JBTC

What are those comments?

Perhaps the most renowned geographer in Canada, Ley has been cranking the foreign-money siren for years, most notably with his 2010 book “Millionaire Migrants”, in which he described a 94 per cent correlation between immigration and home prices in Vancouver over a 30-year period. http://www.scmp.com/news/world/united-states-canada/article/2048798/vancouvers-mayor-never-dreamed-foreign-funded

My guess is that for most people, their most successful investment in life in terms of dollar amount could be their primary home. The reason could be that they buy one when they need it, and go on to live in it for decades. If they try to be clever on timing the market, then there could be lots of reason not to buy. Given home prices don't fall often, the wait can be long and the loss of the compounding effect can be huge. Thankfully most people don't put their life on hold just to wait for a good deal. So maybe the old saying "it's time in the market, not timing the market" does apply.

I just want to mention one point - in earlier years I made the mistake of using the US prices as a benchmark when comparing housing prices in different parts of the world. And I found housing bubbles in every country. It took a while for me to realize that the US prices are abnormal. If Middle America is at one extreme and Hong Kong at another, the world seems to be moving more toward HK than to Middle-America.

This is critically important to prices, but rarely discussed on this board. Builders respond to incentives. If there's no incentive to build, there are likely perverse government policies at work.

The average apartment price (not my preferred statistic, but it's hard to find median price) is $562K. The median household income is around $76K, so that makes a 7.4 times multiple. I'd guess an average 2-bedroom apartment would rent for around $2000/mo. So if you assume the average apartment is the average 2 bedroom (which I imagine it's not), you're getting a 4.3% unlevered return on a rental, before you factor in taxes, depreciation, and special assessments. In 2002, that average apartment was sub $200K. It first broke $400K in 2007, and a year ago was just under $500K. Thanks Richard. Assuming the average price went from $200k to $562k in 14 years, the CAGR is 7.7%. This would seem a very good return for apartments, but is it outrageous? I don't know. So while future returns should be lower, it's not clear to me that apartment prices need to adjust a lot, unless there is a vast amount of supply coming up soon. (In Australia, there's a huge amount of apartments being built in key cities.) Price/income of 7.4x also seems ok. Gross rent yield of 4.3% looks ok. If there is a major city in the world where one can get a 4% net yield, I'd be interested in hearing about it. So it seems while there is a bubble in single family homes, apartments are more affordable. If apartments account for a large portion of the housing stock, then risk to the overall economy may be limited. Also, could it be possible that the sub-$200k price back in 2002 was too low? Is there a way to conclude one way or another?

Question for the locals - it seems prices of single family homes are too high in Vancouver, but what about the apartments? Are they pricey relative to income, rents, and historical prices? Prices in Sydney and Melbourne remain very strong. Prices in many cities in China are up about 40-50% in the past year but now have slowed post numerous purchase restrictions since Oct. Hong Kong prices will probably cool, but tough to know the extent. The HK government first raised stamp duty in 2013, which caused prices to fall by single digits over a few years but the fall was essentially reversed this year. Part of what triggered the panic response by the government two weeks ago was a Mainland developer bidding almost twice the amount of those local developers for a piece of land, leading to fear that prices may soar in Mainland fashion.

It may be difficult to really hurt those companies, but can they grow?

From what I understand about the insurance industry, this is basically correct. But unlike a bond-fund, the fixed income securities are held to maturity (if you have prudent management) to match future liabilities. So even when in a falling rate environment you get some unrealized gains in comprehensive income (mark-to-market), they will not be realized or paid out ("virtual" gains). In a rising rate env. you have the opposite: falling mark-to-market prices but no realized losses. On the other hand, in the meantime the new float can be invested in higher yielding bonds. So all in all a net-positive on the investment-side, if prudently managed. But I'm not an expert. Thanks. In terms of the balance of the two offsetting factors, how do we know if it's going to be a net positive or a net negative? I suppose whether the bonds are held to maturity or not doesn't really change the economic outcome.

