“We got married 1.5 years ago. My husband doesn’t believe in buying a place, so currently, we are renting in downtown Vancouver. We have combined saving of $150,000 plus some assets in gold. We have a combined household income of $115,000. Initially, our goal was to save one of our salaries but realistically it hasn’t happened yet. We plan to start a family soon and will need a bigger place. Our families have been pressuring us to buy a place as the prices are coming down. Since both of us work in downtown Vancouver, we don’t want to move to suburbs like Surrey where houses are cheaper but has longer commute. Do you think prices in North Vancouver will come down in the near future?”
– Jasmine, as relayed by Garth Turner, greaterfool.ca, 8 Jan 2013
There will be a subgroup of buyers who jump in at 10%-15% off, thinking we’ll have a re-run of the 2009 ‘dip and bounce’. They will be as severely punished for their purchase as any other buyers in the last 5 years.
Notice, too, that these advisors/buyers are very early ‘premature-bottom callers’.
– vreaa
Vancouver Real Estate Anecdote Archive 
http://business.financialpost.com/2013/01/11/bad-real-estate-investments-leave-couple-with-1-5-million-in-debt/
So many anecdotes in here. Good luck.
This example is a beauty, no doubt about it. Sure, the “shooter” glass may be half full, but the bottle is nearly empty.
FWIW…
By applying a 10% haircut to the value of the three properties (which isn’t completely out of line), their net worth drops by 70%. A 15% cut would equate to a >90% drop in net worth. At this point, they’d effectively be underwater if you were to factor in selling costs.
The author talks about this couple having gross “employment” income of $125k. It isn’t clear if rental income of say, $3000-4500/mo (from two properties + rental suite) is included in this figure. If it is, then these folks are realistically making only $35-40k/yr each on average, which makes me wonder how they were ever able to get approved for all these mortgages in the first place.
Remarkable story. Thanks for posting the link.
(We’ll likely headline it tomorrow morning).
Their $1.5-million of debt is 12 times their gross employment income.
That works out to a little over double what is supposedly allowed according to a Royal Bank calculator, assuming ZERO additional debt.
So our safe conservative Canadian banks DON’T adhere to a boring low TDS of 35% or whatever it’s supposed to be? I’m shocked!
I think we can say that we’ve seen enough of these kinds of examples (how many does it take?) to prove that there has indeed been lending to poor quality buyers by the “safe conservative Canadian banks”.
The banks don’t care who they lend to because they don’t take on any of the risk. The CMHC covers that for them.
Bally, whether CMHC covers these bad loans or not is going to determine how this crash plays out. Will CMHC (a) do due diligence and kick the loan back for bad paperwork? Or (b) act as a stealth bailout and swallow it?
I completely agree AG. I sincerely hope that the CMHC will be extremely rigorous in examining any claims but I suspect they won’t. I even looked at their website to see if I could figure out how easy/difficult it is to make a claim but all I could find was stuff talking about how straightforward the process was.
If I had to make a prediction I think it will go in three phases. First, claims on the rise – CMHC pays without blinking. Second, claims up a lot – CMHC gets more sticky about paying. Third, bank CEO’s bitch and moan to the government about how the CMHC is being difficult and how if the banks don’t get the money the economy is going to be even more buggered. Government caves in and covers the banks.
Deficit up. Taxes up. Banks happy.
What I hope will happen is that, in stage 2 and 3, someone will say to the banks ‘wait a minute, you’re the ones who made stupid loans. You deal with it’. Any politician who does that will get my vote.
Wonder where they bought in BC? These are the types of people who will have to sell soon. Imagine if rates rise just 1%, it’s all over for them. That and many others.
Things get really tough if prices fall just a little bit more. If one of them gets laid off, then it’s all over.
bullwhip, I think you hit on a really good point. So many people are living on the ragged edge of financial viability because of their wants and not because they don’t have gainful employment that is notably more than minimum wage. Any small changes an the party stops.
I see far too many of my friends in this situation right now. They save what they don’t spend (if they do manage to save) rather than spending what is left over after saving. There always seems to be some consumer good or service they really, really, want and can justify spending on… Although this is nothing unique to the bubble market, just something that is exacerbated.
Inspired by this article, I’m going to make a Francis Fukyama “End of History” – style bold prediction here.
