Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

vreaa is taking liberties with this ‘end-of-the-decade’ note by departing from archiving anecdotes and instead posting a prediction:

A remarkable decade comes to a close. The dot.com bust, 9/11, the US sub-prime housing mess, extreme loonie volatility, failing forestry, commodity roller-coaster rides, the stock market crash of 2008, global recession. Each of these events affected Vancouver’s economy in an exceedingly limited fashion. The strength of the Real Estate market saw us through, and RE was without doubt the social and economic story of the decade. Now, factors threatening market health have steadily accumulated, and in our opinion they are approximating a critical mass. A virtuous cycle is about to turn vicious. All evidence suggests that Vancouver Real Estate is heading for a very significant bear market. Unfortunately, conditions have become so distorted that a simple return to normal will have profound and prolonged consequences for our city.  The coming housing bust will effect all Vancouverites, and the fallout will not be good. For our city, this RE crash will quite likely be the defining social and economic event of the next decade. The factors in the drama are distilled below. Comments welcome. – vreaa

.

‘The Vancouver RE Bubble And Bust’

.Act One – Background Stories:

“Best Place On Earth”.

“Running Out Of Land”.

Chinese Economic Growth.

Wealthy Foreign Buyers.

2010 Winter Olympics.

Grow-Ops; “Multi-Billion Dollar Underground Economy”.

“Real Estate Always Goes Up In The Long Run”.

Free Money; Government Distortion Of Lending Risk.

‘Affordability’ Based Solely On Monthly Carrying Cost.

“Prices Are Going Up”; Bidding Wars.

RE Dominates Social Dialogue; “My Neighbour Made 10 Years’ Salary Flipping.”

Uncritical Media; Vested Interests; Government Compliance.

“Buy Now Or Be Priced Out Forever”, Buying Panic.

Housing Predominantly Valued As Wealth Accumulation Vehicle.

.

The Major Players:

Overextended Local RE Owners.

Local Investors; Households That Own Two or More Properties.

Housing-ATM-Syndrome Sufferers.

Developers, With Lots Of Product.

Speculators, Waiting To Run For The Exit.

Boomers, Waiting To Cash Out For Retirement.

Equity So Life Changing, I’ll Cash Out Soon

Foreign Investors, Who Have As Yet Seen Nothing But Vancouver Gains.

.

Act Two – The Stage Is Set; Current Conditions:

‘Rent to Price’ and ‘Income to Price’ Ratios At Historic Extremes; Both Suggest Housing > 2x Overvalued.

Ownership Levels At Record Highs.

Slow Economy, Strong Loonie, Moribund Industries.

Rising Unemployment, Negative Savings Rate, Dropping Disposable Income, Household Debt.

Misallocation of Capital.

Demand From The Future All Used Up; Depleted Pool Of FTBs.

Adequate Supply.

Olympic Rental Market Underwhelming.

Double Top On Technical Analysis (For What That Is Worth).

Irrational Local Confidence; “We’re Different”; Complacency; Bull Hubris; Bear Capitulation.

.

Act Three – Coming Action:

Dropping Rents, Increasing Vacancy Rates, Worsening Fundamentals.

Mortgage Terms Tighten; At Least 10% Down, 30 Years Maximum Amortization.

Post-Olympic Blues; Olympic Nomad Exodus; Post-Olympic Supply.

Spring 2010 Supply.

Rising Interest Rates.

Price Falls Commence.

Speculator Supply.

Rising Taxes, HST.

Prices Drop Below Jan-Mar 2009 Trough Lows (15% Off).

“Prices Are Going Down”; Dearth Of Bids.

Foreign Investor Supply

Boomer Supply.

Seller Urgency; Irrational Fear.

Stagnation; Multi-Year Bear Market; BC Economy Struggles.

RE Vacates Social Dialogue; “My Neighbour Lost Everything .”

Housing Predominantly Valued As Shelter.

Prediction 2010-2019: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

VREAA will continue to collect stories from the Vancouver RE Bubble ‘n Bust. Please post or e-mail stories from the trenches. The majority will be headlined. The blog posts read like a chronological series of stories. The category and tag sidebars allow you to access specific types of stories. -vreaa

[update: 31 Dec 2009, ‘Foreign Investor Supply’ added]

Related posts:

Regarding the possible relationship between Vancouver RE and Chinese stock & RE markets [27 March 2010].

The Stigma Of Renting In Vancouver [26 May 2010].

Price Drops Will Beget Price Drops [11 August 2010].

