As IF Times

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.

link  Truckloads of snow dumped on melting Vancouver mountain | Reuters.

When they promised that the Vancouver games were going to be green, they didn’t fool around.  First of all, credit goes to the writers of this story for not blaming the unseasonably warm weather that’s occurring in Vancouver on Global Warming.   A year ago, when the frenzy for everything AGW was at its peak, you can bet that SUV’s  and air conditioners would be fingered as the causes of no snow here in February.  Now that there appears to be some cracks in the case for AGW, there are fewer knee jerk reactions to anything that is ‘abnormal’.  At least the games people had a contingency plan in case of no winter in Vancouver, though I suspect moving snow from 150 km away by truck was probably down the list around plan G.  Hey, it’s Vancouver, we’re famous for rain.  Even pets here wear gore-tex. 

The second thought that comes from this article is the entire circus surrounding the Olympics.  While no one is naive enough to think that the spectacle is really about skiers, skaters and bobsledders, the whole “Olympic spirit” propaganda seems hollow when the reality is that the staging of the events are political and economic operations.  If this were not the case, the venues would be the same every 4  years, in particular, the winter Olympics. According to John Furlong, the Vanoc chair when speaking to the lack of snow,

“This has happened at every Olympics and what we’re trying to do is demonstrate we are on top of this.”

 It would make far more sense to hold the events where winter has a greater than 50/50 chance of showing up.  In addition, it would be easier to compare the performance of participants from year to year.

Instead, a beauty contest is held regularly to determine which city will have the “privilege” of spending billions of dollars on infrastructure and these days, security.  The process resembles the old joke; the good news is, you won; the bad news is, you won.  If nothing else, it’s a good excuse to travel somewhere fun every 4 years.  The unspoken winners however, are those involved with the decision making process as Olympic committee judges.  These guys get wined, dined and feted like royalty as nations vie for their favor and attention like competing lovers.  Why anyone would run for el presidente of a country is beyond me when being an Olympic poobah is a much better gig. 

There is obviously economic benefit from hosting the games of course.  Builders, engineers, contractors and developers benefit.  Vancouver will get new civic structures, possibly legacies for future generations.  So you have to spend a billion or so to get a billion or so.  Minus the cost of medals.  And umbrellas.