Is a 70% collapse so hard to imagine?

As longtime followers of this blog know, our prognostication for the popping of the housing bubble in the Village on the Edge of the Rainforest is a decline on the order of 70%-85%.

Nothing brings more derisive emails than re-stating this prediction - even from those who already harbour a bearish outlook.

But is a 70% drop so outlandish?

Yesterday one of the properties we profiled was 2718 W. 24th Ave:

Built in 1988, this 5 bedroom, 3 bathroom house has changed hands three times since then.

In 1998 it sold for $455,000.  In 2004 it sold for $700,000.  In 2011 it was assessed at $1,864,000.

With no significant upgrades whatsoever, this property rose in 'value' from $700,000 in 2004 to $1,864,000 in 2011?  This is a perfect example of the bubble created by the CMHC polices outlined two days ago by the Globe and Mail Newspaper.

The Globe article outlines clearly, with comments from the former Bank of Canada Governor David Dodge, how CMHC policies inflated this housing bubble.

Every asset bubble in history - when it bursts - always over-corrects past the point when the bubble first started.

Below is real estate agent Larry Yatkowsky's average price chart from the start of December 2012 (click on image to enlarge):

Look at where prices were in 2004 (and some would argue that the bubble was already on it's way by then, having started several years before this).

Take a look at the uppermost graph - the stages that all asset bubbles go through.

If we to correct back to only 2004 prices, a mere 8 years ago, consider the impact on our housing market

(In 2004 the Vancouver average house price was around $520,000)

It means this house at 2718 W. 24th Ave would drop to $700,000... a 62.5% collapse in value from the 2011 assessment.

If the bubble correction overshoots 2004 prices, this house could easily shave 70% off of it's 2011 assessed value and drop to $560,000.

To eyes accustomed to housing bubble valuations, the mere idea that the 'worth' of this house could fall from $1,864,000 to $560,000 is just absurd.

But think about it.  This sort of drop only goes back to 2004.  When you look at the progression in panorama, it isn't hard to see how the bubble could burst in this fashion.

• The policies that created the bubble are being reversed.  
• The crack cocaine of easy credit that facilitated the dramatic rise is being removed.

Just remember one important thing. History shows that the unwinding of a bubble takes as long as the inflation of one.  It will take 8 years for values to fall like this... but fall they will.

And 70% will actually be a conservative number.

We are in for a painful ride.

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Email: village_whisperer@live.ca
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Sunday Post #2: Richmond realtor proclaims real estate market in process of a dramatic crash

Richmond realtor James Wong takes a look at the evolving market conditions and comes to the stunning conclusion (for a realtor) that there are "strong signs for a prolonged market downturn." It has Wong asking, Are We Headed For a Housing Market Downturn?

Wong takes a look at the last downturn our market suffered and makes the following observations:

The last real estate cycle started around 1985 to reach a peak around 1994. It was a good 10 years run where average detached home prices in Greater Vancouver was just around $100,000. At it’s peak, home prices were at just over $420,000. The correction that took place was mild, reaching the bottom in 1998 with average price hovering around $360,000. 

There were around 1,030 detached homes listed for sale with average monthly sale around 80 units. The months of inventory (MOI) recorded then was 12.9 months. The current supply/demand ratio for detached homes in Richmond is much worse than the beginning of the downturn in 1995.

Wong then looks at the current boom:

The run up in detached home prices in Greater Vancouver from 2001 took another 10 years, rising from around $380,000 to about $1,300,000 at it’s peak in 2011. The increase in average home prices in Greater Vancouver during this period was around 3.5 times. Housing affordability started to become an issue as early as 2005. Declining sales since 2006 was the first sign of the crack in the housing market in Greater Vancouver.

Wong then takes a stab at predicting where things might be going. He plots a “reverse image” of the Greater Vancouver price chart (with home price topping around March 2011). He yypothesizes how a down cycle for real estate might play out, including the duration and the extend of price decline that could happen the next few years (click on image to enlarge).

Wong's chart forecasts the average price dropping from over $1.1 million to the high $300,000's by 2020.

