Monthly Archives: February 2012

Macleans – ‘Time to panic about the housing market; Why is everyone ignoring this unfolding disaster?’

“Nicole Austin, 31, and her boyfriend, Jim Varlas, know the mania all too well. The couple decided to sell their downtown Toronto condos and buy a house in Markham, a suburb north of the city. They moved in with Varlas’s parents and started shopping around for a house with a budget of $400,000. “Either the homes in our price range were really outdated and hadn’t been touched since the 1970s, or they would need to be renovated,” Austin says. They upped their budget to $500,000 and bid on three homes. They lost all three in bidding wars that pushed prices up as high as $575,000. “In some cases we knew what the house was worth and there was a certain point where we’d just walk away because it was getting ridiculous,” Austin says.
Earlier this month, the couple settled on a new build, paying “in the mid-to-high 500s.” But Austin says taking on a larger mortgage than expected was a fair tradeoff for finding a house in their chosen city. The couple say they expect prices to crash, but that doesn’t matter much since they plan to be in their home for at least 10 years.”

- from ‘Time to panic about the housing market; Why is everyone ignoring this unfolding disaster?’, by Tamsin McMahon, Macleans, 28 Feb 2012

The entire article is a ‘must-read’. Startlingly bearish for such a prominent, mainstream publication.
This issue’s cover was previously archived here.
Excerpts:
“Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the world’s new beacon for financial stewardship. It’s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.
But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt.”


“Since 2008, Canada’s ratio of debt to after-tax income has exploded. By the third quarter of 2011, Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.”

“There’s also a sharp rise in home ownership rates, which at about 68 per cent of Canadians mirrors closely the 69 per cent at the top of the U.S. bubble.”

All of the dots are laid out so obviously now, but it’s still extremely painful for most to draw the logical conclusions.
People ‘know’ that this is a bubble, but they refuse to really accept what that means.
Fantasies of mild pullbacks satisfying the ‘bubble gods’ abound.
Speculative manias only end when the excess is wrung out, when prices drop to levels supported by fundamentals, and, usually, there is overshoot to the downside. For Vancouver RE, this means price drops of 50%-66%, perhaps even more.
- vreaa

Learn From The Hindsight Of Others – “Your mistake was buying a house that was overinflated by over 100% of its actual value and not seeing that housing prices can’t keep increasing 10% a year indefinitely.”

“I found a blog post through the Wall Street Journal and while the post is from mid-2011 and pretty standard, the comments from US RE victims was very interesting. Take a look at the post for a good example of fallout.”
- ‘MC’, via e-mail to VREAA, 27 Feb 2012 [Thanks, MC. -ed.]

In the article, the blogger ‘Thursday Bram’ writes: “When you purchase a house, the general rule is that you want to be sure to be in the same location for at least five years. Otherwise, financially, you’re probably going to take a hit.”

Some comments on the post:

‘houseregrets’, June 6, 2011 at 7:06 am -
“You might want to take into account the millions of people like us who bought a little starter home back in 2006 (just to get in the market– advice was to get in and build equity to sell for a bigger home). We didn’t buy at the top of what we were told we could afford, and we chose a 30 year fixed mortgage, not being persuaded into an adjustable rate. Now, two kids later, 5 years later, our house is worth $100,000+ less than what we paid, we have way outgrown this starter home. With 2 stable incomes, we aren’t approved to do a short sale and just have to live with the situation. With forecasts that the bottom hasn’t yet hit and might not for a few more years, you might want to adjust this advice to say it’s a 10+ year rule.”

‘Also bought in ’06′, June 12, 2011 at 6:03 am -
“I agree with houseregrets. We bought a modest starter home in early 2006, snagging a 3 bedroom, 1500 square foot Cape in a quiet neighborhood. Rather than doing stupid things with balloon or interest-only junk loans or maximizing our borrowing power, we calculated a comfortable payment and worked backwards to figure out our max house price. We have a 30 year fixed rate loan and got a wonderful rate. The assumption we made was that we would likely sell and move up to a bigger/better house in 5-7 years. 5 years later, comps in our town have nosedived in value. If we had to sell today, we would be lucky to get what we owe on the house (and it would take 6-12 months to sell, assuming it did). After realtors’ commissions and closing costs we’d walk away owing money. So paying our mortgage faithfully and on time for 5.5 years has gotten us zero equity, and in fact we have essentially “lost” the tens of thousands of dollars we put down on the house and have invested into improvements.”

