‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

The Vancouver RE market can only be understood as part of a global phenomenon of too-cheap money encouraging ‘extreme speculation’. -vreaa

“When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.
We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.”
– from ‘Setting the stage for the next collapse’, Steve Saville, The Speculative Investor, 22 July 2014

“Yellen will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. … I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck… The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”
– from Jeremy Grantham’s latest newsletter, GMO Q2 2014

‘Vancouver Affordable Housing Agency’ Created By The City

Candidates Should Possess Superhuman Powers and Pixie-Dust

“The City approved the creation of a new Affordable Housing Agency last night, an arms-length organization based on best practices in other cities to enable the creation of new low and modest income housing in Vancouver.

The Vancouver Affordable Housing Agency (VAHA) will also collect available data on issues such as vacant homes, and provide information on ways to limit investor speculation and unnecessary vacancies in Vancouver’s housing market.

“The Vancouver Affordable Housing Agency will be a key tool in the City’s efforts to create new affordable housing that meets the needs of local residents,” said Mayor Gregor Robertson. “As well, by designating it as a research hub to monitor issues such as vacant homes and excessive investor speculation, the VAHA will contribute to an informed, fact-based discussion of Vancouver’s housing market.”

The VAHA will be comprised of a board appointed by City Council, which will include members of the community with expertise in real estate, non-profit housing, and tenant issues, among others. Its target is to create 2,500 new affordable homes by 2021, with 500 in the first three years, with a focus on affordable housing geared towards families.”

– from ‘Council approves new Affordable Housing Agency’, Mayor of Vancouver website, 10 Jul 2014

Above noted, for the record.
A “fact-based discussion of Vancouver’s housing market” sounds like a great idea.
That aside, it would be extraordinary for an Agency like this to make a real difference. It is very, very difficult to create genuinely affordable housing in the context of an extremely overvalued market.
This kind of initiative usually acts as a marker to remind us that people are concerned about the issue, rather than being a force for any substantial change.
– vreaa

Meanwhile…

“Fitch Ratings says Canada’s real estate market is as much as 20 per cent overpriced and cautions the government may need to take more measures to slow down borrowing on homes. Fitch is the second U.S. financial agency to sound the alarm on Canadian home prices in the past week, with the Morningstar research firm predicting a 30 per cent correction was possible over the next few years.

The latest warning comes as the Teranet–National Bank composite house price index for June showed prices rose 0.9 per cent from May and were up 4.4 per cent from last year. The year-to-year gain was the lowest in six months, but still more than twice the underlying level of inflation in Canada and above income growth. Prices were 8.1 per cent higher Calgary compared with a year ago, while Hamilton saw increases of 7.3 per cent and Toronto and Vancouver climbed 6.1 per cent. …

Whether Canada’s home prices are due for a big fall has been a hotly debated topic in Canada for several years, but as yet predictions of a housing bubble about to burst have not materialized.”

– from The Vancouver Sun, 14 July 2014

No, Not Karl Marx; That Other Mark, Mark Carney – “Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”

“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself,” Bank of England governor Mark Carney said. “A sense of self must be accompanied by a sense of the systemic.”

Carney said public trust had been damaged by the behaviour of banks both before and after the financial crisis. He cited allegations that the Libor interest rate benchmarks and prices on the foreign exchange market were tampered with.

“Unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption … has eroded social capital,” he warned. “An unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.”

– from ‘Bank of England’s Carney says bankers should be less selfish’, David Milliken, Reuters, 27 May 2014

—

Related things can be said for the threats to a society of perversely low borrowing rates resulting in astronomically overvalued homes. A housing bubble devours its life-blood.
Carney was instrumental in ensuring years of mispriced money in Canada. He repeatedly threatened to tighten policy, but never walked the walk, and his words were ignored and seen as vacuous. And he never adequately leaned on those in government with direct influence on mortgage terms.
– vreaa

BC Premier: “I think the market’s good, it’s a buyers market. I want to make sure I get in before prices start to rise.”

“In Kelowna on Thursday, Clark said she has already been on the Internet looking for a home but would also like to hear from anyone in real estate about a home that requires low maintenance.
“I have a cat, but I won’t be bringing her. So no pets, no smoking and low maintenance,” she said.
The premier told reporters at her victory party on Wednesday night that she didn’t want to be “presumptuous” and start looking for a house while she was campaigning, but she’s getting serious now.
“I think the market’s good, it’s a buyers market. And you know the riding is really getting stoked again, so I want to make sure I get in before prices start to rise.”
– from The Times Colonist, 11 July 2013 [hat-tip kabloona]
—

Announcement:
With this brief (but sweet) post, we’ll be taking another break from our (admittedly very skeletal) posting habits of the past six weeks. We’ll be on hiatus for at the very least the rest of the summer. Refer to VCI and Whispers for ongoing Vancouver RE discussion. We hope to be back in full at some point. Enjoy the fine weather, and keep well, all. – vreaa
(PS: Nothing has changed regarding our overall bearish outlook on the Vancouver RE market.)

