Spot The Speculator #78 – “One couple recently spent $900,000 on an East Van house and also own a downtown condo.”

“Recently we hosted a meal at our home with 3 young couples present. The topic of real estate came up. One couple recently spent $900,000 on an East Van house. When someone referred to my bearish outlook the male owner of that home, who also owns a downtown condo, brought up a couple of classic arguments:
• even if this is a peak, real estate is still a good investment in the long term, just like the stock market.
• Vancouver is different.”

– b5baxter at 30 Mar 2012 2:36pm, who also adds analysis.

Real estate is only sometimes “a good investment in the long term”.
Buying (or holding) when it is historically overvalued is a certain recipe for underperformance.
Holding more than your personal residence, with leverage, through a downswing, is a recipe for crippling punishment.
– vreaa

59 responses to “Spot The Speculator #78 – “One couple recently spent $900,000 on an East Van house and also own a downtown condo.”

  1. There is more than one of these cases roaming the streets of this fair city. I daresay there are tens of thousands.

    • tens of thousands. do you think the city is at the OF moment yet? what is the panic level – yellow, orange, red?

      • Methinks when it becomes mainstream knowledge when the upcoming buyer pool is no longer large enough or debt-free enough to maintain trends. Waiting for all the tax increases to come in first.

        Then there’s the massive numbers of retirees looking to cash out and downsize in the next few years. Our population growth is slowing while the households committed to mortgage debt grows.

        The govt perks are starting in order to subsidize the real estate industry…
        “Effective April 1, 2012, buyers of newly-constructed recreational properties/secondary homes outside of the Capital and Greater Vancouver Regional Districts, will be able to claim a provincial grant of up to $42,500. Currently, no grant is available for such purchases.” They want you to buy two.

      • Think like a Realtor Chub. They will tell us that the true panic colours are Rose, Crimson, Cherry and Cerise. Panic averted. There, don’t we all feel better now!

      • farmer. yes i had forgotten about REspeak. but psst … it’s more like ma’am, can jesse come out to play with the rest of us kids

      • No way. Is that Jesse? Hilarious.

      • Jesse come out to play!? …”Now you listen ‘ere!”….

      • chubster, I don’t think the city is anywhere close to its OF moment. They will have to be telt and it’s unclear TPTB have finished typing the Manifesto for Immediate Release.

        It took a while for me to realize that Vancouver is still a mouse in the realm of the elites of housing bubble lore. If lending were to continue unabated it could well have been possible for Vancouver prices to continue even higher. The one telling sign of the weakness of the foundations of Vancouver’s economy became clear in early 2008 when, almost like a switch, the lights went out on sales starting in April. I had chalked it up to a change in sentiment or skittishness due to stock market woes but the more I think about it the more I am starting to realise it was banks pulling credit that did it.

        If I have some time I’ll try to dig up some correlations to Canadian mortgage issuances around that time to see if there’s anything coincidental. But the first major OF moments in credit markets came in mid-March of 2008 where the TED spread jumped over 2% for a few days and took about a month to return to normal. TSHTF in September but that initial jarring may have been enough to tell banks to back away from anything with a hint of risk, namely uninsured mortgage loans. That is why this time around I’m looking for a gradual removal of credit over the next few months and quarters but, if OSFI is serious, Vancouver in particular could see the number of people qualifying for loans drop substantially in Q4 2012 and 2013, and it may surprise many who aren’t being qualified: It may well be that drawing from one’s savings rather than income to pay for financing costs is going to be one of the red flags that will cause RWC to increase.

      • jesse. it is indeed true. vreaa is this blog’s brain but you are it’s soul while i aspire only to be its part-time jackass – for entertainment only of course. don’t know if i agree on all counts but allow myself to ponder the excellent textposition. ten thousand thank yous.

  2. They are completely right, look at nortel. LOL. Suckers are born every min. Thats what keeps the debt SLAVE cycle going.

  3. Death of the penny and a 2 cent gas increase, its like a double rainbow. What does it mean ?

  4. A couple who landed here in 2007/8 bought 2 new condos near Brentwood, and have owned and flipped no less than 5 properties since then. He works in IT, and she a homemaker with 2 kids. He briefly lost employment but found another within months last year. Wife is always complaining about being financially strapped, but the real fact is that they are free loaders and expect others to foot their meals all the time.
    When he was unemployed and could not make payment of the mortgages, he sold off one condo in Quangzhou and had his parents remit the funds to him as a gift, since there is no gift taxes in Canada. Recently she is thinking about buying in NV and selling another property in the province of Guangdong, and have the proceeds transmitted over in the same fashion. Most of their cash savings are offshore to take advantage of the much higher interest rates in fixed deposits. And when they need cash, they get their parents to remit gifts to their 2 kids.
    It makes one wonder, if this is perfectly cool for others, then why is it not for the rest of the Canadians?

