Rethinking MPC Intelligence, Part Two

http://www.flickr.com/photos/hermida/

“Great deals out there” is a 1,006-word commentary written by Jennifer Podmore Russell, the head of a Vancouver real estate market research firm. The stated goal of the article is to provide “simple facts” related to the Vancouver real estate market so consumers will be able to “sort through the fact and the fiction in the months ahead.”

The commentary is built around three “truths” about the housing market. In short, these truths are:

  1. Declining demand has led to purchase incentives;
  2. Buyers have more time to research and reflect;
  3. It’s impossible to predict the market bottom.

These truths aren’t controversial, though some may take exception to nuances like describing purchase incentives as “great deals” as the author does. While some may disagree on the greatness of “free” cars and improved finishings, it’s moot because of the larger, more urgent problems with the article.

The problems have to do with assertions put forward, without evidence or context, as facts. There are four assertions so unsubstantiated I dare to call them falsehoods. Quoted directly, they are:

  1. We also have to realize that this is a very different decline than in the past;
  2. As the financially motivated exit the market the aggressive pricing will settle;
  3. Most of us will only be affected by this correction psychologically as it is human nature to monitor the value of our homes;
  4. Perhaps the greatest advice one can receive is that there is never a bad time to start building equity into a home.

On the first point, Podmore Russell provides no evidence. The statement stands alone as its own paragraph. On what basis is this decline “very different” from other declines? Markets are a function of supply and demand. As demand decreases and supply increases, prices fall significantly. This is what is happening in Vancouver. How is this different?

The assertion that aggressive pricing will settle is also unsupported. Aside from the obvious question of what constitutes “aggressive pricing,” how can the author be sure prices won’t continue to fall? Again, it comes down to supply and demand.

More baffling is the assertion that the correction is mostly “psychological” with little external impact. By the industry’s own data, MLS residential sales in 2007 produced $1.3 billion in B.C. household income. This works out to around $13,000 in household income for every home sold, or one full-time job for every four sales. These figures were touted by the industry when times were good. Are they mythical now that the market is in decline?

The last point, on home equity, reads like something out of an Empire Strikes Back re-write penned by Bob Rennie. Rearrange the words and it’s Yoda. It’s extraordinary to think this is “the greatest advice one can receive” when the advice fails to mention risk tolerance, opportunity cost, price-to-rent ratios or the amortization period of the loan.

It’s one thing to get started on home equity when prices are in reasonable relation to local incomes, and you have a substantial downpayment. It’s quite another to buy at prices grossly inflated from historical norms, do so with little money down, and call it a successful step on the road to home equity. These are not irrelevant considerations, yet they are absent from the great advice.

But perhaps the final sentence is the most telling: “Chances like this only come around once each cycle.” The question I ask is whether a home purchase should be predicated on “chance” rather than a comprehensive assessment of the market and one’s situation. I prefer to leave chance at the casino.

To assert facts is to be able to substantiate them. Podmore Russell’s commentary fails the test. It purports to be factual when, in fact, its most important statements are speculative. Like the expert hype of the boom era, the commentary asserts its authority by virtue of the writer’s status as an industry official. Rather than separate fact from fiction, the article contributes to the noise.

Photo credit: Alfred Hermida

30 Responses to “Rethinking MPC Intelligence, Part Two”

  1. scullboy Says:

    Hey CH:

    Loved your thoughtful analysis. The coming crash is no more than a tsunami that will sweep empty-headed fools out to sea.

    Once they’re gone and the shore has been swept clean, the rest of us can begin to remake out lives. For now though, the wave hasn’t even hit…. we’ve just seen the water begin to sweep out to sea as the wave begins to build.

    Me, I’m ‘a build me an ark, in case it’s a flood and not a wave. They aren’t making any more land and there’s SOME kind of water comin’ in. 🙂

  2. Don Lapre Says:

    Well to be fair, JPod did not give any indication as to whether or not purchasers would be building positive or negative equity.

