Optimism become Hopium, but it's still a failed strategy

Real estate sales are down, way down.

"But low sales can only mean one thing:  the pool of eager buyers is building and the damn will burst, you just have to wait it out."

Essentially that's the message from BC Real Estate Association (BCREA) as they report on the dismal February sales statistics.

"B.C. real estate sales decline helps fuel drop in home prices" is the headline, which has to be frustrating because BCREA's Cameron Muir and Tsur Somerville (UBC Sauder School of Business) have spent so much time telling us prices won't be coming down.

But as buyers continue to stay away, Muir sends out a not-so-subtle message to sellers to bolster their confidence and hold firm on prices.

B.C. home sales continued at a modest pace in February," Muir said.  "Despite improved affordability, many potential buyers and sellers remain in a holding pattern.”

Muir’s estimate is that with sales down for such a long period, there are enough potential buyers who have put off decisions that there is what economists call “pent-up demand” building in the market and “it’s not a matter of if, but when home sales rise above their current pace.”

"Most B.C. markets have experienced relatively stable price levels during the first two months of the year."

Optimism or just Hopium?

In Vancouver, sales were down over 29% last month.

Across BC sales were down 24% in February compared to a year ago. This has brought the average BC price down 8%.

The South Okanagan Real Estate Board was worse.  They experienced a 33% sales decline.  The average South Okanagan price was down almost 20%. This region takes in Penticton and Osoyoos.

In Northern Lights, the area around Dawson Creek, sales in February were down 38%.

Perhaps it's time for another sermon from our buddy Somerville so he can tell us how prices simply can't come down any further and buyers shouldn't wait. Of course they would be much like the sermons he gave us on September 5th, 2012, October 13, 2012, and November30th,2012.

Which reminds us, spring is here.

Wasn't it west side realtor Andrew Hasman who was echo'd the Muir/Somerville mime and told us in December and that if you wait until March 2013, you will have 'missed the boat' on a huge Spring surge in sales?

Hasman swallowed the Muir/Somerville Koolaid and told us:

We continued to see slow sluggish sales activity on the Westside during November. That being said there is some promising news. The number of homes on the market at the end of November has dropped substantially since peaking in mid-September. I have also noticed a lot more calls on our listed properties combining with more viewings too. Even though sales volumes continue to remain well below last year’s levels, the shrinking supply and stable sales volume over the past 6 months points to a stable market moving forward. In fact, I’m going to go out on a limb and predict a robust Winter Market with brisk activity in January and February.

For home owners thinking about selling in 2013, keep in mind if you list your home in March (based on the last 4 years of sales activity) you missed the best time for selling. Home owners that listed their homes just before Chinese New Year achieved the highest selling prices. The period of Late January to end of the February was the busiest time for housing sales the last 4 years. Why should this year be any different?

Seems that limb broke on poor Andrew. How did that whole Spring surge thing play out? Here's Andrew's month end review for February 2013:

When you read the real estate market stats in the newspaper and hear it in the media its quite evident that Vancouver’s housing market continues to remain cool. Sales in February across the region were down again in February some 29% compared to last year and year to date are down 23%... There have been some generous price declines on some properties where home owners need to sell. For those that do not have to sell, many homeowners have taken their homes off the market waiting for better times.

Why is it so many in the industry think that buyers 'have to buy' whereas sellers 'don't have to sell' and can wait out the buyers?

The reality is that neither side has to do anything. But with credit rates at historic lows, little to no sales occurring, and no chance whatsoever that the Federal Government is going to ease up on mortgage regulations; it won't be buyers making the first move here.

There is only one solution: -lower prices. And no amount of lecturing or hopium is going to change that.

Rather than focus on brow beating buyers, it's time for the Industry to focus it's efforts on educating sellers on the realities of the current economic situation.

Our markets need a painful adjustment to heal themselves.  The quicker it happens, the better things will be for everyone.

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The media barrage about real estate continues

In conjunction with the Maclean's story, the media barrage about the dismal real estate market continues.

The latest is Global TV, whose intro to the news story above starts:

The image may be attractive, but the reality sure is ugly when it comes to Vancouver real estate. New numbers for December show a bloodbath for residential sales.

To provide 'balance', the real estate industry gets to add the spin denied by Macleans.  And the message is the same: there is no bubble.

The ray of hope being proffered?  HAM will return!

Global ends with the R/E mantra that while sales are down and prices are holding firm.

Which brings us to the 2nd Global clip which focuses on the release of the new assessment values:

And it's the Global commentary that catches the breath of the bear observer used hearing the pro-R/E mantra from Global TV:

Your property assessments are now in the mail. And for the first time in years, house values in some of the Province's hottest markets have actually declined. While most assessments will reflect a slight change from last year, others will come as a quite a shock, reflecting a definite 'cooling-off' of the real estate market in places that were once white-hot.

