Tag Archives: Prediction

Graphic – Degrees of Housing Overvaluation in Canada

trailing-housing

- forwarded to vreaa via e-mail by ‘B’, 13 Apr 2013; original source of graphic as yet unknown to us.

Ben Rabidoux In Vancouver Next Week

Ben Rabidoux has asked me to let readers know that he’ll be in Vancouver next week, giving a talk on housing and the economy. It takes place Thursday April 18th, 4-5pm. More info here.

Those readers you who don’t know Ben will find his analysis thorough and thought provoking. We have featured his opinions here on numerous occasions.
His website is ‘The Economic Analyst’. Take a look at his latest article ‘Canadian housing and economic trends: The good, the bad, and the ugly’ [9 Apr 2013]. Excerpt:
“Things have gone from bad to worse in Vancouver, where sales remain very weak (March sales were almost 20% below an already-weak 2012 level) and existing MLS inventory remains elevated. To add insult to injury, the backlog of unsold new homes is growing, units under construction remain high, and the strong population growth needed to absorb all this inventory is nowhere to be found. It’s going to be another rough year for Vancouver, but on the bright side, we can expect the y/y comparisons to get more favourable throughout the year. Vancouver sales fell off a cliff in late 2012. It’s quite unlikely we’ll be seeing 20-30% y/y sales declines come late summer given how depressed sales were last year. So you can bet the real estate board will be waiting anxiously to put their always-positive spin on that.”

Vancouver RE: Not As Expensive Provided You Don’t Think – “It’s clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.”

Cover_Map_Embedded_0

The following excerpts from ‘Vancouver: Not as Expensive as You Think’, Jim Sutherland, Vancouver Magazine, 1 April 2013 [no joke -ed.]:

“The real estate market is soft, and it’s going to get softer. In the last year, average prices have dropped five percent or so, and they’ll sink some more, guaranteed. Less certainly, the market will…not plunge American-style but rather drift, sometimes downward, sometimes sideways, and perhaps not for very long.”

“… the Cassandras have gained the upper hand lately, and looking at some of the numbers it’s easy to see why. Sales running at only two-thirds the normal pace. Lots of dwelling completions due this year. Historical norms that are way out of whack. The unreasonable chunk of average income that buying a house here requires. Rents that stack up well against buying. Then again, there also exist other, less ominous numbers, some of which will be revealed here for the first time.” [What cheek. MOI has been well know in local RE discussion for years, thanks to the work of jesse (YVRHousing) and others. - ed.]…
The mystic metric is called months of inventory, which is the number of homes for sale divided by a given month’s sales. When the MOI is neutral-around six or seven-average prices change little. Below six, prices rise. And an MOI in double digits results in lower prices. The formula works so reliably, it’s bizarre. … Long before prices respond, anyone willing to make a simple calculation will know.”

“Of course, the mild price drops currently predicted by MOI look nothing like the armageddon forecast by those who believe we’re in a real estate bubble. Why not a U.S.-style meltdown here? The reasons are many (shortage of land, solid financial institutions, impressive livability, fiscal health, low mortgage rates…) even if far from categorical. A major safeguard is the provincial economy.” …
How can this be the case when so many sectors are in trouble? Film production, gaming, life sciences-so much for the halo industries that were going to make us a post-industrial poster child. But at the same time, a lot of industries are thriving. … (goes on to list lumber, mining, pipelines)…
TEDtalks, HootSuite, Plenty of Fish, and Lululemon sure sound like storytime selections at the daycare centre but actually mint money while helping to define the 21st century. Fortunes can be fickle out there on the cutting technical-entertainment-design edge, as a prior generation of civic champions like Angiotech, Electronic Arts, and Ballard Power Systems proves. Still, it’s an indication that at least some cultural creatives can afford to live here. So the local economy is almost certainly going to be just fine, which will help keep the real estate market from crashing, regardless of all those micro-metrics.”

“The monster that threatens to swamp us is declining immigration-and in Vancouver that’s the worst thing that could happen to property markets.”

“But why, one might reasonably ask, are immigrants to Vancouver so fixated on buying real estate? Isn’t it foolish to dive into such a pricey market? Reasons have to do with everything from cultural predilections to the perceived riskiness of other investments; from the apparent solidity and performance of our property market to the essential nature of being adrift in a foreign land. But beyond all that, the fundamental explanation is straightforward: especially to immigrants from Asia, real estate in Vancouver doesn’t seem expensive at all. In fact, it’s pretty cheap.”

“One [analysis], by the Serbia-based crowd-sourced website Numbeo.com, comes up with house-to-income ratios very similar to Demographia’s but analyzes 362 of the world’s largest cities in more than 100 countries. On Numbeo, Vancouver sits not second or even 25th, but as the 125th least affordable city in the world. Our price-to-income ratio is about one-third that of Chinese cities such as Beijing, Shanghai, and Shenzhen and comparable to or cheaper than most other places where Chinese emigrants might reasonably expect to land. Potboiler settings like Moscow, London, Paris, and Tokyo are up to twice as expensive, while secondary but still global cities such as Sydney, Melbourne, Amsterdam, Stockholm, and Barcelona-the kind that join us on livability surveys-are tightly bunched around us in terms of affordability as well. Comparable American spots like Seattle, San Francisco, and San Diego are a little to a lot more affordable, but prices in the U.S. recently experienced a catastrophic plunge and are now bouncing back strongly, even as ours soften. It’s clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.” [...and why shouldn't our housing be inexpensive? -ed.] …

“None of this means that housing affordability isn’t a problem in Vancouver. We know that mortgage payments are taking up too much of our income, that young people discouraged by the high cost of entry are leaving town, and that the situation isn’t sustainable. We also know that prices are currently falling and that the MOI the formula says they will drop some more. But unless we lose status as a global magnet or immigration is otherwise reined in, a real estate environment akin to that of other Canadian cities or currently depressed American ones is not a realizable dream.”

See below for one reader’s impressions of the article.
Personally, we won’t attempt a comprehensive analysis at this moment.
The author deserves credit for listing evidence that Vancouver RE is overextended and some of the negative effects of high RE prices. At the same time he also throws in many of the mythical reasons for ongoing relentless support.
One critique I would offer is that there is a strong possibility that the BC economy has only seemed relatively resilient because of the RE spec mania (and all its knock-on ‘positive’ multiplier effects), and thus using apparent BC economy resilience as a reason for ongoing future RE strength is a circular argument. We still believe that our economy will suffer badly when our RE inevitably reverts to mean.
Another thing: why shouldn’t our RE be as inexpensive as places such as the US?
– vreaa

Regular reader ‘space889′, alerted us all to the above article with the following [edited] comment at VREAA 23 March 2013 at 10:19 pm:

“OMG!! You have to profile this!!! I just flip through April 2013 issue of Vancouver Magzine’s cover story about Vancouver RE. It is simply unbelievable the extent to which they try to convince people that Vancouver RE is still cheap by global standards. Two things stuck out for me -

“The first is a map of Vancouver, Burnaby and North Shores redraw with new neighborhood names like – Hanoi for most of Burnaby, Macau & Kew Gardens for UBC, Downtown Abby for Cambie from Broadway to 41st, and then North & South Yorkshire from 41st to Marine Drive, Queenstown and Gaslamp Quarter for North Van, and Brighton, Monte Carlo, Chamonix Mount Blanc for West Vancouver. Unbelievable!!”

“The second is they tried to dispel the myth that Demography Survey tries to peddle that Vancouver is expensive by world standards. They gave these reasons why you shouldn’t trust that survey. One the survey only included 7 countries and excluded most of the world including Asia, Africa and South America. Second the backers of the survey is an ultra conservative right wing think tank that opposes any idea to moderate car use. As a counter example, they used data from a Serbia-based crowd-source website that shows on a price to income ratio, Vancouver is cheap, cheap, cheap, especially compared against world class cities.”

“Further, in a comparison they claimed to show that a desirable house in 7 cities with higher price to income ratios – Phnom Penh, Rome, St. Peterburgs, Tel Aviv, London, Mexico City, and Melbroune – all require you to spend “the same for less square footage, less lawn but more history”. However their comparison really got my blood pressure up… They do not compare apples to apples… The ‘desirable house’ in Vancouver they picked is a 4 bed 2 bath house near King Ed Canada Line station and they describe it as TEARDOWN! Let’s just let it sink in for a minute. An example of a desirable home in Vancouver is a teardown on a busy main artery road!!”

—-

Here are the definitely-not-apples-to-apples vanmag comparisons that got space889’s blood-pressure up:

“Around the World in Seven (sic) Homes
What does a desirable (but you know, not outrageous) house look like in cities with higher price-to-income ratios? In many cases, you’re spending the same for less square footage, a lot less lawn, and a lot more history.” 
[P:I ratios cited appear to be median city home price to median city income, not related to the specific properties. -ed.]

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Downside Weights On The Vancouver RE Market – “One of the older guys (over 60) mention to the guy beside him that he and his wife were thinking about selling their family home, and renting, in order to get some of the money that was locked up in the house.”

“Every Friday I play hockey with a bunch of guys who are over 55. I’m a goalie, so even though I’m not 55, they let me play – I guess it’s hard to find 55 year old guys whose knees are willing to bounce up and down off the ice for an hour and half.”
“Anyways, I overheard a conversation in the dressing room last Friday. One of the older guys (over 60) mention to the guy beside him (over 70) that he and his wife were thinking about selling their family home, and renting, in order to get some of the money that was locked up in the house. The over-70 guy nodded in approval. The over-60 guy asked if he had heard of anyone doing this before, as they couldn’t see any other way to continue to fund their retirement.”
“The over-70 guy nodded, and said “Yup, we did it a couple of years ago. We’ve been renting now for two years – we had to do it, because we couldn’t afford the property taxes each year anymore”.

– anecdote from ‘Ross’, relayed by Garth Turner at greaterfool.ca 27 Mar 2013

“Boomer retirement supply” will be just one of the factors weighing on the Canadian RE market in these coming years.
In Vancouver, there will be many other downside weights. We anticipate that the largest will be the loss of speculative buying (all buying based on the idea that prices go up will stop). Another downside weight will be the knock on effects of a shrinking RE sector (loss of jobs; loss of related economic activity; people leaving). Yet another will be the disappearance of the ‘move-upper’ market (as condo prices contract, almost all wannabe move-uppers will be stuck.. they will not provide support for townhome or SFH prices). Another downside weight will be cash flow negative properties coming to market that have only been held because prices have remained strong enough (we’d expect this to include some of the empty condos we recently heard about). Collapsing RE markets in China will have a modest direct downside effect, but also a larger indirect downside effect through the psychological impact on local speculators.
This list is not comprehensive, I’m sure readers can think of other mutually-perpetuating downside mechanisms. When a speculative mania cycle turns from ‘virtuous’ to ‘vicious’, the multiplier effects reverse.
Boomer supply will be just one of the many downside weights. Many who are reliant on paper RE wealth for their retirement fiscal health will come to market; as prices drop, some will do so with urgency.
– vreaa

“Vancouver is an urban resort whose value mostly resides in its real estate and not much else.”

“Many of these people are filthy rich and treat Vancouver as the gorgeous playground that it primarily is. These are global cosmocrats who make their money in the real business centres of the world – Hong Kong, London, New York – and then drop in here as a respite from the hurly-burly of their hectic lives. Some bought condos for their kids to stay in while they attended school here. In some cases, those children have moved on but the apartment remains.
In most cases, these wealthy purchasers are buying high-end units with golden views of the city, posh pied-à-terres that are out of reach for most of us. And they pay the requisite taxes to the city to maintain them. To which I say: What is the problem?”

“Are we going to start telling people that if you’re buying a condo in Vancouver you have to make sure you, or someone else, lives in it year-round? Are we going to say you can’t buy a condo as an investment property and sit on it for as long as you want before selling it for a profit?”

“I also find it amusing that we get so up in arms about “foreigners” buying up our real estate but think nothing of the thousands of Canadians who have poured into the United States in recent years to take advantage of the housing mess down there. Does anyone doubt that many of those same Canadians are buying those condos as investments in the hopes they’ll cash in once the market returns to normal? “

“You can’t say: “Oh, it’s different because we aren’t driving up real estate values in Phoenix or Palm Springs the way investors are apparently doing in Vancouver.” You either believe in a free market system or you don’t.”

“Whether we like to admit it or not, Vancouver is an urban resort whose value mostly resides in its real estate and not much else. And when that’s the case, you’re going to encounter the types of situations that we see now, with some buying condos as expensive business-class lounges and others purchasing them as an investment decision.
And I’m not sure there’s much you can do about it or would want to.”

– from ‘The ‘great unoccupied condo scandal’? Get over it’, Gary Mason, ‘The Globe and Mail’, 22 Mar 2013

A few ‘random’ thoughts; any reader suggestions of a comprehensive critique of the article will be appreciated:
1. How is it that local judgments of Vancouver have gone from the embarrassingly over-reaching (“Best Place On Earth”), to the other, nihilistic, extreme (“Value mostly resides in its real estate and not much else”), without touching on the intervening reality (a provincial city with a fair amount going for it).

2. There is the implication that we should accept that RE is primarily a financial instrument, rather than shelter. People buying and selling RE, always, it seems, at a profit: Foreigners sitting on Vanc RE and selling for a profit; Canadians buying US RE with plans to “cash in”.

3. Contains a common “you can’t handle the truth”-type taunt about free markets. But who is this aimed at? Who in Canada is currently taking a strong position that there really should be a completely ‘free-market’ in shelter? When did Canada last have a free market in RE? The Vancouver RE market is already far from a free market. It is a market where lending risk has been mispriced, partly by ‘emergency’ low interest rates (where no need for RE price support has ever existed), partly by tax-payer backstopping of lenders (through the CMHC), and partly by loose mortgage lending guidelines (political expediency). Yes, speculative manias occur in free markets, but they would be far more self-limiting if people and institutions were all forced to play with their own money rather than perversely cheap debt. If Vancouver RE was genuinely a free market, it probably wouldn’t have gotten to its 2008 heights in the first place (let alone its 2011 highs), and, if it had, it certainly wouldn’t have been ‘bailed out’ at the very moment when it least needed it.

4. The article displays the kind of hyperbole that we expect in the vicinity of bubble tops, when everything can be interpreted to be so frothy and paradigm-shifting that it’s overwhelming to some observers. It’ll be interesting to see how all these dilemmas and debates settle down after some healthy price-to-fundamental-value reconciliation.
Vancouver will still have housing and city planning challenges, but they’ll look very different once the massive speculative demand disappears.

