How the boom ends: whimper or bang?

So we’ve gotten to the point where it’s pretty unanimously agreed that real estate in Toronto and Vancouver is over-valued and due for a correction.

The question now is what sort of an end to this housing boom we will be looking at.

Will this be an explosive toppling of values, a market that runs head first into a wall, or will it be a simple slow leak for years and years?

..And which would be better?

You can add David Rosenberg to the list of people that say ‘whimper, not bang‘.

His latest comments fall into the ‘not a bubble, a balloon’ camp:

“Prices are starting to deflate by 0.8% YoY, though more like air coming out a balloon slowly than a giant pop,” wrote Rosenberg Tuesday in his morning note.

“It is gradually becoming a buyer’s market with the inventory of unsold homes rising to six month’s supply, which is at the edge of a balanced market.”

Of course most of that drop nationally is being driven by Vancouver where everything is falling fastest.  What remains to be seen is whether the current drop will remain even or accelerate.

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J
Guest
J

Bang, lets rip off the bandaid quickly!

Starving Artist
Member

As someone else posted, Vancouver has a pro-cyclical economy (boom & bust) and considering the number of people that are directly or indirectly employed by the real estate industry here (almost everyone I know), I would expect falling prices to create a negative feedback loop and accelerate the decline.

http://www.mpettis.com/2012/07/17/the-unacceptable-behavior-of-the-market/

rp1
Guest
rp1

Did Rosenberg ignore:
– the percentage of employment in residential construction?
– dwellings built in excess of households formed over the last 11 years?
– China propping up Canadian exports by building empty cities?

James
Guest
James

I’m predicting a drop like UK and US – ie 15% sharp, followed by long declines of another 20%+ over three years, measured against inflation (ie real terms of say 12%, inflation adjusted 20%) – 35% sounds like a lot, but when you look at some of the astronomical prices in W Van and Van W, it’s buttons.

One other thing – IF it is like UK/US, then watch out for the unreported bellweather: SFHs in outlying areas getting CREAMED. Where I live right now in UK, outlying SFHs are down by around 40-50% if the owners really want to sell..

Oh and finally – after the first big drop, it’s a long slow war of attrition between sellers and buyers. Kind of like watching paint dry…

an observer
Guest

I posted this just before today’s post so reposting here.

7 of the top 11 condo’s with the most units for sale were built within the past year – that can’t be healthy especially if you are one of the flippers!

http://vancouverpricedrop.wordpress.com/2012/07/17/mondo-condo-listings-july-17-2012/

As far as the topic of the day, I believe 20% by this time next year and another 20% over the next 5-10 dark economic years ahead. That will of course be followed with yet another BPOE / Credit / Asia / Brazil? / Etc Real Estate bubble where current highs will be exceeded

yvr2zrh
Member

Reposting today – – Will try to update as I can.

Tuesday’s Sales 135
Post-July 9 sales in this total 21

ScubaSteve
Member
ScubaSteve

Thanks ZRH2YVR. I guess we now know that 21 people must live under a rock in BC. Here’s the best thing… we are all assuming high sales are bad. Well, maybe all these sales are 20% off. Only time will tell at the end of the month. Oh well, we’ve been down 4 months in a row, we need July to go up slightly so we can crash hard for another 4 months. Richmond is going to set some new records for hardest crash. Who said we needed an earthquake for Richmond to sink?

rp1
Guest
rp1
patriotz
Member

@James:
“I’m predicting a drop like UK and US – ie 15% sharp, followed by long declines of another 20%+ over three years”

Neither the UK nor US have followed this decline. The UK has declined very slowly and is now about 20% off peak. The US declined slowly from the 2006 peak to late 2007 (about 10%), then rapidly for about a year and a half (about 20%), then slowly (another 5% net) to date (some markets showed a bounce around the beginning of 2009).

