Saturday, August 3, 2013

Looking back and looking forward...

Time to survey the land. Where have we been and where are we headed.

We have been a raging bull market for Vancouver RE, of that there is no doubt. It started gradually with minor increases in 2000 and then went up parabolically until the crash of 2009. Then after a brief and sharp correction it went vertical and started to correct in 2012. This correction has hit buying in June and July and looks to be in jeopardy.

In 2007/8 I posted about the divergence between income and rental returns and home prices in this city, and in the US.

The financial crisis of 2008 was precipitated by the US housing bubble bursting. It brought a sharp correction to our RE. MOI went sky-high and prices dropped about 10% from late 2008 into 2009.

Us bears where vindicated. The correction we had so long waited for, was happening.

However what we didn't see was the lunacy of the Government both Provincial and Federal and the idiocy of the Bank of Canada.

The right-wing Federal Government who hates semi-socialist outfits like the Wheat Marketing Board , the CBC and the CMHC...very cynically took up the CMHC as their method of stimulating housing demand.

Even though we were witnessing the catastrophic effect on the tax-payer of the US equivalents, Freddie and Fannie going BK and needing huge infusions of money, they doubled the CMHC.

Then Carney in his wisdom brought rates down zero.

As I posted at the time, in 2009, the result of the above measures and the 10% drop in prices was to drop the monthly cost of housing 30%, which was the amount I thought housing was over-priced, and some may want to buy. Well buy they did and up went RE and it kept going up.

As it went up our equally foolish Provincial Government, hearing the cry of first time buyers, gave them financial incentives to get into the market...thereby adding fuel to the fire.

Where are we now? One of the countries with the highest personal debt levels in the world, one of the most over-valued RE in the world and a Government which calls itself fiscally prudent but which has put another $600 Billion of obligations on our shoulders through the CMHC. This is the Canadian miracle that the world has lauded!

The CMHC btw has been called opaque and having poor risk management by several organizations as we have detailed in previous posts. IMVHO this is explained by looking at the composition of the Board which lacks any RE outsiders, serious academics, well-known economists or representatives of tax-payer groups.

So bears were blind-sided by the actions of the Government. What else did we get wrong?

Income. The numbers we worked off for income in this Province, to gauge RE value, are seriously under-represented I believe. We have drug money, a huge black economy (mainly contractors and drug related), and a river of off-shore money coming here. So looking at the stated income levels was wrong.

We were wrong not to account for that in our calculations.

We were also wrong in thinking that Carney would do more than just jaw-bone as consumer debt exploded to the level that the US had pre-crisis. He refused to walk the talk.

We also did not realise how much the Federal Government would allow easy money to come here. The 'Investor's Program' in many cases has been an absolute farce and has allowed Mainland money to come here and invest in little more than commercial and residential RE, with-out the big job impact that was promised. Worse still, the entrants from almost every Province except Ontario ended up here. So Provinces like Quebec got the fiscal benefits and we got the added costs and RE pressure.

More Federal Government meddling which bears did not account for. It is hard to include the effects of Politician's constant desire 'to do something'.

OK, so where are we now?

We are in no-man's land. MOI of 6 = balanced. Some recent buying pressure after a terrible 2012 and early 2013. YOY prices still lower by a few %. Do we go up from here?

Well rates have ticked up. Mortgage rules have been tighetened. The CMHC has a new CEO and has been capped, but at too high a level IMO. 

So was this recent rush just a fear of higher rates?

If so, then it should, as I expect petter out soon and we should enter much higher MOI by late August and early September and the correction will start anew and this time it will have significant drops.

However if the buying pressure keeps up, then the correction meme has been invalidated and for now we go to higher highs. I favour the first scenario. However as we bears have learned, there is always something around the corner (usually Government meddling) which we did not account for.

There is no doubt that bear fatigue exists. Look around the blogosphere. Many blogs have closed up and I am close to throwing in the towel if scenario one does not play out. 

The subject of RE has dominated our lives for too many years in this city. Those that don't own wondering if they should abandon prudent plans and just dive in. Those who own and are deeply indebted, and have all their net worth in RE worrying if they are a job loss or re-financing away from losing it all.

This is the result of initial demand exceeding supply and absolutely stupid policies from lazy politicians and policy-makers who could only take the easy road to try and shore up consumption and demand in the economy. The power of the RE lobby cannot be underestimated.

If you live in the Okanagan and Whistler you have seen major price declines and the Fraser valley is not much better, but this city has not had it's major correction yet. If we are still in a correction it has to happen soon per this graph (hat tip Price Drop Vancouver)

Have a great long week-end.


  1. Great post. I do agree with most of what you said, but I do believe the offshore money isn't as relevant and some believe. I've noticed for the most part in my area (South Delta) that condos are just sitting on the market. If they do sell they are for 2006/7 prices, or at least 20% under assessed value. I also have seen a few more Chinese move into the area. A realtor friend of mine told me that the few he has had dealing with aren't very rich but can get a 700k mortgage but can't get the 900k mortgage to buy in Richmond. The real estate boards won't tell us the truth, all their numbers from yesterday are fudged numbers. You can talk to any realtor in this market and see we have started a correction. Homes in Ladner that sold between 600 and 650k are now listed in the mid 5's. In Tsawwassen you can look at the assessed value and see at least 10 to 15% drop this year. There's a couple homes I took a look at just out of curiousity and they are priced around 550. My realtor friend told me a year and a half ago they were offered 590 and turned it down. Reality is sinking in and prices are dropping, its just a matter of time before it happens in Vancouver proper.

