Monthly Archives: December 2012

Spot The Speculators #94 – They’ve lowered their price to $950K already, but they’re “not going to lower it any more because they want to retire, and they really believe that’s what it’s worth because they built it themselves, and it’s one of a kind, yadda, yadda, yadda.”

“Talking to a colleague at the office this morning over coffee. Her relative is trying to sell their $950K house and acreage on the Sunshine Coast in BC, just a 45 minute ferry ride north of Vancouver. It was built it in 2000…..but they inherited the land for 10 years before that. So, a 50/50 “freebee” from a monetary perspective, but that’s only “IF” they didn’t take all of their equity out, that is……and we don’t know that they didn’t do this already.
I casually asked how long it had been listed, and I got the reply “since late 2008″. ROFL !!
Then I get told they’ve lowered their price already, but they’re “not going to do it any more because they want to retire, and they really believe that is what it is worth because they built it themselves, and it’s one of a kind, yadda, yadda, yadda”. So I go and search the town on realtor.ca and it looks like a really bad case of the measles have hit the Sunshine Coast. Not only is there literally a hundred red dots, but most of them have numbers like 12, 25, 43, 33, 17, 5, etc, overlaid on them, indicating multiple listings contained within that dot.”

Carioca Canuck at VREAA 28 Dec 2012 8:18am who added “Here’s another anecdote from the “willing to sit until I get my price crowd”.

We’re making the point here that any owners who have decided to sell, but then don’t steadily drop their ask price until they hit a bid, are delaying selling on the premise of future market strength.
This is also an example of long-term owners who have, it appears, become dependent on the presumed value of their RE for their future retirement security. We fear that there are many in their position who will have their plans hobbled in the downturn.
– vreaa

Behavioural Finance Textbook Describes Crashes – “As a bubble starts to unwind, there can be under-reaction when investors do not update their beliefs sufficiently, with cognitive dissonance, attempting to rationalize flawed decisions, and initially ignoring or unwilling to accept losses. In crashes, investors hold on to losers and postpone regret. This response initially causes an under-reaction to bad news, but a later capitulation and acceleration of price decline.”

The following from ‘a reader’, via e-mail to vreaa 29 Dec 2012, who writes: “The following is from a CFA level 3 Behavioral Finance textbook that a friend of mine found at a garage sale. Not too many people have access to the book so it might be of some interest. Nothing really too new, but it’s the only time I’ve seen bubbles and crashes written about in a textbook, they are not discussed in university level textbooks as far as I have seen. Provides a lot of insight into the biases that come into play with bubbles and the summary discusses how the crash unfolds. I sounds to me like we are at the early stages of such a crash.”

Bubbles and Crashes
Stock market bubbles and crashes present a challenge to the concept of market efficiency. Periods of significant overvaluation or undervaluation can persist for more than one year, rather than rapidly correcting to fair value. The efficient market hypothesis implies the absence of such bubbles. The frequent emergence of bubbles in history was documented in Extraordinary Popular Delusions and the Madness of Crowds (Mackay 1841). The book captures the concept of extremes of sentiment and apparent mass irrationality. Bubbles and crashes appear to be panics of buying and selling. A continuous rise in an asset price is fuelled by investors’ expectations of further increase; asset prices become decoupled from economic fundamentals.
A more objective modern definition specifies periods when a price index for an asset class trades more than two standard deviations outside its historic trend. Statistically, if returns are normally distributed, such periods should not represent more than 5 percent of total observations. However, for some stock markets and asset classes, these extremes of valuation account for more than 10 percent.

cfa exhibit 11

Bubbles and crashes are, respectively, periods of unusual positive or negative asset returns because of prices varying considerably from or reverting to their intrinsic value. Typically, during these periods, price changes are the main component of returns. Bubbles typically develop more slowly relative to crashes, which can be rapid. This asymmetry points to a difference in the behavioral factors involved. A crash would typically be a fall of 30 percent or more in asset prices in a period of several months. Some bubbles and crashes will reflect rapid changes in economic prospects that investors failed to anticipate. The global oil price shock of the 1970s and the Japanese asset price bubbles of the late 1980s, in which real estate and stock prices rose dramatically, would be examples. Initially in a bubble, some participants may view the trading and prices as a rational response – for example, to easy monetary conditions or a liquidity squeeze – but this view is typically followed by doubts about whether prices reflect fundamental values.
These bubbles have been observed in most decades and in a wide range of asset classes. Recent examples are the technology bubble of 1999-2000 and the residential property boom of 2005-2007, evident in a range of economies globally including the United States, the United Kingdom, and Australia. They appear to be periods of collective irrationality, but can be analyzed in more detail as representing some specific behavioral characteristics of individuals. Behavioral finance does not yet provide a full explanation for such market behavior, but a number of specific cognitive biases and emotional biases prevalent during such periods can be identified.
First, it should be noted that there can also be rational explanations for some bubbles. Rational investors may expect a future crash but not know its exact timing. For periods of time, there may not be effective arbitrage because of the cost of selling short, unwillingness of investors to bear extended losses, or simply unavailability of suitable instruments. These were considerations in the technology and real estate bubbles. Investment managers incentivized on, or accountable for, short-term performance may even rationalize their participation in the bubble in terms of commercial or career risk.
The extent to which investors may rationalize their behavior during bubbles is evident in Exhibit 12 [Investor Behavior in Bubbles]. Both managers appear to have misunderstood risks and exhibited the illusion of control bias. The manager of Fund A believed he could exit a bubble profitably by selling near the top. The manager of Fund B may not have recognized the potential scale of a bubble, or client perspectives on a period of relative underperformance while not participating in the bubble.
Consider the differing behavior of two managers of major hedge funds during the technology stock bubble of 1998-2000:
The manager of Hedge Fund A was asked why he did not get out of internet stocks earlier even though he knew by December 1999 that technology stocks were overvalued. “We thought it was the eighth inning, and it was the ninth. I did not think the NASDAQ composite would go down 33 percent in 15 days.” Faced with losses, and despite a previous strong 12-year record, he resigned as Hedge Fund A’s manager in April 2000.
The manager of Hedge Fund B refused to invest in technology stocks in 1998 and 1999 because he thought they were overvalued. After strong performance over 17 years, Hedge Fund B was dissolved in 2000 because its returns could not keep up with the returns generated by technology stocks.
In bubbles, investors often exhibit symptoms of overconfidence, overtrading, underestimation of risks, failure to diversify, and rejection of contradictory information. With overconfidence, investors are more active and trading volume increases, thus lowering their expected profits. For overconfident investors (active traders), studies have shown that returns are less than returns to either less active traders or the market while risk is higher (Barber and Odean 2000). At the market level, volatility also often increases in a market with overconfident traders.
The overconfidence and excessive trading that contribute to a bubble are linked to confirmation bias and self-attribution bias. In a rising market, sales of stocks from a portfolio will typically be profitable, even if winners are being sold too soon. Investors can have faulty learning models that bias their understanding of this profit to take personal credit for success. This behavior is also related to hindsight bias, in which individuals can reconstruct prior beliefs and deceive themselves that they are correct more often that they truly are. This bias creates the feeling of “I knew it all along.” Selling for a gain appears to validate a good decision in an original purchase and may confer a sense of pride in locking in the profit. This generates overconfidence that can lead to poor decisions. Regret aversion can also encourage investors to participate in a bubble, believing they are “missing out” on profit opportunities as stocks continue to appreciate.
Overconfidence involves an illusion of knowledge. Investors would be better off not trading on all the available information, which includes noise or non-relevant information. Asset prices provide a mix of information, both facts and the mood of the crowd. But in a stock market bubble, noise trading increases and overall trading volumes are high. Noise trading is buying and selling activity conduceted in the absence of meaningful new information, and is often based on the flow of irrelevant information. A manager increasing trading activity in a rising stock market can misinterpret the profitability of activity, believing it is trading skill rather than market direction delivering profits.
The disposition effect recognizes that investors are more willing to sell winners, which can encourage excess trading. There can also be a confirmation bias to select news that supports an existing decision or investment. Indeed, search processes may focus almost exclusively on finding additional confirmatory information. Investors may be uncomfortable with contradictory information and reject it. Investors can also have a bias to buy stocks that attract their attention, and pay more attention to the market when it is rising. For short-term traders who may derive entertainment from the market, monitoring rising stock prices is more entertaining and instills more pride. Entertainment and pride are emotional effects.
As a bubble unwinds, there can be under-reaction that can be caused by anchoring when investors do not update their beliefs sufficiently. The early stages of unwinding a bubble can involve investors in cognitive dissonance, ignoring losses, and attempting to rationalize flawed decisions. As a bubble unwinds, investors may initially be unwilling to accept losses. In crashes, the disposition effect encourages investors to hold on to losers and postpone regret. This response can initially cause an under-reaction to bad news, but a later capitulation and acceleration of share price decline. This situation will only apply to stocks already held by investors, with hedge funds that can sell stock short being more inclined to react first to bad news in a downturn. In crashes, there may be belief that short sellers know more and have superior information or analysis.

Less Expensive Is Better – “So they’ll buy a less expensive home. Good. I consider that desirable.”

flaherty

“It will mean that some people will not buy into the market. It will also mean that some people will buy less into the market… so they’ll buy a less expensive home, or less expensive condominium. … Good! I consider that desirable.”
– Jim Flaherty, Canadian Minister of Finance, April 2012 news conference regarding mortgage condition tightening, as recapped on Global TV News, 18 Dec 2012 [hat-tip Greenhorn for the archived video clip]

Not less of a home, note, but a less expensive home.
This is, indeed, desirable.
– vreaa

Canadian Cities Inflation Adjusted House Prices, 1980-2011, Annotated Chart

Canadian cities house price index with quotes 1980

- chart from Kevin at saskatoonhousingbubble, referred to at VREAA 28 Dec 2012, headlined by popular request. Thanks Kevin and UBCghettodweller. Kevin adds: “The housing bubble that popped in the early 80′s was in Western Canada while Central and Eastern Canada were not affected. The housing bubble that popped in the early 90′s was centered in Toronto and area while the west was still recovering from the 80′s. Today, in 2012, it looks like the housing bubble is spread throughout Canada but to differing degrees.”

