“I’m STILL getting emails from clients who believe the magic way to make money is to invest in real estate.”

“I’m STILL getting emails from clients who believe the magic way to make money is to invest in real estate. One client emailed just last week and asked what I thought about her buying a property in some small-town in Ontario, renovating it and flipping it. Um, what? Bearing in mind they currently “own” a principal residence in the Okanagan which I’m pretty sure they have ZERO equity in (they took out all the equity with a HELOC to finance their struggling business). But they still have this idea that if they just buy the right property and renovate it (with very little down, the DP will come from RRSPs) it will be a quick flip and they’ll be in the $$$. It took me days to figure out how to write a tactful reply which didn’t include phrases like “are you out of your mind?” and “what have you been smoking?”
– pricedoutfornow at VREAA 20 Dec 2011 9:46am

“I know, I know; I’m unrealistic expecting more than a 10% correction”

“I’ve had to endure drivel from people I work with in Vancouver who:
1. bought a house 5 years ago in just outside Shaughnessy for $650k which is now worth… wait for it… $2 million
2. a house in East Van. which is ~90 years old and bought 4 years ago for ~270k is now worth ~$800k…
… I know, I know, I’m unrealistic expecting more than a 10 % correction”
– atomic at greaterfool.ca 17 Dec 2011 5:44am

“Affordable Housing Plan” – Apartment The Size Of Two Parking Spaces For $850 Rent Per Month

Life in an apartment the size of a double parking space will be on full display today as the public gets its first inside look at the mini-living going on at the restored Burns Block building on West Hastings Street in Vancouver.
Boasting 30 micro units described as the smallest rental units in Canada by developer Reliance Properties and partner ITC Construction Group, the Burns building is part of the city’s ongoing affordable housing strategy.
Coun. Kerry Jang told The Province Sunday that the low-rent suites – which range in size from 226 square feet to 291 square feet and rent for an average of $850 a month – were designed with modest income earners in mind.
“What we are trying to do as part of the affordable housing plan and housing in general is to provide a range of housing,” he said. “Because right now, if you rent a place, it’s over $1,000 and that’s beyond people who are making $10 or $12 an hour.”
The city contributed a $50,000 grant to fix the face of the 100-year-old heritage building, $144,000 in property-tax reductions and 62,000 square feet in heritage bonus density.
…
“It’s for folks who need to work in Vancouver but can’t afford to live here,” Jang added. “They can live in Vancouver, go to work and save money on cars and all that kind of stuff because they don’t have to drive in so it makes a big difference.”
…
Wendy Pederson, researcher and organizer for the Carnegie Community Action Project, decried the renovation of the old hotel as gentrification, adding people living on welfare or on old age pensions won’t be able to afford the rents even at $850.
“In my view, it’s a crime that the last housing before homelessness is being converted into micro-lofts,” she said.
“Those rooms used to rent at welfare and old age pension rates, and now the Downtown Eastside is being gentrified by the upscaling of these hotels. It’s upscale by our standards,” she said, adding the pre-reno rents were around $375.
“We don’t have enough social housing, and we’re losing our [single-room occupancy] hotels to upscaling like the Burns Block.
“The city is ignoring gentrification as a cause of homelessness,” said Pederson. “Many residents in a very full hotel were evicted [in 2006] by the owner who wanted to empty his building.” … “That owner made $1 million flipping it,” she said.
– from ‘Living small on West Hastings’, The Province, 19 Dec 2011 [hat-tip jesse]

As we’ve said previously: “Calls for ‘affordable’ new-build housing are almost all band-aid solutions. They largely result in relatively low quality product at proportionally roughly the same elevated costs as all other local properties.” [16 Dec 2011] – vreaa

Price Drops Will Result From Market Forces, Not Policy Change

“If we all agree that lowering the value of current homes is not a realistic policy option, then it’s critical we get more creative in order to increase housing affordability.”
– Daniel Fontaine, Editorial, 24HRS, 14 Dec 2011. Mr Fontaine is “former Chief of Staff to Vancouver Mayor Sam Sullivan”
Hat-tip for the above link to ‘4SlicesofCheese’, who adds:
“No, we don’t all agree, that’s the problem right there. Policies like mortgage relaxation led us here, why should we not use policies to address this as well?”

Policy makers are very reluctant to take any steps that lead towards price reductions:

“At a public debate, both Robertson and NPA leader Suzanne Anton said neither would put limits on foreign investment, which many observers believe is behind skyrocketing real estate prices in Vancouver.”
– from 24hours, 13 Nov 2011

“…government’s role should be to modulate severe market swings and not precipitate them. Shocking the market has potential to wreak havoc on households, especially those who may be over-leveraged or recent buyers.”
– Sandy Garossino, independent candidate for City Council in recent elections, VREAA, 11 Nov 2011

“This is a tough one. As a home-owner I do not want my home to drop too much in value but that said a correction is definitely needed in our city regarding real estate prices.”
– Joe Carangi, NPA City Council candidate, VREAA, 2 Nov 2011

“People who already own homes would be unfairly hurt by a policy that would lead to a drop in real-estate values. If the current homeowner has taken out a mortgage for say 90% of the worth of their home, and values then drop by 10%, the homeowner has lost 100% of her or his equity. I am strongly supportive of policies that would bring new housing to market at below market cost.”
– Tim Louis, COPE City Council candidate, at VREAA, 11 Nov 2011

—
The longer speculative bubbles remain inflated, the greater the number of citizens who get on board before the inevitable crash.
Humane policy makers with a Martian perspective (complete outsiders) wouldn’t hesitate to deflate the bubble instantly, to stop it doing further damage. To do that, they’d simply have to cut off the fuel supply (cheap government backed financing). The bubble would pop; prices would crash; citizens could then get on with sorting out a sensible housing policy amidst the sensibly priced rubble. Vancouver wouldn’t be bothered by another speculative mania in housing for a generation.
In the real world, policy makers shuffle around woefully inadequate ideas aimed at, they believe, decreasing the overall pain.
Calls for ‘affordable’ new-build housing are almost all band-aid solutions. They largely would result in relatively low quality product at proportionally roughly the same elevated costs as all other local properties. Those buying into such schemes would be the most vulnerable to the coming inevitable price deflation.
In the grand scheme of things, though, it doesn’t really make much difference to the outcome whether policy makers step aside or shuffle around paper while it all plays out. As they’re paid to do stuff, we suspect we’ll all be shown a good deal of shuffling.
– vreaa

PostCardsFromTheBlastRadius #14 – Windsor – In the ‘RustBelt’ The RE Deals are…. “FingerLickin’Good”‏

Tecumseh Road, Windsor, Ontario, Summer 2011
—–
Photos and commentary for the ‘BlastRadius’ series by ‘Nemesis’.
[Images Ⓒ​2011 ‘Nemesis’ – All Rights Reserved]

“I know a couple in Lausanne, Switzerland, whose combined income is certainly over $500k. They rent. Many Swiss cities are renter cities.”

“I know a couple in Lausanne, Switzerland, whose combined income is certainly over $500k. They rent. Many Swiss cities are renter cities.” – Jeff Murdock at VREAA 9 Dec 2011 8:19am
—–

“The Swiss have a very well balanced real estate system. They live in a country with limited land and thus, the ownership and use of land is somewhat regulated and it is an asset to be consumed and not “invested in” or traded. This creates a very very stable market. You’ll see that the value of Swiss real estate has barely gone up in the past 20 years which is not so bad in a country where there has been almost no inflation. However, here are some items that keep their real estate in check.
1.) 80% of people rent. It is an asset to be consumed and it’s value is derived from the rent.
2.) Rent is a factor of property value/interest rates and is controlled and regulated.
3.) 100% of the maintenance risk lies with the tenants. Costs are allocated throughout the year in addition to the base regulated rent. In the event of a major item – it is split up between the tenants.
4.) If you actually own, you can deduct your interest – however- even if you have no mortgage (and thus no deduction) you also have an income inclusion which represents hypothetical rental income to yourself. You have to impute rent at say 4% of the property value each year. This is added to your income and you pay income tax on it.
5.) Foreign ownership restrictions are everywhere. And Foreigners have restrictions on the real estate that they dispose and they only allowed to sell for a gain in restricted circumstances.
—
A few other Swiss things to note. The pensions are very very rich and well funded. Up to 30% of your income each year goes into the pension system. Thus – pension funds are massive and retired people are very very wealthy. Where does the pension money go? To own the real estate buildings that people rent – since this is guaranteed and almost riskless cash flow (cash flow is risk reduced because rents are hardwired to property value and the maintenance and repair costs flow to tenants).
—
Another item is that since all the properties are owned by pension funds and insurance companies, you will never be asked to move – – in fact – most Swiss never move. It is too expensive (when you leave – you must return the property in the original condition you received it – no such thing as normal wear and tear. Plus – your movers are not cheap either – over 100/hour plus equipment rental costs).
—
All this means that Real Estate fulfills its function of providing housing stock as a consumable. Cities are priced in a rational way and so is real estate. Owning v. renting is not really much different in terms of risk. Vancouver could learn a lot from this. I am a strong advocate of implementing some type of limited foreign ownership restriction. Where you are dealing with a limited resource – you need to have the resource used for the benefit of the operation of the city – and not some type of traded commodity.”
– ZRH2YVR at VREAA 10 Dec 2011 8:11pm
—–

“I thought it was funny that they make $500,000 a year and still have to rent – mega lol”
– tmda commenting at RETalks 10 Dec 2011 7:53am on Jeff Murdock’s comment above
—–

Thanks to ZRH2YVR for the description of the very sensible Swiss system.
In Vancouver we do things very differently, of course. Ownership culture is entrenched. The speculative mania has caused each and every property to be viewed at least partly as a financial instrument.
– vreaa

Very Full House – Recent Bankruptcy; Borrowed Down-Payments; HELOC Spent On More RE; Cash Flow Negative Rental; 2nd Mortgage On Friends’ Property; “Throwing Away Money” On Rent; “Would Like A Place To Call Home”.