The best thing that could happen for Vancouver is for prices to drop 50% overnight. That would mean that capital would stop being misallocated away from the real economy immediately.

I don’t know how it will actually play out, a lot depends on how hard and how quickly China crashes.

patriotz
Member

@rp1:
What this article is missing is that White House officals can go on to make big money holding corporate directorships, lobbying, etc., after leaving while BC city managers are pretty much already at the top of their careers.

All salaries for Congress, Cabinet and the White House look pretty small at first glance. The big payoff is later. Check out Newt Gingrich for an example (I’m using him because a lot has been written about him recently).

The same goes to a large extent for provincial and federal politicians in Canada. Christy Clark was making way more money as a hotliner than she did as a cabinet minister. She took a big pay cut to become Premier, but she’ll be back in the green one she moves on.

registered
Member
registered
@2 Starving Artist Says: “As someone else posted, Vancouver has a pro-cyclical economy …” Which both begs the question and is of little value. Taking from everyone’s first ref, WikiP: “In business cycle theory and finance, any economic quantity that is positively correlated with the overall state of the economy is said to be procyclical.” The TSX more than tripled between 1992 and 2001 during Dot Com, over the latter half of that period Vancouver was erroneously blaming what was in fact a normal economy during the NDP for a nearly 25% deflation in real home values (Sauder): http://thetyee.ca/Views/2009/04/23/BCEcon/ Correlating the HPI strictly to the state of the economy misses the boat entirely regarding the direct effect of mortgage policies and interest rates. It’s following the same trend-tracker mistakes made by every American economist, the vast majority, who guessed wrong… Read more »
Anonymous
Guest
Anonymous

@an observer: “7 of the top 11 condo’s with the most units for sale were built within the past year – that can’t be healthy especially if you are one of the flippers!”

I think some are flippers but many are probably still for sale by the developers. The developers will be the ones to cut prices first and really burn the flippers.

Anonymous
Guest
Anonymous

@fixie guy: “Vancouver was erroneously blaming what was in fact a normal economy during the NDP”

Yes normal for an NDP run economy. BC was the the worst performing economy in all of North America during the NDP tenure. It is laughable people actually try to defend their record on it.

Anonymous
Guest
Anonymous

@patriotz: “after leaving while BC city managers are pretty much already at the top of their careers.”

That tells you something doesn’t it? The city managers are not employable else where so why are they paid so much?

It is not just the managers that are paid well. I think a saw West Vancouver city employees on average have received a 5% to 6% pay increase for each of the last 5 years. The cities are the worst run level of government by far. Although if the NDP get in provincially I may have to change that statement with the new union contracts they will dole out as payback for political support.

registered
Member
registered

@13 Anonymous: It’s funny when people can’t read graphs. The 90’s economic growth was roughly between the SoCred and Liberal in performance. BCStats confirms the linked Tyee article.

Dan in Calgary
Guest
Dan in Calgary

@Starving artist, “considering the number of people that are directly or indirectly employed by the real estate industry here (almost everyone I know), I would expect falling prices to create a negative feedback loop and accelerate the decline.”

How many RE-associated people are personally invested (highly levered) in RE? As the market declines, how many will lose their salaried/commissioned income and lose the ability to maintain their RE portfolio, thus becoming desperate to sell? In other words, how many RE-associated people will end up accelerating the decline by their own desperation to unload their portfolio?

Will this happen? Does it work like this? Thoughts?

Navin R. Johnson
Guest
Navin R. Johnson

@Anonymous:

The economic situationin the 90’s had very little if anything to do with the NDP. And no, I’m not an NDP supporter, but that argument had been touted by the successive Liberal governments and obviously folks have sucked that up. The economy in BC has been driven almost entirely by resource extraction and it’s the demand for those resources that keep this economy afloat. I’m thinking, without looking it up, that commodity demand has been higher in the last 10 years than it was back then. In recent years,
we know that real estate and construction have also added to the economic growth of this province.

