London=Vancouver?
link Londons Latest Property Bubble – WSJ.com.
Interesting article by Brett Arends. Interesting because of the eerie similarities to real estate in Vancouver over in this part of the world. In classic economic theory, there is the concept of economic utility. With regard to housing, it made sense for people to pay a mortgage if that was cheaper or more beneficial than renting a property of the same type. Conversely, as long as rents were cheaper than paying a mortgage, it made more sense to rent than buy. The other important consideration is the ability of people to sustain mortgage payments for their levels of income.
While not an expert on London real estate and by no means an expert on Vancouver real estate, the main fundamentals that would support and maintain real estate prices in both cities appear questionable. While the author of the article correctly points out that London has reaped the benefit of monies flowing from other murkier and more dangerous parts of the world, so has Vancouver. It may not be relevant to consider only the income of the locals as a gauge of affordability.
Vancouver’s external demand comes from a number of high profile communities, most notably Asian residents and investors. Compared to the bustling Asian cities of Hong Kong and Shanghai, the value received for what one pays in Vancouver is still a bargain. Another constituency, not talked about and a poorly kept secret, is the bustling drug and narcotics trade in Vancouver. Investment in real estate is a superb way to shelter ill gotten loot. As an aside, only in Vancouver will you find, in the middle of any working day, multitudes of young, able bodied people just sitting around at cafes seemingly doing nothing. Hmm.
Those in the real estate business express the same arguments about why prices are as buoyant as they are and why they are destined to go much higher. They cite low interest rates, immigration from other parts of the country and of course the old chestnut, they ain’t making any more of it. From my vantage point as a long time participant in capital markets, the only reason prices go higher is short supply and strong demand. I won’t quibble about where those dynamics are, but an observation if I may. One of the main reasons that people have been buying real estate is for fear of missing the next upmove in prices. In other words, shelter is not the primary reason people are buying homes here. The real reason is the fear of being left behind when prices move. In Vancouver at least, the word is WHEN not if.
Young people and families are brainwashed with the idea that they must enter the housing market with whatever stretched resources are available to them rather than renting to save up a legitimate down payment. Again, they are buying because they are chasing prices much like participants in the stock market. Higher prices reinforces the idea that direction can only go one way and recent history has supported that notion.
We now have the phenomenom of 600 sq ft condos, billed as starter homes, selling at over $500,000 in the downtown core. As if starters live in 600 sq ft. of space paying a half million dollar mortgage. As the author in the article points out, the overall cost of living also increases in the city as the cost of everything from cab fares to restaurants escalate in lockstep with the rising pool of ‘wealth’. At some point, and I certainly don’t know when, the divergence of income and outgo stretch too far and demand falls away. This can occur naturally, in which case, prices ebb and flow. The scarier scenario is when an event triggers the closing of the income/outgo gap, perhaps a sudden uptick in the cost of borrowing. Perhaps an economic road bump in Asia. Perhaps a bad pot harvest.