Tom Davidoff, CBC Video Interview – “I think we have every reason to expect there may be a problem with home prices. If you ask Mark Carney, we should be worried. I would put 20%-30% probability on a world in which people are over-leveraged, and prices fall, and a lot of people owe more than their house is worth.”

“The risk comes.. What if those home price increases aren’t permanent? And I think we have every reason to expect there may be a problem with home prices. We’ve seen transaction volumes slow, and, in some neighbourhoods, we’ve even seen price declines. So, should prices fall 20, 30%, and people increase their borrowing 20, 30%, those two forces can have a very negative outcome, both on an individual’s wealth, and also on the financial situation of banks. We saw a terrible consequence of that in the US, where there was more leverage amongst households, and more leverage on banks. So there are danger signs here. …
If I had to rank the risks: Number 1. Large decline in home prices, Number 2. A decline in the macro economy, rising unemployment… Number 3. Rising interest rates.
If you ask Mark Carney, we should be worried. They spend a lot of time at the BOC thinking about ways they can creatively cut back on consumer debt, without popping asset bubbles.
So, yes, the BOC is worried, I think they’re right to be worried. I don’t think we’ll see a US style catastrophe, but a world in which people are over-leveraged, and prices fall, and a lot of people owe more than their house is worth, that is something that I would put 20, 30% probability on.”

Tom Davidoff, Economist, Sauder School of Business, UBC, excerpts from CBC website video interview, 14 Nov 2012

Agree completely with the substance of what Tom Davidoff says here, but I’d weight the risk of large house price drops at far higher than 20%-30% probability. Especially if by ‘large’ drops one means something in the region of 30%-off. We’d say the chances of that size price fall are over 90%, actually. We’re already about 10%-off and the unwinding has hardly begun. Can’t see any other ‘creative’ way in which the bubble can resolve itself. – vreaa

39 responses to “Tom Davidoff, CBC Video Interview – “I think we have every reason to expect there may be a problem with home prices. If you ask Mark Carney, we should be worried. I would put 20%-30% probability on a world in which people are over-leveraged, and prices fall, and a lot of people owe more than their house is worth.”

  1. 20-30%… The reciprocal number then requires the answering of where new money to finance sales is going to come from.

    We’re on track for [-6%,-4%] YOY in the winter. A few years of that will see negative equity guaranteed. For Davidoff to assign the probability he did requires future years’ sales to rebound from 2012’s (low) level.

    • Yeah.
      Who does one anticipate the buyers will be?
      Once the ‘prices-always-rise’ premise is challenged, who will overextend to buy at these stratospheric price heights?

      • There will always be some, but it will be a very few. Sellers will view it as a miracle when a sale happens. Things like corporate job transfers with subsidized move to cover loss of home value for example. It happens, but takes a certain individual and quite rare in total market. Thinking about that, Canadians in my opinion don’t move around as much as they do in the US, so that part of demand will probably even be less.


      • “Who does one anticipate the buyers will be?”

        Funny you ask that, ED – as, well… let’s put it this way… purely anecdotally speaking, of course – more than a few players were really, really, really counting on the CharterWhirlyBirdPeople. More so now than ever…

        Well, there’s no point prolonging the agony at this WeekEnd’s WestSide OpenHouses any longer than need be… so, without further ‘ado’ [or should that be “Adieu!”], here’s your Quote O’TheWeekend, DearReaders!…

        “It’s prudent for us to suspend it now that we have flagged what we think could be a problem.” – Pat Bell, BC ‘JobsMinister’ [LastNight, in Toronto]

        [G&M] – BC Suspends Visa Program After Suspicious Surge in Applications

        …”Six months after the B.C. government called for more authority to boost its intake of skilled immigrants, officials have suspended a program that fast-tracked visas for business investors following a suspicious surge in applications…

      • [cont]…

        …British Columbia’s provincial nominee program saw an “extraordinary” increase in the number of business applicants for a category that promised a speedy visa in exchange for a $125,000 bond. The spike came after the federal government placed a moratorium on its own investor and entrepreneur visa programs.

        The fast-track program, which provided speedy access to permanent residence status for investors who promised to start a business in B.C., was a potential embarrassment for the province’s capacity to handle immigration affairs.

        A review sparked by the increase in applications found an uncomfortable result – few of those B.C. nominees who had put up a bond were actually running a business as promised. Mr. Bell told reporters Friday that the fast-track program has a “disappointing” success rate of under 20 per cent.”…

        [NoteToEd: Pity the ministerial CopyWriter struggling to obfuscate this revelation – cynics will undoubtedly note that this story was deliberately buried in the AlcoholInfused AfterHours O’LateLateFriday evening’s pre-weekend MediaLull. Just between the two of us, I can already hear the WestSideRealtor™ Wailing&Knashing o’Teeth as, on an annualized basis, 800M in future transactions has just vaporized. NoteToSelf: This is SoBullish for Kleenex™.]