Naturally the real estate 'experts' are trotted out to tell you prices are actually 'flat' and not falling... and that the 'fundamental's' mean real estate can only go up.

Curiously even our buddy Tsur Somerville let's slip that we are seeing a "slight easing of prices."

With Global TV now clearly highlighting the bearish style of the equation, it's clear the media can no longer simply gloss over what is going on.

(hat tip to GreenhornRET for the archiving of the video clips)

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The old standby argument

Received some interesting emails from some concerned about the 'slow' pace of listings to start off the year.

Ummm... slow?

In the three days following the first day (where the month end expiries cycle off the rolls), we have had a net increase of 423 new listings.

That's an average increase of of 141 per day.

If we were to keep up this torrid... err... 'slow' pace, there will be a net increase this month of +2,961 and bring us to 14,750 for the month.  Last year we didn't see that level until the start of March.

And it must be noted, listings don't normally start picking up speed until the middle of January.

Food for thought.

Meanwhile our buddy Tsur Somerville has been busy spinning the 2013 property assessments from BC Assessment.

As most readers already know, the 2013 numbers are based on valuations made in July 2012... meaning they have missed the last half year of horrid R/E data.

In an article discussing the assessments, the Vancouver Sun noted that over the past five years, single-family homes were the big winners, particularly in Burnaby, Vancouver and Richmond, where the five-year gains are still more than 20%.

However, this year, for the first time in many years, a number of homeowners in some areas of B.C. will see a drop in their property assessments. In tony areas like Whistler and Vancouver's west side, assessments fell, while more affordable areas like Surrey or the Tri-Cities, held their own.

But Somerville is out promoting that those who own Single Family Houses (SFH) have nothing to fear:

Single-family homes have been the winners over the long term while apartments have been struggling, an analysis of Metro Vancouver real estate statistics released last week shows.

"The resource that is scarce is land," said Tsur Somerville, director of the centre for urban economics and real estate, Sauder School of Business at the University of B.C. "You can always build more condominiums, but if you want a backyard, there's a limited space."

He said that isn't likely to change soon, despite the large cohort of baby boomers who could choose to downsize in the near future.

"Most people stay in their houses longer than you expect," Somerville said. "They want space for the grandkids."

Ahh yes.  The whole "they aren't making any more land" theme is a favourite of Somerville's.

In an August 21, 2010 edition of the Vancouver Sun (link no longer available) titled "Vancouver's housing affordability problem boils down to too many people on too little land", Somerville noted:

What drives Vancouver's house prices so relentlessly to levels four times higher than Winnipeg's, and more than half again what Torontonians pay?

It's simple, says Tsur Somerville of UBC Centre for Urban Economics and Real Estate. 

"If you want Winnipeg-level house prices here, all you have to do is tear down the mountains and fill in the ocean."

Well, that puts slow or stop to the steady influx of people - though the massive loss of amenities if our landscape were to be suddenly levelled might do that automatically.

"Depending where you draw the circle," Somerville says, "70 per cent of the land isn't developable. It's mountains or water or the United States."

Then, on top of this insurmountable geographic limitation, add the relentless population growth that, in good years and in bad, ranges from 1.3 to 1.5 per cent a year.

"The higher the population of a city, the higher the house prices," he says. "If we lose 70 per cent of the land, our metropolitan area of two million will have the same house prices as a seven-million metropolitan area. Because people have to commute the same distance."

It's as if Somerville has built his entire thesis of Vancouver Real Estate independent of the role played by the credit easing strategies of the Federal Government and CMHC since 2001.  

And because of that, he simply cannot acknowledge that they may play a part in the bubble's unravelling.

When all else fails, fall back on the "they're not making any more land" argument.

Of course sandwiched between the 2013 snippet and the 2010 treatise, we have this from October 3rd, 2012:

“West Vancouver, the west side (of Vancouver) and Richmond are all down five to eight per cent from the peak earlier this year,” noted Tsur Somerville, director, centre for urban economics and real estate, Sauder School of Business at the University of B.C. “In contrast, the Coquitlams, the Deltas, the Maple Ridges, the Burnabys are down one to three per cent. The areas that had the most intense run-up in 2010 and 2011 are the ones where prices are weakening more.”

Somerville noted that a few areas still saw prices rise in the year, including Squamish’s five-per-cent price hike - the highest in the region.

“This is the first time since 2007, 2008, when prices have come down by this degree,” added Somerville. “When you have nine months of continuous months of weak sales, it will show up on the price side.”

