Tide of Money

BALTIMORE – Another indecisive week in the markets. China did not blow up. Energy company debt did not melt down. And investors did not panic in the face of a slowing world economy, falling corporate earnings, and central bank absurdities.

This morning, all is well. But nothing fails like success. Throw a lot of money at any market, and you are asking for trouble. Today, readers are urged to check their real estate holdings.


vancouverVancouver at dusk…

Photo via fourseasons.com


Last year, more than one-third of the houses sold in Vancouver went to Chinese buyers. All over Canada, the story was similar… though not as extreme. Houses are being sold to people who may or may not intend to live in them.

That was great, if you were selling a house. A tide of money rushed in… House prices rose. But tides go both ways. They come in… and go out. And if you are counting on your house to hold its value… watch out.

Housing is normally more stable than the stock market because tides in the housing market are slow and relatively weak. As Nobel Prize winner Robert Shiller explained in his book Irrational Exuberance, contrary to popular belief, there is no continuous long-term uptrend in house prices.

As Shiller puts it, most of the evidence “points to disappointingly low average rates of real [inflation-adjusted] appreciation of most homes.” This makes sense. People do not readily “flip” or speculate with their homes.


1-January-1977-to-2016-REBGV-Price-ChartReal estate prices in Vancouver, long term. The word you’re looking for is “insane”. Then again, if one looks at various charts of money supply growth across the world (including Canada’s domestic money supply), it becomes clear that it is not the real estate market that is insane. It is the guys supervising the printing presses who are – click to enlarge.


You can sell a stock with the push of a few buttons. But moving a household is a pain in the neck. It involves packing up, organizing a mover, settling up on utilities, saying goodbye to neighbors, and so forth.

But when the guy next door is not really next door, his house is not really a home. It’s a floating, speculative hedge. And if you never move in… moving out is a breeze. All it takes is a change in taxes, regulation, or the markets… and you’re outta there.


Super Luxury

Real estate hotspots have seen a lot of phantom buying over the last 10 years. In London and New York, for example, you find entire apartment buildings where no one is home. You can tell. Just look at them in the evening. Often, only the elevator shafts and hallways are lit. The apartments are all dark.

Both cities are now seeing softness in upper-end property prices; perhaps the tide has turned. Top Manhattan apartments sell for more than $4,000 a square foot. At this level, a 1,200-sq-ft two-bedroom apartment sports a $4.8 million price tag. “Super-luxury” space… one small step down from the top… sells for nearly $3,000 a square foot.


2-Monthly_Manhattan_development_site_sales_volumeMonthly Manhattan development site sales – a sudden slowdown from the heady pace of 2015.


The law of supply and demand works in real estate as in other markets. But it is slower to express itself in bricks and mortar. As prices rise, developers (who were burned badly in the last building spree) keep their eyes warily on the market. First, they don’t believe the higher prices will last. Then, prices go higher… and memories fade. Eventually, builders become confident again.

It takes years between the time a decision is made on a major new apartment building and the time the doors open – time in which prices can rise even further. But when the new product is put on the market, the tide goes out like a crowd leaving a football game. The exits jam up with eager sellers.

That appears to be happening now in New York and London. Sales are slow. Markets are crowded with empty units, advertised at fulsome prices.


Bargain or Bomb?

Meanwhile, over on the other side of the country, in Silicon Valley, the poor wizards of the Internet are having a hard time making ends meet.   Palo Alto is proposing giving housing subsidies to people who, almost anywhere else, would be considered rich. Here’s the report from London’s Daily Mail:


People earning $250,000 a year should qualify for subsidized housing in Palo Alto, according to a new proposal. City officials have outlined an eight-year affordable housing plan – with 587 units for reserved for the area’s uniquely wealthy middle class as real estate prices balloon…

With house price averages an eye-watering $3 million, even those earning $250,000 a year are spending two-thirds of their monthly salary (about $14,000) paying off their mortgage.


If the newspaper was trying to impress its readers with a lurid picture of urban excess – a photo the “tear down” house sold recently for $2.7 million – it probably missed its mark.


3-London House PricesLondon house prices – another extremely extended market (note the tiny 2008 crisis blip- that was all it took to bring down nearly the entire financial system!) – click to enlarge.


Londoners are used to excess in their property market. In 2014, one apartment overlooking Hyde Park was reportedly sold to an unnamed Russian for $237 million. At 16,000 square feet, that is perhaps the most expensive ever: Each square foot cost nearly $15,000.

A bargain? Or a bomb?   We don’t know. But we offer the same advice we gave readers 10 years ago: If you were planning to sell an appreciated property “sometime in the future,” this might be the future you were waiting for.   Sell it. Buy something cheaper. Put the difference in gold.


4-London House Price to Gold RatioLondon house price relative to gold – not quite as hot, since they haven’t gone anywhere since 1998. In other words, nominal house prices largely reflect monetary inflation – click to enlarge.


Charts by: Real Estate Board of Greater Vancouver, The Real Deal, Sharelynx


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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4 Responses to “Time to Sell the Family Home?”

  • wmbean:

    My friend is in the same situation so many retirees were in California in the seventies before Prop 13. He can’t sell without being hit with a big chunk of tax on the proceeds and he can’t afford to buy a replacement in a great many parts of California. For me, my place cost me 50K on a VA loan and with a little remodeling I could sell for 50% more than I paid with no tax bite. Eventually CALPERS will fail when outflows exceed inflows. As it is, it will take more and more tax money to keep the retirees living high off the hog while the ordinary folk foot the bill. Very soon my friend will be locked into the situation where he eventually loses what “worth” he has in his house. It makes a big difference where you live, especially retirement. Paradise ain’t cheep.

  • FreemonSandlewould:

    Finally! A actual point from Bill Boner.

  • wmbean:

    Ah, houses, quite an interesting development of late. My friend in Santa Cruz bought a two bed bungalow in the mid eighties for about $150,000, if I recall correctly. It was an older property built in the late forties with a detached garage. Now he recently had his bubble burst because he wanted to turn the two car garage into a mother-in-law suite. His house is worth about 685K at the moment but his tax based is $245,000. The building permit would set him back $35,000. As it stands, the house is in need of remodeling and repair. The only reason he can afford to live there is that his mortgage is paid off. Out side of basic repairs, anything he does will raise his property tax to the point where he can’t afford to retire in the next year or two.

    Me, I bought a three bedroom bungalow (1950 model) in 2013. Got a VA loan at 3.75%. Been doing some improvements and remodeling. Payment is still below $400 a month. Texas is cheaper than many other states. But that is the problem, isn’t it. Northern California is a nice place to live but who can afford it? Meanwhile, Forth Worth ain’t a bad place to live. As it stands, if you live on Social Security you can’t even afford to be homeless in California.

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