True Words Spoke In Jest – “The Vancouver real-estate market is a pyramid scheme teetering atop a cloud of ephemeral hope and, simultaneously, eternal fear. If a single homeowner begins to doubt the prudence of their investment, the pyramid will collapse.”

Stephen Quinn, host of On the Coast on CBC Radio One, Vancouver, in ‘Glad you asked: pithy responses to [Vancouver] visitors’ FAQ’ Globe & Mail 28 Jan 2011 -
“[Vancouver RE] is expensive. The average price of a bungalow in the city is $890,000.
The cost of housing remains high because the Vancouver real-estate market is a pyramid scheme teetering atop a cloud of ephemeral hope and, simultaneously, eternal fear. If a single homeowner begins to doubt the prudence of their investment, the pyramid will collapse. Which is why there is a bylaw prohibiting homeowners from ever expressing out loud regret for their real-estate purchase. Regardless of how leaky it may be.”

This humorous piece taps the author’s unconscious and delivers up a perfect description of the Vancouver RE bubble. The reader comments on the piece are equally telling, most found the observations ‘lame’. As one dissenting commenter noted: ‘sometimes the truth hurts’. -vreaa

“I’m just plain sick of hearing from everyone how much they have made from flipping houses while I sit there renting.”

Singh at greaterfool.ca 31 Jan 2011 12:45am – “I’m just plain sick of hearing from everyone how much they have made from flipping houses while I sit there renting. Can’t wait for this all to play out!”

Downside Of Renting – A Forced Move: “So now me, wife and two kids (one whom is 4 months) have two months to find a home.”

ulsterman at vancouvercondo.info January 29th, 2011 at 1:45 pm – “The intangible benefits to owning brought into sharp focus: This morning I got the break-up call from my landlord. He’s just sold his house in East Van and wants to move in. He had his place on the market just to see what he could get and in his words, “Wow! the market has really picked up.” He’s smart enough to be extracting capital from his home and moving into his mortgage-free, inherited family home – life’s pretty rosy for some.
So now me, wife and two kids (one whom is 4 months) have two months to find a home. Isn’t renting just wonderful. And no, with a family to raise, i was not like the majority of people [on vancouvercondo.info] – i was not stuffing thousands a month into 10-bagger stock picks and getting rich while renting.
OK, gotta go start searching the delightful supply of “no cats” rental homes on Craigslist. Did i mention it’s a shitty, grey Vancouver day?”

“He has been infected with this way of thinking from MSM and friends. Hard to blame him as he has seen his house triple in value in 15 years, he is a simple hard working man, somehow always lucky with real estate.”

4SlicesofCheese at VREAA 29 January 2011 at 12:59 am-
“My father tells me buy now price does not matter.
If you don’t like the place move in 2-3 years and it will be worth 60-70k more.
If you cannot pay the mortgage just sell it and buy a cheaper place with the money you made from selling it.
He is not only giving me advice he actually wants to give me 200k for downpayment, even with that and my own I would still not even consider it.
Everytime I visit my parents, first thing he asks me is have I looked at any new houses. I just have to say “Yeah I am going to an open house this weekend”. I tried once to tell him I think there’s a bubble, that did not go well haha I will just stick to my “Yeah I am going to an open house this weekend”

He has been infected with this way of thinking from MSM and friends. Meanwhile not listening to anything his family says, including a nephew that works at Goldman Sachs who called the bubble in the states years ago and says the same thing is going on here now.
Hard to blame him as he has seen his house triple in value in 15 years, he is a simple hard working man, somehow always lucky with real estate.
At the same time a few of my aunts have lost ALOT of money in the past investing but that does not seem to take that into account.”

David Dodge – “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”

David Dodge, former governor of the Bank of Canada, on BNN ‘Squeeze Play’, 25 Jan 2011 -

Interviewer: How significant was [the recent mortgage tightening]; was it just cosmetic?

David Dodge: No, look, you’re always working at the margin, but let’s be very clear: a home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that, when it’s a high ratio mortgage… and so it’s not at all unreasonable, again for us as taxpayers, to say, “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”
So, there is that issue, and that is a long standing issue, it’s an issue which I raised back in 2005… we didn’t have it quite right… I think the adjustments that the government have made are indeed absolutely appropriate.
We face a funny situation at the moment where low interest rates are appropriate for the economy as a whole but where do they have their maximum impact? They have their maximum impact on the housing market. And so it is appropriate to use that quantitative tool (ie the terms and conditions under which you can get a CMHC insured mortgage), to use that tool to dampen somewhat that effect because you really don’t want the Bank of Canada to have to raise rates inappropriately just to cool the housing market. So I think it was absolutely appropriate what the government did.

Interviewer: Do you think though it’s really going to be enough if you’ve got, basically, record household debt now?

Dodge: Wait a second, wait a second.. this is operating in a particular market, in the housing market, and what we saw was that Canadian housing prices fell sharply but then fully recovered and then overshot. So house price to income, house price to rent at the moment is at historic highs. And so we do risk, in the housing market, we risk a bubble forming, which is not helpful to anything/anybody… so I think the government took exactly the appropriate action… I might have wished they’d taken it a little sooner, but they took exactly the appropriate action, and they deserve full marks for that.

Interviewer: Is the whole credit thing a big deal if your real estate is worth more?

Dodge: Well, hang on (laughs) that was the box that the Americans got themselves into.. they bet on house prices going up ad infinitum… and of course they fell, in some places by more than 50%… and then you have an enormous problem… so I think this is absolutely appropriate policy, given that it is appropriate for the BOC to be very accommodative at this point in time.

Interviewer: But, David, what about the CMHC… massive expansion of their balance sheet from $150B now north of $500B they’ve been approved up to $600B, that’s all on the taxpayers books, why didn’t the government say//… It’s like Fannie and Freddie in the States.. that didn’t work out to well… putting a lot of that on the balance sheet of the tax-payer.. shouldn’t the government be trying to claw CMHC (back)

DD: Whoaa-whoaa…// The Canadian mortgage bond program, that’s what you’re talking about, it’s already insured by CMHC… We have the risk already… whether those mortgages are packaged in a bond, or not… The reason we have that program, why it was expanded so rapidly in 2008 and 2009 and that was to ensure that the banking system had the liquidity to carry on. Now, that program, over time, probably can be wound down a bit, so that it doesn’t add to your and my risk as a taxpayer… we’re already on the hook, we’ve ensured those mortgages

Interviewer: Almost 70% of all residential mortgages are now insured and CMHC is the insurer of last resort

DD: And that is why it is important that everybody have an equity stake in their house! (chuckling)

[*In an earlier part of the interview, Dodge also intimated that many would say that at a 85c loonie we would more or less make Canada "competitive with the Americans".]

Our comments:
Dodge always seems very sensible.
We are pleased to see him mentioning fundamentals such as price/income, price/rent, and how he emphasized their historic extremes. One hopes that those who consider these factors unimportant would note that Dodge still sees them as crucial (but we’re not going to hold our breathe on that one).
We respectfully disagree with him when, like some other commentators, he implies we are able to avoid a bubble via mortgage lending tightening: there already exists a bubble, worse in certain markets. If ‘historic extreme’ separation of prices from fundamentals doesn’t alert us to this, what would?
He repeatedly reiterates that he sees the mortgage tightening move as ‘appropriate’. But he also points out that he would have been more hawkish and moved earlier.
The interviewers are on the correct track when they ask him whether the changes are enough.
It would have been nice to have seen them ask him direct questions about the implications, say, of a price/income ratio of 9.3:1.
-vreaa

“It’s scary how close we came to being trapped in a damn 5 percent down 35 year deal, almost sold our souls. I wanted what I felt I was entitled to.”

HADTOMOVETOTHEARCTIC at greaterfool.ca 22 Jan 2011 4:29 am – “Almost three years ago my then boyfriend now husband and I were pre-approved for $460,000.00. Shockingly since back then I was a nanny barely scraping by at $14.00 an hour, minimal savings and bad credit. The now husband had his you know what together and is practical and smart about money, 30 grand saved in the bank at the time, no debt and working 3 jobs to make more.
I jumped right on the HGTV porn loving, Sandra Rinomato fan club. I couldn’t wait to loose my property virginity. I gyrated in anticipation of an acre for the dog, nice kitchen or something Daddy could help us reno and somewhere between Roberts Creek to Halfmoon Bay, as long as it was on the Sunshine Coast. We scheduled open houses, looked at houses, and searched realtor.ca for hours in search of our entitled home. I even became addicted to house hunters and house hunters international. I envisioned us having the lifestyle all my friends seemed to have. Barbequing on a Weber grill, lounging on the new ginger jar patio furniture and a nice 52 inch TV for the next property virgins marathon. It’s scary how close we came to being trapped in a damn 5 percent down 35 year deal, almost sold our souls, or shall I say mine (Over and over again the husband said even though the bank says yes we really can’t afford a house) I wanted what I felt I was entitled to. I grew up on the North Shore in Vancouver, we always had nice things and all my friends were doing it, and even my mortgage broker friend had me convinced with her constant facebook updates.
And then the husband had a job offer, a professional job. No more UVIC bartending, no more teaching economics, no more odd jobs. It changed EVERYTHING. We now live in the Arctic in Cambridge Bay Nunavut. No more HGTV porn lovin’ for me. No House, BBQ, Furniture, Electronics or that acre backyard for Ralph to run around. Friends thought we were crazy, and still do. They keep telling me time is running out. A friend just bought a place in North Van, in Raven Woods out Deep Cove way….$370,000. For a one bedroom and den. Gross.
I stumbled upon [greaterfool.ca] one day and I finally got it. The husband thanks you. I keep spreading the gospel as best I can, but people just don’t get it. We’ll just hang tight up here in the miserable cold making money and saving it, while the Lower Methland slowly but surely falls apart.”