“I am probably one of the few on this and other blogs who sat thru a RE collapse first hand in Canada back in the early 80′s when I was a banker here in Calgary…”

“I am probably one of the few on this and other blogs who sat thru a RE collapse first hand here in Canada back in the early 80′s when I was a banker here in Calgary. I watched the second mortgage portfolio I managed for National Trust Company go down from 100MM, to about 65MM, in a little over 12 months due to foreclosures and property devaluation. This was at a time when CMHC financing needed 15% down, and we actually took such obscure concepts as credit worthiness, debt to income ratios and past payment history into account “before” we dished the money out. Also, most second mortgages were in the amount of $15-25K on average, as most houses were not much above $125-150K at the peak. If any you thought it was bad last time………..this time around will make history look like picnic.” …
“I was averaging 75 – 100 foreclosures / quit claims a month over 1983/84. And, I just ran the second mortgage and personal loans department. We also had a humongous first mortgage department with its own problems. Thing is, I distinctly remember foreclosing on a ton of realtors’ spec properties, and also their primary residences, as well as that about 75% of the places we eventually got back had been listed in vain (priced too high) for 12-18 months beforehand.”
Carioca Canuck at VREAA 27 Dec 2012 5:58pm and 28 Dec 2012 8:28am

“I was there, too. Was working for a Trust Company that was scrambling to save its own sorry arse after having dished out too much credit. People were desperate to get loans but easy lending had dried up and rejections were the game of the day if you could not bring collateral. Hardly a day went by when I did not see someone sobbing at the loans officers desk. They brought in art work and antiques and junk they thought was valuable to persuade the manager. Nobody cared though. You know how much that stuff is really worth when only cold hard cash, bonds or securites will suffice? Not a spit. I was an assistant then and a mere observer but the image stuck. Never get in debt over your head because when the day of reckoning comes even your friendly banker will pull the plug on you and never give it a second thought. Most people do not realize that internal policy changes at financial institutions where lending is concerned are bureaucratic and very inflexible when the mood changes. It is just a machine that will not be swayed by sentiments and emotion. And all that crap that you thought was valuable is not worth ten cents on the dollar anymore. So I agree with Carioca. This next go-round is going to be quite an experience for the novices in the crowd.”
Farmer at VREAA 27 Dec 2012 10:53pm

“I was a loans officer at a medium sized Credit Union in the 80s.
Heartbreaking. Homeowners were dropping off the keys, walking away.
We did not have the heart to foreclose, ended up as landlords of properties valued way below the mortgage.
After 3 years, the auditors forced us to write down the properties to market value, which almost bankrupted us.”

Real Estate Tsunami at VREAA 28 Dec 2012 7:11pm

Thanks to Carioca Canuck, Farmer, and Real Estate Tsunami for the above anecdotes.
Interesting to see that three regular readers saw battle during the 80’s RE collapse. There is little substitute for first-hand experience when it comes to markets.
– vreaa

Mortgage Policy Decisions – “The pressures on the Minister of Finance are to do the wrong thing.”

Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.

Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.

Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.

But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,” he says.
“And when something is too big to fail, the government will come in.”

Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.

- from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

CMHC allowed the mis-pricing of the risk of lending capital, and this contributed to the massive speculative mania in Vancouver RE. Note how this opinion is now becoming mainstream.
By the time prices have crashed (in a year or three?) we’ll have certain individuals saying both “We all knew it was a bubble” and “Who could have possibly foreseen this?”, sometimes in the very same paragraph. Just watch.
Further point: As usual when markets go through one of these massive manias, policy rethink always happens after the fact, when the horse has long since bolted and the market is already looking after the problem.
– vreaa

“I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”

housing-obrienxxrb1
Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low.

“In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.
The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.
“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,” Ms. O’Brien said. “We probably would have waited.”
The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,” said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,” argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.”


“What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.”


– above two anecdotes excerpted from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

Examples of two couples who bought houses, but shouldn’t have; and who, under normal circumstances (and, ironically, at lower prices), wouldn’t have.
– vreaa

“Neighbour has had place on westside listed forever. Had been holding firm on her price. Then decided to take off market. Then accepted offer 10% below ask. Then offer fell through. Now delisted awaiting the spring.”

“Neighbour has had place on westside listed forever…at least 8-9 months. Had been holding firm on her price. About a month ago she told me she was taking it off the market and waiting for spring “when things would rebound”. Ran into her about a week after that conversation and she said she had decided to take a lower offer after all and had sold it because her friends had told her to take the money and run. (Incidently the lower bid was still very reasonable in my opinion and a mere 10% off ask). Anyhoooo, that bid fell through due to financing problems (surprise). So she left it on market until a few days ago when she finally DELISTED it. So I guess she is back to hoping for the spring-time action.
Poor realtor was doing open houses for the entire day both days of the weekend for months and months. It must have been his only listing.”

Girlbear at VCI 25 Dec 2012 9:30pm

Imagine the sentiment now. If they relist in the spring and comparable properties are selling for 15% or more below last year’s ask, how will they respond?
– vreaa

Bears Care, Too


“…the schadenfreuden stories on Vancouver Real Estate Anecdote Archive. Always good for a bitter laugh.”Bill Lee at francesbula.com 26 Nov 2012

“I never did give anybody hell. I just told the truth and they thought it was hell.” – Harry S. Truman

All the very best for the festive season to all readers, and wishing you all a fine, peaceful 2013.
Regular readers know that we foresee challenging times ahead for the Vancouver RE market. This opinion is not a wish, it is simply the result of an analysis of all the available evidence. And it is most definitely not to be confused with a desire for bad things to befall anyone in our community.
The speculative mania in housing (2003-2012) has been detrimental to Vancouver. It has misallocated human and financial capital, and distorted the economy of the city. It has inconvenienced many, and, unfortunately, in the end, it will have financially and psychologically hobbled a good number of citizens. This outcome is inevitable. Again, please don’t confuse this observation with a wish, it is simply part and parcel of a spec mania: a messy resolution has been ‘baked in’ since prices hit the afterburners in the mid 2000’s. When asset prices are artificially inflated by a chain of ever increasing debt-financed transactions, there will always be a large group left ‘holding the bag’ when it all runs out of oxygen.
There is, unfortunately, no other way things can resolve, and nothing that can be done to significantly ameliorate the bubble’s consequences. It is too late for that. The problem was letting it develop in the first place; and not allowing it to unwind earlier.
Anybody who is wishing for soft-landings, or hoping that some form of kindness will somehow allow for a resolution that involves no damage, needs to answer this question: Who do I expect to do the buying that will let everybody down gently? Who do I expect to step in now, borrow (or ‘donate’) large sums of money, and agree to purchase properties that are still woefully above their fundamental values? (and thus exposing themselves to very large losses ahead). Who do you suggest should be the sacrificial lambs?
Those wishing for fantasy bullish, Pollyanna-ish outcomes may be well-meaning, but they are simply ignorant of bubble market dynamics. You can’t simply call the game off and hope that everybody wins; it doesn’t work like that after years of ever-increasing over-extension.
All that said and done, we hope that readers fare as well as possible. All citizens, owners or not, will feel some of the economic effects of a RE downturn. Non-owners will suffer less direct personal impact, and there are a good number of owners who will survive the RE bear market with just a scratch or two. We are most concerned about modest net-worth households who have almost all of their savings in their homes; often with leverage. We know it is a painful fact that they can’t all get out ‘whole’, but we fear for them nonetheless. Particularly vulnerable are those close to retirement who are relying on the value of their homes for a comfortable future.
We hope that Vancouver can find a way to make the transition from overvalued market to a fairly, and sustainably, valued market with as little damage, and as peaceably, as possible. In fact, for us, the ‘peace’ bit is paramount. Economic stress puts groups at risk of highly-charged fractures, and we sincerely hope that as a large and diverse group we’ll be able to avoid scapegoating, in-fighting, and division.
So, to emphasize: Bears care, too. They may come across as grumpy and (per force) contrarian, but they care as much for family, friends, neighbours, and fellow citizens as anybody else. Sure, the occasional bearish commenter will express the opinion that they will gain pleasure from the losses of speculators, but this is far from the commonest position. The very few Vancouverites who have seen this speculative mania for what it is most commonly express genuine concerns about the potential consequences for themselves, their families, and their fellow citizens.
– vreaa

“I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.” – Benjamin Franklin

“I think you’ll need another sidebar category to capture the mounting “why do you hate families/wish misery on others?” accusations that are going to come in increasing numbers. Long time bulls – and new visitors to this site – may trot that one out more and more, accusing you and posters here of schadenfreude, hating home “owners”, etc. Even if it doesn’t happen here, mind-bending statements in this vein will increasingly pop up elsewhere and be worth collecting. May I humbly suggest a sidebar icon with a picture of Helen Lovejoy and the words “won’t someone PLEASE think of the children?!?” to link to the post you ultimately create addressing this topic?
Past even-handedness will matter little to desperate people who will misinterpret many sentiments expressed here. The archive will be useful to a subset of these people who are willing to be taught the historical mechanics driving this bubble.”

– paraphrasing of Royce McCutcheon at VREAA 17 Sep 2012 8:50am [We'll call such a sidebar 'Bears Care, Too' -ed.]

“We bought in 2005 for $698K, we sold in 2011 for $2.1M and were looking for the Punk’d cameras as we faxed the agreements back and forth. The new owner was adamant that he was tearing down the second we moved out, but still hasn’t done so.”

