Saturday, February 26, 2011

Why have bears been wrong for so long?

We were right with respect to the US and Spain and many other over-priced countries, but Canada keeps on trucking. We were right for a brief time in late 2008 and early 2009 when there was a flash crash. But the Feds and BoC brought that to an abrupt end, and up and away we went.


There are many reasons..low rates, the CMHC, irresponsible mortgages etc But there are others and ironically I found some of them in today's Vancouver Sun, particularly in the business section.


First, the front page storey was about Middle Class Mainland Chinese buying Greater Vancouver Real estate, with one RE company that has offices in Beijing claiming to have sold 500 units to Chinese investors in Toronto and Vancouver in the last two months alone.

500 by one company in two months, in two cities, is significant. Our RE has basically become a commodity like our wood, gas and oil. That is a fact which we (us bears) had not accounted for. The government decided not to allow export of our water, however they have no concern over who owns RE, even if they are absent.

RE bears looked at local factors. Average after-tax salaries and what they could afford and did not account for the major and persistent buying power of Mainland Chinese investors.


The article below was about the turmoil in the middle east driving up oil prices, hurting some and benefiting others. As we all know, we are in the midst of a rip-roaring commodity boom, and fortunes are being made daily by the penny stock scammers and legitimate promoters and deal-makers. The most ever in fact.


Then on page two- there is David Baines' excellent expose of two stock fraud schemes that have made the promoters Ten of Millions in illicit gains.

I suggest everyone read it Those accused are from as diverse places as London and Israel, but end up here. Why do they operate out of BC? Because it is no secret that Canada is 'soft' on stock manipulating and insider trading and white collar crime. Charges are few and far between, convictions even rarer and jail time is almost unheard of.

Those charged in these cases were by the US SEC (a pretty weak toothless body too- but superheroes compared to our fractured ineffectual regulators).

This is another factor that us bears did not account for in the average income/price calculations. The huge amount of hot money that flows into our Province. It isn't just foreign money that sloshes in with little account, it is our own home-grown fraudsters who seem able to move Tens of Millions in and out of the country with impunity -whatever happened to FINTRAC?


Then there is of course our huge drug trade, which is estimated at $7 Billion by the Economist and employs ten of thousands of people.

All money that does not show up in the 'average income' numbers.

So what does this all mean? Well it means that we cannot come to simple calculations based on average income to try and work out what prices are reasonable. there are just too many unknown variables that cannot be accounted for.

Does it mean we will never have a correction in BC? Of course not. But it does mean that unaffordability in itself will not be enough to bring this circus to an end.

It may require the prefect storm of a slow-down in China to reduce outside speculative buying and reduced commodity prices. That or some 'black swan' event like Quebec separatism to raise our rates. Otherwise I do not see how this come to an abrupt end.

I don't think our new Premier Christy Clark, regards outrageously high house prices as a problem to be curtailed. In fact she probably regards it as a sign of strength (and there are probably many around her that will sure that is the only opinion she hears)

As to the Feds and the B of C. Despite their bleating about the high levels of debt - which is almost all RE based AND caused by them, they have no will to reverse the mess they have helped create.


  1. Fish- I think you are right and sadly I don't see any end to these factors in the near term.

  2. 1. Rich investors: weren't they around 15 years ago when Hong Kongese and Taiwanese were immigrating to Canada in numbers way higher than PRC Chinese today? Are you stating that a smaller number of people from China are capable of handling twice the price compared to the tens of thousand of first-world Asian millionaires who immigrated decades ago?

    2. Commodities: How much money is actually generated in BC due to these commodities? Why in the interior of the province, where all the mining is taking place, aren't house prices booming like in towns in Alberta and Saskatchewan?

    3. Stock scams: You mean there are more stock scams today than, say, in the late 1990s, when prices were 50% in real terms from today's levels. Provide some evidence of the actual impact, not Baines anecdotes.

    4. Black market: Can you provide some data on how much the black market contributes to BC's economy? How much is required to justify current prices?

    I like the format -- fosters debate I suppose -- but this is anecdotal conjecture. Provide some numbers to align house prices with the supposed economic boost from these four "unaccounted for" sources! I've already done the math and it doesn't add up. The fact that BC's debt to income ratio is the worst in the country is merely a validation of this.

    Keep up the interesting posts!

  3. Frank- when things do not happen according to my expectations, I look around for reasons. Early in 2009 I posted that the emergency measures the Government was taking, especially the interest rate cut and doubling the CMHC lending capacity would probably stop the much needed housing correction. It did. However we continue to push the ceiling on affordability and I need to look for reasons. these are some.

