MAY 29, 2011
I have nothing against the real estate industry in general. I really don't. At the end of the day, they are looking out for the best interest of their members. I understand that. It's really no different than the multitude of publicly-traded companies who try to spin negative news into a positive light for the benefit of their shareholders or management.
What does bother me though is the massively asymmetrical information relationship between the real estate industry and the general public. The public gets only the information the real estate boards choose to release. If the real estate board chooses not to divulge important stats like sales and inventory numbers (like the Ottawa board), there is little the public can do to gauge the true well-being of the housing market in that area. That needs to end.
Even more frustrating is the willingness of the mainstream media to take the press releases from the real estate industry and pass them directly on to the public without any sort of critical analysis of the content. I've explored that phenomenon several times before. The bottom line is that the real estate industry is one of, if not the, largest source of advertising revenue for newspapers. It's exceptionally difficult to critically analyze and refute information from the very source of a large chunk of advertising revenue. As noted in an article in the McMaster Journal of Communication,
"Building relationships with advertisers limits what news a medium will include. Anything that can be viewed as contrary to business priorities or will interrupt the “buying mood” of consumers often dissuades the advertisers that fund newspapers."
"It would not be financially reasonable for newspaper owners to publish editorials that offend their advertisers or deter consumption. This results in the censorship of news content, whereby journalists are less likely to pursue (certain) stories"
"Since publishers like CanWest Global are more dependent on advertising revenues than they are on subscription payments, selling advertising space becomes the top priority of the company"
We should always keep this in mind when reading anything in the media. But every now and then stories come along that are so absurd that they just make you chuckle. There were three of them this week:
Busting the myth of Vancouver real estate- The Globe and Mail
Should more appropriately be titled, 'Busting the myth of a critical media'. Condo
shill expert Bob "Buddy Holly" Rennie offers some interesting insights that that supposedly 'busts' the 'myth' that Vancouver houses are actually expensive (the second most expensive of any city in the English-speaking world according to Demographia). Some quotes from the article:
"Vancouver: Not really as unaffordable as you think it is."
"...People who specialize in housing affordability in the region say their statistics also indicate that the perception of Vancouver’s affordability problem is distorted by high prices in some places."
"...But Mr. Rennie noted the average condo in Metro Vancouver sold for a mere $313,000 last year after the most expensive condos in the top fifth of the market were taken out. Similarly, single-family homes in the top fifth of the market average $1.72-million. But once those high-end sales are removed from the price-averaging mathematics, home buyers in the rest of the region paid an average of $632,000."
Yes, you read that correctly. Vancouver is not really expensive. It's just that many of the houses there are expensive. Once you strip out the expensive ones, it's not so expensive anymore. I'm not sure what impresses me more, the iron-clad logic of that statement or the analytical critique by the journalist who reported it.
And to think that here I am focusing on such meaningless things as fundamentals. How foolish of me. The overvaluation issue in Canada can be solved quite simply if we just don't focus on expensive houses.
Property sales are dropping- Richmond News via Canada.com
This one is actually a couple weeks old, but it fits nicely in this post. It's no shock to any readers of this blog that property sales in most of BC's lower mainland are wilting big time. Of course it's widely explained that when house prices rise inexorably, it is the impact of wealthy Asian investors who consider BC real estate an absolute bargain. But when sales suddenly plummet, well, then we have to figure out how to spin it. Consider this gem:
"Statistics released by the Fraser Valley Real Estate Board on Tuesday show a 33 per cent decrease in sales for detached homes in Abbotsford last month compared to sales in April 2010.
Townhouse and apartment sales also dropped by 43.5 and 7.1 per cent respectively from where they were a year ago.
In Mission, the number of sales fell even lower. Sales of detached homes tumbled by 42.1 per cent from April 2010, and 48.4 per cent from March to April.
Sales of townhouses and apartments in Mission for April 2011 also decreased by 77.8 and 71.4 per cent each compared to April 2010."
Pretty sobering numbers. The explanation?
...the recently concluded federal election.
"That could've had some effect," he said. "People were distracted, they wanted to know what was going to happen, who was going to get in . . . people like to know before they make a major purchase decision because [the election] could affect them drastically."
There you have it. Wealthy investors in China were so captivated by the Harper-Iggy-Layton slugfest that they forgot how great a bargain real estate is in the Fraser Valley. Makes sense.
Smart money on Toronto condos- The Standard
Barely a week after a Toronto research firm estimated that 45-60% of condos were being purchased by 'investors' we get more insight into the irrational behaviour of this interesting, and increasingly important group of condo buyers.
Condominiums, or condos - as apartments are commonly referred to in Canada - can be seen almost everywhere in Toronto's downtown area, where more than 250 buildings providing 50,000 to 60,000 units are currently under construction.
Not only do the locals buy condos, they have also attracted investors from China, the Middle East and India.
"Overseas buyers sometimes purchase several units simultaneously."
And what motivates these investors? High cap rates? Positive cash flow? Nah!
...Most investors look for capital gains rather than rental return. On average, the rent for each square foot was C$2.50, meaning a 680 sq ft apartment can generate a monthly rent of C$1,700.
The condo owner would need to make a mortgage payment of about C$1,617 a month...In addition, the owner would need to pay property tax and maintenance fees which could add another C$450 per month on average in monthly expenses.
What in the world would motivate the 'smart money' to purchase cash-flow negative condos where they have to subsidize their renters by putting more of their own money towards monthly servicing costs?
"So far, the property market here has not had any big correction."
Ah yes! Smart money = momentum chaser. Forgot about that. So what if there is a correction? Will all of these 'investors' still hold these cash-flow negative properties? And with so much inventory in the pipeline, what if demand from investors even just softens (forgot about them dumping their investments for a moment). What would that alone do to prices?
This will end well!