  5. “Holding more than your personal residence, with leverage, through a downswing, is a recipe for crippling punishment”.
    – vreaa
    I sure agree with that sentiment. This is going to hurt homeowners in ways they never expected. Yesterday I brought up a chart of the Federal Funds Rate to show that we are at the bottom of the channel and very close to a point of reversal for interest rates.

    They are set to rise. Sooner than most anticipate.

    As a general rule we all know that asset prices decline when interest rates go up. We constantly hear objections to this idea though as bloggers swear “that can never happen” because the Fed or the Bank of Canada will keep rates low as long as necessary.

    All nonsense of course. Let me tell you how it is being done……

    You will probably have noticed over the years that inflation tends to lead first and is then followed by rising interest rates. This is the real tool of Central Banks who have at their disposal the ultimate means to contain their earlier expansion of the monetary base. In our own case and that of the US, England, China and now Europe too, expansive policies are utterly off the charts.

    So here we have huge increases in the monetary base but nothing happening and as we saw last week, velocity itself has hit a record low. There is also the appearance of low inflation and thus interest rates are in the gutter. But the economy is actually beginning to heat up again. Oh oh.

    What is not so obvious though is how these “powerful” folk manage to keep rates low despite millions of savers and investors clamoring for better returns. The truth is, they are not magicians. They only need to do one simple thing and this is it….

    Fake the inflation numbers. Yup, you heard it here first.

    As long as inflation is low, interest rates do not need to rise and the real powers of Central Banks will not be invoked. The problem though is that inflation is not low and everybody knows it. Costs are rising sharply all around us and appear in everything from postage stamps to medical costs. Rents are rising as is the cost of fuel, taxation and innumerable consumer goods. Even production from China is up sharply as wages increase there combined with property prices off the charts. So we are importing Asian inflation.

    Oh yes, food is up too. Quite a lot in the past two years.

    But the pickle for our Central Bankers is to convince us that inflation is actually low (which permits low interest rates needed to get business humming and consumers spending) as we all await the business cycle to recover and a period of expansion get underway. The medicine is out there (money supply, bond buybacks, LTRO, QE’s etcetera etcetera).

    Keep in mind that there are billions upon billion of dollars sitting latent and unused on the sidelines. These have the potential to generate explosive inflation once the time is ripe.

    We are fast approaching that time now. An economic recovery as we are now seeing in the US is also a huge warning to investors to take cover as assets can be driven down in value as a result. This environment in particular that is so well primed with the ammunition of Central Bank printing is really going to be a hazard for those not prepared.

    Just to make a long story short….if inflation rises (it already has but only in stealth) then interest rates must increase to cool it off. One precedes the other. In our particular case we should anticipate rather sharp rate increases to offset all the medicine already pumped into the system but not yet activated. This is what everyone is watching for in fact.

    The idea behind suppressing inflation numbers is to encourage the kind of activity we all need to get a recovery going again. It is not really a bad thing so please just cooperate.

    The point here though is that rate increases always hurt property prices coming off a period of sharp price appreciation. The effect could be rather dramatic this time around and we are set for period of consolidation and delevering the likes of which this country really has never seen before. Like I often say, get out of debt, get liquid and get ready. You need cash to buy up assets cheap as they come to market. Credit is going to get tight too so don’t count on it unless you are the best of credit risks.

    Meantime, I would not want to be holding a mortgage right now.

    • Basement Suite

      “Fake the inflation numbers. Yup, you heard it here first.
      As long as inflation is low, interest rates do not need to rise and the real powers of Central Banks will not be invoked. The problem though is that inflation is not low and everybody knows it.”

      EXACTLY how the Bank of Canada justifies following daddy US fed.

      • Exactly, Basement.

        If you are saving now at low rates despite the stealth inflation that is cutting into your stash, you stand to come out far ahead of the pack when the days of reconciliation finally arrive.

        Its a no-brainer. You need cash to win what is coming. Not debt.

    • Wrong. They don’t care about price inflation. You care about prices. I care about prices. They care about wage inflation. As long as employment is weak rates will stay low.

      • Not so Blammo. You are in for a surprise if that is your belief. Rates will not stay low due to weak employment numbers. That is pure fallacy as you will soon see.

      • Basement Suite

        Unfortunately I have to agree with Blammo on this. I would love rates to rise; sub 3% mortgage rates are STUPID f**king low (read: free loans for real estate bubbles) and inflation IS rampant, but hidden with clever measuring sticks that leave out everything we actually have to buy. I know rates SHOULD rise, I’ve been saying it for a long time. But the Bank of Canada will not raise their target rate before their father the US federal reserve does, and the current US fed is the biggest free money machine ever built. Ergo, mortgage rates here will not rise substantially for a very long time. You might see a quarter percent sometime, here or there, but nothing substantial, for a long, long time. What do I mean by substantial? How about at least 5% mortgage rates and preferably 6% or more (which btw are historically very low). Those seem awfully high though to the spoiled brats who borrow at 2% today, and their central banks that accommodate them.

