Denying The Obvious Bubble – Close Your Eyes; Think Happy Thoughts; Don’t Use Nasty Words; Bad Things Will Go Away

“A new year means new resolutions, and we should start fresh when talking about Vancouver real estate.”
“Happy 2012! In keeping with the spirit of the brand new year, I say we resolve to look at our dynamic real estate market in a fresh way. Let’s proverbially “sweep out the old” and make room in our news for market stories from a fresh perspective.
First, we should agree not to discuss things that don’t exist. There are three things I don’t want to hear about anymore in the real estate world for 2012, so let’s clear the air and get off on the right foot here.”
The Bubble
“What bubble? If I never have to hear one word again this year, it would be “bubble.” One of the most compelling aspects of the bubble is there is no way to predict it.
In each historic case of bubble markets (characterized by rapid price increases and a sudden pricing collapse), it is the unpredictability in forecasting that is the common thread. While economists and pundits have claimed affordability indices are the true measurement of anticipating a housing bubble, there is no historical data to support it.
All of the market bubbles in Japan, the U.S. and Australia, had their own underlying economic and political drivers. Our country’s lending policies are conservative and are coupled with record-low interest rates.  B.C. is known for exceptional regional livability, low unemployment and excellence in education.
Let’s face it – if there is a bubble correction, most single-family homeowners won’t be affected. In any market, few “win” on both ends of the deal. Buy low/sell low and buy high/sell high would be the norm for most. Let’s agree to disagree until we can discuss it in hindsight.”
- excerpted from ‘Let’s Change our Vancouver Real Estate Vocabulary’, by realtor Leah Bach, BC Business magazine, 6 Jan 2012 [The other two things to agree to not mention are 'Real Estate Fees' and 'Foreign Investment'.]

Adults know that this is complete hogwash. Of course you can identify bubbles when they exist; they exist when asset prices run up far beyond fundamental value as determined by future income stream, fueled by speculative buyers using cheap financing to chase rising prices in a momentum fashion. As happened with tech stocks in the 90′s, US & many other RE markets housing through the ‘naughts’, and as has so very obviously happened with Vancouver RE 2003-present. These are all classic asset bubbles.
Another reliable identifying factor seems to be that there will always be self-interested commentators, in the middle of the bubble, claiming that bubbles can’t be identified: Greenspan,  Bernanke, Leareah; Vancouver/Canadian RE bubble ignorer/apologists (Bach, Wiebe, Podmore, Sommerville, Flaherty, Muir, Yu, Guateri, Geller, Bryan, Pastrick, Dupuis, Campbell (Don), Goldberg, Marchildon, Lovett-Reid, Klump, Regan-Pollock, Dunning, Dugan, Jenkins, Ash, Kinch, Good, etc, etc).
So, the routine seems to be to stick your fingers in your ears, ignore the data, dismiss the “naysayers”, and then, after the implosion, to pontificate as to how impossible it was to see all this coming. If your eight year old kid behaved like this, you’d call him on it.
Bubbles can be identified before they implode. Shiller, Baker, Prechter, Shiff, innumerable online bloggers, all saw the US RE bubble for what it was. Keene has written extensively about the Australian RE bubble. Rosenberg, Baker, Shiller, Krugman, Shedlock, Coxe, Jarislowsky, ‘The Economist’, Rabidoux, Turner, innumerable bloggers have all clearly stated that they see our national Canadian RE bubble, and many have pointed out that Vancouver is an extreme example of such a speculative mania.
If it walks, talks, smells, looks, behaves, and, heck, has the complete genetic structure of a duck, call it what it is – it’s a duck.
Those who argue that this is not a speculative mania, particularly if they do so from a self-serving position of influence, should be taken to task on their opinion.
- vreaa

48 responses to “Denying The Obvious Bubble – Close Your Eyes; Think Happy Thoughts; Don’t Use Nasty Words; Bad Things Will Go Away

  1. To paraphrase a quote
    “Don’t expect the truth from one whose livelihood depends on maintaining an illusion.”

  2. Why would anyone listen to this salesperson? Besides the obvious element of self-interest, she appears to have absolutely no education or other qualifications to opine on the nature of bubbles and whether we are in one. Go back to chauffeuring people around to look at houses, lady. You know about as much about Canadian lending standards as my dog.

  3. Anyone here remembers the “no bubble” articles at bloodhound realty (Phonix, AZ) blog in 2006?

  4. This realtor needs her head checked, probably has denial issues leftover from childhood. This is a big, dirty, greasy bubble that is going to spew a deluge of housing matter nationwide. It will be disgusting.