Hi, can any of you please compare banks vs. insurance in a rising rate environment? Similarities and differences? Thanks. So insurance profits are the sum of underwriting and investment income. Insurance demand is not that volatile so underwriting profits are driven mainly by industry supply rather than demand. The second part is investment. Underwriting generates float which gets invested - mainly in bonds. In a dropping interest rate environment profits tend to be artificially high as they're collecting higher than market interest and also scoring mark to market gains on their bond portfolio. Their future investment income will decrease as they replace high interest bonds with lower interest ones. In a rising interest rate environment the insurance co's profitability will be understated because they're collecting lower interest rates on their legacy bond positions and also taking mark to market losses but profitability will increase as the replace lower interest bonds with higher interest ones. Thanks very much rb. So if we leave the underwriting side of the insurance business aside, is the investment side of insurance similar to a bond fund (with a small amount of equity)? And if that's the case, how can rising rates be good for insurance? I suppose one factor is how fast the float grows, which will be invested at higher yields and partly offset the decline in the value of the bond portfolio. I asked the question with MKL in mind - it has done very well in the past due in part to strong returns from its equity and bond portfolios. Does a rising rate environment mean that its past returns simply cannot be repeated?

Hi, can any of you please compare banks vs. insurance in a rising rate environment? Similarities and differences? Thanks.

Totally concur on the complexity of the issue. But curious why you suggest it's linked to the current monetary policy of the world? I cannot think of any topic that's harder than China. I have heard no China expert who can make sense of it - neither the bulls nor the bears. I don't think Chinese themselves know where it's headed. I have to assume the Chinese leaders think they can exercise a fair amount of control in the near- or perhaps medium-term but the long-term is anybody's guess. But there are people who have made a lot of money in China. They must be good. Or just buy property. Plenty of cities are up 40-50% in the past year.

http://www.visualcapitalist.com/vancouver-real-estate-mania/ Some information in here, but it seems hard (to me) to tell if they describe a bubble or simply a boom...

Never mind massive returns, any decent returns would be nice. Do you see anything in the developed world that is cheap or decent? Japanese real estate seems cheap but they are losing a million people a year.

Stampede: the inside story of Vancouver’s wildest property deal, gone in 7,200 seconds An SCMP investigation reveals the obscure transactions behind a commercial real estate frenzy, including a two-hour stampede by investors desperate to pay C$60m for a site valued at C$16m. Then, a month after taking ownership, they resold it for C$68m http://www.scmp.com/comment/blogs/article/1937267/stampede-inside-story-vancouvers-wildest-property-deal-gone-7200

Possibly one indication of the size of Chinese buying - Chinese Developers Aim to Expand in Canada http://www.wsj.com/articles/chinese-developers-aim-to-expand-in-canada-1459871887

Jurgis, Would you mind sharing your thoughts on why BAM may be cheap? Thanks.

Hi Packer, Many of those Asian names do look cheap, but my impression is they often remain cheap forever. Does your own experience suggest otherwise, or is there other evidence that suggests buying these cheap stocks does work? Of the names you mentioned I have only heard of Hopewell. It has not moved much for 10 years.

Hot in the city Valuations in globalised cities are rising much faster than in their hinterlands http://www.economist.com/news/finance-and-economics/21695912-valuations-globalised-cities-are-rising-much-faster-their

