves 713.17% over 35.3 years or 23.04% annually ($6,297 per yr )
To any one in (or out) of the stock market/casino and/or economic academia/utopia, 23.04% annual gain is "unsustainable" - except it has been sustained (on average and as a net%) for 35.3 years.
Ah yes, the other factors:
-interest rates were 10-12% for most of this exhilarating ride and today's rates at ~5-6% (bye-bye 3.75-4.5% of recent yrs) make the purchase of a home much easier;
-the philosophy of owning has changed. In 1972 people still bought & stayed, retiring the mortgage - now they trade homes like they trade leased cars, it's all about the payments + the bonus of built-up equity (1-10% yr) that comes with a market where supply is more difficult to replace/increase than demand (anything new is farther away, pricier, or has at least one key component that is smaller) ;
-the increase in prevalence of the above-mentioned two healthy-income (sorry kids, here's an ipod each) household;
-the deterioration of rental stock (deferred maintenance due to rent controls) and relative lack of new "quality" rentals;
to name a few.
So if we take 40-50% off the carrying cost of running a home due to lower interest rates (we've had 5% Down for resales, since about 1975, so the zero Down and 40 yr amm are marginal factors), maybe homes aren't really much more expensive to operate than they were, irrespective of the price increases and allowing for wage gains due to (at least) the same rate of inflation affecting the home prices.
Which brings me to your 40% for Household Debt Service number. This and every other use of the 'whole population's' average or median income is false and misleading. Think Quintiles like Statscan does, divide the population in 5 groups of 20%, the bottom one ('widows& orphans' + 'welfare bums') will NEVER buy a house yet their (gov't subsidized) incomes drag your average numbers down incredibly.
Further, the second from bottom 20% (working poor and those that hide income) may be buyers if they get an inheritance, new job or marry well, but their incomes pull down your average. Do your math again using the average income of "people who have a prayer of buying" and I think your 40%TDS prudent cap to affordability will vapourize.
Finally your use of a Price to Earnings (P/E) ratio. Rhetorical Question - In the stock market do they compare the price of a company or industry to the earnings of THAT industry or do they compare the earnings to something entirely different, say the revenue from the cafeteria?
Comparing home prices to the rent of a two-bedroom apt is ridiculous and so many economist-types (see Scotiabank's, Real Estate Trends, Page 5 ) seem to be wedded to it (must be in the textbook).
Compare the price of a house with the rent it and similar homes of equivalent utility might garner, fine, this is a basic Appraisal technique, but to try and draw conclusions about market trends by comparing the price of a 6 or seven room detached house on its on piece of land to an 4-5 room, 2 bedroom average apartment with underground parking, a laundry on the main floor and a stereo blasting from the neighbour's teenager is impossible.
It is also dangerous to compare rents to ownership just now because in the 'luxury rental' marketplace, say rent of $1500 and up, in 1998-2003 many tenants scraped together 5% down and BOUGHT! The luxury renters bought small-ish or suburban, or ex-urban homes and the 2-3 bedroom apartment-renters bought condo apts and townhomes, both exits combined to drive down 'luxury' rent prices and create high vacancy rates in "average" apartment buildings.
Indeed the real estate market will reach an equilibrium between Sellers' supply and Buyers' demand and we WILL move to a balanced market with no multiple, bidding wars and where good homes sit on the market for 3 weeks - not 3 hours and where prices will only rise 2-4% per year - this will be a return to 'normal' (which we've not seen - except for in the 4th quarter in most of the last 10 years) and I welcome it.
The equilibrium will come when - as a result of increased interest rates and increased prices - the difference between the cost of buying and operating home #A will be 20% greater than the cost of renting and operating that same home #A (disregarding the cost of the funds required for a down payment of that same home #A).
Will the Toronto (or Calgary or Saskatoon, or Moncton) market "bust", "pop" or "disintegrate"? Not unless it "booms" first! (ie rampant, small-time, amateur-investor speculation - Attention Toronto condo sub-market)
In my view we have not had a boom in Toronto, we've just caught up from the sag of 1990-95, which in turn was a result of the general flight to tangible assets boom of the late 80's (with its rampant, small-time, amateur-investor speculation) which itself was caused by the central bankers' strategy of raising rates in an effort to get folks to STOP borrowing, so they could get inflation tamed, get interest rates back down (after the built-in deluge) and thereby help bail out debt-service-swamped governments around the world.
Real Estate - buy anything, in 20 years it'll be the smartest think you've ever done.Buy quality and it'll take less time.
-- Robert Ede,
Sales Representative,Re/Max Hallmark Realty Ltd.,BrokerageT. 416.494.7653F.416.494.0016Direct 416.819.7333http://www.robertede.com/
http://robertede.blogspot.com/
TREB 72-07 with drawn trendlines.jpg1342K
Sat, Sep 8, 2007 at 9:39 AM
To: livio.dimatteo@lakeheadu.ca, nationalpost
Cc: Bob Linney -CREA-
Dear Professor and Editors,
I was glad to see you take a cautious, perhaps apologetic in your Our housing bubble may be next to pop in the FP Comment section FP15 of Sept 8/07.
With all due respect, I'm compelled to challenge your analysis on three points: the 1995 starting point for your % gain stats; the use of the 'whole population's' median income when calculating the % of income required to carry the average home; and the choice of two wholly unrelated housing items in creating your P/E ratios.
I think you've taken too skinny a slice of time in making your comparisons to today's prices. 1995 was the trough after the late-80's boom and is 12 years ago - why 12 and not 10 or 20 or 15 or 25? I suggest you picked it precisely because it was the bottom and unfortunately that decision has skewed your results.
