The Black Swan
Every so often a market takes a dive, but they usually turn around. After a while it it starts to look like it’s hit bottom and a recover is just around the corner. The people with their livelyhoods tied to the market hold out hope of a turn around. Then oil starts washing up on the beach.
The phone call was short and to the point: A buyer who had agreed to spend $500,000 (U.S.) on a beachfront home with a stunning view of the Gulf of Mexico was backing out.
The cancelled sale was a blow to real estate agent Linda Henderson, but it wasn’t a surprise. Globs of thick, pungent oil are washing up on the shores of Alabama’s Dauphin Island, and the smell on some days is enough to drive the island’s predominantly senior population back into their homes.
It’s also enough to drive real estate agents to despair. “I can tell you that things have pretty much dropped to dead,” she says. “We were on track for our best year since Katrina. This is devastating – you can say that the spill killed the real estate recovery.”
Full article in the Globe and Mail.
June 23rd, 2010 at 11:01 am
I am 29, work as an engineer in the Vancouver area and make a little over 100k a year. I work with 600 other people many of whom make much more than I do. 100k+ salaries among people in the Vancouver area that are in their late 20's / early 30's are not that uncommon. Many couples I know are pulling in close to 200k. The average incomes don't come close to this, but as mentioned, a lot of people I know are pulling in a lot of income under the table. This is the competition for houses in Burnaby / Vancouver / Downtown / Richmond.
June 23rd, 2010 at 9:44 am
“but I would be willing to wager there is greater percentage of people in Vancouver looking to be RE investors (either speculative or long-term landlord) compared to anywhere else in North America.”
I agree with VHB and his US Housing Porn comment. The original poster demonstrated amazing short sightedness if he really believes Vancouverites are the most property obsessed population.
He should have lived in the UK or Republic of Ireland over the last 10 years. Getting rich from flipping houses usurped almost all other conversation. Every monkey was at it. As i've said before, my hometown of Belfast has become a much nicer place since house prices fell 40% over the past 2 years. The ugly swagger has gone from the people. Now no one talks about property speculation – it's a forbidden topic because you never know who has a 200k mortgage on a place valued at 110k – and yes, i know someone in exactly that position. By the way, if you think only Vancouver experienced a "real" housing boom, the terraced house i'm referring to could have been bought for about 40k 10 years ago.
June 23rd, 2010 at 9:20 am
@Anonymous: credit cards.
June 23rd, 2010 at 8:53 am
"You have to define some sort of index to measure collective inflation or deflation. Consumer price, wage, and asset price inflation/deflation are all different phenomena and can move in different directions"
You're confusing cause and effect and calling them the same thing. Inflation isn't a rise in prices; rising prices are however a common symptom of inflation, which is simply a net expansion in the supply of money and credit.
Prices change for lots of reasons. Scarcity, for example, has absolutely nothing to do with money supply, but if we were to have a severe oil shock it could move the price of gas up even if prices everywhere else were collapsing because we were in severe deflation.
http://globaleconomicanalysis.blogspot.com/2006/0…
June 23rd, 2010 at 8:49 am
@anonymous456:
What you say your about experiences doing people's tax returns is interesting. We keep hearing about 40k average incomes and no "big employers" in Vancouver. When i'm out and about i cannot help but wonder where people make all the money they do to allow them to "live in that house / drive that car / buy those $200 jeans etc" It MUST be the level of comfort people have living in debt that allows them to spend so lavishly.
I just took my 9 year old to see Star Wars in Concert at GM Place – very impressive show. However, it's amazing how much everything costs, and yet so many appear to have no problem paying these prices:
Ticket $75, "event parking" $25, child's Star Wars T-shirt $35-40, soft drink $4-5, mini doughnuts $5, event program $30!!! Now i was too cheap to buy the t-shirt (buy it online for 1/3, or the program ($30 for a magazine?!), but armies of families walked around GM Place last night dripping with extras and junk. Where do they get this kind of disposable income?
This was an expensive night out for my family, yet there appeared to be so many people just buying everything. I make over twice the average, rent a house, and yet the cost of this type of event still makes my eyes water!
June 23rd, 2010 at 8:34 am
http://tinyurl.com/343lg8t
This is the killer scenario that I hope every night before bed that I won't wake up to this. IMO, it's not about the fundamentals of the absurb valuations in Vancouver. It's about the resolve governments will attempt to kick the can down the road. Those bearish on the real estate, are you prepared for such scenario?
Check out the latest news on the US housing market and what do you think the US administration will attempt to do next? We can easily be looking at a situation where the nominal prices is up 2x from here while the real prices loses > 50%.
