Saturday, May 19, 2012

That is not a bubble. This is a bubble...

I have just returned from visiting relatives in Vancouver. I mostly stayed in West Vancouver with my retired aunt and uncle but also stayed in outer-suburban areas with my police-officer cousin.

I was looking for a bubble - after all Vancouver is a notorious property bubble - but - speaking as someone from Sydney I could not see one. Everything was so cheap. Houses especially. Cars too.

A Mountie and his drug-rep wife had a material standard of living that would match a partner in a second tier law firm in Sydney. House prices seemed impossibly low.

The only place where my material standard of living was markedly higher than the outer Vancouver middle class was that I have a decent surf beach locally and the local restaurants and coffee shops are much better in Sydney. Also alcohol is cheaper in Sydney - which is in part taxes and in part protection. (Alcohol is much cheaper in parts of the USA.)

To offset the beaches and restaurants, my cousins had a ski resort up the hill. And food (other than dairy) was cheaper. Quality was high. Dairy seemed to be another industry-protection issue.

And housing was much cheaper and much higher quality.

I remember thinking that Sydney was in a bubble when it got as expensive as Vancouver now is. But then housing prices doubled. After that they seemed to drift upwards.

I have given up predicting the end of the Sydney property bubble. It will happen. It feels like it might happen now. But it has felt like that before. And before that. And before that.

I would rather be short Sydney property than long it (though my wife might object). And that stance has cost me money in the past.

There is a scene in Crocodile Dundee where a New Yorker pulls a switch blade on Dundee. He pulls out an Australian bush knife which is far more impressive.

That is how I felt about Vancouver. You call this a bubble? I am an Australian. I can show you a bubble. Vancouver - that is just kids having fun.



Anonymous said...

HK 17x income
SYD 15x income
distant #3 is some 6-7x

both money-laundering places for the billion aspirationals. australia FTMFW!

when it bursts it's gonna be epic. and i'll be a little richer.

Ferry van Asperen said...

Global property guide is quoting yields of 6% for small apartments and 3.5% for larger apartments.

While those yields are low compared to other international cities and to local mortgage rates they're not bubble territory-low.

What it does show is that the cost of living is frighteningly high. You can't escape the dance by renting instead of buying, either way you're going to be paying through the nose. US$9000 per square meter? Come on!

Even coastal property in SoCal looks cheap by comparison.

Robert in Chicago said...

We're always alright when we're with you, Hempton.

Australian home sales volumes and prices suggest that the burst has begun. Plus commodities prices down materially, mining stocks crushed, China melt-down worries.... Why aren't the bank stocks down by more than a smidge?

Mongolia has been a fantastic trip so far.

Marcelo Camelo said...

Renting in Sydney is 30 to 50% cheaper than buying at the moment. So it's not Facebook, but not strongly underpinned by fundamental either. Apartment rent seems to be going up faster than houses', though.

Horse With No Name said...

Why will be the catalyst for Sydney property prices would go down?

Last time during gfc aud fell but Sydney property prices didn't fall in aud terms

That said it was only a 1 qtr recession before Aus and China put forward stimulus packages...

JohnL said...

Home ownership in Vancouver consumes 92% of income........personal balance sheet adjustment will cause this to mean revert. Incomes will need to rise(ha ha) or prices fall to return this to a normal 25-40% range.
This may have already begun.

Declan said...

Adding to Ferry's comment above,
did you compare rents?

When I looked at Sydney rents I remember thinking they looked slightly lower than Vancouver rents, and then I realized they were talking per week, vs. per month in Vancouver.

Point being, consider prices relative to rents and incomes, both of which I suspect are a lot lower in Vancouver than Sydney (which is 2x the size of Vancouver).

hugh said...

agree with this... except for the coffee and restaurants bit. Stay out of West Van and and the ski hills. dreadful.

and stay out of downtown too.

Elysian on Broadway and Milano on West 8th both make a very good espresso in Vancouver proper. And there is some fun and delicious places to eat on Cambie, Main and Broadway.

Absalon said...

With Vancouver one has to be a little careful about whether you are talking just the legal city itself or including the surrounding communities (which are also legally cities): North Vancouver, West Vancouver, Richmond, Surrey etc. Prices have apparently trended down recently across the region.

How would one go about constructing a "put" on Sydney real estate?

John Hempton said...

There may be good places to eat in Vancouver - but I was taken to an expensive restaurant in town...

And it was OK - at least by North American standards.

It would not survive in Sydney. Bust - kaput.

Contra: the Sydney restaurants are MUCH more expensive.

The Sydney restaurants compete on quality to the exclusion of price.

Certainly if I pick a random Sydney restaurant I do better than a random Vancouver restaurant.

But I pay MUCH more in the random Sydney restaurant.


Maurice Nistico said...

Does Canada have negative gearing? If no, does that, in part, explain overpriced Aus property?

Anonymous said...

Didn't Mike Fraizer, the CEO of Genworth since the IPO in 2004, lose his job because of the Australian property bubble that is now popping?

Anonymous said...


I too am long Sydney property and wish that I wasn't. Let me explain.

I bought my humble flat in 1996 (due to pressure do so on the domestic front). Most people sitting at a dinner table would say that I have done alright in terms of the increase in the 'value' of the property. But that is nonsense, since it ignores entirely the opportunity cost.

For example, back in 1996 I could have bought WBC shares for say $5.60 per share. Last time I looked, those shares were trading above $21.00 each. Obviously, share prices will fluctuate, but even in what is a fairly low market the capital growth to date would have been satisfactory (ie, had I bought WBC shares instead of my unit).

Further, WBC is currently paying dividends of $1.56 per share. Compared to the cost of $5.60 per WBC share, that represents a net (after tax) dividend yield of about 27%. I don't know of ANY real estate investment which produces a net rental yield (after all expenses and taxes) which comes anywhere near that.

I'm sure your readers could find examples of shares which have not done as well since 1996, but for every one of those I think I could identify other shares which would have performed better than real estate.

I despair about the property mania which has gripped my family and friends. I fear that this will all end badly.

Regards, Nemo

Unknown said...

Canadians always compares ourselves to the US. The US bubble burst at lower levels so Canadians are concerned. I guess we can thank our much better managed banks for keeping the bubble growing.

Anonymous said...

Vancouver is only a regional city, even by Canadian standards...most big business and finance is conducted in TO, Montreal or Calgary. Thus, the salaries and income level don't allow for such home values. This is just bucketloads of asian wealth keeping prices high as they believe its 'cheap' relative to Sings or Shanghai. maybe its all the lululemon millionaires holding the market afloat!

Absalon said...

Richard - it is not that Canadian banks are better managed - they are better regulated.

Anonymous said...

Unlike the US, Canada has no mortgage interest deduction, not sure about OZ. Vancouver is really just a resort city, with backwater jobs. Sure it is a great city for people who don't have to support or house a family. But very few of my friends there had kids... And those who had lived in Surrey.

Anonymous said...

Ferry said "Global property guide is quoting yields of 6% for small apartments and 3.5% for larger apartments."

If you are in New South Wales ( ie Sydney) you pay Land Tax at the rate of 1.6% on the Govt calculated capital value of the land the property sits on.

When you net out all the costs yield is more like 2.5-3.5% which makes sense as it needs to be a premium over the real yield rate you get on Aussie Govt Inflation Linked Bonds ( which run 2-2.5% )

Anonymous said...

John, what do you make of this market?

Prices in Port Hedland and Karratha have increased by 400-500% over the past decade with median prices now above $1m.

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