We posted ‘Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event’ about a year ago [27 Dec 2009], so time for a minor update.
Vancouver RE 2010 played out without any really big surprises. Mortgage tightening started, as expected, but the initial step was less restrictive than we’d anticipated, and credit remained freely available. Household debt pushed to record high extremes. As a consequence, the market was stronger from summer to fall 2010 than we’d guessed it’d be, even though seasonal sales were still tepid when compared with the last decade. The RE market was also likely supported by ongoing strong general stock market and commodities rallies (both of which are looking exceedingly long in the tooth, see below).
We still stand by the prediction items in the Dec 2009 post, and see no need to make any changes at this point. Local RE remains outrageously overvalued by all fundamental measures, and we anticipate that the inevitable coming RE bear market will have profound effects on our community.
The Vancouver RE Bubble is like a large festering carbuncle on a dinner guest’s nose – so clearly present yet publicly unmentionable. We sit and watch the machinations of the bubble in progress, in awe of how that which will seem so obvious to all in retrospect, is in the present essentially ignored. As the market extends more and more, the bulls grow more and more complacent, and the bears grow quieter, and quieter, and some lie down and capitulate (and none can blame them for that exhaustion). These are all increasing signs that the market will turn, not that the bull will go on forever.
So, anything to add? Well, as an aside, we’ve been interested in developments in non-RE markets. We think there is a high risk of a very significant and broad pullback in risk assets over the next 12-24 months, and that would definitely speed the inevitable coming price drops in local RE. Such a deflationary wave would involve the general stock markets, the loonie, oil, other commodities, gold, silver, China, other emerging markets, Chinese RE. The US dollar will likely rally, surprising all the naysayers. Since we posted about this on 25 Oct 2010 [Contrarian Bet - The US Dollar Is About To Rally], the USD index has rallied from 77.1 to 80.2, or +4.0%, which is in the right direction and a modest start. [We admit that the USD is down in loonies through that same period, with the loonie moving from 98.03c to 100.3c. We see this strength as temporary, with fair value now probably in the low 90's.]
Some of the observations on which we base our opinions include the following:
- The vast majority of analysts predict general stock market gains through 2011; in numerous stock market analyst surveys (Barron’s, etc), a full 100% of the individuals interviewed have been bullish
- Sentiment is heady: Yesterday, analyst Laszlo Birinyi published a report predicting that the S&P500 would rally another 124% from here by Sept 2013. (This after a 86% rally off the Mar 2009 lows. Dow 30,000 anybody?)
- Bull:Bear ratios are back to the highs of summer 2008
- Complacency is back to extremes (VIX back into the teens; currently 17.0)
- Insider selling is high; markets have recently pushed higher on decreasing volume; distribution pattern
- Mar 2009 to present was a powerful bear market rally; yields and P/Es did not reach bear market bottom range; the bottom for the bear market that started in 2000 is not yet ‘in’
- Baltic Dry Index is dropping (leading indicator for global economic activity)
- China is trying to put on the brakes to manage its RE bubble
- There are growing voices against Quantitative Easing in the US; limitless printing is not a given
- Precious metals stocks have been underperforming the underlying metals themselves
- Precious metals sentiment is high and widespread; even the real estate blogs are inundated with commenters certain that gold, silver, SLW, etc, etc, can only go up (because, after all, look at all the dollar printing!). Heck, even ‘Johnny Horton’ at RE Talks is touting the PMs. The precious metals are a very volatile market and, the majority of times we’ve seen this kind of confidence over the last ten years, the new/momentum money has been caught off-sides by multi-month corrections. [In the longer term we anticipate ongoing gold strength and further fiat weakness, and a likely gold bull market blow-off peak towards the end of the decade, but only after a substantial pullback in gold in the short and intermediate term.]
So, we foresee another deflationary wave starting hereabouts. This will likely not look exactly like 2008 (that would be too easy), but will probably be a slower process. If this does occur, interest rates will not increase.
But, let’s be clear, this is all an aside, discussion of the general markets is not the core focus of this blog. What happens in those markets may influence the shape of the coming Vancouver RE bear market, but not the fact of the RE bear market. Our RE market is so extremely overextended that we anticipate it collapsing under its own weight at some point, regardless of activity in other markets. Interest rates don’t need to rise for that to happen, nor do general stock markets need to plunge. A simple plateau in prices, increase in inventory, and a small percentage of speculators getting cold-feet would do it. Local properties are selling at 2 or 3 times their fundamental value. We expect homes like the one below on Vancouver’s Westside to sell for less than one million dollars before this is all over. That would represent, in this specific case, a drop of over 65% from it’s current asking price of $2.89M, and would still make it generously priced, actually overpriced, by global standards. Yes, folks, still expensive at a third of the price!