How low will they go? Westside speculators still looking to bail - UPDATED

Post updated with original purchase price

This forlorn looking specimen of a single family house is located at 3955 Blenheim Street in Vancouver.

Situated near the corner of Blenheim and West 23rd, this was one of those prime candidates last year for a HAM flip on Vancouver's desirable westside.

Sitting in the Dunbar school catchment (with Lord Byng Secondary and Lord Kitchener Elementary just around the corner) it had all the elements a speculator could want including a slow speed school zone area,  wide asphalt back lane and a large lot perfect to build a 4000 sqft mansion with a lane-way house.

When it was originally snapped up in 2009, the speculators who bought it up were focused on renovating the house.

But when the market started to turn this year, they tried to bail on their investment.

You may recall we profiled their efforts back on March 1, 2012. The focus of our attention was a February 22nd craigslist ad (click on image to enlarge):

The speckers outline what they have done to the property so far:

Already spent $500,000 for the works. Will need about $250,000 interior works for your personal choices of flooring, kitchen and MBR bathrooms fixture, paint and partition layout, sprinkler & sewage upgrade. Permit with floor area 3497 sf plus bonus open space 400 sf of crawl space 3'11" high in the basement. Roof top has some winter water view with a flat roof in drawing for a potential roof top deck.

And the incentive is laid out for you to take this off their hands:

Quick $2.1m price for handyman or contractor who can do some finishing works and resell it easily for $2.6m-2.8m and up once completed.

So why are they selling?

Reason to sell - my partner and I have different tracks for our train of thoughts now.

Fast forward almost 10 months and the property still languishes on the market.  As VREAA noted today, they have bypassed the craigslist route and opted for a realtor to professionally sell the property.

But instead of $2,100,000, their asking prices has now dropped to $1,599,000.

Their focus has also shifted from finding someone who might be interested in finishing the reno, to seeking a developer who will tear it all down and build a new mansion (i.e: someone catering to HAM).

If nothing else you have the primary reason potential buyers aren't buying right now.  A $600,000 drop in asking price in 10 months?  Who wants to catch this kind of falling knife?

It shows you how real estate is massively overprice right now.  The speculative frenzy we've been through is nothing short of astonishing.

One of the contributors to the comments section (hat tip Eric Langhjelm) advises that this property was purchased for $1,180,000 in 2009. If the speculators who bought it have indeed already sunk $500,000 into the property in improvements, these speckers are already in a loss position particularly when you factor in transaction costs and interest on any money borrowed to finance the deal.

You have to imagine that if anyone wants to buy it for lot value, prospective buyers aren't going to give a damn that these speckers have already sunk $500,000 into the house.  I would be surprised if they could even fetch their original purchase price for the lot right now.

It's crystal clear now that our market is unwinding.

At $1,599,000... this property is still massively overpriced.

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1997... how far removed are we?

The reaction to yesterdays post was interesting. A flood of contributions to the comment section (by this blog's standards) and a flood of email comments.

The attraction?  A single family house on the westside of Vancouver has sold for more than 30% below assessed value.

Is this continuing evidence that the housing bubble here is finally bursting?

Let's remember how we got here:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
• Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.
• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
• In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.
• In March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
• In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
• Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.
• Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion today.

Right there, in all those details, is where all the money originated to fund our housing bubble.

Incomes haven't grown to permit the rise in housing prices, debt has.

How much has changed since 1999?

Yesterday our friends over at VREAA offered us this intriguing reminder:

The house pictured above is 4549 West 12th Avenue on the westside of Vancouver.

In March of 1997 this house sold for $457,500.

Yep... $457,500.

Today the assessed 'value' of that house is $1,782,000.

Debt, and the crack cocaine of easy money is what has inflated it's value. 

Throughout history, all booms created by excessive credit have burst and returned to the the levels from which they started (and often have overshot those levels as the bubble collapses).

From 10% down and 25 year amortizations (with limitations of what they would insure) to 0% down and 40 year amortizations with no limits... it isn't rocket science to trace how this bubble was blown.