The Economist on Land Taxes – “Taxes on immovable property are the most growth-friendly of all major taxes.”

“Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes.”
– from ‘Levying the land’, The Economist, 29 Jun 2013 [hat-tip clive]

Don’t Worry, I’m Sure Somebody Will Sort This All Out – “Policymakers now know better and will be a lot more proactive in preventing a collapse.”

“Risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes. Many housing bears assume this overvaluation entails a hard landing but I’m not convinced it’s inevitable at the national level. One reason – which seems mostly overlooked in the debate – is that Canadian policymakers will be doing their utmost to avert such an outcome.

In a sense, Canada is fortunate to be facing the spectre of a housing bust after other countries have had theirs. Before 2008, it was generally believed house prices could never fall by much. Policymakers now know better and will be a lot more proactive in preventing a collapse.

Canadian policymakers do have the levers to affect outcomes. One is the regulatory framework for housing, which can be amended in various ways to reconfigure housing demand and supply to the extent required. Indeed, Finance Minister Jim Flaherty has tightened mortgage lending several times over the past two years to slow down price increases and give household incomes time to catch up.

Other regulatory changes include tagging Canadian banks with “too big to fail” provisions that require them to put aside more capital. Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity.

In addition to these pre-emptive steps, Canadian policymakers have no doubt given some thought to dealing with the risk that the soft landing could go off the rails. It’s hard to imagine they would allow the housing sector to destabilize the economy and financial system like it did in the U.S. and other countries.

Responses could range from cutting the Bank of Canada rate to relaxing regulatory restrictions on housing demand. Housing bears might complain about such measures but they would allow Canada to reposition back to a soft landing. That would be more preferable than inflicting the trauma that befell the countries hit with housing meltdowns.”

– from ‘Canada’s lucky to come late to the housing-crash party’, Larry MacDonald [a “retired economist”], G&M, 13 Jun 2013
—

A soft landing will not be engineered in the Vancouver RE market;
it is in the nature of spec bubbles that they burst, ending with a “bang and not a whimper”. Let’s hope that those in charge of Canada’s monetary policy and mortgage rates don’t do even more damage to sensible citizens by trying to avert the inevitable.
While we’re on the topic of “late to the party”, it is interesting to see the Globe and Mail’s Larry MacDonald, who up to now has gone to great lengths to reassure himself and everybody else that the RE market is not at risk [see, for instance, ‘Housing bears need to relax and take the long view’, G&M 1 April 2013], now stating that “risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes.” After all, prices have been outrageously high relative to incomes for many years now.
– vreaa

“I Wish Them Bad Luck.” – Jim Flaherty, on those who wish to profit from Canadian RE price drops

“I wish them bad luck.”
– Canadian Finance Minister Jim Flaherty, commenting on recent moves by some U.S.-based hedge funds and other big investors, who worry that the Canadian housing market is heading for a hard landing, and are looking to short, or bet against, Canadian investments.
[as quoted by the Wall Street Journal, 28 May 2013]

Other excerpts from the same article:
“Last year, Mr. Flaherty had voiced concern about the condo markets in Toronto and Vancouver.
“When I look at the housing market, I’m looking for the ‘doom and gloom’. I don’t see the ‘doom and gloom’. I see some moderation in demand. This is a good thing,” he said.
—

Flaherty’s wish for bad ‘luck’ for the ‘shorts’ is the equivalent of a hope for good ‘luck’ for the (immensely greater) ‘long’ position; a long position that he has, after all, attempted to shore up for many years. Flaherty cannot calculate the damage that the housing bubble has done, nor that which its resolution will end up doing. It’s natural for him to be simply trying to keep it going at this point.
Regarding those betting against price increases:
Any healthy market has to be able to tolerate the possibility of people speculating against price increases.
There are strong arguments that the ability for individuals to short a market improve that market’s strength. Shorts improve liquidity, make for more valid ‘price discovery’, and are around to buy when nobody else wants to (near bottoms).
There are no ways to directly short the Vancouver RE market (it would likely have benefited if that had been possible!).
Some are attempting to indirectly short, and hope to profit from price drops via their likely effects on the values of the shares of certain stocks or other instruments. For the record, vreaa is not trying to do anything like that. We’d simply like to see sane valuation of Vancouver housing.
– vreaa