Extra! Extra! Read All About It! – Pablum From ‘The Vancouver Sun’ Lulls Locals

What motivates ‘The Vancouver Sun’ to print an article like: ‘Real estate market calm expected to follow hectic 2010 in Metro Vancouver; Home sales forecast to increase modestly across B.C. as prices stabilize‘, 27 Jan 2011?
It contains no ‘news’ or analysis whatsoever. It consists of hopeful statements regarding price direction from a family who have recently purchased a home, and reassurances of stable markets and price increases from BCREA, CMHC, UBC’s Land Economics department, and a realtor. There is no mention whatsoever of any downside risk.
The only conceivable purpose of this article appears to be to lull current owners and potential buyers into believing that the Vancouver real estate market is stable, cosy, and benign. It’s an advertisment dressed up as a newspaper article. -vreaa
[hat-tip to Mr. Poppinfresh at VREAA for pointing out the importance of non-articles such as this one.]

“Carrie and Mike McDougall — with their daughter Kylie, 3, and son Colton, 4 — moved to British Columbia from Alberta recently and bought a new house in Maple Ridge. They were comfortable with the price they paid and are expecting prices will go up in the next year, as are experts across Metro Vancouver.”
“Hopefully, it was a good time to purchase,” McDougall said in an interview.

Other excerpts:

“There will be a much more gradual increase in consumer demand and less volatility. There will be more stable market conditions this year.” – Cameron Muir, chief economist for the B.C. Real Estate Association

“We’re calling for a three-percent price increase in 2011.”- Robyn Adamache, senior market analyst for Metro Vancouver with Canada Mortgage and Housing Corp.

“[I'm] seeing an uptick in buyers who believe interest rates are heading north. [I] believe there will be a modest increase in both pricing and demand this year.” – Ron Antalek, a realtor with ReMax Ridge Meadows Realty.

Tsur Somerville, director of the centre for urban economics and real estate at the University of B.C.’s Sauder School of Business, said he doesn’t like forecasting the future, but nevertheless believes that 2011′s real estate picture will be largely determined by the speed of the recovery and the Bank of Canada’s action on interest rates.

“The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic.”

“The great enemy of the truth is very often not the lie,
deliberate, contrived and dishonest, but the myth,
persistent, persuasive and unrealistic.”
–John F. Kennedy

[hat-tip to nonymouse at vancouvercondo.info]

“I lived in Portland for over 20 years until moving here 4 years ago.”

Simpatico at vancouvercondo.info January 26th, 2011 at 9:44 pm – “I lived in Portland for over 20 years until moving here 4 years ago. After meeting lots of Vancouverites (the nature of my work), I can honestly say 1) too many are not critical thinkers nor well-read; 2) developers and real estate industry is much more powerful here (reminds me of Arizona in this respect, where I grew up); 3) Portlanders are also the most well-read bunch you can encounter…more books sold per capita in Portland than NYC, a stat that has held for several years. So, prices never got anywhere near the bubbly amount they’ve reached here, simply because less BS, and not as many bought the BS. With one important exception: The mainline banks and the many fly-by-night mortgage lenders launched a mighty predatory lending assault on the Hispanics, in particular, signing entire extended families on the dotted line, including illegals and people who were not literate in their first language, let alone English. It was these who lost their downpayments, paid outrageous fees at closings, were intimidated out of life savings, and lost their homes in droves. These pushed the price fall, especially in the extended metro area. I know because I built social housing for farmworkers, the poorest, and they were buying homes that were 3 and 4 times what they could afford. Nothing was really affordable to them and they would have continued to be good renters who could sleep at night until these sleazy lenders got hold of them…
And also consider that the average HH income in Portland was about $60K when I left, compared to just over $50K here, and you see how out of whack this market here really is.”

4SlicesofCheese at vancouvercondo.info January 26th, 2011 at 11:40 pm – “My uncle is from Portland. At one point he had 3 houses. One primary, two rentals. Occupation – Mailman.
Prices were going up back then and I remember them bragging to my mom about how smart they were. One year I guess something happened. They were up in Vancouver for my cousins wedding and he was talking to my mom that they just got their property taxes worth 10k and they couldn’t pay it. Again house rich, money poor.
My mom offered to lend them the 10k. Thank god he refused to take it. He told my mom he was thinking of selling one of them as it had almost doubled in value, his wife was really against this as she thought prices would go up till infinity and wanted to keep the house for her son.
Thankfully he sold one off to a greater fool, made some good money and paid off the other house (even though its paid off its still worth less then what they paid for it years ago).
Three months later the market tanked.”

Spot The Speculator #25 – “Tonight I found out at dinner that a middle class family bought FOUR pre-sale condos. Their first property “investment”.”

serferboy at VREAA 23 Jan 2011 10:19pm – “Tonight I found out at dinner that a middle class family (own their own home, have stable jobs, net worth likely less than $2M) bought FOUR pre-sale condos… These are not property developers, realtors, etc. This is their first property “investment”…more like speculation…on 800K+ of condos..  Just another normal Vancouver family….”

Anecdotes Counter To Own Analysis – “The strongest argument I have against this is the boomers I know personally, none of whom have been stupid with their money, none of whom got LOCs to support unsustainable lifestyles.”

Vulture Fun at vancouvercondo.info January 7th, 2011 at 5:11 pm-
“[Boomers] getting old. We hear about them often on the news, but how big an effect will they really have on real estate? I tend to think demographics will be the biggest factor in the coming crash. I know this is nothing new, but can anyone dispute the common theory on how this all plays out:
1. The oldest boomers are just turning 65. Time to bail on the house (which is too big since the kids left) and buy a condo or rent.
2. 40% of them are sailing into retirement with nothing saved. The only source of funds other than meager government programs? The primary residence. Time to sell.
3. The first ones out are winners. The last ones out get killed. Once this group starts to sell it creates a vicious cycle that drives prices down for the next ten years. Of course, not all boomers will be forced to sell, but there’ll be enough that do to have a huge effect.

The strongest argument I have against this is the boomers I know personally, none of whom have been stupid with their money, none of whom got LOCs to support unsustainable lifestyles.”

“As frustrating as it may be” on the Wrong Side of the Bubble, the Bearish Position Remains Right

blammo at VREAA yesterday [24 Jan 2011] taunted the Vancouver RE bear ‘Choir’ for having been wrong for so long -
“I often wonder if more people have been hurt by bear blogs (selling too soon/not buying), than will benefit from them due to future market corrections.”

This is a familiar and expected criticism. We acknowledged to blammo that it has indeed felt silly being wrong for so long, but pointed out that this is simply what happens in bubbles. Bears look silly until they suddenly look right. It is easy to point out that anybody could have made a fortune flipping condos or westside lots, but we know that all markets are made up with an almost infinite number of coulda-shoulda-woulda situations, in retrospect.

Despite being wrong for this long, our outlook remains the same. And, no, this is not out of stubbornness, or out of insanity, but quite simply because there is no information out there that causes us to change our view. The vast chasm between Vancouver RE pricing and fundamentals remains astonishing. In fact, we see even more downside for the market as it goes from very overextended to uber-overextended. Fifty percent price drops become even more likely.

David Rosenberg, by coincidence, has some relevant comments in his ‘Breakfast with Dave’ missive today [25 Jan 2010]. He is, of course, talking about the currently overextended stock market, but the principles are very similar:
“As frustrating as it may be to have been focused on risk-adjusted returns as opposed to gross nominal returns, to have been managing the downside risks and preserving capital rather than chase a mostly speculative run, it is more advantageous to be positioned tactically to take advantage of any corrections or price dislocations that occur over the near- or intermediate-term that are part and parcel of all markets, especially ones that have over-run the inherent fundamentals.”

There you have it. That is why sensible managers of their own funds have not bought into the Vancouver RE market for the last 3, 5 or even 7 years. They have seen how much our RE market has ‘over-run the inherent fundamentals’, and have decided not to participate in a ‘speculative run’ with a significant portion of their own net worth. This is not to be confused with risk aversion. All good investors and speculators have to take risk. But the ones who do well through their investing lifetimes are the ones who take calculated risks, when the odds are on their side. Pointing out that people have made money in Vancouver RE in the last 5 years is like pointing out that a cowboy walked up to a roulette table, put all of his money on a number, and his number came up. And then another cowboy did the same thing, and another. Does this change the way one approaches roulette? Do you line up with the cowboys? No. Sensible people avoid roulette altogether as, over the long term, you can be assured of losing.
Yes, it is ‘frustrating’ for bears as the RE run continues, but memories of this frustration will pale into insignificance when compared with the relentless and ongoing pain of being on the wrong side of the bubble collapse. That collapse has the potential to wipe out many, and to severely impede the financial health of even more for decades. Not to mention the broader adverse effects on our society, that we will all be forced to sustain.
Until the price drops commence, we’ll admit we look foolish. But we fully expect that to be a temporary position.
-vreaa

“The day I embraced the fact that I would be in the Lower Mainland for at least the next several years – and I realized that I was completely fine with the idea that I might rent that whole time – was a GREAT one.”

