Tues Post #1: So what happened to all the Asian Money flooding into Vancouver?

Remember when HAM or 'Hot Asian Money' (and not cheap credit inducing Canadians to overextend themselves) was supposed to be the reason the Vancouver Real Estate market was remaining buoyant?

Back in June of 2010 we were told that Vancouver Real Estate had recoverd from the recession and that a surge in sales in the high end market was supposed to be trickling down to the lower levels and thus keeping sales up across the board.

And the source of that high end money?

China... or so we have been told by the media and Cameron Muir, Chief Economist of the BC Real Estate Association (BCREA) as this Global clip from June 12, 2010 attests to:

The clip tells us that all the money flowing into our Real Estate market is coming from Mainland Chinese who were buying homes here, upgrading their homes here or buying homes for investment purposes.

Muir is very specific, telling us that not only are the largest proportion of buyers of high end homes coming from mainland China, but their presence is what has been maintaining property values.

Global TV summarized and stated, "it means the rush of buyers from China is keeping the Lower Mainland housing bubble from loosing air."

Hmm... okay.  And since early 2010 that's all we have heard about in Vancouver:  'Chinese buyers are snapping up properties and keeping the market strong. No need to worry about a market collapse here, hot asian money is pouring into Vancouver.'

Translated... the message for you and I is the same as it always is from the R/E propoganda machine - buy now or be priced out forever.

Fast forward a year and a bit to today and the myth of HAM remains. Talk to anyone on the street and their view is that 'hot asian money' continues to flow into the market.

But wait! The tune from the likes of Cameron Muir has changed dramatically.

Over on the local CTV station, the dinner hour news last night had a segment on concerns our housing bubble is about to burst. You can find it at this link and watch the video broadcast itself (CTV News - Is Vancouver's housing bubble about to burst?)

CTV's story notes that our astronomical real estate prices combined with global instability have many locals wondering if the bubble is about to burst in Metro Vancouver.

Naturally CTV pops by to have a chat with Mr. Muir.

And the chief cheerleader for R/E in BC does not disappoint. "I guess the first question is - is there a real estate bubble at all?" says Muir.

Cameron goes on to tell us there is no bubble; that the average home price is actually being skewed, inflated by skyrocketing prices for detached homes in Richmond, West Vancouver and the West Side where prices have soared nearly 80% over five years - 27% in the past year alone.

A result of 'hot asian money', right?

It doesn't make the written transcript in the link above, but if you watch the actual clip there is a very insightful exchange at the very end.

The newscast host (Tamara Taggart) asks, "What about offshore people are they jacking up prices?"

Reporter: "That's kind of a fiction. The Chief Economist of the BC Real Estate Association says a lot of people have heard these rumours but he says only 2-3% of the buyers are foreign investors from mainland China"

Say wha????

Gee Cameron... and where would these 'rumours' have gotten started to begin with?

Muir quick shifts gears and attempts to belay concerns about a looming collapse by saying, "we had a financial crisis, the largest we've seen since the great depression, we had an ensuing global recession, and if that isn't a trigger or a tipping point for any kind of over-inflated market to see a major correction, I don't know what is."

Wow!

First off HAM is a myth, and now you're telling us that because the bubble hasn't popped yet, there isn't one?

One thing I can agree with Muir is that we did have a financial crisis, and it was the largest we've seen since the great depression. 

We also had an ensuing global recession.

But as the mainstream is starting to appreciate, that recession is nowhere near being over.

Up until now our government has moved heaven and earth to forstall its effects by slashing interest rates and coaxing our citizens to plunge themselves into record levels of debt by buying real estate and delaying the consequences of that financial crisis.

But the global recession marches on and we can't hide from what's coming.

Muir says, "if that wasn't a trigger or a tipping point for any kind of over-inflated market to see a major correction, I don't know what is."

Again, he's right. But the problem is that the trigger hasn't been pulled yet. Muir makes it sound as though the time for the trigger to be pulled has past us by.

It hasn't.  And when it does get pulled, we will see that tipping point.

It may already be upon us.

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R/E and QE

It's been a busy week without time to post but a quick few notes on what is a significant week.

I had hoped to follow up with some commentary on yesterday's post on real estate but I will save that for later in the week. 

Numbers are now out for R/E sales in July and it is clear the market is starting to turn. An article in the Globe and Mail highlights how the latest home-sales figures point to a slowdown.

“The resale market has just gotten stupid in a lot of places,” said Ross McCredie, chief executive officer of Sotheby’s International Realty Canada.

“We’re seeing an increased amount of attention to what’s happening in the economy,” said Don Lawby, the Vancouver-based chief executive officer of Century 21. “It’s having an effect – if a house is priced right and the person is confident about their job, you can do a deal. But the price has to be right.”

And by 'priced right' they mean priced 'lower'.

“You’re starting to see more desperation from the sellers because they want to get out at the top,” said Mayur Arora of Oneflatfee.ca in Surrey, B.C. “It’s not all doom and gloom, because some neighbourhoods in Vancouver are still seeing bidding wars. But you are seeing signs that things are definitely changing.”

We will come back to this theme in the weeks ahead.

The big news of the day was the stock market.

The DOW plunged 512 points, the biggest one day drop since the 2008 financial crisis.  This comes after a 200+ point drop the day before.

The market is finally reacting to the government debt woes that have triggered massive financial bailouts of European countries and major spending cuts in the United States.  Meanwhile indicators show the economy has slowed to a crawl as a slew of global companies have announced broad job cuts.

Ignore all that “soft patch” BS that you hear and read about.  The economic numbers that you’ve seen signalling growth since then were all manipulated to ease fear. The reality is that the US continued to bleed jobs and the number of people going underwater on their mortgages increased. Home values showed a small bounce after the big drop but the downtrend quickly resumed and shows no signs of letting up. 

It’s too early to tell whether or not the stock markets will continue to fall as it did in 2008.  But I suspect one thing will become crystal clear – the public has been completely mislead about the true state of the economy.

As this blog has been fond of saying, few understand the full extend and effect of the financial earthquake that struck us in 2008.

We we have been told the economy is recovering, the reality is that we are still in that crisis.

Former comptroller general of the Government Accountability Office (GAO) David Walker warns that this upcoming phase is going to hurt:

• “Here’s the bottom line. If you take the total liabilities of the United States – public debt, unfunded pensions, retiree health care, under funding with regard to social security, with regard to medicare, a range of commitments and contingencies – as of September 30 2010 we would have had to have had $61.6 trillion dollars in the bank in order to be able to defease those obligations.”

Walker correctly notes that the fact of the matter is that the US problem is overwhelmingly a spending problem.

• “Lets understand something very simple. If you have escalating deficits and mounting debt, that means you have to increase the debt ceiling limit at some point and it means absent structural reforms in entitlement programs, defense and other spending, those represent deferred tax increases."