Regarding debt & the bubble, Two Charts: All You Need To Know About Canada’s Housing Bubble [26 August 2010].

A Housing Crash Rescue Cannot Be Legislated [6 Sep 2010].

Five Charts: Predicting Future Vancouver Housing Prices [11 Sep 2010].

Stealth Speculators & Shadow Inventory [17 Dec 2010].

“As frustrating as it may be” on the Wrong Side of the Bubble, the Bearish Position Remains Right [24 Jan 2011].

Disillusion Row, Numbers 1-12: Distracted and demoralized locals, many thinking of leaving. [2 Feb 2011]

On Government Intervention [16 Apr 2011]

The Third Fundamental: Total Housing Market Value to GDP – BC in the Stratosphere [7 May 2011]

It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That. [18 May 2011]

Misallocation Of Human Capital During Speculative Bubbles – “What do you call societies that depart from meritocracy? What tends to happen to them in the long term?” [30 May 2011]

Was that it? ‘The Top’? [Possibly] [12 Oct 2011]

Land: Not Making Any More; Don’t Need To [9 Dec 2011]

Denying The Obvious Bubble – Close Your Eyes; Think Happy Thoughts; Don’t Use Nasty Words; Bad Things Will Go Away [7 Jan 2012]

Regarding the over-dependence of our economy on the property sector. [19 Jun 2012]

27 responses to “Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

  1. all in all a sobering reminder of what is and can never be….
    :-)

  2. Well said, that’s exactly what has and what will happen.

  3. A bold prediction, vreaa. Not too many sharks left to jump.

  4. pricedoutfornow

    Waiting….waiting….will it finally happen in 2010?

  5. vreaa,

    You are doing a valuable service for future generations. Keep up the good work as future historians will surely dissect your work to understand the mass dementia which takes place here.
    Best regards

    arit

  6. Vancouver real estate prices will never go down, ever.
    They will rise at 10 to 25 % per year forever. This will never stop.
    This is because Vancouver is very, very special. We do not have a homeless or drug problem, who ever is spreading those rumors is simply blind to the truly unique specialness of Vancouver.

  7. Vancouver is also very special in a sense that it does not have a job market, unlike many other cities in the world. So when price goes up 25%, I wonder who can afford these homes. The homeless perhaps.

  8. Who needs a job market when you can buy and flip real estate your way to become a multi-millionaire?

  9. As much as I’d like to agree with this laundry list of things that might or might not happen, I can’t say that I do.

    I’m usually bearish but have started wondering how this list differs from what Fish posted two years ago, or VHB four years ago. If there’s one thing that I don’t see addressed above it’s demand. Ceaseless & consistent demand.

    I can’t say whether or not foreign demand will subside after the Olympics. Can you? For all I know, we may be on the verge of a 20-yr tide of extreme wealth in the BRIC countries looking to park their money here for a decade or two. Maybe oil will hit $140 again and Middle Eastern investors, many of whom have already invested here, will keep on keepin’ on. Or perhaps, FTBs will continue to get cash from their folks for the next 20 years creating a transfer of wealth from the ‘Greatest Generation’ to the ‘Generation Sucked Into Paying Too Much for a Home’.

    I don’t mind reading an analysis but to say that ‘all’ the ‘evidence’ points to one thing and then not to examine the other side seems a bit silly to me.

  10. vomitingdog -> Thanks for the comment.

    You are rightfully questioning how we can disregard the ‘ceaseless and consistent demand’ argument, the argument that “Vancouver is the Swiss Bank account of International Real Estate”.
    Versions of this position have been highlighted in prior posts, as voiced by James Schouw, ‘Vancouver Rocks’, Bob Rennie, and Maggie Chandler, amongst others.

    Obviously, any ‘prediction’ is essentially an opinion, as most people are looking at the same information yet drawing differing conclusions.
    In my opinion, the scenario that I have sketched out above has a >80% probability of coming to pass, in one form or another. There are alternative scenarios such as hyperinflation, perverse government policy, or global Shangrila status, that may lead Vancouver RE prices forever upwards, but (again, only in my opinion) those scenarios all have low probability of coming to pass.

    On the way up, demand always looks ‘ceasless and consistent’, but demand can also be extremely fickle, especially when much of it is predicated on rising prices.

  11. Very nice synopsis, I agree with most of it but I don’t know what you mean by “Double Top On Technical Analysis”.

    I’d also add another point to Act Three, that the city of Vancouver is on the hook for the Olympic village for hundreds of millions in direct loans and something like a billion in loan guarantees.