“We sold our big, two story, 4 bed Kelowna home. We made a profit of only $30K after selling for $100,000 lower than its highest appraisal value just before the 2008 drop. Unfortunately we [had] refinanced and spent the equity on, you guessed it RE!!!
We moved closer to Vancouver not by choice, but for job transfer. We are renting a house for $1900/mth. My husband hates it and feels we are throwing money away!! If we were getting this place cheap, then perhaps it would be ok and we could sock away the savings!!!
We know there will be a market correction, but we are still looking to buy something in the $500,000 range-rancher or something that will be marketable in future! We only have 10% down, but payments will be less than $1900/mth. We have to borrow the 10% down from family (good rate/pymt plan) since we declared bankruptcy last year. Long story but got caught in the real estate speculation hype and lost everything! Well not everything, we have a condo in Kelowna we can’t sell, but at least it is rented!! Mtg is $312K, prop value $300K. Cash flow is negative marginally. We also lent money from our home equity during the boom, when we refinanced. They have defaulted and have not paid us back. We hold a 2nd mtg on their property in St Catharine’s which is not worth much now!!!
Does it make sense to buy? We hope to be here 5 yrs. We are in Langley where we feel any correction would be much lower than in the city. We would be happy to break even and at least enjoy our own place for a bit. We have kids that would like a place to call home!!”
– Sarah’s story, as told by e-mail to Garth Turner and featured at greaterfool.ca 11 Dec 2011

Stop them before they borrow again!
Shouldn’t these guys by now have signed a “keep me out of the casino” voluntary exclusion request?
Just to read the story is difficult and exhausting; the living of it must be mind-blowingly hectic.
Remember when people would buy or rent, and then get on with their lives?
Speculative manias offer people fertile terrain in which to screw themselves up.
– vreaa

Architect Bing Thom – “The city needs a strong vision to avoid becoming a tourist resort and a place to park money.”

“We rely on each other, so it’s really important for us all to engage in dialogue,” emphasizes Thom. Which is why – even though friends warn him that he may be alienating himself from potential clients – he has rallied publicly against the now-defunct bid for a casino at B.C. Place and the “god-awful” Canada Pavilion built in the city during the Olympics.
“Actually, I’m a very optimistic person, so it’s not that I go out of my way to be controversial,” he says with a boyish laugh, throwing up his hands. “It’s just that we have to earn democracy every day, which means caring about your community. And if you care, it’s your duty to speak up.”
Currently irking him is the “issue” of Metro Vancouver: to his mind, Vancouver needs to accept that there are no more boundaries between it and the wider metropolitan area, and to be thinking and acting regionally – especially in terms of economic development – as well as globally. “This little paradise is only here because we simply exported all the dirty stuff to the developing world such as polluting heavy industries and unwanted toxic wastes,” says Thom.
The city needs a “strong vision,” he believes, to avoid becoming “a tourist resort and a place to park money.” For example, as an architect who builds “homes – not commodities to be traded or vertical gated communities,” he applauds social-housing policies that mix people of different incomes in the same building. “It’s a way of building a real community,” says Thom, who lives nearby in a condo – that he designed himself – with his wife Bonnie, whom he met at high school in Kerrisdale.
– from ‘Lunch with Vancouver Architect Bing Thom’, BC Business, 7 Nov 2011

Land: Not Making Any More; Don’t Need To

How much of the earth’s surface would it take to provide each and every one of the 7 Billion people in the world a Vancouver-standard 33ft by 122ft lot?

Preposterous thought, right?
We’re packed into the planet so tight as it is, there certainly isn’t enough space on the globe to do it, so we’d have to be thinking of using the moon, and Mars, right?

One of the perennial bull arguments for never-ending future price strength is the old “They’re not making any more land” litany.
Well, apart from a few rare land reclamation examples, this is indeed correct. But it has also been correct through all prior RE booms and busts.

We’re so used to seeing images of busy streets, packed highways, towering condos, that we’re certain it’s all getting extremely crowded.

So, how much space would it take to provide every person on the planet with a standard lot?
Turns out it’d take a square of 1000 miles by 1000 miles, about the size of the square on the North American map below.

[*Note: Before civil engineers, town planners, and Habitat for Humanity folks chime in, let’s make it clear that we are not advocating for a community like this in the midwest. And we do realize that much of the world’s land is uninhabitable, etc, etc… but… you get the picture. – vreaa]

[hat-tip to Harper’s Index, where a line item about how the entire world’s population could be packed into Texas at the same density as NYC (10m by 10m each), got us to do the math above.]

Related posts:

“Vancouver has a finite amount of land. The prices are only ever going to go up.” – Douglas Coupland, 2000
VREAA 10 Dec 2012

Avocados and Christmas Trees – Vancouver Land Use; ALR; Food
VREAA 11 Dec 2012

A Realtor Sells A House To Himself In North Vancouver – “The untangible feeling of pride of homeownership I feel is overwhelming and I strive to work harder and longer to make sure my clients achieve the same exciting, rewarding, and satisfying experience!”

“This past week I made the highly anticipated move from my condo to my first house on beautiful Cortell Street in North Vancouver. The new house is a very well maintained, updated character cottage from 1928, with extensive kitchen and bathroom renovations.

The Location is one of the finest in North Vancouver, in the quite and sunny southern pocket of Pemberton Heights, 2 blocks from Capilano Elementary with its coveted IB program. The yard is a gardener’s dream, landscaped and set up with an irrigation system and automatic lighting. The garage is tiny, but my truck just fits in it:). Some of my favourtite features are the classic hardwood floors; the fully renovated kitchen with Viking Gas Convection Stove; the loft with skylghts and views; the many species of birds that call the magical garden home; the protected Royal Walnut Tree in the front yard that I’m forbidden by the District of North Van to touch; the gas fireplace; an exposed brick wall; large south-facing wood deck; the antique claw-foot soaker tub; and the detailed door fixtures, built in cupboards, and wainscoting.

The windows, electrical, furnace, on-demand hot water supply, and roof have all been replaced in the past 6 years. The neighbourhood is a charming mix of cute and character, ultra modern, and brand new masterpieces. My west-side neighbour’s house is currently being gutted, there is a handsome new custom mansion across the street, and 2 brand new houses being built on Cortell, so for a Realtor who loves homes, I feel like a kid in a candy store:). Speaking of candy stores, 2 blocks away is the infamous Corner Store, a Pemberton Heights landmark serving up great coffee, sandwiches, groceries, and snacks in a warm neighbourhood environment.

I am thrilled to have the talented eye of Missy Kaniuk from Design Project in charge of the re-design of the main level & renovations to the basement! We are going to paint the wainscotting white, and the wall in the living room and entrance a tope/grey/olive tone, the office a tope green with white baseboards, and the bedroom white with a dark wood door and window trim, using paint by Benjamin Moore. The exterior will be white with blue or charcoal trim and ‘fire-truck red’ front door. In the long term, I want to refinish the floors a dark oak & install crisp white crown moulding in the bedroom, den, and bathroom!

The downstairs has a finished bathroom but the rest is exposed framing, washer/dryer, furnace, and a work shop. I am planning on renovating the basement so the walls and ceiling are finished with electric heat, pot lights, new washer/dryer, guest kitchenette, and a bedroom. With the help of a great plumber, electrician, framer, and Rona I hope to create an additional 650 sq ft of finished living space. The main challenge is the uneven floor which will require a skilled leveler (which I will be meeting on Saturday morning – Basement design details to come, stay tuned!).

Upstairs will be a guest room & office on the dreamy East side of the loft , and a TV room on the West Side to enjoy the city/ocean views.

Follow my blog for updates on the reno and life as a homeowner! The untangible feeling of pride of homeownership I feel is overwhelming and I strive to work harder and longer to make sure my clients achieve the same exciting, rewarding, and satisfying experience!”

– Realtor Stu Bell, at his blog stubell.com, 24 Nov 2011
[hat-tip to reader who e-mailed the link]

That ‘untangible feeling of pride’ is one factor contributing to the ‘ownership premium’, the amount that one is prepared to pay for a home over and above the cost of renting it. Stu clearly gets a great deal of pleasure out of owning this home, and his personal ‘ownership premium’ is likely substantial (whether he had to pay more than rent equivalent to purchase this house or not). One wouldn’t want to get into a bidding war with this kind of buyer for a home on which their heart was set.
The story is saved here as a fairly intense example of the current Vancouver love affair with home ownership. We believe that this infatuation is closely related to rising prices, and that the feelings will become less intense when prices are falling.
“Will you still need me?
“Will you still feed me?
“When I’m 64(%-of-the-price-you-bought-me-for)?”
– vreaa

[For another recent example of related emotions, see the TV announcer exchange at “Real Estate stories are always great, they never get tiring, you know?”]

BC Business Magazine – ‘Housing Has Become Vancouver’s Toxic Asset’ – “As a result of this massive monetization of housing, the entire city’s social and economic scene is under intense pressure and is threatened with collapse.”

“Housing is becoming a toxic financial asset that threatens the entire region.
Before we get into it, let’s look at what a toxic asset is. In the U.S., sub-prime mortgages were a toxic asset because they were converted into financial instruments (derivatives) that had no real value, but were continuously traded for ever-increasing prices until, eventually, the banks that were promoting them couldn’t back them any more. We’re all familiar with the results – massive writedowns and a whopping recession that’s still playing out.
Vancouver is undergoing something similar… because it’s allowing housing to be bid ever higher and far beyond its intrinsic value. As a result of this massive monetization of housing, the entire city’s social and economic scene is under intense pressure and is threatened with collapse.”
…
“The houses had become just another abstract financial instrument.”
…
“Well, eventually, it has to stop. When houses are continually traded for ever higher prices, the entire balance of population and housing becomes extremely distorted. Eventually it reaches such a distortion that it breaks.
Throughout history, we have seen that asset inflation can’t go on forever. Either a giant crash comes eventually, or – if there’s some sense around – authorities step in to slowly deflate the bubble to prevent catastrophe.”
– excerpts from Tony Wanless’ commentary [BC Business, 2 Dec 2011] on Sandy Garossino’s 28 Dec 2011 blog post.

