Price Drops Will Beget Price Drops

In a bubble, prices rise because people buy based on the anticipation of further price rises. This strategy appears to work for most of the duration of the bubble, and encourages even more speculative buying. Thus, the anticipation of price rises causes price rises, as players attracted by the price action add fuel to the fire. Price rises beget price rises. Prices ‘go viral’ to the upside.
In the inevitable ensuing bust, the reverse occurs. Price drops beget price drops. And this can get every bit as frenzied as the upside action. Moreso, actually, given the intensity of aversion that we humans have to financial losses. The fact that price drops alone will be a cause of prices dropping further is an essential point to understand. Many Vancouver RE bulls believe that sellers will simply withdraw product from the market to await price recovery, or that they “won’t sell for less than their property is worth”. But unwindings don’t work like that, and sellers correctly anticipating price drops will bail, bringing in more sellers, etc, etc. It doesn’t matter if it starts making fundamental sense to buy, or if interest rates remain ridiculously low: market participants will be so terrified by the thought of further price drops that they’ll stay away. Price drops will beget price drops. This will continue until everybody who was planning to sell based on any initial speculative intent has done so. As we believe that ‘speculative intent’ runs very deep in this market, we believe that the bust process will take years and will be very thorough. Prices will overshoot to the downside by as much as they overshot to the upside.
We can watch our future playing out right now to the south of us. See below for an illustration of the ‘Price Drops Beget Price Drops’ process. -vreaa

Distilled exchange from cnbc.com ‘Rates and Consumer Confidence’ 10 Aug 2010:
Q: “With the rate on the 30 year fixed now at an historic low, why isn’t that moving the housing market?”
A: “The insecurity that buyers may have regarding what is the price, the value of the home going to do after they buy.”
(Eric Murtagh, Realtor)
Q: “What is going to get buyers off the fence?”
A: “Nothing short of a guarantee that the value of their home is not going to drop.”

[Thanks to Tim (comment at VREAA 10 August 2010 at 11:22 pm) for alerting us to this clip. -ed.]

UPDATE:
From G&M 24 Aug 2010 article on ongoing US home sales drops -
“It really is a self-fulfilling prophecy. If all buyers perceive that home prices are coming down, then they will stop making offers – and home prices will come down.” – Aaron Zapata, a real estate agent in Brea, Calif.

One response to “Price Drops Will Beget Price Drops

  1. VREAA, I completely agree with you that RE prices need to drop significantly here. I think there’s a more pressing reason why buyers are (apparently) “sitting on the fence”.

    The job market for working Vancouverites also plays a great part in why people cannot buy/sell at the same frequency or prices that we’ve seen over the past few years. If there’s few or no jobs paying much over minimum wage, what does the future hold for Vancouver and the people who live here?

    We’ve seen sectors for potential employment here all but disappear in the past couple of decades. Are replacement businesses reluctant to locate here, because people are put off by the cost of renting or buying a home? That may be one reason, among others.

    To add to these woes, salaries are dropping. About 30% or more in some cases, since the recession began a couple of years ago. A truly terrible time to find decent new jobs, as we’ve found out during this past year.

    Even if we were lucky enough to find jobs, we’d be taking a big hit in income, while our living costs would still increase. Sure, we cut back and then cut back even more than we thought possible. When you’re facing a few percent increase for this service, a few percent increase for that service; it starts getting even harder. Yet again, those who are ‘middle class’ are losing ground, making little or no progress or are even worse off in real-terms. Weren’t the middle class the ones who kept this whole fragile scenario ticking over?? Add this insane RE market to the mix and it starts to get very scary and ugly.

    I’m not saying we are unique in our experiences either; we’ve heard similar tales of woe when talking to professionals in all kinds of fields here. These are also professionals with university and post-university education, once-admired qualifications and highly experienced, etc.

    With all this to consider, who would even want to try and take on a crazily-overpriced (and likely badly-built) property that may not even make it through the next decade without major repair costs?

    It’s not surprising many professionals leave Vancouver to try and make a living somewhere else. Many of us hope for better than an over-priced and badly-designed shoebox to show for our pains. If that shoebox has been built and purchased with a mortgage in the last few years with a mortgage balance still remaining, then it makes little difference if we are renters in the traditional sense, or not.

    We’re paying a high premium to live here, and want to make it work because it has so much potential. We meet great people every day with so much to offer and like us, love the landscape and nature on our doorstep. After all, Vancouver is a major Canadian city in terms of size and population; a magnet for immigrants from all over the world.

    Although we’re doing everything we can to make it work we wonder every day: will it ever be a place where we can settle and even thrive? It’s not looking likely as things stand.

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