- vreaa

“So, if you want some Vancouver real estate should you buy now even if you pay a little more and get a little less than you had hoped? Probably. And should you sell your Vancouver real estate in the hope of buying it back later for less? Definitely, not.”

“Will the Vancouver housing market crash? Should I be waiting for a major drop in prices before buying a home in Vancouver? Should I sell my Vancouver home, rent for a while and then be able to buy an equivalent home for a lot less money? The answer to all of them is a resounding NO.” …
“Housing prices did crash in the 1980’s but a major difference is that at that time many homes had been bought by speculators on very small margins and interest rates soared well into double digit levels.
Now, very few homes are held on spec and any anticipated increase in interest rates is expected to be very modest. Mortgage rates may even go down. Canadian banks make a significant share of their profits from mortgage lending and it is a low risk part of their business since their prudent lending standards reduce the chance of default. Also, many mortgages are guaranteed by the Canadian Mortgage and Housing Corporation (CMHC).” …
“The cost of housing in Vancouver is not likely to change dramatically for the foreseeable future. It may soften a bit or it may even rise a bit.” …
“Prices are about 3 per cent lower than they were six months or a year ago, but are 4 per cent higher than they were three years ago. Prices for detached homes have been the softest, while apartments and townhouses have seen much less change, reflecting the trend to condos as a more affordable form of housing.” …
“There are two groups which would benefit from declining home prices. First are people in the Vancouver area who do not own real estate and whose income level does not enable them to afford the size and location of home to which they aspire. Many have adjusted by seeking a smaller home and/or one in a less costly neighbourhood. But some cannot afford even that.
A second group are the retirement age baby boomers across Canada who hope to spend their golden years in this small corner of Canada where you don’t have to shovel snow. They are frustrated because a home anywhere else in Canada buys much less home in and around Vancouver. They are also one of the main reasons why a housing crash will not occur. Any drop in prices will lead to retirees entering the Vancouver housing market, putting a floor under prices.
Those in the international community do not seem to mind our house price levels. When looked at in a global context, home prices in Vancouver are not unreasonable. Ask anyone from London or Hong Kong. And people from around the world see not only good value in our real estate, but also an open society, a pleasant climate and a stable political environment.
Finally, the majority of people in greater Vancouver already own real estate, benefit from current housing values and would be hurt by a crash or any serious drop. They do not want to see the value of their biggest asset decline. Home equity often forms a large part of retirement savings and people count on it in their financial planning.” …
“So, if you want some Vancouver real estate should you buy now even if you pay a little more and get a little less than you had hoped? Probably. And should you sell your Vancouver real estate in the hope of buying it back later for less? Definitely, not.”
– from ‘Little chance of correction in Vancouver real estate market’, Roslyn Kunin (‘Troy Media BC’s Business columnist; consulting economist’), Troy Media, 18 Mar 2013 [hat-tip ATP, who added, perceptively "same old, same old".]

If it really was a case of paying “a little more” and getting “a little less”, few would be discussing the matter. We fully expect that people will “pay a little more and get a little less” in the Vancouver RE market. Fact is they are paying a lot more and getting a lot less.
This “same old, same old” column archived here for the record. It will eventually be noteworthy that in March 2013 some people were still making ‘limitless demand’ arguments for ongoing endless price strength in the Vancouver RE market.
And it is remarkable that an economist would not give any thought to economic fundamentals in their discussion, and wouldn’t consider indicators such as price:rent or price:income ratios in their analysis.
– vreaa

“I explained that if the present rate of price appreciation continued that same house would be worth $92 million in 2051. He astounded me by responding, yes of course. That’s why he was buying a second house.”

“My idiot neighbour.
In his mind “real estate ALWAYS goes up”. When I tried to explain to him that Vancouver was in an unsustainable bubble situation and he said I was crazy. The example I used was a westside special that I know was purchased in 1969 for $38,900 and sold in 2010 for $1.89mm.
I explained that if the present rate of price appreciation continued that same house or 50×120 piece of dirt would be worth $91,800,000 (that is Ninety One Million Eight Hundred Thousand dollars) in 2051 and asked him if he thought that would be the case.
He astounded me by not even blinking and responding, yes of course. That’s why he was buying a second house. At that point I made the decision to leave Canada.”

Bob at greaterfool.ca 12 Mar 2013 9:25pm

Ongoing Hope For Soft Landings – “Growth should actually gain momentum this year rather than crashing as it did the U.S.”

“Some observers became panicky about a serious collapse in the market, perhaps because they believed that Canada was just like the U.S. had been in 2006.
But what we’ve seen in the ensuing months says that this interpretation was entirely wrong. Housing really is somewhat overpriced and it will indeed be the weakest part of Canada’s economy this year, notes economist Arlene Kish at IHS Global Insight, a big economics consulting firm, but it “will not be following in the footsteps of the U.S. housing downturn.”
Instead, it will be more of a typical cyclical downturn, with housing investment — including new construction, renovations and all sorts of related spending — dropping by a significant, but hardly catastrophic, 1.7 per cent. With others sectors of our economy picking up a little steam, growth should actually gain momentum this year rather than crashing as it did the U.S.”

– from ‘Canadian housing market finds its feet’, Jay Bryan, The Montreal Gazette, 15 Mar 2013
[hat-tip to 'Ryan' who told us about this story via e-mail]

Added to the ‘Premature Calls Of A Bottom‘ sidebar collection.
– vreaa

“Many people believe that equity and house prices will be dragged down by Baby Boomers as they reduce purchases and sell holdings during their retirement years. But this forecast’s predictive power could disappoint.”

“Many people believe that equity and house prices will be dragged down by Baby Boomers as they reduce purchases and sell holdings during their retirement years. But this forecast is based on just one of the many factors that impact equity and house prices, so its predictive power could disappoint. Indeed, the track record of previous demographic-based predictions suggests such an outcome is likely. A great deal of scholarly research has established the significance of the other factors.”
– from ‘Don’t blame Boomers if housing goes bust’, Larry MacDonald, Globe and Mail, 25 Jan 2013

Retiring boomers will likely weigh heavily on Vancouver RE.
Wannabe retirees are overdependent on their RE holdings for their retirement.
– vreaa

In a related vein:

“Canada’s financial regulator has “serious concern” about the viability of a rising number of private pension plans, a sign that plans are struggling to meet obligations at a time of low interest rates and weak investment returns.The Office of the Superintendent of Financial Institutions supervises roughly 1,400 private pension plans covering more than 637,000 employees in federally regulated businesses such as banking, airlines and telecom. When pension plans give rise to “serious concern,” generally because of their financial condition, OSFI places them on a watch list to be actively monitored.”
Regulator puts more private pension plans on watch list, Tara Perkins, The Globe and Mail, 7 Jan 2013.

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 10: Reversion To The Mean

Van_house_price_1960_2012

Reversion to the mean

The most likely outcome of any bubble is a reversion to the mean — that is, a return to prices that reflect the long-run mean or average growth rate that existed prior to the bubble. As the various forces that helped inflate a bubble cease to exist (low interest rates, easy access to credit), or reverse themselves (speculative mania turns to fear), prices collapse. One or more external events may also play a role; however, bubbles always contain the seeds of their own demise. Market sentiment in its extreme form is the true creator and destroyer of bubbles.

Falling prices typically stabilize around the point where they would have been had prices followed the average growth rate rather than rapidly inflating and then collapsing. In the aftermath of a house price bubble, prices probably won’t return to where they were before the bubble — although they may temporarily overshoot to this lower level. They’ll likely return to where they would have been if there had been no bubble and they had continued increasing at the average rate of growth, a rate which is typically supported by economic fundamentals such as average household income, house-price-to-rent ratio, and the rate of inflation. We can see two historical examples of this phenomenon in the chart above — the Vancouver house price bubbles that peaked in early 1981, and in late 1994. In both cases, a half-decade later, prices had reverted to the mean.

I’m able to present a clearer picture of this pattern because I recently discovered some Vancouver house price data stretching back to 1960 (details below). Most commentators in the Vancouver RE blogosphere have been using the Real Estate Board of Greater Vancouver (REBGV) average price chart, which goes back to only 1977, at least in the publicly available version, or the Teranet house price index, which goes back to only 1990.

The current Vancouver house price bubble certainly looks epic, in both size and duration. Many people now believe that  a) the past decade has been a bubble, and  b) the top has been reached and the bubble is now beginning to collapse. If the current bubble follows the pattern of the two previous bubbles, collapsing prices should eventually revert to the mean.

What is the mean?

So, what is the mean, or average annual growth rate of Vancouver house prices, in percentage terms? Based on the data underlying the chart above, here are the numbers I’ve arrived at, which assume annual compounding. For calculating the growth rate of the current bubble, I’m excluding 2012, because it has the appearance of being the transitional year between rising prices and what could be a long period of falling prices — although no one can yet be certain.

  • 1960 to 2001, House Price Nominal:  8.33%
  • 2001 to 2011, House Price Nominal:  10.21%
  • 1960 to 2001, House Price Real:  3.62%
  • 2001 to 2011, House Price Real:  7.83%

‘Nominal’ means actual price — what someone actually paid at the time they made the purchase — and ‘real’ means actual price adjusted for inflation — that is, with the inflation component of the price in relation to a control or base year  factored out. The base year is 2002, in this case, meaning real amounts are expressed in 2002 dollars.

The distinction between nominal and real rates of growth would appear to be quite important to the analysis of Vancouver house prices. If we look at only the nominal rates of price growth, we see less than 2% separating the rate for all the years prior to the current bubble, and the rate for the bubble itself. Judging by growth rates alone, we might question whether much of a bubble exists. However, if we look at the real rates for the same time periods, we see a much different picture. The bubble rate of growth is more than double that of the years 1960 to 2001, with over 4% separating the two growth rates. That’s a major difference, especially given the effect of compounding over a number of years.

The reason for the seeming discrepancy between the nominal and real comparisons is that the period 1960 to 2001 includes the years of rampant inflation that occurred during the 1970s and early 1980s, an era when the annual inflation rate hit 14% and almost 13% in two separate peaks. That rampant inflation hasn’t been factored out of the nominal house prices for the period. By comparison, the period 2001 to 2011 has had stable and low annual inflation, around the 2% mark. For the bit of prognosticating I’m about to embark upon, I think it makes better sense to use real rates of growth, which remove the distortions caused by significantly different inflation rates, and which highlight price changes more integral to the housing market itself. Based on the data I’m presenting here, I’m going to use 3.62%, the real growth rate between 1960 and 2001, as the baseline for house price appreciation in Vancouver.

It’s worth noting that a real growth rate of 3.62% in excess of the rate of inflation is significantly greater than the 0.5% above inflation that I think Robert Shiller has demonstrated for American houses, long-term. (Feel free to correct me if I’m wrong about the details of Shiller’s finding.) In other words, even using the most conservative baseline for Vancouver house price appreciation puts us well beyond most other places in North America. That’s how Vancouver became the city with the most expensive residential real estate in Canada even before this latest bubble began to inflate in 2002.

Prognostications

There’s no guarantee that the current bubble will follow a pattern similar to the pattern of the previous two bubbles, or price bubbles generally, but if it does, this second chart shows some possible outcomes. The chart also shows that real house prices are currently 40% overvalued when compared to the 1960-to-2001 mean, and were almost 50% overvalued at the end of 2011.

Van_house_price_1960_2022_mean_reversion

  • Crash — Reversion to the mean takes 4 years, and occurs in 2015. Over the entire period, real price decreases 22.53% from $762,304 to $590,547. Nominal price decreases 17.11% from $921,625 to $763,939.
  • Current Trajectory — Reversion to the mean takes 7 years, and occurs in 2018. Over the entire period, real price decreases 13.92% from $762,304 to $656,215. Nominal price decreases 2.25% from $921,625 to $900,847.
  • Slow Grind — Reversion to the mean takes 11 years, and occurs in 2022. Over the entire period, real price decreases 0.71% from $762,304 to $756,856. Nominal price increases 22.00% from $921,625 to $1,124,654 (not a typo — read on).

These projections assume inflation remains stable over the next decade at approximately 2% a year. So a house price that remains constant in nominal terms from one year to the next has decreased in real terms by approximately 2%. In other words, the house has lost value because it hasn’t kept pace with inflation. Which partially explains the seeming anomaly of some prices decreasing only modestly, or in one case even increasing, while the bubble deflates — the modest decreases are added to by the loss against inflation, and the increase only keeps pace with the 2% annual inflation rate, whereas the mean line is increasing at 3.62% above the inflation rate. The other key factor is that the modest decreases and the increase take place over longer time periods than the decreases in the crash scenario, which gives the mean line, increasing at 3.62% annually (compounded), the chance to catch up to a more slowly deflating bubble line.

Almost certainly, the actual unwinding of this current bubble will not be as regular as any of my three posited scenarios. It will likely be a much more jagged affair, in what has traditionally been Canada’s most volatile real estate market. I’m not sure if the head-and-shoulders pattern from the stock market is truly applicable to real estate, but the two previous bubbles certainly have something resembling that shape. A quick, partial crash in the next two or three years, followed by a rebound (the right shoulder) as unwary early vultures pick up houses at what they consider bargain prices, certainly seems plausible — followed by a second leg down, perhaps less steep but longer, as that initial, relatively shallow wave of buyers exhausts itself.

One other interesting observation made possible by the second chart: from 1972 onward, Vancouver has experienced a closely spaced succession of residential real estate bubbles. For almost the entire 40-year period, a bubble has been either inflating or deflating, with only a couple of years during which the market actually closely tracked the mean. Which suggests that most Vancouverites have never known a stable real estate market in this city. They don’t know what one feels like. I haven’t studied the real estate markets of other cities so I don’t know if this is the norm or not, but I suspect in many cases it’s not. It may help explain the somewhat neurotic, love-hate relation many locals have with real estate. Like junkies, we’re either floating upward, or coming down hard.

Still too damn high

There is a crucial consideration that this technical analysis, such as it is, ignores. Even with a reversion to the most conservative long-term mean that can be extracted from the first 41 years of data, houses in Metro Vancouver will still be too damn expensive for average families. I think there might come a point when absolute or nominal prices become so overwhelmingly high that they break the model, even with a mean reversion. I wonder if Vancouver has gotten there. A growth rate of 3.62% above the rate of inflation is probably not sustainable indefinitely. Because it’s a compounding rate, that mean growth line is exponential, becoming increasingly steep. Like an aircraft, it may eventually stall.

