What do the bankers really think of the future of Vancouver RE? Some commentators see recent subtle statements of caution from the major Canadian banks as the closest we’ll see to them openly warning of coming trouble. Rumors of what bankers are saying behind closed doors seems to support that notion. -vreaa

A prior anecdote was from a friend of a senior official at TD. The one below is from the uncle of someone who works for a big Canadian bank. Here’s robert james at RE Talks 7 Dec 2009 11:56 am -

“We spent the week-end in Victoria and I had a chance to talk to my nephew. He works for a big bank in Victoria. It seems that the banks have the same perspective on this R/E bubble as most bears. When the recent buyer’s rates reset within the next 5 years, things are going to get very ugly. Of course, the banks are having a chuckle over it thanks mainly to CHMC. He did mention that 40% to 50% drops in R/E prices are to be expected.”

Bull-markets, and especially bubbles, reward those who invest with leverage. The rise in the general stock-markets, commodities, and Vancouver RE, through most of 2009, has again encouraged risk taking and expectations of ongoing high returns.  -vreaa

At RE Talks, 7 Dec 2009, posters discuss mortgage strategies -

unicas 7 Dec 2009 2:08 pm – “I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.”

Marco911 7 Dec 2009 2:14 pm – “I would tend to agree. In fact, that is the only way to make some serious money in the long run. You want to essentially NEVER have anything paid off. You should always borrow as much as you can for as long as you can. The trick of course is to make sure that you’re returns on investment are higher than the interest you’re paying.” Marco911 continues 2:57 pm - “I will give you a personal example. My current residence is mortgaged to the max. I was paying 0% through my previously employer but now I’m forced to pay prime which is still not a bad deal since prime is only 2.25%. I have yet switched my loan so it is an interest only loan. I am not suggesting everyone run out and do this but I’m giving you my exact situation. I could pay the loan off in full right now and have no mortgage but why would I do that? If I am earning 10% return on my money (which is a really pathetic return) and my income keeps pace with inflation, why would I want to pay off my loan? If anything, I would want to find more ways to dump money into my 10% growth. That may be with more loans or by dumping the money in directly. So what if interest rates go to 20%? Well, if that happened, I’m pretty sure I’d be able to find an investment that would give me even better returns so the idea of paying off my home would still be pointless. However, let us assume all hell broke out and there was nowhere to put my money. Well, I’d simply pay off the loan.”

Bubbles stir the emotions, and even those who have profited by selling may feel confused. This Vancouverite, who has $600K equity in hand after selling her house in 2008,  expresses regret, sheepishness, dismay, fear, greed, depression and resentment – all in one paragraph. This anecdote is also noteworthy in that it shows that supply does indeed come into the market as prices drop and owners begin to sell out of  fear. How many Vancouver properties will enter the market when prices next descend?  -vreaa

This from the body of Garth Turner’s latest post at greaterfool.ca, 4 Dec 2009, quoting am e-mail from Vancouverite ‘Elaine’ -

“I ended up making a huge mistake and frankly, feel like a pretty great fool. We bought a home in Vancouver’s hideous inflated west side in 2005. We had a  $375,000 mortgage on a nice home we had reno’d. I thought the mortgage was huge (in hindsight I see it wasn’t!). When the markets starting tanking in October 2008 we stupidly panicked, put the house up for sale and essentially gave it away for about $1,000,000, and then rented a home for a hideous monthly fee and intended to buy again when values “stabilized”. Well to our dismay, the average house price one year later in the same area is $1,400,000. Needless to say we have been unceremoniously turfed out of the Vancouver housing market due to our unfounded fear about a housing crash that never happened. I am not challenging you [Garth Turner], I know in time this market cannot sustain itself, but in the meantime we have to live somewhere in Vancouver and with a 70% increase in house value in 10 years, and a steady stream of  strong Asian cashflows, it seems a correction will never come.  I don’t want to lose out on equity, and our lease is up, and what the heck do we do next?  We are in our mid-forties, our combined income is about $150,000 p.a., and we have about $600,000 to put down. Luckily no debt otherwise. The thought of going to a cramped condo after living in a nice home is depressing, not to mention the  resentment over the mountain of equity we lost.”

A useful anecdote from a realtor in the luxury trenches. Questions: How hot is this money? Meaning, how skittish are these owners? Are they here for the long-haul, or would these properties be put back on the market if the Chinese stock market tanks, or if global rates rise, or if Vancouver RE pulls back, or if the loonie weakens? -vreaa

This from Maggie Chandler, reported as a comment at VREAA5 Dec 2009 5:04 pm -

“Mainland Chinese buyers are by far the majority of the luxury condo buyers this year.”

The percentage of downtown condo units standing empty, and their possible meaning to the RE market, remains a hotly debated topic. Vacation homes for wealthy out-of-towners? Speculative vehicles? Owned by locals or foreigners? And, perhaps the most important question: – How many of these units would come on the market if we start seeing substantial price drops and/or if the economy shows a double dip? -vreaa

This observation from davers as reported in a comment at VREAA 5 Dec 2009 4:07 pm -

“A friend of mine works at a certain high rise downtown very close to the Shangri-la. He got us access to the roof, and we had a great view of the whole city, as well as the top 30 or so floors of the Shangri-la. In the top 27 floors (I counted) there were 9 places lit up on the 2 sides we could see [less than 5%]. Maybe 14 at most because it is tough to tell where one unit ends and one begins. I know those are all high class places and many owners may not live there full time, but I expected at least 1/4 of the units to be lit up, and there were hardly any. This was at 9:00 pm on a weeknight, when I would expect most people to be home. Maybe there really is an endless supply of rich people buying Vancouver real estate. Or maybe they are stretched to the limit and can’t afford to light their home, who knows?”