Somerville believes high prices, and reduced economic optimism, are behind the sales drop. “And cycles happen.”

This is pretty much the only time Somerville admitted prices were falling. For some reason the whole 'cycles happen' and prices have fallen 'by this degree' talk vanished... replaced by the 'flat' market and 'flat'  prices mantra.

You don't think that had anything to do with the fact that cycles contain collapses? And that by admitting prices move in cycles, you pretty much acknowledge that a collapse not only can occur... but will occur at some point?

Just a thought.

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You can almost smell the desperation - buyer's once again told prices will not be coming down

It was back in the middle of October that Tsur Somerville first admonished home buyers who were sitting on the sidelines waiting for housing prices to come down.

Tsur Somerville, who holds a real estate foundation professorship at the University of B.C., expects prices to stay flat for a while “because our prices are high relative to what people think they should be,” Somerville said. “Our price adjustment will come from prices being flat for awhile and letting income catch up to where prices are.”

If fact it was just after this that Somerville came out and tried to halt all concerns and worries about a possible collapsing of prices by infamously declaring you can't burst a bubble that isn't there.

“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 

For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”   

None of those conditions appears imminent. 

Somerville said it would take “some negative shock,” such as an ­economic meltdown or mortgage interest rates jumping from four per cent to nine or 10 per cent, to trigger lower prices.

In that October post we profiled some Vancouver westside properties that have dropped their asking prices to between 10%-23%, with no buyers in sight.

The response of Somerville et al?  Prices are flat... there is no decline.

Two and half months later, with the market still suffering with the start of the Spring Market looming, Somerville is back with BCREA Chief Economist Cameron Muir to trumpet the same message: Vancouver real estate buyers waiting for a price collapse in 2013 could be in for a long wait.

While prospective sellers are waiting, the numbers indicate that prospective buyers are a bit shy as well. “The market right now is both slow and tentative. There are a lot of people out there being very tentative because they’re not really sure where things are going,” Somerville said. “I can’t say how many buyers are in the market — I want to differentiate between that and the prices they are willing to pay. Maybe there are people who are actually interested in buying, but they’re either waiting for prices to be at a certain point, or they’re making offers that aren’t being accepted. I can’t differentiate between those things.”

And this is the frustrating thing for the industry right now.  They know there is an incredible amount of pent up demand - demand that knows the market is overvalued and they are prepared to wait for it to come down.

Hence the message:

“To get prices to really tank, you’ve got to have something happen. Either you’ve got to have overbuilding, or you’ve got to have some big change in the world of finance, such as large movement in interest rates or a financial disruption, or you’ve got to have a real negative economic shock,” Somerville said. “You’ve got to have some combination of those, or one of those to make prices drop dramatically.”

Overbuilding of single-family homes in Metro Vancouver is difficult because land is so limited, Somerville said.

It was left to Muir to deliver the R/E message of import:

Cameron Muir, B.C. Real Estate Association chief economist, thinks if buyers are waiting, they could be waiting a long time.

“Three years ago we saw the largest financial crisis since the Great Depression and an ensuing global recession. If that’s wasn’t enough to trigger a correction in an asset bubble, I don’t know what is,” Muir said.

“The condo market in Vancouver has not been ‘hot’ since 2009, and perhaps even earlier than that. Prices on the condominium side have been relatively flat for three years, so that doesn’t signal any kind of asset bubble welling up,” Muir said. “There has also been little speculation in the marketplace over the past few years and home builders have been kept in check in terms of their total units in production.

You almost have to fall out of your chair with laughter here.

• The condo market in Vancouver hasn't been hot since 2009? 
• Little speculation in the market place? 
• Home builders have been kept in check in terms of total units in production?

Riiight.

Wasn't it just last August that ScotiaBank declared the Vancouver market was in a full blown correction  and warned:

the risk of a more difficult adjustment will increase if builders do not soon begin to slow the pace of new construction.

Faithful readers will recall back in February 2012, Ozzie Jurock made reference to the exploding condo inventory on his Face Book page and described the spring/summer condo market as:

"a market that will have a lot of units for sale and more coming on stream."

In an OpEd piece in the Vancouver Sun, Jurock noted:

As of Feb. 29, 2012, there were 6,000-plus condos for sale through the Vancouver Real Estate Board - up 15% compared to the previous year.

At the same time, sales of used condos were down by 18%.

Add to this the fact that - according to MPC Intelligence - there are some 8,000 pre-sale condos being launched in the first six months of this year.

Ultimately Somerville and Muir are going for the soundbite... for the headline.  That's how you mould public opinion.