  3. islander Says:

    1. We also have to realize that this is a very different decline than in the past;

    She’s right. It’s WAY worse this time.

    2. As the financially motivated exit the market the aggressive pricing will settle;

    So only the people who don’t HAVE to sell will try to sell? Neologism in Aisle 5 for cleanup, please!

    3. Most of us will only be affected by this correction psychologically as it is human nature to monitor the value of our homes;

    That would be true if this were 20 years ago. People who didn’t have to sell didn’t get burned. But in a world where we’ve borrowed ourselves to the top of the chimney and where the next step for banks is to start demanding immediate settlement of the mortgage when the term comes due, anybody with more mortgage than cash on hand should be worried.

    4. Perhaps the greatest advice one can receive is that there is never a bad time to start building equity into a home.

    I’d say the greatest advice anybody could receive is learn to be useful and keep your tools sharp. You’re going to need it.

  4. househuntvictoria Says:

    Funny thing about lies: you tell them often enough and you start believing them to be true.

  5. Happy Renter in North Van Says:

    I can’t imagine why anyone would pay nearly 6K for this type of drivel masquerading as analysis… Suppositions and intuitions don’t make up for hard cold facts…

  6. K-Money Says:

    Very well put condohype. A lot of people will be surprised when the market is flooded with condos\houses around spring time. Realtors believe they are thousands upon thousands of people waiting on the sidelines eager to buy. Hmmmm, what happens to the market when you try to sell 30,000-50,000 properties to only 5,000 potential buyers? Down…down…down…

  7. condohype Says:

    The “Great deals out there” piece did not cost anyone $6,000. It was published in the newspaper and is available online for free. Of course, whether it’s representative of the depth of analysis that MPC provides is not an unreasonable question.

  8. mk-kids Says:

    “Neologism in aisle 5 for clean-up” !!! LMAO, thanks islander for that. And Don, you too make a VERY good point. Gosh, I love this site, so many witty smarty pants on here. Great job CH!

  9. Ultraman Says:

    Psychologically affected? If your house drop 20% in value, you are 20% poorer. There’s no two ways around that.

  10. Proponent Says:

    I think CH makes some good points, but i also think i need to provide some clarifications as it seems al the comments are one-sided.

    I need to comments on points 3 and 4.

    What Podmore means by “only psychologically affected” is that you are not poorer if you have no need to sell the property. and your payments are stil the same under a fixed mortgage as they were when you signed. in fact, if you signed a variable mortgage back then, your payments are lower now as the prime rate has dropped.

    A property owner only feels the pinch of the market if they are in a position where they have to sell. i don’t agree with “islander’s” comments. the fact that you borrowed outside of your means is your problem. just as CH says – you should leave the chance to the casinos. if you took the risk of purchasing a home, knowing that you could only afford it if you were able to sell it in a years time that is a mistake on your part. I blame stupid people for that portion. don’t bite more than you can chew.
    I agree with Podmore’s comments that this is psychological. I own 4 properties, i knew that i could afford to carry the mortgages in the long term and that is all that mattered. if i could not afford to carry the mortgage or was completely dependent on being able to sell it in the short term then i would not have purchased.

    I also agree with Podmore’s comments that there is never a bad time to build equity. That doesn’t meant you should go out and purchase the first listing you see. it means that if you do your research you can probably find something that is at a price point that is affordable to you. and that you can afford to hold on to and pay for over a long enough period for the cycle to rebound.

    I do however admit disappointment at the complete “promoter” angle that the article takes. It is essentially trying to convince people to go out and purchase. As CH writes, it would have been more professional to better substantiate the comments made.

    One other comment that should be made is that as you say, the entire market is driven by supply and demand. If, hypothetically, people read Podmore’s article and believed it 100%, and went out there and purchased homes, then indeed it would cause the market to increase. just like the stock market, we create our own market. if we all go out and buy a house tomorrow, then prices will go up, when we all try to sell at the same time, prices go down.

