SimeonG [Simeon Garratt, head of Asian business development at Key Marketing Group] at VREAA 7 Jun 2011 at 11:43am -
“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.
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.
I do like getting the opinions of people looking at this industry from the outside.”
When you are in dense undergrowth, it can be hard to gain perspective regarding the lay of the land.
Industry insiders in SimeonG’s position are almost definitely sincere in their beliefs that demand for Vancouver RE is limitless. They have experienced first-hand the line-ups, the agitated & eager buyers, the breathless bidding wars. And, they see folks buying units every day. Those are all powerful pieces of information.
During a speculative mania, demand always seems overwhelming.
But demand is actually elastic, and can snap down to nothing, or actually become supply, in very short order.
We believe that this will occur once prices turn. It may take restrictions on loose lending or rising rates to precipitate such a turn, but neither is necessary. All that it will take is for prices to stall, and for speculators to begin to attempt to realize their thus-far-paper gains, or to attempt to protect themselves from losses. Demand will evaporate and supply soar.
Simeon asks for ‘outside’ perpective, and our advice (and request) to him would be to gather some information. We’d suggest that he sit down with his next ten buyers, regardless of origin, and, if he has the temerity, ask them the following questions -
1. Would you be purchasing this property if you knew there was a considerable chance of future price decreases?
2. What magnitude of price decrease do you think are possible in this market?
3. How would you respond if prices dropped 10%? or 20%? or 30%?
We suspect that the answers that Simeon got from these buyers would give him some ‘outside’ perspective.
We’d guess a good percentage, perhaps the majority, would tellingly begin by saying: “We don’t expect price drops”. If so, ask them what they’d do if they did indeed start occurring.
Another group would intellectually acknowledge that a small fluctuation in prices may occur (say 5% or even 10%). Ask them how they’d respond if prices dropped 25%.
A much, much smaller percentage would answer: “So what? I like the view.. and the shops.. and the schools.. drops in prices are irrelevant.”
The responses to these questions would tell you how ‘real’ the demand is.
People who want to actually use the accommodation, to live in it, or rent it out for income, wouldn’t be at all deterred by the idea of price drops; they’d stay put, they’d hold their purchase.
Furthermore, investors who genuinely think these properties are well priced by global standards would be looking to buy more if prices drop. They’d say: “Please contact me with buying opportunities if that occurs.”
But speculators (momentum ‘investors’, gamblers) who have bought on the premise of relentless price rises will be looking to be out of the deal if prices are heading down.
What is motivating current buyers?
Answers to the questions above could tell us.
Of course, the chances of Simeon, or any other real estate salespeople, actually putting those questions to prospective buyers is close to nil. Why? Because he already instinctively knows that even the thought of possible price drops deters buyers. He already knows that, in this market, the vast majority are buying anticipating ongoing price appreciation.
Simeon: Perhaps you can find a palatable way of exploring these thoughts with some of your clients. We’d appreciate it greatly if you could share their responses with us. The exercise may confirm what you already suspect; or it may give you some ‘outside’ perspective. We’d be interested either way.