The growth rate of Vancouver house prices has meant that when this latest bubble began inflating, it was inflating a benchmark house price in 2001 of about $350K, which was already the highest in Canada by a large measure. A reversion to the historical mean may not do it this time around. The entire housing market in the city may need a 50-year reboot that creates a new historical mean that’s a lot lower than the current one. Who knows? When the 1981 bubble collapsed, real prices were chopped in half, and nominal prices weren’t far behind. It could happen again. The worst of that earlier bubble was a quick, four-year spike and plummet, so far fewer people would have been affected than are affected now. The dimensions are so much larger this time that the results of a similar implosion truly would be spectacular.

One long boom?

A suggestion I’ve read on several occasions is that Vancouver has been in one long boom of varying intensity for several decades — certainly post-Expo 86. For perspective, I’ve taken the real growth rate for Toronto houses from 1966 to 2001, and from 1966 to 2012 — in other words, excluding and including Toronto’s own bubble — and applied them to the Vancouver chart, using Vancouver’s 1960 price as a starting point. The difference is striking. By Toronto’s standards, we’ve been in a bubble since 1972. I have my doubts that Vancouver’s real growth rate can continue to outstrip Toronto’s by a percentage point or more indefinitely. You’d think that Vancouver mean line would eventually have to lose some altitude. For that to happen, real prices would have to traverse the mean line and stay below it for prolonged periods. In other words, a true crash, and a permanent reassignment downward of the growth rate of Vancouver house prices.

Van_house_price_with_TO_mean

Plastic-folding-chair economist

In one of the early episodes of The Froogle Scott Chronicles I stated that I’m not even an armchair economist. Let me reinforce that now. I’m not even a plastic-folding-chair economist. I could well have made some blunders in my analysis. If so, I won’t resent having them pointed out by anyone with greater expertise in these matters.

Happy continued bubble watching to all…

About the data

Okay, so hold on to your shirts. The numbers for 1960 to 1973 come from an article that Ozzie Jurock published in the Calgary Herald: “Price rise history defies naysayers” (July 28, 2007). I consider the argument that Jurock puts forth in the article, regarding the financial return on houses, arithmetically far-fetched. However, I think the house price data is probably legitimate. Being the suspicious type, I compared the Jurock data to the other Vancouver house price data I could find, to make sure that it aligned reasonably, and for the years in common it does.

The numbers for 1974 to 2012 come from the Royal LePage House Price Survey, which is referenced by the Bank of Canada, and UBC’s Centre for Urban Economics and Real Estate, so I’m assuming the data is valid. I followed the BOC and CUER practice and averaged the prices for Royal LePage’s Detached Bungalow and Executive Detached Two-Storey categories, which probably approximates the REBGV’s Detached Benchmark category.  And I averaged prices for all municipalities in Royal LePage’s “British Columbia, Vancouver Area”.

The Jurock data continues to 2007, but beginning in 1974 it mixes houses and condos, so I switched to the Royal LePage data, which luckily begins in 1974 — although it is somewhat spotty in the earlier years.

This final chart shows how the various data sources align. For the REBGV Detached Average data, I harvested what I could from REBGV news releases. For years prior to 2001, I estimated prices using the REBGV Residential Average Sales Prices chart. All numbers are for December of each year.

As an additional check, I included the REBGV Detached Benchmark, and I also applied the Teranet HPI to the Detached Benchmark, using the 1996 benchmark price as a starting point. As you can see, all lines are strongly correlated, with the exception of the more recent years of the average line, skewed higher by the stratospheric prices at the top end of the market, and the more recent years of the Jurock line, which mixes houses and condos. Single family home and condo prices have increasingly diverged in recent years, so mixing in condos pulls the line lower.

In general, I find searching for Vancouver house price data on the web a frustrating experience. I’m not a conspiracy theorist, but I do get the sense the local real estate industry releases only the data they want to, and controls the vast amount of information at their disposal very carefully.

If anyone can point me to other sources of Vancouver house price data, I’d be most appreciative. For example, I haven’t been able to find the MLS HPI and average price data going back to 1980 that Ben Rabidoux, and Kevin at Saskatoon Housing Bubble, often use for their charts.

Van_house_price_with_data_comparison

Things can go missing from the web, so I’ve replicated the data from the Jurock article below. I’m assuming other commentators may want to include it in their own analyses. The year 1991 was missing from the data, so I averaged the prices for 1990 and 1992.

Year & Avg. sales price Year & Avg. sales price Year & Avg. sales price
1960  $13,105 1961  $12,348 1962  $12,518
1963  $12,636 1964  $13,202 1965  $12,964
1966  $15,200 1967  $17,836 1968  $20,595
1969  $23,939 1970  $24,239 1971  $26,471
1972  $31,465 1973  $41,505 1974  $57,861
1975  $64,471 1976  $68,694 1977  $64,556
1978  $66,243 1979  $70,888 1980  $100,087
1981  $148,860 1982  $107,829 1983  $114,618
1984  $113,722 1985  $112,737 1986  $120,035
1987  $132,658 1988  $160,375 1989  $209,670
1990  $230,641 1991  $237,921 1992  $245,200
1993  $279,800 1994  $305,600 1995  $309,500
1996  $288,200 1997  $287,000 1998  $278,600
1999  $281,100 2000  $295,977 2001  $285,900
2002  $301,500 2003  $329,500 2004  $362,800
2005  $395,400 2006  $482,000 2007  $540,100

In further communication after writing the above article, Froogle added the following thoughts:

- The e10 data still only goes back to 1960. If we had Vancouver house price data for the entire 20th century, what sort of trend line would emerge? That the average price for a house was only $13K in 1960 would suggest that the trend line was probably considerably less steep in the first half of the century.

- Did something start to happen in 1972 that has been continuing ever since, causing at least a portion of the baseline elevation? The thing that comes most immediately to mind is that the first of the boomers began hitting the earliest of the prime house-buying years. Forty year later, the last of the boomers, people our age, are perhaps now exiting the last of the prime house-buying years.

- Even bears would have to agree that the fundamental nature of Vancouver has changed. Not an “it’s different here” argument, but rather that Vancouver has shifted from being a resource-economy-based provincial outpost to being an Asia-Pacific-facing metropolitan region of a certain magnitude. World-class or global city? No. But certainly no longer a provincial backwater, either. Which means the trend line for house price appreciation for modern-day Vancouver should probably be compared to other cities of equal stature, not to earlier-times Vancouver.
—————–

Thanks very much for all this, Froogle Scott. Here follows my discussion. – vreaa

DISCUSSION:

Reversion to which mean?

Froogle Scott has sourced earlier price data, and given us a welcome analysis and discussion of the possible targets of a price reversion. The trend-line derived from data as far back as 1960, and the comparison with the long term Toronto price trend-line are healthy food for thought. If prices do ‘revert to the mean’, to which mean do we expect them to revert?

There could be arguments for the validity of any one of the following trendlines:

1. Trend-line determined by 2001-2011 rate of price increase (7.8% p.a. real)

2. Trend-line determined by longer-term 1960-2001 rate of price increase (3.63% p.a. real).

[2.5. Something in-between 2 and 3. More about this later.]

3. Trend-line determined by nominal prices rising at the same rate as long term wage inflation; little more than 0% real growth.

Trend-line #1 is the bullish case, where the very large annual gains of the last ten years continue indefinitely. By this logic, the current ‘correction’ in Vancouver RE prices would be argued to be over. We’d say at the outset that this represents particularly wishful thinking from those ‘long housing’, that 7.8%-real p.a. increases are preposterously large, and that we will soon find out that rate is far from sustainable.

The most pertinent debate that emerges from Froogle Scott’s analysis is whether we’d expect long-term support at the longer-term 1960-2001 trend-line, at a rate of 3.63% p.a. real. Even though 3.63% p.a. real growth rate may seem low to participants who are now accustomed to the 7.8% real p.a. increases of the last decade, I think we have to question whether a long term 3.63% rate is in any way typical, normal, or sustainable.

At what rate should we expect real prices in any given city to increase over the long-term?

Shiller’s very long term analysis suggests that housing prices should revert to long term means determined by long term wage inflation; by his findings, about 0.5% real growth.

Measures like income growth, population growth, and GDP growth are likely the best indicators of expected long term RE price growth.

“In Canada, as in other countries, movements in land and house prices over long time horizons are driven primarily by changes in population and per capita income. Over shorter horizons—a decade or less—house prices may outpace population and income in some periods and lag behind them in others.” – BOC Review, Winter 2011-2012

Here are some recent indicators of what rates of growth we can expect from these drivers:

Metro Vancouver’s population increased by 9.3% over the five years between the 2006 and 2011 census, an annual compound rate of 1.79%. (source: Statistics Canada)
From 1981 to 2011, the population grew from 1,300,000 to 2,313,000, for an annual compound rate of growth of 1.94%. (source: Metro Vancouver)

Median total family income in Vancouver increased from $62.9K in 2006 to $67.1K in 2010, an annual compound rate of 1.63%. (source: Statistics Canada)
Real income per person increased by slightly less than 1% per year in the 1980’s, actually decreased in the 1990s, and rose by 1.61% per year in the 2000s. (Source: Business Council of BC)

GDP in British Columbia increased from $197.0B in 2007 to $217.8B in 2011, an annual compound rate of 2.54%. (Source: BCStats)
GDP increased at annual rates of 2.12% in the 1980’s, 2.72% in the 1990’s, and 2.36% in the 2001-2010 decade. (Source: Business Council of BC)

Froogle surmises that 3.6% real p.a. growth is “probably not sustainable indefinitely”, and I would strongly agree. Why would we expect Vancouver RE prices to continue to increase at well above the current rate of inflation, at a rate greater than population growth, income growth, or GDP growth? Why should Vancouver RE prices continuously increase at greater than the rate of a city like Toronto, decade after decade? (Note that this is not a question about absolute price levels.. Yes, we can accept that Vancouver commands a ‘mild weather/beautiful vista’ premium.. but that premium is ‘priced in'; it explains why there may be a baseline difference in prices, not why prices should increase each year at about a 35% greater rate in Vancouver vs Toronto.)

The lack of convincing answers to these questions, as well as other factors concerning asset price bubbles that are mentioned below, lead me to believe that prices will go a lot lower than support determined by the 1960-2001 3.63%-real trend-line level.

It may be no coincidence that the nearby support as calculated using this 3.63%-real trend-line is also soon to be in the vicinity of the early 2009 price lows, those that resulted from the quick 15% pullback of 2008-2009. I have previously predicted there would be support at those levels for technical and psychological reasons (which technical analysis aficionados will know to be the same thing). I’d expect a temporary increase in buying interest at those prices, as it is likely that a group of prospective buyers will be expecting a floor at the 2009 lows. It wouldn’t be at all surprising to therefore get some support at those levels, and perhaps a bounce. This would result in the ‘right shoulder’ to which Froogle refers. I’d then expect that such support would fail in the months thereafter.

There are at least two other lines of argument that would suggest that price corrections are going to be more extreme than the worst-case 22.5%-drop scenario predicted by the 3.63%-growth trend line:

A. Fundamental analysis.
Prices in Vancouver have very clearly overextended from those determined by fundamental underpinnings. By price:rent and price:income ratios, Vancouver RE was two to three times overvalued at the peak. The average home price is more than 10 times the average income, where international standards judge 3.5 times average income to already represent an overpriced market. As Froogle puts it, even with a 22.5% drop, “houses in Metro Vancouver will still be too damn expensive for average families”. The thing is, no speculative mania ends with such a scenario. In fact, if anything, one would expect that the price correction will take values to levels where families can afford to buy. Long term sustainable prices should be at levels determined by rental yield, plus a modest ownership premium. Vancouver will never be cheap, but it will be a lot less expensive than two to three times fair value.

B. Sentiment.
Some people would be pretty miffed by a 22.5%-real price pullback. But ‘some’ and ‘miffed’ aren’t extreme enough words to herald the end of a decade long mania that has doubled or trebled prices. If such a modest pullback were to represent the end of the mania, that would mean that market participants would still have been rewarded with years of 3.63% per annum growth, over and above the rate of inflation. All this when fixed income rates have been very low. The point is, this would be a mere rap on the knuckles, and speculative manias always, always, end with holders being punished more than that. Manias resolve when speculation is completely ‘wrung out’, and a good proportion of participants are exhausted and disgusted. The bottom arrives with the proverbial ‘whimper’. After such a large and broad mania, sentiment will have to get particularly poor before we hit a final trough, and 22.5%-off simply won’t do the work necessary to achieve that goal.

Obviously, we can’t know with any certainty what trend-line we’ll revert to, or what the sustainable rate of price growth for Vancouver RE will end up being. Our best guesstimate is that Vancouver RE will find a long term trend-line below the 3.63%-real p.a. growth, but above the 0.5%-real predicted by Shiller. This still represents a very broad range, and consequently is not of much use in predicting price targets. Population-growth, income-growth and GDP-growth suggest that we’d quite likely reverting to a more modest 2%- to 2.5%-real long term growth in RE prices. That might not sound like much of a difference, the difference between 3.63% and 2%-2.5%, but it actually has profound effects on price targets: support determined by long-term 2%- to 2.5%-real growth would require prices to drop by about 55%- to 65%-real from current levels.

- vreaa

Postscript:

Caveats/Intricacies/Other:

(a) Whatever trend-line ends up being valid, we’d expect there to be overshoot to the downside to produce the final bear-market trough.

(b) Froogle asks in correspondence: “Did something start to happen in 1972 that has been continuing ever since, causing at least a portion of the baseline elevation?” We know that gold-bugs are going to be hopping up and down on hearing this question, eager to point out that Nixon closed the gold window in 1971. CPI began to rise at that point (see US chart below). But why should real prices start to rise at an even greater rate? The argument would be that there may have been hidden inflation for some assets. In other words, has there been a change due to ‘non-headline’ inflation of hard assets? This argument would still have to explain why prices have run so far ahead of rents.
Take a look at the 1972 effect on CPI in this US chart:
us national price index

(c) Concerning the argument that something may have changed about the way the world sees Vancouver; that Expo and the Olympics and other such forces moved Vancouver from a sleepy provincial port to a 3rd tiered city in global terms, and that such change merits RE price increases. If this were the case, why wouldn’t rents have increased at the same rate as prices, to reflect the argued increased desirability of the city?