    Thanks for the discussion, CH. As always, a worthy and valuable read!

  11. dingus Says:

    Proponent:

    1. The psychological effect is the flip-side of the wealth effect. How much glee homeowners had opening their last assessment notices! And in turn, how much spending is fuelled by the idea of increased equity! “Only” psychologically effected downplays the pinch felt. Say you bought at 600k, a year later your assessment comes in a 750k. You reno, buy a car, finance the kids education, invest using a HELOC. A year later, your neighbour sells for 575k. What the heck, it’s only psychological! Hey, you’re poorer than you think!

    2. Oh, there is too a bad time to build equity. Specifically, 2008. Probably 2007 and 2009 as well. Possibly 2006, and maybe even 2005. If you bought something at 750k that 3 years from now is worth 600k, well, you haven’t built much equity have you. Even if you paid 100k in rent, you are far ahead of the game having not bought. This is why buyers have been sitting on their hands. Just paying a mortgage is no guarantee of building equity. Pretty simple. Why buy and ride the market down and wait for a rebound, which is what you are suggesting? Why not WAIT and buy when fundamentals make more sense, rather than kissing off equity?

    3. Re supply and demand. Demand is tapped out and supply has ramped up. To borrow freako’s phrase, we have borrowed demand from the future, incomes are less secure, access to debt is contracting. All the exhortation in the world isn’t going to create more buyers with more money to spend on housing.

  12. condohype Says:

    Excellent comments here. I think all well-articulated opinions are valuable. Personally, I have no interest in a one-sided conversation. With all my writing, my goal is to get people to think critically about the market. If this happens, my job is done.

  13. anon Says:

    dingus: if someone leveraged themself that much (reno, buy a car, finance the kids education, invest) based on the anual assessment, they were a hearty fool to think the wave would continue to rise and they would be forever rich.

    That money wasn’t theirs until they sold the property to actually realise the gains on it. Until then, it’s all speculative. They took a ‘chance’ (which is what leveraging is) and it didn’t pay off…

    (On the flip side, they now have a renovated house which I think they would want to stay in for a couple of years now, a new car, kids education paid for, and a healthy investment portfolio.)

  14. dingus Says:

    anon:

    Foolish or not, the psychological effect of your neighbour selling their sh*tbox for 850k is pretty compelling. Lotsa folks in that position thought (and still do) that real estate might plateau, or maybe lose 5 or 10% tops. Almost every home owner, I think, actually, probably thought this was permanent.

    The “wealth effect” has been all too real, and is unwinding savagely now.

    And as for the healthy investment portfolio…

  15. Proponent Says:

    Thanks anon. my thoughts exactly.
    Dingus, i dont disagree with you. There is definately an effect that the cycle has where people think they have more money than is actually the case, and this causes them to spend more. And now, that same effect is making them feel poorer because their house is worth less.

    My point, and i think Podmore’s, is that the change in real estate value, in and of itself, has a psychological effect of making you feel poorer. you are neither richer, nor poorer due to a change in real estate values – unless you want to sell. during the entire period of ownership, the value of the home is purely speculative. you do not actually have more money when your home goes up in value, and you do not have less money when your home goes down in value. if you choose to spend “money” that is not liquid that is your own fault.
    If i too can use an old quote – “a fool and his money are soon parted.”

    If i think i can sell my car for $100,000 and therefore purchase all kinds of “goodies” and then find that the market is only willing to pay $50,000 for the car then i get screwed. that is my fault for not ensuring that i actually have that money before sending it. if you spend money before you have it, you deserve your plight. Sorry to be callous, but it is the truth.

    Same goes for what happened in the United States. those people who took out sub-prime mortgages and are paying for it now should not blame the banks. they knew what they were getting themselves into.
    The banks are at fault only to the extent that they may have misrepresented the package to the customer. But in my view its pretty simple – i borrow “x” and i have monthly payments of “y”. if i cannot afford to make those monthly payments, then i should not be borrowing the money.