    Jesse- here is what i think

    1) The number of wealthy Mainland Chinese dwarfs those from Hong Kong and Taiwan, just because of the huge population. Furthermore, we have never been so open so quickly to investment from any other country. It has probably helped us from following our biggest trading partner the US into a major recession. The downside is that the RE market has been squeezed.

    2) Lots of money is made here. Look at most of the junior miners, oil, potash etc and see where their head-office is. Right here. Even if they drill in AB or SK or even in Columbia! That means executives, staff, lawyers fees etc. Look at where many of the big gold and oil execs live. Right here.

    3) They used to be small potatoes in the 1980-90's except for the big kahuna Bre-X. Everyone knew that the VSE was rigged and the liquidity was so small that no-one could pull off big scams. Now there is international money flowing into the small stocks and that gives the crooks a chance to hit it big. Also many of the US bulletin board scams are run out of vancouver -for reasons I noted above. We are known as a scammers paradise.

    4) The Economist magazine says we have a $7 Billion illicit drug industry. To put that into context, it is 70% of what the Provincial Government spends on all types of education or to put it another way- it is 5X bigger than the film and movie business. You decide if that is significant or not.

    The debt to income is terrible, I agree but I suspect the above factors account for some of the 'missing' income!

    Thanks for sharing your opinion.

  4. So we have $7BB from the illicit drug trade, but not all of it necessarily stays in the province. Nonetheless it's a good start for numbers.

    The rich foreign investors argument smacks of DotBomb bubble thinking. If Vancouver can capture but 0.1% of the "rich mainland Chinese" market, that will justify prices propelled higher and higher forever. Everyone else in the world is saying that too, of course, about wine, cars, art, Zambian copper mines, and on ad infinitum. But how much is really coming in from them? We have data from Landcor on true foreign investors, and we have immigration data too, so we can take a stab at the market size. That should provide some semblance of a starting point.

    What always gets me about these arguments is how little effort is put into estimating the magnitude of their impact. We're left inferring the impact -- since it can't be easily measured, we think, it must be immeasurably big.

  5. "I suspect the above factors account for some of the 'missing' income!"

    What you should be asking is how much more are these factors contributing to high prices today compared to, say, 10 years ago. It's the Δ that would be justifying higher prices.

  6. Well Jesse these are reasons I suspected as causing the on-going rise in RE, despite decreasing affordability.

    What do YOU see as the cause(s) of the on-going rise?

    Please enlighten us.

  7. Fish10, I can only share with you the data and my analysis.

    I estimate Vancouver's real estate capitalization to be in the range of $550BB, which is about a price to average income ratio of 8. The long-term average price to average income is around 5, and that is with some quiescent activity of the four sources you cite. So... taking the leap that today's actual price to income is around 5 due to new unreported sources, we need about $200BB of capital injections to maintain prices, or about a 60% rise in average family incomes. This is in addition to the capital injections required to build new housing at those market prices for population growth.

    So the question is, where do we find $200BB? BC's GDP in 2010 was around $190BB. I don't disagree with you that the four sources you cite contribute to a higher price-(reported)income ratio, however I cannot see it reasonable how increased activity in these areas can single-handedly amount to the increased capitalization levels we're currently seeing. There are just too many working stiffs compared to the elite expats, in-migrants, drug dealers, crooked stock pumpers, and gold miners.

    The more plausible explanation is that the majority of the capitalization has been funded by increased debt loads, most notably in the past 2-3 years. Average debt-income ratios have climbed (read one of the recent posts on Ben's blog for the BC numbers), and I believe most of that is secured loans on hard assets.

    Just looking at the number of locals and the number of people who plausibly have strong economic ties to other areas where they have savings and/or unreported income, my estimate is that around 10% of current total housing market cap increase is plausibly due to the sources you cite, the rest is from increased debt issuance. That's a guess, but it's based on looking at the raw numbers and demographics, not the news reports.

  8. jesse, as I'm sure you know we didn't have half a trillion dollars of real estate turn over so we don't have to find 200 billion dollars at all. prices are formed at the margin.

    New cash inflows and outflows matter a great deal when compared with small trade-ups and trade-downs. If the article for point 1 is to be taken seriously, there is a lot of new money coming into Vancouver from China.