Royce McCutcheon [at VREAA 20 Jan 2011 11:44am] has some wise advice for those caught on the wrong side of the bubble – “Make a choice NOW. Don’t hedge. Don’t wait till the end of this year. Ask yourself: how much sleep have I lost over this issue? How many fights have I had with my partner? How much stress have I carried with me because of this? How much WORSE will my obsession with this issue be as I consider the implications of having an expanded family?
The day I embraced the fact that I would be in the Lower Mainland for at least the next several years – and I realized that I was completely fine with the idea that I might rent that whole time – was a GREAT one. It removed some seriously pointless baggage. Life can’t be lived waiting for things to happen – and while I truly believe things here are going to correct soon, I can’t tell for certain if we’ll see it start this Spring or a few years out – or if I’m flat out wrong. Do you want to worry about how this issue is going to affect your life for that long? A terrible thought.
So do the pro/con calculations with your partner TODAY, ruminate, and make a CHOICE. Choose to stay for a longer time line (like several years) or choose to move soon and start building your new life ASAP. You don’t have to carve it in stone, but at least put it on the wall with some fairly permanent ink. The funny thing is that there’s a decent chance you’ll be happier either way.
Make a call together and then stick with it.
And as a post-script: nothing says you can’t stay engaged on this issue from an intellectual standpoint. I’ve actually found it to be much more interesting once I stopped considering it so much vis-à-vis my own life.”

Ongoing Talk Of Hot Foreign Money – “He says that the ‘official travel destination’ status from the Chinese government, combined with a restriction on investing in China RE, has opened the flood gates to dumping money into Vancouver real estate.”

thinktom (a local realtor) at RE Talks 23 Jan 2011 4;38pm – “One of the owners of a large west side RE company has a friend in Hong Kong who’s been living there 20 yrs. He says that the ‘official travel destination’ status from the Chinese government, combined with a restriction on investing in China RE, has opened the flood gates to dumping money into Vancouver real estate. He says ‘it’s only the beginning’.”

Is this an anecdote or a rumour? (Regardless, it’s a third hand opinion).
Is the ‘owner of a large west side RE company’ an informed insider or a biased observer?
-vreaa

And here’s another related story, this time from unicas at RE Talks 23 Jan 2011 10:05am ‘The Wenzhou ladies may be coming’ – “Wenzhou is a small city in Southeast China. But Wenzhou people are feared in China both as fierce business competitors and real estate buyers. 30 years ago, they were among the first Chinese who set up private business shops. They calculated profit by fraction of a penny. For the past decade they have been known as bigshot condo buyers. They form teams of RE buyers, go from city to city in China, and bring up prices wherever they go.”
unicas quotes from this article from the Financial Times, ‘Chinese city allows personal investing abroad’, 10 Jan 2011 – “A Chinese city celebrated for its cut-throat entrepreneurs has launched a pilot project allowing individuals to invest directly overseas in a move that could signal greater opening of the country’s tightly controlled capital account. The eastern city of Wenzhou will allow individual residents to spend up to $200m a year in offshore investments, according to an announcement on the city government’s website.”

Okay, so, the Redcoats!, or the Tartars!, or the Russians!, or the Zombies!, or the [your scariest nightmare adversary here!] are coming!
Before we all start quaking, note this passage from the end of the article: “Wenzhou investors spent around Rmb5bn buying assets in Dubai before the real estate bubble burst there.”
As we’ve said before, the vast majority of ‘hot’ foreign buyers are dumb-money momentum investors who will high-tail it out of here when prices eventually turn south. It’s a force and a story that will make our bubble ‘n bust that much more extreme.
-vreaa

White-Hot Sentiment – “People want to get in. They want to get in bad”

Transcription and stills from ‘White-hot housing market’, The National, CBC News, 21 Jan 2011. [Hat-tip 'ams' at VREAA and 'kabloona' via e-mail; thanks. Our own comments follow.] -

“If you live in the Vancouver area, it seems like location is no problem at all. The housing market there is hotter than anywhere else. Even a million dollars might not get you the home of your dreams. Even in a city famous for eye-popping house prices, what happened on this corner this month is remarkable.”

“This is the condition it was in.”
It began when agent Nick Calogeros listed this dilapidated home  next to a park in a good neighbourhood.

The lofty asking price: $1,088,000.
“We had over two hundred people at the open house, there was a line up down the stairs, on the walk-way, and onto the sidewalk. And we had thirty offers come in on the property.  And the final sale price was $1,611,000.”

That’s a whopping $533,000 over asking [49% over ask], a new record in this neighbourhood, and for a house that will very likely be knocked down.

And it didn’t stop there.
“After the neighbour across the street found out about the price, she phoned me up and asked me to list her home”

Incredibly the woman had only owned the house for a few weeks. She paid $1,047,000 on November 2nd. She relisted and sold it on January 17th, for $1,350,000. That’s a $300,000 flip in two and a half months, and that’s without making any improvements to the home.”

Calogeros – “The supply is very low, interest rates are still low, and people want to get in.”
Interviewer – “They want to get in bad”
Calogeros – “They want to get in bad… to the market… they do.”

With the average house price here already topping one million, it again begs the question “Can prices keep defying gravity?”

“What’s likely going to happen is that, over the next several years, interest rates will go up, there will be some point where they go up relatively rapidly, and once that happens we’ll see in reality how sustainable these housing prices are.”  (David Macdonald, Canadian Centre for Policy Alternatives)

Besides an incredible backdrop, Vancouver has something else that keeps prices high, a lot of wealthy buyers from mainland China.

“They are willing to spend a lot of money, they have a lot of money, and especially in the luxury market.” – Gregory Carros (Sotheby’s International Realty)

It all adds up to a frothy start to the 2011 selling season.

Interviewer – “When is it going to stop?”
Calogeros – “Hopefully never.”
Spoken like an agent on commission who has just made a killing.

— end of transcription —

Our thoughts:

1. Knockdown for $1.6M; 49% over ask; 200 people on the sidewalk; $300K profit on a 3 month flip; wanting to get in “bad”: anybody need any more evidence this is a mania?

2. $300K in 3 months: High-profile news of great speculative profits is bad, bad news for our society. It distracts everyone from more productive activities, and it’ll demoralize prudent workers and savers. (How long does it take the average family to accumulate $300K savings?). It draws more into the speculative game, and puts even more pressure on prices. (Until, of course, it stops, and reverses.)

3. Throwing in a bit about demand from mainland China seems to be required fashion in these reports; like a crazy leap to try to explain the unexplainable with a hand-wave. The vast majority of sales are to locals; stories of wealthy foreigners cannot support this market indefinitely.

4. To give the CBC their due, they do use the word “frothy” and do ask the question “When is it going to stop?”. The most sensible phrase in the whole piece was “we’ll see in reality how sustainable these housing prices are” [David Macdonald]. We like the language, using the word “reality”, implying, of course that we have prices that are based on “fantasy”. We’d really like CBC to follow up with a piece on the implications to Vancouver if these prices are not based in “reality”.

5. The last two stills are not a visual ‘typo’. The realtor smiled for a really long time after saying that he hopes this never ends. As usual, a small minority of the population, those with vested interests, are happy with the insanity that this RE market has brought to Vancouver.

6. Style comment: Printing the price in massive font over the building in these reports is a bubble development. The implication is that the numbers are far more important than the buildings.

7. “Wanting to get in ‘bad’.” You can feel the exquisite, squirming urgency of the wannabe buyers. Like addicts, groupies,  followers.

8. We fully anticipate that lots comparable to the one that sold for $1.61M in this article, will sell for well below $500K during the coming bear market. That’s more than 70% off the recent sales price. If you think that sounds crazy, yes, at this point, maybe it does… It’s the inverse of how crazy the move to the upside has been. That’s how bubbles implode.

-vreaa

“It’s been taking us about five months to pay off the amount of each cheque we wrote against our HELOC every two weeks during the height of our renovation. And that’s at an interest rate below 3%.”

Froogle Scott comment at VREAA 20 Jan 2011 8:34pm -
“It’s been taking us about five months to pay off the amount of each cheque we wrote against our HELOC every two weeks during the height of our renovation. And that’s at an interest rate (variable) below 3%.
Thank god our renovation, once it really got going, didn’t last that long. And thank god we stopped when we did…”

[Those of you who don't yet know Froogle Scott, check out the fascinating saga of his house purchasing and renos here: 'The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise'.]

“My brother and his wife have their owner-occupied house, investment condo, and vacation condo, where each one was purchased with the down payment coming from a HELOC on the previous property.”

