Thursday, April 2, 2009

Why Vancouver is still a bubble waiting to pop


It's fascinating to observe the real estate scene in Vancouver these days. There is this sense of optomism that the bottom has been hit and real estate is about to turn upward.

Are these people on crack?

Perhaps. If so they are the same people who six months ago couldn't fathom that Canada was about to be hit hard by the same recession that was engulfing the rest of the world.

The average city price is now $653,000, down 15% from it's highs. But in February sales were up and listings down, while in March sales are up over February. It has the optomist's brimming with glee.

But March sales numbers will still be down by over 25% from this time last year.

Hope, I guess, springs eternal. But the fact remains... real estate in Vancouver doesnt reflect the purchasing power of the population. The average family cannot afford the average home, even with the collapse in mortgage rates. Thus prices will continue to fall until that equilibrium is restored.

Gone are the easy-credit fuel inducded days that allowed that equilibrium to fall out of balance. Easy credit feed rampant speculation, allowing flippers to thrive. The flippers main source has been devestated by a world economy in tatters. Gone are the wealthy American, European and Asian buyers who allowed the speculation to drive up values.

Gone is the promise of money flowing into Vancouver from he Asian boom, the burgeoning film industry and the 'Olympic bounce'. Gone is the manufactured mania that said "if you don't get in now, you'll be priced out of the market forever".

The industry is still trying to leverage that fear in a desperate attempt to woo unwary first time homebuyers into the market by promoting the current lower prices and low interest rates. But economic events are sweeping that gambit away.

Jobs are now being lost in Canada at an annual rate that is, on a per capita basis, greater than that being experienced in the United States. Ontario is being devestated by what is happening. Chrysler Canada is probably history. GM is buying off workers with $20,000 cheques and new cars. The steel industry is collapsing and mills are closing everywhere, including northern BC.

The full effects of the recession have not even begun to hit our corner of the world. The forestry industry is preparing for a massive amount of pain. The sale of foreclosures in the United States is now surpassing new home construction. That means no lumber sales to our main customer. Employment in the resource centre has been dwindling rapidly.

Later this summer, the tourism industry will be crushed. The service industry will be wiped out along with it. New housing starts are grinding to a halt and the layoffs in the contruction industry are already starting to pile up.

We are nearing the tipping point where the vast majority of potential buyers for Vancouver real estate will be the average Vancouverite.

It can only mean one thing for real estate prices.

This chart shows Vancouver real estate prices from 1977 to Feb/2009 (click on image to see large size graph).

If we zoom in on the period from 2001 until 2008, you can see how prices shot up dramatically. Incomes did not rise in tandem with this increase. As a result prices have started to fall... (click on image to see large size graph)

So what, exactly, is going to re-inflate the bubble?

Without the artificial conditions that inflated the market in the first place, prices will continue to fall.

And, as you can see by the graph, they still have a long way to fall.

British Columbia is about to be hit with one hell of a wallop from the worldwide recession.

It is clear. Housing prices will continue falling to at least those levels of 2002. And I would be willing to bet they will fall a lot further than that.

I predict we will see 1989 levels once the dust finally settles.




  1. This article is very timely and relevant. As I quote Cameron Muir, an economist, "Home sales are unlikely to fall much further..That being said we expect home sales not to decline much further."

    But it's never too late, with the right business plan set up, it will lead to valuable outcome. This is what most counselors would give as an advise.

  2. The collapse of the RE market in Vancouver to sane levels would be the best thing to happen to this city in terms of arts & culture. I can't tell you how many talented and interesting people have left because it's simply too expensive here to be other than a dual-income household with a crushing debt load. Not very conducive to "fun".