There has been much discussion this week about debt, and about the likely effects of probable upcoming stricter mortgage criteria and rising interest rates on the Canadian housing market. Those are obviously important factors, and a tightening of finance may well be the precipitant that finally breaks this hardy camel’s back.
But, when it comes to the main engine that will accelerate a crash; the factor that will turn a shallow pullback into a dizzying plunge; we have long been most impressed by the effect of ‘shadow’ inventory. We believe that there are many Vancouver owners who are ‘stealth’ speculators, meaning that they have bought or are holding properties purely because prices have been rising. We suspect that a very large number of these properties, including personal residences, will come into the market in attempts at locking in profits or minimizing losses. With dropping prices, the reason for holding will disappear. Waves of inventory will cause prices to drop well beyond that which the consensus deems possible. There is the very real possibility that the selling will reach panic intensity.
Bulls who currently point to apparent unlimited demand and limited supply are not taking into account the dynamic nature of both supply and demand. When prices start their decline in earnest, both will change profoundly. This can happen very quickly.
Speculative demand (largely local) will disappear. Why buy a cash flow negative property in a price dropping environment? Why overextend to pay 10 times your annual income for a home that is dropping in price?
Supply will become plentiful. It will only take a small percentage of owners, perhaps just 4-6%, to decide to try and cash in at the same time for the market to crash.
Only a very small percentage of bubble participants get out with profits.
“As an owner sitting on a significant cushion (greater than 50%), I am again thinking of selling. I’m comfortable and my payments are virtually nil (tenants in the basement) but a capital gains hit will annoy me (at the least!) if we get hit as hard as the States has (and they look like they are in for another leg down). 10-30% I can handle. Any greater than that and I will regret not cashing out.”
This anecdote is extremely valuable as, we believe, it reflects the kind of thinking that is going on in the minds of many Vancouver owners. Some are getting wind of the possibility of price pullbacks, they are considering the possible effects of such pullbacks, and they are weighing their strategies. Do I wait or sell? If I don’t sell, at what point would I sell? How much of my paper profit could I stand to watch disappear? If we get to 30% off, how do I know it won’t hit 50%, 60% off? Shall I stay or shall I go?
Note that this owner is not somebody who is distressed. They are comfortable from the financing perspective. But they have a speculative component to their reason for holding their property, and that makes them a potential seller in the face of a downturn.
There are no karma points for riding markets up and down.