Ben Rabidoux, ‘Where We Stand’ – “While it may be too early to call a definitive peak in Vancouver, things aren’t looking good.”

This from Ben Radioux, at ‘The Economic Analyst’, 20 Feb 2012.
An account of ‘Where We Stand’. Thanks to Ben.

“Keep in mind that this type of data is backwards looking. It tells us what has already happened. Inventory and sales levels can give indication of short-term price pressures, but in a credit-driven market, the real story of future price movements is found in changes in mortgage demand/availability, which I cover in a separate report. The bottom line on that front is that the recent incremental changes in mortgage requirements may prove to be more significant than any month-to-month sales trends. These recent changes include tightening stated-income and business for self mortgages, tightening of CMHC bulk portfolio insurance for big banks, some lenders capping max mortgage amounts at $1 mil, and reports of general internal tightening via lenders and CMHC. The problem is that with 15% of all mortgages originated through the broker channel being originated through explicitly subprime lenders (the highest on record), it strongly suggest that the marginal buyer is the main support of this current market. Prime buyers, by and large, are already in the pool. So these types on incremental changes, which affect marginal buyers the most, can sometimes have far greater consequences than anticipated.”

“Vancouver: Y/Y prices are now negative for the second month leading to a decline in the 12-month moving average for the first time since early 2009. January sales were the second weakest in the past decade (second only to January 2009), while new listings were the highest of any January in the past decade. Consequently, the sales/new listings ratio was extremely weak (0.27) while months of inventory ballooned to 8 in January. Sales will pick up in subsequent months, but rising inventory and weak sales will likely persist, meaning downward price pressure will remain intact. The last time we saw sales this weak, the BoC was in the process of cranking rates down to zero. The ‘shock and awe’ from low rates are now long gone. I’m not sure what will reinvigorate sales in the short term. While it may be too early to call a definitive peak in Vancouver, things aren’t looking good.”

We agree with the flavour of Ben’s framing of the stats. Yes, one can’t be sure that last summer was a top, but, if it were, this is one way the decline would start to play out.
The emphasis on incremental change in lending standards (and other factors) on the marginal buyer (and, ‘marginal holders’) is crucial, and a concept that most market participants do not fully understand. As prices remain stagnant or drop, thresholds will be crossed which result in non-linear changes (a ‘wall’ will be hit, or at least a very steep part of a curve; and demand/supply will deteriorate more rapidly than most imagine).
Also: less space, appetite, and will for bail-out, this time around.
– vreaa

65 responses to “Ben Rabidoux, ‘Where We Stand’ – “While it may be too early to call a definitive peak in Vancouver, things aren’t looking good.”

  1. “The bottom line on that front is that the recent incremental changes in mortgage requirements may prove to be more significant than any month-to-month sales trends. ”

    Ben is being gentle…


    “People seem to think: Inflation—and the more severe hyperinflation—affects all goods and services and asset classes equally, in a rippling effect. Sort of like a rising tide. Because of this very foolish fallacy, many economists and interested observers think that real assets—commodities, land, buildings, factories & machinery—all rise in price equally during an inflationary spell, whereas financial assets—bonds, stocks—uniformly fall.

    But this is wrong: It is at best sloppy thinking, at worst dangerously stupid. Inflation—and hyperinflation—affects two things immediately: Near-term necessities (such as food and fuel), and credit. (Read: requirements)

    How does inflation and hyperinflation affect credit? Real estate price collapse.

    Thus, in an inflationary environment, real estate prices either remain static or indeed fall on a nominal basis, even as inflation is debasing the currency, because real estate sellers will not find buyers willing to take on usurious debt in order to buy the property. This is how real estate prices fall, even as prices for near-term necessities—food, fuel—rise. This is how you have a real estate collapse, even as you have inflation.

    The Great Hernán P.’s example is exactly what any sensible investor should do, in an inflationary or hyperinflationary period: Preserve capital at all costs, via commodities, while keeping a sharp eye out for real estate opportunities. As inflation rises and real estate prices collapse, be prepared to trade the commodities you own for real estate assets selling at depressed prices.”

