BC Business Magazine says "Real Estate Mania Is Ending", but a long hot summer remains before it does.

BC Business Magazine is out this week with an article that headlines: "Real Estate Mania Is Ending"

Seems everywhere you turn these days the message is being hammered home via the mainstream media.

The article starts off with a succinct observation.

History shows that Vancouver has always been a real estate boom-and-bust city. Now that the most recent mania appears to be over, with sales falling and prices threatening to follow, there's no reason to think that's going to change.

Indeed.

But if there is one thing we know for sure, few in the Village on the Edge of the Rainforest are students of history.  If they were, we wouldn't be in this situation right now.

BC Business makes another observation...

Fear and worry are rampant in Vancouver these days: the mighty real estate market is struggling. Whether it is in a tailspin or due for a monstrous crash is the subject of endless dinner conversations, office cooler chats and online messages.

Ahh yes, that is certainly the topic of conversation these days in a City where real estate is almost sport.

But are 'fear and worry' rampant yet?

The answer, at least in this blog's opinion is 'no'.  Certainly not on a level that's possible come the Fall.

BC Business Magazine ultimately dismisses what we believe is coming:

Was this a massive bubble? Slightly. When prices rise that much, we’re nudging bubble territory. But bubbles imply resulting crashes, and I don’t believe we’re going to have one. Of course, prices will drop a bit, but an American-style catastrophe isn’t going to happen.

There's a moral here.

The doubters will only believe it's a bubble if we have a resulting crash. And no manner of charts, theories, or tales of congruent circumstances (leading to this very outcome in other countries) will convince doubters until they see prices fall here - significantly.

Summer will probably not provide either side any answers.

Typically we see listings pulled in the summer as vacations take priority.  Meanwhile current sales are boosted by the rush to beat the new mortgage rules deadline. A curiously large number of recent reported sales are still pre-July 9th.

And as the Vancouver Housing Blogger has noted:

New listings have fallen sharply in last 10 days. The 7-day MA on Juy 9th was 284. Today 225. No sign of panic among sellers.

Market observers are speculating that we are in a standoff between buyers and sellers.  A sentiment echoed by realtor Larry Yatkowsky who asked yesterday, "Are Vancouver home buyers and sellers stubborn?"

The answer is 'Yes'.

Buyers are having their beliefs about a collapsing market reinforced daily. Sellers are adamant that they will not accept less than what they believe their properties are 'worth'.

It's all shaping up to be a long summer for both sides.

Will there be an event that triggers panic for either sellers or buyers in the Fall?

Finance Minister Flaherty and Bank of Governor Carney came back from the G-20 concerned enough to reiterate their warnings to Canadians.

Should you put any worth in their admonishments?

We shall see.

Unlike BC Business Magazine, we believe a catastrophe will happen here.

And then it will be clear to all and sundry that not only are we in a bubble... but we will be ground zero for a collapse unlike anything any of us have ever seen.

That's when 'fear and worry' truly will be rampant.

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If China goes bust, will Vancouver go Ka-Boom?

If China goes bust, will Vancouver go Ka-Boom? This is the $64,000 question.

Or, given that we're talking about Vancouver Real Estate, the $64,000,000 question.

HAM, or Hot Asian Money, has been one of the factors attributed to driving our irrational real estate market.  And many have openly wondered, if China falters will Vancouver whither?

We may soon find out.

Simon Black, who writes the blog Sovereign Man, recently reported that the stresses of the housing bubble in China are starting to become evident.

As faithful readers know, we have talked about the fact that China has poured more stimulus per capita into their economy than have the Americans.

And Black reports of the effects of Chinese backpedalling.

After dumping trillions of dollars into the economy to ward off the effects of the global financial crisis, Black notes the Chinese government is now pressuring banks to reduce loans. A move which is bringing much of China's credit-intensive economy to a screeching halt.

Recent reports from China's National Bureau of Statistics show that home prices have fallen up to 50% in many parts of the country in the period from July to September.

And the reality of those statistics are evident to Black who notes the reaction of Chinese citizens:

• Stunned. That probably best describes the mood of China's vast pool of property owners. For the last few years, anyone with as much as a taxi driver's salary has been speculating in the real estate market, scooping up off-plan properties at terms that would make a Countrywide mortgage broker blush.
  
  And why not? Chinese culture has almost universally adopted the attitude that property prices never go down. Minor fluctuations and corrections over the last several months have been written off as statistical error. Well, reality has now uncomfortably set in.

In Shanghai that uncomfortableness manifested itself in rage as nearly 300 angry customers stormed a sales office of Longfor Properties Co Ltd after finding out that the developer had slashed prices on one of its projects by nearly 25%... practically overnight.

Another angry mob in Shanghai assembled outside the sales office of China Overseas Property Group Co after that company made similar price concessions for new buyers. These were obviously the poor suckers who bought in months (or years) ago at a much higher price... and they're not especially happy about a property crash.

Black notes the troubles are not just in real estate. Auto dealers are having the same issues, with many luxury brands ranging from BMW to Mercedes offering steep discounts up to 20% to lure buyers onto the showroom floor.