Walker knows the looming problems are unavoidable and a mathematical certainty. And it's the next part which emphasises why this blog believes so strongly that precious metals like Silver and Gold are destined to rise much higher.

• “We are not exempt from a debt crisis. We’re never going to default, because we can print money. At the same point in time, we have serious interest rate risk, we have serious currency risk, we have serious inflation risk over time. If it happens, it will be sudden and it will be very painful”

It’s not a matter of if, but when.

The current course America is on is mathematically unsustainable. A few hundred billion in spending cuts is simply not going to be enough.

Combine this with the weak economic data and it's clear that the devastation in the stock market has only just begun.

The countdown to QE 3 has begun.

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Snapshot of Real Estate in BC

The Bank of Canada (BOC) decided to stand pat on interest rates today keeping the trend setting BOC rate at 1%.  This despite the fact inflation under the truncated post-2000 Consumer Price Index (CPI) is sitting at 3%.

The key here is that with interest rates below inflation Canadians discouraged from saving.  Any type of bond purchase under 5 years would give you a return below the rate of inflation.  Why save?

Money is encouraged, instead, to move from prudent behaviour into risky speculative behaviour to get a return that stays ahead of the rate of inflation. 

So with our 'below inflation' interest rates, here's a snapshot of real estate in BC for you.

June's Months of Inventory (MOI) calculations for each of the British Columbia Real Estate Association's (BCREA’s) sales regions is listed below. The inventory and sales data from is from bcrea.com and was posted recently in the comments section over at Vancouver Condo Info.

= = = = = = = = = = = =

BC Northern
Inventory: 3215
Sales: 418
MOI: 7.7

Chilliwack
Inventory: 1828
Sales: 230
MOI: 7.9

Fraser Valley
Inventory: 8169
Sales: 1508
MOI: 5.4

Greater Vancouver
Inventory: 16194
Sales: 3317
MOI: 4.9

Kamloops
Inventory: 2301
Sales: 206
MOI: 11.2

Kootenay
Inventory: 3441
Sales: 232
MOI: 14.8

Okanagan Mainline
Inventory: 6928
Sales: 499
MOI: 13.9

Powell River
Inventory: 265
Sales: 38
MOI: 7.0

South Okanagan
Inventory: 2275
Sales: 145
MOI: 15.7

Northern Lights
Inventory: 356
Sales: 43
MOI: 8.3

Vancouver Island
Inventory: 6676
Sales: 672
MOI: 9.9

Victoria
Inventory: 4108
Sales: 596
MOI: 6.9

Provincial Totals
Inventory: 55816
Sales: 7904
MOI: 7.1

Vancouver continues to have relatively low MOI numbers while outside the Lower Mainland the Months of Inventory numbers are high, especially in the Okanagan.

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Lux Æterna: Cassandra's Nightmare

I recently read an analogy about the stock markets by Jawad Mian of Q Invest which could equally apply to our Canadian Real Estate markets.

In Greek mythology, Cassandra was a princess of the legendary city of Troy, and the most beautiful of King Priam’s daughters.

Cassandra was seduced by Apollo, who gave her the ability to predict the future. But when she refused herself to him, he cursed her by making people disbelieve her predictions.

So Cassandra went around knowing and predicting the future, telling people what was going to happen, but no one ever believed her. She foresaw the fall of Troy, but couldn’t prevent it.

Cassandra is a figure both of sagacity and of tragedy, where her combination of deep understanding and powerlessness exemplify the tragic condition of humankind.

I find the mythic origins of the Greek prophetess and the metaphorical application intriguing in so far as it relates to the Canadian Real Estate markets.

What Cassandra sees is something dark and painful that may not be apparent on the surface of things or that objective facts do not corroborate.

She may envision a negative or unexpected outcome; or a truth which others, especially authority figures, would not accept.

In her frightened, ego-less state, she may blurt out what she sees, perhaps with the unconscious hope that others might be able to make some sense of it. But to them, her words sound meaningless, disconnected and blown out of all proportion.

At the turn of the century, there were some who fretted that higher interest rates might soon return.

Dismissed as scaremongering Chicken Little's who thought the sky was falling, they were further vilified as Central Bankers in the Western World cut interest rates to stimulate the economy out of the dot com collapse.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Now is the time to buy!"

And they were right.

As the American housing market imploded, and the 2008 Financial Crisis took hold, Central Bankers swore to cut interest rates drastically to resuscitate the economy.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Housing in Canada will continue to rise!"

And they were right.

But over the last 12 months that has changed.

First it was Alan Greenspan, former chairman of the US Federal Reserve, who started sounding the warning bells.

Then Canada's Central Banker, Mark Carney, started with his warnings.

For most of this year Carney has intoned his cautionary tale: Interest rates will be going up - sharply. Make sure you are ready.

For years the housing bears have been dismissed because the signs coming from the Central Bankers undercut the primary reason the bulls said housing would collapse: interest rates.

Changing viewpoints is a gradual process. Flipping from bullish to bearish, and vice versa is difficult. We remember what most recently rewarded us, and internalize that.

Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred.

Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances.

Both Greenspan and Carney are issuing warnings about higher interest rates, mainstream media are regularly publishing stories about the existence of a housing bubble, about our extreme debt situation and the American Experience reflects back at us.

And still the warnings sound meaningless, disconnected and blown out of all proportion.

Sometimes illusions are far more comfortable than reality. That may explain the unchecked optimism many continue to have in regards to the Vancouver Real Estate market.

The housing market will soon start a steady erosion that will scar the life of anyone invested on the wrong side. That erosion will be caused by significantly higher interest rates.

The Greek philosopher Solon said: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come.’

Greenspan and Carney have made it clear now that the uncertain future is almost upon us.

• “The crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many [Canadians] with debt loads they can no longer afford."

Soon the Central Banker safety net will be withdrawn, or the bond market will negate their interference.

Will it be a Requiem for the Canadian Housing Dream? More importantly... will you be forced to mourn your own personal circumstance out of insolence?

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Prelude to Real Estate Armageddon?

March 12th, 2009.

If you dropped into our little corner of the world wide web that day you would have seen this post titled 'All New Ground'.

• Increasingly it is becoming clear we are living in a once-in-a-multi-generational time...We have never had this much debt, this type of real estate decline or such a rapid collapsing of employment all convergent with a worldwide financial meltdown and a rapid withdrawal of consumer spending.
  
  And because the entire world has been drawn into this maelstrom, the US Dollar continues to hold it's value...
  
  [But] a great many economists are concerned that the only solution that the US government seems to have for the current financial troubles is to print more and more dollars... [which] is set to trigger a collapse in the value of the dollar against real things such as gold and oil, if not against the other paper currencies.
  