This obviously adds to the ‘normal’ RE leverage very substantially. They are in a situation where a very small drop in housing prices would wipe out their entire equity.
Their speculation is a little like taking out a loan, buying stocks with the borrowed money, then going full margin on the account to buy more stocks, and then borrowing even more against that account to buy even more stocks. It’s unlikely any brokerage would let you do anything remotely like this (although you could get similar suicidal leverage through synthetic instruments).
It never fails to amaze us that citizens merrily do with RE what they wouldn’t dream of doing with other assets.  It’d be interesting to know their exact leverage ratio; it sounds very high.
This kind of behaviour, IMHO, is why our market is so ill. -vreaa

YLTNboomerang at vancouvercondo.info January 17th, 2011 at 7:51 pm – “My brother and his wife must be sweating now! They have their owner-occupied house, investment condo, and vacation condo where each one was purchased with the down payment coming from a HELOC on the previous property. Due to an unexpected career change (she got laid off), they had to rent out both properties but are still not cash flow positive. To deal with this they are currently in the process of re-financing (increasing amortization and consolidation).
I know for a fact that they are negative equity on the vacation home and that they are probably close to neutral on the primary residence however they have a little equity left in the investment property purchased 8 years ago (only a little as they borrowed a lot on this property to buy the others). As long as they finance before the 18th of March they should be able to scrape by until his wife gets a job however I wonder how many other financial retards like my sibling are out there? If his wife still worked but got laid off after March 18th they would be completely screwed!”

Gulf Island Waterfront; 55% Off – “A sharp drop in demand for B.C.’s high-end rural waterfront properties has resulted in substantial price reductions.”

Denman Island; west-facing waterfront restored character house on 1 acre; listed 2007 for $1.5M; sold recently for $665K

From Vancouver Sun 20 Jan 2011 -
“A sharp drop in demand for B.C.’s high-end rural waterfront properties has resulted in price reductions that in some cases are substantial.”
“Rich Albertans and other wealthy buyers who traditionally bought up B.C.’s recreational properties are increasingly looking south to places like Arizona and Nevada, where prices are often much lower following the U.S. real estate meltdown.”
“People are definitely looking south.”

“I can tell she gets tense when I trot out the usual arguments about why it’s STILL a bad time to buy.”

tincup at VREAA 18 Jan 2011 7:43pm – “Much like all the people in the US who vowed they would move to Canada if Bush were elected for a second term, we have not followed through with our plan to move away from Vancouver if things didn’t start correcting by fall 2010. We simply renewed our plan…”if things haven’t turned around by fall 2011.” The difference now though is that due to a growing family we simply can’t stay in our current (cheap) place beyond that, and the S.O. is very anti-renting now due to the eccentricity of our current landlord. I can tell she gets tense when I trot out the usual arguments about why it’s STILL a bad time to buy. It’ll be an eventful 2011 for me, that’s for sure. If/when we buy, it won’t be at the bottom but hopefully it’ll be down enough that I won’t feel like all that patience was wasted. Vancouver really is different in the sense that it is taking forever for this correction to get going.”

Chin up; you are not alone. It’s bloody difficult to live through these times on the wrong side of the bubble. The market is a massive distraction, and it hinders regular folks who are simply trying to get on with their lives. It wastes time and misallocates resources. It causes people to leave or avoid living in our city. Affordable (not necessarily cheap, no one is expecting that) housing (to rent, and, yes, to own) is far, far better for a society. Economically, socially, psychologically. It’s going to take a while to resolve, but it will normalize. The more people that are scared off, the worse the comeuppance. Let’s hope sanity returns soon. -vreaa

UPDATE: tincup at VREAA 20 Jan 2010 1:37pm – “Just to mix things up even more though, yesterday I found out that my very solid, stable job is being relocated. Exactly where is uncertain at this point, but the options (not decided by me) range from pretty nice mountain town to god-aweful northern hole. If they decide on the latter, I’ll be looking for a new job. 2011 will be an interesting and stressful year.
Sure glad I don’t own right now…”

“The more I think back over the past six years, the more I realise how crazy this town has actually been. As a naive 24 year old, when I arrived in 2004 I took it as a fact of life that house prices rose forever.”

TPFKAA at VREAA 16 Jan 2011 9:09pm – “The more I think back over the past six years, the more I realise how crazy this town has actually been. As a naive 24 year old, when I arrived in 2004 I took it as a fact of life that house prices rose forever…. that’s what everyone told me. I also believed that the route to riches was to invest in RE.

Latent anecdotes that I paid no attention to in the past now take on more significance. There were people I met who were obviously making a superb living through RE investment: I remember two in particular. Back in fall of 2005, A forklift driver and lead hand at a warehouse where I briefly worked, owned five rental properties in Poco. He had owned a cannery back in the eighties and made a killing. He had no real need to work; he had already retired once in his early forties. But after two years he realised he was spending all his money at a crazy rate, on harleys, snowmobiles, a boat and cottage on Harrison, golf, drinking parties, and so forth. He decided to go back to work to have something to do. He chose to go back to forklift driving because he was extremely good at it and enjoyed himself doing it (his dad had been a big warehouse owner and he grew up driving rigs and forklifts). He used to be really happy in the lunch room at month’s end because all the rents would be rolling in. One day he was talking about taking on more overtime. I asked him why, knowing he was worth millions, and he replied: “‘Cause I’m saving up to buy an apartment building out in Chilliwack.” His opinion on RE in 2005 was bearish for Greater Vancouver: “you can’t get in on Vancouver, Burnaby, Coquitlam, even Poco, any more” because prices were already too high. But he anticipated Chilliwack, Abbotsford, etc. to see further increases and wanted to invest. I am not clear if he just wanted the building for rental income or as investment. Nobody at the warehouse begrudged the guy for all his RE investments, despite a largely blue-collar work crew, because he was a stand up guy and had amazing energy. I dropped out of contact with him in 06, so I don’t know if he did buy that apartment building.

The second example made my jaw drop. A guy I knew from a sports class in his early twenties did nothing else but RE investments, flipping, for a living. I suspect he got his start with a large DP from family or with some lucky assignment flips. He went from taking the bus and wearing scruffy clothes in ’05 to a Benz, tall blond girlfriend, the works, in the space of a couple of years. All he did, literally, was RE buying and selling, full time. In early ’08 I ran into him last and asked how the downturn was affecting him. He said he felt sorry for those getting in on the game late, who did not have the reserves to absorb the losses, but that “we” – his partners included perhaps – had enough reserves to ride it through.”

Prevalence of 35yr Amortization Mortgages – “If I’m going to lend you money for 3%, why would you ever want to pay me back?”

In light of the new mortgage laws there has been discussion regarding how restrictive the move to insuring only 30 year amortization mortgages would be, and, in a related vein, how prevalent 35 year amortizations had been in the past.

joycer at vancouvercondo.info January 18th, 2011 at 9:55 am – Last time I was talking with a Mortgage Broker (from Dominion Lending about 2 years ago) they told me they try to get ALL of their clients to take the 35 year amortization. Why? Well more flexibility of course. They tried to explain it like if you take out a 35 year amortization you can always accelerate the payments to make it a 25 year amortization. If you happen to need more money that month, then you pay at the 35 yr amm rate. They also said “If I’m going to lend you money for 3%, why would you ever want to pay me back? Back in the 80s when rates were double digits it made sense to put as much money into your mortgage as possible and pay it off quickly, but not at today’s rates.” To be fair he was hinting at the fact that you could put your money to work elsewhere for a better return rather than tie it all up in paying off your mortgage. The point is though he was advising all of his clients to use the 35 year option… I also assume the commission is higher since the banks would make more over the life of a 35yr vs 25yr amortization but he didn’t mention any of that.

4SlicesofCheese at vancouvercondo.info January 18th, 2011 at 2:32 pm- “Last March, I went in to CIBC to get pre approved before house hunting in Vancouver, this was before I actually did research and found [vancouvercondo.info], my “mortgage specialist” did not even suggest anything but 35 year amortization. He even did a printout for me of three different scenarios of different down-payments or different house costs variations. But always kept the same amortization at 35 years. Seems like he wanted me to get the lowest payment possible. He also suggested I get in before the April 19 deadline. Thank god I did some research.”

T at VREAA 18 Jan 2011 7:07pm – “I just bought a house and was quite surprised at how forcefully the 35 year mortgage was pushed by our broker. I went with a 25 year motgage and would have gone with a 10 if the bank would have let me. At any rate, I am pretty sure that my husband and I can have it payed off in just over 5 years if we don’t go on any big spending sprees. We are no longer in Vancouver though. As some of you may recall, we relocated to Fort Nelson.”

“I’ve been a bear since 2004 but constant articles for the last 3-4 years promising a crash is imminent is getting a bit ridiculous.”

grant at vancouvercondo.info January 14th, 2011 at 9:36 am – “I’ve been a bear since 2004 but these constant articles promising a crash is imminent (“we mean it this time! honest!”) for the last 3-4 years is getting a bit ridiculous.”

[Tell us about it! The articles and naysaying will continue to look 'ridiculous' to many observers, until the crash comes. That's one feature of bubbles. Savour the moment... we're watching history being written. -vreaa]

“I just kept thinking: Something is not right here, too much risk, don’t people worry? They seem to think NOTHING is possible, until it’s literally happening.”

