Calamity on the Creek

I enjoyed reading the updates on the Olympic Village fiasco at Frances Bula and Condohype.

What I found striking in reading Bula and other journalists is that what they consider the 'worst case scenario' for the condo market is actually *still* pretty much in the lands of hopes and dreams. The scenarios they seem to be running are things like 20% off pricing, or waiting 2 or 3 years until the market 'comes back.' What I find striking is how people that are intelligent and presumably well-informed seem to be unable to clearly see where this market is going.

Here's one thing that Frances said:

Being a fence-sitter, as my loving critics like to call me, I find myself as unconvinced by those who say (with considerable glee) that the housing market as we knew it will never EVER return to anything near what it was as by those who thought condos would keep selling like cheap underwear at Wal-Mart.

What does she mean by 'what it was'? Yes, people will continue to buy and sell condos. At some point, sales will rebound. They will in fact again sell like underwear at Walmart. But at what price? Does she mean 2007 pricing? Of course, in nominal terms this will happen at some point, but not any time soon.

Here's how I see it. No, prices will not fall forever and they won't fall to zero. Instead, with speculators out of the market, the bottom for prices will be set by cash-flow investors and/or rent vs. buy residents. If these people need, say, a 7% gross yield on investment, then in order to get $1000/sf (which is the number bandied around as break-even for the Olympic Village), we need to see rents at (1000*.07/12)=$5.83/sf per month. This means that a 1000sf condo rents for $5830. Now, the Oly Village might be nice and ultraluxury and all that, but I think it will be awhile until incomes rise to allow $5.83/sf.

Now, maybe one of these assumptions is wrong. Maybe speculators will return to the market and blow a new bubble. Could happen, but I doubt it will happen in the next few years. Maybe investors don't need 7% gross. I don't know. But I'm pretty sure that, while not forever, it will be a l o n g time before rents justify $1000/sf.

Look. It's as simple as this graph. Forget the politics. Forget the legal mumbo jumbo. Forget Bob Rennie's new age condo spin. What people are apparently still not getting is that a 'return to normal' does not mean returning to 2007. It was 2003-2007 that is the anomaly; not 2008-09.



[note: updated graph to Q3 2008. Data here.]
UPDATE: Here is Gary Mason in today's G&M. My impression of Mason is that he is a hard-nosed, cynical journalist. Yet he is still caught in the hype:

The city may be able to take the long view and hold on to unsold condominiums until the economy and real-estate market turn around and the value of the units returns to something resembling what they were expected to be about now.

Then again, that might not be for another six or seven years. No one knows.

See, his worst case scenario is that the market recovers to 2007 wish prices (not actual prices, but the 2007 presale wish prices) in 6 or 7 years. Not. Going. To. Happen.