(d) In the discussion of the 2010 ‘Fives Charts’ post at VREAA, commenter ‘Best Place On Meth’ stated: “I’m wondering if the entire past quarter century [of RE price growth] has been an aberration.” Indeed, it is even possible that the last half century could represent an aberration. Shiller would suggest that this could be the case (and would likely also point out that such periods of price distortion come and go over the centuries).
Did our bubble actually start much earlier than 2003?
Does the 2001-2012 spec mania action just represent the last two or three stages of a larger bubble blow-off, as the curve became steeper (2001) and steeper (2003) and steeper (2006; 2009-2011)?

Other articles pertaining to the trendline/price-support discussion include:

‘Five Charts: Predicting Future Vancouver Housing Prices’, VREAA, 11 Sep 2010

‘Vancouver Teranet HPI Trendline Analysis’, Jesse [YVRHousing] at Housing Analysis, 30 Mar 2012
Chart from jesse/YVRHousing’s article:
Teranet trend

Erroneous Theories For Falling Prices #7 – Talk Of Bubbles Caused The Crash

“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.” …
“…some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.
The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the Economist, Barron’s, and Time Magazine.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)?”
– from ‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

Actually, the fundamentals point to a speculative mania and the increasing talk of bubbles is very appropriate. Sometimes a bubble is a bubble.
Besides, a large, broad, healthy RE market would never crash based on unfounded chatter.
For someone to suggest, in 2013, that the US housing collapse was the result of baseless sentiment change is ridiculous, and to use a US parallel to attempt to argue for Canadian housing strength is more ridiculous still.
No surprise, however, to see pleas to ‘Stay Calm and Carry On’.
When all is said and done, some will blame media hysteria for the RE market collapse.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

#7 – Talk Of Bubbles Caused The Crash
“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.”
‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

Premature Bottom Call – “Vancouver’s housing sector may have hit its bottom with an improvement in home sales seen in October”

“Vancouver, British Columbia’s housing sector may have hit its bottom with an improvement in home sales seen in October”
Marc Pinsonneault, National Bank, Wall Street Journal, 21 Nov 2012

Added to our ‘Premature Calls Of Bottom’ sidebar collection. A steady stream should follow, over the next few years. – vreaa

[Thanks to Ben Rabidoux for pointing out this gem.
Ben is a national RE analyst whose posts at his blog 'The Economic Analyst' have been invaluable reading for those interested in Canada’s RE market. He is more recently working with M Hanson Advisors, ‘a market research firm catering to professional, institutional investors’. Ben tells me he is putting on a seminar regarding the state of the Vancouver RE market, next Wednesday, 28 November 2012, here in Vancouver. Details at http://www.realestate2013.ca%5D

North Van – “Our house at peak was about $1.3M, and now I expect we’d be lucky to get $1.1M, a minimum 15% drop. We’re staying cause we need a place to live with kids, but also cause we paid $600k, which is where it could go back to.”

“I live in Capilano area, bought in 05′. Our house at peak was about $1.3M, and now I expect we’d be lucky to get $1.1M – that’s a minimum 15% drop. We’re staying cause we need a place to live with kids etc. but also cause we paid $600k, which is where it could go back to.
Other houses up the street have lowered from $1.2 to $1.0M and are still not selling.”

NVD at VREAA 13 Nov 2012 5:07pm

This owner appears to fully comprehend the risks and benefits of ownership.
– vreaa

Erroneous Theories For Falling Prices #6 – Toronto Bankers Caused The Crash

“But what if on the way to try to address the housing crisis, Mayor Gregor Robertson and council overlooked a key consideration? Housing isn’t built in a vacuum. It invariably requires financing. And according to several people contacted by the Straight this month, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed to the Straight by phone.”

– from ‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012 [hat-tip 'allen' and 'Where's the HAM?']

The argument is a slight variant of blaming ‘the Conservatives’ and ‘the tightening of mortgage rules’, but it’s a variant nonetheless.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

Erroneous Theories For Falling Prices #5 – Tightening Of Mortgage Rules Caused The Crash

“The value of home sales in B.C. declined more than 25 per cent last month compared to a year ago, according to a report from the B.C. Real Estate Association. That drop is steeper than in any other province, but reflects a broader housing slowdown stemming in part from stricter mortgage rules across the country.” …
“Consumer demand continued to trend lower in August,” said Cameron Muir, chief economist at the BCREA. He said tighter mortgage credit conditions introduced in July are taking a toll on an already tentative market.
“The real key thing for the ownership markets was the reduction in the maximum amortization from 30 years to 25 years,” he said.
That reduction is equivalent to having a full percentage-point increase in the mortgage rate, he added.
“Likely some first-time buyers have been squeezed out of the marketplace as their purchasing power has been eroded.”

– from ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012 [hat-tip allen]

What causes a hangover? Drinking, or finally having to stop drinking?
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

Erroneous Theories For Falling Prices #4 – “Aye, It Was Da Strange Murmurations Wot Caused Ye Crash” – “Invisible forces which lead us to behave in ways that may not be in our best interest”

“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’.” … “Perhaps recent examples of a similar activity might be the ‘Occupy’ movement or globally we might consider how it came to be that so many countries in Europe arrived at the brink of financial disaster at the same time.” …
“At the right time of year if you were to visit Otmoor, a bird sanctuary near Oxford England, you will find Starlings performing a spectacular event known as murmurations. Some might describe these events as spectacular pulsating avian aerobatic operas. Scientists more pragmatic, note it as the Starling’s way of ensuring survival against predators and the maintaining of Starling social hierarchy.
Using murmuration as a model one asks why so many Vancouver home sellers decided to sell at the same time? Was it about survival? Are they acting selfishly in the hope of protecting themselves from the predator of financial disaster by selling their homes and escaping. What was the trigger? Was it the neighbour selling at a price much higher than they anticipated that lead them to believe they could only maintain their social status by selling their home at a higher price?” …
“It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest. While it is fascinating to observe this kind of behavior in animals, for humans it has in many cases proven destructive. You can see this in the number of sales of Vancouver homes and the frustration of Buyers not able to pay the price asked.”

– from ‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

The theory above appears to blame market collapse on something akin to a senseless stampede. The implication is that people in a perfectly normal and healthy environment may all suddenly start behaving together in an almost insane way, all getting swept up in behaviour that “may not be in their best interest”. Actually, this better explains the START of a bubble than it does the unwinding.
Sentiment and herd behaviour is important, but it alone does not cause a perfectly healthy market to collapse. The point is that the market is deeply unhealthy; it is the proverbial accident waiting to happen. Once a speculative mania has driven prices two or three standard deviations from the norm as judged by fundamental values, a price collapse is a healthy and natural phenomenon. It’s the expanding of the bubble that is perverse and ‘destructive’.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

Detached From Reality – “My cousin is a Mortgage broker in White Rock who bought a condo 2 years ago for 265K that she has now listed for 245K with no takers. But she’s sure that her 2 detached houses won’t suffer the same fate!”

“My cousin is a Mortgage broker in White Rock who claims that detached homes are motoring ahead in WR but agrees that Condo prices are down. She bought a condo 2 years ago for 265 that she has listed for 245 with no takers. But she is sure that her 2 detached houses won’t suffer the same fate! Detachment from reality or what!”
Signs of the End at VREAA 3 Sep 2012 6:39pm

The ‘Detached-Is-Different-From-Attached Premise’, commonly used to argue for never-ending strength for detached prices, often stridently expressed on these and other pages, it is, however, false.
By the trough, prices of all property types will have dropped by roughly similar percentages.
– vreaa

What Sets House Prices? – “In the long term prices are set by future earnings potential.”

“The likely scenario is rents increasing slightly above or at inflation and prices correcting over several years. In the US, prices corrected over about 7 years.” …
“To revert price-rent to the middle of the longer-term historical bound in 7 years, with nominal rental inflation of 3%, prices would need to change by -35%, or -6% year-on-year.
To achieve -6% for each of 7 years would require average MOI to be about 9.
2005-2011 MOI averaged 5.4.” …
“A higher MOI is a combination of higher inventory and lower sales. Historically, higher MOI has been a combination of both.
If prices are to correct like they did recently in the US, prepare for a prolonged period of high inventory and low sales.”

From ‘Vancouver’s Housing Market [1 Sep 2012]‘ a slide-format presentation, by ‘jesse’, of ‘Housing Analysis’ and ‘@YVRHousing

Look through jesse’s entire presentation.
His short term and long term hypothesis and analysis is persuasive.
MOI is definitely a very good way of assessing price pressures in the short term, and we are grateful to jesse and others for highlighting it’s importance in recent years.
For what it is worth, I still have some unformed hunches about the relationship between MOI and price drops possibly changing under market conditions that we’ve not yet seen. Could you see data points off the correlation line under certain circumstances? Wouldn’t seller panic possibly take us off the correlation line? (Making larger price drops at lower MOIs possible?). The US chart suggests not. It’ll be interesting to see if our market’s descent produces any MOI/price relationships off that line.
Regardless, I agree regarding the long term primacy of the rent:price ratio; it’s the crux, the most important fundamental measure of a property’s value over the long term. Vancouver RE prices have to, somehow, reconcile with historic norms in this regard.
I strongly suspect this will happen almost entirely via price drops. jesse uses the example of 6% drops per annum over 7 years. We’re aware that isn’t the only scenario that he sees possible. We’d add it’s one of the only scenarios we definitely don’t expect. However the unwinding occurs, you can be sure it won’t be orderly and linear. As regular readers know, we’re particularly interested in the effects of sentiment, and anticipate that, on the way down, we’ll see at least two periods where seller panic sets in. One will likely occur at some point before we hit 2009 lows…. another when we drop below 2009 lows. During those periods price drops will accelerate. Before the trough we’ll definitely see some years with double digit drops, and may even see a year of flat or even slightly advancing prices; possibly after a bounce off the 2009 lows.
– vreaa

Erroneous Theories For Falling Prices #3 – Vancouver RE Bears Caused The Crash

“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

Cause, effect; Cart, horse.
It is common, as speculative manias implode, for ‘naysayers’ to be blamed for the shift in sentiment.
But those same bears went unheard when the market powered ahead. Suddenly, inexplicably, people start listening to bearish predictions? No, the market turns of it’s own accord, and the sentiment change reflects the turn, not the bears suddenly gaining attention.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

Where Are We Now? – jesse’s Thoughts on the Vancouver Market

“Most years since 2005 have seen September inventory at least as high as Octobers but not by much. This year looks to be on balance a hybrid 2008-2010 scenario: inventory is off its highs but still elevated, sales are lackluster, and prices are starting to drop, but nothing as of yet that as yet looks as acute as 2008. So what can be expected for the rest of this year and next for sales and inventory?

We can first compare to 2008. 2008 saw Vancouver get hit by a freight train, most likely in part because lending was becoming difficult, with higher mortgage rates than today’s, but early 2009 saw such a dramatic decrease in price-payment ratios there was an immediate response to housing activity, in part buoyed by robust population growth. Both these shots in the arm are for the most part no longer present.

Nonetheless we are still in a mode where low interest rates are allowing some households to reduce their payments as their pre-2009 financing terms expire, and this tailwind will be mostly spent in a year or so (and as of now it’s mostly spent already). Rents are increasing and have been on the tight side in the past 2 years or so.

A slowdown in China’s investment spending has likely led to less capital flows being invested in Canadian real estate this year compared to 2009-2011. And this is not only because of so-called “HAM” but also indirectly through a recent boom in hard commodity prices that has subsided somewhat this year — look at how BC-headquartered resource company equities have been doing since 2009.

The Chinese central government has already approved a significant stimulus spend to come into place in Q4 of this year. That will lead to additional economic activity but this is unlikely to have the same impact as previous stimulus efforts as much of the spend will go into servicing existing outstanding nonperforming loans. I would expect some uptick in capital flows into Canada in 2013 but nothing like was seen in the past couple of years and will likely be short-lived.

Mortgage rate spreads have increased for a variety of reasons since 2011, which has partially offset falling interest rates seen earlier this year. Going forward we can expect further crimps on lending through increased spreads and increased loan rejections for Vancouver-area mortgages.

Population growth has continued to slow, in part due to unemployment still being elevated. This looks to be a cyclical trend that is highly dependent upon residential construction activity. It is the nature of BC’s economy that construction boom leads to population growth but as completions mount, population growth subsides, as it is doing now. This cycle looks to be on roughly a 10 year period and it looks 2012 and 2013 lie in a downdraft.

Units under construction are elevated relative to population growth and still appear to be increasing. As completions mount later on this year and into 2013 this will provide an additional headwind for the housing market.

Are there factors that could produce a renewed bout of strength? Well some navel gazing is in order — I for one did not anticipate the veracity of the stimulus from governments and how strongly they affected house prices. I am, now, trying to keep an open mind as to what could come to the rescue this time round, though any insight into what this might plausibly be would be greatly appreciated. A markedly improved US economy in 2013 would be a positive for Canada as a whole.

Aside any additional strength from factors not considered above, I see continued elevated inventory and lower sales continuing through the rest of 2012 and likely through 2013: we need only look at the early part of this century to see the effects of lower population growth. I think the months of inventory levels will be enough to put a downwards pressure on prices as measured on a year-over-year basis. This will not mean that prices are monotonically going to fall — seasonality sees prices buoyed in the spring for a variety of reasons — but any bouts of strength are likely to be muted before renewing their descent in the second half of the year. How much? I’ll say -5% by the end of 2012 and a further -10% by the end of 2013. And that is only a guess based on what I can see based on the factors above. If factors I considered above combine in some way to exacerbate effects, or if some real sh!t starts going down in, say, Asia, things could get worse.”

- jesse (YVRHousingAnalyst) at VCI 17 Aug 2012

jesse’s price drop estimates are conservative but we reckon they’re sensible: they’re the high probability outcomes for the next two years.
We’d add that at any point buying could slow more rapidly, via the effect of sentiment change. If it suddenly becomes ‘common knowledge’ that prices are dropping (this is not yet the case), buyers would lose the desire to overstretch to buy, and the market could freeze up.
– vreaa

Andrey Pavlov, Professor of Finance, SFU – “I think this debt accumulation engine of real estate price growth is now done. I don’t see where the future support for real estate can come from.”

