Thursday, September 4, 2008

Journalistic Integrity

I've made much over the spin job we see the MSM (particularly the VanSun and the TC) doing when it comes to how market information is portrayed in the local media.

Is it the responsibility of journalists and editors to delve into the information and fact check it, when the local real estate boards release their market information related to the MLS system?

A quick wiki of journalistic integrity gives us this:
the principles of — truthfulness, accuracy, objectivity, impartiality, fairness and public accountability — as these apply to the acquisition of newsworthy information and its subsequent dissemination to the public.
Let's take a look at the most recent news piece on the Victoria August numbers. Tony Joe, president of the VREB, is quoted as an expert. As is the developer behind Chelsea.

These are two individuals who make a living selling real estate and have a much better grasp of the current state of the market than you or I, but it serves them no purpose to state the obvious truths. The developer's job is to impart confidence in his business. Tony's?, he's elected by the local group of REALTORs to impart confidence in them. I don't believe Tony is attempting to pull the wool over anyones eyes; here is his key message:
well-priced properties can still move quickly
This statement is fundamentally true. Well-priced properties can, and do, move quickly. He's told us a few things this month: the market dropped by 5%, if you want to sell your place next month, drop your price, and if you're looking at buying, low-ball. He's also telling us REALTORs are the only ones with the ability to well-price your home. His job is to increase sales volume, not necessarily price, and that is what I see is his focus; he's a confidence cheerleader.

His explanations of why sales are down "vacation-caused" are weak. We know they are weak. Roger has proven them patently false, using VREB's own data. Does Tony have a responsibility to prove his assertions? I think such a small statement can get passed off, and should be, by anyone looking at buying or selling a house in Victoria. Look, if you're buying or selling, that one sentence in one article on one day should not be the deciding factor in your decision.

The bigger question is, should Carla have called him on it? Does she, or her editors, have a responsibility to fact check a quote? Probably not. She is publishing someone else's statement, not her own, and not trying to take credit for it. She should make sure she quoted him correctly, and if she did, Tony ends up wearing the egg on his face.

The trouble is, it spits in the face of those of us who wrongly assume that the MSM has journalistic integrity in today's market place. Are we wrong to expect it? The internet has changed everything. It has democratized information. You and I, we both have the same access to information as the average journalist these days. We can decipher the spin, we can analyse the stats, we can even publish our opinions and facts that we find. If I spouted off on this blog more often, you wouldn't read it. Many people don't.

But when the MSM drops their integrity, they sell less papers and there is a cause and effect reaction in the market that punishes them greatly. They've already dropped the ball on classifieds. They're dropping the ball on advertising. They're dropping the ball on reporting. The TC especially is dropping the ball on what people have come to expect of the the internet (a voice of their own) and don't even allow comments, moderated or not. I'll leave you with this to end my editorial:
Every news organization has only its credibility and reputation to rely on.
-Tony Burman, editor-in-chief of CBC News
The MSM has been slow to adapt to the internet reality, as have the players that rely on them to get their messages out. In effect, these gang of change-fearing "presstitutes" are committing a slow suicide. Check out their stock valuations, they're not making money and they're getting hammered by investors.

Their credibility is crumbling and their reputation is diminishing. And the consequence of this is that people seek information elsewhere and advertisers follow. I fully expect to see further consolidation of media outlets (National Post is probably done in the very near future) and further entrenchment of the old ways of doing business. Because they really just don't get it. Nor do I, but I think I may be onto something...

59 comments:

Anonymous said...

Great post.

I remember when the the American television networks treated their news divisions as a service to the the community and covered the loss by Wide World of Sports ad revenue?

I remember the evolution (devolution) of that model as news budgets were slashed and entertainment/sensationalistic considerations to attract viewers trumped a reasonable presentation of the day's news.

It was easier for television to go all slutty because it's a visual medium. Add a few hot talking heads and Bob's your Uncle.

Maybe newspapers just held on longer because it's harder to tart them up.

On second thought, why do I even think that newspapers have such a noble past. Becuase they don't. Especially in the US where it is an industry standard for papers to declare party affiliation and write to that audience and be an active player in the game of politics.

Most local papers are about selling as space, the reflective investigative reporting should not be expected. We should jsut expect the Times Colonist to report on who died, give us the the box scores and give me something to read during breakfast.

Nick said...

I can't say I expect much more from an Asper paper like the Times Colonist.

However, while I deplore the generally low standards of journalism locally, nationally and internationally, I would put most of the blame on we the people. There's something wrong when we live in a culture where people will spend 5 bucks in gas driving to 5 different stores to save 2 dollars on a toaster, but don't do their due dilligence when making the biggest purchase of their lives.

People are also so deferential to authority that they believe whatever spin, half-truths or outright lies comes out of the mouths of the presumed experts. As of last year, anywhere from 30-40 percent of Americans still believed that Saddam Hussein was directly involved with the 9/11 plot. Even George W. Bush has publicly admitted that Saddam had nothing to do with 9/11, yet still the ignorance persists.

