How To Spot A Bubble

More than Location, Location, and Location

What's driving any major real estate bubble is the critical thing here.

I’ve been staying in an apartment in one of the newest buildings in the city, the Fairmont Pacific Rim hotel. A room here will set you back at least $500 a night during the peak summer season (if one is even available). I’m staying in the residential part of the hotel. And it’s the epitome of a real estate bubble. My place is a two-bedroom, 2,000 square foot condominium. Don’t get me wrong, it’s nice. The shower has seven heads, the blinds go up and down via remote control, the view is tremendous... But it’s not as nice as the numbers make it out to be.

You see, this condo was originally bought for $3.2 million. The mortgage on that would be about $18,000 a year at current interest rates. And it’s a condo, so there are all kinds of other fees and costs on top of that. The monthly fees exceed $1,500. The taxes are a few hundred dollars a month, too.

All in all, the cost of owning it is about $20,000 a month in what real estate analysts call Owner’s Equivalent Rent (OER).

The rent, meanwhile, is a relatively small $5,000 a month. So the price-to-rent ratio — a key indicator of real estate values — is an astonishing four to one.

In other words, the cost to own is four times higher than the cost to rent.

This is absurd.

At the top of the U.S. real estate bubble, the average price-to-rent ratio peaked at about 1.65 to one. The long-term sustainable price-to-rent ratios usually hang around one to one or slightly above or below.

When you ask local Vancouverites about real estate prices, they are filled with the same bubble-speak we’ve all heard before:

"It’s different this time... It’s different here... This will never end... Housing prices only go up..."

Good investing,
Andrew Mickey