Sandy Garossino – “We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”

From a post by Sandy Garossino, independent candidate for city council in the recent civic elections, at her blog votesandy.ca 28 Nov 2011. The entire post is a must read for those concerned about Vancouver housing. Some excerpts below for our chronological archive. –

“Relative to household income, our property values are now among the most severely unaffordable in the world. Relative to income, Vancouver’s property values are 56% higher than New York’s, and 31% higher than London’s.
In its November, 2011 report on the Canadian housing market, RBC notes that 94% of average household income is required to cover the ownership costs of a 2 storey detached home in Vancouver.
This development is new and unprecedented.”
…

…
“Excesses in the housing sector can generate key vulnerabilities in the financial system and the economy as a whole.
Rather than stimulating productivity and competitiveness through business investment, cheap credit has been used to bid up the price of houses.
Vancouver residential real estate values began to detach from their historical relative values to the rest of the Canadian market sometime around 2006, when volatility began to get very choppy.”
…
“Many see Vancouver in a housing bubble, and it may well be. Others however, such as celebrated architect Gregory Henriquez, think our prices still have far to go to reach that point. Amazingly, Henriquez says that Vancouver is still under-priced. He is not looking at local economic conditions, however, but at the international forces in play. Viewed globally, Henriquez says that our market has become the “safety-deposit box for the world.”
…
“… circumstances militate against Vancouver being able to compete in the global marketplace for the best and the brightest talent needed to drive the knowledge and creative economies that will sustain cities in the future.
Our universities are losing key talent and find themselves unable to attract replacements or build on what we have. Our business sector cannot recruit, our local merchants are caught in a fight for an ever-dwindling supply of disposable incomes, and attitudes are hardening against even modest tax increases necessary to maintain our basic infrastructure.”
…
“Many Vancouverites seem unaware of the strange drama unfolding in many of our neighbourhoods.
The west side of the city is shedding residents almost daily as international buyers purchase more and more housing stock. These homes often sit empty or are re-cycled into the market and re-sold at significant gains within months to other international purchasers.
The west side real estate market is behaving exactly like a secondary market in financial instruments rather than a shelter market. Often the commodity is not actually used or consumed, but only traded. This trait allows valuations to inflate so long as the market is supported by global buyers, completely independently of local economic conditions.
During the recent civic election I was twice approached by people who reported that their homes were the only ones occupied on their block.”
…
“Yet Mark Carney’s sobering warning last summer seems to have fallen on deaf ears. To hear local developers, urbanists and planners discuss this issue, you would think our market is within the normal range, and people concerned about the speculative spree fueled by interest rates and global capital influx are alarmists and potentially xenophobic.” [Well put. – vreaa]
…
“The theory currently dominating the discourse on our housing market points to natural or systemic causes for our pricing: our limited land base pressured by in-migration. According to this view, the cure for this market is to build more housing—ie. condominiums.
Yet in-migration is occurring at historically normal rates and we didn’t grow mountains and a southern frontier overnight.”
…
“Conclusion: It is time to take off the rose-coloured glasses and face some hard truths. We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”
…

Great article. As we’ve said before, Garossino is to be applauded for publicly articulating the ‘hard truths’.
We agree with Garossino’s analysis in many respects.
The hope that there are ‘levers and mechanisms’ to ‘modulate the risks’ the market imposes, is similar to the hope for a ‘soft landing’ after a speculative mania. Some tweaking could alter the flight path, but who is going to be stepping in to buy very overpriced RE that has started a downward price trajectory?
– vreaa
[hat-tip Makaya.]

—

ADDENDUM 6 Dec 2011 8:20am

This comment posted to Sandy Garossino’s site:

Sandy,

Many thanks for this thoughtful and eloquent article.
We’ve headlined, excerpted, and commented on it in our chronological archives.

You are one of the few public figures speaking out on these issues, and we commend you for that. To point out these truths is brave; the thoughts are deeply unpopular in many quarters. As a consequence, most local  discussion of these issues has been done ‘underground’, in anonymous online forums. Some individuals, such as Gord Goble and Peter Ladner, have spoken out publicly, and you are a welcome continuation of that move.

We agree with your concerns about the multitudinous deleterious consequences of the massive misallocation of resources that comes with a speculative mania in housing. The optimist in us wishes you well with your endeavours to alter policy for the better. The realist is concerned that the only path forward for the speculative mania is a crash.

Judging by historically valid underlying fundamentals such as incomes and rent levels, Vancouver RE market prices are 2 to 3 times fair value, perhaps even more.
You see the speculative mania for what it is, and you are suggesting we attempt to orchestrate a ‘soft landing’ (no mean feat, if it is possible at all).
That suggestion itself creates a massive dilemma:
Given that there is such a large difference between the market price of properties, and their fundamental values, who do we hope to be buying these properties at perhaps slightly reduced but still massively elevated prices in the coming years?
Wouldn’t any such buyers be risking financial suicide?
Isn’t the only credible resolution a marked drop in prices, and then a recovery from the rubble?
Aren’t band-aid solutions on the way down simply going to put even more locals at dire financial risk?

Keep up the good work,
vreaa
(vancouver real estate anecdote archivist)

“My friend bought here, and so did her mom. Two units. They got their deposit refunded the day after because they decided the units were too small, but before that, they had raved about how it was perfect. They then went the same day and bought elsewhere.”

“Update on my friend who I mentioned earlier was gonna buy here.
Well she did, and so did her mom. They bought 2 units, said it was a gong show at the sales center.
They actually commented how it was like in China now, how everyone goes crazy sales day and everything gets sold out day 1. After I mentioned China real estate market was going down recently, she was genuinely shocked and thought I was crazy, and said no way, then after awhile said well depends which city and not big cities.
Then I sent her ‘Property Prices Collapse in China. Is This a Crash?‘, by Gordon Chang, Forbes, 6 Nov 2011
I ask where do you get your info about Chinas market, no answer. But she says news always overhypes the situation. Which I replied can be used in both ways. Just look at RE pump stories.
She said the same thing as many people believe about Lower mainland real estate and why prices will remain high,
-everyone wants to be here
-China money (millions of millionaires coming)
-who cares if market goes up or down, as long as you have a comfortable place to live
-you may die tomorrow (lol)
But guess what, they got their deposit refunded the day after because they decided the units were too small. But before that, they had raved about the location and price and how it was perfect,
The same day they got their deposit back they went and bought at the Viceroy, which was “perfect”.
The whole conversation was like living in bizarro world.”
– 4SlicesofCheese at VREAA 29 November 2011 at 6:11 pm

“Yes, There Is Such A Thing As Falling House Prices” – Ordos Down 62.5% Or More In 2 Months

For example, local “Jinxin Han Lin Yuan” project , its second-hand house prices are around 10,000 yuan , while the market price now only is 3750 yuan.
The example given is a 62.5% decline but some properties may have fallen 70%. Either way, that is one hell of a price decline since September.
– From ‘Home Prices Crash 62.5% Since September in Erdos, a Chinese “Ghost Town”, Global Economic Analysis, 25 Nov 2011

“My Brother-in-Law bought his house last year in Burnaby and tells me that it is now worth $300K more. Seriously, what is the point in actually working for a living in Vancouver?”

“I rent a house in Kits and the houses to my direct left and right sold the same week in July, both OVER asking. So, I’m not sure that Kits is dead, just yet. The house to my right sold $500K over asking and the house to my left sold just over asking at $2M. They bought that house in 2006 for $700K, so not a bad profit in 5 years. They plan to rent and buy back in after the correction. The family that made $500K on their house are renting the house back from the mainland Chinese purchaser for the next year and are basically flippers and looking for their next Kits project. They bought the house in 2009, so a tidy $500K profit in less than 2 years isn’t bad either. I’m just a sucker with a really high paying job that can’t afford squat in this town. …
I am seriously banking on a correction in Vancouver next year. I have noticed in the last several months that house prices are slowly coming down (barely) or at least stagnating and definitely selling under asking in the burbs (I almost bought my dream house, but kept strong!). I do now notice that houses are being pulled off the market and there isn’t much selection these days. Lots of crap on the market. I’m hoping this is just seasonal and that next spring will show plenty of inventory at reduced prices. The Vancouver market seems to be resilient for the time being. Very frustrating to say the least. My BIL bought his house last year in Burnaby and tells me that it is now worth $300K more. Seriously, what is the point in actually working for a living in Vancouver?”
– chris at greaterfool.ca 20 Nov 2011 at 9:16 pm

“I’m 200% certified woman and would be perfectly happy in a 800 sq ft apartment with a decently sized balcony for my BBQ. My man is the one who “must” have the house that goes for $1.1M in Vancouver.”

This leisurely exchange at saskatoonhousingbubble earlier this year:

“Women are driving the housing bubble, because they got to have the expensive house or it’s no good.” [ February 2, 2011 12:53 PM ]

“Bull. I’m 200% certified woman and would be perfectly happy in a 800 sq ft apartment with a decently sized balcony for my BBQ. My man is the one who “must” have the 2-door garage, huge backyard and all the dirt bikes and hot tubs and kayaks he can fill it with.
That house goes for $1.1M in Vancouver and our median salary is $40,000. I WISH I had your problem.”[May 3, 2011 3:09 PM ]

Tom Davidoff, Sauder School of Business, UBC – Clarification

Following up on a post from yesterday, this e-mail exchange between Tom Davidoff and vreaa took place 2 Dec 2011. Tom left it up to us to decide how to best clarify his position for our readers, and we’ll do that by simply recording the exchange here:
—

Dear VREEA

I have gotten some hateful and threatening email from followers of your blog, so I thought it might be helpful to shed some light on the interview with ctv that you cite. I believe you have interpreted my comment on camera as answering the question: “what do you say to people who believe the current price level does not reflect fundamentals?” That is not the question I was answering when I made my remark about entitlement. Later in the interview, in fact, I said that I would be reluctant to buy at current prices for investment purposes. I would not be surprised by a large correction in the next year or two. I also would not be surprised if real prices are higher in 10 years than they are today. The question I was answering was closer to “what do you say to people who believe they are entitled to own a home?” I don’t recall the exact question, but my point was just that it is not the end of the world if some people are not able to buy (as opposed to rent) the home in which they want to live. Should the government take steps to promote greater housing supply? That’s an interesting question, but not the one I was answering.

