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.

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?


The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

- vreaa

71 responses to “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.

  1. Good post, however there are some signs of worry, mostly on local expectations of continued capital inflows, elucidated through “rich Asians”, which is at its core a macroeconomic phenomenon that even those at the Bank of Canada recognize as a problem.

    The problem isn’t foreign investment or immigration, it is expectations that distortions will continue; if they do continue for some more years, let’s also be honest about the consequences.

    • Jesse, I’m intrigued by your and VREAA’s comments here and elsewhere on this topic. [pinged you on this at the Talk Housing With Us page as well, apologies for double dipping but am under deadline…]

      I think you are talking sense to say that foreigners shouldn’t be scapegoated– too easy perhaps, and historically the tinder for much (to say the least) bad policy- but I refer to UBC Geography prof David Ley’s figure that btwn 1988 and 1997 Chinese immigrants alone brought in an estimated $35 billion to the Metro Vancouver area, and his note that “The arrival of this extraordinary wealth over a short period had inevitable consequences for Vancouver’s property market. Prices soared in almost a perfect relationship with net immigration….”

      My guess is that the amount of Pacific Rim capital is flowing in at almost the same rate these days, though I have no hard stats except Canadian immigration visas awarded to investor-class immigrants from China (1847 from Canada’s Hong Kong alone in 2009-10). Isn’t it true (and I’m not sure it is) that this capital– not only from predominantly Chinese immigrants also Chinese nationals acting thru proxies, likely reacting to clamp-downs by Beijing on property speculation– is the horse drawing the cart? Those local buyers you discuss are no doubt to some extent the mad speculators who need a good spanking, but aren’t many or most of them simply local families and couples stretching themselves to the limit to keep up with the horse, and buy a home in a globalized and thus highly inflated market?

      I’m working on a Vancouver Mag piece on some of the cultural effects of the affordability crisis and would be most interested to continue this discussion via email if you’re of a mind… I’m at tbridge at shaw dot ca.

  2. Who blames the mania on Mainland Chinese? AFAIK, it’s mostly Cam Good, his lapdog Simeon Garratt and a few slimeball realtors.

    • Perhaps.
      At the same time, if you were to randomly ask 10 people on the streets of downtown why housing prices were high in Vancouver, what percentage would volunteer foreign buyers as a prominent reason?

      • Probably a lot. I have an acquaintance who keeps telling me that “those damn mainland Chinese are buying up all real estate in this city and making it too expensive”. I asked him “How do you know it’s mainland Chinese?”. He responded: “I know what I see.” to which I said: “Half of Vancouver’s population is Asian and many of them are second, third, etc generation. They are locals with mortgages.” and he said: “No. They are rich foreigners”. End of discussion.
        There is simply no arguing with him. I bet that there are many others like him. However, there is a difference between someone who has his own “private” beliefs and someone who actively promotes this bullshit in media or day-to-day life though his job.

      • One more thing: Foreign buyers ARE an important component in the mania. Just not the primary reason. They are here to join the party.

      • Its unbelievable how pervasive the HAM meme is, even within industry professionals.

        It reminds me of the Iraq/9-11 phenom. If you repeat things enough in the media, especially if it feeds a stereotype, people *will* believe it.

    • 和谐的房地产泡沫

      even i acknowledge that HAM is not the main factor of the bubble

      i have reservations about the Chinese government, as i think any sane thinking person ought to about any government.

      we are sitting on a giant pot of racism and as soon a significant downturn happens, it will boil over.

      and yes, blammo, you are correct – propaganda ad nauseum in action.

  3. jesse -> Thanks, as always, for the sensible comment.
    Note that this is not to say there shouldn’t be measures to regulate foreign speculator activity. As I wrote “yes, there may be a need for some consideration of specific limits on their activity”. And we have noted your recent comments regarding the possible wisdom of such actions. Limits on off-shore buyers may be healthy.
    At the same time, let’s not forget where the bubble came from and where it continues to get its primary fuel: cheap finance and local speculators.

  4. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China.

    Exactly. This is the narrative around RE and it’s feeding the confidence of buyers.

    I’m a bear for egoistic reasons, I’m too poor stingy risk averse to pay current prices, and I would welcome any change to the narrative, for example adding some uncertainty about “Limitless Demand From China”, etc.