The Canadian government has not even gone the quantitative easing route yet as the US, EU, the UK did. That's a route that I can guarantee they will take if housing really craters in a year. Damn the savers from their opinion!!!!!
June 23rd, 2010 at 4:17 am
@vibe:
There isn't any such thing a a global objective "value of money". Only the prices of individual goods, services, or assets. You have to define some sort of index to measure collective inflation or deflation. Consumer price, wage, and asset price inflation/deflation are all different phenomena and can move in different directions. When they do you can't really say objectively that there is "inflation" or "deflation" without qualification.
Of course at times they do all move in the same direction, usually up, but sometimes down (early 1930's, Japan less severely recently).
June 22nd, 2010 at 11:42 pm
@huckmeabone: Wherever there is a vacuum – economic or political, outside forces will move in. It is only a matter of time before the true shade of Chinese intentions in British Columbia, beyond "investing in RE" emerges. The Chinese invasion is subtle and silent but salient. You only realise it when everything you see is tagged, ‘Made in China’ and English is officially SL in BC.
June 22nd, 2010 at 11:38 pm
@crashcow:
"@Anonymouse: OK, looks like you agree on the first three points. Let’s discuss the fourth…"
I only conceded on the one point about how investment mentality was as strong in the U.S. I stand by every other argument I made.
Its interesting that everyone here tries to dismiss the "its different here" argument. You have to keep in mind that in reality, every city, every market is different in some respect. There are many places in the U.S. that did NOT experience the RE boom from 2003-2006 (nor did they experience the ensuing bust). In the bust some cities dropped 40%, some 10%. Even within the same city certain locations experienced different conditions. Every place IS different. That is not to say that any particular city is immune from a bust but there is always a unique set of circumstances that has to be acknowledged.
Having said that, no market is immune to interest rates or availability of credit. I think those are the only things that can take the Vancouver market down significantly.
June 22nd, 2010 at 11:14 pm
@huckmeabone:
I thought you were going to stick to real estate.
June 22nd, 2010 at 10:51 pm
Hey PC assholes you may want to watch the CBC Expose on CSIS.
They confirm everything that the rest of us have been suspecting for years!!!!!!!
China aggressively spying, influencing and recruiting other chinese within Canada. This includes Canadian politicians.
June 22nd, 2010 at 10:10 pm
@Anonymouse: Is this a new development? Not sure how long you've lived in Canada but Vancouver has always been located where it is today, so has Montreal and Toronto. So what's different this time?
June 22nd, 2010 at 9:50 pm
@VHB:
I remember the show called, "My House is Worth What?!" on HGTV. (Hosted by Kendra whatever the name was… who won the Apprentice several years ago)
That was the pinnacle of the US puffery.
June 22nd, 2010 at 9:47 pm
@Anonymouse: OK, looks like you agree on the first three points. Let’s discuss the fourth…
Your argument is the classic “Everyone wants to live here.” That the price elasticity of demand for Vancouver real estate is low because there are few good substitutes for this ‘pristine paradise.’ But I say to you and all prospective buyers – you can have your cake and eat it too. You don’t need to buy to live here, rent!
But of course the herd never wants to rent during a housing boom. It’s clearly documented that during the housing boom in the US, Americans had the motto ‘ownership is kingship.’ But after the peak in ’06, ownership suddenly felt like a ball and chain. The herd’s mindset will change here in Vancouver too. All it takes for a bubble to burst is for price appreciation to stop, revealing the true underlying value of the asset.
The Shiller graph is to disprove the myth that prices are rising because everyone is moving to this paradise. The graph shows that we never had a sudden ‘spike’ in population that caused a corresponding spike in home prices.
June 22nd, 2010 at 9:46 pm
@Anonymouse:
I have American relatives who are lovely people, but who are my canaries in a coal mine. They have been taken out by every bubble there's been. They currently are locked into three investment rental houses in an upscale coastal market, and they're losing month over month.
What they're learning is what the Vancouver rental market is beginning to learn.
1) Rents are tied to incomes.
2) In a bubble, every owner thinks they've got a Spectacular Luxury Home that will bring in Above Average rents.(Just like everyone thinks they're an above average driver.) Granite isn't *actually* as big a deal as people think to the renting public. Price and location, space and light, silence or noise tolerance, pets or no pets – these things matter.
3) Like any business, being a landlord requires planning, work, specialized knowledge, and investment.
The only reason that rental investment looks good is because of substantial YoY appreciation. Actually being a landlord isn't a cakewalk: it's work, shit breaks, tenants aren't all 24 year old professionals making 110K per year who neither smoke nor party nor want animals, vacancy loss can quickly eat into your reserves, and at these prices you're not turning monthly profits. So, it doesn't even take a substantial correction to change people's tune on RE investment.
