The Psychological Momentum Bull Argument – “Red is the New Black; Owning has become a Defining Part of One’s Persona in this City; Renting is the Biggest Stigma.”

It is no secret to readers of these pages that vreaa considers the Vancouver RE markets very overvalued and set for a tumble. For the record, we will at times headline opposing and alternative arguments on these pages. We recently had a look at the bullish predictions of Vancouver condo developer James Schouw, which centered around the argument for overwhelming ongoing demand. Here we highlight posts from an individual who argues that despite increasingly unfavourable fundamentals, psychological market momentum will cause people to take on ever increasing amounts of debt, or overextend themselves in whatever way necessary, such that they “do whatever it takes to [own their home] because it has become a defining part of one’s persona in this city, as renting is the biggest stigma”. We agree that RE has attained a remarkable psychological and social pre-eminence in Vancouver through this boom. Such engines are in fact common in bubble markets.  We disagree strongly, however, that such factors can keep price levels divorced from intrinsic value indefinitely. Fundamentals (yes, those “tired old arguments”) will take hold, and will turn a virtuous cycle very vicious. -vreaa.

For the record, this from ‘Vancouver Rocks’, who admits to being someone who works “administering a multi-billion dollar federal infrastructure fund“. They stated their position 4 Jan 2010 3:50 pm & 8:59 pm at greaterfool.ca –

“The strength of the market is domestic based, and has been driven by historically low interest rates (since 2002), a sincere if not brainwashed belief that we are the best place on earth, a certain level of amenities that cater to those that love scenery and the outdoors, and a commitment by a population willing to take on massive debt for bragging rights. Is that delusional? Sure, but that delusion has fueled the longest RE boom in this province (and in Canada’s history as far as I can tell) to the point that it is entrenched.

Affordability has been tapped for many years. This year and next year will be no different. Each year, people are amazed at the ever increasing percentage of income spent on housing, and each year prices continue to go up. Each year, people bring out the same tired old arguments. And yet, here we are with a low paying service sector economy; a province absent of corporate headquarters; a decimated forestry and fishing industry; an embryonic tech sector; anemic immigration at best; a doubled unemployment rate; and a 15% increase in RE prices one year during the “worst” recession.

Income to price ratios mean nothing in this city. This city has not followed the three times income rule since the early 80s. There has been a disjuncture between incomes and home prices for DECADES now. Such a ratio may mean something in Winnipeg, but out here people find a way to pay for their real estate no matter what – through foreign money, renters as mortgage helpers, second jobs, etc.

People in this city will do whatever it takes to keep their place because it has become a defining part of one’s persona in this city, as renting is the biggest stigma in this city.

And because most people are aware of the strength of the market, any minor “correction” will see people flock right back in because they know that prices go up.

I think people believe that people are taking on massive amounts of debt without knowing what they are doing. While some of the generation Ys are doing so because they embrace risk and have never known “bad times,” other older generations that should “know better” take [on the risk of debt] knowingly.

If the big bad “recession” of 2008 taught us anything, it is that being in the red can pay off – “red is the new black” so to speak. The government created a moral hazard with their bailouts, so many homeowners believe deep down that should anything go wrong with real estate the government will bail them out. Real estate has become the defining sector of an economy, an indicator of wealth, and a “right” in the minds of the masses.

Prices have been in a so-called “boom period” for over 8 years now – yes, that is eight years, and this will most likely be the 9th year of significant appreciation. Just a history lesson for all the young’uns – prices may rise, and dip, but in Vancouver they maintain their trajectory ever upwards. To all of you that are waiting for a major crash in Vancouver, you might have to wait another decade. But be sure to keep checking blogs for predictions that a crash will happen “next year,” and be sure to comment on how much your are “saving” every month by renting ($500 here, $1500 there), all the while watching homeowners secure “paper gains” reaching tens of thousands if not more each year.”