    Gas at the pump, $1.34 today, Suncor. Tomorrow?

    • That was a good read although I am generally not a Gonzalo Lira fan. I think he is dead wrong that hyperinflation is coming (actually he predicted it would already be here and it did not come….nor will it).

      Nonetheless, his arguments for falling housing prices during a period of high inflation are good. What he does not mention is that it is actually interest rates that drive down housing prices, not the inflation rate itself.

      Take note that rates rise in tandem with inflation (or even inflation expectations). Real estate pricing is determined by interest rates, not inflation numbers. I have argued with this guy too many times in the past already so I won’t go into it in more depth here.

      Suffice to say he is correct that housing prices can fall when inflation is on the rise but that it is the cost of borrowing increasing that comes about as a consequence of high inflation and not the inflation rate itself.

      Maybe splitting hairs. Enough said.

      I will only add that it is very unfortunate for most of Canada if inflation suddenly kicks in as house prices are at historical highs. This is a distinct possibility if oil suddenly takes a sharp upward trajectory. Iran seems to be creating the circumstances necessary for an oil crisis to occur and therefore a period of sharp inflation to arise.

      On the other hand we have China slowing which could put significant downward pressures on most commodities. That would include energy as most of Europe and the US slow simultaneously.

      If anybody can see how these conflicting events might actually play out in our economy then I would like to hear it. Obviously it is material as to how severe a correction we see.

      Sorry about the long post. It’s family day. Got time?

      • Ralph Cramdown

        Rising oil prices affect CPI, but affect core inflation much less. The BoC won’t crank up rates to combat rising oil prices. The US is growing, not slowing.

      • Let me rephrase… Embargo “seems to be creating the circumstances necessary for an oil crisis to occur and therefore a period of sharp inflation to arise.” The full embargo takes effect July 1, again.

        Yes, I suspect hyperinflation is more likely to occur within a nation of savers, which we are not. Is Canada printing money madly? I dunno. We’ll have to see what motivates the population this summer in RE, energy, food and wages.

      • Very good point Ralph. Seems nobody pays attention to the other (er, good) US news. Here is the January report from the Institute for Supply Management (ISM). Release date, February 2012. The report begins with the following surprising words:

        “Economic activity in the manufacturing sector expanded in January for the 30th consecutive month, and the overall economy grew for the 32nd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.”

        Who knew that EH? ….full report at the following link……

        Makes you wonder.

      • john mf'ing galt


        the manufacturing sector is expanding

        but only after the unions have been slain

    • This is one reason why StatsCan and the US Department of Labour Statistics don’t include housing prices in their CPIs. They have all kinds of shelter components, including property taxes, rents, insurance, replacement costs, maintenance costs, mortgage interest rates…. but no actual housing prices. You can see the breakdown of Canada’s CPI components here:

      • Wow thanks, I could spend mindless hours doing ratios on that chart, alas, who has time unless they are keying loans into a growth sector to jack costs. But I did notice an obvious omission: pets.

  2. February looks a bit more normal in terms of inventory growth, though sales are still relatively slow, at least compared to 2011 (which was linsane). Still some gas in the tank, IMO

    • It looks like the market, while weak, is still alive. Activity during the spring season will be a fairly good indicator of what’s coming (serious correction or flat market). I think TD had a forecast of price correction starting only in 2013. It might well take another year indeed.

      • FWIW, and I’m by no means an expert, I think prices are going to increase for the first half of the year and peter out from there. Inventory is tight enough that prices are likely going to increase. All bets are off for the second half of the year.

      • not a bold prediction jesse. This is pretty much what happens every year.

      • One thing we are all learning when it comes to real estate is that events are spread out by years and not months. Corrections, once they finally occur, seem to be fairly sharp events, but getting there can take forever. You kind of go on and on. Then it happens. Like sex when you are drunk.

      • Thanks Nemesis, but I already have a date. (chuckle)

        By the way, that is some great work you did on the photo spreads. I have been looking at past articles since I found this site and really enjoyed the pieces you put up. Nice job. Can you do one on Canmore? There is a disaster waiting to happen. Right on par with Kelowna or Victoria except 10 times worse.