  5. “let’s not forget where the bubble came from”

    Indeed. But as much as my ideal side likes to think people will realise this, the cynic on the other shoulder reminds me how deeply ingrained entitlements can become. I would encourage any new laws or policies (and there are no new laws or policies yet, remember) to focus on the short-term economic activity itself and its potential to damage long-term economic growth, not on the people who propagate it. I don’t envy policymakers right now but neither do I sympathize.

    • @jesse

      The only sense of entitlement I feel is for a stable economic system and good government. I feel that for the several years the government has actively made things economically worse for me through their economic policies that force speculation as the price of participating in housing market. Under “normal” market conditions given the income that I earn and the savings that I have which are far above the median and average I should be able to enjoy the fruits of my hard work but I can’t.

      • 和谐的房地产泡沫

        ams,

        i am in a similar situation yet i don’t earn nearly as much as you

        now imagine how it is for me and the rest of the under 30k per annum crowd.

        i am non-plussed, to say the least.

    • @ams, a country that promotes capital investment, especially into poor-yielding ones, will inevitably transfer wealth from savers to investors in said capital. That transfer, unless “this time is different”, will reverse, though it could take some years to happen.

      • @jesse can you please elaborate I am not full understanding your point.

      • @ams I take it you are a “saver” and did not invest in a poor-yielding capital asset. As a result your relative net worth has decreased compared to someone who did buy this asset. This is not just a “feeling” you are worse off; you actually are worse off relative to “non-savers” from a balance sheet perspective.

        I don’t think your situation is unique. FWIW I don’t feel entitled to a stable economic system, first because it is not stable, second because such a system must be actively and perpetually advocated for.

    • 和谐的房地产泡沫

      jesse, can you run for premier or mayor some kind of office where you can do some good?

      i’d vote for you, fwiw

      [me too, actually. -ed.]

  6. jesse -> Only just this moment saw your post on Carney’s ‘dumb money’ statement. Very interesting and potentially very important.

    all -> See jesse’s must-read post here:
    ‘Carney says a four letter word’, housing-analysis, 16 May 2011

    http://housing-analysis.blogspot.com/2011/05/carney-says-four-letter-word.html

    • Love jesse’s article, and also the suggestions at the end for progressive property transfer taxes and getting CMHC out of the biz of underwriting the high end.
      In fact, it’d be skookum if CMHC regionally only underwrote mortgages of, say, 3.5x average income.

  7. demand for detached property in Vancouver is massive, and not just from one source (i.e. Chinese). If you didn’t know this you’ve been living in a bubble of your own making. I don’t see this changing anytime soon. Sorry :(

    • That is exactly the point vreaa, I and others are making. The demand is fueled by mostly by locals thanks to easy money and moral hazard of CMHC. It’s the bullish marketing “experts” who promote the idea that most of the demand is from China.

    • Demand only matters if you can afford what you want.

      Low interest rates, CHMC etc. all have inflated the house prices to unsustainable levels. What happens when things change can be seen in the April numbers about house sales who seem to have gone off the cliff.

      There’s a lot of things I would like too, but I realize I can’t afford them so I am not buying. Many people seem to have very short memories and horrible math skills. That combination will break many financial necks in the years to come.

      • Exactly. It’s okay to point out that there is demand for SFHs on the westside.. But it’s another thing entirely to then say that it makes sense for these houses to be changing hands for $2.5M, $3.0M, $3.5M..

    • My d*ck is so massive I can’t even explain.
      I guess it’ll have to be anectodatl evidence as I have no real proof of what I spew out haphazardly.

      • Dick size is a lot easier to verify than the existence of a bubble.
        You come across as a fairly big one.

        See the ‘About’ button near the header for a few comments regarding the strengths and weaknesses of anecdotal evidence.

  8. bubbly,
    demand is from everywhere. Well-heeled retirees from across Canada, immigrants from Europe, US, China, etc. Move up buyers who have lived in this city all their lives. I’m not saying this is best case scenario, but the fact is that there is so few detached homes here that they are easily swallowed up by the elite buyer. The current prices reflects this level of “competition” for a detached property with land. This city is a microcosim of how humans are in direct competition for scarce resources. If you’re on this site bitching about the high prices then you’re probably losing this race. Vancouver teaches pretty harsh lessons in Darwinism.