  If that happens, the fear is that we will enter the next, much more serious stage of the financial crisis, in which falling currencies will push up long-term interest rates, which in turn will crush what's left of the world's financial system.
  
  If the dollar falls in value to the point where no one wants to hold it, North America will feel a tsunami of accelerating inflation as their currency buys less and less. And this time around "inflation has the potential to be worse than the double-digit rates of the 1970s", said Warren Buffet.
  
  So where are we headed? Is the inevitable result a currency crisis of historic proportions? It's all new ground.
  

History unfolds slowly. Seven months later, are we at the precipice of seeing this prediction play out?

The last few weeks have seen the start of that US Dollar crisis. And yesterday, that crisis racheted up a notch when it was revealed that, over the last three months, banks put 63% of their new cash into euros and yen - not the dollar.

This is almost a complete reversal of the dollar's onetime dominance for reserves.

According to Barclays Capital, the dollar's share of new cash in the central banks around the world was down to 37% - compared with two-thirds a decade ago.

Currently, dollars account for about 62% of the currency reserve at central banks, the lowest on record said the International Monetary Fund.

Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy.

According to the New York Post, "Economists believe the market rebellion against the dollar will spread until Bernanke starts raising interest rates from around zero to the high single digits, and pulls back the flood of currency spewed from US printing presses."

Think about that statement for a moment.

"Raising interest rates from around zero to the high single digits."

That's 8% or 9% - which means your standard five year mortgage will run you 10% - 12%.

Remember last week we talked about how California had to raise the yields on it's debt sale to sell it's bonds?

This morning the impact of these moves in the bond market hit us here in Canada.

Each of Canada’s big banks this morning is increasing the cost of taking out a mortgage. While there were some differences in the details of changes made by the banks to their mortgage rates, the announced hikes put all their five-year fixed closed rates at 5.84%, an increase of 0.35 of a percentage point.

That's an overnight hike of 7% to five year mortgage rates.

And that's without any prompting from the Bank of Canada - whose historic low rate of 0.25% remains intact.

Why? Because the cost of money in the bond market is rising.

The stage is being set for an unavoidable outcome. And when people look back at 2009 they will look at this date as the day we began our march to Real Estate Armageddon.

Today's Independent newspaper in the UK notes that, "the willingness of foreigners to hold dollar assets as opposed to, say, euro assets has allowed American citizens to consume beyond their means for many years. Of course, it wasn't just the Chinese and the Russians who were lending to the US. Others did so via their purchases of US mortgage-backed securities (MBS). But if the collapse in the MBS market exposed the first chink in American economic armour, a rejection of the dollar as the world's reserve currency could expose an even bigger hole. If other nations begin to believe the US is happy to allow its currency to plummet, they may all head to the exit at the same time.

A dollar collapse would be a disaster all round. It would drive up the cost of borrowing in the US. It would leave the international monetary system short of stability and long of fear. It would unleash economic upheavals on a similar scale to those seen in the 1970s."

And you remember the 1970s, don't you? A period when interest rates floated for much of the decade from 11% to 21.5%

Interest rates that high in this day and age will trigger real estate Armageddon here in Greater Vancouver.

Guaranteed.

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Scolding the consumer isn't working.

Bad, bad consumer.

Apparently the scolding isn't working.

On the weekend, The New York Times headline said it all: "Americans stop buying; trade deficit declines"

And for an economy that is 70% dependent on consumer spending, that's a huge problem.

Americans have been the world's champion consumers. Just lend them money and they will spend it. A least that's the way the world economy is supposed to function.

But when Americans stop spending it brings a hush to the entire planet.

The malls go quiet... trucks slow down... ships are idled... and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home.

From the Times, "For the first eight months of the year, the United States trade deficit with China is down by about 14% or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20%, and its deficits with Mexico, Canada and the European Union are down more than 40%."

Any wonder the BC government is looking at a massive deficit?

"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."

This despite the fact the US federal government is going into massive amounts of debts trying to get consumers to spend again.

They've given their citizens tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. And they have put at risk a sum of money equal almost to the entire US GDP.

Still those hardheaded consumers won't consume like they're supposed to.

Suddenly, it's the 'Age of Thrift.'

And if the consumer credit party is over, what will replace it?

Is it possible for North American businesses to grow and prosper under these conditions?

Sure it is.

North America has great businesses with great brands. And as the dollar falls, the solution is to gain global market share in some sectors.

But 70% of the economy is consumer spending. Until that changes, the North American economy is hostage to US consumer spending. When consumers stop consuming, the North American economy's wheels stop turning.

And in the contradition lies the ultimate solution.

Americans will have to cut back on their spending and it will be time for the rest of the world to do some of the buying for a while.

And since the United States has less than 5% of the world's population, it is the logical next step.

But rebalancing the world's economies won't happen overnight. Nor even in a couple years. It will take a long, long time.

In the process, North America has a very painful readjustment ahead of it. A readjusment that will affect all sectors of our society.

And real estate values are going to be very much a part of that 'painful' readjustment, even here in North America's most bubbly real estate city.

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Bob Rennie... the newest Bear?

Bob Rennie, dubbed Vancouver's Condo King, is known across Canada as the real estate wunderkid.

Considered the #1 Condo Project Marketer on the wet coast, Rennie has been the penultimate real estate bubble booster. Last year he even revealed his 101 Reasons You Should Buy Today in the Vancouver Marketplace.

What a difference a year makes.

In a stunning article in BC Business Magazine, Rennie has penned a column titled "Lowering the boom: Are the good times over for Canada's most privileged generation?"

It's a question Rennie answer's in no uncertain terms.

"The financial crisis that broke loose a year ago is not just a temporary setback; it’s one of those defining generational events that alter behaviours and attitudes forever."

Rennie forsee's a dramatic shift in our consumer society.

"Many of us have long presumed that a big inheritance was going to be coming down the pipes – a legacy from Ma or Pa that would clear the deck of any debts and solve all post-retirement problems. Yet this market meltdown, which has seen a huge erosion of our mutual funds, pensions and stock portfolios, has affected grandma too. Her portfolio – as conservative as it is (or was) – got whacked, and now she’s being forced to dip into her savings. Our inheritance."

And what does Bob see as the future for real estate?

"The early warning signs of the new, more frugal world order are everywhere... in the real estate world, we’re going to have to recognize the new reality and start looking at boomers differently."

Rather than Boomers shooting the moon on real estate purchases, Rennie correctly sees a massive scaling down, "selling the house and finding something smaller and more affordable, either to pay off their debts or to increase their cash position."

That, by the way, is one of the doomsayer predictions of the real estate bears: Boomers downsizing.

