Chasing the market

When stocks lose 10% of their value, the air in this pathetic blog’s steerage section is thick with the wails, moans and piercing screams of the afflicted. They think it’s all going to zero. Meanwhile the doomers, humpers and hairshirts snicker ‘told ya so’, making everyone believe life is a battle between houses (good) and ETFs (evil).

The truth is, there’s more risk today in Canadian residential real estate than any asset tracking the largest companies in North America. Given higher interest rates, restrictive mortgage regs, stunning household debt levels, inflated house prices and stagnant income, trusting this asset class is plain reckless.

Here’s a quick example from (where else?) the tony side of Vancouver. It’s a real-life example of loss and despair, as Mr. Market relentlessly reprices properties in that troubled city. Let’s start with an email I received yesterday from a local financial advisor who reads this blog, and seems like a good egg even though he works for a bank.

“So this is part of an email string with a bunch of advisors who are trying to arrange a lunch.  Same group tends to chat about real estate as the one guy sold his Shaughnessy house a couple of years ago.  Anyway, he has a realtor trying to get him back into the market now that it has softened.  You can see the listing history and what eventually happened over the past 18 months.  Remember, only the stock market can go down.  You can’t lose money in real estate…!!!  I find trying to read or believe the statistics that come out of the real estate boards to be the ultimate in Fake News.  It is only through very specific, real-time stories like this that you can get any sense of what is really happening.  Like the stock market…where you know exactly how something is being priced in the moment.”

Well, here’s the story of this house, a new-build – fancy, excessive, opulent, sitting on an ample lot. The kind of luxury digs that in the GTA might be listed optimistically for about $3 or $4 million. But in Van, it hit the MLS at $12.8 million.

After being invited out for a meal, and asked to comment on this property, here is the response of a realtor familiar with it. Look what happened…

“Hi, Sean: here is the Altamont brand new 20k+ sqft lot 8k sqft view home that just sold for 6.3. It was originally listed at 12.88 m by Eric in spring 2017 then 11.68 in the summer/ fall 2017. The it went to Edith at 11 and then 10.4 for winter 2017 to 2018. Then 9.68 to the summer this year then 8.8 to the fall. She lost listing to Amir this Sept who listed for 7.998 and just sold 1.7 below that at 6.3.   So deals to be had in high end of market.  I have a few other examples. But this is fresh as of yesterday.  They bought the lot for 2.4 in 2013.  It’s assessed just under. So overpricing and chasing down market for 1.5 years.”

So, a 50% reduction from list, and a memorable example of what can go wrong when you think an asset’s going up forever. None do. There’s always a ceiling, but with real estate the descent can be long, convoluted and tortuous before a property finally becomes liquid. In that aspect, the contrast with equities is stark – where repricing is immediate, and a sale takes instants. You might not like the result, but it’s better to have you money in hand than a trouser full of fire ants.

This example highlights one segment of the market now in full-blown crisis mode: developers. Builders and speculators get hit far harder than resale owners, since they spend real money bringing a property to market, have inventory to carry and usually leverage themselves up the wazoo to survive. In this case a $2.4 million lot was carried and financed for five years, most of which was consumed in planning and building a sexy home which came to market at exactly the wrong time.

Meanwhile the market as a whole is tenuous. Price reductions of between 12% and 17%  for detached homes are widespread across the Lower Mainland and in the city. Prices just declined 2% in one month. Across Canada, as reported this week, prices and sales have fallen again. Values are less year/year for the first time in half a decade. Edmonton and Calgary are a mess. The spec tax is killing BC. The GTA is stagnant, but in comparatively better shape – brimming as it is with delusional hipsters. Still, after buying and selling costs, nobody has made any money on a house in the last couple of years.

As often blurted here, if you need a house and can afford one without gutting your financial life, go ahead. Just don’t call it an investment. If you can wait, even better. More bargains coming, even if you don’t have six mill to spend.