This internalization of untruths leads to massive cognitive dissonance. In the Saddam-9/11 case, those people tend to be the biggest supporters of the war and refuse to accept evidence that shakes their worldview. Similarly, people have internalized the "real estate in Victoria can only go up" idea to the exact same extent. When confronted with counter-evidence, they rationalize as long as possible with "well, buyers were on vacation" and listen to the bloviations of professional liars like Fred Carver in the same way that hardline American conservatives listen to Rush Limbaugh to reinforce their worldview.

When so many people don't have the critical thinking faculties to question what the media and "experts" present them, the future of our democracy seems shaky indeed. I expect the corporate owned media to feed me garbage, but it would be nice to see more public officials like Garth Turner speak out and try and advocate for their constituents. Sadly, many politicians seem to be in the same pockets as the media.

boomer said...

nice posts guys

I was starting to add my words of wisdom but its all been covered. I guess Ill move along to the TC online.

LOL

Anonymous said...

1. Money can change many things. Billions of dollars RE market, advertisement, and huge risk of lost of investment. These people have formed an interest group, using money to manipulate whatever they can to feed their greedy (money, power, sex).

2. More and more normal people are getting the other side of the story by internet, bloger like this. People are getting more and more wisdom and more difficult to fool.

3.The cycle of the market may be delayed but can not be interrupted.

sockpuppet said...

The media definitely helps to push the pendulum in one direction or another. Up until a month ago the MSM was pushing the "hot" real estate market. Now they have realized that they can sell papers and get more TV viewers by hyping the downturn. Here is one example...

Front Page - Vancouver Sun

The TC, for all it's faults, did make the VREB shill look a bit foolish in this article...

Times Colonist - Business Section

In the coming months things will only get worse for RE sellers and better for buyers. The MSM will cover the downward spiral with the same zeal that they covered the market on the way up. This will be especially true of the TV stations that have very little real estate ad revenue.

Nick said...

Sockpuppet: You are definately right about the piling on effect that the media has. You can see it in sharp focus right now with US election coverage, journalism has a herd mentality. Rather than each journalist bringing a different perspective and new insights, they tend to act like an echo chamber where the media repeats and reinforces their preconceived notions of a story. It's much easier to follow the pack than blaze your own trail.

The interesting moment will be when we hit the tipping point when people can't deflect the bad news anymore. Elliot Aronson talks about this phenomenon in his works on cognitive dissonance. He mentions one example that people are often quite familiar with, divorce. People often convince themselves for years that they love their spouse and they ignore or deal with their perceived flaws. However, once the tipping point in a relationship is reached and these flaws and faults hit the breaking point, they swing to the complete opposite end of the pendulum and cannot stand the spouse that a week earlier they would have told you they loved completely. This new mental frame is usually just as unshakable as the initial frame of marital bliss.

We could be heading for a bitter real estate divorce as people go from loving the real estate game and wanting to invest in presales and flips to people hating real estate, which would be a huge market shift. You can see this down south in a big way. Real estate is a dirty word right now and symbolises money lost, credit ratings destroyed and often broken dreams of becoming a real estate/flip mogul.

VicREBear said...

I don't watch the tube; have our local stations (CH, et cetera) given any airtime to the latest Victoria numbers?

sockpuppet said...

The MSM loves to sensationalize once they get onto a theme. In many cases people only remember the headlines. Take a look at these scans of recent newspaper articles...

TC Says Price Cuts & Listings Double

Vancouver Province says Prices Crash

This type of reporting will have an effect. Buyers will get more cautious and sellers more nervous. Downnhill from here guys!

roger said...

Continuing the discussion in the previous thread:

anon 10:00 said:

Do I think that this is just a blip. No. This is the new reality for the next 2-3-4 years. But the average price is not going much lower. I predict it will stabilize in a range between 525,000 to 550,000.

anon 10:20 said:

Generally agree wholeheartedly, although I can't completely deny the possibility of a 10% drop over 3 years. It's not fundamentals, it's mood. And the mood appears to be an expectation of mild decline for a year or two.


Average SFD prices peaked in April and we are down 13% in 4 months. The median is down about 8% since the peak.

If you want to look in the rear view mirror you will see that SFD's are negative Year-Over-Year (YOY) and the trend has been down for most of 2008.

The mood is very negative now with all the MSM reports discussing high inventory, price drops and lower sales. There were only 11 sales over $1M last month - the smart money is sitting on the sidelines. In a few months no more zero down, 40 year mortgages and this will impact the lower end and FTB's. We are heading downhill fast.

Anonymous said...

What I find interesting is the similarities over that same periods for 2006 and 2007 as well. See the summer drops and the subsequent rises?