The problem is their target market - the buyer sitting on the sidelines - is not like Joe Q. Public who browses the media and pays half hearted attention to those headlines.

The buyer on the sidelines is keenly aware of the what is going on.

The buyer on the sidelines is keenly aware that prices have been coming down.

And the buyer on the sidelines is keenly aware Somerville and Muir are full of it.

Which is why they are not biting at those listings currently asking 25% below assessed value.

They are willing to wait.  And it's going to take more than Somerville and Muir berating them for waiting, to get them to buy.

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What lies ahead? One local real estate agent calls the bottom.

As the news about November's real estate sales circulates in the media, the main emphasis shifts from declining sales to actual prices.

The mantra being pushed is that prices aren't (and won't) be coming down.  We saw that message on November 30th:

"If you've been staying out of the housing market, waiting for a big drop, you might be in for a long wait."

And it's been a theme Tsur Somerville has pushed since early October.

Yesterday it was Eugene Klein, president of the Real Estate Board of Greater Vancouver (REBGV):

November home sales in the Vancouver area fell 28.6 per cent compared with a year ago as what was once the country's hottest real estate market continued to cool.

Despite the sharp drop in sales, the board said the MLS home price index composite benchmark for homes Greater Vancouver was $596,900, down just 1.7 per cent compared with a year ago. The index peaked in May at $625,100.

"Home sellers appear more inclined to remove their properties from the market today rather than lower prices to sell their properties," said Eugen Klein, president of the Real Estate Board of Greater Vancouver.

At this stage of the process, it's no surprise that listings are being pulled to wait out conditions.  And it isn't really surprising that the real estate industry is focusing on the convoluted HPI to dampen the impact of any price drop.

For while the HPI is only down 1.7%, the average detached home price is now down 14% from the February 2012 peak.  Who wants that figure prominently publicized?

Conditions are mimicking what we saw in 2008 when the Financial Crisis started.  As Garth Turner noted, the parallels are eerily similar. 2008 saw a huge drop in sales and the average price started to plummet:

Of course the collapse was resuscitated. "In 2008 a variable-rate mortgage was 6% and a five-year loan was 5.75%. The world fell into a financial... and the Bank of Canada rushed in emergency interest rates. By May of 2009 a VRM had collapsed to just 2.25% – the lowest point in history. With rates almost 4% lower than they’d been months earlier, and mortgage payments slashed by more than half, the collapse in real estate prices and sales was quickly reversed"

The efforts were complimented by the federal government's bailout of the banks through the Insured Mortgage Purchase Program (IMPP).

Not only was the collapse halted, but the bubble blew even higher as Canadians plunged themselves into historic levels of debt:

But as the crack cocaine of cheap easy money has run it's course and the government has started to pull back on those emergency measures, the slide is happening again (despite the HPI only dropping 1.7%):

So as the average price mimics 2008, what divine intervention will occur to see that prices only 'flatline'?

What is going to cause prices to resume their upward trajectory?

The changes to the mortgage rules have frozen out the entry level buyer, the ones who used to be balt o to get into the market with nothing down.

Without their business the market freezes, as Thomas Neal of Royal LePage Estate Realty noted in the Globe and Mail:

While people are still coveting single-family houses, those move-up buyers who already own a condo are more hesitant to purchase a house because they don’t know how long it will take to sell the condo. That’s a change from the dynamic of the last eight years or so when condo owners would often list the unit first, reap more than they expected in a bidding contest, and then in turn funnel that money into winning the competition for a house.

“Now they’re not buying first; they’re selling first,” says Mr. Neal. With that shift, he explains, the number of buyers out there is cut roughly in half.

Enter the current industry campaign: "buy now because prices won't be going down."

I have a feeling this theme is going to ramp up over the winter months before the Spring re-listing begins in earnest:

It’s a market that’s winding down in the dwindling days of November. Few new listings will arrive on the market in December. Those sellers who do list now have likely already purchased another property.

“If you don’t have to sell I think you’re going to wait until the spring,” says Mr. Neal.

As for those sellers whose condos and houses are already lingering on the market, Mr. Neal predicts many of those people will be taking down the “for sale” sign by Christmas.

“People who don’t sell in December will be back out on the market in February,” he says.

And when they come back in Spring, they want to hear that there will be people to buy their homes.

Perhaps that's why some bearish agents are starting to change their tune about market conditions.  Let's face it, who wants to list with an agent who tells you it's only going to get worse.

Perhaps this explains the about-face in attitude from real estate agent Andrew Hasman.

