Tag Archives: collapse

Afraid of falling prices? Just don’t sell!

There’s a funny comfort meme in the media now that house and condo prices are falling.

Its a strange interpretation of ‘supply and demand’ that says if demand is dropping dramatically we’ll just cut back on supply to match and prices will stay stable.

Soft landing here we come!

There are a number of talking heads in the media espousing this viewpoint at the moment and If you don’t think about it too hard it kind of makes sense.

Here’s just one recent example:

Don Lawby, chief executive of the Century 21 Canada, and a charter member of the club that doesn’t see home prices dropping anytime soon, can’t see any desperation from sellers.

“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”

If people don’t have to sell, then they’ll just take their homes off the market and there’s one less property on the supply side right?

..Of course if you start thinking about it a little bit it doesn’t make as much sense. As Patriotz points out:

..most discretionary sellers are planning to buy another property, so if they decide not to sell they are also deciding not to buy.

So for those of you keeping score, that’s one less seller AND one less buyer. Kind of cancels itself out doesn’t it?

The other point that has been repeated ad nauseum but always seems to get ignored in these articles: the seller that doesn’t sell has zero affect on the market.  The ONLY activity that affects the market are the sales that take place and what price the exchange happens at.  That sale then sets the comp price for all neighbouring properties.

So what really drives the market?

What buyers are willing and able to pay for their desired property from buyers who either need or want to sell.

In a falling market buyers are willing to pay less, because they aren’t completely stupid.  They know it doesn’t make sense to bid high on a purchase that is falling in value each month.

And how fast are Vancouver property prices falling right now?  Apparently even faster than the US bubble markets were falling at their peak.

So there’s that.

But possibly even more important is the buyers ability to pay.  Even if someone really wants to buy that million dollar house and thinks it’s a great deal they might not be able to.  If the credit isn’t available that sale will not happen.

Recent moderation in the mortgage market will have some effect here as we return to the historical standard 25 year amortization on CMHC insured mortgages.  As CMHC hits it’s mortgage cap it is also pumping less credit into the housing market now than it has been for the last few years.

Every time you read another expert talking about the lack of a ‘trigger’ to cause a collapse in the housing market it’s worth thinking about what the trigger in the US or Spain or Ireland was.

The US housing market started to collapse in 2006.  2 years later financial markets collapsed.  The ‘trigger’ for the US real estate collapse was simply this: House prices were too high.



Close your eyes and load up on debt

This National Post commentary is one of the most direct attacks on Canadian personal debt levels I’ve seen in the mainstream media.

The takeaway is this: YOU are responsible for your own debts, don’t go whining to anyone if it gets you into trouble.

It’s mindboggling to think that an entire population can look at what happened in the US when personal debt levels got this high and shrug it off.

Analysts and economist are filled with forecasts of doom, and that was before the latest figures showed debt had continue to pile up over the past year to a record 163% of household income, which is where the U.S. was before the 2008 collapse, and about 10 points higher than anyone thought. As the housing market cools and home prices slip, a lot of people could find themselves making monthly payments they can barely cover for a house that isn’t worth what they thought it was. If you can’t cover the mortgage, you just have to pray the roof doesn’t start leaking or the furnace fail.

And borrowers won’t really have anyone to blame but themselves. The warnings are out there. The examples are rife: all anyone has to do is examine the experience of U.S. homeowners over the past few years. The dangers aren’t a secret, they’re just being ignored.

But people keep borrowing, because it makes them feel good to spend, because they’re too busy to think about it, because they figure they can cover the payments in the short term and will deal with the future when it comes. And because they can always blame it on someone else when the roof caves in.

Read the full article here.

One bubble down, one to go

The Vancouver real estate slow down is making news all over and people are now wringing their hands over Toronto.

This Financial Post article talks about our bloating inventory and collapsing sales while pointing out that Toronto sales are up 11% year over year.

..and yes, there’s yet another warning from the Bank of Canada:

“Although economic growth in Canada was slightly slower than expected in the first quarter, underlying economic momentum appears largely consistent with expectations. However, the composition of growth is less balanced. In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.”

The warning is apt. Rosenberg said if the Bank of Canada felt the need to re-establish parity between short-term rates and its inflation target it would have to raise the rate 100 basis points.

“That wouldn’t cause a recession, but it sure would be painful for many households,” leading to more loan defaults and less spending growth.

If you can’t afford a 100 basis point increase in rates you probably shouldn’t be taking on too much debt.

Whistler Hotel Condo Prices Collapse

The Pique has an article about some remarkable goings-ons just a little ways north.  Some hotel condo units in Whistler are now selling for half their peak price.

Those who own a condo unit in a Whistler hotel are sitting on great potential, but at the moment the units are not showing great value.

Real estate consultant Denise Brown with Re/Max Sea to Sky Real Estate reported that a unit originally sold in the Four Seasons Whistler for about $1.1 million was recently resold for only $520,000.

The so-called Phase 2 units in Whistler have fallen victim to the globally depressed financial situation, said Brown.

“We’ve seen the prices come down significantly,” she said.

According to Brown, this segment of the real estate business is at the bottom of the cycle so prices are good right now. She said the people who are happiest in the condo hotel market are those who are in for the long-term and have made a lifestyle choice in purchasing a condo unit in a hotel.

Lifestyle.  Got it?  Lifestyle, Lifestyle, Lifestyle.  Just repeat the mantra and you’ll be fine.

Then there’s this gem:

Kelly said this segment of the real estate industry has improved in the last six months but people aren’t willing to spend as much in Whistler as they were a decade ago.

“It’s not anything wrong with Whistler or that Whistler is worth less,” said Kelly. “It is just that people are prepared to spend less.”

It’s not that Whistler is worth less than it has ever been worth, it’s that some people paid more than it was worth.

US housing market still deflating

City by city data for US markets is just out showing how much prices fell in the year and how far they’ve come down since the market top.  Here’s what last year looked like in some major US markets:

South of the border: city -by-city breakdown of latest Case-shiller data

Las Vegas: Prices down 8.8%, and 61% below peak.
Los Angeles: Prices down 5.2%, and 41% below peak.
Miami: Prices down 3.8%, and 51% below peak.
New York: Prices down 2.9%, and 24% below peak.
Phoenix: Prices down 1.2%, and 55% below peak.
Portland: Prices down 4%, and 29% below peak.
San Francisco: Prices down 5.4%, and 41% below peak.
Seattle: Prices down 5.6%, and 32% below peak.

Remember, it’s not a bubble, it’s a balloon.  Balloons don’t pop, they deflate.  Slowly over the course of many years.

Hat tip to VMD for the link.