It takes one shitty tenant, or one family of squirrels in the attic, or one year of prices NOT zooming upwards by 20% YoY, or three months of vacancy loss, or …
It's a business. And it's saturated at a price point above the main renting demographic. Like all the fast food joints upgrading and competing between Earls and CinCin; people are holding on and selling in a year, or in two, but when prices stagnate, it'll take the investors out.
June 22nd, 2010 at 9:34 pm
@jim:
You do realize that listings expire don't you? Before you go off on a rant and start calling people stupid, you might want to get your facts straight. mmmmmm…k?
June 22nd, 2010 at 9:30 pm
What we've seen in all real estate downturns is people rushing on a collapse and buying, but then they get burned too. In the 80's we had ten years of slow motion collapse where investor after investor had thought he'd bought at the bottom only to be proven wrong. It took twelve years to bottom out before we had a two year flattening trough where the market was stable. Then the government stepped in and played silly buggers with the market. Canada will not publish its debt to GDP figures but most other western countries are 125% in the hole. The USA continues to dig itself into a hole which they admit will be technical insovency at 125% by 2015 at the current rate of deficit spending. A spectacular feat for a peacetime economy.
And here we are in little Vancouver thinking that we're isolated from the global economy. The bulls are touting the Chinese as the saviour…rubbish as it is. The Chinese are the least sophisticated investors in the world ie they are the least sophisticated people with as much capital as has been devloped in the current cycle. Does anyone remember when the japanese were the masters of the universe and were buying everything in the art, film and real estate universe? Now they were smart sophisticated people with an incredibly adept financial IQ. Tp put the Chinese investor up against the Japanese would be like Kasparov playing a two year old…sorry but thats just a fact.
The local whores have found another fluff piece on which to pin the story of the ever expansion of the never ending market. If you said that a Japanese conglomerate still owned 30 Rock, you'd be dead wrong. If you got to know a few Chinese businessmen you'd be suprised why they're known as onion farmers in the business world. Money doesn't make you smart, it does however have a habit of being able to find it's rightful owner.
June 22nd, 2010 at 9:09 pm
@Anonymouse: Deal! And if you are right and Vancouver doesn't drop much more than 10%, I'll invite you over to my (future) home in Seattle or Portland for a pint!
June 22nd, 2010 at 8:57 pm
@crabman:
Agreed. Actually some of those friends who invested bought at the peak 2 years ago and are burned a bit right now. Its always the ones late to the game that get hurt. But even with those stories I still know people who want to invest!!
Look, I'm not here to say that you are all a bunch of idiots. I come to this site regularly and enjoy reading the insight here(helps to validate that I am not crazy). I'm just saying that I am doubtful of a huge 40-50% crash.
Now, if I'm wrong I will gladly come back to this site in 2 years and invite you all to my $600k Cambie house and we can share a pint (or a cranteeny!) on my back porch and have a good laugh over how wrong I was. I don't think I would be so happy to be so wrong about something.
June 22nd, 2010 at 8:35 pm
@Anonymouse:
Compare this logic with the following:
June 22nd, 2010 at 8:32 pm
@crashcow: @Anonymouse: Is this the best that the bulls have? Seriously?
LOL, trust me I'm not a bull. I would be thrilled with a severe price reduction, believe me. I'm bearish in sentiment but the Vancouver market has a way of proving me wrong time and time again.
"Stoping new contruction after a bubble has peaked is already too late."
Agreed. I'm just saying that the expansive overbuilding in Florida and Arizona has not taken place to the same extent in Vancouver.
2. “CMHC is around to insure mortgages”
Believe it or not, this amplifies the bubble problem in Canada"
Dude, no kidding. IMO, CMHC is freaking evil and it pisses me off to no end that a government agency is participating in making housing so unaffordable. But as long as the government is backstopping CMHC and CMHC is backstopping mortgages what is going to stop the credit flowing? This would require a major and collossal financial catastrophe in Canada which I don't want to happen.
3. “Everyone thinks about getting rich off RE. Will be difficult to change this mind set.”
I agree with VHB…absolutely no one in Florida, Vegas and California thought like that."
Okay, fair enough.
4. “There just aren’t that many top tier cities in Canada that are pleasant to live in”
Ever look at a population chart for Vancouver? Looks a lot like what Shiller had in his book, Irrational Exuberance:"
Looked at the link but it doesn't really refute my argument. In Canada only Toronto and Montreal are comparable cities to Vancouver and both are far away, colder, blah blah troll talk. At least in the U.S if Manhattan is unaffordable you can move to Philly, Boston, Chicago, SF, Seattle etc. etc. Canada just has a dearth of good cities to live in. Most of our population is centered about 3 or 4 large cities and everyone wants to live there.