If you pick 1972 (pls see my attached chart with hand-drawn -apparently technically incorrect: the scale s/be semi-log & the top & bottom lines in parallel) and first just examine a straight line connecting column A to the most recent column, you'll see an incredible gain, but also, more importantly, see the markets of the late 80's and early '90's as the aberrations.
Factors also to consider are inflation (CPI at least) and household earning increases (far more 2 healthy-income homes now).
My gross calculations (Jan'72 at $31,169 to May'07 at $382,707) show 1,127.84% gain over 35.3 yrs or 31.95% annually about $10,000 per year.
CPI inflation (as furnished by the Bank of Canada's Inflation Calculator with 1972 at 100 produces a result (last month when I did this) of 514.67 . So taking 414.67% out of my 1,127.84% leaves 713.17% over 35.3 years or 23.04% annually ($6,297 per yr )
To any one in (or out) of the stock market/casino and/or economic academia/utopia, 23.04% annual gain is "unsustainable" - except it has been sustained (on average and as a net%) for 35.3 years.
Ah yes, the other factors:
-interest rates were 10-12% for most of this exhilarating ride and today's rates at ~5-6% (bye-bye 3.75-4.5% of recent yrs) make the purchase of a home much easier;
-the philosophy of owning has changed. In 1972 people still bought & stayed, retiring the mortgage - now they trade homes like they trade leased cars, it's all about the payments + the bonus of built-up equity (1-10% yr) that comes with a market where supply is more difficult to replace/increase than demand (anything new is farther away, pricier, or has at least one key component that is smaller) ;
-the increase in prevalence of the above-mentioned two healthy-income (sorry kids, here's an ipod each) household;
-the deterioration of rental stock (deferred maintenance due to rent controls) and relative lack of new "quality" rentals;
to name a few.
So if we take 40-50% off the carrying cost of running a home due to lower interest rates (we've had 5% Down for resales, since about 1975, so the zero Down and 40 yr amm are marginal factors), maybe homes aren't really much more expensive to operate than they were, irrespective of the price increases and allowing for wage gains due to (at least) the same rate of inflation affecting the home prices.
Which brings me to your 40% for Household Debt Service number. This and every other use of the 'whole population's' average or median income is false and misleading. Think Quintiles like Statscan does, divide the population in 5 groups of 20%, the bottom one ('widows& orphans' + 'welfare bums') will NEVER buy a house yet their (gov't subsidized) incomes drag your average numbers down incredibly.
Further, the second from bottom 20% (working poor and those that hide income) may be buyers if they get an inheritance, new job or marry well, but their incomes pull down your average. Do your math again using the average income of "people who have a prayer of buying" and I think your 40%TDS prudent cap to affordability will vapourize.
Finally your use of a Price to Earnings (P/E) ratio. Rhetorical Question - In the stock market do they compare the price of a company or industry to the earnings of THAT industry or do they compare the earnings to something entirely different, say the revenue from the cafeteria?
Comparing home prices to the rent of a two-bedroom apt is ridiculous and so many economist-types (see Scotiabank's, Real Estate Trends, Page 5 ) seem to be wedded to it (must be in the textbook).
Compare the price of a house with the rent it and similar homes of equivalent utility might garner, fine, this is a basic Appraisal technique, but to try and draw conclusions about market trends by comparing the price of a 6 or seven room detached house on its on piece of land to an 4-5 room, 2 bedroom average apartment with underground parking, a laundry on the main floor and a stereo blasting from the neighbour's teenager is impossible.
It is also dangerous to compare rents to ownership just now because in the 'luxury rental' marketplace, say rent of $1500 and up, in 1998-2003 many tenants scraped together 5% down and BOUGHT! The luxury renters bought small-ish or suburban, or ex-urban homes and the 2-3 bedroom apartment-renters bought condo apts and townhomes, both exits combined to drive down 'luxury' rent prices and create high vacancy rates in "average" apartment buildings.
Indeed the real estate market will reach an equilibrium between Sellers' supply and Buyers' demand and we WILL move to a balanced market with no multiple, bidding wars and where good homes sit on the market for 3 weeks - not 3 hours and where prices will only rise 2-4% per year - this will be a return to 'normal' (which we've not seen - except for in the 4th quarter in most of the last 10 years) and I welcome it.
The equilibrium will come when - as a result of increased interest rates and increased prices - the difference between the cost of buying and operating home #A will be 20% greater than the cost of renting and operating that same home #A (disregarding the cost of the funds required for a down payment of that same home #A).
Will the Toronto (or Calgary or Saskatoon, or Moncton) market "bust", "pop" or "disintegrate"? Not unless it "booms" first! (ie rampant, small-time, amateur-investor speculation - Attention Toronto condo sub-market)
In my view we have not had a boom in Toronto, we've just caught up from the sag of 1990-95, which in turn was a result of the general flight to tangible assets boom of the late 80's (with its rampant, small-time, amateur-investor speculation) which itself was caused by the central bankers' strategy of raising rates in an effort to get folks to STOP borrowing, so they could get inflation tamed, get interest rates back down (after the built-in deluge) and thereby help bail out debt-service-swamped governments around the world.
Real Estate - buy anything, in 20 years it'll be the smartest think you've ever done.Buy quality and it'll take less time.
-- Robert Ede,
Sales Representative,Re/Max Hallmark Realty Ltd.,BrokerageT. 416.494.7653F.416.494.0016Direct 416.819.7333http://www.robertede.com/
http://robertede.blogspot.com/
TREB 72-07 with drawn trendlines.jpg1342K
posted by Walk a Kb or Two in my cassins | 2:08 pm
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