      • Not that many applicants, this was all over the Chinese language forums almost a year ago now. La belle province is still seen as fertile ground, for port of entry anyways…

      • Prior to the programme’s cancellation applications were flooding in at a Annualized RunRate ‘o approx 800… and as GoodOld Dr. Albert was wont to opine – “It’s all relative.”… or Relativity, or something like that. Multiply 800 by an average WestSide ask… and that’s still OneSizable Doesn’tFitAll ChunkO’Change, Dr. J. [even if, as a % of TotalTransactionVolume – 800~1000 sales doesn’t sound like a GameChanger].

        Clearly, I am still VeryVeryP***ed/in a snit re: JM’s revelation about MushroomRecords/Studio being bulldozed to make way for yet more ParticleBoardMonstrosities™. It would be tantamount to London’s Westminster City Council deciding to raze AbbeyRoad on the whim of yet another KuwaitiSheik… OhWait…

        …“I recently met one potential client who is a professor in Kuwait and I tried to extol the virtue of the U.K. property market,” Giles Beswick, a director at, a developer of accommodations for wealthy students, said by phone on Oct. 29. “He said ‘Look, you don’t have to convince me at all.”…

      • [BloomBerg] – King Beaten by Pound Gains as Foreigners Buy Homes: Currencies

        …”Foreigners are spending more on U.K. properties worth over 6 million pounds ($9.5 million) than residents are for the first time in a decade, according to Real Capital Analytics Inc. The most recent data on portfolio investments, which include purchases and sales of equities and debt, showed a 37.6 billion- pound net inflow in the second quarter, the biggest since 2009.

        While King and Prime Minister David Cameron are leading an economy poised to contract on an annual basis for the first time in three years, foreign-exchange strategists see no weakness for sterling. That’s because international investors are flocking to the U.K. as a refuge from Europe’s debt turmoil, pushing the pound higher this year against the dollar, euro and yen.”…

      • My old nemesis, there is little in this world that can convince me that tails wag dogs forever. Pulling away what some ardently believe they are entitled is unlikely to happen in less than a generation.

      • I thought for a second there that Cameron has annointed himself king. But I misread. Superb headlinesmanship.

  2. Meanwhile….
    “B.C.’s finance minister says he’s received advice from some of the smartest business minds in Canada and he’s optimistic the province will see modest economic growth next year.”

  3. 4SlicesofCheese

    On the way to work yesterday, I saw a bright colored flyer on the ground that said something like BIG SURREY CONDO SALE. I was tempted to pick it up and see what it was all about, maybe even take a pic and send it in here.
    When I left work, I saw the same flyer on the ground, guess no one else was interested either.

  4. This guy works with Tsur? Maybe he should tell Tsur to tell the public the truth!

  5. Real Estate Tsunami

    The Truth! Tsur can’t handle the truth!

  6. Real Estate Tsunami

    Here’s what I usually do when trying to predict uncertain outcomes:
    Assign a hypothetical probability to possible outcomes:
    I.e what is the probability that prices will fall by let’s say 50%? If you predict a 20% probability of this occurring, then assign this outcome a value of 10%.
    If you think that there is a 50% chance that there will be price drop of 40%, the value will be 20%.
    If you think that there there is a 30% chance of a 30% price drop, the value will be 9%.
    Note: The total of assigned probabilities must be 100%.
    Now add the values together 10+20+9 = 39%.
    This simple model predicts that there will be ~ 40% price drop.
    As is usual with statistical modeling, there are infinite permutations, so I usually play around with many scenarios.
    I’ve used this model in many business situations (I.e. for budgeting, where revenues and costs are uncertain, and I’ve found it reasonably accurate).
    So set up a spreadsheet and input your predictions.
    See what you come up with.

  7. “We saw a terrible consequence of that in the US, where there was more leverage amongst households, and more leverage on banks.”

    I think he means LESS leverage. Canada has MORE.

    “They spend a lot of time at the BOC thinking about ways they can creatively cut back on consumer debt, without popping asset bubbles.”

    That doesn’t make sense.

  8. Real Estate Tsunami

    This is Voodoo Economics.
    Not supposed to make sense.


    Here’s an article about the RE collapse in France…….while it was put thru GOOGLE translator and requires a little concentration to read, it gives you a chilling idea of exactly how fast and devastating it can be once reality sets in.

    Pending residential sales in Paris are at an estimated 30-40% of what they were in September of last year

    Sales collapse and then prices follow. And, Vancouver has nothing at all going for it at all, when compared to Paris.

