But this is only true if the people who buy these places never plan to sell or rent to the local people at some point in the future. If they are speculating on rising rents or prices, then it’s a bubble, IMHO. It might take a while to pop, but chances are pretty good that prices cannot stay out of whack forever.

Excellent article. Good find FG. Firstly, I’m not absolutely certain what the author means by “[It] doesn’t necessarily mean there’s a bubble”. If he means that local conditions aren’t the cause of the high home prices, then he is probably right to an extent. If, on the other hand, he means prices aren’t in a bubble because foreign buyers are aware of the risks or losing capital, and for them as a group prices are not out of reach, I’m not sure the statement stands up. There are so many definitions of bubbles, but I like the one that apparently gave rise to the term. Air! That sums it up really. It certainly sounds like prices are being highly inflated in Vancouver, over and above what you’d normally expect given incomes, rents etc, so I’m going for bubble, or bubbly/frothy.

Asians do seem to favor RE over stocks, probably because their own stock market is not as developed, and they mistrust it. I’m married to an Asian so I have some insight. But this is true for many countries, and I expect that what we are seeing in not just capital flight from developing countries in search of bricks and mortar in developed economies, but rather a lack of understanding of financial products and few investment opportunities in their own countries. You can argue that since many foreign-buyer purchases are with cash, there is less chance of a spiraling crash, but nobody likes to lose money so there may be a pull back if prices reach a tipping point. Presumably the other 50% of buyers have been local and likely have used mortgages, which could be enough to put downward pressure prices.

The more interesting question is what can be done, or should anything be done? If lenders get nervous then it’s probably time to run for cover. If is threatens to derail fragile economic recovery then it poses a threat, and you might expect taxes become the weapon of choice. I hope fingers get burnt, because it is pricing out people who work for essential services in cities, and FTBs. The central bank of England, the Prime Minister, and one of the biggest UK lenders recently made public statements about their concerns over high prices in London. That must be the first time that our ‘leaders’ are calling it what it is before it has happened. Perhaps they are trying to preempt a pop by creating a self-fulfilling fizz.

[quote=joec][quote=CA renter]But this is only true if the people who buy these places never plan to sell or rent to the local people at some point in the future. If they are speculating on rising rents or prices, then it’s a bubble, IMHO. It might take a while to pop, but chances are pretty good that prices cannot stay out of whack forever.[/quote]

Not sure how representative this is, but 2 Asian families close to me are renting out their houses and haven’t sold…Growing up, my dad also nearly always just bought and held renting the properties out.

I think “Asians” in general trust real estate more than stocks/bonds/financial advisers, etc…so they are more likely to buy and hold for their kids, use as a vacation home, possibly use in case they have to leave China/Taiwan, etc…

Some of the other Asian people here can voice their opinion, but I don’t think all the Asians with how they pool their money tend to sell as quick in general…

People who held in areas like the bay area/cupertino/la are sitting pretty well.[/quote]

Right, but are they renting to locals, or to other foreigners who are coming in with money from somewhere else? Someone who bought cash can accept lower rents than a LL who is maxed out on the mortgage because the mortgaged LL could easily be underwater every month on his “investment,” especially if rents go south or some major repairs are required.

The Chinese family who bought with cash can accept a 3% return, and that might be just fine for as long as all other investments, especially “risk-free” bonds, are yielding practically nothing. But how long would they be willing and able to hang on if 10-year US Treasuries are yielding 6% or 7%, or more? And what if rents go down at the same time, and they’ve had a few bad apples as tenants? What would you do?

[quote=AN][quote=CA renter]The Chinese family who bought with cash can accept a 3% return, and that might be just fine for as long as all other investments, especially “risk-free” bonds, are yielding practically nothing. But how long would they be willing and able to hang on if 10-year US Treasuries are yielding 6% or 7%, or more? And what if rents go down at the same time, and they’ve had a few bad apples as tenants? What would you do?[/quote]
When’s the last time you see US Treasuries yielding 6-7% while rent went down? If Treasuries yields 6-7%, what kind of appreciation do you expect from housing?[/quote]

In the late-90s/early 2000s, 10-year Treasuries were yielding over 6%, and rents were going down in certain areas. In other areas, rents were stable. They really didn’t start climbing dramatically until around 2005. Also, the early-90s, mid-90s, and pretty much everything before that until you get to the 60s, when rates were lower. These low rates are anomaly, historically speaking.

If rates go that high, I expect housing prices to fall, not rise. Unlike the supply-siders, I think that rates can (and will!) rise not only when the economy is strong, but when the economy is weak. Note what happened once the credit bubble started bursting in ~2007. Rates were going up as defaults were mounting, which is why the Fed/govt intervened. Note what happens in Europe when defaults are expected to rise and the economy weakens…interest rates shoot up, not down.

The 70s and 80s were an anomaly because of the Baby Boomers who were entering the workforce and peak buying years, and along with that, women were entering the workforce en masse. IMHO, those two trends alone were largely responsible for the inflation of the 70s and 80s.

I just don’t see any reason for incomes to go up unless the govt modifies our tax and trade policies. With corporate America’s strong grip on our govt, I just don’t see that happening (though I wish it would!).

No, the mid-late 90s had a bubble. 🙂

The 70s and 80s were an anomaly with respect to the Baby Boomers and having such a huge additional influx of American citizens — who were as prosperous, and ready to work and spend — into the workforce. There was no other period like it.

IMO, these demographic changes were the primary reasons behind the inflation of that time, though some would also point to Nixon’s dropping the gold standard for the dollar, too. It was a volatile mix.

One thing I don’t think a lot of Americans “get” is the immigrant mindset…

What happens if you get a bad renter? What happens if this or that? The whole immigrant mindset and why it’s different for them is because a lot of these people had a much tougher life where they came from…I grew up wearing Trax shoes from K-mart and hand-me-down clothes looking like a goofball/fob/geek…I didn’t even know it…

A lot of immigrants don’t have the whole “entitlement” mindset so prevalent in American society now of keeping up with the Jones and looking cool.

Growing up, we knew families who were saving well over 50% of their income and buying a house every other year. I don’t think they care if their returns are as high as stocks since they just don’t trust that market.

Also, for real estate, if you buy in a “good” area, I don’t think a lot of these immigrant (Asian) buyers care that much since as in the past, I’m sure all the people who bought in Cupertino, parts of LA are sitting pretty. Also, Asians like to live next to other Asians and get their weekly dose of eating out/dim sum, you name it so they will continue to buy I think.

We’re not talking about Las Vegas, Phoenix or places that people don’t “really” want to end up…but buy in a family area that people want to raise their kids and if you are patient, I don’t think these buyers are the weak hands people think about. This has been true for most prime areas (SD, I don’t think is as prime though as LA/Bay Area).

Again, maybe I’m very biased with what I’ve seen, but nearly every Asian I know had family help buying their house and we’re talking of properties all over a mil in the bay area…

When money is pooled/shared and used to buy real estate, from my experience, it’s strong hands and it’s unlikely the parents of the kids are going to kick them out/be forced to sell. Heck I know of cases in my own close family where this is done already.

I’m sure if you look at property prices in Del Mar, La Jolla, anywhere considered “top”, it has also always been considered “overpriced”…

As mentioned in Rich’s article, it may lag a bit in terms of nominal prices, but I’m not too concerned long term really since there is so much wealth outside of the US and some of these dollars need to leave their original country for safer places to park it.

It’ll go sideways maybe, but again, as I’ve said before, rents are still way too high in a lot of areas so until that goes down, I don’t think foreign buyers with a lot of cash currently getting 1% on their money is going to worry as long as they are making more in rental income.