Friday, July 31, 2009

Still Sizzling

Who would have thunk it!

The US has had a catastrophic RE melt-down, many of it's largest companies have gone bankrupt, most of it's large banks were insolvent and required tax-payer money to stay open. Meanwhile the US's largest trading partner, Canada, is having a rip-roaring RE boom!

That is not how most bears thought the script would be written.

And I have to admit the market is still a rocking and a rolling. I spoke to a Realtor tonight who just wrote a no-subjects, full price offer on a Burnaby house that had been listed 3 days and there were several other full-price offers presented at the same time.

This smells like the panic of 2007 all over again.

We know how that ended, in a blood-bath. Will this too?

It is crazy how an asset can go from must-buy-at-any-price-panic to no-bid and back again in one year!

Basically inventory for July has been flat, going out within a 1-2% of where it came in, as have prices. I am going to be watching the next couple of months carefully to see whether this buying frenzy continues. If so, the bears will have to do some serious hibernation until after the Olympics.

All assets are now linked. RE, gold, oil, stocks and even bonds. They have all been on fire since March 2009 without the even slightest correction. I expect late Summer and early Fall to bring a larger correction in all assets.

If it doesn't then I for one will have to consider whether the economic rebound is stronger than I expected.

Wednesday, July 29, 2009

Sorry for the lack of posts folks

There is not much to say.

It's hot and the heat has been affecting the rational part of many buyer's minds.

I see sales which have sat there for months, suddenly going for at or near the listing price, as multiple buyers chase it up, worried that if they don't buy now the Kingdom of Heaven will be barred to them for ever!

In any case the last two days I have seen more listings and less sales. Lets see if this is a trend. I will tell you if it continues.

As Robert Prechter said:

The news at turning points is too strong for people to act contrary to it...fundamentals so intensely support the continuation of a trend, just when it is ready to reverse.

Friday, July 24, 2009

Week-end round up...

A Tale of Two Markets..

I think we have a tale of two markets. The first is the Fraser Valley and outskirts of Vancouver. While they bounced back from the near catastrophe of last fall, it was a fairly modest rebound.

On the other hand we have had a much more robust rebound in Vancouver proper, especially the previously red hot areas, which are now glowing again.

The question is whether the weakness from the outside will work it's way in or the heat expand out.

Regular readers may remember us charting the progression of the first major started with rising inventory in Surrey and Langley and surrounding areas, then MOI started rising and finally prices fell. In due course this spread to Vancouver itself.

We will keep our beady eyes out to see which way it goes. Inventory has started to inch up a tiny bit. However it is still too soon to call it a trend.

It's All About the Economy Stupid

Mark Carney has called the end of the recession. Well he actually said it would probably end in a few months. The stock-market obviously agrees since world indices are about 40-50% higher than their Armageddon lows of March 09. I am not so sure.

Lets crunch the numbers. We were literally in free-fall late 2008 and early 2009. The GDP in Canada was dropping at an annual rate of 3.7 in the last quarter of 2008 and 5.4% in the first quarter of 2009, and will probably be down 3.4% in the second quarter. These are Major Depression numbers.

So I for one am glad that they pulled everything they had out of the bag and dropped rates down to almost zero to prevent food riots and mass unemployment (yes it was possible).

However I do not have ANY confidence in the predictive abilities of the BOC..Fed..etc. We in the blogosphere have been saying for years that the mountain of debt built on bubbling assets was a recipe for disaster. Furthermore deregulation eg the crazy trading of US brokers and insurance companies or the sale of garbage-backed paper to Canadian investors was unsustainable.

Our regulators and policy makers, who mostly come from the investment industry, assured us that all was well.

"We are insiders, trust us, we know how it works."

Late 2008 they all looked like deer-in-headlights and ripped the cover off the tax-payers' cheque-book and threw as much money as they could at the collapsing assets to put a cushion underneath them.

If they were so bad at predicting the arrival of the biggest financial cataclysm of the last 70 years, should we trust them now?

I expect rather tepid growth for some time. Even though we have are no longer in imminent collapse, we still have de-leveraging and over-capacity to deal with. We also have a lack of any drivers taht I can see for a new leg-up.