“We bought in 2005 for $698k (I was 33) we sold in 2011 for $2.1m and were looking for the Punk’d cameras as we faxed the agreements back and forth.  We rented back for 6 months (for 1$) so the kids could finish school with no disruptions. The new owner was adamant that he was tearing down the second we moved out. Had surveyors, architect dudes coming by to measure stuff, lot was marked out and trees surrounded as we were getting ready to leave. We moved out and a couple of months passed…. nothing. We went trick-or-treating in the old hood and low and behold he’s rented the house out to two students for a year. How fast things change.”
Double Down at VREAA 28 November 2012 at 9:58 am & 10:02 am

A $1.4M gift, care of somebody else’s debt commitment.
– vreaa

“The bank called us and offered us a $300K HELOC on the $315K leaky condo without us even asking for it.”

“Our personal experience in 2008 really shook my confidence in how mortgage and HELOC approvals are handled by banks.
We used to own a 1Bedroom 1 Bath 780 Sqft “Penthouse” in East Vancouver, one block to Commercial Drive.
It was a good location, we renovated it from the inside, great so far… However the building had major issues from the outside and needed a complete rainscreening job. The Strata members fought each other for a long time and renovations were postponed while the damage got worse. Our share when it finally got done $78K.
We had no mortgage on it at the time and were able to get a loan from CMHC for the repairs which we took because it was interest free. Anyways, we sold the place for 315K after the renovation was done and made a good profit as I had bought it very cheap, back in 2001 when everybody was afraid of leaky condos and there were no buyers for this even though the location was great and the unit was nice from the inside.
Here is the part that shows the recklessness of lending though: After we were approved for the CMHC funds one of the major 5 banks who we were banking with at the time called us and offered us a HELOC on the place without us even asking for it.
I asked them how much could they give us and the answer was that based on the location, size and age they can give us up to 300K if we wanted to.”

Mike at VREAA 23 Dec 2012 2:14pm

“I was approved for about 420k in the spring I only made a little more than 50k last year. I looked at a few condos in Vancouver and decided to keep renting.”

“I was approved for about 420k in the spring I only made a little more than 50k last year. I looked at a few condos in Vancouver and decided to keep renting.
I sold my house on Vancouver island for about 40% over assessment also about 20k more than I thought it was worth. I don’t know if a human came to appraise it.
My experience of the past year from looking at condos to selling a home and getting pre-approved I see so many holes in our system.”

Funky Monkey at VREAA 23 Dec 2012 9:27am

“Five years ago my girlfriend and I were pre-approved for over 400k on a mortgage, without showing or proving any income.”

“Five years ago my girlfriend and I were approved for over 400k on a loan. You know, the kind that get pre-done before you shop. Well, that was without showing or proving any income. This was by word of mouth at a mortgage broker’s office. I said I have the papers to back my claims, she said doesn’t matter, we trust your word.
Why would phoney valuations made by a computer surprise anyone in today’s environment?
We never pulled the trigger on a place… good thing too!”

kc at VREAA 23 Dec 2012 9:12am

G&M On Emili – “Everyone is getting nervous now. There is more and more potential of a downturn in the marketplace.”

“Where banks once sent human appraisers to assess a home’s value and determine whether to provide a mortgage for it, the banking industry – encouraged by the federal government’s own Canadian Mortgage and Housing Corporation (CMHC) – had largely converted to a faster and cheaper system of automated underwriting, using computerized models to determine how much money to safely lend. The models weren’t perfect, but they were close enough. And what did it matter? House prices always seemed to be going up in Canada anyway.”

CMHC’s automated underwriting program – called Emili – had been stamping its approval on millions of mortgages as safe. But in Emili-approved cases where the banks were forced to foreclose, the homes turned out to be worth much less than believed.
As the housing market in Canada begins to cool and the federal government talks of a soft landing for home prices, rather than a hard crash, attention is turning to the factors that fed record borrowing and contributed to overheated sales and price increases – and the risks that now lie within the financial system. Rock-bottom interest rates propelled Canadian real estate to undreamt-of heights, and Ottawa’s decision to loosen mortgage rules added to the froth, as marginal buyers flooded into the market.
That much is amply documented. But an investigation by The Globe and Mail has uncovered a hidden risk in Canada’s housing markets: The rise of automated lending approvals, which has created a rapid-fire system that has financial regulators worried about the foundations that underpin Canada’s housing market. There are worries that the true worth of Canadians’ homes could be lower than what computerized methods spit out. There are also worries that unscrupulous human appraisers can manipulate home values.
Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors. But the days of steady gains in real estate are gone: Almost all major metropolitan markets have plateaued, and in some, such as Vancouver, housing prices are falling at a worrying pace.
“Everyone is getting nervous now,” says Phil West, a veteran of the appraisal industry who is critical of Emili. “There is more and more potential of a downturn in the marketplace.”


An on-site visit to a suburban Vancouver home with Mr. Sieb illustrates the concern. As he begins walking through the house, the appraiser grows skeptical about the information the bank has been given about this home.
The listing says this house – a bungalow listed for $479,000 – was built in 1980 and is newly renovated. He notes some fresh carpet and a recently installed light switch, but the kitchen and other rooms show troubling signs of age. “This isn’t a renovation,” he says flatly. “You wouldn’t call it that unless you were stretching what you see for the purpose of getting the value up.”
Mr. Sieb checks the dates stamped on the plumbing. “This place was built in the 70s,” he says, shaking his head.
This, he explains, is the sort of thing that the computers miss.
Last month, Mr. Sieb appraised a home that turned out to be several hundred feet smaller than what the paperwork on the house claimed.
“In my career,” says Mr. Sieb, who has been appraising for 30 years and now runs Inter-City Appraisals of Coquitlam, B.C., “maybe five times have I had the exact same measurements as the realtor.”


– from ‘Shaky foundations: How Ottawa’s computers get Canadian home prices wrong’, Grant Robertson and Tara Perkins, Globe & Mail, 22 Dec 2012[hat-tip Ralph Cramdown]

An article that is worth the entire read.
We particularly like the way the description of the current state of the market is not sugar-coated, the thorough discussion of the clearly fudge-able Emili system, and, in particular, the observation that these kinds of rethinks of aspects of market ‘regulation’ are only questioned when a market begins to fail. As the authors say: “Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors.”
– vreaa


UPDATE: Further regarding the Emili discussion:
“Over portfolios with hundreds of thousands of properties, there will always be overvaluation and undervaluation, and the overwhelming majority of those cases fall within safe parameters. What the public needs to know is the tail risk of auto-valued applications, versus appraiser-evaluated apps. Unfortunately, we don’t have enough data to gauge that yet.
Inevitably, people will read the Globe’s story and think that CMHC is using some back-of-the-napkin formula to judge property risk. That’s so far from the truth. Emili is not some 100-line computer program written by a college intern. It is multi-million dollar mission critical technology benefiting from the best available data and over two decades of R&D.
CMHC knows the risk of it botching property valuations en masse. It has the public, press and regulators breathing down its neck around the clock. It knows the risks in automated valuations better than virtually anyone in the country because it’s processed millions of mortgage files since 1996. And it tirelessly optimizes its systems to statistically factor in and adjust for those risks. To imply that CMHC cannot account for “recent movements in home prices” is simply laughable.”

– from ‘emili Criticisms Resurface’, Rob McLister, canadianmortgagetrends.com, 22 Dec 2012
[hat-tip Ralph Cramdown, added at the suggestion of jesse/YVR]

Okay, fair point. One has to do a careful analysis of the entire risk across the whole CMHC portfolio, agreed; it’s not enough to point to a few anecdotes of errors in valuation assessment and conclude that the entire system is at high risk. The anecdotes could be representative example of a systemic bias towards overvaluation, but they could also simply be outliers.
At the same time, when Rob McLister expresses high confidence in CMHCs risk modelling, refers to the “multi-million dollar mission critical technology”, and states that this criticism of CMHC is “laughable”, we are not immediately reassured. After all, he is
the same guy who called the idea of 40% price drops “farcical”. Any market observer who lacks the imagination to see the possibility of such an outcome is at risk of being blinkered in their analysis.
When we hear market participants calling the idea of certain outcomes “laughable” and “farcical”, we’d strongly suggest one give serious thought to the possibility of those outcomes coming to pass. Why? Because their high confidence reflects the strong probability that a very substantial percentage of market participants are not prepared for that outcome, and that is the very mechanism by which such outcomes come to pass! This is closely related to the analysis of sentiment, and is Contrarianism 101.
When market participants are 100% convinced that stock ‘x’ can only go up, where does it go?
At 125, the thought of Nortel trading at 50 was “farcical”, and “multi-million dollar mission critical technology” showed that such a drop was impossible.
– vreaa

“Priced To Sell” At $4 Million

5575 Elm
5575 Elm, from the backyard

5575 Elm Street, Westside Vancouver
5,101 sqft SFH, built 2006, 50×162 lot
Listed 9 July 2012 $4,880,000
Price reduction 27 July 2012 $4,530,000
Price reduction 19 Dec 2012 $3,990,000
Blurb extract: “Priced to sell.”