I would be delighted to discuss further.

Regards,
Tom Davidoff
—

Dear Tom:

Thanks for the e-mail.
At their website, ctv still has an article up by Darcy Wintonyk that states the following:

(quote)
Tom Davidoff of the UBC Sauder School of Business said that young Vancouver couples simply don’t have a right to own a home in the city they grew up in. “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality,” he said.
The economic reality adds up to a growing sense of frustration and hopelessness for an entire generation of Canadians.
On the upside, Davidoff said that renting isn’t the end of the world in this expensive housing market.
(end quote)

I think you can see how this reads.
If this doesn’t reflect what you said to CTV, and is substantially different from your main position on Vancouver RE, get in touch with CTV and tell them to change that.
This is a risk one takes speaking to the media.
You could insist that you refuse to be quoted out of context, without an opportunity to state your full position.
For instance, get them to include quotes such as:
“I would be reluctant to buy at current prices for investment purposes.” and
“I would not be surprised by a large correction in the next year or two.”
Those aspects of your position may come as a surprise to many CTV readers/viewers.

If you like, I can post the e-mail that you sent me at the blog, by way of your explanation of your position.
Or you could post it yourself as a comment.

Better still, why not lay out your entire opinion on the Vancouver RE market unambiguously, and I’d be happy to headline that as a new and separate post. That would be the best way of clarifying your position.
Let me know.

Regards,
vreaa
(vancouver real estate anecdote archivist)
—

Dear VREEA

Thanks for your reply. I think my original email to you conveys what I meant to say. I’ll leave it to you as to how to clarify for your readers. I don’t think I was quoted out of context by ctv. They were asking about people who grew up in the area and can’t afford to buy a suitable home in Vancouver. Whatever happens to housing prices in the next few years, the problem of people not being able to own the home they want in the location they want is going to persist. I agree that there would be fewer such people if prices were not higher than supply, demographics,and mortgage terms would typically support, and I told ctv that I think it’s likely that prices will fall in the short run, but that’s not what ctv was asking. I should add that in a market like Vancouver where supply is constrained and there is reason to think that there will be growing demand over time, it is not easy to know when or if a price correction is coming because it is difficult to do discounted dividend analysis. What are the correct dividend growth trajectory and risk premium to pin down a price based on today’s observed rents and riskless yield curve? “Not easy to know” is not the same as “it’s impossible to infer that there’s a high probability of a large price decline.”

Regards,
Tom
—

Dear Tom:

Thanks for the reply.
By way of clarification, I’ll post our e-mail exchange.

Regards,
vreaa

—/end

UPDATE:
See also ‘Tom Davidoff Knows About RE Cycles’, VREAA, 4 Dec 2011

Tom Davidoff, Sauder School of Business, UBC – “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality.”

“British Columbian couples with young children are being squeezed in an economic vice because of high housing and child care costs, according to a UBC family expert who dubs the group “Generation Squeezed.” Paul Kershaw says the high cost of housing coupled with skyrocketing child care costs is making it nearly impossible for young parents to raise a family in B.C.’s Lower Mainland.”
…
Derek Atkinson, a 28-year-old university educated dad who lives in Burnaby, said he has a bleak outlook when it comes to buying a home.
“It’s something that is getting closer to being a pipe dream than any sort of reality,” he said.
With a combined income of $92,000, he and his wife could qualify for a $500,000 mortgage. But Atkinson said the minimum $25,000 down payment is too rich for him and his young family.
“We’d have to save up for at least five, six years just to get a decent down payment…and that’s really frustrating,” he said.
The average B.C. couple only makes $66,700, enough to qualify for just a $300,000 mortgage. A November search of the residential real estate listings in Metro Vancouver (MLS) turned up only seven two-bedroom properties in that price range.
…
Tom Davidoff of the UBC Sauder School of Business said that young Vancouver couples simply don’t have a right to own a home in the city they grew up in. “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality,” he said.
…
– excerpted from ‘Housing, child care sting ‘Generation Squeezed’, Darcy Wintonyk, ctvbc.ca, 1 Dec 2011
(hat-tip 4slicesofcheese)

Noting that there is a speculative mania in Vancouver housing is not the same thing as asking for a free lunch. – vreaa

—
ADDENDUM, 2 Dec 2011, 7:50am:

Dan, writing in the comments below, asks “Can someone explain what Prof. Davidoff said that was so objectionable?” and then segues to talk of a speculative bubble (which Davidoff did not mention) and asks “What’s so terrible about renting?” (Davidoff did end up mentioning renting, but that was not the statement he made that has been objected to).
We’ll share our response to Dan’s question here.

Davidoff said: “There’s not going to be any free lunch in Vancouver. There’s no entitlement to own a nice home in the most beautiful place on earth. So I think people need to be prepared just to accept that reality”.

Here’s the objection, Dan –
Davidoff reiterated a sloppy, tired argument that deflects from the issue at hand:
Young couples (or any other prospective buyers) point out that housing prices are extremely overextended in Vancouver.
Davidoff retorts with an argument that directly implies that prospective buyers are asking for something for “free”, that prospective buyers feel “entitled” to get something for nothing. Where did any of these buyers make such ridiculous claims? [They did not!]
Davidoff’s fallacious implications are a straw-man argument; they have the effect, by design or otherwise, of dismissing the prospective buyers’ initial (and very valid observation): Housing prices in Vancouver are very overextended.

Customer: “How much are your sandwiches?”
Storeowner: “$50 each.”
Customer: “$50! That’s a little steep…”
Davidoff: “What do you expect? For someone to give you free food?”

Davidoff is supposedly an academic with, we’d imagine, some claim to expertise in the area of housing markets.
We are in the midst of a global housing market disaster; we have housing prices in Vancouver that are preposterously higher than fundamental values determined by income and rent; we have personal debt levels that are higher than they were in the US before their bust; we have a local economy that is overdependent on real estate … and the only analysis that this School of Business can march out is flaccid non-arguments in favour of the status quo? (Davidoff’s “reality” that has to be “accepted”.)

Are there no sensible academics in this business school that can do back of the napkin math?
‘The Economist’ has just published an article implying that Canadian housing is overvalued by at least 25% (A remarkable 71% as determined by rental rates). Numerous other respectable commentators have pointed out the unsustainable housing valuations in Vancouver.
Has anybody seen any commentary from anybody at UBC’s Sauder ‘School of Business’ that in any way attempts to discuss or analyze these arguments?

When the speculative mania in Vancouver RE collapses, it will be remarkable to look back and see how deficient local economists and financial commentators have been for not warning about this obvious bubble.

The fact that Davidoff even threw in “the most beautiful place on earth” canard just makes his statement that much more pathetic.

Come on, Sauder.
Have any of you studied anything about ‘speculative manias’?
Is the 2011 Vancouver housing market not a wonderful, soaring example of such a beast?
What are you telling students who ask such a question?

– vreaa
—

UPDATE:
See also ‘Tom Davidoff Knows About RE Cycles’, VREAA, 4 Dec 2011

Squamish Townhouse – 2008 $499K, 2011 $358K – “It was supposed to be an investment, not a nightmare.”

Roberta and Johnny can’t wait to dump the Squamish condo townhouse they bought three years ago. “It was supposed to be an investment,” she says, “not a nightmare.” Not that the tenant’s much trouble. She’s not. But it’s tough to know what you paid $499,000 for thirty-seven months ago is now worth $358,000.
At least, that’s the offer they have. Worse, the deal has hair on it. Lots of conditions. Long close. Small deposit. Not much of an offer at all, actually. But better than no offer, the alternative in a town where the market’s died.
Johnny writes: “A side note of potential interest is that the owner of a comparable unit in the same complex priced $100K (yes, one hundred) over ours and that has been sitting on the market without viewings for months, if not a year now, called me the other day and left a message saying that he wanted to talk to me about my price. He felt that I would be leaving “a lot of money on the table” and gave indication that I must not understand the state of the market in the area very well. In the meantime, another comparable brand new unit (one of many that are coming out) in a complex down the street was just listed under headlines of ‘receivership pricing’ for $345K. Needless to say I haven’t called him back.”
– Excerpts from a story relayed by Garth Turner at greaterfool.ca 29 Nov 2011

Sellers compete with other sellers, not with buyers. – vreaa

“If your household income were $100,000, how expensive a home would you be comfortable buying?”

Results of a poll at Seattle Bubble (27 Nov 2011):

If your household income were $100,000, how expensive a home would you be comfortable buying?

• Under $150k (2%, 7 Votes)
• $150k to $199k (10%, 33 Votes)
• $200k to $299k (33%, 111 Votes)
• $300k to $399k (36%, 120 Votes)
• $400k to $499k (12%, 41 Votes)
• $500k to $599k (4%, 13 Votes)
• $600k to $699k (1%, 4 Votes)
• $700k or above (2%, 5 Votes)

Hat-tip to Jeff Murdock, for pointing out this poll. Jeff adds “This from the country where you can lock in a mortgage at <4% for 30 years, and where your interest payments are tax deductible, and from the state with no state income tax.”

In Seattle, 69% of people would feel comfortable buying a house in the $200K to $399K range with a family income of $100K.
In Vancouver, family incomes average somewhere between $73K – $83K, and the average detached bungalow sells for $820K [RBC pdf].
– ed.