All Bull talk from here on is just steaming eponymous digestive by-product with value only insofar as it can be used as fertilizer or projectiles to aim into whirling turbines.
This market will crash BIG. Only an army of 10,000 helicopter foreign buyers a year could save it now, and the prospects of that happening are nil.
It is over. Finally, we are free of this madness. Time to mop up tears, pick up the pieces of ruined lives and clean up this criminal mess.
RIP the Greatest Bubble of Them All, Vancouver 2002 – 2012. You will not be missed.
We have a hunch you may be correct with your bold prediction.
Formerly…great description of SHTF. And, I’m calling it too, the party is officially over. No way to avoid this hangover.
Coaxing the metaphor along a little more leads me to conclude that all the hot air… or steam… rising from the words of bulls… will not reinflate this inflatable. It’s strictly one-time-use only.
Should have read the description on the packaging beforehand, pumpers.
I think we have passed the “hunch” phase into the realm of certainty.
On the ground truth:
Open houses stats: last weekend Vancouver West 127, Richmond 38
This weekend Vancouver West 260, Richmond 85
Looks like panic to me.
It felt the same in January 2011 – listings were growing and sales evaporating. Then the planeloads of HAM buyers landed which triggered a rush into the market by local Asian speculators (I think). Anyway, the market bounced – into the stratosphere. It might happen again – too early to know…..but we’ll have a better clue after February 10 – Chinese New Year. If the market remains flat and HAM does not show up, then this market is, er, cooked.
I agree too. Real estate prices are subject to the most impact at the margins. The econ 101 theory of diminshed supply being supportive of prices (an idea that is currently being postulated by the Realtor crowd) is utter nonsense as it is based on traditional supply/demand theory.
Supply and demand theory does not apply to falling real estate prices coming off a bubble top nor does it take into account sentiment changes in the market.
To understand why you need only know that there are ALWAYS some people who MUST sell. These sales can become dominant in a limited supply environment and yet they do (without remorse) become the drivers for falling prices as the buyers who exist begin to aggressively underbid the market.
We all know how new prices are set. They are determined by present sales prices…not volumes. The concept of vendors withdrawing from the sales landscape and thus carrying the market higher is therefore a non-starter and does not apply. We are not talking widgets here.
Housing is a different animal altogether. It is going down regardless of how many people participate. It will fall harder if supply is limited.
What a horror story of leverage for little benefit. Yikes is all to say, and my bet is versions of this replayed all over.
Great story, unfortunately I think there are thousands of people like this in BC-those with mortgage debts approaching $1 million (or exceeding), lots of credit card/loc debt and little, if any cash. This is going to be terrible on the way down…
I, for one, am hoping to pick up a relatively new and cheap motorcycle as the market tanks. If the boom-bust cycles in Alberta are any indication, people dump their toys pretty quickly when the market turns. There will be oh so many tent trailers and boats to choose from.
Yes there will be. Keep your powder dry. Asset bargains are now on the near horizon and those not prepared for the moment do not get to buy them.
Everything is insane in this story, but what shock me the most is the $46K on credit card. Lots of hardship coming to this family…
And just to think, Makaya…6 short months ago they were held up as geniuses by family, friends and the media. They are complete and utter fools to the rest of us of course. You just can’t help some people. Let reality punish them now for their ignorance.
waw, awesome
If I “have to” bet on a SFH in Greater Vancouver, North Vancouver is a “safer” bet. Prices didn’t go up as much as E.Van/Richmond/W. Van. Also a standard lot in N. Van is 2x that of E. Van. At least you have a front/back yard to speak of.
Again, it is all relatively speaking, and it comes with 15 pages of disclaimers.
Very timely anecdote.
My cousin and his wife are in a serious jam at the moment. The brother in law is a realtor/RE investor. He is really twisting the arms of this couple into buying another place as prices have “dipped”. My cousin doesn’t want any part of it and is trying to tip toe around the issue as delicately as he can. His wife, on the other hand, thinks it is a great idea and could be a win-win for everyone involved. They have been arguing about this pretty much every day for the last 2 months. Ughh… I am starting to wonder if their marriage is in jeopardy now.
If you have extra money, I would not invest in real estate. If you have to borrow to buy that investment condo/house, I would DEFINITELY not invest in real estate.