I would say, "statistically insignificant." It's a bit hard to draw any conclusion from those results. What I do see are the prices in my neighbourhood and my rental neighbourhood. My observation is that neither are down even 5%, yet.

hhv said...

"What I find interesting is the similarities over that same periods for 2006 and 2007 as well. See the summer drops and the subsequent rises?

I would say, "statistically insignificant." It's a bit hard to draw any conclusion from those results. What I do see are the prices in my neighbourhood and my rental neighbourhood. My observation is that neither are down even 5%, yet."


We have not had four consecutive months of negativity to such a drastic extent in any of teh last 5or 6 years.

It amazes me that people want to dismiss the facts of a 13% decline in four months, and a whopping minus $83K in prices as a statistical anomoly. If this trend continues, we can, and may, see a whopping 26% drop by Christmas.

What do you think that will do to buyers come January/February next year? Oh yah, they'll be thinking, great time to buy, we haven't seen prices like these since 2006...

If we hit 26% drop from April 2008 by january 2009, it will take a good year of flat prices to inspire confidence in buyers again, maybe more.

S2 said...

I almost fell out of my chair when I read this from CBC.

It is dated September 4, 2008.

Huh? Are they on vacation and so just pulling old articles from the last couple of years?

"Some Canadians turn to co-ownership as gateway into housing market"

http://www.cbc.ca/cp/Money/080904/J090402AU.html

Anonymous said...

I'm not sure what the problem is, that may be just as true in 2 years as it was 1 year ago regardless of where prices go. And yes, there are lots of people investing together to afford ownership.

Mr.4AM said...

TSX took a major nose dive in the past week, some 900+ points shaved off the top or about 7% index decline across ALL sectors. That's about as much loss in 1 week as most people hope to gain in 1 year with conservative low risk mutual fund portfolios.

I wonder what the next 3 weeks of September have in store for us.

Wipe off people's investment savings, and you can bet that the real estate market will plunge further as first time buyers watch their downpayments savings dissapear into a thin mist, and retirees watch their pensions and/or RRSP's shrink against higher overall costs of living.

The next 2 months in the stock market are going to be very interesting, followed by a highly likely weaker Christmas shopping season than ever.

The only good news I see? Oil is tanking (no pun intended) which in this market appears to be a signal that a US (or even global) recession is expected. Canada just barely missed a recession not 2 weeks ago.

I'm curious to see how the markets will react when the US treasury starts bailing out Freddie and Fannie a la blank cheques.

The good times are over boys & girls, the bear has awaken from an extended hibernation and hungrier than ever.

PS. Have a wonderful weekend! *grin*

Anonymous said...

for anonymous on the previous thread who said that we aren't going to have lower prices because foreclosures haven't happened here: foreclosures are a lagging indicator - they only occur in large amounts when house prices drop and those in financial trouble can no longer sell for more than they owe... We'll see the first hitting the market in around 4-6 months (as happened in the US..

- Dumb Canuck

roger said...

anon 2:50 said:

What I find interesting is the similarities over that same periods for 2006 and 2007 as well. See the summer drops and the subsequent rises?

Lets take a closer look at the period from April to August in each year from 2005 onwards in this chart. The recent price drops in 2008 mark the first year when the prices have fallen during this period. In 2005 & 2007 the price trend was up and in 2006 it was flat.

What happens in the slow sales season from September to January? In this graph we see the following:

Fall 2007 - price trend up
Fall 2006 - price trend slightly down
fall 2005 - price trend flat

Each year was different.

What are the key factors that will influence the price trend in the next 6 months?

- Inventory at levels not seen since 1996 (source VREB). Up 39% from the August last year.

- Sales are way below the 6 year historical average (see link above) and down 39% from last August.

- Effective Oct. 15 zero down, 40 year CMHC insured mortgages will be discontinued resulting in fewer first time buyers.

- Real estate boards (VREB, GVREB, REBGV), CREA and BCREA have all been trumpeting that buyers have more choice and sellers should sharpen their pencil (i.e. lower their price expectations)

- MSM has been saying the boom is over and the market is cooling for several months. Recently, they have said price drops are here and the Province used the word "crash" (see sockpuppet's post above). Ozzie was on Global today talking about RE cycles and that we are in a downturn.

- The US economy and housing market are under strain and their is a spillover effect on consumers in Canada (see recent Cameron Muir comments)

- Calgary and Edmonton markets are dropping. Calgary around 10% so fewer boomers will be selling their home and moving here. Calagary condo investors will be nervous about buying in Victoria when their own market is dropping.

- Canadian economy is barely staying above water. We just missed 2 consecutive quarters of negative growth (i.e. recession)

- Affordability levels are way out of whack from a historical perspective. A family making 100K a year can't buy a house in Victoria without creative financing. Canadian median house price/median family income ratio was 3.2-3.5 only a few years ago.