    1. Thanks Anon.

      I agree with you. However do not underestimate the effect of HAM money in some areas. Mostly West Van and Van West. That is what they are pricing for. Not many locals can afford $2-3-4-5 Million homes. yet that is still what is still selling.

  2. Hey Fish,

    Don't pack it in, you provide an interesting perspective.

    You are right though, there is a bit of bear fatigue, but I think much of it is due to the fact that the bulls have succeeded in changing their justification for owning real estate from profitability to arguments focused on an enhanced lifestyle and not losing money. That is, property owners can no longer point to capital gains as a reason to buy, and they haven't been able to use income as a rational explanation for well over a decade. So, their new arguments appears to be "prices aren't crashing so you might as well jump in" and "I'm not putting my life on hold, while living in a basement suite".

    The bears deserve some credit (blame?) for this obvious goal post move by focusing on the performance of Vancouver real estate in isolation. Hell, such glorious places as Winnipeg have performed much better than Vancouver since the beginning of the great government giveaway you so accurately described in this post. Moreover, Vancouver real estate is clearly getting creamed in comparison to other investments such as US equities.

    Ask yourself this: if I lived somewhere else, would I seriously contemplate investing in Vancouver real estate? Think risk versus reward. It is not hard to argue that there are a lot of safer investments with far greater potential upsides than Vancouver real estate. Remember, lower mainland real estate has absolutely no earnings protection, it is strictly a greater fool play.

    However, the truth is that you and many of your readers do live here. So, we have to ask ourselves how important is it for us to own the place we call home? This is where emotion and lifestyle considerations come into play, and, it is increasingly on these grounds that the industry is making its sell.

    I now think it comes down to this, if you don't mind being highly leveraged while paying a massive premium to own during what appears to be the beginning of a secular bear market in bonds then go ahead and call your local real estate professional. However, if you are more concerned with your financial future fund your TSF with the money you save while renting.

    As for this blog, I think you might find it a little more enjoyable if you wrote more about the economy and investing in general in comparison to Vancouver real estate? You have the breadth of knowledge to do so, and I think it would for the most part illustrate just how poor an investment the local market has been and will likely continue to be considering the increasing financing charges.

    1. Thanks for the comments Anon. Despite your kind words, my knowledge of investing is poor at best, based on my personal returns.

      The problem with all investing, including RE, is that bubbles occur and you have to hold your nose and buy to make the big returns. Remember the Internet craze of 198-2000. I have friends who made Hundreds of Thousands on crap stocks that have since died. However some of them made enough to take a few years off and travel. The same with the penny gold stocks in the 2006-10 era

      Humans are prone to jumping on band-wagons, even when the fundamentals don't make sense any more.

      The problem is when the Government becomes the hand-maiden of the speculators then fundamentals get thrown out of the window because the lender (banks) no longer have to worry about risk, as they will pass that off to the tax-payer, all that is left is to maximize gain. Hence lend as much as you can. Convince people they are 'richer that they think' and all the BS they send our way.

  3. Dear Fish,
    Your perspective and that of the Greater Fool has changed my views on real estate. At the very least your analysis says the downside risk to buying real estate is greater than the upside opportunity (just as stated by Anonymous above). The graph you showed is very pertinent. Indeed if there is to be a drop then it should be apparent after 32 months from the top; i.e. by next spring. Don't give up. The Canadian public desperately needs to hear contrarian views like yours and your readers'. Your logic is sound and the government is running out of resources to delay this fundamental economic trend.

    David McDonald

    1. Thank you David. I would have to characterise the last 5 years as a concerted attack by Central Banks and policy makers on savers and the prudent.

      Having not 'minded the shop' prior to that, and let speculation get out of hand, particularly in the US where that idiot Greenspan and his protege Bernanke kept saying there was no RE bubble and banks did NOT need regulating.

      The resultant bust was met with a response to encourage even more speculation. The treatment for a glutton it seems is even more gluttony. To my despair Canada's response to the crisis was to embark on exactly the same path that led to the catastrophe in the US. Truly we do not learn from history.

      As to the blog. It is hard swimming against the tide. Looking back at my record, my RE call prior to 2008 was very right. My call that RE was in the buying range in 2009 was also very right. But I didn't expect the frenzy to continue for as long and as high as it has. So I was wrong in that respect. If the bull starts running again, then there is nothing more for me to say and better to bow out.

      Clearly it will mean there are factors that I have not been able to account for, whether that be new pro-RE Government initiatives, an influx of un-taxed offshore money, forever low rates making alternative investments less appealing or a boost in incomes (reported and unreported) which brings lack of affordability down.

  4. Fish,
    It is very hard to swim upstream against the tide if that were the case.Even for a fish you are swimming in uncharted waters with riptides, undercurrents and tsunamis all around you steering you in different directions.I follow the Lower Mainland RE market like religion and I consider your daily contribution with this blog to be a valuable asset for anybody who follows this market closely.
    Keep up the great work.
    The Toaster.