  5. People hang on to the illusion because it helps them sleep at night and function normally. If they were smart they would recognize reality and make plans accordingly, even if that means getting an new career. But I think there are many deniers who will opt to let life hit them like a brick wall before they change their plans.

  6. Wow! What a complete and total nutter! Not only does she write such obvious drivel but she’s not even a Vancouver realtor. She’s a Delta realtor accordIng to her profile. Guess what kind of area is going to be absolutely squashed by a nasty bubble pop?

  7. oh no, it’s a bubble cuz a blogger cannot afford local real estate. there you have it!

    • Yeah, that’d be another great example of using completely irrelevant (and, for what it is worth, incorrect) assumptions to avoid looking at the actual evidence, to avoid coming to inconvenient conclusions.

    • Renters Revenge

      Marginal revolutionaries: The crisis and the blogosphere have opened mainstream economics up to new attack
      “Economics, perhaps more than any other discipline, has taken to blogs with gusto. Mainstream figures such as Paul Krugman and Greg Mankiw have commanded large online audiences for years, audiences which include many of their peers. But the crisis has made the academic establishment fractious and vulnerable. Highly credentialed economists now publicly mock each other’s ignorance and foolishness. That has created an opening for the less decorated members of the guild, and the truly peripheral. In the blogosphere anywhere can be, as the title of Mr Mosler’s blog has it, “The Center of the Universe”.”

      http://www.economist.com/node/21542174

      • The internet has been a formidable force regarding educating a minority about speculative manias. The process likely started with contrarian opinions about the tech bubble: even though they made up a miniscule percentage of market followers, there were many sensible folks online discussing the nature of the tech bubble while it was still expanding.
        As a reader on the web, you got to see analyses that simply wouldn’t have been available to the ‘man in the street’ during prior manias.
        Yes, there is lots of crazy stuff on the web, but, if one reads enough, you start getting an idea about which commentators make sense, who has positive predictive capacity, and you definitely can get exposure to perspectives that simply weren’t widely available just 15-20 years ago.
        Yes, you are at risk of going down a rabbit hole with lunatics who share your own crazy theories; it’s one of the risks. (Reading broadly and often protects against that, a bit.)
        At the same time the web is such a powerfully democratic way of expressing opinion and hashing out ideas.
        If mankind ever evolves socially and psychologically to the point where speculative manias are eradicated, it is likely to come about via the kinds of knowledge sharing now available to us by virtue of the web.

      • The field badly needs to challenge bad ideas. Economics has been found to teach way too many things that are wrong. The blogs are doing their job, and in time after the books are rewritten and the consensus jives with reality most blogs will fade into obscurity.

    • 4SlicesofCheese

      Please don’t ever change Fred, you are the best.

    • Wow. 2 sentences. Must have been a good week.

      Gotta work on the capitalization some, though I hear it’s getting a bit dear so I understand your austerity.

  8. I already posted this in a previous entry, but this study shows in economic experiments that even if the people who are buying and selling assets where they know the fundamental values, bubbles will still occur:

    http://noahpinionblog.blogspot.com/2012/01/why-do-bubbles-happen.html

    There is much to learn from these insights w.r.t. the local Vancouver real estate market.

    • Sorry, hazu chan, should have acknowledged your link first time around: This makes an interesting read; describe experiments pertaining to asset bubbles; recommended to all. Thanks.

    • Can’t prevent people from making mistakes. It’s part of progress – trial and error, live and learn. The ssw expat only demonstrates, somewhat predictably, that people will herd. And in markets, that leads to price excursions. And if you are trading a constant value asset, aligning with the herd makes it more likely that you will lose. They also neglect to note that the markets always gets the answer right, eventually. The market is a complex, adaptive mechanism. Bubbles only become large and dangerous when policies are enacted which prevent its normal operation.

      • The “somethingfor nothing” panacea. Can you really blame them..

