Tag Archives: opinion

Repost: It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That.

[This was originally posted here almost exactly six months ago, VREAA 18 May 2011. Reposted in view of discussion regarding foreign ownership in local press, and in light of upcoming election. - vreaa]

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?


The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

- vreaa

Vancouver Sun – “The prevailing wisdom that Vancouver has a housing bubble should perhaps be reconsidered.” [Huh?]

“Housing bubble fears over-inflated”
“Savvy shoppers can still do relatively well in Vancouver by searching for the right unit in the right location”
“..the situation facing homebuyers seems somewhat less dire than at first glance. … Those seeking shelter, both physically and from high prices, can still find relatively affordable units and decent bargaining conditions if they are careful, knowledgeable, flexible and ready to shop around.”
“…the prevailing wisdom that Vancouver has a housing bubble should perhaps be reconsidered. Certainly normal metrics, like the ratio of average price to income, are extraordinarily high and could well be in danger territory. But, existence of more affordable geographic pockets in the Lower Mainland where buyers’ conditions prevail, and softness among apartment and townhouse dwellings, suggest that some markets are much less inflated.”

– excerpts from article by Robin Weibe, Vancouver Sun, 26 July 2011, here noted for the chronological record.

So suddenly the ‘prevailing wisdom’ is that ‘Vancouver has a housing bubble’?
Huh? We must have missed the transition in the prevailing consensus from ‘no-bubble’ to ‘bubble’ there somewhere.
In fact, we’re absolutely sure that the prevailing opinion of market participants remains: “It’s different here; fundamentals are irrelevant; outside money will continue to buoy us up; we are impervious to any significant price drops”. How do we know this? Well, if even 10% of participants actually knew we were in a bubble, and understood what that actually meant, we’d have already had a rush to the exits, and we haven’t had anything like that, have we?
So, there may have been a little bit more public superficial bubble-talk, but the vast, vast majority of participants don’t really see this as a bubble.
Ironically, there will only be a consensus that Vancouver had a price bubble at the very bottom of the market, years hence (which will then be the very best time to buy RE). Only then will all speculative excesses have been wrung out of the market.
Regardless, Robin Weibe’s article shows that the local MSM, despite an occasional good critical article recently, by and large is still asleep at the wheel. There are no pockets of good value in the LML. Far from it; housing is 2-3 times overpriced in all areas. When the tide goes out, all boats will fall. – vreaa

Author David Mitchell Imagines ‘Vancouver’

While on a flight from London for his first visit to Vancouver in October 2010, novelist David Mitchell records a description of what he imagines the city to be, “to pro­tect my imag­i­nary Vancouver against real­ity” [Geist, #80].

Excerpts:

“I find a park bench in my imag­i­nary Vancouver, and see a dad throw­ing a base­ball to his son, and my heart vibrates to minor chords.”

“I think of Douglas Coupland, William Gibson and Wayson Choy, and I think, What a place, and am filled with an intense desire to be twenty-seven again, and buy a house here, and see if I can make fewer mis­takes a sec­ond time around.”

Mitchell has not, to our knowledge, published a record of his impressions of the Vancouver that he actually found here. And it’s not clear whether, in the above excerpt, he is fantasizing about buying his Vancouver house when he actually was 27 (back in 1996), or whether he would like to be 27 now, and be buying a house at current prices. ;)

[By the way, we recommend David Mitchell's books; he's a truly great writer, with a fine imagination.]

Poll: Vancouverites Overwhelmingly Agree Vancouver ‘Nicest City’ In Canada – “95 per cent of those living there convinced there’s nowhere better in Canada.”

Excerpts from‘Vancouver ranked ‘nicest’ city in Canada’, Vancouver Sun 28 Jun 2011 [hat-tip 'calguy'] -
“[A] survey of more than 1,500 Canadians, commissioned by the Montreal-based Association for Canadian Studies and carried out during the week of June 21, presented respondents with a list of nine major cities from coast to coast and asked them to name their first and second choice for “nicest city in Canada.” …
Twenty-five per cent of all Canadians picked Vancouver as No. 1. Quebec City drew the second most votes as Canada’s nicest city, with 20 per cent of respondents nationally. …
The overall results, noted association executive director Jack Jedwab, partly reflect the fact that Vancouver residents themselves overwhelmingly named their own city the nicest — with 94.7 per cent of those living there convinced there’s nowhere better in Canada.”
“…such “hometown patriotism,” while evident to some degree among residents from each of the cities offered as choices, was strongest in Vancouver.”
“63 per cent of B.C. residents in general chose Vancouver.”


This comment below the article from an individual representative of the 94.7%, full-patch cult member ‘len2′ 28 Jun 2011 2:34pm“excuse me, I don’t need polls to tell me what a Garden of Eden I live in, of course this is utopia. have you ever seen the moon on the rise standing by prospect point? how about from the cap river looking west, the string of pearls across the Majestic Lions Gate with a full moon in the background or underneath the Lions Gate looking south at the beautiful span, as it disappears into a forest of green. I have had the pleasure of living in this place of breathtaking beauty for over 40 plus years and I am still in AWE and THANKFULNESS when I look around me. nothing compares. I say to all you Vancoverites get out and explore your paradise, don’t just drive around, walk around the sea walls at night, visit the parks through out the lower mainland. to me this will always be heaven on earth. biased, of course I am, who would not be.”
[Note to self: Avoid getting into a bidding war on a Vancouver property with 'len2'. -ed.]

