Vulnerable

– image from ‘Lamborghini collides with fire hydrant at downtown Vancouver intersection’, by Harrison Mooney, Vancouver Sun, 30 May 2017

What has this got to do with Vancouver RE? you might ask.
An excellent question, dear readers.
Ok, so the references are oblique, and we don’t fully understand them ourselves.
And, while we’re talking about elusive understanding, we don’t understand why anybody would spend a gazillion dollars to buy (lease?? test drive???) a car that is shorter than a fire-hydrant is tall…
I mean, think about it.. the fire-hydrants are looking DOWN on you when you drive past lying down in that thing…
Nostalgia for go-karts may have something to do with it.
We’ve never understood the appeal of these cars.. their engines sound like sewing machines..
Anyway, believe it or not, but this incident became a full article in what’s left of our city’s only newspaper.
Slow news day?
Back to possible RE associations:
Going too fast. Hubris. Unexpected obstacles. Superficially powerful but actually very fragile. Look at me I’ve got lots of money. Vulnerable. Walk away from deposit.
– ed.

Toronto Bursting? – “People need to ask themselves very carefully, “Why am I buying this house?”

During the first two weeks in May, according to preliminary data from Toronto Real Estate Board, home listings surged 47% from the same period last year even as sales plunged 16%. The average selling price dropped 3.3% from April – and this, after a 33% year-over-year spike in home prices in March and a 25% surge in April. Something is happening to Toronto’s blistering house price bubble.
—
It comes after Bank of Canada Governor Stephen Poloz warned in April that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that “It’s time we remind folks that prices of houses can go down as well as up. People need to ask themselves very carefully, ‘Why am I buying this house?”’
—
“We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, told Bloomberg. She said they didn’t get a single visitor to an open house over the weekend. “They don’t want to close anymore.”
“Definitely a perception change occurred from Home Capital,” Shubha Dasgupta, owner of Toronto-based mortgage brokerage Capital Lending Centre, told Bloomberg.
“In less than one week we went from having 40 or 50 people coming to an open house to now, when you are lucky to get five people,” Case Feenstra, an agent at Royal LePage Real Estate Services Loretta Phinney in Mississauga, Ontario, told Bloomberg. “Everyone went into hibernation.”
—
In Canada, the theory has spread that real estate values can never-ever go down in any significant way – on the theory that they always go up – because they didn’t take a big hit during the Financial Crisis, and because the prior declines have been forgotten. So optimism about rising home prices had been huge. Now weekly polling data by Nanos Research for Bloomberg is showing the first signs of second thoughts. Two weeks ago, the share of people saying home prices would rise in the next six months was a record 50.1%. The following week, it dropped to 47.7%. In the most recent poll, it dropped to 46%.
But those who are able to sell at what appears to be the very tippy-top of the market are not complaining. Bloomberg cites business school professor Michael Hartmann who put his north Toronto home up for sale on May 17 sold it on May 22 for C$1.65 million, C$10,000 above asking price. He and his wife are planning to rent and see.

– from ‘All Heck Breaks Loose in Toronto’s House Price Bubble’, Wolf Richter, 24 May 2017

Prices haven’t started to drop yet, so can’t really say… But, could be.
I particularly like the BOC Governor’s suggested question from April: “People need to ask themselves very carefully, “Why am I buying this house?”
Exactly! Regular readers here will know we’ve been discussing this point for years.. If even part of the answer is “because the price will go up”, the buyer is a speculator.
– vreaa

An Economic Boom “In All The Wrong Places”

The Bank of Canada is keeping its key interest rate unchanged at 0.5 per cent as it weighs the clashing forces of falling inflation and a surprising burst of economic growth.
But the central bank warned Wednesday that both factors may be temporary.
The torrid growth in the first quarter – now on a pace to hit 4.7 per cent annual rate – will be followed by “some moderation” in the April-to-June quarter, the bank said in a statement. In April, the bank had forecast 3.8 per cent GDP growth in the first quarter.
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Wednesday’s decision marked the 15th consecutive time since July 2015 that the central bank has left its key rate unchanged. Most economists don’t expect the bank to begin raising rates until at least early 2018.
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“The main message is that the bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them,” Bank of Montreal chief economist Douglas Porter said.
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The bank also acknowledged the hot Ontario and B.C. housing markets, noting that recent government efforts to stop speculation and risky borrowing “have yet to have a substantial cooling effect.”
—
“The Bank of Canada sees an economic boom in all the wrong places,” CIBC economist Avery Shenfeld said in a research note.
– from Bank of Canada holds rates amid boom ‘in all the wrong places’, G&M, 24 May 2017

