BC Business Magazine – “Was this a massive bubble? Slightly. But bubbles imply resulting crashes, and I don’t believe we’re going to have one.” [Why not?]

“History shows that Vancouver has always been a real estate boom-and-bust city. Now that the most recent mania appears to be over, with sales falling and prices threatening to follow, there’s no reason to think that’s going to change. Look for a long quiet period.

Fear and worry are rampant in Vancouver these days: the mighty real estate market is struggling. Whether it is in a tailspin or due for a monstrous crash is the subject of endless dinner conversations, office cooler chats and online messages.

I’m generally in the tailspin camp, because I’ve seen this kind of real estate mania in Vancouver before. Ever since I moved here, what seems like a hundred years ago, I’ve been hearing the “you have to get into the market” mantra and the “woe is me” reactions that follow.

Many years ago, when I was writing a financial planning column, I saw a chart that showed the increase in home prices generally mirrored the inflation rate – despite the bouts of mania – over time.

That means that, essentially, a house is like a big bank account, advancing about 3-5 per cent a year, if measured over decades. In some short-term periods it can rise much more than that, in others it falls or does nothing. Overall, it evens out.

So the people who “get rich” on housing usually own them for 30 years and essentially save their money in a house. They could have done better with some other kind of investment, but needed a place to live, so combined the two.

Here’s my own example: once, I bought a big, old, heritage house that required some rehab work. It cost me $270,000, which I thought was outrageous at the time, but as it turned out, wasn’t.

Some eight years later, I sold it for $425,000 – a gain of about 55 per cent. But for most of those years, it barely registered any increases, and in some cases, even dropped. All the gains – which averaged out to roughly 6-7 per cent a year – came in the last few years. That was at the beginning of the current mania that saw the price of that house hit almost a million.

That’s a long boom that has now apparently subsided – a 10-plus percent drop in sales usually signals the end of a giant buying spree.

Was this a massive bubble? Slightly. When prices rise that much, we’re nudging bubble territory. But bubbles imply resulting crashes, and I don’t believe we’re going to have one. Of course, prices will drop a bit, but an American-style catastrophe isn’t going to happen.

More likely, we’ll just have a long fallow period in which prices have to correlate with incomes, and markets have to better adjust to geographical and other factors. During this period, prices will drop somewhat, but mostly they’ll stagnate. What will likely happen is that this stagnation period will be longer than usual, because the market got ahead of itself so much.

But eventually it will happen again. The Vancouver region now has about twice the population it had 20 years ago, and will continue to increase over time. This increasing population means that more people have to live farther out in the region, where it’s cheaper and there’s more housing availability. In the more popular inner regional areas, prices will inevitably rise again.

Those who understand these rhythms and are patient will do very well. But that will be a minority. It always has been.”

– entire text of ‘Real Estate Mania Is Ending’, Tony Wainless, BC Business, 13 July 2012 [hat-tip Don]

1. To paraphrase the old quip: Our market is ‘slightly’ like a bubble in the way that someone gets ‘slightly’ pregnant.
2. The author seems to lay out at least some of the important dots, but then, in the end, fails to draw the logical conclusion. Note the form of his flawed logic: “Was it a bubble? Well, if it was a bubble it’d have to end in a crash. I don’t believe it’ll end in a crash so, it can’t have been a bubble.” Why doesn’t the author draw the logical conclusion? He doesn’t share with us why exactly he believes it won’t end in a crash, but it’s very likely he does that simply because he hopes it won’t.
3. Yes, the Vancouver RE market is “a massive bubble”. How do bubbles end? Do they peter out over a “long quiet period”? Or do they collapse? Do we have any examples of bubbles simply going away over a “long fallow period”? [Answer: No].
4. To Tony Wainless and others proposing a ‘soft landing’: Who do you expect to now be doing the buying? Prices are still at stratospheric levels compared with price levels supported by fundamentals. For a soft landing to occur, you need a steady supply of buyers over years and years of flat or reducing prices. People in Vancouver have only been overextending themselves to buy at these levels because they presumed future price strength would be relentless. With a lacklustre market, people will stop stretching (hasn’t this already started happening?), and prices will collapse. We cannot see how this market could resolve itself with a soft landing.
5. Talking of minorities: Those who understand that this is a speculative mania, and understand the full implications of that conclusion, remain a very, very small minority.
– vreaa

24 responses to “BC Business Magazine – “Was this a massive bubble? Slightly. But bubbles imply resulting crashes, and I don’t believe we’re going to have one.” [Why not?]