      • @jesse. sort of. i just have a pet peeve with pseudo science like the ssw expt demonstrating the obvious (well sometimes i have a near mi and need to pen a longer rant).

        there is some insight into mass psychology there but it completely ignores the root cause of all financial bubbles: too much credit available where it should not be – not a market phenomena. there has never been a major free market credit bubble. here are the root causes for RE bubble again:
        - fed/boc interest rate policy … taxpayer funded credit way below free market rates
        - cmhc backing … taxpayer funded insurance at prices way below free market
        - high tax rates non-RE vs RE

        free market sounds so cliche, admittedly. but what is it? it is a lot of people doing a lot of complex economic calculation and freely interacting via prices. does it make sense to replace all of that with a bunch of dopes in a room with no accountability? i.e. the fed. it’s socialism or fascism/cronyism depending on if you think they’re trying to do the right thing or serving special interests. people have an inclination to herd and gamble. it’s just human nature. it only gets out of hand when policies prevent normal market operation.

        i work in semiconductors. our industry is famous for manic boom-bust cycles. the landscape is littered with failures everywhere. competition is rabid. yet in the end, what have you got? 30+ years of compounded double-digit improvements in price/performance. this is the backbone of the computer sw and hw industry. it makes everything else possible by driving cost/quality, continuously getting more for less. it’s massively, outrageously price deflationary. omg. keynesian/monetarist/socialist idiots should say what a freakin disaster! why would people buy anything knowing price/performance will halve in 3-4 years?! think of the demand and economic progress we’d have generated if instead there had been 30+ years of increasing prices.

        people are incredibly resilient, creative and adaptive. a nannified state kills this in them.

      • chubster -> good comment.
        A truly free market is a ‘machine’ that possibly harnesses the intelligence of all present and gets them to vote with their own hard-earned assets. Could committees ever possibly hope to beat that?
        Do you think any regulation is necessary at all? Just for one example, what about the risk of monopolies to a free market?

      • @chubster, a big difference betwen semi/tech and RE is that tech innovates in big ways with each cycle. RE’s innovation growth is much slower in its nature.

        I don’t know if you were around in the late ’90s during the penultimate tech boom but there was significant wastage in terms of poor business plans and misdirected resources. Perhaps it moved the dial forward but I think it could have been done without the magnitude of excesses witnessed during that era.

      • aren’t the fingers pointing to deregulation as one reason for current economic mess?

        the question is: what beliefs, values, and principles drive the regulation? there has to be something there as a guide, for example when regulation needs to be updated as the economic landscape changes

        somehow “the economy” became a goal in itself, forgetting that a good economy is only a means to an end

      • @vreaa. can’t see anything wrong with a monopoly justified on merit. a monopoly based on legislated barriers to competition, however, is the law perverted per bastiat. that’s the philosophic ideal: just law defends the right to open competition. this effectively is adaptive regulation – all you need and more. the practical situation is very far from ideal. the law typically does the opposite and this is why we are in such a mess.

      • @jesse 940am. there will always be excesses and waste – hindsight. re: late 90′s, there was a legitimate tech build out. this was amplified to extremes, again by fed policies, mispricing interest rates and backstopping leveraged speculation. eg. bailing out ltcm. imagine if s&l and ltcm were allowed to fail with no backstops. the RE bubble probably never takes off.

      • chubster -> Couldn’t a monopoly theoretically ‘corner’ a market, force producers to sell at artificially low prices to the only buyer in town, etc, etc., thus making a market less ‘free’.

        MM -> Actually, there is a good argument that the problems of the last decade have been caused by the moral hazard which results from intervention/regulation. If all banks knew that they would be allowed to fail, they would be more prudent with their gambles. Thus, a truly free market may have resulted in fewer extreme situations.

      • @jesse: Oh Jesse, tisk tisk, 90s tech boom = classic credit bubble.

  9. I truly enjoy your blog, good to see Keen been mentioned, I was just reading his “Debtwatch Manifesto”, http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/, a little long, but terribly interesting and informative, in it he states that: “Debt acceleration is the main factor in determining asset prices. Asset bubbles therefore have to burst, because debt acceleration cannot remain positive forever.”

    Who knows, Ms. Bach may be right, there may not be a bubble in 2012.

    • By that do you mean that everything may implode to the point that the bubble is completely resolved before the end of 2012?
      (we don’t anticipate such a rapid resolution… it’ll take years.)

