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

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

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

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

  1. I believe we are in a definite bubble in RE. However let’s face it Garth’s angle is to scare the beegeezus out of you and your biggest investment, (real estate). He hates all things that compete with his livelihood. I mean look how he bashes Gold, when clearly it has been on a tear for 10 years now.I take evrything he says with a “box” of salt. people just worship that guy too much.

    • Royce McCutcheon

      “I believe we are in a definite bubble in RE”

      Zhwa?

    • Fred -> This is not a post about Garth Turner, it’s a post about the opinion of a ‘well-connected local player’.

    • Fred -> I’d echo Royce’s surprise regarding your “I believe we are in a definite bubble in RE.” Please expand.
      What do you mean by that statement?
      You do understand what a bubble is, don’t you?

      [For infrequent readers, this surprise and these questions come in view of the fact that, up until now, Fred/fred has been nothing but a uber-bullish sniper, critical of anybody with a bearish take on Vancouver RE.]

      Correction: the above poster is a different ‘fred’.

  2. The way I read that anecdote is that this person is talking about 2012, not the long term.

    But your point vreaa is that people will line up all the dots, start connecting them, then, to save emotional sanity, send the pen off the page and onto the table instead of drawing the final line to the giant red dot.

    Oh the humanity

  3. We’ve had a $50,000 line of credit with one of the big five, in BC, for our business since 1993, at prime plus 1.5%. Never a problem from our end for eighteen years.

    Now, head office, has decided we have to pay prime plus 3.5%. Nothing has changed on our end. We’ve had this line of credit with the SAME bank for 18 years, but apparently head office has decided “they don’t know us.” And since they don’t know us, we will be paying prime plus 3.5%.

    So, obviously we are switching banks or paying off the line of credit and won’t have one. But more to the point, is this a cash grab only? Or are the banks anticipating something dire in the future and hedging their bets? Do they see their bank profits dropping in the near future? If there’s cheap money to buy a house, why is it going to get so expensive to borrow money for your business?

    • Lower grade spreads have been knocked out recently. This is NOT investment advice but that may reverse in a good old-fashioned “yield chase” in the next few quarters.

      • Do you see the bond bubble starting to burst in the near future?

      • Don’t know. Just an observation that risk spreads widened of late. If there’s a “bond bubble” my guess is the timing will be as difficult as timing Vancouver RE 🙂 . Get out the hedge trimmers. (Again, I don’t recommend taking advice solely from anonymous blogger.)

  4. Ah, VREAA, what would I do without you? Thanks for this forum where I hear kindred spirits.

    I’m writing to remind everyone to VOTE for Mayoral and City Council candidates who want to do something about housing issues in Vancouver. If you’ve gotten your Vancouver Voters’ Guide, as I did today, I’d read the candidate profiles carefully (warning: some will remind you that Vancouver’s has some rather loopy political folks, and other profiles are rather vague) and see who is highlighting housing issues. Voters should feel also feel free to contact candidates before the election (most list at phone numbers, email addresses, websites) and ask them hard questions about housing issues, including queries about their takes on the current speculative mania.

    • Funny you should mention that! Stay tuned, Vesta…

    • I saw a question on Twitter that piqued my interest: how does someone who is priced out of Vancouver and living elsewhere (say Burnaby or whatever) vote on Vancouver-specific issues?

    • Vesta, I have low hopes that the outcome of the civic election will change anything bubble-wise. But I’d rather have my vote counted than do nothing at all, so I will vote. I would guess that my criteria are pretty aligned with yours. Can you share with us the information that you’ve learned about the candidates?

    • jesse has sent out a letter we drafted inviting candidates/parties to share their positions with us here, using five points as a guideline. Will post later. We’ll share their (awaited) responses via headline posts.

      • Royce McCutcheon

        Man, I really hope some candidates engage on this. Definitely prepared to listen and consider making choices based on what candidates say here on this issue.

      • There has been uptake, we’ll see how many. If anyone has email addresses for NSV slate candidates let me know. All I could find online was a single form. IMO they need a more comprehensive communications strategy or we won’t get to hear from them in this series.

      • And BTW if you do care about this, I suggest you forward this series to other voters who might also be interested in housing issues.

      • Jesse and VREAA host, what a wonderful idea to invite candidates to comment here!