Real estate markets are also based on psychology and expectations. Buyers now expect to pay less and sellers are starting to realize the peak has passed them by. So my take is that we will see a continuation of the correction that began in April of this year. We may see the odd month with a bounce up but the 3 month rolling average will continue down for the foreseeable future.

However, if any RE bull can provide some concrete reasons why they see prices going back up or levelling off I would be interested in hearing them.

Anonymous said...

"We may see the odd month with a bounce up"

I always find these little caveats interesting as well, just in case it turns back up this fall, eh?

We should be hearing the "dead cat bounce" drama in about 4-6 weeks.

boomer said...

"What I do see are the prices in my neighbourhood and my rental neighbourhood. My observation is that neither are down even 5%, yet."



listing prices- or solds?

Anonymous said...

anonymous 6:26

Know what catching a falling knife is?

Anonymous said...

that was me

- Dumb Canuck

Anonymous said...

No, please do explain.

Anonymous said...

Anon 6:26, since you think Victoria is immune from massive drops in real estate value, what do you attribute the current crash in the US to? (Please don't say subprime, that was just the tip of the iceberg)

Catching a falling knife refers to buying into a dropping commodity with the hopes that it won't fall any further in value - but it does.

Anonymous said...

from Investopedia.com:
http://www.investopedia.com/terms/f/fallingknife.asp

A slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless.

A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment.

As the phrase suggests, buying into a market with a lot of downward momentum can be quite dangerous. If timed perfectly, a buy at the bottom of a long downtrend can be rewarding - both financially and emotionally - but the risks run extremely high. This term implies that the investment will never be a good one again. Examples of stocks that have plummeted are plentiful; a widely-held stock can drop precipitously as the equity ownership is reduced to nothing.

- Dumb Canuck

Art Vandelay said...

As a former journalist at a large Canadian daily, I can tell you newspapers are first and foremost a money-making business. All other considerations are secondary at best.

Publishers keep their jobs by making money for the parent corporation. Advertisers are revenue. Reporters are overhead.

It's not hard to figure out why advertisers have more influence over editorial direction than do the reporters.

patriotz said...

What I do see are the prices in my neighbourhood and my rental neighbourhood.

Rental prices have nothing to do with sale prices except in the long run, so don't expect one market to tell you anything about the other.

Happy Owner said...

I wouldn't say Victoria is different, but the times are different. Even with a significant downturn, there are tons are home owners that don't have to sell. I'm very much one of them.

The demographics have changed compared to previous downturns. There's many more well heeled and those without a lot of "HOT" money invested in pipe dream "investments".

I can easily ride any downturn. Nobody will ever dictate a price for my home. I own it, I live in a great place and "MY" price will ultimately dictate the price of the market.

Yve said...

Wait for it... 3..2..1...

roger said...

happy owner said:

I wouldn't say Victoria is different, but the times are different. Even with a significant downturn, there are tons are home owners that don't have to sell. I'm very much one of them.

I am sure there are lots of owners that don't have to sell under any conditions. I sincerely hope that they, like you, continue to enjoy their homes and are not concerned with a housing downturn. You and the other long-term owners are only bystanders and will not have any influence on market prices.

However, there are many owners who have to sell at some time in the future for reasons we have discussed countless times in other posts. These willing sellers and willing buyers will set the market price for Victoria real estate in the future.

The demographics have changed compared to previous downturns. There's many more well heeled and those without a lot of "HOT" money invested in pipe dream "investments".

Yes the demographics have changed. The population is getting older and many have not saved for their retirement. BC has a negative savings rate and 50% of the population has no emergency funds in the bank. Many new owners are mortgaged to the hilt and have 40 year, zero down mortgages and little if any equity. These folks are in the majority and far outnumber the well heeled you referred to in your post.

I can easily ride any downturn. Nobody will ever dictate a price for my home. I own it, I live in a great place and "MY" price will ultimately dictate the price of the market.

As I said in one of my earlier posts to you - glad you like your place and have it nearly paid off. You have the choice whether or not you wish to sell.

But you are mistaken about who will dictate the sale price of your home if you decide to sell. You can set any asking price you want but it will be the buyer that decides if they will make you an offer and what price they will pay. You can only decide whether you will accept the offer or not. The sellers market is now over and buyers will just move on if the seller sets the price too high and won't sell at the current market value.

womp said...

Anon 2:50

I sold my condo in langford in April. Last month, an identical unit (exact same square footage and layout) one floor up from my old unit was listed for 4% less than my final closing price.

It eventually sold. If it sold for anything less than ask, it was 5% down. And now the market is even worse.

Price declines are obvious. Not sure why you can't see them.

Anonymous said...

The bears are right.
Real Estate is just a bad investment.