“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it. Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”

Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it,” said Deng, a 30-year-old electrical systems salesman. “Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”
– from ‘Shanghaied Home Buyers Take to Street’, Bloomberg, 29 Nov 2011

Then why, Danny, did you buy it?
We know: Because you thought that prices would continue to go up, and up, and up, right? Right.
And if they had, you’d be taking credit, not complaining, right? Right.
Speculators are the same everywhere: Shanghai, Sydney, Spain, Ireland, Vancouver.
The outcomes of speculative manias know no cultural bounds.
– vreaa

—
More of Danny’s story from the article:
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.
The gift made Deng consider himself a member of the “ken lao” generation, meaning to gnaw on the elderly.
“I was depressed, uncertain, touched and a bit ashamed,” he said, asking not to be identified by his full Chinese name because of the personal nature of his story. “I had been proud and didn’t think it was their business. But when the moment really came, I knew it was impossible to manage only by myself.”
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said.
“At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.
Deng saw an ad on Soufun.com for pre-sales of a project called Qinglinjing, meaning “Clear Forest Path,” that was being constructed near a soon-to-be built subway station next to the future home of the Shanghai Disney Resort. Deng and his girlfriend visited a showroom to walk the wooden floors of the replica 96-square-meter (1,033-square-foot) apartment, planning how they would fill its two bedrooms, living room and study.
“We loved it,” Deng said. “It suits us for the next three to five years because we plan to raise a child soon.”
The snag was its 1.7 million yuan price tag. Chinese policy requires a minimum 30 percent deposit. Deng had saved 70,000 — not enough. That’s when he called his parents, then borrowed another 50,000 yuan from his boss, and secured a loan of 1.1 million yuan paying as much as 7.8 percent interest from Agricultural Bank of China, he said.
On Sept. 28, Deng and his girlfriend signed a contract with the developer, happy after winning discounts including 40,000 yuan off for being a member for the Soufun.com website and a 20,000 yuan markdown by collecting 20 stamps on a red “home- passport” issued by Vanke. The end price: 1.58 million, or about 13 times Deng’s annual wage.
The next month, they got married. Paying the mortgage will take up 40 percent of the new couple’s combined salary.
… “I didn’t have a choice,” Deng said of the decision to buy. “I don’t want to be too different. Otherwise, maybe for a long time, I would be alone.”

Wow. Poignant story.
And so many similarities to what is going on to Vancouver: Bank of Mom and Pop; ‘girlfriend insisted they buy an apartment’; plans to move in 3-5 years (but now likely stuck); etc.
Also, some differences, too: 40% of income? (low for Vancouver); 1,033-square-foot apartment (MASSIVE by Vancouver standards), etc.
– ed.

Realtor – “The market will come off the rails in Vancouver next year. Smart money does not chase a falling asset. Spring will be a disaster out west; it may self-perpetuate.”

“The market will come off the rails in Vancouver next year. We’re seeing some China buying reductions but there will always be some Chinese money, however smart money does not chase a falling asset no matter how much they want their kids to go to the “best Schools”. Give me a break – they are not so great that Vancouver is better at education than other cities, that losing 500K is not noticed. Spring will be a disaster out west – as soon as the mainstream media pick up on this – it may self-perpetuate.”
– A Vancouver RE broker, quoted by Garth Turner at greaterfool.ca 27 Nov 2011, who also added “The first half of this year [2011] was hot, the second half will show a dramatic cooling. Tons of sellers have given up, and will flood the market with renewed listings in the Spring [2012]”.

“Smart money does not chase a falling asset. (Price drops) may self-perpetuate.”
Readers will recognize that we’ve been saying exactly this for sometime now.
We’d ourselves probably call it ‘momentum money’ rather than truly ‘smart’ money.
But, regardless, yes, buyers will dry up into price drops; that’s what happens when speculative bubbles burst.
Price drops will beget price drops.
– vreaa

Spot The Speculators #68 – “Trev and Anna paid $1 million for a SFH near Main Street. They must spend $150K to make it livable.”

The story of ‘Trev and Anna’ is relayed and discussed at greaterfool.ca by Garth Turner, 27 Nov 2011, a must read for Vancouverites. Here is the core anecdote:
Trev and Anna paid $1 million for a place near Main Street. Sadly, it was unrenovated, so they must spend $150,000 to make it livable. “We plan to stay here 10 years,” Trev adds, “and we were fortunate enough to put down 50%.
“We’ve set aside an RESP for our kid maxed out to the level the government will contribute. I have a limited partnership investment of $50,000 which is projected to provide us with a 7% return. Our combined income at the moment is 120k per year. The house has a separate suite which will provide us $900 per month income. If times get tough then we can rent a spare bedroom to a student for $700. So, we will have $50k after renovations to invest.
Should we seriously consider selling the house when the renovations are complete, rent for a while and then re-invest? The concern is that we will be house rich. If we are planning on staying there for 10 years does this still apply?”

So:
House value (generously presumed) $1.15M.
Mortgage $500K.
Other assets $100K.
Networth $750K.
Percentage of Networth in RE 153%.
These guys are gambling on ongoing price increases.
They will potentially lose ALL of their equity in the coming crash.
(These houses will very likely sell in the $500K-$550K range again at some point).
The idea of them overextending themselves this much into a ‘livable’ Main Street SFH with tenants in the basement and perhaps one in a bedroom just boggles the mind. – vreaa

Australia – High Profile Sydney RE Weakness – No Takers At $1M-Off 2009 Prices

“It was billed as ‘Super Saturday’ but turned out to be more like soggy Saturday for Sydney’s home auction market.
The last Saturday in November is traditionally the most popular day of the year to buy and sell. But this year the clearance rate of 54.6 per cent was well down on estimates.
Actor Toni Collette’s historic Bronte home failed to find a taker, despite being offered at a discount of almost $1 million from the $4.4 million she paid in 2009. Invitations for opening bids of $3.5 million did not raise an eyebrow, let alone a hand.”
– Sydney Morning Herald, 27 Nov 2011 [hat-tip canuckdownunder at VCI]

Any doubt that this market will end up with >50%-off discounts? -ed.

Toronto Rents – “There has been a gradual insidious change as more people buy houses. There is a lack of qualified renters. Rents are down in real terms.”

“Rent prices are actually depressed in Toronto in real terms – There is a lack of qualified renters. I say this because I’ve been doing this for 15 years and there has been a gradual insidious change as more people buy houses. If 70% of people now own, and 30% do not for a large part the reason is that that 30% is not qualified for a mortgage.
When I look at the criteria used for credit score with my credit checking system, the credit score used for an approved renter is 700, yet CMHC will approve a mortgage for someone with a score of 620 which makes me chuckle a little. My rental screener tells me to decline those with that score. Of course I can’t, you have to pick from the tenants that apply not those you dream about getting!
Rents have gone down in actual terms in apartment buildings. Condo rentals are skewing the market.”
– Rachelle at VREAA 26 Nov 2011 5:49am

RE Price Effects On Grandparents, Daycare, and Working – “My parents thought it would be cool to live near their grandchildren, but that can’t happen at this point in the housing market cycle. Who will look after the kids?”

“It is heartbreakingly cruel, but the retired probably need to learn to love cheaper cities. My parents thought it would be cool to live near their grandchildren, but that can’t happen at this point in the cycle. Unfortunately the cycle may easily take us into their teens, so grandparents and grandchildren alike will miss the most magical people through the most magical period in their lives.
Which begs the question of who will look after the kids while we both work at professional jobs to accumulate enough wealth to de-risk potential home ownership (we can still do that, we’re young). Right now the answer is our awesome home daycare. Her revenue doesn’t cover the cost of her basement-and-garden space, but it’s okay because she bought the place a while ago. She can bleed out her RE gains through years of subsidizing me to go to work. If we lose her we might suddenly have to pay market price for the service. Market price is substandard facilities or care, because they can’t actually charge $2500/month: no one would go to work!”
– Zerodown at VREAA 25 Nov 2011 9:34am

Every word wise. – vreaa

‘The Economist’ – Rental Income Shows Canadian Home Prices Are 71% Overvalued

‘The bursting of the global housing bubble is only halfway through’.
Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.
To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability. The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies. Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.
Based on Incomes, home prices are 29% overvalued in Canada.
Based on Rents, home prices are 71% overvalued in Canada [The most overvalued by this measure of any of the global markets studied. -ed.]
Canada has an even higher household-debt burden in relation to income than America did at the peak of its bubble.
– excerpted from ‘House of horrors, part 2’, The Economist, 26 Nov 2011. Image from the Huffington Post, Canada, where the story was headlined as: ‘Canada’s Housing Market More Overvalued Than U.S. At Its Peak, The Economist Says’.

None of the above comes as anything new to readers here.
Only wackos like Vancouver RE bears and ‘The Economist’ go on about something as passé as ‘fundamentals’.
Gravity will reassert; we will revert to the mean; perhaps overshoot. – vreaa

“I looked for a decent house for 3 years and have given up. I am not willing to spend all my money on a tear down. Just crappy value all around.”

“I too sold my company, no I did not make near $2M, I did ok in my books and I am seriously considering putting some money into other real estate investments NOT in Vancouver. I also looked for a decent house for 3 years and have given up. I am not willing to spend all my money on a tear down. Just crappy value all around. Vancouver is nice, yes, but it also rains 8 months of the year and costs an arm and leg to do it. Central California, a little in from the coast, up in the foot-hills on a few acres… now that sounds decent.
Why does everyone stay in Vancouver if it’s so damn expensive?”
– Cali Calling at VREAA 22 Nov 2011 7:07pm

Spot The Speculator #67 – “It’s a home, it’s an investment — a bit of both.”

Melissa Yan, Yaletown condo purchaser, RE marketer.

“Melissa Yan wondered why she had to wait until she got married to buy a home.
She decided she didn’t. So the 28-year-old, who works in marketing for Magnum Projects, opted to jump into Vancouver’s hot housing market at Christmas in 2010.
She picked up a 600-square-foot, one-bedroom apartment in Vancouver’s trendy Yaletown district in a design that would fit her needs and a price tag that would allow her to enter the market and establish equity so that one day she could get an even bigger house.
“I have always known I had wanted to own, so I made it a priority for myself to put aside money for the past five years,” says Ms. Yan, who was living with family as she saved. “It’s a home, it’s an investment — a bit of both.”
Ms. Yan, who says her work in real estate convinced her she needed to buy, is one of a growing number of 20-somethings who are no longer waiting until they get married to purchase a home for the first time. She is part of a trend that adds an extra stage to the housing market.
Traditionally, people bought their first property upon marriage, looked for a move-up when their families got larger, scaled down as the kids moved out and then were off to the retirement home.
But the new reality is that more first-time buyers fit Ms. Yan’s profile.
A TD Canada Trust survey this spring found 45% of first-time homebuyers were going it on their own rather than with a co-purchaser.
“I would say a lot of my friends are doing this,” says Ms. Yan. “People are getting married later in life, too. Weddings are so expensive. I figured I would invest in an asset for now. I know it’s not my final home.”
– from ‘Mingles’ moving housing markets, Financial Post, 19 Nov 2011 [The above is the later, 21 Nov version, of the article. See below for explanation.]