Only in Vancouver would a house like this be called ‘priced to sell’ at $4M.
Even at about 20% off original ask it’s sorely overpriced; houses like this will likely sell for well below $2 Million in the trough, and still be pricey in global terms.
– vreaa

UPDATE (with info from Canadian Watchdog and by Whisperer):

5575 Elm Street, Vancouver

2003 May: Sold $680K

2006: Rebuilt

2007: Sold $2,980,000

2010 May: Sold $3,079,000

2012 assessed value $3,545,000
2012 July: Listed $4,880,000
2012 July: Price reduction $4,530,000
2012 Dec: Price reduction $3,990,000

Not Good For The School – “The chance of them coming here, even with a massive research budget, is basically close to zero becuase they can not afford the housing that they would be accustomed to for their life situation. If this city continues as it is for the next 20 years, we will have no more city.”

serpent-eating-tail

“I was at a party last night. Some interesting local celebs were there as well as some normal people (like me). One was a young professor from UBC. They are from out of town and are quite open to both renting and leaving town in the mid-term as it does not make sense to own here. They also commented that the University has had little success in attracting talent from outside Vancouver to fill top-level positions. Let’s say you want to hire a new dean of Science. You have found a 48-year-old who is at the top of the field, an amazing educator and researcher and who would be a trophy to have in the school. The chance of them coming here, even with a massive research budget, is basically close to zero becuase they can not afford the housing that they would be accustomed to for their life situation. Thus – most jobs are being filled internally now. Not good for the school.”
– from a comment by yvr2zrh at VCI 21 Dec 2012 4:36am

In the same comment, yvr2zrh also made the following interesting and archive-worthy statements:

Regarding market sentiment and activity:

1.) MOI for December will be the second worst in 15 years. We will likely hit 11. This is a really bad sign as we are typically quite low at the end of the year.
2.) Comparing to 2008, we are deteriorating now. For December, there are even pockets of Vancouver where we may see the December sales lower than December 2008. For November, we compared against November 2008, which is likely Vancouver’s worst month in history. We were up 90% against November 2008 in terms of unit sales but for December 2012, we are only going to be up about 35%.
3.) Van West Detached, Van East Attached and North Van are trending below 2008 lows.
4.) We are starting to see serious motivation in some sellers. Although we have the real estate board spewing out concepts such that sellers will collude to restrict supply to keep prices high, this just does not affect the market. We have a free and open market with 10,000′s of market participants. You will have a lower supply when prices are weak but this will not counteracy the downward forces of the market.

Regarding Carney’s housing allowance in London:

As someone who has worked around the world for over 10 years and who knows many of the housing situations for executives in Central London, I am not surprised or shocked at the alllowance and what this will allow him to get will be nice but not outrageous for someone of his level. In London, for $20,000 per month, you can get a decent apartment for an executive family. Remember that he will keep his house in Canada and only move there temporarily. Thus, he will need to pay out of his own pocket, extra rent, which when paid for by the BOE is taxed. Thus, a 400,000 annual allowance will basically be enough for him to get a 2,400 sq ft apartment in the city of London in which he can live and possibly use for typical entertaining.
That being said – if UBC were to hire a professor to come here on a permanent basis, in order to make them whole on housing, you would likely need to offer a 1.5 million signing bonus, which would be taxed, and from which they would have enough to get into the housing market at the level which they are accustomed to. If this city continues as it is for the next 20 years, we will have no more city.

BC Realtors Predict ‘Unsexy’ Market – “Over the next year or so we expect price changes to hover around zero”; “Price increases of the last decade are long gone”

Announcer: “There hasn’t been a crash, thankfully, but Ottawa, and the Bank of Canada, are desperate to raise interest rates once the economy improves. Economists are expecting rates to start inching upwards by late 2014, meaning that the price increases of the last decade are long gone.”

Cameron Muir, BC Real Estate Association economist: “We expect the market in Vancouver is going to be unsexy over the next year or so… uh, uh, long term trend sales activity… prices… probably pretty flat, we expect prices to stay.. hover around zero… percent or two on [inaudible] side.. depending on what community or neighbourhood you’re in.”

- from Global News 19th or 20th Dec 2012 [video archived by GreenhornRET; hat-tip El Ninja]

Next year will likely see the first very clear declaration of substantial price weakness in Vancouver RE.
Yes, we’ve already seen some price drops, but the numbers are not very remarkable (1%, 4%, 7%), and have been easily hidden in reporting. They certainly haven’t yet pervaded group consciousness.
Realtor association predictions tend to (1) extrapolate recent activity and (2) err on the side of optimism. These calls for a flat market are precisely that, and we are close to certain that they will be proven wrong.
It is noteworthy that even Global sees enough evidence to state plainly “the price increases of the last decade are long gone”.


I’d submit that the use of the word ‘unsexy’ is likely an unconscious attempt at delivering a sobering idea in a playful fashion, in the hope that it makes it somehow more palatable.

As an aside, consider these reports from the perspective of our recently discussed (mythical) ‘Discretionary Seller’. If you had already decided that you’d like to sell, and either had your property on the market, or had taken it off awaiting a strong spring, how would you feel about these predictions? What would you tend to want to now do? Those who reply: “Put another log on the fire and wait for a strong market (in 2014? 2015?)”, back of the class.

- vreaa

Bids All Insultingly Low So Taken Off Market – “We will just wait until the spring when the markets come back and we will get a higher price.”

“True story. Ran into neighbour. She just took her place off the market. It has been constant open houses. She told me the bids were all coming in too low. She was very insulted that people would bid so low. So she took it off the market because she “will just wait until the spring when the markets come back and she will get a higher price”. I didn’t say a word.”
Girlbear at VCI December 5th, 2012 12:27 pm

Point Grey For Less Than $1 Million

4148 w 10th
4148 10th Ave, Vancouver Westside
Small 1929 SFH on 33×122 lot
Listed 14 Dec 2012, V982817
Ask Price $998K

Busy street, yes; lot value only, yes; still very overvalued, yes.
But a landmark on the way down, nonetheless.
Properties like this will likely sell for about $400K-$450K in the trough.
– vreaa

Overheard On Robson – “They were talking about how prices had dropped. One said she was looking to buy, and was weighing up whether this would be a good time to do so.”

“My wife was walking on Robson Street last week. She doesn’t look out for this kind of thing as much as I do, but she couldn’t help overhearing two women, aged about 30, dressed smartly, talking about RE. They were talking about how prices had dropped. One said she was looking to buy, and was weighing up whether this would be a good time to do so.”
– via e-mail from westsidefrank, 17 Dec 2012

The Myth Of The Cool-Headed Discretionary Seller – “I think that’s one of the reasons why the Canadian housing market is likely not going to have a hard landing because you’re not going to have a lot of motivated sellers – people aren’t going to be forced into it by rising interest rates or declining employment so they can take their time and wait for the market to stabilize.”

sellers
Seller’s aren’t competing with buyers, they’re competing with other sellers.

Vancouver sales dropped 27.6 per cent in November compared with November 2011, after tighter lending rules came into force this summer. The average price is down 6.3 per cent for the same period to $682,215, while the MLS home price index is down 1.7 per cent from a year ago. The average price reflects the mix of sales, while the HPI reflects price changes for typical homes.
BMO deputy chief economist Doug Porter called Vancouver a “rather obvious exception” to the soft landing that most Canadian cities would see for their real estate markets. “I don’t know that I’d call it a hard landing in Vancouver, but it’s definitely a bumpier landing than most cities in Canada are going through right now,” Porter said. Meanwhile, it appears people thinking of selling their homes are holding off, especially in Metro Vancouver, which saw the largest drop in the country for new listings. New supply reached its lowest level in more than two years, CREA said.
“That may help avert a harder landing for prices because sellers do have the leeway to back off,” Porter said. “Fundamentally, I think that’s one of the reasons why the Canadian housing market is likely not going to have a hard landing because you’re not going to have a lot of motivated sellers – people aren’t going to be forced into it by rising interest rates or declining employment so they can take their time and wait for the market to stabilize.”
– from ‘Bumpier’ landing seen for Vancouver real estate’, Vancouver Sun, 18 Dec 2012 [hat-tip Edmund Garland]

There have been many stories that served to stimulate Vancouver’s RE mania. The most prevalent latter day myth appears to be that of the discretionary seller. We are all invited by many commentators (bankers, realtors, commenters on the blogs), to imagine the cool-headed seller deciding that, no, this is not the right time to sell, and backing off, biding their time, waiting serenely for the next leg-up in the market; in calm and comfort, perhaps next to a fire with a good book; no hurry, no urgency whatsoever.
I believe that this construct is complete hogwash.
I’d submit that, in the vast majority of cases, once an owner has made the decision to sell, they start the mental preparation for unloading that property. They move into a position where they disinvest themselves of the idea of ownership, and a clock starts ticking.. they have a building desire to convert that asset into cash, to ‘get out’ of the market. In a market where prices have barely budged, but sales are weak, they may be able to convince themselves that a more robust time for sales is just around the corner, so they may take their property off the market. But make no mistake, they remain very much in the ‘sell’ mode, they have their finger on the trigger, and they are waiting to unload. There is no intense urgency at that point; more a mode of expectation, of anticipation of coming action. Imagine now how that group of wannabe sellers responds when prices take their first substantial step down. Suddenly comparables are selling for 10% or 15% lower, and for lower prices than offers they themselves rejected 6 months before. Do these sellers remain cool? Well, a few may, but, here’s the point, a majority will not. They will experience new-found urgency, and many will rush to market. And only a few of them have to do anxious deals for prices to suddenly find themselves 20% to 25%-off the peak. And then more owners holding shadow inventory will respond, and so on. This is how speculative manias unwind.
The other side of all of this is, naturally, the buyers. There will always be some buyers, of course, at each step of the descent, but not enough to rescue the market; not enough to plateau it or take it to new highs. We won’t see a rerun of 2009 (although some of the early buyers will be “buying the dip”, in anticipation of a 2009-type rebound). Buyers will dry up because prices are falling. Yes, but won’t falling prices increase demand? asks the economist. Yes, falling prices increase demand, when those prices are falling from reasonable levels to cheaper levels such that the asset for sale looks like a good deal based on its fundamental value. But, when assets are at stratospheric prices, when people have been overextending themselves to buy at prices that are 2 to 3 times those supported by fundamentals, when people have been buying only because they anticipate future price strength, the dynamics are very different. People stop buying because their premise for buying (“prices will rise”) goes away.
Thus a powerful self-reinforcing system of price increase turns into reverse, and prices collapse. Falling prices beget falling prices. If that seems circular, that’s because it is. A ‘virtuous’ cycle turns ‘vicious’, and by this mechanism price drops that few have anticipated come to pass. Perhaps 2013 will be the first sharp leg down.
– vreaa

Vancouver Actor Bio – “When not acting, Anita enjoys flipping homes…”

actor flipper jeff murdock
– from Cast info for Metro Theatre’s ‘Lend Me A Tenor’, Nov 2012 [hat-tip Jeff Murdock]

Added to the ‘RE References In Popular Culture’ sidebar category.
The point is that there are more of these kinds of references to RE in unexpected places when we are locked in a spec mania, than in more typical times.
– vreaa

Vested Interests Meet Over Hors d’Oeuvres – “Only the best booze and culinary treats were good enough, to ensure another year of rubber stamping developments.”