On the topic, I’m in the ” slow erosion” camp.

R W
Guest
R W
We really have two different markets in Vancouver: the single-family market and the condo market. Look at Landcor’s charts on REW.ca…you will see that the single-family market completely diverged from the condo market in 2011, after 10 years of perfect correlation. The single-family market will correct rather sharply. Basically forget 2011 ever happened…values will correct back to 2010 levels quickly (if they haven’t gotten there already). The condo market is a totally different story. It has been very stable, prices are basically exactly where they are in February 2008. So 4+ years of no value escalation overall (there was a drop in ’09 followed by a climb back up, but right now we are back where we were in Feb’08). The problem with reporting averages is it ignores that we have had two totally different markets over the past 18… Read more »
GVR
Guest
GVR

@patriotz: Just curious, what do you consider to be “real economy” if not real estate? I though shelter was one of our basic needs, along with food and drink. Admittedly, housing has become somewhat extravagant and expensive, but in what sense is it not real? My fear is that real estate is real enough to bring down the rest of the economy if it crashes. There might not be much capital to reallocate to the so-called “real economy” for a while.

UnagiDon
Guest
UnagiDon

@patriotz: “I don’t know how it will actually play out, a lot depends on how hard and how quickly China crashes.”

Dear Patriotz,

I hope this article puts a mid-day smile on your face:
http://www.cbc.ca/news/business/story/2012/07/18/china-profit.html

registered
Member
registered
17 Navin R. Johnson Says: “The economic situationin the 90′s had very little if anything to do with the NDP.” Agreed, it was only raised in anticipation of the inevitable counter whenever BC’s economy in the Nineties is raised. The greater point is stats show the national and provincial economies were fine through the latter half of that decade when house prices were declining. The reason for the latter is obvious, prices were heavily inflated over the first half by the huge influx of unanticipated new buyers from Hong Kong, deflating slowly when it abruptly stopped but never falling back to the original levels. During the Nineties, Van’s RE market was not pro-cyclical. Belief in that principle ignores fundamentals and by putting blame for the inevitable correction on external conditions caused by China, Greece, etc. sets the stage to do… Read more »
Navin R. Johnson
Guest
Navin R. Johnson

@fixie guy:

I also seem to remember BC Hydro selling a lot of power to the US to which they never actually received the royalties for. Do you remember that? Did BC Hydro ever get paid?

Rightsizer
Guest
Rightsizer

@R W: But I see the condo market as very stable. Also not oversupplied…completions have lagged household formation over the past 5 years.

If not oversupplied, I wonder if the condo market is misallocated. It seems to me like the boom has brought a tonne of tiny 1 bed condos and not so many 2 or 3 bedroom units.

I know that families do move into 1 bedroom condos, but its not ideal. Any one who bought 5 years ago and planned to move up to SFH as their family grew is kind of screwed right now.

yvr2zrh
Member

#18

There is some truth to that. Condos do not have as much immediate downside.

However, as potential condo owners and existing investors realize that renting is much lower cost than owning and there is little capital appreciation potential, purchasers will demand lower prices to bring them back to fundamentals and investors will reduce holdings to more appropriately allocate capital to higher yielding investments.

The condo market will also immediately be hit by the lower purchasing power of the entry level buyer.

jesse
Member

@R W: “Also not oversupplied…completions have lagged household formation over the past 5 years”

It’s fair to call out condo prices have been flat in real terms in the past few years. The recent abating of population growth will likely cause more oversupply than is predicted; current growth is 30% below its peak in 2008-2009.

I think it’s also fair to state that lower interest rates have had an effect of buoying prices, however it’s unclear to me how a prolonged period of negative real rates will translate to a prolonged period of prices remaining elevated. I haven’t found many examples in history of a prolonged period of negative real rates keeping asset prices high so I’m cautious assuming low rates for an extended period (say decades) are a rational reason for buying at high prices.

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