Well, it turns out that Melissa’s Marketing work is actually directly related to RE marketing… From her public LinkedIn profile:
“Manage strategic real estate project marketing programs for clients. Responsible for marketing strategy, public relations, forecasting, budgeting, lead generation, event planning, media buying and negotiations. Initiate and manage strategy and direction with graphic and interior designers for marketing collateral, sales centers and show suites.”
I don’t know of we should be outraged, disgusted, sarcastic or amused by such an article… I just want to point out that FP just loss all its little remaining credibility it had in my mind for not disclosing such “details”.
– from Makaya at VREAA 20 Nov 2011 [who cited 604serf at VCI 20 Nov 2011 (“Really, “interview” someone who works in Condo Marketing about how they’re buying a condo…and not disclose that? Seriously??”) for picking this up]

Note: The original article, posted 19 Nov 2011, read “She decided she didn’t. So the 28-year-old, who works in marketing, opted to jump into Vancouver’s hot housing market at Christmas in 2010.”
The ‘for Magnum Projects’ was added in a later edit, seemingly in response to observations such as those by 604serf and Makaya above. – ed.

Update: 604serf, in the comments section below, confirms that they did indeed e-mail the editor of the FP with their observations and that the article was changed as a result. Here is the response they got from the FP managing editor:
“Regarding your note about the story on single people buying more condos, We have confirmed that you are correct and the person used in the story works in condo marketing. If we had known this it would have been disclosed, and that change has been made in the online story.
Thank you for your continued readership and attention.
Cheers,
Grant”

Greenhorn (the Vancouver RE video archivist) forwarded this comprehensive ‘before’ and ‘after’ account, for the record:

Original article started like this:
[quote]Melissa Yan wondered why she had to wait until she got married to buy a home.
She decided she didn’t. So the 28-year-old, who works in marketing, opted to jump into Vancouver’s hot housing market at Christmas in 2010.[/quote]

Was changed to this:
[quote]Melissa Yan wondered why she had to wait until she got married to buy a home.
She decided she didn’t. So the 28-year-old, who works in marketing for Magnum Projects, opted to jump into Vancouver’s hot housing market at Christmas in 2010.[/quote]

And this 5th paragraph was changed from:
[quote]Ms. Yan is one of a growing number of 20-somethings who are no longer waiting until they get married to purchase a home for the first time. She is part of a trend that adds an extra stage to the housing market.[/quote]

to:
[quote]Ms. Yan, who says her work in real estate convinced her she needed to buy, is one of a growing number of 20-somethings who are no longer waiting until they get married to purchase a home for the first time. She is part of a trend that adds an extra stage to the housing market.[/quote]

Screen capture of original 19 Nov 2011 article here.
—

Other choice quotes from the FP article:

“They want to jump on the equity train right away and build equity.”
– Peter Simpson, chief executive of the Greater Vancouver Home Builder’s Association

“People are getting married later, so there is a need to buy a condo sooner. People go to school later; the whole life cycle has changed.”
– Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada.
[Orwell? No, more like Kafka. -ed.]

“They’re not getting married, so they should get on with their financial lives. A home is a great asset. From a financial planning perspective well down the line, these people who bought a home and built up equity in their home from a young age will have an asset that will give them the confidence to retire.”
– Scott Plaskett, a certified financial planner in Toronto
[Worked great for the last 30 years, what could possibly go wrong? -ed.]

“My Vancouver house is valued around 750k. My other homes are much lower in value, but are outside the city. If you can’t manage your money well, you will always be poor, no matter what your income.”

“My Vancouver house is valued around 750k. My other homes are much lower in value, but are outside the city. If you can’t manage your money well, you will always be poor, no matter what your income.” and
“Those who live beyond their means can not afford to buy a home regardless of price. Those who manage their money well will prosper over time. For someone earning a low wage, it can take many years before they can buy a home. The size of the family also effects the ability to buy, but where the fantasy exists, is in your own mind.
I had to buy and sell houses many times over, reinvesting my money, and living very cheaply to get where I am. My children had to go without a lot of things during the early years, but they went to university, and got the things they needed. We saved our money as a family, and we can now enjoy our success. I know that I am not that smart, but I am smart enough to know that I have to save more than I spend to get rich. I still don’t make near 100k per year, but I enjoy my life, and have all that I need. I feel sorry for those who don’t.”
– stopyourwhining in the comments section of ‘Is it time to curb foreign real-estate buying in Vancouver?’, The Province, 14 Nov 2011.

 

Don R. Campbell, President of REIN, In His Own Words – “Bubble, bubble boil and trouble! I just keep hearing this whole thing about bubbles this and bubbles that… It’s not a bubble. It is a very readable cycle.”

“Bubble!”

“Very Readable Cycle.”

“Guess what? Bubble, bubble boil and trouble! I just keep hearing this whole thing about bubbles this and bubbles that.. and I just wish people would start paying close attention to the underlying Real Estate Cycle and the market drivers and the market influences rather than this amorphous bubble idea that keeps floating around… pun intended… that there’s this thing that’s going to burst.
Let’s talk about the condo market, that’s the one that everybody’s taking about “Oh my goodness there’s a big bubble going in condos”..
I like to invest in a property that exists, but let’s talk about prices, demand…
Take a look at some of these numbers… in 2010 there’s going to be 6,693 new condo units that were occupied and moved in… now 2011 15,902 units.. twice the number being put into the market.. big number, let’s be realistic… ah, but they were still being sold… 80, 90, 100% percent sold… but here’s the issue that you’re going to see… 2012 pre-construction totalling 25,893 units… 108 projects already being built… those condos are going to come onto the market over the next couple of years… let’s think this through quite clearly. If you’ve got that giant influx, it was pretty hot at 2010 at 6,000, it was super-hot in 2011 with 15-16,000… we’re going to add another 10,000 units over the 2011 number?.. wow, think of how that market is going to try to absorb this. Now, here is something that you’ve gotta know, is the average price will not be dropping.. why is that? quite clearly, is the contracts have been signed, they’ve been signed over the last couple of years, during this super hot market… so those contracts won’t come in and get registered into the average price of a condo until the keys are handed over, and that’s usually, what, a year and a half, two years, after the contracts signed. So the heat that we’re feeling here will carry through on the average price over the next couple of years. But as the market supply demand starts to get a little bit out of balance, starting in 2012, especially late 2012, you’ll probably start to see some discounts… or some ‘price slowdowns’ in that market as supply outstrips demand.. and contracts signed then will not play out until 2014.. so you’re not going to really see an average price collapse or bubble explode or any of these other terms I get to see tossed around all over the place.. because it’s all about the contracts and when the keys are handed over. So, let’s be realistic… We get 26,000 units coming onto the market in 2012, we have another 17,000 in 2013… people say “But Toronto is growing by 100,000 people per year.. but can’t we step back a little… when you’re either immigrating or migrating, the majority of those people are not going to be able to step in and afford $2,500 – $3,000 rent for a new unit, or have the money to buy one of these units. So, although the population is growing, the people who can afford to buy these properties aren’t growing. So why do I bring this up? Because, inevitably, you’re going to see that cross of the supply and demand line, you’re going to see incentives come into the market, and you’re going to see… let’s use the term ‘negative influences’.. on the market… you’re going to be seeing people buying five, six, seven units, from off-shore, and then wondering what they’re doing come 2013-2014, and those properties will then be dumped onto the market to try and realize some capital. So, let’s be realistic about the condo market: It’s not a bubble that’s going to go ‘kaboom’… What it is is a very readable cycle, that has market influencers, and market drivers, and your job is to step back from the frenzy, and when somebody says to you “This time it’s different”, run away as fast as you can… because over the last 20 years we’ve heard that three times only to see the market flatten and or fall off. Never buy something you don’t understand. Be smart. Invest well. See you soon.”
– ‘Real Estate Bubbles… Fact or Fiction’, self posted you-tube video, Don R. Campbell, President of the Real Estate Investment Network™, 8 Nov 2011

One man’s “very readable cycle” is another man’s bubble. – vreaa

Repost: It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That.

[This was originally posted here almost exactly six months ago, VREAA 18 May 2011. Reposted in view of discussion regarding foreign ownership in local press, and in light of upcoming election. – vreaa]

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?

—
The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

– vreaa

Spot The Speculators #66 – ‘Conservative Guy’ Becomes ‘Risk Taker’ – “In 5 years we will have saved up enough to buy a larger home (with a bsmt suite of course) and keep this house as a full rental.”

