Tyee Bridge is the author of the recent much appreciated ‘Going Going Gone’ [Vancouver Magazine, 1 Nov 2011], an article dealing with the challenging effects of the Vancouver housing market, and our economy, on a generation of industrious young people. The article was much discussed here (12 Oct 2011), and was also followed by a CBC interview (19 Oct 2011). Tyee posted a comment containing discussion and a question in an older thread last evening, so we thought we’d headline it here, with our reply, for sake of ongoing discussion.
Tyee Bridge, at VREAA 21 Oct 2011 9:28pm-
“Hi, Tyee of the article here, with thanks to Jesse and VREAA for their input on the piece early on. If you’re interested, go to the link HERE [CBC, 19 Oct 2011] for a response to the CBC interview and my response in return (assuming the moderator lets it thru)– relates to the premise of the effect of Chinese capital.
Two quick chippy points:
1) I know this is not Jesse or VREEA’s position, but I often hear a sort of default assumption that media and journalists are unwitting (or witting) dupes for the real estate industry– cheerleading for the market to stay ludicrously inflated, or something, an uncritically regurgitating PR as part of the corporate media conspiracy. I’d suggest that this characterization is off the mark, certain Sun columnists excepted. I for one would selfishly love to see the market take a nosedive, if it didn’t kick the heck out of all those I know who do own homes. I do think it will correct, perhaps seriously, esp if something hammers the Chinese economy. But as mentioned, I don’t know that it matters, which brings me to the next pt.
2) I read somewhere on this blog– can’t find it at the moment– that I was wrong in my my assertion that a 40% market crash would not put median-income earners in reach of a 3-bdrm home in Vancouver. By my rather ham-handed calculations, a household income of $68K (the family median here) would get you a mortgage of about $300K. That means you would need to have 3-bdrm homes that go for $500K to make them affordable to median-income earners in a 40% crash. Am I wrong here? When I looked on MLS this week there were exactly 19 three-bdrm homes of any description (condo/townhome/detached) in all of Vancouver and North Vancouver going for less than $500K. Unless I’m missing something, that’s only 19 of 150,000 owner households, which seems negligible.”
Tyee, thanks for your article; as you will have seen it was much appreciated here.
And thanks for the comment. Regarding the points you raise:
1) As you point out, most of us here know that Vancouver journalists aren’t all members of some kind of RE cabal or “corporate media conspiracy”. But you have to acknowledge that, as a group, they haven’t accounted well for themselves when reporting on RE in this town over the better part of the last decade. Sure, there may be a few journalists, like yourself, who do not have direct self-interest in ongoing supernatural Vancouver RE market strength, but they compose a very small minority, and that has been reflected in how the market has been covered. If you look back through the last 5-8 years of media coverage, it is very clear that the vast majority of all published and aired stories promoted and championed the market; only very recently have there been any significant numbers of articles questioning the sustainability of the boom, or critical of its effects.
There may also exist some local journalists who own property but have been able to overcome self-interest and see the mania for what it is. But they, again, are in a (even smaller) minority.
Here’s a mental-exercise ‘poll’ – Make a list of ALL the journalists/producers/newswriters/editors you know who have a voice in the local media. Ask yourself whether each of them owns real estate in the city. For each of them, what percentage of their net-worth is tied up in the RE market? For many (most, perhaps?) the answer will be over 100%. (We’d love to hear your ballpark estimate results.)
Apart from the fact that bubbles are hard to identify from the inside, those who have vested interests in them continuing are particularly bad at spotting them. This could be happening consciously or unconsciously, so this is not to say that all of the bubble-pumpers have necessarily been ‘bad’; many have simply been herd-followers, or vacuous cheer-leaders. Regardless of the exact motivations, the market has for years been covered in a very biased fashion.
2) Yes, at 40% off, this city will still be woefully overpriced.
You may have seen from our prior posts that we now fully expect a 50%-66% price drop (peak to eventual trough; real prices).
At that level fundamentals will kick in, certain properties will be persuasive to cash-flow seeking investors, that’ll put a floor under the drops (but, as with the implosion of most manias, we may well overshoot).
Like raises in interest rates, an economic implosion in China will speed a crash in Vancouver RE, but neither are necessary for this mania to end. All that needs to happen is for prices to stall and then fall, a process that may have already commenced. In the current economic environment, a small price drop could be the spark to the tinder.
You may also have seen our posts where we discuss the massive amount of ‘covert’ speculation in the market. We suspect that very few players can imagine the effects of that evaporating.
Simple price drops may bring some prices into an affordable range for some citizens, as you are calculating. The vanilla math still looks fairly bleak, as you point out, but a speculative mania aftermath has some weird consequences, and many of the variables won’t respond in a linear or predictable fashion.
If prices drop 30%, we’d imagine effects would include:
– complete absence of new speculative buying (= far fewer buyers)
– very few move-up buyers (almost all wannabe-move-uppers will be stuck with low or negative equity in condos and townhomes)
– tighter lending practices (= fewer buyers)
– attempt to lock-in-your-profit selling; perhaps even panic selling (from off-shore investors, local speculators, boomers in retirement, pure flippers; = more supply)
– slump in the economy; lower wages (= fewer buyers; = more sellers)
– disgust with RE (= markets correcting to even lower than the means and fundamentals would suggest; overshoot).
- rents may drop, with falling wages & lost jobs (= drop in income yields; fundamental ‘floor’ prices drop lower)
– other factors
* Overall, there are many factors that will feed off each other once price drops have clearly commenced. The ‘virtuous’ cycle of the boom will become the ‘vicious’ cycle of the bust. If you can imagine 30%-off, all the factors would be in play to take us to 55%-off.
So, that figure of ’19 out of 150,000′, for $500K, may change very substantially.
In the trough, there may well end up being something like one to two hundred 3BR homes selling for $200K-$250K at any one time. But there won’t be many buyers around to take advantage. And, ironically, at the precise point when true speculators should be stepping in, they’ll mostly be gun shy, because most are momentum and not value investors. And people who expect off-shore money to surge in and scoop up all sales at 10%-off or 20%-off will be surprised to find these guys sitting on their hands at 30%-off and 40%-off (because why buy something that’s losing value, right?). In fact, we wouldn’t be surprised if off-shore investors, rather than stepping in to buy, actually become sellers, dumping assets that are dropping in value. A falling loonie will at that point make the RE price fall look even worse from their perspective. Suddenly Vancouver, rather than appearing to be some kind of charmed safe-haven, will look exactly like hundreds of other cities around the world with falling RE prices.
There will be very substantial consequences of the crash, many are impossible to predict. When it has all shaken itself out, and everybody has dusted themselves off, only then will it make sense to discuss a sustainable housing strategy for the region. In current discussions, the biggest ‘player’ (by far) is being left completely out of the equation. Whether you’re talking about DTES subsidized accommodations, or young couples looking for affordable first time buys, or UBC staff/faculty housing plans, the whole terrain will look different at ‘half-off’. There will still be challenges, but they’ll be different, and, we suspect, more addressable.
We hope you, Tyee, stick around to see it all play out, and we hope that all goes well for you and your wife with future endeavours (real estate and otherwise). Please continue to share your thoughts.