Of Bubbles and Olympics

Last week, at two different social functions, I heard more people spewing the same old Vancouver talk about how the Olympics have fueled the rise in real estate prices. One person bought a place the day before the Olympic city for 2010 was announced and that was hailed by another as “the best possible day to buy.” Another talked about hopefully leaving Vancouver right before the Olympics (clearly the best time to sell right?). The funny thing about bubbles is that many people start talking like they are living in one. Well the Vancouver Housing Blogger has a lot to say on the topic (see here and here). You don’t have to be the Vancouver Housing Blogger to figure out that the Olympics have had very little to do with the rise in housing prices in Vancouver. Just look around and get out of your bubble for a bit. Just look at this graph of Calgary’s housing prices since 1970:

Oh right, but their housing boom has been caused by the oil sands right? There’s a housing boom in the UK as well:

Well that’s the UK, everything is always expensive over there, right? We can’t forget about the average US housing prices:

Remember what “average” means. It means it is the average of all cities that are hosting the Olympics in 2010 and those that aren’t. Oh, no cities in the States are having the Olympics in 2010 you say? Then why the housing bubble down there? Hmmm… By the way, Peter Mansbridge said last week on the National (CBC) that US had it’s first downward y-o-y (year-over-year) decline in housing prices following months of decreased sales (I didn’t watch the news until today, had it “taped”) which I thought was an interesting statistic.

Clearsight Comment on Current Market Conditions

Today I received a link to a Clearsight “market communique.” It starts off with a little technical charting stuff that I’m not too fond of:

After rebounding nicely from its June lows through the first week of September, the TSX Composite Index has fallen over 4%. As in previous setbacks, the index now stands at a key valuation level that if held might lead to another bounce. In the most recent rally and ensuing downturn however, there has been a general absence of many signals at key price breakpoints for the leading stocks in the index.

See what I mean? I’m not a big fan of “valuation levels”, “signals”, or “price breakpoints”…load of crap if you ask me. No offense to them, I just don’t get off on technical analysis (of stock price charts at least :-)).

Apparently a US slowdown has begun, “For over a year, economists have sounded an alarm that a U.S. economic slowdown would begin, as an unprecedented bull-run in residential housing comes to an end. This forecast has now become reality.”

No big surprise, economists can’t agree on what will happen (haven’t they invented crystal balls yet?):

Some economists and market observers are now predicting an outright recession, while others call for a ‘mid-business cycle slowdown’, i.e., soft landing to occur. Even the more optimistic admit however, that this slowdown will feel like a recession to many people.

There final advice is a bit mixed:

On balance, there appears to be a reasonable likelihood that the economy will avoid recession, at least in the near term. This in and of itself however, may not be enough to spark a genuine rally in the markets. Even so, abandoning one’s investments completely at this point would generally not be advisable for long term investors, not to mention impractical. But, cash is not a four letter word, and finding opportunities to take profits and increase cash holdings in markets such as the current one can help add comfort and stability for long term investors

In essence they provide some optimism, or hope for those who are worried about a downturn, and give some very sound advice, 1) to not sell the farm, but 2) hold some cash, and if you are a bit underweight right now, selling a few equities wouldn’t be a bad thing to do.

Stupidist Thing I’ve Done This Year

Well actually in the past 2 years. In September 2004 I upgraded from an American Express Air Miles card to an American Express Air Miles GOLD card. I have no recollection of why I did it. The only explanation I can come up with is that I somehow thought that there was no annual fee or something. I honestly cannot remember why I upgraded to the GOLD card. I stopped using my AMEX card a couple months ago and have been meaning to cancel it outright (actually I kind of thought I did, ok, so I’m a bit disorganized). Today, I got a statement in the mail saying that I owe them $50 for “Membership Fee.” This next part I feel really stupid about… I called AMEX and asked them why I got charged this fee. The lady didn’t really know but she said according to my account there was a fee, but the call ended quickly because apparently their main servers were down so she couldn’t get any more information. After I got off the phone I opened up Gnucash because I wanted to see if I had been charged this before. It turned out I was charged $50 in September 2005 as well! God dammit I had a $50 annual fee card and I didn’t even know it. I’m so embarrassed about it…anyways, I’m going to pay the $50 fee and cancel the card ASAP.

Bill Miller on Commodities and Market Physics

Here’s a really old article, flagged it a long time ago, and just got to it now: “Bill Miller on Commodities.” How true is that? To make some money by buying things at the right place and the right time (if that is your fancy) you have to be buying things that are in the dumps, things that no one has made money on in a really long time, things that are cheap. It is funny how most humans never figure this out. Part of the reason why this happens is that bull markets can be so prolonged. The other reason I think is that when the big crashes hit, no one has any spare cash around to invest in the cheap stuff because, well, it was all invested, and now you’ve lost it.