“This may be a little off topic, but I found out that the Richmond Developers were wining and dining Richmond City brass last Friday.
Only the best booze and culinary treats were good enough, to ensure another year of rubber stamping developments.”

Real Estate Tsunami at VREAA 17 Dec 2012 10:36pm

Not off topic at all. A central thread to the whole speculative mania has been the confluence of the interests of all the different parties who benefited from the run up in prices.
Note that this is not to suggest any form of elaborate or sinister or illegal collaboration. It is simply to point out that many local entities together benefited from years of debt-fuelled RE spending: government and lenders; developers, realtors, owners; advertisers & media; retailers; all sorts of individuals & organizations that experienced short-term benefit from the immense amount of capital flow that resulted from buyers taking out large mortgages and spending the proceeds. It is completely natural that all of these parties would work together to perpetuate a situation from which they were all gaining short-term benefits. Humans are like that. This is why speculative manias burn so bright for a period; so many come together to fuel the flames of the same fire.
– vreaa

Ignoring The Effects Of A Topping Bubble – “Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

“The market for home sales is chilling further after months of decline – and it’s putting Finance Minister Jim Flaherty on the hot seat. New data show sales deteriorating in November, and the association that represents Canadian realtors says sales will fall, not rise, this year and next. Mr. Flaherty, who sought to cool the market this summer by tightening mortgage insurance rules, says his actions are only one part of the story and that Canadians are voluntarily curbing their appetites for mortgage debt.” …
“Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity,” CREA chief economist Gregory Klump stated in a press release.

– from ‘Realtors blame Flaherty as slump deepens’, Globe and Mail, 17 Dec 2012 [hat-tip allen]

A speculative mania eventually implodes under its own weight. It doesn’t need rising interest rates or a failing economy to bring about its demise. In fact, its deflation is more likely to bring on an economic slump than to be caused by it. In Vancouver, the market started slowing before the mortgage changes came into effect.
The erroneous argument put forward by the economist above has already been ‘collected’ in our ‘Erroneous Theories For Falling Prices’ category.
– vreaa

“His friend was squabbling over what to do with a house he and his brother inherited. Since neither of them wanted to be landlords, they decided to sell right away.”

“A long time friend told me his friend was squabbling over what to do with a house he and his brother inherited. Since neither of them wanted to be landlords, they decided to sell right away. I suspect they’ll be quite a bit of those in the years to come with our aging demographics. Perhaps adding more pressure on prices in the near future?”
Seeking knowledge… at VREAA 14 Dec 2012 5:24pm

“My wife and I bought our first home in Oshawa in 1989 for $178K. Seven years later, after many renovations, we could only sell it for $148K.”

“My wife and I bought our first home in Oshawa in 1989 for $178K. Seven years later, after many renovations, we could only sell in for $148K. Mind you, we then bought in the same down market in Toronto’s High Park area. The home we bought in Toronto, for $325K, had been listed at $580K just 18 months before we bought it. That gives you some sense of how the market corrected. We sold that same house this spring, for $975K, exactly three times what we paid for it 16 years ago. It obviously does depend on when you buy and when you sell, it always has. BUT, we are experiencing prolonged and historic low interest rates, and Mr. Flaherty’s creation of the 0 down/40 year amortization did create a subprime effect here in Canada. We have never seen a run-up in home prices like this before. The correction, one would think, will be greater than the ones we’ve seen in the past, given that so many people are so over-leveraged.”
– comment by ‘ReMaxed Out’, at The Globe and Mail, 11 Dec 2012 11:27am

“We have never seen a run-up in home prices like this before. The correction, one would think, will be greater than the ones we’ve seen in the past..”
That’s pretty much our opinion, too. Perhaps the Vancouver 1980’s bust will compare. – vreaa

43 years old; Owns 6 Rental houses; Goal is to buy 4 more and retire by 50.

facelift-1214rb1

“A hard-working entrepreneur who runs a restaurant and retail outlet, Jim hopes to retire while he is still relatively young and live off the income from his rental properties.
Jim and his partner Bethany live with their toddler in her home in small-town Alberta. He is 43, she is 38. Jim also has a 12-year-old child from a previous marriage.
Jim’s short-term goals include buying four more houses – the ones he has are in Alberta and British Columbia – paying off his mortgage debt and perhaps forming a holding company if it makes sense. Longer term, he wants to retire comfortably at age 50 and leave something for his children.
Jim is doing well, bringing in $10,000 a month before tax from his businesses. He estimates his share – he has partners – is worth $750,000. Bethany, who keeps her personal finances separate but contributes to joint food and housing costs, earns $75,000 a year before tax.
On paper, Jim is looking good. He has $3-million worth of investment real estate. Still, he is mindful of the other side of the balance sheet – the $1-million-plus of mortgage debt, which he hopes to have paid off by the time he is 55 or 60.”


“So can Jim retire at age 50?
Jim figures he will have his mortgage debt paid off by the time he is 55 or 60. His financial picture at age 50 is less clear. As well, Jim doesn’t have a firm handle on how much money he will need when he retires. In his application, he lists “spending money” of $2,500 a month or $30,000 a year after tax.”


“Jim is taking home $84,000 a year from his businesses now plus another $12,000 in net rental income, for a total of $96,000. If he sells his share of the businesses for $750,000 and invests the proceeds at 4 per cent a year, he will be making $30,000 a year before tax. When calculating how much Jim might need in retirement, the adviser uses a rule of thumb of 70 per cent of preretirement earnings, which in Jim’s case would be $67,200 before tax. Thus his revenue properties would have to generate at least $37,200 a year after operating expenses to make up the difference, substantially more than the $12,000 a year they are throwing off now.”

“Monthly net income: $8,000
Assets: Bank accounts $25,000; stocks $50,000; TFSA $25,000; RRSP $25,000; RESP $10,000; six rental houses $3-million. Total: $3,135,000
Monthly disbursements: Mortgage $900 (his share of $1,800); other housing costs $790; car lease $500; other vehicle costs $390; groceries $250 (his share of $500); child care $900; clothing $300; gifts, charitable, other $150; vacations, travel $200; dining out, entertainment $250; clubs, sports $150; grooming $50; doctors, dentists $250; drugstore $100; cellphone, Internet $200; RESP $200; TFSA $400. Total: $5,980
Liabilities: Mortgages $1,062,000; car loan $17,000. Total: $1,079,000″

– image and excerpted text from ‘An entrepreneur’s path to early retirement’, Dianne Maley, Globe and Mail, 14 Dec 2012 [Hat-tip Makaya at VCI]
—-

Jim and Bethany have accumulated a net-worth of over $2 Million ($2.75 Million if he were able to sell his share of his business), by the age of 43, on a household income of less than $200K before tax. This is remarkable. It is highly likely that a large portion (almost all?) of their gains are due to the increase in the paper value of the six rental houses that they own. This would also explain their desire to “buy four more houses” – this sector has treated them well and they expect it to continue to do so.
As others have pointed out in the G&M comment section, simply liquidating all of their assets and investing in conservative instruments would already possibly spin off enough income for them to be able to retire soon.
A disastrous outcome would be the use of their equity to buy even more RE at the very peak of a nation wide speculative mania in housing. Worse still if they are tempted to use leverage by increasing their mortgage debt. This is the way that many with impressive paper gains on RE holdings, at this point in the cycle, will give them back (and in some cases even be wiped out) in the coming market weakness.
As an aside, note the misallocation of resources that comes with the speculative mania: in this case we have a couple considering leaving the workforce in their 40’s.
– vreaa

“I took a big gamble and bought a house in the Oakridge area a few years ago for around 700K, on limited income. I sold it last year because I knew I got lucky and didn’t want to push my luck.”

“I took a big gamble when we bought a house in the Oakridge area a few years ago for around 700K on limited income and sold it last year because I knew I got lucky and didn’t want to push my luck. Now we’re renting a condo in Vancouver.”
Dashgall at VREAA 14 Dec 2012 10:45am

This is an example of speculative behaviour being bailed out by luck. Despite that, ‘Dashgall’ does deserve some respect, not for the initial bet (which was, indeed, a rash gamble), but (1) for having the insight to sell rather than “push (his/her) luck”, and (2) [special points for this one] for being able to admit that the profit was the result of luck, rather than attributing it to one’s own new-found investment genius (the commoner explanation used in this scenario).
Only a very small percentage of market participants will end up having sold in even the vague vicinity of the top. The majority will remain invested in the RE market one way or another, and ride their paper-gains down as the market collapses.
– vreaa

“I rent at Park West in Yaletown and was just at the holiday party, met several of the people in this building. I was under the impression that Yaletown was filled with speculators, but it seems that many of the people who live here are renting.”

“I rent at Park West in Yaletown and was just at the holiday party, met several of the people in this building. I was surprised by how many of them are renting. I was under the impression that yaletown is filled with speculators, but it seems that many of the people who live here are renting.”
yvrness at VCI 12 Dec 2012 9:15pm

“Meaning of course that most of the condos are owned by speculators and are being rented out while their fortune grows.”
– Eddie, ibid.