This from “just call me anonymous please” via e-mail to VREAA 18 Jan 2011 -
“I was at Metrotown this evening, SALE signs everywhere (retail – a hint at the big picture ?). What is it? Boxing month?!
As a young (23 y/o) Vancouverite, I felt so alone before finding the [bearish RE websites]. I just kept thinking “Something is not right here, too much risk, don’t people worry?”. Everyone I know is sucking on the kool aid, it’s extremely comforting to know I’m not alone in my views. People truly are stupid, it seems they are just not too good at taking guesses at estimating possible outcome scenarios. People are shortsighted, they think NOTHING is possible, until it’s literally happening.”

Yes, we are aware that one can make the argument that the bearish Vancouver RE websites are like a cult, with posters and readers all reinforcing each other’s delusional views of coming RE collapse. But, we consider that argument carefully, weigh it, and discard it. There is far more evidence that the delusions are held by the far larger bullish-owner-speculator cult, who are apparently having to deny far more to maintain their false beliefs. Sample belief: “There is no relationship between income and the price of housing.”  -vreaa

New Mortgage Rules – “It’s not a ton, but it’s enough for me to go, ‘Oh my goodness, I’m not going to really get what I want now’.”

From ‘Tighter mortgage rules will hit Metro Vancouver the hardest, expert says’, Vancouver Sun, 18 Jan 2011 – “The mortgage changes come at the worst possible time for Guy Pearson. The Surrey resident, who lives with his wife and three children in his mother-in-law’s house, has been looking to buy a house with a suite and was pre-approved for a purchase price of $340,000. The reduction in the maximum amortization period means Pearson now only qualifies for a $325,000 purchase. “It’s not a ton, but it’s enough for me to go, ‘Oh my goodness, I’m not going to really get what I want now,’ “ said Pearson. He is now looking at staying put or house-hunting in Langley.”

“As of November, 30 per cent of all new mortgages in Canada had a 35-year amortization period, according to the Canadian Association of Accredited Mortgage Professionals. While B.C. numbers are not available, that percentage is undoubtedly higher here, said Tsur Somerville, director of the UBC Centre for Urban Economics and Real Estate.”

Pity the exact BC numbers aren’t available, you’d think it’d be fairly straightforward for the industry to calculate them. Anyway, no matter: More than 30% of BCers originating new mortgages are now “not going to get what they really want”. We’ll see whether this is enough to tip the market. -vreaa

Flaherty Tightens Another Smidgen; How Will Vancouver RE Respond? – Faucet or Tipping-Point?

Minister of Finance Jim Flaherty announced 17 Jan 2011 that mortgage lending terms will tighten. Maximum amortization periods will drop from 35 to 30 years, HELOCs will not be insured by CMHC, and individuals will only be able to refinance up to 85% of their property’s market value, down from the prior 90%.

These small incremental measures are designed to slightly cool off the market, and are an attempt at engineering a soft landing. Flaherty is hoping that a ‘faucet’ model applies regarding lending and the RE market: The hope is that as you tighten a little, the market slows a little. If this model applies, and you do that incrementally, you can potentially get it ‘just right’.
However, is that how the market actually works?

What if a ‘tipping point’ model better applies? In that case, there is going to be a non-linear response: as some point in the tightening process, a threshold is crossed, and large changes will rapidly occur. Like worn brakes going from smooth braking to suddenly seizing, like an egg being nudged over the edge of a table.

In Vancouver, the RE bubble has been fueled by very loose lending. Prices have pressed upwards, always at the very edge of what ‘affordability’ based on monthly payments has allowed. There will come a point where one more tightening nudge will halt that upward advance in prices. Today’s changes may very well be that nudge. And when that upward price advance ends, other factors will suddenly come into play. We believe that the very most critical change will be the psychological one that occurs when a majority of owners go from believing ‘this market is only going up’ to ‘this market could go flat or even fall’.

Many, many Vancouver owners are holding onto properties based on the premise that prices only go up. The moment that belief is seriously challenged, we believe that these holders will begin to liquidate their RE holdings. We are not just referring to the obvious speculator/flippers here, although they do make up an important minority. We are talking about the large number of regular citizens who have their financial futures dependent on the real estate market. They may be holding second and third properties, or their financial well-being may be largely dependent on the equity in their principal residences. There is far more ‘speculative holding’ in this market than is widely understood or acknowledged.

Sure, we had price drops before. At the end of 2008/beginning of 2009, prices dropped 15% in 3 to 4 months. But most owners had no chance to respond to the drop. It takes a few months to decide to sell real estate, and to act on it. Before the vast majority of owners could respond, interest rates were dropped to zero and the market was juiced. So slowly do things move in the RE markets that some owners may only have heard of the drop and bounce after the fact. When the market next turns, there will be a more relentless grind down. There will be no fiscal loosening to rescue a previously overextended market, both the MoF and the BOC appear to have made that clear. Price drops will beget price drops. The ‘virtuous’ cycle of price rises begetting more price rises will turn ‘vicious’.

-vreaa

“This is a knee jerk reaction by idiot bankers pressuring idiot politicians that don’t understand that the condominium market in Ottawa, Vancouver, Toronto and Montreal is driven by investors.”

Brad Lamb, Toronto condo developer, in response to suggestions that 100% of condo fees be taken into account in calculations of allowable mortgage sizes by income level [a move that would reduce the qualified mortgage by about 13%], as cited at canadianmortgagetrends.com 15 Jan 2011 -
“A lot of people are going to get locked out of buying a condo, which, in most cities in Canada, is the most affordable option for housing…It’s a terrible idea.”
“All it is is a knee jerk reaction by idiot bankers pressuring idiot politicians that don’t understand the nature of the condominium market in Canada. What is driving the condominium market in Ottawa, Vancouver, Toronto and Montreal is investors. This won’t affect them. This just attacks the lowly first-time buyer.”

Last week the CREA took pre-emptive action against mortgage tightening; this week saw the condo developers join in. We hope that the Minister of Finance has the fortitude to make decisions that are in the long-term economic best interests of the citizens of Canada, rather than keeping things loose in a way that’ll benefit the minority-but-vocal vested interests.
We do agree with this developer in one major way: The condo market in Vancouver IS driven by ‘investors’. These speculators are holding deeply cash-flow negative properties, purely for assumed future price gains. When prices drop, that premise will disappear, these players will evaporate, and the market will crash. At some point condos may lead the way in Vancouver, but we fully expect all other sectors to collapse thereafter. Move-uppers will disappear, the high-end will plummet, even the market darling areas will collapse. In the end the percentage drops will be about the same in all sectors.
-vreaa

Spot The Speculator #24 – “They are just an ordinary couple, no spectacular income, who bought a home in an appreciating neighbourhood a couple of years back and were now “looking to flip a house”.”

TPFKAA at VREAA 11 Jan 2011 at 7:13pm – “Here’s an anecdote from last summer [2010]. I was at a birthday party and got talking to a couple I barely knew about living out in Abbotsford. They said they have been going to open houses in their neighbourhood because they are looking for a house to “flip”. Their words, not mine. They are just an ordinary couple, no spectacular income, who bought a home in an appreciating neighbourhood a couple of years back and were now “looking to flip a house”. They told me of a guy in their neighbourhood who had flipped two homes in the same street, living in them and renoing for about six months then selling. The prices were escalating rapidly, they said.”

“If somehow this market is special, and ignores fundamentals, and keeps going up, in two years my family and I are outta here!”

YLTNboomerang at vancouvercondo.info January 11th, 2011 at 9:44 am -
“If somehow this market is special, and ignores fundamentals, and keeps going up, in two years my family and I are outta here! I’ve been courted a few times to move to Calgary for significantly higher wages but held off due to extended family being here in Vancouver. Looking into it further, I can get flight passes from AC for $320 per round trip which means: $320 x 3 x 26 = $24,960 gets the three of us back to Vancouver every other weekend and let me say, the raise for moving to Cowtown is much more than $25K!”
and January 11th, 2011 at 1:43 pm-
“My moving to Calgary wouldn’t be acceptance that the market will continue up, it would be a “sick of waiting, move on with life” move. The Vancouver market will crash, hopefully soon as it has gone on too long however if there is some bizarre move that delays the eventual crash beyond the next 2 years I’ll go somewhere else to wait. Furthermore, if there is such a massive crash that the CHMC goes down with it and becomes a burden on the taxpayer…well…I’ll just give up on this country as a whole and move overseas or down south – somewhere that has already been through their re-pricing and is back to recovery.”

“I am a realtor with a banking background. I think that it may require a significant economic slowdown in China to stem the outrageous prices paid by “greater fools”.”

It is very, very difficult to be an industry insider with market insight during a bubble. Corpses of sensible stock advisors littered the roadside during the tech boom – the skeptics were made to look like fools by the relentless, illogical bull. Afterwards they were seen as unheeded visionaries, but it is exceptionally difficult for naysayers to stay the course; there is immense pressure to get in line.
‘ckung’ is a local realtor who understands the state of the market and has warned of a pending price collapse for at least a year. We have featured his quotes twice previously, 22 Dec 2009 and 25 July 2010.
Here he is again, ckung, at one of our fellow Vancouver RE bubble sites, ‘Whispers From The Edge Of The Rainforest‘, 11 Jan 2011 8:24 am -
“Firstly, I am not a bull but a realist and thus am more of a bear given the economic conditions we are in. Secondly I am a realtor with a banking background.
I just sent out an E-newsletter to my network of clients and contacts with regards to the influence of Mainland Chinese Investor immigrants on our market and more specifically on Vancouver West and Richmond. These people are not just looking at houses in these areas in terms of economic rents or even in terms of short term capital appreciation. They are seeking a way out of China for themselves and their families. So how much is it worth to them given this context? Something to ponder when you see outrageous selling prices.
Personally, I think that it may require a significant economic slowdown in China to stem the flow of such immigrant investors and thus the outrageous prices paid by these “greater fools”. Interesting times.”