In 2011, when prices were going crazy on the west side, he was calling the market 'unhealthy' and warning about the consequences:

"The local person is completely out of this market," he said. While skyrocketing prices have made business good, Hasman said that the current market, with housing prices rising 10-15 per cent each year, is unhealthy.

"Anytime you have extremes in markets, it's never healthy," he said. "You end up with a bubble. If the local economic base can't support these levels, then at some point you're going to have a lot of people burned big time. It's not sustainable."

In July 2012 he told us that:

This feels like the first Normal Real Estate market in many years. That is if you can even define or remember what 'Normal' really feels like.  Gone are the bidding wars and gone (for now) are the days when homes were selling in mere days. For buyers there is now good selection and no pressure to make that big commitment... Sales of homes across the Greater area of Vancouver are at levels not seen since 2000!

Overall, prices still seem to be holding with some price softening in specific markets only. Vancouver’s Westside looks to be one of those markets.  Fewer buyers from China, tougher mortgage regulations and concerns over the global economy are all weighing on consumer confidence. I predict these market conditions will continue through the balance of 2012 with further price softening.

So does Hasman see more dismal times ahead for when all those disgrunted sellers re-list in the Spring?  Apparently not, according to his December 4th market report:

We continued to slow sluggish sales activity on the Westside during November. That being said there is some promising news. The number of homes on the market at the end of November has dropped substantially since peaking in mid-September. I have also noticed a lot more calls on our listed properties combining with more viewings too. Even though sales volumes continue to remain well below last year’s levels, the shrinking supply and stable sales volume over the past 6 months points to a stable market moving forward. In fact, I’m going to go out on a limb and predict a robust Winter Market with brisk activity in January and February.

Really? And what are we going to hang our hopes on for this resurgence in the market?

For home owners thinking about selling in 2013, keep in mind if you list your home in March (based on the last 4 years of sales activity) you missed the best time for selling. Home owners that listed their homes just before Chinese New Year achieved the highest selling prices. The period of Late January to end of the February was the busiest time for housing sales the last 4 years. Why should this year be any different?

Ummm... because that period in 2012 also wasn't like the years before it?  Based on 2012, that period was a disaster. Are we really going to continue to hang out hats on Hot Asian Money (HAM) again this Spring? 

It appears so. Hasman not only pins his clients hopes on HAM, he goes further than that and calls a bottom for the market:

I do not see any housing crash or even much more downside to house prices. Prices have already slipped 10-15% in some cases and I feel that is as far as it will go.

So there you have it: Buy now, because prices aren't going to go down.

Pardon me if I read the tea leaves a little differently.

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The root of the analysts' belief why there won't be a system shock to create a housing collapse here

CIBC joins the list of banks warning Boomers who are counting on funding their retirement by downsizing and selling their bubble inflated house that their plans might be in jeopardy.

In the November 29th, 2012 edition of CIBC's Economic Insights, Avery Shenfeld says:

The evident slowing in Canadian home sales will take a bite out of domestic economic growth... But another dimension of the recent trend, a cooling in house prices, is less of an unambiguous negative as it’s often made out to be.

For one, a retreat today could be the preferred alternative to a harder landing from even higher prices down the road. Less understood is that cheaper home prices could bring winners as well as losers across the economy.

And who might the losers be?

A home owner that counted on downsizing to fund her retirement might have to pare spending plans.

Oh? And why is that?

While a month ago we quoted widely cited estimates of the wealth effect on spending, it’s difficult to disentangle them from the data.

Yes... it's a bitch when reality gets in the way, isn't it?  What is that data?

Most historic wealth declines coincided with other sources of economic weakness, including rising unemployment or high interest rates that depress consumption.

But wait a minute.  Is CIBC suggesting that a bigger storm is brewing beyond a simple 'flatlining' in housing.  Didn't Tsur Somerville just say yesterday that no one can see any economic shock on the horizon?

What about the shock of declining housing prices? CIBC sees a concern:

Didn’t house deflations sink the US and Ireland? Not on their own. It was the accompanying wave of defaults that devastated the financial system in both countries. Canada hasn’t lent as aggressively to its lower-income home buyers, and a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock.

Hmm... "not on it's own." Does this support Somerville's view?

The central conflict is this belief that "Canada hasn't lent as aggressively to its lower-income home buyers." 

I know I beg to differ.

Zero down mortgages (aided by the banks 7% cash back mortgage plans) which were facilitated by CMHC's excessively easy liquidity boom (which saw the amount CMHC lent out rise from $100 Billion in 2006 to $600 Billion today), and all of this supposedly went to Canadians who weren't "lower-income home buyers?"

Alrighty then.

This belief, that Canada hasn't lent as aggressively to its lower-income home buyers, is the crux of what the analysts like Somerville are counting on.

