Monthly Archives: November 2011

“The threat of a bubble has largely dissipated. But, really, there never was one.”


“The threat of a bubble has largely dissipated. But, really, there never was one.” – Robin Wiebe, senior economist, Conference Board of Canada, speaking of Metro Vancouver; as quoted in ‘Metro Vancouver resale market ‘balanced': conference board report’, Vancouver Sun, 29 Nov 2011 [hat-tip Smokin' Jayne; added to the 'What Bubble?' sidebar archive as suggested.]

In light of what is happening around the world, it is remarkable that anyone with a training in economics could look at Vancouver’s RE market and not want to issue at the very least some words of reservation. – vreaa

“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it. Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”

Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it,” said Deng, a 30-year-old electrical systems salesman. “Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”

– from ‘Shanghaied Home Buyers Take to Street’, Bloomberg, 29 Nov 2011

Then why, Danny, did you buy it?
We know: Because you thought that prices would continue to go up, and up, and up, right? Right.
And if they had, you’d be taking credit, not complaining, right? Right.
Speculators are the same everywhere: Shanghai, Sydney, Spain, Ireland, Vancouver.
The outcomes of speculative manias know no cultural bounds.
– vreaa


More of Danny’s story from the article:
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.
The gift made Deng consider himself a member of the “ken lao” generation, meaning to gnaw on the elderly.
“I was depressed, uncertain, touched and a bit ashamed,” he said, asking not to be identified by his full Chinese name because of the personal nature of his story. “I had been proud and didn’t think it was their business. But when the moment really came, I knew it was impossible to manage only by myself.”
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said.
“At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.
Deng saw an ad on Soufun.com for pre-sales of a project called Qinglinjing, meaning “Clear Forest Path,” that was being constructed near a soon-to-be built subway station next to the future home of the Shanghai Disney Resort. Deng and his girlfriend visited a showroom to walk the wooden floors of the replica 96-square-meter (1,033-square-foot) apartment, planning how they would fill its two bedrooms, living room and study.
“We loved it,” Deng said. “It suits us for the next three to five years because we plan to raise a child soon.”
The snag was its 1.7 million yuan price tag. Chinese policy requires a minimum 30 percent deposit. Deng had saved 70,000 — not enough. That’s when he called his parents, then borrowed another 50,000 yuan from his boss, and secured a loan of 1.1 million yuan paying as much as 7.8 percent interest from Agricultural Bank of China, he said.
On Sept. 28, Deng and his girlfriend signed a contract with the developer, happy after winning discounts including 40,000 yuan off for being a member for the Soufun.com website and a 20,000 yuan markdown by collecting 20 stamps on a red “home- passport” issued by Vanke. The end price: 1.58 million, or about 13 times Deng’s annual wage.
The next month, they got married. Paying the mortgage will take up 40 percent of the new couple’s combined salary.
… “I didn’t have a choice,” Deng said of the decision to buy. “I don’t want to be too different. Otherwise, maybe for a long time, I would be alone.”

Wow. Poignant story.
And so many similarities to what is going on to Vancouver: Bank of Mom and Pop; ‘girlfriend insisted they buy an apartment'; plans to move in 3-5 years (but now likely stuck); etc.
Also, some differences, too: 40% of income? (low for Vancouver); 1,033-square-foot apartment (MASSIVE by Vancouver standards), etc.
– ed.

Realtor – “The market will come off the rails in Vancouver next year. Smart money does not chase a falling asset. Spring will be a disaster out west; it may self-perpetuate.”

“The market will come off the rails in Vancouver next year. We’re seeing some China buying reductions but there will always be some Chinese money, however smart money does not chase a falling asset no matter how much they want their kids to go to the “best Schools”. Give me a break – they are not so great that Vancouver is better at education than other cities, that losing 500K is not noticed. Spring will be a disaster out west – as soon as the mainstream media pick up on this – it may self-perpetuate.”
– A Vancouver RE broker, quoted by Garth Turner at greaterfool.ca 27 Nov 2011, who also added “The first half of this year [2011] was hot, the second half will show a dramatic cooling. Tons of sellers have given up, and will flood the market with renewed listings in the Spring [2012]“.

“Smart money does not chase a falling asset. (Price drops) may self-perpetuate.”
Readers will recognize that we’ve been saying exactly this for sometime now.
We’d ourselves probably call it ‘momentum money’ rather than truly ‘smart’ money.
But, regardless, yes, buyers will dry up into price drops; that’s what happens when speculative bubbles burst.
Price drops will beget price drops.
– vreaa

“I work in the financial industry and I know of several clients who have approached us recently about the possibility of going bankrupt. They have made some bad financial decisions over the past 5 years, a lot of it to do with risky real estate investments.”