        Would love to see you both on the slate. Gimme a V, gimme an R, gimme an E, gimme an A, gimme an A, whaddaya get? Sanity on housing issues! Rah!

        Jesse, unfortunately I haven’t found any NSV email addresses — the Vancouver Voters’ Guide also gives just the website. We could write the website and point out a lot of other candidates give more contact information and perhaps the NSV candidates could consider doing this as well.

        Jeff Murdock — thanks for asking, I’ll update with any helpful information I can find. One candidate named Sandy Garossino did have quite a blunt statement on her website at least as of a few weeks ago about housing issues, but I note her profile in the Voters Guide is quite muted on that score.

      • Vesta, Sandy has been contacted, if anyone’s on Twitter she’s on there too. She’s been preoccupied with the Occupy Vancouver issues of late, hope she can now turn to housing. It is the issue on which the City can have the largest impact, and is where it spends most of its efforts for anyone who cares to follow council activities on a recurring basis.

        The City can make a huge difference but can and can are completely different things; we have to remember that a large contingent of the voting populace will likely be unable/unwilling to “connect the final dot”. It may be the best one can hope for is a strong advocate for the underlying problems plaguing Vancouver.

        I really think things get easier once speculative bubbles are slammed shut. There are a few things the City could do but we have to ask the question: what could the City do? I do not accept for a second that the City is powerless, though their populace likely is. (That’s step 1 of 12 for those who get the reference.)

  5. hi vreaa,

    i think my dad is really enjoying your blog. he sold out of kerrisdale in 2009 and mom is in a big hurry to get back in. he is not and this leads to a bit of strife. i left vancouver 20 yrs ago, had a front row seat to the dotcom bubble living in the bay area and also the us housing bubble. the wishful thinking and tortured logic about how “this time it’s different” is always interesting to read and understand. i think the one new thing about the van housing situation is the (unanticipated) magnitude of ham. there was a taste of this before with the migrants who feared hk going back to china would be business -ve. but, that was much smaller in scope and occurred at a time when the market was somewhat depressed still. the current version is maximally steroidal due to ww monetary easing. for disillusioned renters, when the world around has gone insane, all you can do is keep your head. when a society chooses to expend its resources wastefully, the result is ultimately detrimental to all, even those who believe themselves to have benefited. for nervous owners, i would sell unless you are willing to absorb a potential 50% reversal – there is still time for a few more to get out.

  6. What a funny post! Yes, indeed – connect the dots and then the brain blanks out in denial. I have seen it happen in the equity markets my whole career. My recent theory (don’t worry, I am not about to justify the RE prices!) is that Vancouver RE will not trade on normal rental yields and average income multiples (my two favorite yardsticks for identifying a bubble); to some extent it will be set by prices and incomes in SIngapore, Hong Kong, and China (due to proximity, immigration friendliness and the fact that those three are all dictatorships and no one really feels safe). All three regions are now in a massive bubble, and all their buying have made Vancouver locals become born-again-Christian houseflippers (no offense to Christians), so the overshoot is huge. But when the bubble bursts, you don’t want to wait for it to go down to a normal multiple of average vancouver income, you want to take the normalized upper middle-class to very wealthy Singapore/HK/Shangai income number (much lower than it is now) and apply a discount to that (but it will still be higher than using Vancouver incomes is my guess – anyone care to crunch the numbers?). Also, this only applies to very nice condos and trophy homes in Vancouver.

    • this theory has some merits. but you are dead wrong about the drivers for immigration from sea, hk and china. it isn’t freedom, political and economic. private property laws in sgp and hk are among the best anywhere – ask some who formerly swore by the swiss standard. that along with low tax rates is what makes them destinations for trade, banking and commerce. governments can change laws at the stroke of a pen. so, if you are looking for freedom, the best places are those where the motivation to stick their hands in your pockets is the lowest. at the present time and wrt this very important consideration, us and china are going in opposite directions. one society follows an arc of increasing freedom while the other the complementary descending arc. vancouver is one destination for some looking to escape the rabid pace and overcrowding. also for a bit of diversification among the wealthy. they don’t come seeking freedom and opportunity. north american colleges are still very highly regarded. there are many families who send their kids to study in us and can. but most return to work and live in asia.