“According to the Real Estate Board of Greater Vancouver (REBGV), home sales dropped 18.4 per cent in July, marking the lowest total in the region since 2000. In Coquitlam, the number of sales in July dropped 26 per cent from the previous year. …
“We’re seeing some areas that are quite flat and no changes, and some areas we still have pockets of activity,” said Sandra Wyant, president-elect of REBGV.
She suggested July is typically a slow month for real estate sales, noting buyers and real estate agents alike often tend to be on holidays. …
She said prices could start to come down as competition amongst sellers heats up.
However, Wyant said it often takes a while for sellers to make an adjustment in the marketplace.
“Right now it’s a fabulous time to jump into the market,” she said, adding there are many choices and no pressure to make a decision.


“But one financial expert believes Lower Mainland real estate has reached a turning point.
Andrey Pavlov, a professor of finance with Simon Fraser University, noted prices in Vancouver have rocketed past those in places like New York and San Francisco, and in the case of the Tri-Cities, are comparable to suburbs of those major cities.
He suggested the pace will not continue and predicts prices will likely drop in the Vancouver area.
Pavlov argued home prices rose dramatically in the Lower Mainland, not out of income or general economic growth, but rather debt accumulation.
With low interest rates and easy qualification terms, people have been taking on more and more debt.
“I think this engine of real estate price growth is now done,” Pavlov told The NOW in an e-mail.
“So I don’t see where the future support for real estate can come from.”
And he’s especially concerned for the condo market.
He explained that singlefamily properties would always hold their value to some extent because usable land in the Lower Mainland is limited.
But he contends condos have absolutely nothing that can support them. And in cases where the quality of a new development might be in question, he can see prices of condos in the suburbs dropping by half or more.


– from ‘Housing sales plummet, SFU professor believes price of some suburban condos could drop by half’, Jeremy Deutsch, Coquitlam Now, 10 Aug 2012 [hat-tip Gord and Alexcanuck]

Another article of interest because it involves named locals coming out publicly with bearish predictions.
We agree with Pavlov that the home price rises have been the result of a debt fuelled bubble, and that future support is tenuous.
As for the quantitative aspect of his prediction: we’d agree that “condos in the suburbs” will drop by more than 50%. However, so will condos in the city, and, contrary to Pavlov’s apparent suggestion, so will SFHs, in all areas.
During the speculative mania, it was argued that SFHs were something particularly special, and they received that much more speculative juice as a result. During the descent, that speculative component will be wrung out, and prices will return to those of the early 2000’s. For the vast majority of SFHs that means drops of greater than 50%.
– vreaa

Financial Institutions Underestimate The Downside – “Metro home prices will slip, not plunge”

“Canada’s hot housing market is beginning to cool off, Scotiabank said Wednesday in a new report, with average home prices expected to decline by about 10 per cent over the next two to three years.
Scotiabank economists warn that the housing price correction will largely occur in the Toronto and Vancouver markets.” …
“The Scotiabank report says that the balance sheets of Canadian households remain in good shape, with real-estate equity sitting at an average of 67 per cent. However, Canadians are still carrying high personal debt loads, and with their balance sheets so heavily skewed to real estate, they are vulnerable to a sharp price correction.”

‘Canada’s housing market cooling: Scotiabank’, CTVnews.ca, 8 Aug 2012

Metro Vancouver home prices may slip a bit over the next year, but don’t expect them to drop sharply, according to a report released Wednesday by Central 1 Credit Union. …
“Right now, we’re undeniably in a sales slowdown with substantial declines in sales over the past several months,” said report author and Central 1 economist Bryan Yu. “But we’ve also seen positive employment growth and continuing very low interest rates.
“We believe the supply side will adjust substantially. When prospective sellers see weak sales and pricing, they pull their listings. [Most] don’t have to sell. This balances out the supply side environment.”
Yu’s report maintains home prices in Metro Vancouver should drop more than five per cent this year before rising 2.9 per cent in 2013 and 2.0 per cent in 2014.
“A recent tumble in home sales coupled with a drop in headline prices have some wondering (hoping?), whether Canada’s longtime poster child for a potential housing price bubble is set to burst,” the report concluded. “While a weakening state of demand in Metro Vancouver makes short-term price drops a near certainty, we expect that declines will be both modest and temporary.
“Prospective sellers are expected to respond to weaker market conditions by curtailing listings activity, which will limit excessive inventory in the housing market. Short of another recession and large-scale job losses, market activity in the Lower Mainland is expected to be characterized by a relatively low sales and a flat-to-weak pricing environment.”

– from ‘Metro home prices will slip, not plunge: Central 1 Credit Union’, Vancouver Sun, 8 Aug 2012

As numerous savvy web-based analysts have already observed, these are the same guys who had previously reassured us that any falls at all were unlikely. Now that we’ve already had the falls they’re ‘anticipating’, they ‘predict’ they’ll happen. This is rear-view mirror commentary, and they’ll chase the market all the way down with their non-predictions.
– vreaa

“I met a realtor today at an open house. He was totally convinced that this was a quite summer lull and that there would be a feeding frenzy come September.”

“I met a realtor today at an open house. He was totally convinced that this was a quite summer lull and that there would be a feeding frenzy come September. He also mentioned that other realtors were very worried that this is the end of the good times, but not him. Essentially he was saying that we should buy now because prices will be shooting up again. I told him good luck with that.”
Loon at VCI 4 Aug 2012 6:47pm

“Second friend turned around and said that there is no way it’s going to crash in Vancouver, since San Francisco never crashed.”

“Was at a friend’s wedding last night, with a group of friends. One asked me if I am going to up-size from my current place to a bigger one. I said no, since market is crashing, and gave him most up to date stats -50% in sales compared to last year and -10% in price in last 5 months. Second friend turned around and said that there is no way it’s going to crash in Vancouver, since San Francisco never crashed. I was bit a buzzed from gin and tonic so couldn’t remember exacts stats for San Francisco. Then the first friend jokenly said that second one bought a third property not too long ago and is waiting for it to be built.
At that point I told them that lets not talk about real-state since it’s an emotional topic and I didn’t want to upset anyone, and lets enjoy the wedding.”

SunBlaster at VCI 29 Jul 2012 10:33pm

“We will buy a house in Spain in 2014. We would be happy to pay $150K Canadian for a detatched Villa with Ocean views and a pool. I have to disagree with the predictions for a housing crash here in Vancouver.”

“I’m waiting to buy a house in Spain. A country house 5 to 20 K away from the drab concrete settings of the coast. I used to live in Gibraltar in the mid 80s when the Costa Del Sol was pretty much sand dunes and an acre of waterfront was $40,000.
We will buy in 2014 which is when we would be happy to pay $150K Canadian for a detatched Villa with Ocean views and a pool. I have no idea if the market would be at the bottom then but that is one hell of a deal and we would be very happy to purchase at that price. We have duel Citizenship .
I have to disagree with the comments about a housing crash here in Vancouver.
It’s pretty solid on all fronts. There may be a level or even a 10% correction but there will be no crash.
I used to think there would be a crash (since 2004) but after much thought I became aware that as crappy as Vancouver is during the winter etc its still the warmest and most interesting place in the entire country to live. Our banking system is tight. Commodities + resources are in abundance.
Canada is rocking on the business front as is evident in the real estate prices across the country. If you have cash its a very safe country to bring your treasure to.
It’s just not comparable to Spains economic woes and the parallel is stretching it a bit.”

– comment by ‘a different fred’* at VREAA 29 Jul 2012 3:50pm [*'fred' is not the same fred who posts many trollish comments. ed.]

David Rosenberg’s Stunning Canada vs US RE Charts – “Canadian housing prices are not sustainable, my friends.”

As the U.S. begins to recover from its housing bubble, concerns have been escalating about a housing bubble in Canada.
“Canada is carving out a top, while the United States is seemingly carving out a bottom,” writes Gluskin Sheff economist David Rosenberg.
Using three charts, Rosenberg points out the stark differences in the Canadian and U.S. housing market and the existence of a possible Canadian housing bubble.

Chart 1. The ratio of Canadian housing starts to U.S. starts is now 0.3x:

Chart 2. Canadian home prices are on average twice the level of home prices in the U.S.:


Historically, average home prices had been close to parity.
Rosenberg asks, “which of the two do you think is going to correct relative to the other?”

Charts 3 & 4. Vancouver & Toronto home prices relative to U.S. home prices:


Vancouver’s home prices are down 12% from year-ago peak levels but still average $733,000. Toronto’s average is about $517,000.
“Not sustainable, my friends,” writes Rosenberg.

- from ‘Canadian housing prices are not sustainable: David Rosenberg’, Financial Post, 11 Jul 2012 [hat-tip pennysaver]

Spend some time with these charts and you’ll see why our own call for Vancouver prices to fall 50%-66%, peak to trough, is fairly pedestrian.
By the way, we suspect that US home prices haven’t yet bottomed, and have about another 20% to go.
– vreaa

Globe & Mail Poll – 84% Say That Vancouver Is In A “Housing Price Bubble”


Poll at the Globe and Mail, 12 Jun 2012 [hat-tip patriotz at VCI]

There were 1004 respondents by the time we took the above snap-shot.
A remarkable 84% of respondents voiced the opinion that Vancouver is in a bubble.
Even with a caveat concerning the validity of online polls of this nature, it is fair to say that this represents a significant change in general public opinion and sentiment.
– vreaa

“I’m a Realtor and it’s not a buyers market at all. Based on Vancouver’s historic benchmark price chart I would be hitting the sell button asap.”

“I’m a Realtor and it’s not a buyers market at all. Most of my income is derived from trading stock’s thank god they are liquid unlike houses and condo’s. I love having a diversified income stream otherwise I fear I might be inclined to shovel the whole “good time to buy and good time to sell” routine. That whole sentence is pure B.S. When I buy a stock it’s usually because it’s become temporarily unpopular with the investment community. Vancouver’s real-estate is the polar opposite everyone want’s a piece of it. If I were put Vancouver’s historic benchmark price chart over anyone of the stock’s I hold or have held I would be hitting the sell button asap. I have instructed several client’s to hold off and buy at a discount down the road. This has cost me financially but cost me nothing morally and ethically. P.S. my condo in florida was purchased at a 50% discount and i did not time it perfectly. The herd is falling off a cliff right now and there’s no safety net waiting for the lambs.”
Big D at VREAA 6 Feb 2012 11:35pm

“She tells me that she isn’t worried because the prices cannot drop below what she paid.”

“My sister-in-law bought her place 5 yrs ago, and saw her house price double last year. She tells me that she isn’t worried because the prices cannot drop below what she paid. Only time will tell.”
eagle eyes at greaterfool.ca 2 Feb 2012 1:13am

These are the owners who may well end up being most surprised by the coming deflation.
After sitting on what felt like certain profits for years, they will give them back, and more.
The mania was already well underway by 2006; prices could end up going back as far as those of 2000, 2001.
– vreaa

Canadian Business Housing “Crash!” Cover


– cover, Canadian Business, Jan 2012, for the record. [hat-tip 'J']
Featured article ‘Prediction: The Canadian housing market will crash’, by Joe Castaldo, 12 Jan 2012, was recently discussed on these pages [VREAA 21 Jan 2012].

Cooper Says “No” – “The national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” [BMO]

“The Bank of Montreal poured cold water on the idea Canada’s housing market could be headed for a crash, suggesting that prices are only “moderately high across the country.”
“Expect the housing boom to cool rather than crash,” BMO’s chief economist Sherry Cooper and senior economist Sal Guatieri said in a report published Monday.
“While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust.”
The bank says home values are indeed rising at a faster pace than they used to, but the signs are pointing to a soft landing where prices stabilize — not a hard correction where prices drop quickly by 20 per cent or more.
“In our view, the national housing market is more like a balloon than a bubble,” the bank said. “While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” …
Average prices have grown more than twice as fast as family incomes since 2001, but BMO’s report argues there’s no reason to panic yet.
Nationally, home prices are 4.9 times higher than the average household income. A decade ago, that ratio was at 3.2.
Some cities are hotter than others. Vancouver’s ratio currently sits at 10 times higher than average household income, Toronto’s is at 6.7, Montreal’s is at 4.5 while Halifax is at 3.8. Those are all on the high side, but if the market cools, that will allow incomes to catch up and move the price-to-income ratio lower, the bank argues.” …
The bank does note, however, three risks to the outlook. A sudden hike in interest rates, a widespread Canadian recession, or an economic slowdown in Asia reducing the number of foreign buyers would all take the air out of Canada’s housing market.
“But barring one of these triggers, however, a dramatic correction is unlikely,” the bank said.

– from ‘No housing crash coming in Canada, BMO says’, CBC, 30 Jan 2012
[hat-tips to Zerodown, HD, Potato, Don]
BMO report itself here: BMO 30 Jan 2012 pdf

What’s the difference between a balloon and a bubble?
It seems, from this report’s perspective, the only real difference is HOPE.
Hope that the bag of gas with a membranous cover will deflate slowly rather than implode. Otherwise, a balloon pretty much is a bubble. Both are, after all, largely made up of air.
We’d love to see the BMO math on the proposed ‘income catch up’. It simply isn’t going to happen. There is no way of price:income reconciliation other than via a dislocation, and, unlike BMO, we don’t think there is any need for a precipitating factor to start the implosion.


“There’s no reason to panic yet.”
Of course, by the time BMO warns you to panic, it’ll be obvious to everybody that it has indeed been a classic bubble.
This is all rear-view commentary, with a hefty dose of aforementioned hope. Pretty much useless to anybody attempting to make decisions concerning their own financial future.
Has anybody done an analysis of the predictive capacity of BMO Special reports over the last 12 years?
– vreaa

Maclean’s – “Yes, we’re in a bubble, and it will probably pop soon. The signs of a bubble are unequivocal.”

“Are we literally living in a bubble? And when it bursts, will it get as ugly as it did south of the border? Here’s where the most recent speculation is pointing:
Yes, we’re in a bubble, and it will probably pop soon.
The signs of a bubble are unequivocal. At 13 years and counting, Canada’s current housing boom is one of the longest-lasting in the world, the Bank of Nova Scotia noted in a recent report. The real price of Canadian homes has increased by 85 per cent on average since 1998. Prices stagnated in 2008, at the height of the financial crisis, but they were back on the rise again as soon as 2009, when they grew by nearly 20 per cent, according to the Canadian Real Estate Association.
Meanwhile, Canadian household debt set a new record last year. On average, the debt burden of Canadian families stands at 153 per cent of their disposable income, according to Statistics Canada. That’s almost as much debt as American households had at the peak of their bubble.”