“Lotsa regrets on my end….. a lot of properties I’ve wanted to buy in the lower mainland over the past 7 years but didn’t “

RiskArb at RE Talks 10 Jan 2011 9:16am -
“Lotsa regrets on my end….. a lot of properties I’ve wanted to buy in the lower mainland over the past 7 years but didn’t:
- parking lot on granville street before the big redevelopment
- West side lot on SW Marine with views
- Pre-sale condos in coal harbour
- First phase of Harbour Green
- Didn’t buy into Hong Kong real estate during SARS (bought in Vancouver instead) and later in 2008
- Didn’t buy into several Singapore and Indonesian projects I liked in 2007/2008…. again, cash constrained and I didn’t want to over-leverage
- Never flipped a property ever. Instead of buying and holding (I always put down 35%), I could have been more ballsy and flipped condos or put down less equity.

The reasons:
- Couldn’t scrounge up enough $$ for the parking lot on granville b/c most of my savings was stuck in an illiquid stock holding that didn’t end up making me any $$$
- My partner on the west side lot (was a small builder) bailed on me. His wife was nagging him and he gave in.
- Pre-sale condos. I bought some…. but should have done more and bought a penthouse instead of the smaller units
- First phase of Harbour Green…. this was so underpriced versus Rennie product….. should have plunked down but again, my holdings in stocks/PE at the time were locked-in and couldn’t come up with the $$$

Having said that, I’ve done better than most so i”ll count my blessings.
I’m no rocket scientist, but I usually call it right and the major f*ck ups have been when I listen to other people.”

“Units here are worth $1 million. We put our life savings into this. I’m very angry and upset. If I had known it was going to be a hospice, I wouldn’t buy it for half the price.”

Excerpts from ‘Angry Asian UBC condo owners to protest ‘bad luck’ hospice‘, The Province, 12 Jan 2011 -
“Dozens of angry Asian residents of a posh, University of B.C., highrise building aim to stage a placard-waving protest rally to protest a 15-bed hospice being planned next door. “We cannot have dying people in our backyard,” said rally organizer Janet Fan, Wednesday “It’s a cultural taboo to us and we cannot be close to so many dying people. It’s like you open your door and step into a graveyard.”  Fan lives on the 17th floor at Promontory, at 2688 West Mall, near Thunderbird Stadium. …
Fan said 80 per cent of the residents of her 18-storey building are Asian and are strongly opposed. “Units here are worth $1 million,” she added. “We put our life savings into this.” She said residents are worried the hospice will have a negative impact on their property values. …
Qing Lin, who bought a Promontory apartment for $900,000 almost a year ago, said she and her seven year old daughter will have nightmares if the hospice goes ahead. “We believe that people dying outside will bring us bad luck,” she added. “I’m very angry and upset. If I had known it was going to be a hospice, I wouldn’t buy it for half the price.” …
Sharon Wu, chairwoman of the University Neighborhood Association said 60 residents came to a UNA board meeting Tuesday. “The UNA respects cultural beliefs,” she said. “UBC is planning to address the concerns of the residents. It’s a very emotional and sensitive issue.”

UPDATE: 13 Jan 2011 Global BC news clip on this issue archived at youtube by GreenhornRET, ‘Ghosts To Decrease Real Estate Values’:

UPDATE2: Image of Promontory owners with petitions:

“Think about how fortunate many have been to have been involved in RE in the last decade. I mean everyone: realtors, builders, plumbers, electricians, mortgage brokers, inspectors, etc… you name it. Not a bad gig. Many people/families have enjoyed good employment.”

thinktom (a Vancouver realtor) at RE Talks 7 Jan 2011 4:33pm -
“I’ve got a million [regrets about the RE market]. I remember in 2000/2001 watching the market start to move.
I went to see Ozzy Jurock speak in 2001. He said if anyone has balls, they’ll buy 5 condos right now and they’ll be rich in a few years.
I didn’t buy 5. But I bought 1.
My mother and I purchased at 1277 Nelson for $158k a year later I think. Concrete 1 bed w views. Rented it out furnished for a few years and did well. I loved that building and watched 2 beds go for $250k. I shoulda’ bought every unit in the place as they came up.
I know a house near Commercial/12th. Got pulled off the market and sold privately….. for $225k.
I bought a house at Fraser/23rd for $389k. Sold for $815k. I should have bought 5.
I sold some clients in SOMA Lofts. The D plan was a one bed plus den but I told my clients they could easily turn the den into another bedroom. They made a killing. 2 of those D plans sat on the market for a long time. The TH’s were also $315 and wouldn’t sell. *sniff* *sob*
West end was giving away condos for years. SO close to the beach and yet the prices were lower than almost any city in the world with that kind of location.
But even in 2003, people were talking ‘bubble’. I had a client that sold his East Van house for $289k due to ‘the bubble’. He stubbornly refused to ever buy back in as well, convinced it was still coming. Maybe it is???
I never should have sold anything I’ve ever bought and should been renting ‘em all ever since.
I prefer to think about how fortunate many have been to have been involved in RE in the last decade. I mean everyone, not just the realtors. I’m talking builders, plumbers, electricians, mortgage brokers, inspectors, etc… you name it. Not a bad gig and many people/families have enjoyed good employment.
Of course, hindsight is 20/20 for all this stuff. I remember the Google IPO. I thought ‘I’ll drop $10-15k. What the hell I thought. I really like google and use it all the time’ My financial advisor (a serious pro) thought it was overvalued at $105. So I didn’t *sob*”

Comment:
1. Yes, hindsight is 20:20. The past is the past. You could make an infinitely long list of prior investments/speculations that we can now see would have done well. Look at a long term chart of any market whatsoever and they leap out at you. ‘Regrets’ don’t really mean much.
2. The ‘gig’ that employed and enriched a minority sector of our society has been based on the spending into the economy of vast, vast amounts of borrowed money. It has been the result of a debt fueled binge. We have not yet begun to really pay for this artificial boom.
-vreaa

“I regret not buying into particular building a few years ago. Should definitely have taken the plunge then. Not out of the race just yet though.”

Fabien at RE Talks 11 Jan 2011 10:21 am – “I regret not buying into particular building a few years ago. The place looked great and the price looked right for an assignment.
Unfortunately I believed, or rather allowed myself to be influenced, by some insanely doom laden BS on [RE Talks website] that was claiming on good authority that 75% – (yes 75%!) weren’t going to complete. Probably wasn’t even 3%, I certainly didn’t see any bargains after the completion.
The place is now one of the hippest places and arguably the most distinctive building for years. The area is also attracting a really eclectic mix of people from all over Canada and the world (particularly Europe it seems, few Aussies too, Taip..?!), also of course including the old traditional trend spots like Yaletown, West End, Robson.
Not out of the race just yet though so I’ll keep a watching brief on that one. Should definitely have taken the plunge then though, instead of spending time on [RE Talks] arguing that people were talking agenda-driven BS!”

“One guy told me that he “owns” 6 condos in Yaletown. All of them have negative cash flow.”

bubbly at VREAA 10 Jan 2010 12:16am – “One guy told me that he “owns” 6 condos in Yaletown. All of them have negative cash flow. He is losing thousands of dollars every month, but he will be rich once he sells the condos to a greater “investor” for much more than what he paid. Yeah, right…”

The Economist – “Momentum effects help to explain why bubbles develop. Put that together with borrowed money and you have a disaster in the making.”

“You talking about me?”

‘The big mo’ [The Economist, 6 Jan 2011], deals with the dangerous situations that arise when herds follow winners, and the implications such behaviour should have for policy makers. The brief article is primarily about stock markets, but any sensible Vancouverite will see that it applies strikingly well to our own real estate market. [excerpts below]

We have long argued that momentum effects are driving our market. Vancouver RE prices are far removed from prices determined by fundamental measures. We believe that almost every Vancouver RE purchase has a speculative component, meaning that the purchase would not take place if the buyer did not think that prices will continue to rise at something like the historically unprecedented speed of the last 7 years. And, consequently, that many purchases would simply not have occurred if buyers expected a flat or falling market. Many in the market, without even knowing it themselves, are momentum players.

When the market turns, as it must, not only will this momentum demand evaporate, but all of the owners who are holding property for speculative reasons will experience some motivation to sell. How they act on those urges will determine the shape of our RE bear market. -vreaa

A few excerpts:

“The momentum effect cannot last for ever or share prices would head for infinity. Over long periods (more than three years or so) an opposite anomaly known as the value effect occurs: shares that are depressed in price tend to rebound. Momentum-chasing investors may get caught out by the switch from one effect to the other, especially when they have used borrowed money to try to enhance returns.”

