Tuesday, June 5, 2012

Random thoughts

A few random items for you this morning.

(1) On the topic of HAM

The topic of Hot Asian Money (HAM) in Vancouver is a strong one. There have been lots of stories about how west side houses have been snapped up by HAM and sit vacant (the Courier newspaper did an article about this, but I don't have the link at the moment).

In a report released by the Bejing News, google translated here, Bejing alone has 3.8 million vacant houses, presumably bought by speculators in the real estate frenzy there and those homes are being held for the right time to 'flip'.

3.8 million?  Even in the United States, five years into a bursting housing bubble, it is estimated only 2.54 million homes are available for SALE!

Imagine the panic to dump if the China/world economy turns significantly downward?

(2) On the topic of Vancouver Speculators

Speaking of not ending well, a discussion went on the other day over in the comments section of the blog Vancouver Condo Info. Contributor 'Patsan' noticed that one person (Gary) was advertising 3 homes for rent on the west side of Vancouver and the tone of the craigslist ad seemed 'desperate'.

I noted that if the phone number listed was 'googled', there were a whole host of properties available for rent from this 'Gary' person. One diligent reader of the site did some research and noted:
"This Gary guy has at least 12 West Side and Richmond properties advertised for rent. They are all vacant and available now and if you goggle the address all were recently purchased. Most of the properties on the West Side sold for close to 3 million and the Richmond ones are in the 1.5 million range. The guy must be a rental agent or ring leader behind investors who have recently dropped at least 20 to 30 million on houses to rent. The ads all state minimum 1 year lease so they are not looking for quick flips. None of the ads have photos or much details. The guy doesn’t have any houses advertised that appear to have been previously rented so he must be a newby to the game."
And this is just ONE group of speculators in Vancouver.

Now multiply Gary's group by a couple of hundred and imagine the speculative panic here if the housing market in Vancouver turns downward.

(3) Comparing Statistics

Speaking of the euphoria that buyers were in a year ago, contributor VMD over on Vancouver Condo Info posted some comparisons of single family home sales from last May 2011 to this May 2012 to show just how bad sales are this year compared to last year.

1. Van West
Sales YoY -47%
Lists YoY +36%

2.West Van
Sales YoY -59%
Lists YoY +23%

3. Burnaby
Sales YoY -38%
Lists YoY +23%

4. Van East
Sales YoY -28%
Lists YoY +26%

Sales YoY -21%
Lists YoY +21%

6. Richmond
Sales YoY -20%
Lists YoY +11%

VMD notes Richmond was the first to slow down last spring, so its numbers were pretty bad last May. This May is even worse.

Will Boomers pull the trigger in greater numbers as the market worsens and slash the price point they will accept even more? Thus pushing the drop from 12% to 20%?

Could the drop accelerate even greater than that?

(4) If we slide downward, how far could we go?

If you follow this blog, you already know my thoughts.

Consider this musing from Vancouver realtor Larry Yatkowsky who broaches the concept of a 32% drop in prices:
Let’s start at the highest average price ever reached in Vancouver for a detached home – a mere $1,235,244. Now let’s also assume this market is on the skids sliding down the drain faster than we think to bottom out at something most of us would not imagine – a market that drops so much it hits May 2009′s Average Price of $831,171.

With a price drop of $404,073... that's a 32% drop from the all time high.
Consider that a 32% drop in prices only takes us back to 2009.

Larry argues buyers will rush in at this point (and I agree), but rather than establish a bottom for the 'correction' - I can't help but recall the 'phases of a bubble' chart:

A rush of buyers into the market at this point would just about reflect these phases perfectly, wouldn't it?

Can you see all the pieces falling into place for a significant drop?

Is a 70-85% collapse in prices still all that hard to fathom if these elements come to pass: The China Trigger + The Speculator Trigger + The Boomer Trigger?


Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.
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  1. I fear what's coming is going to be very ugly. It looks like all the stars are aligned to make a bad situation even worse.

    China is cooked. Japan is cooked. Europe (especially UK) is cooked. US is cooked.

    Painful times ahead indeed...

    1. I agree Makaya. It will be very painful and we will all be deeply affected by it.

      No one should be happy with what is about to play out.

    2. Make that three of us. I feel honestly depressed about what is happening some days. Did you hear Harper today? He actually sounded scared to me and I thought "holy crap, maybe things really are that out of control". We should be taking this time to clear away our debts and prepare for trouble. Most won't of course but the few here and elsewhere who are paying attention should take action on a personal basis to protect their assets and their families interests.

      It would be so much easier if our families got on board and actually made an attempt to understand the risks that are coming.

  2. I think it will be an epic drop that will stun even the bears. I personally know 2 people who are renting their houses waiting for the market to re-establish a price they are comfortable with. While they are holding their breath, waiting to be relieved by market forces, they will find their hopes dashed and their worst case scenarios unfold. Been there done that, very humbling.

  3. Whisperer - I just read this and think you are bang on with the phases of bubble chart.

    As for the trigger, in my opinion, the speculators present the biggest risk. The reason is the immediate need they have to sell due to the calculated, leveraged nature of their business. If prices start to go the wrong way, a speculator becomes very motivated.

    The boomers, who have the opportunity to sell and cash in face the same human inertia and denial we all do. Most of them will stay put and miss the opportunity. Unfortunately, they will bemoan for years how they once had a million dollar property and if only they had sold. For a few lucky or prescient ones it can be different by selling now. I wish them well.


    1. Ha Ha. Yes, they will all tell their children and their grandchildren how they were once a millionaire! (But Mommy had an obsession with owning her own house and was too proud to be renter so now the family fortune is gone and we are poor!)

      But now we rent.....