  12. Jordan-> Thanks for the comment.
    If you look at a Vancouver RE price chart, you’ll see that we have peaked once in July 2008, gone down to a trough in early 2009, and now climbed to a second peak that is about at the same price level as the July 2008 peak.
    This formation is known as a ‘double top’ in technical analysis. If prices start falling from here, they may go down a long way. The idea is that the market ‘retested’ the highs and failed to break through (in this case, despite money being a lot cheaper than at prior high).
    I say ‘for what it is worth’ because a double top doesn’t necessarily always fail. If we march on to new highs in a very decisive fashion, that will, obviously, be bullish.

    http://en.wikipedia.org/wiki/Double_top

    Image here:

    As pointed out in the first link, the crucial level here is the depth of the trough. If prices drop below that, ‘look out below’.

  13. Its a behavioral finance theory. Basically the “re-testing” idea is that people are more likely to cash out at that point because people that bought at the last top were previously underwater on an investment but can now break even and relieve themselves of the stress. So at this point selling is stronger then usual making it a “line of resistance.” I’m unsure if that applies to housing the same way as equities (probably not as strong)….. ah well, one way to find out …. :P

  14. I wonder what will happen with RE prices in Victoria ?
    Vic has recently been proclaimed “unbelievably unaffordable” (or whatever the technical term is), just behind Vancouver in an international ranking. Two of the most unaffordable places in the world.
    Any thoughts on Vic ?

  15. vreaa: You don’t even have to believe in technical analysis to support the notion that a price drop is just around the corner. The double top formed because lusty Vancouver buyers were given low interest rates and CMHC insurance to roll the dice with.

    Prices might start falling even if those things aren’t taken away – but they surely will fall when the low rates and CMHC disappears.

    Around the world over the next few years it will surely become common practice for governments to remove support of the housing market, because people will eventually come around to the realization that they won’t have a job unless money is spent on other more productive things.

  16. Rocker -> thanks for the comment.
    Essentially, I agree with all you’ve said.
    Bubbles don’t need precipitants to pop, they can and will eventually collapse under their own weight. Like any pyramid scheme.

  17. Oh, You are ABOUT to have a homeless and drug problem the likes of you NEVER dreamed possible!! All CREATED by morons like you.

    Its sad that you couldnt learn from the US’s STUPID mistakes.

  18. @william In your comment, to whom does “You” refer? Thanks for the clarification.

  19. Scott Beesley

    I would note that in the case of California, Florida, etc., people had the same beliefs about the special nature of the place. I am from Vancouver and I agree, but that doesn’t make it immune to math. In the U.S., lenders kept tossing out money for the same reasons they are still doing it here – the mortgages were either sold immediately or were fully insured by the government. But even that comes to an end someday, when many buyers cannot make the payments they have agreed to, and default. B.C. will be the same. Imagine being a Canadian banker now, knowing that when you finally cut off the lines of credit of all these people, you will start the down cycle/defaults/strategic walks/foreclosures, and so on. They have enjoyed being seen as prudent, so it will be no fun to finally face the music. Good luck to all because this will not be pretty. Finally, I really resent my tax money being put at risk to back these stupid purchases, and cover the hineys of the banks. Why should I insure the banks against losses on a $1,000,000 Van house that is actually worth $480,000?????
    Bye for now!
    Scott

  20. Vancouver used to be a great city. I left a few years ago as the character was sucked dry by the speculators and their pretend games. Everyone knows you are not really rich. The games are only fooling yourselves. Like everywhere else in the world the music will stop and they very bank that has been feeding you will pull your chair. That is after all the real game that is being played and you are the ones being played.

    Maybe once the dust settles Vancouver can go back to having some character. Right now it’s all Starbucks and the Gap. People having Lattes by day then visiting various versions of the Roxy at night. Cookie cutter madness. White guys chasing asian girls and a huge homeless/drug problem that knocks on everyones car windows daily ….. or should I say smashes everyones car windows?

    I loved Vancouver but the carrot and cart game is too much. It will come to a vicious end. Then what? A bunch of babies will cry. Boardwalk will have many new renters in their west end dumps, that’s for sure.