We continue to register that the local mainstream media largely remains in the comfy pockets of their advertisers from the real estate industry.

An ‘article’, ‘Housing market to remain strong in 2010: Re/Max’, 3 Dec 2009, from the Vancouver Sun ‘by’ Kim Covert [joke ghost pseudonym? -ed.] is essentially written by Re/Max. (Full article reproduced in comment section.) Gobal Canwest Channel 2/7 news also ran this as ‘news’.

These relevant posts from discussion at vancouvercondo.info -

Limey 4 Dec 2009 2:16 am – “I don’t want to start picking on the Canadian mainstream media, or the state of BC journalism in general. But in other parts of the world, if you wrote an article about RE, and where it’s going in the next year, and only used one source, and that source had a suspiciously high level of investment in the RE industry, it would be regarded as some sort of joke. What’s next? “Cigarettes found to extend lifetime: Marlboro”? I mean, for christ’s sake – it’s pathetic. Where’s the objective discussion questioning the status quo? Am I being naive? I thought this is what newspapers are supposed to do – not re-write advertisements for large corporations.”

Carioca Canuck 4 Dec 2009 10:05 am – “Last night we were watching GLOBAL/Canwest Channel 2/7 news, which is sponsored be REMAX. Their latest fluff piece that is linked here was front and centre masquerading as a “news” article. ROFL !!! The wife looks at me and says “This is bullshit….” Pretty interesting comment coming from someone who just moved here 6 years ago from a foreign country, and has only started closely watching the mess that is our RE market, over the last 24 months.”

This from realtor Maggie Chandler’s blog 1 Dec 2009 (hat-tip to Starving Artist at vancouvercondo.info)-

“If memory serves me right, it’s been early 2007 since we’ve seen lineups for Vancouver condo pre-sales but that changed on Saturday as the investors lined up (in the rain) to take advantage of the low prices at The Mark, on Seymour and Pacific. Onni’s new building will be 41 storeys and prices started at $325,000. Given that completion will be 2013, it’s a no brainer that investors can only win as this is one of the final sites available in Yaletown and we assume prices will be higher in 2013 than they are now. Is this madness? Given the current economic conditions around the world, should Vancouver real estate be moving at such a pace? The problem is lack of supply and lots of International buyers – from what I have observed Mainland Chinese are all over West Side homes and luxury condos and the word is they’re here for a while. In my 28 year career I have never seen such a quick downturn or such a fast recovery. Some buyers are expecting a downturn after 2010 Olympics and some are expecting prices to continue to rise. We shall have to wait and see.”

There are Vancouver RE bears who have been wrong for a long, long time. Many have friends who have done very well as owners.

This from realisticman at The Tyee 2 Dec 2009 -

“About twelve years ago a good, intelligent friend said I’d be better off to rent because housing prices were too high and would probably come down. He said, keep your money in the bank and earn the interest. I didn’t listen and bought. Risking all my savings and risking too that I could become horribly in debt, particularly if a crash came. Well it didn’t come and instead of earning almost nothing on cash because of low interest rates I now have a home and no matter if it’s worth a million or a hundred thousand I don’t care because this roof and this space is mine.”

Foreign buyers with cash do exist. They influence the market directly to a small degree. A more powerful but indirect effect is that local buyers tell themselves that foreign money is contributing to ongoing market strength.

This from ryedawg76 4 Dec 2009 11:00 am at RE Talks -

“I just sold a condo to a buyer from Asia who’s paying all cash. What does that say about the Vancouver market? Interest rates may be influencing the prices to some degree but foreign investors with boatloads of cash and an appetite for real estate are the biggest contributors to the lofty but relatively stable prices we are seeing.”

The most destructive social consequence of a large bubble is the misallocation of capital. Resources (money, effort, time) get redirected away from goals that would truly build a society and into high risk speculation, into chasing the fast buck. Honest and prudent citizens make 0.4% on their Canada Savings Bonds. Condo flippers make more in  year than the average Canadian could save in a lifetime. Five years of this and a lawless, frontier quality creeps in to the prevailing ethos. Your choice is to hustle, or to be stepped on by hustlers. Blog discussions show that ‘legal tax evasion’ has become a priority for many regular citizens. It is also clear that some players in the housing boom have quite simply broken the law by not paying taxes. Undeclared income from tenants. Under the table cash payments for construction work. Flippers avoiding taxation by calling each flip a primary residence for someone in the family. When this lawlessness is rampant, honest citizens feel like schmucks for being honest. One hopes that the CRA has their best folks on this. The public coffers certainly could do with the revenue. More important, the society needs to be confident that honest and well directed efforts are those that are most valued and rewarded. -vreaa

This from LTR,FTW at greaterfool.ca 3 December 10:06 pm -

“I’ve lived in at least a half a dozen basement suites (”Mortgage Helpers”) that I know for sure that the Rent was not declared as income for the slum-lord. What about those self employed business owners that can write-off family meals, gas receipts etc as a business expense. It may not seem like much when taken in isolation but across the country it can sure add up.
Just look at grow-ops. You can’t tell me there is a demand for Hydroponic Tomatoes to justify thousands of dollars of equipment and supplies. And when the unemployed farmer gets caught, he gets a small fine and off he goes in his Hummer to the Cabin at the lake to enjoy all of his tax free gains.
As an hourly paid employee, there is not much I can claim back on my taxes. When I used to pull wrenches for a living, I couldn’t even write-off my tools !
It’s about time everyone paid their fair share of taxes and crime shouldn’t pay ….. but it does!”