Vancouver, home of Speculators

I found this on Vancouver Condo info, hat tip China bust, it is a legal action brought by investors who purchased units at the Olympic Village and who now want their contracts  rescinded .

They are suing the City of Vancouver.

Here is the list of investors named in the law suit:

ok J. Choi, Il Ho Ahn and Ra Young Choi,
Yen Hai Doan, Tian Gao, Thomas Gisby,
Jung Gu Han and Hyun Joo Han,
Jung Kyoo Han and Sung Sub Han,
In Cheol Jang and Sunkyu Choi,
Heebo Kang and Soon Bin Kang,
Mi Hyang Jin and Yung Jun Kwon,
Mohamad Lafta, Hak Hyung Lee, Flora Kwangah Lee,
Sang Wook Kwang and Hyun Jung Lee,
Kyoung Won Lee and Nam Won Park,
Gordon Mah, Wendy Milligan,
Sook Ja Oh and Mu Hong Oh,
Young Ock Park and Yi Yong Pan,
Young Mi Seo, Shermar Holdings Ltd.,
Susana Yim and Hardy Yim,
Sook Ja Yoon and Eul Byong Yoon

Here is the case, and from what I can understand, the first question is whether the City of Vancouver can be deemed to be the developer of the project. I definitely do not know or even understand the legal intricacies. 

But I am an over-taxed Vancouver resident worrying about cuts to other City-funded services or a Provincial bail-out. I am also a student of the speculative frenzy in this city, where Billions of Dollars of real estate are bought and flipped or bought and left empty.

A few things come to mind:

1) The names are apparently mostly Korean. I don't know whether they are resident in Canada or not. They could be German or Mongolian, but the fact that one ethnic group has so many unhappy buyers, makes one wonder if the project was aggressively marketed to this group by a realtor.

2) Are they end users who have some concern about construction or are they speculators who are upset about the drop in value. ie were they speculating. The GetLegal blog linked thinks they are investors who bought at the top and are now regretting their decision and trying to get out of their obligations.

Certainly there have been a lot of condo projects built in this city which have been late or have had issues. When the market is flying no one seems too bothered, but once it falters the law suits start flying, like Sangrila and now OV.

3) How much more is this going to cost us? What we do know is that when lawyers have the Government as a client, ie the taxpayer, the fees are exorbitant. Let us not forget the defence that we paid for in the Dave Basi and Bobby Virk case which cost us $6 Million, before they pled guilty. 

To add insult to injury Judge Robert Bauman who IMVHO is a very misguided Judge, refused to allow the tax-payer's watchdog, the Auditor General, to audit the Legal bills to see how come they were sooo high.

Apparently the rights of two individuals who have already pled guilty trumps the ability of the Auditor General to do his job and point out waste and corruption.

What message does that give the legal profession? If you can get a clerk in Victoria to sign off on your billing, you are audit free!!!

I cannot believe what a carte blanche Bauman has given his fellow lawyers!

Once again I say PPP do not work. If the project is profitable, the Private keeps it, and if it doesn't the Public owns it. The financial sharks make sure they write the deals so that is how it works out. The other side of the table are well-meaning but naive councillors and city officials who are no match for the sharks. We are witnessing the result now.

Of course the councillors are mostly gone and the officials still get their bonuses and pensions and us suckers get to pick up the tab.

Make or break time

The graph above is the Canadian five year bond yield. As you can see it started it's parabolic ascent early May. The rush to use up the low-rate pre-approvals SHOULD be almost over. Unless we are really headed for the stratosphere I actually expect things to settle here for a while. The US economy (which is what started the super low rates and now the rebound) is not strong enough to absorb much higher rates.

Throw in the CMHC changes, tepid jobs and wages situation and we should see some real weakness in the low and mid market starting right now! As I have said before the higher end has it's own dynamics.

Where are we?

Self Serving Propaganda

Off topic.

Have you heard the ads by the telecom giants, Bell, Rogers and Telus. They have some average employee who tells you that if the Government lets Verizon in to Canada then this unfortunate soul will lose their job and they and their family will be cast out to the wolves.

Funny how they pick lower ranking employees, not someone from the executive suite.

How about the CEO of Telus doing the ad and saying..." I made $11 Million last year and $10 Million the year before and if Verizon comes in, I may lose my bonus".

Or the Rogers CEO saying.."Next year I get a $18.5 Million retirement package and um...well good luck with that Verizon things".

In fact the three CEO's earned $23 Big ones between the three of them. Enough to run a medium sized hospital or two High schools.

That is our society folks.

These companies who have shamelessly outsourced call and technical centres outside of Canada, are now waving the flag and asking for protection from that big hairy American company.

We could be more sympathetic if you weren't such greedy ba$tard$!! 

My cousin who has ATT comes up here from the US and uses his phone without a second thought to call the US or anywhere worldwide for one fixed rate. 