The theory is that, as the market begins to flood with all the huge 'McMansions' for sale by aging Boomers, the much smaller 'echo' generation will not be able to absorb all the inventory.

Result? A severe decline in prices.

It's a stunning about face for Rennie, whose company is currently marketing the Woodwards development in the seedy downtown east side. 'Be bold or move to Surburbia! The wait is finally over...' goes the marketing slogan. It appears Rennie is not quite as bold (or as bullish) as the ad copy and predicts a massive demographic shift in priorities.

"We’ve experienced the biggest financial collapse in our lifetime. We will have to institute dramatic changes in how we entertain ourselves, where and how we travel, what we drive, where we live and how we ultimately pass on wealth to our children."

Not only doesn't Bob see the economic recovery taking hold in the same way as the rest of the real estate community, Rennie is downright pessimistic about what he does see.

"For those praying for a return to yesterday, forget it. It’s gone."

This is an earth shattering statement from someone like Rennie.

Bob clearly knows that the bubble is about to burst and that the ever-expanding real estate growth of the last decade is going to come to a crushing end.

I just never thought I would ever see the likes of Bob Rennie publically admitting it.

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Canada's Looming Subprime Mortgage Disaster

Perhaps the greatest lie fed to the Canadian public is the one that says we don't have a looming subprime mortgage condition in Canada.

"Our banks only lend to qualified people," we are told and "not to deadbeats who will never be able to pay their mortgages like they did in the United States."

That, dear reader, is a crock.

What you have to understand about the US mortgage fiasco is what subprime mortgages were and who utilized them.

The common belief is that sub-prime loans were made to borrowers who did not qualify for loans from mainstream lenders. While that is, in part, true... it is not the whole story.

From 2004 through 2006 a large segment of the American homebuying public (both those who did not qualify from mainstream lenders and those who did) took advantage of mortgages with "teaser rates".

A teaser rate is a low rate - sometimes as low as 1% - that lasts a short time (anywhere from one month to 7 years). Most US subprime adjustable-rate mortgages had teaser rates that last two or three years and up to five to seven years.

After the teaser rate expires, rates can rise rapidly, causing minimum monthly payments to skyrocket.

Lenders got into the habit of qualifying borrowers according to their ability to pay the teaser rates, but not by their ability to make payments after rates rose.

It was never seen as a problem because borrowers could always renew their mortgage with a new teaser rate once the first teaser expired. Especially if the market value of their house had increased.

This only became a problem if the value of the property fell. Then you couldn't renew the mortgage because the value of the mortgage was greater than the market value of the property.

And that's where the whole issue imploded in the US. When values started to drop, mortages couldn't get renewed with new teaser rates. As a result the higher term rates then kicked in.

The end result: default and foreclosure.

So let me ask you a question. How is Canada much different right now?

We have a situation where thousands of Canadians are buying homes because they can take advantage of the lowest interest rates in our nation's history.

Some one year variable mortgages issued this year have a 1.47% rate.

Will these rates be like this for the next 35 years?

Not a chance. Even the governor of the Bank of Canada came out a few weeks ago and warned Canadians that "the days of ultra-low interest rates are ending and Canadians should prepare for more 'normal' rates."

The historical 'norm' over the last 35 years would be 8%.

In the United States, lenders got into the habit of qualifying borrowers according to their ability to pay the teaser rates, but not by their ability to make payments after rates rose.

In Canada, lenders have gotten into the habit of qualifying borrowers according to their ability to pay the current 'ultra-low' rates, but not their ability to make payments at higher mortgage rates down the road.

If the 'ultra-low' rates won't last for the next 35 yeras, it means Canada is pumping out mortgages with 'ultra-low' teaser rates by the hundreds of thousands. Just like the United States was.

And when these rates rise, minimum monthly payments are going to skyrocket.

And the media is starting to take notice. Check this out...

Here is an article in last Friday's Globe and Mail.

It's about a BC couple who are drowning in real estate debt and are worried that the debt could be unmanageable if interest rates rise.

A financial planner takes a look at their financial situation.

The couple owns a house and a rental property. With property taxes, their debt service bill is 77% of the family budget.

The planner concludes that "if interest rates rise just one percentage point, mortgage costs would consume all rental income."

If rates rise more than that "they might not be able to pass on the higher costs to tenants in increased rents nor find sufficient cash to pay their lenders," the planner warns.

A two percent raise in rates could put them into default and foreclosure.

The fact is, there are thousands of BC families in a similar condition.

They have leveraged mortgages at historic lows to make maximum purchases. When rates rise just 1 or 2 percentage points, they will be in the EXACT same position as all those American borrowers who utilized low teaser rates.

It doesn't matter if these BC families have 1, 3, 5 or even 10 year mortgages. NO ONE expects these rates to be around for much longer. If rates rise to only 4 or 5%, BC families like the one in this Globe and Mail article are FAWKED.

Our situation today is no different from the United States in 2005.

The clock is ticking. And when rates rise, our bubble real estate condition is going to hyper-explode.

We cannot escape this destiny.

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Vancouver: North America's Most Bubbly City

Local rock and roll legend Red Robinson was profiled in the Vancouver Sun this past week. And it wasn't his entertainment credentials or stories that were of interest. Instead, it was his views about Real Estate that caught our eye.

After 44 years on the North Shore, Robinson and his wife Carole, decided it was time to downsize. They sold their 4,000-square-foot home in Deep Cove and, rather than buy a new place, they opted to rent a 1,560-square-foot condo in Coal Harbour.

Why rent?

"We sold our place for over a million - I'm not going to go into the exact figure, but well over a million. And . . . it's tax-free! Now wouldn't I invest that, while I'm waiting to see whether the prices are going to go up or down?"

Sound advice.

Robinson, you see, isn't being sucked into all the hype by the BC Real Estate Association, Canadian Real Estate Association, et al that 'now' is the time to buy.

And he is following the exact advice that we 'whisper' to every soul who will listen.

Our market is at the absolute pinnacle of it's bubble right now. When interest rates start going up (and they WILL go up), our market is going to crash in stupendous fashion.

So Robinson wonders, why buy now?

And with good reason. Property values are way out of balance.

Consider this this little gem.

Here is a house located on the west side of Vancouver, in Marpole. It is located at 541 W. 64th Ave (hattip to 'bestplaceonmeth' at RET).

What a dump! How much is this piece of crap on the market for?

$1.5 million dollars!

I'm not making this up. Here is the MLS listing. I'm going to also post an image of the listing for future reference (click on the image to enlarge)

How whacked is that?

Now let's compare that to a worldwide resort destination like Hawaii.

Two weeks ago, in Molokai, the Hawaiian estate of software mogul John David McAfee (of McAfee Virus Protection fame) was auctioned off.