Just like in 1981 when the avg price dropped to $100k, then in 1995 when it hit $230k...all bad times to own real estate for the 'long term'. (wen you factor leverage in the returns are pretty darn impressive)

Seriously though, the historical data has shown us that in past serious downturns (like 81 and 94) the market flat lines pretty quickly (http://vreb.org/pdf/historical_statistics/GRAA2007.pdf) . In a year the market creates a base and hovers around that level for many years until the 10-20% increases start up again.

But if prices hover/do nothing for 6-7 years and you pay off 1/25 of your mortgage per year...then you are 6/25 or 7/25 paid off with no price appreciation...its better to own than to sit on the sidelines.

I remember friends who bought places in 1998 with prices falling. They worried that the market might go 'lower' and they were buying a falling knife. Like they care now about buying early.

The sheep are not buying now, the sheep are sitting on the sidelines whining about the falling market.

Mr.4AM said...

Anon 12:45,

Re: History = small drop/flat line, then rise again.

While I believe those graphs reflect reality, they are a little misleading of the overall story because they are so averaged out.

Zoom in and drops are more severe:
The truth is also that during those small drops, there were many months in a row and in some cases, years, where the drop - if you were to zoom in - looked more like 20% to 40%, and those were also averages of all the inventory of Victoria, meaning that there must have also been some properties that dropped even more than that.

And that's not just a guess based on graph extrapolation, I was here and saw some of that with my own two eyes. From the perspective of a couple of dozen or how-ever many bears are on here, we each just need 1 house (hey if they go low enough I might bite for 2 or 3), to live in. So since we're a patient bunch some of us will wait around for that bottom or as close to it as it will go.

Inflation
Further, I am don't believe the numbers on this graph are compensated for inflation (click to watch video), which tell a far more bearish story. You see, for every year that it appears "flat", in fact inflation is occuring at the same time and in the past 40+ years, inflation was pretty much always positive, and EXPONENTIAL!), and so a flat line in prices, if adjusted for inflation would actually show up as a increasingly negative trend line in an inflation adjusted graph (your assets are worth the same number of dollars, but what you could buy with those dollars on the market is less than say 1 year before).

Cost of operations:
Not to mention that when prices are flat, even ignoring inflation, real estate IS a losing asset because of the costs of operation that add up on average to 5% or more (depending on the property) - property taxes, repairs, insurance, mortgage interest payments to the bank, etc.

Globalization impact makes it different this time:
What's hugely different this time, is that the dip events aren't an isolated story to North America or just Canada, but are in fact a repeated event occuring in 20+ other countries all over the world in a real estate bubble. The similarities are nearly identical in every case, except the initial triggers are months or upwards of a couple of years apart:
- Easy credit / lending
- Lowered legal requirements to home ownership
- Manipulated low interest rates
- Massive manipulation of how a nation's economic health is measured and reported.
- Exponential growth in "Derivatives" / creative investment vehicles in the stock market
- Liquidity crisis
- Monetary contraction


Don't ignore the Internatinal financial markets:
If you ignore what is going on in the financial markets internationally, it's easy to be a bull based on graphs like the one you mentioned, but that is a very misleading reality. Yes real estate will one day go up again beyond even current dollar prices; however, between now and then, and as evidenced by many of those countries listed that are ahead of a us in the real estate bubble correction, prices will go substancially lower in numerical value (nevermind inflation) before they eventually one day "recover".

In fact that recovery is not garanteed. We haven't yet seen any of those countries show recovering real estate prices (keep an eye on the US/UK & Australia, as they may be one of the first) - that, only time will tell. I think in the loooooong run, yes, it is likely prices will recover, but the nastiness of what's happening in the international financial markets is far more severe than any historic international downward trends we've seen. It is in fact unprecidented. Let me put it this way, several key international economic indicators show the situation is ALREADY worse than the great depression, and no respected market analyst is able to see a bottom from where we stand today - meaning, the overall the trend of world wide markets is definitely lower.

But isn't Victoria doing fine?:
I know this sounds like far fetched gloom and doom from where we stand. Everything is so relatively peaceful in Victoria. The weather is nice, nature is beautiful here, most people are friendly and walk around smiling, unemployment is low, the few problems (high oil prices, and higher food prices) thus far have made only a small dent in the average Victorian's daily life, but the problems here in Canada have just barely begun, and if so many other countries in similar economic situations haven't been able to dodge a significant downward trend in real estate prices and overall financial health, what makes you think Canada will figure it out? I think 2 years from now, the average Victorian will no longer be smilling as much.

In short, what goes up must come down. (Watch the educational video in this link), and the road to the bottom is a long one from here.

Anonymous said...

Happy Owner, I assure you, if I ever buy your house, it will be at MY price, not YOURS.

Even if you stubbornly try to take it with you and I buy it from your far wiser and far more desperate heirs.

patriotz said...

I can easily ride any downturn. Nobody will ever dictate a price for my home. I own it, I live in a great place and "MY" price will ultimately dictate the price of the market.