Commercial RE

Last week-end I drove around Vancouver and saw lots of commercial real estate in trouble. Shops and offices down-town vacant and strip malls with empty stores. The situation is the same in many industrial parks where businesses are leaving or down-sizing.

Metro Vancouver's office vacancy is up from 5.7% late 2008 to 7.4% mid-2009. Which businesses suddenly start soaking up this excess? I would guess that we will be up HIGHER by the end of the year lease renewals will be at lower rates.

My proof - I rent my business space and my home - and for the first time - neither increased their rents but were just happy to have me stay.

So I think we have a modest rebound, and then folks realise that the recovery is going to be slow and job-less and that in the meantime, governments are going to have to provide for more people with less revenue. I suspect that will come in the next few months and will be looking to the stock-market and bonds for clues that the investment community is moving from the euphoria of non-collapse to a realization that this is no ordinary recession. BTW if Mark Carney is right that would make it a very short recession of about a year or so.

From 'end-of-the-world' to short recession - I don't buy it.

Low rates and oil and cheaper stuff

We have had a huge fiscal stimulus. Interest rates are lower, oil is less than half what it was a year ago, and many things like cars and furniture are being sold with 0% interest rates.

So those with secure jobs have been using their newly acquired disposable income to buy a house or move up.

I would have thought the effect of this huge boost would have ended by now, and the reality of a fragile job market and on-going recession would have pulled the carpet from under the rebound in housing. However I underestimated the effect. It went on longer and stronger than I thought. It happened across the country, with some cities reaching new price highs.

Thankfully that hasn't happened in Vancouver (yet!) and frankly speaking I doubt it will, but will be watching the numbers heading into fall very carefully.

Monday, July 20, 2009

Watch this...

Brian Ripley in particular is worth watching, since he talks about the Vancouver market. "The banks have started pricing in the risk that the Government doesn't want to."

Friday, July 17, 2009

Into hibernation we go...

OK bears, I think we need to go into hibernation for a while. Nothing I see in the numbers is bearish so far, so there is no point dissecting every little twist and turn in the market.

When the market turns down again, it will be obvious. Now is not that time.

The market needs a jolt to send it back down, like it had from the events of last fall.

What will that event be?

1) Rising interest rates. Possible, but I would be surprised if we go much higher. Inflation is fairly tame at the present. In fact we just had negative yoy rates, down 0.3% from last June. The drop was caused by gas prices dropping. Without the gas price drop we would be up over 2%. I don't think the economy can withstand higher rates.

2) The Provincial Government slipping further into deficit and having to slash spending, just as the big projects..bridges, Olympics-related, Canada line come to an end.

3) The World economy having escaped financial Armageddon, just sinks into a very severe recession, hitting commodities and bringing fear back into the minds of asset buyers.

I think 2) and 3) are more likely. Despite the fact that we have unprecedented rate cutting and stimulus packages around the world, we are sinking deeper into recession daily with rising unemployment and lower government tax receipts. The governments which were blowing the horn of stimulus, will soon be panicking about the burgeoning deficits, and will be looking to make cuts.

So I don't think we need to look at every statistic hoping for signs of a change. When it comes, it will be unmistakable. Until then I am going to enjoy the summer, and wait for the jolt.

Sunday, July 12, 2009

Bears anxious, bulls victorious and a poll

Poll first. I am trying to work out how many readers I have. Google analytics may double count some folks who use different computers to access the site, therefore please take a millisecond to click ONCE on the poll to the right.

Now to the bubble graph I posted the graph a week or so ago:

In the post I said that most bubbles follow this pattern though there are of course variations in shape and duration as the authorities try their best to keep the bubble inflated, having completely ignored it while it was being pumped up (and even taking credit for it).

I did mention that the bubble doesn't have to resolve this way but could plateau or run up again. In fact I have to admit that I do not recall any bubbles that have NOT burst in this manner. From railroads at the turn of the 20th century to the stock-market bubbles, gold, oil...every crazy run-up seems to follow this path.

For it not to follow this graph would suggest:

1) We are not in a bubble but are just moving up to fair market value

2) We still have more inflation to go in the bubble.