‘Michael Henson’, October 30, 2011 at 11:14 pm -
“Not true. I bought for $300K in 2006, put $60k down, made all payments on time, and I even paid an extra $20 k on the principle. My rate is 6.5%. My house is now worth $125k, if I’m lucky. I now owe $209K. So where was my stupid mistake and overstepping my means?”

‘Pete’, January 4, 2012 at 7:59 am -
“Your stupid mistake was when you bought a house that was overinflated by over 100% of its actual value and didn’t see the writing on the wall that housing prices can’t keep increasing 10% a year indefinitely.”

“After two years of convincing my friend of a housing bubble, he decides to list his Burnaby condo. Open house over the weekend, no one came.”

“After two years of convincing my friend of a housing bubble, my friend decides to list his 1 br Burnaby condo.
Open house over the weekend, no one came.”

- 4SlicesofCheese at VREAA 27 Feb 2012 11:47pm

Ian Watt, Realtor – “I don’t like to do predictions on real estate. I own a few properties, and I’m not selling them anytime soon. My plan is to hold them for the long term.”

“I’m not an economist, I don’t understand any of that, I am very uneducated when it come to the economy, what I do know, though… I don’t like to do predictions on real estate, I’m hired, basically, to market, expose and facilitate a transaction, that’s pretty much it.. that’s all I’m hired for… I’m hired to get the best dollar, at the best price, for the present market conditions, no matter what’s going on”

“So, I don’t really know the answer.. if we’re in a bubble or not. But, I don’t think there’s anything that indicates that our real estate can go up any higher in the next year or two… probably, if I were to bet if it were to go up or down, I’d probably say that it has better chances of going down than going up, in the next year… Having said that, I do own a few properties, and I’m not selling them anytime soon. My plan is to hold them for the long term.”

- Ian Watt, local realtor, self-posted video at youtube, 25 Feb 2012

The first paragraph is very, very smart realtor talk. We believe that that is precisely how good realtors should present themselves… as expert deal facilitators and not market predictors. Most don’t, of course, and can’t resist predicting future market strength.
Ian is himself on record as having made statements like “I don’t think that [Vancouver RE prices] are going to drop 30% back to prices of 15, 20 years ago. I just don’t see it happening” [VREAA 9 Nov 2010], so he seems to at times break his own rules.
Ian tells us he owns “a few properties” and it would be interesting to know what percentage of his net-worth is in Vancouver RE.
Also, it’d be interesting to know how strong his hands are… would he keep holding at 20%-, 25%-, 30%-, 35%-off?
- vreaa

[PS: Yes, connoisseurs, that’s another gorgeous back-alley shot that Ian has scouted. He remains Vancouver RE’s “undisputed King of the DashCam”, and more of his work can be seen in our ‘Realtor DashCam Gallery‘, where he still holds poll-position. -ed.]

One Of These Things Is A Lot Like The Other – “Australian prices matched other countries’ bubbles until 2008. But while the real estate process elsewhere has since been deflating, Australian prices marched higher after a brief respite. The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case for a housing/land shortage.”

.

Australian fundamentals, or lack of them. Enough to make a Canadian homesick.

“It’s different from the US. The Australians have a very strong economy. China is buying our coal and iron ore like crazy! That’s not going to stop any time soon.”

The Australian economy today
What the bulls will tell you:
“The Australian economy is a true success story compared to those of other developed countries. It almost completely escaped the “Great Recession” and with its GDP slightly dipping for only one quarter in late 2008, its unemployment stands today at an enviable 5.1%. Real estate is booming. Until recently, the Reserve Bank of Australia was raising rates to fight inflation and “economic overheating.”
Reality:
The reality is starkly different: Australia has a very vulnerable economy where upcoming bad news has not been “priced in” at all. The country suffers from an epic real estate bubble that greatly exceeds those of US, Ireland, and Spain. The average Australian consumer is completely tapped out. Take out a “consumer credit” punchbowl and reduce the Chinese voracious appetite for iron ore and coal, and the Australian economy will collapse like a house of cards.