“I would say about 50% of downtown condos are rented. That actually confirms the amount of speculation – just not by the people living in them. The owners live in their parent’s Surrey basement suites in order to afford the negative cash flow.”
– Anonymous, ibid.

“I’m hoping I can buy my daughter a decent size condo in Vancouver when she graduates from UBC next year. Even if she finds a good job, she will never be able to afford home ownership without my help.”

“When prices become unaffordable, demand should come down. At least that is what I’m hoping for, in the short to medium term, so I can buy my daughter a decent size condo in Vancouver when she graduates from UBC next year. Even if she can find a good job after graduation she will never be able to afford home ownership without my help. Renting is obviously a viable alternative if condo prices in Vancouver don’t come down. Or she can just return home and stay with me, my wife and our dog :)”
– comment by Simple Living at The Globe and Mail, 11 Dec 2012, 12:54am

Later on in the same thread ‘Simple Living’ adds:
“If I can afford to pay cash up to $1 million for a condo for my only daughter, it’s my choice and it still is simple living by my standard.” &
“$200,000 a year combined income will not buy you much of a condo in Vancouver at present, let alone a house. That’s why property prices in Vancouver right now are beyond what most working class people can afford. As soon as mortgage rates go up, a lot of over extended home owners will be in serious trouble.”

Speculators, Come Back! – “Those purchasing in a buyers’ market can reap huge rewards.”

click to enlarge
– front page article ‘Buy it, Fix it, Flip it could be smart strategy’, REW.ca, 14 Dec 2012 [hat-tip Jack, and Happy Cynic]
Those flippers look.. youngish. Summer jobs? -ed.

Excerpts:
“The BCREA notes a turnaround in housing sales next year could trigger speculators back into action. Those purchasing in a buyers’ market can reap huge rewards.”

“When the market is down, like now, is the time to be buying”, real estate consultant Ozzie Jurock said.

Cameron Muir, chief economist with the BCREA said he is confused by the “bubble hyperbole” in much of the media. “There are minimal risks ahead,” he said. … “I just don’t see any reason to fear a long term downturn in BC’s residential market”.

Flipping is the most obvious form of speculation, and not really the one that interests us the most (that remains the average buyer who overextends to buy on the premise of rising prices without even knowing they are speculating).
We are not yet in a market that is good for buyers, not by a long shot.
This could well be the very worst time in the history of the Vancouver RE market to attempt a flip.
– vreaa

“The sharp run-up in house prices raises the risk of an abrupt correction. A sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger an adverse feedback loop between economy activity, bank lending, and the property market. The property sector is the main source of domestic economic risk.”

“The International Monetary Fund has warned that Hong Kong could see an abrupt fall in property prices after years of dramatic increases in one of the world’s most expensive housing markets.
Home prices in the Asian financial hub have skyrocketed 90 percent since 2009 due to an influx of wealthy mainland Chinese buyers, pushing home-ownership beyond the reach of many of its seven million people.
“The sharp run-up in house prices raises the risk of an abrupt correction,” the IMF said in its annual review of Hong Kong’s economy.
“A sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger an adverse feedback loop between economy activity, bank lending, and the property market.
“The property sector is the main source of domestic economic risk,” the Washington-based organization said.”

– from ‘IMF Sounds The Alarm On The Hong Kong Housing Bubble’, Business Insider, 12 Dec 2012

Okay, so, they’re talking about HK, not Vancouver, but what’s the difference?
“Running out of land” (and other fables); Spec mania; Bubble bursts.
– vreaa

“The young couple that moved in is currently listing the same unit for 30K less than I sold it to them for in 2011. If it sells at all it will be far below that.”

“Sold my 2 bedroom condo in Port Moody a year and a half ago in the mid 300K’s and I was lucky to get that. It took 6 months and it was in a really good building during the height of the market.
The buyers were honest and said they were going to live in it for a year or two then flip it for a profit.
The young couple that moved in is currently listing the same unit for 30K less than I sold for. If it sells at all it will be far below that. Flip fail!”

Landbaron at VCI 9 Dec 2012 at 6:28pm

Ben Rabidoux Discusses Canadian RE – Why Analysts With Big Institutions Can Never Be Honest About Bearish Thoughts

Rabidoux Joseph

Ben Rabidoux speaks to Bruce Joseph about the Canadian housing market.
Ben explains why analysts with major institutions are unable to honestly share bearish predictions (and, consequently, why one should always take their statements with a grain of salt).
– from Bruce Joseph, youtube, 1 Sep 2012

“I still say no crash in Vancouver in regards to single family homes.” [We Disagree]

“I still say no crash in Vancouver in regards to single family homes.
Sure real estate sales are slow – it’s December!
Spring will bring a flurry of sales in single family homes -don’t forget that “Real Estate is emotional”
As soon as the price dips a bit (maybe 10-20%) and there are lots of listings – people will flock to the market.
Vancouver is like the San Francisco of Canada. Prices never dipped there more than 20% from the peak and have rebounded to almost peak values . Check Zillow if you don’t believe me.
Vancouver has the mildest climate of any major city in Canada and is the most attractive major city in Canada.
Definitely no “crash” in Vancouver in regards to single family homes.”

western observer at greaterfool.ca 11 Dec 2012 12:26am

Keep chanting “no crash in SFHs” and perhaps that will have some kind of buoyant effect.
We disagree with this ‘argument’, which is little more than an expression of hope. It also sounds like the seeking for reassurance.
SFHs are as overvalued as any other Vancouver property type, and we fully expect them to plunge in price to pre-spec-mania levels.
– vreaa

“My father bought and paid for our suburban Vancouver home within 2 years on a city worker’s wage. Second largest country in the world and I can’t afford a 50 year old house on a postage size lot in the suburbs. Things are supposed to get better, not worse.”

“My father bought and paid for our suburban Vancouver home within 2 years on a city worker’s wage, he paid for property taxes with one day’s pay. 2nd largest country in the world and I can’t afford a 50 year old house on a postage size lot in the suburbs. things are supposed to get better, not worse.”
Led at greaterfool.ca 10 Dec 2012 11:21pm

‘Soft Landing’ Call Spotted

land ahoy
“Sure looks like you could just step out there, don’t it?”

“The Canadian housing market appears to have achieved “a soft landing” so far with sales cooler but still fairly steady along with prices, Scotiabank says.”
– from ‘Housing market appears to have achieved soft landing: Scotiabank report’, Canadian Press, 11 Dec 2012 [hat-tip Terminalcitygirl]

Will be added to the ‘premature bottom calls’ sidebar collection. -ed.

I Was Literally Shocked By Her Lack Of Knowledge Of Current Conditions – “Aren’t prices still going up in the lower mainland? I mean look at all those sold out presales in the news recently.”

“Last week I had a conversation with one of my co-workers, who recently got engaged, about her RE plans. Her fiance and her have fairly good paying jobs and are currently renting. She is a SFU grad and her fiance is a recent UBC grad. She told me she desperately wants to have a place of her own and is thinking about diving into the market. I advised her to wait at least a year and see what happens in spring of 2013 before taking the plunge. She then gave me a confused look and stated: “But aren’t prices still going up in the lower mainland, I mean look at all those sold out presales in the news recently.”After hearing that I knew she has not done any research at all. I then told her to check out this blog [VCI], Garth’s blog, and a few other RE blogs before she makes her final decision. I was literally shocked by her lack of knowledge of current conditions. In the last few months even the MSM has been reporting on the emergence of a “buyers market”. But for some reason she has filtered all those bearish reports and concentrated on the sensational stories of presale sell outs with people lining up just to get a chance to snap up a few units. Sometimes I just don’t get it. People are making financial decisions that will effect them for the next 25 years in some cases even more, and they base their decisions largely by their emotions sometimes irrational and the message being spewed by the highly biased MSM. In my opinion RE blogs are providing a great service to the general public by providing a different perspective of the RE debate and hopefully they can save a few sheeple from becoming the greatest fools of all.”
Waiting to exhale at VCI December 8th, 2012 at 7:40 pm

The average Vancouver RE market participant continues to view the market as robust.
We expect this to change profoundly in 2013-2014, as price weakness becomes obvious.
– vreaa

False Creek Condo Drops Ask Price 56% Over 9 Months


# 206 1477 FOUNTAIN WY, False Creek, Vancouver West
1400 sqft 2BR condo
Original ask: 9 Mar 2012: $568K
Last ask: 1 Jul 2012: $320K (-44%)

– from “My mom has to get a certain price before she will sell. We are waiting for prices to turnaround.”, VREAA 3 July 2012 quoting from Vancouver Price Drop 2 July 2012

UPDATE posted by katrina at VREAA 11 Dec 2012 12:50pm -
“Same address was listed yesterday afternoon (Dec 10, 2012) at $250,000. Heard the building is undergoing rainscreening for the next year.”

Sure enough, from a realtor site, listed 10 Dec 2012:

206 1477 Fountain Way

That’s a drop in ask price of $318K, or 56%, since March 2012. -ed.