The estate is 5.34 acres of oceanfront property, zone agricultural and equestrian, contains bridal and hiking trails throughout, and is a short distance to Papohaku Beach which is one of the longest white sand beaches in Hawaii.

The 4 bedroom home has a mastersuite that opens onto a large covered deck that faces the ocean, a huge walk in closet, a large jacuzzi in the master bath surrounded by black granite, a glass block shower, his and her sinks and an ocean view.

Bedrooms 2 and 3 have 18x20 foot walk-in closets and full bathrooms. Bedroom 2 has a whirlpool bathtub and a seperate shower. Bedroom 3 has a loft area. Both bedrooms open up to the large covered deck which faces the ocean. Bedroom 4 is slightly smaller with a full bathroom and its own deck.

Here are a couple of pictures. As always, click on the image to enlarge.

You can see the brochure advertising this auction here.

And what did this palatial oasis go for?

You guessed it! $1.5 million dollars (you can see a reference to the auction result on page 2 of this New York Times story).

Now let me ask you a question.

If you had $1.5 million dollars to spend on a house, would you really buy that piece of shite in Marpole instead of something like this Molokai estate?

The answer is not only obvious, but it seems profoundly laughable to even be asking it.

The people who are buying real estate in Vancouver this year, even those who are 'only' paying half a million dollars for a house, will very shortly be wondering how they could have been so shortsighted to consider... and then act on... their decision to buy in this market.

They will regret not doing exactly what Red Robinson is doing; waiting it out.

The popping of this bubble is going to be nothing short of stunningly spectacular.

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Mission Accomplished

That's what their calling it. A result of he busiest July ever for Vancouver Real Estate, both in Greater Vancouver and in the Fraser Valley.

And according to the Vancouver Sun, first-time homebuyers are driving the market.

Faithful readers will recall several posts I made earlier this year about how all the propaganda being pushed out by the Real Estate Associations was targeting first time homebuyers in a desperate attempt to grease the wheels of a real estate machine that had begun seizing up.

And now?

Paul Penner, president of the Fraser Valley board, notes the effect of luring the first timer's back. “That volume creates a significant ripple effect as the sellers of those homes move up,” Penner said in a news release.

Jake Moldown, president-elect of the Vancouver real estate board, concurred.

He said first-time buyers who entered the market during the boom a couple of years ago now feel comfortable moving up the property ladder.

“They understand what a mortgage is and they’re comfortable with their payments, and now they’re looking to step up,” Moldown said.

So it's Mission Accomplished for the real estate associations.

But I have said it before, and I will say it again... cheap interest rates are the one and only reason real estate is selling.

We have created a mini bubble, which was the whole point of the Bank of Canada flooding the market with 2% and 3% mortgages.

It's as if the nation has completely forgotten about collateralized debt obligations.

This boom you are seeing is the last silver bullet that our central bank and government can fire. It has staved off the wholesale collapse we have seen in the United States.

When we look back at the stock market collapse of 1929, no one could foresee the subsequent collapses of 1932 and 1937.

Investors are banking on the belief that the economic recovery has started. But just because believe something doesn't make it true. People believe that there is a recovery... and that it is the result of stimulus efforts by the feds.

However the results from the second quarter show the economy still contracting... albeit at a slower pace, just -1% annually, rather than the -6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.

It if weren't for stimulus spending, the contraction [in the 2nd quarter] would have been closer to -4%.

It's how the government has been staving off collapse in the general economy.

In 1930 the world had thought the economy had recovered. Seventy-nine years later, most people cannot remotely fathom how a populace couldn't have realized that they were in the grips of 15 years of difficult economic times.

The stage is being set for our generation to understand it... succinctly.

On Vancouver Condo Info, there was an interesting comment posted by a mortgage broker:

“I am lender and have first hand knowledge regarding speculators holding out. Most of them have VRM (variable rate mortgages) of 0.75% to 0.90% below Prime. So currently their mortgage rate is between 1.35 to 1.50%. How many of them lock up into 5 year term when the rate was 3.5%? Very few. It is very hard for a person to lock up with a 2.0% rate increase rightaway especially if they are thinking short term to sell. I have none of my clients lock up. So if the Prime goes up next year by big numbers, you will see lots of blood.”

Yes, yes we will.

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How US Treasury Sales Immediately Impacted Canada This Week

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It has been another banner week for the US Federal Treasury and Treasury sales. This week alone the Fed had to convince “investors” to buy up $150 billion worth of debt! This follows three weeks where the US auctioned off $87 Billion, $127 Billion and $138 Billion. This is an astonishing amount of debt for investors to absorb (and there's lots more to come).

This insatiable demand for debt sales has now created a historic crash of the bond market with TLT (the 20 year bond fund) losing almost 30% of its value. The ten year rose to 4% and that will take 30 year mortgages well over 6% in the United States.

This last statistic is particularly important for us because as US mortgage rates go, so do Canada's mortgage rates.

As such three of Canada's major banks decided to push mortgage rates higher yesterday despite the fact the Bank of Canada did not change it's rate and the BOC govenor wishes lending rates to stay where they are.

Nothwithstanding, the Royal Bank of Canada, the Bank of Montreal and Bank of Nova Scotia all announced they had increased the rates charged for money for homebuyers. Five year mortgages at these institutions will now cost a borrower 5.85%, four-tenths of a percentage point higher than the previous rate. Likewise, the rate for a three-year term rose 0.40 of a percentage point for the trio of banks, reaching 4.55%.

And why did they do this even when the Bank of Canada had not changed the lending rate?

CBC reported the news this way, "Analysts have noted that the cost of borrowing for longer periods of time more likely reflects the prevailing view of inflation in the next couple of years rather than the current short-term collapse in economic activity. Governments have responded to the ongoing recession by running deficits and printing money, factors that can boost short-term activity but hold out the threat of longer-run price increases. Thus, lenders will be reluctant to extend cash for longer periods without a commensurately higher interest rate."

But the Bank of Canada lending rate is still 0.25%. What gives?

The article goes on to note, "More ominously, the U.S. government got the cold shoulder from debt buyers Wednesday when Washington sold off $14 billion US in long-term bonds. Traders said Washington has been forced to flood debt markets in order to cover its stimulus spending. In bond economics, falling prices equal higher interest rates. Thus, industry experts now expect interest rates on longer-term borrowing to start rising again."

You see? It's all about US Treasury and Bond sales, which is why we follow the topic so closely.

Interestingly... Global News covered the rate increase on their 11:30pm newscast Wednesday night. The last interview of the piece was with a CMHC rep who pointed out that Vancouver prices are still falling and are expected to fall further over the next year, suggesting that future lower prices might more-than-offset future rate increases.