      • Dead wrong are pretty strong words 🙂

        I guess there is no argument about China, so it is basically HK and Singapore you are talking about.

        Yes, the property laws are fine, but without democracy you can never feel completely safe.
        Real democracies can be messy (US, Italy etc) but they are less likely to settle into a very nasty but stable equilibrium like North Korea and other dictatorships.
        Indeed the low tax you pay in countries like Singapore, HK and Russia are almost the quid pro quo of not questioning government. And even this low tax is a mirage, because unless you are Singaporean, with sky-high rents, international school fees (over 20k USD per child a year) and cost of owning a car, an income of 500k USD does not make you feel rich at all in that country.

        I imagine the peak exodus from HK was at the time of the British hand-over, but I also imagine every time executives of global companies like Rio Tinto or even celebrity artists like An Wei Wei are imprisoned, Hong Kongese are grateful for their second passports and homes.

        Singapore is a country where you can get arrested without trial if you criticize the government, and the courts always rule with the ruling party to bankrupt you (with defamation lawsuits) if you are too good as an opposition party politician. And maybe you are aware that in Singapore you have a serial number on the election ballot.

        But you could be right,maybe these rights are over-rated.

      • Sorry, can’t comment on Singapore or HK, but for people from China, it is about escaping potential for the government to get you for corruption. No one gets rich in China without bribing someone, so if I was rich, I would want to move as much of my money out ASAP. You never know when some official will be busted and drag you into the mess. Then some other righteous official will want to make an example of you, next thing you know you are facing life in prison because of bribery charges. I would want to get the heck out as soon as I can. If that doesn’t get you, China’s air quality definitely will kill you at some point.

    • I agree with most of what you are saying. My argument is largely based on your argument with additional factors including cultural placement of value of properties, etc. I definitely don’t believe that you can use any sort of Western country ratios to look at Vancouver because Vancouver has about 50% Asian people when you total up everyone from Chinese to Indian to Iranian to Korean, etc. So it’s ratios are going to be skewed by the demographic shift.

      Bottom line is this, whenever you have the rise of a nation there will be asset inflation created at some desirable place where that nation’s citizens tend to go. In this case it happens to be China’s rise and the location happens to be Vancouver. And the scary part for us is that China has definitely not peaked, in fact it has just started, it will still grow at just under 10% year on year until it overtakes the US as the world’s largest economy. Our premier has clued into this and is now wanting Asian investments into Canadian resources which plays smack into what the Chinese government wants (which in turn makes it easier for HAM to move their money out of the country in the name of investment in natural resources). But I definitely agree that even the Chinese themselves do not buy every piece of land in Vancouver, they are very selective. If you know what areas that they want and just stay in those areas and find the best value, then you’ll probably be better off than the guy who bought an area that really they wouldn’t touch in a million years and is mostly supported through HELOC’s that people have been mentioning here.

      • Yes, it is a very good point. China has pretty good long term prospects, which is one of the things that feed the Vancouver RE bull case. No doubt it is a positive, but people punting on RE need to also realize (as we who read this forum already know) that
        1. long term economic growth does not rule out busts in equity prices (China stocks have been dogs this year) and real estate prices, if there is a bubble,
        2., certain important segments of China demographics start turning negative in a few years (and GDP is linked to population growth) and very few people realize this, even professional investors, and
        3. to some extent prices must be anchored ultimately to a level that allows enough “normal” people to live in a city (and of course, be able to provide services ranging from legal, accounting, education and healthcare, to the refugee billionaires from China).

      • Julian -> “China has definitely not peaked, in fact it has just started, it will still grow at just under 10% year on year until it overtakes the US as the world’s largest economy.”

        Don’t hold your breath on that.
        Yes, China will get bigger. But it definitely won’t happen in a straight line (“just under 10% year on year”)… there is massive upheaval coming soon.
        Also, don’t count out the US.
        So “overtakes the US”? Perhaps not in our lifetimes.

      • @vreaa, yes they definitely don’t go in a straight line, no market goes up straight, hence why you have technical analysis, but china is definitely going to be on a technical up. I have been investing in the RMB for a long time and actually see it as a much more stable currency than the USD.