Avocados and Christmas Trees – Vancouver Land Use; ALR; Food

avo xmas copy

In view of yesterday’s spirited and informative discussion (thanks, all), we have withdrawn this morning’s teed-up anecdote and invite the continuation of yesterday’s discussion here today. [Here are a few comments from yesterday's thread]:

“There seem to be some misconceptions about the size and capacity of the ALR.
“The minimum amount of agricultural land necessary for sustainable food security, with a diversified diet similar to those of North America and Western Europe (hence including meat), is 0.5 of a hectare per person. This does not allow for any land degradation such as soil erosion, and it assumes adequate water supplies. Very few populous countries have more than an average of 0.25 of a hectare. It is realistic to suppose that the absolute minimum of arable land to support one person is a mere 0.07 of a hectare–and this assumes a largely vegetarian diet, no land degradation or water shortages, virtually no post-harvest waste, and farmers who know precisely when and how to plant, fertilize, irrigate, etc. [FAO, 1993]”
Total hectares of ALR in fraser valley: 132,760 in 2009 (stats canada) (less today)
132,760/0.07 = 1.9 million people. That’s how many the ALR can support, best case scenario. That’s for people fed a subsistence, almost vegan diet, where one crop failure means famine.
Keeping current diets up: 265,500 people. (That’s 0.26 million).
Current lower mainland population: 2.6 million.
While fishing adds to the total number of people, we are nevertheless completely dependent on food imports. Any food supply chain disruption is going to cause a slight… inconvenience to the normal process of cellular respiration. Worth keeping in mind when we look at the planned growth strategy for the region – was it 4 million by 2050?”

– The Poster Formerly Known As Anonymous

“Out of anything that should be outsourced and diversified for stability shouldn’t food be? Locavore sentiments are great, but in reality, being able to transfer food from areas of plenty to areas with little is sort of a fundamental requirement for stable societies. Starving people tend to get pretty cranky.”
– UBCghettodweller

“The issue is transportation. We are wholly dependent on liquid fuels for that, and they just quadrupled in cost in a decade. It’s an awfully long way by sailboat or horsewagon from the places that have the food to those that don’t. The second issue are chemical fertilizers, which will also become scarcer, diminishing yields per acre everywhere.”
– The Poster Formerly Known As Anonymous

“The ALR is not about locavore sentiments. It’s about security. It’s well and good to diversify and outsource food production, but if one day one of the areas with plenty can’t or won’t send the food shipments for whatever reason, a shitload of people get very cranky, very quickly.”
– The Poster Formerly Known As Anonymous

“Acquaculture? More factory chicken farms? Electrified railways supplied by nuclear or hydro power? Nuclear generated hydrogen for transport? Not to be flippant or anything, but I’ve been hearing about the end of the world for over 2,000 years, and science has proven that mankind is unsustainable for 200 years. Yet our food production and productivity continues to grow, birthrate is declining in most countries, and we’ve always solved our problems before. I think it’s a bit egotistical to think that, even though everything, been (comparatively) skittles and beer for our species for 200,000 years now, it’s all going to go pear shaped before this generation passes the baton.”
– Ralph Cramdown

““Running out of land”. “Immigration”. “Mountains”. “Water”. “Hard asset”. The list goes on. What these rationales have in common, besides being fallacious, is that they’re nice ‘n easy for folks to understand, and make handy talking points for promoters. And how about this gem, heard from a senior RBC advisor, in defence of Vancouver’s current real estate prices: “Well, everyone needs a roof over their head!”
– El Ninja

“We are completely dependent on food imports.”
Then, why are we growing Christmas trees instead of wheat in the ALR?

– Cyril Tourneur

“Christmas trees? That’s part of what the Fraser Institute calls “human ingenuity and market forces.” Have you all considered that this obsession with being self-sufficient in the lower mainland is just a group version of ‘Prepper’ madness?
“Britain has not been fully self-sufficient since the eighteenth century. It imported large quantities of wheat, eggs and sugar during the Victorian era, growing an increasingly small proportion of what it ate until World War II, when millions of consumers followed the plea to “dig for victory”. This self-sufficiency trend was immediately reversed after the war ended, however.”
Even at the height of the Battle of the Atlantic, people weren’t starving in Britain. Those in the cities weren’t eating well, but they weren’t starving. And, not to put too fine a point on it, commodity and shipping prices were rather high at that point. Y’all are wanting to prepare for a worse scenario than that?”

– Ralph Cramdown

A few thoughts from a non-expert in this field:

This all looks like a problem with dietary behaviours as much as it is a problem with land use.
As an example, Vancouver Island apparently imports 90% of its food. We suspect that number could be reduced by a lot, but people choose not to produce the food and/or change their diets.

It seems people enjoy having access to the dietary variety offered by foods sourced globally. Who wants to give up avocados and bananas unless necessary? Consequently, dietary behaviour will likely be shaped by circumstance rather than choice: people will only give up certain items when they become unavailable, or prohibitively expensive. Fuel costs and other such considerations will likely apply natural pressures in this regard. People will have to adapt. If such changes happen in a precipitous fashion, that could be a problem.

As a society, should we put the effort and resources into developing an arrangement where we ensure that adequate ongoing protein and calories supplies for our entire population are available from BC & Canadian sources? We could do this, but there would be substantial expense involved. A bit like earthquake preparation, or forms of insurance. A diet from such sources would likely be far less diversified than we currently enjoy; it’d be more an emergency measure than an immediate and total replacement for current diets. Surplus during non-crisis periods (such as the present) could be exported, perhaps making the system partly self-supporting.
How close are we to having such a plan working right now?
If we had to immediately stop all food imports/exports, what would our diets look like?
Would we have enough calories/protein to sustain the Canadian population?

Even if we did set up such a plan, we’d expect people to continue to enjoy the diversified globally-sourced diet, while it was still available. Ingenuity may allow for current circumstances to continue for far longer than many anticipate.

Yesterday I expressed the opinion: “I think that the ‘scarcity’ of land (in Vancouver) is greatly over exaggerated, even within the ALR restraints. At the same time, I suspect that the ALR applies even further artificial limitations on land that is available… I suspect that there is massive amounts of land available for the accommodation of people, AND enough land to meet our agricultural needs.” Perhaps I’m wrong on the latter bit, as TPFKAA has suggested.
But what percentage of Vancouver’s food supply currently comes from the ALR?
If the ALR is only supplying us with a small fraction of our current diets, how important is it as part of any future food supply plan?
If the ALR is being used to grow Christmas trees, to support ‘hobby farms’, and to grow crops that are largely exported, why not more strongly encourage it to be used it for local food supply, or, alternatively, use it for housing?

- vreaa


Pre-emptive retort from TPFKAA:
“We need to start creating infrastructure that can tap other sources, or changing our profligacy with energy use, or both. While in principle there may be enough alternative energy to supply our needs, it takes many, many years to put the machinery in place to tap into these energies. You can’t build the port mann bridge in a day, nor can you replace the energy from oil at the pace of market forces. Market forces will lead to an abrupt cutoff, with not enough time to put that infrastructure in place. It’s hard to build and design shit when you hungry, the lights don’t work, and trucks can’t carry yo shit around. S’all I’m sayin, y’know?
The ALR is a damn important piece of land that needs not to have condos and sprawly mcmansions slapped onto it. It is a part of the solution.”

“Vancouver has a finite amount of land. The prices are only ever going to go up.” – Douglas Coupland, 2000

“Vancouver has a finite amount of land. The prices are only ever going to go up.”
– from ‘City of Glass’, [p22], Douglas Coupland, 2000
[hat-tip 'proteus']

Documenting the life of the “Vancouver is running out of land” meme.
We are particularly interested in trying to find record of its earliest mention.
Local historians, help us out. – vreaa

This question previously raised here:
‘Vancouver Housing Affordability – Century Long Crisis or Boom ‘n Bust Cycles?’
VREAA 25 Nov 2012

Double Negatives – “They might look like geniuses in 4-5 years. If anything, your language regarding “a dangerous time” makes me think they are making a contrarian move – not necessarily a bad thing in RE is it?”

509 30th ave E
“509 30TH AVE E
MLS® V981538
33x143sqft
2230sqft house built 1960
$859,000
SOLD for $868,000 on 3-Dec-2012 after 5 days on the market.”

– eyesthebye

“WOW someone actually paid over asking for this place, it’s a dump inside. Need at least $200,000 to renovate it up to current standards. Needs new electrical, plumbing, drain tile, roof, total basement reno, new kitchen, bath, among a few other things, totally not worth it.”
– red_lantern

“Land value – not home.
This 4719sqft lot means a new home of 3303sqft can be built on the site.”

– eyesthebye

“What I see is risk and the fact that they spent 900k on an asset that is extremely dangerous at this time. It’s like buying a stock after it soars. The higher it goes the higher the risk. I’m sure there is nobody in this forum that is buying right now, I’m sure some bulls here wouldn’t jump in, would they?”
– HAM

“They might look like geniuses in 4-5 years from now.
Time will tell I suppose.
If anything, your language regarding “a dangerous time” makes me think they are making a contrarian move – not necessarily a bad thing in RE is it?”

– gobigorgohome

[above exchange from RETalks 7 Dec 2012 1:35pm to 8 Dec 2012 6:45pm]

The vast majority of Vancouverites continue to believe that the local RE market will remain relatively strong. It’s the guy who sees the purchase as risky who is the contrarian, not the guy trying to get cute by out contrarianing the contrarian. The actual contrarian buy signal will be when the man-in-the-street in Vancouver is disgusted with RE as an asset class. This is still a long, long way off. – vreaa

Kelowna Garden Shed Rented Out To ‘Homeless’ Couple Makes CBC News

hi-bc-121207-shed-kelowna-8col

“A B.C. woman has been fined $500 for renting out a garden shed to a homeless couple and their three dogs.
A power cord that ran from the woman’s house in Kelowna, B.C., supplied electricity to the small metal building, for which she was charging rent of $200 per month.

– from ‘Homeless couple, 3 dogs, lived in garden shed’, CBC, 7 Dec 2012 [hat-tip Nemesis]

“Today at lunch my friend who lives on the westside said he just accepted terms with a contractor to build him a $300,000 laneway house at the back of his lot.”

“I never bring up the subject of RE with friends, but they always just volunteer this stuff. However today at lunch, my friend who lives on the westside said he just accepted terms with a contractor to build him a $300,000 laneway house at the back of his lot. 2 stories, 700 square feet.