“My wife and I just purchased a house (with illegal bsmt suite) with a legal carriage house in Kelowna. We worked out the financials and with the rent we can get from both the basement suite & carriage house, we can cover our mortgage entirely. We are going to live off of her paycheck and bank mine every month so that in 5 years we will have saved up enough to buy a larger home (with a bsmt suite of course) and keep this house as a full rental. We spent 5 months looking for a place and were very discerning – often turning down places with all the bells and whistles for a more modest, older home with revenue potential. I am in my mid-thirties and we even took a year off to travel (backpacking) so its not like we hit the lottery. We made the choice to buy because it made sense financially not because it was “our time to become homeowners”. We’ve taken a risk and I really believe that you need to take some risks in life for the potential to be rewarded (and I’m a naturally conservative guy).”
– Shane at VREAA 14 Nov 2011 10:10pm

Shane, you seem like a very honest and straightforward guy, and we wish you well. For the sake of consistency and integrity, we have to point a few things out; and out of respect for your intellect we’ll ourselves be completely honest.
First, in your probability calculations, how heavily did you weight the significant price drop outcome? You are exposing yourself to substantial downside risk, with leverage. Kelowna may have already dropped, but it’ll drop further in the coming Canada wide RE bubble deflation.
Secondly, you haven’t purchased a single family house, you’ve purchased a multi-family dwelling. You’ve purchased the real estate you need to live in for the next five years AND you’ve purchased two other rental ‘units’ that are speculative bets on future housing price strength.
Thirdly, you’ve taken on the job of landlords. You will be paying in elbow-grease and inconvenience in addition to the math you’ve already done. You’ve also exposed yourself to tenant delinquencies in the event of an economic downturn.
Fourthly, if you do get to buy the second house before the deflation you will likely have leveraged your exposure even further. What percentage of your net-worth is currently in RE? What will that figure be after the purchase of a second house?
– vreaa

HELOC Poll – “36% of Canadians have a home equity line of credit.”

Canadians who have a home equity line of credit (HELOC): 36%
Proportion who are “quite confident of their level of knowledge” about HELOCs: 79%
Proportion of questions that tested their basic knowledge of how HELOCs work that they answered correctly: 43%

Proportion of HELOCs used for renos and ‘major purchases’: 37%
For car or vacation: 29%
For a down payment on an investment property: 9%

– from a Leger Marketing Poll [n = 1,501 adult Canadians; conducted online; late Oct 2011], commissioned by TitlePLUS program, reported at Canada Newswire 15 Nov 2011 and G&M 15 Nov 2011

Globe and Mail – “Realistic way to become financially comfortable: Buy a House”

A Globe and Mail financial advice article ‘Four fatal financial fantasies’ (Amy Fontinelle, 15 Nov 2011) warns against the following assumptions:
1. I’ll receive a large inheritance.
2. I’ll win the lottery.
3. I’ll start a website and make a killing off advertising.
4. I’ll make a ton off an initial public offering (IPO).
Okay, so far so good, we agree; don’t count on any of the above.
The article then, however, claims to make a ‘Reality Check’ and lists four “more realistic ways to become financially comfortable”. The fourth of these?
“I’ll buy a house”.

Comments In ‘The Province’ Regarding Foreign Buyers – “Affordability has nothing to do with the colour of your skin; it impacts every resident of Vancouver. Politicians need to step up on this. And please, please, please, look deeper than what the RE industry has to say on this.”

From the comments section of ‘Is it time to curb foreign real-estate buying in Vancouver?’, The Province, 14 Nov 2011:

“I run and own a successful mid-sized company, if I hadn’t a bought my small house 10 years ago, I would not be able to live here. My company would go somewhere else and 60 people in Vancouver would be looking for work. It strikes me that this is not about racism, as affordability has nothing to do with the colour of your skin. A lack of affordability impacts every resident of Vancouver. The Politico’s need to step up on this. And please, please, please-look deeper than what the real estate industry has to say on this, pardon me but they cannot be viewed as owning an objective POV.”
– The Drake

“I lease a 4000 sq ft commercial property in the city my property taxes are 24,000 a year (yes 24 thousand dollars a year.) These investors are buying to make money, treat them like the businesses that employ people in this city.” and “Last year my household income was 171000 I could afford a house but I’d be strapped for cash. If I moved to another city and earned the same I could buy a house and stIll enjoy my life. There is no reason Vancouver is as overpriced as it is except for speculation.”
– Paulys (13 Nov 2011 10:52pm)

“I was born and raised in Vancouver and I have never seen anything like what is going on now. I attended two first day sale events for a highrise tower in Burnaby and a low rise townhome, also in Burnaby. Both events were packed with Chinese/Korean purchasers snapping up everything in sight. The real estate agents on site didn’t even bother to give me the time of day although initially I was interested. I felt myself to be the victim of reverse racism due to my white skin and possible perceived lack of big money to spend. I employed numerous university students and witnessed time and again the purchase of large “family” homes, all the children going through university and attaining Canadian passports. The children have all gone back home, the properties have been sold and the children come back every 5 years to renew the passports. The parents aren’t interested in doing business here due to our red tape and tax issues but want a bolthole to escape from Asia.”
– anonymous (13 Nov 2011 10:55am)

“I would totally support restrictions on foreign buyers in GVRD. I was born and raised here, have multiple degrees and work my tail off (and save a tonne) but there’s no way I’ll ever be able to afford a million dollar home – and that doesn’t buy much. Its a darn shame that good people can’t afford housing. There won’t be much more complaining from me, but this will drive me to leave the GVRD.”
– anonymous (13 Nov 2011 11:55am)

“I realize this story is about foreigners purchasing Vancouver real estate to the detriment of your average born and raised here Canadian, but I’ve just got to mention how many young people I know here in Greater Victoria who plan on moving somewhere else due to the horrendous cost of living in the Capital region.”
– DC in BC

“My parents bought a house in west Richmond for just under half a million dollars. 50K in renovations and 6 years later, it was sold for just under a million dollars. I love them, and am happy for their success, but it’s stuff like that that’s ruining Vancouver. I’m 25, and I cannot come close to affording a house with my salary (I have a full time job). I’m looking to move out of the country. I’ve had it. If it’s not real estate agents pushing up prices, we have indifferent and out-of-touch politicians looking to raise taxes, and not offer anything worthy in return.”
– Allan Hall

“I just bought a house on an acre of land, in Hawaii, for the cost of a rock bottom condo here in Vancouver. Plus, the weather is better. 🙂 Seeya!”
– anonymous (13 Nov 2011 11:43pm)

“87% of BC residents believe real estate is a good investment”

“87 per cent of residents of B.C. who were polled believe real estate is a good investment (compared to 84 per cent of Canadians).”
[From an investment perspective, when 87% of any population take up one position, it is wisest to take the opposite position. – vreaa]

Question: “The amount at which, if your monthly mortgage payment increased this much, you would be concerned with your ability to make your payments”.
32% of canadian respondents could not make additional payments of $300 more per month

70.2% of Canadian homeowners have a mortgage and/or HELOC on their homes.
Of those, 22% (1.5 million owners) have less than 25% equity in their homes, and 47% have less than 50% equity.
10% of home owners with mortgages have taken out equity during the past year.
The average amount taken out was about $49,000.
During the past year renovation activity resulted in $28.5 billion of equity take-out by mortgage holders.

“Many Canadians believe that other people have taken on too much debt or have bought homes for which they are unprepared. But, when responses about their own situations are aggregated, most believe that they have been responsible. The contrast between these sets of responses is interesting. Actual behaviour by people and their beliefs about their own behaviour tells us more than does their beliefs about the behavior of other people: overall these responses suggest that prudence rules the land.”
[Alternative interpretation: Individuals are inherently biased towards making overly optimistic forecasts regarding their own future prospects. Thus these individuals may be accurate about seeing risk in the situations of others, but far less so when it comes to assessing their own risk. – vreaa]

– Annual State of the Residential Mortgage Market in Canada, Canadian Association of Accredited Mortgage Professionals, Nov 2011 [pdf], and discussion thereof (‘British Columbians think prices unreasonable but real estate still a good investment’, Vancouver Sun, 9 Nov 2011)

“I work in the financial industry. We have a list of clients with way too much debt who we anticipate will be going bankrupt in the next 1-2 years. Also, we’ve had a few surprises…”

“I’ve had some interesting conversations with clients these last few weeks. I work in the financial industry and we are well aware that several of our clients have way too much debt (yes, a lot of it is bad decisions regarding real estate investments). We have a list of those we anticipate will be going bankrupt in the next 1-2 years. However, we’ve had a few surprises-people who we thought were fine financially are calling up and confessing that they are facing financial problems-credit card debt, loc debt etc. It’s quite surprising to hear from these people that things are not so good after all. In terms of bankruptcies, we’ve seen it coming for a few years now, but it only seems to be about now that people are facing the inevitable. Before they could run through savings, cash out RRSPs, run up that LOC in hopes that things would turn around. But now there is no money/credit left. The end of the line is here, it’s strange how it seems to be coming to so many people at the same time-I would expect to see a flood of bankruptcies over the next two years. I can’t see how the housing market will continue the way it has, people are tapped out now.”
– pricedoutfornow at vancouvercondo.info 10 Nov 2011 10:20am

North Shore Owner – “I like this city less every year. If we didn’t have the family ties, we would leave in a heartbeat for better opportunities. Anyone who can leave here should get out and not look back. This city is the real estate and social equivalent of rat poison.”

“We’re in our late 30′s and were *extremely* lucky in being able to purchase a home on the North Shore where we grew up with the profits from selling our previous home at the peak of the boom. We plan to stay here for a long time, so a collapse isn’t going to affect us in the same way that it would if we planned on “cashing in” by selling the place (always a dumb thing to count on anyway!). We have well paid secure jobs and a low enough mortgage that we could handle living on one income if needed. We would never have done it otherwise. I see people my age with $500k mortgages and it makes me just cringe. I have no idea how they can live, given salaries in this town, unless they’re dealing drugs on the side, and a lot of people probably are.
The only reasons that we stay in this town is that our family is all here and we are not financially stretched. I like this city less every year, and if we didn’t have the family ties, we would leave in a heartbeat for better opportunities elsewhere. My advice to anyone who can leave here is to get out and not look back. This city is the real estate and social equivalent of rat poison.”
– RESkeptic at VREAA 7 Nov 2011 10:13am

“My Dad sold out of Kerrisdale in 2009 and Mom is in a big hurry to get back in. He is not and this leads to a bit of strife.”