Whereas we make sure we have every button turned off to airplane mode or free wifi only to make sure we never inadvertently down-load a text or e-mail in Calgary, never mind the US.

Last year I went to Europe and somehow my phone set itself free and downloaded two banal text messages and one e-mail. I heard the ping and my heart sank. Sure enough, when we went back home the bill from Fido (Roger's pooch to make us feel like we have choice) was over $50!

Welcome Verizon, who BTW can only have up to 10% of the market anyway! AND CEOs of Rogers, Telus and Bell, if you are so worried about your employees distribute some of your huge payments to them and let us have SOME choice as consumers.

Some Sunday Afternoon Reading..

As we wait to see if the recent bounce was an interest-rate induced pull forward of demand or a new up-leg, it is time to review our premise that we are in a bubble.

We have been over the exploding debt situation, the huge discrepancy between income, rental return and prices which is the basis for the bubble call. There is no point me reviewing them, suffice it to say we are near extremes in all these measure. Numbers which look even worse with the market driven rate rises (no action from the Bank of Canada needed), and now the CMHC pull back.

In fact since 2010, we have had a number of changes by the Federal Government designed to take RE off the boil and prices have withstood all this very well.

Will it continue or will we have a 'Wiley Coyote" moment as David Madani says.

On the other hand we have the bulls who point to places like Hong Kong, where finite supply and enormous demand from Mainland China have sent prices into the stratosphere. This is despite nearly a dozen initiatives from the HK Government trying to cool things down.

In fact they are very well documented in this excellent chart. You can click on it so that you can read the notations.

The HK government has been much more proactive about reigning in prices. Short of banning sales to Mainland Chinese, which they cannot do, they have done everything else. These include:

Forcing banks to stress test borrowers.

Dropping the loan to value to 60% for properties over about $900K (it was $1.7M before)

Increasing the property transfer tax to 4.25% for properties over $1.7M

Tightening up presales and putting penalties on both sides if they cancel.

Compared to Hong Kong, we are still in easy street, despite Mr Flaherty's changes (which were really a reversal of previous mistakes).

HK prices prices have gone up and up, pushing aside the Government road blocks like so many flies. The wall of money from China pours in through over dyke pricing out locals.

As you can see corrections were countered by the actions of another Government, Quantitative Easing by the US Fed which has poured money into the system (I won't go into how few people have benefitted from this action at this time, but will keep that for another tirade) as well as Chinese government liquidity drives (not shown) and those who can access cheap money will push up assets.

What does this tell us? That bubbles have a mind and a momentum of their own.

You will also note that Government action, even in Hong Kong, did not start until housing had increased 80% off the bottom in just a few years, and Hong Kong is one of the more sensible jurisdictions.

Government action to reign in bubbles ALWAYS comes too little and too late. When things are going up, everyone is happy and the groups benefitting the most become active in the political process to prevent any action to curtail things. It is only when it is obvious to any fool that we have entered a fantasy of valuation does Government act, usually with little effect.

Look at the graph again and you can contrast the actions of the HK government when prices started collapsing from their last bubble. Only a 30% drop brought action to bolster prices (in green). And yet they had very little effect on the way down too!

The bubble burst had to run it's course and went on and down for 5.5 years despite nearly a dozen pro-RE actions. 

Bubbles will implode when they implode. After the fact people will try and look for the cause. A particular event or action or some change in fundamentals. None of these are usually the case. It is just a case of a sudden change of mass psychology and a run for the exits.

Look at Gold the general wisdom is that Gold has been dropping due to the Fed talking about tapering QE. However if you look at the chart , you will see that the collapse started a few months BEFORE the FEd announced tapering.  

Now while I do believe the Fed's main role under Greenspan and Bernanke has been to keep profits at the Wall Street casinos healthy and some pre-warning is not unlikely, this still does not explain a drop that started due to a sudden drying up of demand. It happened because it happened.

So when our bubble bursts, we should be alert for the 'causation experts'. RE representatives, bank economists etc who will try and blame the drop on the CMHC changes or some other Government action that needs to be reversed quickly - so that we can hold them to account in public.

1) No one action leads to a bubble bursting

2) The actions of Government are always too little and too late, on the way up and down.

3) No industry has the right to jeopardize the financial well-being of a country and future generations. It is my contention (and that of many smarter than me) that the CMHC has done just that, by increasing our obligation to $600 Billion and help fan the fires of prices. The next generation has enough to contend with carrying the debt of baby-boomer entitlements without having to deal even more obligations and even more expensive housing.

Finally it is good to end with Galbraith, the pre-eminent bubble economist dissector, who was quoted in Hussman's article today

Decades ago, in his narrative A Short History of Financial Euphoria economic historian J.K. Galbraith lamented the “extreme brevity of the financial memory.” He wrote, “In consequence, financial disaster is quickly forgotten. 