        As for the debate about overtaking US, what I was referring to was the national GDP not per capita. If a country of 1.3 billion people overtakes US on a per capita GDP basis, then it is about 5 times more powerful than the US. But in terms of national GDP, I think it should happen within a decade or two.

        Don’t get me wrong, China has its own set of problems that it must solve before it can become a true global power, I could write a long essay about why it may never reach its potential. But one thing going for it is actually its lack of democracy as it can push through laws at a much quicker pace. For example, say if a housing overheated, then it can introduce measures quickly to cool the market down; now on the other hand, if the housing market cooled too much, then it could control supply and introduce other measures to boost the market.

  7. Jesse, agree that the City is definitely not powerless (if it is, our geese are collectively cooked). What it has the guts/resources to do is another thing, but the invitation for candidates to post here is an excellent way to let candidates know what our concerns are and perhaps suggest items for immediate action as well as directions for the long term.

    Onward and upward, and inward into affordable housing!

    • Quite Vesta. I’ve realized in recent debates that the term “speculation” and “affordability” have different definitions. I expect you’ll see some of the confusion in the upcoming responses.

      Does “affordability” imply lower rents, lower prices, or both?

      Define “speculation”.

      Not so easy…

  8. Does this RE “expert” know anything about herd mentality. Trust me, a 10% market drop will scare the Bejesus out of you average speculator and set the stage for panic mode. All those over leveraged specuvestors will wanna pull out at exactly the same time. Trust me its not pretty. This is a picture of just the supply side of real estate.

    On the demand side potential buyers will now take a wait and see approach, hoping to buy at the bottom. And to entice buyers sitting on the fence, sellers will have to offer major discounts and such discounts only further confirm the fact that prices can only go lower. Now we have a vicious circle. This is all just stage one.

    Stage 2 is when the not so typical speculator (i.e. those who bought homes for the long term) tries to refinance or get a HELOC. I do not want to get into the graphic details but hope you get the picture.

    These things can only bottom out once we have hit at least fundamental level prices. No guarantee either that the prices will not fall below fundamental. I am just using fundamental as the best case scenario.

    Factor in the fact that RE is Vancouver’s main economic driver and you can see the economic multipliers at work. Construction will come to an abrupt stop and everyone in that industry becomes jobless – further depleting the source of buyers. Even HAM will not touch Vancouver properties with a 9 foot pole since each one in the community will know of at least one person that got burned. Remember, homogeneous communities like HAM tend to base their RE purchase decisions on how successful so and so they know made a boat load of cash in the GVA real estate market – textbook herd mentality. The opposite is also true of such communities.

  9. Connected local player

    I did mean 10% for 2012. However – given that we are running about .7% per month right now – we could see decreases pickup once spring hits – – then you could have a nasty fall and this could lead to 25%. On the downside – it can really pickup speed.

  10. 4SlicesofCheese

    http://search.suttonwestcoast.com/BC/Victoria-Fraserview,_Vancouver#/listings/info/p4238-cambie-st

    Weren’t these going for 3.4 awhile ago.
    So no one is interested so they raise it to 5.1?

  11. @john ito,

    good pts. i am out of line with dead wrong comment. but the main point survives. for example, here, if you are labeled a terrorist, you have no rights. no proof, no process, it’s just simon says. ask a muslim how free they feel. do we really need to be afraid of our shoes and toothpaste at airports? do kids and grandmas need to be fondle-searched? another step the police state. the west 1st world presents the fascade of freedom/democracy but is in reality fascist (big business + big government control of banking, strategic resources and military power). what fundamental difference does it really make whether it is libs or tories, dems or republicans? one can vote but only for pre-approved solutions. what is the typical fully-allocated tax burden now, income+sales+gasoline+other? working >50% of the time for the government yet? and that is before the money printing (i.e. stealing from your savings) to backstop the banking system whenever it gets into trouble. ever wonder why bread, eggs and milk don’t get better and/or cheaper like computer parts? there is freedom to the extent that the freedom does not interfere with how the state-sponsored cronies suck your blood. and canada is usa-lite with respect to such affairs. fundamentally in a society, freedom = private property rights = your right to keep what you earned. freedom exists to the extent this is possible. oops. sorry, probably strayed way off topic for this blog. sun is out! gotta get a ride in today. ciao.

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