This is why they say "a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock."

I suspect the pool of suspect borrowers is far higher than most are counting on. And that they are leveraged in such a way that the 'flatlining' housing market is going to have a much greater impact then ever imagined.

 We shall see in the months ahead.

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Realtyland - where prices don't fall, they 'flatline'

As November comes to a close, sales continue to lag despite some shrinking of the massive inventory that has built up since the start of the year.

And you can sense the desperation.

If the average home price had increased almost 6% since last year, the headlines would be screaming that prices continue to shoot upward.

But they're not shooting upward.  As the month comes to a close the average price is down 5.7% - so will headlines claim prices are falling?

Of course not.  In Realtyland prices aren't falling at all... they're 'flatlining'. Now 'flatlining' is a most interesting choice of words, don't you think?

But this is the spin as we see in the press today.

Housing market has 'flatlined'

The average home costs about 5.7 per cent less than 2011

Housing market has 'flatlined'

VANCOUVER (NEWS1130) - If you've been staying out of the housing market, waiting for a big drop, you might be in for a long wait.

Metro Vancouver's housing market is in a 'flatline' pattern, according to the numbers.

The Conference Board of Canada's latest look finds the average home costs less than last year, by about 5.7 per cent. Resales are up 3.9 per cent over the previous month but still down more than 20 per cent compared to last year.

Tsur Somerville of the Sauder School of Business says the signs don't show a collapsing market. "They're more suggestive of a leveling out, but looking at a period where the housing market is at a slower, calmer place."

Somerville says that should give people the chance to look around without major stress. 

"There's not a lot of pressure or worry that somehow if you miss a house now, that there won't be any next month, or prices will be out of your reach."

Somerville says it would take a major change in interest rates or an economic shock for the housing market to plunge dramatically.

As always, it's Tsur Somerville telling us those declining prices aren't declining prices (?) and if you're waiting to buy, don't... cause those declining prices (which aren't declining) won't keep declining.

Speaking of declining prices, earlier this week Observer had some new additions to the 30% below assessed value club for us on his blog Vancouver Price Drop.

In Abbotsford #1411-34909 Old Yale Rd is listed for 32% below assessed value:

In White Rock, #302-15342 20th Ave has dropped it's asking price to 32% below assessed value:

In Richmond, #204-3411 Springfield Drive is now 30% below assessment:

And in Pemberton, 7306 Clover Rd joins the 40% below assessment club:

Somerville says it would take a major change in interest rates or an economic shock for the housing market to plunge dramatically.

I guess that means the 30% and 40% below assessment club would become the 60% and 70% club at that point.

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It's not just the million dollar homes falling below assessed value

L

Reading this blog you know we are watching the comments of the likes of BCREA chief economist Cameron Muir and UBC Sauder Associate Professor Tsur Somerville with keen interest.

Last month we have Somerville saying:

“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 

For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”

None of those conditions appears imminent. 

This week he changed his tune and said Vancouver home prices could drop by 10% next year.

Meanwhile Cameron Muir insists:

"we don’t see a recession on the horizon, and we don’t see interest rates going up any time soon, so what kind of financial calamity is going to happen in Vancouver to get people to sell for 75 cents on the dollar?”

We've shown you examples of Vancouver detached houses that currently have asking prices 23% below assessed value and Richmond detached houses 25% below assessed value.

Some have suggested that these are these extreme examples and that no such worry exists on the lower end of the spectrum where the average Vancouver income earner resides.

Without getting into the debate about whether the 'average Vancouver income earner' is into million dollar properties or not, a quick check of the comment section on the excellent blog Vancouver Condo Info turns up an immediate example to reference (hat tip Teddybear).

Here is an example of a Vancouver condo from a lower price range.

This is #2905-438 Seymour Street in the downtown core of Vancouver (click images to enlarge): 

It's a 1 bedroom, 1 bathroom condo which is currently listed at $319,000.

The $319,000 asking price, btw, is a big reduction.  It was originally listed for $389,000 on August 20th, 2012.

Now for those that discount that a $70,000 asking price cut (detractors will tell you idiots can always ask wild prices, doesn't mean squat in the big picture), the real test comes when we look at the assessed value:

As you can see... this property is assessed at $376,000.

So in a so-called 'flat' period (according to Somerville), the owners of this property have cut their asking price to more than 15% below assessed value.

Toss in another 10% drop in value next year (again... according to Somerville) and you have a property that would come in at 25% below assessed value.

Muir wants to know what is going to happen in Vancouver to get people to sell for 75 cents on the dollar?

Perhaps he should give the folks at 498 Seymour Street a call and ask them?