I asked him how much he thought he could rent it out for and he said about $2000/month. I guess on paper that is sort of a 10% net return if you don’t consider the $1.7 million it cost to buy his house in the first place. Although I kind of wonder who would want to pay $2K/month to live in a shoebox in an alley, westside or not.

Also the contract is not fixed price, so if costs go over (like if it rains and lengthens the period of construction … and sometimes in January it does rain here) maybe the house ends up costing $350K-$400K. Seems like an odd thing to spend more than 2x the average US home price on a bunky in Vancouver.”

- HAM Solo at VCI 7 Dec 2012 1:58pm and at VREAA 7 Dec 2012 2:22pm.

Owners building laneway houses aren’t factoring in the market value of the land, which makes the price:rent math even worse. – vreaa

Further: People deceive themselves into thinking that they own a SFH in a desirable area of a desirable city, but they actually end up amateur landlords, running a rooming house with tenants in their basement and garage. [This applies to basement suites as much as it does to laneway houses].
That self-deception has been one of the bubble subplots; one of the mechanisms that have driven prices to artificial heights.
When folks sign the papers for these purchases (for which they have overextended themselves cruelly), they’re not thinking about the landlord math, they’re lost in the fantasy of SFH ownership. – vreaa

UPDATE:
Prior related posts of possible interest:

“What’s the Difference Between A Shed And A ‘Laneway House’?” [Drum-roll] “About $268,000!” [Cymbal]
VREAA 29 May 2012

Basement Suite In East Vancouver Sells For $590K
VREAA 24 Feb 2012

BOC Warns Of Circumstances That Their Very Own Policies Have Encouraged – “The most important risk to financial stability is the elevated level of household indebtedness and stretched valuations in the housing market.”

“High household debt and a heated housing market remain the biggest domestic threats to Canada’s financial system, the Bank of Canada said on Thursday, despite tighter mortgage rules introduced by the government in July.
“The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market,” the central bank said in its semi-annual Financial System Review.
Canada’s financial system remains robust but the overall risks to the stability of the banking sector remained high, unchanged from June, it said. …
Housing prices and construction in Canada roared higher in 2011 amid low interest rates, sparking fears of a U.S.-style bubble. The market started to slow after the government tightened rules on mortgage lending in July, the fourth time it had acted to curb borrowing since 2008.
The Bank of Canada’s two-year freeze on interest rates is also seen as a reason for the credit binge and the bank has said it could, as a last resort, use monetary policy to address the problem.”

– from ‘Bank of Canada says housing market risk still high’, Reuters, 6 Dec 2012

“Chief among those domestic concerns is record-high household debt, the inevitable result of rock-bottom interest rates that, nevertheless, have acted as a buffer against even more worrisome threats from outside Canada.”
– from ‘Bank of Canada warns own low rate policy poses risk to economy’, Financial Post, 6 Dec 2012

The Bank is warning us of a problem, while simultaneously confessing that its own ongoing policies have caused and are perpetuating this problem.
– vreaa

“The sales in the $725K-$800K range caused cries of disbelief and anger from my close family who bought a house down the street for almost $1M, in June.”

“Sellers in Burnaby North, like many markets, are busy chasing the market down, with very few getting out in front of the declines. I’m fortunate to have access to MLS, and I’m seeing many listings that were priced >$1M as late as August now well in to the $800k range.”

v972997_1
“This one, V972997, a foreclosure, is particulary extreme: original list $1.8M in Dec 2011, now listed at a fire sale price of 900k.”

“A couple of decent houses (V967123, V981232) in Brentwood Park area just sold for <725k. V967123 was originally listed for 988k in May! The sales caused cries of disbelief and anger from my close family who recently bought a house down the street for almost $1M in June. Their lot/house is nicer but still, you can see the doubt creeping in, even as they vociferously defend their investment.Things are changing in that market, and fast.”

- CashedOut At VCI December 3rd, 2012 at 7:47 pm .

It’s Different Here, Really It Is – “The rich are not the same as most people, otherwise Vancouver’s prices would never have risen so far above average household incomes in the first place.”

“The free-falling Vancouver housing market shows no signs of reversing its slide with the latest figures showing November sales 30.3% below the 10-year average for the month.
The Real Estate Board of Greater Vancouver now says consumers have begun pulling their homes off the market rather than settle for a lower prices in what is still the country’s most expensive market to buy a home.
Since reaching a peak of $625,000, the board’s MLS Home Price Index for all residential properties in the city is off 4.5% to an average of $596,900. Prices are off 1.7% from a year ago.
“Home sellers appear more inclined to remove their properties from the market today rather than lower prices to sell their properties. On the other hand, buyers appear to be expecting prices to moderate,” said Eugen Klein, president of the board.”

– from ‘Vancouver homeowners pulling properties off the market rather than settle for lower prices’, Garry Marr, 4 Dec 2012

“Given that Vancouver’s RBC housing affordability ratio has been about 92% of household income for awhile now, that must tell you that most homes here are bought by people with wealth. They can afford to hang on and wait for better market conditions, so it makes sense that listings are getting pulled. Conventional house price economic responses are more applicable to cities like Calgary and Edmonton that will react to changes in their (oil based) economy than they are to Vancouver. The rich are not the same as most people, otherwise Vancouver’s prices would never have risen so far above average household incomes in the first place.”
– ThinkRight commenting at Financial Post 4 Dec 2012
[hat-tip to JS who adds "I love the logical deduction that because the affordability ratio has been so poor, it obviously means that homes are bought by people with wealth."]

Agreed, JS, you’ve got to love some of the bizarre justifications for current circumstances.
From the school of handwaving logic. Also, tautological.
“Prices are high for good reason (trust me on that) therefore they will stay high.”
And the bit about “the rich are different from most people”? (gack!!)
Regarding the article, and sellers pulling their wares in disgust.. they still do think it’s different here, but will discover it’s pretty much the same as everywhere else.
Sales are down; Prices will follow.
– vreaa

Vancouver RE Average Price Chart Nov 2012

rebgv nov 12
– from REBGV, 4 Dec 2012

Headlined here for the record. Average prices are not the best way of following the market; averages (means) are easily skewed by outliers (especially in illiquid markets). The best measure are indices based on time1 to time2 same-property sales, like Case-Shiller and Teranet. Regardless, the average chart is published each month, and we continue to keep an eye on it. It’ll certainly be headline-worthy when detached average drops through $1M, and regular readers are aware we’re expecting later support (a bounce) at 2009 lows. For an older but still relevant chart discussion, see ‘Five Charts’ [VREAA 2010] – vreaa

Sticky Seller Ignores Bird In Hand – “He bought new in spring 2009. He is very frustrated that he can’t get a sale, but does not think that the problem is price! He thinks he just hasn’t found the right buyer yet.”

“Colleague at work bought a new 2BR 1200 sq ft townhouse in North Delta (Van suburb) for $330K. Now has 2 kids under 3 and has decided said townhouse is too small for his growing family; they want to rent for a couple of years and then “vultch” a house after prices have come off current peaks. Back in March this year he listed his place at $399K. On the market for a couple of months, only one serious offer, I believe $379K or so, they turned down that “insulting lowball offer”. Pulled the listing to try again later in the year.

Re-listed after Labour Day — this time at $409K. I know, why do they list (doesn’t sell), pull, then re-list later at a higher price?! Well, here is his and his realtor’s reasoning: felt in part that the place didn’t sell/attract offers last time for what it was “worth” because they had low-balled on price and therefore were attracting the “wrong perspective buyer” and were cheating themselves out of a deal at what the place was really “worth”. This is how these people think! And my colleague has a math and accouting background, totally understands numbers……

The townhouse is still on the market today — price drops to $405K, $399K, and currently $389K have not attracted any offers. Some young-ish couples have I gather expressed an interest in the high $370s (the price they poo-poo’d in March!), but in all cases (3-4 times I think), the parents of those folks, who are apparently ponying up the downpayment money, have said they think the price is too high for the location — specifically, within a block or so of a major arterial highway (which one might think would be a selling point given the traffic in the Van area – my colleague’s place does not actually hear traffic apparently).

There are so many units listed, buyers do really have a lot more time and options to shop around. I did try to talk to my colleague (he asked for my view as he knows I follow the RE market, even though I am a renter!) about getting ahead of the price reduction curve, to avoid chasing the price down, languishing on the market and STILL not getting a deal…. when it didn’t get any sniffs back at $409K, I said, given what he had told me about last March’s experience — drop the price to $379K, you want to sell, something “drastic” like that could precipitate an offer, multiple offers maybe and perhaps a price in the low $380s? He does have significant equity in the place about a third, depending on what the place actually is “worth”, so he is not at risk of being underwater….needless to say, he did the slow water torture price changes instead…..

I think he will be lucky to sell in the $360s…. and if this goes on until the spring, which it looks like it will if he is still listed, he will be looking at something in the $350s or even lower….which with breaking the term on his mortgage and paying the commission and transactions costs will leave him at net proceeds likely below what he got in at…he bought new in spring 2009…he is very frustrated that he can’t get a sale, but does not think that the problem is price! He thinks he just hasn’t found the right buyer yet…..”

- renters rule at greaterfool.ca 2 Dec 2012 8:36pm

High House Prices, Less Liquid Wealth – “The cheapest house in this neighbourhood goes for $1.2 million, but people are too cheap/poor to fork over $50 per kid.”

“Our elementary school, solidly in the “rich” Arbutus neighbourhood on the west side of Vancouver managed to raise $17,000 this year during its fundraising drive. Last year they raised $21,000.
Goal was $25,000. There are approx 500 students in the school, so the goal is $50 per student. They raised $34 per student.
Not sure you can draw an anecdote, maybe people are cheap or think their taxes should cover schools, I just find it quite sad/disgusting that when the cheapest house in this ‘hood goes for $1.2 million, people are too cheap/poor to fork over $50 per kid.”

LS at greaterfool.ca 17 Nov 2012 6:55pm