    • “Vancouver teaches pretty harsh lessons in Darwinism.”
      QFT

    • “Vancouver teaches pretty harsh lessons in Darwinism.”
      Yes. So does Phoenix, Miami, Las Vegas; Ireland, Spain, Greece… What’s your point?

    • Btw, Rusty, why are you on this site? Besides trolling?

    • @rusty,

      The issue is not the demand houses but the supply of credit which changes how the game is played to the detriment of the economy. If the majority of people buying single family homes were putting down 25% to buy the home and doing 15 to 20 year amortizations i would accept your argument, but most reports I have seen in the business press are reporting down payments of 7% and amortizations of 35 years!

      Rusty you are missing the point that the supply of cheap credit is increasing the demand for homes and when the supply of credit goes down it will destroy demand for homes in Vancouver. What this blog argues is that there are negative consequences to the credit fueled boom and far more negative consequences to the coming bust. The banks and real estate agents are the only winners so far, real estate agents will be losers in the bust, the banks because of CHMC are going to be winners in the bust too.

      Is Vancouver more desirable than the rest of Canada? I would say that depends on many factors. If you want to be in Canada’s business center then Vancouver is not it you gotta be in Toronto. if you want nicer weather and alpine skiing then Vancouver is better, on balance for some people Vancouver will be desirable and for other it won’t.

      I would assume that there could be a small premium for nicer weather in Vancouver but by the same token there should be other factors like smaller economy which should also be pulling the prices down.

      The only Darwinism I see in Vancouver is financial suicide by stupid Vancouver locals who have too much debt. It really is like living in a city where everyone drives dangerously and there are no police enforcing traffic laws at some point for those who value safe driving the city becomes too much of a hassle to live in.

      • 和谐的房地产泡沫

        but..

        we DO live in a city where everyone drives dangerously.

        how many times to you see a bimmer accelerate to a red light – gotta be first, no matter what.

  9. reality check

    • 1) Please learn how to reply to a post.
      2) Reality check for whom? To me, you look like you are trying to confirm the correctness of your decisions by arguing with bears (often without properly reading what they write). Do you feel uneasy?

  10. there are two sides to every story. If you don’t wish to hear both then don’t read my comments.

    • Nice attitude. However, it’s you who does not bother properly reading the comments to which you reply.

      Bears are aware of the bullish arguments. Some are legit and some are BS. The bullshit arguments have been debunked by bears many times. Yet, you keep ignoring it and instead keep spewing the nonsense over and over again.

  11. @ams
    prices rise in Vancouver during periods of “tough” credit (aka higher interest rates) too. Don’t you think this isn’t the only factor? It may help a first time buyer afford a detached home, but 99.9% of single family home buyers are bringing a lot of wealth to their purchase. Is this what you’re attempting to do? Be a first time buyer of a detached property? If so I understand your frustration. Try the property ladder.

    • The property ladder doesn’t work in a downturn; and, in a crash, it becomes a property elevator heading for the basement with snapped cables. Take a look at all the underwater US condo owners who can’t afford to move up to SFHs that are selling for pennies on the dollar. That’s why busts are so ugly (and why they effect all layers of the market).

      • What you are missing vreaa, is that in US, they don’t have all these wonderful sources of genuine demand from all over the World. That’s why many people who saved money instead of jumping on the property ladder can now buy a nice SFH with cash or at least a large downpayment.

      • 和谐的房地产泡沫

        if the americans still had a semblance of habeus corpus left, i might consider buying in the states, too.

        talk about sweet deals.

        the irony of all this is that after the crash, probably more HAM will gobble up property on the cheap, still humping the dream.

    • 和谐的房地产泡沫

      hahah

      tell that to vancouverites who bought in the early 80s

      oh wait, they’ve all moved away.

  12. vreaa,
    If you’re pinning your future on the same scenario occuring in Vancouver as the housing crash in the US, well, godspeed to you. Find a US city with the same immigration policy, land scarcity, and relative unique climate and I guarantee you you’ll find rising prices.

    • Troll.

    • No, we expect Vancouver’s speculative mania to crash and burn in its own unique way; we don’t expect it to exactly follow the script of any other city, anywhere.

      You are essentially arguing that Vancouver is different from all other cities.
      We’re arguing that speculative manias play out essentially in the same way in all cities, because humans around the world behave the same in all speculative bubbles.
      Gravity has not been refuted in Vancouver.
      Vancouver will look ‘different’ to you until suddenly it looks similar.
      Then it’ll all be obvious, that Vancouver’s bubble was in essence like all the rest.