“Analysing an irrational market is extremely difficult [Tell us about it! -ed.], as those who tried to call the top of the dotcom boom discovered in the late 1990s.”

“An irrational market sends misleading signals, causing capital to be allocated in the wrong places. … The [entities] that find it easiest to raise cash thanks to these market signals may not be those with the best business prospects.”

“Momentum effects help to explain why bubbles develop. Put that together with borrowed money and you have a disaster in the making.”

“Too often, central banks have tended to give speculative buyers a one-way bet—cutting interest rates when markets falter, but leaving them unchanged when asset prices boom.” [= 'moral hazard'. -ed.]

“Asset bubbles can be deflated through limits on some sorts of borrowing rather than just interest-rate hikes.” [Mr Carney can't raise interest rates right now, but Mr. Flaherty can tighten mortgage lending. Let's hope he's listening. -ed.]

“Economies can get carried away by momentum.” [Yeah, 'greatly excited', but at the same time severely distracted and deeply injured. -ed.]

“The average Joe I discuss real estate with just can’t get their mind past the “everyone wants to live here” depth of analysis.”

Beaker at RE Talks 7 Jan 2010 10:52am & 11:40am – “When the credit contraction eventually hits Canada, as it inevitably will, most will be “shocked and surprised” at the affect it will have on housing. Of course the experts will be out in force in the MSM talking about how no one could have predicted this type of decline. People don’t seem to understand that during a credit contraction, prices for houses will be falling despite the fact that there is an equal supply of people who still “want” to live in Vancouver (i.e. demand for local housing stock).” … “The average Joe I discuss real estate with just can’t get their mind past the “everyone wants to live here” depth of analysis.”

“In spring 2007, I sold my Vancouver Westside condo for $435K. The new owner has put it up for sale. They’ll come out with a LOSS, after owning the property for 4 years.”

M- at vancouvercondo.info January 7th, 2011 at 2:01 pm – “In spring 2007, I sold my Vancouver westside condo for $435K. The new owner has put it up for sale a few months ago. Initially they were asking ~$470K (I can’t remember the exact number), but it didn’t sell. They dropped the asking price a month ago, and are now asking $459K.
So for buying and holding the property for almost 4 years (my god, has it been that long already!), *if* they sell at their current *asking* price, they’ll get 5.5% more than they paid. Take off the realtor fee (7/3 = ~$20K after HST), property purchase and transfer tax (~$7K), and legal costs to buy&sell (~$2K), and they’ll come out with a *LOSS* of $5K, after owning a property for 4 years.
Let me say this again: the people who bought my condo owned it for nearly four years. After transaction costs, if they sell for their asking price, they’re facing a LOSS of $5,000. They also paid strata fees, property taxes, mortgage interest&principal, electricity, and any special assessments that may have been assessed during those 4 years, so it’s not like they “lived for free” or anything like that…
They tried asking for more, but it’s been sitting for a month at the current price; I think their chances of selling at the asking price are slim. Obviously there’s no bidding war.”

“I’ve been living overseas for 15 years, watching this bubble from afar…”

honest weights at greaterfool.ca 6 Jan 2010 1:09am – “I’ve been living overseas for 15 years, watching this bubble from afar. Seeing one brother buy a 1 bathroom house in Ladner for about 1/2 mill and another brother see his North Van house rise from about 400k to about 2 mill (after serious renos).
I would once and a while think about buying a house in the Vancouver area – only because it’s my hometown and to be around family.
But buying at these prices you’d have to be the greatest fool indeed. Sorry Vancouver, but you’re just not worth it.
Trying to create wealth by lowering interest rates is a short term ponzi scheme at best. This equates to printing money. Wouldn’t it be nice if governments could print their way to prosperity? You can’t fool all the people all the time. I don’t wish this on my fellow Canadians but I can smell the reckoning day.”

“My pleading with my spouse to buy met with nothing but negativity. I am no longer with the lass who put up the road blocks to buy this grand old home.”

eyesthebye at RE Talks, 6 Jan 2011, 6:37pm -
“Real estate regrets, got any? I have a few, but let’s get specific.
I wasn’t ready to buy at the time but I would have jumped all over these two.

Regret #1
1606 East 15th ave
Just off Commercial Drive on the hill at E. 15th ave sat a stunning old arts and crafts. Stained glass, fantastic stonework, incredible view of the north shore and a park right across the road. The house sits on a dead end street to minimize traffic.
Now here’s the good part…it sat on an oversize lot with the vacant portion being a corner lot. Asking price circa 2003 – I believe it was 679K but I could be mistaken.
Fast forward to today. On the previous vacant corner now sits a nicely done heritage style duplex. Assessed value of each duplex is 632K each (or about 800K market value each unit). The old arts and crafts has an assessed at 978K and the home should easily be one of the most valuable in East Vancouver. Conservative value 1.3M
Total of all = 2.9 Million

Regret #2
2316 Gravely
circa 2005 this “fixer upper” was available for 369K. It’s a finely build 1912 arts and crafts close to Commercial Drive.
Amazingly, it sat on the market for many months. My pleading with my spouse to buy the home met with nothing but negativity. When it was finally bought my heart sank.
Fast forward to today. The home was nearly gutted and redone to it’s original splendor. I drive by every now and again to appreciate what might have been. Assessed value is 1,060,000 and market value is likely in the 1.4M range. Yes gang, I am no longer with the lass who put up the road blocks to buy this grand old home.“

Realtors Lobby Finance Minister To Keep Mortgage Lending Loose

The Canadian Real Estate Association this week [4 Jan 2010] asked its 100,000 members to send a form letter to the Minister of Finance, Jim Flaherty, urging him to keep mortgage lending loose. The realtors are pretending to take the high ground on an issue where their motivation is clearly for the health of their own business. It would be far more honest and acceptable for them to simply come out and say that they are worried about themselves, but they hide behind a faux concern for ‘Canadian families’ and ‘homebuyers, homeowners and the economy’. They aren’t kidding anybody, including, one hopes, the Minister of Finance.

Loose lending has fueled the RE Bubble, and has made housing less, not more, affordable. The longer that cheap money is available, the larger the debt burden will become before the inevitable bust. Loose lending is profoundly detrimental to the health of our society.

The CREA appeal  has been thoroughly discussed on other RE blogs but, for the sake of the historical chronology of the bubble, we headline this noteworthy event here, and post images of the CREA ‘Call to Action’ to their realtors, and of the CREA recommended form letter to the Minister.

“I have many peers that own homes. Only one put down more than 20% as a first-time buyer, and that money was a gift.”

taylor192 at vancouvercondo.info, January 5th, 2011 at 10:35 am, has this to say regarding FTB mortgages – “I’m 32yo, have owned a house, and have many peers that own homes. I only know one person who put down more than 20% as a first-time-buyer, and that money was a gift. Thus my off-the-cuff stat is almost 100% [of FTBs buy with less than 20% down]. My mortgage broker confirmed that I’m probably correct, adding that those same first-time-buyers are generally taking 35yr terms.”

Spot The Speculator #23 – “A friend of a friend told me that the reason he bought two properties in the last 2 years is because, with a job like his, he has “very limited ways to get rich.”

pricedoutfornow at vancouvercondo.info January 5th, 2011 at 8:59 am - “I had a friend of a friend tell me that the reason he bought two properties in the last 2 years is because, with a job like his, he has “very limited ways to get rich.” He thinks real estate is the way.
In other news, I just found out my friend’s parents are packing up their house in Alberta and leaving it to the bank. Place has been for sale for more than 6 months with no dibs and they’re basically broke due to family illness. It’s starting…”

2010-2019 Prediction – 2011 Update – “The Vancouver RE Bubble is like a large festering carbuncle on a dinner guest’s nose – so clearly present yet publicly unmentionable.”

We posted ‘Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event’ about a year ago [27 Dec 2009], so time for a minor update.

Vancouver RE 2010 played out without any really big surprises. Mortgage tightening started, as expected, but the initial step was less restrictive than we’d anticipated, and credit remained freely available. Household debt pushed to record high extremes. As a consequence, the market was stronger from summer to fall 2010 than we’d guessed it’d be, even though seasonal sales were still tepid when compared with the last decade. The RE market was also likely supported by ongoing strong general stock market and commodities rallies (both of which are looking exceedingly long in the tooth, see below).

We still stand by the prediction items in the Dec 2009 post, and see no need to make any changes at this point. Local RE remains outrageously overvalued by all fundamental measures, and we anticipate that the inevitable coming RE bear market will have profound effects on our community.

The Vancouver RE Bubble is like a large festering carbuncle on a dinner guest’s nose – so clearly present yet publicly unmentionable. We sit and watch the machinations of the bubble in progress, in awe of how that which will seem so obvious to all in retrospect, is in the present essentially ignored.  As the market extends more and more, the bulls grow more and more complacent, and the bears grow quieter, and quieter, and some lie down and capitulate (and none can blame them for that exhaustion). These are all increasing signs that the market will turn, not that the bull will go on forever.