“The scary part is that, by most accounts, 2012 is going to be the year when housing prices start heading south. The housing market is already showing signs of weakness. Despite a rebound in December, housing starts fell in the last quarter of 2011. And in some smaller markets on the west coast, condo prices have already declined 15 per cent, according to Merrill Lynch. The bank predicts that prices nationwide will slip by five per cent this year in the best-case scenario. A spike in unemployment could trigger a 10 per cent price drop.”

“No, it won’t be “housemageddon.”
The good news is that, in all likelihood, our bubble won’t go KABOOM! Instead, we seem to be in for a painful but not devastating pop. That’s because only certain parts of Canada are in a bubble. Overcrowded markets in B.C. and Ontario may be close to busting, but many other areas of the country remain very affordable. The very same survey that ranked Vancouver most-unaffordable-city after Hong Kong rates Canada the third most affordable country, after the U.S. and Ireland.” …
“Most likely, then, the Canadian market will let the air out gradually. As inelegant as that sounds, it’s good news.”

– excerpts from ‘What happens when Canada’s housing bubble pops?’, Erica Alini, 26 Jan 2012 [hat-tip Potato]

Well, hard to get more mainstream, or more definite, than that.
All of the signs of a speculative mania were very definitely present by 2006-2007, but the MSM were silent about it then.
Now, 5 years and tens-of-thousands of overextended buyers later, it is even more glaringly obvious that the bubble is present, so the media ‘warns’ of this. What do they expect the record high number of homeowners to do about this now?
The MSM are rear-view commentators, and their articles have little predictive capacity. Like all other mainstream commentary recently, this Maclean’s piece is overly optimistic in its price-drop predictions.

Note ‘Maclean’s’ is calling for a soft landing. All those predicting a slow gradual reconciliation of prices and the fundamentals (which are currently far, far below prices) have to answer one big question:
Who do they imagine these buyers will be, who will step in and buy, in an orderly fashion, all the way down?
Who will, essentially, step in and bail out current owners, with promises to pay banks a stream of money for the rest of their lives, at these still very elevated prices?

And, while they’re pondering that, ask them for historic examples of speculative manias that have resolved with a soft landing. (There aren’t any.)
– vreaa

Bob and Doug McKenzie Discuss Canadian RE… With Mike

BOB: Hello, I’m Bob McKenzie, and this is my brother Doug. Good day.

DOUG: Good day, eh. This is my nephew Mike. We’re here today to talk about money and Canada, and Mike is the expert in our family. He even got past high school, which is a first in our family.

MIKE: Let’s start by considering the status of Canada’s housing bubble. Because of unprecedented increases in residential real-estate valuations relative to rents and incomes, particularly in Vancouver and Toronto, we run the risk of substantially lower Canadian housing prices during the next several years especially in real terms.

BOB: I’m a little confused. Could you explain that again?

DOUG: I think he said housing prices could go down.

BOB: No way. In Canada, houses only go up in price. Anyone knows that. Even my really stupid friends know that.

DOUG: Bob’s right. You don’t really think prices can go lower, eh? That’s like the Leafs winning the Cup.

MIKE: Perhaps you aren’t familiar with housing prices in Phoenix, Orlando, and Las Vegas losing an average of two thirds of their value during the past six years.

BOB: I have a friend who goes to Florida in the winter. And, yeah, he said something about that. But that’s the States. I mean, they hardly even know how to play hockey down there. That has nothing to do with Canada.

MIKE: Do you really think it’s that different south of the 49th parallel?

DOUG: Of course it’s different. It’s always different this time, eh? No two snowflakes are ever alike, and we sure know a lot about snow up here.

MIKE: The reason this is important is that we have housing bubbles in many countries, particularly in those like Canada. Australia, Brazil, and Russia with high ratios of commodities to people. The main consumers of these commodities are countries like China and India, where even more extreme real-estate overvaluations are especially dangerous since their collapse will likely lead to a sharp decline in demand for the goods that are produced by Canadian companies.

DOUG: You mean companies like Labatt’s, Molson’s, and Moosehead?

BOB: Don’t forget Kokanee. You know that’s my favorite.

MIKE: Of course beer is a sort of commodity, but I was referring primarily to mining and energy companies, as well as some major agricultural producers. Much of the aggregate marginal demand for the world’s commodities have originated from countries which are most at risk of being forced to reduce their consumption in the event of an unexpected disappointment in GDP growth. This will also impact the loonie, which is at risk of surrendering much of its gains of recent years.

BOB: You’re not saying the loonie is going to drop against the U.S. dollar. That’s ridiculous. Not more than a few cents, anyhow.

DOUG: Your mind is stuck in the old days. We’re never going to see the loonie below 80 cents again. It’s just not going to happen. I think you’re spending too much time reading those books and not getting outside enough. Put on your toque and go for a walk.

MIKE: There is also significant risk in Canadian banks, since they’ve made so many loans which are directly or indirectly connected with the ability of borrowers to repay in full. As housing prices decline, many people will owe more on their homes than they’re worth, increasing the risk of default and foreclosure. When a person perceives a decline in his or her net worth, this creates a psychological condition known as the negative wealth effect, in which this person will curtail present-day consumer spending. Multiply this by millions of Canadians, and a severe credit crisis cannot be easily dismissed.

BOB: I know you’re wrong there. We don’t let people buy houses on zero money down, do we, Doug?

DOUG: Not that I know of. So it’s nothing like the States.

MIKE: While you’re correct that down payments are generally more stringent here than they are south of the border, it’s also true that housing prices in many Canadian cities are far more overvalued relative to historic norms than they ever were at their peaks in the United States. So the advantage of lower leverage is unfortunately offset by a greater total price risk. In China, the down payment requirements are even more rigorous, but they have significantly higher relative valuations compared with rents or income. So, in the end, all of these bubbles are unfortunately all going to end the same way.

BOB: You forgot about peace, order, and good government.

DOUG: Yeah, they don’t have those in the States. They have life, liberty, and something else.

BOB: I think it’s the pursuit of happiness. Plus they have all those guns down there, so it’s a totally different situation.

DOUG: Besides, we’ve got some smart people here. I’m not pretending to be one of them, but wouldn’t one of those economists at the Globe and Mail or U of T figured this out by now? If they’re not worried, then I’m not worried.

BOB: I mean the first time someone told me my house was worth a half million dollars, I called him a hoser. But then I found out he was right. Now it’s worth a million dollars. Things change. Sure, it doesn’t seem to make sense, but the world is a confusing place. Almost nothing makes sense these days. I can barely keep track of my favorite TV programs.

DOUG: We have a bunch of geniuses in the government and the schools, and one of them would have figured all of this out by now. If the house next door is worth a million, and the one across the street is worth a million, and I put that extra bathroom in a few years ago, then I know this house is worth more than a million.

BOB: Yeah, that’s why we don’t bother with the RRSP or that other recent thing which is never taxed, since our house is our retirement plan. You don’t need anything else. I’m gonna have to talk with my sister about the people you’re hanging around with.

DOUG: So let me get this straight: you think the loonie is going to lose value? Like this week?

MIKE: In the short run, the loonie will probably actually go higher, because everyone expects the U.S. dollar to keep rising, so it won’t. Within a few months, everyone will be convinced that the loonie will keep on climbing, which is when it will begin a significant downtrend.

BOB: Do you just do the opposite of what everyone is thinking? That’s crazy, eh?

MIKE: It’s known as contrarian logic.

DOUG: I agree with you, brother. This guy might be our sister’s kid, but he’s a little off. You can’t mean to say that if everyone agrees on something then they’re all wrong.

MIKE: When it comes to financial matters, that actually sums up the situation quite succinctly.

BOB: I’m trying to understand this myself. I think you’re telling us that the prices of oil, gold, beer, and the loonie are going to first go higher because everyone thinks they’ll go lower. And then when everyone changes their mind and expects them to keep going higher, they’ll go lower.

MIKE: That’s it exactly. You picked it up quicker than all of the university and government economists I’ve met during the past several years.

DOUG: This is insane. So we should sell this house and rent for a few years? Can you imagine what our friends and family would say about that?

MIKE: In the United States, many people didn’t sell their homes because of perceived public ridicule. Because U.S. housing prices have been declining for the past six years, it’s now considered trendy to rent instead of buying. More importantly, many people have friends and family who have lost hundreds of thousands of dollars with real estate, so even those who can afford to buy aren’t doing so out of fear. This has caused a huge demand for apartments and other rental units, at the same time that the oversupply of single-family homes could persist for another decade. Some enterprising folks have finally begun to convert foreclosed single-family homes into rental homes to rectify this growing imbalance. The problem is that by the time it becomes trendy in Canada to rent instead of buy, it will be far too late to sell at a good price.

BOB: That’s awesome, dude. I’m almost starting to believe what you’re saying, even though it’s impossible for you to be right.

DOUG: This is like a bad trip. But we sure could use the money from selling this old place which our parents bought for like fifty thousand dollars way back when, and we’ve gotten lots of offers even though it’s not on the market.

BOB: You reminded me of a true story. One guy I know from way back, a rich fellow who bought a house in Vancouver, had an offer from a Chinese family to sell his place for three million dollars. Three million–unbelievable. The only catch was that his wife didn’t want to sell. So whenever we would talk on the phone, I would ask him how everything was going, and he would tell me that they still hadn’t worked things out. Finally I got a phone call from him. He shouted with excitement, “Sold. 3.1 million to the Chinese.” And then he hung up. So I called him back and asked him, “How did you get your wife to agree?” So he told me, “I couldn’t convince her.” “Wait a minute, didn’t you tell me you sold the place?” “Yeah, I did. And I forgot to also tell you that we’re getting divorced.”

DOUG: No way. I know that guy. I’ve heard so much today. My brain doesn’t usually think this much in a month.

BOB: Mine neither. I know we’ve got a few bottles of Labatt Blue around here somewhere. Let’s stop thinking and start drinking.

DOUG: I’m with you, brother. Mike, I hope you’ll join us for one or two.

MIKE: Why not. By the time this stuff gets around to killing me, I’ll be dead from something else anyhow.

- from Steven Jon Kaplan’s update to his subscribers, #1604, for Thursday night, January 12, 2012. Steve is a wise contrarian market analyst who can be followed at his website, ‘True Contrarian‘. He correctly predicted many of  the major market moves of the last 12 hectic years. He also plays the piano.

Afterthought: Is ‘wise contrarian’ tautological?

Globe And Mail Publishes Dire Harry Dent Jr. Canadian RE Prediction – “Look at what your real estate was worth between 1996 and 2000. That is the range it will fall to. I think housing in Vancouver and Victoria could decline 60 or 70 per cent.”

Like stocks, global real estate is also in a bubble spurred by easy credit, but is bursting in different areas at different times, Harry Dent Jr. said. He has been renting a home in Tampa since 2005 as he waits for the battered Florida market to bottom before buying. “The home I have been renting for six years has fallen at least 40 per cent, and I am expecting another 20- or 30-per-cent decline.”
When an asset bubble bursts, prices often return to where the rapid, price runup began, he said. “Look at what your real estate was worth between 1996 and 2000. That is the range it will fall to … I think housing in Vancouver and Victoria could decline 60 or 70 per cent, while Toronto is more like 50 per cent, and Montreal a little less.”

– from ‘Get set for a crash, forecaster says’, Globe and Mail, 10 Jan 2012

Noted here not as an endorsement of Mr Dent as an analyst, but rather to mark the fact that the Globe and Mail has actually put into print predictions of RE price drops this extreme. They’re more extreme than our own modest 50%-66%-off predictions for Vancouver.
– vreaa

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

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

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

Sentiment & Prediction – “This city is for those with equity. Your governments have abandoned you. Everyone wants the RE gravy train to continue and measures will, and have been taken, to keep the party going. Nobody cares about a small, silent minority of prudent renters. You are invisible.”

“Ah…another year and another year of failed predictions to come for the bears…
I always love January…its the start of the delusional bear “wishful thinking” season…
January rolls around, and out comes the threat to prices from a blossoming inventory; soon, after no price declines, we move into Spring, with the criticism of stupid buyers as bears watch strong sales and inching up prices; then comes summer, with declining inventory, and wails of dirty asian money and cheap money; then comes fall with increasing inventory, but no price declines despite “poor” sales; then comes the next year…
Ah, repeat….for the 7th year of failed predictions for some of you (circa 2005)
You have one life to live bears…
Maybe its time to take a page out of “formervancouverresident”‘s play book, and move on…
This city is for those with equity after not “sitting on the sidelines” for almost a decade and those rich Asians that have no problem laundering their ill-gotten gains here.
Face it, the federal government has abandoned you; your provincial government has abandoned you; and your local government has abandoned you. Everyone wants the RE gravy train to continue and measures will, and have been taken, to keep the party going. Nobody cares about a small, silent minority of prudent renters… you are invisible.
Your family and friends all question your intelligence for sitting on the sidelines, and quietly whisper “I wish they would just do the right thing, and settle down, and buy a place”…
Time to move on boys and girls…”

Move On at vancouvercondo.info 1 Jan 2012 11:35am

Vancouver RE has indeed been in a speculative mania since 2005, perhaps it started as early as 2002-2003, and ‘Move On’ is correct to note that a small group of bears have been pointing this out since then. Remarkable, eh? The audacity!… the tenacity! But that is what happens in bubbles. Bears look sillier and sillier until they suddenly, spectacularly, look right. (Then everybody goes back to ignoring the contrarians, again…).
But ‘Move On’ is wrong about other things:
Just because a bubble expands for a long time doesn’t mean it transforms into a stable entity. On the contrary, it becomes more and more likely to implode, and the implications of the implosion get more dire the bigger it gets.
Also, there are no powerful ‘hands’ supporting the speculative mania. It has been the product of self-perpetuating market forces and myths; the results are far larger than any entities could hope to ‘orchestrate’. Conversely, when the bubble begins to implode, governments will be powerless in attempts to keep it inflated. Market forces are far more powerful than any available ‘measures’.
‘Move On’ will be proven wrong; until then, ‘Move On’ appears to the superficial observer to be ‘right’. This is always the way it is with these market phenomena.
– vreaa

Chart of Greater Vancouver Average SFH Prices 1977-2011

In view of discussion on the previous thread, we add this chart for illustration and ongoing chat.
[This is a nominal average price chart, and the axes are linear.
Ideally one would do analysis of real, Case-Shiller type data on a logarithmic price chart.]

