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.