During asset bubbles, it is relatively easy for participants to almost imperceptibly leverage themselves into more and more exposure to the inflating asset class, thus putting themselves at risk of complete wipe-out when the bubble pops. Participants actually believe that they are being prudent, and their ever expanding paper-profit bottom line reassures them and reinforces their behaviour. The fact that they are taking substantial risk and speculating on ongoing price appreciation may not be obvious to them. -vreaa
The Bill Good show on CKNW Friday 27 Nov 2009 at 10.30 am featured discussion with Garth Turner (greaterfool.ca) and realtor Tony Ioannou of Dexter Realty Vancouver (author of ‘Buying and Selling a Home for Canadians For Dummies’). These excerpts –
Tony Ioannou – “[We are] dealing with a lot of people who think that they have to buy now because the market is running away from them. Most of the people we are dealing with are buying a property to live in… a principle residence… very little speculation in the market.. Very few of our clients are going to ‘the end’ of what they can afford.. They might be approved for a 500K mortgage, [but] they’re taking out a 300K mortgage.. They’re not overextending themselves as they might have done a couple of years ago… We still have some off-shore money coming into Vancouver and the lower mainland but much, much less than in the past. Most of the people we are dealing with are local people just upgrading, mostly move up buyers from a small apartment to a townhouse, townhouse to a house, or up to a bigger house. We’re still dealing with a lot of first time buyers.. [they are] very cautious,… they’ve worked hard to make a downpayment they’re not going to throw it away… So they’re very very cautious and slowly entering the market.”
Garth Turner, in response to the above, said that there was a “giant argument that interest rates would not stay low”. He also pointed out that the average abode cost “between 7 and 10 times the average family income” in Vancouver which was “by world standards, severely overpriced”.
Tony Ioannou continued – “A lot of our clients do have a huge amount of equity, especially if they are in the market, trading up. One quick example, I’d sold a property to a young couple in 2000, a $300,000 townhouse, [with] conventional financing, I went to meet with them last week, they now have paid off their mortgage, [their property is] now worth about $500,000 , they now have a half-million-dollar down payment to go and buy their first house”.
Garth Turner retorted – “Well, that’s exactly what scares me about this whole thing, when you have people who are taking… and in the case of that couple, I’m sure that constitutes the bulk of their net worth… anytime I see people taking the bulk of their net worth and dumping it into one asset and then trading up exactly the same asset class, and increasing their exposure as they go on and on and on…// If we do have an interest rate increase,.. if we have taxes go up,.. I cannot see the Vancouver real estate market sustaining its value going forward.”