I suspect it has something to do with the fact that the listing indicates that this is the first time this unit has been on the market since the original sale. 

The building was built in 1996. Since then we have seen a huge loosening of credit (which triggered our massive housing boom -see our post here).  As a result it's not hard to surmise we have a situation very similar to the Boomer Trigger - i.e. people can move on price, so they will - and in doing so they still get out with a healthy capital gain.

This is an element that both Muir and Somerville appear to completely ignore. Many of these people selling for below assessed value aren't taking 75 cents on the dollar for their original 'investment'. 

It's a factor could wind up having a profound effect in the coming year.

If anyone knows the original purchase price of this unit, it would be nice to compare that to the current asking price/current assessed value  - let us know.

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The Evolution of Rationalization

We seem to have entered an interesting phase in the media coverage of our housing collapse.

Instead of denying there is even a bubble to burst in the first place, now the media is filled with economists and 'experts' who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

The latest to join the chorus (after Muir and Somerville yesterday) is CIBC deputy-chief economist Benjamin Tal.

Tal, however, takes it beyond accepting there will be some price declines and minimizing them. For Tal it's about ensuring slipping prices don't trigger a collapse in buyer/seller confidence.

"There is nothing to fear but fear itself... Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go."

Tal, Muir and Somerville have one central worry: that Canadians are starting to talk themselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what Americans experienced just before their housing prices plummeted by as much as 50% in some markets.

Which is why each and everyone of them keeps insisting/re-assuring that there will be no U.S. style crash in Canada.

Says Tal:

"When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number. The quality of the debt is much different here."

Err... quality?

Tal maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Ummm... But if Canadians are such a better risk than what do you make of a Bank of Montreal report that BMO came out with on Monday that noted that almost three-quarters of Canadian homeowners would feel a significant squeeze from even a small rise in interest rates?

The report basically says 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.

A third of these people have already cut back on other spending so they can make the mortgage payment.

One in six has been forced to raid their savings to pay current costs.

This is at a time when interest rates are at historic lows, which means they can only go up. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.

So much for Canadian debt being of a higher quality.

Another key factor that Tal insists is ignored in the current housing bubble discussion is how much of our Canadian mortgage debt is locked in for longer terms and not subject to the vagaries of rising rates.

Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29% (Tal cites the latest survey from the Canadian Association of Mortgage Professionals for this statistic).

Umm... just a quick question here.  When you say only 29% of Canadians are in variable products... does that mean we don't count a mortgage that resets to a different interest rate after five years?

I mean, aren't ALL Canadians in variable products when you consider this factor?  How many Canadians have 30 year locked in mortgages like in the United States?

Blink... blink.

Sorry Tal... I know I'm afraid.

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After insisting prices would remain flat, Tsur Somerville concedes prices could drop 10% next year

Was it only last month, on September 5th, 2012, that everyone's favourite industry shill Tsur Somerville was trotted out to declare prices would not come down!:

Tsur Somerville, who holds a real estate foundation professorship at the University of B.C., expects prices to stay flat for a while “because our prices are high relative to what people think they should be,” Somerville said. “Our price adjustment will come from prices being flat for awhile and letting income catch up to where prices are.”

If fact it was just after this, on September 14th, 2012 that Somerville came out and tried to halt all concerns and worries about a possible collapsing of prices by infamously declaring you can't burst a bubble that isn't there.

If there was a large number of unsold units coming onto the market or a huge change in the economic environment, Somerville said, “that would really cause prices to tank.” 

“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 

For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”

None of those conditions appears imminent. 

Somerville said it would take “some negative shock,” such as an ­economic meltdown or mortgage interest rates jumping from four per cent to nine or 10 per cent, to trigger lower prices.

So no lower prices then?

What a difference a month makes.

Yesterday the Vancouver Province headlined Somerville's latest comments by trumpeting Vancouver home prices could drop by 10% next year.

Prices could drop?

So much for remaining flat.  As noted in the Province article:

“As home sales continue to plummet in Vancouver, it wouldn’t be surprising to see 10-per-cent price declines next year." That’s the view of University of B.C. real-estate economist Tsur Somerville, who was asked to respond to new market forecasts released by the B.C. Real Estate Association.

So what is this forecast from the BCREA that has changed Somerville's outlook?

On Tuesday, BCREA chief economist Cameron Muir said tighter mortgage rules implemented by Ottawa this summer triggered a 20.5-per-cent drop in Vancouver home sales, in a market that was already softening. The plunge in sales will cause a six-per-cent price decline in Vancouver’s average home price, Muir said, to $734,000. The association sees sales rebounding by 13.7 per cent in 2013, but predicts prices will slide by another two per cent, to $720,000.