Growth has definitely slowed dramatically, and the tightening of credit is having widespread effect across the economy.

This article notes that a Chinese banking collapse is brewing and that in Hong Kong September sales to the United States and Mainland China fell 8.9% and 7.3% respectively. Shipments of electronics are off 16%, while outflow of T-shirts, undies, and the like fell 8%.

The HK government has described the situation as "bleak."

Will it be long before the effects are felt in Vancouver?

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Hitting the snooze button...

Last Thursday we commented how real estate sales in Vancouver are on track for another dismal month.

If the trend holds out, sales will once again be among the lowest in the last decade - the fifth consecutive such month.

But as the Vancouver Housing Blogger noted in the comments section of the Vancouver Condo Info blog (VCI), "not only will sales be the 2nd lowest over the last 10 Octobers, but listings will be the lowest in the last 5 years. If it were a hot market, sales would be booming. They’re not."

That's a stunning situation. Low listings and low sales.

Sellers are yanking their listings off the market and waiting until 2011. The hope is that the dearth of listings will re-ignite the market.

But with interest rates at their lowest levels in history, where are the buyers?

In 2009 prices had dropped by 10%. Emergency level interest rates combined with the 10% price drop drew many into the market.

But prices have not begun to drop yet.

As I have already mentioned, many observers anticipate ongoing minor price drops through October, November and December. Then, in the first half of 2011, you will probably start to see speculators, boomers, foreign holders, overextended locals and developers all come to the market.

By then we will probably be looking at 8-10 consecutive months of the worst sales in over a decade.

As VHB noted, "the Vancouver real estate market has hit the great snooze button."

Will the market wake up in Spring 2011 with a giant hangover?

Meanwhile in West Vancouver...

This isn't to say we aren't seeing price reductions, especially at the high end (where are those wealthy Asian buyers who will keep luxury prices where they belong?)

This Arthur Erickson built home at 1812 Palmerston Avenue was originally constructed as a four-bedroom family home but was renovated into a three-bedroom by the previous owners.

Sold in 2003 for $2,375,000, it has been laguishing for sale on the market for over six months with an asking price of $5,695,000.

Recognizing the current state of the market, the seller came down on his asking price and the home has sold for $4,750,000.

That's a drop of 17%.

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A Real Estate Carol?

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CMHC UPDATE: Financial Post Editorial - CMHC Needs to Review Policies

Cameron Muir is the chief economist for the British Columbia Real Estate Association and is someone we have criticised on numerous occasions for his overly optimistic assessments of real estate in BC.

Throughout 2008, Muir seemed to be taking a page from Prime Minister Harper's playbook and endlessly denied the economy was heading for recession and that housing values might decline.

And when they did, Muir still seemed to understate events.

So we were taken aback to read the comments he made yesterday to the Kamloops Homebuilders’ Conference as reported in the Kamloops Daily News.

Muir told the conference that Vancouver’s record housing sales and prices are "not sustainable because interest rates have nowhere to go but up."

Say wha???

Muir noted that last year’s credit crisis helped affordability across B.C. through a combination of lower housing prices and lower mortgage rates. But the same sudden increase in affordability on the Left Coast caused a frantic amount of activity once fear from the crisis wore off. But that activity cannot last, Muir argued, calling it “irrational exuberance.”

(We call it an even more dangerous bubble than we had before the crisis, but we're good with his assessment)

And what does the coming year hold in store for us?

“We have high prices, affordability limits and [then we will] inject higher interest rates.”

And the outlook for the Canadian economy?

“This will be the slowest recovery we’ve ever seen coming out of a recession,” Muir said.

So what will all this mean for real estate?

Those rebounded prices and higher mortgage rates will combine with a slow recovering economy and it will mean the days of double-digit housing price increases are over, Muir argued.

“How high can prices go before consumers reach a limit on what they can pay?” asked Muir.

Muir said he expects the prime rate to rise from today’s 2.25 to a more than double rate of 4.75 in 2010.

Whoa!

Today's posted rate for five year mortgages at RBC is 5.74% (with a special offer of 4.44%). An increase of 2.50% would boost that 'special' rate to almost 7%, the stated rate would jump to 8.24%.

Hmmm... wasn't the 'doomsday' rate cited by those mortgage brokers in our post on Wednesday set at 8%?

It makes you wonder if Muir didn't get the 'Sunshine, Lollipop and Rainbows' memo sent out by CMHC on the bright future for real estate in 2010. Michael Levy got it.

For Muir, this is the equivalent of having been visited by three spirits and the ghost of Jacob 'Van-Housing-Blogger' the night before the conference.

All that remains now is to see if Muir maintains his penchant for dramatically understating what is coming.

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A Tale of Two Predictions: Part (b)

Mainstream media often provides Real Estate 'insight' from builders, bankers, developers and realtors. For years this Real Estate ‘cabal’ has insisted that the Vancouver market was not in a bubble. Now that prices have started to decline, they insist this drop in prices is only a ‘momentary dip’ attributal to a ‘lack of consumer confidence’. Their prognosis: price declines are relatively muted and upward momentum will return in short order.

