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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Tues Post #2: Metro Vancouver Real Estate achieves a 'New Paradigm'

If you have followed the topic of real estate bubbles, you have seen the above graph (click image to enlarge).

Titled 'The Main Stages of a Bubble', it is a representation of the stages that all bubbles (real estate or otherwise) travel through.

As we watch our Real Estate bubble in Vancouver, one has to wonder if we are now approaching the end of the third stage of the bubble process; the Mania Stage.

The Mania Stage has four basic phases: Enthusiasm, Greed, Delusion and New Paradigm.

Many real estate bears, salivating in 2008/2009 that the bubble might have been bursting, thought we had seen the end of the Mania Phase.

But watching events over the past 18 months, many will surely say the current market qualifies as delusion bordering on a new paradigm.

Have we indeed made that transformation?

How else to describe the belief by some economist's that the 'threat' of a bubble forming in Metro Vancouver has dissipated?

A Conference Board of Canada report released today quotes senior economist Robin Wiebe as saying not only has “the threat of a bubble largely dissipated” in Metro Vancouver “but, really, there never was one.”

See? There never was a bubble. Our market has achieved a New Paradigm.

Perhaps this explains why, in the current mania, we see the asking price of this Shaughnessy Mansion almost double from $17 million to $31 million.

Or why we see this downtown Penthouse condominium, which sold last year for $18.1 million recently relisted for a stunning $28.8 million (click on image below to enlarge MLS screenshot of listing).

The chutzpah for these types of increases is emboldened by the belief we have achieved that 'New Paradigm'. And the new paradigm viewpoint has been further reinforced with the proliferation of articles, like this one, explaining why the influx of Chinese money won't dissipate.

For those who study Bubbles, it has always been difficult to truly appreciate how pervasive and engulfing the Mania Phase can be.

People still look back at Holland's tulip mania in the 1600's with a sense of bewilderment. Long considered the first recorded speculative bubble, the peak of tulip mania saw single tulip bulbs selling for more than 10 times the annual income of a skilled craftsman.

Peering back across the gossamer waves of time, it's often difficult to comprehend how the enthusiasm for tulip bulbs could beget the all-consuming greed that leads to the delusional prices which then entrap a nation into believing that somehow a new paradigm could be created in the price of tulips.

By the time our current situation bursts, residents of the Village on the Edge of the Rainforest will be experts on just how a inexplicable Mania can completely grip a populace.

People will say "it's just real estate" the same way we now look at them as "just tulip bulbs."

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Email: village_whisperer@live.ca
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