  1. His reference to a doubling in population in twenty years seems to have been pulled out of thin air. Greater Vancouver’s population has in fact grown by 26%, not 100%, since 1991.


  2. Renters Revenge

    “Ireland is opting for bulldozers rather than bankers as it starts to clear the legacy of the housing boom whose collapse brought the economy to its knees.About 1,850 housing developments, unfinished after the bubble burst in 2008, pockmark the Irish landscape, according to government figures. This week, Ireland’s National Asset Management Agency, the state agency set up in 2009 to purge banks of their most toxic commercial property loans, started the destruction of an apartment block for the first time.”

  3. Ralph Cramdown

    There’s no point spending 9 8 7 6 5 4 times your income on a house unless you think it’s going to beat inflation by a fair margin.

  4. “Once, I bought a big, old, heritage house that required some rehab work. It cost me $270,000, which I thought was outrageous at the time, but as it turned out, wasn’t. Some eight years later, I sold it for $425,000 – a gain of about 55 per cent.”

    A gain of 55% in the value of the house, but at rates typical of the era he is referencing (mid-1990s purchase?) certainly not a gain of 55% in his pocket.

  5. “That means that, essentially, a house is like a big bank account, advancing about 3-5 per cent a year, if measured over decades. In some short-term periods it can rise much more than that, in others it falls or does nothing. Overall, it evens out.”

    I like how he uses 3-5% (nominal?) price gains. That’s not how it works.

    • That’s right. The properly calculated gain would be about that:

      nominal price gain
      – minus the yearly property tax (4-5K in Richmond on houses currently);
      – minus the maintenance cost (at least 2% for the newer houses and 5% for an old not renovated house has to be set aside for the upkeep and the capital reno projects);
      – minus the amortization (meaning the dwelling’s life in Vancouver is about 50 years max after that it gets demolished as it gets to old to keep renovating);
      – minus the yearly municipal charges for the garbage+water+sewage services (currently about $1000 in Richmond);
      – minus the cost of the mortgage…This is what I would expect from the person who used to write “a financial planning column”…

  6. The conclusion of Tony’s article – that there will be a modest drop followed by price stagnation – does not logically flow from the first few paragraphs.

    Tony initially argues that prices will return to mean and that mean prices can be heavily influenced by short periods of above average change (i.e., 55% gain due to large price increases in 2 years preceding the sale). Generally, I would agree with both of these arguments…

    …AND in Vancouver’s case, what this means is that prices need to drop ~50% to return to mean, and that the price correction required to return to mean could occur rapidly.

    Given past experience in Vancouver, many other housing markets, other types of asset inflation episodes etc…, there is every reason to think that steep and fast is how we’ll get back to mean.

  7. I find it curious that the person who used to write “a financial planning column” got the math wrong on the annual percentage increase of the property. The annualized percentage increase, using the numbers he provided, is less than 6%.

  8. joe_blown_away_by_high_housing_costs

    Left wing discussion of Vancouver’s housing bubble:


    As an NDPer I especially enjoyed this read. Good points made about how the privatization/redevelopment of social housing (Little Mountain, Heather Place) are carried out to feed the housing bubble.

    • That VanCity billboard is gold. VREAA, worth archiving I think. I can’t quite read the rightmost pink rectangle.

      “Imagine. A financial institutition that lets everybody profit.” Yup. Bernie Madoff used to run one of those too.

    • Renters Revenge

      Kind of muddled logic in that article, if you ask me. Either you want government interference or you don’t. Also, made the mistake that so many others have made on this issue – glossed over national level central planning and put way too much emphasis on local municipal zone tinkering. This bubble is not a land use planning issue, IMHO.

    • My biggest complaint with the article is placing onus on Vision Vancouver for perpetuating the bubble when it’s the nature of the City’s finances, not the political stripe of council, that’s the problem. Ultimately cities derive revenue from permits and other real-estate-related activities and, if that is not present, either need to increase revenues in other areas or cut back. Look what happened in 2009: the City of Vancouver made significant cuts to its budget in part because permit revenue all but dried up and raising property taxes significantly was a political non-starter.

      So at the local level, because of how the tax base is matched to the expenses, regardless of who’s in power, there will be pressure to kowtow to the real estate industry to keep revenues flush. And it’s not some “neoliberal” trend in my view, it’s what the populace votes for, evident by tuning in to any CKNW talk show for 5 minutes. Being rational people, we don’t want high taxes but want an infinite level of services and nobody can possibly what’s reasonable without dedicating themselves full time to understanding the cash flows involved. The only plausible way to square revenue shortfalls is unsurprisingly myopic: turn to developers and speculators who ultimately fund them. That’s the way it is, and it’s the electorate that gets to sleep in its own bed.