Australian Real Estate Bubble
What the bulls will tell you:
“We hear bubble warnings all the time today as many people see bubbles everywhere where a price has appreciated. You can hear about “commodity bubbles”, “treasury bonds bubbles”, “new dot.com bubbles”, etc. Australian housing is built on solid fundamentals due to economic and population growth. There is not enough land in large cities to build houses to meet ever-increasing demand.”
Reality:
It’s always instructive to take a look at historical trends and plot a “mean-reversion” graph before concluding that something is significantly overpriced.
Optimist’s claims are not supported by any other data such as high GDP growth rate, rising rates, or increasing construction costs.
What’s truly remarkable is that the Australian economy had sub-par GDP growth rate (under 2% vs. USA over 3%) for the last 30 years, while real estate prices significantly outpaced those in the USA. The fact that the Australian real estate bubble is probably 30 years old is missed by many observers who plot data from the year 2000.
Australian prices matched some of the other country’s bubbles until 2008. But while the real estate process elsewhere has been deflating, the Australian prices marched higher after a brief respite.
The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case that Australia is experiencing a housing/land shortage. The rising income and rising construction costs were (at best) only minor contributing factors to the price rise.


What may “pop” the bubble
The Australian real estate bubble has run longer and deeper than recent property bubbles in the USA, Ireland, and Spain. Heavily indebted Australian consumers, just like those in America, have a large portion of personal wealth tied-up in real estate. The price correction has not yet run its course (the mortgage defaults hover around 2%). When it does, it will certainly plunge the Australian economy into a severe recession.


- from ‘An Epic Australian Bust’, Igor Novgorodtsev, Seeking Alpha, 27 Feb 2012 [hat-tip Farmer]

“Another two people I spoke to in passing have just decided to list their homes because they fear impending price declines.”

“Another week, and another two people I spoke to in passing have just decided to list their homes because they fear impending price declines… One of them told me their realtor showed them an inventory graph that sounded remarkably similar to the one from VCI, and also said the shit will hit the fan in spring, and that they should really hurry and list to try to catch the last of the HAM before the China crash tightens up the availability of funds from there… and that SFHs will see large declines in sale price this year.”
- TPFKAA at VREAA 24 Feb 2012 at 8:07pm

“I was at supper with a large group of friends earlier this week, many who are Westside owners, when one who had never mentioned RE before piped up “Sometimes I think we’re fools not to take advantage of these high prices and sell.”
- West-side Frank, via e-mail to VREAA, 23 Feb 2012

Pumps are primed (People ‘know’ it’s a bubble).
It’s going to happen (Rush to realize profits; sellers storming to market; buyers backing off; steep price drop; self-perpetuating further drops).
- vreaa

West-Side Report – “8 yr old SFH; $3M+ ask price; 150 people through multiple Open Houses; No bids yet; Seller has already bought a new house nearby”

“Over here on the West Side, I’m starting to hear some noises like those made by untied, inflated balloon when they are let go.
Stopped by an Open House for a place built in the last 8 years, a few blocks away from where there have been recent bidding wars for teardowns. $3-million plus pricetag for this place. The listing realtor said close to 150 people had come through over the course of multiple Open Houses. No bids yet. The would-be seller has already bought a new house in another nearby neighbourhood. I got the feeling that not only the listing realtor but the seller was starting to get nervous about unloading this house.
Saw another very unbusy Open House a few blocks away for a $2-million- plus newer place, built in the last 15 years and reno’d 3 years ago.
Teardowns look like they may be the most popular right now in this neighbourhood, but I’m wondering if the first signs of a real West-Side SFH slowdown are appearing, as I’ve suggested before, in the more newly-built inventory.”

- Vesta at VREAA 19 Feb 2012 5:20pm