    • I heard sales are brisk from across the bacons.
      Would be interested in the weekly numbers for the LML.

  3. “The emphasis on incremental changes in lending standards (and other factors) on the marginal buyer (and, ‘marginal holders’) is crucial, and a concept that most market participants do not fully understand.” vreaa

    Quite right. This is indeed why policy makers find themselves in a trap. While on the one hand almost everyone knows that action needs to be taken to slow credit growth, it is also well known that even minor policy tweaking can spill the apple cart.

    I think this is also pointing to why a a soft landing is impossible. Ben’s data indicates we have arrived at that point in time where momentum is lost. Buying power is very weak except at the edges where small changes in regulation tend to have the most impact. Realtors might imagine this as the point of perfect balance . It is too quiet. I might suggest instead that this is the eye of the storm.

    That this is the moment in time just before the real declines commence.

    Certainly, if you have been holding off buying until now it would be foolhardy to jump in by concluding the market had hit a plateau. I sense this is the time of greatest danger for buyers as the window is closing for sellers. As inventory rises it also becomes clearer to those who chose to list in spring what a big mistake they made.

    Everyone will be listing this spring. The thrill ride down is here.

  4. Off topic, or not – over the past year I began working with a loose group of consultants; there are five of us who work in complementary ways together. We’ve taken steps towards forming a more formal business together, but last night during a meeting realized that of five, only two *aren’t* thinking about leaving the city in the next year or two. Vancouver’s too expensive to be an entrepreneur and have a family, and we all want other things – like retirement funds, or the ability to travel and take vacations, etc.

    • Not off topic at all Absinthe. You said it all.

      You are thinking of packing up and leaving due to high cost. Taking your young family with you, taking your skills and abilities out of the mix and taking one more business to a more favorable environment.

      Vancouver will be a morgue if it keeps up. Just old folks. No decent jobs. No skilled talent to staff those that remain. No youth or energy. This kind of trend takes years to reverse too.

      Your post said it all.

      • john mf'ing galt

        honestly there’s no limit to young people in this city

        they just all happen to be hipster idiots though,
        many from ontario – our hapless oakies, easily suggested to by commercials during the olympics

    • So many of my friends have already moved to Europe – mostly Germany, but other countries too.

      • So many of my friends from Europe have moved to Vancouver.

      • Craig Sterling

        As a Canadian living in Europe, I am at a complete loss to understand that. .Europe is finished.

      • Europe is finished

        Really? Will the continent cease to exist?
        I go to Europe every year and have lots of friends and family there.
        Situation is never as bad as the newspaper titles suggest.

    • The worrisome thing is, even if Van housing did become reasonably priced again, so much of the city’s economy has become dependent on the housing boom that cheaper digs might not be enough to stem the bleeding of young families like yours. In the event of a major correction, for every family attracted by more reasonably priced housing, there might be two families headed the other direction, as they were dependent on the RE gravy train for their income.

  5. “things aren’t looking good”

    In what sense? We should define what “not good” means.
    To me, continuing increases in RE prices are not good.
    A peak followed by a massive crash would be great, awesome, definitely good!

    • As much as I’m expecting a crash (sooner or later) and believe no other outcome is likely, I’d actually prefer a soft landing at this point. The ideal, of course, would have been gradually rising prices in line with inflation.

      As much as our collective schadenfreude may be tickled by seeing speculators and others take it in the shorts, the economy is also going to take it in the shorts, and that’s going to negatively affect everybody except bankruptcy trustees.

      • You think this is about schadenfreude? Savers have been raped over and over again and anyone not willing to take on insane amounts of debt has been priced out of the RE market. Your ideal of “gradually rising prices in line with inflation” is just more raping of savers. And soft landing keeps homes unaffordable AND speculators lose money – so everybody will lose. But that is, thankfully, an unlikely scenario. Prices will either keep growing or crash.

        A crash is badly needed. It’s the only way back to long-term sanity. A big brutal deep crash of historic proportions. Everything else is a defeat for the whole city.