  4. I really appreciate the consistently excellent content you have been providing. Thanks.

  5. I think that every market has a floor. I would agree with prices dropping but your prediction is beyond impossible. It is basic economics and as you can see from the various RE blogs that there are people sitting on the sidelines waiting for the drop to enter into the market. There are many.
    These people will support the price and keep them from dropping beyond 20 to 30% as rates continue to stay low. The only way you would get 70% is if rates doubled and unemplyment increased significantly. Canada really has no issues on this front. Well paying jobs are available and rates are destined to be low for awhile. You can get a 10 year fixed right now for about 8% (not that you would want one). 8% used to be a fair mortgage rate in my fathers day and age. I ask one last question is why do all precious metals guys predict and in some cases pray for this massive reckoning. I don't get it and I saw this mentality in the early eighties and it served those individuals a large helping of humble pie when silver dropped big time.

    1. Care to attach a name to this prediction for future reference?

      If it is basic economics that it is impossible for the market to drop more than 20=30% as rates say low, then how did basic economics fail in the United States, Spain, ireland, the UK, etc? You can get a 30 year mortgage in the US for under 4%, how did house prices drop more than 30% there?

    2. "The only way you would get 70% is if rates doubled and unemplyment increased significantly."

      Well, if rates double, that would bring them back to historical norm...

      Regarding unemployment, it's coming (unfortunately). RE industry as a whole is about 25% of GDP. How many workers are vulnerable to a market downturn?

      My prediction, which is based on historical price to rent ratio, is a correction of 55% of Vancouver prices.

      What I find amusing in your argument is that you dismiss totally the possibility of a severe price correction while, at the same time, never question why prices in Vancouver more than double in the past 10 years. Is it so difficult to understand that the factors at play during the boom will be the same during the bust, with similar extreme consequences?

    3. So much here, the debate is great--

      @Anonymous - they are waiting on the sideline because history has only shown prices rising until recently and people wish they could capture gains. If prices start to fall, these same people will be influenced by fear and doubt. They will pull away waiting for yet more drops.

      As for your take on where rates it's hard to dispute that rates are at or near their lowest rates ever. Just 30 years ago in the 80's they were 20%. That's a range that not only can happen but did happen and rates will continue to move and adjust over time. Jumping just a few percentage points will drastically impact most people's VRM payment and unfortunately that seems not only totally plausible but rather a certainty - it's just a matter of when. The unknown is that is could be soon or a number of years out.

  6. DG
    You can call me the above and you can have my full name when your prediction comes true. Cheers,
    We know why the RE fell in the states. And those factors have a basis in or economy as well but not to the same degree ( I am sure you can argue that point ). And you show me any of the above countries that had a 70% correction or more and please dont send me a link to the Vegas market - Vancouver and the Canadian market has no relationship to what occured in Vegas.

    1. Actually, Vancouver seems a lot like Vegas in many ways.

      - Huge recent gains in price
      - Regional city w/ lack of strong diversified industry base
      - Markets itself as tourist destination
      - Relatively small population base, lots of land around (Yes there is).

  7. Also if you are really into the graphs if I am not mistaken but I have seen a few on the Vancouver market and a basic book on candle stick techinical analysis would put you somewhere back at the 2005/2006 prices in the Vancouver market. There is always a floor and back to prices in the 1990's and early 2000 is just not going to happen. But you PM guys keep hoping and wishing. 30 to 40 % will hurt a lot of people. Anyway everyone has an opinion...

  8. Also the other item that seems to be overlooked on this blog as why the USA market had the crap kicked out of it.
    Gas prices and since then gas prices and fuel prices for heating etc...have dropped and there is a glut at this point which may cause some producers a concern as the cost of a barrel goes down. There is a direct relationship with this and the consumer in the USA during that period. They had less money in their pocket which made it more difficult to spend on housing and the econmies that spin off from the purchase of a new home. DG

  9. What occured in Vegas was gas prices went through the roof because of an overheated economy globally - not the same in Vancouver.

    Severally over built - not the same in Vancouver ( I would be willing to bet that if there is a 20 to 30% drop in prices from today you would see product being taken up and listings drop down to normal )

    Land - well anyone who has flew into Vegas would disagree on the availability of land. Vegas could build forever and up. Outside of the strip it is all single family homes.

    As for Vancouver not having diversification well I call bs. Our economy is way more diversified. Mining capital of the world, foresty, tourism...etc.

    Also if I am not mistaken as I dont study this stuff there were rate increases on mortgages that reset on in Vegas causing individuals problems with the ability to pay as their payments went up.

    This caused the the economy to contract thus huge employment losses. Mortgage brokers if they were lucky found a cab they could drive.

    Canada at this point economy moderate to good in most areas. Unemployment relatively low compared to the Vegas. Rates are low. So Vegas is not Vancouver the only similiar point would be that they both start with the big V.

    Cheers, DG

  10. It can and has happened in Vancouver before. In 1984 I bought a house from a guy (a banker no less) who had paid 160.000 for the place in 1981. He sold it to me screaming and crying for 88,000. Just shy of a 50 percent loss. I see the smae thing only even worse this time. Van is overpriced by at least 60 percent.

  11. What a stretch 1981. I remember it well my dad lost everything by by 1983. Rates were up near 20% on variable business loans.

    You can hope and pray all you like or may I say prey but there is no way how the market will drop 60 percent. And by the way your example is not a 50% loss. A loss closer to 45% which is much closer to the 40% than 60% plus. Broad strokes for simple folks. Any evidence why this would happen would be good as well. Like a well grounded philosphy 101 premise for 2012 and not just it could happen because we got close in 1981.

  12. Oh by the way silver crapped the bed in the 80's a lot more than housing did. Look it up PM dudes.

  13. http://www.silverinstitute.org/site/silver-price/silver-price-history/1981-1990/