Wednesday, January 20, 2010

Thanks to vancouvercondoinfo for the above graph.
As regular readers know, I have posted the typical 'bubble graph' several times in the blog and until the end of 2009, there was still a strong possibility that Vancouver was following the path of Dutch Tulips and the Dot-com-laden NASDAQ of the late 90's.
However as you can see from the graph detached has made a new high in average price, which puts this model under some stress. All is not lost...yet. But it is getting close to the wire.
Just because we think something SHOULD correct and clearly is over-priced, doesn't mean it will oblige. There is often a confounding factor that we did not account for that could prolong the bubble or push it to higher heights. Remember Japan had a RE bubble that went on for 15 years without a pause and has been on an equally long down-ward path.
Lets look at the graph above once more.
The Boom-bust sequence often follows a predictable course:
First there is a trend change which is subtle at first and then picks up momentum and feeds on itself.
You can see in this graph that 2001 marked that departure. Prices rise at an even steeper trajectory and bears talk of 'bubbles' and 'unsustainability'. Each minor correction is hailed by bears as the beginning of the major drop, each bounce back is a vindication for bulls that the move up will keep going. People move from the bears to the bulls campand are quickly rewarded by an increase in equity and feel smart for making the jump.
Those who don't change camps, become ever more dejected and bitter towards all the factors that they believe are keeping the bubble inflated...government policies, rich immigrants, tax breaks, realtors, pumpers, lax bank lending etc They feel and are made to feel like losers.
The peak is marked by absolute recklessness as people throw money at the asset. That would be late 2007/2008. It is the last gasp of the main run-up.
Then we have a drop, which was quite rapid and frightening. Bears are jubilant.
There is usually a retest up to the highs. The late-comers see their opportunity, the vested interests try their best to keep the bubble inflated and up goes the asset again.
Bears who didn't buy are ready to leave town or are getting divorced by their spouces :)
However the mood is different than the first peak. It is not as reckless. The recent memory of the drop is still in people's minds and their is anxiety in both camps. I would say this is the part of the graph where there is the most anxiety and worry.
Both sides worry about which route the asset will take. Despite all the bravado from both sides, no one knows, or can say with conviction which way the graph will go.
Buyers, especially recent ones, will turn on any bears who may suggest that their buy was at the top, where-as bears are looking for some indication that they didn't miss the last chance to gas up for 200 miles.
We are at this point now.
I note that the UK was in a similar position and thanks to herculean efforts from the government to pump up the asset and bail out the speculators, the price of housing has rebounded but even they didn't get to new highs as we have in Canada:
Ironically we felt proud in Canada that we had more sound lending and did not end up with the same problems as the US. Then we increased the CHMC limits at the all-time lows of rates and at the all-time highs of prices. To paraphrase repeat the same actions that failed before and expect them to succeed is true stupidity.

The next few months will make things a lot clearer.


  1. Fish,

    Don't forget the UK had two tops. Don't have the time to find the links for you but they're in HPC (HousePrice Crash UK). The second top came from HUGE City Bonuses the year before Wall St. fell off a cliff. That could explain why this (now third, government induced top) didn't go as far as ours. They've had two gos at seeing the other side.

  2. As I mentioned before, people were expecting this last dip (albeit a large dip) to be the poping of the bubble.

    When the bubble didn't pop (but blew even higher) people started to say the boom-bust model was wrong.

    It isn't wrong.

    What's wrong is the assumption we were at the peak of the bubble. The large dip was, in reality, just part of the jagged climb to the true peak.

    The boom-bust model will play out... just not necessarily on the timeline many want it to.

  3. Anon- yes indeed. The UK government has thrown everything but the kitchen sink at the bubble, trying to keep it (and their banks) afloat.

    Whisperer- a human's lifespan is finite. I hope to see this bust that you speak of :)

  4. Fish,

    The Crokcord Pacific Showroom on the south east seawall has more action in it than all the takoyaki, dim sum eateries just West of it. In the midst of what looks like a too-calm Olympic event, the sales carry on. Looks mostly like the same old suspects: locals, asian locals.