If you think about it, it’s not worth the hassle, right now, and financially it makes no sense. If you have cash to buy a 275,000 condo, assuming you can rent it out for 1000 a month, that’s a yearly return of only 4.3%. This is not including all the transaction fees, maintenance costs (including maintenance fees), property taxes the headache of finding a tenant, etc. Assuming maintenance costs of at least 300 dollars a month, and property taxes of 1500 a year, your yearly return is going to be around 2.5%, or less. Now, compare this to buying stocks. Many stocks give an annual dividend yield of more than 2.5% without all the headaches. Sure stocks can drop too, but you can sell quickly if you’re worried, and transaction costs are minimal. This is all assuming that of course, you have the cash to buy a condo, which most people do not. If you have the 30,000 downpayment, much better to diversify it in other asset classes, then to take out a loan to buy a condo.
Don’t kid yourself, stocks are just as risky. Enron just gave us a small peak at what’s really going on under the hood. If that isn’t enough, the typical human stands zero chance against the likes of HAL or Watson who can either ramp or demolish any stock within nanoseconds of a market moving event. If there is another 2008 style meltdown, you won’t be able to get your money out in a timely fashion (if at all) when stock markets, banks are closed and brokerage accounts are “Corzined”. If, by shear chance, you just happened to be in the right place at the right time when the next flash crash occurs, the powers that be will just cancel the trades (as they have done in the past with regularity)
There are plenty of safe investments that pay out a pretty much guaranteed 4.5%+ after tax return if you have over $100K to work with and don’t need instant liquidity.
Observer, what kind of things were you thinking of? I’m genuinely interested because I want to decrease my risk profile. Thanks!
That is not in the cards Bullwhip. The theory of an epic crash is fiction. All companies still retain some value even at the very worst of times. You are better off owning solid dividend paying companies than holding debt instruments if the worst were to occur. Investors understand this and will be loath to sell even in a crisis. Markets will bounce back quickly should a big crash event happen.
@ an observer
I think most investors are having the wool pulled over their eyes when told that their investments are “safe” or “guaranteed”. We’re all entitled to our opinions, I guess…
@ Farmer
Stocks dropped nearly 60% from Oct ’07 to Mar ’09 with much of the decline occurring in a matter of weeks during the fall/winter of 2008. It was almost lights out for this ponzi, house of cards market. While the markets have managed to recoup most of their losses, it took nearly 4 yrs, many tens of trillions in monopoly money and lots of rule breaking and/or accounting wizardry to do so. IMHO, our central planners will have a much more difficult time maintaining the firewalls the next time a financial crisis erupts. In the meantime, sit back, collect your dividends and hope like hell no one peaks behind the curtain, falls asleep at the wheel or trips and falls on something. Like Vanc home values, stock prices can only go up over the long run, right?
Stock market corrections have been a regular part of life on the markets since the beginning of time. They are highly anticipated by some people for the simple reason that the long term trend has always been up. Notwithstanding that some corrective periods are longer and more painful than others it has always paid to hold good companies that throw off income and dividends. Note that I said good companies. If things change you sell them and move on. Are you trying to suggest that this time is different?
@ Farmer
Yes, the next time will be different IMHO.
The exponential growth in trading volume in leveraged/inverse ETF’s suggests markets are now dominated by short term speculators, not long term investors. As if this wasn’t alarming enough, HFT accounts for the lion’s share of all stock market transactions too.
While many of the talking heads compare the events of 2008 to that of 1929 or even 1987, I tend to disagree. I do not believe what occurred 4 yrs ago was one of those rare, “once in a lifetime” anomalies, but rather a sample of the extreme (and likely increasing) volatility we all better get used to going forward. We now live in a world where a company like AAPL could be out of business in a few years if a few wrong moves are made. For that matter, the fate of entire nations is literally rests in the hands of just a small handful of very powerful individuals. Things are moving at warp speed now. Those that choose to ignore this could be rendered obsolete overnight at the click of a mouse (or the swipe of a finger).
@an observer
“plenty of safe investments that pay out a pretty much guaranteed 4.5%+ after tax return if you have over $100K”
Wow. I am all ears. Really. Either you are trolling or you have a very unusual understanding of what “safe” is. Or do I?
Hold your Gold! Buy RE in 2017!