A drop of over 70%.

Wong then makes a stunning analysis for a realtor.  First he recognizes that the market should have strongly corrected in 2006 but didn't for the following reasons:

In spite of many new homes being added to the market each year, sales decline since 2006 was an ominous sign the housing market is ripe for a fall. Strong buying interest from Chinese from mainland China, easy credit and irrational market sentiment continued to drive home prices higher until 2011. 

Then he summarizes EXACTLY what is going on:

We are now witnessing the unwinding of the housing market. The severity and pace of price decline are dependant on the interaction of buyers and sellers perception of the market. At current price point, getting financing for a family earning $65,000 a year with 5% down payment will allow the buyer to afford a home valued at $280,000. 

It will take many years before owning a home makes sense again. Home prices are not going up now or holding. Instead, the housing market is coming down in values. The rush to exit the market will take its toll on sellers who bought their homes recently.

Wong has concluded the crash is underway and that values are going to drop dramatically to the point where owning a home makes fiscal sense again.

And that... is one hell of a drop.

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BC Business Magazine says "Real Estate Mania Is Ending", but a long hot summer remains before it does.

BC Business Magazine is out this week with an article that headlines: "Real Estate Mania Is Ending"

Seems everywhere you turn these days the message is being hammered home via the mainstream media.

The article starts off with a succinct observation.

History shows that Vancouver has always been a real estate boom-and-bust city. Now that the most recent mania appears to be over, with sales falling and prices threatening to follow, there's no reason to think that's going to change.

Indeed.

But if there is one thing we know for sure, few in the Village on the Edge of the Rainforest are students of history.  If they were, we wouldn't be in this situation right now.

BC Business makes another observation...

Fear and worry are rampant in Vancouver these days: the mighty real estate market is struggling. Whether it is in a tailspin or due for a monstrous crash is the subject of endless dinner conversations, office cooler chats and online messages.

Ahh yes, that is certainly the topic of conversation these days in a City where real estate is almost sport.

But are 'fear and worry' rampant yet?

The answer, at least in this blog's opinion is 'no'.  Certainly not on a level that's possible come the Fall.

BC Business Magazine ultimately dismisses what we believe is coming:

Was this a massive bubble? Slightly. When prices rise that much, we’re nudging bubble territory. But bubbles imply resulting crashes, and I don’t believe we’re going to have one. Of course, prices will drop a bit, but an American-style catastrophe isn’t going to happen.

There's a moral here.

The doubters will only believe it's a bubble if we have a resulting crash. And no manner of charts, theories, or tales of congruent circumstances (leading to this very outcome in other countries) will convince doubters until they see prices fall here - significantly.

Summer will probably not provide either side any answers.

Typically we see listings pulled in the summer as vacations take priority.  Meanwhile current sales are boosted by the rush to beat the new mortgage rules deadline. A curiously large number of recent reported sales are still pre-July 9th.

And as the Vancouver Housing Blogger has noted:

New listings have fallen sharply in last 10 days. The 7-day MA on Juy 9th was 284. Today 225. No sign of panic among sellers.

Market observers are speculating that we are in a standoff between buyers and sellers.  A sentiment echoed by realtor Larry Yatkowsky who asked yesterday, "Are Vancouver home buyers and sellers stubborn?"

The answer is 'Yes'.

Buyers are having their beliefs about a collapsing market reinforced daily. Sellers are adamant that they will not accept less than what they believe their properties are 'worth'.

It's all shaping up to be a long summer for both sides.

Will there be an event that triggers panic for either sellers or buyers in the Fall?

Finance Minister Flaherty and Bank of Governor Carney came back from the G-20 concerned enough to reiterate their warnings to Canadians.

Should you put any worth in their admonishments?

We shall see.

Unlike BC Business Magazine, we believe a catastrophe will happen here.

And then it will be clear to all and sundry that not only are we in a bubble... but we will be ground zero for a collapse unlike anything any of us have ever seen.

That's when 'fear and worry' truly will be rampant.

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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%

5.Coquitlam

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?

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