      • Plus it punishes all those greedy bastards that make us all mad! Why should they spend like drunken sailors and waste money they don’t have while sticking our noses in it? Stupid Bahamas vacation with nice pictures and buff naked hotties on the beach while we stink like a long winter in the office!

        Admit it, we want GOD to smite the speculators (and a few of our friends too)

      • I don’t mind the speculators making money. What pissess me off is the collateral damage. This is a result of criminal system of debt, inflation and moral hazard. Speculators are just playing the system.
        The damage created by this system is much greater than any crash will do. And any damage created by a crash should be blamed on the bubble that preceded it.

      • BTW, Re: Vacations – none of my acquaintances who “own” can go on vacations as often as I do. Most are happy to scrape together enough money so that they can get by month-to-month. So it’s really not about that.

      • But that is what it is all about, Bubbly. We want those stupid, spendthrift, borrowers to suffer a little while those of us with savings and cash in the bank wing it off to Mexico for a secret snuggle with the bosses wife.

        Then we want to terrorize them with all the pictures of the beach fun and drunken sailboat antics we did (with actual money) while they struggle to pay off the never ending LOC and shop for second-hand snow boots in January.

        Suckerssssss!! HaHaHaHa We win! HaHaHa (evil laughter)

        (do you get kicked out or being immature here?…oh yeah…… FIRST!!!)

      • Ralph Cramdown

        I don’t see how savers have been raped over and over again. I certainly haven’t. People who hoped to beat inflation while investing only in short term government guaranteed paper haven’t done so well. But I suspect that if you’re angry at the CMHC for guaranteeing the loans of all those spendthrift home buyers, you’re not expecting great things from CDIC guaranteed stuff, are you?

        Invest in the preferred or common of all those companies that screw people like you every day (telcos, banks, cablecos &c) and you end up doing pretty well.

      • Invest in the preferred or common of all those companies that screw people like you every day (telcos, banks, cablecos &c) and you end up doing pretty well.

        This is one of the things this screwed up system does – it forces people to speculate.
        I have invested and have done well. However, that does not mean that savers have not been raped. If you have to speculate just to maintain the value of your savings, you are getting screwed.

      • john mf'ing galt

        @bubbly – savers don’t get raped in our society

        they’re fleeced

      • Ralph Cramdown

        Exactly, it forces people to invest. If inflation were held at zero, many more people would just stick their money under the mattress, wage earners would never get raises, and the velocity of money would go to zero. I’ve said it before and I’ll say it again: “Historically, creating mass political movements sympathetic to those living off their income has been difficult. Calling them ‘savers’ rather than ‘the parasitic classes who control the means of production’ is probably a good marketing move, though.”

      • “If you have to speculate just to maintain the value of your savings, you are getting screwed.”

        Actually most times in history “risk free” has a negative return. The last few decades were the exception.

  6. Exactly, it forces people to invest. If inflation were held at zero, many more people would just stick their money under the mattress, wage earners would never get raises, and the velocity of money would go to zero.

    Ehm, no. Money would not go under a mattress, but into a bank. Bank would then lend it out or invest.

  7. Actually most times in history “risk free” has a negative return.

    Wrong. Most of the history money was gold/silver and savings were stored in it. Except for rare periods of large discoveries or intentional debasement of coins by the government (for ex. by decreasing the PM content), money has held it’s value.

    • “Most of the history money was gold/silver and savings were stored in it”

      Then you can buy gold. Problem solved.

      • No it’s not solved. I have a job, you have a job, everybody on this website has some job and most are not investors or bankers by profession. In normal environment, most people make money and save the excess in the bank because their real job doesn’t leave much time for thinking about investing. The bank then invests the money or lends it out. The stored money holds it’s value over time. Some people may choose to take on a higher risk and invest by themselves and that is fine. The key word is “choose”.
        However, in the current fradulent environment, the choice is “get screwed by inflation” or “speculate”.

        So, sure, you can put money in gold, but you need to diversify just to preserve capital, because the whole monetary system is volatile and fucked up.

        Or, like you and others on this website, you can ignore the real issues and pretend that savers are parasites.