Comment:
Yes, it’s another one of those almost innumerable polls/surveys/ratings.
We don’t have access to the methodology or raw data; the actual poll results themselves doesn’t appear to yet be publicly available. The poll was “conducted last week via web panel by the firm Leger Marketing”. A “web-panel” is a group of people who have previously agreed to participate in such polls. ‘1500 Canadians’ were each presented with a list of 9 cities (Vancouver, Quebec City, Ottawa, Montreal, Toronto, Halifax, Calgary, Edmonton and Winnipeg) and asked to rank them by ‘niceness’. There also appears to have been an ‘Other’ choice.
It looks like almost all Vancouverites polled voted Vancouver #1, and that is “partly reflect[ed]” in the “overall result”. We take this to mean that the pollster is pointing out that part of the reason that Vancouver did so well is that it got all of its home-town votes. Perhaps Vancouverites actually are more invested in their city than most?
Anybody with access to the actual poll publication, please share it with us. It’d be interesting to know more about the methodology, if only for curiosity sake, and we’d like to see the actual numbers.
And, by the way, what is the rationale for funding such a study? – vreaa

Family Wedding RE Chat – “Despite the American relatives pointing out the ridiculousness of these arguments, there was no convincing the Vancouverites that it’s a bubble.”

pricedoutfornow at vancouvercondo.info May 22nd, 2011 at 7:27 pm -
“Went to a family wedding this weekend. American relatives were attending, and as usual as per social conversations in Vancouver, the topic quickly became real estate. The Vancouverites were jumping up and down, telling my American relatives that “Vancouver is different, it won’t crash here, we have Chinese investors, we have mountains.” Despite the American relatives pointing out the ridiculousness of these arguments, there was no convincing the Vancouverites that it’s a bubble, and it will crash here too, just like it has in their home country. Finally, the Americans realized there was no convincing these delusional, irrational people, finally one just turned away, and remarked under his breath “Well, sure sounds like a bubble to me.”
I think the Americans would know, they’ve seen this hype before (and are now buying properties in Florida for half price). They just shake their heads sadly and sigh “Poor Canadians, they will learn.”

It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That.

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?


The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

- vreaa

Reply To Rusty #3 – The ‘New Monaco’ Argument For Divergence Of Vancouver RE Prices From Fundamentals

Readers we respect have pointed out the trollish nature of some of rusty’s comments here, and we’d agree. Having said that, rusty’s position does genuinely reveal beliefs that are shared by many buyers/owners of Vancouver RE, and for that reason, we have headlined this response, for the record.
Here’s the question that Rusty has posed:

vreaa,
you didn’t answer this question:
“what about when prices break with fundamentals? How do you explain Hong Kong, Manhattan, London, Singapore, Rome, Tokyo, Paris, Moscow, Monaco, Sydney, etc? They all easily eclipse Vancouver in $/sqft and price/income? If prices “always return to fundamentals”, why haven’t prices followed this path in the aforementioned?”rusty 12 May 2011 6:43am

We will magnanimously put aside the many questions that rusty himself hasn’t answered (most pertinent, his degree of leverage net-worth:local-RE), and also put aside the fact that price ($/sqft) is not a fundamental, and answer thus:

rusty -
80% of Singaporeans live in public housing, so how can we begin to compare that market with Vancouver’s?
Manhattan has lower ownership rates than Vancouver, and has price:GDP and price:rent ratios that support prices far, far better than similar ratios in Vancouver. We’d argue that Manhattan hasn’t really ‘broken’ with fundamentals.
The city you list that is arguably most comparable to Vancouver is likely Sydney, which is, like Vancouver, still in a large RE bubble.
The city that best supports your argument is possibly Monaco, a tax haven/resort town/plaything for Europe’s wealthy (which, BTW, really has run out of land. Visit and you’ll see.)

We see and understand the argument you are making. You’re saying that Vancouver has moved from being a town in which, prior to 1995, or 2000, or 2003, housing prices tracked fundamentals such as income, to being  a town where externally generated wealth is driving prices up beyond local fundamentals, such that local incomes don’t matter any longer (Rents should still matter, but let’s put that aside for now). This is essentially the ‘Limitless Demand Argument’.

In prior discussions here we have weighted the possibility of this being the case (Vancouver = ‘New Monaco’) as low (we’d say less than 5%). So, yes, we’ll give you that there is a small chance that we transition to become China/Asia’s Monaco, with Vancouver becoming a resort town/political haven for thousands of millionaires from elsewhere, but we rate that possibility as much lower than you do, for various reasons (China is less robust economically than people imagine; there are many alternatives to Vancouver; the foreign buyers are momentum players who will desert the market; etc).
So, that is the essential difference in our positions: You say “New Monaco”, we say “Not”. OK?

You should realize that, making an ‘all-in’ bet on “New Monaco” being the case (as you have, with leverage) is very gutsy because such an event only happens once in a town’s history, if it ever happens at all. In other words, it is a very low frequency event, and you are betting that it’s happening here and now. For every city that you list above where such a distortion may have occurred, there are thousands of others where such a distortion has never occurred and will never occur. So, you’re betting that this is ‘it’ for Vancouver. We see the Vancouver market action as being far, far more likely to be the result of a far, far more common occurrence, that of a speculative market bubble.

Either way, we have little alternative other than to wait and see how it plays out.
– vreaa