Well no.

Market prices are determined by those who are buying and selling, not those who aren't.

If you want more than the market price for your house, nobody is going to buy it. Your house is not special to anyone but you.

Anonymous said...

The word isn't on the street yet. Down in the fever swamps the regular joes still believe in the real estate investment pipe dream. I know two flippers trying to sell and they think it's going to be easy as pie. It's in the bag but no offers yet! One flipper is planning on flipping right away again, the other is going to just buy something else. Both say renting is just stupid at this point. At the extreme there's one person I know who's just started being a real estate agent and has quit his job to do it too. He did this based on the advice of one of the big names in Victoria telling him he could clear 6 figures no problem. It's been 2 months and not one sale. I've got front row seats.

Anonymous said...

I like Happy Owner's economic theory, and I'm going to apply it to other assets. I own an ounce of gold, and I really like it. It's almost paid for, and I have no intention of selling it. I can easily ride any downturn. Nobody will ever dictate a price for my ounce of gold. I own it, it's shiny and smooth and pretty, and "MY" price will ultimately dictate the price of the gold market. So, you see, I can't lose!

roger said...

anon 12:46 said:

The bears are right.
Real Estate is just a bad investment.


I think most, if not all bears, would disagree with you. I think that real estate is a good investment in cetain phases of the market cycle. Buying right now at the peak of a speculative bubble is not one of those times.

Seriously though, the historical data has shown us that in past serious downturns (like 81 and 94) the market flat lines pretty quickly (http://vreb.org/pdf/historical_statistics/GRAA2007.pdf) . In a year the market creates a base and hovers around that level for many years until the 10-20% increases start up again.

Here are the nominal price and real (inflation adjusted) price graphs for Victoria single family homes (SFH) from 1978-2007. Several observations can be made from the past 30 years of data:

1. Real estate goes up and down in cycles. Once the peak is reached it takes around 7 years to recover to the nominal peak (9 to 11 years after considering inflation).

2. The annual increases in nominal market value during boom periods can be 10-15%.

3. Drops from the peak can be significant or moderate. 26% in the 80's but only 5% in the 90's

4. For the period 1978-2003 the average price cycled from 62K-106K in inflation adjusted terms with 1978 as baseline. At the end of 2007 this had risen to 185K!! IMHO this is because we have experienced a speculative bubble just like Vancouver (see Shiller site)

5. When real estate drops it eventually plateaus for several years before the next upwards cycle.

Is it possible to time the RE market?

Unlike the stock market which is very liquid and subject to daily variation the real estate market changes slowly. It is not possible to find the absolute bottom but it is possible to get close enough to make a prudent purchase. Every year VREB publishes the annual average. In 2007 that number for SFH was 566K for SFH as shown in this graph. When two or more years are around the same level the market has levelled off and represents a buying opportunity.

But if prices hover/do nothing for 6-7 years and you pay off 1/25 of your mortgage per year...then you are 6/25 or 7/25 paid off with no price appreciation...its better to own than to sit on the sidelines.

I think you should take a closer look at amortization tables. On a 400K mortgage at 5.5% for 25 years the principal remaining at the end of 7 years is 336K. You have paid off 16% of the mortgage not 28% (i.e. 7/25). The monthly payments have been $2442 and over 7 years you have paid 141K in interest to the bank. The rent vs. own tradeoff requires extensive calculations and you can use this
calculator

I remember friends who bought places in 1998 with prices falling. They worried that the market might go 'lower' and they were buying a falling knife. Like they care now about buying early.

This is not 1998 when prices had been flat for years!! We have passed the peak of a multi-year up cycle. Buy now if you want but be prepared to see the market value drop for several years before the next cycle starts.

Anonymous said...

Seriously folks, do you really think that another real estate boom is going to happen in our life times.

The reason real estate has performed like it has over the last 80 years is because of the baby boomers. As the largest demographic group (roughly now 43 to 63) moved through the marketplace it caused these booms and busts in real estate.

In 1980, the leading edge boomers were age 25 to 35. -time to find the spouse, house and have your first set of kids.)

In 1995, the boomer was 40 to 50 years old - time to buy that second spouse and second house.

2008, the leading edge boomer is now 63 to 53 - time to sell that second house, move up to last house and/or help out the kids and grand kids.

The boomers parents (age 74 to 94) are now dying off and the leading edge boomers are starting to go as well. The peak of the boomer deaths will be around the year 2035. Victoria will probably feel the loss of the boomers sooner than most of the rest of Canada, because our average age is about 10 years more than the Canadian average.

So what age group that came after the boomers is enormous enough to purchase the homes of the boomers.

-----None-----

So, if you think the real estate market will boom again in 10 or 15 years (2018 to 2023), think again. Because that is going to be when the boomers will be buying plots not lots.


just jack

Phil said...