  21. If you want a scary walk….come with me to see what has happened to DT Vancouver. The drug dealers are El Salvadoan and they are all from the Salvamaratrucha, or M13… these guys scare everybody…the dregs. That, added to the mushrooming illegal Mexicans who a bussed here from the States….by the hundreds….and buster, you have a real problem.
    Guns. Lots of them, and these pachuchos will use em.
    The Angels and the Triads run the docks and YVR – ask the RCMP how frustrated and outgunned they are. I respect the Cops mightily, because they are way outmanned and in deep water.
    This city is not fit to live in, in many quarters.
    The downturn will blow feral winds here, and soon. Very scary.

    • 和谐的房地产泡沫

      i spent the night in the main/hastings drunk tank several years ago

      we were surrounded by honduran crack dealers

      fucking terrifying

  22. @mack: Since no one responded to you, I’m happy to pass my opinion along with regard to Victoria.

    Victoria is not nearly as overheated as Vancouver. Houses in James Bay, a relatively nice neighbourhood, very close to downtown still average under a million dollars. Furthermore, the bidding wars and crazy over-payments are much less frequent in Victoria. Finally, consider that a large portion of the RE owners in Victoria are retirees, and not working people; these people bought their houses for cash many years ago and will likely stay in these houses until they die. Therefore, I predict that Victoria will weather the coming crash much better than Vancouver. Sure, prices will go down, no doubt, but mass foreclosures are much less likely.

    • @JP I actually think it’s the larger portion of 60 to 70 year olds in Kelowna and Victoria (Van. Island in general) that make these cities even more vulnerable. I’ve read two different University studies concluding that people between 64-65 become net sellers of homes. Here’s a great comparison chart that refers to one of the studies and explains our housing issue.

      https://sites.google.com/site/bchousingdemographic

      When you consider the debt levels 60+ year old Canadians are still carrying into retirement, i’m convinced retiree selling in high living cost cities like Victoria will be even greater than the Harvard and USC studies found.

  23. VREAA:

    Don’t get me wrong – I’m not hunting for errors in judgement. I think you know my feelings about real estate values here and their relation to fundamentals.

    Anyway, i was just clicking away on your icons and ran into this post.

    ‘the scenario that I have sketched out above has a >80% probability of coming to pass, in one form or another. There are alternative scenarios such as hyperinflation, perverse government policy, or global Shangrila status, that may lead Vancouver RE prices forever upwards, but (again, only in my opinion) those scenarios all have low probability of coming to pass. ”

    From today’s standpoint would you concede that government policy (perverse or otherwise) has played a huge role in our local market continuing to dodge the bullet? The 80% + chance hasn’t really happened, right?

    The ideas that “it happened in California”, or that “they said all the same things” or “bubbles always collapse under their own weight” or “we have homelessness, drug dealers, Salvadorans…” haven’t really explained much.

    I see more evidence that prices wont’ collapse. Continuing access to credit and low rates are the huge ones.

    All that said, real estate prices are a defining fact for this town. Assessments just came out. $1.285 still qualifies for a homeowner’s grant, because, hey, what working stiff doesn’t have a million bucks of paper real estate equity? And if we tax that at the old rates people will recognize that they’re being taxed on paper wealth, not income or real wealth.

    • Rob:
      Thanks for posting.
      Vancouver may have dodged a bullet thus far in part because of government policy (in particular low interest rates and a failure to tighten mortgage terms adequately enough into what is clearly a speculative mania in housing in more than one part of the country) but just as important has been pure chance (the fact that we hadn’t imploded along with US housing prior to getting free-money bail-outs that we didn’t need).
      The 80% risk of a massive house price deflation (50%-66%-off) in Vancouver is still on: In fact, I’d possibly raise that figure to 85% chance at this point. With developments in Canadian debt levels, global financial markets, other RE markets (the old culprits like Spain, Ireland, but now the addition of China, Australia, and peripheral BC), we are, IMHO, setting up for a very large deflationary wave. This one will not be bailed-out by emergency interest rates, ‘cos we’re already there. Vancouver RE will almost definitely go along for the ride this time around. And the factors that will take this from a modest pullback (10-20% off) to an absolute rout will be psychological… those massive herd instincts that drove Vancouver housing up by a factor of 2 or 3 or more will be reversed, and we will drop to 2005, 2003 prices, perhaps below.
      The game ain’t over yet, pull up a chair.

  24. Canadians didnt experience the full force of this recession. The baby boomers are greedy and selfish. The govt supports these boomers as every policy is geared towards their benefit. Foreigners didnt find another location to safely park and grow their money in the last few years due to recesssion. The young vancouverites are bloody stupid and deserve whats coming.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s