    I apologize for bringing another topic into the equation, but i think it is related. because those people who are feeling the pinch, truly feeling the pinch, here in Vancouver, are the ones that actually have to sell. and the only reason they have to sell is because they too bit off more than they could chew.

  16. Proponent Says:

    Also, to CH,

    indeed you have done your job well!

    Cheers and thank you!

  17. Osborne Says:

    What is it about real estate pundits having to use simple catch phrases? The things to consider when buying a house are so much more complex than a proverb. So lame!!

  18. Panda Says:

    There are definitely bad times to build equity. Buy at the peak (or even now), and you might be locked into something which is little more than a tear-down or is an hour or more from the city. Wait a while and you can spend the same money and live closer to where you work and in a nicer place. If there was never a bad time to build equity, then metrics would be meaningless and you should buy whatever you can afford regardless of how unappealing the properties are at your pricing level.

  19. blueskies Says:

    quite simply, you can’t build equity when values are falling…..

    and i won’t charge $5K for this snippet of wisdom…..

  20. Proponent Says:

    Osborne, if you are going to slam the fact that i resorted to a proverb (note that i have written many lines of argument and used 8 words of ‘proverb’) then at least reply with some sort of argument. I should hope you could do better than “So Lame!!”

    anyway.
    Panda, i think your argument is good. i think that both myself and Podmore may have taken a bit of an extreme position in our statements. I think the point I was trying to make is that when you purchase, your asset will ride with the market. if you believe that the market will go down, then you are absolutely right that you are better off to wait. the mistake a lot of people made was they thought the market was going to keep going up and were hoping to make a quick buck by flipping the real estate. i continue to believe that in the long run (and i am talking 10 years plus) you will be better of if you purchase than if you rent.

    before i hear more from the Osbrone’s of the world. i will try to pre-defend my statements.
    firstly, i always assume that a purchaser does their homework. i would caution anyone from “just buying” for the sake of buying. see what the city or community os doing – are the dependent on a particular resources (i.e. the ghost towns we see in movies are not just in movies)
    secondly, i do not disagree that buying at a peak of a particular cycle is worse than buying and the trough. so yes, there is always a better and a worse time. Podmore also never said “now is the BEST time to begin building equity” she said that it is never a bad time, and i think in essence this is correct.
    Thirdly, when i think of building equity I am not talking about buying something today to sell tomorrow. i am talking about actually sticking at it for the long hall and growing the equity within the asset.

    Many people will read this and find a lot of repetition. to those people i apologize. i felt it necessary to make these repetitions, but phrasing it differently in the hopes that those that are blindly against this point of argument will actually see the reason and rationality within the debate.

  21. Proponent Says:

    I was writing the above when Bluskies made his/her comment. but my arument still stands and i disagree.

    lets take an extreme example.
    if i purchase a $200,000 home now with 25% down. and its value drops to $100,00, but i hold onto it and continue to make my mortgage payments. in 10 years when the value climbs back up again to $200,000 i have built equity in the home through my monthly principal payments. (i would never use an interest only loan). the fact that the home dropped to $100,000 has no real effect on me.
    yes, i would have been better off purchasing at $100,000 if i knew that was going to happen and where the bottom/top of the market is. but i didnt, but i still built equity. if my property goes up further i have built additional equity through market condiditons.

    I will not argue that as long as prices continue to drop, one cannot build valuable equity. but this is not a possibility. especially in a place like vancouver, where land is no longer attainable.

    The other point to realize is that the rest of the market dropped by 50% (in my example) as well. so if i sell for $100,00 and purchase another $200,000 home. i am purchasing a home that was $400,000 when i purchased mine.

  22. jesse Says:

    “I also agree with Podmore’s comments that there is never a bad time to build equity.”

    Yes there is: when you risk adjust the return it is absolutely horrible (i.e. bad). Building equity is done because you no longer want to rent money and is sidestepping whether or not you payed too much in the first place.