Wow, it looks like the US is going through with the Fanny/Freddie bailout to the tune of TRILLIONS. Unbelievable!

If I was an American who saved during the boom I would have a very hard time paying my income tax from now on. What a scam.

Could we see a similar bailout in 2-3 years?

roger said...

There has been a lot of discussion on the blog about the future of Victoria real estate market.

I have prepared a new annotated slide show and added it to the Victoria Stats Gallery

Victoria Real Estate - Are Prices Falling?

You will need to pause and single step the slides using the controls at the top of the presentation.

This slideshow is a work in progress. Your comments and suggestions for improvement would be appreciated.

patriotz said...

Is it possible to time the RE market?

People who talk about timing are missing the point.

No, it is not possible to time market tops or bottoms.

But it is easy to know if you are paying a reasonable price for a house. This is when ownership costs are at, or close to, renting.

If you look at RE cycles, you will see that the rent equilvalence point is always reached during the downturn. This is what we call reversion to fundamental value.

The right time to buy is when you can buy at the right price.

sitting pretty said...

I sold my condo in langford in April. Last month, an identical unit (exact same square footage and layout) one floor up from my old unit was listed for 4% less than my final closing price.

If you've ever wondered what "mental masturbation" means, well there you go!

boomer said...

hi sp

hafta admit i kinda wondered where you were this month.

you're here

all is good

cheers

Art Vandelay said...

Further to Just Jack's point, David Cook outlined this scenario in The Pig and the Python, 1996. Technically, I believe he called for Baby Boomers to start bailing on real estate in 2010 (so either he was off by about 18 months or my memory is fuzzy, not that it matters).

I remember critics at the time saying that building would simply Stop Building so that supply would align with demand.

Problem with that criticism is that if you make money building houses you don't just wake up one day and say to yourself, "OK, there's nothing left here for me. I quit." It's not like working a shift at Wal-Mart.

When you consider larger products, developers who have sunk several years and multi-millions of dollars into a condo tower are loathe to abandon it. So the pipeline is likely to be pumping out product for a while yet.

In spring, there were still buyers. Sometime around June somebody finally flushed. And we started circling the drain.

What you're going to see in the next three months is the people who came late to selling will yank their rat-holes off MLS and go back to telling themselves they don't mind living in Esquimalt, Fernwood, Sooke, etc.

The people who have to sell for one reason or another, will be in a race to see who can cut their price deepest and fastest.

So listings will likely flatten, but the carnage in prices has only just begun.

Muriel said...

Roger,
I love your most recent slideshow (Victoria Real Estate - Are prices fallingÉ).
In terms of format, I particularly like how are putting comments on them, and outlining the significant data points - the graphs were compelling before, but these features make the points impossible to miss.
Thanks!

patriotz said...

So the pipeline is likely to be pumping out product for a while yet.

Builders will keep building indefinitely. New houses were still built in the 30's and things are not going to get anywhere near that bad.

As long as the market price is over the cost of construction, the builders will make money. They will pay a price for the land that allows them to sell the finished house or condo for a profit margin. As house prices are determined by the buyers, so land prices are determined by the builders.

Anonymous said...

yes, thanks Roger. I'm starting to share some of your graphs with friends, and it is making them open their eyes a little and question the advice and insight they've been getting from realtors. If it stops one or two of them from buying now, my (little) time sharing the graphs will be worth it. It's also a good feeling knowing that down the road, your friends won't be in financial despair.

boomer said...

I see that the US govt has just announced they are taking over control of Freddie and Fannie.

That is tens of billions of dollars that US taxpayers are potentially liable for.

This financial mess aint near over there---- and has just started here.

Remember "decoupled"?
Forget it.

We're going back to 25% down and REAL credit checks for mortgages----that in itself will dictate lower prices.

Anonymous said...

That will dictate lower prices because it will force 80% of the new homebuyers to rent another 10 years.

Add to that the fact that not everyone will be getting the standard P-.8 mortgages. Rates would based on actual credit history, equity, and real capacity to pay.

What you suggest sounds like the wealth transfer was successful and a long winter's eve in favour of landlords to me.

roger said...

anon 10:30 said:

thanks Roger. I'm starting to share some of your graphs with friends

I have added a new slide to the presentation Victoria Real Estate - Are Prices Falling?.

The URL is: http://tinyurl.com/PriceDrop

In order to make it easier to print or pass around there is now a pdf version on my website Needs Analysis.

roger said...

womp said:

I sold my condo in Langford in April. Last month, an identical unit (exact same square footage and layout) one floor up from my old unit was listed for 4% less than my final closing price.

Condos have been selling for around 97% of last listing price this summer. So it looks like womp came out 7% ahead by selling in the spring. I don't know his listing price but if he sold for between 300-400K he was able to pocket between 21-28K (tax free) more than the current sellers in his old building.

