Not just Real Estate is Fucked...

Oh boy. This is heavy. I was re-exploring my reading list that I posted a week or so back. I stumbled upon this article by Matt Taibi that furthers what I was talking about with respect to real estate prices last week. It actually digs a little bit deeper than the Michael Lewis article I was talking about before. I was just going to add an update to my other posting, but it feels like it deserves it's own moment in the sun.


The Matt Taibi article puts some meat on the bones of where mortgage backed securities were created, how they were allowed and where they came from. It paints a shocking picture of the investment landscape and basically makes me fear for my financial life. Just read it. It's shocking, shocking stuff.

Two things really come to mind from this article. Number one, I feel stronger about my opinion on real estate. What has kept me out of the Vancouver market over the years is the irrationality of it all. I haven't bought because it hasn't made sense. Every time I compare the numbers of renting to the numbers of buying, I get a bit freaked out and lose my nerve. I've even made it to the point where I've put offers on places. At that point, the bidding war that has commenced has scared me off. Deep inside me, I'm not willing to throw money at something just so that it can be mine.


Up until 2008, the Canadian market closely followed the American market. We went up as they went up. We dipped when the American economy fell apart. And then...things got weird. All of a sudden, you could buy a mansion in the states for no money at all, and Canadian real estate was rebounding. The reason for this was:


1) Canadian banks were more solid than American banks due to stronger regulation.

2) We didn't have sub-prime mortgages and therefore our housing market was on solider ground.


Now, after reading this article, I have a better understanding of it all. I finally can understand where the frenzy came from, how things became so inflated and why it all collapsed. I heard it all before, but it didn't really make sense.


But Canadian real estate didn't rise in a vacuum. Our prices rose as American prices rose as the rest of the world rose. Without that American bubble, we would not be anywhere close to where we are today. We had a direct benefit due to American house prices rising in a ridiculous fashion. We just didn't have the secondary crazy mortgage speculation directly fueling our fire. We had crazy mortgage speculation in the US fueling crazy real estate appreciation in the US fueling crazy real estate appreciation in Canada.

But it all really comes down to people buying houses that they can't afford, borrowing tremendous sums against the rising value of that home, banking on that value always rising.


How are we any different? We have all of this, the only difference is that our sub-prime mortgages are backed by a government agency, CMHC. The only difference is that when our house prices dipped, our entire economy did not imploded because we hadn't made the same gambles selling of this horrible mortgage debt and because it was the government backing the loans. So we recovered. But all the underlying symptoms are there. We still have a drastically over-inflated real estate market being bought up by people that can't really afford these homes, with incredibly long mortgages at ridiculously low interest rates with almost no money down, ratcheting up their lines of credit and credit card interest to pay for all the new crap that they need and to cover off the fact that they can't actually afford to be doing what they are doing.


I don't think this is sustainable.


Now, the other thing that this article brings to mind, number two if you will, is that it's scary that an article like this gets no coverage and no response. Now, I am taking a leap of faith in believing everything that this article says. But it seems to me that it's incredibly well researched and draws from facts of the past. That's what makes it believable.


Now, if one magazine and one author can put together a case like this, what exactly is the government up to? What are larger "news" organizations doing? It's just all so incredibly scary I don't know what to think. Why isn't anybody doing anything about it?

And the final point about cap-and-trade. Sweet jesus. I've long thought cap-and-trade is the stupidest idea ever. The shear amount of money that would need to be spent and government intervention required just to figure out the baseline for each company would be staggering. I don't even know how they would figure it out. How do you account for every delivery truck and every smokestack across and entire continent? You just can't. It would be much simpler to tax the fuels and chemicals that create the problem in the first place. Much, much simpler. I could never figure out why anybody would push for cap-and-trade. I never considered this side of things. And for the first time in my life, I'm questioning the motivations of people pushing for something that I firmly believe in.

What a crazy, exciting, interesting, depressing article.

Update - August 19th. I just finished reading this. It's more of a scientific analysis of exactly what I just wrote about. It's just...wow...unbelievable.

Why Real Estate in BC, and Therefore Canada, is Fucked

I decided to read a few articles from my past post on magazine articles today. I cam upon "The End", by Michael Lewis in Portfolio magazine. This is a great article. I have read many articles on the financial collapse in the last few years. None of them have made any sense to me. This is a great article because it explains that things collapsed because none of this stuff made any sense to anybody. Which somehow makes me feel better.

Think about it. Think about past articles. Well, the market collapsed because banks repackaged sub-prime loans as AAA rated bonds and re-sold them, then, when the real estate market collapsed, they were worth nothing. That is as far as they would take it. Nobody would ever try to explain why that happened, how it happened or what it actually meant. Now I know it's because there is no answer to that question. There's no logical answer for why it happened. But nobody ever just came right out and said that.

So, on to why Canada is, as I said above, fucked. Page 3 or the article, maybe one third of the way down...

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1.

So, let's analyze where we're at. Start pulling data from places. Here, here, here.

Let's start with the City of Vancouver proper. Average January 2010 real estate price, $638,000. This includes, condos, townhouses, everything. Median family income (I would guess that the average would actually be substantially lower than that, as when you analyze other median/averages, the top end salaries pull the averages up), $80,127.

That's a ratio of 7.975. Worse, I don't think they are considering people owning shitty little condos when they consider a ratio of 3 to 1 as being healthy.

So, now, I hear you. Vancouver is crazy. The rest of British Columbia/Canada will be fine.

Average real estate price, British Columbia, $492,000. Median British Columbia household income, $65,780. Ratio, 7.479. It's hardly better. An entire province running ratios referred to as crazy for a swanky American major Metropolitan area. It's crazy.

Now, if you still aren't convinced, I referenced this page up above, but here it is again. Apologies if they've updated the data by the time you read this, but you can trust me that I'm telling the truth. Anyhow, look at the chart right at the top page. This is based on a 25% down payment and a 25 year mortgage, purchasing in what I must assume is Metro Vancouver based on the prices given.

2 story detached - Average Price $716,000 - Income to carry mortgage, $141, 600
Detached bungalow - Average Price $635,800 - Income to carry mortgage, $126,000
Townhouse - Average Price $476,300 - Income to carry mortgage, $94,500
Condo - Average Price $362,700 - Income to carry mortgage, $72,400

So, this is saying that if the average family manages to scrape together a down payment of $90,675, they'll have enough income to buy the average condominium or perhaps get in to the bottom of the townhouse market. Then, if they decide that they don't want it anymore, they'll be able to put the $1,154 they could get in the open market for rental income towards their $1,800 in monthly expenses (mortgage and property taxes) and make out like bandits!

This is crazy. This makes no sense. Even using these extremely generous mortgage guidelines there are not enough people to keep this going. There's too big of a spread in the statistics.

Sure it's culture. It's on the internet.

You ask for more posts, this is what you get.

David Harvey is a leading Marxist geographer who writes about economics. He's been lecturing about the crisis since before it started, and counts as one of the genuine canary-in-the-coal-mine figures out there, who saw everything coming years ago. This is one of his recent lectures, but someone decided to animate it. It's been making the academic rounds this week.



Two things here: all university lectures should be animated. Departments should hire full time animators to stand at the front of the room and draw. Second, I think Harvey's the only guy making sense of what's happening out there right now. The transfer of crisis from the financial sphere (2007-09) to a national economies (2010- )is where we're at, now that the banks have been bailed out and are making money again. And it's a big problem that isn't going away. Welcome to the double dip.