LongHaul, Your math is so wrong that I want to correct it. I invest in property a little but have no direct development experience, so if I am way off in my post I will apologize and correct myself. I gather you are not in the property business, and you don't know New York well. The $1,200 land price cited in the article is per buildable square foot. It's the unit land price based on the total floor area of the building, not the unit price based on the size of the plot. Put in another way, the Soho parking lot sold for $50mn does not have 0.84 acre - it's likely a fraction of that size. In fact, if you did read the article you provided, the facts are crystal clear. "If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that’s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin." In this example, the land cost is 48% of the final selling price. Let me know if you disagree. JBTC - Excellent correction. You are totally right and I was wrong. Nice catch. Good to learn from someone who knows real estate. The chart I saw must of been price per buildable square foot in Manhattan and not price per sft of land. So for 2014 I see the average as price per buildable SFT as $579 and new condo prices at ~$1851 or 31% of the price of a new unit as land. Very interesting. It seems like the constraint may also be how much SFT one can put up on the raw land. If it was much larger across the board then the land/unit price should be less, but of course it is very constrained in Manhattan. I view land as just another input into the construction of new units. You have some land to put up a building and earn a return. If the return is low the land is over priced. If the price of apartments goes way up the land prices will go up at a much faster rate. The land/apartment unit price ration should be dependent on the price of the apartment. The higher the price of the apartment the higher the land price embedded in the apartment (All else equal - construction costs, site, etc.) I personally think NY is in a bubble with low cap rates so the land is inflated in price. Perhaps a more normalized ratio is 15% or so. Thanks again for the correction. You are the most welcome. We are all here to learn and I have learned a lot from everyone. If you believe the statement that what matters in real estate is location, location, location, then it follows land price is an important component of real estate price. There cannot be any other way. I haven't studied the ratios of land price to property price. They seem to vary by country and market. My guess is they may also vary over time. But I have no data. Relative to land which is nonmovable and nontradable (real estate in French is immobilier), construction materials are movable and tradable although can be heavy. So relative to each other, I would expect land prices to vary more greatly than construction material prices. Construction labor is generally mobile but nontradable (mostly), and the price difference can be huge between countries but may be small within a country.

I don't have a bear in this fight. Not even a polar one. As I said before in this thread, when I buy a house for consumption, I refuse to spend 1.X M because I might just as well use that money to retire. But I'm fine if people want to waste that money on houses in Silly Valley, NYC, Vancouver or North Pole. The views are great I hear. And the prices can never go south. I knew that. I'd be more careful about venting to a bear. ;) From you I can count on getting a few jokes, and I like the North Pole bit.

A couple of days ago I was flipping through the FT property section when sitting in a plane. Yup, French and Spanish properties are dirt cheap. If you can think of a way to arbitrage, we can get rich. 1. Flip that 1.8M mobile home 2. Buy French/Spanish properties with the money 3. ... 4. Profit!!! Repeat as needed. 8) 3. Ship the Spanish house and the land underneath to Vancouver. :D Look, I don't want to defend the current housing prices. They look high, and I am not buying at the current level. But I do think many bears clearly missed a few secular drivers of Canadian housing in the past decade. This thread is four years old. I am not saying some of you need to change your view - your view on today's price could well be correct. What I found slightly lacking is very few of the bears have come out and reflect on where they got wrong. Such reflections are critical for us to improve our ability to forecast. It's wrong to ignore the significant speculative activities in the market. It's also wrong to completely dismiss the fundamental factors that have allowed and encouraged the speculative activities. Housing is both an investment and a consumption good. Many of you have focused entirely on the investment side of the equation. But people also buy to live in it. When a house is bought mostly as consumption, the cap rates and all sorts of ratios matter less.

LongHaul, Your math is so wrong that I want to correct it. I invest in property a little but have no direct development experience, so if I am way off in my post I will apologize and correct myself. I gather you are not in the property business, and you don't know New York well. The $1,200 land price cited in the article is per buildable square foot. It's the unit land price based on the total floor area of the building, not the unit price based on the size of the plot. Put in another way, the Soho parking lot sold for $50mn does not have 0.84 acre - it's likely a fraction of that size. In fact, if you did read the article you provided, the facts are crystal clear. "If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that’s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin." In this example, the land cost is 48% of the final selling price. Let me know if you disagree.

A couple of days ago I was flipping through the FT property section when sitting in a plane. Yup, French and Spanish properties are dirt cheap. If you can think of a way to arbitrage, we can get rich.