“Overvaluation is especially marked in Canada, particularly with respect to rents (78%) but also in relation to income (34%). Mark Carney, the country’s central-bank governor, who is soon to jump ship to join the Bank of England, where he takes over from Sir Mervyn King in July, may have shown good market timing with his move to London as well as a deft hand in negotiating his lavish remuneration.”
–The Economist, January 12, 2013
http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home
Carney…. at least he has the perfect name. “Step right up, suckers!!!!!”
😉
The north shore definitely still has a way to go before it bottoms out, but I dont think it will drop as low as parts of East Vancouver. I honestly always thought that North Vancouver was under priced when you compared it to what people were/are paying to live on the east side.
It rains a lot more on the North shore. And the commute…
Don’t kid yourself. North Vancouver is massively overpriced just like the rest of the city. Did you know you could have bought a private home there for under 100k as recently as 1985?
Just try that today. NV is in deep trouble.
Gemba
IN REAL-ESTATE – go to GEMBA. Go to the display suite.
This article is about a Japanese word.
Genba (現場 genba?) (also romanized as Gemba) is a Japanese term meaning “the real place.” Japanese detectives call the crime scene genba, and Japanese TV reporters may refer to themselves as reporting from genba. In business, genba refers to the place where value is created; in manufacturing the genba is the factory floor. It can be any “site” such as a construction site, SALES FLOOR or where the service provider interacts directly with the customer.[1] (http://en.wikipedia.org/wiki/Gemba).
In 2008 I was seriously looking at buying a condo in Coquitlam, Port Moody, Burnaby area. Many condo towers were offered for pre-sale or just finished. Inventory seemed high. When I went to view their display suits the RE agents were very aggressive. One lady agent all of 90 lbs literally blocked my way to the exit. ‘Make me a deal’ she exclaimed! Here is my office, make an offer, sign now! The point I am slowly making here is we that are bombarded with statistics from both sides of the border – bulls and bears. One area left out is the smell test. Go to Gemba – go to the condo display suites and get a feel on how the listing agents are behaving. This will tell you if there is a price reduction happening or not. If they directly (sometimes coyly) suggest ‘make me an offer’ you know prices are dropping. The more condo project agents discuss price reductions the greater the drop in pricing forthcoming.
Wow, this is all starting to sound really , really bad. I drove by at least 5 condo developments in various stages of completion some haven’t even broke ground yet. This was just on my way to and from errands. If I stood on a rooftop and counted cranes I would still be up there. Common sense tells you that there is no way these could all be matched up with buyers at the current price points. Bloodbath IS a good term for whats about to happen.
Yea, 2nd ave in Vancouver is going to be the new ground zero. My fav though is the carwash beside Opsal that refuses to move. I spoke to the cashier yesterday while getting my car washed and he said the developer tried to buy him out but then there was no location he could buy to put the car wash. $22/car, 6 workers (at least half illegal I’m sure); the owner knows you can’t make a moneymaker like it anymore with overvalued price of land. It’s my fav because the industrial vacuums they use are a lot louder than shop vacs and there are two always turning on and off…right below the patio’s of the tower! Just wait for the complaints!
A new folk hero is born.
It’s the “Century Hand Car Wash”?
Under construction is climbing again, and this will lead to a lower level of activity in 2-3 years’ time unless population growth increases in that time.
For real data nerds, check out the “under construction” activity in Victoria and Kelowna from CANSIM data 027-0048, compared to 2007 levels.
I graphed under construction here:
http://twitpic.com/bueroc
Wow… that’s quite the rate of growth, if I’m reading correctly.
(there seems to be some ambiguity with the y axis labelling (two y labels but only one line for each city; or am I misreading?))
LHS=left hand side
Of course, thanks.
Lloyds TSB reports in their 2013 Second Stepper report that homeowners are finding it impossible to move to a second property due to buying high and now being trapped in negative equity. Can’t find a link to the new report which was just mentioned on radio, however, here’s a story from August of 2012 reflecting the same issue in the UK: http://www.bbc.co.uk/news/business-19372268
How long until these problems break MSM here?
pffft! … http://tinyurl.com/2eelsnd
lol! … http://tinyurl.com/b6ckn29
Lessons from South of the border. Just came across this article on Seekingalpha that is worthy of a look for those interested in knowing our own future.
Housing in the US is now more affordable than any time in history.
http://seekingalpha.com/article/1106951-housing-today-is-more-affordable-than-at-any-time-in-history