      Rhetorical enough? 🙂

      • While I might not agree with all of your conclusions, Dr. J… In answer to your question, in all matters Trivium you are clearly deserving of a plethora of GoldStars… Watch out for bullies though, they despise the cerebral… but fortunately, they are usually too preoocupied with banal recreations to prove truly irksome.

        Speaking of such… In other news ‘development’ the FamilyManse of the Architect of the “Arsenal of Democracy” is slated to become yet another ‘putting green’ for peripatetic NakedOfficials and those who would rather not be seen rubbing elbows with Donald Trump…


      • I almost forgot, what is this “talk radio” and “CKNW” of which you speak???

      • As crazy as it might seem, Nemesis, I don’t agree with all my conclusions either, but it helps to role play to get a sense of what the road really feels like underfoot. I know, that means I might stand for nothing but whatever, I cannot be so convicted to go for the upvotes. I blame childhood vaccinations.

  9. “More likely, we’ll just have a long fallow period in which prices have to correlate with incomes, and markets have to better adjust to geographical and other factors”

    ?????? Is he kidding?

    If only that would be true. Everyone would be saved. Alas that is not what is about to happen. Worse for Tony Wainless theory and projections is that is not what we are currently experiencing. It must be the popular delusion of the masses at work or the faint hope that all will be well if we just crawl under the covers and pretend there is no bear in the room.

    Fortunately, there are many good analysts who know better and they are not surprised by how the data is coming in. Nor have they been lulled into a false sense that there will be anything akin to price stability going forward as Tony suggests. The smartest of them sold their homes months ago and are tickled they got out just a hair under the absolute top.

    This is indeed shaping up to be quite a normal bursting bubble and that means the downdraft is going to be very painful for Vancouver.

    The double top hypothesis (for you technical buffs) is playing out pretty much as expected (see link to chart below) and the downward corrective action roughly mirrors the rapid rise of the latter part of 2011 and early 2012. Again, this is telling us to be ready for a hard landing in Vancouver real estate so look out below.

    Losses of 14.1% on average prices over a period of just four months are what we might call dramatic evidence of trouble. The technical term is “oh shit!”. We do not even need to speculate on how bad the outcome will be.

    It is happening already right now in real time.

    Surely Mr Wainless looked at a few charts before he wrote the article. Missing the significance of this current corrective move is a fairly large error. Kind of like putting the Costa Concordia on a reef by misjudging the distance to the shore. Everyone is entitled to their opinion though. But is it any surprise that the bubble got so far out of hand to begin with?

    Even smart people with the hard evidence and numbers in hand cannot seem to project the obvious into the future. They are blind to what is happening and will be stung along with everyone elses as the declines continue.

    Even where prices do get sticky and firm up the odds of actually selling can be poor. Sellers never understand this dynamic. Once the market turns down buying activity shrivels for all but the most desired properties or the best deals. It does not matter what average prices are if you can’t catch a bid. And so that is where we are now going as homes pile up like driftwood and listings languish month after sorry month.

    Larry Yatkowsky’s chart for the newcomers who never saw it.

  10. History shows again and again how nature points up the folly of man.

    • I am still shaking my head in amazement, Paul.

      Honestly, what are some of these writers thinking when they put a piece together for a business publication that comes to such an obviously wrong conclusion? Don’t people read the numbers and do projections anymore? Agree it is a Godzilla moment. Godzilla meets housing bubble maybe.

  11. Such a hopeful fluffy bunny.

    [i]Everything is Ok. I’ve got 100% of my assets in residential housing because it only goes up. Ok it might slide a little sideways but won’t drop 50% in places like Vancouver,[/i] says our dear writing friend.

    [i]And on Saturdays I talk to the wee people, leprechauns, and elves at the bottom of the garden and they assure me everything will be wonderful. And on Sunday we will have cake with real cream![/i]

    Fools and their money are soon parted – and a lot of fools have just been parted from their money. You sure this was in the business section and not in the children’s fantast section!

  12. Pingback: Entities Are Aligned In Perpetuating The Speculative Mania Regardless Of Political Stripe – “The only decisive action taken by politicians has been to add more layers of finance to the teetering system of debt and precarity. Elites in Vancouve

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s