Clearly Vancouver RE was way underpricing on an international basis about 15 years ago. As we have moved up the ranks of the most expensive cities the same cannot be said now.

Could the bubble have further to go? Possibly. As I mentioned in one of my comments the dramatic drop in interest rates came as a result of the catastrophe that was unfolding in the US, and before the full effects were felt here. We therefore had the bounce in RE all across the country. However the effects are now being felt here with rising unemployment and bankruptcies.
If we do not get a bounce in the worldwide economy soon, we will feel it full brunt.

Our governments have already fired their bullets of low rates, increased spending and tax cuts. We have nothing left to throw at the fire.

Policy makers around the world, are doing what they have done best for years, try and prevent the cleansing action of a recession - which BTW punishes speculation and over-capacity- and by doing so have built up the mother-of-all-purges.
So I would not bank on the bull resuming, but of course I cannot completely rule it out.

In fact if you look at the graph, the time of maximum anxiety for bears is during the peaks of the bubble. Like Spring 2008 when bears where getting completely despondent, watching a US RE market melting down and ours hitting new highs.

There was a brief sense of relief and vindication from Summer 2008 to Winter 2009 and now the anxiety is back up to fever pitch as prices have stabilised and moved up. That is to be expected. This graph could chart human emotions, as much as the price of an asset.
Most bubbles end with a quick drop, a bounce and then a long drawn out downward path. We will know if that is our fate in a few months.

Wednesday, July 8, 2009

Good Housing Report - and it's from a bank!

The Royal Bank's Robert Hogue has put out a good report on Housing in Canada.

Most of it we have been saying on the blogs.

1) Sales and prices are up since March due to the unprecedented drop in interest rates improving affordability.
2) The best of the rates are probably behind us.
3) So from now the state of the economy and incomes will be the drivers.

BC specific: after the sharpest drops since 1991, it has rebounded and he sees a floor under prices from lower construction and listings.

The RBC affordability measure dropped for Vancouver dropped from a staggering 80-90% of household income to own a SFH to 70% or so. Still remarkably high. He notes the rebound DESPITE
a soft economy and surging unemployment.

Here is the whole report :

I agree with most of it. The drop in interest rates has had an incredible affect on affordability. It was like a price drop of 20-30% -except not quite. The asset you are buying is still over-priced even if the carrying costs are lower. Would you buy a car for 20% more than it is worth, just because the financing costs were low?

Nevertheless it has led to a major bounce. Now what? Well as he says now we have to wait and see what happens to the economy. The floor he mentions can easily be broken if the economy starts to wilt.

In fact I would say that after the Olympics, if the world economy does not rebound quickly, the price of housing will be the least of our worries as our unemployment continues to surge, and we have to deal with the Olympic cost over-runs and resultant cuts in spending.

I don't see any driver for improving the employment situation anytime soon and am concerned about another surge post Olympics.

Hat tip to Larry Yatter for posting the report.

Monday, July 6, 2009

Bubble Graphs

If you follow most bubbles you will see a graph that is similar to this one.

If course every bubble is different and the desperate measures to reinflate the bubble once it starts to deflate means that the shape and duration get distorted.

The Nasdaq graph from 1996 to 2004 follows this graph almost perfectly. You could put the two on top of each other and each blip and spike will be on both.

US real estate also followed this pattern.

Of course not ALL bubbles follow the graph, some will have prolonged plateaus, others will just collapse suddenly. However this pattern repeats itself sufficiently frequently to suggest it is a good proxy for human mass psychology.

In any case, I post this to show that we could very well be right where we should be. We had the first sudden drop, are in the midst (or near the end) of the rebound up...perhaps to be followed by the big drop.

Ironically we are so easy to predict that we have the exact emotions on the graph. Bulls are now jubilant and bears dejected, both are becoming convinced that we are heading for the highs again.

If we DO reach the highs again, then this graph is not valid and we are developing a different pattern. Let us see what happens over the next few months.

Friday, July 3, 2009

Making sense of the Housing numbers

Here are a few random thoughts that are passing through my brain....I am afraid it will be a bit long.