  23. blueskies Says:

    proponent:
    but i hold onto it and continue to make my mortgage payments.

    my point is:
    you are using borrowed money to buy a depreciating asset
    you are basically renting from the bank and are still
    on the hook for maintenance and taxes…….

    all the metrics spin in the world won’t make a pig fly

  24. Osborne Says:

    @Proponent: I was talking about the proverbs in the J-P-R article not yours. Sorry to get you excited for a whole lotta nothing. She used a proverb about living in interesting times and the experts have a habit of doing this. I think it is used as cover for weak argument in a lot of cases.

    Real estate in the lower mainland is too overpriced. I will buy when prices come down to where there’s no extra charge for owning. It should be close to rent except for having to make the down payment.

  25. Johnnyrent Says:

    Proponent

    Whether its a good time to be building equity in a home is driven largely by people’s financial circumstances. I disagree strongly that it is always a good idea. For some, in this market, it would be a terrible idea.

    Much of this market’s frenzy has been driven by the “buy now or forever be priced out” syndrome which particularly resonates with first time buyers (FTBs). Many FTBs in this market, put little to nothing down and had to stretch their budgets to the max in order to handle loan payments barely within their means.

    Even the most previously bullish local housing economists are calling for continued price declines in 2009 and again in 2010. Up to 18% down over this period according to Helmut Pastrick (six months ago he was predicting increases in both years). To my mind, it would be a very bad idea for a couple with little down and stretched resources to buy into this market now, and risk all of their equity evaporating or being underwater within a year or two of purchasing. Ms. Podmore’s article poses as an objective analysis but it is just another unsubstantiated puff piece by the real estate establishment.

  26. Larry Yatkowsky Says:

    Put the abacus away.

    Economist John Helliwell, with the Canadian Institute for Advanced Research and the University of British Columbia has the answer:

    ” it’s really about confidence”

    Details: http://tinyurl.com/7efahy

  27. Proponent Says:

    blueskies,
    you are missing my point. When you purchase a home using mortgage financing you are always one the hook for the mortgage payments and the maintenance and the taxes. this is the case when the market is going up, down or flat. i dont understand your point relative to mine. if you buy now and within your means, in ten years you will be better off than if you rented until then. That is my point.

    Johnnyrent,
    I agree with you wholeheartedly when you say that whether someone should purchase is relative to their financial circumstances. I said in my argument that one should not purchase if they will be stretching themselves financially. If they cannot afford to purchase now, then they should not. As i said, i believe it is always a good (albeit not always the best) time to build equity. that means that even if they don’t purchase now, it will still be a good idea in a year’s time, assuming they can afford it then.

    I dont put much stock in using the predictions of an economist that was so wrong 6 months ago. If he was wrong before why should i believe him now.

    However, my statements still hold if his predictions are correct. I said “hold for ten years and you will be better off than if you had rented for that period”.

  28. Proponent Says:

    Osborne,
    Thanks for straightening me out. lol. I deserved that.
    I agree that rent vs purchase is not financially feasible today, in Vancouver. If you believe that prices will go down, then it makes sense to hold off until you think prices are more reasonable.
    I never argued that prices would not go down, I am not predicting the short term real estate market in Vancouver, I was predicting the long term market.

  29. jesse Says:

    “f you buy now and within your means, in ten years you will be better off than if you rented until then. That is my point.”

    I fail to see how paying a 50-100% premium to own today is better off than renting, even if 25%-50% of that increases equity. If your point is that if you have already purchased then your debt load is sunk cost, then fine it’s often and close to always a good time to reduce debt.

    We should separate this scenario from a prospective buyer taking out a loan on an overpriced property then using the logic that they’re building equity so it’s all good. It’s not.

  30. nancy Says:

    MPC Intelligence was started by a major vancouver marketing real estate company.
    It is safe to say that they likely still have some very heavily controlling interest in it as well.
    Do a little research into what MPC actually stands for and see if you still think its a unbiased company.

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