      • I just meant that the bubble may burst in 2012, in which case, the bubble will be gone. I’m not sure what you mean by resolution, whatever is left behind won’t be pretty. After the burst, the asset prices may or may not follow the script you outline, deleveraging will take years if not decades, but asset price implosion may occur sooner, it may drag out with an up and then down as you suggest, but there’s also too much debt, Canadian household debt is > 150%, and Vancouver wise? A lot of generational wealth is already tied up in real estate, many twenty and thirty somethings either borrowed via CHMC insurance or via the help of their parent’s retirement funds, if the economy implodes, pension and retirement funds will also lose value. As generational wealth goes so goes the middle class. Canada may not be “the island of stability” that it was in 2008, canadian jobs numbers are lately not looking great, US jobs are arguably better, but their numbers may not be sustainable, China this time may not act as the engine of the world, and the european slow down is already affecting the rest of the BRICS, there are just too many variables for artificial high asset prices after a burst. It’s also conceivable for the real estate bubble to chug along for 2012, also the mainstream media and economists will never identify a duck as a duck until it is too late, calling it too early may trigger a self-fulfilling prophecy, I think they’re calling it a balloon now.

  10. Okay Fred. What about people like me who have cash to buy a house? No mortgage required. Any price up to $1.2 million. Am I one of those bloggers who can’t afford to buy a house there, so I need a housing collapse? It is what it is. Denying doesn’t make the bubble go away. Meanwhile I’m happily renting. And BTW rents are falling.

    • then no problem. we are all rich. we all have cash to buy houses. but we have to bitch about everything. we just have to dig at garth’s blog, find something to headline, and we have thing to bitch about it all year long!

      • fred appears unable to see how a speculative mania has innumerable deleterious effects on a society, regardless of whether you as an individual can afford to buy or not.

    • renting bloggers who have cash to pay for a detached home in Vancouver but are prudently waiting for prices to correct:
      stated = 95%
      actual = 0%

  11. Funny, no comments to the Bach article have been approved yet.

    But it’s great that she suggests real estate agent fees be market driven, I hope the media picks up on that.

    And Fred, your attempts to shoot the messenger are futile. The current situation is unsustainable, so better wake up and start adapting to where things will be going.

    • blog less and work more, then any situation is sustainable.

      • lazy canadians!

        ever notice how fred’s answer is always ‘work more’

        yeesh no thanks, hitler

      • thanks fred, but I work just the right amount – I have other obligations after all

        aside from obligations to my family, I have an obligation to myself to continuing to learn, think, observe and discuss the world around me, to have a view of what is good and right, and to feed this into the community (another obligation)

  12. “While economists and pundits have claimed affordability indices are the true measurement of anticipating a housing bubble, there is no historical data to support it.”

    This one sentence summarizes all you need to know about the position.

  13. I have decided, after listening to bulls and real estate folks, that they conflate “no one can predict a bubble until it pops” with “no one can predict when a bubble will pop.”

    Over and over, we’re told that since it hasn’t popped, then there’s no bubble. Of course, if you were riding the bull wave and seeing Real Estate (or any bubble) as something you can flip & pulling profits from … not falling for the siren song of “double or nothing” …. well, than I suppose timing is more important than fundamentals to you. What these folks want is not an examination of housing, what they want is a best by date that allows them to maximize the upside. And every day that we say “whoa, you can rent a bigger place, in a better location, for thousands less per year” is a day that we’re saying sell. And the bulls think there’s more juice in the market. EVERYONE, even Fred, knows it makes no bloomin’ sense here anymore.

    • No they aren’t conflating it. They are being deliberately obtuse because there is a sliver of a hope that the bubble may be a permanent phenomenon.

      You won’t know for sure you will die if you shoot yourself in the head until you shoot yourself in the head and you’re dead. Because you aren’t dead until you’re dead. QED

  14. Absinthe -> “I have decided, after listening to bulls and real estate folks, that they conflate “no one can predict a bubble until it pops” with “no one can predict when a bubble will pop.” ”

    Great observation; likely true for some of them.

    • It’s extremely difficult to predict the timing of a market in a bubble but most traders/investors recognize a bubble for what it is and actively seek them out for their money making potential. An important consideration is potential changes in liquidity once it’s evident that the bubble is in its final phase before popping. This is when the momentum indicators are crucial – remaining long while waiting for the uptrend to break as the sell signal can be very dangerous for illiquid assets (especially real estate) because of the liklihood of gaps down in pricing. After a gap down in 2012, one should look for the classic bull trap which I fully expect to see in 2013. 2014 to 2015 will see the huge price declines.

      • We have no idea as to the timing of how this will play out, but we do agree with your description of the likely shape of the descent (bull trap bounce (likely off the 2009 lows), and then down severely once that level fails).

      • Bull trap unlikely, IMO. Too many have seen this movie already. It just goes down.

      • Chubster -> we’ll see. Either possible.

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