“Although Vancouver’s real estate market has been on steroids for years, I do think this boom coming to an end. The rest of BC is not faring so well, prices and sales are down a lot in many areas outside of Vancouver. I work in the financial industry and I know of several clients who have approached us recently about the possibility of going bankrupt. They have made some bad financial decisions over the past 5 years, a lot of it to do with risky real estate investments (and also some just have too much consumer debt, lines of credit etc). Sure, Chinese might come to Vancouver and buy overpriced single family houses, but this is not representative of the entire market. I live in a decent, newer condo building and many units have been sitting unsold for months. Oh and the rent we pay? It’s half the monthly cost of a mortgage payment with 10% down, 30 year mortgage (and yes, in Canada, you only lock in your mortgage rate for 5 years, and no, the mortgage interest is not tax deductible). No wonder those units are not selling. I think 2012 and 2013 will see price declines and more bankruptcies in Canada. Household debt is at an all-time high. This trend is not sustainable.”
– comment from Sally Smith at Global Economic Analysis 20 Nov 2011

[This story is familiar in some aspects, and could possibly be a retelling of an anecdote posted previously at VREAA, from a comment at a different source and under a different handle. This may happen occasionally here. If any original poster notes us doing this, please notify us. - vreaa]

Spot The Speculators #68 – “Trev and Anna paid $1 million for a SFH near Main Street. They must spend $150K to make it livable.”

The story of ‘Trev and Anna’ is relayed and discussed at greaterfool.ca by Garth Turner, 27 Nov 2011, a must read for Vancouverites. Here is the core anecdote:
Trev and Anna paid $1 million for a place near Main Street. Sadly, it was unrenovated, so they must spend $150,000 to make it livable. “We plan to stay here 10 years,” Trev adds, “and we were fortunate enough to put down 50%.
“We’ve set aside an RESP for our kid maxed out to the level the government will contribute. I have a limited partnership investment of $50,000 which is projected to provide us with a 7% return. Our combined income at the moment is 120k per year. The house has a separate suite which will provide us $900 per month income. If times get tough then we can rent a spare bedroom to a student for $700. So, we will have $50k after renovations to invest.
Should we seriously consider selling the house when the renovations are complete, rent for a while and then re-invest? The concern is that we will be house rich. If we are planning on staying there for 10 years does this still apply?”

So:
House value (generously presumed) $1.15M.
Mortgage $500K.
Other assets $100K.
Networth $750K.
Percentage of Networth in RE 153%.

These guys are gambling on ongoing price increases.
They will potentially lose ALL of their equity in the coming crash.
(These houses will very likely sell in the $500K-$550K range again at some point).
The idea of them overextending themselves this much into a ‘livable’ Main Street SFH with tenants in the basement and perhaps one in a bedroom just boggles the mind. – vreaa

Australia – High Profile Sydney RE Weakness – No Takers At $1M-Off 2009 Prices


“It was billed as ‘Super Saturday’ but turned out to be more like soggy Saturday for Sydney’s home auction market.
The last Saturday in November is traditionally the most popular day of the year to buy and sell. But this year the clearance rate of 54.6 per cent was well down on estimates.
Actor Toni Collette’s historic Bronte home failed to find a taker, despite being offered at a discount of almost $1 million from the $4.4 million she paid in 2009. Invitations for opening bids of $3.5 million did not raise an eyebrow, let alone a hand.”

Sydney Morning Herald, 27 Nov 2011 [hat-tip canuckdownunder at VCI]

Any doubt that this market will end up with >50%-off discounts? -ed.

Toronto Rents – “There has been a gradual insidious change as more people buy houses. There is a lack of qualified renters. Rents are down in real terms.”

“Rent prices are actually depressed in Toronto in real terms – There is a lack of qualified renters. I say this because I’ve been doing this for 15 years and there has been a gradual insidious change as more people buy houses. If 70% of people now own, and 30% do not for a large part the reason is that that 30% is not qualified for a mortgage.
When I look at the criteria used for credit score with my credit checking system, the credit score used for an approved renter is 700, yet CMHC will approve a mortgage for someone with a score of 620 which makes me chuckle a little. My rental screener tells me to decline those with that score. Of course I can’t, you have to pick from the tenants that apply not those you dream about getting!
Rents have gone down in actual terms in apartment buildings. Condo rentals are skewing the market.”

Rachelle at VREAA 26 Nov 2011 5:49am