        Reminder, we are still well under 3%.

      • Fair enough, Basement. One thing we can agree on is that rates will probably rise gradually over time. Of course that assumes there is no crisis of any kind. You know, like the energy crisis in the 70’s that blew everyone’s theory right out the window. And not that history is about to repeat exactly but there is a bad coincidence in the timing of the threats being issued between Iran and the Israel and the West right now. High oil means rising inflation. The outcome is rates that have the potential to rise dramatically. Of course, cost push inflation usually doesn’t do much for employment. It is really a kind of tax more than anything else and is not one we easily budget for. So it cuts into consumption numbers. Wage growth can remain sluggish in that environment. We should keep an eye on inflation expectations nonetheless. You might like the site where they put up some great material on forecasting. Here is a link to a recent article that notes inflation expectations are currently on the rise due to all the printing at the BoE, Fed, BoJ, ECB and others. First the expectations, then the event….then the rates will follow. All in good time.

      • Some good articles at that site, Farmer.

        This one has some wonderful charts, demonstrating how CBs are not good at predicting inflation:
        ‘Central banks’ poor forecasting records and why the Fed may hike rates before late 2014’

      • Basement Suite

        I wish you guys were right, but that seems premised on the US fed or Bank of Canada actually caring about / responding to inflation. Fact is, they truly don’t care about inflation, and just hide it every way possible, or say it will moderate later, so don’t worry about it today (which makes NO sense at all since you can get a year’s worth of inflation in 3 or 4 months very easily). They (Bank of Canada and US fed) are idiots, so I would not presume they will make any intelligent response to inflation. I do not see mortgage rates back at 6% (which is historically very low!) until well after 2020. Lets hope I’m wrong but I really doubt it.

      • The Bank of Canada *does* care about inflation, just not the same inflation you or I care about.

        Farmer, you mention stealth inflation. There is nothing stealth about it, even your most fiscally illiterate woman-on-the-street is well aware of price inflation, just ask her about bus fare or gas prices. No amount of cheap TV’s can make up for that.

        Those costs all get passed on to consumers whereas wage increases are born by business. This is, I believe, what drives the CB’s mandate.

        With this in mind, asset prices will continue to trend up (liquidity) with short bouts of scary deflation (sovereign debt, etc.). Employment changes are structural so rates will stay historically low (maybe not this low).

        I’m not saying everything is rose-y (it isn’t) but I don’t agree with your premise (even if I enjoy your analysis).

      • Basement Suite

        All the Bank of Canada really cares about is following the US fed. Any excuse to make that happen, they will take. No, they do not care about price inflation. Do they care about wage inflation? Who knows, but it won’t affect their policy. Only the US fed affects the BoC’s policy.

  6. fun chatter for your next party

    [we post here the abstract chubster has linked to]:

    “Higher social class predicts increased unethical behavior”

    Paul K. Piffa et al
    PNAS February 27, 2012


    Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals. Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

    • Wow. Great stuff.
      This is only a study of association, but it leads to the (preposterous?) hypothesis that (genetic?) predisposition for unethical behaviour may lead to being in the ‘higher class’ (!).

      • There is a literature on the evolutionary benefits of deceit.

      • …and altruism… 😉

        [ScientificAmerican*] – Is altruism a genetic trait?

        *Note to Ed: [Scientific + American] sounds like an oxymoron… but, PinkSlime and Utah’s “Stellar Wind” AI excepted, it’s not all ‘creepy science’ down there…

      • Altruism pays off!

      • OK. I feel better after reading your link Nem. The earlier story of class structure and unethical behavior left me a little cold. So there is hope for us. Genetics might determine altruistic tendencies just as it does the tendency to greed. Whew. Close call. Where is Darwin when we need him?

      • fuzzy logic -> altruism doesn’t have a pay off, imo. more like just do it.

    • Funny thing this coming up. I’ve been reading the stories of the orphan train children in the U.S. when tens of thousands of homeless, abandoned or just desperate children were adopted out and sent west.

      Probably my bias to expect that kids adopted by wealthier families would have it better but the stories are exactly the opposite. Kids sent to wealthy families ended up as unpaid servants, threatened and abused. The ones sent to poorer families, while certainly there was a lot of work to be done, were taken in as actual family.

      • aside: on one of the live albums, ron thomason of dry branch fire squad spins a hilarious story about how he came to debate socialist icon utah phillips at a folk music festival – and how philiips wrote this song for his band. i’ve heard about 30 different versions but still like these guys jamming under a tree in phoenix the best

  7. The calm before the storm..???

    Volatility is now at all time lows. So says the VIX chart. We are in such a quiet period on the stock markets that it is frankly getting eerie. Anyone else here beginning to wonder what it means when so many charts are either at historical tops or major bottoms?