In other words rising interest rates are going to beat down house prices so that anyone buying at the higher interest rate will still be able to afford roughly the same size house because the lower selling prices (and thus mortgage size) will produce a similar monthly payment despite the higher interest rate.

Gee... and on what blog did you hear that prediction first?

And it's an important point, because it will happen.

When rates do skyrocket to 1981 levels (22%), anyone trying to sell their $650,000 home is screwed. They would need a buyer to assume a mortgage that will equate to a monthly payment of $11,700 per month... and that's simply not going to happen.

The only way that house is going to sell is if the price falls to $220,000.

The CMHC rep knows what all of us who were old enough to live through those times in 1981 know... that high interest rates will crush our bubble inflated Vancouver Real Estate market like a flimsy tin can.

So I ask you, what would you rather have?

(1) A $600,000 mortgage at last weeks low 2.99% variable interest rate, or
(2) A $220,000 mortgage at 1981's 22% interest rate?

Both will run you about $2,500 per month in monthly payments.

The difference? If interest rates skyrocket, you won't be able to renew your mortgage if you choose option (1). You will lose your home.

If interest rates skyrocket, as so many analysts now predict, a seller will never be able to sell a $650,000 property unless he slashes the price to $220,000 because no one can afford a $600,000 mortgage at 22%.

And when you consider how many local homeowners, who have bought in the last five years, will have to surrender their homes to banks under foreclosure when owners can't pay the monthly payments required when they have to renew under these rates... the downward pressure of forced bank sales will easily push prices down to $220,000, if not lower.

Remember banks don't keep foreclosed properties, they move them off their books ASAP.

If you buy under option (2), you still have the same monthly payment as option (1) BUT when rates go down again, you'll be laughing.

So why would anyone buy in today's market when virtually all economists are predicting a return to late 1970s style inflation and interest rates?

Why indeed.

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But the BC economy is getting better, isn't it?

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Took the dog for a walk at the beach with a friend yesterday.

He (the friend, not the dog) was keen to take issue with some of my recent blog musings.

"How can you say real estate is not going to do well. People are jumping into the market and the BC economy is getting better, isn't it?"

Uhh... no, it isn't.

Many of British Columbia's lumber mills sit idle. Coal exports are down 40%. The price of natural gas, one of our key commodities, has collapsed and the tourism industy this summer is going to suck wind, big time.

More importantly the industry that had helped fuel the province's economic growth the past 10 years - residential home and condominium construction - is suffering the "nastiest" downturn among the provinces according to a recent report.

Canada Mortgage and Housing Corp. released data this week that showed B.C. has had "arguably the nastiest residential construction recession this cycle" in the country.

But what about the 'Olympic bounce'?

We've already had that, at least in the construction industry. Any added construction oomph from the coming Vancouver 2010 Winter Olympics is gone. Most major projects are nearing completion or have been completed.

So what's the near-term outlook for the construction industry?

Peter Simpson, chief executive officer of the Greater Vancouver Home Builders Association says, "housing starts are abysmal. Builders are hesitant to put shovels in the ground when there's inventory that hasn't sold."

And with interest rates on their way back up, that inventory isn't going to be moved out quickly, creating a further drag on the real estate market.

"We're in a full-scale recession in B.C.," said Jock Finlayson, executive vice-president of the Business Council of British Columbia. "Getting out of it is going to depend on when the global economy, and the U.S. economy, bottom out, and how things look after that."

Hmmm... there's that nasty tie-in to the global economy again. So what's happening out there?

Oil is way up, closing over $71 US a barrel yesterday, the price having shot up over 100% over the last three months. This has sent the Canadian dollar up over 90 cents US and on it's way to par - a development that will kill exports and manufacturing jobs.

Meanwhile, in the US, the economy is about to be broadsided by another huge wave of defaults from Alt-A, Option ARM and commercial real estate mortgage resets (see latest article here). Estimates peg coming residential foreclosures at $1.5 trillion.

As for the global economy, it appears Europe is about to be rocked by banking issues (IMF tells Europe to come clean on bank losses). Seems that, contrary to popular belief, the German banking system was just as irresponsible as the American banking system. Turns out the German state-owned banks, who's boards of directors are filled with the politically well connected, had been a dumping ground for US toxic waste - evidently the 'benefactor' of German trade surpluses.

And Germany wasn't alone in the mad dash to lend to foreigners. Austria is up to its eyeballs in loans made to Eastern Europe. Sweden had done the same in the Baltic States. Spain pumped money in to cajas that were used to finance a property boom fueled by foreign investors. Ireland had engaged in an Florida style construction boom as well. This is only a brief summary.

Now the jig is up. Spain, Ireland and the Baltic states have collapsed into depression. Their debts will never be paid. Eastern European currencies have tumbled, massively increasing their debt burden. They either hyperinflate or default. All of these loans, in addition to the tens of billions of US toxic waste remain on the balance sheets of European banks. And for the most part they are still valued at 100 cents on the dollar.

The message here: Europe's financial crisis is just getting started.

Then there is China, the supposed economic darling who will pull the planet out of recession. Today's China Daily News reports that China's exports and imports shrank for the seventh month in a row in May as the economic downturn continued to dampen global trade (see article here). I have a question for you. Who, exactly, is China going to be selling goods to so that their economy can keep growing?

So much for global recovery.

Far from getting better, we have BC entering a "full-scale recession" with recovery dependent on US and global conditions improving. That will be compounded with rising loan costs, big energy price hikes, reduced consumer spending, more pain for the Canadian manufacturing sector, a US economy that is going to remain stagnant (if not get worse), evidence that Europe is in for some serious pain and no one with money to buy China's goods so that China can, in turn, buy Canada's commodities.

No, my friend... the outlook for BC real estate values remains gloomy. I'd be willing to bet that within a year the prime rate will be double what it is today and Vancouver will have re-taken the lead from Miami in that plunging real estate graph I posted on Monday.

The sun is setting fast on the real estate boom times.

Even my dog can see that.

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Condo's, Coffee... and an ode from Ms. Hopkin

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A chilling turn of events for condo developers and a ray of hope for pre-sale buyers sewered by the market crash of 2008.

As reported in the Vancouver Sun, the B.C. Supreme Court has ruled that the pre-sale buyer of a UBC condo development is entitled to rescind the contract under the Real Estate Development Marketing Act because the developer failed to properly inform him of changes to the development. The section of law in question is one which requires that purchasers receive all amendments to the disclosure statement.

There are dozens of other cases currently before the courts from people who put deposits on condominium units when the market was red hot, and now, for various reasons, are trying to walk away from them.

I suspect that never in the history of real estate have so many disclosure statements been raked over with such a fine tooth comb nor developments so finitely inspected, as is now being done in British Columbia.

We will watch developments unfold with keen interest.