Greater Vancouver Average SFH Prices (as per REBGV):
2011-12: $1,064,249 (Current; down 13% from the peak; up 1.7% YOY)
2011-05: $1,223,421 (Historic peak)
2010-12: $1,046,348 (Ave price one year ago)

From a technical analysis perspective, despite numerous valid caveats, we note the following:
– Very steep channel support from 2009-2012 now violated to downside.
– Mild horizontal support comes in at $1M (‘big number support’ and 2010 congestion).
– Steep channel support from 2003-present still intact; bottom rail (support) now comes in at $935K-$970K for 2012. With added horizontal support at $935K, the $935K-$970K area is important through the coming year.
– The most important support level is arguably the lows of 2008-2009. We anticipate that, once the 2003-present channel gives, there will be a relatively quick move to $740K, a likely bounce there (to fool the folks who think that that is a superb entry point, given memories of 2009), before it is violated to the downside.
Ultimate support in $444K-$600K range, the likely bottom targets (thus 50%-66% off from peak).
May overshoot to downside, as often happens when such a massive generational speculative mania implodes.
If Shiller is right, and Vancouver SFHs ends up only increasing at the rate of inflation from the 1978-1986 region, ultimate support could be in the unimaginable $300K-$330K range. It’d probably take an economic depression to see those numbers.

Prior related posts:

Five Charts: Predicting Future Vancouver Housing Prices
11 Sep 2010

Was that it? ‘The Top’? [Possibly]
12 Oct 2011

A Bull Predicts – “From 2012-2018 the current real estate boom that is being fueled by hot asian money will continue to push people into the suburbs.”

“My predictions
-Real Estate in BC will continue to skyrocket until 2015 …
-Mass exodus of Vancouverites being pushed into Maple Ridge, Pitt Meadows, Surrey, Langley
-Tale of two cities emerging after the tolls on Port Mann Bridge.
-The world will not end
-Hot asian money will continue to rule the market
-5% increase in real estate prices
From 2012-2018 the current real estate boom that is being fueled by hot asian money will continue to push people into the suburbs and exhurbs. I predict Chiliwack to be the winner for prices percentage wise.”

– FuturePorscheOwner at RETalks 20 Dec 2011 4:21am

Clearly the poster is a friend of the trend, with little imagination.
Given what is going on in other markets, it is arguably surprising that a price crash will surprise so many here in Vancouver.
– vreaa

“The threat of a bubble has largely dissipated. But, really, there never was one.”


“The threat of a bubble has largely dissipated. But, really, there never was one.” – Robin Wiebe, senior economist, Conference Board of Canada, speaking of Metro Vancouver; as quoted in ‘Metro Vancouver resale market ‘balanced': conference board report’, Vancouver Sun, 29 Nov 2011 [hat-tip Smokin' Jayne; added to the 'What Bubble?' sidebar archive as suggested.]

In light of what is happening around the world, it is remarkable that anyone with a training in economics could look at Vancouver’s RE market and not want to issue at the very least some words of reservation. – vreaa

‘Mish’ Headlines Vancouver and Calls For 75% Price Crash – “$50K can now buy you a pretty decent house in some parts of the US. Do you want to see what $1,050,000 buys you in Vancouver? A house that is described as ‘livable’.”

Anyone who follows economics in cyberspace knows of Mike Shedlock’s ‘Global Economic Trend Analysis’. ‘Mish’ today [19 Nov 2011] highlights Vancouver’s bubble, quoting the following letter from ‘Terry':
“I am beginning to believe that Canada’s housing bubble is making the US housing bubble look bush league in comparison. The worst part is Canadians are so delusional they still believe that “It is different here”. 50,000 dollars can now buy you a pretty decent house in some parts of the US, do you want to see what $1,050,000 buys you in Vancouver? A house that is described as “livable”.
Wow, million dollar mortgages which are fully insured by the tax payers of Canada are being handed out to 20 year-olds like they are candy and meanwhile our government still declares, just as the US government did before it’s house crash, that there is no housing bubble and that prices will remain stable and “affordable”. And the rest of the world still looks on and considers Canada to be a fiscally responsible, financially prudent country. Just another of many myths that get started and than repeated ad nauseam by the press without understanding the whole story.”

‘Mish’ adds:
“Housing bubble denial in Canada keeps getting louder and louder, as prices become more and more absurd.”…
“Note the alleged 6 bedrooms (3 converted from the basement) but only 2 bathrooms. Who are they kidding? Is this the happy hooker flop house?
Unfortunately, pictures like these are easy to find.
The longer this continues the bigger the crash. Look for prices on such properties to crash 75% or more. When it does, it will be no bargain.”

Our own prediction at VREAA is for a conservative 50%-66% off. Who is this ‘Mish’ guy, some lunatic bear?
(Actually, we can imagine 75% off for some properties.)
What do these Yanks know about markets?
– vreaa

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

‘Well-Connected Local Player’ – “People are tapped out. Ownership rates are now at the highest. Not pretty. However, overall, the market will likely fall only 10%.”

“An increase in rates or a reduction in credit would cause this whole house of cards to fall – and many people are afraid of that and won’t openly talk about it. The Gov’t is out of ammunition – people are tapped out – ownership rates are now at the highest – – HAM?  Well – look at the latest from the Chinese market. We’ll get some for sure but this will not be like Spring 2011.  This will likely lead to a fairly good decrease in the price at the high-end of the market.  However – overall – the market will likely fall only 10% (my prediction) as these things never happen instantly.  But a 10% reduction will take a lot of the people at the bottom into negative equity – – which as you know slows the market more as they cannot sell to move up.  Not pretty.”
– “A well-connected local player”, quoted by Garth Turner, greaterfool.ca 1 Nov 2011

Have access to all the dots; line up all the dots; then, fail to connect the dots because, well, the conclusions you’d reach are too painful.
This ‘well-connected local player’ lays out (some of) the reasons for the market being so vulnerable, is bright enough to be able to calculate some of the consequences, but is unable to state the logical conclusions.
What are the consequences after a 10% drop that takes “a lot of the people at the bottom into negative equity”? Exactly, further market weakness.
“The market will likely fall only 10%”? – After the 200%+ run-up of the last 10 years, a 10% pullback isn’t even a pullback, it’d be expected normal market fluctuation; ‘noise’.
This market is ripe for a very big, multi-year crash, taking prices down at the very least by 30%, and more likely by 50%-66%.
The ‘well-connected player’ finds the consequences of such a move too ghastly to contemplate, so they simply don’t entertain the possibility.
– vreaa

Tyee Bridge – “Two quick chippy points”

Tyee Bridge is the author of the recent much appreciated ‘Going Going Gone’ [Vancouver Magazine, 1 Nov 2011], an article dealing with the challenging effects of the Vancouver housing market, and our economy, on a generation of industrious young people. The article was much discussed here (12 Oct 2011), and was also followed by a CBC interview (19 Oct 2011). Tyee posted a comment containing discussion and a question in an older thread last evening, so we thought we’d headline it here, with our reply, for sake of ongoing discussion.

Tyee Bridge, at VREAA 21 Oct 2011 9:28pm-

“Hi, Tyee of the article here, with thanks to Jesse and VREAA for their input on the piece early on. If you’re interested, go to the link HERE [CBC, 19 Oct 2011] for a response to the CBC interview and my response in return (assuming the moderator lets it thru)– relates to the premise of the effect of Chinese capital.

Two quick chippy points:

1) I know this is not Jesse or VREEA’s position, but I often hear a sort of default assumption that media and journalists are unwitting (or witting) dupes for the real estate industry– cheerleading for the market to stay ludicrously inflated, or something, an uncritically regurgitating PR as part of the corporate media conspiracy. I’d suggest that this characterization is off the mark, certain Sun columnists excepted. I for one would selfishly love to see the market take a nosedive, if it didn’t kick the heck out of all those I know who do own homes. I do think it will correct, perhaps seriously, esp if something hammers the Chinese economy. But as mentioned, I don’t know that it matters, which brings me to the next pt.

2) I read somewhere on this blog– can’t find it at the moment– that I was wrong in my my assertion that a 40% market crash would not put median-income earners in reach of a 3-bdrm home in Vancouver. By my rather ham-handed calculations, a household income of $68K (the family median here) would get you a mortgage of about $300K. That means you would need to have 3-bdrm homes that go for $500K to make them affordable to median-income earners in a 40% crash. Am I wrong here? When I looked on MLS this week there were exactly 19 three-bdrm homes of any description (condo/townhome/detached) in all of Vancouver and North Vancouver going for less than $500K. Unless I’m missing something, that’s only 19 of 150,000 owner households, which seems negligible.”

—-
Tyee, thanks for your article; as you will have seen it was much appreciated here.
And thanks for the comment. Regarding the points you raise:

1) As you point out, most of us here know that Vancouver journalists aren’t all members of some kind of RE cabal or “corporate media conspiracy”. But you have to acknowledge that, as a group, they haven’t accounted well for themselves when reporting on RE in this town over the better part of the last decade. Sure, there may be a few journalists, like yourself, who do not have direct self-interest in ongoing supernatural Vancouver RE market strength, but they compose a very small minority, and that has been reflected in how the market has been covered. If you look back through the last 5-8 years of media coverage, it is very clear that the vast majority of all published and aired stories promoted and championed the market; only very recently have there been any significant numbers of articles questioning the sustainability of the boom, or critical of its effects.
There may also exist some local journalists who own property but have been able to overcome self-interest and see the mania for what it is. But they, again, are in a (even smaller) minority.
Here’s a mental-exercise ‘poll’ – Make a list of ALL the journalists/producers/newswriters/editors you know who have a voice in the local media. Ask yourself whether each of them owns real estate in the city. For each of them, what percentage of their net-worth is tied up in the RE market? For many (most, perhaps?) the answer will be over 100%. (We’d love to hear your ballpark estimate results.)
Apart from the fact that bubbles are hard to identify from the inside, those who have vested interests in them continuing are particularly bad at spotting them. This could be happening consciously or unconsciously, so this is not to say that all of the bubble-pumpers have necessarily been ‘bad'; many have simply been herd-followers, or vacuous cheer-leaders. Regardless of the exact motivations, the market has for years been covered in a very biased fashion.

2) Yes, at 40% off, this city will still be woefully overpriced.
You may have seen from our prior posts that we now fully expect a 50%-66% price drop (peak to eventual trough; real prices).
At that level fundamentals will kick in, certain properties will be persuasive to cash-flow seeking investors, that’ll put a floor under the drops (but, as with the implosion of most manias, we may well overshoot).
Like raises in interest rates, an economic implosion in China will speed a crash in Vancouver RE, but neither are necessary for this mania to end. All that needs to happen is for prices to stall and then fall, a process that may have already commenced. In the current economic environment, a small price drop could be the spark to the tinder.
You may also have seen our posts where we discuss the massive amount of ‘covert’ speculation in the market. We suspect that very few players can imagine the effects of that evaporating.
Simple price drops may bring some prices into an affordable range for some citizens, as you are calculating. The vanilla math still looks fairly bleak, as you point out, but a speculative mania aftermath has some weird consequences, and many of the variables won’t respond in a linear or predictable fashion.
If prices drop 30%, we’d imagine effects would include:
– complete absence of new speculative buying (= far fewer buyers)
– very few move-up buyers (almost all wannabe-move-uppers will be stuck with low or negative equity in condos and townhomes)
– tighter lending practices (= fewer buyers)
– attempt to lock-in-your-profit selling; perhaps even panic selling (from off-shore investors, local speculators, boomers in retirement, pure flippers; = more supply)
– slump in the economy; lower wages (= fewer buyers; = more sellers)
– disgust with RE (= markets correcting to even lower than the means and fundamentals would suggest; overshoot).
- rents may drop, with falling wages & lost jobs (= drop in income yields; fundamental ‘floor’ prices drop lower)
– other factors
* Overall, there are many factors that will feed off each other once price drops have clearly commenced. The ‘virtuous’ cycle of the boom will become the ‘vicious’ cycle of the bust. If you can imagine 30%-off, all the factors would be in play to take us to 55%-off.

So, that figure of ’19 out of 150,000′, for $500K, may change very substantially.
In the trough, there may well end up being something like one to two hundred 3BR homes selling for $200K-$250K at any one time. But there won’t be many buyers around to take advantage. And, ironically, at the precise point when true speculators should be stepping in, they’ll mostly be gun shy, because most are momentum and not value investors. And people who expect off-shore money to surge in and scoop up all sales at 10%-off or 20%-off will be surprised to find these guys sitting on their hands at 30%-off and 40%-off (because why buy something that’s losing value, right?). In fact, we wouldn’t be surprised if off-shore investors, rather than stepping in to buy, actually become sellers, dumping assets that are dropping in value. A falling loonie will at that point make the RE price fall look even worse from their perspective. Suddenly Vancouver, rather than appearing to be some kind of charmed safe-haven, will look exactly like hundreds of other cities around the world with falling RE prices.

There will be very substantial consequences of the crash, many are impossible to predict. When it has all shaken itself out, and everybody has dusted themselves off, only then will it make sense to discuss a sustainable housing strategy for the region. In current discussions, the biggest ‘player’ (by far) is being left completely out of the equation. Whether you’re talking about DTES subsidized accommodations, or young couples looking for affordable first time buys, or UBC staff/faculty housing plans, the whole terrain will look different at ‘half-off’. There will still be challenges, but they’ll be different, and, we suspect, more addressable.

We hope you, Tyee, stick around to see it all play out, and we hope that all goes well for you and your wife with future endeavours (real estate and otherwise). Please continue to share your thoughts.

- vreaa

“I’d like to share my story as someone who was born and raised in Vancouver, lived abroad for ten years, returned, and is now planning to leave permanently.”

“I’d like to share my story as someone who was born and raised in Vancouver, lived abroad for ten years, returned, and is now planning to leave permanently.
I grew up in what is today ground zero for Vancouver’s speculative mania, Point Grey. My dad was a professor at UBC, and my mom a part-time teacher. In real terms, my income is comparable to that of my parents when they bought our house in the 70s. And my expenses are lower: we have one child (so far) instead of four, one car instead of two, etc. And yet the modest house I grew up in would be utterly out of reach for me today.
The question is, what has changed between a mere two generations? Yes, the economy has grown, and there is more wealth in the world today. But presumably one’s income reflects this growth, so that real estate should be no less affordable than it ever was.
Locals shrug off this uncomfortable question with the standard wisdom: We have water! And mountains! To which I reply: Vancouver has always had water and mountains. The city’s attractive geography is widely known and has long been priced in to the market. It’s a valid reason for local prices to start out higher than in certain other places, but not for them to go up any faster over time. Some improvements have been made to the city itself, but the fact is Vancouver is pretty much the same place it was 30 years ago.
What does seem to have changed is our collective mindset. We are living in a dream where Vancouver is the new global hotspot, debt and real estate are the path to riches, and where history doesn’t matter, because “it’s different here”.
I believe Vancouver is in for a grim wake-up call. By any number of fundamental metrics, local real estate appears overvalued by 60-70%. If there were a way to short the market, I would wager a significant portion of my net worth on this bet.
The ridiculous cost of housing aside, after living in six cities in four countries, and traveling to countless other locales, I can say with some confidence that Vancouver is not as uniquely wonderful a place as its residents claim it to be.
None of my three siblings—all hard-working professionals—has chosen to settle in their hometown. My wife and I only moved back because my dad fell ill. We currently rent an eastside bungalow, and intend to relocate internationally next year. I plan to move my business with us. The place we’re going to has its own challenges, but in our experience the overall quality of life is superior.”