  13. yes bubble,
    Bulls are also aware of bear argument yet you keep spewing them here too. I would think that after pricing you out of the market these past 10 years you’d accept that you’re on the losing side. Dawinism is a bitch.

    • Nothing like as bad as Daloseism…

      [Irresistible pun on typo; apologies, all. -ed]

    • 1) This is a bear blog.
      2) I refuse to buy at these insane prices. that does not mean that I can’t afford and that I am priced out. I don’t buy into manias.
      3) Actually, almost nobody is really priced out in this city. Even an unemployed person can go deep in debt and “own” a house. Few weeks ago, I have posted direct links on this blog to private lenders that would lend money to that target group.

  14. Rusty is probably being paid to come on this site and act like a dick.

    • The country needs more employment — it’s a precursor to interest rates meaningfully rising. So for the good of the bear cause, please continue to engage, so says the voice of Invisible Lord Keynes.

    • Rusty is a stupid [expletives deleted, even though possibly valid. -ed].

    • 和谐的房地产泡沫

      rusty is in the wu mao dang

      even if he’s not getting paid for it

  15. “1) This is a bear blog”

    This is a real estate anecdote site.
    I’m not seeing an indication anywhere that opposing opinions are not welcome. I think VREAA can delete my comments if he thinks my opinions are not appropriate

    • Demagoguery again. You are not just providing opposing opinions. You are repeating debunked BS ad nauseam like a good troll.

  16. as are you bubbly. Troll on

  17. Nice post. I think the fact that rich chinese buyers are mentioned more prominently in the news media is just a side effect of the zenith of the Canadian housing bubble. In a few years, at the nadir, we’ll laugh (or cry) about this.

    • Nick -> Thanks.
      We suspect that the whole foreign buyer thing will very rapidly become moot once prices start their downward course. It’ll end up as a subplot/footnote to our bubble.
      In the longer term, we do expect China to have ongoing social and economic influence on our society here, naturally.
      If prices manage to continue upward for longer we’d expect the debate to get louder.

  18. Pingback: Is Real Estate A Gold Rush | Property Rental Agency & Property Management Services - Landlord Rescue

  19. Everyone I know is deeply offended when I say anything about real estate prices in a negative way. It’s like they are all in denial.

    Too bad they don’t realize their lifestyle is diminishing at an astounding rate to keep their ‘dream’ alive. Enjoy folks, I’m off on a 6 month trip to Central America.

    Boy, sure was easy to cancel my rental agreement and take off! Good luck with the mortgage, and all that fun “nesting”… Hey, keep your ears open for a rental for me around October…

  20. VREAA, have you thought of sending this in to local and national papers as an op-ed piece? I think the point about racism and scapegoating is worthy of more exposure and discussion.

    • Catherine -> Thanks for the appreciation. I’d be quite happy for you to forward it on my behalf; please do.

    • Or save it for when the issue goes mainstream? It seems to me that we’re still in a state where Asian investment is seen as a guarantee that prices will stay high (or go even higher, yay!)

    • I second that. A really well-written piece, congratulations.

  21. 和谐的房地产泡沫

    i posit this just for ghits and siggles – if it were rich saudis gobbling everything up in certain areas, all of the silent majority god fearin’ types would be out in the streets.

  22. again, a post full of angry and jealousy tone!

  23. Nobody wants to admit that this ‘demand’ can’t stay strong forever and that pricing can’t stay this inflated without an obvious ‘bust’ at some point in the future. However, no one really wants to fully explain why it can’t. When you look at it from the flipside and see the sheer demand that exists in China at the RE expos and see how long the lineups are at the immigration consultancies.. it does start to make a bit more sense.

    As I’ve been quite involved in this whole process of driving asian buyers (primarily Mainland Chinese) to purchase property in Vancouver I know quite a lot about the headspace about overseas investors/buyers. In majority, they aren’t buying in Vancouver for fun. They truly want to live/work/retire here. That creates a much different ‘bubble’ than one formed around pure investment.

    I apologize if I haven’t read through this entire comment feed but I do like getting the opinions of people looking at this industry from the outside.

    All in all — I’m just a lapdog ;)

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