Three-quarters of Canadian mortgage holders would be unable to manage a modest increase in interest rates.
Three. Quarters.
– El Ninja, on VREAA, citing this Vancouver Sun report

I’ll just leave this here:
An economic analysis released on May 4 by the Desjardins Group predicted that the central bank may increase its benchmark rate by 0.5 percent per year starting in 2019, bringing it to about 2.5 percent by 2021. According to the Desjardins paper, that could mean a two-percent increase in variable and five-year fixed mortgages.
“It will make it even more unaffordable to buy a property,” Kadi said about the prospect of higher interest rates.”
– BlaMmO, on VREAA, citing this Georgia Straight article

—-

Cheap money plus good story leads to housing bubbles.
Looks great on the way up, everybody loves it, especially the banks and the politicians. And owners, RE ‘investors’, Home Depot, kids with new trucks drywalling, [any poor value local item dependent on wealth effects].
‘Wealth’ is created out of thin air with every mortgage created. (Free money!)
Bonus extra level of juice if you’re importing some of the downpayments.
However, all pretty much a ponzi, and when you run out of air, what then?
The whole process in reverse really, really sucks.
– vreaa

A Few Charts

– from mybudget360.com

Sometimes charts say it all.
– ed.

A Reader’s Perspective

This via email from a reader, who prefers to keep their name out of it, so here shared anonymously:

“I like reading your blog. Thanks for the perspectives.

The perspective that the Vanc prices are a “bubble” and “will crash”, implies that “it is all froth, no substance”, and there are no fundamentals behind what is happening.

I like reading your articles. However, l remain unconvinced about lack of fundamentals. Such as:
Globalization (ie sort of free movement of capital, people, products, information).
Low interest rates (ie:prices are about selling mortgage payments).
Low Canadian dollar make Cdn “cheap” (tanked to support oil exports).
Vancouver is a safe haven for rich people (ie: income tax evasion, no extradition, free education & health care as no income taxes).
BCLiberals and Fed’s are wealth managers for corporations/real estate & construction industry/etc. (ie: bought and rewarded by).
Property ownership is a right (ie owners and buyers can sell/buy how they like; just like for your car/used computer/etc).
Vancouver and area is a nice place to live. (for many reasons, not perfect, but nice). Some net 50,000 people moving here per year creates demand for housing.
Declining inventory of detached homes relative to all inventory (gobbled up for condos/etc).
Prices will not crash and stay low; rather they will fluctuate, but generally will follow inflation as minimum.
Vanc is not some industry dependent town that booms and busts; it has it’s own appeal/demand.

Not to say there are not issues. There are:
Stalled incomes.
Tax unfairness.
Public policies not in Cdn public interest.
Hijacked democracy.
Unaffordable housing.
Other sectors crushed by unaffordable housing.
And many others too in education, infrastructure, congestion, cultural.

Our governments can/should be doing more:
Buying up land in advance of transportation development (that is then allocated to public housing at cost, like how Whistler does; keeps cost lower).
Advancing mortgage money at Provincial rates.
Builds are done at cost, and exclude developers who add 20% profit to cost.
Rules to keep this housing in “affordable housing pool” (not allowed to be sold for “market”; see Whistler model, or Coop model?).

As a taxpayer – l am not in favour of subsidies. One taxpayer paying another kind of taxpayer. Not fair. And then tax payers are subsidizing the profits to banks, land developers, developers, speculators, etc. Not fair.

We need to shake off the concept that the free market solves social policies. The evidence is they don’t. The free market (made up of banks, developers, real estate industry, construction industry) can never ever sell housing that is affordable – not when their goal is “what the market will bear” or “sell to the highest bidder”, and maximize profits. Only a controlled gov’t intervention, at zero cost to the tax payer is fair to both taxpayer and those in need of affordable housing.

That there will be a crash? I don’t think so. Not permanent. Too many rich people/corporations depend on prices where they are. So does the gov’t who is both the silent partner (makes money) and wealth managers for these industries.

I think looking at what is “fair” for the most people, and “good” for all constituents, would be a more compelling perspective to effect helpful change on affordability. My two cents.

Regards.”

Thanks for these thoughts, Anonymous Reader.
I have many thoughts, but I’ll share just one:
Market participants (whoever they are) “depending on prices where they are” have never prevented market crashes.
– vreaa