    On the other hand, there have always been scammers, and CEOs, and drug dealers, and I don't see why this money would be so different from the past. Maybe old drug money is withdrawn/consumed from housing similarly as fast as new money is invested.

    I agree debt is the major factor, but immigration and foreign investment are also big.

  9. "we didn't have half a trillion dollars of real estate turn over"

    You can look at the turnover rate of that real estate to get an idea of how quickly this cash must be generated. Additionally, it must be generated ad infinitum unless incomes rise to compensate.

    "If the article for point 1 is to be taken seriously, there is a lot of new money coming into Vancouver from China"

    So how much do you think is coming in? Let's estimate 20,000 families, each with $1MM, and none selling, in addition to the quiescent flow of capital that exists anyways. That's a $20BB direct capital injection, which gets you a little less than half of the way there. So it's a matter of how many additional rich people you think are coming compared to before.

    I have yet to see any hard numbers verifying a significant and sustainable increase in foreign investment in real estate that does not involve significant amounts of financing. If these data can be found, then yipee, if not, then yipee.

  10. I'm in broad agreement with you Jesse. It is mostly debt. But I think inflows of money from china are having a major effect.

    A simple test if Asian money matters is to check how a part of the city preferred by Chinese capital inflows compares with parts that are less preferential.

    According to the benchmarks, Richmond went up an astounding 80% over the last 5 years. The greater Vancouver region went up 37%.

  11. I was quoting detached benchmarks in my previous comment, btw.

  12. @Panda, I don't dispute that certain ethnic groups are driving up prices of specific properties in specific locales. It's unclear how much of the $ is being injected from outside the country via direct investment, and how much is being supported by local activities from locals who believe that "rich foreigners" will buy.

    It may well be true that rich foreigners are injecting tens of billions of dollars on an annual basis to keep prices high, however the whole concept parallels a gold rush mentality, where everyone thinks they can profit from the boom, without asking how much gold there actually is to be mined. Instead we get the "rich Chinese" in the abstract. Sorry if I remain skeptical!

  13. Always nice to see a set of data have different interpretations.

    Notice I do not mean to say "rich" or "foreigners". I'm talking money which is foreign sourced, and multiplied by debt. "Rich" by Canadian standards is definitely not needed. "Foreign" citizenship of the buyer is not required either.

  14. I posted a reply but the ethosphere seems to have swallowed it up. Either that or I posted it on someone else's blog :0

    Jesse you make a valid point. Since we cannot quantify how much comes from drug, off-shore money, scammers etc and how much from more debt- we will have to accept that we are both right.

    I suspect even the debt is driven higher by the easy money. For example houses are used both as grow ops and to launder hot money (local and foreign), so joe-blow has to borrow more to compete with these buyers. Since the difference between a buyers and a seller's market can be a small swing either way, the 'easy money' buyers are keeping the bid up and forcing others to borrow more to buy.

  15. BTW- I do not believe in anyone's God given right to own a home. It was that crazy thinking that got us that behemoth the CMHC.

    Also I do not believe you are owed a home because you lived here a long time. Look how many Canucks are snapping up property in AZ and Fl now.

    VREAA posted one whiney comment about someone who said they had 150 years connection with Vancouver and yet couldn't buy a home. Lets ignore the fact that Vancouver is younger than 150 and remember that there are many folks with longer connections (try 1000 years!) who have no home or land because they are non-treaty first nations people.

    What I would like is the true free market. If the Government feels like it has to keep interfering in the market like 2009, when they prevented a long awaited correction, then they should stop local and foreign speculation too- but they wont!

  16. When I see the line ups of Mainland Chinese at buying fenzies and the complaining over Hospices and the tree-cutting and environmental disregard, I know what the first nations must have felt when the white settlers came and gobbled up their land and trod on their local customs.

  17. "'Foreign' citizenship of the buyer is not required either"

    Yeah the real question is the magnitude of unreported income of residents and their savings. This goes for anyone, including all walks of Canadians, PRs, landed immigrants, and foreign nationals who amassed (or are amassing) some reasonable nuts abroad.

    I like the format of this post.

  18. The Bank of Canada stands pat. 1% - below inflation. It talks the talk on debt, but refuses to walk the walk. This is a transfer of wealth from savers to borrowers. and lenders (since they pay short and lend long and the curve is still very steep)

  19. "his is a transfer of wealth from savers to borrowers"

    I think that's a fair assessment. The Governor of the Bank of England was stating the same thing and was borderline apologetic:

    "I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis."

    That's not to say rushing out and levering up is the right answer either!

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