For several years now, the Vancouver Housing Blogger has been a counterpoint to this view. Recently VHB offered his prediction for the immediate future of Vancouver Real Estate on Housing Analysis ; a blog whose stated objective is ‘providing thoughtful analysis on the housing market’.

Noting that current Canadian labour market statistics predict a very bleak picture for 2009 and that the prognosis for BC in the coming few years is for extremely hard times; VHB points out that circumstances are, in reality, far worse than the predictions. January statistics already show BC is down 35,000 jobs - a pace that will blow most economist’s predictions for 2009 job losses right out of the water. And one week into February, the torrid pace of corporate layoff notices has continued unabated.

More importantly, BC’s labour market boom has been based on construction and as that construction boom continues to collapse, massive job losses will continue to mount. A situation which cannot help but mortally damage BC’s housing market.

“When the bubble started to burst in Spring 2008 in the midst of a strong economy, it burst mostly because there was a psychological change--people stopped wanting to pay the inflated prices because they didn't have confidence that they could find a greater fool to whom to unload their property in the future. We've seen 15% or so come off prices, but the main effect really has been that properties have just sat around not getting sold. Aside from a few flips gone bad, there hasn't been a lot of urgency on the sell side. So it didn't sell in 2008--just rent it or try again in 2009,” said VHB.

“What will be different going forward is this. As unemployment approaches double digits in BC (we'll get there shortly after the Olympics--if not earlier), there will be thousands of people who cannot make their mortgage payments on their primary residence--not to mention their inability to feed the monthly bleed from their condo 'investments.' These properties will be thrown back on the market first by themselves, and later by banks as foreclosures.”

VHB goes on to note, "When will this happen? When people lose their job, it takes some time before they get irreversibly behind on their bills. It then takes some time for the bank to foreclose and get the thing on the market. So, the 'have to sells' are not going to seriously start hitting the market until late 2009. But in 2010, this will be a dominant part of the housing picture."

VHB paints a very compelling picture. Record new housing inventory on the way and a cascade of 'have-to-sell' people driven by job losses.

Meanwhile speculators have vanished from a collapsing market, home ownership rates are at record level (with those owners unable or unwilling to upgrade and no new customers coming into the picture) and the evaporation of U.S. and Asian buyers due to the world wide economic collapse

It’s a toxic mix: exploding inventory with no customers to fill the void.

The end result? VHB predicts 2009-2010 will provide a tremendous amount of pain for those who are overexposed to Vancouver real estate because we have the creation of a perfect storm which will send real estate values into a downward spiral: rising unemployment levels leaving many local Vancouverties unable or afraid to commit to real estate purchases for themselves, the evaporation of speculators who cannot turn a guarenteed profit and the evaporation of U.S. and Asian buyers - buyers who have always kept the market artificially high.

VHB - along with a ‘mohican’ - post their statistical case on a regular basis on the Housing Analysis blog. Its worth you while to check it out.

Meanwhile the coming two years will play out as a tale of two predictions: the CREA's or VHB's.

Who are you inclined to believe?

Even for Karnac the Magnificent, this would be a 'gimmie'.

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A Tale of Two Predictions: Part 2 (a)

Back in the heady bull run real estate market days of 2005, when virtually everyone seemed to be proclaiming that the BC Real Estate market was in a permanent "bull" market, an anonymous internet real estate blogger(known by his moniker: the Vancouver Housing Blogger or VHB) openly questioned whether or not the Vancouver market was in a bubble.

He was one of the few locals to do so.

So popular were his posts that he was getting over 25,000 unique visitors a week to his site.

The VHB would post daily entries that warned that Vancouver and Victoria were in a massive speculative bubble. And it wasn’t just editorial commentary. He would link to reports from the Real Estate Board of Greater Vancouver, Statistics Canada, expert opinions, other cities' real estate blogs, and to media reports to make his case. All available information was interwoven to prove his point.

The thoroughness of the VHB was such that even Bob Rennie, BC’s Condo King, was drawn into debates on his site. Rennie, regularly quoted in the media at the time as saying the real estate market would continue to be strong and wouldn’t suffer a downturn, chided VHB at one point by refering to one of his highly successful condo pre-sales and saying, "If the blogger is right...1,000 people are wrong."

Well it turns out both Rennie and those 1,000 condo pre-saler's were wrong and the Blogger was right.

That infamous quote is now used as a tagline by the VHB whenever he posts on the local Real Estate Talks messageboard.

VHB told a reporter that he started his blog because, "I was following the housing market and wondered if others shared my more unorthodox views. I was making some graphs on my own. I thought some others might like to see them too. [The mainstream media] doesn't point out the inherent conflict of interest in always asking builders, bankers, developers and realtors about the housing market."

VHB used his blog to serve as a counterweight to thosed biased positions.

In February, 2007 the VHB closed down his blog saying, “Things have changed on the off-line front. I have to go now. It has been a lot of fun. I might be back sometime in the future, but I need to stop for a while anyway. Ta Ta For Now.”

Well... the VHB has returned and while he has not re-started a blog of his own, he makes regular contributions to a number of Vancouver R/E sites.

Recently he made his own predictions for the current market.

His thoughts tomorrow in Part 2(B).

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