As the credit taps are turned off, who is genuinely caught off guard as the bubble contracts? Perhaps only the ignorant and the wilfully blind.

It doesn't take the incredible vision of a prescient oracle to see where we are or what is coming. It's common sense.  It's history replicating itself: all booms created by excess credit bust when that credit is withdrawn.

How long before we return to 10% down and 25 year amortizations?  We're almost there now. And with the $600 Billion CMHC cap looming, are greater restrictions so hard to foresee? Particularly with the Federal Government committed to a "soft deflating" of the bubble?

For those who objectively view our housing bubble, it isn't hard to see where we are going.

As the bubble unwinds, as credit is withdrawn, values will return to where they were before this bubble began (accounting for inflation).

Make no mistake... one example is not proof of the collapse.  But it wasn't that long ago people were insisting we would only ever see prices come down 10%, 15% TOPS.

Now we see regular examples of 25% off and evidence of 30%+ drops are appearing.

As incredible as it seems to eyes conditioned to 2011 prices,  4549 West 12th's 'value' is really around $600,000.  And it will return to that level, and most likely lower.

$600,000 would be a drop of about 67%.

When you consider that the unwinding is only just starting, and that we are already seeing examples of 30%+ drops, is a 67% drop still so hard to believe?

More significantly, if you can now appreciate that it might happen, is selling now and getting 35% off assessed value so bad when you consider what is coming?

We do live in interesting times.

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Email: village_whisperer@live.ca
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Mon Post #1: Real Estate Forecast - updated

Excellent interview with David Lepoidevin of National Bank on BNN about real estate last week (hat tip to Fish from Fishyre).

If you missed it you can watch it here.

Transcript excerpts courtesy of VREAA:

"Where we are concerned is regarding the value of Canadian real estate. The lessons from the world have been that real estate has had greater implications than just the value of your investment properties.”

“In Canada if you look at the actual numbers, the numbers don’t lie. If you look at median real estate prices compared with those in the US, at their peak the median US housing price was $265,000. Today in Canada, the latest figures we have is $375,000 for the median real estate price transaction. So therefore we are 42% higher in Canada today that the US was at the peak. And we’re [about twice] the median price in the US today.”

“Many of the banks are more exposed [to the mortgage market] than they have ever been. CIBC has 50% of their loans in real estate. When we got into trouble in the early 1990’s, the average Canadian bank was about 13% exposed to RE, and we know we got into a heap of trouble then [with overexposed institutions].”

“The Canadian bubble has extended far beyond the US bubble. We’re beginning to see cracks in the system and the cracks are coming from my home town which is Vancouver, which may have been the epicenter of the bubble. A stand-alone house in Vancouver was over $1 million and still is over $1 million.

Reports are coming in that Asian money is slowing to a trickle. [Real estate prices in China are dropping.] The frenzy had spilled over into Vancouver almost as a suburb of China. [The money has stopped because the Chinese real estate market has slowed but also because the investor immigrant program has ‘shutdown’.”

“If we look at the percentage of jobs in actual construction (this isn’t realtors this is actually guys swinging hammers) ... we can see that Canada, the red line, is way above not only where the US is today, but we are significantly higher at 7.5% compared with 5.5% in the US at their peak.”

“So we need to define whether there is a bubble and what I’m trying to point out to people is, yes, there is a bubble.”

“The myth in Canada is that real estate cannot go down unless there is a spike in interest rates. In the United States interest rates of 2% lower than they were when housing prices will almost double what they are today. So it wasn’t a spike in rates that caused house prices to go down it was a reduction in the availability of credit, tightening credit. We now have the first Canadian majority government we’ve had in 8 years and they are beginning to put the brakes on.”

“If we did an Internet search for ‘boom and bust’ you will find hundreds of examples in history, in various economies, of boom bust cycles. If you do an Internet search for ‘boom’ and ‘soft landing’ there are no entries. There are none. ‘Soft landing’ are the scariest words in investment history because they don’t happen. We are trying to engineer a soft landing in real estate just as the Chinese are. The NASDAQ bubble, the US housing bubble,The Canadian housing bubble... You will not find a soft landing.”

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