Enthusiasm and Euphoria

If you click on the above image, you can enlarge it.

The chart is Vancouver's average real estate sale prices. The upper line represents detached houses and is significant this month because the Village on the Edge of the Rainforest has hit a new high for average detached house price: $1,144,537.

It's a stunning number to be sure.

Back in the fall of 2009, when prices had started to climb again after a temporary adjustment in response to the 2008 financial crisis, there was considerable dismay in the Bear camp because it appeared that the 'Stages of a Bubble' pattern appeared to be wrong this time.

All asset 'Bubbles' follow a very predictable pattern as exemplified by this graph (also click to enlarge):

Many believed the drop in 2009 was a case of our market passing the 'New Paradigm' stage, moving through the 'Denial' stage and into the 'Return to Normal' stage.

Bear despair began to mount when prices continued to climb and new highs once again established.

On various blogs I commented that the Asset Bubble pattern had not been dis-proven... Bears were simply mistaken believing we had reached the 'New Paradigm' stage.

Mortgage rule changes and a stalling economy may produce a slow melt, but it will be rising interest rates that finally prick the bubble.

And that hasn't happened yet.

And as one watches the market lately, it's hard not to find the developments of late to be significant.

The failure of a crash to fully materialize in summer of 2009 has almost emboldened and cemented the belief that it 'truly is different here'.

There is, once again, mania in the industry.

Our friends over at VREAA were moved to comment on this today.

The recent rise in average prices looks almost "vicious". Taking a snapshot of the current condition VREAA notes a milieu of heady prices, breathless media reportage, a disregard for debt by some economists, and nothing less than full on Bull exuberance:

• In pockets of Vancouver, a fair number of over ask sales; Westside, Richmond, and Eastside, too.
  
  Global BC runs a breathless piece on spiking prices, bidding wars, and over ask sales; with the obligatory mention of “increased Asian investment”. [3 Feb 2011, archived by fellow archivist Greenhorn HERE.]
  
  The Vancouver Sun runs an article ‘How much has the value of your Metro Vancouver home increased in five years?‘ [4 Feb 2011].
  
  In a G&M article [3 Feb 2011] Benjamin Tal, CIBC ‘specialist on household credit’, argues that we’re all richer than we think, and that the 148% debt to disposable income ratio is nothing to worry about. An unwise position, in our humble opinion, and one that is likely to haunt Tal in the fiasco that will follow.

I would humbly suggest that not only is the Asset Bubble pattern still fully at play but that we are only now moving fully into the Greed/Delusion/New Paradigm stage.

The Irving Housing Blog descibes this aptly:

• In the Greed stage, the bullish sentiment reaches a feverish pitch and prices rise very rapidly. Every owner in the market is making money and most believe it will go on forever. As prices continue to climb, buyers become very enthusiastic about owning the asset, and they tell all their friends about their great investment. The word-of-mouth awareness and increased media coverage bring even more buyers to the market. Egomania sets in as everyone thinks she is a financial genius. Any intellectual analysis at this stage is merely a cover for emotional buying and greed. During the Great Housing Bubble, there were many instances of properties receiving a dozen or more offers the day they were listed, with many in excess of the asking price.

As some Bears fretted in autumn 2009/Spring 2010, I suggested that we needed to sit back and allow events to play out.

The Asset Bubble pattern had not been disproven, it simply had not fully played out yet.

Watching events unfold these past two months, I remain fully convinced our real estate market is unfolding in classic Bubble format.

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Email: village_whisperer@live.ca

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