June 22nd, 2010 at 8:31 pm
@Anonymous:
Care to elaborate on that position?
June 22nd, 2010 at 8:28 pm
yalie says:
There is no way to print our way out of this, even if we wanted to, because banks won’t lend if they don’t think they’ll get repaid. The above graphs shows just how indebted the US is (and Canada is just as bad).
Deflation is a near-certainty
they said that in the early 70's also. i like mish, but better is roubini. no one has better understood the inflationary and deflationary pressures (and how they manifest) than roubini. monetization and inflation will come to the u.s., japan and other nations with the ability to manipulate their currency and bond markets. canada is positioned that way also. deflation for now but look out mid to long term.
June 22nd, 2010 at 8:22 pm
"but I would be willing to wager there is greater percentage of people in Vancouver looking to be RE investors (either speculative or long-term landlord) compared to anywhere else in North America."
I wish I could take that wager. Did you not watch any TLC or other housing-porn shows between 2003-2007? The US was SATURATED with housing puffery in the mid 00's.
June 22nd, 2010 at 8:19 pm
200+ is a good sales day, no doubt. But in 2005,6,7,9 sales were 4000+ for June, meaning you had to **average** 200 a day. We around this bear cave have just been spoiled by the bear-tacular spring that some are all mopey when sales hit 200 for a day. We're so used to sh!tty, that sh!tty plus epsilon smells like a bouquet of roses.
June 22nd, 2010 at 8:18 pm
@VHB:
@Anonymouse: “Everyone thinks about getting rich off RE.”
Yeah, no one in the US thought that in 2002-2006. You’re right–we ARE different!!!"
Sure, Americans were speculating as well but I would be willing to wager there is greater percentage of people in Vancouver looking to be RE investors (either speculative or long-term landlord) compared to anywhere else in North America. I can't tell you how many people I know personally (all solidly middle class, non-chinese) who have already invested or want to invest. Not their principal residence, I mean a real investment property. Its almost a sickness.
As others on this site have pointed out, this is all because Vancouver has no real industry to speak of. Real estate is all anyone talks about.
Of course, a real significant downturn would cure the sickness but it would have to be severe.
June 22nd, 2010 at 8:17 pm
Oh yeah!
I'm 18 and I make 38,000 a month distributing monavie
suckaz
June 22nd, 2010 at 8:13 pm
I predict average price drops for detached homes for June at 2-3%, with benchmark prices down around 1% for the month.
July should see at least the same amount, and double these numbers for the fall.
This is where the market will start to get killed.
June 22nd, 2010 at 8:12 pm
@Anonymouse: Is this the best that the bulls have? Seriously?
1. "No massive overbuilding. Developments are shelved when demand falls"
Stoping new contruction after a bubble has peaked is already too late. And the demand that existed while the good times were rolling was influenced heavily by speculation and bandwagon jumping, causing overbuilding. Ever hear of the expression "I buya three, husba buya three?"
2. "CMHC is around to insure mortgages"
Believe it or not, this amplifies the bubble problem in Canada
3. "Everyone thinks about getting rich off RE. Will be difficult to change this mind set."
I agree with VHB…absolutely no one in Florida, Vegas and California thought like that.
4. "There just aren’t that many top tier cities in Canada that are pleasant to live in"
Ever look at a population chart for Vancouver? Looks a lot like what Shiller had in his book, Irrational Exuberance:
http://www.mymoneyblog.com/images/0612/shiller.gi…
June 22nd, 2010 at 8:10 pm
@sluggo:
Michael Levy
mlevy@shaw.ca
June 22nd, 2010 at 8:08 pm
145 anon there are so many of you it's hard to keep track. Although we all appreciate your opinion. It's weak 1 overbuilding we have had a lot of building going on which is what tends to happen in a boom and when the bust comes we somehow have this glut of inventory.
2) CHMC is solely responsible for pumping up the bubble to the level we have now. Ie 0/40
3) As far as the mindset of RE being an investment based solely on speculation will change as soon as their is blood in the street guaranteed.
4) Just because Vancouver is one of the so called top tiered cities as you so eloquently stated. This lame reason doesn't justify one of the most expensive city on the planet if you think it does you need to get out more.
He who laughs last laughs best. So for now laugh it up. Time is on the side of the bear.
June 22nd, 2010 at 8:06 pm
Looks like the developer has a few extra units they can't sell…
http://vancouver.en.craigslist.ca/van/apa/1805941…