1) As I mentioned a few months ago, as soon as the Provincial election was over, the Liberals would start admitting that their budget forecasts were too rosy. Well here we are just over a month after the election and our premier is starting the process of fessing up.

As Vaughn Palmer wrote in one of the local papers.."Campbell is talking about holding the line on a relatively modest deficit at a time of economic decline, crashing revenues and escalating costs."

It will just be a matter of time before they are forced to start some major cuts or give up on any pretence of minor deficits, never mind balanced budgets.

2) OK so I got one thing right. What I didn't expect was the strength of the rally in assets. All assets. Oil, R.E. (in Canada) and Stocks. Given that we came back from the brink of financial Armageddon, by the tax-payer assuming huge swaths of liability, a bounce was likely. However what we got was more sustained than I had expected.

The RE Bear's case has always been that RE worldwide was grossly over-valued.

This was particularly the case in the US, where it was so over-leveraged and so much of it was held in speculative hands. However it stretched to the UK, Spain, the Baltics, Central America and of course Canada, especially YVR.

Everywhere else on the bubblesphere, prices have dropped, in many cases dramatically. In the US, the Case-Shiller housing index has dropped to late 2002 levels. In some parts of Europe where the bubble was most inflated, prices have dropped as much as 20% or more in the last year alone...

Meanwhile in Canada some cities like Montreal and Ottawa are at new highs, and Toronto is flat.

In YVR after the sudden huge drop in fall, we stabilised and have started to make a small recovery. We had a sizzling June for sales. How is that possible?

My reasoning is this....the crisis hit the US first as they had been the most irresponsible in lending. We were still doing OK as they started to collapse, due to several factors;

a) The usual lag between the US and Canada. We have contracts in place that have to be worked through.
b) Our lending was (comparatively) more responsible.
c) We were protected by the resource sector, even with the battering it took over the last 18 months.

As the US economy dropped, the Fed desperately cut rates and our rates followed down (after all we cannot afford to have any strength in the Canadian We also had Federal panic measures like the home renovation grants and various stimulus packages.

The result was that we had two separate economies.

The first were the folks getting laid off in manufacturing and forestry...and buying a house was the last thing on their mind.

Then there was the other 92% of the work force who were employed, still getting paid pretty well, and who saw the price of many things dropping - like gas and travel and cars -and then this wave of interest rate easing hits them.

The lower cost of borrowing allowed them to buy an extra 40% more home (30% from lower mortgage rates + 10% from lower prices). I have shown you in previous posts how the rate cuts made housing a lot more affordable, even without the price drops.

Who wouldn't jump at the chance to get on the housing band-wagon or to move up. (obviously not us bears :) )

It is no coincidence that the Government and head-office cities of Ottawa, Montreal and Toronto, where employees feel the most secure in keeping their jobs, had the most price gains, while the entrepreneurial cities of Calgary and Edmonton had price drops.

What now?

I think we are now in the calm that is the eye of the storm. That is when those who have not been affected breathe a sigh of relief and then get hit by the other side of the storm.

It is inconceivable to me that our major trading partner, the US is in such dire circumstances and we should get by relatively unscathed.

Remember Canada exports greater than 30 x more to the US than to China. Most of our trade with China is imports.

My Guess

I think we will soon have the second leg of the severe recession starting. I expect the markets and assets to roll over again. When? I think it could be anytime from now until early fall. As an economist once said.."You can ask me what or when, but not both!"

If so, I think that commodities will also roll over once again and it will be our turn in the barrel. The only problem is, we will have already fired all our more easing is possible, Federal and provincial debts are climbing rapidly and stimulus packages will be spent.

I expect the Provincial fiscal position to be a LOT worse this time next year and for the government to be looking at health and education (2/3rds of the budget) cut backs to make up for the Olympics and income hole.

RE is just another asset and is about as over-priced relative to income and purchasing power as ever, so IF the weakness that I expect starts anew, we should expect RE to roll-over in Fall and keep going down after the winter Olympics.

However I didn't expect the up-tick that started in March to last this long, so as always, take my opinions with a large bag of salt.