Meanwhile over on Real Estate Talks, one of the best R/E discussion boards around town, there has been an interesting banter about the spring bounce in the real estate market.

Sales volume is clearly up, driven by the government's desperate attempt to halt falling property values by slashing interest rates to historic lows.

Anecdotal evidence posted on the board suggests that many sellers are tapped out of equity in their properties that they are selling. Once sold, the outstanding mortgages held by the sellers are very close to the selling prices, ie…..no equity left. So, although there are a lot of first time buyers purchasing these properties, the Seller’s don’t have the equity to buy “up” or even buy “down” afterward.

In addition, it is being suggested that some investors who would love to sell, won’t sell because there is no profit on the table. They are underwater on the deals and are left bleeding money every month because they are paying a tenant to live in their investment for rents far below their own mortgage payments. One poster suggested that this negative cash flow each month is like a Chinese water torture for the property owners.

Despite such evidence, one RETalks contibutor (messageboard posting handle 'eyesthebye') is so convinced that the selling frenzy means Vancouver home prices will rise in 2009 that he is betting the naysayers on the board a beverage at Starbucks if he is wrong.

The measurement standard will be the MLS HPI, a concept modeled after the Consumer Price Index. The HPI is touted by MLS as an alternative measure of real estate prices that provides a clearer picture of market trends over traditional tools such as mean or median average prices.

The specific bet will use the January, 2009 HPI numbers for Greater Vancouver Detached Homes (194.8) and for East Vancouver Detached Homes (200.6). 'eyesthebye' states these numbers will be higher at the end of the year.

Clearly 'eyesthebye' is one of those who thinks that the notion that Vancouver is in a housing bubble is pure nonsense. He has even posted that Vancouver 'is different' from other cities and suggests that we are immune here.

I'll keep you posted on the results.

That anyone refutes the fact we are in a bubble that is bursting continues to amaze me. Yet 'eyesthebye' is clearly one who thinks it can go on and on and on.

Reminds me of the lyrics from the song,

Through the door there came familiar laugher,
I saw your face and heard you call my name.
Oh my friend we're older but no wiser,
for in our hearts our dreams are still the same...



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Vancouver Home Values Still Declining according to Teranet

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Monthly real estate sales may be increasing from their January lows and realtors may be boasting of multiple bidding wars and properties selling over ask price, but the big picture reality is that Vancouver Home values have now declined for a ninth consecutive month.

According to the Teranet—National Bank Composite House Price Index, which was released Wednesday, Vancouver prices fell 6.4 per cent between January and March. More significantly the March drop was the ninth consecutive month of decline on the financial institution’s measure.

The Teranet—National Bank index pegs Vancouver's market peak at June of 2008. Since then the market has declined almost 12 per cent.

So with all the hype from the real estate pollyanna's, should we expect to see a dramatic turnaround to that downward trend?

“I’m not making a forecast,” Simon Cote, managing director of property derivatives for National Bank Financial, said in an interview. “But if we look to previous business cycles, very seldom do we see the house-price index turn around in a direct V shape.”

He looks to the volume of sales as an indicator that the decline in values is stopping, and the sales volumes that are captured in the Teranet index were still low compared with a year ago, some 40 per cent below last year in Vancouver’s case.

“Until the year-over-year change in volume starts to pick up and be positive, even if it is low, it is going to be very difficult to see a turnaround [or stabilization] in the index,” Cote said.

The Teranet—National Bank index is calculated based on repeat sales of existing homes, known as paired sales, to capture direct examples of changes in value, rather than just measuring the average value of all homes that sell in a given month.

National Bank Financial uses the index as the basis to trade housing futures, builders or lenders to make bets on whether home prices will increase or decrease and hedge against volatility in housing prices.

It tracks housing prices in Vancouver, Calgary, Toronto, Ottawa, Montreal and Halifax.

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Email: village_whisperer@live.ca

Are we nearing the tipping point for Real Estate?

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There's a whirlwind of pertinent news out there right now and it makes me wonder if we are at the tipping point for Real Estate, both in Canada and here in the Village on the Edge of the Rainforest.

The real estate pollyanna's are all agog at the recent sales data which has prompted the British Columbia Real Estate Association to declare that plunging prices in B.C.'s residential real estate market are levelling off.

"The majority of the decline in home prices has already occurred," said association chief economist Cameron Muir, in a report released on Tuesday. "Balanced markets are emerging in Victoria, Vancouver and the Fraser Valley. There's now little downward pressure on home prices in these areas."

Prices have stabilized because of increased demand, with seasonally adjusted home sales raising over the past three months, according to Muir. "First-time buyers were largely absent in the late fall and winter, making it more difficult for move-up buyers to sell their current homes. The chain of ownership is now being oiled."

The chain of ownership is being oiled alright, but is that chain about to fall off the drive shaft?

There have been some interesting posts over on the real estate discussion board 'Real Estate Talks'. One particular contributor, who takes great glee in dissing all bearish viewpoints, has made some interesting observations of late. He has noted several times now that, "My buddies in the business tell me that a lot of seller's are tapped out of equity in the properties that they are selling. Many of the mortgages are very close to the selling prices, ie: no equity left. Although there are a lot of first time buyers purchasing these properties, the Seller's don't have the equity to buy 'up' or buy 'down'. So maybe what we'll see is the prices at the bottom end of the market strong, but quite a weakening in the mid level prices."

And it buyer's fail to move up, Muir's optomism of recovery will fail. And its not just Muir's optomism riding on this.

The federal government has slashed interest rates in a desperate attempt to stave off both a plunging economy and plunging real estate values. That - and a highly manipulative campaign to drive first-time buyers into the market - is what is driving the current sales spurt.

For the government, this is crucial.

We have seen in the United States how much real estate values are interconnected to the financial system. The goverment is desperate to stem the collapse and forestall the decline in hopes that the 'Immaculate Recovery' will occur in the meantime and resuscitate both land values and the economy.

But beyond stemming the collapse, ominous signs of catasophe are looming on the horizon.

Statistics Canada released it's latest survey yesterday and B.C. just recorded the fastest increase in the number of employment insurance beneficiaries since comparable data was first recorded in 1997.

More critically, Economists say the new numbers show a Canadian economy that is shrinking at a pace most Canadians have never experienced with joblessness having become a central element of the downturn.

So what do we have here?

Unemployment is dramatically rising, the economy is shrinking and home sellers (who see the writing on the wall) are dumping real estate holdings at a price the gives them little or no equity after paying off their mortgage just so they can get the debt burden off their back.

Those sellers can see what is coming. And what's coming has been playing out in the financial markets over the past week.

Sales of US Treasuries fell for a fourth consecutive day, pushing 10-year note yields to a six-month high, amid concern record U.S. debt sales will overwhelm investor demand as the economy begins to show signs of stability.