So prices will slide but sales will rebound?  

Hmm... sounds like another prediction to be revised at a later date to me.

The best quote from the article is this one:

These declines should be seen in the context of unrealistic gains in 2011, Muir said.

Say wha????

Unrealistic gains in 2011. Quick... search those BCREA monthly market reports. Does anyone recall the BCREA proclaiming "unrealistic market gains" at any time in 2011?

But don't worry, homeowners, Somerville hasn't abandoned the flat prices theory.  You assets might fall 10% in value next year, but:

"(Somerville) expects prices to be more or less flat in 2014."

As for Cameron Muir, he wants to disuade all those bargain hunters sitting on the sidelines:

Right now, buyers seem content to sit on the sidelines in Vancouver, but people expecting to win massive discounts a few years down the road will be disappointed, Muir says. “We don’t see a recession on the horizon, and we don’t see interest rates going up any time soon, so what kind of financial calamity is going to happen in Vancouver to get people to sell for 75 cents on the dollar?” Muir asked.

I dunno... the same 'calamity' that already has them selling for 23% below assessed value in Vancouver  and 25% below assessed value in Richmond?

Just a thought.

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Tsur says "No lower home prices for you?" Fail... more examples of Vancouver homes below assessment value

As summer came to an end and the fall real estate season was set to begin, there was optimism in some quarters that the fall market would resuscitate sales after 5 months of dismal results.

The silver lining among all the negativity had been housing prices themselves.  

Monthly sales had tanked but the real estate industry hyped that Metro Vancouver prices remain high as home sales slow. 

Everyone's favourite industry defender, Tsur Somerville, was trotted out to declare prices would not come down! A theme he has publicly espoused several times during the summer:

Tsur Somerville, who holds a real estate foundation professorship at the University of B.C., expects prices to stay flat for a while “because our prices are high relative to what people think they should be,” Somerville said. “Our price adjustment will come from prices being flat for awhile and letting income catch up to where prices are.”

If fact it was just after this that Somerville came out and tried to halt all concerns and worries about a possible collapsing of prices by infamously declaring you can't burst a bubble that isn't there.

If there was a large number of unsold units coming onto the market or a huge change in the economic environment, Somerville said, “that would really cause prices to tank.” 

“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 

For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”   

None of those conditions appears imminent. 

Somerville said it would take “some negative shock,” such as an ­economic meltdown or mortgage interest rates jumping from four per cent to nine or 10 per cent, to trigger lower prices.

So no lower prices for you!

Kinda reminds you of Seinfeld's soup nazi, doesn't it? Tsur shouting "no lower prices for you!"

Fast forward one month later.

Yesterday we relayed realtor Andrew Hasman's observation that "the media always seem to be somewhat behind what is really happening on the front lines."

And behind they are.  

We have shown you that prices in Richmond certainly aren't remaining flat.  Houses are selling 25% below assessed value right now in the former HAM hotspot.

As per Hasman, westside Vancouver inventory has ballooned with 12 months of supply for single family houses. This glut of inventory forced the likes of those who owned the house we profiled at 3888 W. 30th Avenue to drop their asking price below assessed value and sell for 12% below assessment.

What was it Somerville said? “Most people don’t have to sell their house. You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?”... to escape a collapsing market, perhaps?

To demonstrate that 3888 W. 30th was just the tip of the iceberg, one faithful reader offered the following five examples of other westside Vancouver properties who have cut their asking prices anywhere from 10% to 23% below market assessed value without any buyers in sight.

Paying attention, Tsur?

(all images can be enlarged by clicking on them)

1998 Cedar Crescent

This house is assessed at $5,203,000.

Current asking price $4,488,000

Already $715,000 or 13.74% below assessed value and still no sale.

1903 Cedar Crescent

This house is assessed at $5,145,000.

Current asking price $3,980,000

Already $1,165,000 or 22.64% below assessed value and still no sale.

2168 West 20th Avenue

This house is assessed at $3,313,000.

Current asking price $2,980,000

Already $333,000 or 10.05% below assessed value and still no sale.

4055 West 41st Avenue

This house is assessed at $1,892,000.

Current asking price $1,498,000

Already $394,000 or 20.82% below assessed value and still no sale.

1966 West 13th Avenue

This house is assessed at $1,902,000.

Current asking price $1,475,000

Already $427,000 or 22.45% below assessed value and still no sale.

With asking prices trending 10% - 23% below assessed value, we may have to ask Somerville to redefine the term 'flat'. I don't think local sellers will agree with his current definition.

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Email: village_whisperer@live.ca
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