      • Ralph Cramdown

        I guess I don’t understand what Bubbly’s definition of “normal environment” is. For most of recorded history, most people had no ‘excess’ — they lived hand to mouth, were illiterate, and slept with the livestock in the house for warmth. From time immemorial, governments have been debasing/inflating and defaulting. Consumers have paid big for credit (Winston Churchill paid 2%/month for his polo ponies while in India). Banks paid depositors only what they had to, which was generally not much. They often went bust, or got bailed out. People with capital invested it themselves, or got fleeced. Today? “8 Sep 2011 – The survey reports 57 per cent of Canadians said they would be in trouble if they missed one paycheque.” Plus ça change, plus c’est la même chose.

        Given the above, you’ll never get sympathy from the masses for complaining that your pile doesn’t generate enough income. Not now, not then.

        Two book recommendations:
        This Time is Different: Eight Centuries of Financial Folly
        Markets Never Forget, But People Do

        And for God’s sake, don’t touch your capital! Borrow them from the library.

      • jesse is so contrarian that he’s now contrarian to the contrarians and has become a bull. Just like those clothes from the 70s that are so out, they’re in. =)

    • john mf'ing galt

      such vintage threads are not unlike the housing stock

      overpriced, aged crap

  8. Ralph Cramdown – Your argument on savers being detrimental to the economy is flat out wrong. Savers are the backbone of the economy. How can you loan out money if there is no savings? Savers have been forced into speculative investments that they do not understand due to the artificially low interest rates that have destroyed any returns. Check out how the DOW has done over the last 11 years and then adjust for inflation. Most speculators have lost big time. Add in fees and commissions by mutual funds and investment advisors and you can see just how badly the speculators have done. Those who stuff money into mattresses are self-reliant, you don’t see them asking for a bailout do you?

    The U.S. enjoyed its greatest period of economic growth from 1860 – 1900. During this time prices fell by over 50%. So no, inflation does not spur economic growth, it destroys wealth.

    • Agreed. Nice to see that not everyone is an ignorant ***.

    • Who argued savers were detrimental to the economy? Savers have bid the yield of 30 year Treasuries down to 3.17%, and the 5 year down to 0.89%. Oh yeah, they’re really out there taking the risks, all right. There’s plenty of places to lend your money for more or even — heavens — put up equity, but these people are willing to take less than inflation because they all think the world’s going to end. If it weren’t for inflation and government backed bank deposits, they WOULD put their money under the mattress.

      And yes, I do see savers asking for a bailout. They complain about “artificially” low interest rates (with unemployment near double digits and wage growth near zip), when they’re the very people bidding that yield down at the long end of the curve.

      • You have no clue.

      • There is not much point in arguing with someone who is brainwashed with communist propaganda, so this is my last reaction to you: Look up who are the actual buyers of canadian bonds – foreign buyers, governments, institutional investors etc. Then compare it to the amount that actual canadian savers invest in them.

      • I see what you are saying all around me. There’s probably a certain demographic that many on this blog just don’t understand. The equity markets have not been kind to some over the past 10+ years and they are running out of time. Risk aversion, fear, and limited alternatives have pushed this demographic into long bonds over the past 4 years creating another bubble of sorts – bonds topped all other investments by a large margin last year. It’s also interesting that ZIRP has resulted in this demographic saving more / spending less than they would if rates were much higher (not the ususal textbook economic result). I’ve received emails from US residents describing how boomer investors are stepping back into housing because rental yields are now many times higher than other investments now. There’s generally less fear in buying a real asset vs. a financial asset. Low interest rates are compounding the eventual problem for this demographic as pension funds become increasingly unfunded. ZIRP is a mistaken policy with such huge economic imbalances everywhere.

    • all you dumb motherfucking austrian school shitheels ragging on Ralph need to do yourselves a favour and google “inflation” and do some reading while protecting your piles of gold bars

  9. I’ve said it before and I’ll say it again: “Historically, creating mass political movements sympathetic to those living off their income has been difficult. Calling them ‘savers’ rather than ‘the parasitic classes who control the means of production’ is probably a good marketing move, though.”