El Ninja at VREAA 15 Oct 2011 3:28pm

‘Occupy’ Vancouver? – Sorry, The Majority Here Are Already Preoccupied

In cities around the globe ‘Occupy’ protests are taking place as the ‘99%’ confront the ‘1%’.
In our city the ‘Occupy Vancouver’ movement, convening today downtown, struggles for focus. Why?

Well, consider that here in Vancouver 60-70% of the population own real estate, and, rather than being economically distressed by virtue of that fact, as most would if they lived elsewhere, owners here are feeling very smug and content about somehow having missed the global-economic-crisis bullet. They are relatively rich (they believe); their RE holdings have mostly risen since they bought, and, for many, their property values have increased 100%, 200%, even 300%, making for life-changing, retirement-securing, (but as-yet-unrealized) profits. Even those who haven’t yet profited are, like the waitress with the 250K mortgage, living in optimistic anticipation of their future profits. Because real estate in Vancouver, of course, always goes up.

The majority here don’t feel as distressed as the majority do elsewhere. It’s all because of RE holdings, and the related artificial positive effects that the RE industry has applied to our local economy through our speculative mania in housing. These owners have no idea how precarious their situation is, they don’t see their gains as having been built on a speculative mania, and they don’t foresee the very large price drops that will occur when prices deflate. Many will lose all of their net-worth (and more) in the deleveraging ahead.

For now, the majority here feel relatively content, and many can’t even really imagine what there is to protest about.
So, keep that in mind while considering ‘Occupy Vancouver’.

In other cities it may be the 99% protesting the 1%.
In Vancouver it’s more like some of the 35% trying hard to articulate something vaguely wrong and difficult to pinpoint about the state of affairs, while 65% watch from the middle distance, feeling comfortable. There are many things about local and global economic developments to be concerned about: but these concerns are unlikely to gain traction in Vancouver, at this time.

Vancouver always seems to live by its own schedule, and holding an ‘Occupy Vancouver’ event today is asynchronous. Follow up events in 2013 or 2014 will, we suspect, make a lot more sense to the majority of locals.
– vreaa

Was that it? ‘The Top’? [Possibly] – “They are not as excited, they’re taking a wait and see approach. They’ll put an offer in, and the offer may not be close to the asking price, and then the owner might give them a counter offer, and then the buyer is gone.”

So, was that ‘The Top’? Perhaps it was.

TECHNICAL ANALYSIS:
The average price of a detached home in Greater Vancouver has dropped $115K from a top of $1.22M in May-June 2011. That’s a drop of 10%.
From a technical perspective, however, the price is still in a steep uptrend (light red line), which will be violated if prices drop below about $1.10M next month. Below that there is support (light blue lines) at $1.0M, $935K, and at (as long-time readers know, a level we see as crucial) about $740K.
Price drops will not be in a straight line, and we would not be surprised to see short-lived bounces upwards off any of the support levels. That is perhaps most likely to occur at the $740K support level, before that support then gives way to the downside perhaps 6-18 months later.
We expect a number of factors to add momentum when prices start to fall in earnest. Each violated level of support will bring more sellers to market.

[Chart from the REBGV. For caveats regarding use of technical analysis and average prices, and for prior TA at VREAA, see 11 Sep 2010]

INVENTORY INCREASING; SALES STAGNANT; MOI RISING
“September was a month that recorded the third lowest number of sales in the last 10 years and in combination it had the third highest volume of listings in 17 years.”Larry Yatkowsky, Realtor, 4 Oct 2011
Months of Inventory for Greater Vancouver roughly 6.6
Over 800 SFHs for sale on the westside.
Prices in October appear, thus far, to be flat compared with September.

NEW BUILD SFH SALES ON WESTSIDE: ZERO
In September, there were 0 (zero) new build SFH sales on the west-side. This is the first time that this has happened in any month over the 17 years of available records. The HST ‘uncertainty’ was immediately blamed.

FOREIGN BUYERS ‘LEVEL OFF’
[Wouldn't that more accurately be 'DROP OFF'? -ed.]
Reporter: “Realtor Lorne Goldman says that he’s recently seen a 30% decrease in sales on Vancouver’s westside. Off-shore buyers from mainland China appear to be leveling off”.
Goldman: “You’re not seeing as many, and the ones that are coming in, are, you know, not as excited, they’re taking a wait and see approach, … they’ll put an offer in, and the offer may not be close to the asking price, and then the owner might give them a counter offer, and then the buyer is gone.”‘Buyer’s Market’, Global TV, 4 Oct 2011
[With the drop in average prices, and with simultaneous loonie weakness (down 10% in 6 weeks), these homes would actually look 15%-20% cheaper to foreign buyers. So, why hasn't demand increased, as bulls always claimed it would? Why aren't buyers stepping in to snap up bargains and 'deals'?
It is way too early to tell, but regular readers know that, unlike the bulls, we fully expect demand to drop with falling prices, as demand based on the premise of rising prices will disappear. Buying based on price-momentum will stop. - vreaa
]

‘BUYERS’ MARKET': A MISNOMER [so far]
“Prices are still high, but listings have increased and sales have decreased, turning the Greater Vancouver area into a buyers’ market!”‘Buyers’ Market’, Global TV, 4 Oct 2011

Chart shows impressive year over year price changes.
[We have a semantic problem: A 'buyers market' should not simply be defined in terms of sales:listings ratios. That term leads to confusion: If sales are slow and inventory rises, but prices are still 2-3 times fundamental values, describing that as a 'buyer's market' is just a sales gimmick. Sure, sellers start sweating, but buyers are not yet being offered good value. A true 'buyers market' only emerges when prices fall to a range of good value, as determined by underlying fundamentals, or lower. Of course, higher MOIs do translate into downward pressure on prices, eventually. We are possibly starting that process now in Vancouver-ed.]

SALES COMPOSITION CHANGING?
“What’s selling? A bottom end market with only 25% of the Downtown Vancouver [condo] sales over $500,000 and a mere 8% over $1M. August listings and and sales were flat, compared to July. Inventory climbed to 7.2 months. Up from 3.7 in March.”Maggie Chandler, realtor, ‘Downtown RE Update’, 3 Oct 2011
[This effect may exaggerate 'average' price drops, so caution needs to be used in interpreting average prices, as always. - ed.]

EVEN MORE CONVOLUTED BULLISH REALTOR ARGUMENTS
“We saw a sizeable number of investor class immigrants who came here a little more than 5 years ago, got their contribution, or their investment to Canada back… and many of them are using that money to…uh.. putting that into the real estate market.”Cameron Muir, BCREA Economist, Global TV, 4 Oct 2011 (1:30 on)

SENTIMENT CHANGING?
“We are here on the front line in Vancouver. It’s amazing the attitude shift in people within the last 2 months or so. People are openly talking about the market here being in a bubble. People I know who were total RE pumpers are starting to look scared. This is going to be epic.”Drew at greaterfool.ca 4 Oct 2011 11:54pm
“I was sitting and doing my work minding my own business and started hearing my coworkers discuss real estate, and they were literally mad about what’s going on. Amazing, the tides really are turning.”4SlicesofCheese at vancouvercondo.info October 5th, 2011 at 1:06 pm

FLAHERTY STILL IN DENIAL (publicly, anyway)
Asked at a news conference in New York (5 Oct 2011) what it would take for Canada to act again to cool the market, Finance Minister Jim Flaherty said: “It will take clear evidence of a bubble in the housing market in Canada, which we have not seen.”Reuters, 5 Oct 2011

So, a top, yeah, perhaps.

Steak = Overpriced Condo; Sizzle = Vancouver ‘Safety’ : “The broader asset is Vancouver.”

Voice over: Tuesday Bob Rennie launches the sale of the section called ‘Sails’… Bigger units, bigger views, bigger prices… from half a million up to two million dollars.
Reporter: How do you go about doing something like this when there is such financial turmoil?
Rennie: You know… we can start… we’re talking about the asset called ‘The Village’, but the broader asset is Vancouver… If you want to take money out of volatile markets, Vancouver is looked at as a very safe place to put money.
– excerpted from Global TV ‘News’ piece on RE selling in Surrey and the Olympic Village, 24 Sep 2011 [hat-tip Greenhorn]

“The broader asset is Vancouver” – Bob Rennie, Rennie Marketing Systems, Global TV ‘News’ (2011)
“Don’t Sell the Steak — Sell the Sizzle!” – Elmer Wheeler, Marketing Expert, ‘Tested Sentences That Sell’ (1937)

People are poor at assessing ‘safety’ when it comes to investments.
Assets that have shown apparent strength because of massive speculative momentum, are actually the least-safe place to attempt to invest.
Vancouver RE will look safe until it doesn’t, and demand will then quickly disappear.
We’ll find out what it’s like to participate in the downside of volatility.
Steaks will once again become steaks.
– vreaa

“I do not see this trend of rising house prices in Vancouver ending until in-migration stops, likely not until 2050 when the world population is forecasted to be peaking.”

“I do not see this trend of rising house prices in Vancouver to end until this in-migration stops .. likely not until 2050 when the world population is forecasted to be peaking and Canada has perhaps 50,000,000+ people !
People come here because the scenery is spectacular, air is clean, flights are plentiful, low corruption, law & order, great education K-12-Uni .. and because house prices are still reasonable compared to other world class cities like Singapore, London, New York, Munich, Paris, Moscow, HongKong.
Yours Sincerely,
Thomas Beyer, President
Prestigious Properties Group”

RE Talks, 21 Sep 2011 3:22pm

Another post for our collection of ‘Limitless Demand Argument For Ongoing Market Strength’ personal opinions. – vreaa

Vancouver RE ‘Jumps The Shark’ – Candidate Moments

To ‘Jump the Shark’ – Definition: ‘the moment in the evolution of a phenomenon where it moves beyond the essential qualities that initially defined its success, and begins a decline in quality that is beyond recovery.’

Has the Vancouver RE market ‘jumped the shark’? Only in retrospect will we be able to identify an exact defining moment, but, in the meantime, we here suggest prospective candidates. We’ll update as necessary, and link via a sidebar graphic. Please post any suggestions/’votes’/nominees in the comment section. The envelope, please…

1. VANHATTAN
BC Homes Magazine runs a front cover asking “Are sky-high real estate prices turning Vancouver into the next New York City?” [August 2011]

2. Cam Good Helicopter Tour Of White Rock
Local condo salesman takes Global TV crew and local realtors with mainland China marketing connections on a much-publicized RE promotional helicopter flight over White Rock. [Feb 2011]

3. Vancouver RE Mention In U.S. Republican Candidates Debate
“Why is it Vancouver is the fastest-growing real estate market in the world today? They allow immigrants in legally, and it lifts all boats.” [7 Sept 2011]

4. This House On The Market For $3.18M
Sold 15 Feb 2011 $2,830,000 back on the market August 2011 with an ask price of $3,180,000 [August 2011]

5. Craigslist Offer To “Be Your Dinosaur” In Exchange For A Home
“This is the only way you will ever have your pet dinosaur, and the only way I will ever be able to acquire a house in Vancouver.” [Aug 2011]

6. Gangsters Move To The US To Avoid Vancouver RE Costs
“RCMP report suggests the dramatic plunge in U.S. house prices has caused some gangsters to re-evaluate whether B.C. is really the best place to do business.” [Aug 2011]

7. Only One UBC Employee Can Afford To Own A Westside Home.
Poster UnagiDon, using public info regarding incomes, and bank mortgage guidelines. [July 2011]

8. Moderator Of ‘Vancouver RE Bubble?’ Debate Wears ‘No Bubble’ Button
David Podmore, CEO of Concert Properties Ltd., wears ‘No Bubble’ button to RE industry insider debate he moderated at the Vancouver Board of Trade regarding “whether or not Vancouver real estate is in the midst of a bubble”. The panel, unanimously, agreed: ‘No Bubble’.[Oct 2011]

9. ‘Affordable Housing Plan’ Results In Apartments The Size Of Two Parking Spaces For $850 Rent Per Month
[19 Dec 2011]

10. Basement Suite In East Vancouver Sells For $590K
[24 Feb 2012]

11. Laneway House, 500sqft, For $270K, Not Including Land Cost
[29 May 2012]

12. Trump Brand Coming To Vancouver
A high-rise hotel and condo project on Vancouver’s West Georgia Street is being rebranded as the city’s first Trump tower. [17 Feb 2013]
trump tower vancouver +

Earthquake; BC Job Losses; Richmond Dropping; ‘Bubble’ Mentioned In ‘The Province’

A 6.7 Richter earthquake occurred off the west coast of Vancouver Island today at 12:41pm, felt in Vancouver. Buildings swayed “from Fraser Valley to Campbell River.”
“I was watching the U.S. Open Tennis downstairs and while sitting on my couch I felt it beginning to move back and forth…. It didn’t frighten me… but it took my attention off the tennis match for a few minutes.” [David Dickinson, Courtney]

CBC News, 9 Sept 2011

12,000 Jobs lost in BC last month.
News 1130, 9 Sep 2011

The Richmond RE market has very definitely softened year over year:
#Sales: 2011-8 (2010-8) : % Change
Detached : 95 (124) : -23%
Attached : 69 (84) : -17%
Apartments: 96 (127) : -24%
New Listings 2011-8 (2010-8) : % Change
Detached : 251 (165) : +52%
Attached : 165 (125) : +32%
Apartments: 244 (205) : +19%

– via VMD, vancouvercondo.info 9 Sep 2011

‘The Province’ quoted David Madani’s ongoing sensible (but conservative) prediction of a Canadian housing price correction of 25%.
The Province, 9 Sep 2011