“i think my dad is really enjoying your blog. he sold out of kerrisdale in 2009 and mom is in a big hurry to get back in. he is not and this leads to a bit of strife. i left vancouver 20 yrs ago, had a front row seat to the dotcom bubble living in the bay area and also the us housing bubble. the wishful thinking and tortured logic about how “this time it’s different” is always interesting to read and understand. i think the one new thing about the van housing situation is the (unanticipated) magnitude of ham. there was a taste of this before with the migrants who feared hk going back to china would be business -ve. but, that was much smaller in scope and occurred at a time when the market was somewhat depressed still. the current version is maximally steroidal due to ww monetary easing. for disillusioned renters, when the world around has gone insane, all you can do is keep your head. when a society chooses to expend its resources wastefully, the result is ultimately detrimental to all, even those who believe themselves to have benefited. for nervous owners, i would sell unless you are willing to absorb a potential 50% reversal – there is still time for a few more to get out.”
– chubster at VREAA 2 Nov 2011 1:37pm

Spot The Speculators #65 – “It’s more fun to blame the Chinese, but really what went wrong in Vancouver is the baby boomers bought up all the property, drove up the prices, and drove out the lower class, including their own kids.”

“My parents own a million dollar house in North Vancouver and a quarter million dollar apartment in Lower Lonsdale.
How about a couple hundred bucks a month to help out on rent so I can afford to live in the city where people like my parents have skewed the prices?
Not a chance.
It’s more fun to blame the Chinese, but really what went wrong in Vancouver is the baby boomers bought up all the property, drove up the prices, and drove out the lower class, including their own kids.”
– Iain at VREAA 9 Nov 2011 10:20pm

We are in a speculative mania caused largely by locals buying as much RE as possible by borrowing at very low rates, leveraging and overextending themselves.
Iain’s parents may look innocent enough, but if you consider their age and the percentage of their net-worth in RE, you’ll see than many in this position are very over-dependent on RE for the fiscal health of their retirement. – vreaa

“We have high responsibility jobs for good employers, and do well financially, but not well enough to afford what we think is reasonable for two people like us, a single family home with a yard.”

“My wife and I have good jobs in high standing professions. Between us, we have five university degrees in hard science fields (with a sixth at the doctoral level underway) all from top three Canadian universities. We have high responsibility jobs for good employers, and do well financially, but not well enough to afford what we think is reasonable for two people like us, a single family home with a yard. We are good with our money and have solid nest egg already built. We cannot justify spending 80% of our income to be able to afford a single family home anywhere within an hour of the downtown core.
We also visit Seattle regularly. In Seattle, we would both make double or more than we would here in Vancouver, with housing at half the price, and the same climate. Similar circumstances exist elsewhere in Canada. While our families are here, we want to start our family in a place where we can provide our children with opportunities, not where every last dollar goes to real estate.
To put a point on it, people like my wife and I are being groomed by our employers to take on senior leadership roles in their organizations down the road. The problem for our employers is that we won’t be here – we can’t have the family we want, along with quality of life we desire and can easily obtain elsewhere.
I look forward to leaving this real-estate obsessed burg. Unless things change, things are going to get a lot worse here before they get better.”
– Vancouver In The Rearview at VREAA 6 Nov 2011 8:06pm

“At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?”

“I felt we could afford around $350,000. We called a real estate agent named Mitch, and suddenly we were looking at houses that listed at $500,000 or more.
It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.
At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?
But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd.”
– from ‘How a financial professional lost his house’, Carl Richards, NYTimes 9 Nov 2011
Remarkable story, be sure to read the whole piece. Hat-tip to Ray for the link (and to many other readers for alerting us via e-mails: clearly this story resonates for many of us.) -ed.

Peddling Influence In Municipal Government – Civic Politicians and Vancouver’s RE Industry

In March 2011 we calculated that Christy Clark received more than 50% of her campaign funds for the race for the leadership of the BC Liberal Party from RE-related industry.

Now, at the Municipal level:

“In this case, the money speaks a lot. If you look across the range of contributions and you try to group them broadly, the property development and construction business is the largest collective group of contributors.” – Patrick Smith, political science professor, SFU
– from ‘Running Against Developers in Condolandia’, Ben Christopher, The Tyee, 9 Nov 2011
[hat-tip ‘Jeff Murdock’]

“It’s clear that Vision Vancouver and NPA received a lot of funding from development companies during the last election.” – Nicole Benson, Candidate, Neighbourhoods for a Sustainable Vancouver (NSV)
– The Tyee, 9 Nov 2011

“Both main parties are completely beholden to real estate developers, more so than any time in the city’s history. This isn’t good and I have to wonder just how much monied backslapping and handshaking is going on. This is how the BC Liberal Party imploded, by allowing their donors and top, most accommodative friends unfettered access to the keys of the province: No door was off-limits, no industry remained unmolested–friends and insiders ravished them all.
Well, look for Vision’s attempts to destroy the viaducts to be one such example. The developers with the most to gain are Vision’s biggest corporate cheque writers…that’s if you don’t count the American money of unknown origin, pouring in from the radical, left-wing Tides Foundation.
And this isn’t an issue for the NPA to raise? Of course it is, but they can’t, seeing as though the same monsters, who buy favour, are writing them cheques as well.”
– Alex Tsakumis, on his blog ‘Rebel With a Clause’, 7 Nov 2011
[hat-tip ‘Nemesis’]

“Vision’s executive director, Ian Baillie, insists that there is no quid pro quo relationship between campaign donors to his party and the candidates they support.”
– The Tyee, 9 Nov 2011
[Don’t you love it when these guys say this with a straight face?
Why would companies possibly give money to politicians if they didn’t want to curry favour?
What else could possibly be on their minds?
– vreaa]

“Welcome To Vancouver. Now Buy Some Real Estate”

– photos by ‘ams’, who writes:
“Just came back through YVR international arrivals and got pictures of the real estates ads that you see once you clear customs and are on your way out, there are two billboards inside and two outside. The last time I went through YVR it was all Real estate ads, today only four.
Most world airports, in the international arrival area, greet you with some ads for local companies, or the local economic development explaining how great the city/region is for business.”
[thanks ams. – vreaa]

“At the time he absolutely believed it 100%, and so did I. How did we get sucked in? I figured it out: It’s possible to have your ego get so pumped up that it completely destroys all logic and common sense.”

“Little vignette. During the dotcom bubble when our company stock was flying while we rushed crap out the door just to be able to book the revenue, I overheard from my cube one of the sales guys ask: “How is it possible customers go along with this and we still get paid?” to which, our GM very loudly proclaimed: “We’ve worked very hard and earned it!”. This will stick with me forever. The reason being at the time he absolutely believed it 100% … and so did I. Our GM was a very sharp guy. So how did he get sucked in? How did I get sucked in? Took me a bit, but I figured it out: It’s possible to have your ego get so pumped up that it completely destroys all logic and common sense. So, let me ask the bulls, AFTER all that you can see laid out before you (San Diego, Phoenix, Miami, Las Vegas, Shanghai, HK, Spain, Ireland, Greece, blah-blah-blah), how can you think this will end differently for you? Have your heads really become that enormous? (PS. Homer wrote a nice little volume about this.)”
– chubster at VREAA 6 Nov 2011 2:44pm

Spot on regarding “can’t happen to me” psychology.
Amazing, isn’t it?
Completely relevant to why so many Vancouver owners/buyers see the dots but don’t connect them.
– vreaa

Property Prices Collapse in China – “When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse.”

“Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun”…
Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.
When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse.”
– excerpted from ‘Property Prices Collapse in China. Is This a Crash?’, Gordon Chang, Forbes, 6 Nov 2011

Effects on Vancouver RE?:
1. A very, very small direct negative effect (a handful of prospective buyers who may have been dependent on funds from these Chinese projects will now be unable to buy here)
2. A very much larger indirect negative psychological effect:
— Things “Chinese” and things “Real Estate” can ‘crash’.
— ‘China’ feels closer to home for Vancouverites than does ‘Ireland’, ‘Spain’, ‘Phoenix’ etc.
— The simple experience of hearing ‘32%-off’ and “price cuts of 50%” has a bracing effect.
– vreaa

“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
– Rudiger Dornbusch, MIT economist, as quoted by John Hussman 7 Nov 2011

Paul Kedrosky Features Vancouver Flip On ‘Infectious Greed’ – “Vancouver Bidding-War House? It’s Being Flipped for 78% (Annualized) Gain”

“Remember that Vancouver house that went for $2.55M ($655,000 over asking) in a 25-person bidding war last April [2011]? Well, the house is back on the market a mere six months later for an asking price of $3.5m, or an annualized 78%. (This house originally went for $531,000 in 1996.)”
– Paul Kedrosky, Infectious Greed, 28 Oct 2011

US commentators have a perspective on these things that is sorely lacking locally. – vreaa

“I got on the “property ladder” 14 years ago using my RRSP savings to buy a 500 sq.ft. condo, then I moved up to a 2 bedroom, then a townhouse, then a 1/2 duplex, and now am the proud owner of my dream 4 bedroom westside home for my family.”

“You lazy spendthrifts have no one to blame but yourselves…I got on the “property ladder” 14 years ago using my RRSP savings to buy a 500 sq.ft. condo, then I moved up to a 2 bedroom, then a townhouse, then a 1/2 duplex, and now am the proud owner of my dream 4 bedroom westside home for my family. Hard work and saving money, keeping my head down and saving and investing like previous generations. It worked then, it still works now. It is doable. Great condos are available in Gastown right now starting at $200k, not that much different than the $165,000 I paid for my first place Downtown in 1997.
But everybody wants the easy life, no one wants to work for it!”
– r_dub71 at Vancouver Sun, 25 Oct 2011, 11:49am

We believe 98.37% of the anecdotes we read.
Granted, we err on the side of gullibility.
We are more the librarian, less the prosecutor.
But, even we found this story too ‘cute’.
Hard working property ladder climber or hard working Gastown condo salesman?
(“You’re not buying a small box for $200K, you’re taking your first step to securing your dream home!”)
OK, let’s assume it’s all true: We’d really like to see the math on the sales-prices and mortgage debt for each of the 5 deals, and to see the current networth:RE ratio.
Anybody care to come up with some hypothetical numbers for climbing the ladder the way he/she claims?
Has that worked through the mania?
Don’t the higher rungs get further away each step? (Yes, they do.)
Sure, you build (paper) equity, but you fold it into a higher buying price, and take on more mortgage debt, each step.
– vreaa