Sitting pretty didn't think this was a big deal. SP - how long would it take you to make 21-28K after-tax in your government job??

Anonymous said...

If those numbers are not skewed, he still hasn't "made" anything. If he wanted to turn around and rebuy that same property now he has lost money on the overall cost - RE fees out, PP tax in, closing cost, utility transfers, rent etc etc. He would need to "make" another $30,000 to break even on this turn around - not to mention the stress involved.

Not for me I'm afraid

roger said...

anon 6:43,

You missed the point. He wanted to sell his condo and does not want to buy another condo. He is renting now and has over 20K more in his pocket than he would if he waited until now to sell.

And if he waits a while the new place he buys will have dropped considerably so he does well selling and buying back in.

Anonymous said...

"And if he waits a while the new place he buys will have dropped considerably so he does well selling and buying back in."

I didn't miss the point at all. This is a risky position to take and whether or not he "makes" money, only time will tell. So far there's no gain, only cost, risk of more cost, and stress.

roger said...

anon 7:55,

Since womp sold in April there have been four straight months of SFH price drops (average and median); MLS listings have hit a 12 year high; sales are dropping like a stone and even the MSM has daily doom and gloom articles. Lots of price reductions every day on PCS. In a few months bye bye to zero down and 40 year mortgages (FTB specials) and the global economy will be in even worse shape.

But denial runs deep. I guess you have decided to keep drinking this stuff..

Anonymous said...

I'm not in denial, I'm witnessing price drops and expecting more.

But all that has happened so far for the poor unfortunate souls that have recently sold is that they have lost money - they will not break-even until the actual price drop is perhaps 25% (on SFH's), then they can start talking. For now it's continued risk and stress.

roger said...

anon 9:00 said:

But all that has happened so far for the poor unfortunate souls that have recently sold is that they have lost money - they will not break-even until the actual price drop is perhaps 25% (on SFH's)

Lost money - How do you know what they paid for the property? What makes you think they all want to buy again or continue to live in Victoria? Maybe they just want to pocket their profit and rent in the future.

Need 25% to break even - On a 400K property selling costs run around 18K (full RE fees & legal) and buying back a 400K unit is around 7K (PTT & legal). Throw in 3K for moving expenses and you have 28K or around 7% to buy and sell a 400K property.

And don't start the throwing money away on rent story because owning has maintenance and repair costs and there is mortgage interest (lost to the bank instead of landlord). Oh let's not forget the money made by the renter on his/her investments.

You need to use a rent vs. buy calculator to tailor the decision to each persons needs. Waving your arms and using generalizations like 25% is disingenuous.

poor unfortunate souls
Who are you to pass judgement on other folks lifestyle? Some people are happier owning and some renting. Some renters find less stress having someone else do the maintenance and repairs. They may choose to spend their disposable income doing other things than building equity.

BTW - why not use a nickname in your posts. This anon thing is getting really old.

Anonymous said...

"You need to use a rent vs. buy calculator to tailor the decision to each persons needs. Waving your arms and using generalizations like 25% is disingenuous."

You're the one waving your arms on the "profit" (or "and he does well) and that's disingenuous. There's been no profit, period.

I wish I could sign up for an account to satisfy you, but I don't want to, sorry.

Maybe I'm one of the Bears here with a guilty conscience? No, of course not, but I feel I can be just as respectful towards the posters on here with an anonomous posting as with a nick-name. Takes the EGO out of it, don't you think?

As for this, "Some people are happier owning and some renting. Some renters find less stress having someone else do the maintenance and repairs."

I think that says it all. Owning or renting is not about making or losing money, it's a lifestlye choice. It's when someone attempts to profit through that lifestyle choice that it becomes risky and stressful - and I certainly was not passing any judgement, we all make decisions about owning or renting our homes for many many reasons.

Anonymous said...

"And don't start the throwing money away on rent story because owning has maintenance and repair costs and there is mortgage interest (lost to the bank instead of landlord). Oh let's not forget the money made by the renter on his/her investments."

And that's been beaten to death, of course newly renting from owning has a cost. The money made by someone waiting to buy back in is GIC rates for anyone managing an acceptable level of risk for that short term money IMO(effectively 0 adjusted for inflation and tax.)

I'm sure you in a better position, but my interest cost is $800 per month on a home that would rent for $2,000 net of taxes and monthly costs.

roger said...

anon,

let's just agree to disagree.

You do not have to sign up for an account in order to use a nickname. You can do one of the following:

- Use the Name/URL option under Choose an identity. Put in your nickname and use a couple of space characters for the URL. Your nickname will appear in black like mine did in this post.

- Use anonymous like you are now but sign with a nick name at the end. That is what just jack uses in his posts.

Using a nickname is not about EGO. It allows others to reference your posts and follow your comments through multiple threads. It also reduces the flaming because readers can tell who is posting. How do you know two anons in one or more threads are different posters or the same one?