In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by an always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

(Think Nortel and RIMM shares hitting the stratosphere. Think  shoe-box sized Condos selling for $600K or crack-shacks unfit for human occupation selling for over $1 Million Dollars.)

“There is protection only in a clear perception of the characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved. In the short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, of the wonderful process of enrichment.”

“Speculation building on itself provides its own momentum. This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. 

There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. 

They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.

“For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”

.

US to phase out their own catastrophic CMHC...

President Obama, arguably to the left of PM Harper, has decided to phase out Fannie Mae and Freddie Mac, their own two versions of our CMHC which insure mortgages.

Our own dithering fools in Ottawa were anti-CMHC except when it suited them. And it did in 2008/9. Even as they watched the US equivalents pull hundreds of Billions out of tax-payers pockets, they cynically doubled our own CMHC, loaded it up with a weak board (IN MY OPINION) and allowed it to have poor risk management and operate opaquely (in the opinion of Nomura and IMF and other non-Major-bank economists). 

Now hopefully they will do the right thing before this monster endangers our financial future further...and wind it down!



BTW- there was a great BNN interview with Ian Lee, an Academic who has been sounding the alarm on CMHC liability which he calls gargantuan! Says the banks are using CMHC!

Try this link.

Click on the second video 'CMHC to take stream out of housing market'. All bulls and bears should listen to this interview

The definition of a RE speculator

“In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.” 

- Chicago Tribune, April 1890

Look at the date it was written!

This comes from the weekly post of one of my favourite commentators, John Hussman.

You can read it here. He is talking about the stock market but outlines how one bubble bursting leads to the next one inflating and the foolish actions of Central bankers who think they know better.

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.

REBGV Press release

No surprises here. We all knew July was hotter in every way than we expected. Was it the post interest rate rise blip? Was it due to Chinese RE going up again, and easing of liquidity? Or are we headed up on a new up-trend?

In any case we are still down a few % YOY for HPI.

My own opinion for what it is worth (very little) is that we saw the peak of buying for the year and MOI will start going up again. We have been hovering around 6 for July. If I am right it should move up briskly, if not I am wrong.

July 2013

July home sale activity increases in Greater Vancouver

Sunny weather did not slow the pace of home sale activity in July. Last month was the highest selling month of the year in Greater Vancouver and the highest selling July since 2009.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential property sales in Greater Vancouver reached 2,946 on the Multiple Listing Service® (MLS®) in July 2013. This represents a 40.4 per cent increase compared to the 2,098 sales recorded in July 2012, and an 11.5 per cent increase compared to the 2,642 sales in June 2013.

Last month’s sales were 0.1 per cent above the 10-year sales average for the month.

“Demand has strengthened in our market in the last few months, which can, in part, be attributed to pent-up demand from the slowdown in sales activity we saw at the end of last year,” Sandra Wyant, REBGV president said. 

New listings for detached, attached and apartment properties in Greater Vancouver totalled 4,854 in July. This represents a 1.1 per cent increase compared to the 4,802 new listings reported in July 2012 and a 0.4 per cent decline from the 4,874 new listings in June of this year.

The total number of properties currently listed for sale on the MLS® in Greater Vancouver is 16,618, which is an 8.1 per cent decrease compared to July 2012 and a 3.9 per cent decline from June 2013.

The sales-to-active-listings ratio rose two and-a-half percentage points between June and July to 17.7 per cent in Greater Vancouver. This is the highest this ratio has been in Greater Vancouver since April 2012.

The MLS® Home Price Index composite benchmark price for all residential properties in Greater Vancouver is currently $601,900. This represents a decline of 2.3 per cent compared to this time last year and an increase of 2.3 per cent over the last six months.

“Home prices continue to experience considerable stability with minimal fluctuation throughout much of this year,” Wyant said. “This stability in price brings greater certainty to the home buying and selling process.”

Sales of detached properties reached 1,249 in July 2013, an increase of 59 per cent from the 787 detached sales recorded in July 2012, and a 13.7 per cent increase from the 1,099 units sold in July 2011. The benchmark price for detached properties decreased 3.1 per cent from July 2012 to $920,500.

Sales of apartment properties reached 1,210 in July 2013, an increase of 31 per cent compared to the 927 sales in July 2012, and an increase of 16.3 per cent compared to the 1,040 sales in July 2011. The benchmark price of an apartment property decreased 1.6 per cent from July 2012 to $368,300.

Attached property sales in July 2013 totalled 487, an increase of 27 per cent compared to the 384 sales in July 2012, and a 12.7 per cent increase from the 432 attached properties sold in July 2011. The benchmark price of an attached unit decreased 2.6 per cent between July 2012 and 2013 to $456,700. 

Posted: Friday, August 2, 2013