Yields on long-dated U.S. debt are now in nose bleed territory, the return on the benchmark ten-year Treasury now careening quickly toward the once unthinkable "four percent" level as detailed in this report at Bloomberg.

Why is this important? Because yields on Treasury notes are the benchmark which sets the prime rate used for lending by Banks.

Noted investment advisor Marc Faber has been moved by these developments to strongly suggest the U.S. economy is on the cust of entering “hyperinflation” (see the bloomberg story here).

While Faber's views may be a little extreme, there is no doubt we will see much, much higher inflation when the U.S. Federal Reserve embarks on its campaign to normalize interest rates. It must withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, making high inflation is unavoidable.

And high inflation means high interest rates.

That will kill off the first-time entry buyers, eliminate any 'move-up' buyers, and send Real Estate values plummeting downward again.

And that's before all those who currently hold mortgages start having to renew at the dramatically higher mortgage rates.

Anyone care to wager how many of those first-time buyers, who jumped into the market with those all time low rates because it made home ownership affordable, will be able to renew next year at a 5% higher rate?

There is a very ugly nexus forming in the coming months and it is going to take a miracle to avoid it.

The tipping point is very near.

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Email: village_whisperer@live.ca

There must be a pony around here...

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Ahh... the credo of the eternal optomist as adopted to the real estate industry. You could walk into a house and be up to your knees in manure and a real estate agent would cheerfully tell you... "Gee, this place must come with a pony."

Once again the Real Estate pollyanna's shill about the return of good times, the underlying message the same as always... Don't be left out, you better buy now!

The latest is the Real Estate Board of Greater Vancouver telling us that the Greater Vancouver housing market "has entered a more moderate and balanced state," with sales and benchmark prices both up in April compared to March.

And don't kid yourself, the local real estate community is doing everything it can to whore values higher.

The industy is eagerly pointing at 3% mortgages and homes being up to 15% more affordable than they use to be. The carrot is dangled furiously at people who wanted to buy in the past, but could not. "Now," the pollyanna's proclaim, "they can."

As we have documented here in the past month the crucial first-time buyers are being relentlessly prodded into action.

The pollyanna's hook their prey and trumpet that the Federal government will let them raid $25,000 from their RRSPs, tax-free, to buy a home. The Feds will also donate $750 to help them close. Then real estate industry creates media releases about young buyers rushing into the market in this, perhaps the best (and last) time, to buy into the market.

Even the mighty CKNW, the radio station that bills itself as "BC's News Leader and the station you turn to in an emergency", has turned to pimping for the real estate industry. Surely you have heard the sickening PSA's that tell everyone that 'now is the time to buy'.

For shame. It's peer pressure at it's manipulative best.

And what about the real news? The economic winds are not blowing kindly.

The public service abounds with rumours of slumping revenues, pending cuts in spending, and a much bigger-than-budgeted deficit.

Watch for a new provincial budget on the heels of the BC Liberal election majority that cuts services, raises taxes and slashes funding to municipalities.

What is it they say? Shite rolls down hill? Municipalities will, in turn, cut services and raise - wait for it - property taxes. And the hikes will be significant.

All of this comes on the heels of yesterdays news that bankruptcies in B.C. are soaring and that heavy job losses are taking their toll on individual residents. B.C. has the dark distinction of having posted Canada's third-largest increase in consumer bankruptcies, behind Alberta's 99.8-per-cent increase and Newfoundland's 88.9-per-cent rise.

Mark my words, if the economy does not perform the Immaculate Resuscitation investors in the stock market are being hoodwinked into believing, all those being sucked into buying now are going to be very, very bitter.

Maybe they can console themselves as they hunt around their new house looking for the pony.

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Email: village_whisperer@live.ca

Tug O' War

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There's nothing like a good 'ole fashion Tug-O-War to get the competitve juices flowing, is there?

Yesterday we profiled Meredith Whitney, a former stock analyst at the investment bank Oppenheimer & Co. Inc, an insider who became one of Wall Street’s first bears when credit markets started to freeze in 2007. Early this week, after government evaluations of their financial health, she said banks are “grossly overvalued” and that "at a core basis, I would not own these stocks. Their business models are not going to come back."

Enter Bill Miller, fund manager of Legg Mason's Value Trust mutual fund. Miller is famous for having beat the Standard & Poor’s 500 Index for a record 15 straight years (before stumbling in 2006) and he proudly proclaims that financial companies are his favorite investment for the rest of the decade.

Now there's bravado for you! And if there is something investors love, it's confidence.

Miller is a self-titled 'value investor', someone who seeks the cheapest companies relative to earnings or assets. Last week he said, “financials have the biggest potential to outperform” and boldly named his favorite picks as San Francisco-based Wells Fargo & Co., Capital One Financial Corp., and New York-based American Express Co.

And faithful readers know how much the Whisperer has been picking on Wells Fargo of late.

So it is with great interest that we will watch the great Bill Miller and his stock market advice because, make no mistake, it is at stark odds with what the Whisperer has been saying.

Miller’s says his bets hinge on U.S. home prices stabilizing this year and an economy that performs better than projections from the Federal Reserve. Whisperer believes both will do the opposite.

To his credit, in the first three months of 2009, Miller bought about 3.77 million shares of Wells Fargo (who, btw, is the largest U.S. mortgage originator) and almost quadrupled his position in credit-card company Capital One, according to data compiled by Bloomberg and Legg Mason’s Web site. Miller also increased his stake in American Express, the biggest U.S. credit-card company by purchases, by about 22 percent.

With a maasive wave of foreclosures yet to come and a tsunami of credit card write-downs in the offing, what does Miller see that Whisperer does not?

Perhaps a lot.

Miller can currently boast tremendous success with his investments. Since March 31st Wells Fargo has gained 70%, Capital One 96%, and American Express 77%.

But as we saw in yesterday's post when we profiled Whitney, there is significant concern bank stocks will decline because the gains aren’t matched by improvements in their businesses.

“The underlying core earnings power of these banks is negligible,” cited Whitney, who quit Oppenheimer in February to start her own firm, Meredith Whitney Advisory Group LLC in New York. U.S. banks will likely return to “negative earnings” after posting first-quarter profits and the largest companies must sell assets after expanding at an unsustainable pace in the past two decades.

Furthermore home prices are likely to be down 50 percent from peak levels, which makes gains unlikely and a recovery in consumer spending (which accounts for 70 percent of the U.S. economy) may be undermined as banks and card companies slash $2.7 trillion in credit lines by the end of 2010.

It's a classic battle of viewpoints. What makes it so compelling is that the viewpoints are such polar opposites. And the impact from the winner will affect stock markets and real estate worldwide.

We do indeed live in interesting times.

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Email: village_whisperer@live.ca