Saturday, May 9, 2009

Where to now?....and then some

Rob Chipman, the realtor who has been blogging and posting numbers steadily for the past few years put up a thoughtful post recently: In it, he admits that even he is surprised by the strength of the Spring bounce and wonders what's up?

Well I think what's up is that a lot more homes just became affordable. We are down anything from 12-15% from the peak and interest rates have brought the monthly mortgage payments down 20% or more. Combine those two and you can estimate, that even though we are still at bloated valuations (compared to income, historically etc), homes have become 30-40% cheaper to buy than at the peak.

That's pretty good and some folks who have been waiting to buy, or move up, have jumped on this opportunity. Others have refinanced at these low rates and so maybe able to hold on to their homes longer through these difficult times (another good thing)

This is exactly what the central banks wanted. They could see, residential and commercial property and stocks in free-fall and the whole system was at risk of collapse.

In our leveraged society, the ultimate holders of these assets are the banks, insurance companies and CHMC. The only thing that they could do, was what they had done again and again for the last two decades, debase money so no one wants to hold it.

Forgetting of course that this was exactly what got us into this mess in the first place. However, this time they had no choice but to pull out all the stops.

Frankly speaking if this didn't cause a small blip up in activity then we could all kiss capitalism goodbye and look for another system of societal interaction.

In the US, the blip was tiny, but enough to stabilise the stock market from it's quickest decline in history.

In our city, the blip was a bit more. That's good, but unfortunately I don't think it will persist for much longer.

We still are in a nasty recession. Lay-offs like the 800 person closure of E-bay's Burnaby call center will continue. Add to that the government cut backs, that in my opinion, WILL come from Gordon after the election, when a 'special budget' will show us how bad the books really are.

However for now there are folks buying. You see, there are some people who look at monthly payments and some who look at price. Those who look at monthly payments, cant believe their luck; prices have dipped, rates are down..they can buy...and they have decided that they wont look at the price in 6 months and kick themselves if their equity goes, or if the foreclosure down the street shaves 20% off.

Others are focused on price, they see a 20% a year, multi-year rise and then, in the worse financial crisis since the great depression, a 15% drop. Surely that cant be it? They would be upset to buy something, the biggest thing you ever buy, and then find it 15%+ cheaper in a year or two.

Count me in the second group. I have waiting so long another year is hardly a chore.

June and the summer will be very telling.


Just got back from the EPIC sustainability show. A bit of a disappointment. I was expecting some solid ideas on how to reduce waste, particularly plastics which are destroying our oceans and rivers. Instead I paid $15 to wander through a bazaar with people trying to sell me stuff.

There were a few stands given to Fraser River protection and other environmental groups, and some interesting speakers, but ING? Investors group? The car companies??

Lots of food samples, given out in little plastic cups...duh! How the heck is that sustainable??

Kudos goes to Salt Spring Coffee Company which was the only one (that I saw) using coffee mugs for their samples, and this company stood out for me: You can buy all your summer picnic wear..plates, cutlery, even straws for $30 or less and it's all biodegradable.

However the show did not meet my expectations, but then it was sponsored by my least favorite media monopoly.

First look at the convention centre for me, and I liked it. Lets hope it isn't an expensive white elephant.

BTW - when I bought my ticket they asked for my phone number? Huh? Why? The last thing I want is some call centre trying to sell me something...maybe even a newspaper subscription?? No!


  1. Mortgage rates in the US have fallen significantly, just like Canada. Yet affordability is now significantly better in even the "bubbliest" of their markets. If interest rates are truly putting a floor under Vancouver's prices, it's certainly odd Phoenix, Sacramento, and even Seattle's prices haven't drastically rebounded. It appears that many buyers are still living in "floating relative affordability" space, not grounded on much except short term affordability calculations.

    It surprises me how dependent upon interest rates the Vancouver market appears to be. Agreed that the Q3 and Q4 2009 will be telling.

  2. Jesse

    Things never got as bad debtwise here. The helocs (Home equity line of credit) withdrawal in the US was truly mind-boggling. As soon as folks had a paper gain on their RE , they would whip it out, aided and abetted by the mortgage companies and banks, and spend it on TVs and holidays with no idea how they would pay it back.

    BTW will add to the post over the week-end.

  3. Fish, there are a lot of highly indebted people here too, living in very over-leveraged homes.

  4. I agree anon. A lot of ordinary people have squeezed themselves into impossible situations, where they can only afford the mortgage with a suite (or two!) or a gaggle of Far East students crowded in the basement.

    The lower rates will give them some breathing space and I am glad for that. As you know I am not one of those 'scorched earth' bears who hope that owners end up foreclsoing in droves. They are our friends and relatives and they made their choices and we made ours. It isn't war after all!

    We can already buy at a good discount to last year (especially when you factor in low interest rates)- we just want more! :)

  5. Fish10, Vancouver has an air of invincibility when it comes to real estate. Looking at what happened to US markets, where price-income and price-rent ratios were similar to Vancouver's at their peaks, their markets have tanked despite equally low mortgage rates there.

    I wonder if Vancouver is merely destined to have reasonable price-rent ratios return, regardless of leverage.

  6. Well Jesse, I dont think we will ever get the same p/r as Winnipeg (no offence to pegers). There are many reasons for that:

    1) All of the Province's wealth gets funelled through YVR- a lot the accountants and lawyers and specialists and head offices that service the province sit here.

    2) Land limits

    3) Immigration and Inter-provincial migration of retiring baby-boomers

    4) Weather

    However there are also a lot of people holding RE who are only hanging on precariously. Either with two jobs at one end, or cashing in stock options to maintain their life-style at the other.

    I may do a post one day on who are the big earners (profession-wise) in Vancouver and how much they make...if there is any interest?

  7. Fish,

    All these four reasons were around before the bubble. As you and others said, this is a temporary blip before the seasons changes and more bad economic news arrives.

    The layoffs are just beginning. Trust me, I know :P

  8. Patiently- right you are. They were there before and kept a floor under Vancouver prices, which I think we will eventually return to, unless we have a no-holds barred depresssion.

    Cities that have the most gain during the crazy RE bubble of the last 10 years, where the ones who had some reason for underlying strength prior. Location, jobs growth...something. It was adding dry kindling to a smouldering fire.

    Like San Deigo, or San Francisco...but not Akron Ohio.

  9. If you want to gauge a city's desirability, I would look at the ratio of incomes to rents. If a city is truly desirable, people will be willing to put a greater proportion of their incomes towards rents. Prices with respect to rents should be relatively stable over time unless there is a structural shift in a city's demographics a la Detroit.

    Hawaii is a good example of this. High rents, low wages, great surfing.

  10. Nice analysis. People may think that prices only have dropped by 15%, but in reality it is closer to 50% off peak prices once they factor in the decrease in mortgage payments from decrease in interest rates.

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