Friday, February 10, 2012

Real Estate Bull Insists Rents Should Not be Adjusted for Quality

And he calls it a "fallacy". Awesome. So noting this one.

Analysing Toronto’s Real Estate Market: How Can So Many Be So Wrong?
Because this is the largest credit bubble in world history, maybe and therefore utterly unprecedented?

Oh, nevermind, Mr. Pasalis does not acknowledge the impact of credit on prices. I see given his little list of things that impact prices. (Hint: it is not the same as low interest rates. Interest rates were formerly used as a mechanism to control appetite for credit, but that does not make it a requirement to control access to credit. They really are independent. With regulation, that is. What we have is a massive symptom of lack of regulation.)

Also, if the house price gains were real wealth, they wouldn't be balanced out on the other side of the equation by an equal gain in debt. Think about it.

These new condominiums are completely different in size, style and condition from old purpose built apartments. They are usually in more premium locations and have modern finishes and amenities that you do not find in an older apartment building. As a result, condos will usually rent for roughly 40-50% more than older apartments.

Condominium rentals are not a luxury upgrade that only a select few choose. This is the new standard in Toronto's rental market. With vacancy rents hovering around the 1% level in Toronto, most renters have no option but to pay this premium.
The vacancy rate right now is 1.4%. (More accurate given the huge error incurred in rounding to actually include that digit, btw.)

But you need to take it to the next logical step. Given the ultra low vacancy rate and the ability to double and treble up in these amazing new standard flats of glory, why haven't rents gone up more? You're crying foul because rents have remained commensurate with quality. If your thesis were correct here, they would have exceeded it. Greatly.

I'm just glad this guy isn't talking his book. Ehem.

Related Links: Ontario Vacancy Rates


jesse said...

I was astounded seeing the maths on a few newly-built condos. The strata fees are killers. Some condo investor was explaining to me how cap rate was rent minus strata fees and taxes.

GG said...

Even with the U.S. Bubble so fresh in my mind, I still can't seem to avoid being surprised by the craziness going on.

Kudos to Canada on that, at least.