Laadies aaand Gentlemen! Step right up, one and all and ride the bubbliest market in North Americaa!. The Great Vancouver Real Estate Roller Coaster is now open for bizness! Experience the thrills! The Spills! The mind-boggling economic waste of it all!
Front row seats for you only my friend, here’s your tickets:
Our bubbly market has been featured in Macleans again: In Vancouver, logic has left the housing market.
And so it is with Greater Vancouver’s real estate market. People are indeed clinging by their fingernails as they try to meet their mortgage payments. The anecdote archive tells an all-too-typical story of a couple who bought a $1.2 million house with a $700,000 mortgage. The husband was laid off last month and the wife isn’t sure if her job is secure. Others like Pospisil despair of ever getting into the market. Certainly if you have to fall $700,000 into debt, why would you want to?
But in some parts of the Lower Mainland those sorts of mortgages are the price of admission. North Vancouver, the poor cousin of the three highest cost areas, had a benchmark price in March for a typical detached home of $927,122. A similar benchmark or typical house in neighbouring West Vancouver sold for $1,440,747. And in Vancouver’s west side it went for $1,656,986, according to the latest figures from the Greater Vancouver Real Estate Board. True, there was a dip in housing prices in late 2008 and much of 2009, but it was temporary, and relatively minor in nature. It was certainly not the burst housing bubble that many predicted, and still predict, will hit. By rights the housing prices should have peaked, but logic has long since left the market place.
Read the full article at Macleans, and congrats to VREAA for the mention in that article!
Everybody knows that interest rates are going up, but the big question is how soon and how fast? Recently two banks chimed in with two different forecasts:
CIBC: Interest rates unlikely to soar
Canadian interest rates will probably begin rising from July but are unlikely to soar as significant uncertainties remain in global economies, a new report by CIBC World Markets found.
Interest rates are likely to remain low by historical standards at no more than 2.5% at least until the end of 2011, CIBC Chief Economist Avery Shenfeld in the report.
Scotia: Interest rates seen rising
The Bank of Canada is set to embark on a series of interest rate hikes, starting in June, that will see its benchmark rate climb from its historic low of 0.25 per cent to three per cent in little over a year, Bank of Nova Scotia’s chief economist said yesterday in his latest outlook.
Warren Jestin said the move away from short-term “emergency level” rates is necessary because of inflationary pressure that is expected to emerge from stronger-than-expected growth. By the end of next year, the central bank’s target rate should be 50 basis points higher than the comparable rate set by the powerful U.S. Federal Reserve, he said in his latest update to Scotiabank’s economic forecast.
The increase of 275 basis points, to three per cent by the end of the third quarter of 2011, is bigger than what Jestin had previously anticipated. His earlier forecast had the central bank target rate climbing by a cumulative 200 points.
So which bank forecast will be correct when we see rates move from the historic low of .25%? will we see rates go up by a factor of 10 as CIBC predicts, or a factor of 12 as in the Scotia outlook? And what will this move mean for mortgages at renewal?
There’s a book excerpt by Moshe Milevsky over at Globe Investor that makes the argument that many people would be better off renting and not buying their first home until age 50. When housing is a hot investment sector many people overpay and the return to fundamental value hurts many. In the US about 25% of homeowners owe more on their mortgage than their house is worth. This is an obvious reason why renting early in life can be a better long term economic move, but it’s not the crux of the authors argument:
So, where does this leave us in terms of practical housing advice? For one, I think that a large proportion of individuals within the population should not own a house, or they should at least push off the purchase as long as possible, and instead rent. Anyone that followed this advice in the U.S. over the last few years, possibly the last few decades, would be much better off today. This is not just me being preachy or dispensing with advice that–with hindsight–proves correct. If you actually go back to one of the first principles I discuss in this book, namely Long Division and the spreading of resources over time, you can arrive at the same conclusion, but the reason is not as simple as you might think. It isn’t because housing is a “bad investment” or has performed poorly relative to other asset classes. Instead, it relates to the investment characteristics of your human capital when you are young and as you age.
In a number of recent studies, a variety of mathematical economists have developed a control theory model to derive the optimal or rational approach to housing over the life cycle. (I discussed Dynamic Control Theory in the Introduction.) You can think of their research as exploring how Mr. Spock (from Star Trek), who knows all the odds and can act completely logically, would behave. According to these researchers, most “typical” people under the age of 40 shouldn’t own a house but should rent, instead. But again, this isn’t recommended for the reasons you might think. Here’s the Spock argument against home ownership early in life: When you are young the vast majority of your true wealth is locked up in human capital, which is illiquid, nondiversified, and definitely nontradable. It therefore makes little sense to invest yet another substantial amount of total wealth in yet another illiquid and nondiversifiable item like a house.
Sure, if you could buy a house that has a bedroom in New York City, a bathroom in Los Angeles, and a kitchen in Chicago and perhaps a garage in Las Vegas, yes, your home would be diversified. Buying a house as an investment has strong similarities to someone being convinced that stocks are good investment in the “long run,” but they decide to buy only one stock for their portfolio. I don’t care how reliable that one stock is, or how large are the dividends, that stock portfolio is not diversified. The same goes for housing.
Read the full excerpt over at the Globe Investor website.
Several people have pointed out this article in the Globe and Mail, but I believe Strataman was the first. This article is one of a growing number that are looking at the negatives of government pumping a house-price based economy rather than a more diversified productivity based financial ecosystem.
The stories are all too common. There’s the couple down the street who haven’t dined out in years and the kids wearing hand-me-downs, all to make the mortgage payment and cover the interest on the line of credit that paid for their home’s renovation.