    Have a look at this one. ccompidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013

    Hopefully my chart comes up correctly. It is a five year “daily” chart of the VIX, the volatility index. It is telling me that a huge buying opportunity has arrived for anyone betting on market fear. This would be a bottom.

    But what comes next? You see, this is what is so interesting. The shit is about to hit the fan and every single chart I offer here these past days is just further confirmation of the extremes and stresses that are appearing everywhere.

    We all worry about falling real estate prices as the bubble bursts but I want to tell you that there is much more to worry about than just that .Exciting times no doubt. I strongly suspect we will soon see inflation break out in a significant way as the recovery proceeds.

    • I know you yourself know this, Farmer, but perhaps you should clarify for readers: a low in the VIX suggests low fear/high complacency amongst market participants, and usually suggests we are near a top in the stock markets.

      • Yes. It is time to get cautious.

      • the complacency results largely from belief in the backstop of more money printing in response to any sustained weakness, imo. where things will get hairy is when inflation from the printing starts dragging yields higher. that would something new for the markets to digest.

      • John Hussman is essentially calling a market top as of 2 weeks ago:

        His call was correct last year.

      • Thanks Jeff. The article you highlighted gathers together many of the current worries and it is my belief we need pay attention to those considerations now. Hussman is right.

      • Hussman is excellent; always very sensible analysis.
        Note his methodology. He doesn’t call tops or bottoms so much as calculates probability of various scenarios going forward:
        “At present, we estimate the likely total return for the S&P 500 over the coming decade to be about 4.1% annually (nominal). While this may seem adequate compared to a 10-year Treasury yield of 2.3%, the comparison entirely ignores risk.”
        We don’t think he’s ever commented directly about Vanc RE, but we can imagine the tone of his conclusions regardless.

  8. Ok, try to keep this short.

    A relative of mine was caught chasing the “boom” in Calgary a couple of years ago (2006). He bought 2 houses (one to live in and one as an investment) and a condo. He subsequently took a huge hit on all three when he was forced to move to Vancouver nearly 2 years ago. The properties all became completely illiquid a couple of years ago. He listed one house 5 times, with lower prices each time until he finally unloaded it, last month, at a huge loss.

    Swore he would never buy again. Guess what. He’s back, now in Vancouver, buying at another crest.

    Oh yeah, when he moved to Vancouver, he took a rather large (20%) salary cut.

    Some people never learn. And the streets seem to be littered with these stories here in Calgary.

  9. hahah i love the can you dig it video!

    [link to gizmo for sale here]

    [this spam got through the filters; left up to make sense of following comment.. -ed.]

    • Oh great. This site is now so popular that the advertisers are showing up and pretending to be regular posters. So how are sales going, Amy? Got any houses to flip?

      • It’s not that popular, Farmer.
        Still just a ‘wafer thin’ percentage of Vancouver market participants.

      • More flyers then!

      • “Wafffffer theeen!”… No, I’d better not… that whole bucket thing is so disgusting..

      • Nem -> Intentional MP reference, given your prior clip. And, yes, the bucket thing is disgusting. Better to simply mention that we’re reminded. Like that sketch (Cook & Moore?) about the comedian convention where nobody tells jokes but rather shouts out reference numbers for jokes and everybody laughs nonetheless.

  10. alright fellow kids … enjoy the evening then time to get ready for the office again

  11. @Nem: *Note to Ed: [Scientific + American] sounds like an oxymoron… but, PinkSlime and Utah’s “Stellar Wind” AI excepted, it’s not all ‘creepy science’ down there…”

    Especially when you consider how many Nobel prizes in science Americans have won. 🙂

  12. Of possible interest:

    Housing bubbles and interest rates
    Christian Hott Terhi Jokipii (Swiss Bankers)
    29 March 2012

    “Our findings suggest that rates that are too low can lead to emergence of housing bubbles. To assess whether the duration of interest-rate deviations has an additional impact on house price overvaluation, we create additional variables that capture the number of consecutive periods that observed short-term rates are lower than those implied by the Taylor rule.
    For each of the 14 countries in the sample, we show that the longer the rates deviate from the Taylor-implied rates, the higher the housing overvaluation.”

  13. March numbers thread updated with info from yattermatters.
    Numbers for Vancouver Detached:
    YOY Sales: – 34%
    YOY Inventory: +22%
    YOY Prices: FLAT

    Hmmm. Seem bearish to me.

  14. Me too. We seem to have arrived at that time when supply is finally overtaking demand and it is happening just as the season would normally be heating up. Lets all hope this insanity will end before it gets any worse.

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