One final reason could be that humans seem to have Newton’s 1st law of motion hard-wired into their brains. The law says that an object will not change velocity until a force acts upon it. Humans have a slightly corrupted version of this law programmed in their brains, however. A version that ignores the “until a force acts upon it” part. People forget so easily that there are forces that can cause markets to “change velocity” from upwards to downwards, instead thinking that the velocity will stay upwards (as if the world was frictionless). Inflation, rising interest rates, commodity shortages, natural disasters, a huge shift from the historical mean, war, stupidity, corruption, routine market correction, etc… In fact, in another analogy with physics, you could probably say that the magnitude of the restoring force involved is proportional to how far away from the mean the market has travelled, just like a spring (see Hooke’s Law). In other words, the bigger they are the harder they fall.

I’m curious, what has done really badly in the past few years anyways? What has performed the worst? I did a quick check of index funds using globefund.com‘s fund filter and sorted them by worst performers over the past 3 years. It looks like tech stocks/nasdaq, bonds, and US equities (due to US dollar decline) have been the worst performers in increasing order of better performance. We also can’t forget about cash which also hasn’t performed too well (in never does, but it doesn’t do that badly either, just losing a few percent every year due to inflation). 🙂 What has performed the best over the past 3 years? Well just about everything, energy stocks, gold, Canadian equities, REITs, international equities, European equities, in decreasing order of performance. Anyways, don’t read too much into that, it’s just me playing around. I have a hunch though, that those investments that have performed well over the past 3 years are probably less likely to perform as well going forward.

Aside: Newton himself famously lost 20,000 pounds (in 1720, worth 1.9 million pounds in today’s dollars) on the South Seas bubble.

Monte Carlo Investment Simulation

Many months ago, I saw this blog post about a Monte Carlo investment simulator. I liked it right off the bat because rather than giving exact answers, it gives probabilities of outcomes instead. You can read more about Monte Carlo method at Wikipedia.

A few comments about their simulator:

  • At first I was annoyed that I couldn’t specify my estimated nominal return on my investments. But then I thought, well, they have probably determined the average return of a conservative portfolio over the past few decades and so its probably better that I don’t have the power to change it, otherwise, I might be prone to use an overly-optimisted return
  • They use 4.83% as an expected inflation rate, which “corresponds to the average inflation rate for the period of 1974 to 2004” according to their instructions on their website. Isn’t that a bit high? The most I have ever heard quoted is 3-4%, but almost 5%?
  • I noticed that there is no way to specify a monthly cash flow into an asset. It turns out that any leftover surplus in the cash-flows tab will get transferred into assets (in the same proportion I assume).

I have been playing around with it for a while today and I plan on fine-tuning it a bit more. There are also a few other simulators that the blog post above mentions. Not sure how many of those are free though.

Real Estate Prices Will Fall In Vancouver

Anyone who has any doubt that housing prices will fall in Vancouver should get their head out of the sand. More articles today from van-housing blogger:
Ozzie has the Scoop
Your Daily Doom & Gloom

When the Globe & Mail starts coming out with articles like these you can forget about confirmation bias among the doom & gloomers.

Interesting comment here:

Vanblogger I’ve been following your site with interest. I’m a native Vancouverite in my fifties and I’ve owned two homes on Vancouver’s westside, the most recent of which I sold in late 2005 anticipating a correction.

What I find most interesting about comments here and also in the MSM is how little credence is given to Greater Vancouver’s price history since the late 70’s (i.e. the chart at the top of your blog).

I have a more detailed chart and what it shows is:

1. There have been a number of run-ups in Vancouver, but none more prolonged as this one, and only one more steep.
2. There has never been an instance of a significant run-up followed by a plateau or a less steep upward curve. They have always been followed by a down slope – read, correction.
3. There has never been a correction of less than 15% and its never taken more than 18 months for a drop of this magnitude.

Unless we believe that Vancouver can defy gravity or that history is no guide, we are in for a correction, and in fact, we’ve already started. How far it drops will be a function of how far ahead price increases have eclipsed fundamentals. We all know from credible economic reports that this is a very large gap, ergo, the potential exists for a large drop. My own prediction is 20% minimum.

Your blog isn’t far from being vindicated and the same applies for real estate cheerleaders in terms of vilification.

Here’s a link to the picture at the top of van-housing blogger’s blog.

These are interesting times. I’m looking forward to watching what will happen from the side-lines. It’s not even a question of staying out of the real estate market right now because I think they are overpriced or because I think they will crash (which they will). If I walk into a bank today and ask how big of a mortgage they’ll approve me for, I would have to live in a smaller place than the one I am renting now. Even when prices do come down, it still may not be economical to buy for the square footage we require.