The tales are not apocryphal. The shifting spending patterns are clearly evident in retail sales data.
Canadians are funnelling more disposable income to homes at the expense of most anything that isn’t housing related. The government is aiding and abetting this with policies designed to support housing, such as tax credits for renovations and mortgages backed by the Canada Mortgage and Housing Corp.
The article goes on to cover some of the reasons why governments pump housing at the expense of the rest of the economy and what the inevitable fall-out of these policies are. Read the full article here.
March saw listings grow like crazy and April started off with a bang adding close to 500 listings on April 1st alone. The growth in inventory is being mirrored by a growing number of people who appear to be seeking out more information on a Vancouver housing bubble – traffic on this blog has nearly doubled in the last couple of months.
The following comment was posted just before the weekend by GregK71 regarding the growing number of bullish comments here and on other blogs. I suspect it may sum up the way many readers feel about the current state of the Vancouver real estate market and its likely future:
The bulls on this and other RE blogs absolutely see the writing on the wall going into Q3 and Q4 2010, and beyond. They’re not blind. Arrogant, yes. Foolish, perhaps. Blind, no.
Oddly enough for a group of people apparently content and smug in their asset class, bulls never turn down the chance for a satisfying faeces toss on blogs like VCI. They’re coming here to convince themselves to keep on believing house prices only ever go up. And it’s worked like a charm.
Now, although it doesn’t always seem to come across in their posts, bulls understand market forces. They’ve made money in RE. Big money. Like bears, bulls too sense danger. In their gut, bulls comprehend irrational exuberance. Heck, they’re the ones who’re listing their presales and resales en masse, soon to push listings onward to 25,000 and beyond.
Bulls know this thing’s running on fumes. Bulls know the time is short. Bulls know there’s no such thing as running out of land when you can build up. They know these things.
They also know the Kool-aid is starting to taste a bit, um, funny.
Vancouver bulls, you’ve had an amazing run. You’ve defied the fundamentals for longer than many thought humanely or economically possible. It’s been unreal. It’s been absurd.
To those of you over-leveraged on severely overpriced Vancouver real estate: relish these final few weeks on the upside. You may have a month and a half.
But the tipping point is here. It’s visible. It’s shocking. And it can’t be put off with another rate cut, loosened restriction, extended am or exotic mortgage product. That deck is exhausted.
The process just getting started ends only with utter revulsion and complete contempt for the asset class. Needless to say: it’s going to be a long, long way down.
Domus pointed out this editorial in the Globe and Mail, Tone down the real estate speeches:
A funny thing happens to people when an economic or financial trend holds in place for a very long time. They begin to assume that “a long time” equals “forever.” You can see this clearly in the U.S. Its home prices hadn’t declined on a national level since the Great Depression, so buyers and rating agencies assumed they could never go down – until they did.
Read the full article here.
On a side note Raincouver points out this morning that RBC and TD have just announced the first mortgage rate increases since October, with the other banks expected to follow.
The biggest jump is attached to the popular five-year fixed closed rate, which moves from 5.25 per cent to 5.85 per cent at both banks. That’s the posted rate, which is routinely discounted by the big banks.
RBC’s new discounted rate for the five-year term also rises 6/10ths of a percentage point to 4.59 per cent. TD’s rises the same amount to 4.55 per cent.
Both banks also raised their three-year and four-year fixed closed rates. The posted three-year rate at Royal Bank climbs one-fifth of a percentage point to 4.35 per cent, while the posted rate at TD jumps 4/10ths of a point to 4.70 per cent.
Plans to build a 20 story tower in the west end met some resistance yesterday, as local residents held a protest against the proposal.
The rezoning would allow developers to build a 20-storey tower on the site and take advantage of the city’s Short Term Incentives for Rental Housing (STIR) program, which includes incentives such as faster permitting process, parking requirement reductions and increased density of the rental apartments.
“It’s completely out of sync with what works in the neighbourhood,” said Godfrey Tait, a spokesman for the concerned residents. “You could maybe have some mixed-market, family-oriented housing, maybe something that wouldn’t exceed six levels, but certainly not another tower.”
The full article is in the Vancouver Sun.
Those heretics over at Canadian Business magazine have a cover article this month called Why Buying a House is a Bad Investment.
The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall — and they can take a long time to recover. Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one’s entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.
..and it goes on and on.
“There’s a unique confluence of factors that has driven house valuations up this sharply,” says Derek Holt, vice-president of economics at Scotia Capital. “They’re all temporary, and that’s a house price bubble that could be pricked as we go off into the next year.” The rate of growth in home prices for the past 10 years has in fact been out of line with prior decades, pointing to lofty valuations today, according to Holt. Prominent Canadians such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge have also sounded the alarm recently on today’s unusually rich home prices.
You can read the full article at the Canadian Business website, but these people clearly don’t know what they’re talking about. After all, real estate prices never go down, everybody knows that.
The latest issue of Business BC is all about the property market rebound and they focus on 5 ‘hot pockets‘ to watch for and invest in for 2010.
What goes down in B.C. real estate must, apparently, come up. And quickly: by the end of 2009, the average home price in the province had risen to $463,000, back to where it was in 2007. Interest rates are, at least for now, at record lows, and increasing consumer confidence has spurred the market’s recovery beyond expectations. Barring the usual unforeseeable mayhem, things are looking good.
Just for fun, let’s see if we can predict which of those five markets will do best by January 2011. Below are the BC markets they focus on, vote for the one you think will have the best percentage return by the end of 2010. In the event of a housing market crash, best performance would be the market that lost the least amount of value.
[poll id="34"]