So, anything to add? Well, as an aside, we’ve been interested in developments in non-RE markets. We think there is a high risk of a very significant and broad pullback in risk assets over the next 12-24 months, and that would definitely speed the inevitable coming price drops in local RE. Such a deflationary wave would involve the general stock markets, the loonie, oil, other commodities, gold, silver, China, other emerging markets, Chinese RE. The US dollar will likely rally, surprising all the naysayers. Since we posted about this on 25 Oct 2010 [Contrarian Bet - The US Dollar Is About To Rally], the USD index has rallied from 77.1 to 80.2, or +4.0%, which is in the right direction and a modest start. [We admit that the USD is down in loonies through that same period, with the loonie moving from 98.03c to 100.3c. We see this strength as temporary, with fair value now probably in the low 90's.]
Some of the observations on which we base our opinions include the following:
- The vast majority of analysts predict general stock market gains through 2011; in numerous stock market analyst surveys (Barron’s, etc), a full 100% of the individuals interviewed have been bullish
- Sentiment is heady: Yesterday, analyst Laszlo Birinyi published a report predicting that the S&P500 would rally another 124% from here by Sept 2013. (This after a 86% rally off the Mar 2009 lows. Dow 30,000 anybody?)
- Bull:Bear ratios are back to the highs of summer 2008
- Complacency is back to extremes (VIX back into the teens; currently 17.0)
- Insider selling is high; markets have recently pushed higher on decreasing volume; distribution pattern
- Mar 2009 to present was a powerful bear market rally; yields and P/Es did not reach bear market bottom range; the bottom for the bear market that started in 2000 is not yet ‘in’
- Baltic Dry Index is dropping (leading indicator for global economic activity)
- China is trying to put on the brakes to manage its RE bubble
- There are growing voices against Quantitative Easing in the US; limitless printing is not a given
- Precious metals stocks have been underperforming the underlying metals themselves
- Precious metals sentiment is high and widespread; even the real estate blogs are inundated with commenters certain that gold, silver, SLW, etc, etc, can only go up (because, after all, look at all the dollar printing!). Heck, even ‘Johnny Horton’ at RE Talks is touting the PMs. The precious metals are a very volatile market and, the majority of times we’ve seen this kind of confidence over the last ten years, the new/momentum money has been caught off-sides by multi-month corrections. [In the longer term we anticipate ongoing gold strength and further fiat weakness, and a likely gold bull market blow-off peak towards the end of the decade, but only after a substantial pullback in gold in the short and intermediate term.]

So, we foresee another deflationary wave starting hereabouts. This will likely not look exactly like 2008 (that would be too easy), but will probably be a slower process. If this does occur, interest rates will not increase.

But, let’s be clear, this is all an aside, discussion of the general markets is not the core focus of this blog. What happens in those markets may influence the shape of the coming Vancouver RE bear market, but not the fact of the RE bear market. Our RE market is so extremely overextended that we anticipate it collapsing under its own weight at some point, regardless of activity in other markets. Interest rates don’t need to rise for that to happen, nor do general stock markets need to plunge. A simple plateau in prices, increase in inventory, and a small percentage of speculators getting cold-feet would do it. Local properties are selling at 2 or 3 times their fundamental value. We expect homes like the one below on Vancouver’s Westside to sell for less than one million dollars before this is all over. That would represent, in this specific case, a drop of over 65% from it’s current asking price of $2.89M, and would still make it generously priced, actually overpriced, by global standards. Yes, folks, still expensive at a third of the price!

“Have you thought about putting it up for sale?” … “Not right now. We’ll wait until the summer.”

TPFKAA at VREAA 28 Dec 2010 4:07pm -
“I visited a friend for some drinks recently. Thought long and hard about bringing up real estate… then thought I owed it to them to at least mention what several economists and respected experts have been saying lately that may impact their lives. They sold a nice SFH back East and bought a “poky, tiny – in their words” condo here 3 years ago, with downpayment help from family; despite household income above average. So I asked if they had been following the Van real estate market recently.
“Why?”
“Because some have been saying that there may be a little bit of a correction coming.”
(I deliberately understate here… being cautious not to spoil the mood)
“That’s what we’re scared of. We’re worried that we’re going to get stuck here, with the value being less than what we owe on it. We’re pretty worried. Now we’re thinking that if we can escape with breaking even, we’ll be okay. We’ll be ok with that”
“So have you thought about putting it up for sale?”
“Not now. Not right now. We’ll wait till next summer.”
“I can point you in the direction of some websites where people post analyses and economic indicators and stuff to help you with your decisions. If you like.”
“We’ll work it out, It’s okay.”
He then quickly changes the subject. He’s obviously very worried, with a growing family, about becoming trapped by negative equity – it was clearly not their choice for a multi-decade domicile. I avoid the subject completely from now on. It’s not my business and I don’t want to say whose predictions are correct. But I would try selling now, knowing what I know.”

“We aren’t selling yet but when I think we can clear $3.5M, we likely will. 10% to go…”

‘John V’, who appears to be planning to sell his Kerrisdale home, has this to say at yattermatters.com 2 Jan 2010 1:57pm -
“I think the market pushes higher into spring as inventory drops to zero (and I am talking only West side here).
Driving around I don’t see a lot of new houses ready to come on the market, however I have seen some lots sold in May-Oct coming back on the market as builders are looking for quick flips rather than tying up more capital to build new houses. This will only serve to delay any new house inventory.
People thinking of moving up are staying put, cause prices are just too insane to contemplate selling for $3M to buy $4M, so dont expect a lot of mid-tier investory [sic] either.
That leaves estate sales and sales from people will to leave the Vancouver market all together. And that aint much.
So with huge demand and diddly for inventory prices go higher until current owners finally capitulate and sell to realize huge gains.
We aren’t selling yet but when I think we can clear $3.5M (after fees) we likely will. 10% to go …”

Pretty classic. Prices treble or more over ten years, and the players are still holding out for the last 10% of gains.
How many other (thus far invisible) sellers are in this situation?
Many are sitting on large, life-changing paper gains and feeling sure that they’ll be able to realize them.
What will their response be when prices instead stagnate, or begin to drop?
‘John V’ may get his timing right, he clearly has his finger right on the sell button. But the vast majority of those planning to sell will not realize their imagined gains. It’ll only take a very small percentage of people trying to cash out at once to crash prices from these heady heights. Wait too long and… it could be ugly.
Those ‘$4M’ Kerrisdale homes will sell for $1M – $2M in the coming bear market. -vreaa

“I made $185K in 2001; $215K in 2010. Ten years more experience accounts for some of that increase. How can prices of high-end houses have sustainably tripled!!? What has changed since 2001, except interest rates and stupidity?”

TIME MACHINE at vancouvercondo.info January 1st, 2011 at 11:09 pm writes – “Houses that sell for $800K today were in many cases much less than $300K [ten years ago]. Take a look at this link listing some 2001 Vancouver sales.
1105 W 32ND AV is interesting. In 2001 someone paid $585K for a 3000 sq ft house on a corner lot in Shaughnessy that is at least 50 feet wide. That house would be a minimum of $1.8m today.
What has changed since 2001, except interest rates and stupidity? In 2001, BC had a healthy forestry industry. What industry does it have now, other than real estate development??
I am at the top end of income earners in this city. I made about $185K/year in 2001. In 2010 I made about $215K. Ten years more experience accounts for some of that increase. How can prices of high-end houses have sustainably tripled!! when my high-end income hasn’t even gone up by 20%?
Please don’t mention rich Asians, etc. because they have been here for decades, and were certainly here long before 2001.”

Great comment, TIMEMACHINE; directly to the crux of the matter.
Growth in price of housing cannot sustainably depart from growth in incomes. See the illustrative chart below. And see this post for the source of the temporary divergence. -vreaa

2006: Analyst Accurately Predicts Effect Of Looser Mortgage Policy – “Unintended consequence of these amortization changes will be that the real estate market in Canada will go up, thus making affordability slip again after a brief period of relief.”

International Real Estate Digest ‘Canadian analyst’ Simeon Mitropolski plainly and simply predicted the effects of longer amortization terms on Canadian RE prices in an article at IRED 18 Aug 2006. [Hat-tip to 'Best place on meth', at vancouvercondo.info , who's handle still doesn't fail to raise a smile.]
Why did the government loosen mortgage criteria when it was clear that the move would simply increase prices and not help true affordability in any meaningful fashion? Could it be that they were driven by a desire for short term political benefits for themselves, and to help out vested interests, rather than out of a desire for sensible long term policy concerning housing and household debt ?
Shouldn’t we all feel like idiots for supporting a system of government that rewards short term squandering over longer term wisdom? -vreaa

“CMHC announced new measures making mortgage loans in Canada more accessible for would-be buyers with moderate incomes. These measures include among the other things offering loan insurance on extended mortgage loan amortization periods up to 35 years, instead of 30-year maximum in force between March and June 2006. … In February 2006 in a 4-month pilot project the maximum amortization period was extended from 25 to 30 years. The last decision makes this pilot project ongoing and extends additionally the amortization period to 35 years.”

“The consequences of this new policy fall into two categories, intended and unintended. Intended consequences are to make some hesitant Canadians go and buy housing despite the rising prices and the rising interest rates. … Unintended consequence of this rising demand will be that the real estate market in Canada will go up, thus making the affordability slip again after a brief period of relative mortgage relief.”