Sunday, October 4, 2009

When Prudence Doesn't Pay

Who are bears? Permanent pessimists and negative souls ,who secretly pray for the collapse of civilization. Not most of the ones that I know.

In fact most are fiscally careful people...they save money, buy things on sale and won't over-pay for something because they 'just have to have it right now'.

For these folks Vancouver RE hasn't made sense for several years now. The widely accepted, often quoted ratios are...keep your mortgage to 3.5 X your total income and keep your house expenses to 40% of net income. Vancouver has been well over these numbers for a long time.

So they have patiently waited, like the counterparts in the US.

The US bears have been richly rewarded for their patience, as the housing crisis struck and foreclosures mounted. They now have their pick of properties and a low mortgage rate (assuming they still have a job!)

Here in Vancouver (in fact in all Canada) it looked like the bears were about to get their moment in the sun as well. As you can see from the graph below, sales completely collapsed last year.

The rate of collapse was unprecedented. The bounce up was also unprecedented, even faster than the preceding bubble. Enough to make a bear's head spin
. No wonder the bears are downcast.

Who would have forecast an instant rebound back up to pre-crisis sales levels. It was like Vancouver hit a trampoline.

So why were so many caught off guard by this rebound. Here are some reasons:

1) Firstly there was the interest rates. The BOC dropped the rates to 0.25%. Never before had they been so low. As I posted at the time the drop in mortgage rates was like a 30% drop in prices.

2) The drop in interest rates not only made mortgages cheaper, but rates on deposits dropped encouraging those with a large down-payment to put it in property. Both 1 and 2 helped move the equation in the direction of buying versus renting.

3) Those of us who have a lived here a long time time failed to understand the allure of our city. This is particularly true for retirees, who come here with funds. The last that apartment sold in my building was to a retired dentist from out east. He also bought another apartment and a commercial property for investment. He admits the cap (returns) rates on both are minuscule compared with what he could get out east..'but I can keep an eye on them here'.

4) The drop in interest rates and Federal and Provincial crisis spending came at a time when we already had a boom from construction, both Olympic related and residential, commodities were still pretty solid eg gold and oil, and so we just bubbled some more.

Ok so that is what happened -what now?

I will give that my best shot in the next post.


  1. and fear. Fear of financial catastrophe caused the drop down, fear of being left out caused the spike up.

  2. Fish- you missed out another bear characteristic, they dont expect to be bailed out of their mistakes.

  3. Inflation AdjustmentOctober 5, 2009 at 1:00 PM

    I think you have hit the nail on the head here. I have been a RE bear for some 4 years now and am also pessimistic about a quick bounce out of the recession. Sometimes when I hear myself talk I wonder if getting older is making me more negative when I am otherwise a very positive person.

    But I read your last blog entry and realize that it is not that I am more or less negative than the next person. It is just that I am more prudent/cautious when it comes to taking on debt and have a better appreciation for potential risks when it comes to buying assets. It is a little like being the grandmother in the group of youngsters - always wanting to watch the dollars whereas the grandkids are happy to spend.

  4. That graph is quite astounding, even when you're like me and keeping ridiculously close tabs on the numbers! What smacks me in the face is the strength of the rebound. We knew it was crazy on the first wave up. Now we've entered the realm of 'beyond ludicrous' - especially when you factor in how disgustingly high the prices remained even at the bottom of the dip. I'm tempted to believe that insanity has no bounds, but I remain unable to capitulate and buy some real estate. The price tag turns my stomach even more than the thought of being priced out forvever. Besides, I can't shake the idea that insanity is bound - bound and gagged that is, and on the way down to the bottom of the lake!

  5. fish did you see what happened to Canwest today?

  6. These are extraordinary times folks. Predicting RE is a crapshoot right now.
    Never in the history of the Western World has central banks intervened in the capacity they are doing so today.
    They say we live in a free market economy, but I call BS
    There are 7 leading economic indicators. 3 of them are up and the rest are down.
    Guess what, the 3 that are up are all government related.
    This is stimulus we're talking about. It's a crutch put up by the government.
    A crutch needs to eventually be removed so that the healing can take place.
    However if the crutch is removed, the patient will collapse.
    I urge you fellow bears to not be fearful of the future, but rather take steps to ensure you're in a good financial position to strike once the market hits your entry price.
    Don't have everything in cash. Similarly, don't have everything in stocks or gold.
    Cash is one of the worse places to be right now, but you still need to keep some for a rainy day.
    Gold is only a hedge. Don't expect to get rich off it.
    Diversity is key. 20% cash, 20% fixed income, 30% equities (solid companies only), 20 energy and commodities.