Sunday, January 31, 2010

Common Wisdom

I hate it, because people accept it as fact without even considering questioning it. Maybe it's because I'm a bit of a contrarian, but when people pass on their little fact-turds, it drive me insane.


You've been there; the polite dinner conversation with friends that turns to the old, "I'm thinking about buying a house/condo" discussion. The prospective buyer goes on about how they WANT a house or condo, but then there's always the "and because it's a good investment" argument tacked on at the end as an afterthought to help rationalize their decision. Inevitably everyone agrees that buying beats wasting money on rent.

Fuck! This is such a gross oversimplification that it boggles the mind. I have no problem if someone wants to grossly overspend on a house because they WANT that house. Go ahead, knock yourself out. But don't try and fucking "justify" your house lust as being a good investment decision to boot.

If you're going to treat a house as both a place to live AND an investment (which maybe you should since it is typically the biggest purchase of most people's lives), then maybe you should try to define WHY it's the greatest investment since Bre-X/Worldcom/Enron/

Usually the "common wisdom" arguments are:

1) House prices will appreciate.

Assuming this was true, what's your expected rate of return? Is allocating the bulk of your assets in housing the best choice, or can you achieve higher returns elsewhere? Does it make sense to concentrate everything you own in your house? The vast majority of people do not ask these questions, because it makes their head hurt.

Second of all, assuming prices MUST appreciate is a BIG assumption, that largely to this point has been true in the long run (mainly due to declining borrowing costs). Most people don't consider the potential risk if housing prices stagnate or God forbid, decline (take a look south). But the housing bubble is another rant...moving on.

2) You're "building equity" vs. wasting money on rent.

OK, that may be true, but you can "build equity" by saving/investing in things other than houses as well. Generally speaking the cost of renting is less than the cost of owning, and if you're saving the difference, guess what, YOU'RE BUILDING EQUITY, and it's a hell of a lot more liquid than a house. Besides, the rate that you "build equity" is going to depend on how long your amortization is, how much you put down, what your interest rate is, etc. Instead of "wasting money" on rent, homebuyers waste money on interest costs, property taxes, maintenance, legal fees, land transfer taxes, realtor commissions. Contrary to popular belief, houses don't self repair and organically grow new roofs, paint themselves, rewire, fix plumbing leaks etc. People "accept" a car as a depreciating asset loaded with future expenses...but somehow not a house.

3) Interest rates are at record lows, so it's a good time to buy.

Is this really a good reason to buy? Yes your cost of borrowing is low (for now), but due to the excessively low borrowing costs, everybody can borrow their brains out to buy houses with other people's money. This inevitably leads to bidding wars, and grossly inflated home prices. Due to the high cost of home ownership people are often forced into taking long amortizations, and often can only put down a minimal down payment. As such, they are highly leveraged and should not be asking "Are interest rates low NOW?" but rather, "Are interest rates going to remain LOW ENOUGH over the lifetime of my mortgage that I can reasonably afford it?"

Rates have nowhere to go but up, the only question is by how much, and how fast. The best part in all this, is that you can actually usually get people to concede the point that rates will rise, but they'll argue that this will take place "slowly".


If I tell you to put your head in a vice (make sure it fits snugly to begin with), and I tell you to keep it there for the next 30-35 years while at the same time telling you that I will probably start to tighten the vice at some point in the future (and I guarantee this, I just won't tell you when, and I guarantee I won't loosen the vice). Do you still put your head in the vice?

Peer pressure doesn't end at adolescence...and neither does human stupidity.

Saturday, January 30, 2010

Monopoly on Information - CREA

The G&M had a decent article today on the barriers that the CREA throws up to maintain their iron fist on all things housing.

“There is a lack of information and a lack of transparency in this industry that simply does not exist in any other industry,” says Bill McMullin, an industry dissident who owns Halifax-based ViewPoint Realty. “The real estate industry may be uncomfortable with this, but once you automate a lot of that data, you circumvent the need for a realtor. Things are changing, and they are changing quickly.”

This is by design, and it's not confined solely to the real estate industry. The lack of transparency in the banking industry is a prime example. The amount of pilfering still ongoing in our neighbour to the south is a good example of why obfuscation leads to a corrupt business model.

A bigger step would be to allow homeowners to list their homes on MLS for a small fee, then negotiate the sale of their homes without the help of an agent. As the process becomes commodified, consumers stand to benefit in lower transaction costs.

This makes perfect sense. The consumer should have the option to pay a fixed cost for a service as opposed to a ridiculous percentage commission. Does a realtor really do 10x the work to sell a $1.5M dollar home than a $150K home? While on the topic of compensation: what incentive does a buyer agent have to reduce the cost for the buyer, as they're compensated on the selling price! Direct conflict of interest?!? Buyer agent's compensation should be tied to the amount saved on the cost of the purchase, not the selling price. Utterly ridiculous.

The real estate industry's lock on information is one reason why the process of buying and selling a home in Canada has changed little since online real estate listings began in 1996, even as other customer-service-intensive industries such as travel and tourism have seen radical technological transformations. An estimated 90 per cent of all home sales in Canada are still done in the traditional manner.

Astounding, that in today's age, with the technology advances of the 00's we're stuck with this. Clearly the CREA have seen this coming and have been fighting tooth and nail for years.

And the CREA's justication for the current system?

With a great database comes great responsibility, he says. An advantage of the traditional system is that anyone using MLS has an agent to help them through what can be a confusing process.

Seriously, the CREA thinks their freaking Spiderman? I wonder WHY the process is "confusing"? Maybe it's because nobody but the CREA has access to any of the relevant information in the first place!


Realtor: "Pay me lots of money because this is complicated."
Buyer/Seller: "Could you explain it to me?"
Realtor: "No! I can't charge you lots of money if you actually know what I do."
Buyer/Seller: "Well that doesn't seem right, I think I'll see if someone else can explain this to me."
Realtor: "Haha, loser, only Realtors know this info, and we won't give it to peons like you, so suck it up and pay us."
Buyer/Seller: "Fuck me."
Realtor: "Gladly!"

Hopefully, things WILL change at some point. Somehow with the introduction of the HST on home prices, rising interest rates, and the eventual collapse of the housing bubble in Canada (that's another rant), I can see sellers getting squeezed. Are they going to continue to pay exorbinant realtor costs especially if they are close to a negative equity situation? I'm guessing "No".