    • “Pending residential sales in Paris are at an estimated 30-40% of what they were in September of last year”

    • Wow indeed, maybe Makaya can add some insight here. There are some big tax changes to wealth including property coming soon.

      I never understood, until recently, when the French call someone socialist, that means something.

      • Remember GW Bush’s speech in which he said he wanted every american to live the american dream (aka become a home owner)? His devoted admirer Sarkozy said exactly the same thing during his presidential bid in 2007: “I want France to become a country of home owners”. Same cause, same effect… The government got involved in the lending business: until recently, if you were a FTB, you could get up to 30% of your mortgage at 0%, courtesy of the generous tax payer. The were also a wide range of costly measures put in place to encourage people to “invest” into RE. Well, now the coffers are empty (they have been for a long time, in fact) the current government is slashing into these programs (Scellier, PTZ, etc.). What you’re seeing now, in terms of sales in Paris following these changes, is in fact no different from the low sales in Vancouver following the new lending restrictions. Prices in Paris are, to a certain extent, as stupid as Vancouver and “regular folks” can no longer afford to buy there. The thing is, we’re only talking about France RE because Paris is now affected, but the market in the rest of France has been going downhill since 2008 (in my region in the west, prices are already down 30% from the top and no bottom in sight yet). People in France are no less greedy and stupid than their Canadian cousins… (look at this chart:

        Regarding Hollande’s socialist’s craziness, don’t believe the big headlines coming from Newspapers in London’s City or Wall Street. French bashing is a very popular entertainment it seems. The 75% rate is in fact just a joke that will have so many ways to get around that nobody will be affected (besides, that 75% tax rate is only applicable on your revenue above $1million. Somebody making $2million would have an effective taxe rate of “only” 53%. Less than 20 000 people make that kind of money in France).
        Hollande is hammering the country with a round of tax increases (VAT, income tax, etc.), while slashing public expenses at the same time (which is not talked too much in the newspapers). He has no choice because of the EU requirements. The reason people are so pissed at him in the country at the moment is not necessarily because he’s raising taxes, but because he’s not doing (yet) the long awaited structural reforms that the country badly needs and is (finally) ready to accept. We’ll see what happens during his mandate, but I believe he’s going somehow in the right direction (surprisingly). He’s a lot less vocal than Sarko, but a lot more is happening behind the scene. (I could go on and on, but this is already too long!)

      • The major complaint I was hearing was on the wealth tax hitting property owners with low incomes hard if their holdings are in excess of 1MM or whatever. I had thought that might be putting a damper on the impetus to accumulate French real estate holdings.

      • Jesse, you are correct. There is a wealth tax in France for those who have assets above a certain threshold. That includes your RE holdings. The argument that some house rich / cash poor people are “unfairly” hit by this tax has been made before and used by Sarkozy to try to kill this tax. The fact is, these house rich / cash poor people never managed to get sympathy from the working class people who are heavily taxed on their income.

      • UBCghettodweller

        Makaya, actually, I’d like to hear more. Going on is good in your case.


      • Unfair is one thing, another is the tax’s effect on real estate purchases

  10. I did own a house in BC for ~3 years or so. Did not make a dime when I sold in late 90’s. I am not an economist. I just make observations. I now live in the US where my house is almost at par with my house hold yearly income. I have a lot of disposable money which I spend back into the economy. When I visit BC, It is difficult for me to imagine people having too much disposable income, at least in the area’s where I visit. Every thing is about 30-40% more expensive. A car insurance could be 100% more expensive, for example. I think there are more taxes. Milk, gas, designer clothing are quite a bit more expensive. What is the point of have an expensive house? What would happen if the prices of real estate were on a downward spiral. May be I am jealous to see people living in houses which are 3 – 10 times more expensive than mine depending if it is Delta or West End of Vancouver. May be it is the fear that I can’t afford to live in Vancouver, for sure, with my income and life style. Not sure what I want to convey……….

    • 4SlicesofCheese

      Met with a friend and her mom who moved to HK about 5 years ago, they were saying how everything is so expensive here now, the mom asked me have wages gone up? I smiled politely and said no.
      Even though they live in HK my friend realize how ridiculous house prices are here and said it can not continue.

    • bz6wp4 – if you do not mind me asking – I am just curious as where do you live in US that the cost of the house is equal to 1 year household income?

  11. Real Estate Tsunami

    Who the hell is Makaya, and how does French RE relate to Vancouver.

  12. Olga62 I live in metro Detroit. I live in Rochester Hills. The price of my house is perhaps around 225k or a bit more. We, wife and myself, are both professionals. I honestly do think that I will never make the same money and have technical satisfaction in Vancouver. This is strictly my personal opinion. Rochester has very good schools, parks, and negligible crime rate.

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