    Communist bullshit.
    I have earned my money through hard work and living below my means. The government is eroding those savings through inflation and by promoting debt-slavery. I do not appreciate when ignorant morons call savers “parasitic”. If anyone is parasitic, it’s those who live off this fradulent system and receive bailouts when their bets don’t work out.

    • Indeed. Living off your own income is in fact what we ALL must do given our lifespans. This isn’t about everyone becoming a pure capitalist, it’s about shifting the fruits of labor forward in time for your own survival. Central bank policy has left the average middle class person with no choice but to move up the risk/return curve or face shortfalls.

      • Ralph Cramdown

        “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

        It was wrong then and it’s wrong now. Central bank policy has been about saving the average middle class person and above from marauding gangs of formerly average middle class persons and below, which is what you would’ve seen had unemployment hit 20% or so. Yep, it’s been a tough decade. Take solace in the fact that markets have generally roared back after the few decades such as this, or start stocking the bunker.

      • Easy Ralph, you can pick on politicians all you like but don’t mess with farmers.

    • There are others who have come around and chosen other alternatives to safeguard their nest-eggs. I sold off one condo (estate sale) 2 floors above another seller, and got to know him. He has cash to pay down 100% on an overpriced westside home, but instead he invested in a plantation in Africa. I am keen of Malaysia’s second home program (no restriction to foreigners) and their 10-year foreigners. Will be handy comes retirement time. Another friend and his brothers have invested in Vietnam and Thailand, where they still have family members whom they trust. It works out for them even with the mandated 50%-51% local partnership.

    • Compound Interest Lenders Meet-up

      Convene at 10 am
      Elect chair
      Raise inflation

  10. TRT on Garth’s blog makes an apt comment:

    “Although I believe that real RE prices are unsustainable in the medium-long term, some comments perplex me…

    comments like ‘its starting’ etc makes me think of the titanic. one set of people on land and the other on the ship. the ‘its starting’ crowd fails to realize thats its them that have been on the titanic for the last 10years. i guess they are comforted by the music (blog) and are blind to whats happening around them…i can see them waving to the people on ground, the greater fools….”

    • Amusing imagery, but I don’t think it quite accurately describes my mindset.

      I’m in Vancouver because I enjoy certain aspects of life here and my job doesn’t suck. I didn’t buy a home or rent any money from the bank because I’m not comfortable with that level of risk. If Vancouver prices double again over the next couple of years and “price me out forever”, well that’s fine, I’ll move somewhere where jobs pay more and houses cost less. This is hardly being stuck on the Titanic.

  11. Ralph Cramdown – you are clueless. Central Bank policies are geared toward saving the skins of their friends (and co-workers) on Wall Street. Any piling in of savers to T-Bills is due to the horrific returns they’ve seen in the stock market. The whole point of savings is to not take risks – that’s the job of entrepreneurs who borrow money (from savers). Without savings how can you have entrepreneurship?

    You quote how 57% of Canadians would be in serious trouble if they missed one paycheque. They wouldn’t be in trouble if they had savings now would they?

    Back when interest rates were realistic (as in higher), one could save for retirement and live off of the interest. You say if it weren’t for inflation they’d put their money into mattresses? That’s just stupid. Higher interest rates tame inflation, making savers more likely to put their money into banks to earn a return above inflation and where it can be lent out to entrepreneurs. Today’s high unemployment and financial debacle was caused by years of artificially low interest rates leading to asset bubbles.

    People like you spewing ridiculous advice are the reason I buy gold and silver. I’ll guarantee my returns in precious metals have far outpaced yours as well.

  12. Ralph Cramdown – the mattress isn’t lumpy at all, and I have savings to tide me through a crisis. Your arguments have been destroyed for all on this thread to see, deal with it.

    • Thanks Canis. Coming from a realtor that was a fairly candid assessment of the existing market. Selling is not based on fundamentals and everyone knows it. Pure speculation was the driver and that is clearly ending. The chart he offers says it all.

      I would say the writing is on the wall for Vancouver R/E.

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